Garner and Simon are accountants for Desktop Computers. They are having disagreements concerning the following transactions that occurred during the calendar year 1996.

1. A 1-year insurance policy was purchased by Desktop on September 1, 1996 for \(\$ 12,000\). Garner believes that the following entry should be made on September 1 :

2. Desktop purchased equipment for \(\$ 35,000\) at a going-out-of-business sale. The equipment was worth \(\$ 45,000\). Garner believes that the following entry should be made:

3. Land costing \(\$ 60,000\) was appraised at \(\$ 90,000\). Garner suggests the following journal entry:

4. Depreciation for the year was \(\$ 18,000\). Since net income is expected to be lower this year, Garner suggests deferring depreciation to a year when there is more net income.
5. Desktop bought a custom-made piece of equipment for \(\$ 18,000\). This equipment has a useful life of 6 years. Desktop depreciates equipment using the straight-line method. "Since the equipment is custom-made, it will have no resale value and, therefore, shouldn't be depreciated but instead expensed immediately," argues Garner. "Besides, it provides for lower net income."
6. Garner suggests that equipment should be reported on the balance sheet at its liquidation value, which is \(\$ 15,000\) less than its cost.
Simon disagrees with Garner on each of the above situations.
\section*{Instructions}
For each transaction, indicate why Simon disagrees. Identify the accounting principle or assumption that Garner would be violating if his suggestions were used. Prepare the correct journal entry for each transaction, if any.

Transcribed Image Text:

Insurance Expense Cash 12,000 12,000