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Unformatted text preview: Problems: E2-4 (Assumptions, Principles and Constraints) Presented below are the assumptions, principles and constraints used in this chapter. 1. Economic entity assumption 2. Going concern assumption 3. Monetary unit assumption 4. Periodicity assumption 5. Historical cost principle 6. Fair value principle 7. Expense recognition principle 8. Full disclosure principle 9. Cost-benefit relationship 10. Materiality 11. Industry practices 12. Conservatism Instructions Identify by number the accounting assumption, principle or constraint that describes each situation on the next page. Do not use a number more than once. (a) Allocates expenses to revenues in the proper period. (b) Indicates the fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.) (c) Ensures that all relevant financial information is reported. (d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle) (e) Anticipates all losses, but reports no gains. (f) Indicates that personal and business record keeping should be separately maintained. (g) Separates financial information into time periods for reporting purposes. (h) Permits the use of fair value valuation in certain industries. (Do not use the fair value principle) (i) Requires that information significant enough to affect the decision of reasonably informed users should be disclosed. (Do not use full disclosure principle) (j) Assumes that the dollar is the “measuring stick” used to report on financial performance. E2-8 (Accounting Principles – Comprehensive) Presented below is information related to Anderson, Inc. Instructions Comment on the appropriateness of the accounting procedures followed by Anderson, Inc. (a). Depreciation expense on the building for the year was $60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded. Retained Earnings 60,000 Accumulated Depreciation-Buildings 60,000 (b). Materials were purchased on January 1, 2010 for $120,000 and this amount was entered in the materials account. On December 31, 2010, the materials would have cost $141,000, so the following entry is made. Inventory 21,000 Gain on inventories 21,000 (c). During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of $135,000 and fair market value of $450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows. Equipment 135,000 Common Stock 135,000 (d). During the year, the company sold certain equipment for $285,000, recognizing a gain of $69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased. (e). An order for $61,500 has been received from a customer for products on hand. This order was shipped on January 9, 2011. The company made the following entry in 2010. Accounts receivable 61,500 Sales 61,500 ...
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- Spring '07