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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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A company receives an advance payment for special-order goods to be manufactured and delivered within 6 months. The advance payment should be reported on the company’s balance sheet as a:

  1. a. deferred charge
  2. b. contra-asset account
  3. c. current liability
  4. d. noncurrent liability

To determine

Identify the classification of advance payment on the company’s balance sheet.

Explanation

Justification for the incorrect option a:

Deferred charge is the cost of an asset on a balance sheet which is been incurred, but yet to be consumed or used and deferred charge is a “long-term prepaid expense”. Therefore, it is the incorrect option.

Justification for the incorrect option b:

Contra-asset account offsets the balance of assets to which it is paired and it is a negative asset account recorded in separate line items on the balance sheet. Therefore, it is the incorrect option.

Justification for the incorrect option d:

Non-current liabilities are long-term liabilities that takes period of more than one year to settle...

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