Answer:
12.95%
Explanation:
The risk free rate of return is 3.2%
The market risk premium is 4.6%
The beta is 2.12
Therefore, the expected rate of return on a stock can be calculated as follows
= 3.2% + (2.12×4.6%)
= 3.2% + 9.752
= 12.95%
Hence the expected rate of return on a stock is 12.95%
Food Shoppe Galore had the following information: Total market value of a company’s stock: $650 million Total market value of the company’s debt: $150 million What is the weighted average of the company’s debt?
Answer:
18.75%
Explanation:
Food Shoppe galore has a total market value stock of $650 million
The total market value of the company's debt is $150 million
The first step is to calculate the total market value of the company's capital
= $150,000,000 + $650,000,000
= $800,000,000
Therefore, the weighted average of the company's debt can be calculated as follows
= $150,000,000/$800,000,000
= 0.1875×100
= 18.75%
Hence the weighted average of the company's debt is 18.75%
The basic unit in which data are stored in an accounting system is called an __________. These storage units should be so constructed as to readily receive money measurements of the __________ or ___________ in the items for which they are established.
Answer:
it would be 3 units for the first part then second answer would be 5 then the last one would be 13
Explanation:
that's why it would be asking for how many units for each storage units
15. Karla Salons leased equipment from Smith Co. on July 1, 2021, in a finance lease. The present value of the lease payments discounted at 10% was $81,100. Ten annual lease payments of $12,000 are due each year beginning July 1, 2021. Smith Co. had constructed the equipment recently for $66,000, and its retail fair value was $81,100. What amount of interest revenue from the lease should Smith Co. report in its December 31, 2021, income statement
Answer: $3,455
Explanation:
The interest received by Smith can be calculated as;
Interest Value = Present value of lease payment * interest rate
Present Value of interest rate
Ten annual lease payments of $12,000 are due each year beginning July 1, 2021.
That means first payment has been made already. Present value is;
= 81,100 - 12,000
= $69,100
Only half a year has gone by so this will need to be reflected;
Interest Value = Present value of lease payment * interest rate
= 69,100 * 10% * 6/12
= $3,455
In capital rationing, alternative proposals that survive initial screening by cash payback and average rate of return methods are further analyzed using:________
Answer:
Net present value and internal rate of return
Explanation:
when making a decision between alternative projects, initial analysis is done with the cash payback and average rate of return.
Cash payback period calculates the amount of time it takes to recover the amount invested in a project from its cumulative cash flows
Average rate of return = Average net income / average book value.
this is followed by the Net present value analysis and Internal rate of return determination.
Net present value is the present value of after tax cash flows from an investment less the amount invested.
Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested
project with the highest positive project NPV should be chosen.
Also, a project with an IRR greater than the discount rate should be chosen. when choosing between alternative projects, the project with the highest IRR should be chosen if the IRR is greater than the discount rate.
. A particular parcel of real estate (land) is sold for $20,000,000 and was originally purchased for $10,000,000. On a taxable sale, explain a circumstance (type of investor, intent, entity, etc.) that would pay the following U.S. federal income tax results on the $10,000,000 gain (exclude the 3.8% net investment income tax and any state taxes in the calculation):
Question Completion:
Choices: a. No tax liability on the sale b. $2,000,000 of tax c. $2,960,000 of tax d. $2,100,000 of tax
Answer:
b. $2,000,000 of tax for individuals
Explanation:
Long-term capital gains tax is a tax on profits from the sale of an asset which an investor has held for more than a year. The approved long-term capital gains tax rates are 0%, 15% or 20% depending on your taxable income bracket and whether you are filing as a single or jointly as married. But, an important point to note is that long-term capital gains tax rates are generally lower than short-term capital gains tax rates, thus encouraging investors to hold assets for a longer time. Short-term capital gains tax rates are the rates applicable to the normal individual income tax brackets.
When Production decreases what is a very likely possibility? a hire new workers b expand production c purchase new equipment d downsizing
The correct answer is D. Downsizing
Explanation:
In businesses, the term "downsizing" is used to describe a reduction in the number of workers or the total labor force. This often means non-essential workers are fired or even complete departments are eliminated. Moreover, this is likely to occur if the business expenses are higher than its profits or if the production decreases because in both situations fewer workers are needed to eliminate unnecessary expenses. In this context, if production decreases it is likely downsizing occurs.
