P1-12A Presented below are a number of business transactions that occurred during the current year for Delgado, Inc.
1. Because the general level of prices increased during the current year, Delgado, Inc. determined that there was a $40,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made.
2. Because of a "flood sale," equipment obviously worth $300,000 was acquired at a cost of
$240,000. The following entry was made.
3. An order for $60,000 has been received from a customer for products on hand. This order
is to be shipped on January 9 next year. The following entry was made.
4. Land was purchased on April 30 for $200,000. This amount was entered in the Land account.
On December 31, the land would have cost $230,000, so the following entry was made.
Depreciation Expense 40,000
Accumulated Depreciation 40,000
Gain on Purchase of Equipment 60,000
Accounts Receivable 60,000
Gain on Land 30,000
Miscellaneous Expense 54,000
In each situation, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.
This transaction does not follow GAAP. The Depreciation method used by the company should be consistent and should be one of the commonly used depreciation methods. Depreciation is designed to properly match expenses with revenues in accordance with the Matching Principle. Hence, unless the increase in the general level of prices necessitates the change in the depreciation method, the company should not have made the entry.
This transaction does not follow the Cost Principle ...
Solution discusses the appropriateness of the journal entries in terms of generally accepted accounting principles.