MBA 612 Week 4 Midterm Exam Questions And
Accurate Answers
Delta Air Lines' (DAL) SkyMiles program allows frequent flyers to earn credit toward
free tickets and other amenities.
(1). Does Delta Air Lines have a contingent liability for award redemption by its SkyMiles
members? Explain.
(2). When should a contingent liability be recorded? Explain. - ANSWER 1. Yes. Delta Air
Lines bears contingent duty with regard to the redemption of awarded rewards, given
that its Sky Miles program enables members to accrue credits toward complimentary
tickets and other benefits. It is possible to assess and quantify the credits obtained
fairly.
2. When the obligation is likely to occur and its approximate amount can be determined
with reasonable accuracy, the contingent liability has to be documented.
The estimated amount of depreciation on equipment for the current year is $133,000.
(1). How is the adjustment recorded? Indicate each account affected, whether the
account is increased or decreased, and the amount of the increase or decrease.
Explain.
(2). If the adjustment in (a) was omitted, which items would be erroneously stated on (a)
the income statement for the year and (b) the balance sheet as of December 31?
Explain. - ANSWER 1. A obligation is shown by the cumulative depreciation, which is an
expenditure in this case. The depreciation would thus be recorded in a journal entry that
would increase the balances of both accounts by debiting the depreciation expense
account and crediting the accumulated depreciation account.
2. The company's net income would rise as a result of the income statement's
understatement of depreciation expenditure, an overstated income results from
understating an expenditure.
In the same way, the balance of cumulative depreciation is still undervalued if the entry
is missed.
If a business retained its accumulated depreciation, it wouldn't have an immediate effect
on its overall assets. Accrued depreciation is a contra-asset account that is subtracted
from the asset's total value to find its net book value.
As an alternative, asset accounts may be credited in lieu of accumulated depreciation
, when recording depreciation. Then, leaving out the same information would have led to
an asset overstatement. However, because the cumulative depreciation account is
maintained here, even if total assets may have an influence in the future, it is presumed
that they do not currently.
Still, if depreciation charges were not taken into consideration, the company's net
income and retained earnings would be overstated. Since shareholders' equity is a
component of retained profits, an overstatement of retained earnings would result in an
overstatement of shareholders' equity.
In summary, failing to record depreciation will result in an overstatement of net income,
assets, and shareholders' equity. This might fool creditors and investors into thinking
the firm is more successful and financially stable than it really is, which could have
long-term consequences for the company's capacity to remain in operation.
After the accounts are adjusted at the end of the fiscal year, Accounts Receivable has a
balance of $475,000 and Allowance for Doubtful Accounts has a negative balance of
$(46,800). Describe how Accounts Receivable and Allowance for Doubtful Accounts are
reported on the balance sheet. Be specific. Show calculations where necessary. -
ANSWER Accounts receivable : $475,000
Less allowance for doubtful accts: $46,800
Net Accounts receivable: $428,200
(Net realizable value of the accounts receivable = 47,5000 - 46, 800 = 428,200)
Billy Jessop is the owner of Valley Delivery Service. Recently, Billy paid interest of
$6,000 on a personal loan of $75,000 that he used to begin the business. Should Valley
Delivery Service record the interest payment? Explain. - ANSWER Given that interest is
a reasonable business expenditure, Valley Delivery Service is required to report the
interest payment. As the firm's owner, Billy bears the responsibility of making sure that
all of the company's costs are duly recorded, as interest payments are an essential part
of operating a business.
For every company, like Valley Delivery Service, keeping proper financial records is
essential, and this includes recording interest payments. The firm may make sure that
its financial records are correct and up to date, which is necessary for making wise
business choices, by documenting the interest payment.
For the current year ending December 31, Fromm Industries expects fixed costs of
$930,000, a unit variable cost of $53, and a unit selling price of $63. Show your
calculations.
Accurate Answers
Delta Air Lines' (DAL) SkyMiles program allows frequent flyers to earn credit toward
free tickets and other amenities.
(1). Does Delta Air Lines have a contingent liability for award redemption by its SkyMiles
members? Explain.
(2). When should a contingent liability be recorded? Explain. - ANSWER 1. Yes. Delta Air
Lines bears contingent duty with regard to the redemption of awarded rewards, given
that its Sky Miles program enables members to accrue credits toward complimentary
tickets and other benefits. It is possible to assess and quantify the credits obtained
fairly.
2. When the obligation is likely to occur and its approximate amount can be determined
with reasonable accuracy, the contingent liability has to be documented.
The estimated amount of depreciation on equipment for the current year is $133,000.
(1). How is the adjustment recorded? Indicate each account affected, whether the
account is increased or decreased, and the amount of the increase or decrease.
Explain.
(2). If the adjustment in (a) was omitted, which items would be erroneously stated on (a)
the income statement for the year and (b) the balance sheet as of December 31?
Explain. - ANSWER 1. A obligation is shown by the cumulative depreciation, which is an
expenditure in this case. The depreciation would thus be recorded in a journal entry that
would increase the balances of both accounts by debiting the depreciation expense
account and crediting the accumulated depreciation account.
2. The company's net income would rise as a result of the income statement's
understatement of depreciation expenditure, an overstated income results from
understating an expenditure.
In the same way, the balance of cumulative depreciation is still undervalued if the entry
is missed.
If a business retained its accumulated depreciation, it wouldn't have an immediate effect
on its overall assets. Accrued depreciation is a contra-asset account that is subtracted
from the asset's total value to find its net book value.
As an alternative, asset accounts may be credited in lieu of accumulated depreciation
, when recording depreciation. Then, leaving out the same information would have led to
an asset overstatement. However, because the cumulative depreciation account is
maintained here, even if total assets may have an influence in the future, it is presumed
that they do not currently.
Still, if depreciation charges were not taken into consideration, the company's net
income and retained earnings would be overstated. Since shareholders' equity is a
component of retained profits, an overstatement of retained earnings would result in an
overstatement of shareholders' equity.
In summary, failing to record depreciation will result in an overstatement of net income,
assets, and shareholders' equity. This might fool creditors and investors into thinking
the firm is more successful and financially stable than it really is, which could have
long-term consequences for the company's capacity to remain in operation.
After the accounts are adjusted at the end of the fiscal year, Accounts Receivable has a
balance of $475,000 and Allowance for Doubtful Accounts has a negative balance of
$(46,800). Describe how Accounts Receivable and Allowance for Doubtful Accounts are
reported on the balance sheet. Be specific. Show calculations where necessary. -
ANSWER Accounts receivable : $475,000
Less allowance for doubtful accts: $46,800
Net Accounts receivable: $428,200
(Net realizable value of the accounts receivable = 47,5000 - 46, 800 = 428,200)
Billy Jessop is the owner of Valley Delivery Service. Recently, Billy paid interest of
$6,000 on a personal loan of $75,000 that he used to begin the business. Should Valley
Delivery Service record the interest payment? Explain. - ANSWER Given that interest is
a reasonable business expenditure, Valley Delivery Service is required to report the
interest payment. As the firm's owner, Billy bears the responsibility of making sure that
all of the company's costs are duly recorded, as interest payments are an essential part
of operating a business.
For every company, like Valley Delivery Service, keeping proper financial records is
essential, and this includes recording interest payments. The firm may make sure that
its financial records are correct and up to date, which is necessary for making wise
business choices, by documenting the interest payment.
For the current year ending December 31, Fromm Industries expects fixed costs of
$930,000, a unit variable cost of $53, and a unit selling price of $63. Show your
calculations.
