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Chapter 4

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

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Department
Accounting
Course
ACC 110
Professor
Else Grech
Semester
Winter

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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