1460T_c02.qxd 11:11:2005 09:45 Page 56 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11: EQA 56.Chapter 2 Conceptual Framework Underlying Financial Accounting By May 31,2007,the project was nearly completed,and tenants had signed leases to occupy 90%of the available space at annual rentals totaling $4,000,000.It is estimated that,after operating expenses and debt service,the annual net income will amount to $1,500,000. The management of Sulu Associates believed that (a)the economic benefit derived from the contract with McCoy should be reflected on its financial statements for the fiscal year ended May 31,2007,and directed that revenue be accrued in an amount equal to the commercial value of the services Sulu had rendered during the year,(b)this amount should be carried in contracts receivable,and(c)all related expenditures should be charged against the revenue. Instructions (a)Explain the main difference between the economic concept of business income as reflected by Sulu's management and the measurement of income under generally accepted accounting prin- ciples. (b)Discuss the factors to be considered in determining when revenue should be recognized for the purpose of accounting measurement of periodic income. (c)Is the belief of Sulu's management in accordance with generally accepted accounting principles for the measurement of revenue and expense for the year ended May 31,2007?Support your opin- ion by discussing the application to this case of the factors to be considered for asset measure- ment and revenue and expense recognition. (AICPA adapted) CA2-7 (Matching Principle)An accountant must be familiar with the concepts involved in determin- ing earnings of a business entity.The amount of earnings reported for a business entity is dependent on the proper recognition,in general,of revenue and expense 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 de- veloped for recognizing costs as expenses or losses by other criteria. Instructions (a)Explain the rationale for recognizing costs as expenses at the time of product sale. (b)What is the rationale underlying the appropriateness of treating costs as expenses of a period in- stead of assigning the costs to an asset?Explain. (c) In what general circumstances would it be appropriate to treat a cost as an asset instead of as an ⊕ expense?Explain. (d)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. (e)Identify the conditions under which it would be appropriate to treat a cost as a loss. (AICPA adapted) CA2-8 (Matching Principle)Accountants try to prepare income statements that are as accurate as pos- sible.A basic requirement in preparing accurate income statements is to match costs against revenues properly.Proper matching of costs against revenues requires that costs resulting from typical business operations be recognized in the period in which they expired. Instructions (a)List three criteria that can be used to determine whether such costs should appear as charges in the income statement for the current period. (b)As generally presented in financial statements,the following items or procedures have been crit- icized as improperly matching costs with revenues.Briefly discuss each item from the viewpoint of matching costs with revenues and suggest corrective or alternative means of presenting the fi- nancial information. (1)Receiving and handling costs (2)Valuation of inventories at the lower of cost or market (3)Cash discounts on purchases. CA2-9 (Matching Principle)Carlos Rodriguez sells and erects shell houses,that is,frame structures that are completely finished on the outside but are unfinished on the inside except for flooring,partition studding,and ceiling joists.Shell houses are sold chiefly to customers who are handy with tools and who have time to do the interior wiring,plumbing,wall completion and finishing,and other work necessary to make the shell houses livable dwellings. Rodriguez buys shell houses from a manufacturer in unassembled packages consisting of all lumber, roofing,doors,windows,and similar materials necessary to complete a shell house.Upon commencing operations in a new area,Rodriguez buys or leases land as a site for its local warehouse,field office,and display houses.Sample display houses are erected at a total cost of $30,000 to $44,000 including the cost of the unassembled packages.The chief element of cost of the display houses is the unassembled packages,By May 31, 2007, the project was nearly completed, and tenants had signed leases to occupy 90% of the available space at annual rentals totaling $4,000,000. It is estimated that, after operating expenses and debt service, the annual net income will amount to $1,500,000. The management of Sulu Associates believed that (a) the economic benefit derived from the contract with McCoy should be reflected on its financial statements for the fiscal year ended May 31, 2007, and directed that revenue be accrued in an amount equal to the commercial value of the services Sulu had rendered during the year, (b) this amount should be carried in contracts receivable, and (c) all related expenditures should be charged against the revenue. Instructions (a) Explain the main difference between the economic concept of business income as reflected by Sulu’s management and the measurement of income under generally accepted accounting prin￾ciples. (b) Discuss the factors to be considered in determining when revenue should be recognized for the purpose of accounting measurement of periodic income. (c) Is the belief of Sulu’s management in accordance with generally accepted accounting principles for the measurement of revenue and expense for the year ended May 31, 2007? Support your opin￾ion by discussing the application to this case of the factors to be considered for asset measure￾ment and revenue and expense recognition. (AICPA adapted) CA2-7 (Matching Principle) An accountant must be familiar with the concepts involved in determin￾ing earnings of a business entity. The amount of earnings reported for a business entity is dependent on the proper recognition, in general, of revenue and expense 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 de￾veloped for recognizing costs as expenses or losses by other criteria. Instructions (a) Explain the rationale for recognizing costs as expenses at the time of product sale. (b) What is the rationale underlying the appropriateness of treating costs as expenses of a period in￾stead of assigning the costs to an asset? Explain. (c) In what general circumstances would it be appropriate to treat a cost as an asset instead of as an expense? Explain. (d) 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. (e) Identify the conditions under which it would be appropriate to treat a cost as a loss. (AICPA adapted) CA2-8 (Matching Principle) Accountants try to prepare income statements that are as accurate as pos￾sible. A basic requirement in preparing accurate income statements is to match costs against revenues properly. Proper matching of costs against revenues requires that costs resulting from typical business operations be recognized in the period in which they expired. Instructions (a) List three criteria that can be used to determine whether such costs should appear as charges in the income statement for the current period. (b) As generally presented in financial statements, the following items or procedures have been crit￾icized as improperly matching costs with revenues. Briefly discuss each item from the viewpoint of matching costs with revenues and suggest corrective or alternative means of presenting the fi￾nancial information. (1) Receiving and handling costs. (2) Valuation of inventories at the lower of cost or market. (3) Cash discounts on purchases. CA2-9 (Matching Principle) Carlos Rodriguez sells and erects shell houses, that is, frame structures that are completely finished on the outside but are unfinished on the inside except for flooring, partition studding, and ceiling joists. Shell houses are sold chiefly to customers who are handy with tools and who have time to do the interior wiring, plumbing, wall completion and finishing, and other work necessary to make the shell houses livable dwellings. Rodriguez buys shell houses from a manufacturer in unassembled packages consisting of all lumber, roofing, doors, windows, and similar materials necessary to complete a shell house. Upon commencing operations in a new area, Rodriguez buys or leases land as a site for its local warehouse, field office, and display houses. Sample display houses are erected at a total cost of $30,000 to $44,000 including the cost of the unassembled packages. The chief element of cost of the display houses is the unassembled packages, 56 • Chapter 2 Conceptual Framework Underlying Financial Accounting 1460T_c02.qxd 11:11:2005 09:45 Page 56 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11: