Question

LO2-2 EXERCISE 2.4 Accounting Principles and Asset Valuation The following cases relate to the valuation of assets. Consider each case independently. a. World-Wide Travel Agency has office supplies costing $1,400 on hand at the balance sheet date. These supplies were purchased from a supplier that does not give cash refunds. World- Wide's management believes that the company could sell these supplies for no more than $500 if it were to advertise them for sale. However, the company expects to use these supplies and to purchase more when they are gone. In its balance sheet, the supplies were presented at $500. b. Perez Corporation purchased land in 1957 for $40,000. In the current year, it purchased a simi- lar parcel of land for $300,000. In its current year balance sheet, the company presented these two parcels of land at a combined amount of $340,000. c. At December 30 year 1. Felix, Inc., purchased a computer system from a mail-order sup- plier for $14,000. The retail value of the system-according to the mail-order supplier--was $20.000. On January 7, however, the system was stolen during a burglary. In its December 31, year 1, balance sheet, Felix showed this computer system at $14,000 and made no reference to its retail value or to the burglary. The December balance sheet was issued in February year 2. In each case, indicate the appropriate balance sheet amount of the asset under generally accepted accounting principles. If the amount assigned by the company is incorrect, briefly explain the accounting principles that have been violated. If the amount is correct, identify the accounting principles that justify this amount.

Answer 1

Presentation in the financial Statement – World wide Travel Agency disclosed the supplies balance $ 500 in the Balance Sheet . This disclosure amount is not correctly shown in the financial Statement . As per Standard and GAAP , company needs to disclose the supplies value $ 1400 . They violated the accounting rule. As mentioned in the Question ,World wide management believes that the company could sell these supplies for no more than $ 500 . They disclosed number n Liquidation basis and not following standard Going concern basis . So They have to disclose in $1400 value in the financial

Answer b –Perez Corporation purchased first asset year 1957 for $ 40,000 . Again in the current year it purchased similar assets ( parcel of land ) for $ 300,000 . I the current year balance sheet , company disclosed total value of parcel of land - $ 40,000+$ 300,000 = $ 340,000.

As per GAAP, standard , the above disclosure is correct because they are belong to same class of asset and company. We can go with same “ Stable dollar “ concept and disclose the above amount in the financial . As per standard, company disclose the cost price which they paid to acquire the asset .

So above disclosure is correct

Answer c- At Dec 30, Felix Inc , purchase computer system from a mail order supplies for $ 14000. Company paid actual cost to purchase this asset amount to $ 14000.

Later we notced that retail value of the system according to mail to order supplier was $ 20,000 . This is retail value and we can not disclose this value in the Financial Statement . Also noticed on Jan 7, however the system was stolen during a burglary . As on balance sheet date Felix showed this computer system at $ 14000 so they need to disclose this amount in the Balance sheet .it will be violate the policy if they disclose amount at Retail price .