Question

#1

If Croder, Inc. underestimates its ending inventory balance in year 1 and it records ending inventory correctly in year 2, which of the following is true?

A) Net Income is understated in year 2

B) Net Income is overstated in year 1

C) Retained Earnings is understated at the end of year 2

D) Costs of goods sold is understated in year 2

#2

Croder, Inc. accounts for bad debts using the allowance method. On September 1, Corder wrote-off a customer's $2,500 account balance. Croder believes the customer will never pay any portion of this balance owed to Croder. What effect will this write-off have on Croder's balance sheet at the time of this write-off.

A) An increase to stockholders equity and a decrease to liabilities

B) A decrease to assets and a decrease to stockholders equity

C) An increase to assets and an increase to stockholders equity

D) no effect

Answer 1

Question 1:

Answer: D) Cost of goods sold is understated in year 2

Explanation:

When the company underestimates its ending inventory in year 1, its cost of goods will be overstated and net Income will be understated. Hence, option B is incorrect. In year 2, when the underestimated ending inventory will be beginning inventory in year 2. When the beginning inventory is underestimated in year 2, cost of goods in year 2 will be understated. Therefore, Option A is incorrect. Because, net income is overstated in year 2.

Question 2:

Answer: D) No effect

Explanation:

When the company wrote off a customer account balance under allowance method, there will be no effect on the company's balance sheet. Under allowance method, bad debts is estimated and charged on the income statement. When we write off a customer account, allowance for doubtful account is created and reducing the accounts receivable account.

Journal Entry Debit Credit

Allowance for Doubtful Accounts $2,500   

Accounts Receivable $2,500

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