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What accounting assumption, principle, or constraint would Target Corporation use in each of the situations below?

(a) Target was involved in litigation over the last year. This litigation is disclosed in the financial statements.

(b) Target allocates the cost of its depreciable assets over the life it expects to receive revenue from these assets.

(c) Target records the purchase of a new Dell PC at its cash equivalent price.

Short Answer

Expert verified

a) Full disclosure, (b) Expense recognition, (c) Historical cost

Step by step solution

01

(a) Company Target has disclosed the litigation in the financial statements which was happened last year  – Full disclosure

Full disclosure – Full disclosure is an accounting principle that states that the company or the firm must disclose all the relevant information about the transactions or the operations that are happening in the business. When a company discloses all the required information in the financial statements the creditors, investors, shareholders, government, and the public can know about the financial position of the business.

Target company disclosed the limitation on the financial statements and disclosing all the relevant information in the financial statement comes under the full disclosure accounting principle concept.

02

(b) Company Target has allocated the cost of its depreciable assets over the life it expects to receive revenue from these assets – Expense recognition

Expense recognition – Expense recognition is an accounting principle that states that the company or the firm must recognize all the relevant expenses in the same period as well as the revenues associated with those expenses.

The target company has allocated the cost of its depreciable assets over the life it expects to receive the income from that assets comes under the expense recognition principle concept.

03

(c) Company Target has recorded the new purchase of DELL pc as its cash equivalent price  –  Historical cost

Full disclosure– Historical cost is an accounting principle that states that the company or the firm must record the prices of the asset in the balance sheet at their historical cost even if the price of the asset has changed over a period of time. The price of the asset must be recorded in the books of the account at the price at which it is purchased.

The target company has recorded the price of the DELL pc as its cash eqilavlemt price comes under the historical cost accounting principle concept.

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Most popular questions from this chapter

Three expense recognition methods (associating cause and effect, systematic and rational allocation, and immediate recognition) were discussed in the text under the expense recognition principle. Indicate the basic nature of each of these expense recognition methods and give two examples of each.

Briefly describe how the organization of the FASB Codification corresponds to the elements of financial statements.

What is a conceptual framework? Why is a conceptual framework necessary in financial accounting?

Question: Wal-Mart Stores, Inc.

Wal-Mart Stores, Inc. provided the following disclosure in a recent annual report.

New accounting pronouncement (partial) . . . the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101—“Revenue Recognition in Financial Statements” (SAB 101). This SAB deals with various revenue recognition issues, several of which are common within the retail industry. As a result of the issuance of this SAB . . . the Company is currently evaluating the effects of the SAB on its method of recognizing revenues related to layaway sales and will make any accounting method changes necessary during the first quarter of [next year].

In response to SAB 101, Wal-Mart changed its revenue recognition policy for layaway transactions, in which Wal-Mart sets aside merchandise for customers who make partial payment. Before the change, Wal-Mart recognized all revenue on the sale at the time of the layaway. After the change, Wal-Mart does not recognize revenue until customers satisfy all payment obligations and take possession of the merchandise.

Instructions

(a) Discuss the expected effect on income (1) in the year that Wal-Mart makes the changes in its revenue recognition policy, and (2) in the years following the change.

(b) Evaluate the extent to which Wal-Mart’s previous revenue policy was consistent with the revenue recognition principle.

(c) If all retailers had used a revenue recognition policy similar to Wal-Mart’s before the change, are there any concerns with respect to the qualitative characteristic of comparability? Explain.

Describe the basic assumptions of accounting.

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