Question

02. Identify the accounting assumption that best applies to each of the following situations a. KFC, the restaurant chain, sold a store location to Burger King. How can KFC determine the sale price of the store: by a professional appraisal, KFC's cost, or the amount actually received from the sale? b. If Trans. Realtors had to liquidate its assets, their value would be less than carrying amounts of the assets. c. Toyota Canada wants to determine which division of the company-Toyota or Lexus-is more profitable d. You get an especially good buy on a laptop, paying only $399 for a computer that normally costs $799. What is your accounting value for this computer?

Answer 1

a. Historical-cost assumption. The assumption that best applies to this situation is 'Historical cost' which states that assets are recorded at purchase price. The determination of the sale price of the store should be done following this assumption.

b. Stable monetary unit assumption is applied to this situation which states that value of a currency is stable over given period of time.

c. Entity assumption or Separate entity assumption is best applied to this situation which states that a business is a separate econonmic unit. While determining the profitability of Toyota and Lexus, these divisions should be treated as separate economic units.

d. Historical-cost assumption. While determining the accounting value for the computer, Historic -cost assumption is best suited, according to which, the value of the computer must be recorded at purchase price.