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Chapter 2: Q2-23Q (page 61)

Mogilny Company paid \(135,000 for a machine. The Accumulated Depreciation- Equipment account has a balance of \)46,500 at the present time. The company could sell the machine today for $150,000. The company president believes that the company has a 鈥渞ight to this gain.鈥� What does the president mean by this statement? Do you agree?

Short Answer

Expert verified

Yes, the president is right. The company has a right to gain. It implies that the gain will be obtained from the sale of the machine for $150,000.

Step by step solution

01

Meaning of Unrealized Gain

An unrealized gain is an increment in the asset value or investment that is yet to be sold by the investor, like open-stock status. A gain takes place when the market price of an asset exceeds the amount paid by the investor.

02

Explanation of the “statement”

According to the given situation, it is agreed that the president is right regarding 鈥渢he excess amount of sale on the machine will be measured as the gain on sale of the machine.鈥� The president is saying about the gain that will be obtained by selling the machine for $150,000. Mogilny Company purchased the machine for $135,000, and the accumulated depreciation on the machine is $46,500. According to this, the present value of the machine is the cost of acquisition minus accumulated depreciation on the machine, which equals $88,500 ($135,000 - $46,500). Therefore, the purchase price is less than the selling price, which implies profit.

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Most popular questions from this chapter

Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material.

a) Legal fees paid in connection with the purchase of land are \(1,500.

b) Eduardo, Inc. paves the driveway leading to the office building at a cost of \)21,000.

c) A meat market purchases a meat-grinding machine at a cost of \(3,500.

d) On June 30, Monroe and Meno, medical doctors, pay 6 months' office rent to cover the month of July and the next 5 months.

e) Smith's Hardware Company pays \)9,000 in wages to laborers for construction on a building to be used in the business.

f) Alvarez's Florists pays wages of $2,100 for the month an employee who serves as driver of their delivery truck.

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.

BE2-9 (L05) If the going concern assumption is not made in accounting, discuss the differences in the amounts shown in thefinancial statements for the following items.

(a) Land. (d) Inventory.

(b) Unamortized bond premium. (e) Prepaid insurance.(c) Depreciation expense on equipment.

(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.

E2-7 (L05,6) (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time.

Instructions

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)

  1. Fair value changes are not recognized in the accounting records.
  2. Financial information is presented so that investors will not be misled.
  3. Intangible assets are amortized over periods benefited.
  4. Agricultural companies use fair value for purposes of valuing crops.
  5. Each enterprise is kept as a unit distinct from its owner or owners.
  6. All significant post-balance-sheet events are disclosed.
  7. Revenue is recorded when the product is delivered.
  8. All important aspects of bond indentures are presented in financial statements.
  9. Rationale for accrual accounting.
  10. The use of consolidated statements is justified.
  11. Reporting must be done at defined time intervals.
  12. An allowance for doubtful accounts is established.
  13. Goodwill is recorded only at time of purchase.
  14. A company charges its sales commission costs to expense
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