Question

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

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

Step-by-step solution

(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.

(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.

(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.