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<p><em><strong>The fair value of the equipment was $18,000. Hayworth recorded this</strong></em></p> <p><em><strong>transaction with a debit of $20,000 to cash and a credit of $20,000 to sales revenue. Which of the</strong></em></p> <p><em><strong>following statements is correct regarding Hayworth's current-year financial statements?</strong></em></p> <p><em><strong>a. The financial statements are correct.</strong></em></p> <p><em><strong>b. Net income will be overstated.</strong></em></p> <p><em><strong>c. Total assets will be overstated.</strong></em></p> <p><em><strong>d. Total liabilities will be overstated.</strong></em></p>
b. Net income will be overstated.
B. Net Income is overstated. The value (making cost) of the product is 18,000 and it was sold for 20,000. So 2000 is the incoming value, also the product has 2 years of service warranty which will further incur maintenance or operations cost for the coming years.
B. Net Income overstated and C. Asset will be overstated both will be correct but again it all depend on the nature of business hayworth Co are doing henceforth if their main business activity is assets trading then A and D are the correct position otherwise the asset sold was suppose to be accounted in the following order; Debit cash/bank, Credit Asset account with the net book value of the asset, Debit disposal account with Asset net book value, Credit disposal account with cash proceed recieved, Closing the Asset disposal account balance as credit or debit to profit/loss/income statement account.
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