EXERCISE 12­1 1. 2. 3. 4. 5. 6. 7. Time period assumption. Cost principle. Economic entity assumption. Revenue recognition principle. Full disclosure principle. Matching principle. Going concern assumption.

EXERCISE 12­2 1. 2. No violation of generally accepted accounting principles. 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. 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

3.

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 12­3B Costs Total Incurred Estimated (Current Period) ÷ Cost $ 3,000,000 $20,000,000   9,000,000 $20,000,000   5,000,000 $20,000,000     3,000,000 $20,000,000 $20,000,000 Percent Complete = (Current Period) 15% 45% 25% 15%

Year 2004 2005 2006 2007 Totals

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 12­2 (Continued) Equipment................................................................... Cash..................................................................... 65,000 5. 65,000

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.

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