Question

best answer explenation

Problem A-I - Multiple Choice. Choose the best answer for each of the following questions and enter the identifying letter in the space provided. 1. How does failure to record accrued revenue distort the financial reports? a. It understates revenue, net income, and current assets. b. It understates net income, stockholders' equity, and current liabilities. c. It overstates revenue, stockholders' equity, and current liabilities d. It understates current assets and overstates stockholders' equity. A contingent liability which is normally accrued is a notes receivable discounted. b. accommodation endorsements on customer notes. C. additional compensation that may be payable on a dispute now being arbitrated d. estimated claims under a service warranty on new products sold. 3. Which of the following items is a current liability? a. Bonds due in three months (for which there is an adequate sinking fund classified as a long-term investment). b. Bonds due in three years. C. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months. d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue. 4. On June 15, 2014 Stine Corporation accepted delivery of merchandise which it purchased on account. As of June 30 Stine had not recorded the transaction or included the merchandise in its inventory. The effect of this error on its balance sheet for June 30, 2014 would be a. assets and stockholders' equity were overstated but liabilities were not affected. b. stockholders' equity was the only item affected by the omission. C. assets and liabilities were understated but stockholders' equity was not affected. d. assets and stockholders' equity were understated but liabilities were not affected

Answer 1

1.

Let us see what happens when Revenue is recorded

Accounts Receivable Debit
Revenue Credit

Accounts receivable is a current asset. If Revenue is not recorded then current assets would be understated
Since revenue is not recorded, therefore revenue would be understated
Also, Revenue is a credit. So it results in increase in Net Income. Not recording would result in understatement of Net Income

Answer is Option A

2.

The correct answer is Option D
A contingent liability is a liability in which there is an uncertainty. So estimated claims is an estimate and also would only be incurred when there are actual claims. So there is an uncertainty.

3.

In this case the correct answer is Option C
First all, to be short term the period must be Less than 12 months.

There is an adequate appropriation of retained earnings for this bond. So the bonds due in eleven months (option C) is the answer

4.

The correct entry would be

Purchases Debit
Stine Corporation Credit

Stine Corporation is an Accounts Payable which is a liability. Purchases in turn increase the inventory and the same is a current asset.

Since the entry was not recorded, both Asset (inventory) and Liability (Payable) would be understated.