Question

Match the following situations with the accounting principle that best applies. In some cases, more than one principle may apply. A Unit of Measurement G. Realization B. Historical Cost H. Matching C. Going-Concern I. Materiality D. Conservatism J. Consistency E. Objectivity K. Full Disclosure F. Time Period L. Fair Value 1. A large hotel corporation is preparing its vear-end financial statements. Management has informed the certified public accountant that in two months it will begin closing 15 of its hotel properties. The accountant will provide information of this future event on the current year-end financial statements because of the_ principle and the _principle. 2. A hotel purchases a van for $5,000 from a distressed rental agency. Due to the principle, it is recorded at $5,000, even though the hotel could resell it for $6,500. 3. A motel receives an advance deposit of $150 for reserving guestrooms and meeting room space. This transaction cannot be classified as a sale because of the principle.

Answer 1

1. K & I

Full disclosure principle and materiality principle.

Hotel corporation is planning to close its properties. As per full disclosure principle, it need to disclose this information in the financial statements.

Materiality principle states that all the information that is material must be disclosed.Material information means information, the knowledge of which will influence the decisions.

2. B

Historical cost principle.

Van is recorded at $5000 due to historical cost principle. As per historical cost principle, assets are recorded at the price paid to acquire them. Van is an asset for the hotel so it is recorded at historical cost.

3. H & F

Matching principle & Time period principle

As per matching principle, revenue is matched with the expenses incurred to earn that revenue. Here, in the given transaction, the services, against which advance of $150 is received will be performed in the future period, so this revenue will be recognized in the future period.

Time period principle also applies here. According to time period principle, transaction should be recognized in the period to which it belongs.Here, advance of $150 belongs to future period, so it should be recorded it the future period.

4. J

Consistency

According to consistency principle, the methods applied in valuation or recording must be followed year after year. In the given transaction, straight line method was applied earlier. When the method is change, then it will violate consistency principle.

5. G

Realization principle.

As per realization principle, revenue is recognized when earned or realized. If cash basis of accounting is followed, then revenue is recognized when received. It will violate realization concept.