300625

Question 1

After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by his branch. For Year 1, income for Cone’s branch was $160,000 before income taxes and Cone’s bonus. Cone’s bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Cone’s bonus for Year 1?

$32,000

$15,000

$25,000

$12,000

Answer 1

$12,000

Cone’s bonus for Year 1 is $12,000:

Bonus = 0.25 x ($160,000 - $100,000 - Bonus)
Bonus = 0.25 x ($60,000 - Bonus)
Bonus = $15,000 - (.25 x Bonus)
Bonus + (0.25 x Bonus) = $15,000
1.25 (125%) x Bonus = $15,000
Bonus = $15,000 / 1.25
Bonus = $12,000

Question 1

2273.01

Answer 1

Guidance for recognizing expenses and losses is as follows (SFAC 5.85):

a. Consumption of benefit: Expenses are generally recognized when an enterprise’s economic benefits are consumed in revenue-earning activities or otherwise.
b. Loss or lack of benefit: Expenses or losses are recognized if it becomes evident that previously recognized future economic benefits of assets have been reduced or eliminated, or that liabilities have been incurred or increased, without associated economic benefits.

Question 2

2273.02

Answer 2

Expenses are outflows of assets or incurrences of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations. Losses are decreases in net assets other than from expenses or withdrawals by owners.

Question 3

2273.03

Answer 3

Expenses are accrued (expensed) based on the matching principle. The matching principle states that the accrual basis of accounting correctly matches the revenue from the sale of goods with the historical cost of the inventory sold, the salesperson’s salary, and other applicable costs and expenses. Net income or loss for an accounting period is determined by the process of associating realized revenues with those expenses and expired costs necessary to generate them. This often requires estimates and allocations.

Question 4

2273.04

Answer 4

Following are some of the most common expenses and costs:

a. Cost of goods sold
b. Depreciation
c. Interest
d. Uncollectible accounts (i.e., bad debt)
e. Post-acquisition costs (i.e., maintenance and repairs)
f. Amortization and impairment