E2-2 (Qualitative Characteristics) The qualitative characteristics that make accounting information
useful for decision-making purposes are as follows.
Relevance Timeliness Representational faithfulness
Reliability Verifiability Comparability
Predictive value Neutrality Consistency
Feedback value
Identify the appropriate qualitative characteristic(s) to be used given the information provided below.
(a) Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.
(b) Quality of information that confirms users’ earlier expectations.
(c) Imperative for providing comparisons of a company from period to period.
(d) Ignores the economic consequences of a standard or rule.
(e) Requires a high degree of consensus among individuals on a given measurement.
(f) Predictive value is an ingredient of this primary quality of information.
(g) Two qualitative characteristics that are related to both relevance and reliability.
(h) Neutrality is an ingredient of this primary quality of accounting information.
(i) Two primary qualities that make accounting information useful for decision-making purposes
(j) Issuance of interim reports is an example of what primary ingredient of relevance

E2-4 (Assumptions, Principles, and Constraints) Presented below are the assumptions, principles, and constraints used in this chapter.
1. Economic entity assumption 5. Historical cost principle 9. Materiality
2. Going concern assumption 6. Matching principle 10. Industry practices
3. Monetary unit assumption 7. Full disclosure principle 11. Conservatism
4. Periodicity assumption 8. Cost-benefit relationship
Identify by number the accounting assumption, principle, or constraint that describes each situation below.
Do not use a letter more than once.
(a) Allocates expenses to revenues in the proper period.
(b) Indicates that market value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)
(c) Ensures that all relevant financial information is reported.
(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)
(e) Anticipates all losses, but reports no gains.
(f) Indicates that personal and business record keeping should be separately maintained.
(g) Separates financial information into time periods for reporting purposes.
(h) Permits the use of market value valuation in certain specific situations.
(i) Requires that information significant enough to affect the decision of reasonably informed users should be disclosed. (Do not use full disclosure principle.)
(j) Assumes that the dollar is the measuring stick used to report on financial performance.

E2-7 (Accounting Principles Comprehensive) Presented below are a number of business transactions that occurred during the current year for Fresh Horses, Inc.
In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.
(a) The president of Fresh Horses, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made.
Miscellaneous Expense 29,000
Cash 29,000
(b) Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value.
Merchandise Inventory 70,000
Revenue 70,000
(c) The company is being sued for $500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry.
Loss from Lawsuit 500,000
Liability for Lawsuit 500,000
(d) Because the general level of prices increased during the current year, Fresh Horses, Inc. determined that there was a $16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made.
Depreciation Expense 16,000
Accumulated Depreciation 16,000
(e) Fresh Horses, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at $800,000 was written off as follows.
Retained Earnings 800,000
Goodwill 800,000
(f) Because of a fire sale, equipment obviously worth $200,000 was acquired at a cost of $155,000.
The following entry was made.
Equipment 200,000
Cash 155,000
Revenue 45,000

E3-5 (Adjusting Entries) The ledger of Duggan Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation Equipment $ 8,400
Notes Payable 20,000
Unearned Rent Revenue 9,300
Rent Revenue 60,000
Interest Expense 0
Wage Expense 14,000
An analysis of the accounts shows the following.
1. The equipment depreciates $250 per month.
2. One-third of the unearned rent was earned during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $850.
5. Insurance expires at the rate of $300 per month.
Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are: Depreciation Expense; Insurance Expense; Interest Payable; and Supplies Expense. (Omit explanations.)

*P3-9 (Adjusting and Closing) Presented below is the December 31 trial balance of Nancy Drew
Debit Credit
Cash $ 18,500
Accounts Receivable 42,000
Allowance for Doubtful Accounts $ 700
Inventory, December 31 80,000
Prepaid Insurance 5,100
Furniture and Equipment 84,000
Accumulated Depreciation Furniture and Equipment 35,000
Notes Payable 28,000
Common Stock 80,600
Retained Earnings 10,000
Sales 600,000
Cost of Goods Sold 398,000
Sales Salaries Expense 50,000
Advertising Expense 6,700
Administrative Salaries Expense 65,000
Office Expense 5,000
$754,300 $754,300
(a) Construct T-accounts and enter the balances shown.
(b) Prepare adjusting journal entries for the following and post to the T-accounts. (Omit explanations.)
Open additional T-accounts as necessary. (The books are closed yearly on December 31.)
(1) Bad debts are estimated to be $1,400.
(2) Furniture and equipment is depreciated based on a 6-year life (no salvage value).
(3) Insurance expired during the year $2,550.
(4) Interest accrued on notes payable $3,360.
(5) Sales salaries earned but not paid $2,400.
(6) Advertising paid in advance $700.
(7) Office supplies on hand $1,500, charged to Office Expense when purchased.
(c) Prepare closing entries and post to the accounts.