Unformatted text preview: E 1-9 Basic assumptions and principles LO6 through LO8 Listed below are several statements that relate to financial accounting and reporting. Identify the basic assumption, broad accounting principle, or pervasive constraint that applies to each statement. 1. Jim Marley is the sole owner of Marleys Appliances. Jim borrowed $100,000 to buy a new home to be used as his personal residence. This liability was not recorded in the records of Marleys Appliances.
Economic entity assumption
2. Apple Computer, Inc., distributes an annual report to its shareholders.
3. Hewlett-Packard Corporation depreciates machinery and equipment over their useful lives.
Matching principle (also the going concern assumption)
4. Crosby Company lists land on its balance sheet at $120,000, its original purchase price, even though the land has a current market value of $200,000.
Historical cost or original transaction value principle
5. Honeywell Corporation records revenue when products are delivered to customers, even though the cash has not yet been received.
Realization principle or revenue recognition principle
6. Liquidation values are not normally reported in financial statements even though many companies do go out of business.
Going concern assumption
7. IBM Corporation, a multibillion dollar company, purchased some small tools at a cost of $800. Even though the tools will be used for a number of years, the company recorded the purchase as an expense.
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