Foe each of the following four situations, state the accounting concept(s) or pr
ID: 2454736 • Letter: F
Question
Foe each of the following four situations, state the accounting concept(s) or principle(s) that was violated. For some of the situations, there will be more than one answer. Explain each answer. A company expensed a patent purchased for $500,000. The expected useful life of the patent is 10 years. An appraisal reflected a one acre plot owned by a company was worth $60,000 more than its balance sheet value. The company added $60,000 to the land's asset account. A group of citizens won a class action lawsuit against a large corporation for polluting a stream. The company did not show the amount of the settlement in its financial statements, nor did the company discuss the lawsuit in its footnotes. A company switched methods of accounting for inventory on its balance sheet every year for four years, depending on which method produced higher reportable net income.Explanation / Answer
1)The company instead of amortising the patent ,fully charged the purchase cost in the year of purchase ,which is against the accrual concept .
The company should amortize the $500,000 over itss useful life.
2) Land is an asset which should be reflected at a cost unless there is a permanent dimunition in value .so the land should not be appraised unless there is a certainity that gain would be recognised.
This appraisal is against prudence concept (Do not recognise profit but provide for all possible losses)
3)The company shall disclose the amount of law suit it lost as an extraordinary loss so that shareholder come to know about it.
It is against the Materiality concept. (That is it could influence the decision of useful users)
4) The company should disclose the change in method of accounting.Also the company can change method only when it is required by law or for better presentation of financial statement.
So change of method to report higher income is against accounting principles as well the comapny has violated consistency principle in preparing financial statment.