Q10E - Intermediate Accounting (Kieso)

Question

Question: Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.

a. Depreciation expense on the building for the year was \(60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.

 

           Retained Earnings                                    60,000

               Accumulated Depreciation—Buildings           60,000

 

b. Materials were purchased on January 1, 2017, for \)120,000 and this amount was entered in the Materials account. On December 31, 2017, the materials would have cost \(141,000, so the following entry is made.

                             Inventory                         21,000

                                    Gain on Inventories            21,000

c. During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of \)135,000 and a fair value of \(450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.

 

                         Equipment         135,000

                                 Common Stock        135,000

d. During the year, the company sold certain equipment for \)285,000, recognizing a gain of \(69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.

 

e. An order for \)61,500 from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.

                   

                         Accounts Receivable   61,500

                                   Sales Revenue                61,500

Step-by-Step Solution

Answer

Answer

1. Depreciation is an allocation of cost, not an attempt to value assets.
2. A gain should not be recognized until the inventory is sold
3. Recording the asset at the par value of the stock has no conceptual validity.
4. Deferral of the gain should not be permitted.
5. Revenue should be recognized when a performance obligation is met.

Step 1: Meaning of Accounting Procedures

The definition of an accounting strategy may be a standardized preparation that carries out a certain accounting work and is made to incorporate improved risk management rules so that these tasks are carried out more successfully and beneficially.

Step 2: (1) Commenting on the appropriateness of the accounting procedures

Depreciation is not an attempt to appraise assets; it is an allocation of cost. Because of this, costs associated with this building should be matched with revenues on the income statement rather than being charged to retained earnings, even though the building's value is rising.

Step 3: (2) Commenting on the appropriateness of the accounting procedures.

The inventory should not be sold until a gain is recorded. Accountants use the measurement principle (historical cost) approach, and asset write-ups are not allowed. According to the revenue recognition principle, a performance requirement must first be fulfilled before revenue should be recognized. When the consumer receives the goods in this instance

Step 4: (3) Commenting on the appropriateness of the accounting procedures.

Assets must be valued at either the fair market value of what is acquired or the fair value of what is given up, whichever is more obvious. It should be underlined that using the stock's fair value does not contradict the measuring (historical cost) principle. No conceptual justification exists for recording the asset at the stock's par value. Simply put, par value is a fictitious sum typically determined at the time of incorporation.

Step 5: (4) Commenting on the appropriateness of the accounting procedures

When the customer receives the equipment, the gain should be acknowledged. Because the corporation has met the performance commitment, deferral of the gain shouldn't be allowed.

Step 6: (5) Commenting on the appropriateness of the accounting procedures.

According to the information, the sale should have been recorded in 2018 instead of 2017. When a performance obligation is satisfied, revenue should be pronounced. When the order is delivered to the buyer in this circumstance, the performance obligation is satisfied. 2018 ought to be the year that deals income and accounts receivable are reported. It ought to be famous that a charge to Cost of Goods Sold and a credit to Inventory are moreover required in 2018 if the company uses an interminable stock framework in terms of dollars and quantities.