Intermediate Financial ACCT I
Intermediate Financial ACCT I ACCT 3311
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Caroline Roberts ACCT 3311001 Chapter 1 Homework Concepts for Analysis 1 3 9 12 16 CA1 3 Financial Reporting and Accounting Standards 1 GAAP stands for a Governmental auditing and accounting practices b Generally accepted attest principles c Government audit and attest policies d Generally accepted accounting principles 2 Accounting standard setters use the following process in establishing accounting standards a Research exposure draft discussion paper standard b Discussion paper research exposure draft standard c Research preliminary views discussion paper standard d Research discussion paper exposure draft standard 3 GAAP is comprised of a FASB standards interpretations and concepts statements b FASB financial standards c FASB standards interr 39 EITF and 39 U rules issued by FASB predecessor organizations d Any accounting guidance included in the FASB Codification 4 The authoritative status of the conceptual framework is as follows a It is used when there is no standard or interpretation related to the reporting issues under consideration b It is not as authoritative as a standard but takes precedence over any interpretation related to the reporting issue c It takes precedence over all other authoritative literature cl It has no authoritative status 5 The objective of financial reporting places most emphasis on a Reporting to capital providers b Reporting on stewardship c Providing specific guidance related to specific needs cl Providing information to individuals who are experts in the field 6 General purpose financial statements are prepared primarily for 3 Internal users b External users c Auditors cl Government regulators 7 Economic consequences of accounting standard setting means a Standardsetters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard Page 1 Caroline Roberts ACCT 3311001 b Standardsetters must ensure that no new costs are incurred when a new standard is issued c The objective of financial reporting should be politically motivated to ensure acceptance by the general public Accounting standards can have detrimental impact on the wealth levels of the providers of nancial information 8 The expectations gap is P a What financial information management provides and what users want b What the public thinks accountants should do and what accountants think they can do c What the governmental agencies want from standardsetting and what the standard setters provide d What the users of financial statements want from the government and what is provided CA1 9 FASB Role in RuleMaking A press release announcing the appointment of the trustees of the new Financial Accounting Foundation stated that the Financial Accounting Standards Board to be appointed by the trustees will become the established authority for setting accounting principles under which corporations report to the shareholders and others AICPA news release July 20 1972 Instructions a Identify the sponsoring organization of the FASB and the process by which the FASB arrives at a decision and issues an accounting standard The sponsoring organization of the FASB is the Financial Accounting Foundation FAF The FAF select the FASB members funds their activities and generally oversees the FASB s activities In order to arrive at a decision the FASB follows the quotdue processquot system They first identify topics and add them to the Board39s agenda Next they perform research and analysis on the topic and weigh bene ts and costs of the proposed standard In this activity they are often assisted by task force groups and sometimes by the Financial Accounting Standards Advisory Council FASAC on some of the more major issues The proposal is then heard and discussed and then evaluated and turned into an exposure draft After issuing the exposure draft the Board analyzes the responses and either changes the exposure draft or goes on and issues the final standard b Indicate the major types of pronouncements issued by the FASB and the purposes of each of these pronouncements The three major types of pronouncements issued by the FASB are 1 Standards Interpretations and Staff Positions 2 Financial Accounting Concept and 3 Emerging Issues Task Force Statements The first type includes accounting standards Page 2 Caroline Roberts ACCT 3311001 issued by the FASB that are then considered part of GAAP and also interpretations of existing standards or APB Opinions that can extend or modify them Staff positions the final element of the first category provide interpretive guidance and also minor amendment to standards and interpretations They have replaced the FASB Technical Bulletins that were formerly released All ofthis type of pronouncement hold the same authority and are considered GAAP Financial Accounting Concepts pronouncements are part of a series of Statements of Financial Accounting Concepts that comprise part of the FASB s conceptual framework project The goal of this project is to eventually form a cohesive set of interrelated concepts or conceptual framework which will serve as resources to assist in solving existing and emerging problems in a consistent manner These Concepts DO NOT establish GAAP but can pass through the same due process as regular standards to become GAAP in the same way Emerging Issues Task Force Statements result from a variety of different people and professionals collaborating in order to reach a consensus on how to account for new and unusual nancial transactions that may potentially create differing financial practices This type of pronouncement is the one you would look for when you re dealing with something new or uncommon and there is no specific direction in GAAP They generally are able to resolve these issues quickly and for smaller problems the EITF usually handles them without even involving the FASB so the FASB can stay focused on bigger problems CA112 GAAP Terminology Wayne Rogers an administrator at a major university recently said llI ve got some CDs in my IRA which I set up to beat the IRSquot As elsewhere in the world of accounting and finance it often helps to be fluent in abbreviations and acronyms Instructions Presented below is a list of common accounting acronyms Identify the term for which each acronym stands and provide a brief definition of each term a AICPA American Institute of Certified Public Accountant The national professional organization of practicing Certi ed Public Accountant CPAs They were strongly involved in the development of GAAP CAP Committee on Accounting Procedure A committee appointed by the AICPA in 1939 made up of practicing CPAs who issued Accounting Research Bulletins in an attempt to deal with a variety of accounting problems Their problembyproblem approach failed and they only lasted about 20 years ARB Accounting Research Bulletins Bulletins issued by the CAP between 1939 and 1959 that attempted to deal with various problems in accounting on a problembyproblem basis APB Accounting Principles Board The APB replaced the unsuccessful CAP and focused on advancing the written expression of accounting principles determining appropriate practices Page 3 Caroline Roberts r In 7 ACCT 3311001 and narrowing the areas ofdifference and inconsistency in practice They intended to achieve this by developing an overall conceptual framework to assist in resolving problems as they became evident and to substantively research individual issues before the AICPA issued pronouncements FAF Financial Accounting Foundation The FAF was one ofthree new organizations created as a result ofthe Wheat Committee39s recommendations It select the members of the FASB and FASAC funds their activities and provides general oversight for the FASB s activities FASAC Financial Accounting Standards Advisory Council The FASAC was one of the three new organizations created as a result ofthe Wheat Committee s recommendations It acts as a consultant for the FASB on major policy and technical issues project priorities and selection and organization of task forces SOP Statement of Position Statements of Position were one ofthe avenues ofwritten communication ofthe AcSEC They provided guidance on financial reporting topics until the FASB set standards on the issue in question They were able to update revise and clarify audit and accounting guides as well as provide freestanding advice GAAP Generally Accepted Accounting Principles GAAP is the set of standards for the accounting profession that are generally accepted and universally practiced quotGenerally acceptedquot means that either an authoritative accounting rulemaking body has established a principle of reporting in a given area or that over time a given practice has been accepted as appropriate because of it universal application They have substantial authoritative support The AICPA s Code of Professional Conduct requires that it members prepare nancial statements in accordance with GAAP GAAP includes such items as FASB Standards Interpretations and Staff Opinions APB Opinions and AICPA Research Bulletins CPA Certified Public Accountant A CPA is an accountant who has a degree completed the requirements for education and experience according to the state in which they intend to practice and passed all four portions ofthe CPA examination administered by the AICPA FASB Financial Accounting Standards Board The FASB is one of the three new organizations created as a result ofthe Wheat Committee s recommendations Its mission is to establish and improve standards of nancial accounting and reporting for the guidance and education ofthe public which includes issuers auditors and users of financial information It has several significant improvements from the Accounting Principles Board including smaller membership fulltime remunerated membership greater autonomy increased independence and broader representation SEC Securities and Exchange Commission The SEC is a federal agency created to help develop and standardize nancial information presented to stockholders It administers the Securities Exchange Act of 1934 and several other act The SEC receives mandatory audited nancial statements from most companies that issue securities to the public or are listed on a stock exchange The SEC may also prescribe the accounting practices and standards to be employed by companies that fall within its jurisdiction IASB International Accounting Standards Board The IASB is the Londonbased organization that is responsible for the IFRS the second set of rules that in addition to GAAP is accepted for international use The IASB and the FASB want to converge the GAAP and IFRS to form Page 4 Caroline Roberts ACCT 3311001 only one standard set of accounting principles in use and the SEC has laid out a plan in which all US companies may be required to use the IFRS by 2015 CA16 Securities and Exchange Commission The US Securities and Exchange Commission SEC was created in 1934 and consists of five commissioners and a large professional staff The SEC professional staff is organized into five divisions and several principal offices The primary objective of the SEC is to support fair securities markets The SEC also strives to foster enlightened stockholder participation in corporate decisions of publicly traded companies The SEC has a significant presence in financial markets the development of accounting practices and corporationshareholder relations and has the power to exert influence on entities whose actions lie within the scope of its authority Instructions a Explain from where the Securities and Exchange Commission receives its authority The SEC receives it authority from the federal government It administers the Securities Exchange Act of 1934 as well as several other act b Describe the official role of the Securities and Exchange Commission in the development of financial accounting theory and practices The SEC was established to help develop and standardize nancial information presented to stockholders It has the power to prescribe the accounting practices and standards to be employed by companies that fall within its jurisdiction However the SEC indicated in it report to Congress that quotit continues to believe that the initiative for establishing and improving accounting standards should remain in the private sector subject to Commission oversightquot In other words the SEC generally does not develop accounting standards but mostly approves or disapproves of them to bring them officially into fruition and enforces them The SEC39s involvement is often limited to the accepting or rejecting of a proposed standard At times they prompt the private sector into taking action more quickly on certain reporting problems They also occasionally communicate problems to the FASB respond to FASB exposure draft and provide the FASB with counsel and advice upon request c Discuss the interrelationship between the Securities and Exchange Commission and the Financial Accounting Standards Board with respect to the development and establishment of financial accounting theory and practices The interrelationship between the SEC and the FASB is what together creates nancial reporting standards fthe FASB is not moving quickly enough to deal with an issue the SEC prompt them to respond faster fa problem has gone unnoticed they make sure the FASB takes note Once development begins the SEC responds to FASB exposure drafts and upon request provides the FASB with advice and counsel It is the interactions between the two that together hone an idea or concept into a final approved standard The SEC has the ultimate authority over the FASB Page 5 Caroline Roberts ACCT 3311001 Chapter 10 Homework Exercises 10 2 7 14 18 19 21 23 24 E102 Acquisition Costs of Realty Pollachek Co purchased land as a factory site for 450000 The process of tearing down two old buildings on the site and constructing the factory required 6 months The company paid 42000 to raze the old buildings and sold salvaged lumber and brick for 6300 Legal fees of 1850 were paid for title investigations and drawing the purchase contract Pollachek paid 2200 to an engineering firm for a land survey and 65000 for drawing the factory plans The land survey had to be made before definitive plans could be drawn Title insurance on the property cost 1500 and a liability insurance premium paid during construction was 900 The contractor s charge for construction was 2740000 The company paid the contractor in two installments 1200000 at the end of 3 months and 1540000 upon completion Interest costs of 170000 were incurred to finance the construction Instructions Determine the cost of the land and the cost of the building as they should be recorded on the books of Pollacheck Co Assume that the land survey was for the building Land Purchase price 450000 Removal of old buildings 42000 Less salvaged materials 6300 35700 Legal fees 1850 Title insurance 1500 Total cost 489050 Building Land survey 2200 Drawing factory plans 65000 Liability insurance 900 Construction 2740000 Interest costs 170000 Total Cost 2978100 Page 1 Caroline Roberts ACCT 3311001 E10 7 Capitalization of Interest McPherson Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of 5000000 on January 1 2012 McPherson expected to complete the building by December 31 2012 McPherson has the following debt obligations outstanding during the construction period Construction Loan 12 interest payable semiannually issued December 31 2011 2000000 Shortterm loan 10 interest payable monthly and principal payable at maturity on May 30 2013 1600000 Longterm loan 11 interest payable on January 1 of each year principal payable on January 1 2016 1000000 Instructions Carry all computations to two decimal places a Assume that McPherson completed the office and warehouse building on December 31 2012 as planned at a total cost of 5200000 and the weighted average of accumulated expenditures was 3800000 Compute the avoidable interest on this project WeightedAverage Interest Rate Principal Interest Rate Interest 1600000 x 010 160000 1000000 x 011 110000 2600000 270000 Total interest 270000 1039 Total principal 2600000 WeightedAverage Interest Avoidable Accumulated Expenditures x Rate Interest 2000000 x 012 240000 1800000 x 01039 187020 3800000 427020 b Compute the depreciation expense for the year ended December 31 2013 McPherson elected to depreciate the building on a straight line basis and determined that the asset has a useful life of 30 years and a salvage value of 300000 Page 2 Caroline Roberts ACCT 3311001 Actual Interest Construction Loan 2000000 x 012 240000 Shortterm loan 1600000 X 010 160000 Longterm loan 1000000 x 011 110000 510000 Building cost 5200000 Capitalized interest 427020 5627020 5627020 33 300000 53020 17756733 E1014 Purchase of Equipment with Zerolnterest Bearing Debt Sterling Inc has decided to purchase equipment from Central Michigan Industries on January 2 2012 to expand its production capacity to meet customers demand for its product Sterling issues a 900000 5year zerointerest bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12 The company will pay off the note in five 180000 installments due at the end of each year over the life of the note Instructions a Prepare the journal entryies at the date of purchase Round to nearest dollar in all computations Future value 900000 Market rate 12 Annual installments 180000 n 5 PV of an OA of 1 factor 360478 180000 x 360478 648860 Jan 2 Equipment 648860 Discount on Notes Payable 251140 Notes Payable 900000 Page 3 Caroline Roberts ACCT 3311001 b Prepare the journal entryies at the end of the first year to record the payment and interest assuming that the company employs the effective interest method Dec 31 Interest Expense 77863 Notes Payable 180000 Cash 180000 Discount on Notes Payable 77863 