Questions: Brief Exercise 1-4 (Static) Basic assumptions and principles [LO1-7, 1-8, 1-9] Identify the accounting concept that was violated in each of the following situations. 1. Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured. 2. McCloud Drug Company owns a patent that it purchased three years ago for 2 million. The controller recently revalued the patent to its approximate market value of 8 million. 3. Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expense.

To address the question, we need to identify the accounting concept that was violated in each of the given situations. Here are the explanations for each scenario:

1. Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured.

   • The answer is: Matching Principle
   • Explanation: The Matching Principle in accounting states that expenses should be recognized in the same period as the revenues they help to generate. By recognizing the cost of goods sold when the product is manufactured rather than when it is sold, Astro Turf Company is violating this principle. The cost of goods sold should be matched with the revenue from the sale of the product, not the manufacturing period.

2. McCloud Drug Company owns a patent that it purchased three years ago for $2 million. The controller recently revalued the patent to its approximate market value of $8 million.

   • The answer is: Historical Cost Principle
   • Explanation: The Historical Cost Principle requires that assets be recorded at their original purchase cost. By revaluing the patent to its current market value, McCloud Drug Company is violating this principle. The patent should remain recorded at its purchase price of $2 million, not the revalued amount of $8 million.

3. Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expense.

   • The answer is: Economic Entity Assumption
   • Explanation: The Economic Entity Assumption states that the transactions of a business should be kept separate from those of its owners or other businesses. By paying the personal mortgage of its president and recording it as a business expense, Philips Company is violating this assumption. Personal expenses of the president should not be recorded as business expenses.

Here is the summary in tabular form:

\begin{tabular}{|l|l|} \hline

1. & Matching Principle \\ \hline
2. & Historical Cost Principle \\ \hline
3. & Economic Entity Assumption \\ \hline \end{tabular}