Answer to Question #218501 in Accounting for aghan

Question

(iii) M.K. Industries purchased an expensive special-purpose machine with an estimated useful life of 10 years. Proper installation of the machine required that it be set in the concrete floor of the factory. Once the machine was installed the assistant factory manager argued that the machine had no resale value and thus directed that the entire cost of the machine should be written off in the current year.

(iv) Land was reported at its estimated selling price, which is substantially higher than its cost. The increase in value was included in the income statement.

(v) The personal assets of M.Mutiso and K.Kyalo are not included in the financial statements of the business although M.Mutiso and K.Kyalo are agreeable to guaranteeing the bank overdraft of the business.

Required:

For each of the above items, explain which basis of accounting principle(s), concept(s) or convection(s), if any, are violated or observed. In each case, indicate the correct treatment 

Answer 1

(iii) In this case, the principle of accounting for fixed assets was violated. This is expensive equipment and should have been accounted for as a fixed asset. When selling these funds, the residual value is written off. The principle which is violated is cost principle

(iv) In this case, the principle which is violated is cost principle. According to the cost principle, the amount of the cost of fixed assets should be reflected at the initial cost equal to the cost of acquiring the asset.

(v) In this case, the principle of property isolation is violated:(the assets and liabilities of an organization should be accounted for separately from the assets and liabilities of its owners and other organizations).