Acc421 Intermediate Accounting: Week 2 Individual Assignment (I2-1, I2-2, I2-3, I2-4)

Accounting 421 Intermediate Accounting
Week 2 – Individual Assignments

Accounting information is useful because of the following qualitative characteristics underlying our accounting standards:
Comparability Consistency
Feedback Value Neutrality
Predictive value Relevance
Reliability Representational Faithfulness
Timeliness Verifiability

(1) For each item below, identify the relevant qualitative characteristic(s):
(a) Records information without bias regarding economic effects.
(b) A component of this primary quality is verifiability.
(c) Information that corrects previous forecasts.
(d) Information is useful when making decisions.
(e) A component of this primary quality is timeliness.
(f) Qualities that are associated with both comparability and consistency.
(g) Companies in different industries use the same method to compute estimates of bad debt expense.
(h) Meeting deadlines to issue financial information.
(i) A company uses the same method to compute estimates of bad debt expense each year.
(j) A consensus of certified public accountants agrees on the method to be used to compute estimates of bad debt expense.

The following are accounting principles, constraints, and assumptions:
Conservatism Cost-benefit relationship
Economic entity assumption Full disclosure principle
Going concern assumption Historical cost principle
Industry practices Materiality
Matching principle Monetary unit assumption
Periodicity assumption

(1) For each of the below situations, identify the principle, constraint or assumption relevant to each situation.
(a) A company produces financial statements each quarter.
(b) A company’s assets are not reported on the financial statements at their net realizable value.
(c) Information that would affect decisions based upon the financial statements is disclosed. (Note: not the full disclosure principle.)
(d) Expenses are recorded in the period incurred to generate revenue rather than in the period they are actually paid.
(e) Financial statements report values measured in dollars.
(f) Requires the recognition of reasonably probable losses but prohibits the recognition of reasonably probable gains.
(g) All relevant financial information is reported.
(h) Requires that personal transactions of a business owner are not recorded in the business’ records.
(i) Allows variances from common accounting standards in specific situations.
(j) Provides that increases in the value of assets owned are not reported in the financial statements.

Consider each of the following independent situations.

(1) Relate generally accepted accounting principles to each of the following situations and state if the entry recorded is appropriate. If not, specify the accounting principle that was violated.
(a) Although the company is doing well, management is concerned about their ability to sell the company’s assets if the company must file bankruptcy and cease business operations. Consequently, to be conservative, instead of recording the acquisition of a delivery truck costing $40,000 as an asset and depreciating the asset over its useful life as is the normal procedure under generally accepted accounting principles, the company recorded the following entry.

Truck Expense 40,000.00
Cash 40,000.00

(b) A sales representative from another company was visiting the company’s factory. During the visit, the sales representative ignored signs stating “Restricted Area, Authorized Personal Only, Hard Hats Required” and entered the area without permission. As a result, the sales representative was injured and sued the company for damages in the amount of $400,000. The company’s attorneys have advised that the company has no liability since the sales representative violated posted notices and entered the area without permission. Management, however, to be conservative, has recorded the following entry.

Accident Expense 400,000.00
Reserve for Accident Expenses 400,000.00

(c) The sole shareholder and president of ABC, Inc. used a company check to pay for an addition to his house and entered the following transaction into the company’s financial statements.

Owner Expense 27,000.00
Cash 27,000.00

(d) A company acquired a used milling machine from a company that was going out of business. The company paid $25,000 for the machine which is estimated to have a fair market value of $30,000. The company recorded the acquisition of the machine as follows.

Machinery 30,000.00
Cash 25,000.00
Gain on acquisition of machinery 5,000.00

(e) A company has 20,000 widgets in its inventory which the company purchased for $4 each. As there has been a worldwide shortage of widgets in the recent past, the current market price for widgets is $5 each. To recognize the increase in value, the company has recorded the following entry.

Inventory 20,000.00
Gain on appreciation of inventory 20,000.00

(f) A company has been deprecating a delivery truck at the rate of $5,000 per year. Because good used vehicles have been in high demand, the estimated value of the delivery truck is $3,000 higher than anticipated. Therefore, to recognize the improved estimated value of the delivery truck, the company recorded current year depreciation as follows.

Depreciation Expense 2,000.00
Accumulated Depreciation 2,000.00

The Skyhigh Company has prepared the following schedule of some of its ledger accounts balances as of December 31.
Debit Credit
Office Supplies $4,900
Prepaid Rent 6,000
Machinery 45,000
Accumulated Depreciation - Machinery $13,500
Accounts Payable 4,750
Notes Payable 35,000
Unearned Subscription Revenue 100,000
Subscription Revenue 750,000
Wages Expense 24,500

Additional information:
1. The notes payable carries an annual interest rate of 8% and has been outstanding for the entire year. It will be paid in full next July 1. No interest expense has been recorded for this note during the year.
2. 75% of the unearned subscription revenue was earned during the year. No unearned subscription revenue has been reclassified to revenue during the year.
3. The prepaid rent is for a small storage facility rented on October 1 of the current year at $500 per month. No amount of the prepaid rent has been reclassified to expense during the year.
4. A count of the office supplies indicates that a total of $800 remain on hand at the end of the year. No amount of the office supplies has been reclassified to expense during the year.
5. The machinery depreciates at the rate of 2% per month. No depreciation expense has been recorded during the year.
6. The company’s fiscal year ends on December 31.
7. The company records all adjusting entries at the end of the fiscal year.

Prepare the year end adjusting entries necessary.
Hint: Additional accounts needed are Depreciation Expense, Office Supplies Expense, Rent Expense, and Interest Expense.
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