Question

Michael McNamee is the proprietor of a property management company,Apartment Exchange, near the campus of Pensacola State College. The business has cash of \(8,000 and furniture that cost \)9,000 and has a marketvalue of \(13,000. The business debts include accounts payable of \)6,000. Michael's personal home is valued at \(400,000, and his personal bank accounthas a balance of \)1,200. Consider the accounting principles and assumptionsdiscussed in the chapter, and identify the principle or assumption that best matches the situation:

a. Michael's personal assets are not recorded on the Apartment Exchange's

balance sheet.

b. The Apartment Exchange records furniture at its cost of \(9,000, not its market

value of \)13,000.

c. The Apartment Exchange reports its financial statements in U.S. dollars.

d. Michael expects the Apartment Exchange to remain in operation for the

foreseeable future

Short answer

(a) Separate legal entity

(b) Cost principle

(c) Monetary unit assumption

(d) Going concern assumption

Step-by-step solution

Explanation on Separate Legal Entity

As per the separate legal entity assumption, the company and the company's owner are considered separate entities. The personal property of the owner can not be used to repay the debts of the business.

Explanation on Cost Principle

As per the cost principle, assets purchased by the entity should be recorded at purchase price or historical cost.

Explanation on Monetary Unit Assumption

As per the monetary unit assumption, the financial statement should be measured as per the monetary unit like dollars, yen, Canadian dollar, etc.

Explanation on Going Concern Assumption

As per the going concern assumption, it is assumed that business will continue to be functional in the foreseeable future.