Chapter 7 Exercise Review

Question 1

Explain why commencing entries must be recorded in the general journal

Answer 1

Because they are infrequent, non cash entries that cannot be recorded in the special journals

Question 2

Explain the role of the narration in the General Journal entry

Answer 2

Because the General Journal records a variety of transactions, the narration is necessary to describe or explain the transaction, and identify the source document

Question 3

Explain why the asset contributed to the business was valued at its agreed value

Answer 3

Although the owner and the business are assumed to be separate entities, there is no ‘sale’ document (and no cash exchanged) when the asset is contributed. Therefore, the agreed value ($13 000) must be used as the Historical Cost in the business’ records.

Question 4

Referring to an accounting qualitative characteristic, explain why the computer must be valued at its agreed value

Answer 4

Relevance
The new value agreed value of $1 100 is more useful for decision-making as it is the agreed value at the time the computer is contributed to the business.

Question 5

Referring to two accounting principles, discuss why the original purchase price is not used when there is an agreed value

Answer 5

Wendy might argue that the Historical Cost principle demands that transactions are recorded and assets valued at their original purchase price of $2 000. This was the price paid by the owner, but according to the Entity principle, the business is considered to be separate to the owner. Thus, the business must value the asset at is agreed value ($1 100) at the time it is contributed, and use this agreed value as its Historical Cost.