E9-10. Apply accounting concepts. (LO 1, 2, 3, i), C The following situations ar
ID: 2528591 • Letter: E
Question
E9-10. Apply accounting concepts. (LO 1, 2, 3, i), C The following situations are independent of one another, 1.An accounting student recently employed by a small company doesn't and he company is only depreciating its buildings and equipment, but not its land. The student prep equipment for the current year-end. . 2.The same student also thinks the company's amortization policy on its intangible assets is wrong. The company is currently amortizing its patents but not its goodwill. As a result, the student added goodwill to her adjusting entry for amortization at the end of the current year. She told a fellow employee that she felt she had improved the consistency of the company's accounting policies by making these changes .3.The same company has a building still in use that has a zero book value but a substantial fair value. The student felt that this practice didn't benefit the company's users-especially the bank-and wrote the building up to its fair value. After all, she reasoned, you can write down assets if fair values are lower. Writing them up if fair value is higher is yet another example of the improved consistency that she has brought to the company's accounting practices Instructions Explain whether or not the accounting treatment in each of the above situations is in accordance with generally accepted accounting principles. Explain what accounting principle or assumption, if any, has been violated and what the appropriate accounting treatment should be.Explanation / Answer
1. Depreciation is the process where the cost of the assets is allocated to the expense, as they are used in the operations of the company. All the plant, property and equipment are depreciated like Equipment, building but not Land. Land is not depreciated as the value of land does not decline with time and usage. So, the student should not depreciate Land.
2. Goodwill is an intangible asset which has indefinte life and is not amortized as per the accounting standards but is impaired annually.
3. The building and the assets needs to be reported at the cost and not the fair value. it is a violation of cost principle if the student has mentioned and recorded the value of asset at its fair value, the value reported should be its cost i.e. its acquisition value.
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