The qualitative characteristics that make accounting information useful

E2-4 (Qualitative Characteristics) The qualitative characteristics that make accounting information useful for decision-making purposes are as follows.

Relevance                    Neutrality
Verifiability                     Faithful representation
Completeness                    Understandability
Predictive value                 Timeliness
Comparability                     Confirmatory value
Materiality                     Free from error

Instructions: Identify the appropriate qualitative characteristic(s) to be used given the information provided below.

(a) Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.
(b) Quality of information that confirms users’ earlier expectations.
(c) Imperative for providing comparisons of a company from period to period.
(d) Ignores the economic consequences of a standard or rule.
(e) Requires a high degree of consensus among individuals on a given measurement.
(f) Predictive value is an ingredient of this fundamental quality of information.
(g) Four qualitative characteristics that are related to both relevance and faithful representation.
(h) An item is not recorded because its effect on income would not change a decision.
(i) Neutrality is an ingredient of this fundamental quality of accounting information.
(j) Two fundamental qualities that make accounting information useful for decision-making purposes.
(k) Issuance of interim reports is an example of what enhancing quality of relevance?

E2-6 (Assumptions, Principles, and Constraint) Presented below are the assumptions, principles, and constraint used in this chapter.

1. Economic entity assumption             2. Going concern assumption
3. Monetary unit assumption             4. Periodicity assumption
5. Measurement principle (historical cost)     6. Measurement principle (fair value)
7. Expense recognition principle                8. Full disclosure principle
9. Cost constraint                 10. Revenue recognition principle

Instructions:  Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once.

(a) Allocates expenses to revenues in the proper period.
(b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)
(c) Ensures that all relevant financial information is reported.
(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)
(e) Indicates that personal and business record keeping should be separately maintained.
(f) Separates financial information into time periods for reporting purposes.
(g) Assumes that the dollar is the “measuring stick” used to report on financial performance

E3-1 (Transaction Analysis—Service Company) Beverly Crusher is a licensed CPA. During the first month of operations of her business (a sole proprietorship), the following events and transactions occurred.

April    2 Invested $32,000 cash and equipment valued at $14,000 in the business.
2 Hired a secretary-receptionist at a salary of $290 per week payable monthly.
3 Purchased supplies on account $700. (Debit an asset account.)
7 Paid office rent of $600 for the month
11 Completed a tax assignment and billed client $1,100 for services rendered. (Use Service Revenue account.)
12 Received $3,200 advance on a management consulting engagement.
17 Received cash of $2,300 for services completed for Ferengi Co.
21 Paid insurance expense $110.
30 Paid secretary-receptionist $1,160 for the month.
30 A count of supplies indicated that $120 of supplies had been used.
30 Purchased a new computer for $6,100 with personal funds. (The computer will be used exclusively for business purposes.)

Instructions: Journalize the transactions in the general journal. (Omit explanations.)

E3-5 (Adjusting Entries) The ledger of Duggan Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.

Debit      Credit
Prepaid Insurance                      $ 3,600
Supplies                                  2,800
Equipment                                25,000
Accumulated Depreciation—Equipment              $ 8,400
Notes Payable                                      20,000
Unearned Rent Revenue                              9,300
Rent Revenue                                       60,000
Interest Expense                                    –0–
Salaries and Wages Expense                         14,000

An analysis of the accounts shows the following.

1. The equipment depreciates $250 per month.
2. One-third of the unearned rent was recognized as revenue during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $850.
5. Insurance expires at the rate of $300 per month.

Instructions:  Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense. (Omit explanations.)

E3-16 (Closing Entries for a Corporation) Presented below are selected account balances for Homer Winslow Co. as of December 31, 2014.

Inventory 12/31/14            $ 60,000           Cost of Goods Sold         $225,700
Common Stock                  75,000          Selling Expenses              16,000
Retained Earnings             45,000          Administrative Expenses       38,000
Dividends                     18,000          Income Tax Expense            30,000
Sales Returns and Allowances  12,000
Sales Discounts               15,000
Sales Revenue                 410,000

Instructions:  Prepare closing entries for Homer Winslow Co. on December 31, 2014. (Omit explanations.)

Here’s the SOLUTION

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