Question 1

The following are independent situations observed by Dino Industrial's senior accountant at December 31, 2021, the company's year end:
1. Dino has parts inventory for use in its construction department (not for resale). The inventory includes over 1,500 different items, with between 10 and 100 of each item in stock. The cost of the individual items ranges from $ 0.30 to $ 1.50. In the past, the inventory quantities have been estimated by weighing the parts bins. This year, the accountant had the individual items counted and priced to provide more precise information. The total estimated value of the items is $ 45,000, which is material in total. It took four staff a full day to count the inventory at a cost of $ 1,000 in labour costs, and it would have taken two staff a half day to complete the estimate by weighing at a cost of $ 250. After the count, an entry of $ 27 was needed to reduce the inventory balance to actual. The entry was debited to Construction Supplies Expense.
2. Goods with a sales price of $ 55,000 were shipped to a customer FOB shipping point. The goods were picked up by the shipping company on December 31, 2021, and delivered to the customer on January 2, 2022. The customer's invoice was prepared and recorded in January 2022.
3. Prepaid expenses include $ 12,000 in prepaid rent related to the long-term lease of a branch office. When the lease was signed 4 years ago, Dino had to pay a $ 6,000 deposit, which comprises the final month's rent. Rental rates have since doubled in that location, so an entry has been recorded to reflect this value as follows: "Debit Prepaid Rent $ 6,000; Credit Rent Expense $ 6,000." The junior accountant's argument for making this entry is that the company has benefited from the long-term lease and the financial statements should reflect this benefit.
4. One of the owners of Dino purchased a vacation property for $ 190,000 with company funds. The transaction was recorded as a debit to Property, Plant, and Equipment, and a credit to Cash.
Instructions
For each of the events, indicate the accounting assumption, concept, constraint, or recognition criteria that have been violated and provide your reason. Prepare the correcting entry required, or if no entry is required, explain what other change, if any, should be made to ensure that Dino's financial statements comply with GAAP.

Accepted Answer

The answer of The following are independent situations observed by...

Question 2

The following are independent situations observed by Aqua Company's senior accountant at December 31, 2021, the company's year end. Aqua Company has not adopted the revaluation model for accounting for long-lived assets.
1. Aqua purchased land in February at a cost of $ 60,000 for the purpose of expanding the size of their parking lot, although this project has not yet been started at year end. Due to increases in real estate values, this land has a value of $ 100,000 by year end. An entry to record this increase in value has been recorded, crediting "Gain on Land."
2. One of the items making up Aqua 's total current assets of $ 354,000 is an amount of $ 1,400 for Supplies. The company owner asks one of the accounting staff whether she thinks this balance is correct. The staff person takes two days of work time to count the actual supplies on hand and another day to research the exact cost of the items, and subsequently adjusts the balance of Supplies to its exact balance of $ 1,425. As a result of this task, the month-end financial statements are submitted to the company's lender two days after the reporting deadline.
3. A $ 96,300 payment for a 12-month insurance policy effective March 1 had been debited to Insurance Expense.
4. Included in Accrued Interest Payable is interest on a $ 200,000, 3% note payable. Interest has been paid to December 2, 2021. Accrued interest payable was calculated and recorded as $ 500 by applying the following formula: $ 200,000 x 3% x 1÷12. However, the accountant was concerned because part of December's interest has already been paid and the formula included a full month's accrual. He therefore reduces the accrued interest payable by $ 33 ($ 200,000 x 3% x 2÷365).
5. On January 15, 2022, before the financial statement preparation for December 31, 2021 had been completed, a fire destroyed General's warehouse, which had a carrying value of $ 1,500,000, and inventory with a cost of $ 900,000. The lost assets are insured, but will result in a 6-month interruption in business while being reconstructed. No mention of this event is found in the financial statements.
6. The company completed its year-end inventory count and the controller noticed that obsolete inventory had been included in the physical count and that it was valued at its original cost less an obsolescent factor of 10%. When the controller asked how long the inventory had been on hand, he was told that it was 4 years old; most of their inventory is 6 months old.
Instructions
For each of the events, indicate the accounting assumption, concept, or constraint that has been violated and provide your reason. Prepare the correcting entry required, or if no entry is required, explain what other change, if any, should be made to ensure that Aqua's financial statements comply with GAAP.

