Required: 1. For each transaction, identify the inappropriate treatment and acco

Question

Required:

1. For each transaction, identify the inappropriate treatment and accounting principe violated.

2. Give the original entry should have been made.

Question a) Merchandise purchased for resale was recorded as a debit to inventory for the invoice price of $80,00; terms were 2/10, n/30. Ten days later, Mawani Inc. paid the account at the net amount due, $78,400 (80,000 less the 2% discount). The $1600 discount was credited to revenue. The purchased goods were still shown in inventory at $80,000 at year end.

Question b) Mawani Inc. recorded equipment depreciation expense of $227,000 as a debit to retained earnings and credit to the equipment account.

Explanation / Answer

1a. Crediting the $1,600 discount to revenue is inappropriate treatment. The discount should ideally be adjusted to the cost of the inventory purchased. By crediting the discount to revenue and valuing the inventory at $80,000, the cost principle is violated. The matching principle is also violated since the discount is credited to revenue in one period while the goods are still in inventory.

b. Recording the equipment depreciation expense of $227,000 as a debit to retained earnings and credit to equipment account is inappropriate treatment. The depreciation expense should be debited to a separate depreciation expense account so that the same is considered in the computation of the current accounting period's net income or loss. By debiting it directly to the retained earnings, the current period's net income will be overstated. This would violate the matching principle since the depreciation expense is not matched with the revenues earned during the current period by using the equipment.

2.

Transaction Description Debit Credit a. Accounts payable 80000 Merchandise inventory 1600 Cash 78400 (To record payment on account) b. Depreciation expense 227000 Accumulated depreciation-equipment 227000 (To record depreciation on equipment)

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