CHAPTER 1
CA 1-5

(a) One of the committees that the AICPA established prior to the establishment of the FASB was the Committee on Accounting Procedures (CAP). The CAP, during its existence from 1939 to 1959, issued 51 Accounting Research Bulletins (ARB). In 1959, the AICPA created the Accounting Prin-ciples Board (APB) to replace the CAP. Before being replaced by the FASB, the APB released 31 official pronouncements, called APB Opinions.

(b) Although the ARBs issued by the CAP helped to narrow the range of alternative practices to some extent, the CAP’s problem-by-problem approach failed to provide the well-defined, structured body of accounting principles that was both needed and desired. As a result, the CAP was replaced by the APB.

The APB had more authority and responsibility than did the CAP. Unfortunately, the APB was beleaguered throughout its 14-year existence. It came under fire early, charged with lack of produc¬tivity and failing to act promptly to correct alleged accounting abuses. The APB also met a lot of industry and CPA firm opposition and occasional governmental interference when tackling numerous thorny accounting issues. In fear of governmental rule making, the accounting profession investigated the ineffectiveness of the APB and replaced it with the FASB.

Learning from prior experiences, the FASB has several significant differences from the APB. The FASB has: (1) smaller membership, (2) full-time, compensated membership, (3) greater autonomy, (4) increased independence, and (5) broader representation. In addition, the FASB has its own research staff and relies on the expertise of various task force groups formed for various projects. These features form the bases for the expectations of success and support from the public. In addition, the due process taken by the FASB in establishing financial accounting standards gives interested persons ample opportunity to make their views known. Thus, the FASB is responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession.

(c) The AICPA has supplemented the FASB’s efforts in the present standard-setting environment. The issue papers, which are prepared by the Accounting Standards Executive Committee (AcSEC), identify current financial reporting problems for specific industries and present alternative treat-ments of the issue. These papers provide the FASB with an early warning device to insure timely issuance of FASB standards, Interpretations, and Staff Positions. In situations where the FASB avoids the subject of an issue paper, AcSEC may issue a Statement of Position to provide guidance for the reporting issue. AcSEC also issues Practice Bulletins which indicate how the AICPA believes a given transaction should be reported.

Recently, the role of the AICPA in standard-setting has diminished. The FASB and the AICPA agreed, that after a transition period, the AICPA and AcSEC no longer will issue authoritative accounting guidance for public companies.




CA 1-6

(a) The Financial Accounting Foundation (FAF) is the sponsoring organization of the FASB. The FAF selects the members of the FASB and its Advisory Council, funds their activities, and generally oversees the FASB’s activities.

The FASB follows a due process in establishing a typical FASB Statement of Financial Accounting Standards. The following steps are usually taken: (1) A topic or project is identified and placed on the Board’s agenda. (2) A task force of experts from various sectors is assembled to define problems, issues, and alternatives related to the topic. (3) Research and analysis are conducted by the FASB technical staff. (4) A preliminary views document is drafted and released. (5) A public hearing is often held, usually 60 days after the release of the preliminary views. (6) The Board analyzes and evaluates the public response. (7) The Board deliberates on the issues and prepares an exposure draft for release. (8) After a 30-day (minimum) exposure period for public comment, the Board evaluates all of the responses received. (9) A committee studies the exposure draft in relation to the public responses, reevaluates its position, and revises the draft if necessary. (10) The full Board gives the revised draft final consideration and votes on issuance of a Standards Statement. The passage of a new accounting standard in the form of an FASB Statement requires the support of five of the seven Board members.

(b) The FASB issues three major types of pronouncements: Standards and Interpretations, Financial Accounting Concepts, and Technical Bulletins. Financial accounting standards issued by the FASB are considered GAAP. In addition, the FASB also issues interpretations that represent modifications or extensions of existing standards and APB Opinions. These interpretations have the same authority as standards and APB Opinions in guiding current accounting practices.

