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Chapter 4

Financial Accounting: A Critical Approach 3e _ Chapter 4 Answers

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Department
Accounting
Course Code
ACC 110
Professor
Else Grech

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CHAPTER 4
Income Measurement and the Objectives of Financial Reporting
EXERCISES
E4-1.
a.Employee wages of employees actually making the candy would be a product cost because
they can be attached to the production of candy. People indirectly associated with production
of candy could be treated as a period cost.
b. The advertising costs can be attached to the produce to evaluate the overall performance of
the candy sensation. In practice advertising costs aren’t included in inventory since they
aren’t part of the cost of production and it’s difficult to determine how, if, or when particular
advertising contributed to sales.
c.Depreciation would be a period cost as the benefit that head office provides for each product
is not measurable.
d. Sales commissions are product costs because they can be matched to specific revenues, the
revenues that were earned as a result of the efforts by the sales person. Sales commissions
would be expensed when the revenue they pertained to was recognized.
e.Ingredients are product costs since they can be easily allocated to specific products.
f. Conceptually these are product costs since they can be allocated to products. Utilities in a
plant can be associated with the production of products. In practice, utilities might be treated
as period costs if the allocation of the costs is too arbitrary.
g. These are product costs because they can be associated with particular sales (i.e. the revenue
associated with the merchandise in the truck).
h. These salaries would be period costs since the work of head office employees and senior
executives can’t reasonably be associated with specific products.
i.Conceptually these costs are part of the costs of the candies that are introduced, but in
practice they would often be expensed entirely or partially as period cost.
E4-3.
a. Recognize revenue when the contract is signed.
December 13, 2015
Dr. Accounts Receivable550,000
Cr. Revenue 550,000
Dr. Cost of goods sold 300,000
Cr. Liability for Installation Costs300,000
[It’s assumed that the provision for warranty costs is included in this entry. A student
could also prepare a separate entry to record the warranty provision (Dr. Warranty
expense, Cr. Warranty liability). The important point is that the warranty cost should be
accrued at the time the revenue is recognized.]
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
1
www.notesolution.com
October 15, 2016
[No specific entry required but over the period from the signing of the contract to the
expiration of the warranty the expenses accrued at the date the revenue was recognized
would have to be paid.]
December 12, 2016
Dr. Liability for Installation Costs35,000
Cr. Accounts Payable/Cash 35,000
[This entry follows from the assumption above that the warranty provision is included in
the liability for installation costs.]
January 8, 2017
Dr. Cash 550,000
Cr. Accounts Receivable550,000
April 15, 2017
No entry required.
b. Recognize revenue when installation of the system is complete.
December 13, 2015
No entry
October 15, 2016
Dr. Accounts Receivable550,000
Cr. Revenue 550,000
Dr. Cost of Goods Sold 300,000
Cr. Accounts Payable/Cash/Accrued liabilities300,000
[It’s assumed that the provision for warranty costs is included in this entry (in cost of
goods sold). A student could also prepare a separate entry to record the warranty
provision (Dr. Warranty expense, Cr. Warranty liability). The important point is that the
warranty cost should be accrued at the time the revenue is recognized. In addition, the
$300,000 represents all costs of developing the system including costs that have been
incurred before the revenue was recognized and costs that will be incurred later. Costs
incurred before October 15 would be deferred and expensed at the time the revenue was
recognized. Payment of obligations would occur over the time period.]
December 12, 2016
Dr. Accrued liabilities—warranties35,000
Cr. Accounts Payable/Cash 35,000
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
2
www.notesolution.com
January 8, 2017
Dr. Cash 550,000
Cr. Accounts Receivable550,000
April 15, 2017
No entry required.
c. Recognize revenue when cash is collected.
December 13, 2015
No entry
December 13, 2015—October 15, 2016
Dr. Inventory 265,000
Cr. Accounts Payable/Cash 265,000
[Over the period before cash is collected and revenue recognized, costs incurred for the
system would be accumulated in asset accounts. These amounts would be expensed when
the revenue is recognized. In this case, no warranty costs would be accrued since the
revenue from the sale hasn’t been recognized. This entry assumes that the total warranty
provision would be $35,000 (see the next entry). As a result, the non-warranty costs are
assumed to be $265,000 ($300,000-$35,000).]
December 12, 2016
Dr. Deferred Warranty Costs (asset +)35,000
Cr. Accounts Payable/Cash 35,000
[Since the warranty service was provided, it must be accounted for. Risteen incurred
costs but those costs shouldn’t be expensed until the revenue from the sale is recognized
when cash is received. As a result, the warranty costs incurred are recorded as a deferred
cost that is reported on the asset side of the balance sheet.]
January 8, 2017
Dr. Cash 550,000
Cr. Revenue 550,000
Dr. Cost of Goods Sold 300,000
Cr. Inventory 265000
Cr. Deferred Warranty costs35,000
April 15, 2017
No entry required.
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
3
www.notesolution.com

