Refer to Case 2–1. Mr. Pitt has relented and agrees to provide you with the information necessary to convert his cash basis financial statements to accrual basis statements. He provides you with the following transaction information for the fiscal year ending December 31, 2018: 1. A new comprehensive insurance policy requires an annual payment of $12,000 for the upcoming year. Coverage began on September 1, 2018, at which time the first payment was made. 2. Mr. Pitt allows customers to pay using a credit card. At the end of the current year, various credit card companies owed Mr. Pitt $6,500. At the end of last year, customer credit card charges outstanding were $5,000. 3. Employees are paid once a month, on the 10th of the month following the work period. Cash disbursements to employees were $8,200 and $7,200 for January 10, 2019, and January 10, 2018, respectively. 4. Utility bills outstanding totaled $1,200 at the end of 2018 and $900 at the end of 2017. 5. A physical count of inventory is always taken at the end of the fiscal year. The merchandise on hand at the end of 2018 cost $35,000. At the end of 2017, inventory on hand cost $32,000. 6. At the end of 2017, Mr. Pitt did not have any bills outstanding to suppliers of merchandise. However, at the end of 2018, he owed suppliers $4,000. Required: 1. Mr. Pitt’s 2018 cash basis net income (including depreciation expense) is $26,000. Determine net income applying the accrual accounting model. 2. Explain the effect on Mr. Pitt’s balance sheet of converting from cash to accrual. That is, would assets, liabilities, and owner’s equity be higher or lower and by what amounts? Information from Case 2-1: You have recently been hired by Davis & Company, a small public accounting firm. One of the firm’s partners, Alice Davis, has asked you to deal with a disgruntled client, Mr. Sean Pitt, owner of the city’s largest hardware store. Mr. Pitt is applying to a local bank for a substantial loan to remodel his store. The bank requires accrual based financial statements but Mr. Pitt has always kept the company’s records on a cash basis. He doesn’t see the purpose of accrual based statements. His most recent outburst went something like this: “After all, I collect cash from customers, pay my bills in cash, and I am going to pay the bank loan with cash. And, I already show my building and equipment as assets and depreciate them. I just don’t understand the problem.”
> On January 1, 2018, Harlon Consulting entered into a three-year lease for new office space agreeing to lease payments of: $5,000 in 2018, $6,000 in 2019 and $7,000 in 2020. Payments are due on December 31 of each year with the first payment being made on
> On January 1, 2018, Nguyen Electronics leased equipment from Nevels Leasing for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Nevels. The equipment cost Nevels $824,368 and has an expected e
> If a company prepares its financial statements according to International Financial Reporting Standards, how would it account for convertible bonds it issues for $12.5 million? What is the conceptual justification?
> A six-year lease can be renewed for two additional three-year periods, and it also can be terminated after only three years. How do the lessee and lessor decide the lease term to be used in accounting for the lease?
> What are debt issue costs and how should they be reported?
> How is periodic interest determined for outstanding liabilities? For outstanding receivables? How does the approach compare from one form of debt instrument (say bonds payable) to another (say notes payable)?
> What must a company do in the long run to be able to provide a return to investors and creditors?
> What is meant by GAAP? Why should all companies follow GAAP in reporting to external users?
> Selected balance sheet information for the Wolf Company at November 30, and December 31, 2018, is presented below. The company uses the perpetual inventory system and all sales to customers are made on credit. The following cash flow information also is
> Define net operating cash flows. Briefly explain why periodic net operating cash flows may not be a good indicator of future operating cash flows.
> McGuire Corporation began operations in 2018. The company purchases computer equipment from manufacturers and then sells to retail stores. During 2018, the bookkeeper used a check register to record all cash receipts and cash disbursements. No other jour
> The unadjusted trial balance as of December 31, 2018, for the Bagley Consulting Company appears below. December 31 is the company’s fiscal year-end. Required: 1. Enter the account balances in T-accounts. 2. From the trial balance and in
> The Marchetti Soup Company entered into the following transactions during the month of June: (1) purchased inventory on account for $165,000 (assume Marchetti uses a perpetual inventory system); (2) paid $40,000 in salaries to employees for work perfor
> Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2015, are available in Connect. This m
> Distinguish between the revenue/expense and the asset/liability approaches to setting financial reporting standards.
> Excalibur Corporation sells video games for personal computers. The unadjusted trial balance as of December 31, 2018, appears below. December 31 is the company’s fiscal year-end. The company uses the perpetual inventory system. Informat
> Some theorists contend that companies that create pollution should report the social cost of that pollution in income statements. They argue that such companies are indirectly subsidized as the cost of pollution is borne by society while only production
> Briefly describe the inputs that companies should use when determining fair value. Organize your answer according to preference levels, from highest to lowest priority.
