EXERCISE 12-1 Time period assumption. Cost principle. Economic entity assumption. Revenue recognition principle. Full disclosure principle. Matching principle. Going concern assumption. Noopons EXERCISE 12-2 1. No violation of generally accepted accounting principles. 2. This is a violation of the economic entity assumption. The transaction treats Ben Manion and Etheridge Co. as one entity when they are two separate entities. No journal entry should have been made since Ben Manion should have used personal assets to purchase the truck. If cash assets of the company were used, the debit entry could be to Accounts Receivable—B. Manion, or the debit entry could be to B. Manion, Drawing. 3. This is a question of matching and materiality. The pencil sharpener could be depreciated to match the expense with revenue since the pencil sharpener has an estimated useful life of 5 years. However, the pencil sharpener should not be depreciated because the cost of it is not material. Since the cost of the sharpener is not material, it should be expensed immediately. The correct journal entry at the time of purchase is: Miscellaneous Expense.. 25 Cash... 254. This is a violation of the cost principle because the equipment was recorded at its estimated market value and not its exchange value. The correct journal entry is: PROBLEM 12-3B Costs Total Percent Incurred Estimated Complete Year _(CurrentPeriod) + Cost = _(Current Period) 2004 $ 3,000,000 $20,000,000 15% 2005 9,000,000 $20,000,000 45% 2006 5,000,000 $20,000,000 25% 2007 3,000,000 $20,000,000 15% Totals $20,000,000 Percent Revenue Complete Total Recognized ‘Current Period) X_ Revenue = (Current Period, 15% $28,000,000 $ 4,200,000 45% 28,000,000 12,600,000 25% 28,000,000 7,000,000 15% 28,000,000 4,200,000 $28,000,000 EXERCISE 12-2 (Continued) 65,000 5. This is a violation of the cost principle. The inventory was written up to its market value when it should have remained at cost. Thus, no journal entry should have been made.