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Chapter 2: Q9BE (page 64)

BE2-9 (L05) If the going concern assumption is not made in accounting, discuss the differences in the amounts shown in thefinancial statements for the following items.

(a) Land. (d) Inventory.

(b) Unamortized bond premium. (e) Prepaid insurance.(c) Depreciation expense on equipment.

Short Answer

Expert verified

(a) Net realizable value

(b)Would not be disclosed

(c)Would not be disclosed

(d) Net realizable value

(e) Net realizable value

Step by step solution

01

Going concern assumption or concept

The main meaning of the going concern concept is that business runs for a longer period.

02

An explanation for part (a)

Land 鈥� The term land means any building or other constructed asset on the property. The value received by selling the asset by deducting the selling costs is called the net realizable value. The net realizable cost is determined by deducting the selling costs, such as transportation costs. When there is no going concern concept, the value of the land is recorded at the net realizable value in the books of accounts.

03

An explanation for part (b)

Unamortized bond premium 鈥揑t means the net difference in the bond's price when the bond issuer sells the bond less than the face value at maturity. The unamortized bond premium is considered the liability of the issuer. When there is no going concern concept, the company or the issuer will not disclose the amount in the books of accounts.

04

An explanation for part (c)

Depreciation expense on equipment 鈥� The asset's value decreases over time because the asset is used for a long period, the technology change, or many other reasons is termed depreciation. There is no need to write the depreciation amount on equipment in the accounts when the going concern concept is not followed.

05

An explanation for part (d)

Inventory 鈥� It means the goods are in various production stages and ready for sale. It can be finished goods, work-in-progress, and raw materials. Net realizable value is the amount that a business entity will receive after paying or deducting the total selling cost from the selling price of the inventory. When there is no going concern concept, the net realizable value of the inventory is recorded

06

An explanation for part (e)

Prepaid insurance 鈥� Prepaid insurance means the individuals or businesses pay the insurance company in advance for insurance services or coverage. When there is no going concern concept, then the net realizable value of the prepaid insurance is recorded in the books of accounts.

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Most popular questions from this chapter

Three expense recognition methods (associating cause and effect, systematic and rational allocation, and immediate recognition) were discussed in the text under the expense recognition principle. Indicate the basic nature of each of these expense recognition methods and give two examples of each.

Question: Describe the major constraint inherent in the presentation of accounting information.

Question: An accountant must be familiar with the concepts involved in determining earnings of a business entity. The amount of earnings reported for a business entity is dependent on the proper recognition, in general, of revenues and expenses for a given time period. In some situations, costs are recognized as expenses at the time of product sale. In other situations, guidelines have been developed for recognizing costs as expenses or losses by other criteria.Instructions

  1. Explain the rationale for recognizing costs as expenses at the time of product sale.
  2. What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the costs to an asset? Explain.
  3. In what general circumstances would it be appropriate to treat a cost as an asset instead of as an expense?
  4. Some expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the underlying rationale for recognizing expenses on the basis of systematic and rational allocation of asset cost.
  5. Identify the conditions under which it would be appropriate to treat a cost as a loss.

GROUPWORK (Accounting Principles and Assumptions鈥擟omprehensive) Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc.

Instructions

In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.

(a) The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made.Miscellaneous Expense 29,000Cash 29,000

(b) Merchandise inventory that cost \(620,000 is reported on the balance sheet at \)690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value.Inventory 70,000Sales Revenue 70,000

(c) The company is being sued for \(500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry.Loss from Lawsuit 500,000Liability for lawsuit 500,000

(d) Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a \)16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entryDepreciation Expense 16,000Accumulated Depreciation Equipment 16,000

(e) Gonzales, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at \(800,000 was written off as follows.

(f) Because of a 鈥渇ire sale.鈥� equipment obviously worth \)200,000 was acquired at a cost of $155,000. The following entry was made.Equipment 2000Cash 155,000Sales Revenue 45,000

What is meant by term 鈥渜ualitative characteristics of accounting information鈥�?
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