> Describe the purpose of each of the five primary financial statements.
> The information necessary for preparing the 2018 year-end adjusting entries for Vito’s Pizza Parlor appears below. Vito’s fiscal year-end is December 31. a. On July 1, 2018, purchased $10,000 of IBM Corporation bonds at face value. The bonds pay interest
> What are the four different approaches to implementing expense recognition? Give an example of an expense that is recognized under each approach.
> The December 31, 2018, adjusted trial balance for the Blueboy Cheese Corporation is presented below. Required: 1. Prepare an income statement for the year ended December 31, 2018, and a classified balance sheet as of December 31, 2018. 2. Prepare the ne
> Describe how revenue recognition relates to transferring goods or services.
> The Mazzanti Wholesale Food Company’s fiscal year-end is June 30. The company issues quarterly financial statements requiring the company to prepare adjusting entries at the end of each quarter. Assuming all quarterly adjusting entries were properly reco
> What are two advantages to basing the valuation of assets and liabilities on their historical cost?
> The general ledger of the Karlin Company, a consulting company, at January 1, 2018, contained the following account balances: The following is a summary of the transactions for the year: a. Sales of services, $100,000, of which $30,000 was on credit. b.
> The Eldorado Corporation’s controller prepares adjusting entries only at the end of the fiscal year. The following adjusting entries were prepared on December 31, 2018: Additional information: 1. The company borrowed $120,000 on March 3
> Prepare the necessary adjusting entries at its year-end of December 31, 2018, for the Jamesway Corporation for each of the following situations. No adjusting entries were recorded during the year. 1. On December 20, 2018, Jamesway received a $4,000 payme
> Briefly define the financial accounting elements: (1) assets, (2) liabilities, (3) equity, (4) investments by owners, (5) distributions to owners, (6) revenues, (7) expenses, (8) gains, (9) losses, and (10) comprehensive income.
> Prepare the necessary adjusting entries at December 31, 2018, for the Microchip Company for each of the following situations. Assume that no financial statements were prepared during the year and no adjusting entries were recorded. 1. On October 1, 2018
> What is meant by the term materiality in financial reporting?
> Define closing entries and their purpose.
> Prepare the necessary adjusting entries at December 31, 2018, for the Falwell Company for each of the following situations. Assume that no financial statements were prepared during the year and no adjusting entries were recorded. 1. A three-year fire in
> Explain what is meant by: The benefits of accounting information must exceed the costs.
> Some of the ledger accounts for the Sanderson Hardware Company are numbered and listed below. For each of the October 2018 transactions numbered 1 through 12 below, indicate by account number which accounts should be debited and which should be cre
> Explain what is meant by adverse economic consequences of new or changed accounting standards.
> Indicate whether a debit will increase (I) or decrease (D) each of the following accounts listed in items 1 through 16 Increase (I) or Decrease (D) Account 1. Inventory Depreciation expense Accounts payable Prepaid rent Sales revenue 2. 3. 4. 5. Commo
> Howarth Company’s fiscal year-end is December 31. Below are the unadjusted and adjusted trial balances for December 31, 2018. Required: Prepare the adjusting journal entries that were recorded at December 31, 2018. Unadjusted Adjust
> Indicate the organization related to IFRS that performs each of the following functions: 1. Obtains funding for the IFRS standard-setting process. 2. Determines IFRS. 3. Oversees the IFRS Foundation. 4. Provides input about the standard-setting agenda. 5
> In its Final Staff Report (issued in 2012), what type of convergence between U.S. GAAP and IFRS did the SEC staff argue was not feasible? What reasons did the SEC staff give for that conclusion?
> Listed below are several terms and phrases associated with the accounting processing cycle. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. List A List B 1. Source documents 2. Transacti
> List three key provisions of the Sarbanes-Oxley Act of 2002. Order your list from most important to least important in terms of the likely long-term impact on the accounting profession and financial reporting.
> The following transactions occurred during the month of June 2018 for the Stridewell Corporation. The company owns and operates a retail shoe store. 1. Issued 100,000 shares of common stock in exchange for $500,000 cash. 2. Purchased office equipment at
> Explain the role of the auditor in the financial reporting process.
> Define adjusting entries and discuss their purpose.
