Author Question: For each of the following situations discuss whether the accounting treatment is proper and, if not ... (Read 106 times)

Alygatorr01285 · **on:** Jul 5, 2018

For each of the following situations discuss whether the accounting treatment is proper and, if not proper, what accounting principle is violated. Discuss the ethical and financial statement implications of each of the improper treatments.

A. A service company records revenue when cash is collected in advance of performing the service.
B. The owner used the cash received from a company bank loan to buy a car for his own personal use. The car was recorded as a company asset.
C. A company records revenue when earned even when the cash has not yet been received.
D. Land purchased ten years ago for 20,000 is reported on the balance sheet at its current value of 30,000. The company follows U.S. GAAP in preparing financial statements.
E. Inventory purchased last month and sold this month was deducted as an expense on this month's income statement.

Question 2

The amount of employers' Medicare taxes is computed by multiplying total earnings by 1.45.
a. True
b. False
Indicate whether the statement is true or false

ilianabrrr · **Reply #1 on:** Jul 5, 2018

Answer to Question 1

A. This violates the revenue-recognition principle and is considered unethical because recording revenue prior to performing the service would overstate revenue and net income (and understate liabilities.)
B. This violates the separate-entity assumption and is considered unethical because owners should not include their personal affairs with their companies' affairs. The company's notes payable and assets will be overstated, which is unethical since these are not the company's but the owner's obligation and asset.
C. This is proper treatment.
D. This violates the cost principle. Land is to be reported at its cost and not its current value. It is unethical to increase the value of land under U.S. GAAP because it is thought that the current values are not reliable. However, this is an acceptable accounting treatment under IFRS.
E. This is proper treatment.

Answer to Question 2

True