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chapter 2 - CHAPTER 2 BALANCE SHEET PRESENTING THE...

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2-1 Odd-numbered Solutions CHAPTER 2 BALANCE SHEET: PRESENTING THE INVESTMENTS AND FINANCING OF A FIRM Questions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions 2.1 See the text or the glossary at the end of the book. 2.3 The justification relates to the need for a reasonably high degree of reliability in the preparation of the financial statements. When there is an exchange between a firm and some other entity, there is market evidence of the economic effects of the transaction. The independent auditor verifies these economic effects by referring to contracts, cancelled checks and other documents underlying the transaction. If accounting recognized events without such a market exchange (for example, the increase in market value of a firm's assets), increased subjectivity would enter into the preparation of the financial statements. 2.5 Accountants record assets at acquisition cost. Cash discounts reduce acquisition cost and, therefore, the amount recorded for merchandise or equipment. 2.7 a. Liability—Receivable from Supplier or Prepaid Merchandise Orders. b. Liability—Investment in Bonds. c. Asset—Interest Payable. d. Asset—Insurance Premiums Received in Advance. e. Liability—Prepaid Rent. 2.9 (Citigroup; asset recognition and valuation.) Although the tuition support clearly benefits future periods, the benefits to Citigroup are too difficult to measure reliably to justify recognition of an asset. Citigroup would treat the $10 million as an expense.
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Odd-numbered Solutions 2-2 2.11 (Pizza Hut; asset valuation.) The acquisition cost of the van includes the purchase price of $14,500 and the cost of painting the van of $1,200, for a total of $15,700. The license fee and insurance are annual operating expenses and are not part of the acquisition cost of the van. Pizza Hut should include the license fee and insurance in Prepayments on the balance sheet. 2.13 (Leonard Corporation; journal entry for acquisition.) (Amounts in Millions) Inventory ........................................................................................ 20 Land, Buildings, and Equipment ................................................ 40 Goodwill and Other Intangibles .................................................. 35 Cash ....................................................................................... 10 Liabilities ............................................................................... 25 Common Stock ..................................................................... 60 Assets = Liabilities + Shareholders' Equity (Class.) +20 +25 +60 ContriCap +40 +35 –10 To record the acquisition of the assets and the assumption of the liabilities of Newsome Corporation with cash and common stock. 2.15 (Delta Air Lines; asset recognition and valuation.) a. The placing of an order does not give rise to an asset. b. Deposit on Aircraft (noncurrent asset), $5 million. c. Landing Rights (noncurrent asset), $4 million. d. Equipment (noncurrent asset), $10 million. e. Accounting does not recognize the employment contract, a mutually unexecuted contract, as an asset. f. Equipment (noncurrent asset), $60 million. The book value of the aircraft on the seller’s books is not relevant to Delta Air Lines’ recording of the purchase.
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2-3 Odd-numbered Solutions 2.15 continued.
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