Assume that you are an independent CPA performing audits of financial statements. In the course of your work, you encounter the following independent situations. Review each of the situations. If you consider the treatment to be in conformity with generally accepted accounting principles and concepts, explain why. If you do not, explain which principle or concept has been violated and how the situation should have been reported.
1. In its regional office, Southeastern Stores purchases at least 140 storage bins each year. These baskets cost approximately $20 each and have useful lives ranging from two to six years. They are depreciated over a period of four years, the estimated average life. One of the company's accountants has suggested that the costs of the baskets should be charged to expense at the time they are purchased.
2. Yondell Company prepares financial statements four times each year. For convenience, these statements are prepared when business is slow and the accounting staff is less busy with other matters. Last year "quarterly" financial statements were prepared for the five-month period ended May 31, the two-month period ended July 31, the three-month period ended October 31, and the two-month period ended December 31.
3. Equipment Supply Company has constructed special-purpose equipment designed to manufacture other equipment that will be sold to computer chip manufacturers. Due to the special nature of this equipment, it has virtually no resale value to any other company. Therefore, Equipment Supply has charged the entire cost to construct the equipment, $90 million, to expense in the current period.
4. The Discount Store spends a large sum on advertising for various sales promotions during the year. The advertising includes "institutional" ads designed to bring in customers in future years. The owner is sure that the advertising will generate revenue in future periods, but she has no idea of how much revenue will be produced or over what period of time it will be earned. In the current year, $700,000 was paid for advertising, and all of this amount was charged as an expense in the current period.
5. Get Away Vacation Resort recognizes room rental revenue on the date that a reservation is made. For the summer season, many guests make reservations as far as a year in advance of their intended visit.
6. Waynesboro Oil and Gas Company produces oil and gas from the ground. It drills wells to attempt to find the oil and gas and to produce any minerals found. On average, about one out of four wells that the company drills produces oil and gas. Drilling costs range from $700,000 to $3,000,000 for each well. The company has adopted a rule that if the well results in finding oil and gas that can be produced profitably, the drilling costs will be recorded as an asset. If a dry hole results, the drilling costs are charged to expense.
Analyze: If item 5 were recorded as described, what possible implications would this have for stockholders in the company?