Garnett Co. shipped inventory on consignment to Hart Co. that originally cost $50,000. Hart paid $1,200 for advertising that was reimbursable from Garnett. At the end of the year, 40% of the inventory was sold for $32,000. The agreement stated that a commission of 10% will be provided to Hart for all sales. What amount should Garnett report as net income for the year

 Question 6

The premium on a 3-year insurance policy expiring on December 31, year 3, was paid in total on January 1, year 1.  Assuming that the original payment was initially debited to an expense account, and that appropriate adjusting entries have been recorded on December 31, year 1 and year 2, the balance in the prepaid asset account on December 31, year 2, would be
    Zero.
    Lower than the balance on December 31, year 3.
    The same as the original payment.
    The same as it would have been if the original payment had been initially debited to a prepaid asset account. Correct

You Answered Correctly!
This answer is correct because under either method the balance in the prepaid asset account on December 31, year 2, should be the unexpired portion of the policy.  On 12/31/Y1, an adjusting entry would be made by debiting “Prepaid insurance” and crediting “Insurance expense” for two-thirds of the original payment (the unexpired portion of the policy). This would result in one-third of the payment being expensed.  This entry would then be reversed on 1/1/Y2. At the end of year 2, an adjusting entry would again be made by debiting “Prepaid insurance” and crediting “Insurance expense” for one-third of the original payment (the unexpired portion of the policy).  Since the reversing entry will not be made until 1/1/Y3, the prepaid asset account balance would be the same on 12/31/Y2 for this method as it would have been had the payment originally been debited to “Prepaid insurance” on 1/1/Y1.
 

Question 7

According to ASC Topic 250, the cumulative effect of changing to a new accounting principle should be included in net income of


    Future periods     The period of change
    No    No Correct
    Yes    No
    Yes    Yes
    No    Yes
You Answered Correctly!
This answer is correct. A change in accounting principle is accounted for through retrospective application to all prior periods, unless it is impracticable to do so.
 

Question 8

During year 1 Kerr Company sold a parcel of land used as a plant site.  The amount Kerr received was $100,000 in excess of the land’s carrying amount.  Kerr’s income tax rate for year 1 was 30%.  In its year 1 income statement, Kerr should report a gain on sale of land of
    $0
    $ 30,000
    $ 70,000
    $100,000 Correct

You Answered Correctly!
This answer is correct. Generally, gains and losses on the sale of land are not accorded special treatment. The entire $100,000 gain should, therefore, be included in income before taxes.
 

Question 9

What type(s) of revenue will a contract with a significant financing component generate?
    Sales Revenue
    Sales Revenue and Interest Revenue Correct
    Unearned Revenue and Sales Revenue
    Contract Asset Revenue and Sales Revenue

You Answered Correctly!
Correct! A contract with a significant financing component will generate both sales and interest revenue. The seller is essentially providing financing to the buyer and the buyer is paying interest for the financing.
 

Question 10

Garnett Co. shipped inventory on consignment to Hart Co. that originally cost $50,000. Hart paid $1,200 for advertising that was reimbursable from Garnett. At the end of the year, 40% of the inventory was sold for $32,000. The agreement stated that a commission of 10% will be provided to Hart for all sales. What amount should Garnett report as net income for the year?
    $0
    $7,600 Correct
    $10,800
    $12,000

You Answered Correctly!
This answer is correct. Garnett’s net income is $7,600, as calculated below.

 
Revenue    $32,000
Cost of goods sold ($50,000 × 40%)    (20,000)
Commission ($32,000 × 10%)    (3,200)
Advertising    (1,200)
Net income    $ 7,600