The Statements of Financial Accounting Concepts (SFAC) help the FASB to avoid the “problem-by-problem approach.” These statements set forth fundamental objectives and concepts that the Board will use in developing future standards of financial accounting and reporting. They
are intended to form a cohesive set of interrelated concepts, a body of theory or a conceptual framework, that will serve as tools for solving existing and emerging problems in a consistent, sound manner.

The FASB may issue a technical bulletin when there is a need for guidelines on implementing or applying FASB Standards or Interpretations, APB Opinions, Accounting Research Bulletins, or emerging issues. A technical bulletin is issued only when (1) it is not expected to cause a major change in accounting practice for a number of enterprises, (2) its cost of implementation is low, and (3) the guidance provided by the bulletin does not conflict with any broad fundamental accounting principle.

In addition, the FASB’s Emerging Issues Task Force (EITF) issues statements to provide guidance on how to account for new and unusual financial transactions that have the potential for creating diversity in reporting practices. The EITF identifies controversial accounting problems as they arise and determines whether they can be quickly resolved or whether the FASB should become involved in solving them. In essence, it becomes a “problem filter” for the FASB. Thus, it is hoped that the FASB will be able to work on more pervasive long-term problems, while the EITF deals with short-term emerging issues.



CA 1-10

1. (b), (e)
2. (a)
3. (c)
4. (d)

CA 1-11

1. (d)
2. (f)
3. (c)
4. (e)
5. (a)
6. (b)




























CHAPTER 2

BRIEF EXERCISE 2-3

(a) Equity
(b) Revenues
(c) Equity
(d) Assets
(e) Expenses
(f) Losses
(g) Liabilities
(h) Distributions to owners
(i) Gains
(j) Investments by owners


BRIEF EXERCISE 2-4

(a) Periodicity
(b) Monetary unit
(c) Going concern
(d) Economic entity

BRIEF EXERCISE 2-5

(a) Revenue recognition
(b) Expense recognition
(c) Full disclosure
(d) Historical cost




 
EXERCISE 2-3 (15–20 minutes)

(a) Gains, losses.
(b) Liabilities.
(c) Investments by owners, comprehensive income.
(also possible would be revenues and gains).
(d) Distributions to owners.
(Note to instructor: net effect is to reduce equity and assets).
(e) Comprehensive income.
(also possible would be revenues and gains).
(f) Assets.
(g) Comprehensive income.
(h) Revenues, expenses.
(i) Equity.
(j) Revenues.
(k) Distributions to owners.
(l) Comprehensive income.



















CHAPTER 3

EXERCISE 3-6 (10–15 minutes)

1. Accounts Receivable 750
Service Revenue 750

2. Utilities Expense 520
Utilities Payable 520

3. Depreciation Expense 400
Accumulated Depreciation—Dental Equipment 400

Interest Expense 500
Interest Payable 500

4. Insurance Expense ($15,000 X 1/12) 1,250
Prepaid Insurance 1,250

5. Supplies Expense ($1,600 – $400) 1,200
Supplies 1,200


EXERCISE 3-9 (15–20 minutes)

(a) 10/15 Salaries Expense 800
Cash 800
(To record payment of October 15
payroll)




10/17 Accounts Receivable 2,100
Service Revenue 2,100
(To record revenue for services
performed for which payment has
not yet been received)

10/20 Cash 650
Unearned Service Revenue 650
(To record receipt of cash for
services not yet performed)

(b) 10/31 Supplies Expense 470
Supplies 470
(To record the use of supplies during
October)

10/31 Accounts Receivable 1,650
Service Revenue 1,650
(To record revenue for services
performed for which payment
has not yet been received)

10/31 Salaries Expense 600
Salaries Payable 600
(To record liability for accrued payroll)

10/31 Unearned Service Revenue 400
Service Revenue 400
(To reduce the Unearned Service
Revenue account for service that
has been performed)





EXERCISE 3-11 (20–25 Minutes)

