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Chapter 1: Q5SE (page 33)

Michael McNamee is the proprietor of a property management company,Apartment Exchange, near the campus of Pensacola State College. The business has cash of \(8,000 and furniture that cost \)9,000 and has a marketvalue of \(13,000. The business debts include accounts payable of \)6,000. Michael's personal home is valued at \(400,000, and his personal bank accounthas a balance of \)1,200. Consider the accounting principles and assumptionsdiscussed in the chapter, and identify the principle or assumption that best matches the situation:

a. Michael's personal assets are not recorded on the Apartment Exchange's

balance sheet.

b. The Apartment Exchange records furniture at its cost of \(9,000, not its market

value of \)13,000.

c. The Apartment Exchange reports its financial statements in U.S. dollars.

d. Michael expects the Apartment Exchange to remain in operation for the

foreseeable future

Short Answer

Expert verified

(a) Separate legal entity

(b) Cost principle

(c) Monetary unit assumption

(d) Going concern assumption

Step by step solution

01

Explanation on Separate Legal Entity

As per the separate legal entity assumption, the company and the company's owner are considered separate entities. The personal property of the owner can not be used to repay the debts of the business.

02

Explanation on Cost Principle

As per the cost principle, assets purchased by the entity should be recorded at purchase price or historical cost.

03

Explanation on Monetary Unit Assumption

As per the monetary unit assumption, the financial statement should be measured as per the monetary unit like dollars, yen, Canadian dollar, etc.

04

Explanation on Going Concern Assumption

As per the going concern assumption, it is assumed that business will continue to be functional in the foreseeable future.

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Most popular questions from this chapter

What is the accounting equation? Briefly explain each of the three parts.

Identifying users of accounting information

For each of the users of accounting information, identify whether the user is an external decision maker (E) or an internal decision maker (I):

a. customer

b. company manager

c. Internal Revenue Service

d. lender

e. investor

f. controller

g. cost accountant

h. SEC

Consider the following accounting terms and definitions, and match each term to the definition:

1. Sole proprietorship

2. Faithful representation

3. Partnership

4. IFRS

5. Corporation

6. Audit

a. Set of global accounting guidelines, formulated by

the IASB

b. Holds that fair market value should not be used

over actual costs

c. Stands for Financial Accounting Standards Board

d. Owner is referred to as a proprietor

e. Asserts that accounting information should be

complete, neutral, and free from material error

7. Cost principle

8. FASB

9. Creditors

10. SEC

f. An examination of a company鈥檚 financial statements

and records

g. Has two or more owners (called partners)

h. U.S. governmental agency that oversees the U.S.

financial markets

i. Type of entity that is designed to limit personal

liability exposure of owners to the entity鈥檚 debts

j. Person or business lending money

Centerpiece Arrangements has just completed operations for the year ended December 31, 2018. This is the third year of operations for the company. The following data have been assembled for the business: Insurance Expense \( 4,500 Salaries Expense \) 46,000 Service Revenue 70,000 Accounts Payable 17,600 Utilities Expense 1,400 Office Supplies 1,700 Rent Expense 16,000 Dividends 4,800 Common Stock 9,000 Accounts Receivable 8,000 Cash 7,200 Equipment 12,100 Retained Earnings, January 1, 2018 5,100

Preparing the balance sheet

Prepare the balance sheet of Centerpiece Arrangements as of December 31, 2018.

Cosmo Thomas started a new business, Thomas Gymnastics, and completed the following transactions during December: Dec. 1 Received \(19,000 cash from Thomas in exchange for common stock. 2 Received \)3,800 cash from customers for services performed. 5 Paid \(300 cash for office supplies. 9 Performed services for a customer and billed the customer for services rendered, \)4,500. 10 Received \(150 invoice for utilities due in two weeks. 15 Paid for advertising in the local paper, \)350. 20 Paid utility invoice received on Dec. 10. 25 Collected cash in full from customer billed on Dec. 9. 28 Paid rent for the month, \(2,600. 28 Paid \)1,200 to assistant for wages. 30 Received \(1,600 cash from customers for services performed. 31 Cash dividends of \)3,000 were paid to stockholders. Analyze the effects of the transactions on the accounting equation of Thomas Gymnastics using a format similar to Exhibit 1-6.
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