7 E2-9 (Accounting Principles Comprehensive) Presented below are a number of bus

Question

7 E2-9 (Accounting Principles Comprehensive) Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc. Instructions In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles (a) The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made. Miscellaneous Expense 29,000 Cash 29,000 (b) Merchandise inventory that cost $620,000 is reported on the balance sheet at 5690,000, the expected selling price less estimated selling costs. The following entry was made to record this in- crease in value. Inventory 70,000 Sales Revenue 70,000 (c) The company is being sued for $500,000 by a customer who claims damages for personal injury ap parently caused by a defective product. Company attorneys feel extremely confident that the com- pany will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry Loss from Lawsuit 500,000 Liability for Lawsuit 500,000 (d) Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a s16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made. Depreciation Expense 16,000 Accumulated Depreciation- Equipment 16,000 (e) Gonzales, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at $800,000 was written off as follows Rotained Eamings 800,000 Goodwil 600,000 (D Because of a "fire sale," equipment obviously worth $200,000 was acquired at a cost of $155,000. The Equipment 200,000 Cash Sales Revonue 155,000 45,000 7 12.10 (Accounting Principles-Comprehensive) Presented below is information related to Anderson In

Explanation / Answer

1. As per the generally accepted accounting principles expenses which are of personal nature should be debited to "drawings account", since only those expenses which are incurred wholly for the business purpose are allowed. In the question personal expenses of $ 29000 is debited to miscellaneous expenses which is incorrect. Instead $ 29000 should be debited to " drawings A/c". (Economic entity assumption). correct entry would be:

Drawings A/c dr. $ 29000

To cash $ 29000

2. Inventory should be valued at the cost. As per the concept of revenue recognition revenue should only be recognised when the same is actually accured. so, the correct journal entry would be:

Inventory Dr. $ 620000

To cash $ 620000

3. No Journal entry is required in this case since law suit is pending in the case and there is a high probability that company will not be hold liable for any payment. However, following the principle of full discolusure company should mention the same in the foot note.

4. Accounting principles are based on the historic cost i.e. the cost which has actually been incurred irrespective of when it was incurred. So, an increase in the general price level of equipment leading to increase in depreciation can not be recorded in the books of the account

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