(a) CAVAMANLIS CO.
Income Statement
For the Year Ended December 31, 2010
Revenues
Service revenue $12,590
Expenses
Salaries expense $6,840
Rent expense 2,760
Depreciation expense 145
Interest expense 83 9,828
Net Income $ 2,762


(b) CAVAMANLIS CO.
Statement of Retained Earnings
For the Year Ended December 31, 2010
Retained earnings, January 1 $11,310
Add: Net income 2,762
Less: Dividends 3,000
Retained earnings, December 31 $11,072


 

(c) CAVAMANLIS CO.
Balance Sheet
December 31, 2010
Assets
Current Assets
Cash $18,972
Accounts receivable 6,920
Prepaid rent 2,280
Total current assets $28,172
Property, plant, and equipment
Equipment 18,050
Less: Accumulated depreciation (4,895) 13,155
Total assets $41,327

Liabilities and Stockholders’ Equity
Current liabilities
Notes payable $ 5,700
Accounts payable 4,472
Interest payable 83
Total current liabilities 10,255
Stockholders’ equity
Common Stock $20,000
Retained Earnings 11,072* 31,072
Total liabilities and stockholders’ equity $41,327

*Beg. Balance + Net Income – Dividends = Ending Balance
$11,310 + $2,762 – $3,000 = $11,072


EXERCISE 3-14 (10–15 minutes)

Sales 340,000
Sales Returns and Allowances 13,000
Sales Discounts 8,000
Income Summary 319,000

Income Summary 302,000
Cost of Goods Sold 202,000
Freight-out 7,000
Insurance Expense 12,000
Rent Expense 20,000
Salary Expense 61,000

Income Summary 17,000
Retained Earnings 17,000

EXERCISE 3-15 (10–15 minutes)

(a) $5,000 ($90,000 – $85,000) (d) $95,000 ($5,000 + $90,000)
(b) $29,000 ($85,000 – $56,000) (e) $52,000 ($90,000 – $38,000)
(c) $14,000 ($29,000 – $15,000)


EXERCISE 3-16 (10–15 minutes)

Sales 390,000
Cost of Goods Sold 235,700
Sales Returns and Allowances 12,000
Sales Discounts 15,000
Selling Expenses 16,000
Administrative Expenses 38,000
Income Tax Expense 30,000
Income Summary 43,300

(or)

Sales 390,000
Income Summary 390,000

Income Summary 346,700
Cost of Goods Sold 235,700
Sales Returns and Allowances 12,000
Sales Discounts 15,000
Selling Expenses 16,000
Administrative Expenses 38,000
Income Tax Expense 30,000

Income Summary 43,300
Retained Earnings 43,300

Retained Earnings 18,000
Dividends 18,000













CHAPTER 4

EXERCISE 4-2 (25–35 minutes)

(a) Total net revenue:
Sales $400,000
Less: Sales discounts $ 7,800
Sales returns 12,400 20,200
Net sales 379,800
Dividend revenue 71,000
Rental revenue 6,500
Total net revenue $457,300

(b) Net income:
Total net revenue (from a) $457,300
Expenses:
Cost of goods sold $184,400
Selling expenses 99,400
Administrative expenses 82,500
Interest expense 12,700
Total expenses 379,000
Income before income tax 78,300
Income tax 26,600
Net income $ 51,700

(c) Dividends declared:
Ending retained earnings $134,000
Beginning retained earnings 114,400
Net increase 19,600
Less: Net income (from (b)) 51,700
Dividends declared $ 32,100


ALTERNATE SOLUTION (for (c))

Beginning retained earnings $114,400
Add: Net income 51,700
166,100
Less: Dividends declared ?
Ending retained earnings $134,000

Dividends declared must be $32,100
($166,100 – $134,000)

EXERCISE 4-4 (30–35 minutes)

(a) Multiple-Step Form
WEBSTER COMPANY
Income Statement
For the Year Ended December 31, 2010
(In thousands, except earnings per share)
Sales $96,500
Cost of goods sold 63,570
Gross profit 32,930