c Prepare the journal entryies at the end of the second year to record the payment and interest Dec 31 Interest Expense 65607 Notes Payable 180000 Cash 180000 Discount on Notes Payable 65607 d Assuming that the equipment had a 10 year life and no salvage value prepare the journal entry necessary to record depreciation in the first year Straight line depreciation is employed Dec 31 Depreciation Expense 64886 Accumulated Depreciation 64886 E1018 Nonmonetary Exchange Montgomery Company purchased an electric wax melter on April 30 2013 by trading in its old gas model and paying the balance in cash The following data relate to the purchase List price of new melter 15800 Cash paid 10000 Cost of old melter 5year life 700 residual value 12700 Accumulated depreciation old melter straightline 7200 Secondhand fair value of old melter 5200 Instructions Prepare the journal entryies necessary to record this exchange assuming that the exchange a has commercial substance and b lacks commercial substance Montgomery s year ends on December 31 and depreciation has been recorded through December 31 2012 Page 4 Caroline Roberts ACCT 3311001 Annual depreciation 12000 5 2400 Depreciationexpense 2400 12 200 x 4 800 Accumulateddepreciation 7200 800 8000 Bookvalueoldmachine 12700 8000 4700 Fair value of old melter 5200 Cash paid 10000 Cost of new melter 15200 Apr 30 Depreciation Expense 800 Accumulated Depreciation Equipment 800 Apr 30 Equipment 15200 Accumulated Depreciation Equipment 8000 Equipment 12700 Cash 10000 Gain on disposal of used melter 500 b Book value of used melter 4700 Plus Cash paid 10000 Basis of new melter 14700 Apr 30 Depreciation Expense 800 Accumulated Depreciation Equipment 800 Apr 30 Equipment 15200 Accumulated Depreciation Equipment 8000 Equipment 12700 Cash 10000 Gain on disposal of used melter 500 Page 5 Caroline Roberts ACCT 3311001 E1019 Nonmonetary Exchange Santana Company exchanged equipment used in its manufacturing operations plus 2000 in cash for similar equipment used in the operations of Delaware Company The following information pertains to the exchange Santana Co Delaware Co Equipment cost 28000 28000 Accumulated depreciation 19000 10000 Fair value of equipment 13500 15500 Cash given up 2000 Instructions a Prepare the journal entries to record the exchange on the books of both companies Assume that the exchange lacks commercial substance Santana Company Book value 28000 19000 9000 Book value of used equipment 9000 Plus Cash paid 2000 Basis of new equipment 11000 Equipment 11000 Accumulated Depreciation Equipment 19000 Equipment 28000 Cash 2000 Delaware Company Book Value 28000 10000 18000 Fair value of used machine 15500 Less Book value of used machine 18000 Loss on disposal of used machine 2500 Page 6 Caroline Roberts ACCT 3311001 Cash 2000 Equipment 13500 Accumulated Depreciation Equipment 10000 Loss on Disposal of Equipment 2500 Equipment 28000 b Prepare the journal entries to record the exchange on the books of both companies Assume that the exchange has commercial substance Santana Company Fair value of equipment exchanged 13500 Cash paid 2000 Cost of new equipment 15500 Fair value of used equipment 13500 Cost of used equipment 28000 Less Accumulated depreciation 19000 Book value of used equipment 9000 Gain on disposal of used equipment 4500 Equipment 15500 Accumulated Depreciation Equipment 19000 Equipment 28000 Gain on Disposal of Equipment 4500 Cash 2000 Delaware Company Cash 2000 Equipment 13500 Accumulated Depreciation Equipment 10000 Loss on Disposal of Equipment 2500 Equipment 28000 Page 7 Caroline Roberts ACCT 3311001 E10 21 Analysis of Subsequent Expenditures Accardo Resources Group has been in its plant facility for 15 years Although the plant is quite functional numerous repair costs are incurred to maintain it in sound working order The company s plant asset book value is currently 800000 as indicated below Original cost 1200000 quot 39 39 39 39 39 400000 Book value 800000 During the current year the following expenditures were made to the plant facility Because of increased demands for its products the company increased its plant capacity by building a new addition at a cost of 270000 In An addition would be capitalized because it increases the company s service potential and therefore should be matched against future revenues 57 The entire plant was repainted at a cost of 23000 Repainting is an ordinary repair and is expensed and included in operating costs because it primarily bene ts the period during which it occurs The roof was an asbestos cement slate For safety purposes it was removed and replaced with a wood shingle roof at a cost of 61000 Book value of the old roof was 41000 Squot This is an improvement because it substantially benefits more than the current operating cycle or one year and since the carrying amount ofthe old roof is available the cost of the old roofshould be removed and replaced with the cost of the new asset Accumulated depreciation for the old asset must also be removed and gain or loss on disposal of plant assets should be included as well 53 The electrical system was completely updated at a cost of 22000 The cost of the old electrical system was not known It is estimated that the useful life of the building will not change as a result of this updating This is a replacement and generally when the cost ofthe original item is not known the cost of the replacement is debited to accumulated depreciation However in this case is should just be capitalized because it is speci cally stated that the useful life ofthe building remains unchanged Page 8 Caroline Roberts e ACCT 3311001 A series of major repairs were made at a cost of 47000 because parts of the wood structure were rotting The cost of the old wood structure was not known These extensive repairs are estimated to increase the useful life of the building Since these are major repairs and they will benefit more than the current operating cycle or year they are considered improvement The costs of these improvements should be debited to accumulated depreciation to recognize the increase in length of the useful life of the building Instructions Indicate how each of these transactions would be recorded in the accounting records E10 23 Analysis of Subsequent Expenditures Plant assets often require expenditures subsequent to acquisition It is important that they be accounted for properly Any errors will affect both the balance sheets and income statements for a number of yea rs Instructions For each of the following items indicate whether the expenditure should be capitalized C or expensed E in the period incurred a 9 Improvement Capitalized C Replacement of a minor broken part on a machine Expensed E Expenditure that increases the useful life of an existing asset Capitalized C Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value Capitalized C Page 9 Caroline Roberts ACCT 3311001 e Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset s salvage value Capitalized C f Ordinary repairs Expe nsed E g Improvement to a machine that increased its fair value and its production capacity by 30 without extending the machine s useful life Capitalized C h Expenditure that increases the quality of the output of the productive asset Capitalized C E10 24 Entries for Disposition of Assets On December 31 2012 Chrysler Inc has a machine with a book value of 940000 The original cost and related accumulated depreciation at this date are as follows Machine 1300000 quot 39 39 39 39 39 360000 Book value 940000 Depreciation is computed at 72000 per year on a straightline basis Instructions Presented below is a set of independent situations For each independent situation indicate the journal entry to be made to record the transaction Make sure that depreciation entries are made to update the book value of the machine prior to its disposal a A fire completely destroys the machine on August 31 2013 An insurance settlement of630000 was received for this casualty Assume the settlement was received immediately Depreciationexpense x 8 48000 Page 10 Caroline Roberts ACCT 3311001 Accumulated Depreciation 360000 48000 408000 Machine original cost 1300000 Less Accumulated Depreciation 408000 892000 Insurance Settlement 630000 Loss on Disposal of Machinery 262000 Aug 31 Depreciation Expense 48000 Accumulated Depreciation Equipment 48000 Aug 31 Cash 630000 Accumulated Depreciation Equipment 408000 Loss on Disposal of Equipment 262000 Equipment 1300000 b On April 1 2013 Chrysler sold the machine for 1040000 to Avanti Company Depreciation expense x 3 Accumulated Depreciation 360000 18000 Cash received Original cost of machine 1300000 Less Accumulated depreciation 378000 Gain on Disposal of Machinery Apr 1 Depreciation Expense Accumulated Depreciation Equipment Apr 1 Cash Accumulated Depreciation Equipment Equipment Gain on Disposal of Equipment Page 18000 378000 1040000 922000 118000 18000 18000 1040000 378000 1300000 118000 11 Caroline Roberts ACCT 3311001 6 On July 31 2013 the company donated this machine to the Mountain King City Council Thefair value of the machine at the time of the donation was estimated to be 1100000 72000 Depreciation expense T x 7 42000 Accumulated Depreciation 360000 42000 402000 Fairvalue of machine 1100000 Original cost of machine 1300000 Less quot 39 39 39 r 39 39 402000 898000 Gain on Disposal of Machine 202000 Jul 31 Depreciation Expense 42000 Accumulated Depreciation Equipment 42000 Jul 31 Contribution Expense 1100000 Accumulated Depreciation Equipment 402000 Equipment 1300000 Gain on Disposal of Equipment 202000 Page 12 Caroline Roberts ACCT 3311001 Chapter 4 Homework Exercises 4 5 8 Problem 4 4 Concepts for Analysis 4 4 E4 5 MultipleStep and Extraordinary Items The following balances were taken from the books of Parnevik Corp on December 31 2012 Interest revenue Cash Sales revenue Accounts receivable Prepaid insurance Sales returns and allowance Allowance for doubtful accounts Sales discounts Land Equipment Buildings Cost of goods sold Accumulated depreciation equipment 5 86000 51000 1280000 150000 20000 150000 7000 45000 100000 200000 140000 621000 40000 Assume the total effective tax rate on all items is 34 Instructions Accumulated depreciation buildings Notes receivable Selling expenses Accounts payable Bonds payable Office expenses Accrued liabilities Interest expense Notes payable Loss from earthquake damage extraordinary item Common stock Retained earnings Prepare a multiple step income statement 100000 shares of common stock were outstanding during the year Page 1 28000 155000 194000 170000 100000 97000 120000 500000 21000 Caroline Roberts ACCT 3311001 PARNEVIK CORPORATION INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31 2012 Sales revenue Sales S 1280000 Less Sales returns and allowances S 150000 Sales discounts 45000 195000 Net sales revenue 1085000 Cost of Goods Sold 621000 Gross profit 464000 Operating expenses Selling expenses 194000 Office expenses 97000 291000 Income from operations 173000 Other revenues and gains Interest revenue 86000 259000 Other expenses and losses Interest expense 60000 Income from continuing operations before income tax 199000 Income tax 67660 Income from continuing operations 131340 Extraordinary item loss from earthquake damage 120000 Less Applicable tax reduction 40800 79200 Net income S 52140 Earnings per common share 052 E48 MultipleStep Statement with Retained Earnings Presented below is information related to Brokaw Corp for the year 2012 Net sales 1200000 Cost of goods sold 780000 Selling expenses 65000 Administrative expenses 48000 Dividend revenue 20000 Interest revenue 7000 Writeoff of inventory due to obsolescence Depreciation expense omitted by accident in 2011 Casualty loss extraordinary item before taxes Cash dividends declared Retained earnings at December 31 2011 Effective tax rate of 34 on all items 980000 Page 2 Caroline Roberts ACCT 3311001 Instructions a Prepare a multiple step income statement for 2012 Assume that 60000 shares of common stock are outstanding BROKAW CORP INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31 2012 Net sales revenue S 1200000 Cost of goods sold 780000 Gross profit 420000 Operating Expenses Selling expenses S 65000 Administrative expenses 48000 113000 Income from operations 307000 Other Revenues and Gains Dividend revenue 20000 Interest revenue 7000 27000 334000 Other Expenses and Losses Writeoff of inventory due to obsolescence 80000 Income from continuing operations before income tax 254000 Income tax 86360 Income from continuing operations 167640 Extraordinary item casualty loss 50000 Less Applicable tax reduction 17000 33000 Net income S 134640 Earnings per common share 224 b Prepare a retained earnings statement for2012 BROKAW CORP RETAINED EARNINGS STATEMENT FOR THE YEAR ENDED DECEMBER 31 2012 Retained earnings January 1 as reported S 980000 Correction for overstatement of net income in prior period depreciation error net of 13600 tax 26400 Retained earnings January 1 as adjusted 953600 Add Net income 134640 1088240 Less Cash dividends 45000 Retained earnings December 31 1043240 Page 3 Caroline Roberts P4 4 Multiple and SingleStep Income Retained Earnings ACCT 3311001 The following account balances were included in the trial balance of Twain Corporation at June 30 2012 Sales revenue Sales discounts Cost of goods sold Salaries and wages expense sales Sales commissions Travel expense salespersons Freightout Entertainment expense Telephone and Internet expense sales Depreciation expense sales equipment Maintenance and repairs expense sales Miscellaneous selling expenses Office supplies used Telephone and Internet expense administration 1578500 31150 896770 56260 97600 28930 21400 14820 9030 4980 6200 4715 3450 2820 Depreciation expense office furniture and equipment S Property tax expense Bad debt expense selling Maintenance and repairs expense administration Office expense Sales returns and allowances Dividends received Interest expense Income tax expense Depreciation understatement due to error 2009 net of tax Dividends declared on preferred stock Dividends declared on common stock The Retained Earnings account had a balance of 337000 at July 1 2011 There are 80000 shares of common stock outstanding Instructions 7250 7320 4850 9130 6000 62300 38000 18000 102000 17700 9000 37000 a Using the multiple step form prepare an income statement and a retained earnings statement for the year ended June 30 2012 TWAIN CORPORATION INCOME STATEMENT FOR THE YEAR ENDED JUNE 30 2012 Sales Revenue Sales Less Sales returns and allowances Sales discounts Net sales revenue Cost of goods sold Gross profit Operating Expenses Selling expenses Sales commissions 1578500 62300 31150 93450 1485050 896770 588280 97600 Page 4 Caroline Roberts ACCT 3311001 Salaries and wages expense 56260 Travel expense 28930 Freightout 21400 Entertainment expense 14820 Telephone and Internet expense 9030 Maintenance and repairs expense 6200 Depreciation expense 4980 Bad debt expense 4850 Miscellaneous selling expenses 4715 248785 Administrative expenses Maintenance and repairs expense 9130 Property tax expense 7320 Depreciation expense 7250 Supplies expense 3450 Telephone and Internet expense 2820 Miscellaneous office expenses 6000 35970 284755 Income from operations 303525 Other Revenues and Gains Dividend revenue 38000 341525 Other Expenses and Losses Interest expense 18000 Income from continuing operations before income tax 323525 Income tax 102000 Net income S 221525 Earnings per common share 266 TWAIN CORPORATION RETAINED EARNINGS STATEMENT FOR THE YEAR ENDED JUNE 30 2012 Retained earnings July 1 as reported S 337000 Correction for overstatement of net income in prior period depreciation error net of tax 17700 Retained earnings July 1 as adjusted 319300 Add Net income 221 525 540825 Less Dividends declared on preferred stock S 9000 Dividends declared on common stock 37000 46000 Retained earnings June 30 494825 Page 5 Caroline Roberts ACCT 3311001 b Using the single stepform prepare an income statement and a retained earnings statement for the year ended June 30 2012 TWAIN CORPORATION INCOME STATEMENT FOR THE YEAR ENDED JUNE 30 2012 Revenues Net sales S 1485050 Dividend revenue 38000 Total revenues 1523050 Expenses Cost of goods sold 896770 Selling expense 248785 Administrative expense 35970 Interest expense 18000 Income tax expense 102000 Total expenses 1301525 Net income 5 221525 Earnings per share 266 TWAIN CORPORATION RETAINED EARNINGS STATEMENT FOR THE YEAR ENDED JUNE 30 2012 Retained earnings July 1 as reported 337000 Correction for overstatement of net income in prior period depreciation error net of tax 17700 Retained earnings July 1 as adjusted 319300 Add Net income 221 525 540825 Less Dividends declared on preferred stock 9000 Dividends declared on common stock 37000 46000 Retained earnings June 30 494825 Page 6 Caroline Roberts ACCT 3311001 CA4 4 Earnings Management Bobek Inc has recently reported steadily increasing income The company reported income of 20000 in 2009 25000 in 2010 and 30000 in 2011 A number of market analysts have recommended that investors buy the stock because they expect the steady growth in income to continue Bobek is approaching the end of its fiscal year in 2012 and it again appears to be a good year However it has not yet recorded warranty expense Based on prior experience this year s warranty expense should be around 5000 but some managers have approached the controller to suggest a larger more conservative warranty expense should be recorded this year Income before warranty expense is 43000 Specifically by recording a 7000 warranty accrual this year Bobek could report an increase in income for this year and still be in a position to cover its warranty costs in future years Instructions a What is earnings management Earnings management