Domingo Corporation uses the weighted...
Domingo Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 2,300 units. The costs and percentage completion of these units in beginning inventory were:
Cost Percent Complete
Materials costs $7,400 50%
Conversion costs $3,600 20%
A total of 8,700 units were started and 8,000 units were transferred to the second processing department during the month. The following costs were incurred in the first processing department during the month:
Cost
Materials costs $160,600
Conversion costs $122,300
The ending inventory was 85% complete with respect to materials and 75% complete with respect to conversion costs. How many units are in ending work in process inventory in the first processing department at the end of the month?
a. 700.
b. 1,700.
c. 6.400.
d. 2,700.
Answer:
3,000 units
Explanation:
Calculation for How many units are in ending work in process inventory
Using this formula
Ending work in process units =Beginning work in process units + Units started into production - Transferred to the second processing department units
Let plug in the formula
Ending work in process units= 2,300 units + 8,700 units - 8,000 units
Ending work in process units= 3,000 units
Therefore 3,000 units are in the ending work in process inventory in the first processing department at the end of the month.
The declaration, record, and payment dates in connection with a cash dividend of $77,000 on a corporation's common stock are October 1, November 7, and December 15.
Required:
Journalize the entries required on each date.
Answer:
Oct 1
Dr Cash Dividend $77,000
Cr Dividend Payable $77,000
Nov 7
No Entry required on the record date
Dec 15
Dr Dividend Payable $77,000
Cr Cash
Explanation:
Preparation of the Journal entries for each date
Based on the information given we were told that the cash dividend of the amount of $77,000 was a corporation's common stock are October 1, November 7, and December 15 which means that the transaction will be recorded as:
Oct 1
Dr Cash Dividend $77,000
Cr Dividend Payable $77,000
Nov 7
No Entry required on the record date
Dec 15
Dr Dividend Payable $77,000
Cr Cash
Costs that are capitalized because they are expected to have future value are called product costs; costs that are expensed are called period costs. This classification is important because it affects the amount of costs expensed in the income statement and the amount of costs assigned to inventory on the balance sheet. Product costs are commonly made up of direct materials, direct labor, and overhead. Period costs include selling and administrative expenses.
A service company has which of the following costs
a. Direct Material
b. Overhead Costs
c. Product Costs
d. Expensed in the period incurred
Answer:
b. Overhead Costs
d. Expensed in the period incurred
Explanation:
-Direct material refers to the cost of the material used to manufacture a product.
-Overhead costs are the costs related to the operation of the business and they can't be assigned to a good or service.
-Product Costs are the costs to manufacture a product.
-Expensed in the period incurred are the period costs which are costs not related to the production of a good.
According to these definitions, a service company has the following costs: overhead costs and expensed in the period incurred because these are costs that are not related to the creation of a product.
On the other hand, the other options direct material and product costs are not right because these costs are directly related to products.
Whispering Corporation began 2017 with a $94,200 balance in the Deferred Tax Liability account. At the end of 2017, the related cumulative temporary difference amounts to $352,400, and it will reverse evenly over the next 2 years. Pretax accounting income for 2017 is $505,400, the tax rate for all years is 40%, and taxable income for 2017 is $388,500.
Part 1
Compute income taxes payable for 2017.
Income taxes payable
$
Part 2
Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit Credit
Part 3
Prepare the income tax expense section of the income statement for 2017 beginning with the line "Income before income taxes.". (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Answer:
1. Income tax payable = Taxable income for 2017 * Income tax rate
Income tax payable = $388,500 * 40%
Income tax payable = $155,400
2. Journal Entry
Account Titles and Explanations Debit Credit
Income tax expense $202,160
($505,400*40%)
Deferred tax liability $46,760
($202,160-$155,400)
Income tax payable $155,400
($388,500*40%)
3. Income Statement (Partial)
For the Year Ended Dec 31, 2017
Income before income taxes $505,400
Income tax expense
Current $155,400
Deferred $46,760 $202,160
Net Income $303,240
Wookie Company issues 8%, five-year bonds, on January 1 of this year, with a par value of $108,000 and semiannual interest payments.
Semiannual Period-End Unamortized Premium Carrying Value
(0) January 1, issuance $8,271 $116,271
(1) June 30, first payment 7,444 115,444
(2) December 31, second payment 6,617 114,617
Use the above straight-line bond amortization table and prepare journal entries for the following:
a) The issuance of bonds on January 1.
b) The first interest payment on June 30.
c) The second interest payment on December 31.
