Question

Transactions from Gravenhurst Inc.’s current year follow. Gravenhurst follows IFRS.

1.		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 Land 25,000
2.		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
3.		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 Expense 450,000 Litigation Liability 450,000
4.		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
5.		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 Goodwill 800,000
6.		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

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.

Answer 1

1. The given journal entry is not correct. The correct entry will be as follows:

Cash/Bank Dr. 25,000

Loss on disposal of asset Dr. 25,000

To Land 50,000

2. The second entry is not correct. Ideally there should not be any entry because the inventory should be valued at cost or expected selling price, whichever is lower. So the inventory should be valued at 6,30,000.

3. If the lawyer is confident enough that there will not be any amonunt which the company is required to pay, then there is no need to book such entry since the possibility is very remote. So the company should book contingent liability, not the accrual in the books.

4. Yes, the given entry is correct. The depreciation amount was underestimated which now has been booked.

5. If the company is having doubts over recoverabilty, it will not be recorded and the entry is correct.

6. The entry given is incorrect, the correct entry will be as follows:

Equipment 1,55,000

Cash 1,55,000

Since it has been purchased at a cost of 1,55,000 so it will be recorded with the same amount.