Concept explainers
Basic assumptions and principles
• LO1–8, LO1–9
Identify the accounting concept that was violated in each of the following situations.
1. Pastel Paint Company purchased land two years ago at a price of $250,000. Because the value of the land has appreciated to $400,000, the company has valued the land at $400,000 in its most recent
2. Atwell Corporation has not prepared financial statements for external users for over three years.
3. The Klingon Company sells farm machinery. Revenue from a large order of machinery from a new buyer was recorded the day the order was received.
4. Don Smith is the sole owner of a company called Hardware City. The company recently paid a $150 utility bill for Smith’s personal residence and recorded a $150 expense.
5. Golden Book Company purchased a large printing machine for $1,000,000 (a material amount) and recorded the purchase as an expense.
6. Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its employees in the manufacturing plant. The company is being sued for $2,000,000, a material amount, and is not insured. The suit was not disclosed in the most recent financial statements because no settlement had been reached.
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INTERMEDATE ACCOUNTING BUNDLE
- Problem 14-86 (b) (LO. 9) Griffin sold three items of business equipment for a total of $144,000. None of the equipment was appraised to determine its value. Griffin's cost and adjusted basis for the assets are shown below. Asset Cost AdjustedBasis Equipment1 $63,800 $40,000 Equipment 2 34,800 32,000 Equipment 3 46,400 22,000 Total $145,000 $94,000 Griffin has been unable to establish the fair market values of the three assets. All he can determine is that combined they were worth $144,000 to the buyer in this arm's length transaction. How should Griffin allocate the sales price and figure the gain or loss on the sale of the three assets?arrow_forwardOLA#11.3 Mitchell purchased a franchise agreement to distribute electronic gadgets for 7 years. The agreement cost $2,200,000 and he had to make investments of $875,000 for the first 2 years to set up his showroom. The franchise generated $1,025,000 in profits each year from the 1st year to 7 years afterwards. At the end of year 7, he sold the furniture in his showroom for $120,000. a. What is the Internal Rate of Return (IRR)? b. Should he have proceeded with this plan if his cost of capital was 18%? Kindly add all the decimals DO NOT ROUNDarrow_forwardP4.3 (LO 2, 3, 4) (Various Income-Related Items) Maher Inc. reported income from continuing operations before taxes during 2020 of $790,000. Additional transactions occurring in 2020 but not considered in the $790,000 are as follows. 1. The corporation experienced an uninsured flood loss in the amount of $90,000 during the year. 2. At the beginning of 2018, the corporation purchased a machine for $54,000 (salvage value of $9,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2018, 2019, and 2020, but failed to deduct the salvage value in computing the depreciation base. 3. Sale of securities held as a part of its portfolio resulted in a loss of $57,000 (pretax). 4. When its president died, the corporation realized $150,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,000 (the gain is nontaxable). 5. The corporation disposed of its recreational…arrow_forward
- Problem 3-25Hobby Losses (LO 3.12) Lew is a practicing CPA who decides to raise bonsai as a business. Lew engages in the activity and has the following revenue and expenses: Sales $ 5,000 Depreciation on greenhouse 10,000 Fertilizer, soil, pots 1,500 If an amount is zero, enter "0". a. Select either "Yes" or "No" to indicate which of the following are factors the IRS will consider when evaluating whether the activity is a business or a hobby. 1. Carrying on the activity in a businesslike manner. Yes 2. The time and effort put into the activity indicate you intend to make it profitable. Yes 3. Dependence on the income for the taxpayer's livelihood. Yes 4. Whether the losses are due to circumstances beyond control (or are normal in the startup phase of this type of business). Yes 5. Attempts to change methods of operation to improve profitability. Yes 6. The taxpayer or advisors have the knowledge needed to carry on the…arrow_forwardDillip Lachgar is the president and majority shareholder of Argon Inc., a small retail chain store. Recently, Dillip submitted a loan application for Argon Inc. to Compound Bank. It called for a 600,000, 9%, 10-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of 750,000. This will enable Argon Inc. to open a store in the town of Compound. Land for this purpose was acquired last year. The bank's loan officer requested a statement of cash flows in addition to the most recent income statement, balance sheet, and retained earnings statement that Dillip had submitted with the loan application. As a close family friend, Dillip asked you to prepare a statement of cash flows. From the records provided, you prepared the following statement: Argon Inc. Statement of Cash Flows For the Year Ended December 31, 20Y7 Cash flows from operating activities: Net income.................................................... 300,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation................................................ 84,000 Gain on sale of investments.................................. (30,000) Changes in current operating assets and liabilities: Decrease in accounts receivable............................ 21,000 Increase in inventories..................................... (42,000) Increase in accounts payable............................... 30,000 Decrease in accrued expenses payable...................... (6,000) Net cash flow from operating activities.......................... 357,000 Cash flows from (used for) investing activities: Cash from investments sold..................................... 180,000 Cash used for purchase of store equipment..................... (120,000) Net cash flow from investing activities........................... 