Answer:
See the journal entries and explanation below.
Explanation:
The journal entries will look as follows
a) The issuance of bonds on January 1.
Date Accounts title Debit ($) Credit ($)
Jan. 1 Cash 111,671
Premium on Bonds Payable 8,271
Bonds Payable (w.1) 108,000
(To record issuance of bonds.)
b) The first interest payment on June 30.
Date Accounts title Debit ($) Credit ($)
Jun. 30 Interest Expense (w.4) 3,493
Premium on Bonds Payable (w.2) 827
Cash (w.3) 4,320
(To record first interest payment)
c) The second interest payment on December 31.
Date Accounts title Debit ($) Credit ($)
Dec. 31 Interest Expense (w.4) 3,493
Premium on Bonds Payable (w.5) 827
Cash (w.6) 4,320
(To record second interest payment)
Workings:
w.1: Bond payable = Cash - Premium on Bonds Payable = $111,671 - $8,271
w.2: Premium on Bonds Payable = January 1 Unamortized Premium - June 30 Unamortized Premium = $8,271 - $7,444 = $827
w.3: Cash = $108,000 * 8% * (6 / 12) = $4,320
w.4: Interest expense = w.3 - w.2 = $4,320 - $827 = $3.493
w.5: Premium on Bonds Payable = June 30 1 Unamortized Premium - December 31 Unamortized Premium = $7,444 - $6,617 = $827
w.6: Cash = $108,000 * 8% * (6 / 12) = $4,320
w.7: Interest expense = w.6 - w.5 = $4,320 - $827 = $3,493
Use goal seek to answer this question. All else equals, to have a net income of 20,000, the COGS margin percentage must be ______, and the gross profit must be ______. Review Later
Answer:
Use goal seek to answer this question. All else equals, to have a net income of 20,000, the COGS margin percentage must be 40%, and the gross profit must be $17,250.
Explanation:
The income statement is missing, so I looked it up and the information given was:
Revenue 100,000 COGS 40,000 Gross Profit 60,000 Salaries Marketing Rent Earnings Before Tax 23,000Income Tax 25% Net Income ?Since COGS are$40,000 and total sales are $100,000, the COGS margin percentage = 40,000 / 100,000 = 40%
Since earnings before taxes are $23,000 and taxes are 25%, then net income = $23,000 x (1 - 25%) = $23,000 x 75% = $17,250
A firm has a debt-to-equity of 0.69 and a market-to-book ratio of 3.0. What is the ratio of the book value of debt to the market value of equity?
Answer:
0.23
Explanation:
Debt to Equity Ratio = Total debt/ Total common equity
Market to book Ratio = Market price per share / Book value per share
Book debt to Market equity Ratio = Debt to Equity Ratio / Market to book Ratio
Book debt to Market equity Ratio = 0.69 / 3
Book debt to Market equity Ratio = 0.23
Therefore, the ratio is 0.23
Disturbed Corp. needs to raise $57 million to fund a new project. The company will sell shares at a price of $23.70 in a general cash offer and the company's underwriters will charge a spread of 7.5 percent. The direct flotation costs associated with the issue are $725,000 and the indirect costs are $445,000. How many shares need to be sold?
Answer: 2653438 shares
Explanation:
From the information given in the question, the following can be deduced:
The share price will be:
= $23.70 × (1 - 7.5%)
= $23.70 × (1 - 0.075)
= $23.70 × 0.925
= $21.9225
The money that will be raised will be:
= 57,000,000 + 725,000 + 445,000
= $58,170,000
The number of shares that are needed to be sold will be:
= $58,170,000/$21.9225
= 2653438 shares
Budgeted variable overhead for the year is $150,000. Expected activity is 30,000 standard direct labor hours. The actual hours worked were 15,000 and the standard hours allowed for actual production were 18,000. The variable overhead efficiency variance is:
Answer:
-$15,000 favorable variance
Explanation:
variable overhead efficiency variance = standard overhead rate x (actual hours - standard hours)
standard variable overhead rate = $150,000 / 30,000 = $5actual hours 15,000standard hours 18,000variable overhead efficiency variance = $5 x (15,000 - 18,000) = $5 x (-3,000) = -$15,000 favorable variance
On February 3, 1969, New York lawyer and businessman _______________ was appointed the Beatles' business manager, as John was impressed by what the man had done financially for the Rolling Stones.
