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Assignment #1 Questions

This document contains a multi-part assignment involving adjusting journal entries, matching accounting objectives to different users, identifying which objectives are served by different accounting policies, distinguishing between realization and recognition dates for different transactions, and identifying which accounting quality is demonstrated in different situations. The assignment requires analyzing accounting concepts and principles and applying them to various questions and scenarios.

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78 views3 pages

Assignment #1 Questions

This document contains a multi-part assignment involving adjusting journal entries, matching accounting objectives to different users, identifying which objectives are served by different accounting policies, distinguishing between realization and recognition dates for different transactions, and identifying which accounting quality is demonstrated in different situations. The assignment requires analyzing accounting concepts and principles and applying them to various questions and scenarios.

Uploaded by

Smelly Donkey
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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COMM 321 Assignment #1

Question 1: Adjusting Journal Entries:


Manitoba Mini Homes Corp. has annual earnings of $24,600 in its unadjusted trial balance. The company
prepares financial statements annually, with adjusting journal entries recorded at year-end. The following
items have not yet been addressed for the fiscal period ended 31 December:
a. A 12-month, $1,560 insurance policy that commenced on 1 September was paid on 1 September
and debited to prepaid insurance at that time. The prepaid insurance account already had a
balance of $960 on 1 September in relation to the prior insurance coverage, which expired on 30
August.
b. The office supplies inventory account had a balance of $1,300 at the beginning of the year.
Supplies costing $3,900 were purchased during the year and expensed as bought. There is an
inventory of $1,700 physically on hand at the end of the year.
c. Manitoba completed a mini-home sale on the last day of the fiscal year but has not yet recorded
the transaction. The mini-home was sold for $56,000, and the proceeds were to be paid in early
January. The unit has a cost of $43,100 and was still in inventory on the books as of 31
December.
d. A customer paid $5,160 in early November for one year’s rent on a mini-home, a rental
arrangement effective on 1 November. The cash received was credited to revenue in November.
e. A customer who rents a mini-home did not pay her rent in November or December, although the
company believes that the amount will be paid in January. Nothing has been recorded for
November or December. Monthly rental is $500 on this unit.

Required:

Give the adjusting entry (or entries) that should be made on 31 December for each item. If an adjusting
entry is not required, explain why.
Question #2: Accounting Policies and Reporting Objectives:
Match the user with the most likely objective:

User Objective
1. Bank A. Stewardship
2. Small private company B. Income tax deferral
3. Not-for-profit organization C. Cash flow prediction
4. Management D. Contract compliance
5. Shareholders with agreement E. Performance evaluation

Question #3: Accounting Policies and Reporting Objectives:

Entities may have a variety of corporate reporting objectives specific to their circumstances, such as:

A. Assessing and predicting cash flows;


B. Minimizing current income taxes;
C. Complying with restrictive covenants (specifically, debt covenants that specify minimum levels
of shareholders’ equity); and
D. Evaluating management’s performance.

Required:

For each of the accounting policies listed below, indicate which of the above list of objectives of
corporate reporting (A to D) are best served. Each policy may serve more than one objective.

1. Capitalize and amortize development costs.


2. Disclose potential lawsuits against the company.
3. Defer expenses to match them against revenue generated from the activity.
Question #4: Realization versus Recognition:
For each of the following transactions, indicate:
(1) the date or point in time at which the initial transaction is recognized and
(2) the date or point in time when financial statement element is realized:
1. Inventory is purchased on credit on 1 August and is received on 14 August. It is paid for on 12
September.
2. A customer buys a product on credit on 13 November and takes immediate delivery, promising to
pay on 1 February of the following year.
3. A customer orders a custom-built machine and pays when the order is placed on 20 February. The
machine is delivered on 10 March.
4. The company uses a substantial amount of electricity. The electric utility issues bimonthly bills
(i.e., one every two months) three weeks following the two-month usage period.
5. A sale on credit is completed on 20 January; the product is delivered on 1 February. Payment is
received on 1 March.

Question #5: Relevance and Faithful Representation:


Accounting measurements are enhanced by the presence of the accounting qualities such as relevance
(predictive and feedback value), comparability, verifiability, timeliness, and faithful representation.

Required:

For each of the following, indicate which accounting quality is demonstrated:


1. The value assigned to equipment is checked by referring to the original invoice.
2. Predictions concerning this year’s income, issued 12 months ago, are compared with the actual results
to assess the accuracy of the prediction.
3. Adjustments are made to financial statements that both increase and decrease net income despite the
manager’s preference to report lower net income.
4. Financial statements are issued four weeks after the year-end, even though this requires the use of
estimates for some elements.
5. Preferred shares that have to be repaid on a given date are classified as a liability despite their legal
status as equity.
6 Lawyers provide an estimate of the company’s potential liability for product defects.

End of Assignment

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