B the two accounts and the purpose of each are 1

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(b) The two accounts and the purpose of each are: (1)Common stockis used to recordinvestments of assets in the business by the owners (stockholders). (2)Retained earningsisused to record net income retained in the business.Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA FC: Measurement, AICPA PC: Communication, IMA: ReportingS-A E230Distinguish between a reversing entry and an adjusting entry. Are reversing entries required?Solution 230A reversing entry is the exact opposite of an adjusting entry and is made at the beginning of thenew accounting period. Reversing entries are an optional step in the accounting cycle.Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA FC: Measurement, AICPA PC: Communication, IMA: ReportingS-A E231(Ethics)Under Protection provides underground storage facilities for companies desiring off-site storageof sensitive documents, computer records, and other items. They have developed a sophisticatedsurveillance and security system which they initially used in their own facilities, and have recentlystarted to market elsewhere as well.The underground storage facilities are made from natural caves in some instances (reinforcedand modified as appropriate) and from excavations of natural rock formations in others. The landwas purchased over ten years ago for a total of $2.5 million. The modifications have costapproximately $15 million more. The company has never depreciated its storage facilitiesbecause the market value of the property has continued to rise. Presently, the market price isbetween $30 and $40 million.FOR INSTRUCTOR USE ONLY4 - 78
Completing the Accounting CycleS-A E231(Cont’d)Betsy Brantley, a new accounting manager, questioned this depreciation policy. Will Gray, thecontroller, has told her that she needn’t worry about it. For one thing, he says, this is really aspecial form of Land account, which should not be depreciated at all. For another, this is aprivately held company, and so they don’t need to worry about misleading investors. All theowners know about and approve the depreciation policy.Required:What are the ethical issues in this situation?Solution 231The ethical issue is one of integrity. Even though the storage facilities are underground, that doesnot mean that they can be accounted for simply as land. The structural improvements andsurveillance mechanisms will not last forever, and therefore their cost should be allocated overthe periods that are benefited. Net income is being overstated because the depreciation expense,at zero, is being understated.A second issue is the harm that may be incurred by outside parties because of themisrepresentation in the financial statements. Even though the owners know about the (lack of)depreciation, they may still use their financial statements to obtain loans. Private investors andbankers should be able to rely on the financial statements.

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Term
Fall
Professor
NoProfessor
Tags
Accounting, Balance Sheet, Income Statement, Revenue, Generally Accepted Accounting Principles

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