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. a.    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 29,000            Cash     29,000   b.    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   c.    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   d.    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   e.    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

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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.

a.    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 29,000      
     Cash     29,000  

b.    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  

c.    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  

d.    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  

e.    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
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