Question

Identify the basic assumption or broad accounting principle that was violated in each of the following situations. Pastel Paint Company purchased land two years ago at a price of $250,000. Because the value of the land has appreciated to $400,000, the company has valued the land at $400,000 in its most recent balance sheet Atwell Corporation has not prepared financial statements for external users for over three years The Klingon Company sells farm machinery. Revenue from a 2. 3. large order of machinery from a new buyer was recorded the 4. City. The company recently paid a $150 utility bill for Smith's 5. $1,000,000 (a material amount) and recorded the purchase as day the order was received Don Smith is the sole owner of a company called Hardware personal residence and recorded a $150 expense Golden Book Company purchased a large printing machine for an expense Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its employees in the manufacturing plant. The company is being sued for $2,000,000, a material amount, and is not insured. The suit was not disclosed in the most recent financial statements because no settlement had been reached 6.

Answer 1

Serial No.	Principle /Assumption violated	Reason
1	Historical cost principle	Fixed asset should be recorded at cost (not market value ) unless there is a permanent diminution in the value .
2	periodicity concept	Financial statement should be prepared at the end of each fiscal year
3	Revenue recognition	Revenue should be recorded at the time risk and reward associated with ownership of asset is transfered
4	the economic entity assumption	According to this principle ,Business and owners are two seperate entity therefore personal expense should not be recorded in business books
5	Expense recognition and materiality concept	Expense that will spread the benefits over the years and not to year of expense is a capital expenditure and should be capitalized and not to be charged to revenue
6	Disclosure principle	The material amount effecting the financial statement should be fully disclosed.