Intermediate Accounting
16th Edition
ISBN: 9780134102313
Author: GORDON
Publisher: PEARSON
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Textbook Question
Chapter 1, Problem 1.7E
Rules-versus Principles-Based Accounting. Review the following statements and indicate if the statement is referring to a principles-based or a rules-based accounting standard.
Statement. An accountant will use a particular accounting standard only if ... | Principles-Based or Rules-Based Accounting Standard |
a. ... the length of a contract covers substantially all of the useful life of a plant asset. | a. ____________________ |
b. ... the number of new common shares a firm issues is equal to 20% of the previously outstanding shares. | b. ____________________ |
c. ... a corporation owns over 50% of the voting shares of an affiliate company. | c. ____________________ |
d ... a corporation has the ability to control the operating and financing activities of an affiliate company. | d. ____________________ |
e. ... it is more likely than not that a company’s tax position will be sustained upon examination by the Internal Revenue Service. | e. ____________________ |
f. . .. the sum of the undiscounted future cash flows from the use of a plant asset is less than its carrying value. | f. ____________________ |
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An accountant must be familiar with the concepts involved in determining earnings of a business entity. The amount of earnings reported for a business entity is dependent on the proper recognition, in general, of revenues and expenses for a given time period. In some situations, costs are recognized as expenses at the time of product sale. In other situations, guidelines have been developed for recognizing costs as expenses or losses by other criteria.
Instructions
a. Explain the rationale for recognizing costs as expenses at the time of product sale.
b. What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the costs to an asset? Explain.
c. In what general circumstances would it be appropriate to treat a cost as an asset instead of as an expense? Explain.
d. Some expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the underlying rationale…
An analyst must be familiar with the determination of income. Income reported for a business entity depends on proper recognition of revenues and expenses. In certain cases, costs are recog- nized as expenses at the time of product sale; in other situations, guidelines are applied in capi- talizing costs and recognizing them as expenses in future periods.
Required:
a. Under what circumstances is it appropriate to capitalize a cost as an asset instead of expensing it? Explain.
b. Certain expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the rationale for recognizing expenses on such a basis.
Revenue is recognized for accounting purposes when a performance obligation is satisfied. In some situations, revenue is recognized over time as the fair values of assets and liabilities change. In other situations, however, accountants have developed guidelines for recognizing revenue at the point of sale.
Questions:
1. Explain and justify why revenue is often recognized at the time of sale.
2. Explain in what situations it would be appropriate to recognize revenue over time.
Chapter 1 Solutions
Intermediate Accounting
Ch. 1 - Prob. 1.1QCh. 1 - Prob. 1.2QCh. 1 - How is the allocation of capital linked to the...Ch. 1 - Prob. 1.4QCh. 1 - What is the function of the accounting standard...Ch. 1 - Can U.S. companies listen on U.S. stock exchanges...Ch. 1 - Prob. 1.7QCh. 1 - Prob. 1.8QCh. 1 - Prob. 1.9QCh. 1 - Prob. 1.10Q
Ch. 1 - Prob. 1.1BECh. 1 - Financial Statement Users and Other Parties...Ch. 1 - Prob. 1.3BECh. 1 - Prob. 1.4BECh. 1 - Prob. 1.5BECh. 1 - Prob. 1.6BECh. 1 - Prob. 1.7BECh. 1 - Financial Accounting. Define financial accounting...Ch. 1 - Prob. 1.2ECh. 1 - Convergence of Accounting Standards, IFRS Vikram...Ch. 1 - History of Standard Setting in the United States....Ch. 1 - Prob. 1.5ECh. 1 - Prob. 1.6ECh. 1 - Rules-versus Principles-Based Accounting. Review...
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- Revenue is recognized for accounting purposes when a performance obligation is satisfied. In some situations, revenue is recognized over time as the fair values of assets and liabilities change. In other situations, however, accountants have developed guidelines for recognizing revenue at the point of sale. Instructions (Ignore income taxes.) a. Explain and justify why revenue is often recognized at time of sale. b. Explain in what situations it would be appropriate to recognize revenue over time.arrow_forwardList the classification of each of the following accounts as A (asset), L (liability), OE (owners equity), R (revenue), or E (expense). Write Debit or Credit to indicate the increase side, the decrease side, and the normal balance side. PART 1: The Accounting Cycle for a Service Business: Analyzing Business Transactionsarrow_forwardWhich of the following is the principle that a business must report any business activities that could affect what is reported on the financial statements? A. revenue recognition principle B. expense recognition (matching) principle C. cost principle D. full disclosure principlearrow_forward
- The first step in the revenue recognition process is determining if a contract is in place between the seller and the customer. A contract is an agreement between two or more parties that creates enforceable rights and obligations. The standard states that a contract may be written, oral, or implied by customary business practices. To be a contract, the accounting standard states that it must meet five criteria. Required: Discuss the criteria necessary for a contract to be considered under the revenue recognition process. How would a company account for a contract that does not meet the criteria?arrow_forwardWhich of the following terms is used when assuming a business will continue to operate in the foreseeable future? A. separate entity concept B. monetary measurement concept C. going concern assumption D. time period assumptionarrow_forwardQuestion: How much is the equipment contributed by Rogers? PLEASE SHOW THE ANSWERS WITH COMPLETE SOLUTION IN A GOOD ACCOUNTING FORM.arrow_forward
- Give an example of situation to show how a business adheres to each of the following accounting principles: Historical cost Revenue recognitionarrow_forwardIncome reported for a business entity depends on the proper recognition of revenues and expenses. In certain cases, costs are recognised as expenses at the time of product sale and in other situations costs are capitalised if they bring future benefits.In around 250 words, comment on the above statement. Your comments should include valid examples and illustrations.arrow_forwardDepreciation is considered as accounting policy and operational expense for the accounting period. The value to be included in the financial statement is calculated based on the decision of the Board. (a) You are re quire d to: (i) Explain the difference between capital expenditure and revenue expenditure, and how each type of expenditure will affect the financial statements of a business. (ii) Explain why it is important to distinguish between capital expenditure and revenue expenditure, and briefly explain the accounting treatment of each type of expenditure. (iii) Under what circumstances will you consider the reducing balance method as the most appropriate method of calculating depreciation? (iv) Does Depreciation decrease cash in business? Explain your answer.arrow_forward
- Which of the following states that the business should use the same accounting methods from period to period? a. Materiality concept b. Consistency principle c. Disclosure principle d. Accounting conservatismarrow_forwardMake an economic statement of your own which has impact as follows in “a” and then journalize thatentry properly. You can use hypothetical name for your company and choose the date.• Increase one asset, decrease another asset, and increase a liability.arrow_forwardRevenue is recognized for accounting purposes when a performance obligation is satisfied. In some situations, revenue is recognized over time as the fair values of assets and liabilities change. In other situations, however, accountants have developed guidelines for recognizing revenue at the point of sale. Explain in what situations it would be appropriate to recognize revenue over time. Ignore income taxes.arrow_forward
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