A co-op student, Toni Johnston, encountered the following situations at Chin Chin Corporation, a publicly traded company:
1. Toni learned that Chin Chin is depreciating its buildings and equipment, but not its land. She could not understand why land was omitted, so she prepared journal entries to depreciate all the company’s property, plant, and equipment for the current year end.
2. Toni determined that Chin Chin’s amortization policy on its was wrong. The company was amortizing its patents but not its . She fixed that for the current year end by adding to her adjusting entry for amortization. She told a fellow student that she felt she had improved the consistency of the company’s accounting policies by making these changes.
3. Chin Chin has a building still in use that has a zero carrying amount but a substantial fair value. Toni felt that this practice did not 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 her employment has brought to the company’s accounting practices.
Instructions
Explain whether or not the accounting treatment in each of the above situations is appropriate. If an accounting principle or assumption has been violated, explain what the appropriate accounting treatment should be.
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