Question

(i) Abel Rufus Company owns equipment that is worth substantially more than they originally cost. In an effort to provide more relevant information, Abel Rufus reports the equipment at market value in its accounting reports.

(ii) Nairobi Holdings Company includes in its accounting records only transaction data that can be expressed in terms of money.

(iii) Wambui the managing directors of Wambui Club, records his personal living costs as expenses of the Cantina.

Required;

For each of the three situations, say if the accounting method used is correct or incorrect. If correct, identify which principle or assumption supports the method used. If incorrect, identify which principle or assumption has been violated.

Give your answer by completing the table below:

Situation	Is accounting method correct?	Principle or assumption that supports method	Principle or assumption violated
(i)
(ii)
(iii)

Answer 1

i) Reporting of Equipment at the market value is incorrect accounting method and it is the violation of Cost principle. According to the cost principle, each Plantm, Property and Equipment should be valued and reported at its actual cost not at its market value.

ii) The accounting method used by Nairobi Holdings Company is correct and this method is supported by Monetary unit assumption. In monetary unit assumption, only transactions which can be measured in the terms of money is only included in accounting records.

iii) The accounting method used by Wambui the managing directors of Wambui Club is incorrect and it is a violation of the principle of economic entity assumption. Under economic entity assumption, owner of the entity is treated distinct from the entity and any personal expense of the owner should not be considered as the expenses of entity.

Situation	Is accounting method correct?	Principle or assumption that supports method	Principle or assumption violated
(i)	Incorrect	-	Cost principle
(ii)	Correct	Monetary unit assumption	-
(iii)	Incorrect	-	Economic Entity assumption