The Truck is recorded at FMV and as revenue per SFAS 116.

2. Correct way to report these assets:

Lawn mower = $40

Pickup Truck = $2,000

The other side of the Pickup Truck is Revenue for $2,000. Also, a disclosure has to be made in the notes indicating that the Pickup Truck was donated by the uncle and the revenue has to be listed under a Related Party Transaction note.

3. A truly accurate balance sheet value for the truck is a valuation of the truck. Usually, the value of a similar truck in the same condition will suffice.

4. The capital would be understated by $1,000.

2)Ted needs to change the amount on his balance sheet for the price of the lawn mowers and take out the amount for the truck.

3)Cost principle would be used to determin the truck value.

” Generally accepted accounting principles state that the original cost (often called historical cost) is the appropriate value to assign to all business transactions- and therefore to all assets, liabilities, and components of owner’s equity, including revenues and expenses recorded bya business.”

4) Well for one his capital would be wrong because he did not spend that amount of money so the items are not valued at that amount, also over time the value lowers making his investment less then what it is. There are many reasons why this can affect his capital.

Hope this helps, I have a degree in accounting : )

2.) The correct journal entries would have been:

. . . Dr Equipment (lawn mowers) $40

. . . . . . Cr Cash

and

. . . Dr. Equipment (truck) $2000

. . . . . . Cr Owner’s Equity (not revenue!!)

3.) Adjust his books so that these items are recorded as in #2.

4.) His capital (or equity) would be understated by $1000 for the truck and overstated by $120 for the lawn mowers (understated by $880 net). This could lead Ted to make poor management decisions should he rely on faulty figures to represent his equity.