> Post the journal entries prepared in E 2–2 to T-accounts. Assume that the opening balances in each of the accounts is zero. Prepare a trial balance from the ending account balances. Journal Entries from E2-2: 1. Cash 300,000 Common stock 300,000
> For each of the items listed below, identify the appropriate financial statement element or elements. 1. Obligation to transfer cash or other resources as a result of a past transaction 2. Dividends paid by a corporation to its shareholders 3. Inflow of
> Prepare journal entries to record each of the transactions listed in E 2–1. Transactions Listed in E2-1: The following transactions occurred during March 2018 for the Wainwright Corporation. The company owns and operates a wholesale warehouse. 1. Issue
> Three groups that participate in the process of establishing GAAP are users, preparers, and auditors. These groups are represented by various organizations. For each organization listed below, indicate which of these groups it primarily represents. 1. Se
> Refer to P 2–3 and complete the following steps: 1. Enter the unadjusted balances from the trial balance into T-accounts. 2. Post the adjusting entries prepared in P 2–3 to the accounts. 3. Prepare an adjusted trial ba
> The following transactions occurred during March 2018 for the Wainwright Corporation. The company owns and operates a wholesale warehouse. 1. Issued 30,000 shares of common stock in exchange for $300,000 in cash. 2. Purchased equipment at a cost of $40,0
> Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Determine the specific citation for each of the following items: 1. The topic number for business combinations 2. The topic number for related party disclosures 3. The
> Presented below is income statement information of the Schefter Corporation for the year ended December 31, 2018. Required: Prepare the necessary closing entries at December 31, 2018. 284,000 12,000 4,000 30,000 20,000 Sales revenue $492,000 80,000 6
> Listed below are several transactions that took place during the second and third years of operations for the RPG Company. In addition, you learn that the company incurred advertising costs of $25,000 in year 2, owed the advertising agency $5,000 at the
> American Chip Corporation’s fiscal year-end is December 31. The following is a partial adjusted trial balance as of December 31, 2018. Required: Prepare the necessary closing entries at December 31, 2018. Account Title Deblts Credi
> Listed below are several transactions that took place during the first two years of operations for the law firm of Pete, Pete, and Roy. In addition, you learn that the firm incurred utility costs of $35,000 in year 1, that there were no liabilities at th
> Explain the difference between permanent accounts and temporary accounts. Why does an accounting system include both types of accounts?
> The accounting system of K and M Manufacturing consists of a general journal (GJ), a cash receipts journal (CR), a cash disbursements journal (CD), a sales journal (SJ), and a purchases journal (PJ). For each of the following, indicate which journal shou
> Listed below are accounting concepts discussed in this chapter. a. Economic entity assumption b. Going concern assumption c. Periodicity assumption d. Monetary unit assumption e. Historical cost principle f. Conservatism g. Matching h. Full-disclosure pr
> For each of the following situations, (1) indicate whether you agree or disagree with the financial reporting practice employed and (2) state the accounting concept that is applied (if you agree), or violated (if you disagree). 1. Winderl Corporation
> The White Company’s accounting system consists of a general journal (GJ), a cash receipts journal (CR), a cash disbursements journal (CD), a sales journal (SJ), and a purchases journal (PJ). For each of the following, indicate which jou
> Pastina Company sells various types of pasta to grocery chains as private label brands. The company’s fiscal year-end is December 31. The unadjusted trial balance as of December 31, 2018, appears below. Information necessary to prepare
> 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 fro
> Refer to E 2–9 and respond to the following requirements. Data from E2-9: 1. On October 1, 2018, Microchip lent $90,000 to another company. A note was signed with principal and 8% interest to be paid on September 30, 2019. 2. On November 1, 2018, the co
> For each of the following situations, indicate whether you agree or disagree with the financial reporting practice employed and state the accounting concept that is applied (if you agree) or violated (if you disagree). 1. Wagner Corporation adjusted the
> The employees of Xitrex, Inc., are paid each Friday. The company’s fiscal year-end is June 30, which falls on a Wednesday for the current year. Salaries and wages are earned evenly throughout the five-day work week, and $10,000 will be paid on Friday, Ju
> 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
> Refer to E 2–9 and respond to the following requirements. Data from E2-9: 1. On October 1, 2018, Microchip lent $90,000 to another company. A note was signed with principal and 8% interest to be paid on September 30, 2019. 2. On November 1, 2018, the co
> Listed below are several statements that relate to financial accounting and reporting. Identify the accounting concept that applies to each statement. 1. Jim Marley is the sole owner of Marley’s Appliances. Jim borrowed $100,000 to buy a new home to be u
> Each economic event or transaction will have a dual effect on financial position. Explain what is meant by this dual effect.
> Explain the roles of the SEC and the FASB in the setting of accounting standards.
> The December 31, 2018, unadjusted trial balance for the Wolkstein Drug Company is presented below. December 31 is the company’s fiscal year-end. The following year-end adjusting entries are required: a. Depreciation expense for the year
> Listed below are several terms and phrases associated with the accounting concepts. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. List A List B 1. Expense recognition 2. Periodicity 3.