Accepted Answer

The answer of The following are independent situations observed by...

Question 3

Target Security Company provides surveillance services to numerous corporate customers. The company has recently signed a new surveillance contract with Martin Manufacturing on January 1 for a period of one month at a cost of $ 500. On January 31, Target completed the contract and invoiced Martin for the full contract price due in 30 days.
Instructions
Complete the following steps to determine if the appropriate criteria have been met for Target to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Target can recognize the revenue and when it would be appropriate to do so.
1. Is there a contract?
2. What is the performance obligation?
3. What is the transaction price?
4. Is there a need to allocate the selling price?
5. Has the performance obligation been satisfied?

Accepted Answer

The answer of Target Security Company provides surveillance services to...

Question 4

For each of the independent situations described below, list the assumption, concept, constraint, or recognition criteria that have been violated and describe the appropriate treatment.
1. MacDonald Industrial purchased a piece of land that was listed for $ 150,000. The company worked very hard in negotiations and both parties agreed on a purchase price of $ 139,000. Lawson's accountant has recorded the land on the books at $ 150,000 because she felt this was the most representative fair value at the time of purchase.
2. Chantal's Hair Salon purchases many different hair and cosmetic supplies to be used within the salon and sold to customers. Darlene only has one credit card that she uses to make personal and business purchases. She often gets confused which purchases are for business purposes so she records all credit card transactions through the salon.
3. Buddie's Furniture operates in a small town and often sells on credit without any detailed credit checks. The company sold merchandise to Darcy last year and he failed to pay the amount owing so Buddie wrote off his account. Buddie has recently made another sale to Darcy on credit for $ 12,000 without any security on the transaction. Buddie records all sale transactions once the goods are delivered and title passes.
4. Fancy Diamonds is a Canadian company that reports its financial statements in Canadian dollars. The company often sells its diamonds to customers in the United States and receives U.S. dollars. Fancy records the U.S. dollar amounts within the accounting records without any currency exchange.

Accepted Answer

The answer of For each of the independent situations described...

Question 5

Comfort King Ltd. sells central air units and furnaces to local residents as well as ongoing maintenance plans. Jack Frost agreed to an arrangement with Comfort King to purchase a central air package for $ 4,000 on May 1, 2021. In addition to the sale, the arrangement includes installation, maintenance on the central air unit for two years, and a one-time furnace cleaning, which will occur when the central air unit is installed. Jack Frost is receiving a great deal as the full contract price represents the stand-alone value of the central air unit. Comfort King also provides installation, central air maintenance, and furnace cleaning services separately to its customers as follows: installation fee $ 400, annual central air maintenance fee $ 250, and furnace cleaning fee $ 100. Comfort King installed the unit and cleaned the furnace on May 20, 2021, and was immediately paid the agreed-upon price by Jack Frost.
Instructions
Complete the following steps to determine if the appropriate criteria have been met for Comfort King to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Comfort King can recognize the revenue and when it would be appropriate to do so.
1. Is there a contract?
2. What is the performance obligation?
3. What is the transaction price?
4. Is there a need to allocate the selling price?
5. Has the performance obligation been satisfied?

Accepted Answer

The answer of Comfort King Ltd. sells central air units...

