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Topic
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At the beginning of the current year, Hayworth Co. sold equipment with a two-year service contract for a
single payment of $20,000. The fair value of the equipment was $18,000. Hayworth recorded this
transaction with a debit of $20,000 to cash and a credit of $20,000 to sales revenue. Which of the
following statements is correct regarding Hayworth’s current-year financial statements?
a. The financial statements are correct.
b. Net income will be overstated.
c. Total assets will be overstated.
d. Total liabilities will be overstated
The correct answer is “B” . Which I totally agree with: “Hayworth has not earned all of the income because it has not fulfilled all requirements related to the service contract and, therefore, should not recognize all of the revenue in the year the equipment is sold. Consequently, net income is overstated. “
ok
BUT
Wouldn’t the assets be overstated as well?
Since you didn’t remove them from the books?
I JUST DONT GET IT!!!!!
Please someone explain this to me!!!!
Bunch of thanks,
AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100
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