Page 227 - Accounting Principles (A Business Perspective)

5. Accounting theory

Problems
Problem A Select the best answer to each of the following questions:
The assumption that each business has an existence separate from its owners, creditors, employees, customers,

other interested parties, and other businesses is the:
a. Going-concern assumption.
b. Business entity concept.
c. Separate entity concept.
d. Corporation concept.
Companies should use liquidation values to report assets if which of the following conditions exists?
a. There are changes in the value of the dollar.

b. The periodicity assumption is applied.
c. The company is not a going concern and will be dissolved.
d. The accrual basis of accounting is not used.
Assume that a company has paid for advertising and that the ad has already appeared. The company chose to
report the item as prepaid advertising and includes it among the assets on the balance sheet. Previously, the
company had always expensed expenditures such as this. This practice is a violation of:
a. Generally accepted accounting principles.
b. The matching concept.
c. The consistency concept.

d. All of the above.
Recording revenue only after the seller has obtained the right to receive payment from the buyer for
merchandise sold or services performed is called the:
a. Earning principle.
b. Installment basis.
c. Realization principle.
d. Completed-contract method.

Problem B Ramirez Video, Inc., sells video recorders under terms calling for a small down payment and
monthly payments spread over three years. Following are data for the first three years of the company's operations:
2008 2009 2010
Gross margin rate 30% 40% 50%
Cash collected in 2010:
From sales in............................$216,000
From sales in.............................................. $288,000
From sales in............................................ $480,000
Total sales for 2010 were USD 1,600,000, while general and selling expenses amounted to USD 400,000.

a. Compute net income for 2010, assuming revenues are recognized at the time of sale.
b. Compute net income for 2010, using the installment method of accounting for sales and gross margin.
Problem C The following data relate to Merit Construction Company's long-term construction projects for the
year 2010:
Completed Incomplete
Projects Projects
Contract price.................................... $20,000,000 $100,000,000
Costs incurred prior to 2010 ............... ..... 3,700,000 16,000,000
Costs incurred in 2010........................ ..... 11,100,000 32,000,000
Estimated costs to be incurred
in future years................................ - 0- 32,000,000

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