Question

For each of the following situations, state whether you agree or disagree with the nancial reporting practice employed,

and briey explain the reason for your answer.
1. The controller of the Dumars Corporation increased the carrying value of land from its original cost of $2 million to its
recently appraised value of $3.5 million.
2. The president of Vosburgh Industries asked the company controller to charge miscellaneous expense for the purchase
of an automobile to be used solely for personal use.
3. At the end of its 2013 scal year, Dower, Inc., received an order from a customer for $45,350. The merchandise will ship
early in 2014. Because the sale was made to a long-time customer, the controller recorded the sale in 2013.
4. At the beginning of its 2013 scal year, Rossi Imports paid $48,000 for a two-year lease on warehouse space. Rossi
recorded the expenditure as an asset to be expensed equally over the two-year period of the lease.
5. The Reliable Tire Company included a note in its nancial statements that described a pending lawsuit against the
company.
6. The Hughes Corporation, a company whose securities are publicly traded, prepares monthly, quarterly, and annual
nancial statements for internal use but disseminates to external users only the annual nancial statements.

Answer 1

1) DISAGREE, assets must be recorded at their historical cost or purchase value ⇒ cost principle

2) DISAGREE, the company should not pay for a car that will serve only for personal use ⇒ economic entity principle

3) DISAGREE, revenue must be recorded only when the earning process is substantially completed ⇒ revenue recognition principle

4) AGREE, it can be recorded as Prepaid Rent ⇒ conservatism principle

5) AGREE, it can be recorded as a contingent liability ⇒ full disclosure principle

6) DISAGREE, generally corporations should disclose quarterly and annual financial statements ⇒ time period principle