ACC 421 Week 2 Exercises E2-2, E2-4, and E2-7 in Ch. 2 and Exercise E3-5 in Ch. 3 ...

May 8th, 2015
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ACC 421 Week 2 Exercises E2-2, E2-4, and E2-7 in Ch. 2 and Exercise E3-5 in Ch. 3 ...

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E2-7(Accounting PrinciplesComprehensive) Presented below are a number of business transactions that occurred ducurrent year for Fresh Horses, Inc.InstructionsIn each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accountingprinciples.a. The president of Fresh Horses, Inc. used his expense account to purchase a new Suburban solely for personal usefollowing journal entry was made.Miscellaneous ExpenseCash29,00029,000This entry is in violation of the economic entity assumption. The economic entity statementshows that the economic activity can be found in particular units of accountability. Thisparticular situation causes the company to be charged the cost to the wrong economic entity.b. Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected selling priceestimated selling costs. The following entry was made to record this increase in value.Merchandise InventoryRevenue70,00070,000The historical cost principle shows that all the assets and liabilities are accounted for on thebasis of cost.c. The company is being sued for $500,000 by a customer who claims damages for personal injury apparently causedefective product. Company attorneys feel extremely confident that the company will have no liability for damagesfrom the situation. Nevertheless, the company decides to make the following entry.Loss from LawsuitLiability for Lawsuit500,000500,000The

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