> The following is the post-closing trial balance for the Whitlow Manufacturing Corporation as of December 31, 2017. / The following transactions occurred during January 2018: Jan. 1 Sold merchandise for cash, $3,500. The cost of the merchandise was $2,0
> Haskins and Jones, Attorneys-at-Law, maintain its books on a cash basis. During 2018, the company collected $545,000 in fees from its clients and paid out $412,000 in expenses. You are able to determine the following information about accounts receivable
> The conceptual framework indicates the desired fundamental and enhancing qualitative characteristics of accounting information. Several constraints impede achieving these desired characteristics. Answer each of the following questions related to these ch
> Stanley and Jones Lawn Service Company (S&J) maintains its books on a cash basis. However, the company recently borrowed $100,000 from a local bank and the bank requires S&J to provide annual financial statements prepared on an accrual basis. Dur
> Target Corporation prepares its financial statements according to U.S. GAAP. Target’s financial statements and disclosure notes for the year ended January 30, 2016, are available in the Connect. This material also is available under the Investor Relation
> During the course of your examination of the financial statements of the Hales Corporation for the year ended December 31, 2018, you discover the following: a. An insurance policy covering three years was purchased on January 1, 2018, for $6,000. The en
> Listed below are several terms and phrases associated with the FASB’s conceptual framework. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. List A List B a. Decreases i
> The following transactions occurred during 2018 for the Beehive Honey Corporation: Required: 1. Record each transaction in general journal form. Omit explanations. 2. Prepare any necessary adjusting entries at the year-end on December 31, 2018. No adju
> What is the purpose of special journals? In what ways do they simplify the recording process?
> Access the financial statements for the year ended January 30, 2016 for The Gap, Inc. by downloading them from www.gapinc.com, and use them to answer the following questions. Required: 1. What amounts did The Gap report for the following items for the f
> Explain the difference between external events and internal events. Give an example of each type of event.
> The Righter Shoe Store Company prepares monthly financial statements for its bank. The November 30 and December 31, 2018, trial balances contained the following account information: The following information also is known: a. The December income statemen
> Halogen Laminated Products Company began business on January 1, 2018. During January, the following transactions occurred: Required: 1. Prepare general journal entries to record each transaction. Omit explanations. 2. Post the entries to T-accounts. 3.
> When a company makes an expenditure that is neither a payment to a creditor nor a distribution to an owner, management must decide if the expenditure should be capitalized (recorded as an increase in an asset) or expensed (recorded as an expense thereby
> Target Corporation prepares its financial statements according to U.S. GAAP. Target’s financial statements and disclosure notes for the year ended January 30, 2016, are available in Connect. This material is also available under the Investor Relations li
> Revenues measure the accomplishments of a company during the period. Expenses are then matched with revenues to produce a periodic measure of performance called net income. Required: 1. Explain what is meant by the phrase matched with revenues. 2. Descr
> Newman Consulting Company maintains its records on a cash basis. During 2018 the following cash flows were recorded: cash received from customers, $420,000; and cash paid for salaries, utilities, and advertising, $240,000, $35,000, and $12,000, respectiv
> 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. Renters usually pay rent on a quarterly basis at the beginning of the quarter. The owners con
> The year-end adjusted trial balance of the Timmons Tool and Die Corporation included the following account balances: retained earnings, $220,000; sales revenue, $850,000; cost of goods sold, $580,000; salaries expense, $180,000; rent expense, $40,000; an
> Prepare the necessary adjusting entries at December 31 for each of the items listed in BE 2–4. Depreciation on the equipment is $12,000 per year. Items from BE 2-4: (1) on October 1, $12,000 was paid for a one-year fire insurance policy; (2) on June 30
> Assume that the FASB is considering revising an important accounting standard. Required: 1. What is the desired benefit from revising an accounting standard? 2. What are some of the possible costs that could result from a revision of an accounting stand
> The following account balances were taken from the 2018 post-closing trial balance of the Bowler Corporation: cash, $5,000; accounts receivable, $10,000; inventory, $16,000; equipment, $100,000; accumulated depreciation—equipment, $40,000; accounts payab
> Mary McQuire is trying to decide how to invest her money. A friend recommended that she buy the stock of one of two corporations and suggested that she should compare the financial statements of the two companies before making a decision. Required: 1. D
> Explain the difference between the general ledger and a subsidiary ledger.
> Using the information from P 2–8, prepare and complete a worksheet similar to Illustration 2A–1. Use the information in the worksheet to prepare an income statement and a statement of shareholders’ eq
> The following account balances were taken from the 2018 adjusted trial balance of the Bowler Corporation: sales revenue, $325,000; cost of goods sold, $168,000; salaries expense, $45,000; rent expense, $20,000; depreciation expense, $30,000; and miscella
> Generally accepted accounting principles do not require companies to disclose forecasts of any financial variables to external users. A friend, who is a finance major, is puzzled by this and asks you to explain why such relevant information is not provid
