(Accounting Principles—Comprehensive) 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 Suburban 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.

Merchandise Inventory 70,000
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 16,000

(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.

Retained Earnings 800,000
Goodwill 800,000

(f) 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
Revenue 45,000

The transactions itself should not be happened because the President uses company resources for his own use, so the best way is to recover the amount spent and reverse the entries.

However, if it is justified that the vehicles is for the president to travel in his business trip, as vehicles is a fixed asset rather than an expenses, it should be recorded as:

Dr Vehicles 29,000

Cr Cash 29,000

(b)

It is not acceptable to raise up the value of inventory such as the firm did. Under GAAP, the inventory should be recorded as the lower value of its cost and net realizable value. As a result, it should be recorded at $620,000.

(c)

it is appropriate to record the entry because as: it is highly probable that the company will loose the lawsuit as a customer who claims damages for personal injury apparently caused by a defective product; and it is possible to estimate the loss amount which is $500,000.

(d)

It is not appropriate because accounting does not adjust for changes in level of prices.

(e)

It is not appropriate. Under GAAP, Goodwill - a form of intangible asset - is recorded and should be amortized over its useful life.

(f)

It is not appropriate because no sales of asset has been taken place. Cash account does not change and equipment should be recorded at original cost.

Explanation: