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Unformatted text preview: Exercise 3 -4 L05 Exercise i-S L05 ACCT 203
Chapter 1 — Week 1
Recommended Problems Trade-Off Between Qualitative Characteristics _ In each of the following independent situations, an example is given requiring a
trade-off between the qualitative characteristics discussed in the text. For each situa-
tion, identify the relevant characteristics and brieﬂy discuss how satisfying one char— 1. 2. 7 acteristic may involve net satisfying another. The book value of an office building is approaching its originally estimated
salvage value of $100,000. However, its fair value has been estimated at $10
million. The company’s management would like to disclose to financial state-
ment users the current value of the building on the balance sheet. JCB Industries has used the FIFO inventory method for the past 20 years.
However, all other major competitors use the LIFO method of accounting for
inventories. JCB is contemplating a switch from FIFO to LIFO. Hobson Inc. is negotiating with a major bank for a significant loan. The bank
has asked that a set of financial statements be provided as quickly after the
year—end as possible. Because invoices from many of the company’s suppliers
are mailed several weeks after inventory is received, Hobson Inc. is consider-
ing estimating the amounts associated with those liabilities to be able to pre—
pare its financial statements more quickly. Starship Inc. produces and sells satellites to government and private industries.
The company provides a warranty guaranteeing the performance of the satel—
lites. A recent space launch placed one of its satellites in orbit, and several
malfunctions have occurred. At year—end, Starship Inc.’s auditors would like
the company to disclose the potential liability in the notes to the financial
statements. Officers of Starship Inc. believe that the satellite can be repaired in orbit and that disclosure of a contingency such as this would unnecessarily
bias the financial statements. Assumptions of Financial Reporting In each of the following independent situations, an example is given involving one of
the five traditional assumptions of the accounting model. For each situation, identify
the assumption involved (brieﬂy explain your answer). 1. A subsidiary of Parent Inc. was exhibiting poor earnings performance for the
year. In an effort to increase the subsidiary’s reported earnings, Parent Inc.
purchased products from the subsidiary at twice the normal markup. When preparing the financial statements for MacNeil & Sons, the accountant
included certain personal assets of MacNeil and his sons. The operations of Uintah Savings & Loan are being evaluated by the federal
government. During their investigations, government officials have determined
that numerous loans made by top management were unwise and have seri-
ously endangered the future existence of the savings and loan. -"Pine Valley Ski Resort has experienced a drastic reduction in revenues because of light snowfall for the year. Rather than produce financial statements at the
end of the fiscal year, as is traditionally done, management has elected to wait
until next year and present results for a two-year period. Colobri Inc. has equipment that was purchased in 1996 at a cost of $150,000.
Because of inﬂation, that same equipment, if purchased today, would cost $225,000. Management would like tov'report the asset on the balance sheet at
its current value. Exercise [-7 L05 Exercise l-9 L05 Elements of Financial Reporting
For each of the following items, identify the financial statement element being discussed.
1. Changes in equity during a period except those resulting from investments by
owners and distributions to owners. ‘
2. The net assets of an entity. ‘
5. The result of a transaction requiring the future transfer of assets to other
4. An increase in assets from the delivery of goods that constitutes the entity’s
ongoing central Operations.
5. An increase in an entity’s net assets from incidental transactions.
6. An increase in net assets through the issuance of stock.
7. Decreases in net assets from peripheral transactions of an enterprise.
8. The payment of a dividend.
9. Outﬂows of assets from the delivery of goods or serviCes.
10. Items offering future value to an entity. Measurement Attributes and Going Concern Problems One of the underlying assumptions of the accounting model is the going concern
assumption. When this assumption is questionable, valuation methods used for assets
and liabilities may differ from those used when the assumption is viable. For each of
the following situations, identify the measurement attribute that would most likely be
used if the company is not likely to remain a going concern. 1. 2. 3" Plant and equipment are carried at an amortized cost on a straight-line basis of
$2,100,000. Bonds with a maturity price of $1,500,000 and interest in arrears of $400,000
are reported as a noncurrent liability. Accounts receivable are carried at $600,000, the gross amount charged for
sales. No allowance for doubtful accounts is reported. The reported LIFO cost of inventory is $250,000. Investments in a subsidiary company are recorded at initial cost plus undistrib—
uted profits. MMW¢L<§ Manama“; ...
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- Fall '09