Question

James Company, a proprietorship, had the following selected business transactions during the year: (a) In each situation, identify whether the accounting treatment is correct, incorrect or partially correct. 1. Land with a cost of $415,000 was recorded at its fair value of $465,000. Alease agreement to rent equipment from an equipment supplier starting next year was signed. The rent is $500 per month and the lease is for two years. Payments are due at the start of each month. Nothing was recorded in James Company's accounting records when the lease was signed 3. James paid the rent for an apartment for the owner's personal use and charged it to Rent Expense. 4. James prepaid for a one-year insurance policy for $1.200. The amount was charged to Insurance Expense. 5. James included a note in its financial statements stating the company is a going concern. 6. James included a note in its financial statements stating the company is following ASPE.

Answer 1

20 1) Incorrect 21 According to historical cost principle assets such as land should be recorded at their cost 22 or historical value ,even if the fair value is higher. 23 24 25 2) Correct 26 As only the agreement has only signed and there is no monetary transaction has 27 taken place ,therefore,there is no need to record when the lease was signed. 28 29 30 3) Incorrect 31 As the rent has been paid for the owner's use it must be charged to Drawings account. 32 33 34 4) Incorrect 35 As the Insurance has been paid forone year it must be charged to Prepaid Insurance.. 36 37 38 5) Incorrect 39 It must be disclosed in accounting policies.lt must be disclosed only 40 when there is doubt o the entity's ability to continue as a going concern. 41 42

43 6) 44 45 Incorrect It must be disclosed in accounting policies.Only the changes in policies should be disclosed in notes. 46 47 Solution of 2nd question 48 49 Proprietorship Partnership Publicly Traded Corporation 50 Owners have limited liability т Records of the business are combined with the 51 52 53 54 55 56 personal records of the owner or owners Required to follow IFRS т Pay income taxes on its Profits т Owers are called shareholder's т Will have more than one owner Has a limited life т т 57 Has a seprate legal existence from its owners