Business transactions for SGI Company, a private company reporting under ASPE, in the current year follow:

1. The company used the average cost formula to determine that the cost of the merchandise inventory at December

31 was $65,000. On December 31, it would have cost $80,000 to replace the merchandise inventory, so the following entry was made:

Merchandise Inventory......................................15,000

Cost of Goods Sold......................................................15,000

2. An order for $35,000 of goods on hand was received from a customer on December 27. The customer paid a $5,000 deposit when the order was placed. This order is to be shipped on January 9 next year. The following entry was made on December 27:

Cash......................................5,000

Accounts Receivable.................30,000

Sales................................................35,000

3. On December 31, SGI Company's fiscal year end, a 12-month insurance policy for the following year was purchased. The following entry was made:

Insurance Expense...................24,000

Cash.................................................24,000

4. At a fire sale, equipment worth $300,000 was acquired at a cost of $225,000. It had soot and smoke damage, but was otherwise in good condition. The following entry was made:

Equipment..................................300,000

Cash.........................................225,000

Gain on Fair Value Adjustment of Equipment...............75,000

5. The cost of utilities used during December was $4,200. No entry was made for the utilities in December as the bill was not received until January and was paid in February.

Instructions

(a) In each of the situations, identify the assumption or concept that has been violated, if any.

(b) Prepare the journal entry to correct each incorrect transaction identified in (a).

Taking It Further

Would your response to item 5. be different if you did not know the cost of the December utilities?