Question 1

Canadian GAAP allows private companies the choice to adopt ASPE instead of IFRS since the cost to private companies of providing financial statements prepared under IFRS is often greater than the benefits. This statement is an example of which of the following concepts and constraints?

Accepted Answer

The statement highlights the cost constraint, which considers whether the cost of providing financial information outweighs the benefits derived from that information.

Question 2

Which of the following is a situation indicating that control over goods or services have transferred at a point in time?

Accepted Answer

Control over goods or services is typically transferred at a point in time when the customer accepts delivery, as in the case of the alarm system.

Question 3

At the time of acquisition, long-lived assets are recorded at

Accepted Answer

Long-lived assets are recorded at cost at the time of acquisition, as per the generally accepted accounting principles (GAAP). The cost includes all expenditures necessary to acquire and prepare the asset for its intended use, such as purchase price, taxes, and transportation fees. This cost is then allocated over the asset's useful life through depreciation or amortization.

Question 4

Which of the following violates the monetary unit concept when measuring, recording, and reporting financial information?

Accepted Answer

The monetary unit concept requires that all financial transactions be recorded in a stable currency. Customer loyalty cannot be measured in monetary terms, thus violating this concept.

Question 5

When a private company is reporting under ASPE, and under the going concern assumption, the company will be reporting their equipment assets at

Accepted Answer

Under the going concern assumption, equipment assets must be reported at their carrying value, which is the original cost less accumulated depreciation. This reflects the current value of the equipment to the company and is in line with the concept of conservatism in accounting.

Question 6

A persuasive constraint that ensures the value of the information provided is greater than the costs of providing it is the

Accepted Answer

The answer of A persuasive constraint that ensures the value...

Question 7

Presented below are some business transactions that occurred during 2021 for Kilgana Company:  Instructions
For each situation above, identify the assumption, concept, or constraint that has been violated, if any. If the entry is incorrect, prepare the entry that should have been made, if any.

Accepted Answer

The answer of Presented below are some business transactions that...

Question 8

A common application of the cost constraint is I. recording assets at cost.
II) not disclosing information that is immaterial and unnecessary in the notes.
III) use of the FIFO cost flow assumption for inventory valuation.

Accepted Answer

The cost constraint involves not disclosing immaterial information, as it may not justify the cost of providing it.

Question 9

The cost constraint

Accepted Answer

The cost constraint in accounting means that the value of the information provided should justify the cost of producing it.

Question 10

Retailers who sell a product with a warranty period can recognize revenue when

Accepted Answer

Revenue should be recognized at the point of sale if the warranty amount can be estimated. This is because the warranty cost is a future cost and should be accounted for at the time of sale. If the warranty cannot be estimated, revenue recognition should be delayed until the warranty period has expired. Options C and D are not relevant to the revenue recognition criteria.

Question 11

One criterion for recognition of revenue is to recognize revenue when

Accepted Answer

The answer of One criterion for recognition of revenue is...

Question 12

Which of the following is a constraint in financial reporting?

Accepted Answer

Cost is a constraint in financial reporting because the cost of preparing the financial statements should not outweigh the benefits derived from them. In other words, the cost of providing information must be reasonable and justifiable. Comparability and consistency are qualitative characteristics while going concern is an accounting assumption.

Question 13

Which of the following is not a criterion pertaining to revenue recognition for the sale of goods under the earnings approach?

Accepted Answer

Under the earnings approach, the amount of returns does not need to be known with certainty, but rather can be estimated. The other options are criteria for revenue recognition.

Question 14

Sam Baker enters into a contract with Pit Company to purchase a gas fireplace unit. The sale agreement is for a total price of $ 3,000 and includes delivery of the unit, installation, and a two-year warranty. Installation successfully occurred on November 1, 2021. Pit Company often sells this gas fireplace for $ 2,500 and offers installation and warranty services at $ 500 and $ 300, respectively. Using the stand-alone fair values, what amount would be recorded as revenue on November 1, 2021 under the contract-based approach to revenue recognition? Round to the nearest whole dollar.

Accepted Answer

The total transaction price of $3,000 is allocated based on the stand-alone selling prices: $2,500 for the fireplace, $500 for installation, and $300 for the warranty. The revenue for the fireplace and installation ($2,500 + $500 = $3,000) is recognized on November 1, 2021, as these obligations are satisfied. The warranty is a separate performance obligation recognized over time.

Question 15

Which of the following would be an example of multiple performance obligations?

Accepted Answer

The purchase of a gas range and a two-year extended warranty involves two separate performance obligations: delivering the gas range and providing warranty services over two years.

Question 16

An inexperienced accountant for Can't Add Company recorded the following transactions in the records of the company for the year ended December 31, 2021. The controller has questioned the appropriateness of the entries since she thinks that they have not been recorded in accordance with generally accepted accounting principles. Profit for the year, including the entries described below, is $ 200,000.  Instructions 
a) For each of the above entries, indicate the concept or constraint that was violated.
b) Determine the correct profit for 2021.

Accepted Answer

The answer of An inexperienced accountant for Can't Add Company...

Question 17

Financial statements are prepared for an economic business unit that is separate and distinct from its owners. This is referred to as

Accepted Answer

The economic entity concept states that financial statements are prepared for a separate and distinct economic business entity, which is different from its owners. This concept is the basis for the preparation of financial statements and helps in evaluating the financial performance of the business entity. The going concern assumption refers to the assumption that the business will continue to operate for the foreseeable future, while the objective of financial reporting relates to communicating useful financial information to stakeholders. A cost constraint refers to the limitation on the resources available for reporting financial information.

Question 18

There are several ways the recognition and measurement concepts can be violated. Which one of the following would not necessarily be considered a violation?

Accepted Answer

A change in an accounting policy is not necessarily a violation of recognition and measurement concepts as long as it is properly disclosed and justified. It is a normal and acceptable practice to change accounting policies when necessary to improve the relevance and reliability of financial information. However, intentional misstatement of estimates, failure to record a revenue or expense, and recognition of revenue or expense in the incorrect accounting period are clear violations of recognition and measurement concepts that can distort the accuracy of financial statements.

Question 19

A number of unrelated transactions recorded by Farm Company are as follows:  Instructions
For each of the above situations, identify the accounting assumption, concept, constraint, or recognition criteria that have been violated. Prepare the correct journal entry as it should have been made. If no entry should have been made, or if additional financial statement disclosure is required, explain.

Accepted Answer

The answer of A number of unrelated transactions recorded by...

Question 20

Comfort King Ltd. sells central air units to local residents. Jack Frost agreed to an arrangement with Comfort King to purchase a central air unit for $ 4,000 on May 1, 2021. In addition to the sale, the arrangement includes unit installation which was completed on May 20, 2021. Comfort King only provides installation services for its customers who purchase new units. Comfort King was immediately paid the agreed-upon price by Jack Frost.
Instructions
Complete the following steps to determine if the appropriate criteria have been met for Comfort King to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Comfort King can recognize the revenue and when it would be appropriate to do so.
1. Is there a contract?
2. What is the performance obligation?
3. What is the transaction price?
4. Is there a need to allocate the selling price?
5. Has the performance obligation been satisfied?

Accepted Answer

The answer of Comfort King Ltd. sells central air units...

Quiz 3: Financial Reporting Concepts