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 the major principle or concept in support.
1. Each year Technology Support Company has a large number of uncollectible accounts. Technology charges uncollectible accounts to expense when they are written off. On the average, this is about 18 months after the due date of the account.
2. Wu Builders Company uses a large quantity of small tools. The annual purchases of the tools, which have a life of about two years, are approximately 2 percent of the company's net income for the year. Wu has followed the practice of capitalizing the cost of the tools and depreciating the cost over two years. The owner asks why the accountant spends so much time on "bookkeeping" and tells her to simply charge the tools to expense when they are purchased.
3. John Johnson owns a travel tour service. Customers must make a deposit of one-half the tour price at the time they book reservations. The balance is due 60 days prior to departure. Partial refunds are provided, depending on the date of cancellation. At the time deposits are received, Johnson records them as revenue. Refunds are treated as expenses at the time they are made.
4. Internet Sales and Exchanges Company sells such items as discontinued products and merchandise purchased from bankrupt companies. Freight costs on goods purchased are quite high. The company adds the freight costs to the purchase price and treats the total as cost of inventory.
5. Smiley Company manufactures paving equipment. It pays its salespeople a commission of 15 percent of the sales price as their remuneration. During 2016, its sales were $20,000,000 and commissions were $3,000,000. In the income statement, sales are shown as $17,000,000. Analyze: What is the effect on sales of the procedure used by Smiley Company in question 5, above?