Reading 33: Understanding the Balance Sheet-LOS c 习题精选 2011, process, product, revenue, assets

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Session 8: Financial Reporting and Analysis: The Income Statement, Balance Sheet, and Cash Flow Statement
Reading 33: Understanding the Balance Sheet

LOS c: Explain how assets and liabilities arise from the accrual process.

 

 

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 Increase

B) Increase No effect

C) No effect Increase

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When a firm recognizes revenue before cash is collected, equity increases (retained earnings) and assets increase (accounts receivable). Liabilities would not be affected.

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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) Understated Overstated

B) Overstated Overstated

C) Overstated Understated

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When payment is received, the firm has an obligation to provide the service. This obligation is reported as a liability ‘unearned revenue’ as a liability, offsetting the increase in cash. If they book the revenue and estimated expenses of providing the service this will overstate equity (assuming revenue greater than expected expense) and liabilities will be understated.

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At the beginning of 20X7, 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 20X7 and what amount should Bryan report as assets related to these recipes on its balance sheet at the end of 20X7?

Recipe expense

Balance sheet

A) $5,000 $25,000

B) $7,500 $22,500

C) $3,000 $30,000

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The recipes are intangible assets. The purchased cookie recipe is capitalized and amortized over 10 years at $2,500 per year ($25,000 cost / 10 years). Since the cake recipe was developed internally, it is expensed immediately. Thus, total expense for 20X7 is $7,500 ($2,500 amortization expense + $5,000 cake recipe expense). The balance sheet value of the purchased recipe at the end of 20X7 is $25,000 – $2,500 = $22,500.

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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 $30,000

B) $15,000 $15,000

C) $45,000 $15,000

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At the beginning of 20X7, the prepaid insurance account (asset) will have a balance of $45,000. Insurance expense will be recognized at a rate of $15,000 per year. At the end of 20X8, one year’s insurance remains; thus, the balance of the prepaid insurance account will equal $15,000 ($45,000 beginning balance – $15,000 insurance expense for 20X7 – $15,000 insurance expense for 20X8).