CA1-3 (Financial Reporting and Accounting Standards) Answer the following multiple-choice questions.

1. GAAP stands for: D (d) generally accepted accounting principles.

2. Accounting standard-setters use the following process in establishing accounting standards: D

(d) Research, discussion paper, exposure draft, standard.

3. GAAP is comprised of: D (d) any accounting guidance included in the FASB Codification.

4. The authoritative status of the conceptual framework is as follows. A(a) It is used when there is no standard or interpretation related to the reporting issues under consideration.

5. The objective of financial reporting places most emphasis on: A(a) reporting to capital providers.

6. General-purpose financial statements are prepared primarily for: B (b) external users.

7. Economic consequences of accounting standard-setting means: D (d) accounting standards can have detrimental impacts on the wealth levels of the providers of financial information.

8. The expectations gap is: B (b) what the public thinks accountants should do and what accountants think they can do.

E2-5 (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 EquityDistributions to owners RevenuesExpenses LossesLiabilities Investments by ownersComprehensive income Gains 

Instructions

Identify the element or elements associated with the 12 items below.

(a) Arises from peripheral or incidental transactions. Gain, Losses

(b) Obligation to transfer resources arising from a past transaction. Liabilities

(c) Increases ownership interest. Investment by owners, Comprehensive income

(d) Declares and pays cash dividends to owners. Distribution to owners

(e) Increases in net assets in a period from non-owner sources. Comprehensive income

(f) Items characterized by service potential or future economic benefit. Assets

(g) Equals increase in assets less liabilities during the year, after adding 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. Revenue, 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. Revenue

(k) Decreases assets during the period by purchasing the company’s own stock. Distribution to owners

(l) Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners. Comprehensive income

E3-1 (Transaction Analysis—Service Company) Christine Ewing is a licensed CPA. During the first month of operations of her business (a sole proprietorship), the following events and transactions occurred.

April 2 Invested $30,000 cash and equipment valued at $14,000 in the business.  2 Hired a secretary-receptionist at a salary of $290 per week payable monthly.  3 Purchased supplies on account $700. (debit an asset account.)  7 Paid office rent of $600 for the month.

  11Completed a tax assignment and billed client $1,100 for services rendered. (Use Service Revenue account.)

  12 Received $3,200 advance on a management consulting engagement.  17 Received cash of $2,300 for services completed for Ferengi Co.  21 Paid insurance expense $110.

  30 Paid secretary-receptionist $1,160 for the month.  30 A count of supplies indicated that $120 of supplies had been used.

  30Purchased a new computer for $5,100 with personal funds. (The computer will be used exclusively for business purposes.)

Instructions Journalize the transactions in the general journal. (Omit explanations.)

SOLUTION:

April 2 Cash………………………………. 30,000Equipment……………………….... 14,000

Christine Ewing, Capital…. 44,000

2 No entry – not a transaction

3 Supplies…………………………… 700Accounts Payable…………. 700

7 Rent Expense……………………… 600Cash……………………….. 600

11 Accounts Receivable……………… 1,100Service Revenue…………… 1,100

12 Cash……………………………….. 3,200Unearned Service Revenue... 3,200

17 Cash……………………………...... 2,300Service Revenue…………… 2,300

21 Insurance Expense………………… 110Cash……………………….. 110

30 Salaries Expense………………….. 1,160Cash………………………. 1,160

30 Supplies Expense…………………. 120Supplies…………………… 120

30 Equipment………………………… 5,100Christine Ewing, Capital…. 5,100

E3-5 (Adjusting Entries) The ledger of Chopin Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.

  Debit Credit

Prepaid Insurance $3,600

Supplies 2,800

Equipment 25,000

Accumulated Depreciation-Equipment $8,400

Notes Payable 20,000

Unearned Rent Revenue 6,300

Rent Revenue 60,000

Interest Expense -0-

Salaries and Wages Expense 14,000

An analysis of the accounts shows the following.

1. The equipment depreciates $250 per month.

2. One-third of the unearned rent was earned during the quarter.

3. Interest of $500 is accrued on the notes payable.

4. Supplies on hand total $650.

5. Insurance expires at the rate of $300 per month.

Instructions

Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are: Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense. (Omit explanations.)

ADJUSTING ENTRIES:

1. Depreciation Expense ($250 x 3)………………… 750Accumulated Depreciation-Equipment… 750

2. Unearned Rent Revenue ($6,300 x 1/3)………….. 2,100Rent Revenue…………………………... 2,100

3. Interest Expense…………………………………… 500Interest Payable………………………….. 500

4. Supplies Expense………………………………….. 2,150Supplies ($2,800 - $650)………………… 2,150

5. Insurance Expense ($300 x 3)……………………… 900

Prepaid Insurance………………………… 900

CA1-1 (FASB and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false.

1. GAAP is the term used to indicate the whole body of FASB authoritative literature. TRUE

2. Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements.

FALSE. Any company claiming compliance with GAAP must comply with all standards and interpretations, including disclosure requirements.

3. The primary governmental body that has influence over the FASB is the SEC. TRUE

4. The FASB has a government mandate and therefore does not have to follow due process in issuing a standard.FALSE. In establishing financial accounting standards, the FASB relies on two basic premises: 1) the FASB should be responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession, 2) it should operate in full view of the public through a “due process” system that gives interested people ample opportunities to make their view known.

E2-6 (Assumptions, Principles, and Constraints) Presented below are the assumptions, principles, and constraints used in this chapter. 1. Economic entity assumption 2. Going concern assumption 3. Monetary unit assumption 4. Periodicity assumption 5. Historical cost principle 6. Fair value principle 7. Expense recognition principle 8. Full disclosure principle 9. Cost constraint 10. Industry practices

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.

(a) Allocates expenses to revenues in the proper period. 7

(b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.) 5 (c) Ensures that all relevant financial information is reported. 8 (d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.) 2 (e) Indicates that personal and business record keeping should be separately maintained. 1 (f) Separates financial information into time periods for reporting purposes. 4 (g) Permits the use of fair value valuation in certain industries. (Do not use fair value principle.) 10 (h) Assumes that the dollar is the “measuring stick” used to report on financial performance. 3

E2-7 (Assumptions, Principles, and Constraints) Presented below are a number of operational guidelines and practices that have developed over time.

Instructions

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)

(a) Fair value changes are not recognized in the accounting records. Historical cost principle(b) Financial information is presented so that investors will not be misled. Full disclosure principle(c) Intangible assets are capitalized and amortized over periods benefited. Expense recognition principle(d) Repair tools are expensed when purchased. Materiality(e) Agricultural companies use fair value for purposes of valuing crops. Industry practices or fair value p(f) Each enterprise is kept as a unit distinct from its owner or owners. Economic entity assumption(g) All significant postbalance sheet events are reported. Full disclosure principle(h) Revenue is recorded at point of sale. Revenue recognition principle(i) All important aspects of bond indentures are presented in financial statements. Revenue and expense recognition principle(j) Rationale for accrual accounting. Periodicity assumption(k) The use of consolidated statements is justified. Economic Entity assumption(l) Reporting must be done at defined time intervals. Periodicity assumption(m) An allowance for doubtful accounts is established. Expense recognition principle(n) Goodwill is recorded only at time of purchase. Historical cost principle(o) A company charges its sales commission costs to expense. Expense recognition principle