Answer:
Allen B. Klein
Explanation:
Allen B. Klein was an American businessman that became a powerful person in the music industry because he managed several artists and became well known for helping them increase their income and he worked with Sam Cooked, the Rolling Stones and The Beatles who hired in him in 1969 as their manager. According to this, the answer is that on February 3, 1969, New York lawyer and businessman Allen B. Klein was appointed the Beatles' business manager, as John was impressed by what the man had done financially for the Rolling Stones.
Identify five HRM criteria or components that can be used to measure organizational effectiveness or ineffectiveness. "Grievance rate" is an example.
Answer:
They include;
1. Customer Satisfaction
2. Absenteeism
3. Legal Compliance
4. Performance
5. Training
Explanation:
The Human Resource Management criteria that are used to measure the effectiveness or ineffectiveness of an organization, are a list that gives an idea of how an organization is performing, and this list can serve as a basis of comparison with other organizations. These options include;
1. Satisfaction: If the employees are treated fairly and so, feel satisfied with the organization, then they can be said to be effective.
2. Absenteeism: When workers are always absent from work it does not present the organization as an effective one.
3. Legal Compliance: The organization must be able to comply to government rules and regulations guiding the business to be rated as effective.
4. Performance: High or low-performance which is reflected in the turnover rates would be an indication of how effective or ineffective an organization is.
5. Training: The organization should be able to provide regular standard training for its workers to be rated as effective.
In response to the financial crisis, the Fed and the U.S. Treasury took all of the following policy actions except _______.
a. lowering tax rates on commercial bank profits
b. The Troubled Asset Relief Program
Answer: lowering tax rates on commercial bank profits
Explanation:
The financial crisis which is also widely called the global meltdown was caused as a result of the financial indutry deregulation.
The goal of TARP was to strengthen the banks, and improve market stability. Lowering tax rates on commercial bank profits wasn't part of the action used by the government.
Sonny's BBQ Company recently issued $85 par value preferred stock that pays an annual dividend of $9. Analysts estimate that the stock has a beta of 1.01. The current T-bill rate is 2.4%. The S&P 500's expected return is 12.1%. Assuming that CAPM holds, what is the intrinsic value of this preferred stock?
Answer:
Intrinsic value=$73.77
Explanation:
The Dividend Valuation Model(DVM) is a technique used to value the worth of an asset.
According to this model, the value of an asset is the sum of the present values of the future cash flows would that arise from the asset discounted at the required rate of return.
Price = D/Kp
D- Dividend payable
Kp- cost of preferred stock
So will need to work out the cost of equity using CAPM
The capital asset pricing model (CAPM): relates the price of a share to the market risk or systematic risk. The systematic risk is that which affects all the all the economic agents, e.g inflation, interest rate e.t.c
This model is considered superior to DVM. Hence, we will use the CAPM
Using the CAPM , the expected return on a asset is given as follows:
E(r)= Rf +β(Rm-Rf)
E(r) =? , Rf- 2.4%, Rm- 12.1% β- 1.01
E(r) = 2.4% + 1.23×(12.1- 2.4)% = 12.20 %
Cost of preferred stock= 12.20 %
Using the dividend valuation model
Intrinsic value = 9/0.1220=73.77
Intrinsic value=$73.77
Green Inc. made no adjusting entry for accrued and unpaid employee wages of $38,000 on December 31. This error would Multiple Choice Understate assets by $38,000. Overstate net income by $38,000. Understate net income by $38,000. Have no effect on net income.
Answer:
The answer is B. Overstate net income by $38,000.
Explanation:
Accrued expense is an expense that has been enjoyed or incurred but has been paid for. Examples of an accrued expense are unpaid wages/salary, unpaid electricity bill etc.
Usually, the adjusting entry for accrued expense is to debit the expense and debit increases expense while credit decreases it. Since there is no adjusting entry, that means no expense is being recognized on the income statement for this transaction. Hence, the net income increases (overstated). because ordinarily expense reduces net income.