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Description
CHAPTER 4 Income Measurement and the Objectives of Financial Reporting EXERCISES E4-1. a. Employee wages of employees actually making the candy would be a product cost because they can be attached to the production of candy. People indirectly associated with production of candy could be treated as a period cost. b. The advertising costs can be attached to the produce to evaluate the overall performance of the candy sensation. In practice advertising costs arent included in inventory since they arent part of the cost of production and its difficult to determine how, if, or when particular advertising contributed to sales. c. Depreciation would be a period cost as the benefit that head office provides for each product is not measurable. d. Sales commissions are product costs because they can be matched to specific revenues, the revenues that were earned as a result of the efforts by the sales person. Sales commissions would be expensed when the revenue they pertained to was recognized. e. Ingredients are product costs since they can be easily allocated to specific products. f. Conceptually these are product costs since they can be allocated to products. Utilities in a plant can be associated with the production of products. In practice, utilities might be treated as period costs if the allocation of the costs is too arbitrary. g. These are product costs because they can be associated with particular sales (i.e. the revenue associated with the merchandise in the truck). h. These salaries would be period costs since the work of head office employees and senior executives cant reasonably be associated with specific products. i. Conceptually these costs are part of the costs of the candies that are introduced, but in practice they would often be expensed entirely or partially as period cost. E4-3. a. Recognize revenue when the contract is signed. December 13, 2015 Dr. Accounts Receivable 550,000 Cr. Revenue 550,000 Dr. Cost of goods sold 300,000 Cr. Liability for Installation Costs 300,000 [Its assumed that the provision for warranty costs is included in this entry. A student could also prepare a separate entry to record the warranty provision (Dr. Warranty expense, Cr. Warranty liability). The important point is that the warranty cost should be accrued at the time the revenue is recognized.] 1 Copyright 2010 McGraw-Hill Ryerson Ltd. John Friedlan, Financial Accounting: A Critical Approach, 3e www.notesolution.comOctober 15, 2016 [No specific entry required but over the period from the signing of the contract to the expiration of the warranty the expenses accrued at the date the revenue was recognized would have to be paid.] December 12, 2016 Dr. Liability for Installation Costs 35,000 Cr. Accounts PayableCash 35,000 [This entry follows from the assumption above that the warranty provision is included in the liability for installation costs.] January 8, 2017 Dr. Cash 550,000 Cr. Accounts Receivable 550,000 April 15, 2017 No entry required. b. Recognize revenue when installation of the system is complete. December 13, 2015 No entry October 15, 2016 Dr. Accounts Receivable 550,000 Cr. Revenue 550,000 Dr. Cost of Goods Sold 300,000 Cr. Accounts PayableCashAccrued liabilities 300,000 [Its assumed that the provision for warranty costs is included in this entry (in cost of goods sold). A student could also prepare a separate entry to record the warranty provision (Dr. Warranty expense, Cr. Warranty liability). The important point is that the warranty cost should be accrued at the time the revenue is recognized. In addition, the $300,000 represents all costs of developing the system including costs that have been incurred before the revenue was recognized and costs that will be incurred later. Costs incurred before October 15 would be deferred and expensed at the time the revenue was recognized. Payment of obligations would occur over the time period.] December 12, 2016 Dr. Accrued liabilitieswarranties 35,000 Cr. Accounts PayableCash 35,000 2 Copyright 2010 McGraw-Hill Ryerson Ltd. John Friedlan, Financial Accounting: A Critical Approach, 3e www.notesolution.com
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