In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.(a) Merchandise inventory that cost $310,000 is reported on the balance sheet at $345,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value. Inventory 35,000 Sales Revenue 35,000 (b) Because the general level of prices increased during the current year, Ebersole, Inc. determined that there was a $24,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made. Depreciation Expense 24,000 Accumulated Depreciation —Equipment 24,000 (c) Because of a “fire sale,” equipment obviously worth $400,000 was acquired at a cost of $310,000. The following entry was made. Equipment 400,000 Cash 310,000 Sales Revenue 90,000 (d) Ebersole, 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 $750,000 was written off as follows. Retained Earnings 750,000 Goodwill 750,000 (e) The company is being sued for $1,500,000 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 1,500,000 Liability for Lawsuit 1,500,000 (f) The president of Ebersole, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made. Miscellaneous Expense 53,000 Cash 53,000
In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.
(a) Merchandise inventory that cost $310,000 is reported on the balance sheet at $345,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value.
| Inventory | 35,000 | |||
| Sales Revenue | 35,000 |
(b) Because the general level of prices increased during the current year, Ebersole, Inc. determined that there was a $24,000 understatement of
| Depreciation Expense | 24,000 | |||
| |
24,000 |
(c) Because of a “fire sale,” equipment obviously worth $400,000 was acquired at a cost of $310,000. The following entry was made.
| Equipment | 400,000 | |||
| Cash | 310,000 | |||
| Sales Revenue | 90,000 |
(d) Ebersole, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence,
| 750,000 | ||||
| Goodwill | 750,000 |
(e) The company is being sued for $1,500,000 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 | 1,500,000 | |||
| Liability for Lawsuit | 1,500,000 |
(f) The president of Ebersole, Inc. used his expense account to purchase a new Suburban solely for personal use. The following
| Miscellaneous Expense | 53,000 | |||
| Cash | 53,000 |
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