Spiceland Chpt 7 Assigned Homework Solutions

Spiceland Chpt 7 Assigned Homework Solutions - Chapter 7...

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Chapter 7 Homework Solutions – Spiceland Question 7-1 WorldCom recorded assets on the balance sheet that should have been recorded as expenses on the income statement. When WorldCom uses the telecommunication lines of another company, it pays a fee. This fee is part of normal operating costs, and should be recorded as an expense of the current period to properly match the expense with the revenues it helped to generate. Instead, WorldCom recorded these operating expenses as long-term assets on the balance sheet. Question 7-4 It will overstate net income on the income statement and overstate assets and retained earnings on the balance sheet. If University Hero initially records an expense incorrectly as an asset, expenses are understated or too small. Since expenses are subtracted from revenues in arriving at net income, understating expenses will overstate net income reported on the income statement. Similarly, recording an expense as an asset will overstate assets on the balance sheet. Retained earnings on the balance sheet will also be overstated due to the overstatement of net income. Question 7-6 We don’t depreciate land because its service life never ends. Land improvements are additional amounts spent to improve the land such as a parking lot, paving, temporary landscaping, lighting systems, fences, sprinkler systems, and similar additions. We record land improvements separately from land because, unlike land, these assets are subject to depreciation. Question 7-17 The service life tells how long the company expects to obtain benefits from the asset before disposing of it. Under the straight-line method we determine service life in units of time. Under the activity-based method we determine service life in units of activity. For example, the estimated service life of a delivery truck might be either five years or 100,000 miles.
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Chapter 7 Homework Solutions – Spiceland Pg. 2 Question 7-22 Most companies use the straight-line method for financial reporting and the Internal Revenue Service’s prescribed accelerated method (called MACRS) for income tax purposes. Companies choose straight-line for financial reporting for several reasons. Many probably
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Spiceland Chpt 7 Assigned Homework Solutions - Chapter 7...

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