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E2-7 - Michael McCormick ACG 3103 E2-7 a Violates the...

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Michael McCormick ACG 3103 E2-7. a. Violates the Economic Entity assumption. b. Violates Historical Cost principle. c. Even thou the company does not need to disclosure the law suit it is not violating GAAP. The company is following the Conservatism constraint. d. Depreciation Expense is not tied to the general level of prices, but the cost of equipment over time or the number of goods produced by the equipment. Depreciation Expense cannot be adjusted for a change in price(s). e. Fresh Horses is not following the Going Concern Assumption, and should not adjust its books based on the liquidation value of assets. The company could, however, amortize the asset. f. Fresh Horses should not show the $45,000 as revenue (This is just crazy thinking), nor should it show the equipment at $200,000. The equipment should be shown at $155,000 (cost). Who is to say the equipment is worth $200,000. E2-8. a. This is a change in estimates and should not be charged to Retained Earnings, but charged to Net Income. b. The company is not realizing lower of cost or market. If the cost decreased the company could use a Contra account to show a reduction in inventory but to a “gain.” c. The entry should be as following: Equipment 450,000 Common Stock 135,000
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