Question

The following are unrelated accounting practices:

1. Vine Company purchased a new $18 snow shovel that is expected to last six years. The shovel is

used to clear the ?rm’s front steps during the winter months. The shovel’s cost is recorded on the

company’s balance sheet as an asset.

2. Filene Corporation has been named as the defendant in a $40 million pollution lawsuit. Because

the lawsuit will take several years to resolve and the outcome is uncertain, Filene’s management

decides not to mention the lawsuit in the current year ?nancial statements.

Required:

For each of the given practices, indicate which accounting concepts, principles, or constraints apply

and whether they have been applied appropriately. For each inappropriate accounting practice, indicate

the proper accounting procedure.

Answer 1

1. Fixed Assets acquired before six years ago should taken into consideration on WDV basis.

      In given situation they have recorded Snow Shovel at cost basis only that is not correct . As per standard of fixed assets should be taken on WDV basis i.e Assets minus depriciation.

2.In second case it is Contingent Liabilities. Contingent liabilities should not present on financial statement . It should be shown in Notes to account for presentation purpose.

      In given situation Filene Corporation $ 40 million polution lawsuit is takining several years & outcome is uncertain . This shows Contingent Liabilities . Contingent liabilities should not show in financial statement. It should be shown in Notes to account.