Four independent situations follow:

1. Human Solutions Incorporated believes its people are its most significant asset. It estimates and records their value on its balance sheet.

2. Sharon Barton, president and owner of Barton Industries, has instructed the accountant to report the company’s land and buildings at their current value of $500,000 instead of their cost of $350,000. “Reporting the land and buildings at $500,000 will make it easier to get a loan from the bank next month,” Sharon states.

3. Will Viceira, owner of Music To You Company, bought an electric guitar for his personal use. He paid for the guitar with company funds and increased the Equipment account.

4. West Spirit Oil Corp. is a very small oil and gas company that is listed on the Toronto Stock Exchange. The president asked each of the shareholders to approve using ASPE instead of IFRS to reduce expenses for accounting services. He received unanimous approval and has advised the company accountant to prepare the 2024 financial statements accordingly.

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 companies to follow generally accepted accounting principles when preparing their financial statements?