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# REHAN NABI SIDDIQUI

## Bundlemaze Hotel Inc.

Unadjusted Trial Balance March 31st 2012 DR CR Cash \$ 155,650,090 Accounts Receivable \$ 8,850,000 Unexpired Insurance \$ 48,000 Machinery and Elevators \$ 1,050,000 Office Supplies \$ 39,900 Prepaid Advertisement \$ 15,000 Building \$ 38,983,000 Revenue Earned \$ 1,890 Accumulated Depreciation building \$ 60,570,361 Accounts Payable \$ 17,000 Notes Payable \$ 140,031,200 Income Taxes payable \$ 9,760 Unearned Revenue \$ 6,900 Capital Stock \$ 14,520,291 Dividends \$ 1,117,800 Insurance Expense \$ 68,000 Utilities Expense \$ 111,900 Depreciation Expense building \$ 3,562,962 Salaries Expense \$ 600,000 Interest Expense \$ 2,830,000 Income Tax Expense \$ 2,222,000 Advertisement Expense \$ 8,750 \$ 215,157,402 \$ 215,157,402

## REHAN NABI SIDDIQUI

Income Statement Revenue - Expenses = Net Income I NE I

Question 2: (10 Points) Suppose the hotel building by Bundle-Maze Company was acquired in September 31st 2011 for \$38,983,000. Lets assume for this question, the useful life for the building is 9 years and 120 days (given 30 days in a month) and the hotel uses straight line depreciation. What is the current age of the building in months and what is the total accumulated depreciation as of March 31st 2012?

## REHAN NABI SIDDIQUI

ANSWER Current age of the building: 9*12 = 108 + 4 = 112 (Total Useful Life in Months) 112-6 = 114 months (Required Answer) Using Straight Line Depreciation Method: cost-salvage value /estimated life in years 38983000-0/9.25 = 4214378.4 per year Total Accumulated Depreciation (October 1st 2011 March 31st 2012) (For Six Months): 4214378.4/12 = 351198.2 * 6 = 2107189.2 (Required Answer)

Question 3 (15 Points) The president of Crown Construction was informed that the first quarter financial statements would be available "as soon as the adjusting entries are made." Being a nonaccountant, the president feels adjustments should not be necessary if the accounting department is operating in a competent manner. Does the need for adjusting entries at the end of the quarter imply that transactions are not being recorded properly? Explain.

ANSWER At the end of the accounting period (one month, one quarter, six months, or one year management decides), some revenues and expenses may not properly recorded. For this reason the adjusting process (Adjusting Entries) is necessary to make sure that all revenues and expenses are properly recorded.

Question 4 (15 Points) 1. Identify several factors considered by an accountant in deciding whether an item is "material." 2. Does the concept of materiality complicate or simplify the process of making adjusting entries? Give an illustration to support your answer.

## REHAN NABI SIDDIQUI

ANSWER Part (1) Whether a specific item or event is Material is a matter of professional judgment. In making these judgments, accountants consider several factors. 1. What constitutes a "Material Amount varies with the size of the organization. For example, a \$1,000 expenditure may be material in relation to the financial statements of a small business but not to the statements of a large corporation such as General Motors. 2. Accountants must consider the cumulative effect of numerous Immaterial events. For Example, each of a dozen items may be immaterial when considered by itself. When viewed together, however, the combined effect of all twelve items may be material. 3. Materiality depends upon the nature of the item, as well as its dollar amount. For example, that several managers systematically have been stealing money from the company that they manage. Stockholders probably would consider this fact important even if the dollar amounts were but a small percentage of the company's total resources. Part (2) The concept of materiality enables accountants to shorten and simplify the process of making adjusting entries in several ways: 1. Businesses purchase many assets which have a very low cost which will be consumed quickly in business operations. Examples are wastebaskets light bulbs and janitorial supplies. The materiality Concept permits charging such purchases directly to expense accounts, rather than to asset accounts. 2. Some expenses, such as telephone bills and utility bills may be charged to expense as the bills are paid, rather than as the services are used. Technically this treatment violates the matching principle. 3. Adjusting entries to accrue unrecorded revenue may be ignored if the dollar are immaterial. 4. If the amount of error is not likely to be material adjusting entries may be based on estimates.