P7-1A Scott and Quick are accountants for Millenium Computers.They disagree over the following
transactions that occurred during the calendar year 2008.
1. Scott suggests that equipment should be reported on the balance sheet at its liquidation
value, which is $15,000 less than its cost.
2. Millenium bought a custom-made piece of equipment for $36,000.This equipment has a useful
life of 6 years. Millenium depreciates equipment using the straight-line method. “Since
the equipment is custom-made, it will have no resale value.Therefore, it shouldn’t be depreciated
but instead should be expensed immediately,” argues Scott. “Besides, it provides for
lower net income.”
3. Depreciation for the year was $18,000. Since net income is expected to be lower this year,
Scott suggests deferring depreciation to a year when there is more net income.
4. Land costing $60,000 was appraised at $90,000. Scott suggests the following journal
entry. Land 30,000
Gain on Appreciation of Land 30,000
5. Millenium purchased equipment for $35,000 at a going-out-of-business sale.The equipment
was worth $45,000. Scott believes that the following entry should be made.
Equipment 45,000
Cash 35,000
Gain on Purchase of Equipment 10,000
Quick disagrees with Scott on each of the above situations
Instructions
For each transaction, indicate why Quick disagrees. Identify the accounting principle or assumption
that Scott would be violating if his suggestions were used. Prepare the correct journal entry
for each transaction, if any.
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