Question

Brief Exercise 2-28 Assumptions and Principles Five common accounting practices are listed below: Required: Identify the accounting principle or assumption that best describes each practice. a. A customer pays $20 to mail a package on December 30. The delivery company recognizes revenue when the package is delivered in January. b. Jim Trotter owns C&S Heating Company. In preparing the financial statements, Trotter makes sure that the purchase of a new truck for personal use is not included in C&S's financial statements. c. Moseley Inc. recorded land at its purchase price of $50,000. In future periods, the land is reflected in the financial statements at $50,000. d. Mack Company purchases inventory in March. However, it does not expense that inventory until it is sold in April. e. Mueller Inc. prepares quarterly and annual financial statements.

Answer 1

Revenue recognition principle Revenue is to be recognized only when they are earned. (i.e. when the goods are transferred or services are provided) In this case, the delivery company will recognize revenue only when the delivery is complete. Any payment received in advance will be recorded as unearned revenue and revenue recognition is deferred until the delivery is made.

Economic entity principle Transactions of a business entity should be kept separate from those of its owners and other business entities. In this case, a new truck purchased by the owner for his personal use is not recorded in the books of the company.

Historical cost principle Business must record assets at the original acquisition or purchase price. In this case, the company is carrying the land at its original purchase price in the financial statements.

Matching principle Expenses are recorded in the same period in which the related revenues are earned. In this case, the inventory purchased in March is charged as cost of goods sold in the month of April, when it is sold.

Time period principle Businesses should report their financial transactions over specific time periods. The time periods may be monthly, quarterly, semi-annually, yearly, etc. In this case, Muller Inc. is preparing quarterly and annual financial statements.