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DP 3–1

14 August, 2015 - 17:32
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Net income over a fiscal year is determined in accordance with the matching concept.

Required: For each of the following independent situations, indicate how you think the transaction should be recorded in the corporation. Provide reasons for your answers.

  1. An advertizing expenditure of $100,000 is made on the first day of the current fiscal year. The company’s advertizing agency estimates that three-fourths of the expected increase in sales will take place this fiscal year and one-fourth will occur next year.
  2. The company sustained a fire loss this period of $180,000 in excess of insurance proceeds.
  3. Research outlays amounted to $480,000 this year. These resulted in a new production technique that is in the process of being patented. It will be introduced into the company’s manufacturing processes in the next fiscal year.
  4. A machine was purchased for $10,000. It is expected to have a 10-year life. Each period was expected to benefit equally from the machine’s output. In the first year, the machine operated according to expectations. However, the machine was idle in the second fiscal year because of a recession.
  5. At the end of the fiscal year, salaries and wages for services performed were unpaid in the amount of $25,000.
  6. The company is facing a lawsuit. The company’s lawyers cannot predict the outcome of the case with certainty, but indicate the damages could be as high as $400,000.
  7. At the end of the period, accounts receivable from sales to customers amounted to $190,000. Based on past experience, it is estimated that $6,000 of this amount will have to be written off as uncollectible.
  8. Pensions will be paid to workers still employed by the company at the time of their retirement. Estimated pension expense for employees applicable to this fiscal year is $95,000.
  9. A bill for property taxes will not be received until the beginning of fiscal year. It is expected that the property taxes will amount to $30,000, of which three-fourths applies to the current year.
  10. A fire insurance premium of $3,000 was paid on the first day of the current fiscal year. The premium covers the current year plus the next two fiscal years.
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