Hillside had the following selected account balances as of December 31, year 1.

Accounts receivable $250,000

Notes receivable 75,000
Prepaid rent 168,000
Supplies 60,000
Inventory 420,000
Equipment (historical cost) 640,000
Accounts payable 176,000
Salaries payable 15,000
Accumulated depreciation 174,000

The following information was received from Hillside's accountant. Adjusting entries have not yet been
made.

1. It is estimated that $16,000 of accounts will not be collectible. A provision for uncollectible
accounts has never been made by Hillside.
2. Supplies remaining at the end of the year were $37,000.
3. Equipment is depreciated over 20 years with a $60,000 salvage value.
4. Accrued salaries at 12/31/Y1 were $37,500.
5. The note receivable was signed by the customer on November 1, year 1. It is a 6-month note
with an interest rate of 12%, with the principle and interest paid at maturity.
6. Rent was paid on August 1, year 1, for 24 months and recorded in a prepaid rent account.
7. Hillside does not elect to use the fair value option for any of its financial assets or liabilities.

Determine the adjustments necessary for December 31, and indicate the adjusted balances of the
selected accounts at December 31, year 1.

1. Accounts receivable (net)

2. Notes receivable
3. Prepaid rent
4. Supplies
5. Inventory
6. Equipment (historical cost)
7. Accounts payable
8. Salaries payable
9. Accumulated depreciation

Rationale:

1. $250,000 - $16,000 allowance for uncollectible accounts = $234,000

2. No change. Interest receivable is recorded in a separate account.

3. $168,000 - $35,000 = $133,000

4. Given in the problem.

5. No adjustments were made to inventory.

6. Equipment is at historical cost.

7. No change.

8. $15,000 + $37,500 = $52,500

9. $174,000 + $29,000 = $203,000

Indicate whether each of the following adjusting entries is an accrual or a deferral type entry.
Accrual/Deferral
1. Depreciation expense xx
Deferral
Accumulated deprecation xx
2. Interest receivable xx
Accrual
Interest revenue xx
3. Rent expense xx
Deferral
Prepaid rent xx
4. Unearned revenue xx
Deferral
Rent revenue xx
5. Wage expense xx
Accrual
Wages payable xx

Emco has the following transactions in year 1. Indicate the amount of revenue or expense recognized
in year 1, year 2, and year 3 for each of these items. You may show expense recognitions in
parentheses (xx). If no other amount is appropriate enter 0 (zero).
Amounts
to be
recognized
Year 1 Year 2 Year 3
1. Emco sells $5,000 of goods to a customer, FOB shipping 5000 0 0
point on 12/30/Y1.
2. Emco sells three pieces of equipment on a contract over a
three-year period. The sales price of each piece of equipment
is $10,000. Delivery of each piece of equipment is on 10000 10000 10000
February 10 of each year. In year 1, the customer paid a
$20,000 down payment, and paid $5,000 per year in year 2
and year 3. Collectibility is reasonably assured.
3. In 1/1/Y1, Emco pays $9,000 for a membership to
Wholesalers Association for a two-year membership in the (4500) (4500) 0
trade association.
4. On 6/1/Y1, Emco signs a contract for $20,000 for goods to
be sold on account. Payment is to be made in two installments
of $10,000 each on 12/1/Y2 and 12/1/Y3. The goods are 20000 0 0
delivered on 10/1/Y1. Collection is reasonably assured, and
the goods may not be returned.
5. Emco sells goods to a customer on July 1, year 1, for
$50,000. If the customer does not sell the goods to retail
customers by December 31, year 2, the goods can be returned 0 50000 0
to Emco. The customer sells the goods to retail customers on
October 1, year 2.

Rationale:

1. When goods are sold FOB shipping point, title passes at the time the goods are shipped.
Therefore, Emco may recognize revenue on 12/30/Y1 at the time the goods are shipped.

2. Revenue is recognized when earned and realizable. This sale is not complete until each
piece of equipment is delivered. Therefore, Emco should recognize $10,000 each year as the
equipment is delivered, regardless of payment terms.

3. Emco should match expenses to the year in which the benefits are received, which is over
the two-year period.

4. Because Emco delivered the goods in year 1, and collectibility is reasonably assured,
Emco should recognize all revenue in year 1.

