Identify the accounting concept that was violated in each of the following situations.

1. Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured.

2. McCloud Drug Company owns a patent that it purchased three years ago for $2 million.

3. The controller recently revalued the patent to its approximate market value of $8 million.

4. Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expense.

Expense Recognition

The Historical Cost (original transaction value) Principle

The Economic Entity Assumption

Explanation:

The principle of expense recognition is a fundamental part of the accounting accrual scale, which maintains that income is identified when earned and expenditures when consumed.

The theory of historical cost specifies that firms must report and account for most financial assets and liabilities at either purchase or lease price.

The business entity principle is an accounting principle claiming that all business financial records should be recorded separately from his holders.