is the planned timing of revenues expenses gains and losses to smooth out bumps in earnings In most cases companies use earnings management to increase income in the current year at the expense of income in future years In effect earnings management is simply manipulating when speci c information is reported or changing the information itself in order to generate certain desired effects such as increasing net income in a certain period b Assume income before warranty expense is 43000 for both 2012 and 2013 and that total warranty expense over the 3 year period is 10000 What is the effect of the proposed accounting in 2012 In 2013 The income would continue to increase through 2013 if following the suggestion of the managers In 2012 income would increase from 30000 30000 0 30000 to 36000 43000 7000 36000 and the warranty expense would be charged with 7000 Since there is only 10000 in warranty expense over those years that leaves only 3000 of warranty expense to be applied in 2013 so even though the actual income remains the same at 43000 the income in 2013 appears higher because ofthe difference in the amount of warranty expense applied to each year What is the appropriate accounting in this situation The appropriate accounting in this situation would be to apply 5000 warranty expense to both 2012 and 2013 in order to spread the expense evenly The income would no longer appear to be increasing as it would remain equal from 2012 to 2013 at 38000 but the income would be more accurately reflected during both years and is still higher than it was in 2011 5 Page 7 Caroline Roberts Chapter 7 Homework Exercises 7 5 8 9 18 Problems 7 2 3 E75 Record Sales Gross and Net ACCT 3311001 On June 3 Bolton Company sold to Arquette Company merchandise having a sale price of2000 with terms of 210 n60 fob shipping point An invoice totaling 90 terms n30 was received by Arquette on June 8 from John Booth Transport Service for the freight cost On June 12 the company received a check for the balance due from Arquette Company Instructions a June June 9 June July Prepare journal entries on the Bolton Company books to record all the events noted above under each of the following bases 1 Sales and receivables are entered at gross selling price 3 Accounts Receivable Arquette Company 2000 Sales Revenue 12 Cash 1960 Sales Discounts 40 Account Receivable Arquette Company 2 Sales and receivable are entered at net of cash discounts 3 Accounts Receivable Arquette Company Sales Revenue 1950 12 Cash 1960 Account Receivable Arquette Company 2000 2000 1950 1950 Prepare the journal entry under basis 2 assuming thatArauette Company did not remit payment until July 29 3 Accounts Receivable Arquette Company 1960 Sales Revenue 14 Accounts Receivable Arquette Company 40 Sales Discounts Forfeited 29 Cash 2000 Account Receivable Arquette Company 1950 40 2000 Page 1 Caroline Roberts ACCT 3311001 E78 Recording Bad Debt At the end of 2012 Sorter Company has accounts receivable of 900000 and an allowance for doubtful accounts of 40000 On January 16 2013 Sorter Company determined that its receivable from Ordonez Company of 8000 will not be collected and management authorized its writeoff Instructions a Prepare the journal entry for Sorter Company to write off the Ordonez receivable Jan 16 Allowance for Doubtful Accounts 8000 Accounts Receivable Ordonez Company 8000 b What is the net realizable value of Sorter Company s accounts receivable before the write off of the Ordonez receivable 900000 40000 860000 c What is the net realizable value of Sorter Company s accounts receivable after the write off of the Ordonez receivable 892000 32000 860000 E79 Computing Bad Debt and Preparing Journal Entries The trial balance before adjustment of Estefan Inc shows the following balances Dr Cr Accounts Receivable 80000 Allowance for Doubtful Accounts 1750 Sales Net Revenue all on credit 580000 Instructions Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of a 4 of gross accounts receivable and 80000 04 3200 3200 1750 4950 Bad Debt Expense 4950 Allowance for Doubtful Accounts 4950 Page 2 Caroline Roberts ACCT 3311001 b 1 of net sales 580000 01 5800 Bad Debt Expense 5800 Allowance for Doubtful Accounts 5800 E718 Note Transactions at Unrealistic Interest Rates On July 1 2012 Rentoul Inc made two sales 1 It sold land having a fair value of 900000 in exchange for a 4year zerointerestbearing promissory note in the face amount of 1416163 The land is carried on Rentoul s books at a cost of 590000 900000 590000 310100 1416163 590000 516163 July 1 Notes Receivable 1416163 Discount on Notes Receivable 516163 Land 590000 Gain on Disposal of Land 310000 2 It rendered services in exchange for a 3 8year promissory note having a face value of 400000 interest payable annually Present Value of 1 factor n 8 i 12 is 40388 400000 40388 161522 Present Value of an Ordinary Annuity of 1 factor n 8 i 12 is 496764 Interest 400000 03 12000 12000 49764 5961168 161552 5961168 22116368 400000 22116368 17883632 July 1 Notes Receivable 400000 Discount on Notes Receivable 17883632 Service Revenue 22116368 Rentoul Inc recently had to pay 8 interest for money that it borrowed from British National Bank The customers in these two transactions have credit ratings that require them to borrow money at 12 interest Instructions Record the two journal entries that should be recorded by Rentoul Inc for the sales transactions above that took place on July 1 2012 Page 3 Caroline Roberts ACCT 3311001 P72 Bad Debt Reporting Presented below are a series of unrelated situations 1 Iquot S Halen Company s unadjusted trial balance at December 31 2012 included the following accounts Debit Credit 4000 Allowance for doubtful accounts Net sales 1200000 Halen Company estimates its bad debt expense to be 172 of net sales Determine its bad debt expense for 2012 1200000 015 18000 An analysis and aging of Stuart Corp accounts receivable at December 31 2012 disclosed the following Amounts estimated to be uncollectible 180000 Accounts receivable 1750000 Allowance for doubtful accounts per books 125000 What is the net realizable value of Stuart s receivables at December 31 2012 1750000 180000 1570000 Shore Co provides for doubtful accounts based on 3 of credit sales The following data are available for 2012 Credit sales during 2012 2400000 Allowance for doubtful accounts 1112 17000 Collection of accounts written off in prior years customer credit was reestablished 8000 Customer accounts written off as uncollectible during 2012 30000 What is the balance in the Allowance for Doubtful Accounts at December 31 2012 17000 8000 25000 25000 30000 5000 debit balance prior to adiusting entrv 2400000 03 72000 72000 5000 67000 credit balance after adiusting entg Page 4 Caroline Roberts ACCT 3311001 4 At the end of its first year of operations December 31 2012 Darden Inc reported the following information Accounts receivable net of allowance for doubtful accounts 950000 Customer accounts written off as uncollectible during 2012 24000 Bad debt expense for 2012 84000 What should be the balance in accounts receivable at December 31 2012 before subtracting the allowance for doubtful accounts 950000 84000 1034000 1034000 24000 1010000 This is assuming Darden Inc has to offset the existing balance in Allowance for Doubtful Accounts that would have been 24000 for the already written off accounts and is estimating 60000 in uncollectible accounts based on their current amount of receivables 5 The following accounts were taken from Bullock nc s trial balance at December 31 2012 Debit Credit Net credit sales 750000 Allowance for doubtful accounts 14000 Accounts receivable 310000 f doubtful accounts are 3 of accounts receivable determine the bad debt expense to be reported for 2012 310000 03 9300 9300 14000 23300 Instructions Answer the questions relating to each of the five independent situations as requested Page 5 Caroline Roberts ACCT 3311001 P73 BadDebt Reporting Aging Manilow Corporation operates in an industry that has a high rate of bad debts Before any yearend adjustments the balance in Manilow s Accounts Receivable account was 555000 and the Allowance for Doubtful Accounts had a credit balance of 40000 The yearend balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below Days Account Outstanding Amount Probability of Collection Less than 16 days 300000 98 Between 16 and 30 days 100000 90 Between 31 and 45 days 80000 85 Between 46 and 60 days 40000 80 Between 61 and 75 days 20000 55 Over 75 days 15000 00 Instructions a What is the appropriate balance for Allowance for Doubtful Accounts at yearend 300000 02 6000 100000 1 10000 80000 15 12000 40000 2 8000 20000 45 9000 5000 10000 12000 8000 9000 45000 b Show how accounts receivable would be presented on the balance sheet Account Receivable 540000 Less Allowance for Doubtful Account 45000 495000 c What is the dollar effect of the yearend bad debt adjustment on the beforetax income 60000 40000 20000 The bad debt adjustment only decreases beforetax income by 20000 because there was already a credit balance of 40000 in the Allowance for Doubtful Accounts that will already cover most ofthe estimated uncollectible debts for the following yea r Page 6 Caroline Roberts ACCT 3311001 Chapter 11 Homework Exercises 11 1 2 3 11 16 17 22 E11 1 Depreciation Computations SL SYD DDB Lansbury Company purchases equipment on January 1 Year 1 at a cost of 518000 The asset is expected to have a service life of 12 years and a salvage value of 50000 Instructions a Compute the amount of depreciation for each of Years 1 through 3 using the straightline depreciation method Year 1 39000 Year 2 39000 Year 3 39000 b Compute the amount of depreciation for each of Years 1 through 3 using the sumoftheyears digits method Year 1 72000 Year 2 66000 Year 3 60000 c Compute the amount of depreciation for each of Years 1 through 3 using the doubledeclining balance method In performing your calculations round constant percentage to the nearest onehundredth of a point and round answers to the nearest dollar Year 1 518000 78011 Year 2 439989 66262 Year 3 373727 56283 E11 2 Depreciation Conceptual Understanding Hasselback Company acquired a plant asset at the beginning of Year 1 The asset has an estimated service life of 5 years An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods You are to assume that the following schedules have been correctly prepared for this asset using 1 the straightline method 2 the sumof theyears digits method and 3 the doubledeclining balance method Page 1 Caroline Roberts ACCT 3311001 Sumof the Double Straight Years39 Declining Year Line Digits Balance 1 9000 15000 20000 2 9000 12000 12000 3 9000 9000 7200 4 9000 6000 4320 5 9000 3000 1480 Total 45000 45000 45000 Instructions Answer the following questions a D r What is the cost of the asset being depreciated 50000 What amount if any was used in the depreciation calculations for the salvage value for this asset 5000 Which method will produce the highest charge to income in Year 1 DoubleDecliningBalance Which method will produce the highest charge to income in Year 4 StraightLine Which method will produce the highest book value for the asset at the end of Year 3 StraightLine If the asset is sold at the end of Year 3 which method would yield the highest gain or lowest loss on disposal of the asset DoubleDecliningBalance Page 2 Caroline Roberts ACCT 3311001 E11 3 Depreciation Computations SYD DDB Partial Periods Cosby Company purchased a new plant asset on April 1 2012 at a cost of 774000 It was estimated to have a service life of 20 years and a salvage value of 60000 Cosby s accounting period is the calendar year Instructions a Compute the depreciation for this asset for 2012 and 2013 using the sumoftheyears digits method 2012 51000 17000 15150 2013 33150 b Compute the depreciation for this asset for 2012 and 2013 using the doubledeclining balance method 2012 53550 17850 48195 2013 66045 E11 11 Depreciation Change in Estimate Machinery purchased for 52000 by Carver Co in 2008 was originally estimated to have a life of 8 years with a salvage value of 4000 at the end of that time Depreciation has been entered for 5 years on this basis In 2013 it is determined that the total estimated life should be 10 years with a salvage value of 4500 at the end of that time Assume straightline depreciation Instructions a Prepare the entry to correct the prior years depreciation if necessary No entry required b Prepare the entry to record depreciation for 2013 Depreciation Expense 3500 Accumulated Depreciation Machinery 3500 Page 3 Caroline Roberts ACCT 3311001 Ell16 Impairment Presented below is information related to equipment owned by Pujols Company at December 31 2012 Cost 9000000 Accumulated depreciation to date 1000000 Expected future net cash flows 7000000 Fair value 4400000 Assume that Pujols will continue to use this asset in the future As of December 31 2012 the equipment has a remaining useful life of 4 years Instructions a Prepare the journal entry if any to record the impairment of the asset at December 31 2012 Loss on impairment 3600000 Accumulated depreciation Equipment 3600000 b Prepare the journal entry to record depreciation expense for 2013 Depreciation expense 1100000 Accumulated depreciation Equipment 1100000 c The fair value of the equipment at December 31 2013 is 5100000 Prepare the journal entry if any necessary to record this increase in fair value No entry required E11 17 Impairment Assume the same information as E1116 except that Pujols intends to dispose of the equipment in the coming year It is expected that the cost of disposal will be 20000 Instructions a Prepare the journal entry if any to record the impairment of the asset at December 31 2012 Page 4 Caroline Roberts ACCT 3311001 Loss on impairment 3620000 Accumulated Depreciation Equipment 3620000 b Prepare the journal entry if any to record depreciation expense for 2013 No entry required c The asset was not sold by December 31 2013 The fair value of the equipment on that date is 5100000 Prepare the journal entry if any necessary to record this increase in fair value It is expected that the cost of disposal is still 20000 Accumulated depreciation Equipment 680000 Recovery on impairment loss 680000 E11 22 Depletion Computations Mining Henrik Mining Company purchased land on February 1 2012 at a cost of1250000 It estimated that a total of 60000 tons of mineral was available for mining After it has removed all the natural resources the company will be required to restore the property to its previous state because of strict environmental protection laws It estimates the fair value of this restoration obligation at 90000 It believes it will be able to sell the property afterwards for 100000 It incurred developmental costs of 200000 before it was able to do any mining In 2012 resources removed totaled 30000 tons The company sold 24000 tons Instructions Compute the following information for 2012 a Per unit mineral cost 29ton b Total material cost of December 31 2012 inventory 145000 c Total materials cost in cost of goods sold at December 31 2012 696000 Page 5 Caroline Roberts ACCT 3311001 Chapter 3 Homework Day 2 Problems 3 5 9 P35 Adjusting Entries The accounts listed below appeared in the December 31 trial balance ofthe Savard Theater Debit Credit Equipment S 192000 Accumulated Depreciation Equipment S 60000 Notes Payable 90000 Admissions Revenue 380000 Advertising Expense 13680 Salaries and Wages Expense 57600 Interest Expense 1400 Instructions a From the account balances listed above and the information given below prepare the annual adjusting entries necessary on December 31 Omit explanations 1 The equipment has an estimated life of16 years and a salvage value of24000 at the end of that time Use straight line method 2 The note payable is a 90 day note given to the bank October 20 and bearing interest at 8 Use 360 daysfor denominator 3 In December 2000 coupon admission books were sold at 30 each They could be used for admission any time after January 1 4 Advertising expense paid in advance and included in Advertising Expense 1100 5 Salaries and wages accrued but unpaid 4 700 Depreciation expense 192000 24000 16 168000 16 10500 Interest expense prt 90000 08 72360 1440 Admissions Revenue 2000 30 60000 Page 1 Caroline Roberts ACCT 3311001 GENERAL JOURNAL Date AccountTitles and Explanation I Ref I Debit I Credit Dec 31 Depreciation expense 10500 Accumulated Depreciation Equipment 10500 31 Interest expense 1440 Interest payable 1440 31 Admissions Revenue 60000 Unearned Admissions Revenue 60000 31 Prepaid Advertising 1100 Advertising Expense 1100 31 Salaries and Wages Expense 4700 Salaries and Wages Payable 4700 b What amounts should be shown for each of the following on the income statementfor the year H Interest expense Interest expense 1400 Bal 1440 Adj 2840 dr 2 Admissions revenue Admissions revenue 380000 Bal 60000 Adj 320000 cr 3 Advertising expense Advertising expense 13680 Bal 1100 Adj 12580 dr 4 Salaries and wages expense Salaries and wages expense 57600 Bal 4700 Adj 62300 dr Page 2 Caroline Roberts P39 Adjusting and Closing ACCT 3311001 Presented below is the trial balance of the Crestwood Golf Club Inc as of December 31 The books are closed annually on December 31 CRESTWOOD GOLF CLUB INC TRIAL BALANCE DECEMBER 31 Cash Accounts Receivable Allowance for Doubtful Accounts Prepaid Insurance Land Buildings Accumulated Depreciation Buildings Equipment Accumulated Depreciation Equipment Common Stock Retained Earnings Dues Revenue Green Fees Revenue Rent Revenue Utilities Expense Salaries and Wages Expense Maintenance and Repairs Expense Debit 15000 13000 9000 350000 120000 150000 54000 80000 24000 815000 Credit 815000 1100 38400 70000 400000 82000 200000 5900 17600 Instructions a Enter the balances in ledger accounts Allow five lines