Operating Expenses
Selling expenses
Sales commissions $7,980
Depr. of sales equipment 6,480
Transportation-out 2,690 $17,150
Administrative expenses
Officers’ salaries 4,900
Depr. of office furn. and equip. 3,960 8,860 26,010
Income from operations 6,920

Other Revenues and Gains
Rental revenue 17,230
24,150
Other Expenses and Losses
Interest expense 1,860

Income before income tax 22,290
Income tax 7,580
Net income $14,710

Earnings per share ($14,710 ÷ 40,550) $.36

(b) Single-Step Form
WEBSTER COMPANY
Income Statement
For the Year Ended December 31, 2010
(In thousands, except earnings per share)
Revenues
Sales $ 96,500
Rental revenue 17,230
Total revenues 113,730

Expenses
Cost of goods sold 63,570
Selling expenses 17,150
Administrative expenses 8,860
Interest expense 1,860
Total expenses 91,440

Income before income tax 22,290
Income tax 7,580
Net income $ 14,710

Earnings per share $0.36

Note: An alternative income statement format for the single-step form is to show income tax as part of expenses, and not as a separate item.

(c) Single-step:
1. Simplicity and conciseness.
2. Probably better understood by users.
3. Emphasis on total costs and expenses and net income.
4. Does not imply priority of one revenue or expense over another.

Multiple-step:
1. Provides more information through segregation of operating and nonoperating items.
2. Expenses are matched with related revenue.

Note to instructor: Students’ answers will vary due to the nature of the question; i.e., it asks for an opinion. However, the discussion supporting the answer should include the above points.







EXERCISE 4-5 (30–35 minutes)

PARNEVIK CORP.
Income Statement
For the Year Ended December 31, 2010
Sales Revenue
Sales $1,280,000
Less: Sales returns and allowances $150,000
Sales discounts 45,000 195,000
Net sales revenue 1,085,000
Cost of goods sold 621,000
Gross profit 464,000

Operating Expenses
Selling expenses 194,000
Admin. and general expenses 97,000 291,000
Income from operations 173,000

Other Revenues and Gains
Interest revenue 86,000
259,000
Other Expenses and Losses
Interest expense 60,000

Income before tax and extraordinary item 199,000
Income tax ($199,000 X .34) 67,660
Income before extraordinary item 131,340
Extraordinary item—loss from earthquake damage 120,000
Less: Applicable tax reduction ($120,000 X .34) 40,800 79,200
Net income $ 52,140

Per share of common stock:
Income before extraordinary item
 ($131,340 ÷ 100,000)

$1.31*
Extraordinary item (net of tax) (0.79)
Net income ($52,140 ÷ 100,000) $0.52

*Rounded

EXERCISE 4-12 (15–20 minutes)

Net income:
Income from continuing operations
before income tax
$21,650,000
Income tax (35% X $21,650,000) 7,577,500
Income from continuing operations 14,072,500
Discontinued operations
Loss before income tax $3,225,000
Less: Applicable income tax (35%) 1,128,750 2,096,250
Net income $11,976,250

Preferred dividends declared: $ 860,000

Weighted average common shares outstanding 4,000,000

Earnings per share
Income from continuing operations $3.30*
Discontinued operations, net of tax (0.52)**
Net income $2.78***

*($14,072,500 – $860,000) ÷ 4,000,000. (Rounded)
**$2,096,250 ÷ 4,000,000. (Rounded)
***($11,976,250 – $860,000) ÷ 4,000,000.

EXERCISE 4-13 (15–20 minutes)

(a) 2010
Income before income tax $460,000
Income tax (35%) 161,000
Net Income $299,000

(b) Cumulative effect for years prior to 2010:

Year Weighted
Average FIFO Difference Tax Rate
(35%) Net Effect
2008 $370,000 $395,000 $25,000
2009 390,000 420,000 30,000
Total $55,000 $19,250 $35,750

(c) 2010 2009 2008
Income before income tax $460,000 $420,000 $395,000
Income tax (35%) 161,000 147,000 138,250
Net income $299,000 $273,000 $256,750