Identify the basic assumption or broad accounting principle that was violated in
ID: 2328468 • Letter: I
Question
Identify the basic assumption or broad accounting principle that was violated in each of the following situations.
1. Astro Turf Company recognizes an expense, cost of good sold, in the period the product is manufactured.
2. McCloud Drug Company owns a patent that is purchased three years ago for $2 million. The controller recently revalued the patent to its approximate market value of $8 million.
3. Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and changes the expenditure to miscellaneous expense.
Explanation / Answer
1)Expense recognition :
This principle requires expense to be recognised in the period in which revenue in relation to such expense is earned .
therefore expense should be recognised in the period product is sold and not in the year of manufacturing
2)The historical cost principle
Asset should be carried at its original cost (unless there is premanent dimunition) orits carrying value (cost-accumulated depreciation)
It should be valued at current replacement cost only in case it is held for sale
therefore patent should be carried at its original cost of $ 2 million and not revalued at 8 million
3)Entity assumption
As per this concept ,business and owners are two seperate entity ,therefore personal expense of owner is a disallowable as it is not a business expense