Page 226 - Accounting Principles (A Business Perspective)

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2010 2011
Installment sales......................... $800,000 $960,000
Cost of goods sold on installment sales ..... 560,000 720,000
Other expenses.......................... 120,000 160,000
Cash collected from 2010 sales.............. 480,000 240,000
Cash collected from 2011 sales.............. 640,000
a. Compute the net income for 2011, assuming use of the accrual (sales) basis of revenue recognition.
b. Compute the net income for 2011, assuming use of the installment basis of recognizing gross margin.

Exercise C A company has a contract to build a ship at a price of USD 500 million and an estimated cost of
USD 400 million. Costs of USD 100 million were incurred. Under the percentage-of-completion method, how much
revenue would be recognized?
Exercise D A company follows a practice of expensing the premium on its fire insurance policy when the policy
is paid. In 2010, the company charged to expense the USD 6,000 premium paid on a three-year policy covering the
period 2010 July 1, to 2010 June 30. In 2010, a premium of USD 5,400 was charged to expense on the same policy
for the period 2010 July 1, to 2010 July 30.
a. State the principle of accounting that was violated by this practice.
b. Compute the effects of this violation on the financial statements for the calendar year 2010.

c. State the basis on which the company's practice might be justified.
Exercise E Match the descriptions in Column B with the accounting qualities in Column A. Use some
descriptions more than once.

Column A: Accounting qualities Column B: Descriptions

Relevance. a. Users of accounting information.

Feedback value. b. Pervasive constraint.

Decision makers. c . User-specific qualities.

Representational faithfulness. d. Primary decision-specific qualities.

Reliability. e. Ingredients of primary qualities.

Comparability. f. Secondary and interactive qualities.

Benefits exceed costs. g. Threshold for recognition.

Predictive value.

Timeliness.

Decision usefulness.

Verifiability.

Understandability.

Neutrality.

Materiality.

Accounting Principles: A Business Perspective 227 A Global Text