PRACTICAL EXERCISE:

TEAM MEMBERS:
María Fernanda Porras
María de los Ángeles Forero
Cristian Hernandez
Nicoll Dayana Osorio

For each of the following proposed business situations write down the GAAP referred, and answer the
questions if necessary.
Housing Lakeshore Real Estate buys software licenses for its property listing programs every year. Ed usually
has to buy at least 10 licenses that cost $15,000 a piece. Ed's capitalizes these licenses and amortizes them in
the years he doesn't need a deduction and he expenses them in the years that he needs a tax deduction. This
violates the consistency principle because Ed uses different accounting treatments for the same or similar
transactions over time.
GAAP: Consistency
According with the consistency principle is that practice correct?.
Explain your reasons:
No, because the consistency principles says that the accountable information requires that the quantification
procedures follow over time. This means that if someone needs to amortize a huge cost or expense, it’s
mandatory to do it continuously and cannot change the accounting treatments with different transactions.

Burkely and Waldorf, LLC is an accounting firm that provides tax and consulting work. During December, JW
provides $2,000 of consulting work to one of its clients. The client does not pay for the consulting time until the
following January.
GAAP: Revenue Recognition
According with selected principle when should Johnson and Waldorf, LLC recognize the revenue?.
The company should register the revenue at the moment that is provided the consulting work and can create
the doubtful account in order to receive the payment later.

During the middle of the night a retailer's store is vandalized. The sign is spray-painted over, the windows are
broken, and some merchandise is stolen. The retailer's financial statements will only report a loss on the
damaged property. It will not report lost potential sales due to down time wait for repairs or additional inventory
because of the monetary unit assumption.
GAAP: Monetary Unit
Should the retailer record hypothetical lost sales, in which monetary unit?
He should not, because It’s only needed to register the commercial transactions that only can be expressed in
terms of an unique currency.
Entertainmen Machining, Inc. buys a new piece of equipment for $100,000 in 2015. This machine has a useful
life of 10 years. This means that the machine will produce products for at least 10 years into the future.
GAAP: Matching
According with the selected principle the hole machine cost should be recorded in 2015?, If your
answer is negative , How should it be recorded?
The hole machine shouldn’t be recorded in 2015 because the company needs to reduce its monetary value
through a depreciation which is shown in the financial statement. Also, the revenues that the machine
generates will be depict in the same financial statement during its useful life.
Consequently, there must be a relation between the cost of the machine (depreciated) and the revenues of the
company.

Music Emporium is a nationwide guitar retailer. It reports $10.5M in guitar inventory last year. In the notes of its
financial statements, GE should disclose its significant accounting policies. This would include its inventory
evaluation methods. GE should disclose whether its financial statements are prepared uses FIFO or LIFO
inventory cost methods.
GAAP: Full disclosure
Should GE disclose whether its financial statements are prepared uses FIFO or LIFO inventory cost
methods.?
Why ?: Explained your reason pls:
The company must use the system LIFO (Last in, First out) because this system is more comfortable for the
non-perishable products.

A small company bookkeeper doesn't do a very good job of keeping track of expenses. Most random expenses
get recorded in the miscellaneous expense account. At the end of the year the miscellaneous expense account
has a total of $1424.25 in it. The total net income of the company is $36,940.
GAAP: Materiality
Should the accountant work in reclassifying the expenses on it?.
The accountant doesn’t have to work in the reclassification because the miscellaneous account is immaterial to
the financial statement because the immaterial assets are only small expenses and they don’t need
classification.

Assume Metalic Guitars , Inc. is in the middle of a patent lawsuit. GGI is suing Blue Guitar, Inc. for patent
infringement and anticipates winning a large settlement. Since the settlement is not certain, GGI does not
record the gain on the financial statements. Why? Because of the GGI might not actually see this gain. It might
not win, or they might not win as much as it expected. It’s lawyers said there is a high probability to win the
lawsuit, more that 70%.
GAAP: Full Disclosure/ Going concern
Since a large winning settlement might skew the financial statements and mislead the users, Should
they left the gain out on in the records?
They should not leave the earnings in the records in the financial statements because they do not know the
amount they will receive from the lawsuit sure.They have to leave the records in the full notes.

Robert`s Restaurant, LLC was formed in 1945. It purchased a building soon after in 1946 for $20,000. Total,
some 50 plus years later, Pam's is still in business. The original building is still on the balance sheet for
$20,000 even though the current fair market value of the building is well over $200,000.
GAAP: Historical cost
What alternative is more convenient for Robert`s Restaurant, record the building for 20.000 or for
200.000?-
The most convenient alternative would be 20,000 since in the balance sheet is already recorded the original
building cost. So, if the principle that they were using before was historical cost, it’s necessary to continue with
this method.