Jim Casey recently received his accounting degree from State University and went to work for a Big-Six CPA firm. After he had been with the firm for about six months, he was sent to the Ling Clothing Company to work on the audit. He was not very confident of his knowledge at this early point in his career. He noticed, however, that some of the company's transactions and events were recorded in a way that might be in violation of accounting theory and generally accepted accounting principles.

Study each of the following facts to see if the auditors should challenge the financial accounting practices used or the intentions of management. Write your decisions and the reasoning behind your conclusions.
This problem can serve as an opportunity to apply accounting theory to situations with which you are not yet familiar and as a preview of future chapters. Some of the following situations relate to material you have already covered, and some situations relate to material to be covered in future chapters. After each item, we have given an indication of the chapter in which that item is discussed. You may research future chapters to find the correct answer. Alternatively, you could use your present knowledge of accounting theory to determine whether or not Casey should challenge each of the financial accounting practices used. Realize, however, that some generally accepted accounting practices were based on compromise and seem to differ with accounting theory as described in this chapter.
1. One of the senior members of management stated the company planned to replace all of the furniture next year. He said that the cash in the Accumulated Depreciation account would be used to pay for the furniture. (Ch. 3)
2. The company held the books open at the end of 1999 so they could record some early 2000 sales as 1999 revenue. The justification for this practice was that 1999 was not a good year for profits. (Ch. 3, 5, 6)
3. The company's buildings were appraised for insurance purposes. The appraised values were \(\$ 10,000,000\) higher than the book value. The accountant debited Buildings and credited Paid-in Capital from Appreciation for the difference. (Ch. 5)
4. The company recorded purchases of merchandise at the list price rather than the gross selling (invoice) price. (Ch. 6)
5. Goods shipped to the company from a supplier, FOB destination, were debited to Purchases. The goods were not included in ending inventory because the goods had not yet arrived. (Ch. 5, 6)
6. The company counted some items twice in taking the physical inventory at the end of the year. The person taking the inventory said he had forgotten to include some items in last year's physical inventory, and counting some items twice would make up for the items missed last year so that net income this year would be about correct. (Ch. 7)
7. The company switched from FIFO to LIFO in accounting for inventories. The preceding year it had switched from the weighted-average method to FIFO. The reason given for the most recent change was that federal income taxes would be lower. No indication of this switch was to appear in the financial statements. (Ch. 5, 7)
8. Since things were pretty hectic at year-end, the accountant made no effort to reconcile the bank account. His reason was that the bank probably had not made any errors. The bank balance was lower than the book balance, so the accountant debited Miscellaneous Expense and credited Cash for the difference. (Ch. 8)
9. When a customer failed to pay the amount due, the accountant debited Allowance for Uncollectible Accounts and credited Accounts Receivable. The amount of accounts written off in this manner was huge. (Ch. 9)
10. A completely depreciated machine was still being used. The accountant left the asset and its related accumulated depreciation on the books, stopped recording depreciation on the machine, and did not go back and correct earlier years' net income and reduce accumulated depreciation. (Ch. 10)
11. The accountant stated that even though research and development costs incurred to develop a new product would benefit future periods, these costs must be expensed as incurred. This year \(\$ 200,000\) of these costs were charged to expense. (Ch. 11)

12. An old truck was traded for a new truck. Since the trade-in value of the old truck was higher than its book value, a gain was recorded on the transaction. (Ch. 11)
13. The company paid for a franchise giving it the exclusive right to operate in a given geographical area for 60 years. The accountant is amortizing the asset over 60 years. (Ch. 11)
14. The company leases a building and has a nonrenewable lease that expires in 15 years. The company made some improvements to the building. Since the improvements will last 30 years, they are being written off over 30 years. (Ch. 11)