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Reading 33: Understanding the Balance Sheet - LOS c ~ Q1-4

 

Q1. When a firm recognizes revenue in excess of expenses on a product not covered by a warranty before cash is collected, what is the impact on the firm’s assets and liabilities, ignoring taxes?

          Assets                               Liabilities

 

A) Increase                                    No effect

B) Increase                                    Increase

C) No effect                                   Increase

Q2. Bug-Be-Gone is a residential pest control company that offers a 12 month home-service contract to eliminate insect infestation. Customers are required to prepay for the service at the beginning of each year. If Bug-Be-Gone erroneously records these payments as revenue and include the estimated cost of performing the service, what is the most likely effect on the firm’s liabilities and equity compared to the correct treatment?

Liabilities                      Equity

 

A) Overstated                                Overstated  

B) Understated                             Overstated

C) Overstated                                Understated

Q3. At the beginning of 2007, Bryan’s Bakery Company purchased a secret cookie recipe for $25,000. In addition, Bryan developed a new cake recipe at a cost of $5,000. Bryan expects to use both recipes indefinitely; however, the useful (economic) life of similar recipes has been 10 years. Assuming straight-line amortization, what amount of recipe expense should Bryan report for the year ended 2007 and what amount should Bryan report as a tangible asset on its balance sheet at the end of 2007?

          Recipe expense                          Balance sheet

 

A)                                                      $7,500 $22,500

B)                                                     $7,500 $0

C)                                                     $3,000 $30,000

Q4. On January 1, 20x7, Omega Corporation paid $45,000 to renew its property insurance for 3 years. What amount of insurance expense should Omega report for the year-ended December 31, 20x7 and what is the balance of Omega’s prepaid insurance account on December 31, 20x8?

          Insurance expense        Prepaid insurance

 

A) $15,000                                     $15,000

B) $15,000                                    $30,000

C) $45,000                                    $15,000

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