Question

What is violated here?

Golden Book Company purchased a large printing machine for $1,000,000 (a material amount) and recorded the purchase as an expense.

Answer 1

The accounting principle violated by Golden Book Company is the matching principle. A large printing machine should be recorded as a capital expenditure and depreciated over time, not expensed immediately. The firm's accounting profit would be $50,000 calculated by subtracting total expenses from the sales revenue.

Step-by-step explanation:

The accounting principle violated in the scenario where Golden Book Company recorded the purchase of a large printing machine as an expense is the matching principle. This principle dictates that expenses should be recorded in the same period as the revenues they help to generate.

Since a printing machine is a capital asset with a useful life extending beyond a single year, it should be recorded as a capital expenditure and then depreciated over its useful life, rather than being expensed all at once.

To address the student's homework question:

1. Total sales revenue: $1,000,000
2. Total expenses (Labor: $600,000 + Capital: $150,000 + Materials: $200,000) = $950,000
3. Accounting profit = Sales revenue - Total expenses = $1,000,000 - $950,000 = $50,000