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Chapter 2: Question 16Q (page 61)
What is the definition of fair value?
The term fair value in accounting refers to the physical value of an asset, product, stock, or security.
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(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 Distributions to owners Expenses Liabilities Comprehensive Income Gains Equity Revenues Losses Investments by owners
Instructions
Identify the element or elements associated with the 12 items below.(a) Arises from peripheral or incidental transactions.
(b) Obligation to transfer resources arising from a past transaction.
(c) Increases ownership interest.
(d) Declares and pays cash dividends to owners.
(e) Increases in net assets in a period from nonowner sources.
(f) Items characterized by service potential or future economic benefit.
(g) Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.
(h) Arises from income statement activities that constitute the entity’s ongoing major or central operations.
(i) Residual interest in the assets of the enterprise after deducting its liabilities.
(j) Increases assets during a period through sale of product.
(k) Decreases assets during the period by purchasing the company’s own stock.(l) Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.
Selane Eatery operates a catering service specializing in business luncheons for large corporations. Selane requires customers to place their orders 2 weeks in advance of the scheduled events. Selane bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Selane recognize revenue related to its catering service
What is the primary objective of financial reporting?
Question: Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.
a. Depreciation expense on the building for the year was \(60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.
Retained Earnings 60,000
Accumulated Depreciation—Buildings 60,000
b. Materials were purchased on January 1, 2017, for \)120,000 and this amount was entered in the Materials account. On December 31, 2017, the materials would have cost \(141,000, so the following entry is made.
Inventory 21,000
Gain on Inventories 21,000
c. During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of \)135,000 and a fair value of \(450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.
Equipment 135,000
Common Stock 135,000
d. During the year, the company sold certain equipment for \)285,000, recognizing a gain of \(69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.
e. An order for \)61,500 from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.
Accounts Receivable 61,500
Sales Revenue 61,500
(Assumptions, Principles, and Constraint) Presented below are the assumptions, principles, and constraints used in this chapter.
1. Economic entity assumption 6. Measurement principle (fair value)2. Going concern assumption 7. Expense recognition principle3. Monetary unit assumption 8. Full disclosure principle4. Periodicity assumption 9. Cost constraint5. Measurement principle (historical cost) 10. Revenue recognition principle
Instructions
Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once
.(a) Allocates expenses to revenues in the proper period.
(b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)
(c) Ensures that all relevant financial information is reported.
(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)
(e) Indicates that personal and business record keeping should be separately maintained.(f) Separates financial information into time periods for reporting purposes.
(g) Assumes that the dollar is the “measuring stick” used to report on financial performance.
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