Question

For each of the following situations, indicate whether you agree or disagree with the financial reporting practice employed and state the basic assumption, constraint, or accounting principle that is applied (if you agree) or violated (if you disagree).
1. Wagner Corporation adjusted the valuation of all assets and liabilities to reflect changes in the purchasing power of the dollar.
2. Spooner Oil Company changed its method of accounting for oil and gas exploration costs from successful efforts to full cost. No mention of the change was included in the financial statements. The change had a material effect on Spooner's financial statements.
3. Cypress Manufacturing Company purchased machinery having a five-year life. The cost of the machinery is being expensed over the life of the machinery.
4. Rudeen Corporation purchased equipment for $180,000 at a liquidation sale of a competitor. Because the equipment was worth $230,000, Rudeen valued the equipment in its subsequent balance sheet at $230,000.
5. Davis Bicycle Company received a large order for the sale of 1,000 bicycles at $100 each. The customer paid Davis the entire amount of $100,000 on March 15. However, Davis did not record any revenue until April 17, the date the bicycles were delivered to the customer.
6. Gigantic Corporation purchased two small calculators at a cost of $32.00. The cost of the calculators was expensed even though they had a three-year estimated useful life.7. Esquire Company provides financial statements to external users every three years.

Answer 1

Answer:

1. Historical cost VIOLATION

2. Disclosure principle VIOLATION

3. Matching VIOLATION

4. Historical cost VIOLATION

5. Matching VIOLATION

6. Matching principle VIOLATION

Explanation:

1 &4. Note here that standard accounting procedures mandates that transactions should be recorded precisely in their historical context with no such adjustments.

2. This is a disclosure violation probably done by the company to reduce taxes on its assets which is prohibited by accounting law.

3 &5 & 6. Both transactions represents a matching violation in which transactions are mismatched or adjusted deliberately leading to inaccurate financial account status.