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Grading: This problem is worth a total of 18.75 points. There are 10grading elements each worth 18.75 x 2/3 / 10 = 1.25 points. There are 18.75 x 1/3 = 6.25 points available for effort. Consider each one of the following in light of the characteristics of accounting: A: The economic consequences of a standard or rule are not considered.
B: Two other qualitative characteristics related to both reliability and relevance.
C: Exists when a particular measurement is agreed to by the majority.
D: Two large retail chains employ the same accounting principles.
E: Accounting information is useful because of these two primary qualities.
F: Usersâ€™ expectations are confirmed by accounting information.
G: This primary quality has predictive value as a component.
H: This primary component of relevance is illustrated by quarterly financial statements issued in addition to annual financial statements.
I: A component of this primary quality of accounting information is neutrality.
J: This quality is necessary in order to compare the results of a company over time.
Grading: This problem is worth a total of 18.75 points. There are 10grading elements each worth 18.75 x 2/3 / 10 = 1.25 points. There are 18.75 x 1/3 = 6.25 points available for effort. Consider each of the following in light of accounting assumptions, principles, and constraints:
A: Potential gains are not recorded in the financial records; however potential losses are recorded in the financial records.
B: Financial information for personal finances and financial information for business finances are kept separate.
C: The value of land increases after it was purchased, however the increase in value is not recorded in the financial records. (Do not use the revenue recognition principle.)
D: In the United States, the dollar is the quantitative measure used in financial statements.
E: Allows a dealer in gold to revalue gold inventory up to market value, for instance.
F: Requires the recording of expenses in the same period the revenue resulting from those expenses is recorded.
G: A companyâ€™s assets are not reported at liquidation value. (Do not use the historical cost principle.)
H: Allows information that will not influence the decisions of reasonably informed uses to be omitted from the financial statements but requires the inclusion of information that will affect such decisions. (Do not use the full disclosure principle.)
I: Financial statements are issued at regular intervals.
J: Financial statements contain all relevant information.
Grading: This problem is worth a total of 18.75 points. There are 12grading elements each worth 18.75 x 2/3 / 12 = 1.0417 points. There are 18.75 x 1/3 = 6.25 points available for effort. Consider each of the following items recorded by the SWN Company:
A: The SWN Company has received the proper documents indicating that it is being sued by the WWK Company for $300,000 because the WWK Company claims that one of SWN Company’s products failed causing damage to WWK Company’s factory machines. SWN Company’s attorneys have carefully reviewed the suit and have concluded that there is very little probability that the suit will be successful and SWN Company will have no liability for the damages. However, in order to be conservative, SWN Company records the following entry:
Product Liability Loss
Accrued product liability loss
To accrue for possible loss from product liability
(Note that generally accepted accounting principles specify that potential losses are recorded if (1) the amount of the potential loss can be reasonably estimated and (2) it is probable that the loss will be incurred.)
B: The SWN Company acquired factory equipment for $135,000 at a liquidation sale of a local company that was in bankruptcy. Because the company was selling due to a bankruptcy liquidation, the sale prices were significantly below the actual fair market value of the equipment. In fact, the fair market value of the equipment purchased by the SWN Company was $180,000. Upon purchase the SWN Company recorded the following:
Gain on acquisition of equipment
To record acquisition of equipment sold in liquidation
C: Although the SWN Company is doing reasonably well, management is concerned that, in the event of liquidation, certain assets could not be sold for their current value as shown on the balance sheet. Management’s major concern is the amount of $450,000 paid in goodwill when acquiring a competitor company this year. Therefore the company wrote off the goodwill with the following entry:
Loss on impairment of goodwill
To record write-down of goodwill
D: The majority stockholder and president of the SWN Company purchased a new automobile for his personal use at a cost of $54,000. Rather than have SWN Company declare and pay a dividend to him in order to pay for the car, the president had SWN Company paid for the car and recorded the following entry:
To record presidentâ€™s expenses
E: SWN Companyâ€™s management was looking at the prices of new factory machinery similar to the machinery they are currently using and discovered that prices of such machinery have risen considerably recently. When compared to the prices of new machines, the amount of depreciation expense recorded for the year appears to be inadequate. Therefore the company recorded the following entry:
Depreciation Expense Accumulated Depreciation
To record catch-up depreciation
F: During the year, the value of one of the companyâ€™s raw materials increased in value to $924,000. The materials had originally cost $770,000. To record this increase in value, the company recorded the following entry:
Gain on Inventory
To record correct value of inventory
For each of the above entries:
1. Determine if each journal entry is appropriate under generally accepted accounting principles.
2. If the entry is not appropriate under generally accepted accounting principles, explain why it is not appropriate and indicate which principle(s) is violated.
Grading: This problem is worth a total of 18.75 points. There are 10grading elements each worth 18.75 x 2/3 / 10 = 1.25 points. There are 18.75 x 1/3 = 6.25 points available for effort. The following are selected general ledger account balances for the KFD Company as of June 30, 2012 before any adjustments:
Accumulated Depreciation - Equipment
Unearned Rent Revenue
The following information is available:
A: The prepaid insurance expires at the rate of $300 per month.
B: The equipment depreciates at the rate of $570 per month.
C: Interest of $400 is accrued on the notes payable for the quarter.
D: 25% of the unearned rent was earned during the quarter.
E: A count of supplies at the end of the quarter revealed that $1,360 of supplies were on hand
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