Exercise NO: 9

Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc.\nInstructions\nIn each of the situations,

Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc.

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Instructions

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In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.

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

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Miscellaneous Expense 29,000

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Cash 29,000

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(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.

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Inventory 70,000

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Sales Revenue 70,000

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(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.

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Loss from Lawsuit 500,000

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Liability for Lawsuit 500,000

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(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.

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Depreciation Expense 16,000

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Accumulated Depreciation—Equipment 16,000

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(e) Gonzales, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at $800,000 was written off as follows.

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Retained Earnings 800,000

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Goodwill 800,000

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(f) Because of a “fire sale,” equipment obviously worth $200,000 was acquired at a cost of $155,000. The following entry was made.

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Equipment 200,000

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Cash 155,000

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Sales Revenue 45,000

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