Applying accounting concepts and principles [5-10 min]
Michael McNamee is the sole shareholder of a property management company near the campus of Pensacola State College. The business has cash of $8,000 and furniture that cost $9,000 and has a market value of $13,000. Debts include accounts payable of $6,000. Michael’s personal home is valued at $400,000 and his personal bank account has a balance of $1,200.
1. Consider the accounting principles discussed in the chapter and define the principle that best matches the situation:
a. Michael’s personal assets are not recorded on the property management company’s balance sheet.
b. Michael records furniture at its cost of $9,000, not its market value of $13,000.
c. Michael does not make adjustments for inflation.
d. The account payable of $6,000 is documented by a statement from the furniture company showing the business still owes $6,000 on the furniture. Michael’s friend thinks he should only owe about $5,000. The account payable is recorded at $6,000.
2. How much equity is in the business?
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