Scott and Quick are accountants for Millenium Computers. They disagree over the

Question

Scott and Quick are accountants for Millenium Computers. They disagree over the following transactions that occurred during the calendar year 2008.

For each transaction, indicate why Quick disagrees. Identify the accounting principle or assumption that Scott would be violating if his suggestions were used. Prepare the correct journal entry for each transaction, if any. (If there is no transaction, enter No entry as the description and 0 for the amount.)

1. Scott suggests that equipment should be reported on the balance sheet at its liquidation value, which is $15,000 less than its cost.

Violation:  Time period assumptionFull disclosure principleRevenue recognition principleEconomic entity assumptionMatching principleNo violationMonetary Unit assumptionGoing Concern AssumptionMaterialityConservatismCost principle.

Debit

Credit

2. Millenium bought a custom-made piece of equipment for $36,000. This equipment has a useful life of 6 years. Millenium depreciates equipment using the straight-line method. "Since the equipment is custom-made, it will have no resale value. Therefore, it shouldn't be depreciated but instead should be expensed immediately," argues Scott. "Besides, it provides for lower net income."

Violation:  Full disclosure principleConservatismTime period assumptionCost principleEconomic entity assumptionMonetary Unit assumptionMaterialityMatching principleRevenue recognition principleGoing concern assumptionNo violation.

Debit

Credit

3. Depreciation for the year was $18,000. Since net income is expected to be lower this year, Scott suggests deferring depreciation to a year when there is more net income.

Violation:  Revenue recognition principleTime period assumptionNo violationMonetary Unit assumptionCost principleMaterialityConservatismMatching principleFull disclosure principleGoing concern assumptionEconomic entity assumption.

Debit

Credit

4. Land costing $60,000 was appraised at $90,000. Scott suggests the following journal entry.

Debit

Credit

Violation:  Cost principleFull disclosure principleMaterialityMonetary Unit assumptionConservatismGoing concern assumptionMatching principleTime period assumptionRevenue recognition principleEconomic entity assumptionNo violation.

Debit

Credit

5. Millenium purchased equipment for $35,000 at a going-out-of-business sale. The equipment was worth $45,000. Scott believes that the following entry should be made.

Debit

Credit

Violation:  Full disclosure principleEconomic entity assumptionRevenue recognition principleCost principleMonetary Unit assumptionMatching principleNo violationMaterialityConservatismGoing concern assumptionTime period assumption.

Debit

Credit

Account Description

Debit

Credit

Accounts receivableEquipmentGainAccumulated Depreciation-EquipmentNo EntryDepreciation ExpenseMiscellaneousAccounts payableCash $ Accumulated Depreciation-EquipmentAccounts payableMiscellaneousCashEquipmentGainNo EntryAccounts receivableDepreciation Expense $

Explanation / Answer

Equipment

35000

Cash

35000

Cash

35000

loss on sale

10000

Deprecation

If any

Asset

45000

Equipment

35000

Cash

35000

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