AC3202 Corporate Accounting I, Semester A, 2022/2023

Week 1 Financial Reporting and Conceptual Framework

Examples

Assumptions & Principles

For each of the following independent situations, state whether the following accounting
practices are in accordance with or in violation of generally accepted accounting
principles. Identify the accounting assumptions and principles followed / violated in
each situation.

1. Stone Co. purchased a piece of land several years ago for $200,000. A similar piece of
land close by recently sold for $1,000,000. The Land Account balance is not increased
but remains at $200,000.

2. Ann Boutique Ltd. manufactures and sells high-fashion clothing to customers on credit.
In preparing the financial statements for the company, the Accountant showed all orders
placed by customers as sales.

3. Max, a doctor, has prepared the financial statements for his business. He has included the
market value of his house as an asset in his business’ financial statements.

4. ABC Corp recorded $4 million as an expense related to the damages in a lawsuit that will
probably go against the company.

5. At the end of the year, Big Co. reports its assets on a liquidation basis even though it is
likely to continue operations in the foreseeable future.

DEFINITIONS OF ELEMENTS AND RECOGNITION CRITERIA

Explain how you would account for the following items, justifying your answer by reference
to the Conceptual Framework’s definitions and recognition criteria:

(a) A trinket of sentimental value only.

(b) You are guarantor for your friend’s bank loan:

(i) You have no reason to believe your friend will default on the loan.
(ii) As your friend is in serious financial difficulties, you think it is probable that he will
default on the loan.

(c) You receive 1000 shares in X Ltd, trading at $4 each, as a gift from a grateful client.

(d) The panoramic view of the coast from your café’s windows, which you are convinced
attracts customers to your café.

(e) The court has ordered your firm to repair the environmental damage it caused to the
local river system. You have no idea how much this repair work will cost.