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Revision ques solution chap 2 - ACCT1501 2010S1 Chapter 2...

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ACCT1501 2010S1 Chapter 2 Additional Questions Solutions Problem 2.16 Problem 2.21 1 a 2 b 3 b 4 b 5 a 6 c 7 b Problem 2.25 1 Amcor: Cost of advertising for new employees. This would be an expense of the current period. While the new employees will likely benefit future periods, the cost of the advertising was likely minimal in relation to the operation of the company. In addition, it is difficult to estimate how long an employee will remain with the company. 2 Telstra: Collection of old accounts. If the collection of these accounts does not affect the over-all estimate of uncollectable accounts there will be no effect on revenue or expense of the current year. If the estimate of these does affect the estimate of uncollectable accounts the collection of these accounts may result in a decrease in bad debt expense of the current period. 3 National Australia Bank: Costs of renovating branch. If the renovations are expected to prolong the useful life of the branch or improve service at the branch, they would be treated as an asset and be amortised to expense over an appropriate period. This is because they are expected to benefit future periods. If the renovations are maintenance to keep the branch in useable condition, they would be expensed in the current period because they are not expected to benefit future periods. 4 Woolworths: Increased value of land. This is neither a revenue nor an expense of
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ACCT1501 2010S1 the current period. Accounting rules place restrictions on write-ups in the value of assets and require a reserve account to be credited.. A gain can only be recorded if the land is sold to an outside party. This would of course, also necessitate the sale of Woolworths’ department stores. 5 Pizza Hut: Food sold on credit. This would be recorded as revenue of the current period. Pizza Hut has performed the service by providing the food, therefore, the collection of cash is basically guaranteed. 6 Harvey Norman Discounts: Money paid by customers in advance on special furniture orders. When the money is initially received, Harvey Norman has not manufactured the furniture nor delivered it to the customers, therefore revenue cannot be recognised at this point. To the extent that the furniture has been manufactured and shipped to customers prior to year-end, revenue can be recognised. 7 Westpac: Whether this is recorded as an expense of the current year depends on whether the customer’s lawsuit is likely to be successful. It is possible to estimate the amount that will be awarded to the customer in the event that his/her lawsuit is successful.
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