Other income recognition Interest revenue shall be recognized on 4 time pro) i that takes into account the effective yield the a Danis Royalties shall be recognized on an a I basie j with the substance of the relevant agreement. raanee Dividends shall be recognized as revenue when the hol + mn i : when the dividends are declared. " Installation fees are recognized as revenue over the period of installation by reference to the stage of completion. Subscription revenue should be recognized on a straight line basis over the subscription period, Admission fees are recognized as revenue when the event takes place, Tuition fees are recognized as revenue over the period in which tuition is provided. Definition of expense Expense is decrease in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that results ‘in decrease in equity, other than distribution to equity: participants. Expenses encompass losses as well as those expenses that arise in the course of the ordinary regular activities. Expenses that arise in the course of ordinary regular activities include, for example, cost of sales, wages and depreciation. Losses do not arise in the course of the ordinary regular activities and include losses resulting from disasters. . flood, storm eurge, tsunami Examples include losses from fire, from sisposal of and hurricane, as well as those arising Roncurrent assets. . 99 nen Peedi inciple Expense recognition princip ognition prinoiple means that tex "The basic expense r© neta ate are recog en incurred But the question is when are expenses incurred? sork provides that expenses tual Framewor! ate oe ae it is probable that a decrease in futon eeneiite benefits related to decrease in an asset ¢, ay iabili ed and that the decres, ‘ase in liability has occurr at geononic benefits can be measured reliably. ‘Thus, two conditions inust be present for the recognition y expenses: a. It is probable that a decrease in future economic benefit, has occurred as a result of a decrease in an asset or a increase in a liability. +b, The decrease in economic benefits can be measured reliably, Matching principle Actually, the expense recognition principle is the application of. the matching principle. The generation of revenue is not without any cost. There has Got to be some cost in earning a revenue. “There is no gain if there is no pain”, The matching principle requires that those costs and expense ineurred in earning a revenue shall be reported in the sa? period. The. matching principle has three applications, namely: a. Cause and effect association, b. Systematic and ‘rational allocation ¢. Immediate recognitionCause and effect association Under thie principle, the expense is + k , the expense is recognized whi revenue is already recognized. vie the ‘The reason ie the presumed direct association of the expense with specific items of income 'This is actually the “stri matching concept”. net This process, commonly referred to as the matching of cost with revenue, involves the simultaneous or combined. recognition of revenue and expenses that result directly and jointly from the same transactions or events. The best example is the cost of merchandise inventory. Such cost is considered as an asset in the meantime that the merchandise is on hand. When the merchandise is sold, the cost thereof is expensed in the form of “cost of goods sold” because at such time revenue may be recognized. Other examples include doubtful accounts, warranty expense and sales commissions. Systematic and rational allocation Under this principle, some costs are expensed by simply allocating them over the periods benefited. The reason for this principle is that the cost incurred will benefit future periods and that there is an absence of a direct or clear association of the expense with specific revenue. When economic’ benefits are expected to arise over several accounting periods and the association with income can only be broadly or indirectly determined, expenses are recognized . on the basis of systematic and allocation procedures. “Concrete examples include depreciation of property, plant and equipment, amortization of intangibles, and allocation of prepaid rent, insurance and other prepayments. 101Immediate recognition -ingiple, the cost incurred is expenseg rtainty of future economic han. «Meh, bly associating certain costs w; efit, Under this P because of unce diffieulty of relial revenue. th fue ‘An expense is recognized immediately: a, When an expenditure produces no future veo, . NOM; benefit. b, When cost incurred does not qualify or ceases to ‘als for recognition as an asset. ify Examples include officers’ salaries and most administratiy, expenses, advertising and most selling expenses, amount », settle lawsuit and worthless intangibles. Many losses, such as loss from disposal of building, loss fron sale of investments, and casualty loss, are immediately recognized because they are not directly related. to specifi revenue. Measurement of elements Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the statement of financial position and income statement. ‘There are four measurement bases or financial attributes namely: a. Historical cost b. Current cost c. Realizable value d, Present valueDefinition of terms Historical cost is the a: a. £18 ‘Mount of cash or c: . paid or the fair value of the considemting cat ade an asset at the time of acquisitian erent ean This is also known as "past purchase exchange price". Historical cost is the measurement basi mmo! i s nt basis mo: adopted in preparing the financial matemens mM b. cate oe sn ts meuane of cash or cash equivalent that wor e paid if the sam i soured currenthe fe or equivalent asset was ‘This ia also known as "current purchase exchange price". c. Realizable value is the amount of cash or cash equivalent that could currently be obtained by selling the asset in an orderly disposal. ‘This is also known as “current sale exchange price" . Present value is the discounted value of the future net cash inflows that the asset is expected to generate in the normal course of business. This is also known as "future exchang2 price". pe belongs to respective authors ea bpQUESTION! s 1. Define elements the elements direetly relate to y * Wie cameat of financial position? of financial statements, the elements directly related of financial performance? to 4, [Link] are measurement eat ss ie meant of "recognition" of the elements . " nancial statements? o 5. Define an asset. 