Question

Statements of Omitting Adjustment

The adjustment for accrued fees of $13,400 was omitted at July 31, the end of the current year. Indicate whether each of the items below will be overstated or understated as a result of the omission. Also indicate which financial statement is affected by each error.

	Account	Overstated/Understated	Financial Statement
	Fees earned (or revenues)
	Net income
	Accounts receivable (or assets)
	Stockholders' equity (retained earnings)

Adjustment for Depreciation

The estimated amount of depreciation on equipment for the current year is $133,000.

a. How is the adjustment recorded? Indicate each account affected whether the account is increased or decreased, and the amount of the increase or decrease.

	Account	Increase/Decrease	Amount
	Depreciation expense		$
	Accumulated depreciation		$

b. If the adjustment in (a) was omitted, which of the following items would be erroneously stated on the income statement for the year and the balance sheet as of December 31?

	Account	Overstated/Understated	Financial Statement
	Depreciation expense
	Net income
	Accumulated depreciation
	Total assets
	Stockholders' equity (retained earnings)

Book Value of Fixed Assets

For a recent year, Barnes & Noble Inc. (BKS) reported (in thousands) Property and Equipment of $3,076,299 and Accumulated Depreciation of $2,627,007.

a. What was the book value of the fixed assets?
$ (in thousands)

b. Which of the following would be equal in amount to the book value of Barnes & Noble's fixed assets?

a. Fair market value

b. Carrying value

c. Appraised value

d. Historical cost

Answer 1

Account	Overstated/Understated	Financial Statement
Fees earned (or revenues)	Understated	Income statement
Net income	Understated	Income statement
Accounts receivable (or assets)	Understated	Balance Sheet
Stockholders' equity (retained earnings)	Understated	Balance Sheet

a.

Account	Increase/Decrease	Amount
Depreciation expense	Increase	$133,000
Accumulated depreciation	Increase	$133,000

b.

Account	Overstated/Understated	Financial Statement
Depreciation expense	Understated	Income statement
Net income	Overstated	Income statement
Accumulated depreciation	Understated	Balance sheet
Total assets	Overstated	Balance sheet
Stockholders' equity (retained earnings)	Overstated	Balance sheet

Barnes & Noble:

a. Book value of fixed assets = $3076299 - $2627007 = $449292 (in thousands)

b. Answer: Option b. Carrying value

The book value of the assets is the carrying value of the assets or the value at which the assets are carried in the books which is the cost less accumulated depreciation.

The other options are incorrect since: Fair market value is the price at which the asset is expected to sell in the market. Appraised value is an expert's estimation of the asset value. Historical cost is the original cost at which the asset was acquired.