For each of the following situations, indicate whether you agree or disagree wit
ID: 2333423 • Letter: F
Question
For each of the following situations, indicate whether you agree or disagree with the financial reporting practice employed and state the accounting concept that is applied (if you agree)or violated (if you disagree) 1. Wagner Corporation adjusted the valuation of all assets and liabilities to reflect changes in the purchasing power of the dollar 2. Spooner Oil Company changed its method of accounting for oil and gas exploration costs from successful efforts to full cost. No mention of the change was included in the financial statements. The change had a material effect on Spooner's financial statements. 3. Cypress Manufacturing Company purchased machinery having a five-year life. The cost of the machinery is being expensed over the life of the machinery 4. Rudeen Corporation purchased equipment for $180,000 at a liquidation sale of a competitor. Because the equipment was worth $230,000, Rudeen valued the equipment in its subsequent balance sheet at $230,000. 5. Davis Bicycle Company received a large order for the sale of 1,000 bicycles at $100 each. The customer paid Davis the entire amount of $100,000 on March 15. However, Davis did not record any revenue until April 17, the date the bicycles were delivered to the customer. 6. Gigantic Corporation purchased two small calculators at a cost of $32.00. The cost of the calculators was expensed even though they had a three-year estimated useful life. Esquire Company provides financial statements to external users every three years.Explanation / Answer
1. Wagner Corporation---Dis-Agree This violates both the going concern concept & the cost concept.Unless, in liquidation, current market values are never reflected in the books , as the business is assumed to go on indefinitely. Secondly, but for certain markeatble securities ,held as investments, all assets & liabilities are held in the books of accounts ,at cost or their purchase price only. By and large,accounting is an objective & fair historical record only. 2.Dis-agree Spooner Oil Company violated both the full disclosure concept & materiality convention of accounting whereby the US GAAP categorically states that items are material if they have the inherent capacity to influence the economic decisions of the intended users, must be fully disclosed, within the financial statement or as notes to the statements , so that materiality errors do not mislead the users or the intended reportees. The users of Spooner's financial statements are entitled to be informed of the change in the costing method 3..Agree Cypress Manufacturing expensing the cost of the machinery, over its 5 year life , as depreciation ,is in keeping the matching principle concept ,whereby, revenues earned over a period, are matched with all the costs incurred to earn those revenues.Naturally depreciation,is a portion of teh capital cost , necessary to earn these revenues over the same period. It is also in keeping with the going concern concept ,by which it is assumed that the business will operate indefinitely & hence allows the cost of the asset to be spread over its useful life & the balance unamortised cost ,to be carried in the balance sheet as its asset. 4..Rudeen Corporation--- Dis-agree This may violate the objectivity concept of accounting, whereby, the fifure 230000 may not have any objective evidence to support the entry. 5.Davis Bicycle Co.---- Agree This concept of realisation is based on conservatism, when income is recognised only when the sale /delivery actually occurs and not when advance was received. This amount of $ 100000 must have been kept in the unearned sales revenue a/c. 6. Gigantic Corpn.---Agree This is in keeping with the materiality concept ---the amount of $ 32 is not significant enough to be carried in the balance sheet & depreciated over 3 yrs. ---might be more cumbersome than the value dictates.Expensing it as office utilities ,in a single year, is perfectly correct. 7..Esquire Co.----Dis-agree This is in violation of the time -period concept which specifies certain periodicity for report-generation ,for the use of all external users.. This can either be a fiscal year,ie.Mar 1 – Feb 28 or a natural calendar year ,ie.Jan 1 – Dec 31 , or any other shorter & meaningful period such as a quarter . Three years is not specified. 1. Jim Marley-- Business entity concept--The owner(Jim Marley) is distinct from the Company (Marley Appliances)---- & the personal liability need not be entered in the books of Marley Appliances. 2.Apple Inc.--Time Period concept--- the specific interval between reports is 1 year. 3. Hewlett Packard---Going concern concept- where assets cost is spread over its life Matching principle concept---Also matching revenues with relevant coststhat includes depreciation. 4.Crosby Co.--- cost concept-- whereby assets are recorded at their purchase price only. 5.Honeywell Corpn.---Realisation concept-----based on conservatism,income is accrued/ recognised in the income statement of the period,on delivery of goods , even though actual cash is yet to be received. 6.. Going Concern concept --- that assumes that the businesses go on indefinitely. 7..IBM Corpn.----Materiality concept ---the amount of $ 800 is not significant enough to be carried in the balance sheet & depreciated over a no.of yrs.
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