For each of the unrelated situations below, identify the accounting principle or concept violated (if a violation exists) and explain the nature of the violation. If you believe that the treatment is in accordance with GAAP, state this as your position and defend it.

1. T. J. Lewis owns Lewis Computer Services. His annual net income is $750,000 and his owner’s equity is $1,350,000. In December 2019, an irate customer sued Lewis for $2,000,000, alleging that an error made by Lewis had resulted in damages of that amount. Lewis’s attorney thinks there may be substantial liability. Lewis does not disclose the suit in the financial statements sent to the firm’s banker and to providers of equipment and services.

2. Martinez Company sold for $275,000 land that was purchased 10 years ago for $217,500. Even though the general price level had doubled during this period, Martinez reported a profit of $57,500 on the sale.

3. Windmill Company manufactures a product requiring several parts. The company manufactures the parts, even though almost all competitors purchase the parts from outside sources, because Windmill can manufacture the parts for about 15 percent less than it would have to pay for the parts. Windmill thinks that comparability is very important in financial reporting, so when the parts are manufactured they are recorded at what the purchase price would have been. At the same time, income is recorded equal to the difference between actual cost and the hypothetical purchase price. The Inventory of Parts account reflects this outside purchase price and the Finished Products Inventory also reflects the hypothetical purchase price of the part used in manufacturing the products.

4. In recent years, Interior Designs has enjoyed rapid growth in profits because of customer loyalty and its reputation of putting the needs of customers first. The company recently debited an account called Goodwill in the amount of $150,000. The owner says this reflects the company’s success in the business and the true worth of the business. The offsetting credit was to the Owner’s Equity account.

5. A building repair company opened for business in late 2019. On December 31 the Services Revenue account contained a balance of $252,000. Of that amount, $68,500 represents deposits received on contracts for services to be performed in January and February 2020.

Analyze: Refer to situation 4, above. Assume that in item 4, Taylor Company bought all of the assets of Interior Designs, paying an amount equal to book value for all assets, including $150,000 for goodwill. Also assume that the actual values of all the other assets purchased were equal to the purchase price. Do you think that it would be appropriate for Taylor Company to record the purchase price of the goodwill at the $150,000 paid for it?