Question

For each of the following situations, indicate whether you agree or disagree with the financial reporting practice employed and state the basic assumption, component, or accounting principle 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 3 Cypress Manufacturing Company purchased machinery having a five-year life. The cost of the machinery is being expensed over 4. Rudeen Corporation purchased equipment for $180,000 at a liquidation sale of a competitor. Because the equipment was worth 5. Davis Bicycle Company received a large order for the sale of 1,000 bicycles at $100 each. The customer paid Davis the entire statements the life of the machinery. $230,000, Rudeen valued the equipment in its subsequent balance sheet at $230,000 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 7. Esquire Company provides financial statements to external users every three years. they had a three-year estimated useful life. Situation Agree/Disagree Assumption/Constraint Accounting principle

Answer 1

Situation Agree/Disagree Assumption Constraint/Accounting principle Explanation Disagree Monetary unit assumption Business transactions or events can be expressed and measured in terms of monetary units Disagree Full disclosure principle Management must report all relevant company's operations details to creditors and investors Agree Expense recognition Expenses and revenues to be recognized in the same period to which they relate Disagree Historical cost (original transaction value) principle Original amount at the acquisition value Agree Revenue recognition Application of concept of accruals towards the revenue recognition Agree Materiality A company may violate another principle when the amount is small for not to be misleading 7 Disagree Periodicity assumption Company may divide up their activities into artificial time periods.