Conceptual Framework Comment on the appropriateness of the j

Conceptual Framework: Comment on the appropriateness of the journal entries conducted by Wang, Inc. Depreciation expense on the building for the year was x60,000. 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. 1- etained Earnings 60,000 on Buildings 2- Materials were purchased on January 1, 2011, for ¥120,000 and this amount was entered in the Materials account. On December 31, 2011, the materials would have cost ¥141,000, so the following entry is made. nventory 21,000 Gain on Inventories During the year, the company purchased equipment through the issuance of ordinary shares. The stock had a par value of ¥135,000 and a fair market value of $450,000. The fair market value of the equipment was not easily determinable. The company recorded this transaction as follows. 3- uipment 135,000 35 During the year, the company sold certain equipment for ¥285,000, recognizing a gain of x69,000. 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. 4- 5- Anorder for ¥61,500 has been received from a customer for products on hand. This order was shipped on January 9, 2012. The company made the following entry in 2011. unts Receivable 61,500 ales 61

Solution

1) This treatment is wrong because depreciation means allocation of costs and it is not used to value the asset .Although the value of the building is increasing , all the cost related to this building should be matched with revenues on the income statement .It is not to be charged against retained earnings.

2)This treatment is also not correct .Revenue recognition principles states that revenue must be recognized when amount has been received and it is not recognized until it is realized.Therefore , a gain should not be recognized until the inventory is sold.

3)This treatment is also not correct .Assets should be recorded at the fair value .It is not considered as a violation of historical principle for using the fair value of the stock.Recording the asset at the par value is merely an arbitrary amount which has been set by the company at the time of incorporation.

4)It is not correct to deffer the gain as the gain is realized because the equipment has been sold.It can not be deferred till the next asset has been purchased.

5)Revenue recognition principles states that revenue must be recognized when amount has been received and it is not recognized until it is realized.Therefore , the sale must be recorded in 2012 and not in 2011 as the goods were shipped in 2012.