Question

At the beginning of 2016, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2016 year-end statement of financial position and $1,000 as sales revenue for 2016. What effect did this accounting for the note have on Gannon's net earnings for 2016, 2017, 2018, and its retained earnings at the end of 2018, respectively

Answer 1

Answer:

Overstate, understate, understate, zero is the correct answer

Explanation:

The trading note was for three years, but Gannon reported it as revenue in 2016 itself, which is why the net earnings are exaggerated. Similarly, he does not report proportionate revenues related to the trade mark in 2017 and 2018, as he had already reported all of them in 2016 as a result of net earnings for 2017 and 2018 being understated. The trading note does not therefore have an impact on 2018's net earnings.