Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Bruce purchased a business Sport Magazine from Samson on December 1, 2018. The purchase price of the business was agreed to be 80% of the

image text in transcribed

Bruce purchased a business Sport Magazine from Samson on December 1, 2018. The purchase price of the business was agreed to be 80% of the Company's profit in each of the next five years. Samson was unhappy when Bruce reported the first year's profit which was far below Samson's expectations. The purchase agreement did not specify how "profit" should be measured. It stated only that the profit of the corporation should be measured in a "fair and reasonable manner". Neither Bruce nor Samson was familiar with accounting concepts. In measuring profit, Bruce applied the following policies: a. Revenue was recognized when cash was received from customers. Given the nature of business, most customers paid the magazine subscriptions for future delivery of magazines before December 2018. b. The business had purchased a $150,000 printing equipment for cash in January 2019. It was reported as equipment expense in the first-year financial statements. c. The business also purchased a set of furniture for the reception area at $10,000 during the first year of operation. It was purchased under a big sale, featuring No payments until 2021. Accordingly, this furniture was not in the accounts since no payment was made. Required: Comment the above profit measurement policies and state if the assets, liabilities and profits are overstated or understated in each case based on accrual basis accounting concepts

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting

Authors: Robert Libby, Patricia Libby, Frank Hodge

11th Edition

1264229739, 9781264229734

More Books

Students also viewed these Accounting questions

Question

1. Information that is currently accessible (recognition).

Answered: 1 week ago