Understatement & Overstatement – Assets & Liabilities

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Understatement & Overstatement – Assets & Liabilities

Understatement & Overstatement – Assets & Liabilities – Accounting and Finance.


On 12-31-19, Gage entered into an agreement that required Gage to pay a vendor $800 every year on 12-31 until 2039. The agreement required Gage to make the first annual payment on 12-31-19. Assume the market rate of interest for Gage is 2%. As of 12-31-19 what was the present value of Gage’s obligation?

$13,081

$13,881Correct

$12,281

$13,014

$13,609


The failure to properly record an adjusting entry to accrue an expense will result in an

understatement of net income.

the understatement of expenses and an overstatement of liabilities.

understatement of expenses and an understatement of liabilities.Correct

understatement of expenses and an understatement of assets.

overstatement of expenses and an overstatement of assets.


Penning Corporation reported the following:

Net income of $900,000
Dividends on common stock of $40,000
Dividends on preferred stock of $50,000
Weighted average common shares outstanding of 300,000

What should Penning report as its earnings per share?

$3.17

$2.83Correct

$3.00

$2.87

$2.70


Adjusting journal entries are often prepared

after the balance sheet date, and dated after the balance sheet date.

before the balance sheet date, and dated after the balance sheet date.

after the balance sheet date, but dated as of the balance sheet date.Correct

before the balance sheet date, but dated as of the balance sheet date.


Which of the following characteristics means that financial accounting information is reasonably free from error and bias?

predictive value

feedback value

consistency

relevance

faithful representationCorrect


The failure to properly record an adjusting entry to accrue a revenue item will result in an

understatement of revenues and an understatement of liabilities.

overstatement of revenues and an overstatement of liabilities.

understatement of revenues and an understatement of assets.Correct

overstatement of net income.

overstatement of revenues and an overstatement of assets.


On 12-31-19, Gage entered into an agreement that required Gage to pay a vendor $800 every year on 12-31 until 2039. The agreement required Gage to make the first annual payment on 12-31-19. Assume the market rate of interest for Gage is 2%. As of 12-31-19 what was the present value of Gage’s obligation?

$13,081

$13,881Correct

$12,281

$13,014

$13,609


The failure to properly record an adjusting entry to accrue an expense will result in an

understatement of net income.

the understatement of expenses and an overstatement of liabilities.

understatement of expenses and an understatement of liabilities.Correct

understatement of expenses and an understatement of assets.

overstatement of expenses and an overstatement of assets.


During the year, Leia Company wrote off a customer’s account receivable. Leia uses the allowance method for uncollectable accounts receivable. What impact, if any, will Leia’s write-off have on its net income and its total assets, respectively?

decrease, decrease

no impact, decrease

increase, decrease

decrease, no impact

no impact, no impactCorrect

On 12-31-18, Mecklin Company accepted a two-year, zero-interest-bearing $1,500 trade note receivable from Raycroft Inc. in exchange for some services that Mecklin provided to Raycroft on 12-31-18. Mecklin will collect the $1,500 note on 12-31-20. On 12-31-18, the market interest rate for similar notes was 3%. As a result of recording this transaction, Mecklin’s balance sheet as of 12-31-18 reported a $1,500 trade note receivable while Mecklin’s income statement for the year ended 12-31-18 reported $1,500 of consulting services revenue. What impact, if any, did Mecklin’s accounting for the note and the services rendered have on its net income for the years ending 2018, 2019, and 2020 and on its retained earnings as of 12-31-20, respectively?

overstate, no impact, no impact, overstate

no impact, understate, overstate, no impact

overstate, understate, understate, overstate

overstate, understate, understate, no impactCorrect

understate, overstate, overstate, no impact


During the year, Steve Company recorded an entry to write off a $15,000 uncollectible account receivable. Before Steve recorded this entry, the balance in Steve’s accounts receivable account was $150,000 and the balance in Steve’s allowance for doubtful account was $20,000. The net realizable value amounts of Steve’s accounts receivable before and after the write-off, respectively, were

$130,000, $125,000

$115,000, $115,000

$120,000, $120,000

$130,000, $130,000Correct

$115,000, $110,000


Joe completed a physical inventory on 12-31-18. On the basis of his count, Joe determined his ending inventory at retail selling prices was $36,000. In recent years, Joe’s gross profit equaled 44% of Joe’s selling price. Additional information from Joe’s accounting records identified the following:

Inventory cost, 12-31-17   $20,000
Net purchases during 2018   $108,000
Net sales revenue during 2018   $186,000

Joe suspects some inventory is missing. Joe used the gross profit method to estimate what his ending inventory should be based on historical facts and trends.

 
What estimated loss, if any, should Joe record for the missing inventory.

$3,680Correct

$4,000

$0

$4,160

$8,160


The cost of land does not include

costs of grading, draining, and clearing.

costs of removing old buildings.

closing costs related to the purchase of the land.

costs of improvements with limited lives.Correct

special assessments.


Based on an aging of its accounts receivable, the required balance in Portage’s allowance for doubtful accounts is $40,000. Portage’s unadjusted trial balance currently has a balance of $4,000. After adjustment, Portage’s bad debt expense for the period is:

$44,000.

$40,000

$42,000.

$36,000.Correct

$4,000.


The phrase “depreciable base” refers to

the estimated market value of the fixed asset at the end of its economic life.

the estimated market value of the fixed asset at the end of its use life.

the amount to be recorded as depreciation over a fixed asset’s useful life.Correct

the acquisition cost of a fixed asset.

the acquisition cost of a fixed asset reduced by any accumulated depreciation.


Acme Company determined that one of its plant assets suffered a permanent impairment in value because of technological changes. Acme’s entry to record the impairment should

include a credit to an accumulated depreciation account.Correct

not include a debit to an accumulated depreciation account.

include a credit to a loss account.

include a credit to a plant asset account.

not be made until the end of the plant asset’s useful life.


The capitalized cost of a purchased intangible asset includes all of the following except

any attorney fees relating to the purchase.

the purchase price.

any legal filing fees relating to the purchase.

any incidental fees relating to the purchase.

all of these costs are capitalized.Correct


Which of the following methods of amortization is normally used for intangible assets?

Accelerated

Double-declining-balance

Sum-of-the-years’-digits

Units of production

Straight-lineCorrect

Balance sheet information is useful for all of the following except to

evaluate capital structure.

analyze cash inflows and outflows for the period.Correct

compute rates of return.

assess future cash flows.


Balance sheet information is useful for all of the following except

determining free cash flows.Correct

evaluating a company’s liquidity.

assessing a company’s risk.

evaluating a company’s financial flexibility.


The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to as

solvency.

exchangeability.

liquidity.Correct

financial flexibility.


Penning Corporation reported the following:

Net income of $900,000
Dividends on common stock of $40,000
Dividends on preferred stock of $50,000
Weighted average common shares outstanding of 300,000

What should Penning report as its earnings per share?

$3.17

$2.83Correct

$3.00

$2.87

$2.70


Adjusting journal entries are often prepared

after the balance sheet date, and dated after the balance sheet date.

before the balance sheet date, and dated after the balance sheet date.

after the balance sheet date, but dated as of the balance sheet date.Correct

before the balance sheet date, but dated as of the balance sheet date.


Which of the following characteristics means that financial accounting information is reasonably free from error and bias?

predictive value

feedback value

consistency

relevance

faithful representationCorrect


Balance sheet information is useful for all of the following except

determining free cash flows.Correct

evaluating a company’s liquidity.

assessing a company’s risk.

evaluating a company’s financial flexibility.


The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to as

solvency.

exchangeability.

liquidity.Correct

financial flexibility.


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