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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

Are short-term unearned revenues, such as returnable deposits and advance sales, expected to be discharged with current assets in the near future? Discuss.
Provide two examples of third-party collections. Do they require cash payments from the company’s standpoint? Discuss.
Certain liabilities cannot be determined until the end of the accounting period. Two examples are the liabilities associated with income taxes and bonus agreements. What term is used to describe
Why do companies compensate their employees through bonus agreements and profitsharing plans?
What has the SEC done recently in the area of executive compensation to help stockholders better assess the quality of a firm’s management? How will this help stockholders?
What is a contingent loss, and under what conditions must it be accrued? Under what conditions are contingent losses ignored or simply disclosed?
How are gain contingencies accounted for?
What major contingent loss are many large manufacturing and utility companies presently facing? Explain.
Explain why product warranties are classified as contingent liabilities. Under what condi¬ tions are the costs associated with product warranties accrued?
Briefly explain why executive compensation in Japan is generally lower than that in the United States.
Identify three problems with the executive incentive compensation packages normally used in U.S. corporations.
(Appendix 10A) Briefly explain what a pension plan is and why the assets in the pension fund do not appear on a company’s balance sheet. Why does a pension liability sometimes appear on the balance
(Appendix 10A) What is the difference between a defined-contribution pension plan and a defined-benefit pension plan? Which of the two is becoming more popular, and why? What are the major
(Appendix 10A) What is ERISA, and why was it instituted?What role do actuarial estimates play in accounting for defined-benefit pension plans?
(Appendix 10A) Define postretirement health care and insurance costs and explain how the FASB requires that they be accounted for. Why has the proposal been so controversial?
(Appendix 10B) Why do companies use accelerated methods to depreciate their fixed assets for tax purposes? How does this practice lead to the recognition of a liability?
(Appendix 10B) Do deferred income taxes actually represent liabilities? Will they require the future payment of assets?
(Appendix 10B) In 1986 the income tax rate for U.S. corporations was reduced, and sev¬ eral years later it was raised. How did these changes influence the financial statements of U.S. corporations
(Appendix 10B) What is the conservatism ratio, how is it calculated, and what does it measure?
Is it necessarily in management’s best interest to perform such manipulations? Why?
How might such covenants affect the reporting and operating decisions of management?
What role do financial statement numbers play in these compensation schemes, and how might this method of compensation influence the reporting and operat¬ ing decisions of management?
The guidelines that specify the methods of accounting for contingent liabilities are very subjective. Discuss some of the factors that might influence managers and auditors to want to account for the
Why are gain contingencies accounted for in a different manner than loss contingencies?
Briefly explain the proce¬ dures involved when accounting for product warranties.
Why are deferred liabilities so large for many major U.S. cor¬ porations? Discuss.
Gemini Incorporated reported current assets of $15,000 and current liabilities of $12,000 on its December 31, 1996, balance sheet. After examining the financial records, the auditor discov¬ ered
Winslow Enterprises reports $40,000 in Accounts Payable on the balance sheet as of December 31, 1996. These payables, on average, will be paid in ten days. Note: Knowledge of present value is
Lily May Electronics recognizes expenses for wages, interest, and rent when cash payments are made. The following related cash payments were made during December 1996. 1. December 1 Paid $1,100 for
On December 1 Spencer Department Store borrowed $19,250 from First Bank and Trust. Spencer signed a ninety-day note with a face amount of $20,000. The interest rate stated on the (Short-term notes
On January 1, 1992, Lacey Treetoppers borrowed $300,000, which is to be paid back in annual installments of $20,000 on December 30 of each year. REQUIRED:a. Assuming that Lacey has met all payments
Norsums Department Store sells gift certificates that are redeemable in merchandise. During 1996 Norsums sold gift certificates for $88,000. Merchandise with the total price of $52,000 was redeemed
On November 25 Nate Stober received his monthly paycheck from Linson Motor Services. The employee earnings statement that accompanied the check indicated the following: Gross monthly earnings $6,126
Laurant Landscaping pays federal income taxes at a rate of 35 percent of taxable income. On January 1, 1996, Laurant estimated that taxable income would be $400,000 for 1996 and based its quarterly
Zeus Power has brought suit against Regional Supply in the amount of $825,000 for patent infringement. As of December 31 the suit is in process, and the attorneys have determined that there is a
Jordan Brothers recently instituted a bonus plan to pay its executives. The plan specifies that net income must exceed $200,000 before any bonus payments are made. Cash in the amount of 10 percent of
