Question

Correctly state the letter or letters of the principle(s), assumption(s), or concept(s) used to justify the accounting procedure followed for all eight of the accounting procedures.

o Principle(s), assumption(s), concept(s): A. Business entity. B. Conservatism. C. Earning principle of revenue recognition. D. Going concern (continuity). E. Exchange-price (cost) principle. F. Matching principle. G. Period cost (or principle of immediate recognition of expense). H. Realization principle. I. Stable dollar assumption.

o Accounting procedures: 1. Inventory is recorded at the lower of cost or market value. 2. A truck purchased in January was reported at 80 percent of its cost even though its market value at year-end was only 70 percent of its cost. 3. The collection of $40,000 of cash for services to be performed next year was reported as a current liability. 4. The president's salary was treated as an expense of the year even though he spent most of his time planning the next two years' activities. 5. No entry was made to record the company's receipt of an offer of $800,000 for land carried in its accounts at $435,000. 6. A supply of printed stationery, checks, and invoices with a cost of $8,500 was treated as a current asset at year-end even though it had no value to others. 7. A tract of land acquired for $180,000 was recorded at that price even though it was appraised at $230,000, and the company would have been willing to pay that amount. 8. The company paid and charged to expense the $4,200 paid to Craig Nelson for rent of a truck owned by him. Craig Nelson is the sole stockholder of the company.

Answer 1

Correctly state the letter or letters of the principle(s), assumption(s), or concept(s) used to justify the accounting procedure followed for all eight of the accounting procedures.

Principle(s), assumption(s), concept(s): A. Business entity. B. Conservatism. C. Earning principle of revenue recognition. D. Going concern (continuity). E. Exchange-price (cost) principle. F. Matching principle. G. Period cost (or principle of immediate recognition of expense). H. Realization principle. I. Stable dollar assumption.

Solution

1. Accounting assumption relevant is Business entity assumption which states that identity of business is altogether different from its owners.

1. According to conservatism anticipates all losses, but reports no gains

1. Revenue should be recognized only when either of the below mentioned two conditions are satisfied.

1. When the consideration with regard to the work has been already received or
2. When possession of the goods has been delivered to another person.

1. According to going concern business will operates indefinitely and will not wound up in near future.
2. All assets should be valued at historical cost
3. According to matching concept of accounting it is necessary that expenses should match with the income. For example, the use of depreciation in the accounting for non-current assets
4. Expenses should be recognized in the same period as the revenues to which they relate.
5. According to realization concept that the revenue can only be recognized when the goods or services which have been associated with the revenue have been delivered or rendered.
6. According to stable dollar assumption that the value of dollar will remain constant across various fiscal years.

Accounting Procedure	Principles ,Assumption , Concepts ,
1. Inventory is recorded at the lower of cost or market value.	E. Exchange-price (cost) principle. F. Matching principle.
2. A truck purchased in January was reported at 80 percent of its cost even though its market value at year-end was only 70 percent of its cost.	H. Realization principle. C. Earning principle of revenue recognition.
3. The collection of $40,000 of cash for services to be performed next year was reported as a current liability.	E. Exchange-price (cost) principle. F. Matching principle. G. Period cost (or principle of immediate recognition of expense).
4. The president's salary was treated as an expense of the year even though he spent most of his time planning the next two years' activities.	F. Matching principle
5. No entry was made to record the company's receipt of an offer of $800,000 for land carried in its accounts at $435,000.	E. Exchange-price (cost) principle. H. Realization principle. I. Stable dollar assumption.
6. A supply of printed stationery, checks, and invoices with a cost of $8,500 was treated as a current asset at year-end even though it had no value to others.	G. Period cost (or principle of immediate recognition of expense).
7. A tract of land acquired for $180,000 was recorded at that price even though it was appraised at $230,000, and the company would have been willing to pay that amount.	E. Exchange-price (cost) principle. F. Matching principle.
8. The company paid and charged to expense the $4,200 paid to Craig Nelson for rent of a truck owned by him. Craig Nelson is the sole stockholder of the company.	A. Business entity