ACCT550 Exercises Week 1

CA1-1 (FASB and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false. 1. GAAP is the term used to indicate the whole body of FASB authoritative literature. True 2. Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements. False Any company claiming compliance with GAAP must comply with all standards and interpretations, including disclosure requirements 3. The primary governmental body that has influence over the FASB is the SEC. True 4. The FASB has a government mandate and therefore does not have to follow due process in issuing a standard. False In establishing financial accounting standards, the FASB relies on two basic premises: 1) the FASB should be responsive to the needs and view-points of the entire economic community, not just the public accounting profession, and 2) it should operate in full view of the public through a “due process” system that gives interested people ample opportunities to make their view know.

E2-7 (Assumptions, Principles, and Constraints) Presented below are a number of operational guidelines and practices that have developed over time. Instructions Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (a) Fair value changes are not recognized in the accounting records. Historical cost principle (b) Financial information is presented so that investors will not be misled. Full disclosure principle (c) Intangible assets are capitalized and amortized over periods benefited. Expense recognition principle (d) Repair tools are expensed when purchased. Materiality (e) Agricultural companies use fair value for purposes of valuing crops. Industry practices or fair value principle (f) Each enterprise is kept as a unit distinct from its owner or owners. Economic entity assumption (g) All significant post balance sheet events are reported. Full disclosure principle (h) Revenue is recorded at point of sale. Revenue recognition principle (i) All important aspects of bond indentures are presented in financial statements. Full disclosure principle.

(j) Rationale for accrual accounting. Revenue and Expense Recognition principle (k) The use of consolidated statements is justified. Economic entity assumption (l) Reporting must be done at defined time intervals. Periodicity assumption (m) An allowance for doubtful accounts is established. Expense recognition principle (n) Goodwill is recorded only at time of purchase. Historical cost principle (o) A company charges its sales commission costs to expense. Expense recognition principle

P3-1 (Transactions, Financial Statements—Service Company) Listed below are the transactions of Yasunari Kawabata, D.D.S., for the month of September. Sept. 1

Kawabata begins practices as a dentist and invests $20,000 cash.

2

Purchase dental equipment on account from Green Jacket Co, for $17,280.

4

Pays rent for office space, $680 for the month.

4

Employs a receptionist, Michael Bradley.

5

Purchases dental supplies for cash, $942.

8

Receives cash of $1,690 from patients for services performed.

10

Pays miscellaneous office expenses, $430.

14

Bills patients $5,820 for services performed.

18

Pays Green Jacket Co. on account, $3,600.

19

Withdraws $3,000 cash from the business for personal use.

20

Receives $980 from patients on account.

25

Bills patients $2,110 for services performed

30

Pays the following expenses in cash: Salaries and wages $1,800, miscellaneous office expenses $85

30

Dental supplies used during September, $330.

Instructions (a) Enter the transactions shown above in appropriate general ledger accounts (use Taccounts). Use the following ledger accounts: Cash, Accounts Receivable, Supplies, Equipment, Accumulated Depreciation—Equipment, Accounts Payable, Owner’s Capital, Service Revenue, Rent Expense, Office Expense, Salaries and Wages Expense, Supplies Expense, Depreciation

Expense, and Income Summary. Allow 10 lines for the Cash and Income Summary accounts, and 5 lines for each of the other accounts needed. Record depreciation using a 5-year life on the equipment, the straight-line method, and no salvage value. Do not use a drawing account. (b) Prepare a trial balance. (c) Prepare an income statement, a statement of owner’s equity, and an unclassified balance sheet. (d) Close the ledger. (e) Prepare a post-closing trial balance. a. T-CCOUNTS and b. TRIAL BALANCE Sept

1 8 20

30

Sept

Sept

Sept

Cash 20,000 Sept 4 1,690 5 980 10 18 19 30 30 22,670 Bal 12,133

5 30 Bal

2

19

Supplies 942 Sept 612

30

680 942 430 3,600 3,000 1,800 85 10,537

330

Equipment 17,280

Owner's Capital 3,000 Sept 1 20,000 30 6,007 30 Bal 23,007

Sept

Accounts Receivable 14 5,820 Sept 20 25 2,110 7,930 30 Bal 6,950

Accumulated Depreciation - Equipment Sept 30 288

Sept

18

Sept

30

Accounts Payable 3,600 Sept 2 17,280 30 Bal 13,680

Service Revenue 9,620 Sept 8 14 25 30 Bal

1,690 5,820 2,110 9,620

980 980

Sept

4

Rent Expense 680 Sept 30 0

Sept

Salaries and Wages Expense 30 1,800

Sept

Depreciation Expense 30 288

680

Sept

10 30

Office Expense 430 85 515

Supplies Expense Sept 30 330

Kawabata Yasunari Trial Balance September 30 Debit Credit Cash $12,133 Accounts Receivable 6,950 Supplies 612 Equipment 17,280 Accumulated Depreciation-Equipment 288 Accounts Payable 13,680 Owner’s Capital 17,000 Revenue 9,620 Salaries Expense 1,800 Supplies Expense 330 Office Expense 515 Rent Expense 680 Depreciation Expense 288…………………… Total $40,588 $40,588 ====== ======

Kawabata Yasunari Income Statement

For the Month Ended September 30 Revenues Expenses Salaries Expense Supplies Expense Office Expense Rent Expense Depreciation Expense Total Expenses Net Income

$9,620 1,800 330 515 680 288 3,613 $6,007 =====

Kawabata Yasunari Statement of Owners Equity For the Month Ended September 30 Retained Earnings Add: Net Income Owners Equity. September 30

$0 6,007 $6,007 =====

Kawabata Yasunari Balance Sheet September 30 Cash Accounts Receivable Supplies Equipment 17,280 -Depreciation 288 Total Assets Liabilities and Owner’s Equity Liabilities Accounts Payable Total Liabilities

$12,133 6,950 612 16,992 $36,687 ======

$13,680 $13,680

Owners Equity Capital $17,000 Owners Equity 6,007 Total Liabilities and Owners Equity $36,687

====== d. Close the Ledger

Sept

30

Income Summary 1,800 Sept 30 330 680 515 288 6,007 9,620

9,620

9,620

Kawabata Yasunari Post-Closing Trial Balance September 30 Account Debit Cash $12,133 Accounts Receivable 6,950 Supplies 612 Equipment 17,280 Accumulated Depreciation-Equipment Accounts Payable Owner’s Capital Revenue Total $36,975 ======

Credit

288 13,680 17,000 6,007 $36,975 ======