Question

Page 1 of 3 ACCT 201 Spring Semester Preparation for Mid-Term Exam The exam has 9 questions, SOLVE THE QUESTIONS 1. ABC adopts the (15 marks) plus a 1 mark bonus question. Here are 13 questions to help you prepare for the exam accounting practice whereby all external transactions involving prepaid expenses are initially debited to the ount. if the company fails to adjust any one of these accounts for the current year what will be the effect on (1) the current year's total expenses, (2) total revenues, (3) net income, and (4) ending owner's equity? A Understated, understated, understated, and understated. and overstated C. Overstated, overstated, no effect, and no effect. D. Understated, no effect, overstated, and overstated. E. Overstated, no effect, overstated, and overstated. az. XYZ adopts the accounting practice whereby all external transactions involving advanced by customers are credited to the liability account. If the company fails to adjust any one of these accounts for the current year what will be the effect on (1) ending liabilities, (2) total revenues, (3) net income, (4) ending owner's equity? A. Overstated, understated, understated, and understated , understated, overstated, overstated, and overstated. C. Overstated, overstated, no effect, and no effect. D. Understated, no effect, overstated, and overstated. E. Overstated, no effect, overstated, and overstated. which company (A, B, C or D) investors would likely prefer on the risk-return relation. All amounts are in $ Show plausible calculations to get credit. A 180,000 20,000 | 120,000 | 90,000 C 90,000 10,000 80,000 160,000 Answer: the company investors would likely prefer on the risk-return relation is:.. Q4: Use the following information to answer Q4a & Q4b.

Answer 1

1. The prepaid expenses are initially accounted for by debiting prepaid expense account. The adjusting entry would be to debit expense account and credit prepaid expense account so that expense for the period is correctly recorded and asset is not overstated.

If the adjusting entry is not passed, then

• Current year’s total expenses – will be understated (because expense is not recorded)
• Total revenue – will not be effected (because concerned account is expense account)
• Net income – overstated (because expenses are understated)
• Ending owner’s equity – overstated (because net income is overstated which adds to the equity)

Hence, the right answer is option D

2. The advance payments are initially accounted for by crediting liability account. The adjusting entry would be to debit liability account and credit revenue account so that the advances received are cancelled after providing the services and revenues are correctly recognized.

If the adjusting entry is not passed, then

• Ending liabilities – overstated (because the liability is not cancelled)
• Total revenues – understated (because revenues are not recognized though services are provided)
• Net income – understated (because revenues are understated)
• Ending owner’s equity – understated (because net income is understated, which adds to the equity)

Hence, the right answer is option A

	Assets	Liabilities	Calculations	Average assets	Net income	Calculations
			Net assets			Return on assets = Net income / Average assets
A	180000	20000	160000	160000	40000	25.00%
B	120000	90000	30000	100000	25000	25.00%
C	90000	10000	80000	80000	12000	15.00%
D	180000	190000	-10000	160000	50000	31.25%

Company investors would prefer investing in the company A. The company's return on assets is high and the net assets available are also high.
The company D, though has highest return on assets, has negative net assets. Hence, it is not advisable to invest in D.
The company C has low return on assets compared with other companies.
The companies A and B have same return on assets, but the company A's net assets are more implying that the assets available with A are far higher than with B. Hence, it is advisable to invest in A