Exercise 1-13 Basic assumptions and principles

Exercise 1-13 Basic assumptions and principles [LO1-7, 1-8, 1-9]

For each of the following situations, state whether you agree or disagree with the financial reporting practice employed, and briefly explain the reason for your answer.

   

1.	The controller of the Dumars Corporation increased the carrying value of land from its original cost of $2 million to its recently appraised value of $3.5 million.
2.	The president of Vosburgh Industries asked the company controller to charge miscellaneous expense for the purchase of an automobile to be used solely for personal use.
3.	At the end of its 2013 fiscal year, Dower, Inc., received an order from a customer for $45,350. The merchandise will ship early in 2014. Because the sale was made to a long-time customer, the controller recorded the sale in 2013.
4.	At the beginning of its 2013 fiscal year, Rossi Imports paid $48,000 for a two-year lease on warehouse space. Rossi recorded the expenditure as an asset to be expensed equally over the two-year period of the lease.
5.	The Reliable Tire Company included a note in its financial statements that described a pending lawsuit against the company.
6.	The Hughes Corporation, a company whose securities are publicly traded, prepares monthly, quarterly, and annual financial statements for internal use but disseminates to external users only the annual financial statements. Get the answer now only $1.99

Exercise 1-2 Accrual accounting - Intermediate Accounting Spiceland 7th Edition

Exercise 1-2 Accrual accounting [LO1-2]

Listed below are several transactions that took place during the second two years of operations for RPG Consulting.

	Year 2			Year 3
Amounts billed to customers for services rendered	$	430,000		$	530,000
Cash collected from credit customers		340,000			480,000
Cash disbursements:
Payment of rent		88,000			0
Salaries paid to employees for services rendered during the year		148,000			168,000
Travel and entertainment		38,000			48,000
Advertising		19,000			43,000

In addition, you learn that the company incurred advertising costs of $33,000 in year 2, owed the advertising agency $5,800 at the end of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment was for a two-year period, year 2 and year 3. Required: 1. Calculate accrual net income for both years. 2. Determine the amount due the advertising agency that would be shown as a liability on the RPG’s balance sheet at the end of year 2. Click here for the answers $3.99

Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment were $82,000 and $90,000, respectively.

Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment were $82,000 and $90,000, respectively.

Assuming that the exchange has commercial substance, Alamos would record a gain/(loss) of:

	$26,000.
	$8,000.
	$(8,000).
	$0.

Equipment-new (FV of old + $18,000)	108,000
Cash		18,000
Equipment-old (book value)		82,000
Gain ($90,000 – 82,000)		8,000

Why would a company use the cash basis of accounting?

To my understanding, some organizations may use the cash basis of accounting when they cannot convert to GAAP due to costs. When filing their income taxes the organization may use the tax basis of accounting to save money for that organization. Political campaigns and committees would be an example of an organization that would use the cash basis of accounting.

Valuation of Bonds

Bonds generally provide for periodic fixed interest payments at a contract rate of interest. At issuance, or thereafter, the market rate of interest for the particular type of bond may be above, the same, or below the contract rate. If the market rate exceeds the contract rate, the book value will be less than the maturity value.  The difference (discount) will make up for the contract rate being below the market rate.
Conversely, when the contract rate exceeds the market rate, the bond will sell for more than maturity value to bring the effective rate to the market rate.  This difference (premium) will make up for the contract rate being above the market rate.  When the contract rate equals the market rate, the bond will sell for the maturity value.

The market value of a bond is equal to the maturity value and interest payments discounted to the present.  Finally, when solving bond problems, candidates must be careful when determining the number of months to use in the calculation of interest and discount/premium amortization.  For example, candidates frequently look at a bond issue with an interest date of September 1 and count 3 months to December 31. This error is easy to make because candidates focus only on the fact that September is the ninth month instead of also noting whether the date is at the beginning or end of the month.

The issue price of bonds is equal to the present value (PV) of the maturity value plus the PV of the interest annuity.  The PV must be computed using the yield rate.  The computation is

Amount   PV Factor   PV
$1,000,000 × .386 = $386,000
80,000 × 6.145 = 491,600
Total issue price       $877,600

The interest amount above ($80,000) is the principal ($1,000,000) times the stated rate (8%).

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A client wants to know how many years it would take before..

the accumulated cash flows from an investment exceed the initial investment, without taking the time value  of money into account. Which of the following financial models should be used?

• Net present value
• Time value of money
• Payback period
• Internal rate of return

Answer: Payback Period

The requirement is to identify the term that describes a method that measures the number of years it takes to recoup an initial investment without considering the time value of money. This answer is correct because the definition describes the payback period.

Under Frost free conditions

The requirement is to determine what the probability of frost must be for Ball to be indifferent to spending $20,000 for frost protection.  In other words, you must find the point at which the cost of the frost protection equals the expected value of the loss from frost damage.  The table below summarizes the possible outcomes.

	Frost	Frost-free
Protected	$180,000 Market value	$1200,000 Market value
Unprotected	$80,000 Market value	$120,000 Market value

The difference between the market value of protected and unprotected strawberries if a frost were to occur is $100,000.  Since we want to determine the probability of a frost when the expected value of the loss from frost damage is $20,000, this probability can be calculated as follows:

Loss from damage	×	Probability of frost	=	Expected value of the loss
$100,000	×	P	=	$20,000   $20,000
		P	=	$100,000
		P	=	.200