Question

An inexperienced accountant for Can’t Add Company recorded the following transactions in the records of the company for the year ended December 31, 2019. The controller has questioned the appropriateness of the entries since she thinks that they have not been recorded in accordance with generally accepted accounting principles.

1. An order for $61,500 was received from a customer on December 29, 2019 for products on hand. This order was shipped f.o.b. shipping point on January 9, 2020. The accountant made the following entry in 2019:

Accounts Receivable ……………………….. 61,500

Sales Revenue ………………………………. 61,500

2. 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

Gain on Equipment …………….. 45,000

3. On January 1, the company president, the owner of the company, took a personal vacation trip to the Gaspé. The trip cost $ 3,000. The accountant recorded the entry as follows:

Travel Expense ............................................................................. 3,000

Accounts Payable ................................................................... 3,000

4. The company purchased on account a wastebasket on December 31 at a cost of $ 20. The accountant made the following entry:

Office Equipment ........................................................................... 20

Accounts Payable ................................................................... 20

In each situation above, identify the concept that has been violated, if any and why you think it has been violated. If a journal entry is incorrect, provide the correct journal entry.

Answer 1

1) Revenue recognition is done when substantial risk and rewards are transferred to the buyer. In the present case, this a FOB sales and risk and reward has been transferred on Jan 9, 2020. So no revenue needs to be recognised for the year ending 31 December 2019. The accountant should not have passed this entry for 31 December 2019 ending period. He/She should have postponed this to the date of sale i.e. Jan 9, 2020.

2) The accountant should have passed the entry for actual cost paid for the equipment. This violates the cost principle in the GAAP. Hence the revise entry will be as follows-:

Equipment A/c Dr. 155,000

To Cash A/c 155,000

(Being equipment purchased by the Company)

3) The owner of the Company took this trip as a personal vacation. So his personal expenses should not be debited as business expenditure as per the economic entity concept. The revise journal entry should be-:

Drawings/Owner's A/c Dr. 3,000

To Accounts payable 3,000

(Being drwaings made by the owner for the cost of personal trip)

4) In this case, the amount of wastebasket is immaterial, hence its cost should not be capitalised as office equipment. Materiality concept should be applied in this case-:

Revise journal entry should be-:

Misc. Expenses A/c Dr. 20

To Accounts payable 20

(Being wastebasket pruchased by the Company during the year)