PART 1

First, the practice of deferring expenses is unethical and is disallowed by the

Securities and Exchange Commission. This means that if he was to be caught
doing so, he would risk losing his job and or/ even a jail term. Again deferring
of expenses into the future is just postponing a problem instead of solving it.
By deferring expenses into a future period, he affects the future profits that
would be reported which would lead to the same problem, reporting a loss
that he is trying to avoid. Therefore, it would be better if the manager
reported the expenses in the period in which they are supposed to be
reported according to the matching accrual principle and then investigate
the cause for the lack of profitability and work on solving the causes to
enhance future and sustainable profitability for the company. This would lead
to better performance in the future without having to compromise the
integrity of the company and the manager.

PART 2
QUESTION 1
Dr

Salaries Expense

Cr

Absent days Payable

(To recognize accrued absenteeism pay)

Question 2
Post-employment benefits are payments made to the employee after his
employment is terminated before his retirement time. These payments may
include, retraining costs and education costs for a given period.

Question 3
DETAIL
weeks earnings
less:
FICA
federal income tax

45.9
30

withholding
state income tax

16

withholding
voluntary

40

$
600

withholding
Net pay for the

(131.9)
468.1

week

Question 4
The tax is classified as a Liability representing the amount payable to the
state or federal government. They are specifically recorded as sales tax
payable, which is a liability account.
Question 5
The reasons for the difference include

Reported income tax expense reflects the income taxes attributable to

income earned during the year, whether paid during that year or not.

Income tax expense is based on reported financial accounting income,

whereas the amount of cash paid for income taxes is based on the
applicable tax laws.

Differences between the financial accounting standards and the tax

laws may create deferred tax assets and liabilities.

Question 6
Environmental liabilities
Question 7
A cost should be recorded as an asset whenever it has been incurred in
relation to something that will yield benefit for the organization in future.
Question 8
These are those revenues and expenses that are not from the operating
activities of the business. They are revenues resulting from activities such as
investing. They may include rental income, share of profit of an associate,
dividend income, interest expense relating to investment among others.
Question 9
Revenue

456000

Expenses

(392000)

Profit

64000

EPS = EARNINGS/SHARES OUTSTANDING

64000/10000
EPS = $6.4

Question 10
Contingencies are uncertain circumstance involving a potential gain or loss
that will not be resolved until some future event occurs. Disclosure for a
contingency depends upon the assessed outcome. Recognizing contingent
gains is, in most cases, inappropriate. The accounting for contingent
liabilities depends on the expected likelihood of the future event occurring
causing the contingent liability.

PART 3
QUESTION 1
Accounting for payroll is made complex by the diversity of entries required
compared to other current liabilities. At the initial stage the salary expense is
debited and salary payable credited, however not all of the amount recorded
as the salary expense is paid out to the employee as the organization is
required to withhold some money from the employee and remit to the state
or federal government. Again, matching principle requires that the expense
associated with the compensated absence be accounted for in the period in
which the employee earns it. Accounting for compensated absences is
similar to accounting for bad debts. While a company could wait until the
sick days are taken in order to know exactly what they will cost, this might
take years. Rather than wait to know the exact expense, companies
estimate. This farther complicates the accounting for payroll.

Question 2
Research and development covers a wide range of activities. However, there
are three basic classifications under research and development namely: pure
research, applied research and development. The FASB has provided
guidelines on some of the pertinent issues such as cost to be attributed to
research and development, what is comprises of research and development
as well as how to account and report such costs. The costs to be associated
with research and development include materials, equipment and facilities;
personnel salaries, wages and other related expenses; intangibles such as
licenses and rights purchased from others; contract services and indirect
costs. The basic rule is that all costs of development and research should be
charged to expense account when incurred. In reporting, disclosure of all
research and development costs charged to expenses for each period is
required for each year the financial statements are presented. In exceptional
circumstances

where

research

and

development

costs

are

deferred,

additional disclosure is required in the notes for the following:

accounting policy, including the basis for amortization

Total research and development costs incurred in each period an
income statement is presented and the amount of those costs that
have been capitalized or deferred for each period.

Question 3
The reason behind the different accounting treatment for costs incurred in
relation to advertising is the matching accrual principle, which requires that
revenues be matched with the expenses incurred in earning such revenues.

For this reason, some advertising expenditure may only relate to sales for a
certain period and thus they are expensed in that period to be charged
against sales revenue earned in that period. In such a case, it is right for XYZ
Corporation to expense such an advertisement cost. On the other hand,
some advertising expenditure may be incurred in relation to an aspect of
advertising whose benefits will accrue over a number of accounting periods.
It then follows that the expenditure on such will have to be spread over or
amortized over the accounting periods for which it will continue to yield
benefit, sales, for XYZ. This is in line with the matching accrual principle.
Therefore, in such a case, the advertising expenditure will be recorded as an
asset and depreciated over its useful life to apportion the expenditure to the
various accounting periods the expense generates revenues.

Question 4
A pension is cash compensation received by an employee after that
employee has retired. Pension expense has three components namely:

interest cost
service cost
return on pension fund assets

The three are netted against one another to yield a single amount reported
on the income statement.
Pension-related interest costthis cost is the increase in the pension
obligation resulting from interest on the unpaid obligation.
Service costthe amount of a companys pension obligation increases each
year as employees work and earn more benefits. This increase is an expense
associated with work done during the year.

Return on pension fund assetsthe cost of a companys pension plan is

partially offset by the return that the company earns on the pension fund
assets.

Question 5
The primary reason the company would want to offer stock options instead of
paying cash to employees especially those in top management positions is to
align the objectives of the management with those of shareholders
eliminating

the

conflict

of

interest

inherent

in

the

shareholder

vs.

management relationship. The interest of the management is to maximize

their earnings while shareholders primary objective is to maximize the value
of their shares to increase their wealth. This two conflict in that if
management

increase

their

salaries,

this

will

reduce

the

amount

distributable to shareholders as well as the earning per share which will

affect the value of the shares negatively. To eliminate this conflict, the
company may tie the interests of shareholders and management together
through use of share options. This works as the management will work hard
to improve the value of the shares to make maximum gain from the
difference between the option price and the exercise price. This will in turn
be good for shareholders as the increase in value of shares increases their
wealth.
On the other hand an employee would want to take a share option instead of
asking for cash compensation for a number of reasons one being the share
option rewards the effort of the employee accordingly in that by working
hard and improving the value of the company, the value of the companys
shares goes up leaving him a substantial margin.

Question 6
DETAIL
salaries payable
FICA taxes payable

$
59647
6503

employer
federal unemployment

720

taxes payable
state unemployment taxes

2380

payable
salaries expense

69250

Question 7
DETAIL
current price
option price
margin
total benefit (1000*18)

$
58
-40
18
18000

Question 8
The journal entry when an employee is actually terminated:
Dr

Salaries Expense $2400000

Cr

benefits payable $2400000

(To record postemployment benefits for laid-off employees)