Question 6

For each of the independent situations described below, list the assumption, concept, constraint, or recognition criteria that have been violated, if any. List only one term for each case.
1. Chris Burgess, MD, had the clinic accountant prepare his personal tax return. He paid the accountant using clinic funds and debited the clinic's "Professional Fees" account.
2. Chu Company does not use an account for allowance for doubtful accounts. Instead, accounts receivable are written off directly to Bad Debt Expense if they remain unpaid after 24 months.
3. Equipment is carried at its fair value on the Chipawa Company balance sheet, which is $ 25,000 higher than cost. Fontaine Chipawa has not adopted the revaluation model for accounting for long-lived assets.
4. Depreciation Expense for Rowland Company is $ 15,000. The company will have a net loss of $ 12,000 if the depreciation is recorded, but a profit of $ 3,000 if depreciation is deferred a year. The decision is made to defer the depreciation to next year which is expected to be more profitable.
5. The land of Fountain Company is appraised at $ 200,000 more than its cost. The new accountant for the company recommends booking the appraised value and showing a "Gain from Revaluation" on the income statement. Fountain Company has not adopted the revaluation model for accounting for long-lived assets.

Accepted Answer

The answer of For each of the independent situations described...

Question 7

In the following transactions, indicate when revenue should be recognized:
1. In September, La Cloche University collects tuition revenue for the term from students. The term runs from September through December.
2. Burns Island Company sells merchandise with terms of 2/10, n/30, FOB destination.
3. The Ottawa Senators sell season tickets to games in Canadian Tire Centre. Fans can purchase the tickets at any time, although the season doesn't officially begin until September. It runs from September through May.
4. Canada Airline sells you a refundable airline ticket in September for your flight home at Christmas.
5. The University Bookstore has the following return policy for textbook sales: "Textbooks (new and used) may be returned for seven calendar days from the start of classes. After that time, textbooks (new and used) may be returned within 48 hours of purchase."

Accepted Answer

The answer of In the following transactions, indicate when revenue...

Question 8

Comfort King Ltd. sells central air units to local residents as well as ongoing maintenance plans. Jack Frost agreed to an arrangement with Comfort King to purchase a central air package for $ 4,000 on May 1, 2021. In addition to the sale, the arrangement includes unit installation and maintenance on the central air unit for two years. Jack Frost is receiving a great deal as the full contract price represents the stand-alone value of the central air unit. Comfort King also provides installation and central air maintenance separately to its customers as follows: installation fee $ 400 and annual central air maintenance fee $ 250. Comfort King installed the unit on May 20, 2021, and was immediately paid the agreed-upon price by Jack Frost.
Instructions
Complete the following steps to determine if the appropriate criteria have been met for Comfort King to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Comfort King can recognize the revenue and when it would be appropriate to do so.1. Is there a contract?
6. 2. What is the performance obligation?
7. 3. What is the transaction price?
8. 4. Is there a need to allocate the selling price?
9. 5. Has the performance obligation been satisfied?

Accepted Answer

The answer of Comfort King Ltd. sells central air units...

Question 9

The following are independent situations observed by Mersey's senior accountant at December 31, 2021, the company's year end. Mersey has not adopted the revaluation model for accounting for long-lived assets.
1. The draft financial statements include an item listed under non-current assets "Human resources" but there is no financial amount included.
2. Mersey's employees are paid a bonus based on profit. Mersey's management would like to minimize the amount of bonus paid, and so they instructed a junior accountant to write down inventory by $ 1,000,000 and record a Loss on Inventory. Their argument is that the "fire sale" value of the inventory would be lower than recorded cost by this amount. Mersey has no intention of liquidating the inventory under such circumstances, but expects to sell the inventory in the normal course of business at amounts significantly above cost.
3. A building being constructed for a customer was 90% complete, and accordingly 90% of the related revenue had been correctly included in sales for the year. The total projected cost of construction is $ 600,000. Of the $ 540,000 cost of the project incurred to date, $ 200,000 has been expensed to COGS
4. Mersey owns 5% of the shares of Liverpool Investments. A note to Liverpool's financial statements describes a valuable new patent registered by Liverpool and the anticipated profits that are expected to result. A junior accountant at Mersey recorded an entry "Debit Intangible Assets; Credit Gain on Patent Registration" in the amount of $ 220,000, which is 5% of the amount at which Liverpool has recorded the cost of the patent.
5. In November, Mersey entered into a service contract to provide maintenance services to a client for a fee of $ 20,000 per month. On signing the contract, the client paid Mersey a $ 40,000 deposit on services to be provided. The term of the contract is from December 15, 2021 through December 15, 2022. The $ 40,000 deposit was recorded as Service Revenue.
Instructions
For each of the events, indicate an accounting assumption, concept, constraint, or recognition criteria that have been violated and provide your reason. Prepare the correcting entry required, or if no entry is required, explain what other change, if any, should be made to ensure that Mersey's financial statements comply with GAAP.

