E1.12 (LO 3) An icon reads, Groupwork. (Accounting Principles—Comprehensive) Presented below is information related to Cramer, Inc.

E1.12 (LO 3) An icon reads, Groupwork. (Accounting Principles—Comprehensive) Presented below is information related to Cramer, Inc. Instructions Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.

Depreciation expense on the building for the year was $60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.

Retained Earnings 60,000

Accumulated Depreciation—Buildings 60,000

This journal entry was wrong. The company is not following the faithful representation principle and the verifiability principle. Also, the retained earnings account is used for a whole different purpose than the one that this company gave it.

What is Retained Earnings?:

The money amount kept by the company after paying dividends.

Materials were purchased on January 1, 2028, for $120,000 and this amount was entered in the Materials account. On December 31, 2028, the materials would have cost $141,000, so the following entry is made.

Inventory 21,000

Gain on Inventories 21,000

This journal entry was wrong. Changes of an asset’s price is not permitted to be recorded in the accounting world.

During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of $135,000 and a fair value of $450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.

Equipment 135,000

Common Stock 135,000

This journal entry is wrong. In this kind of situation, the company is obligated to record it at the fair value price instead of the par value.

What is par value/nominal value?:

La etiqueta o el precio de un bond/loan.

During the year, the company sold certain equipment for $285,000, recognizing a gain of $69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.

This journal entry was wrong. The company did not follow the Revenue recognition principle.

An order for $61,500 has been received from a customer for products on hand. This order was shipped on January 9, 2029. The company made the following entry in 2028.

Accounts Receivable 61,500

Sales Revenue 61,500

This journal entry was wrong. The company buying the inventory received it on January of 2029. The seller can not record revenue when the client hasn’t received the product (Revenue recognition principal).