Revenue recognition

Question 1 Bunbury Ltd commenced operations on 1 January 2015 Its balance sheet at 31 December 2015 showed: Share capital (3 000 ordinary shares issued) $6 000 Retained earnings $10 500

 

Requirements 1 Journalise the company’s issuing of the shares in payment for office equipment 2 Was the main source of shareholders’ equity: (a) share capital, or (b) profitable operations? How can you tell?

 

Requirement 1 Date Accounts and Explanations

DR

CR

Issued shares in payment for office equipment

 

Requirement 2

 

Question 2 Frenchvanilla Ltd earned a profit of $75,000 during the year ended 31 December 2015 On 15 December, Frenchvanilla declared the annual cash dividend of 575 cents per share on its 10 000 issued preference shares and a 50 cents per share cash dividend on its 55 000 issued ordinary shares Frenchvanilla then paid the dividends on 4 January 2016

 

Requirements Journalise for Frenchvanilla Ltd: 1 Declaring the cash dividends on 15 December 2015 2 Paying the cash dividends on 4 January 2016

 

Requirement 1 Date Accounts and Explanations DR CR

 

Declared a cash dividend

 

Requirement 2 Date Accounts and Explanations DR CR

 

Paid the cash dividend

 

Question 3 – Reflection (Minimum 100, Maximum 150) Sigma Pharmaceuticals was convicted of falsely overstating the revenue of the company Explain how the earnings cycle can be used to abuse revenue recognition Why do you think revenue recognition is abused?

Solution:

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