The following situations involve accounting principles and assumptions. For each

Question

The following situations involve accounting principles and assumptions.

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.

Accounting method Principle/Assumption 1. Rex Company owns buildings that are worth substantially more than they originally cost. In an effort to provide more relevant information, Rex reports the buildings at fair value in its accounting reports. IncorrectCorrect Monetary unit assumptionEconomic entity assumptionFair value principleCost principle 2. Levi Company includes in its accounting records only transaction data that can be expressed in terms of money. IncorrectCorrect Monetary unit assumptionEconomic entity assumptionFair value principleCost principle 3. Josh Borke, owner of Josh The following situations involve accounting principles and assumptions. 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.

Explanation / Answer

1. Incorrect, cost principle
2. Correct.
3. Incorrect, economic entity assumption

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