Harlika Dawn C.

Cristobal June 25, 2018

BSAC – 1 AEC 11 ACB

Problem 2-9 (IAA)

For each situation, identify the underlying assumption involved.

1. The operations of a saving bank are being evaluated by the Bangko Sentral ng Pilipinas

During the investigation, the BSP has determined that numerous loans made by top management
were unwise and have seriously endangered the future of the saving bank.
ANSWER: Going Concern

2. The parent entity in Manila has a subsidiary in Japan. The financial statements of the subsidiary
are translated to pesos for consolidation with the financial statements of the parent entity at year-
end.
ANSWER: Accounting Entity

3. A machinery was imported from USA at a certain cost five years ago. Because of inflation, the
machinery has now a current replacement cost which is very much higher than the historical cost.

Management would like to report the machinery at current at current replacement cost.
ANSWER: Monetary Unit

4. An entity has experienced a drastic reduction in revenue by reason of a long dry spell in the area
where the entity grows its tobacco.

The management decided to wait until next year and present financial statements for a two-year
period rather than prepare now the traditional twelve-month financial statements.
ANSWER: Time Period

5. A subsidiary was exhibiting poor financial performance for the current year.

In an effort to increase the subsidiary’s reported income, the parent entity purchased goods from
the subsidiary at twice the normal markup.
ANSWER: Accounting Entity

Problem 2-10 Identification (IAA)

Identify the assumption that is most clearly violated by the accounting practice.

1. An entity decided to publish financial statements only in the years when it had good news to
report.
ANSWER: Going Concern
 2. An entity reported inventory, property, plant and equipment and intangible assets at current
value at year-end.
ANSWER: Monetary Unit

3. An electronics entity owned by a proprietor reported the cost of the proprietor’s swimming pool
as an asset of the entity.
ANSWER: Accounting Entity

4. An entity prepared financial statements adjusted for changes in purchasing power.

ANSWER: Monetary Unit

5. A mining entity kept no accounting records after starting business. The entity is waiting until the
mine is exhausted to determine the success or failure of business.
ANSWER: Going Concern

Problem 2-11 Identification (IAA)

Identify the assumption defined or described.

1. An entity reported financial statements in nominal pesos that have mixed rather than uniform
amount purchasing power.
ANSWER: Monetary Unit

2. A multinational entity published a complete set of financial statements at least once a year,
regardless of whether the financial results were good or bad.
ANSWER: Time Period

3. The pesos of today can buy as much goods and services as the pesos five years ago.
ANSWER: Monetary Unit

4. An accounting entity is viewed as continuing in operation in the absence of evidence to the

contrary.
ANSWER: Going Concern

5. An accounting practitioner mixed personal accounting records with the records of the accounting
practice.
ANSWER: Accounting Entity