for each account b From the trial balance and the information given below prepare annual adjusting entries and post to the ledger accounts Omit explanations 1 line method 2 The equipment is depreciated at 10 per year 3 Insurance expired during the year 3500 4 facilities The December rent has not yet been received Page 3 The buildings have an estimated life of 30 years with no salvage value straight The rent revenue represents the amount received for 11 months for dining Caroline Roberts ACCT 3311001 5 It is estimated that 12 of the accounts receivable will be uncollectible 6 Salaries and wages earned but not paid by December 31 53 600 7 Dues received in advance from members 8900 Depreciation Expense Buildings 120000 0 30 4000year Depreciation Expense Equipment 150000 1 15000year Rent Revenue 1760011 1600month 13000 12 Allowance for Doubtful Accounts 1100 1560 1100 460 GENERAL JOURNAL Date Account Titles and Explanation I Ref I Debit Credit Dec 31 Depreciation Expense 4000 Accumulated Depreciation Buildings 4000 31 Depreciation Expense 15000 Accumulated Depreciation Equipment 15000 31 Insurance Expense 3500 Prepaid Insurance 3500 31 Rent Receivable 1600 Rent Revenue 1600 31 Bad Debt Expense 460 Allowance for Doubtful Accounts 460 31 Salaries and Wages Expense 3600 Salaries and Wages Payable 3600 31 Dues Revenue 8900 Unearned Dues Revenue 8900 Page 4 Caroline Roberts ACCT 3311001 0 Prepare an adjusted trial balance CRESTWOOD GOLF CLUB INC TRIAL BALANCE DECEMBER 31 Debit Credit Cash S 15000 Accounts Receivable 13000 Allowance for Doubtful Accounts S 1560 Prepaid Insurance 5500 Land 350000 Buildings 120000 Accumulated Depreciation Buildings 42400 Equipment 150000 Accumulated Depreciation Equipment 85000 Common Stock 400000 Retained Earnings 82000 Dues Revenue 191100 Green Fees Revenue 5900 Rent Revenue 19200 Utilities Expense 54000 Salaries and Wages Expense 83600 Maintenance and Repairs Expense 24000 Salaries and Wages Payable 3600 Bad Debt Expense 460 Unearned Dues Revenue 8900 Rent Receivable 1600 Depreciation Expense 19000 Insurance Expense 3500 Totals S 839660 S 839660 C Prepare closing entries and post GENERAL JOURNAL Date Account Titles and Explanation I Ref I Debit Credit Dec 31 Dues Revenue 191100 Green Fees Revenue 5900 Rent Revenue 19200 lncome Summary 216200 Page 5 Caroline Roberts 31 Income Summary Utilities Expense Salaries and Wages Expense Maintenance and Repairs Expense Bad Debt Expense Depreciation Expense Insurance Expense 31 Income Summary Retained Earnings 184560 31640 ACCT 3311001 54000 83600 24000 19000 3500 31640 Accounts Receivable Income Summary Bal 13000 Exp 184560 Rev 216200 Inc 31640 216200 216200 39 39 Buidings Bal 38400 Adj Dec 31 4000 InsuranceExpense 42400 Adj Dec 31 3500 Close Dec 31 3500 39 J Equipment Land Bal 70000 Bal 350000 Adj Dec 31 15000 85000 and Repairs Expense Bal 2 000 Close Dec 31 24000 Allowance for D ubtfulAccounts Bal 1100 Adj Dec 31 460 Prepaidlnsurance 1560 Bal 9000 Adj Dec 31 3500 5500 Bad Debt Expense Rent Receivable Adj Dec 31 460 Close Dec 31 460 Adj Dec 31 1600 Page 6 Caroline Roberts ACCT 3311001 Buildings Rent Revenue Bal 120000 Close Dec 31 19200 Bal 17600 Adj Dec 31 1600 19200 19200 Cash Bal 15000 Retained Earnings Bal 82000 CommonStock Inc Dec 31 31640 Bal 400000 113640 Expense Salaries and Wages Expense Adj Dec 31 4000 Close Dec 31 19000 Bal 80000 Close Dec 31 83600 Adj 31 15000 Adj Dec 19000 19000 83600 Dues Revenue Salaries and Wages Payable Adj Dec 31 8900 Bal 200000 Adj Dec 31 3600 Close 31 191100 200000 200000 Unearned Dues Revenue Adj Dec 31 8900 Equipment Bal 150000 Utilities Expense Bal 0 Close Dec 31 54000 Green Fees Revenue Close Dec 31 5900 Bal 5900 Page 7 Caroline Roberts ACCT 3311001 Chapter 8 Homework Exercises 8 4 5 9 14 24 25 E84 lnventoriable Costs Perpetual Bradford Machine Company maintains a general ledger account for each class of inventory debiting such accounts for increases during the period and crediting them for decreases The transactions below relate to the Raw Materials inventory account which is debited for materials purchased and credited for materials requisitioned for use l Iquot S P Equot An invoice for 8100 terms fob destination was received and entered January 2 2013 The receiving report shows that the materials were received December 28 2012 Inventory Accounts Payable 8100 8100 Materials costing 7300 were returned to the supplier on December 29 2012 and were shipped fob shipping point The return was entered on that date even though the materials are not expected to reach the supplier s place of business until January 6 2013 No correcting entry required Materials costing 28000 shipped fob destination were not entered by December 30 2012 llbecause they were in a railroad car on the company s siding on that date and had not been unloadedquot Inventory Account Payable 28000 28000 An invoice for 7500 terms fob shipping point was received and entered December 30 2012 The receiving report shows that the materials were received January 4 2013 and the bill of lading shows that they were shipped January 2 2013 Account Payable Inventory 7500 7500 Materials costing 19800 were received December 30 2012 but no entry was made for them because llthey were ordered with a specified delivery of no earlier than January 10 2013quot Inventory Account Payable 19800 19800 Page 1 Caroline Roberts ACCT 3311001 Instructions Prepare correcting journal entries required at December 31 2012 assuming that the books have not been closed E85 lnventoriable Costs Error Adjustments Werth Company asks you to review its December 31 2012 inventory values and prepare the necessary adjustments to the books The following information is given to you 1 P Iquot Werth uses the periodic method of recording inventory A physical count reveals 234890 of inventory on hand at December 31 2012 No entry required Not included in the physical count of inventory is 10420 of merchandise purchased on December 15 from Browser This merchandise was shipped fob shipping point on December 29 and arrived in January The invoice arrived and was recorded on December 31 No entry required Included in inventory is merchandise sold to Bubbey on December 30 fob destination This merchandise was shipped after it was counted The invoice was prepared and recorded as a sale on account for 12800 on December 31 The merchandise cost 7350 and Bubbey received it on January 3 Sales Revenue Accounts Receivables 12800 12800 Included in inventory was merchandise received from Dudley on December 31 with an invoice price of 15630 The merchandise was shipped fob destination The invoice which has not yet arrived has not been recorded Purchases Accounts Payable 15630 15630 Not included in inventory is 8540 of merchandise purchased from Minsky Industries This merchandise was received on December 31 after the inventory had been counted The invoice was received and recorded on December 30 Page 2 Caroline Roberts ACCT 3311001 No entry required 6 Included in inventory was 10438 of inventory held by Werth on consignment from Jackel Industries No entry required 7 Included in inventory is merchandise sold to Sims fob shipping point This merchandise was shipped after it was counted The invoice was prepared and recorded as a sale for 18900 on December 31 The cost of this merchandise was 11520 and Sims received the merchandise on January 5 No entry required 8 Excluded from inventory was a carton labeled llPlease accept for creditquot This carton contains merchandise costing 1500 which had been sold to a customer for 2600 No entry had been made to the books to reflect the return but none of the returned merchandise seemed damaged Sales Returns and Allowances 2600 Account Receivable 2600 Instructions a Determine the proper inventory balance for Werth Company at December 31 2012 234890 10420 8540 10438 11520 1500 233392 b Prepare any correcting entries to adjust inventory to its proper amount at December 31 2012 Assume the books have not been closed E89 Periodic versus Perpetual Entries Chippewas Company sells one product Presented below is information for January for Chippewas Company Page 3 Caroine Roberts Jan 1 27 Inventory Sale Purchase Sale Purchase Sale ACCT 3311001 100 units at 6 each 80 units at 8 each 150 units at 650 each 120 units at 875 each 160 units at 7 each 100 units at 9 each Chippewas uses the FIFO cost flow assumption All purchases and sales are on account Instructions a Assume Chippewas uses a periodic system Prepare all necessary journal entries including the end of month closing entry to record cost of goods sold A physich count indicates that the ending inventory for January is 11 0 units Bl 100 6 600 Purchases 150 650 160 7 975 1120 2095 coes 300 unit 100 6 150 650 50 7 600 975 350 1925 El 110 7 770 Jan 4 11 13 Accounts Receivable 640 Sales Revenue 640 Purchases 975 Accounts Payable 975 Account Receivable 1050 Sales Revenue 1050 Purchases 1120 Account Payable 1120 Account Receivable 900 Sales Revenue 900 Inventory 770 Cost of Goods Sold 1925 Purchases 2095 Inventory 600 Page 4 Caroline Roberts ACCT 3311001 b Compute gross profit using the periodic system Revenue 80 s 120 875 100 9 540 1050 900 2590 2590 1925 555 6 Assume Chippewas uses a perpetual system Prepare all necessary journal entries Jan 4 Accounts Receivable 640 Sales Revenue 640 4 Cost of Goods Sold 480 Inventory 480 11 Inventory 975 Account Payable 975 13 Account Receivable 1050 Sales Revenue 1050 13 Cost of Goods Sold 770 Inventory 770 20 Inventory 1120 Account Payable 1120 27 Account Receivable 900 Sales Revenue 900 27 Cost of Goods Sold 675 Inventory 675 d Compute gross profit using the perpetual system Revenue 640 1050 900 2590 COGS 480 770 675 1925 Gross profit 2590 1925 665 E814 FIFO LIFO and Average Cost Determination LoBianco Company s record of transactions for month of April was as follows Page 5 Caroline Roberts ACCT 3311001 Purchases April 1 balanceon hand 600 at 600 4 1500 at 608 8 800 at 640 13 1200 at 650 21 700 at 660 29 500 at 679 5300 Sales April 3 500 at 1000 9 1300 at 1000 11 600 at 1100 23 1200 at 1100 27 900 at 1200 4500 Instructions a Assuming that periodic inventory records are kept compute the inventory atApriI 30 using 1 LIFO and 600 600 200 608 3600 1216 4 816 2 Average cost 600 600 1500 608 800 640 1200 650 700 660 500 679 3600 9120 5120 7800 4620 3395 32855 33655 5300 635 635 800 5080 b Assuming that perpetual inventory records are kept in both units and dollars determine the inventory atApriI 30 using 1 FIFO and 300 660 500 679 1980 3395 5375 2 LIFO Page 6 Caroline Roberts ACCT 3311001 Apr 1 600 600 Apr 13 650 1200 Sale 43 500 Sale 423 500 100 700 Sale 427 700 Apr 4 608 1500 0 Sale 49 500 1000 Sale 411 600 Apr 21 660 700 400 Sale 423 700 Sale 427 200 0 200 Apr 29 679 500 Apr 8 640 800 Sale 49 800 0 100 500 200 508 500 579 500 1215 3395 5211 c Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO 500 500 1500 508 800 540 1200 550 400 550 3500 9120 5120 7800 2540 28280 d In an inflationary period which inventory method FIFO LIFO average cost will show the highest net income FIFO E824 DollarValue LIFO The dollarvalue LIFO method was adopted by King Corp on January 1 2012 Its inventory on that date was 160000 On December 31 2012 the inventory at prices existing on that date amounted to 151200 The price level at January 1 2012 was 100 and the price level at December 31 2012 was 112 Instructions Page 7 Caroline Roberts ACCT 3311001 a Compute the amount of the inventory at December 31 2012 under the doIIar vaIue LIFO method 151200 112 135000 135000 150000 25000 135000 100 135000 b On December 31 2013 the inventory at prices existing on that date was 195500 and the price level was 115 Compute the inventory on that date under the doIIar vaIue LIFO method 195500 115 170000 170000 135000 35000 135000 100 135000 35000 115 40250 135000 40250 175250 E825 Dolla rValue LIFO Presented below is information related to Martin Company Ending Inventory Price Date Endof Year Prices ndex December 31 2009 80000 100 December 31 2010 111300 105 December 31 2011 108000 120 December 31 2012 122200 130 December 31 2013 147000 140 December 31 2014 176900 145 Instructions Compute the ending inventory for Martin Company for2009 through 2014 using the doIIar vaIue LIFO method 2009 80000 100 M 2010 111300 105 105000 80000 25000 25000 105 27300 80000 27300 107300 2011 108000 120 90000 105000 15000 10000 105 10500 80000 10500 90500 Page 8 Caroline Roberts 2012 122200 130 94000 90000 4000 90500 5200 m 2013 147000 140 105000 94000 11000 95700 15400 111100 2014 176900 145 122000 105000 17000 111100 24650 135750 Page 9 ACCT 3311001 4000 130 5200 11000 140 15400 17000 145 24650 Caroline Roberts ACCT 3311001 Chapter 5 Homework Exercises 5 10 12 13 E510 Current Liabilities Mary Pierce is the controller of Arnold F and is I quot 39 for the r r 39 of the year I end financial statements The following transactions occurred during the year a On December 20 2012 an employee filed a legal action against Arnold for 100000 for wrongful dismissal Management believes the action to be frivolous and without merit The likelihood of payment to the employee is remote Not reported as a current liability because there is no de nite payment whether or not it even becomes a liability has yet to be seen While the item remains a contingency it is listed only as a supplement to the balance sheet 57 Bonuses to key employees based on net income for 2012 are estimated to be 150000 Reported as 150000 it is a payable Equot On December 1 2012 the company borrowed 900000 at 8 per year Interest is paid quarterly 6000 reported as Interest Payable 900000 08 14 18000 18000 3 6000 Only one month has passed since the money was borrowed so while it is not yet due one month39s worth should still be counted as payable at the end ofthe year 53 Credit sales for the year amounted to 10000000 Arnold s expense provision for doubtful accounts is estimated to be 2 of credit sales Not reported as a current liability Allowance for Doubtful Accounts is a contraasset account and Bad Debts Expense is an equity account They are measuring what is owed to us not what we owe and since it is a sunk cost and not owed to anyone it is classi ed as an expense not a a payable or other type of liability e On December 15 2012 the company declared a 200 per share dividend on the 40000 shares of common stock outstanding to be paid on January 5 2013 Reported as 80000 in Dividends Payable 200share 40000 shares 80000 Page 1 CaroIine Roberts ACCT 3311001 1 During the year customer advances of 160000 were received 50000 of this amount was earned by December 31 2012 Reported as 110000 in Unearned Service Revenue the remainder that has been earned is listed in Service Revenue an equity account Instructions For each item above indicate the dollar amount to be reported as a current liability If a liability is not reported explain why E512 Preparation ofa Balance Sheet Presented below is the trial balance of Vivaldi Corporation at December 31 2012 Cash Sales Debt Investments trading cost 145000 Cost of Goods Sold Debt Investments longterm Equity Investments longterm Notes Payable shortterm Accounts Payable Selling Expenses Investment Revenue Land Buildings Dividends Payable Accrued LiabiIities Accounts Receivable Accumulated Depreciation Buildings Allowance for Doubtful Accounts Administrative Expenses Interest Expense Inventory Extraordinary Gain Notes Payable longterm Equipment Bonds Payable Accumulated Depreciation Equipment Franchises Page 2 Debits 197000 153000 4800000 299000 277000 2000000 260000 1040000 435000 900000 211000 597000 600000 160000 Credits 5 7900000 90000 455000 63000 136000 96000 352000 25000 80000 900000 1000000 60000 Caroline Roberts ACCT 3311001 Common Stock 5 Pa r 1000000 Treasury Stock 191000 Patents 195000 Retained Earnings 78000 Paidin Capital in Excess of Par 80000 Totals 12315000 12315000 Instructions Prepare a balance sheet at December 31 2012 for Vivaldi Corporation Ignore income taxes VIVALDI CORPORATION BALANCE SHEET DECEMBER 31 2012 Asset Current assets Cash 197000 Accounts Receivable 435000 Less Allowance for Doubtful Accounts 25000 410000 Inventory 597000 Debt Investments 153000 Total current assets 1357000 Longterm investments Equity investments 277000 Debt Investments 299000 Total longterm investments 576000 Property Plant and equipment Land 260000 Buildings 1040000 Less Accumulated Depreciation Buildings 352000 688000 Equipment 600000 Less Accumulated Depreciation Equipment 60000 540000 Total property plant and equipment 1488000 Intangible assets Patents 195000 Franchises 160000 Total intangible assets 355000 Total assets 3776000 Page 3 Caroline Roberts ACCT 3311001 Liabilities and Stockholders39 Equity Current liabilities Notes payable S 90000 Accounts payable 455000 Accrued liabilities 96000 Dividends payable 136000 Total current liabilities S 777000 Longterm debt Notes payable 900000 Bonds payable 1000000 Total longterm debt 1900000 Total liabilities 2677000 Stockholders39 eguity Paid in on capital stock Treasury stock 191000 Common stock 5 Pa r 1000000 Paidin Capital in excess of par 80000 1271000 Retained earnings 78000 Total stockholders39 equity 1349000 Total liabilities and stockholders39 equity 4026000 E513 Statement of Cash Flows Classi cations The major classifications of activities reported in the statement of cash flows are operating investing and financing Classify each of the transactions listed below as Operating activity add to net income Operating activity deduct from net income 1 2 3 Investing activity 4 Financing activity 5 Reported as significant noncash activity The transactions are as follows a Issuance of capital stock 4 Financing activity b Purchase of land and building 3 Investing activity Page 4 Caroline Roberts 5 R f 9 3 ACCT 3311001 Redemption of bonds 4 Financing activity Sale of