An examiners close inspection of the annual financial statements and the accounting records revealed that Mawani Inc.


An examiner’s close inspection of the annual financial statements and the accounting records revealed that Mawani Inc. may have violated some accounting principles. The examiner questioned the following transactions:

a. Merchandise purchased for resale was recorded as a debit to inventory for the invoice price of $ 80,000 (accounts payable was credited for the same amount); terms were 2/ 10, n/ 30. Ten days later, Mawani Inc. paid the account at the net amount due, $ 78,400 ($ 80,000 less the 2% discount). The $ 1,600 discount was credited to revenue. The purchased goods were still shown in inventory at $ 80,000 at year- end.

b. Mawani Inc. recorded equipment depreciation expense of $ 227,000 as a debit to retained earnings and a credit to the equipment account.

c. Routine repairs on equipment were recorded as follows: debit equipment, $ 500; credit cash, $ 500.

d. The company sustained a $ 96,000 storm damage loss during the current year. The company had no insurance. Mawani Inc. reported the loss as follows:

Statement of retained earnings— storm loss .............$ 24,000

Statement of financial position ( assets): Deferred charge— storm loss... $ 72,000

e. Mawani’s balance sheet showed accounts receivable of $ 95,000. This amount included a $ 42,000 three- year loan to the company president. The maturity date of the loan was not specified.


1. For each transaction, identify the inappropriate treatment and the principle(s) violated, if any.

2. Give the original entry that should have been made or the appropriate reporting.

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Related Book For  answer-question

Intermediate Accounting

ISBN: 978-0071339476

Volume 1, 6th Edition

Authors: Beechy Thomas, Conrod Joan, Farrell Elizabeth, McLeod Dick I

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