Concepts of Analysis

“Concepts for Analysis”

E2-9

a. This entry would not follow the guide lines of the Expense Recognition Principle. The approach for recognizing expense is “Let the expense follow the revenue”, this expense is not following any type of revenue. This entry goes against the Economic Entity Assumption, in other words a company keeps activity separate and distinct from its owners and any other business unit.

b. Inventory should be entered at Historical cost because that would be the value of the inventory. The cost of selling would be entered as an expense, and revenue would be recorded when it was earned not estimated.

c. No entry should have been made at all due to the lawyer’s recommendations that there would not be any liability.

d. Once the depreciation schedule is set and the historical cost determined it should be carried forward. The focus of depreciation is to allocate and match the cost to expense and it is not to provide an estimate of the current value of the asset.

e. The entries for goodwill would have been a debit to goodwill and the balance to the asset, also a credit to cash for the purchase of the asset. There is no guarantee with goodwill and therefore would not determine liquidation.

f. When recording an asset even at a discount the asset would be accounted for at historical cost.

CA2-5

a. Revenue is recognized when realized, realizable or earned. Realized revenue is when products, services or other assets change hands and cash is recognized. Realizable is when assets are readily converted to cash. Revenues are considered earned when a company substantially accomplishes what it must do to be entitled to the benefits represented by the revenues.

b. Timing the recognition

1. Cash sale of the magazine- Receipt of cash is a basis for revenue recognition.

2. The publication of the magazine- At times, a company may recognize revenue after completion of the production cycle but before the sale takes place. This occurs if...