Onslow Co. purchases a used machine for $178,000 cash on January 2 and readies it for use the next day at a $2,840 cost. On January 3, it is installed on a required operating platform costing $1,160, and it is further readied for operations. The company predicts the machine will be used for six years and have a $14,000 salvage value. Depreciation is to be charged on a straight-line basis. On December 31, at the end of its fifth year in operations, it is disposed of.Required:Prepare journal entries to record the machine's disposal under each of the following separate assumptions: a. It is sold for $22,000 cash. b. It is sold for $88,000 cash. c. It is destroyed in a fire and the insurance company pays $32,500 cash to settle the loss claim.
Answer:
All the requirements are solved below
Explanation:
Purchase = $178,000
Ready to use cost = $2,480
Installation cost = $1,160
Salvage value = $14,000
Depreciation method = Straight line
Useful life = 6 years
Solution
Requirement A If sold for $22,000
Entry DEBIT CREDIT
Cash $22,000
Accumulated depreciation $140,000
Profit/loss on disposal $20,000
Machinery $182,000
Requirement B If sold for $88,000
Entry DEBIT CREDIT
Cash $82,000
Accumulated depreciation $140,000
Profit/loss on disposal $40,000
Machinery $182,000
Requirement C If destroyed in fire and insurance company paid $32,500
Entry DEBIT CREDIT
Cash $30,000
Accumulated depreciation $140,000
loss from fire $12,000
Machinery $182,000
Workings
Cost =$178,000 + $2,480 + $1,160
Cost = $182,000
Accumulated depreciation = ([tex]\frac{182,000-14,000}{6}x5[/tex]
Accumulated depreciation = 140,000
If an economist wishes to determine whether there is evidence that average family incomes in a community exceeds $25,000:_______
a. either a one-tailed or two-tailed test could be used with equivalent results.
b. a one-tailed test should be utilized.
c. a two-tailed test should be utilized.
d. None of the above.
Answer: one tailed test should be utilized
Explanation:
From the question, we are informed that an economist wishes to determine whether there is evidence that average family incomes in a community exceeds $25,000.
A one tailed test should be utilized because the region of rejection will just have to be based on one side.
Bob: Listen, donuts are made to bring joy into our lives and to wake up our glazed faculties. Just let them be distributed according to unchanging moral principles of justice. The donuts will distribute themselves according to natural principles. We just take what we want and the leftovers will be appreciated by those who enjoy them most. Don't overcomplicate this. Where's the chocolate milk? End Part 2
Answer:
National law school of thought
Explanation:
The natural law school of thoughts refers to analyze the behavior of humans also it figured out the moral rule occurs from the behaviors.
It is inherent laws that are applied to all societies, communities, etc also it is common for all whether it is mentioned or officially announced
It should be rational and reasonable too
Therefore the given scenario represents the National law school of thought
As the athletic shoe buyer for Sports Authority, how would you go about forecasting sales for a new Nike running shoe?
Answer:
The answer is below
Explanation:
I would go about forecasting sales for a new Nike running shoe in the following ways:
1. Check past sales history: Examining Nike's sales history to check and differentiate which items have high sales well and those items that didn’t. This will help anticipate and forecast sales for the new Nike running shoe by putting it side by side with a similar product.
2. Conduct detailed market research: This is vital to predicting prospective sales in order to determine if the shoes will sell satisfactorily.
Making research to infer specifically the products, consumers wants will give Nike a current idea of what is in vogue. Thus, by conducting detailed research and discovering what their consumers prefer and disfavor, they will have the ability to predict sales for a new item.
A stock had returns of 15.51 percent, 22.47 percent, −8.68 percent, and 9.43 percent over four of the past five years. The arithmetic average return over the five years was 12.71 percent. What was the stock return for the missing year?
Answer:
24.82%
Explanation:
Arithmetic average = sum of observations / number of observations
Let x = the stock return for year 5
12.71 % = (15.51% + 22.47% −8.68% + 9.43 + x) /5
Multiply both sides by 5
63.55% = (5.51% + 22.47% −8.68% + 9.43 + x)
63.55% = 38.73% + x
x = 63.55% - 38.73% = 24.82%
Empirical evidence from 1960 to 2010 shows that convergence in economic growth is occurring in which of the following cases?
a. All low-income countries are catching up to all high-income countries.
b. Low-income industrial countries are catching up to high-income developing countries.
c. Low-income developing countries are catching up to high-income industrial countries.
d. Low-income industrial countries are catching up to high-income industrial countries.
Answer:
Correct Answer:
c. Low-income developing countries are catching up to high-income industrial countries.
