Analyze the following transactions and assess whether the accounts (Assets, liab

Question

Analyze the following transactions and assess whether the accounts (Assets, liabilities, equity, revenues, expenses, net income) are Overstated, Understated, or No effect. Base your analysis on Proper GAAP.

The company failed to write down a 50% impairment of inventory

The company used too large a discount rate in estimating capital lease assets and liabilities

AOL capitalized CD production and distribution costs realted to mailed free-trail subscriptions

Regular equipment maintenance expendistures were recognized as capital improvements to the assets

The company failed to recognized foreign currency gains related to international sales transactions

Explanation / Answer

1)Since company fails to write down impairment of inventory ,it means inventory is overstated .

so ,Net income (closing inventory )is overstated and so as assets side of balance sheet.

2) company has used large discount rate to discount capital lease assets and liabiliites ,so it means the value of asset and liabilites is undervalued as when we discount value with large rate ,we get less value.

So both asset and liabiliites are understated.

3) capitalisation of distribution cost leads to overstatement of asset value and overstatement of expenses and so as net income .

4)Since regular revenue expenditures are capitalised(added to cost of asset ),so asset is overstated .

since such expenditure should charge to income statement (not charged but capitalised) ,therefore net income is also overstated.

Asset-overstated ,expenses -understated ,net income -overstated.

5)since foreign currency gain is not recognised ,it means accounts receivables are still understated (as we receive more payment than due ,as there is a gain ) .

so asset is understated and net income is also understated. (foreign gain not recognised)

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