Reference no: EM132642118
Transactions from Gravenhurst Inc.'s current year follow.
Gravenhurst Inc. thinks it should dispose of its excess land. While the carrying value is $50,000, current market prices are depressed and only $25,000 is expected upon disposal. The following journal entry was made:
Loss on Disposal of Land 25,000
Merchandise inventory that cost $630,000 was reported on the statement of financial position at $690,000, which is the expected selling price less estimated selling costs.
The following entry was made to record this increase in value:
Inventory 60,000
Sales Revenue 60,000
The company is being sued for $500,000 by a customer who claims damages for personal injury that was allegedly caused by a defective product. Company lawyers 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:
Litigation Expense450,000
Litigation Liability450,000
Because the general level of prices increased during the current year, Gravenhurst Inc. determined that there was a $15,000 understatement of depreciation expense on its equipment and decided to record it in its accounts.
The following entry was made:
Depreciation Expense 15,000
Accumulated Depreciation-Equipment 15,000
Gravenhurst Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a result, goodwill arising from a business acquisition during the current year and recorded at $800,000 was written off as follows:
Retained Earnings 800,000
Goodwill800,000
Because of a "fire sale," equipment that was obviously worth $200,000 was acquired at a bargain price of $155,000. The following entry was made:
Equipment 200,000
Cash 155,000
Revenue 45,000
Problem 1: In each of the above situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles. For the purposes of your discussion, assume that the financial statements, particularly net income, will be used by the court in a divorce settlement for the company president's spouse.