During 1996 Seagul Outboards sold 200 outboard engines for $250 each. The engines are under a one-year warranty for parts and labor, and from past experience, the company esti¬ mates that, on
Swingley Company uses an accelerated method to depreciate its fixed assets for tax purposes and the straight-line method for financial reporting purposes. In 1996 the accelerated method recognized
The information below was taken from the annual report of Busytown Industries. 1996 1995 Balance Sheet Deferred income tax liability Income Statement $ 9,700 $8,300 Income before taxes $ 68,000
The information below was taken from the annual report of Sega-Venus Enterprises. (Appendix 10B: conservatism ratio) 1 996 1995 Balance Sheet Deferred income tax liability Income Statement $ 18,300
Beth Morgan, controller of Boulder Corporation, is currently preparing the 1996 financial report. She is trying to decide how to classify the following items. 1. Account payable of $170,000 owed to
Linton Industries borrowed $500,000 from Security Bankers to finance the purchase of equip¬ ment costing $360,000 and to provide $140,000 in cash. The note states that the loan matures in twenty
Before adjustments and closing on December 31, 1996, the current accounts of Seymour and Associates indicated the following balances. Debit Credit Cash $40,000 Accounts receivable 50,000 Allowance
On April 12, General Home Appliances sold a toaster for $48.15 cash. The total sales price included a 7 percent sales tax, which must be remitted to the state government at the end of the month.
Makert Marketing Services pays its employees on the 25th of every month for the first fifteen days of the month. The following information is available for the pay period June 1-June 15. Gross wages
Trailor Homes showed a federal income tax liability of $15,000 on its 1996 balance sheet. At the beginning of 1997, for purposes of estimated tax payments, the company estimated its tax¬ able income
While shopping on October 13, 1996, at the Floor Wax Shop, Tom Jacobs slipped and seriously injured his back. Mr. Jacobs believed that the Floor Wax Shop should have warned him that the floors were
Arden’s Used Cars offers a one-year warranty from date of sale on all cars. From historical data, Mr. Arden estimates that, on average, each car will require the company to incur warranty costs of
To kick off its 1996 advertising campaign, Rachel’s Breakfast Cereal is offering a $1 refund in exchange for five cereal box tops. The company estimates that the tops of 10 percent of the cereal
Shelby Company instituted a defined-benefit pension plan for its employees at the beginning of 1992. An actuarial method that is acceptable under generally accepted accounting principles indicates
Acme, Inc., purchased machinery at the beginning of 1992 for $50,000. Management used the straight-line method to depreciate the cost for financial reporting purposes and the doubledeclining-balance
You are a security analyst for Magneto Investments, and have chosen to invest in one firm from the semi-conductor manufacturing industry. You have narrowed your choice to either OwenFoley Company or
Federal Express Corporation, a world leader in express mail services, reported the following in its 1994 financial statements (dollars in millions). 1994 Current assets $1,762 Current liabilities
The following excerpt was taken from the 1990 annual report of Exxon Corporation. 15. LITIGATION On March 24, 1989, the Exxon Valdez, a tanker owned by Exxon Shipping Company, a sub¬ sidiary ofExxon
In early 1991 Lifschultz Industries, a small gas meter company, reported a book value of less than zero (i.e., reported liabilities exceed reported assets). Yet, in late March the company’s stock
The following quote appeared in The Wall Street Journal (December 26, 1989). It refers to the problems of Campeau Corporation, a Canadian-based retail empire that declared bankruptcy in early 1990.
The 1994 annual report of General Mills reported the following (dollars in millions). 1994 1993 Current assets $1,129.2 $1,076.9 Current liabilities 1,832.1 1,558.8 Included in current liabilities
The SEC recently required additional information in the proxy statements that describe the compensation packages of the company’s top executives. A Wall Street Journal article pub¬ lished soon
A major defense contractor, LTV, faced with huge liabilities, sought Chapter 11 protection sev¬ eral years ago. Under Chapter 11, a company continues to operate but is protected from cred¬ itors
General Cinema Corporation operates the leading movie theater circuits in the United States, is an independent bottler of Pepsi-Cola and related products, and also owns several “high-end” retail
Refer to the annual report of MCI and answer the following questions.a. Compute the current ratio, working capital, and current liabilities as a percentage of total assets for the company, and
The Chicago Tribune (June 24, 1990) reported that AMR Corporation, in response to the new accounting rule requiring that postretirement healthcare costs be accrued, now requires employees to
At the beginning of 1993 Chrysler had $3.6 billion in unfunded pension liabilities. During the first three quarters of that year the company contributed $2.6 billion to its pension fund as part of an
In the third quarter of 1994 General Motors posted net income of $552 million, compared with a loss of $112.9 million a year earlier. Over $200 million of the profit was due to an account¬ ing
List and define the different kinds of long-lived assets. Why are long-lived assets of interest to stockholders, investors, creditors, managers, and auditors?
This chapter mentions three basic issues that must be addressed when accounting for longlived assets. What are these issues and how are they related to the matching principle?
Differentiate among land, fixed assets, natural resource costs, and intangible assets. In each case how is the capitalized cost allocated to future periods? What accounts are involved?
The different methods of accounting for long-lived assets give rise to timing differences in asset and income recognition. Explain what this means and provide an illustration.
Long-lived assets are (1) acquired, (2) used, and then (3) disposed of. Briefly describe the accounting issues that are addressed at each of these three stages.
What is the general rule for determining the amount of cost that should be capitalized for a long-lived asset? What kind of costs are typically included?
Distinguish between the costs included in the Land account and the costs included in the Land Improvements account. How are they accounted for differently?
How is the cost of a lump-sum purchase allocated to the component items purchased?
What are postacquisition expenditures? Differentiate a betterment from a maintenance expenditure, and describe the methods used to account for each. What criteria are used to define a betterment?
What three steps are required to allocate the cost of a long-lived asset over its useful life? How do these three steps affect the measurement of assets and net income?
The chapter describes and illustrates four cost-allocation methods. Describe each method and compare their effects on the income statement and the balance sheet. Which methods tend to make a company
Provide an example of how the terms of an outstanding loan liability (i.e., debt covenant) might influence a manager to choose a particular depreciation method.
Explain why a large, well-established company might not choose to change from an accelerated method of depreciation to straight-line. How might investors and creditors interpret such a move?
Describe the activity method and how it is used to deplete the costs of acquiring rights to extract natural resources.
Briefly describe the tax law with respect to the depreciation of fixed assets. Why do most companies choose one depreciation method for reporting purposes and another for tax pur¬ poses? When
List the three ways described in the chapter to dispose of long-lived assets. What do the methods used to account for these three events have in common?
Under what conditions should long-lived assets be written down?
What is the general rule for valuing an asset received in exchange for a dissimilar asset and cash?
Name three countries that allow fixed assets to be carried on the balance sheet at current values. Explain how fixed asset revaluations affect the financial statements and why they increase
Has the ability to revalue long-lived assets helped foreign companies raise capital in U.S. markets? Explain.
Appendix 9A. What is goodwill, and how is it recognized on the financial statements?
Appendix 9A. How are the methods used to account for research and development costs inconsistent with the matching principle? Why have they not been changed?
Appendix 9B. What are the two fundamental problems with valuing long-lived assets at historical cost?
Appendix 9B. Some claim that an objective of allocating the costs of long-lived assets to future periods is to provide funds for the future replacement of those assets. Evaluate this statement,
The controller of Elton Furniture Store is currently trying to decide what depreciation method to use for a particular fixed asset. The controller has prepared the following list of possible
If inventory, land, and equipment were all purchased for one lump sum, why would it make a difference on the financial statements how the total cost was allocated to each item? Explain.
Describe the role of materiality with respect to accounting for better¬ ments and maintenance expenditures.
How can management use the accounting standards in this area to “manage” reported earnings numbers over time?
Prepare the form of a journal entry (i.e., debited and credited accounts but no dollar amounts) used to record such a transaction. Assume that a loss is recognized on the exchange.
What problems are there with the cost-allocation process?
What factors would affect the period over which goodwill is amortized?
Lowery, Inc., purchased new plant equipment on January 1, 1996. The company paid $920,000 for the equipment, $62,000 for transportation of the equipment, and $10,000 for insurance on the equipment
The following items represent common postacquisition expenditures incurred on machinery. Identify each as a betterment or a maintenance item.a. Lubrication serviceb. Painting costsc. Cleaning
Stockton Corporation purchased a new computer system on January 1, 1996, for $300,000 cash. The company also incurred $25,000 in installation costs and $10,000 to train its employ¬ ees on the new
Benick Industries purchased a new lathe on January 1, 1996, for $300,000. Benick estimates that the lathe will have a useful life of four years and that the company will be able to sell it at the end
The condensed balance sheet as of December 31, 1996, for Van Den Boom Enterprises follows. Assets Liabilities and Stockholders’ Equity Current assets $40,000 Land 50,000 Total assets $90,000

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