5. Because there is a sale with a right of return, and the buyer may return the merchandise
if it is not sold to a retail customer, recognition should be delayed until the right of return
has expired.

FAC 5 provides guidance on measuring assets and liabilities. The following measurement methods are
available to measure assets and liabilities, as shown in the list below. Identify the appropriate
valuation method for each item.
Measurement methods
A. Historical cost or historical proceeds
B. Current cost
C. Current market value
D. Net realizable value or settlement rate
E. Present value of future cash flows
Account
1. Long-term receivables E
2. Available for sale securities C
3. Equipment A
4. Warranty obligations D
5. Short-term payables A
6. Accounts receivable D
7. Bonds payable, due in ten years E
 8. Trading securities C

This question consists of ten items that represent descriptions or definitions of the various elements of
the FASB's Statements of Financial Accounting Concepts. Select the best answer for each item from
the terms listed in A–L. A term may be used once, more than once, or not at all.
Terms
A. Recognition G. Gains
B. Comprehensive Income H. Net Income
C. Faithful representation I. Earnings
D. Revenues J. Realization
E. Predictive Value K. Replacement Cost
F. Comparability L. Current Market Value
1. Component of relevance. E
2. Increases in net assets from incidental or peripheral transactions
G
affecting an entity.
3. The process of converting noncash resources and rights into cash or
J
claims to cash.
4. Enhancing qualitative characteristic of relevanceand faithful
F
representation.
5. The process of formally recording an item in the financial
statements of an entity after it has met existing criteria and been A
subject to cost-benefit constraints and materiality thresholds.
6. All changes in net assets of an entity during a period except those
B
resulting from investments by owners and distributions to owners.
7. Inflows or other enhancements of assets of an entity or settlements
of its liabilities from delivering or producing goods, rendering
D
services, or other activities that constitute the entity's ongoing
operations.
8. The amount of cash, or its equivalent, that could be obtained by
L
selling an asset in orderly liquidation.
9. The quality of information that helps users to increase the likelihood
E
of correctly forecasting the outcome of past or present events.
10. A performance measure concerned primarily with cash-to-cash
I
cycles.

Rationale:

1. (E) SFAC 5 states that "Relevance is a primary qualitative characteristic. To be relevant,

information about an item must have feedback value or predictive value (or both) for users
and must be timely."

2. (G) SFAC 6 states that "Gains are increases in equity (net assets) from peripheral or
incidental transactions of an entity and from all other transactions and other events and
circumstances affecting the entity except those that result from revenues or investments by
owners."
3. (J) SFAC 5 states that "Revenues and gains are realized when products (goods or
services), merchandise, or other assets are exchanged for cash or claims to cash."

4. (F) SFAC 8 states that "Comparability, including consistency, is an enhancing quality that
interacts with relevance and faithful representation to contribute to the usefulness of
information."

5. (A) SFAC 5 states that "Recognition is the process of formally recording or incorporating
an item into the financial statements of an entity as an asset, liability, revenue, expense, or
the like." SFAC 5 continues the recognition concept by stating, "An item and information
about it should meet four fundamental recognition criteria to be recognized and should be
recognized when the criteria are met, subject to a cost-benefit constraint and a materiality
threshold."

6. (B) SFAC 5 states that "Comprehensive income is a broad measure of the effects of
transactions and other events on an entity, comprising all recognized changes in equity (net
assets) of the entity during a period from transactions and other events and circumstances
except those resulting from investments by owners and distributions to owners."

7. (D) SFAC 6 defines revenues as "inflows or other enhancements of assets of an entity or

settlements of its liabilities (or a combination of both) from delivering or producing goods,
rendering services, or other activities that constitute the entity's ongoing major or central
operations."

8. (L) SFAC 5 defines current market value as "the amount of cash, or its equivalent, that
could be obtained by selling an asset in orderly liquidation."

9. (E) Predictive value is the quality of information that helps users to increase the
likelihood of correctly forecasting the outcome of past or present events (SFAC 8).

10. (I) SFAC 5 states that "Earnings is a measure of performance during a period that is
concerned primarily with the extent to which asset inflows associated with cash-to-cash
cycles substantially completed (or completed) during the period exceed (or are less than)
asset outflows associated, directly or indirectly, with the same cycles."