Assignment
Rivett and Jones (1990), Chapter 3, question 3.22:
In each of the following separate cases at least one of the assumptions or concepts of the accounting conceptual framework has been violated. Explain which concept or assumption has been violated and what the correct treatment should be.
a) The owner of Discount DVD Hire bought a DVD Recorder for her own use. She paid for the DVD Recorder by writing a cheque on Discount DVD's account. She instructed the bookkeeper to debit the "Equipment" account and credit the "Cash at Bank" account of Discount DVD for the amount paid for the recorder.
b) The entire cost of a new warehouse is charged to an expense account in the year the warehouse was bought.
c) Because profit for the year was extremely small, no depreciation expense was charged.
d) A firm had been charging depreciation on a building that it expected to use for 20 years, at the rate of one twentieth per annum. In the present year, the current cost of the building increased dramatically. This caused the accountant to double the depreciation expense.
e) During the year the bookkeeper stole $20,000. Profit for the year was $50,000, after taking into account the theft. The manager of the firm has argued that the theft need not be separately reported as long as it has been taken into account in calculating the profit. "If it were reported separately", he argued, "people would get a bad impression of our internal control".
f) The manager of a firm was advised by the accountant that the loss of large sums of money was probably because several customers were close to bankruptcy. The customers concerned probably would not be able to pay their debts. The manager has argued that no allowance should be made because the losses have not yet occurred.