Blind River, Inc., recently hired Neil Young as its bookkeeper. Mr. Young is somewhat inexperi- enced and has made numerous errors recording daily business transactions.

Indicate the effects of the errors described below on each of the financial statement elements shown in the column headings. Use the following symbols: O for overstated; U for understated; and NE for no effect.

 

 

 

Net           Total           Total          Owners’

Error                                        Income      Assets      Liabilities        Equity

 

Recorded the issuance of capital stock by debiting Dividends and crediting Cash.
Recorded the payment of an account payable by debiting Cash and crediting Accounts Receivable.
Recorded the collection of an outstanding account receivable by debiting Service Revenue and crediting Cash.
Recorded client billings on account by debiting Accounts Payable and crediting Cash.
Recorded the payment of an outstanding dividend payable by debiting Dividends and crediting Cash.
Recorded the payment of salaries payable by debiting Salaries Expense and crediting Salaries Payable.
Recorded the purchase of office supplies on account by debiting Rent Expense and crediting Office Supplies.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C

 

 

 

 

 

 

 

 

 

 

 

 

 

Q50

The realization principle determines when a business should recognize revenue. Listed next are three common business situations involving revenue. After each situation, we give two alternatives as to the accounting period (or periods) in which the business might recognize this revenue. Select the appropriate alternative by applying the realization principle, and explain your reasoning.

a.       Airline ticket revenue: Most airlines sell tickets well before the scheduled date of the flight. (Period ticket sold; period of flight)

b.       Sales on account: In June 2011, a San Diego–based furniture store had a big sale, featuring “No payments until 2012.” (Period furniture sold; periods that payments are received from customers)

c.       Magazine subscriptions revenue: Most magazine publishers sell subscriptions for future delivery of the magazine. (Period subscription sold; periods that magazines are mailed to customers)