6. Explain the asset recognition principle, 7. Explain future economic benefit. 8. What is the cost principle? 9. Define a liability. 10. Explain the liability recognition principle. 1. Define income. 12. Distinguish income, revenue and gain. 13. Explain the income recognition principle. 44, Explain the revenue recognition from i i nla gn m interest, royalties 16. apie the revenue recognition from installation fees subscription fees, admission fees and tuition fees. 16. Define expense, 17, Distinguish expenses and losses. belongs to respective authors b mn18, Explain the expense Tecognition principle. 19, What do you understand by the "matching principle? 20, What are the three applications of the matching principle? 91. Explain cause and effect Association principle 22. Explain systematic and rational allocation principle, 23, Explain immediate recognition princigle, hat is mi i i 24. wh iat easurement of elements of financial 25. Define historical cost, current cost, realizable value and present value. ‘al Accounting Books PHPROBLEMS i P| Problem 4-1 Multiple choice (ACP) 1. The elements, directly related to the Measureme; 7 Financial position ae ‘Aseet, liability and equity ae ‘Asset and lability b. and Labity . Income ant ¥ a ‘Asset, liability, equity, Y of financial position describe amounts of claims against resources income and expense 2. The elements resources and a: During a period a time ment in time . b. Ata moment 14 Grime and ot « moment in time e. During a period un a d. Neither during a period of time nor at a moment in time | / | 8. The elements directly related to the measurement of | financial performance are |_| | a. Income and expense \ b. Asset, lability and equity c. Asset and liability d. Income, expense and equity | 4. It is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. a. Asset b. Liability c. Equity d. Income 5. It is a present obligation of an entit isi ym past sean | the atenient of which is pected te oe F4 a benefits. anaty of resources embodying econowie a. Asset b. Liability ¢ Equity d. Expense belongs to respective authors b6. Tt is the residual interest in th e + Fi deducting all of the Habilides” on Ce meite atta a. Income b, Equity ¢, Retained earnings d. All of the choices match the definition 7. Itis a pean economic benefit during the accounting period related to an increase in ass i period nere et or a decrease in liability that results in increase in equity other than contribution from owners. a. Asset b. Liability c. Income d, Expenses 8. It is a decrease in economic benefit during the a: i wea a talibel to-¢ doorongn in aeot ov am incense a \ liability that results in decrease in equity other than { distribution to owners. . a. Asset b. Liability c. Income d. Expense 9, This arises in the course of ordinary regular activities of the entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. a. Income b, Revenue ¢. Profit d. Gain. 10, Which statement in relation to income is true? asses both revenue and gain. | a. Income encomp: a1 oth income and gain. . ' b, Revenue encompasses b income and revenue. e only. | c. Gain encompasses both d. Income encompasses revenurice (ACP) Problem 4-2 Multiple ch 1. An asset is recognized when It is probable that future 00! 9 can be measured Relinbly omic benefit will 4,, the entity. asset ‘ost or value of the Sila in b am entity obtains control of the nights associated economic benefit will fly, , the asset. a Peeeecbable that fate coon ageet the entity and the cost or je entity and measured rel 2. A liability is recognized when i le that an outflow of future economic bene a. Ibis probed ed to sette the obligation. fe b. The amount of the obligation can measured reliably. c. Itis probable that an outflow of future economic benef; will be required to settle an obligation and the amoun; ion can be measured reliably. of the obligati ~ 4. When the entity obtains control cf the obligation. 3. An income is recognized when a. It is probable that future economic benefit will flow ip the entity and the economic benefit can be measured reliably. b. It is possible that future economic benefit will flow to es oot and the economic benefit can be measured reliably. c,, The entity obtains control of the future economic benefit d. The future economic benefit can be measured reliably. 4. An expense is recognized when a i Hs probable that a decrease in future economic benefit b The seorenee in future economic benefit can be measured ¢. Itis probable that a decrease in futi i ure economic benefit pas, gocurred and the decrease in the future econo a anefit can be measured reliably. Hi is probable fat an increase in future economic beneft can be measured relied rae ~ft Problem 4-3 Multiple choice (AA) ich sta i h Minh Ip ement describes the revenue recognition a. Cash is received and the amount is materi \s he an t is jal. b. It is probable that future economic benefit will flow to the entity and the amount can be measured reliably. ¢. Production is complete and tees i fries ‘ere is an active market d. Cash is realized and Production is complete, 2. The revenue principle states that revenue shall be recognized at a point when a, Anexchange transaction has occurred and the earning process is essentially complete. b. An order for shipment of merchandise has-been received. ¢. Acontract between buyer and seller has been signed, d. The seller has shipped merchandise under terms that the customer need not pay until it is sold. 3. Generally, revenue is recognized a. At the paint of sale. | b. When cause and effect are associated, ¢. At the point of eash collection. d. At appropriate points throughout the operating cycle. 