Question

Identify the accounting concept that was violated in each of the following situations.1. Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured.Z McCloud Drug Company owns a patent that it purchased three years ago for 52 million. The controller recently revaluedthe patent to its approximate market value of 58 million.3. Philips Company pays the monthly mortgage on the home of its president, Lany Crosswhite, and charges theexpenditure to miscellaneous expense.

Answer 1

Answer:

1. Expense recognition or Matching principle

2. Historical cost principle

3. Economic Entity principle

Explanation:

1. The expense recognition or matching principle states that each expense should be recorded whenever the revenue is recognized or whenever the expenses are recognized. As AstroTurf company recognizes the cost of goods sold when the manufacturing process is completed, the company is violating the expense recognition principle.

2. The historical cost principle states that the cost of any non-current assets (tangible or intangible) should be valued at their purchase price or cost price. However, McCloud Drug company showed the Patent as market value in the balance sheet. Hence, the company is violating the historical cost principle concept.

3. According to the economic entity principle, one of the vital underlying assumptions, the economic activity of the business should be separated from its owner or manager or chairman or all other economic entities. As Philips company paid the mortgage of its president and showed it as a miscellaneous expense of the company's income statement, they violated the economic entity principle by not separating it.