equipment 3 Investing activity Depreciation of machinery 1 Operating activity add to net income Amortization of patent 1 Operating activity add to net income Issuance of bonds for plant assets 5 Reported as signi cant noncash activity Payment of cash dividends 4 Financing activity Exchange of furniture for of ce equipment 5 Reported as signi cant noncash activity Purchase of treasurystock 4 Financing activity Loss on sale of equipment 1 Operating activity add to net income Increase in accounts receivable during the year 2 Operating activity deduct from net income Decrease in accounts payable during the year 2 Operating activity deduct from net income Page 5 Caroline Roberts ACCT 3311001 Chapter 3 Homework Day 1 Exercises 3 1 12 Problem 3 1 Journal Entries Only E31 Transaction Analysis Service Company Christine Ewing is a licensed CPA During the first month of operations her business a sole proprietorship the following events and transactions occurred April Instructions Invested 30000 cash and equipment valued at 14000 in the business Hired a secretaryreceptionist at a salary of 290 per week payable monthly Purchased supplies on account 700 debit an asset account Paid office rent of 600 for the month Completed 3 tax assignment and billed client 1100 for services rendered Use Service Revenue account Received 3200 advance on a management consulting engagement Received cash of 2300 for services completed for Ferengi Co Paid insurance expense 110 Paid secretaryreceptionist 1160 for the month A count of supplies indicated that 120 of supplies had been used Purchased a new computer for 5100 with personal funds The computer will be used exclusively for business purposes Journalize the transactions in the general journal Omit explanations GENERAL JOURNAL Date Account Titles and Explanation Ref Debit Credit April 2 Cash 30000 Equipment 14000 Owner39s Capital 44000 2 No entry required 3 Supplies 700 Accounts Payable 700 7 Rent Expense 600 Cash 600 Page 1 Caroline Roberts ACCT 3311001 11 Accounts Receivable 1100 Service Revenue 1100 12 Cash 3200 Unearned Service Revenue 3200 17 Cash 2300 Service Revenue 2300 21 Insurance Expense 110 Cash 110 30 Salaries and Wages Expense 1160 Cash 1160 30 Supplies Expense 120 Supplies 120 30 Equipment 5100 Owner39s Capital 5100 Page 2 Caroline Roberts ACCT 3311001 E312 Prepare Financial Statements Flynn Design Agency was founded by Kevin Flynn in January 2006 Presented below is the adjusted trial balance as of December 31 2012 FLYNN DESIGN AGENCY ADJUSTED TRIAL BALANCE DECEMBER 31 2012 Dr Cr Cash S 10000 Accounts Receivable 21500 Supplies 5000 Prepaid Insurance 2500 Equipment 60000 Accumulated Depreciation Equipment S 35000 Accounts Payable 8000 Interest Payable 150 Notes Payable 5000 Unearned Service Revenue 5600 Salaries and Wages Payable 1300 Common Stock 10000 Retained Earnings 3500 Service Revenue 58500 Salaries and Wages Expense 12300 Insurance Expense 850 Interest Expense 500 Depreciation Expense 7000 Supplies Expense 3400 Rent Expense 4000 127050 127050 Page 3 Caroline Roberts ACCT 3311001 Instructions a Prepare an income statement and a statement of retained earnings for the year ending December 31 2012 and an unclassi ed balance sheet at December 31 FLYNN DESIGN AGENCY Income Statement For the Year Ended December 31 2012 Revenues Service Revenue 58500 Expenses Salaries and Wages Expense 12300 Depreciation Expense 7000 Rent Expense 4000 Supplies Expense 3400 Insurance Expense 850 Interest Expense 500 Total Expenses 28050 Net income 30450 FLYNN DESIGN AGENCY Statement of Retained Earnings For the Year Ended December 31 2012 Retained earnings Jan 1 3500 Add Net income 30450 Retained earnings December 31 33950 Page 4 Caroline Roberts ACCT 3311001 Cash FLYNN DESIGN AGENCY Balance Sheet December 31 2012 Assets Accounts receivable Supplies Prepaid insurance Equipment Less Accumulated depreciation equipment Liabilities Notes payable S 5000 Accounts payable 8000 Unearned service revenue 5600 Salaries and wages payable 1300 Interest payable 150 Total liabilities Stockholders39 Equity Common stock S 10000 Retained earnings 33950 60000 Total assets Liabilities and Stockholders39 Equity Total liabilities and stockholders39 equity 35000 V 10000 21500 5000 2500 25000 64000 20050 43950 64000 b Answer the following questions 1 Ifthe note has been outstanding 6 months what is the annual interest rate on that note Interest Face value Annual interest rate Time in terms of 1 year 150 5000 r 612 150 5000 r 12 2 150 5000 r 12 2 300 5000 r 3005000 5000 5000r 06 r r annual interest rate Page 5 Caroline Roberts ACCT 3311001 2 If the company paid 51 7500 in salaries and wages in 2012 what was the balance in Salaries and Wages Payable on December 31 2011 Salaries and Wages Expense 12300 Salaries and Wages Payable 1300 12300 1300 11000 17500 11000 6500 Salaries and Wages Payable 123111 P31 Transactions Financial Statements Service Company Listed below are the transactions of Yasunari Kawabata DDS for the month of September Sept 1 Kawabata begins practice as a dentist and invests 20000 cash 2 Purchases dental equipment on account from Green Jacket Co for 17280 4 Pays rent for office space 680 for the month 4 Employs a receptionist Michael Bradley 5 Purchases dental supplies for cash 942 8 Receives cash of 1690 from patients for services performed 10 Pays miscellaneous office expenses 430 14 Bills patients 5820 for services performed 18 Pays Green Jacket Co on account 3600 19 Withdraws 3000 cash from the business for personal use 20 Receives 980 from patients on account 25 Bills patients 2110 for services performed 30 Pays the following expenses in cash Salaries and wages 1800 miscellaneous office expenses 85 30 Dental supplies used during September 330 Instructions a Enter the transactions shown above in appropriate general ledger accounts use T accounts Use the following ledger accounts Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Equipment Accounts Payable Owner s Capital Service Revenue Rent Expense Office Expense Salaries and Wages Expense Supplies Expense Depreciation Expense and Income Summary Allow 10 lines for the Cash and Income Summary accounts and 5 lines for each of the other accounts needed Record depreciation using a 5 year life on the equipment the straight line method and no salvage value Do not use a drawing account Page 6 Caroline Roberts GENERAL JOURNAL Date Account Titles and Explanation Credit Sept 1 Cash 20000 Owner39s Capital 20000 2 Equipment 17280 Accounts Payable 17280 4 Rent Expense 680 Cash 680 4 No entry required 5 Supplies 942 Cash 942 8 Cash 1690 Service Revenue 1690 10 Office Expense 430 Cash 430 14 Accounts Receivable 5820 Service Revenue 5820 18 Accounts Payable 3600 Cash 3600 19 Owner39s Capital 3000 Cash 3000 20 Cash 980 Accounts Receivable 980 25 Accounts Receivable 2110 Service Revenue 2110 30 Salaries and Wages Expense 1800 Office Expense 85 Cash 1885 30 Supplies expense 330 Supplies 330 30 Depreciation Expense 288 quot 39 39 D 39 39 r 288 ACCT 3311001 Page 7 Caroline Roberts ACCT 3311001 Accounts Payable Office Expense r Sept 18 3600 Sept 2 17280 Bal 30 13680 Accounts 39 Sept 14 5820 Sept 20 980 25 2110 Bal 30 6950 quot 39 J T r Equipment Sept 30 288 Cash Sept 1 20000 Sept 4 680 8 1690 5 942 20 980 10 430 18 3600 19 3000 30 1885 Bal 30 12133 Depreciation Expense Sept 30 288 Close Sept 30 288 Sept 2 17280 Income Summary Sept 30 288 30 515 680 1800 330 Sept 30 9620 0007 0007 Page 8 Sept 10 430 Sept 30 515 30 85 Bal 30 515 Close 30 515 Owner39s Capital Sept 19 3000 Sept 1 20000 30 6007 Bal 30 23007 Rent Expense Sept Sept 4 680 Close 30 680 Salaries and Wages Expense Sept 30 1800 Close Sept 30 1800 Service Revenue Sept 30 9620 Sept 8 1690 14 5820 25 2110 Close 9620 9620 Supplies Sept 5 942 Sept 30 330 Bal 30 612 Supplies Expense Sept 30 330 Close Sept 30 330 Chapter 1 Financial Accounting and Accounting Standards Thinking Outside the Box Investors have expressed concerns that onesizefitsall financial reports do not meet the needs of the spectrum of investors many individual investors want summarized easily understandable plainEnglish reports while investment professionals may want many more details than are provided Many companies assert that when preparing financial reports it is difficult to ensure compliance with the voluminous and complex requirements contained in US GAAP and SEC reporting rules The US capital markets can run fairly orderly and efficiently only through the steady flow of comprehensive and meaninful information The percentage of a company s market value that can be attributed to accounting book value has declined significantly from the days of a bricks andmortar economy Thus we may want to consider a more comprehensive business reporting model including both financial and nonfinancial key performance indicators All this information also needs to be delivered in a timelier manner The analysis of financial information is still subject to many manual processes resulting in delays increased costs and errors Some of the major changes that are already underway support quotoutside the boxquot thinking and will take the accounting profession beyond the complexity debate to encompass both the usefulness of financial reporting and the most effective delivery of information to investors These projects include o The FASB and IASB are working on a convergence project including a reconsideration of the conceptual framework It is hoped that this project will contribute to lesscomplex moreunderstandable standards 0 Standardsetters are exploring an enhanced business reporting framework which will result in expanded reporting of key performance indicators 0 The SEC now requires the delivery of financial reports using eXtensible Business Reporting Language XBRL Reporting through XBRL allows timelier reporting via the Internet and allows statement users to transform accounting reports to meet their specific needs The US system of financial reporting has long been the most robust and transparent in the world To ensure that it continues to provide the most relevant and reliable financial information to users a number of financial reporting issues must be resolved including Adopting global standards Increasing fair value reporting Using principlesbased versus rulebased standards Meeting multiple user needs Financial Accoun ng and Accoun ng 5fandards 4 Genera V st mg rft39j rid Eartleslnvplvedln A 9 Issues In Flnanclal Financial Reporting Standard setting Fling Repoan Accounting and 0 Securities and o FASE Cudificaiun Puliticalenvimnment capital allocation Expemamsgap 0 ObJEE WE cumm ss m o Financiairepuring o Needtu develop AWEV EWW ME Di challenges standards CPA 0 international accounting Standards FinancialAccuunting rdsEiuard Em Standa Changing rule or the AlCF39A Chapter 14 FINANCIAL STATEMENTS AND FINANCIAL REPORTING The essential characteristicts of accounting are 1 the identification measurement and communication of financial information about 2 economic entities to 3 interested parties Financial accounting is the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties Users ofthese financial reports include 0 Investors 0 Creditors 0 Managers 0 Unions 0 Government agencies Managerial accounting is the process of identifying measuring analyzing and communicating financial information needed by management to plan control and evaluate a company39s operations Financial statements are the principal means through which a company communicates its financial information to those outside it These statements provide a company39s history quantified in money terms The financial statements most frequently provided are 0 The balance sheet 0 The income statement 0 The statement of cash flows 0 The statement of owners39 or stockholders39 equity 0 Note disclosures are an integral part of each financial statement Some financial information is better provided or can be provided only by means of financial reporting other than formal financial statements Examples include 0 President s letter or supplementary schedules in the corporate annual report 0 Prospectuses 0 Reports filed with government agencies 0 News releases 0 Management s forecasts 0 Social or environmental impact statements 0 Companies may need to provide such information because of I authoritative pronouncement I regulatory rule I custom I voluntary provision of information by management We focus on the development of two types of financial information o the basic financial statements 0 related disclosures Accounting and Capital Allocation Resources are limited efficient use of resources often determines whether a business thrives Accountants must measure performance accurately and fairly on a timely basis so that the right managers and companies are able to attract investment capital Relevant and reliable information allows investors and creditors to compare the income and assets employed by companies Because these users can assess the relative return and risks associated with investment opportunities they channel resources more effectively The process of capital allocation is as follows 0 Financial Reporting the financial information a company provides to help users with capital allocation decisions about the company 0 Users present and potential Investors and creditors use financial reports to make their capital allocation decisions Capital Allocation The process of determining how and at what cost money is allocated among competing interests An effective process of capital allocation is critical to a healthy economy It promotes productivity encourages innovation and provides an efficient and liquid market for buying and selling securities and obtaining and granting credit Unreliable and irrelevant information leads to poor capital allocation which adversely affects the securities markets Even the slightest hint of any accounting irregularity at a company leads to a subsequent pounding of the company s stock price it has become clear that investors must trust the accounting numbers or they will abandon the market and put their resources elsewhere With investor uncertainty the cost of capital increases for companies who need additional resources Relevant and reliable financial information is necessary for markets to be efficient Objective of Financial Reporting The objective of generalpurpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors lenders and other creditors in decisions about providing resources to the entity Those decisions involve buying selling or holding equity and debt instruments and providing or settling loans and other forms of credit Information that is decisionuseful to capital providers investors may also be helpful to other users of financial reporting who are not investors The elements of this objective are GeneralPurpose Financial Statements provide financial reporting information to a wide variety of users including shareholders creditors suppliers employees and regulators helping them to better understand its financial position and related performance To be costeffective in providing this information generalpurpose financial statements are most appropriate they provide at the least cost the most useful information possible Equity Investors and Creditors the objective of financial reporting identifies investors and creditors as the primary users for generalpurpose financial statements this provides an important focus of generalpurpose financial reporting These users have the most critical and immediate need for information in financial reports to assess the company s ability to generate net cash inflow and to understand management s ability to protect and enhance the assets of the company which will be used to generate future net cash inflows As a result the primary user groups are not management regulators or some other noninvestor group Entity Perspective Companies are viewed as separate and distinct from their owners present shareholders using this perspective The assets of the company belong to the company and not to a specific creditor or shareholder These investors have claims on the company s assets in the form of liability or equity claims The entity perspective is consistent with the present business environment where most companies engaged in financial reporting have substance distinct from their investors both shareholders and creditors Thus a perspective that financial reporting should be focused only on the needs of shareholders often referred to as the proprietary I rr r is not r r Management is also accountable to investors for the custody and safekeeping of the company s economic resources and for their efficient and profitable use The management is responsible for protecting its economic resources from unfavorable effects of economic factors such as price changes and technological and social changes The company s stewardship responsibilities usually affect its ability to generate net cash inflows and financial reporting may also provide decisionuseful information to assess management s performance in this role DecisionUsefulness Investors are interested in financial reporting because it provides information that is useful for making decisions When making these decisions investors are interested in assessing o The company s ability to generate net cash inflows o Management s ability to protect and enhance the capital providers investments Financial reporting should therefore help investors assess the amounts timing and uncertainty of prospective cash inflows from dividends or interest and the proceeds from the sale redemption or maturity of securities or loans In order for investors to make these assessments the economic resources of an enterprise the claims to those resources and the changes in them must be understood Financial statements and related explanations should be a primary source for determining