Five independent situations follow:
1. In preparing its financial statements, Kari Company estimated and recorded the impact of the recent death of its president.
2. Power Drilling Company recently purchased a fishing boat. It plans on inviting clients for outings occasionally, so the boat was paid for with company funds and recorded in the company's records. Dave Power's family will use the boat whenever it is not being used to entertain clients. It is estimated that the boat will be used by the family about 85% of the time.
3. Because of a "flood sale," equipment worth $300,000 was purchased by Montaigne Company for only $200,000.
The equipment was recorded at $300,000 on Montaigne's books.
4. Vertical Lines Company was on the verge of fi ling for bankruptcy, but a turnaround in the economy has resulted in the company being very healthy financially. The company president insists that the accountant put a note in the financial statements that states the company is a real going concern now.
5. Harbinger and Jamal operate two oil wells as a partnership. The partners are planning on expanding. They plan on incorporating and going public in three years. They agree that the company should use International Financial
Reporting Standards (IFRS) and also agree that they do not need to put that information in the financial statements as they are currently a private company.
Instructions
(a) For each of the above situations, determine if the accounting treatment of the situation is correct or incorrect.
Explain why.
(b) If the accounting treatment is incorrect, explain what should be done.
TAKING IT FURTHER Why is it important for private and public companies to follow generally accepted accounting principles when preparing their financial statements?