Part -1:
Question 1:
Qualitative Characteristics - The qualitative characteristics that make accounting information useful for decision-making purposes are as follows.
Relevance Neutrality
Verifiability Faithful representation
Completeness Understandability
Predictive value Timeliness
Comparability Confirmatory value
Materiality Free from error
Instructions: Identify the appropriate qualitative characteristic(s) to be used given the information provided below.
(a) Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.
(b) Quality of information that confirms users' earlier expectations.
(c) Imperative for providing comparisons of a company from period to period.
(d) Ignores the economic consequences of a standard or rule.
(e) Requires a high degree of consensus among individuals on a given measurement.
(f) Predictive value is an ingredient of this fundamental quality of information.
(g) Four qualitative characteristics that are related to both relevance and faithful representation.
(h) An item is not recorded because its effect on income would not change a decision.
(i) Neutrality is an ingredient of this fundamental quality of accounting information.
(j) Two fundamental qualities that make accounting information useful for decision-making purposes.
(k) Issuance of interim reports is an example of what enhancing quality of relevance?
Question 2:
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.
Question 3:
Assumptions, Principles, and Constraint - Presented below are the assumptions, principles, and constraint used in this chapter.
1. Economic entity assumption 2. Going concern assumption
3. Monetary unit assumption 4. Periodicity assumption
5. Measurement principle (historical cost) 6. Measurement principle (fair value)
7. Expense recognition principle 8. Full disclosure principle
9. Cost constraint 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.
Part -2:
Question 1:
Transaction Analysis-Service Company - Beverly Crusher 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 $32,000 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
11 Completed 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.
30 Purchased a new computer for $6,100 with personal funds. (The computer will be used exclusively for business purposes.)
Instructions: Journalize the transactions in the general journal. (Omit explanations.)
Question 2:
Adjusting Entries - The ledger of Duggan 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 9,300
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 recognized as revenue during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $850.
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.)
Question 3:
Closing Entries for a Corporation - Presented below are selected account balances for Homer Winslow Co. as of December 31, 2014.
Inventory 12/31/14 $ 60,000 Cost of Goods Sold $225,700
Common Stock 75,000 Selling Expenses 16,000
Retained Earnings 45,000 Administrative Expenses 38,000
Dividends 18,000 Income Tax Expense 30,000
Sales Returns and Allowances 12,000
Sales Discounts 15,000
Sales Revenue 410,000
Instructions: Prepare closing entries for Homer Winslow Co. on December 31, 2014. (Omit explanations.)