E1.11 (LO 3) An icon reads, Groupwork. (Accounting Principles and Assumptions—Comprehensive) Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc.

E1.11 (LO 3) An icon reads, Groupwork. (Accounting Principles and Assumptions—Comprehensive) Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc. Instructions In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.

The president of Gonzales, Inc. used his expense account to purchase a new Tahoe solely for personal use. The following journal entry was made.

Miscellaneous Expense 63,000

Cash 63,000

Failed. The owner can keep company and personal transactions together. He broke the economic entity principle.

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.

Inventory 70,000

Sales Revenue 70,000

This is wrong. The company is recording the selling price of the asset just bought, not the actual price they paid for. This action breaks, neutrality and faithful representation, plus they are recording the Revenue of an activity that hasn’t happened: for this to actually be reported in the financial statement, it should be recorded when he actually happens (Revenue recognition principle).

Because the general level of prices increased during the current year, Gonzales, 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—Equipment 16,000

This entry is wrong. Accountants can’t change the price of an item every time it goes up in value. Doing this will make the company lose consistency (because of how often they would be changing prices). If the price was repeatedly going down in price, that change would be recorded under their impairment.

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

Sales Revenue 45,000

This entry was wrong. The company is breaking the Revenue recognition principle and neutrality. Recording a revenue that hasn’t happened and intentionally recording the price of an asset at a higher price than what the company actually acquired it for is not accepted in the accounting field.