B407F Week 13 Tutorial solution

B407F Week 13 - B407F Week 13 Tutorial Solution Overview of the framework of accounting and interim reporting Question 1 Under current accounting

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1 B407F Week 13 Tutorial Solution– Overview of the framework of accounting and interim reporting Question 1 Under current accounting, the airline should not recognize any asset or liability at the time it place the order, because the transaction has not taken place. Accounting recognizes purchase transactions when delivery takes place, and title passes. At this point the airline, and not the manufacturer, has assumed the risks and rewards of owning the airplane. a. Nonetheless, the airline has made an important and irrevocable commitment. Generally, major capital spending commitments are disclosed in the notes to the financial statements. b. The airline is better off for having locked in the price than if it had not done so. Conversely, if the price had fallen, it would be worse off for having signed the non-cancellable fixed price order. Nonetheless, under current accounting standards, such gains and losses are not recognized. c. Accounting treats commitments to purchase financial assets differently from commitments to purchase property. If the airline had agreed to purchase a foreign currency at a fixed price for delivery at a future date, and the exchange rate goes up or down, it is required to recognize a gain or loss. Question 2 The Framework defines expenses as decreases in economic benefits during the period in the form of asset decreases or liability increases that result in decreases in equity, other than those relating to distributions to owners. The theft of the $20,000 cash satisfies the expense definition as: It is a decrease in economic benefits during the period, as cash (economic benefits) has decreased; The decrease in economic benefits is in the form of an asset decrease, as cash (an asset) has decreased; and It has resulted in a decrease in equity, as assets have decreased and liabilities have not changed. In accordance with the
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This note was uploaded on 02/24/2012 for the course ACT 407 taught by Professor Mshui during the Fall '11 term at The Open University.

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B407F Week 13 - B407F Week 13 Tutorial Solution Overview of the framework of accounting and interim reporting Question 1 Under current accounting

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