this information The emphasis on llassessing cash flow prospects does not mean that the cash basis is preferred over the accrual basis of accounting Information based on accrual accounting better indicates a company s present and continuing ability to generate favorable cash flows than does information limited to the financial effects of cash receipts and payments The objective of accrualbasis accounting is to ensure that a company records events that change its financial statements in the periods in which the events occur rather than only in the periods in which it receives or pays cash Revenues are recognized when goods or services are provided rather than when cash is received and expenses are recognized when they are incurred rather than when they are paid Revenues are recognized when a company makes sales so the company can then relate the revenues to the economic environment of the period in which they occurred Over the long run trends in revenues and expenses are generally more meaningful than trends in cash receipts and disbursements The Need to Develop Standards The main controversy in setting accounting standards is llWhose rules should we play by and what should they bequot Users of financial accounting statements have both coinciding and conflicting needs for information of various types The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced Otherwise it would be almost impossible to prepare statements that could be compared The common set of standards and procedures is called generally accepted accounting principles GAAP The term llgenerally accepted means either that an authoritative accounting rulemaking body has established a principle of reporting in a given area or that over time a given practice has been accepted as appropriate because of its universal application Although principles and practices continue to provoke both debate and criticism most members of the financial community recognize them as the standards that over time have proven to be most useful PARTIES INVOLVED IN STAN DARDSE39ITI NG Three organizations are instrumental in the development of financial accounting standards GAAP in the United States 0 Securities and Exchange Commission SEC 0 0 External financial reporting and auditing developed in tandem with the growth of the industrial economy and its capital markets However when the stock market crashed in 1929 and the nation s economy plunged into the Great Depression there were calls for increased government regulation of business generally and especially financial institutions and the stock market As a result of these events the federal government established the Securities and Exchange Commission SEC to help develop and standardize financial information presented to stockholders It is a federal agency and administers the Securities Exchange Act of 1934 and several other acts Most companies that issue securities to the public or are listed on a stock exchange are required to file audited financial statements with the SEC The SEC also has broad powers to prescribe in whatever detail it desires the accounting practices and standards to be employed by companies that fall within its jurisdiction It currently exercises oversight over 12000 companies that are listed on the major exchanges eg the New York Stock Exchange and the Nasdaq PublicPrivate Partnership I At the time the SEC was created no group issued accounting standards I It encouraged the creation of a private standardsetting body because it believed that the private sector has the appropriate resources and talent to achieve this daunting task As a result accounting standards have developed in the private sector either through the American Institute of Certified Public Accountants AICPA or the Financial Accounting Standards Board FASB I The SEC affirmed support for the FASB by indicating financial statements conforming to FASB standards are presumed to have substantial authoritative support I The SEC requires registrants to adhere to GAAP I The SEC continues to believe that the initiative for establishing and improving accounting standards should remain in the private sector subject to Commission oversight SEC Oversight I The SEC s partnership with the private sector works well I The SEC acts with remarkable restraint in the area ofdeveloping accounting standards Generally the SEC relies on the FASB to develop accounting 39 39 their39 39 in the 39 39 a standard proposed by the private sector to prodding the private sector into r varies ranging from rejecting taking quicker action on certain reporting problems such as accounting for investments in debt and equity securities and the reporting of derivative instruments At times they also communicate problems to the FASB respond to O FASB exposure drafts and provide the FASB with counsel and advice upon request The SEC s mandate is to establish accounting principles In some sense the private sector is the formulator and the implementer of the standards Enforcement Companies listed on a stock exchange must submit their financial statements to the SEC If the SEC believes there to be an accounting or disclosure irregularity regarding the form or content of the financial statements it sends a deficiency letter to the company Usually the company resolves these letters quickly but if disagreement continues the SEC may issue a llstop orderquot which prevents the registrant from issuing or trading securities on the exchanges The Department of Justice may also file criminal charges for violations of certain laws The SEC process private sector initiatives and civil and criminal litigation help to ensure the integrity of financial reporting for public companies American Institute of Certified Public Accountants AICPA The AICPA is the national professional organization of practicing Certified Public Accountants CPAs The AICPA has been an important contributor to the development of GAAP O O 0 Committee on Accounting Procedure At the urging of the SEC the AICPA appointed the Committee on Accounting Procedure CAP in 1939 which issued 51 Accounting Research Bulletins between its inception and 1959 which dealt with a variety of accounting problems Accounting Principles Board ts major purposes were to 0 Advance the written expression of accounting principles 0 Determine appropriate practices 0 Narrow the areas of difference and inconsistency in practice To achieve its objectives its mission was to 0 Develop an overall conceptual framework to assist in the resolution of problems as they became evident 0 To substantively research individual issues before the AICPA issued pronouncements It has 1821 members selected primarily from public accounting but also including representatives from industry and academia The Board s official pronouncements called APB Opinions were intended to be based mainly on research studies and be supported by reason and analysis While it existed from 1959 to 1973 the APB issued 31 opinions The APB came under early fire charged with lack of productivity and failing to act promptly to correct alleged accounting abuses Later the APB tackled many O sensitive accounting issues only to be met with strong opposition from industry and CPA firms and occasional government interference I In 1971 the accounting profession s leaders appointed a Study Group on Establishment of Accounting Principles in order to avoid governmental rule breaking This group was often called the Wheat Committee run by chair Francis Wheat and it examined the organization and operation of the APB and determined the necessary changes to attain better results These recommendations were submitted to the ACPA Council in the spring of 1972 and thereafter were adopted in total and implemented by early 1973 Changing Role of the ACPA I For several decades the ACPA provided leadership in developing accounting principles and rules it regulated the accounting profession more so than any other organization and it developed and enforced accounting practice I When the FASB replaced the Accounting Principles Board the ACPA established the Accounting Standards Executive Committee AcSEC as the committee authorized to speak for the ACPA in the area of financial accounting and reporting It does so through various written communications Audit andAccounting Guides summarize the accounting practices of specific industries and provide specific guidance on matters not addressed by the FASB such as accounting for airlines casinos colleges and universities banks and insurance companies 0 Statements ofPosition SOP provide guidance on financial reporting topics until the FASB sets standards on the issue in question SOPs may update revise and clarify audit and accounting guides or provide free standing guidance Practice Bulletins indicate AcSEC s views on narrow financial reporting issues not considered by the FASB I The role of the ACPA in standardsetting has diminished The FASB and the ACPA agree that the ACPA and AcSEC no longer will issue authoritative accounting guidance for public companies Furthermore while the ACPA has been the leader in developing auditing standards through its Auditing Standards Board the SarbanesOxley Act of 2002 requires the Public Company Accounting Oversight Board to oversee the development of auditing standards I The ACPA will continue to develop and grade the CPA examination which is administered in all 50 states 0 Financial Accounting Standards Board FASB O The recommendations of the Wheat Committee led to the demise of the APB and the creation of a new standardsetting structure composed of three organizations I Financial Accounting Foundation FAF selects the members of the FASB and the Advisory Council funds their activities and generally oversees the FASB s activities O O O I FinancialAccounting Standards Board FASB mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public which includes issuers auditors and users of financial information I Financial Accounting Standards Advisory Council FASAC There were several significant differences between the APB and the FASB I Smaller membership there are only 7 members I Full time remunerated membership FASB members are wellpaid fulltime members appointed for renewable 5year terms whereas the APB members were volunteers I Greater autonomy The APB was a senior committee of the AICPA but the FASB is not part of any single professional organization and therefore is appointed by and answerable only to the Financial Accounting Foundation I Increased independence APB members retained private positions with firms companies or institutions while FASB members are required to sever all such ties in order to ensure objectivity I Broader representation All APB members were required to be CPAs and members of the AICPA while members of the FASB are not required to be CPAs The FASB relies on research help from its own staff as well as the expertise of various task force groups formed for various projects and on the Financial Accounting Standards Advisory Council FASAC The FASAC consults with the FASB on major policy and technical issues and also helps select task force members In establishing financial accounting standards the FASB relies on two basic premises I The FASB should be responsive to the needs and viewpoints of the entire economic community not just the public accounting profession I It should operate in full view of the public through a lldue process system that gives interested persons ample opportunity to make their views known 0 To ensure the achievement of these goals the FASB follows specific steps to develop a typical FASB Statement of Financial Accounting Standards 0 llDue Processquot System I Topics identified and placed on Board s agenda I Research and analysis conducted and preliminary views of pros and cons issued I Public hearing on proposed standard Board evaluates research and public response and issues exposure draft I Board evaluates responses and changes exposure draft if necessary Final standard issued 0 The passage of a new FASB Standards Statement requires the support of at least four of the seven Board members FASB Statements are considered GAAP and thereby binding in practice All ARBs and APB Opinions implemented by 1973 when the FASB formed continue to be effective until amended or superseded by FASB pronouncements Since its inception the FASB has issued over 160 standards 48 interpretations and nearly 100 staff positions In recognition of possible misconceptions of the term quotprinciplesquot the FASB uses the term llfinancial accounting standards in its pronouncements There are 3 types of pronouncements O 0 Standards Interpretations and Staff Positions Financial accounting standards issued by the FASB are considered generally accepted accounting principles GAAP Interpretations modify or extend existing standards or APB Opinions they have the same authority and require the same votes for passage as standards Staff positions provide interpretive guidance and also minor amendments to standards and interpretations these staff positions have the same authority as standards and interpretations The Board also has issued FASB Technical Bulletins which provide timely guidance on selected issues staff positions are now used in lieu of technical bulletins Financial Accounting Concepts as part of a longrange effort to move away from the problembyproblem approach in November 1978 the FASB issued the first of a series of Statements of Financial Accounting Concepts as part of its conceptual framework project This series sets forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting The FASB hopes to form a cohesive conceptual framework that will serve as tools for solving existing and emerging problems in a consistent manner A Statement of Financial Accounting Concepts DOES NOT establish GAAP However the concepts statements do pass through the same due process system as do standards statements Emerging Issues Task Force Statements Created in 1984 the Emerging Issues Task Force is comprised of representatives from CPA firms and financial statement preparers Observers from the SEC and AICPA also attend EITF meetings Its purpose is to reach a consensus on how to account for new and unusual financial transactions that may potentially create differing financial reporting practices such as accounting for pension plan terminations revenue from barter transactions by Internet companies and excessive amounts paid to takeover specialists The EITF also provided timely guidance for the accounting for loans and investments in the wake of the credit crisis The FASB reviews all EITF consensuses which is generally about 75 of an average of 61 emerging financial reporting issues per year Consensus solutions are considered preferred accounting and require persuasive justification for departing from them The EITF helps the FASB in many ways such as I Quickly resolving emerging issues so as not to attract or to minimize public attention this prevents financial crises scandal and undercutting of public confidence in current reporting practices Identifying controversial accounting problems as they arise and then determining whether they can be quickly resolved or whether to involve the FASB in solving them It is in effect a llproblem filter for the FASB so the FASB will hopefully work on more pervasive longterm problems while the EITF deals with short term emerging issues GENERALLY ACCEPTED ACCOUNTING PRINCIPLES GAAP GAAP have substantial authoritative support The AICPA s Code of Professional Conduct requires that members prepare financial statements in accordance with GAAP The major sources of GAAP come from the organizations discussed earlier in this chapter It is composed of a mixture of over 2000 documents that have developed over the last 60 years or so It includes such items as o FASB Standards Interpretations and Staff Positions 0 APB Opinions 0 AICPA Research Bulletins FASB Codi cation o The documents that comprise GAAP vary in format completeness and structure In some cases they are inconsistent and difficult to interpret As a result financial statement preparers sometimes are not sure whether they have the right GAAP determining what is authoritative and what is not becomes difficult In response to these concerns the FASB developed the Financial Accounting Standards Board Accounting Standards Codification aka llthe Codificationquot o The FASB s primary goal in developing the Codification is to provide all in one place all the authoritative literature related to a particular topic in order to simplify user access to all authoritative US generally accepted accounting principles o It changes the way GAAP is documented presented and updated it explains what GAAP is and such as document summaries basis for conclusions sections and historical content It integrates and synthesizes GAAP does NOT create new GAAP creating one level of GAAP which is considered authoritative and all other accounting literature is considered nonauthoritative 0 When the Board approves a new standard staff position etc the results of that process are included in the Codification through an Accounting Standards Update which is composed of the background and basis for conclusions for the new pronouncement with a common format regardless of the form in which such guidance may have been issued Accounting Standards Updates are also issued for amendments to the SEC content in the Codification 0 To provide easy access to the Codification the FASB also developed the Financial Accounting Standards Board Codification Research System CRS which is an online realtime database that provides easy access to the Codification The Codification and CRS provide a topically organized structure subdivided into topic subtopics sections and paragraphs using a numerical index system 0 If the Codification does not cover a certain type of