4. Which of the following is not an accepted basis for recognition of revenue? a | a. Passage of time Performance of service j c. Completion of percentage of @ project d. Upon signing of contract { 5. Normally; revenue is recognized a. When the customer order is received. b. When the customer order is accompanied by a a ¢. Only if the transaction will create an account receival d, When the title to the goods changes.Jeognized 6. Revenue may be recou™ i Je he point of se! ae production ; ‘At the end of production ‘All of the choices ™AY recognition be acceptable for Feveny, Boge 1. Which of the following is not @ URE when revenue may ” be recognized? a. At time of sale b. At on ot cash uring juction a re of hese are possible times of revenue recognition, &, Which of the following practices may not be an accepiakis deviation from recognizing revenue at the point of sale? a. Upon receipt of cash b. During production ¢. Upon receipt of order d. End of produetion 9, Which of the following represents the least desirabie choice for the recognition of revenue? a. Recognition of revenue during production b. Recognition of revenue when a sale occurs c. Recognition of revenue when cash is collected d. Recognition of revenue when production is completed 10. Revenue from an artistic performance is recognized onc? a. The audience register for the miine. b fel ee the concert ar old ‘ . e 8) recei ic d. The event takes ie eee a teiProblem 44 Muitiple choice (AICPA Adapted) 1. Revenue recognition conventionally refers to . The process of identi a Process of identifying transactions to be recorded nate enue in an accounting period. a b. ‘The process of measuring and relating revenue and expenses during a period. : ce, The earning pr ch gi A tseraioe. Process which gives rise to revenue a The | pronest ot identifying those transactions that result in an inflow of assets to the entity, 2. Which of the following in the most precise sense means the process of converting non i ee mrorens or conven aa cash resources and rights . Allocation Collection % | Recognition | . Realization perp by the term a, Unrecorded b. Unrealized c. Unrecognized a. Unallocated 4, The term recognized is synonymous with the term 3, Gains on assets unsold are identified, in a precise sense, | a. Recorded b. Reali ec. Matched d. Allocated 5. Which statement conforms to the realization concept? i spreciati aasigned to product unit. cost = | tb. uae ware in exchange for a note receivable ¢. Cash was collected on accounts receivable si dhs Product unit costa were assigned to cost of goods belongs to respective authors bpi cP) blem 4-5 Multiple choice (A Proble: tinoloes the stmutANeOUs OF com, 1. It ia the process the xpenses that result dit recognition of revepactions and other events. from the same t Matching of cost with oven ee f revenue with cost . Systematic and rane 4 Immediate recognition ected to arise over several peri, 2, When benefits re with income ean only be indiregt pests expenses are recognized on what basis? * _ Cause and effect association i Systematic and rational allocation c. Immediate recognition : d. Profit maximization 3, An expense is recognized immediately ‘When an expenditure produces 10 future benefit. When cost incurred ceases to qualify as an asset, When an expenditure produces future benefit. When an expenditure produces no future benefit and when cost incurred ceases to quelify as an asset. a. b. e d. 4. It is the process of reporting in the statement of financial position or income statement an element of financial statements. a. Recognition b. Allocation ¢. Realization d. Summarization 5. It is the process of determini : 8 ling the monetary amounts at which te elements of the financial statements ar recognized and carried in the financial statements. a. Measurement b. Recognition ¢. Presentation d. Recordingproblem 4-6 Multiple choice (IAA) * 1, Which measurement attribute wectice? is not currently used in a. Present value b. Net realizable value c. Current replacement cost d. Inflation-adjusted cost 2, Which financial attribute is v i the most relevant? generally considered to be a, Present value b, Current exit value c. Current cost d. Historical cost 3. It is the amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was acquired currently. a. Historical cost b, Current cost ¢, Realizable value d. Present value 4, Which term best describes assets recorded at the amount that represents the immediate purchase cost of an equivalent asset? a. Historical cost b. Realizable value c. Present value d. Current cost 5. Which term best describes the amount of cash or cash equivalents that could currently be obtained by selling ‘an ‘asset in an orderly di 2 a. Fair value # b, Realizable value é ¢. Residual value d. Value in use 7 113 Al rights ae Solow eanuintent Eee een nsencnaal icles to el al Pills}4.7 Multiple choice (AICPA Adaptegy following is BOF pense? mo Proble: a theoretical basi 1. Which of the allocation of 31 tion . a. Immediate recogni! } allocation tic and rations! © b. Systemnd effect association c, Cause and effect, d, Profit maximization ably associated with space 2. Costs that can be ent product should be 5Pecitiy revenue but not wit is ensed in the period incurred b ae to the specific product based on the thy Sroduct processing time .stimate of-the Pt s . Exponsed in the period in which the related reven,. is recognize: . d. Capitalized and then amortized over a reasonabj: period 3, Which of the following is an example of the cause ang effect association principle? a. Sales commission b. Allocation of insurance cost c. Depreciation of property, plant and equipment d. Officers' salaries 4, Which of the following is an application of the systemati and rational allocation principle? ha a, Doubtful accounts b. Research and development cost c. Warranty cost d. Amortization of intangible asset 5. Which of the following would i H roveneon tact than sso fe oo a. Goodwill b. Cost of goods sold c. Sales commission a. Warranty cost Eco ie hatha belongs to respective authors b