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Week 1

Practice Question Solutions


CA 1-1
1.
GAAP is the term used to indicate the whole body of FASB authoritative literature.
(True)
2.
Any company claiming compliance with GAAP must comply with most standards and
interpretations but does not have to follow the disclosure requirements
False. Any company claiming compliance with GAAP must comply with all standards and
interpretations, including disclosure requirements.
3.

The primary governmental body that has influence over the FASB is the SEC.
True

4.
The FASB has a government mandate and therefore does not have to follow due process
in issuing a standard.
False. In establishing financial accounting standards, the FASB relies on two basic premises:
(1) the FASB should be responsive to the needs and viewpoints of the entire economic
community, not just the public accounting profession, and (2) it should operate in full view
of the public through a due process system that gives interested people ample
opportunities to make their view known.

EXERCISE 2-7 (2025 minutes)


E2-7 (Assumptions, Principles, and Constraint) Presented below are a number of operational
guidelines and practices that have developed over time.
Instructions
Select the assumption, principle, or constraint that most appropriately justifies these
procedures and practices. (Do not use qualitative characteristics.)
(a) Fair value changes are not recognized in the accounting records. Answer:
Measurement (historical cost) principle
(b) Financial information is presented so that investors will not be misled.
Answer: Full disclosure principle
(c) Intangible assets are capitalized and amortized over periods benefited.
Answer: Expense recognition principle
(d) Repair tools are expensed when purchased.
Answer: Materiality

(e) Agricultural companies use fair value for purposes of valuing crops.
Ans: Measurement (fair value) principle
(f) Each enterprise is kept as a unit distinct from its owner or owners.
Ans: Economic entity assumption
(g) All significant post-balance-sheet events are reported.
Ans: Full disclosure principle
(h) Revenue is recorded at point of sale.
Ans: Revenue recognition principle
(i) All important aspects of bond indentures are presented in financial statements.
Ans: Full disclosure principle
(j) Rationale for accrual accounting.
Ans: Expense recognition and revenue recognition principles
(k) The use of consolidated statements is justified.
Ans: Economic entity assumption
(l) Reporting must be done at defined time intervals.
Ans: Periodicity assumption
(m) An allowance for doubtful accounts is established.
Ans: Measurement (fair value) principle
(n) Goodwill is recorded only at time of purchase.
Ans: Measurement (historical cost) principle
(o) A company charges its sales commission costs to expense.
Ans: Expense recognition principle

PROBLEM 3-1

(a)

(Explanations are omitted.) and (d)

Cash
Sept.

Equipment

20,000 Sept. 4

680

1,690

942

20

980

10

430

18

3,600

19

3,000

30

1,800

30

85

Sept.

17,280

Owners Capital
Sept.

19

3,000 Sept.

Bal.

20,000

30

6,007

30

23,007

17,280

30

13,680

30 Bal 12,133

Accounts Receivable
Sept. 14

5,820 Sept. 20

25

2,110

Bal. 30

6,950

980
Accounts Payable
Sept.

18

3,600 Sept.
Bal.

Rent Expense
Sept.

680 Sept.

30

680

Supplies
Sept.
Bal.

5
30

942 Sept.
612

Service Revenue
30

330

Sept.

30

9,620 Sept.

1,690

14

5,820

25

2,110

9,620

Office Expense
Sept. 10
30

430 Sept.

30

Accumulated DepreciationEquipment
515

85
515

515

Salaries and Wages Expense


Sept.

30

1,800 Sept.

30

1,800

Supplies Expense
Sept.

30

330 Sept.

30

9,620

330

Sept`.

30

288

PROBLEM 3-1 (Continued)

Depreciation Expense
Sept.

30

288 Sept. 30

Income Summary
288

Sept.

30

680 Sept.

30

515

30

1,800

30

330

30

288

30 Inc.

30

9,620

6,007
9,620

(b)

9,620

YASUNARI KAWABATA, D.D.S.


Trial Balance
September 30
Debit

Credit

Cash .......................................................................................................................
$12,133
Accounts Receivable ............................................................................................
6,950
Supplies .................................................................................................................
612
Equipment.............................................................................................................
17,280
Accumulated DepreciationEquipment ...........................................................

288

Accounts Payable .................................................................................................

13,680

Owners Capital ...................................................................................................

17,000

Service Revenue....................................................................................................

9,620

Rent Expense ........................................................................................................


680

Office Expense ......................................................................................................


515
Salaries and Wages Expense ...............................................................................
1,800
Supplies Expense ..................................................................................................
330
Depreciation Expense ..........................................................................................
288
Totals .......................................................................................................
$40,588

$40,588

PROBLEM 3-1 (Continued)

(c)

YASUNARI KAWABATA, D.D.S.


Income Statement
For the Month of September
Service revenue ...............................................................................................

$9,620

Expenses:
Salaries and wages expense ........................................................
$1,800
Rent expense ................................................................................ 680
Supplies expense .......................................................................... 330
Depreciation expense .................................................................. 288
Office expense .............................................................................. 515
Total expenses ........................................................................

3,613

Net income .......................................................................................................

$6,007

YASUNARI KAWABATA, D.D.S.


Statement of Owners Equity
For the Month of September
Owners capital September 1 ..................................................................................... $20,000
Add:

Net income ....................................................................................................

6,007
26,007

Less: Withdrawal by owner ......................................................................................

3,000

Owners capital September 30 ................................................................................... $23,007

YASUNARI KAWABATA, D.D.S.


Balance Sheet
As of September 30
Liabilities and Owners Equity

Assets
Cash

$12,133

Accounts payable....................................
$13,680

Accounts receivable ......................... 6,950

Owners capital .............................................23,007

Supplies .............................................

612

Equipment. ....................................... 17,280


Accum. depreciation
equipment .....................................

(288)

Total assets .............................$36,687

Total liabilities and


Owners equity ....................................
$36,687

PROBLEM 3-1 (Continued)

(d)

YASUNARI KAWABATA, D.D.S.


Post-Closing Trial Balance
September 30
Debit

Credit

Cash ...................................................................................................
$12,133
Accounts Receivable ........................................................................ 6,950
Supplies .............................................................................................

612

Equipment ........................................................................................17,280
Accumulated DepreciationEquipment .......................................

288

Accounts Payable .............................................................................

13,680

Owners Capital ...............................................................................

23,007

Totals ...................................................................................
$36,975

$36,975