Question

Select the necessary words from the list of possibilities to complete the following statements.

(acquisitions and retirements; capital lease; goodwill; net income; ownership; property tax; repairs and maintenance; retirement work orders; revenue; subsidiary ledger; working papers)

1. A December 30 acquisition of a new plant asset was recorded after year-end rather than prior to year-end. Such an error does not usually result in a significant misstatement of __.

Answer 1

A December 30 acquisition recorded after year-end does not significantly misstate net income because the cost is capitalized and depreciated over time. Banks may list money as an asset even if it's not physically present because they lend most of the deposits they receive. The price paid for loans in the secondary market depends on the borrower's creditworthiness, interest rate changes, and expected returns.

Step-by-step explanation:

A December 30 acquisition of a new plant asset that was recorded after year-end rather than prior to year-end does not usually result in a significant misstatement of net income. The reason for this is that when a plant asset is acquired, it is capitalized rather than expensed immediately in most cases. This means its cost is spread over the useful life of the asset through depreciation, which affects net income gradually over time, rather than all at once. Recording the acquisition after year-end may delay the start of depreciation but does not materially misstate net income for the current year.

The money listed under assets on a bank balance sheet may not actually be in the bank because banks operate under a fractional reserve system. This means that banks lend out most of the money deposited with them, keeping only a fraction of the total deposits as reserves. The assets on the balance sheet include loans made to customers, which are not physically present in the bank but represent amounts owed to the bank.

When buying loans in the secondary market, willingness to pay more or less for a given loan depends on factors such as the borrower's creditworthiness, prevailing interest rates, and expected returns:

• A borrower who has been late on a number of loan payments is riskier, so the loan would be purchased for less.
• If interest rates in the economy as a whole have risen, existing loans with lower rates are less attractive, so a lesser amount would be paid.
• A borrower that is a firm which has declared high profits is more creditworthy, making the loan more valuable, thus one would pay more.
• If economy-wide interest rates have fallen, existing loans with higher rates become more attractive, increasing their value and the amount one might pay.