transaction or event other accounting literature should be considered such as FASB Concept Statements international financial reporting standards and other professional literature o It is hoped that the Codification will enable users to better understand what GAAP is The time to research accounting issues and the risk of noncompliance with GAAP will be reduced sometimes substantially and the electronic Webbased format will make updating easier which will help users stay current with GAAP o For individuals attempting to learn GAAP the Codification is invaluable It is an outstanding effort by the profession to streamline and simplify how to determine what GAAP is which will lead to better financial accounting and reporting Should the accounting profession have principlesbased standards or rulesbased standards Critics of the profession today say that over the past three decades standardsetters have moved away from broad accounting principles aimed at ensuring that companies financial statements are fairly presented and instead moved toward drafting voluminous rules that if technically followed in quotcheckboxquot fashion may shield auditors and companies from legal liability That has resulted in companies creating complex capital structures that comply with GAAP but hide billions of dollars of debt and other obligations To add fuel to the fire the chief accountant of the enforcement division of the SEC recently noted llOne can violate SEC laws and still comply with GAAPquot meaning you have to exercise judgment in applying GAAP to achieve highquality reporting ISSUES IN FINANCIAL REPORTING Since the implementation of GAAP may affect many interests much discussion occurs about who should develop GAAP and to whom it should apply GAAP in a Political Environment User groups are possibly the most powerful force influencing the development of GAAP User groups consist of those most interested in or affected by accounting rules GAAP is as much a product of political action as it is of careful logic or empirical findings User groups may want particular economic events accounted for or reported in a particular way and they fight hard to get what they want They know that the most effective way to influence GAAP is to participate in the formulation of these rules or try to influence or persuade the formulator of them User groups often target the FASB to pressure it to influence changes in the existing rules and the development of new ones These pressures have been multiplying because some influential groups demand that the accounting profession act more quickly and decisively to solve its problems while other groups resist such action preferring to implement change more slowly if at all Examples of user groups include business entities CPAs and accounting firms AICPA AcSEC academicians investing public financial community analysts bankers etc preparers eg Financial Executives Institute government SEC IRS other agencies and industry associations GAAP is part of the real world and it cannot escape politics and political pressures The economic consequences of accounting are clearly illustrated by the current debate over the use of fair value accounting for financial assets Both the FASB and the International Accounting Standards Board IASB have standards requiring the use of fair value accounting for financial assets such as investments and other financial instruments Fair value provides the most relevant and reliable information for investors about these assets and liabilities However in the wake of the recent credit crisis some countries their central banks and bank regulators want to suspend fair value accounting based on concerns that use of fair value accounting which calls for recording significant losses on poorly performing loans and investments could scare investors and depositors and lead to a llrun on the bankquot Some investors claim suspending fair value accounting would delay the recovery of the banking system Considering the economic consequences of many accounting rules special interest groups should vocalize their reactions to proposed rules What the Board should NOT do is issue pronouncements that are primarily politically motivated While paying attention to its constituencies the Board should base GAAP on sound research and a conceptual framework that has its foundation in economic reality The Expectations Gap Accounting scandals have attracted the attention of Congress who as a result enacted the Sarbanes Oxley Act This law increases the resources for the SEC to combat fraud and curb poor reporting practices The SEC has also increased its policing efforts approving new auditor independence rules and materiality guidelines for financial reporting In addition the SarbanesOxley Act introduces sweeping changes to the institutional structure of the accounting profession The following are some of they key provisions of the legislation 0 Establishes an oversight board the Public Company Accounting Oversight Board PCAOB for accounting practices The PCAOB has oversight and enforcement authority and establishes auditing quality control and independence standards and rules o Implements stronger independence rules for auditors Audit partners for example are required to rotate every five years and auditors are prohibited from offering certain types of consulting services to corporate clients 0 Requires CEOs and CFOs to personally certify that financial statements and disclosures are accurate and complete and requires CEOs and CFOs to forfeit bonuses and profits when there is an accounting restatement o Requires audit committees to be comprised of independent members and members with financial expertise o Requires codes of ethics for senior financial officers In addition Section 404 of the SarbanesOxley Act requires public companies to attest to the effectiveness of their internal controls over financial reporting Internal controls are a system of checks and balances designed to prevent and detect fraud and errors Most companies have these systems in place but many have never completely documented them Companies are finding that it is a costly process but perhaps badly needed Already intense examination of internal controls has found lingering problems in the way companies operate Many internal control problems involve closing the books revenue recognition deficiencies reconciling accounts or dealing with inventory The expectations gap what the public thinks accountants should do and what accountants think they can do is difficult to close Due to the number of fraudulent reporting cases some question whether the profession is doing enough Although the profession can argue rightfully that accounting cannot be responsible for every financial catastrophe it must continue to strive to meet the needs of society However efforts to meet these needs will become more costly to society The development of a highly transparent clear and reliable system will require considerable resources Financial Reporting Challenges Our reporting model works well in capturing and organizing financial information in a useful and reliable fashion but much still needs improvement Some of the areas needing improvement are Nonfinancial measurements Financial reports fail to provide some key performance measures widely used by management such as customer satisfaction indexes backlog information and reject rates on goods purchased Forward looking information Financial reports fail to provide forwardlooking information needed by present and potential investors and creditors Financial statements use historical cost and accumulation of past events Soft assets Financial reports focus on hard assets inventory plant assets but fail to provide much information about a company s soft assets intangibles The best assets are often intangible Timeliness Companies only prepare financial statements quarterly and provide audited financials annually Little to no realtime financial statement information is available Some positive signs signaling coming changes in the accounting profession include 0 Some companies voluntarily disclose relevant especially nonfinancial information such as banking companies disclosing data on loan growth credit quality fee income operating efficiency capital management and management strategy 0 Most companies publish their annual reports for quicker and lowercost access to users on the Internet 0 More accounting standards now require the recording or disclosing of fair value information 0 These types of changes enhance the relevancy of financial reporting and provide useful information to financial statement readers International Accounting Standards Relevant and reliable financial information is necessary for viable capital markets Unfortunately companies outside the US often prepare financial statements using standards different than US GAAP or sometimes different from GAAP altogether As a result international companies have to develop financial information in different ways Companies incur additional costs and users of the financial statements often must understand at least two sets of accounting standards There is a growing demand for one set of highquality international standards Presently there are two sets of rules accepted for international use GAAP and the International Financial Reporting Standards IFRS issued by the Londonbased International Accounting Standards Board IASB US companies that list overseas are still permitted to use GAAP and foreign companies listed on US exchanges are still permitted to use IFRS There are many similarities between the two Over 115 countries use IFRS and the European Union now requires all listed companies in Europe over 7000 companies to use it The SEC laid out a road map by which all US companies might be required to use IFRS by 2015 The FASB and the IASB formalized their commitment to the convergence of GAAP and IFRS by issuing a memorandum of understanding often referred to as the Norwalk Agreement The two boards agreed to use their best efforts to 0 Make their existing financial reporting standards fully compatible as soon as practicable 0 Coordinate their future work programs to ensure that once achieved compatibility is maintained 0 As a result of this agreement the two Boards identified a number of shortterm and longterm projects that would lead to convergence Ethics in the Environment of Financial Accounting In accounting as in other areas of business we frequently encounter ethical dilemmas Some are simple and easy to resolve but many are not requiring difficult choices among allowable alternatives Companies that concentrate on llmaximizing the bottom linequot llfacing the challenges of competitionquot and llstressing shortterm results place accountants in an environment of conflict and pressure Technical competence is not enough when encountering ethical decisions Doing the right thing is not always easy or obvious The pressures llto bend the rulesquot llto play the gamequot or llto just ignore itquot can be considerable The decision is more difficult because there is no comprehensive ethical system to provide guidelines Time job client personal and peer pressures can complicate the process of ethical sensitivity and selection among alternatives Conclusion Bob Herz former FASB chairman believes that there are three fundamental considerations the FASB must keep in mind in its rulemaking activities 1 Improvement in financial reporting 2 Simplification of the accounting literature and the rulemaking process and 3 International convergence These are notable objectives and the Board is making good progress on all three dimensions Issues such as offbalancesheet financing measurement of fair values enhanced criteria for revenue recognition and stock option accounting are examples of where the Board has exerted leadership Improvements in financial reporting should follow Also the Board is making it easier to understand what GAAP is GAAP has been contained in a number of different documents The lack of a single source makes it difficult to access and understand generally accepted principles As discussed earlier the Codification now organizes existing GAAP by accounting topic regardless of its source FASB Statements APB Opinions and so on The codified standards are then considered to be GAAP and to be authoritative All other literature will be considered nonauthoritative Finally international convergence is underway Some projects already are completed and differences eliminated Many more are on the drawing board It appears to be only a matter of time until we will have one set of global accounting standards that will be established by the IASB The profession has many challenges but it has responded in a timely comprehensive and effective manner Caroline Roberts ACCT 3311001 Chapter 2 Homework Exercises 2 4 5 6 E24 Qualitative Characteristics The qualitative characteristics that make accounting information useful for decisionmaking purposes are as follows Relevance Predictive value Completeness Verifiability Faithful Confirmatory value Timeliness Understandability representation Neutrality Materiality Comparability Instructions Identify the appropriate qualitative characteristics to be used given the information provided below 8 E E E J E Qualitative characteristics being employed when companies in the same industry are using the same accounting principles Comparability Quality of information that confirms users earlier expectation Confirmatory value Imperative for providing comparisons of a company from period to period Consistency Comparability Ignores the economic consequences of a standard or rule Neutrality Requires a high degree of consensus among individuals on a given measurement Verifiability Predictive value is an ingredient of this primary quality of information Relevance Four qualitative characteristics that are related to both relevance and faithful representation Timeliness Veri ability Understandability Comparability An item is not recorded because its effect on income would not change a decision Materiality Neutrality is an ingredient of this primary quality ofaccounting information Faithful representation Two primary qualities that make accounting information useful for decisionmaking purposes Relevance Faithful representation Issuance of interim reports is an example of what primary ingredient of relevance Predictive value Page 1 Caroline Roberts ACCT 3311001 E25 Elements of Financial Statements Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below Assets Investments by owners Comprehensive Expenses income Liabilities Distributions to owners Gains Revenues Equity Losses Instructions Identify the element or elements associated with the 12 items below a Arises from peripheral or incidental transactions Gains Losses b Obligation to transfer resources arising from a past transaction Liabilities c Increases ownership interest Investment by owners Comprehensive income Gains Revenues d Declares and pays cash dividends to owners Distributions to owners e Increases in net assets in a period from nonowner sources Comprehensive Income Gains Revenues f Items characterized by service potential or future economic benefit Assets g Equals increase in assets less liabilities during the year after addition distributions to owners and subtracting investments by owners Comprehensive income h Arises from income statement activities that constitute the entity s ongoing major or central operations Revenues Expenses i Residual interest in the assets of the enterprise after deducting its liabilities Equity j Increases assets during a period through sale of product Revenues k Decreases assets during the period by purchasing the company s own stock Distributions to owners Includes all changes in equity during the period except those resulting from investments by owners and distributions to owners Comprehensive income Page 2 Caroline Roberts ACCT 3311001 E26 Assumptions Principles and Constraint Presented below are the assumptions principles and constraints used in this chapter 1 2 3 Economic entity assumption 5 Historical cost principle 8 Full disclosure principle Going concern assumption 6 Fair value principle 9 Cost constraint Monetary unit assumption 7 Expense recognition 10 Industry practices Periodicity assumption principle Instructions Identify by number the accounting assumption principle or constraint that describes each situation on the next page Do not use a number more than once 57 Allocates expenses to revenues in the proper period 7 Expense recognition principle Indicates that fair value changes subsequent to purchase are not recorded in the accounts Do not use revenue recognition principle 5 Historical cost principle Ensures that all relevant financial information is reported 8 Full disclosure principle Rationale why plant assets are not reported at liquidation value Do not use historical cost principle 2 Going concern assumption Indicates that personal and business record keeping should be separately maintained 1 Economic entity assumption Separates financial information into time periods for reporting purposes 4 Periodicity assumption Permits the use of fair value valuation in certain industries Do not use fair value principle 10 Industry practices Assumes that the dollar is the quotmeasuring stickquot used to report on financial performance 3 Monetary unit assumption Page 3 Caroline Roberts ACCT 3311001 Chapter 9 Homework Exercises 9 3 7 10 12 16 E93 Lowerof Cost orMarket Sedato Company follows the practice of pricing its inventory at the lowerof cost ormarket on an individualitem basis Item Cost per Cost to Estimated Cost of Completion Normal No Quantity Unit Replace Selling Price and Disposal Profit 1320 1200 320 300 450 035 125 1333 900 270 230 340 050 050 1426 800 450 370 500 040 100 1437 1000 360 310 320 045 090 1510 