Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 9, Problem 14PC
Discuss when each of the following types of businesses is likely to recognize revenues and expenses.
- a. A bank lends money for home mortgages.
- b. A travel agency books hotels, transportation, and similar services for customers and earns a commission from the providers of these services.
- c. A major league baseball team sells season tickets before the season begins and signs its players to multiyear contracts. These contracts typically defer the payment of a significant portion of the compensation provided by the contract until the player retires.
- d. A producer of fine whiskey ages the whiskey 12 years before sale.
- e. A timber-growing firm contracts to sell all timber in a particular tract when it reaches 20 years of age. Each year it harvests another tract. The price per board foot of timber equals the market price when the customer signs the purchase contract plus 10% for each year until harvest.
- f. An airline provides transportation services to customers. Each flight grants frequent-flier miles to customers. Customers earn a free flight when they accumulate sufficient frequent-flier miles.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
How would each of the following items be reported on the balance sheet?
a. Accrued vacation pay.
b. Estimated taxes payable.
c. Service warranties on appliance sales.
d. Bank overdraft.
e. Employee payroll deductions unremitted.
f. Unpaid bonus to officers.
g. Deposit received from customer to guarantee performance of a contract.
h. Sales taxes payable.
i. Gift certificates sold to customers but not yet redeemed.
j. Premium offers outstanding.
k. Discount on notes payable.
l. Personal injury claim pending.
m. Current maturities of long-term debts to be paid from current assets.
n. Cash dividends declared but unpaid.
o. Dividends in arrears on preferred stock.
p. Loans from officers.
A new client, the Wolf Company, asks your advice concerning the point in time that the company should recognize revenue from the rental of its office buildings under generally accepted accounting principles. Renters usually pay rent on a quarterly basis at the beginning of the quarter. The owners contend that the critical event that motivates revenue recognition should be the date the cash is received from renters. After all, the money is in hand and is very seldom returned.Required:Do you agree or disagree with the position of the owners of Wolf Company? State whether you agree or disagree, and support your answer by relating it to accrual accounting under GAAP.
Referring to relevant statutory provisions and common law, discuss whether, for the current income year, the following amounts would be as an allowable deduction against assessable income.
a) Provision for the estimated amount of trade debtors’ accounts, which might not be collected.
b) An amount of $9,000 paid to a solicitor for preparing a partnership deed.
c) Newspapers purchased by an accountant who advises clients on financial and investment matters.
d) Travel cost of a business executive to attend a trade fair in London paid by the employer.
e) Speeding fines of $ 500 paid by an owner to a driver.
Chapter 9 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Consider each of the following scenarios: a. A seller orally agrees with one of its best customers to deliver goods in exchange for 10,000. While the sellers practice is to obtain a written sales agreement, the seller delivered these goods to the customer without a written agreement due to the customers urgent need. b. A seller agrees to provide accounting services to a customer for the next year in exchange for 40,000. While the two parties are negotiating the terms of the agreement and the specific services to be performed, the seller begins to perform some services as a gesture of good faith. c. A seller has a written agreement to deliver goods to a customer for 50 per unit. The price will drop to 45 per unit if the customer purchases more than 2,000 units per month. d. A seller had a written agreement and provided custodial services to a customer for 2,000 per month in a previous year. The contract expired on December 31, 2019. During negotiations for a new contract in January 2020, custodial services were provided at the previous monthly rate and paid for by the buyer. The seller and the customer agree to a new contract on February 1, 2020. The seller is concerned whether a contract existed in January 2020 and whether revenue can be recognized. Required: 1. Determine if a contract exists for each of the scenarios. 2. If it is determined that a contract exists but the seller believes it is probable that it will not collect the expected consideration, how does this affect the sellers ability to recognize revenue?arrow_forwardReferring to relevant statutory provisions and common law, discuss whether, for the current income year, the following amounts would be as an allowable deduction against assessable income. Provision for the estimated amount of trade debtors’ accounts, which might not be collected. An amount of $9,000 paid to a solicitor for preparing a partnership deed. Newspapers purchased by an accountant who advises clients on financial and investment matters. Travel cost of a business executive to attend a trade fair in London paid by the employer.arrow_forwardConsider the following situations and determine (1) which type of liability should be recognized (specific account), and (2) how much should be recognized in the current period (year). A business sets up a line of credit with a supplier. The company purchases $10,000 worth of equipment on credit. Terms of purchase are 5/10, n/30. A customer purchases a watering hose for $25. The sales tax rate is 5%. Customers pay in advance for season tickets to a soccer game. There are fourteen customers, each paying $250 per season ticket. Each customer purchased two season tickets. A company issues 2,000 shares of its common stock with a price per share of $15.arrow_forward
