ACC 349 E2-7 Fresh Horses, Inc

ACC 349 E2-7 Accounting Principles—Comprehensive Presented below are a number of business transactions

ACC 349 EXERCISE 2-7 (Accounting Principles—Comprehensive)

ACC 349 E2-7 Fresh Horses, Inc

Intermediate Accounting: Weygandt, Kieso, Kimmel

Axia College of University of Phoenix (UoP)

Intermediate Accounting 1

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.

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

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

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

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

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

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