Explanation:
The evidence which shows that low income developing countries are catching up to high-income industrial countries could be found in the series of developmental strides made by some countries like Rwanda, Kenya, Tanzania, Indonesia, Vietnam etc over the years. Most of their achievements is at par with most European countries in different sectors such as educational, and social sectors.
If the range of feasibility indicates that the original amount of a resource, which was 20, can increase by 5, then the amount of the resource can increase to 25.
a. True
b. False
Answer: True
Explanation:
The range of feasibility is used to measure values that are on the right-hand-side(objective function) that won't alter dual prices.
When the range of feasibility indicates that the original amount of a resource, which was 20, can increase by 5, then the amount of the resource can increase to (20 + 5) = 25
Therefore, the option is true
An assembly line with 17 tasks is to be balanced. The longest task is 2.4 minutes, and the total time for all tasks is 18 minutes. The line will operate for 450 minutes per day.Required:a. What are the minimum and maximum cycle times? b. What range of daily output is theoretically possible for the line? c. What is the minimum number of workstations needed if the maximum output rate is to be sought?d. What cycle time will provide an output rate of 125 units per day?
Answer
a)Minumum cycle time = 2.4 Minutes And Maximum cycle time = 18 Minutes
b)=187.5 units per day and 25 units per day
c) 8 workstation
d)2.6min/cycle
Explanation:
Given:
output rate = 125 units per day
Operating time= 450 minutes per day
What are the minimum and maximum cycle times?
Minimum Cycle time = duration of the longest task
Therefore,Minimum cycle time = 2.4 minutes
Maximum cycle time = addition of the task
Maximum Cycle Time = 18 minutes
Therefore, Minumum cycle time = 2.4 Minutes And Maximum cycle time = 18 Minutes
B)B)What range of daily output is theoretically possible for the line?
Range of daily output = Operating time / minimum Cycle time
At 2.4 minutes Cycletime
= 450/2.4
=187.5 units per day
At Cycle time 18 Minutes
= 450/18
Cycle time 18 minutes = 25 units per day
C)What is the minimum number of workstations needed if the maximum output rate is to be sought?
number of workstation=(D× summation of all task)/Operating time
number of workstation=(187.5*18)/450
= 7.5= 8 workstation
D)What cycle time will provide an output rate of 125 units per day?
cycle time= Operating time/output rate
=450/125
= 2.6min/cycle
A firm has the following gross requirements for Item OF. Ordering costs are $60 per order and carrying costs are $0.50 per period.
Item F Period
LT: 1 1 2 3 4
Gross Requirements 60 40 80 60
Schedule Receipts
Project on Hand 100
Net Requirements
Planned Order Receipts
Planned Order Releases
If EOQ lot sizing is used the minimum order quantity would be:_______
a. 85
b. 100
c. 120
d. 150
Answer:
c. 120
Explanation:
The economic order quantity is the minimum amount of inventory that a seller must keep to demand and lower the holding cost. The formula for Economic order quantity is represented by the formula:
EOQ = [tex]\sqrt{\frac{2*Demand*Ordering Cost}{Holding cost} }[/tex]
EOQ = [tex]\sqrt{\frac{2*240*60}{0.5} }[/tex]
EOQ = 120
Bronco Corporation discovered these errors in August of Year 3:
Year Depreciation Overstated Prepaid Expense Omitted
1 $2500 $3000
2 4000 2000
Assume all current items are two months in duration. Net Income for Year 2 was $18,000. Assume all errors are discovered in August of Year #3. The Year #2 books are closed. The net effect on Year #3 Beginning Retained Earnings caused by the August Year #3 correcting journal entries was:
a. $5,500
b. $6,500
c. $6,000
d. $8,500
e. $4,500
Answer:
e. $4,500
Explanation:
Year Depreciation overstated Prepaid expense omitted
1 $2,500 $3,000
2 $4,000 $2,000
Year 2's net income = net income (year 2) + overstated depreciation (year 2) + omitted prepaid expenses (year 1) - omitted prepaid expenses (year 2) = $18,000 + $4,000 + $3,000 - $2,000 = $23,000
This means that year 2's net income was understated by $5,000.
But year 1's net income was overstated by = $2,500 - $3,000 = -$500.
The adjustment on the retained earnings account should be $5,000 - $500 = $4,500
