QUESTION 2 The accountant for the Selma Company forgot to ma

QUESTION 2 The accountant for the Selma Company forgot to make an adjusting entry to record revenue earned but not yet billed to customers. The effect of this error would be: blled Anunberstatement of ct of this error would be: An understatement of assets, net income, and owner\'s equity. An overstatement of liabilities offset by an understatement of owner\'s equity. An (overstatement of assets and of net income offset by an understatement of owner\'s equity. An overstatement of net income and an understatement of assets. Nohe of the above.

Solution

Part 1

If adjusting entry to record revenue earned but not yet billed to customers is not recorded, it will lead to an understatement of assets, net income and owner\'s equity.

Explanation

When a revenue has been earned but not yet billed to the customer, it means the amount has to be received from the customer. Hence, this amount will add to the assets of the business. Since, revenue has been earned, it will add to the income of the business also. Income earned in the business increases owner\'s equity since it is added to owner\'s equity.

Since, the entry was not recorded for the revenue earned, hence assets, income and owner\'s equity were understated by the amount of revenue earned.

Hence, correct option is (a)

Part 2

Date of purchase = April 1, 2012

Cost of equipment = $600,000

Residual value = $40,000

Useful life = 4 years

Annual depreciation as per straight line method = (Cost - Scrap value)/Useful life

= (600,000 - 40,000)/4

= $140,000

Depreciation rate = 140,000/560,000

= 25%

Straight line depreciation rate is 25% per annum.

Hence, depreciation rate as per double declining method = 25% x 2

= 50%

Hence, depreciation on equipment in 2012 = 600,000 x 50% x 9/12

= $225,000

Hence, correct option is (a)