Cash flows during the first year of operations for the Harman-Kardon Consulting Company were as
follows: Cash collected from customers, $310,000; Cash paid for rent, $34,000; Cash paid to employees
for services rendered during the year, $118,000; Cash paid for utilities, $47,000.
In addition, you determine that customers owed the company $52,000 at the end of the year and no
bad debts were anticipated. Also, the company owed the gas and electric company $1,000 at year-end,
and the rent payment was for a two-year period.
Calculate accrual net income for the year. (Omit the "$" sign in your response.)
Net income
$
128000
Identify the basic assumption or broad accounting principle that was violated in each of the following
situations.
1. Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is
manufactured.
2. McCloud Drug Company owns a patent that it purchased three years ago for $2 million. The controller
recently revalued the patent to its approximate market value of $8 million.
3. Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and
charges the expenditure to miscellaneous expense.
1.
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2.
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3.
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Listed below are several transactions that took place during the second two years of operations for RPG
Consulting.
Amounts billed to customers for services rendered
Cash collected from credit customers
Cash disbursements:
Payment of rent
Salaries paid to employees for services rendered during the year
Travel and entertainment
Advertising
Year 2
$357,000
254,000
Year 3
$547,000
351,000
78,000
145,000
23,500
12,500
0
168,000
40,000
31,000
In addition, you learn that the company incurred advertising costs of $27,000 in year 2, owed the
advertising agency $5,300 at the end of year 1, and there were no liabilities at the end of year 3. Also,
there were no anticipated bad debts on receivables, and the rent payment was for a two-year period,
year 2 and year 3.
Required:
(1) Calculate accrual net income for both years. (Amounts to be deducted should be indicated with
minus sign. Omit the "$" sign in your response.)
Revenues
Expenses:
Rent
$
Year 2
357,000
$
Year 3
547,000
Salaries
Travel
and
entertainment
Advertisi
ng
Net
Income
$
$
(2) Determine the amount due to the advertising agency that would be shown as a liability on the RPG’s
balance sheet at the end of year 2. (Input the amount as positive value. Omit the "$" sign in your
response.)
Advertising expense in year three
$
Listed below are several terms and phrases associated with the FASB’s conceptual framework. Pair
each item from List A (by letter) with the item from List B that is most appropriately associated with it.
(Click to select)
List A
1. Predictive value
List B
a. Decreases in equity resulting from transfers
to owners.
b. Requires consideration of the costs and
value of information.
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2. Relevance
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3. Timeliness
c. Important for making interfirm comparisons.
(Click to select)
4. Distribution to owners
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5. Confirmatory value
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6. Understandability
d. Applying the same accounting practices over
time.
e. Users understand the information in the
context of the decision being made.
f. Agreement between a measure and the
phenomenon it purports to represent.
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7. Gain
g. Information is available prior to the decision.
(Click to select)
8. Faithful representation
h. Pertinent to the decision at hand.
(Click to select)
9. Comprehensive income
i. Implies consensus among different
measurers.
(Click to select)
10. Materiality
j. Information confirms expectations.
(Click to select)
11. Comparability
(Click to select)
12. Neutrality
k. The change in equity from nonowner
transactions.
l. The process of admitting information into
financial statements.
(Click to select)
13. Recognition
m.The absence of bias.
(Click to select)
14. Consistency
n. Results if an asset is sold for more than its
book value.
(Click to select)
15. Cost effectiveness
o. Information is useful in predicting the future.
(Click to select)
16. Verifiability
p. Concerns the relative size of an item and its
effect on decisions.
Listed below are several terms and phrases associated with basic assumptions, underlying principles,
and constraints. Pair each item from List A (by letter) with the item from List B that is most appropriately
associated with it.
(Click to select)
List A
1. Matching principle
List B
a. The enterprise is separate from its owners
and other entities.
(Click to select)
2. Periodicity
b. A common denominator is the dollar.
(Click to select)
3. Historical cost principle
c. The entity will continue indefinitely.
(Click to select)
4. Materiality
(Click to select)
5. Realization principle
(Click to select)
6. Going concern assumption
(Click to select)
7. Monetary unit assumption
d. Record expenses in the period the related
revenue is recognized.
e. The original transaction value upon
acquisition.
f. All information that could affect decisions
should be reported.
g. The life of an enterprise can be divided into
artificial time periods.
(Click to select)
8. Economic entity assumption h. Criteria usually satisfied at point of sale.
(Click to select)
9. Full-disclosure principle
i. Concerns the relative size of an item and its
effect on decisions.
Identify the basic assumption or broad accounting principle that was violated in each of the following
situations.
1. Pastel Paint Company purchased land two years ago at a price of $250,000. Because the value of the
land has appreciated to $400,000, the company has valued the land at $400,000 in its most recent
balance sheet.
(Click to select)
2. Atwell Corporation has not prepared financial statements for external users for over three years.
(Click to select)
3. The Klingon Company sells farm machinery. Revenue from a large order of machinery from a new
buyer was recorded the day the order was received.
(Click to select)
4. Don Smith is the sole owner of a company called Hardware City. The company recently paid a $150
utility bill for Smith’s personal residence and recorded a $150 expense.
(Click to select)
5. Golden Book Company purchased a large printing machine for $1,000,000 (a material amount) and
recorded the purchase as an expense.
(Click to select)
6. Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its
employees in the manufacturing plant. The company is being sued for $2,000,000, a material amount,
and is not insured. The suit was not disclosed in the most recent financial statements because no
settlement had been reached.
(Click to select)
For each of the following situations, indicate whether you agree or disagree with the financial reporting
practice employed and state the basic assumption, constraint, or accounting principle that is applied (if
you agree) or violated (if you disagree).
1. Wagner Corporation adjusted the valuation of all assets and liabilities to reflect changes in the
purchasing power of the dollar.
2. Spooner Oil Company changed its method of accounting for oil and gas exploration costs from
successful efforts to full cost. No mention of the change was included in the financial statements. The
change had a material effect on Spooner's financial statements.
3. Cypress Manufacturing Company purchased machinery having a five-year life. The cost of the
machinery is being expensed over the life of the machinery.
4. Rudeen Corporation purchased equipment for $180,000 at a liquidation sale of a competitor. Because
the equipment was worth $230,000, Rudeen valued the equipment in its subsequent balance sheet at
$230,000.
5. Davis Bicycle Company received a large order for the sale of 1,000 bicycles at $100 each. The
customer paid Davis the entire amount of $100,000 on March 15. However, Davis did not record any
revenue until April 17, the date the bicycles were delivered to the customer.
6. Gigantic Corporation purchased two small calculators at a cost of $32.00. The cost of the calculators
was expensed even though they had a three-year estimated useful life.
7. Esquire Company provides financial statements to external users every three years.
Situation
Agree/Disagree
Assumption/Constraint/Accounting principle
1.
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2.
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3.
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4.
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5.
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6.
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7.
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