Question: Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.
a. Depreciation expense on the building for the year was \(60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.
Retained Earnings 60,000
Accumulated Depreciation—Buildings 60,000
b. Materials were purchased on January 1, 2017, for \)120,000 and this amount was entered in the Materials account. On December 31, 2017, the materials would have cost \(141,000, so the following entry is made.
Inventory 21,000
Gain on Inventories 21,000
c. During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of \)135,000 and a fair value of \(450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.
Equipment 135,000
Common Stock 135,000
d. During the year, the company sold certain equipment for \)285,000, recognizing a gain of \(69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.
e. An order for \)61,500 from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.
Accounts Receivable 61,500
Sales Revenue 61,500
