Question

In: Accounting

1. An error in the physical count of goods on hand at the end of the...

1. An error in the physical count of goods on hand at the end of the current period resulted in a $2,500 overstatement of the ending inventory. The effect of this error in the current period is to:

a) overstate cost of goods sold

b) understate cost of goods available for sale.

c) understate gross profit.

d) overstate net income.

e) understate ending retained earnings.

2. Under the equity method of accounting for investments in common stock, when a dividend is received from the investee company:

a) the Dividend Revenue account is credited.

b) the Investments account is increased.

c) no entry is necessary.

d) the Dividend Revenue account is debited.

e) the Investments account is decreased.

3. A purchase of common stock of Ajax Corporation for $14,000 was sold three months later for $15,000. The entry to record the sale would include a:

a) debit to Cash of $14,000.

b) credit to Gain on Sale of Investments of $1,000.

c) credit to Investments of $15,000.

d) credit to Interest Revenue of $1,000.

e) debit to Gain on Sale of Investments of $1,000.

Expert Solution

1) An error in the physical count of goods on hand at the end of the current period which resulted in an overstated ending inventory of $2500 will result in an overstated net income as Cost of goods sold is understated which results in overstated gross profit and hence net income and it will also result in increased retained earnings.Hence option d is correct

2) Under the equity method of accounting for investments in common stock, when a dividend is received from the investee company , the investor company receiving the dividend records an increase to its cash balance but reports a decrease in the carrying value of its investment.Hence the investment account will get decreased (option e )

3) A purchase of common stock of Ajax Corporation for $14,000 was sold three months later for $15,000. The entry to record the sale would include a Debit to cash $15000 , Invetsment account credit with $14000 and gain on sale of investments $1000. Out of the given options only option b is correct in other options either the amount stated is wrong or the account debited or credited is wrong.(option b)

ekkarill92 answered 1 year ago

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