/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q10E Question: Comment on the appropr... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 2: Q10E (page 68)

Question: Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.

a. Depreciation expense on the building for the year was \(60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.

Retained Earnings 60,000

Accumulated Depreciation鈥擝uildings 60,000

b. Materials were purchased on January 1, 2017, for \)120,000 and this amount was entered in the Materials account. On December 31, 2017, the materials would have cost \(141,000, so the following entry is made.

Inventory 21,000

Gain on Inventories 21,000

c. During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of \)135,000 and a fair value of \(450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.

Equipment 135,000

Common Stock 135,000

d. During the year, the company sold certain equipment for \)285,000, recognizing a gain of \(69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.

e. An order for \)61,500 from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.

Accounts Receivable 61,500

Sales Revenue 61,500

Short Answer

Expert verified

Answer

  1. Depreciation is an allocation of cost, not an attempt to value assets.
  2. A gain should not be recognized until the inventory is sold
  3. Recording the asset at the par value of the stock has no conceptual validity.
  4. Deferral of the gain should not be permitted.
  5. Revenue should be recognized when a performance obligation is met.

Step by step solution

01

Meaning of Accounting Procedures

The definition of an accounting strategy may be a standardized preparation that carries out a certain accounting work and is made to incorporate improved risk management rules so that these tasks are carried out more successfully and beneficially.

02

(1) Commenting on the appropriateness of the accounting procedures

Depreciation is not an attempt to appraise assets; it is an allocation of cost. Because of this, costs associated with this building should be matched with revenues on the income statement rather than being charged to retained earnings, even though the building's value is rising.

03

(2) Commenting on the appropriateness of the accounting procedures.

The inventory should not be sold until a gain is recorded. Accountants use the measurement principle (historical cost) approach, and asset write-ups are not allowed. According to the revenue recognition principle, a performance requirement must first be fulfilled before revenue should be recognized. When the consumer receives the goods in this instance

04

(3) Commenting on the appropriateness of the accounting procedures.

Assets must be valued at either the fair market value of what is acquired or the fair value of what is given up, whichever is more obvious. It should be underlined that using the stock's fair value does not contradict the measuring (historical cost) principle. No conceptual justification exists for recording the asset at the stock's par value. Simply put, par value is a fictitious sum typically determined at the time of incorporation.

05

(4) Commenting on the appropriateness of the accounting procedures

When the customer receives the equipment, the gain should be acknowledged. Because the corporation has met the performance commitment, deferral of the gain shouldn't be allowed.

06

(5) Commenting on the appropriateness of the accounting procedures.

According to the information, the sale should have been recorded in 2018 instead of 2017. When a performance obligation is satisfied, revenue should be pronounced. When the order is delivered to the buyer in this circumstance, the performance obligation is satisfied. 2018 ought to be the year that deals income and accounts receivable are reported. It ought to be famous that a charge to Cost of Goods Sold and a credit to Inventory are moreover required in 2018 if the company uses an interminable stock framework in terms of dollars and quantities.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

(Full Disclosure Principle) Presented below are a number of facts related to Weller, Inc. Assume that no mentionof these facts was made in the financial statements and the related notes.

Instructions

Assume that you are the auditor of Weller, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items.

(a) The company decided that, for the sake of conciseness, only net income should be reported on the income statement. Details as to revenues, cost of goods sold, and expenses were omitted.

(b) Equipment purchases of \(170,000 were partly financed during the year through the issuance of a \)110,000 notes payable. The company offset the equipment against the notes payable and reported plant assets at \(60,000.

(c) Weller has reported its ending inventory at \)2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes.

(d) The company changed its method of valuing inventories from weighted-average to FIFO. No mention of this change was made in the financial statements.

GROUPWORK (Accounting Principles and Assumptions鈥擟omprehensive) Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc.

Instructions

In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.

(a) The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made.Miscellaneous Expense 29,000Cash 29,000

(b) Merchandise inventory that cost \(620,000 is reported on the balance sheet at \)690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value.Inventory 70,000Sales Revenue 70,000

(c) The company is being sued for \(500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry.Loss from Lawsuit 500,000Liability for lawsuit 500,000

(d) Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a \)16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entryDepreciation Expense 16,000Accumulated Depreciation Equipment 16,000

(e) Gonzales, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at \(800,000 was written off as follows.

(f) Because of a 鈥渇ire sale.鈥� equipment obviously worth \)200,000 was acquired at a cost of $155,000. The following entry was made.Equipment 2000Cash 155,000Sales Revenue 45,000

E2-2 (L01,2,3) (Usefulness, Objective of Financial Reporting, Qualitative Characteristics) Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position.

  1. The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability.
  2. Relevant information only has predictive value, confirmatory value, or both.
  3. (c)Information that is a faithful representation is characterized as having predictive or confirmatory value.
  4. Comparability pertains only to the reporting of information in a similar manner for different companies.
  5. Verifiability is solely an enhancing characteristic for faithful representation.
  6. In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities.

Question: What are some of the costs of providing accounting information? What are some of the benefits of accounting information? Describe the cost-benefit factors that should be considered when new accounting standards are being proposed.

Question: Briefly describe the types of information concerning financial position, income, and cash flows that might be provided (a) within the main body of the financial statements, (b) in the notes to the financial statements, or (c) as supplementary information.
See all solutions

Recommended explanations on Business Studies Textbooks

Human 91影视

Read Explanation

Managerial Economics

Read Explanation

International Business

Read Explanation

Strategy

Read Explanation

Public Relations Business Studies

Read Explanation

Startups

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.