Accepted Answer

The answer of The following are independent situations observed by...

Question 10

Ed Sullivan Sailing Ltd. sold $ 175,500 of boat parts on credit in September. A total of 30% of the goods were shipped FOB destination and 70% were shipping FOB shipping point. At September 30, $ 25,000 of the goods that were FOB destination, were in transit. During September the company collected $ 100,000 cash from its customers. The company estimates that about 2% of the sales will become uncollectible and that about 8% of the sales will be returned by the customer. How much revenue should the company recognize for the month?

Accepted Answer

The answer of Ed Sullivan Sailing Ltd. sold $ 175,500...

Question 11

A number of unrelated transactions recorded by Abba Company are as follows:  Instructions
For each of the above situations, identify the accounting assumption, concept, constraint, or recognition criteria that have been violated. Prepare the correct journal entry as it should have been made. If no entry should have been made, or if additional financial statement disclosure is required, explain.

Accepted Answer

The answer of A number of unrelated transactions recorded by...

Question 12

For each of the independent situations described below, list the assumption, characteristic, concept, or constraint that has been violated, if any. List only one term for each case.
1. The Who Company reports only current assets and current liabilities on its balance sheet. Intangible assets and a 20-year mortgage payable are reported as a current asset and a current liability, respectively. Liquidation of the company is unlikely.
2. Gabi Company is in its third year of operation and has yet to issue financial statements. (Do not use full disclosure principle.)
3. Griffin Company is carrying inventory at its net realizable value of $ 110,000. The inventory had an original cost of $ 135,000.
4. Paul Company expenses some office equipment that is inexpensive even though it has a useful life that exceeds 1 year.
5. Singh Corporation has selected FIFO as its inventory cost flow formula during the current year. Next year it plans to change to the weighted average cost formula.

Accepted Answer

The answer of For each of the independent situations described...

Question 13

Spanish Marine Supplies is a marine supplier of tugboat engines. As part of the selling process, the company will install the tugboat engine, conduct sea trials on the engine, provide any servicing required on the engine for the first year of operation, and not require a payment from the client until 60 days after the client's acceptance of the engine. The engine will remain the property of Spanish until the first payment is made, even though the boat is not the property of Spanish. The company's customers frequently ask Spanish to customize the engines to suit their needs. These customization changes can be extensive and may take several months.
Instructions
Comment on when you think Shediac should recognize revenue.

Accepted Answer

The answer of Spanish Marine Supplies is a marine supplier...

Question 14

The following transactions occurred during 2021:
1. A television set is delivered to the customer in August. Six instalment payments of $ 200 per month begin the following January. Ignore interest considerations.
2. Goods are sold FOB shipping point. An item with a retail value of $ 10,000 is loaded onto the truck on May 31, but not unloaded until June 3 because the recipient delayed paying the freight bill until then. The vendor prepares and mails the invoice to the customer on June 10.
3. A computer network system and related cables are delivered to the customer's premises on March 31. Installation is completed by April 30, after which the system is ready for use. The vendor provides monthly support and upgrades for 4 months following the month of installation (through end of August). The value of the system and cables is $ 50,000, the value of the installation services is $ 22,000, and the value of the monthly support totals $ 6,000.
4. Goods are sold FOB destination. An order with an invoice total of $ 3,500 is loaded onto the truck January 31 and delivered on February 1.
5. A customer prepays for 10 oil changes for a total of $ 300. During December, two oil changes are completed for this customer.
Instructions
Identify in which month revenue should be recognized in each situation. If revenue should be recognized in more than one month, calculate the amounts that apply to each relevant month.

Accepted Answer

The answer of The following transactions occurred during 2021:
1. A...

