Ehrlich Smith the owner of The Shoe Box has asked

Ehrlich Smith the owner of The Shoe Box has asked

Ehrlich Smith, the owner of The Shoe Box, has asked you to help him understand the proper
way to account for certain accounting items as he prepares his 2019 financial statements. Smith
has provided the following information and observations:

a. A 3-year fire insurance policy was purchased on 2019, for $2,400. Smith believes that a part
of the cost of the insurance policy should be allocated to each period that benefits from its
coverage.

b. The store building was purchased for $80,000 in January 2011. Smith expected then (as he
does now) that the building will be serviceable as a shoe store for 20 years from the date of
purchase. In 2011, Smith estimated that he could sell the property for $6,000 at the end of its
serviceable life. He feels that each period should bear some portion of the cost of this long-lived
asset that is slowly being consumed.

c. The Shoe Box borrowed $20,000 on a 1-year, 8% note that is due on September 1 next year.

Smith notes that $21,600 cash will be required to repay the note at maturity. The $1,600
difference is, he feels, a cost of using the loaned funds and should be spread over the periods
that benefit from the use of the loan funds.

Required:

1. Explain what Smith is trying to accomplish with the three items. Are his objectives supported
by the concepts that underlie accounting?

2. Describe how each of the three items should be reflected in the 2019 income statement and
the December 31, 2019 balance sheet to accomplish Smith's objectives.

Ehrlich Smith the owner of The Shoe Box has asked

SOLUTION-- http://expertanswer.online/downloads/ehrlich-smith-the-owner-of-the-shoe-box-
has-asked/

See Answer here expertanswer.online

Powered by TCPDF (www.tcpdf.org)