(Accounting Principles-Comprehensive) Presented below are a number of business transactions
that occurred during the current year for Fresh Horses, Inc.
In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted
(a) The president of Fresh Horses, Inc. used his expense account to purchase a new Suburban solely
for personal use. The following journal entry was made.
Miscellaneous Expense 29,000
(b) Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected
selling price less estimated selling costs. The following entry was made to record this increase
Merchandise Inventory 70,000
(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. 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, Fresh Horses, Inc. determined
that there was a $16,000 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 16,000
(e) Fresh Horses, 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.
Retained Earnings 800,000
(f) Because of a "fire sale," equipment obviously worth $200,000 was acquired at a cost of $155,000.
The following entry was made.
a. This is not correct. The transactions of the president cannot be the transactions of the company. Under the economic entity assumption, these are to treated as personal expense of the President.
b. The is a violation of cost principle and revenue ...
The solution explains if the journal entries are correctly passed in relation to accounting principles