Accounting Problems: Assumptions and Definitions
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1- If the going concern assumption is not made in accounting, discuss the differences in the amounts shown in the financial statements for the following items.
a- land
b- Unamortized bond premium
c- Depreciation expense on equipment
d- Merchandise inventory
e- Prepaid Insurance
2-What accounting assumption principle or modifying convention does Target corporation use in each of the situations below?
a- Target uses the lower of cost or market basis to value inventories.
b-Target was involved in litigation over the last year. This litigation is disclosed in the financial statements.
c-Target allocated the cost of its depreciable assets over the life it expects to receive revenue from these assets.
d-Target records the purchase of a new Dell pc at its cash equivalent price.
3-(financial accounting)
Alan Rodriguez has recently completed his first year of studying accounting. His instructor for next semester has indicated that the primary focus will be the area of financial accounting.
Instructions:
a- Differentiate between financial accounting and managerial accounting
b- One part of financial accounting involves the preparation of financial statements. What are the financial statement most frequently provided?
c- What is the different between financial statements and financial reporting?
4(Need for accounting standards)
Some ague that having various organizations establish accounting principles is wasteful and inefficient. Rather than mandating accounting standards, each company could voluntary disclose the type of information it considered important. In addition, if an investor wants additional information, the investor could contact the company and pay to receive the additional information desired.
Instructions:
Comment on the appropriateness of this viewpoint.
5-Accounting Principles comprehensive.
Instructions comment on the appropriateness of the accounting procedures followed by Garth Brooks Inc.
a- Depreciation expense on the building for the year was $60,000. Because the building was increasing in value during the year, the controller decided to change the depreciation expense to retained earnings instead of to net income. The following entry is recorded.
Retained Earnings...............................60,000
Accumulated depreciation building ........................60,000
b- Materials purchase in January 1, 2006 for 120,000 and this amount was entered in the Materials account On December 31, 2006 the materials would have cost $141,000, so the following entry is made.
Inventory...............................21,000
Gain Inventories................................21,000
c- During the year the company purchased equipment through the issuance of common stock. The stock had a par value of $135,000 and a fair market value of $450,000. The fair market value of the equipment was not easily determinable. The company recorded this transaction as follows.
Equipment...............................135,000
Common Stock........................................135,000
d- During the year, the company sold certain equipment for $285,000, recognized a gain for of $69,000, because the controller believe that new equipment would be needed in the near future, she decide to defer the gain and amortize it over the life of any new equipment purchased.
e- An order for $61,500 has been received from a customer for products on hand. This order was shipped on January 9, 2007. The company made the following entry in 2006.
Accounts Receivable...............................61,500
Sales..............................................................61,500
6-On July1, 2007, Blair company pays $18,000 to Hindi Insurance Co. for a 3 year insurance contract. Both companies have fiscal years ending December 31. For Blair Co. journalize the entry on July 1 and the adjusting entry on December 31.
7-(Closing entries for a corporation)
Homer Winslow Co.
December 31, 2007
Merchandise Inventory(12/31/07) $60,000
Common Stock 75,000
Retained Earnings 45,000
Dividends 18,000
Sales Returns and allowances 12,000
Sales Discount 15,000
Sales 410,000
Cost of good Sold 225,000
Selling Expenses 16,000
Administrative 'Expense 38,000
Income Tax Expense 30,000
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The solution answers and discusses different accounting assumptions and definitions.
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(1) The going-concern assumption is fundamental to accrual accounting. To assume that an entity will continue in business is to say that the entity expects to realize its assets at the recorded amounts and to extinguish its liabilities in the normal course of business. If the going-concern assumption fails, then the amount and classification of assets and liabilities in the balance sheet may need to be adjusted, with consequences to revenues, expenses, and equity. Among other things, the going-concern assumption justifies the current and noncurrent classification within the balance sheet, the allocation of costs over periods benefited, historical cost accounting, and most aspects of the revenue recognition and matching principles. In this case, we ...
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