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 market value 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 account has a balance of $1,200. Consider the accounting principles and assumptions discussed 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 nancial statements in U.S. dollars.d. Michael expects the Apartment Exchange to remain in operation for the foreseeable future.

Answer 1

a. Michael’s personal assets are not recorded on the Apartment Exchange’s balance sheet. ECONOMIC ENTITY PRINCIPLE, the owner's personal assets are not part of his business assets and therefore should be reported separately.

b. The Apartment Exchange records furniture at its cost of $9,000, not its market value of $13,000. HISTORIC COST PRINCIPLE, assets must be recorded at their purchase price.

c. The Apartment Exchange reports its financial statements in U.S. dollars. MONETARY UNIT PRINCIPLE, businesses must record their transactions in a unit of currency (US dollar).

d. Michael expects the Apartment Exchange to remain in operation for the foreseeable future. GOING CONCERN PRINCIPLE, the business will remain in operation for the foreseeable future.