Intermediate Accounting
Chapter 2 Lab
Intermediate Accounting I
(a) The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. Miscellaneous Expense 29,000 Cash 29,000
This in inappropriate based on the economic entity assumption. Economic Entity Assumption states that the economic activity can be identified with a particular unit of accountability. In other words, a company keeps its activity separate and distant from its owners and any other business unit.
(b) Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected selling price less estimated selling costs. Inventory 70,000 Sales Revenue 70,000
The historical cost principle indicates that assets and liabilities are accounted for on the basis of cost. Therefore inventory should be reported at cost value. Revenues should be recorded only when it is realized and not when it is estimated.
(c) The company is being sued for $500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation.
Loss from Lawsuit 500,000 Liability for Lawsuit 500,000
The matching principle indicates that expenses should be allocated to the periods involved. In this case, there appears to be a high uncertainty that the company will have to pay. The company made this entry to air on the side of caution.
(d) Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a $16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. Depreciation Expense
Intermediate Accounting I
(a) The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. Miscellaneous Expense 29,000 Cash 29,000
This in inappropriate based on the economic entity assumption. Economic Entity Assumption states that the economic activity can be identified with a particular unit of accountability. In other words, a company keeps its activity separate and distant from its owners and any other business unit.
(b) Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected selling price less estimated selling costs. Inventory 70,000 Sales Revenue 70,000
The historical cost principle indicates that assets and liabilities are accounted for on the basis of cost. Therefore inventory should be reported at cost value. Revenues should be recorded only when it is realized and not when it is estimated.
(c) The company is being sued for $500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation.
Loss from Lawsuit 500,000 Liability for Lawsuit 500,000
The matching principle indicates that expenses should be allocated to the periods involved. In this case, there appears to be a high uncertainty that the company will have to pay. The company made this entry to air on the side of caution.
(d) Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a $16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. Depreciation Expense