This year Burnham Trucking Compay told their CPA they had purchased a $12,000 trailer but only...

This year Burnham Trucking Compay told their CPA they had purchased a $12,000 trailer but only has receipts of $10,000. Burnham has stated that they "know" what the the true value of the trailer should be, even though the receipt provided is closer to the purchase price of other trailers purchased in the same city/area.

Acceptance by the CPA's of the asset cost as the higher figure of $12,000 and the asset's presentation in the financial statements as $12,000 would be...

	A.	...no problem at all.
	B.	None of the other answers
	C.	... a violation of the cost principle.
	D.	... a violation of the revenue recognition principle.
	E.	...a violation of the matching principle.

Expert Solution

Based on the information available in the question, we can summarize as follows:-

Receipts of the trailer purchase - $10,000

Balance communicated by the client - $12,000

When the cost is recorded at $12,000 there is a violation of Option C - Cost principle. Under the cost principle of accounting, the recorded value of the assets should be objective and should be readily verifiable as invoices , sales receipts, delivery receipts and observance of the bank statements. Since the Burnham trucking company does not have any receipts but still records the asset at $12,000 as against the $10,000 , this is clearly a violation of the Cost principle.

Option A is incorrect. The situation presented is clearly a cost principle violation.

Option B is incorrect as we have the answer at Option C.

Option D is incorrect. Under revenue recognition principle, revenue should be recognized during the period when the services are performed. As such, this option is not relevant in this situation.

Option E is incorrect. Under the matching principles, the costs should be recorded in the company's books of accounts during the same time when the revenues relating to the expenses were earned. As such, this principle is not relevant in the above scenario.

ekkarill92 answered 2 years ago

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