Exam 3: Financial Reporting Concepts

In the following transactions, indicate when revenue should be recognized: 1. In September, La Cloche University collects tuition revenue for the term from students. The term runs from September through December. 2. Burns Island Company sells merchandise with terms of 2/10, n/30, FOB destination. 3. The Ottawa Senators sell season tickets to games in Canadian Tire Centre. Fans can purchase the tickets at any time, although the season doesn't officially begin until September. It runs from September through May. 4. Canada Airline sells you a refundable airline ticket in September for your flight home at Christmas. 5. The University Bookstore has the following return policy for textbook sales: "Textbooks (new and used) may be returned for seven calendar days from the start of classes. After that time, textbooks (new and used) may be returned within 48 hours of purchase."

The qualitative characteristics should be applied in which order?

The following are independent situations observed by Mersey's senior accountant at December 31, 2021, the company's year end. Mersey has not adopted the revaluation model for accounting for long-lived assets. 1. The draft financial statements include an item listed under non-current assets "Human resources" but there is no financial amount included. 2. Mersey's employees are paid a bonus based on profit. Mersey's management would like to minimize the amount of bonus paid, and so they instructed a junior accountant to write down inventory by $ 1,000,000 and record a Loss on Inventory. Their argument is that the "fire sale" value of the inventory would be lower than recorded cost by this amount. Mersey has no intention of liquidating the inventory under such circumstances, but expects to sell the inventory in the normal course of business at amounts significantly above cost. 3. A building being constructed for a customer was 90% complete, and accordingly 90% of the related revenue had been correctly included in sales for the year. The total projected cost of construction is $ 600,000. Of the $ 540,000 cost of the project incurred to date, $ 200,000 has been expensed to COGS 4. Mersey owns 5% of the shares of Liverpool Investments. A note to Liverpool's financial statements describes a valuable new patent registered by Liverpool and the anticipated profits that are expected to result. A junior accountant at Mersey recorded an entry "Debit Intangible Assets; Credit Gain on Patent Registration" in the amount of $ 220,000, which is 5% of the amount at which Liverpool has recorded the cost of the patent. 5. In November, Mersey entered into a service contract to provide maintenance services to a client for a fee of $ 20,000 per month. On signing the contract, the client paid Mersey a $ 40,000 deposit on services to be provided. The term of the contract is from December 15, 2021 through December 15, 2022. The $ 40,000 deposit was recorded as Service Revenue. Instructions For each of the events, indicate an accounting assumption, concept, constraint, or recognition criteria that have been violated and provide your reason. Prepare the correcting entry required, or if no entry is required, explain what other change, if any, should be made to ensure that Mersey's financial statements comply with GAAP.

Full disclosure means that the financial statements must be accompanied by notes to the financial statements.

Which of the following is not an indication that control over goods or services have transferred at a point in time?

For each of the independent situations described below, list the assumption, characteristic, concept, or constraint that has been violated, if any. List only one term for each case. 1. The Who Company reports only current assets and current liabilities on its balance sheet. Intangible assets and a 20-year mortgage payable are reported as a current asset and a current liability, respectively. Liquidation of the company is unlikely. 2. Gabi Company is in its third year of operation and has yet to issue financial statements. (Do not use full disclosure principle.) 3. Griffin Company is carrying inventory at its net realizable value of $ 110,000. The inventory had an original cost of $ 135,000. 4. Paul Company expenses some office equipment that is inexpensive even though it has a useful life that exceeds 1 year. 5. Singh Corporation has selected FIFO as its inventory cost flow formula during the current year. Next year it plans to change to the weighted average cost formula.

Management bonuses based on profit may encourage management to overstate profits.

An error is considered to be a material error if the error in the accounting information could have an impact on an investor's or creditor's decision.

The conceptual framework will not be able to guide decisions about what to present in the financial statements.

Notes to the financial statements are required because the most important objective of financial reporting is to

If accounting information has predictive value, it is useful in making predictions about

When a private company is reporting under ASPE, and under the going concern assumption, the company will be reporting their equipment assets at

Comfort King Ltd. sells central air units to local residents. Jack Frost agreed to an arrangement with Comfort King to purchase a central air unit for $ 4,000 on May 1, 2021. In addition to the sale, the arrangement includes unit installation which was completed on May 20, 2021. Comfort King only provides installation services for its customers who purchase new units. Comfort King was immediately paid the agreed-upon price by Jack Frost. Instructions Complete the following steps to determine if the appropriate criteria have been met for Comfort King to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Comfort King can recognize the revenue and when it would be appropriate to do so. 1. Is there a contract? 2. What is the performance obligation? 3. What is the transaction price? 4. Is there a need to allocate the selling price? 5. Has the performance obligation been satisfied?

The following transactions occurred during 2021: 1. A television set is delivered to the customer in August. Six instalment payments of $ 200 per month begin the following January. Ignore interest considerations. 2. Goods are sold FOB shipping point. An item with a retail value of $ 10,000 is loaded onto the truck on May 31, but not unloaded until June 3 because the recipient delayed paying the freight bill until then. The vendor prepares and mails the invoice to the customer on June 10. 3. A computer network system and related cables are delivered to the customer's premises on March 31. Installation is completed by April 30, after which the system is ready for use. The vendor provides monthly support and upgrades for 4 months following the month of installation (through end of August). The value of the system and cables is $ 50,000, the value of the installation services is $ 22,000, and the value of the monthly support totals $ 6,000. 4. Goods are sold FOB destination. An order with an invoice total of $ 3,500 is loaded onto the truck January 31 and delivered on February 1. 5. A customer prepays for 10 oil changes for a total of $ 300. During December, two oil changes are completed for this customer. Instructions Identify in which month revenue should be recognized in each situation. If revenue should be recognized in more than one month, calculate the amounts that apply to each relevant month.

Comfort King Ltd. sells central air units to local residents as well as ongoing maintenance plans. Jack Frost agreed to an arrangement with Comfort King to purchase a central air package for $ 4,000 on May 1, 2021. In addition to the sale, the arrangement includes unit installation and maintenance on the central air unit for two years. Jack Frost is receiving a great deal as the full contract price represents the stand-alone value of the central air unit. Comfort King also provides installation and central air maintenance separately to its customers as follows: installation fee $ 400 and annual central air maintenance fee $ 250. Comfort King installed the unit on May 20, 2021, and was immediately paid the agreed-upon price by Jack Frost. Instructions Complete the following steps to determine if the appropriate criteria have been met for Comfort King to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Comfort King can recognize the revenue and when it would be appropriate to do so.1. Is there a contract? 6. 2. What is the performance obligation? 7. 3. What is the transaction price? 8. 4. Is there a need to allocate the selling price? 9. 5. Has the performance obligation been satisfied?

An item is material when it is unlikely to influence the decision of a reasonably careful investor or creditor.

Which of the following is a situation indicating that control over goods or services transfers over a period of time?

When an asset ceases to have future value it should be expensed.

______ play(s) a fundamental role in the efficient functioning of the economy by providing capital (cash) to businesses.

Not every country uses the same conceptual framework or set of accounting standards.