Louis's firm had the following situations during the year: Louis's CEO purchased a Ferrari for personal use and charged it to the company. Louis added five additional weeks to its fiscal year so it could improve its income. The accounting period for the previous years were 52 weeks. Equipment with a cost of £100,000 is reported at its market value of £150,000. Recently, Louis purchased a beach house for his personal use. However, he plans on using it for company retreats and for hosting large clients. Hence, he decided to list the asset and the corresponding liability for this reason (he used a loan to purchase this asset). Louis included £10,000 in accounts receivable and retained earnings for a service that he will provide next year. Since he is an honest man and will provide the service, he decided to record the amount this year. The company had paid £3,000 for insurance but uses only £2,000 during the period. The accountant has recorded £3,000 as insurance expenses for the current year. The company owns a fleet of delivery vehicles, which is recorded correctly in the books. Louis does not understand the concept of depreciation and thus, chooses not to record this expense. In each situation, identify the assumption or principle that has been violated and discuss how Louis should have handled the situation.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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“Louis's firm had the following situations during the year:

Louis's CEO purchased a Ferrari for personal use and charged it to the company.

Louis added five additional weeks to its fiscal year so it could improve its income. The accounting period for the previous years were 52 weeks.

Equipment with a cost of £100,000 is reported at its market value of £150,000.

Recently, Louis purchased a beach house for his personal use. However, he plans on using it for company retreats and for hosting large clients. Hence, he decided to list the asset and the corresponding liability for this reason (he used a loan to purchase this asset).

Louis included £10,000 in accounts receivable and retained earnings for a service that he will provide next year. Since he is an honest man and will provide the service, he decided to record the amount this year.

The company had paid £3,000 for insurance but uses only £2,000 during the period. The accountant has recorded £3,000 as insurance expenses for the current year.

The company owns a fleet of delivery vehicles, which is recorded correctly in the books. Louis does not understand the concept of depreciation and thus, chooses not to record this expense.

In each situation, identify the assumption or principle that has been violated and discuss how Louis should have handled the situation.

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