Q5SE
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
Step-by-Step Solution
Verified(a) Separate legal entity
(b) Cost principle
(c) Monetary unit assumption
(d) Going concern assumption
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.
As per the cost principle, assets purchased by the entity should be recorded at purchase price or historical cost.
As per the monetary unit assumption, the financial statement should be measured as per the monetary unit like dollars, yen, Canadian dollar, etc.
As per the going concern assumption, it is assumed that business will continue to be functional in the foreseeable future.