Question

2.

Instructions: Each of the situations below may illustrate a violation of an accounting assumption or principle. Indicate the assumption or principle that is most clearly violated using the following codes: Codes A. Economic entity assumption G. Materiality B. Monetary unit assumption H. Full disclosure principle C. Time period assumption I. Cost principle D. Going concern assumption J. Conservatism E. Revenue recognition principle K. No violation of operating guidelines F. Matching principle Situations ____ 1. Stockholders invested an additional $60,000 cash in the business in 2007. This investment was reported as revenue on the 2007 income statement. ____ 2. Larson Paperweights values the marble it has on hand at its expected selling price since this is its expected value to the business. The marble's expected selling price exceeds the price Larson paid for it. ____ 3. Pandle Company reports its inventory at cost when current replacement cost is significantly below cost. ____ 4. Kailey's Novelties has 100,000 whistling dolls in inventory at a cost of $5 each. Only eight were sold last month. Not wanting to write off this inventory and report a loss, Kailey has decided not to issue financial statements until at least half of the dolls have been sold. ____ 5. Zenger's Pizza is being liquidated because it has sustained losses for many years. It continues to depreciate its assets and prepare financial statements on the cost basis. ____ 6. Kim Penkins, president of Penkins Machinery, took a power saw out of inventory to use as a birthday present for his son. Supplies expense was debited. ____ 7. Blake Industries has developed an automobile engine that will run on sea water instead of gasoline, while providing equal performance. They have chosen not to release reports of this engine to the public. ____ 8. Minton Company made no entry to record depreciation on its equipment for 2007. ____ 9. Stevens Brokerage bought each of its 5,000 employees new staplers for their desks. Each stapler cost $10 and was decorated with the company's logo. Since Stevens expenses all assets costing less than $25, no asset was recorded. Using the following codes, classify each of the items listed below as either an assumption, a principle, or a constraint.

please explain

Answer 1

1.E)Revenue Recognition Principle

When an amount of $60,000 is invested into the business by the stakeholders, it should be recognized as Additional Capital and not as Revenue. This is because the basis of the revenue recognition principle is that the Revenue should be recorded only when it is earned and not when some amount(cash) comes into the business. It means only that amounts are capable of being recognized as revenue which is earned by operating the business activities. Thus the Revenue recognition concept is at stake here.

2. I Cost principle:

Cost principle states that the assets and liabilities should be recorded at the cost at which they were acquired and not at the price prevailing in the market. If at all any difference between the cost and market prices exists and is needed to be recognized, it should be shown separately as gain or loss from valuation but the original price of the asset to shown in the balance sheet must remain the same.

Hence if the Larsons Paperweights values its inventory at the expected selling price instead of cost, it means it is violating the cost principle.

3.J Conservatism principle:

Conservatism concept focuses on anticipating further loses and recording them but not gains(and to record them only when they occur)

This principle is the driving force in recognizing the inventory at lower of cost or net realizable value. It means the further decrease in the value is always expected and any appreciation of value is ignored.

Thus if the Pandle company records the inventory at cost even though the replacement cost is less than cost, it ignores the Conservatism principle.

4.C) Time period assumption:

As per the Time period assumption ( also called periodicity concept), the incomes and expenses, profits, and losses belonging to an accounting year should be recognized in that accounting period only.

When Kaitlyn Novelties tries to postpone the recording of loss, it ignores the Time period assumption. It should record the loss of the current period in this year only and then when further sales are made in the following years, they must be recorded in the year in which the sales are to be attributed.

5.E)Going Concern Assumption:

As per this assumption, the transactions should be recorded in the business keeping in view that the business is going to continue in the coming foreseeable future and accordingly all the Reserves for losses or bad debts or future expenses should be maintained.

But since Zengers pizza is about to liquidate itself it no longer needs to provide for depreciation, as there is no future for the business,Going Concern assumption is in conflict here.

6.A) Economic Entity Assumptions:

This assumption states that the business is a separate legal entity from the owner. It means all the transactions pertaining to the business must be kept separate from the books(or transactions of the owner)

When The President of Penkins Machinery,Kim Penkins takes the inventory for personal use, it should be recorded as Drawings and must be debited by crediting the Inventory Account. Instead here the Supplies expenses account is credited thus violating the Economic Entity Assumption

7.H)Full Disclosure Principle:

Full Disclosure Principle states that the business must report to it stakeholders all the financial and other relevant information that helps them in taking important business decisions

In the given question, Even though the Blake industries innovative automobile gives equal performance as gasoline, still it should be reported in the financial statements as a footnote because it is an important change which can affect the performance of the business in the future

8.F) Matching Principle:

This principle states that the revenues should match with expenses in the accounting period, meaning the revenue earned in the year should match with the related expenses incurred in that period. When we record depreciation, we distribute the depreciable value of an asset over its expected useful life and record it ever year accordingly

If Minton is not recording the depreciation, it is not recording the expense from the asset for the current period and is only recording the revenue generated from that asset, thus violating the Matching principle.

9)K) No violation of Guidelines

Stevens follows the policy of recording only those assets with a value above $25 and expensing the ones below it. Since the price of Staplers is $10 i.e., less than $25, it recorded it as expense without violating any guidelines necessary for accounting.