ACIS+3115+Chapter+2+Homework+Solutions

ACIS+3115+Chapter+2+Homework+Solutions - CHAPTER 2 Homework...

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CHAPTER 2 Homework Solutions EXERCISE 2-3 (20–30 minutes) (a) Confirmatory Value. (f) Relevance and Faithful Representation. (b) Cost Constraint. (g) Timeliness. (c) Neutrality. (h) Relevance. (d) Comparability (Consistency). (i) Comparability. (e) Neutrality. (j) Verifiability. EXERCISE 2-5 (15–20 minutes) (a) Gains, losses. (b) Liabilities. (c) Investments by owners, comprehensive income. (also possible would be revenues and gains). (d) Distributions to owners. (Note to instructor: net effect is to reduce equity and assets). (e) Comprehensive income. (also possible would be revenues and gains). (f) Assets. (g) Comprehensive income. (h) Revenues, expenses. (i) Equity. (j) Revenues. (k) Distributions to owners. (l) Comprehensive income. EXERCISE 2-7 (20–25 minutes) (a) (b) (c) (d) Historical cost principle. Full disclosure principle. Expense recognition principle. Expense recognition principle. (j) Revenue and expense recogni- tion principles. (k) Economic entity assumption. (l) Periodicity assumption.
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(e) (f) (g) (h) (i) Industry practices or fair value principle. Economic entity assumption. Full disclosure principle. Revenue recognition principle. Full disclosure principle. (m) Expense recognition principle. (n) Historical cost principle. (o) Expense recognition principle. EXERCISE 2-9 (a) This entry violates the economic entity assumption. This assumption in accounting indicates that economic activity can be identified with a particular unit of accountability. In this situation, the company erred by charging this cost to the wrong economic entity. (b) The historical cost principle indicates that assets and liabilities are accounted for on the basis of cost. If we were to select sales value, for example, we would have an extremely difficult time in attempting to establish a sales value for a given item without selling it. It should further be noted that the revenue recognition principle provides the answer to when revenue should be recognized. Revenue should be recognized when (1) realized or realizable and (2) earned. In this situation, an earnings process has definitely not taken place. (c) The company is too conservative in its accounting for this transaction. The expense recognition principle indicates that expenses should be allocated to the appropriate periods involved. In this case, there appears to be a high uncertainty that the company will have to pay. FASB Statement No. 5 requires that a loss should be accrued only (1) when it is probable that the company would lose the suit and (2) the amount of the loss can be reasonably estimated. (Note to instructor: The student will probably be unfamiliar with FASB Statement No. 5. The purpose of this question is to develop some decision framework when the probability of a future event must be assessed).
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EXERCISE 2-9 (Continued) (d) At the present time, accountants do not recognize price-level adjust-ments in the accounts. Hence, it is misleading to deviate from the historical cost principle because conjecture or opinion
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This note was uploaded on 03/01/2012 for the course FIN 3154 taught by Professor Jceasterwood during the Spring '08 term at Virginia Tech.

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ACIS+3115+Chapter+2+Homework+Solutions - CHAPTER 2 Homework...

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