The following situations are independent of one another.
1. An accounting student recently employed by a small company doesn’t understand why the company is only depreciating its buildings and equipment, but not its land. The student prepared journal entries to depreciate all the company’s property, plant, and equipment for the current year-end.
2. The same student also thinks the company’s amortization policy on its intangible assets is wrong. The company is currently amortizing its patents but not its goodwill. The student fixed that for the current year-end by adding goodwill to her adjusting entry for amortization. She told a fellow employee that she felt she had improved the consistency of the company’s accounting policies by making these changes.
3. The same company has a building still in use that has a zero book value but a substantial fair value. The student felt that this practice didn’t benefit the company’s users—especially the bank—and wrote the building up to its fair value. After all, she reasoned, you can write down assets if fair values are lower. Writing them up if fair value is higher is yet another example of the improved consistency that she has brought to the company’s accounting practices.
Instructions
Explain whether or not the accounting treatment in each of the above situations is in accordance with generally accepted accounting principles. Explain what accounting principle or assumption, if any, has been violated and what the appropriate accounting treatment should be.