60,000 Cash flows from (used for) financing activities: Cash used for dividends........................................ (126,000) Net cash flow used for financing activities........................ (126,000) Increase (decrease) in cash......................................... 291,000 Cash at the beginning of the year................................... 108,000 Cash at the end of the year......................................... 399,000 After reviewing the statement, Dillip telephoned you and commented, Are you sure this statement is right?" Dillip then raised the following questions: 1. How can depreciation be a cash flow?" 2. Issuing common stock for the land is listed in a separate schedule. This transaction has nothing to do with cash! Shouldn't this transaction be eliminated from the statement?" 3. How can the gain on the sale of investments be a deduction from net income in determining the cash flow from operating activities? 4. Why does the bank need this statement anyway? They can compute the increase in cash from the balance sheets for the last two years." After jotting down Dillip's questions, you assured him that this statement was right." But to alleviate Dillip's concern, you arranged a meeting for the following day. a. How would you respond to each of Dillip's questions? b. Do you think that the statement of cash flows enhances the chances of Argon Inc. receiving the loan? Discuss.arrow_forwardProblem No. 8 Use the following information for the next four (4) questions: AACA Corp. is in the process of preparing its financial statements for the year ended Dec. 31, 2022. The following represent various information about the entity’s intangible assets. On May 1, 2022, AACA sold a patent in exchange for a P5,000,000 non-interest bearing note due on May 1, 2025. There was no established exchange price for the patent, and the note had no ready market. The prevailing rate of interest for a note of this type at May 1, 2022 was 14%. The collection of the note receivable is reasonably assured. The patent was purchased for P3,150,000 on Sept. 1, 2018. On that date, the remaining legal life was fifteen years, which was also determined to be the useful life. In 2022, AACA developed a new machine and secured a patent for it. The following expenses were incurred in developing and patenting the machine: Research and development laboratory expenses P1,500,000…arrow_forward
- 30. A taxpayer engaged in the practice of his profession bought a brand-new motor vehicle in the amount of Php 5 Million. Which is FALSE? S1: Depreciation expense can be claimed if the asset shall be used in business. S2: The motor vehicle, if used in business, shall be classified as an ordinary asset. Group of answer choices d. Both are true b. Only S2 is false c. Both are false a. Only S1 is falsearrow_forwardAccounting 11) Jill purchased a printing press for her business on 6/15/21 costing $60,000. The installation cost $2,000 and the sales tax was $5,000. (a)What is Jill's basis in the equipment? (b)Using the info in question 11, what is the amount of depreciation for 2021?arrow_forward3) b) Profit before tax for Juventus is estimated at $3,000,000 for the year ended June 30, 2019, during the audit, the team has identified the following errors,i. An error of $3,000 was found in the audit of depreciation expense of the warehouse purchased in January 2019. The management of Juventus have indicated that they do not wish to amend the financial statements.ii. An error of $350,000 in the valuation of work in progress was found as a number of the assumptions contain out of date information. The management of Juventus have indicated that they do not wish to amend the financial statements.Calculate Performance Materiality and utilize this to discuss the appropriate treatment of the above two errors.arrow_forward
- Question 3What is the proper solution for this problem? B. On August 1, 2021, the board of directors of LL Co. voted to approve the disposal of one of its B division.The sale is expected to occur in June of next year. The B division's revenue and expenses for the period from January 1 to July 31 amounted to P14,000,000 and P10,000,000, respectively. For the period from August 1 to December 31, B Division's revenue amounted to P5,000,000 while expenses totaled P4,500,000. The carrying amount of B Division's net assets on December 31, 2021 was P21,000,000 and the fair value less cost of disposal was P25,000,000. The sale contract requires the company to pay termination cost of affected employees in the amount of P1,200,000 to be paid on September 30, 2022. The income tax rate is 30%. Required:25 – 27. Determine the income (loss) net of tax from discontinued operation.arrow_forwardhd.10. Question 1 Loftus et al (2023) Exercise 13.5 Amended The following information was extracted from records of Nawa Ltd for the year ended 30 June 2024. NAWA LTD Statement of financial position (extract) as at 30 June 2024 Assets Accounts receivable $ 50 000 Allowance for doubtful debts (5 000 ) $ 45 000 Motor vehicles 250 000 Accumulated depreciation — motor vehicles (50 000 ) 200 000 Liabilities Interest payable 5 000 Additional information • The accumulated tax depreciation for motor vehicles at 30 June 2024 was $100 000. • As at 30 June 2023, the balance in the deferred tax asset was $2,000 and the balance in the deferred tax liability was $8,000. • The income tax rate is 30%. Required: Prepare a deferred tax worksheet for Nawa Ltd and the end of year deferred tax journal entry required to bring the deferred tax accounts to their ending balances as at 30 June 2024.arrow_forwardQ.27. Mr Cruz, procured a tract of timber for P65,000. The worth of the land was established tobe P17,000 and the worth of the 23,500 trees was P45,000. During the first year ofoperation, they cut down 4,500 trees. What was the depletion allowance that year? Please asap.arrow_forward
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