Required: For each statement below state if it is True or False . 1. Under a per
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Required: For each statement below state if it is True or False. 1. Under a perpetual inventory system, each time goods are purchased, the inventory account is transferred to sales revenue. Answer: 2. The buyer must include goods purchased FOB shipping point in its inventory account if the goods are still in transit. Answer: 3. The difference between the FIFO, LIFO, and average cost methods is that each of these methods of inventory costing makes a specific assumption about the flow of costs. Answer: 4. An example of a current liability is a note payable that is due in 2 years. Answer: 5. Sales taxes collected from customers should be recorded in a liability account until the cash is passed along to the taxing authority. Answer: 6. The proceeds from advance ticket sales for a concert to be held next month should be recorded as a current liability. Answer: 7. Warranty expenses result when a company sells products then estimates the units and cost per unit for repairs and replacements that may occur during the warranty period. Answer: 8. Contingent liabilities must be recorded in the accounting records if they are probable and the amount can be reasonably estimated. Answer: 9. Interest on a note payable can be calculated by multiplying the amount owed by the interest rate by the fraction of year that represents the time elapsed since borrowing. Answer: 10. If new equipment purchased in 2014 is reported on the balance sheet at December 31, 2014 as a long-term asset, there will be no related item on the 2014 income statement. Answer: 11. All intangible assets are subject to amortization. Answer: 12. A company determined that it had incorrectly estimated the useful life of equipment that it had purchased two years ago. It must now depreciate the asset’s remaining book value over the current and future accounting periods. Answer: 13. Costs incurred related to plant assets that are already in use are called revenue expenditures if the cost increases the useful life or the asset's productivity. Answer: 14. The reason some major intangible assets are not in the financial statements is because they cannot be measured. Answer: 15. Research and Development costs should be added to the cost of patents. Answer: Required: For each statement below state if it is True or False. 1. Under a perpetual inventory system, each time goods are purchased, the inventory account is transferred to sales revenue. Answer: 2. The buyer must include goods purchased FOB shipping point in its inventory account if the goods are still in transit. Answer: 3. The difference between the FIFO, LIFO, and average cost methods is that each of these methods of inventory costing makes a specific assumption about the flow of costs. Answer: 4. An example of a current liability is a note payable that is due in 2 years. Answer: 5. Sales taxes collected from customers should be recorded in a liability account until the cash is passed along to the taxing authority. Answer: 6. The proceeds from advance ticket sales for a concert to be held next month should be recorded as a current liability. Answer: 7. Warranty expenses result when a company sells products then estimates the units and cost per unit for repairs and replacements that may occur during the warranty period. Answer: 8. Contingent liabilities must be recorded in the accounting records if they are probable and the amount can be reasonably estimated. Answer: 9. Interest on a note payable can be calculated by multiplying the amount owed by the interest rate by the fraction of year that represents the time elapsed since borrowing. Answer: 10. If new equipment purchased in 2014 is reported on the balance sheet at December 31, 2014 as a long-term asset, there will be no related item on the 2014 income statement. Answer: 11. All intangible assets are subject to amortization. Answer: 12. A company determined that it had incorrectly estimated the useful life of equipment that it had purchased two years ago. It must now depreciate the asset’s remaining book value over the current and future accounting periods. Answer: 13. Costs incurred related to plant assets that are already in use are called revenue expenditures if the cost increases the useful life or the asset's productivity. Answer: 14. The reason some major intangible assets are not in the financial statements is because they cannot be measured. Answer: 15. Research and Development costs should be added to the cost of patents. Answer:Explanation / Answer
1) False, Under a perpetual inventory system, each time goods are purchased, the inventory account is debited and Accounts Payable is credited.
2) True, the buyer takes delivery of goods being shipped to it by a supplier once the goods leave the supplier's shipping dock. Since the buyer takes ownership at the point of departure from the supplier's shipping dock, the supplier should record a sale at that point.The buyer should record an increase in its inventory at the same point (since the buyer is undertaking the risks and rewards of ownership, which occurs at the point of departure from the supplier's shipping dock). Also, under FOB shipping point terms, the buyer is responsible for the cost of shipping the product to its facility.
3) True, The main difference between weighted average cost accounting, LIFO, and FIFO methods of accounting is the difference in which each method calculates inventory and cost of goods sold.
The weighted average cost method uses the average of the costs of the goods to assign costs. In other words, weighted average uses the formula: Total cost of items in inventory available for sale divided by total number of units available for sale.
In contrast, FIFO (first in, first out) accounting means that the costs assigned to goods are the costs for the first goods bought. In other words, the company assumes that the first goods sold are the oldest or the first goods bought. On the other hand, LIFO (last in first out) assumes that the last or latest items bought are the first items to be sold.
4) False, Current liabilities are a company's debts or obligations that are due within one year, appearing on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts. Essentially, these are bills that are due to creditors and suppliers within a short period of time.
5) True, the entry shall be as follows:-
At the time of collecting tax from the customer at the time of sale-
Debtor A/c Dr XXX
To Sales A/c Cr XXX
To Sales Tax Payable A/c Cr XXX
And at the time the sales tax is paid to the tax authority, the entry shall be as follows-
Sales Tax Payable A/c Dr XXX
To Cash A/c Cr XXX
6) True, Current liabilities are a company's debts or obligations that are due within one year, appearing on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.
7) True, Warranty expense is the cost that a business expects to or has already incurred for the repair or replacement of goods that it has sold. The total amount ofwarranty expense is limited by the warranty period that a business typically allows.
8) True, Record a contingent liability when it is probable that the loss will occur.
9) True, the formulae is
Interest = (Amount payable * Interest Rate per annum) * (Days elapsed in the year since taking loan / 365 Days)
10) True, since Profit/Loss A/c or Income statement as mentioned above will not contain expenses which are capital in nature, it only contains expenses of revenue nature. Thus purchase of long term asset shall not form a part of income statement.
11) False, Intangible assets other than goodwill may or may not be amortized depending on their useful lives to the entity: Assets with finite lives are amortized; assets with indefinite lives are not. Goodwill is not amortized. There is no arbitrary ceiling on the useful life of an amortized asset.
12) True, Useful life revision is accounted for prospectively: the change in the estimate is reported in the current and prospective periods. In other words, previously reported statements and opening balances do not need to be adjusted to reflect the change in the useful life estimate.
13) False, If such expenditure results in the increase in the life of the asset or productivity, it shall be a capital expenditure and not revenue expenditure.
14) False, The reason for the variable treatment of intangible assets is that the accounting standards mandate that a business cannot recognize any internally-generated intangible assets (with some exceptions), only acquired intangible assets. This means that any intangible assets listed on a balance sheet were most likely gained as part of the acquisition of another business, or they were purchased outright as individual assets.
15) False, research and development (R&D) costs required to develop the idea being patented cannot be included in the capitalized cost of a patent. These R&D costs are instead charged to expense as incurred; the basis for this treatment is that R&D is inherently risky, without assurance of future benefits, so it should not be considered an asset.
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