The Mock Corporation was formed on January 1. At December 31, William Mock, CEO and sole owner, prepared the company's balance sheet as follows:

William is not an accountant by trade, and he believes there may be some mistakes in his balance sheet. He has provided you with the following additional information:
1. The building is William's personal beach house. However, he plans on using it for company retreats and for hosting some large clients. He decided to list the asset and the corresponding liability for this reason.
2. The inventory was originally purchased at $12,000, but due to a recent increase in demand, he believes he could sell it for at least $35,000. He thought that $35,000 would best portray the economic reality of his inventory.
3. William included $5,000 in accounts receivable and retained earnings for a service that he will provide next year. Since he is an honest man and will provide the service, he decided to record the amount in this year's balance sheet.
Required
Comment on what accounting assumptions or principles are violated, briefly describe how each item should be accounted for, and prepare a correct balance sheet.

Transcribed Image Text:

Mock Corporation Balance Sheet December 31 Assets Cash Accounts receivable Inventory Building Liabilities and Equity Accounts payable Building loan Retained earnings $25,000 40,000 35,000 20,000 $40,000 15,000 37,000