Question

1*What is SEC, in what way is it related to the establishment of accounting standards and how can it be linked to FASB? How has your role evolved over the years?

2*What is the purpose of the closing process?

3*Archie Co. purchased a framing machine for $45,000 on January 1, 2013. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

a. Using the straight-line method, depreciation for 2013 and book value at December 31, 2013, would be:

b. Using the double-declining balance method, depreciation for 2013 and book value at December 31, 2013, would be:

c. Using the sum-of-the-years'-digits method, depreciation for 2013 and book value at December 31, 2013, would be:

4* When you prepare the current assets section of the balance sheet under GAAP you see that two of the balance sheets of the bank accounts are negative. Where would you look to determine how these balances should be reported?

a*Rules and procedures of the American Banking Association

b*FASB coding system

c*IFRS pronouncements since negative balances are currently passive

d*None of the above since the balance sheets should be grouped in the balance sheet

5. Which of the following is not one of the steps for the ethical decision analysis model:

a*Identify the consequences of each possible course of action

b*determine the facts within the situation.

c*Consult with the review board (ethics review board) of AICPA

Answer 1

1. ans

S.E.C is U.S Securities and Exchange Commisision which is the independent agency of the united states federal government and regulatory body constituted in 1934. SEC holds primary responsibility for enforcing the federal securities laws, proposing securities rules, and regulating the securities industry, the nation's stock and options exchanges, and other activities and organizations, including the electronic securities markets in the United States.

The main role of SEC was to set accounting and reporting standards for all companies whose securities were exchanged publicly. SEC was given both the power and responsibilityto establish the accounting standards, however, it delegated the responsibility to private sectorbut retained the power to oversee the setting of acco8nting standards. If SEC disagrees withany standards made by the private sector, such standards cannot be amended, they must be revised as SEC has got the final say.

The FASB is an independent organization that creates financial reporting standards for public and governmental organizations. Its role is to ensure that companies report financial information in a clear and ethical way, and that accounting practices are consistent. This ensures that anyone reading a financial report can understand what information is given, what is meant by various terms and how financial operations are functioning.

2. ans.

The accounting closing process, also called closing the books, is the steps required to prepare accounts for financial statement preparation and the start of the next accounting period. The closing process consists of steps to transfer temporary account balances to permanent accountsand make the general ledger ready for the next accounting period.

The closing process consists of three main steps:

1. Identify temporary accounts that need to be closed.
2. Record closing entries.
3. Prepare the post closing trial balance.

Since income statement accounts record current year activity, they must be zeroed out or closed at the end of each accounting period. This way they will have a zero balance for the start of the next accounting period and only current balances will exist in these accounts. In order to achieve this, closing entries must be made to transfer the ending income statement balances to balance sheet accounts

For Example:

At the end of each year, the revenue and expense account balances are transferred to the income summary account. This way all of the revenue and expense accounts will have a zero balance at the end of the year and will start the next year fresh with no prior activity.

The income summary account balance is then transferred to the retained earnings or capital accounts depending on what type of entity the business is.

After the closing entries have been made and all of the temporary accounts have been closed, a post closing trial balance is prepared. This is a listing of all the accounts with balances that will carry forward to the next accounting period. Since the income statement accounts don’t have balances anymore, you can think of this as the opening balance sheet for the next accounting period.

3. ans

Opening cost of the machine= $ 45000

Residual value = $ 5000

useful life of the machine = 4 years

a. Straight line method

Depreciation for 2013 = (original cost - residula life)/ useful life

=($ 45000-$ 5000)/4

= $ 10000

Book value at December 31, 2013 = opening cost - depreciation

= $ 10000

b. DOuble declining balance method:

Depreciation rate as per straight line = depreciaton *100/( cost of the asset- residual value)

= $ 10000*100/$45000-$5000

= 10%

Depreciation rate as per double declining balance method= 2 * 10% = 20 %

Depreciation for 2013 = cost of the asset * depreciation rate as above  

= $ 45000*20% = $ 9000

Book value at December 31, 2013 = opening cost - depreciation

= $ 45000- $ 9000

= $36000

c. ans. sum of digits method:

Sum of the Years' Digits = 1 + 2 + 3 + 4 = 4(4 + 1) ÷ 2 = 10

Depreciable Base = $45,000 − $5,000 = $40,000

Year	Depreciable Base	Depreciation Factor	Depreciation Expense		Accumulated Depreciation
1	$40,000	4/10	4/10 × 40,000 =	16,000	$16,000
2	$40,000	3/10	3/10 × 40,000 =	12,000	$28,000
3	$40,000	2/10	2/10 × 40,000 =	8,000	$36,000
4	$40,000	1/10	1/10 × 40,000 =	4,000	$40,000

  Book value at December 31, 2013 = opening cost - depreciation

= $ 45000- $ 16000

= $29000