Question

1. On December 31, 2018, Far Niente Winery sold a wine press for $545,000; the wine press had originally cost $900,000. Cash was paid by the buyer of the press. Accumulated Depreciation on the press, updated to the date of disposal, was $450,000.

What is the effect of the sale on the balance sheet and income statement of Far Niente reported as of and for the year ended December 31, 2018?

2. Executives at WorldCom committed an $11 billion fraud by capitalizing costs that should have been expensed. This fraud had many effects on WorldCom's balance sheet. Which of the following does not describe one of the misstatements that resulted on the company's balance sheet?

3.Specialty Inc. converts an existing account receivable to a note receivable to allow an extended payment period. Specialty receives a $2,000, 3-month, 12% promissory note from its customer. What entry will Specialty make upon receipt of the note?

Answer 1

1. On December 31, 2018, Far Niente Winery sold a wine press for $545,000; the wine press had originally cost $900,000. Cash was paid by the buyer of the press. Accumulated Depreciation on the press, updated to the date of disposal, was $450,000,

Here the cost of the assets = $ 900000 and accumulated depreciation till the date of disposal = $ 450000 ,

so the value of the assets on the date of sale = Cost - Accumulated depreciation = $ 900000 -$450000

Value of assets on date of sales i.e 31st december 2018 = $ 450,000..

Gain / (Loss) on disposal = Sales value - Value of assets = $ 545000 - $450000   

Thus Gain on disposal = $ 95,000

Here the income statement will be credited by the gain on the assets by $ 95,000 , and cash account will be debited by $ 545000 and the asset account will be credited at cost = $900000 and accumulated depreciation will be debited by $ 450000.

The effect on the income statement is that it will be credited i.e increased with the profit amount , and the balancesheet will be increased with cash and reduced with the accumulated depreciaton and assets cost value.

2. Executives at WorldCom committed an $11 billion fraud by capitalizing costs that should have been expensed , here the income statement is hown more by the amount of fraud as the expenses are short booked and transferred to the assets, the effect on the balancesheet is that the assets are increased due to the fraud as instead of including in the income statement it is included in balancesheet . Here the options are not given so the answer can be solved completely.

3. Specialty Inc. converts an existing account receivable to a note receivable to allow an extended payment period. Specialty receives a $2,000, 3-month, 12% promissory note from its customer.

In case the accounts receivable is converted in the notes receivable, the accounts receivable is credited in order to reverse it and 12% Note receivable is debited as it becomes receivable along with the interest in the near future, the journal entry will be as follows:

Dec .31	12% Notes Receivable	2000
	Accounts Receivable		2000
	( To record conversion of accounts receivable in notes)