700 225 200 325 080 060 1522 500 300 270 390 040 050 1573 3000 180 160 250 075 050 1626 1000 470 520 600 050 100 Instructions From the information above determine the amount of Sedato Company s inventory Item NRV Normal Market Net Realizable No Profit Margin Value Value 1320 290 415 1333 m 230 290 1426 360 M 460 1437 185 310 E 1510 185 M 245 1522 M 270 350 1573 125 E 175 1626 450 M 550 Lowerof Cost Item No Quantity orMarket Q LCM 1320 1200 300 3600 1333 900 240 2160 1426 800 370 2960 1437 1000 275 2750 1510 700 200 1400 1522 500 300 1500 1573 3000 160 4800 1626 1000 4 70 4700 3600 2160 2960 2750 1400 1500 4800 4700 23870 Page 1 Caroline Roberts ACCT 3311001 E97 Relative Sales Value Method Larsen Realty Corporation purchased a tract of unimproved land for 55000 This land was improved and subdivided into building lots at an additional cost of 30000 These building lots were all of the same size but owing to differences in location were offered for sale at different prices as follows No of Price per Group Lots Lot 1 9 3000 2 15 4000 3 19 2000 Operating expenses for the year allocated to this project total 18200 Lots unsold at the yearend were as follows Group 1 5 lots Group 2 7 lots Group 3 2 lots Instructions At the end of the fiscal year Larsen Realty Corporation instructs you to arrive at the net income realized on this operation to date No Sales Total Relative Cost of Price Sales Sales Total Allocated Group Lots per Lot Price Price Cost to Lots 1 9 3000 27000 27125 85000 18360 2 15 4000 60000 60 125 85000 40800 3 19 2000 38000 38125 85000 25840 43 125000 85000 Number of Cost Cost of Gross Group Lots Sold per Lot Lots Sold Sales Profit 1 4 2040 8160 12000 3840 2 8 2720 21760 32000 10240 3 17 1360 23120 34000 10880 53040 78000 24960 Net Income 24960 18200 6760 Page 2 Caroline Roberts ACCT 3311001 E910 Purchase Commitments At December 31 2013 Volkan Company has outstanding noncancelable purchase commitments for 40000 gallons at 300 per gallon of raw material to be used in its manufacturing process The company prices its raw material inventory at cost or market whichever is lower Instructions a Assuming that the market price as of December 31 2013 is 330 how would this matter be treated in the accounts and statements Explain The purchase commitment should be disclosed in the notes of the financial statements It should not be recorded in the actual statement or in the account yet because it is an executor contract and it has not yet been ful lled b Assuming that the market price as of December 31 2013 is 270 instead of 330 how would you treat this situation in the accounts and statements The value of the purchase commitment would not be included in the statements excepting the notes or the accounts yet but since the market price has dropped below the contract price a loss would be recorded in the account as follows Unrealized Holding Gain or Loss Income Purchase Commitment 12000 Estimated Liability on Purchase Commitments 12000 c Give the entry in January 2014 when the 40000gallon shipment is received assuming that the situation given in b above existed at December 31 2013 and that the market price in January 2014 was 270 per gallon Give an explanation of your treatment Purchases Inventory 108000 Estimated Liability on Purchase Commitments 12000 Cash 120000 The purchases or inventory account is debited to record the receiving of the goods and cash credited to pay for the purchase The estimated liability on purchase commitments account takes the balance ofthe difference between the current market value for the goods and the price the company actually had to pay since the loss that was previously recorded has now been realized Page 3 Caroline Roberts ACCT 3311001 E912 Gross Profit Method Astaire Company uses the gross profit method to estimate inventory for monthly reporting purposes Presented below is information for the month of May Inventory May 1 160000 Purchases gross 640000 Freightin 30000 Sales 1000000 Sales returns 70000 Purchase discounts 12000 Instructions a Compute the estimated inventory at May 31 assuming that the gross profit is 25 of sales 160000 640000 12000 30000 818000 1000000 70000 930000 930000 25 232500 1000000 232500 697500 818000 697500 120500 b Compute the estimated inventory at May 31 assuming that the gross profit is 25 of cost 930000 186000 744000 818000 744000 74000 E916 Gross Profit Method Silver Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost Lumber 25 Millwork 30 Hardware 40 On August 18 a fire destroyed the office lumber shed and a considerable portion of the lumber stacked in the yard To file a report of loss for insurance purposes the company must know what the inventories were immediately preceding the fire No detail or perpetual inventory records ofany kind were maintained The only pertinent information you are able to obtain are the following facts from the general ledger which was kept in a fireproof vault and thus escaped destruction Page 4 Caroline Roberts ACCT 3311001 Lumber Millwork Hardware Inventory Jan 1 2013 250000 90000 45000 Purchases to Aug 18 2013 1500000 375000 160000 Sales to Aug 18 2013 2050000 533000 245000 Instructions Submit your estimate of the inventory amounts immediately preceding the fire 250000 1500000 1750000 1750000 25 437500 2050000 437500 1512500 1750000 1512500 137500 90000 375000 455000 455000 3 139500 533000 139500 393500 455000 393500 71500 45000 150000 205000 205000 4 82000 245000 82000 153000 205000 163000 42000 Lumber 137500 Millwork 71500 Hardware 42000 Page 5 Caroline Roberts ACCT 3311001 Chapter 6 Homework Day 2 Exercises 6 6 7 9 13 Problems 6 1 3 E66 Future Value and Present Value Problems Presented below are three unrelated situations a Ron Stein Company recently signed a lease for a new office building for a lease period of 10 years Under the lease agreement a security deposit of 12000 is made with the deposit to be returned at the expiration of the lease with interest compounded at 10 per year What amount will the company receive at the time the lease expires Future Value of 1 factor n 10 i 10 is 259374 12000 259374 3112488 Kate Greenway Corporation having recently issued a 20 million 15 year bond issue is committed to make annual sinking fund deposits of 620000 The deposits are made on the last day of each year and yield a return of 10 Will the fund at the end of 15 years be sufficient to retire the bonds If not what will the deficiency be Future Value of an Ordinary Annuity of 1 factor n 15 i 10 is 3177248 620000 3177248 1969893760 the fund will not be sufficient to retire the bonds it will end up being short 301l 06240 of its goal Under the terms of his salary agreement presidentJuan Rivera has an option of receiving either an immediate bonus of 40000 or a deferred bonus of 75000 payable in 10 years Ignoring tax considerations and assuming a relevant interest rate of 8 which form of settlement should Rivera accept Present Value of 1 Factor n 10 i 8 is 46319 75000 46319 3473925 Future Value of 1 Factor n 10 i 8 is 215892 40000 215892 8635680 Rivera should accept the immediate bonus of 40000 because it is worth more in the present as well as the future and he will also then have the money immediately to invest or do as he chooses with it instead of delaying the satisfaction for ten years Page 1 Caroline Roberts ACCT 3311001 E67 Computation of Bond Prices What would you pay for a 100000 debenture bond that matures in 15 years and pays 10000 a year in interest if you wanted to earn a yield of a 8 Present Value of 1 factor n 15 i 8 is 31254 100000 31524 3152400 Present Value ofan Ordinary Annuity of 1 n 15 i 8 factor is 855948 10000 855948 8559480 31 52400 8559480 11711880 b 10 Present Value of 1 factor n 15 i 10 is 23939 100000 23939 2393900 Present Value ofan Ordinary Annuity of 1 n 15 i 10 factor is 760608 10000 760608 7606080 23 93900 7606080 9999980 c 12 Present Value of 1 factor n 15 i 12 is 18270 100000 18270 1827000 Present Value ofan Ordinary Annuity of 1 n 15 i 12 factor is 681086 10000 681086 6810860 1827000 68 10860 8637860 E69 Unknown Rate Kross Company purchased a machine at a price of 100000 by signing a note payable which requires a single payment of 118810 in 2 years Assuming annual compounding of interest what rate of interest is being paid on the loan 118 810 100000 Future Value Factor n 2 i Future Value Factor 118810 100000 read across n 2 row to find interest rate Here rate is E613 Computation of Bond Liability Messier Inc manufactures cycling equipment Recently the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company s bikes After a careful evaluation of the request the board of directors has decided to raise funds for the new plant by issuing 3000000 of 11 term corporate bonds on March 1 2012 due on March 1 2027 with interest payable each March 1 and September 1 At the time of the issuance the market interest rate for similar financial instruments is 10 Page 2 Caroline Roberts ACCT 3311001 Instructions As the controller of the company determine the selling price of the bonds Principal 3000000 bond rate 11 n 15 market rate 10 Interest payable 3000000 055 165000 Present Value of 1 factor n 30 i 5 is 23138 3000000 23138 694140 Present Value of an Ordinary Annuity of 1 factor n 30 i 5 is 1537245 165000 1537245 253645425 253645425 694140 323059425 Problem 61 Various Time Value Situations Answer each of these unrelated questions a On January 1 2012 Fishbone Corporation sold a building that cost 250000 and that had accumulated depreciation of 100000 on the date of sale Fishbone received as consideration a 240000 non interest bearing note due on January 1 2015 There was no established exchange price for the building and the note had no ready market The prevailing rate of interest for a note of this type on January 1 2012 was 9 At what amount should the gainfrom the sale of the building be reported Principal 24000000 n 3 market rate 9 book value 15000000 Present Value of 1 factor n 3 i 9 is 77218 24000000 77218 18532320 18532320 15000000 3532320 9 On January 1 2012 Fishbone Corporation purchased 300 of the 1000 face value 9 10 year bonds of Walters Inc The bonds mature on January 1 2022 and pay interest annual beginning January 1 2013 Fishbone purchased the bonds to yield 11 How much did Fishbone pay for the bonds Principal 30000000 n 10 market rate 11 bond rate 9 Interest payable 2700000 Present Value of 1 factor n 10 i 11 is 35218 30000000 35218 10565400 Present Value of an Ordinary Annuity of 1 factor n 10 i 11 is 588923 2700000 588923 15900921 105 65400 15900921 26466321 Page 3 Caroline Roberts ACCT 3311001 c Fishbone Corporation bought a new machine and agreed to pay for it in equal annual installments of 4000 at the end of each of the next 10 years Assuming that a prevailing interest rate of 8 applies to this contract how much should Fishbone record as the cost of the machine Principal 400000 n 10 i 8 Present Value of an Ordinary Annuity of 1 factor n 10 i 8 is 671008 400000 671008 2684032 R Fishbone Corporation purchased a special tractor on December 31 2012 The purchase agreement stipulated that Fishbone should pay 20000 at the time ofpurchase and 5000 at the end of each of the next 8 years The tractor should be recorded on December 31 2012 at what amount assuming an appropriate interest rate of 12 Principle 500000 n 8 i 12 Present Value of an Ordinary Annuity of 1 factor n 8 i 12 is 496764 500000 496764 24 83820 2483820 2000000 44l 83820 e Fishbone Corporation wants to withdraw 120000 including principal from an investment fund at the end of each year for 9 years What should be the required initial investment at the beginning of the first year if the funds earn 11 Principal 12000000 n 9 i 11 Present Value of an Ordinary Annuity of 1 factor n 9 i 11 is 553705 12000000 553705 664 44600 P63 Analysis of Alternatives Assume that WalMart Stores Inc has decided to surface and maintain for 10 years a vacant lot next to one of its stores to serve as a parking lot for customers Management is considering the following bids involving two different qualities of surfacing for a parking area of 12000 square yards Bid A A surface that costs 575 per square yard to install This surface will have to be replaced at the end of 5 years The annual maintenance cost on this surface is estimated at 25 cents per square yard for each year except the last year of its service The replacement surface will be similar to the initial surface Cost to install 12000 575 6900000 Present Value of 1 n 5 i 9 gure is 64993 Cost to reinstall 6900000 64993 4484517 Total Installation Cost 6900000 4484517 11384517 Present Value of an Ordinary Annuity of 1 factor n 4 i 9 is 323972 Page 4 Caroline Roberts ACCT 3311001 Maintenance Cost 12000 25 300000 300000 323972 971916 Years 14 Present Value of an Ordinary Annuity of 1 factor n 95 i 9 599525 388965 21056 300000 21056 631680 Years 69 Total Maintenance Cost 971916 631680 1603596 Total Cost 11384517 1603596 12988113 Bid B A surface that costs 1050 per square yard to install This surface has a probable useful life of 10 years and will require annual maintenance in each year except the last year at an estimated cost of 9 cents per square yard Cost to install 12000 1050 12600000 Present Value of an Ordinary Annuity of 1 gure n 9 i 9 is 599525 Maintenance Cost 12000 09 108000 108000 599525 647487 Total Cost 12600000 647487 13247487 Instructions Prepare computations showing which bid should be accepted by WaI Mart You may assume that the cost of capital is 9 that the annual maintenance expenditures are incurred at the end of each year and that prices are not expected to change during the next 10 years Bid A should be accepted because its present value lower the total estimated cost ofthe project for Bid A comes to only 12988113 in todaVs terms while Bid B39s total estimated costs are 13247487 in today s terms Page 5 Caroline Roberts ACCT 3311001 Chapter 6 Homework Day 1 Exercises 6 2 3 4 E62 Simple and Compound Interest Computations Lyle O Keefe invests 30000 at 8 annual interest leaving the money invested without withdrawing any of the interest for 8 years At the end of the 8 years Lyle withdrew the accumulated amount of money Instructions a Compute the amount Lyle would withdraw assuming the investment earns simple interest Interest 30000 08 8 2400 8 19200 19200 interest 30000 principal 49200 b Compute the amount Lyle would withdraw assuming the investment earns interest compounded annually Year 1 30000 08 2400 Year 2 32400 08 2592 Year 3 34992 08 279935 Year 4 3799135 08 302331 Year 5 4101457 08 328117 Year 5 4429584 08 354357 Year 7 4783951 08 382715 Year 8 5155557 08 413333 30000 2400 32400 32400 2592 34992 34992 279935 3799135 3799135 302331 4101457 4101457 328117 4429584 4429584 354357 4783951 4783951 382715 5155557 5155557 413333 55800 Using Future Value of 1 Table 8 interest at n8 the factor is 185093 30000 185093 5552790 Compute the amount Lyle would withdraw assuming the investment earns interest compounded semiannually Period 1 30000 04 1200 Period 2 31200 04 1248 Period 3 32448 04 129792 Period 4 3374592 04 134984 Period 5 3509575 04 140383 Period 5 3549959 04 145998 Period 7 3795957 04 151838 Period 8 3947795 04 157912 30000 1200 31200 31200 1248 32448 32448 129792 3374592 3374592 134984 3509575 3509575 140383 3549959 3549959 145998 3795957 3795957 151838 3947795 3947795 157912 4105707 Page 1 Caroline Roberts ACCT 3311001 Period 9 4105707 04 164228 Period 10 4269935 04 170797 Period 11 4440732 04 177629 Period 12 4618361 04 184734 Period 13 4803095 04 192124 Period 14 4995219 04 199809 Period 15 5195028 04 207801 Period 16 5402829 04 216113 4105707 164228 4269935 4269935 170797 4440732 4440732 177629 4618361 4618361 184734 4803095 4803095 192124 4995219 4995219 199809 5195028 5195028 207801 5402829 5402829 216113 5618942 Using Future Value of 1 Table 4 interest at n16 the factor is 187298 30000 187298 5618940 E63 Computation of Future Values and Present Values Using the appropriate interest table answer each of the following questions Each case is independent of the others a 9 What is the future value of 9000 at the end of 5 periods at 8 compounded interest Future Value of 1 Table factor n 5 i 8 is 146933 9000 146933 1322397 What is the present value of 9000 due 8 periods hence discounted at 11 Present Value of 1 Table factor n 8 i 11 is 43393 9000 43393 390537 What is thefuture value of15 periodic payments of9000 each made at the end of each period and compounded at 10 Future Value of an Ordinary Annuity of 1 Table factor n 15 i 10 is 3177248 9000 3177248 28595232 What is the present value of 9000 to be received at the end of each of 20 periods discounted at 5 compound interest Present Value of an Ordinary Annuity of 1 Table factor n 20 i 5 is 1246221 9000 1246221 11215989 Page 2 Caroline Roberts ACCT 3311001 E64 Computation of Future Values and Present Values Using the appropriate interest table answer the following questions Each case is independent of the others a 9 5 R What is the future value of 20 periodic payments of 5000 each made at the beginning of each period and compounded at 8 Factor is 4576196 n 20 i 8 5000 4576196 22880980 22880980 108 24711458 What is the present value of 2500 to be received at the beginning of each of 30 periods discounted at 10 compound interest Factor is 942691 n 30 i 10 2500 942691 2356728 2356728 11 2592401 What is the future value of 15 deposits of 2000 each made at the beginning of each period and compounded at 10 Future value as of the end of the fifteenth period Factor is 3177248 n 15 i 10 2000 3177248 6354496 6354496 11 6989946 What is the present value of six receipts of 3000 each received at the beginning of each period discounted at 9 compounded interest Factor is 448592 n 6 i 9 3000 448592 1345776 1345776 109 1466896 Page 3
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