Question 15

Match between columns
                        Premises: All of the information necessary to show the economic reality of transactions is provided.
Information is available to decision makers before the information loses its ability to influence decisions.
Information is free from bias that is intended to attain a predetermined result.
Accounting information reports the economic reality of a transaction, not its legal form.
Information makes a difference in a decision.
Users are assured that the financial information shows the economic reality of the transaction.

Accepted Answer

The Answer of Neutral and Timeliness and Faithful representation and is...

Question 16

Match between columns
                        Premises: Information that is helpful in assessing management's performance
Confirmatory value
Timeliness
Comparability-consistency
Information that is useful in making resource allocation decisions
Neutral
Expense
Full disclosure principle
Owners' equity
Faithful representation

Accepted Answer

The Answer of Qualitative Characteristics of Accounting Information and Objective is...

Question 17

Match between columns
                        Premises: Insurance expense is recorded each month, although the insurance policy covers a full year and is paid annually.
A company's accountant notices that the petty cash account was not adjusted prior to preparing the year-end financial statements and the account balance is incorrect by $ 13.52. However, the accountant decides to release the financial statements without making the correction.
The company's sales are made on credit, but to keep accounting costs down, sales are recorded when the customer accounts are paid.
When preparing financial statements, the company's policy is to record all correcting entries, whether the correction is for $ 200,000 or $ 2.
The proprietor's babysitting costs are recorded in the company expense accounts.
After obtaining an independent appraisal that indicated a significant increase in value over original cost, the company restated its land at the higher amount. The company has not adopted the revaluation model for accounting for long-lived assets.
A former employee has sued the company for a large amount, but no mention is made of this case in the financial statements.
One third of the company's sales were made to a related party and this fact is disclosed in the financial statements.
The company has a large number of accounts receivable that individually have small balances. In order to determine the allowance for doubtful accounts, the company uses an estimate based on past experience rather than taking the time to evaluate the collectibility of individual accounts.
A patent with an indefinite life has an original cost of $ 12,500 although the company was recently offered $ 1,000,000 by another company who wants to buy it.
The proprietor of an unincorporated business maintains two bank accounts and two sets of accounting records—one for household expenses, and the other for business purposes.
Interest is payable semi-annually and is recorded only when paid, with no adjustment at year end even though payment dates do not coincide with the year-end date.
All assets are restated at their liquidation values.
The company records revenue when services are provided, not when the customers pay for the service.
The company's inventory's cost is $ 50,000, its retail value is $ 120,000, and if liquidated could be sold at auction for $ 30,000. The inventory is reported at $ 50,000 on the company's balance sheet.
The company accountant recently spent two days calculating the accrued utilities expense on 130 individual apartments for the last few days of the year. In the past, the amounts were estimated.

Accepted Answer

The Answer of Cost concept and Cost constraint and Full is...

Question 18

Match between columns
                        Premises: Two knowledgeable and independent people would agree that information is faithfully represented.
When information confirms or corrects prior expectations
Information that has a bearing on a decision
Financial information includes all necessary information to show the economic reality of the underlying transactions or events.
Assumes a company will exist long enough to carry out its existing objectives and commitments
Different companies using the same accounting principles
Appropriate for certain long-term construction contracts
A coherent system of interrelated objectives and fundamentals that can lead to consistent standards
Standard-setting body that is responsible for developing IFRS
Economic events can be identified with a particular business.
The carrying value of property, plant, and equipment is its fair value less accumulated depreciation less subsequent impairment losses.
The cost of producing the information does not exceed the value of the information.
This criterion allows revenue to be recognized when there is an increase in assets or decrease in liabilities from profit-generating activities.

Accepted Answer

The Answer of Relevance and Comparability and IASB and Confirmatory is...

Quiz 3: Financial Reporting Concepts

Match the following qualitative characteristics of financial statements to the appropriate code:

For each item below, indicate the area of the conceptual framework that pertains to that item by selecting the appropriate code. Example: C Asset (An asset is an element of financial statements.)

Match the items below by entering the appropriate code letter.