Question

Presented below is information related to Cramer, Inc.

Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.

(a) Depreciation expense on the building for the year was $60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.

Retained Earnings 60,000

Accumulated Depreciation—Buildings 60,000

(b) Materials were purchased on January 1, 2017, for $120,000 and this amount was entered in the Materials account. On December 31, 2017, the materials would have cost $141,000, so the following entry is made.

Inventory 21,000

Gain on Inventories 21,000

(c) During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of $135,000 and a fair value of $450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.

Equipment 135,000

Common Stock 135,000

(d) During the year, the company sold certain equipment for $285,000, recognizing a gain of $69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.

(e) An order for $61,500 has been received from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.

Accounts Receivable 61,500

Sales Revenue 61,500

Answer 1

a) This is not appropriate as Depreciation should taken to the income statement against the revenue but not to be charged to retained earnings as it will not correct Profit/Loss of the organization.

b)This is not appropriate as Revenue should be recognized only when it is realized or realizable and also earned as per the revenue recoginition Principle. In this case ,the price of the closing stock has went up but the same are not realized nor realizable.

c)Recording a asset at Par value is not appropiate as par value are more different than the current market value . Par value is determined at the time of incorporation so this is not historical and also has no conceptual validity. The asset should be recorded at fair value if its more evident.

d)Deferring of gain when its already earned and realized is not proper as gain are recorded at the point of Sale.

e)The company is suppose to make a entry in the year 2018 not in 2017. Since the shipment and risk was transferred in the year 2018 thats why the entry has to be done in 2018