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. Identify the principle or assumption that best matches the situation:

A) Economic Entity Assumption

B) Cost Principle

C) Monetary unit assumption

D) Going concern assumption

Explanation:

A) As the business properties (Apartment Exchange) are separated from personal assets by not recording those personal assets in the balance sheet, it is the economic entity assumption. Economic Entity Assumption refers to the state that the properties of owners should be separated from the business properties.

B) The company records furniture in the balance sheet at the cost of $9,000 instead of the market price of $13,000. It is an example of the cost principle. Cost principle states that the cost price of an asset should be recorded in the balance sheet at the time of purchasing the asset instead of a recent or market price.

C) As the company records its financial statements in U. S. dollars, it matches with the monetary unit assumption. According to the monetary unit assumption, business corporation's transactions are expressed through a monetary value of that country's currency. Here, Apartment Exchange company's transactions are measured and expressed through a specific currency, and it is a reliable unit.

D) As Michael expects the company to remain in operations for the foreseeable future, it is the assumption of the going concern assumption. According to the going concern assumption, a company will continue to operate in the market for the foreseeable future. It may only stop only when the owners want to liquidate their assets.