Question
A2-1 Application of Principles: An examiner's close inspection of the annual financial statements and the accounting records revealed that Mawani Inc. may have violated some
A2-1 Application of Principles: An examiner's close inspection of the annual financial statements and the accounting records revealed that Mawani Inc. may have violated some accounting principles. The examiner questioned the following transactions:
a. Merchandise purchased for resale was recorded as a debit to inventory for the invoice price of $80,000 (accounts payable was credited for the same amount); terms were 2/10, n/30 . Ten days later, Mawani paid the account at the net amount due. $78.400 (80.000 less the 2% discount). The 1,600 discount was credited to revenue. The purchased goods were still shown in inventory at $80.000 at yearend
b. Mawani Inc. recorded equipment depreciation expense of $227,000 as a debit to retained earnings and a credit to the equipment account.
c. Routine repairs on equipment were recorded as follows: debit equipment, $500; credit cash, $500.
d. The company sustained a $ 96.000 storm damage loss during the current year. The company had no insurance. Mawani Inc. reported the loss as follows :
Statement of retained earnings - storm loss $24000
Statement of financial position - asset: deferred charge-storm $72000
e. Mawani's balance sheet showed accounts receivable of $95000. This amount included a $42000 three-year loan to the company president. The maturity date of the loan was not specified.
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