Question

1. How Does paying interest on a note that was NOT previously recorded affect the accouting equation?

a.increase assets and increase liabilites

b.increase liabilites and decrease equity

c.decrease liabilites and increase equity

d.decrease assets and decrease liabilities

e. decrease assets and decrease equity

2.Which of the following statements is incorrect?

a. The incurrence of routine repairs and maintenance costs is expensed on the income statement.

b. The depreciable cost of a fixed asset includes installation costs

c.IF a company sells a fixed asset for more than its book value, a gain is recognized

d. THe estimated amount that an assest can be sold for at the end of its useful life is called a residual value

e.Depreciation, as defined in financial accounting, refers to the decline in market value of a fixed asset

Answer 1

1. Answer is e ) decreases assets and decrease equity

Since interest is paid, cash is paid so assets will decrease and expense is recognised in books of account so equity will decrease. So answer is e)

2. Answer is e)

Depreciation is reduction in value of asset for usage of asset. It is gradual reduction in cost of asset and depreciable cost of asset charged to income statement. Hence answer is e). Repairs and maintenance expense is routine expense so charged to income statement. Depreciable cost of asset includes installation cost since installation cost is needed for asset to bring to its working condition. The excess of sale value over book value of asset is gain recognised in income statement. The estimated sale value at end of life of asset is residual value of asset.