- Consider the following situations and determine (1) which type of liability should be recognized (specific account), and (2) how much should be recognized in the current period (year). A. A business sets up a line of credit with a supplier. The company purchases $10,000 worth of equipment on credit. Terms of purchase are 5/10, n/30. B. A customer purchases a watering hose for $25. The sales tax rate is 5%. C. Customers pay in advance for season tickets to a soccer game. There are fourteen customers, each paying $250 per season ticket. Each customer purchased two season tickets. D. A company issues 2,000 shares of its common stock with a price per share of $15.arrow_forwardInterpreting Income Tax Disclosures. Prepaid Legal Services (PPD) is a company that sells insurance for legal expenses. Customers pay premiums in advance for coverage ever some specified period. Thus, PPD obtains cash but has unearned revenue until the passage of time over the specified period of coverage. Also, the company pays various costs to acquire customers (such as sales materials, commissions, and prepayments to legal firms who provide services to customers). These upfront payments are expensed over the specified period that customers contracts span. Exhibit 2.16 provides information from PPDs income tax note. REQUIRED a. Assuming that PPD had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for 2007? For 2008? Explain. b. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2007? For 2008? c. PPD must report as taxable income premiums collected from customers, although the company defers recognizing them as income for financial reporting purposes until they are earned over the contract period. Why are deferred taxes related to deferred revenue disclosed as a deferred tax asset instead of a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2007 and 2008. d. Firms are generally allowed to deduct cash costs on their tax returns, although they might defer some of these costs for financial reporting purposes. As noted above, PPD defers various costs associated with obtaining customers. Why are deferred taxes related to this item disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2007 and 2008. e. Like most companies, PPD uses the straight-line depreciation method for financial reporting and accelerated depredation methods for income tax purposes. Why are deferred taxes related to depredation disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax liability between 2007 and 2008. f. Based only on the selected disclosures from the income tax footnote provided in Exhibit 2.16 and your responses to Parts d and e above, do you believe that PPD reported growing or declining revenue and profitability in 2008 relative to 2007? Explain.arrow_forwardIdentify whether each of the following transactions, which are related to revenue recognition, are accrual, deferral, or neither. A. provided legal services to client, who paid at the time of service B. received cash for legal services performed last month C. received cash from clients for future services to be provided D. provided legal services to client, to be collected next montharrow_forward
- What Would You Do? You are responsible for preparing all of the journal entries for Regional Financial Services. You have correctly prepared the following entry for financial services provided on December 15: Your boss has asked you to change the date from December 15 to January 15 so that the business’s profit, and thus taxes, would be lower. Are you allowed to do this? What is your response to your boss? How should you handle this situation?arrow_forwardYour client is preparing financial statements to show the bank. You know that he has incurred a refrigeration repair expense during the month, but you see no such expense on the books. When you question the client, he tells you that he has not yet paid the 1,255 bill. Your client is on the accrual basis of accounting. He does not want the refrigeration repair expense on the books as of the end of the month because he wants his profits to look good for the bank. Is your client behaving ethically by suggesting that the refrigeration repair expense not be booked until the 1,255 is paid? Are you behaving ethically if you agree to the clients request? What principle is involved here?arrow_forwardThe company receives a $500,000 payment from a client. Half of this payment is for services that the company had previously performed for the client, while the other half of the payment is a retainer fee for services to be performed in the future. For each element of the fundamental accounting equation (A, L, E), indicate whether that element increases, decreases, or ultimately remains unchanged.arrow_forward
- The company receives a $500,000 payment from a client. Half of this payment is for services that the company had previously performed for the client, while the other half of the payment is a retainer fee for services to be performed in the future. Provide the journal entry that would be necessary to record the transaction.arrow_forwardFor each of the following independent items, indicate when revenue should be recognized. a. Interest on loans made by a financial institution, receivable in annual payments. b. Interest on loans made by a financial institution, receivable in three years when the customer, who has an excellent credit rating, will make payment. c. Recognition of revenue from the cash sale of airline tickets, when the travel purchased will occur in the next fiscal period. d. Transportation of freight by a trucking company for a customer; the customer is expected to make payment in accordance with the terms of the invoice in 60 days. e. Growing, harvesting, and marketing of Christmas trees; the production cycle is ten years. f. Building houses in a subdivision, when the project will take two years to complete and each house must be individually sold by the contractor. The contractor owns each house until title is transferred to the new owner. g. Building houses in a subdivision, when the…arrow_forwardWhich of the following situations violates the matching principle? Some of the amount that was paid for a one-year insurance policy partway through Year 1 is recorded as insurance expense in Year 2. A one-year insurance policy is purchased partway through the year; full payment is recorded as insurance expense when the payment is made. Wages expense is recorded in Year 1 even though payday is not until sometime in Year 2. Sales commissions on all sales made in Year 1 are recorded as an expense in Year 1 even though some of the commissions have not yet been paid.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
Chapter 19 Accounting for Income Taxes Part 1; Author: Vicki Stewart;https://www.youtube.com/watch?v=FMjwcdZhLoE;License: Standard Youtube License