Valix Finacc vol 1 Problem 1-15

Financial Accounting Volume 1 2008 Valix-Peralta
Chapter 1 Problem 1-15

1.       The cost of leasehold improvement should not be recorded as outright expense, but should be amortized as expense over the life of the improvement or life of the lease, whichever is shorter. This is in conformity with the systematic and rational allocation principle of expense recognition.

2.       The fact that the customer has not been seen for a year is not a controlling factor to write off the account. If the account is doubtful of collection, an allowance should be set up. It is only when there is proof of uncollectibility that the account should be written off.

3.       Advertising cost should be treated as outright expense, by reason of the uncertainty of the benefit that may be derived therefrom in the future, in conformity with “immediate recognition principle”.

4.       The balance of the cash surrender value should not be charged to loss. In reality, this is conceived as a prospective receivable if and when the policy is canceled because of excessive premium in the early stage of policy. The CSV should be classified as noncurrent investment.

5.       The cost of obsolete merchandise should not be included as part of inventory but charged to expense, as a conservative approach.

6.       The excess payment represents goodwill which should not be amortized but subject to impairment. Conservatism dictates that goodwill should be recognized when paid for. 

7.       The depreciation is not dependent on the amount of profit generated during the year. Depreciation is an allocation of cost and therefore should be provided regardless of the level of earnings.

8.       An entry should be made to recognize the inventory fire loss, and such loss should be treated as component of income.

9. Revenues and expenses of the canteen should be separated from the revenues and cost of regular business operations in order to present fairly the financial position and performance of the regular operations.

10.       The increase in value of land and building should not be taken up in the accounts. The use of revalued amount is permitted only when the revaluation is made by independent and expert appraiser. The expected sales price of P5,000,000 is not necessarily the revalued amount of the land and building.  Moreover, increase in value is not an income until the asset is sold.