E2-4 Assumptions, Principles and Constraints Presented

E2-4  Assumptions, Principles and Constraints Presented below are the assumptions, principles, and constraints

1. Economic entity assumption
2. Going concern assumption
3.Monetary unit assumption
4. Periodicity assumption
5. Historical cost principle
6. Matching principle
7. Full disclosure principle
8. Cost-benefit relationship
9. Materiality
10. Industry practices
11. Conservatism

Instruction
Identify by number the accounting assumption, principle, or constraint that describes each situation.

Allocates expenses to revenues in the proper period.
Indicates that market value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)
           Ensures that all relevant financial information is reported.
Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)
Anticipates all losses, but reports no gains.
Indicates that personal and business record keeping should be separately maintained.
Separates financial information into time periods for reporting purposes.
Permits the use of market value valuation in certain specific situations
Requires that information significant enough to affect the decision of reasonably informed users should be disclosed. (Do not use full disclosure principle.)
Assumes that the dollar is the “measuring stick” used to report on financial performance.


E2-7
(Accounting Principles—Comprehensive) Presented below are a number of business transactions that occurred during the current year for Fresh Horses, Inc.
Instructions
In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.
The president of Fresh Horses, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made.
Miscellaneous Expense     29,000     
Cash           29,000
Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value.
Merchandise Inventory     70,000

Revenue           70,000
The company is being sued for $500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry.
Loss from Lawsuit     500,000     
Liability for Lawsuit           500,000
Because the general level of prices increased during the current year, Fresh Horses, Inc. determined that there was a $16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made.
Depreciation Expense     16,000     
Accumulated Depreciation           16,000
Fresh Horses, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at $800,000 was written off as follows.

Retained Earnings     800,000     
Goodwill           800,000

1.     Because of a “fire sale,” equipment obviously worth $200,000 was acquired at a cost of $155,000. The following entry was made.
Equipment     200,000     
Cash           155,000
Revenue           45,000