ACC 356 Concepts Part 1 Questions And Answers
Should we wait until all uncertainty is resolved to decide whether items meet the definition of assets or liabilities? ANS No. Degrees of uncertainty do not impact whether a transaction/event meets the definition of an element. Uncertainty has a role ...
ACC 356 Concepts Part 1 Questions And Answers
Should we wait until all uncertainty is resolved to decide whether items meet the definition of assets or liabilities?
ANS No. Degrees of uncertainty do not impact whether a transaction/event meets the definition of an element.
Uncertainty has a role in the recognition and measurement decisions.
Explain why cash meets the definition of an asset. ANS The answer to this question is very clearly that yes, cash
represents an asset but the key part here is to explain why (as you will see throughout the semester). Cash represents
an asset because the entity has the present right to use the cash, which provides an economic benefit to the entity.
Specifically, the entity can use the cash to purchase other resources/invest or settle liabilities and is able to restrict
others' access to the cash. Finally, the cash exists in the bank and is thus provides the entity the right at the balance
sheet date.
Explain why bank loans meet the definition of a liability. ANS Similar to above, loans are obviously a liability
but the key thing is to understand why. A bank loan is a liability because the entity has a present obligation at the
balance sheet date to transfer economic benefits (cash) to the bank to pay off the principal and interest associated
with the loan.
CwP, a global accounting firm, gives a $200,000 donation to the McCombs school. The money will be used to
improve the curriculum and fund student scholarships. CwP currently recruits at McCombs and wants to maintain a
good reputation and ensure an adequate supply of well-trained potential recruits. Does the donation meet the
definition of an asset for CwP? ANS Probably not. It is unlikely that the donation provides a present right to the
entity primarily because CwP cannot restrict others' access to the potential benefits (which are better trained
students). Other accounting firms, for example, can recruit the better-trained students. Without a right, the donation
does not meet the definition of an asset.
Tom Herman's contract calls for a bonus payment of $500,000 if he wins a bowl game. The Longhorns are
scheduled to play LSU in the Cotton Bowl on Jan 2, Year 2. As of December 31, Year 1, the Horns are a 7 point
favorite to win. Should the potential bonus payment be accrued as a liability? If the Horns are a 21 point favorite
does your answer change? ANS The issue here is what is the obligation for and when does it exist (i.e., when
does UT have a present obligation)? Is it an obligation to pay Herman if the game is won? If so, this obligation
exists at the signing of the contract and involves an uncertain payout for which the outcome of the game in year 2
simply serves to resolve that uncertainty. Or is it an obligation to pay the bonus once the outcome is known? In this
case, the obligation doesn't exist until the game is won in Year 2, so there is no present obligation in Year 1, and
there's no liability. The point spread here affects the probability of future payment, but has no bearing on the more
fundamental question as to whether a present obligation exists at the end of year 1. People could reach different
conclusions on this issue, so you should be comfortable understanding both sides of the argument.
(Multiple choice) Pear Company is a market leader in consumer electronics and has a distinctive logo (a pear) that is
a registered trademark. The logo is recognizable to consumers around the world. This logo and Pear's related brand
reputation:
a) Do not meet the definition of an asset because it is too uncertain whether these items will
yield economic benefits to Pear
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