Exercise 2-7 (E2-7) Accounting Principles-Comprehensive. Presented below
are a number of business transactions that occurred during the current
year for Fresh Horses, 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 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
Cash 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 in value.
Merchandise Inventory 70,000
Revenue 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
Goodwill 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.
Equipment 200,000
Cash 155,000
Revenue 45,000
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