solutions-ch02

solutions-ch02 - EXERCISE 2-7 1 Definition of element asset...

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EXERCISE 2-7 1. Definition of element – asset Foundational principles – historical cost and matching Repairs expense. ................................. 2,000 Accounts payable. ...................... 2,000 2. Qualitative characteristic – representational faithfulness Definition of element – revenue Foundational principles – revenue recognition Cash. ..................................................... 18,000 Unearned revenue. ..................... 18,000 3. Definition of element – asset Qualitative characteristic – representation faithfulness Inventory held on consignment is not an economic resource of Sugar; it is an economic resource to Steamers and Steamers has the right to this inventory. NO journal entry should be made by Sugar until the sale of the inventory to a third party. 4. Definition of element – expense Matching principle. Prepaid insurance. .............................. 4,000 Cash. ........................................... 4,000 For item 4, a principle is not necessarily violated if the company is using the alternative method of recording prepayments and the appropriate adjusting entry is created as part of the year-end process. Page 1 of 4
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PROBLEM 2-5 1. The change appears acceptable. Comparability is affected in this situation, although its violation may not be material. The revenue recognition principle requires that the risks and reward transfer to the purchaser in order for the sale to be recognized. While the shipping terms have been changed, further investigation should be undertaken to ensure that customer business practices are aligned with this changed policy; for example, if the company will continue to replace items lost or damaged in transit, the risks have not passed irrespective of the change in shipping terms (further discussed in Chapter 6). In addition, the rationale for any change in policy should be understood. For
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solutions-ch02 - EXERCISE 2-7 1 Definition of element asset...

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