Transcript Chapter 1

Exercises
When is revenue generally recognized?
Revenue is generally recognized when (1)
realized or realizable, and (2) earned.
Jane Hull Company paid $135,000 for a machine in 2005.
The Accumulated Depreciation 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 “right to this gain.” What
does the president mean by this statement? Do you
agree.
The president means that the "gain" should be
recorded in the books.
This item should not be entered in the accounts,
however, because it has not been realized.
Identify which basic assumption of accounting is
best described in each item below.
(a) The economic activities of FedEx Corporation
are divided into 12-month periods for the purpose
of issuing annual reports.
(b) Solectron Corporation, Inc. does not adjust
amounts in its financial statements for the effects
of inflation.
(c) Walgreen Co. reports current and noncurrent
classifications in its balance sheet.
(d) The economic activities of General Electric and
its subsidiaries are merged for accounting and
reporting purposes.
(a) Periodicity
(b) Monetary unit
(c) Going concern
(d) Economic entity
Identify which basic principle of accounting is best
described in each item below.
(a) Norfolk Southern Corporation reports revenue in its
income statement when it is earned instead of when the
cash is collected.
(b) Yahoo, Inc. recognizes depreciation expense for a
machine over the 2-year period during which that machine
helps the company earn revenue.
(c) Oracle Corporation reports information about pending
lawsuits in the notes to its financial statements.
(d) Eastman Kodak Company reports land on its balance
sheet at the amount paid to acquire it, even though the
estimated fair market value is greater.
(a) Revenue recognition
(b) Matching
(c) Full disclosure
(d) Historical cost
Which constraints or Modifying Principles on accounting
information are illustrated by the items below?
(a) Zed's Farms, Inc. reports agricultural crops on its
balance sheet at market value.
(b) Crimson Tide Corporation does not accrue a
contingent lawsuit gain of $650,000.
(c) Wildcat Company does not disclose any
information in the notes to the financial statements
unless the value of the information to financial
statement users exceeds the expense of gathering
it.
(d) Sun Devil Corporation expenses the cost of
wastebaskets in the year they are acquired.
(a) Industry practices
(b) Conservatism
(c) Cost-benefit
(d) Materiality
In each of the situations, discuss the appropriateness of the
journal entries in terms of generally accepted accounting
principles.
(1) 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……………….29,000
Cash …………………………..29,000
This entry violates the economic entity assumption
The correct entry is:
President’s, Drawings ……………….29,000
Cash …………………………..29,000
(2) 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.
Merchandise Inventory…………………. 70,000
Revenue ………………………………..70,000
a- This entry violates the cast principles. Because the
historical cost principle indicates that assets and liabilities
are recorded on the basis of cost not FMV.
In addition to:
b- This entry violates the revenues recognition principles.
Because revenue should be recognized when (1) realized or
realizable and (2) earned.
(3) 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 ………………………..500,000
Liability for Lawsuit…………………. 500,000
The company is too conservative in its accounting for this
transaction. Because a loss should be accrued only (1) when
it is probable that the company would lose the suit and (2)
the amount of the loss can be reasonably estimated.