Reference no: EM132622279
You are involved in the review of financial statements of various companies and encounter the following situations.
1. Calvin Chemical Company "faces possible expropriation (i.e., takeover) of foreign facilities and possible losses on sums owed by various customers on the verge of bankruptcy."The company president has decided that these possibilities should not be noted on the financial statements because Calvin still hopes that these events will not take place.
2. Breda Starr, manager of College Bookstore, Inc., bought a computer for her own use. She paid for the computer by writing a check on the bookstore checking account and charged the "Office Equipment" account.
3. Hobbs, Inc. recently completed a new 120-storay office building that houses their home offices and many other tenants. All the office equipment for the building that has a per item or per unit cost of sh.100,000 or less was expensed as immaterial, even though the office equipment has an average life of 10years. The total cost of such office equipment was approximately sh.2, 600 million. (Do not use the matching principle).
4. A large lawsuit has been filed against Brunhilda Corp. by Nerwin Co. Brunhilda has recorded a loss and related estimated liability equal to the maximum possible amount it feels it might lose. Brunhilda is confident, however, that either it will win the suit or it will owe a much smaller amount.
5. The treasurer of Piestengle Co. wishes to prepare financial statements only during downturns in their wine production, which occur periodically when the rhubarb crop fails. He states that it is such times that the statements could be most easily prepared. In no event would more than 30 months pass without statements being prepared.
6. The C.Brown Power & Light Company has purchased a large amount of property, plant and equipment over a number of years. They have decided that because the general price level has changed materially over the years, they will issue only price-level adjusted financial statements.
7. Lock horn Manufacturing Co. decided to manufacture its own widgets because it would be cheaper to do so than to buy them from an outside supplier. In an attempt to make their statements more comparable with those of their competitors, Lock horn charged its inventory account for what they felt the widgets would have cost if they had been purchased from an outside supplier. (Do not use the revenue recognition principle).
8. Zonker's Discount Centers buys its merchandise by the truck and train carload. Zonker does not defer any transportation costs in computing the cost of its ending inventory. Such costs, although varying from period to period, are always material in amount.
9. A piece of land was bought at sh400, 000 on 1 Jan 2000. It appears in the accounting records at that value as 31 December 2009. Even though it was valued at sh 1,750,000 according to a recent revaluation by brown &brown values. Management asked for your suggestions.
10. The debtors as on 31 December 2009 amounted to sh 5 million, out of which sh 20,000 is owed by a bankrupt customer. Management has also suggested that a provision for bad debts amounting to 5% of the remaining debtors be created.
11. The book keeper has provided for depreciation on plant and machinery at 15% reducing balance method previous plant and machinery has been depreciated at 10% straight line basis. The assets have a cost of sh 20 million and a written down value of sh 8 million as at 1 January 2009.
12. The accountant clerk came across the electricity bill dated 8 December 2009 amounting to sh 42,200 which has not been recorded. The accounting records indicate that electricity expenses paid in 2009 amounted to sh 324,000.
13. Mambo ltd has operated for several years in the import-export business as big client accounting for 40% of the profits for the year 2009 has been affected by the international financial crisis. Mambo Company made sales of sh 125 million and the expense during the period amounted to sh 60million.
14. Mtwapa enterprises received a sales order of sh3.2 million from one of its big clients on 20 December 2009, Mtwapa enterprises is to order for goods from Tanzania and they expected to be received on 28 January after clearance with customers its only possible to supply the goods to the client on 10 January 2010.
15. The entire cost of delivery truck is to be charged to an expense account.
Required
Question 1: For each of the foregoing situation list the assumption, principle or constraint that has been violated, discuss the nature of the violation and recommend the appropriate treatment.