Assignment
Question 1
Presented below are three different transactions related to materiality. Explain whether you would classify these transactions as material and explain why or why not.
(a) Bingo Corporation has reported a positive trend in earnings over the last 3 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 2% of net income.
(b) Red Wing LLC has an extraordinary gain of $4.1 million on the sale of plant assets and a $4.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Red Wing LLC's income for the current year was $12 million.
(c) Rainbow Records expenses all capital equipment under $25,000 on the basis it is immaterial. The company has followed this practice for a number of years. Its average yearly capital expenditures over the last 5 years is $25 million.
Question 2
Identify which basic assumption of accounting is best described in each item below:
(a) The economic activities of UPS Corporation are divided into 12-month periods for the purposes of issuing financial statements.
(b) Sunbeam Corporation does not adjust amounts in its financial statements for the effects of inflation.
(c) CVS reports current and noncurrent classifications on its balance sheet.
(d) The economic activities of Marriott International, Inc. and its subsidiaries are merged for accounting and reporting purposes.
(e) American Airlines reports revenue in its income statement when it is earned instead of when the cash is collected.
(f) Google, Inc. recognizes depreciation expense for a machine over the 5-year period during which that machine helps the company earn revenue.
(g) MGM Grand reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.
Question 3
In each of the following business transactions, discuss the appropriateness of the journal entry in terms of generally accepted accounting principles.
(a) The CFO of Smith Travel, Inc. used his expense account to purchase a new vehicle solely for personal use. The following journal entry was made:
Miscellaneous Expense $34,000
Cash $34,000
(b)Merchandise inventory that cost $550,000 is reported on the balance sheet at $620,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value:
Inventory $70,000
Sales Revenue $70,000
Question 4
The unadjusted trial balance as of December 31, 2013 for the Bagel Company appears below. December 31 is the company's fiscal year-end.
Account Title Debits Credits
Cash 8,000
Accounts Receivable 9,000
Allowance for Uncollectible Accounts 50
Prepaid Insurance 3,000
Land 200,000
Buildings 50,000
Accumulated Depreciation - Buildings 20,000
Equipment 100,000
Accumulated Depreciation - Equipment 40,000
Accounts Payable 35,000
Salaries Payable -0-
Unearned Rent Revenue -0-
Common Stock 200,000
Retained Earnings 56,450
Sales Revenue 90,000
Interest Revenue 3,000
Rent Revenues 7,500
Salaries Expense 37,000
Bad Debt Expense -0-
Depreciation Expense -0-
Insurance Expense -0-
Utility Expense 30,000
Maintenance Expense 15,000
Totals 452,000 452,000
Complete the following steps:
(a) Enter the account balances into T-accounts.
(b) From the trial balance and information given, prepare adjusting entries and post the amounts to the T-accounts.
(1) The buildings have an estimated useful life of 50 years with no salvage value. The company uses the straight-line depreciation method.
(2) The equipment is depreciated at 10 percent of original cost per year.
(3) Prepaid insurance expired during the year, $1,500.
(4) It is estimated that 10% of the accounts receivable balance will be uncollectible.
(5) Accrued salaries at year-end should be $1,500.
(6) Unearned rent revenue at year-end should be $1,200.
(c) Prepare an adjusted trial balance.
(d) Prepare closing entries.
(e) Prepare a post-closing trial balance.
(f) Prepare an Income Statement and Balance Sheet.