Question

Correctly state the letter or letters of the principle(s), assumption(s), or concept(s) used to justify the accounting procedure followed for all eight of the accounting procedures.

Principle(s), assumption(s), concept(s):

A. Business entity.
B. Conservatism.
C. Earning principle of revenue recognition.
D. Going concern (continuity).
E. Exchange-price (cost) principle.
F. Matching principle.
G. Period cost (or principle of immediate recognition of expense).
H. Realization principle.
I. Stable dollar assumption.

Accounting procedures:

1. Inventory is recorded at the lower of cost or market value.
2. A truck purchased in January was reported at 80 percent of its cost even though its market value at year-end was only 70 percent of its cost.
3. The collection of $40,000 of cash for services to be performed next year was reported as a current liability.
4. The president's salary was treated as an expense of the year even though he spent most of his time planning the next two years' activities.
5. No entry was made to record the company's receipt of an offer of $800,000 for land carried in its accounts at $435,000.
6. A supply of printed stationery, checks, and invoices with a cost of $8,500 was treated as a current asset at year-end even though it had no value to others.
7. A tract of land acquired for $180,000 was recorded at that price even though it was appraised at $230,000, and the company would have been willing to pay that amount.
8. The company paid and charged to expense the $4,200 paid to Craig Nelson for rent of a truck owned by him. Craig Nelson is the sole stockholder of the company.

Answer 1

The list of the principle(s), assumption(s), or concept(s) used to justify the accounting procedure followed for all eight of the accounting procedures are as follows:

1. Inventory is recorded at the lower of cost or market value.

B. Conservatism ( Always anticipate possible losses but not gains).

2. A truck purchased in January was reported at 80 percent of its cost even though its market value at year-end was only 70 percent of its cost.

D. Going concern/ Continuity ( long term assets are purchased on the basis of assumption that the business will carry its operations for indefinite future).

3. The collection of $40,000 of cash for services to be performed next year was reported as a current liability.

C. Earning Principle of revenue recognition ( revenue is recognized when cash received).

4.The president's salary was treated as an expense of the year even though he spent most of his time planning the next two years' activities.

G. Period Cost.( Makesva part of current period cost).

5. No entry was made to record the company's receipt of an offer of $800,000 for land carried in its accounts at $435,000.

H. realization principle (as value will be recorded when its ownership will be delivered).

6. A supply of printed stationery, checks, and invoices with a cost of $8,500 was treated as a current asset at year-end even though it had no value to others.

F. Matching principle.(Expenses should be matched with incomes of a particular period, so as to get correct amount of profit).

7. A tract of land acquired for $180,000 was recorded at that price even though it was appraised at $230,000, and the company would have been willing to pay that amount.

E. Exchange price (cost) principle (assets must be recorded at the price at which it is acquired).

8.The company paid and charged to expense the $4,200 paid to Craig Nelson for rent of a truck owned byhim. Craig Nelson is the sole stockholder of the company.

A. Business Entity ( business and owner are two different entities, and personal expenses should not be charged to business expenses).