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(Solution) Assignment for Chapter 7

(Solution) Assignment for Chapter 7 - market value in this...

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Assignment for Chapter 7 1. Cost principle. Appreciation in value does not justify recognizing a gain on the land until it is sold. Appreciation does not involve an exchange transaction. No entry is necessary . 2. Matching principle. The purchase of equipment should not be expensed immediately. Only costs which have no future benefit are recognized immediately as expenses. Reporting a lower net income is not a l eg i t i - mate reason for expensing a piece of equipment. Therefore, the following entry is necessary: Depreciation Expense ($60,000 ÷ 5 years 60,000 Accumulated Depreciation—Equipment 60,000 3. Matching principle. Plant assets should be expensed through a rational and systematic policy. Deferring depreciation is not rational and systematic. Therefore, the following entry is necessary: Depreciation Expense 130,000 Accumulated Depreciation 130,000 4. Cost principle. Recording the transaction at its estimated market value would not be proper because estimated
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Unformatted text preview: market value in this case does not represent an exchange price. The purchase should be recorded at cost, not at a market price that someone believes the equipment is worth. The correct entry is: Equipment 90,000 Cash 90,000 5. Going concern assumption. Liquidation value is not appropriate because it assumes that the company will not continue. No entry is necessary. Only when liquidation appears imminent is the going concern assumption inapplicable. 6. Matching principle. The matching principle is violated because expensing the cost of the rent does not allow a proper matching of expense with the period in which the revenue will occur. Revenue associated with the rent would benefit both years. The correct entry is: Prepaid Rent 120,000 Cash 120,000 An adjusting entry is made at December 31 to record the proper rent expense. Rent Expense ($24,000 X 3/12) 30,000 Prepaid Rent 30,000...
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