question archive 1) UM Associates paid $30,000 wages in advance for 6 months
1) UM Associates paid $30,000 wages in advance for 6 months
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1) UM Associates paid $30,000 wages in advance for 6 months. This transaction is most likely to result in:
Group of answer choices
a.) An increase in net assets.
b.) A decrease in net assets.
c.) No change in net assets.
d.) No answer text provided.
2. Agka Lee is a manufacturer of shovel and mining equipment. It collects 50% of the
invoiced amount in advance when customers place their orders and
collects the remaining 50% upon delivery of the equipment. The company only
recognizes the sale on its financial statements once the product is
delivered. The most likely effect of a customer placing an order worth
$7,000 on its financial statements is:
Group of answer choices
a.) An increase in liabilities of $3,500.
b.) An increase in assets of $7,000.
c.) No effect on liabilities.
d.) No answer text provided.
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1. c.) No change in net assets.
2. a.) An increase in liabilities of $3,500.
Step-by-step explanation
Q1: Payment of wages in advance is recorded as
Advance Wages paid- Dr
Cash- Cr
Advance wages is a current assets. The debit entry is an increase in current assets.
However cash is also an asset and is reduced when it is paid out. So the net change in assets is zero.
Q2: Sales amount= $7000. Advance cash = 7000*50%= 3500
The entry on receipt of advance cash will be
Cash- Dr 3500
Customer advance account-Cr 3500
This is a credit to the customer advance account which is a liability. The sales revenue is not credited yet since sales are booked on delivery only. So there is an increase in liabilities by $3500.
