CHAPTER 2
SOLUTIONS TO B EXERCISES
EXERCISE 2-1B (15–20 minutes)
(a) True.
(b) False – General-purpose financial reports helps users who lack the
ability to demand all the financial information they need from an entity
EXERCISE 2-2B (15–20 minutes)
(a) False – The fundamental qualitative characteristics that make accounting
information useful are relevance and faithful representation.
(b) False – Relevant information must also be material.
E2-3B (20–30 minutes)
(a)
Relevance.
(f)
Cost constraint.
(b)
Consistency.
(g)
Neutrality.
representation.
E2-4B (15–20 minutes)
(a)
Faithful representation.
(f)
Confirmatory value.
(d)
Relevance.
(i)
Timeliness.
E2-5B (15–20 minutes)
(a) Revenues, expenses.
(b) Distribution to owners
E2-6B (15–20 minutes)
(a)
5.
Measurement principle (fair value).
(b)
Going concern assumption.
(c)
7.
Expense recognition principle.
(d)
Economic entity assumption.
(e)
8.
Full disclosure principle.
Measurement principle (historical cost ).
(g)
Periodicity assumption.
Monetary unit assumption.
E2-7B (20–25 minutes)
(a)
(b)
(c)
(d)
(e)
(g)
(h)
(i)
(j)
Revenue recognition principle.
(k)
Expense recognition principle.
(l)
Expense recognition principle.
Periodicity assumption.
(n)
Measurement principle (historical cost ).
(o)
Economic entity assumption.
(p)
Materiality.
(q)
Expense recognition principle.
E2-8B (20 minutes)
(a) This event need not be disclosed in the financial statements. The amount of
monies involved is relatively small in relation to the net income of the
business and should not affect the fairness of the presentation of the
financial statements.
(b) According to GAAP, the basis upon which inventory amounts are stated
(c) Comparability requires that disclosure of changes in accounting principles
be made in the financial statements. To do otherwise would result in
financial statements that are misleading. Financial statements are more
useful if they can be compared with similar reports for prior years.
(d) The proper accounting for this situation is to report the equipment as an
(e) It is well established in accounting that revenues and cost of goods sold
E2-9B (15–20 minutes)
(a) Probably the company is too conservative in its accounting for this
transaction. The expense recognition principle indicates that expenses
(b) At the present time, accountants do not recognize price-level adjustments in
the accounts. Hence, it is misleading to deviate from the measurement
principle (historical cost) because conjecture or opinion can take place. It
(c) Most accounting methods are based on the assumption that the business
enterprise will have a long life. Acceptance of this assumption provides
(d) The measurement principle (historical cost) indicates that assets and
liabilities are accounted for on the basis of cost. If we were to select sales
E2-9B (Continued)
(e) This entry violates the economic entity assumption. This assumption in
(f) The answer to this question is the same as (d).
E2-10B (15–20 minutes)
(a) Assets should be recorded at the fair market value of what is given up or
the fair market value of what is received, whichever is more clearly
(b) The gain should be recognized at the point of sale. Deferral of the gain
should not be permitted, as the company has satisfied its performance
(c) It appears from the information that the sale should be recorded in 2015
instead of 2014. Regardless of whether the terms are f.o.b. shipping point or
(d) A gain should not be recognized until the inventory is sold. Accountants
follow the measurement principle (historical cost) and write-ups of assets
(e) Depreciation is an allocation of cost, not an attempt to value assets. As a
consequence, even if the value of the building is increasing, costs related