E2-7 Fresh Horses, Inc.
E2-7 Accounting Principles—Comprehensive) Presented below are a number of business transactions that occurred during the current year for Fresh Horses, Inc.
In each of the situations, discuss the appropriateness of the journal entries in terms of generally
accepted accounting principles.
Miscellaneous Expense 29,000
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
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
Because the general level of prices increased during the current year, Fresh Horses, 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
Fresh Horses, 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
Because of a “fire sale,” equipment obviously worth $200,000 was acquired at a cost of $155,000.
The following entry was made.