Homeworksolution-ch.2

Homeworksolution-ch.2 - BRIEF EXERCISE 2-3 (a) Conservatism...

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BRIEF EXERCISE 2-3 (a)Conservatism (b)Full disclosure (c)Matching principle (d)Historical cost principle BRIEF EXERCISE 2-4 (a) Should be debited to the Land account, as it is a cost incurred in acquiring land. (b)As an asset, preferably to a Land Improvements account. The driveway will last for many years, and therefore it should be capitalized and amortized. (c)Probably an asset, as it will last for a number of years and therefore will contribute to operations of those years and should be amortized.
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BRIEF EXERCISE 2-4 (Continued) (d) If the fiscal year ends December 31, this will all be an expense of the current year that can be charged to an expense account. If statements are to be prepared on some date before December 31, part of this cost would be expense and part asset. Depending upon the circumstances, the original entry as well as the adjusting entry for statement purposes should take the statement date into account. (e) Should be debited to the Building account, as it is a part of the cost of that plant asset which will contribute to operations for many years. (f) As an expense, as the service has already been received; the contribution to operations occurred in this period. BRIEF EXERCISE 2-8 (a)Industry practice (b)Uncertainty (c)Cost-benefit (d)Materiality
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BRIEF EXERCISE 2-10 Companies and their auditors for the most part have adopted the general rule of thumb that anything over 5% of income from continuing operations is considered material. Other factors must nevertheless be considered. For example, companies cannot fail to record items in order to meet analysts’ earnings numbers; preserve a positive earnings trend; convert a loss to a profit or vice versa; increase management compensation, or hide an illegal transaction like a bribe. Both quantitative and qualitative factors must be considered in determining when an item is material. (a) Because the change was used to create a positive trend in earnings, the change is considered material. (b) Each item that is considered a financial statement element must be considered separately and not netted. Therefore each transaction is considered material. (c) In general, companies that follow an “expense all capital items below a certain amount” policy are not in violation of the materiality concept. Because the same practice is followed from year to year, and the amounts are considered small, it is unlikely that the aggregate of these amounts would be material, as the amounts capitalized would eventually be charged off to expense through amortization. One would have to decide in the situation given whether the amount $25,000 was in fact not material. (d) Since the misstatement is material in the current year, the capital items will need to be reported on the balance sheet and amortized. This is not considered a change in accounting policy since it arises from a change in circumstances.
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EXERCISE 2-2 (15-20 minutes) 1. Comparability. 2.
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Homeworksolution-ch.2 - BRIEF EXERCISE 2-3 (a) Conservatism...

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