Wall Street Prep The Premium Package Review Accounting & Financial Statement Analysis Exam

Question 1 Assume US GAAP to answer this question. In 2017, $2 million in wages were earned and no cash wages were paid. In 2018, $8 million in wages were earned and $7 million in cash wages were paid. Cash wages were used to first pay wages earned in 2017 with the remainder used to pay wages earned in 2018. Any earned but unpaid wages will be paid during the first quarter of 2019. Using only the information provided, which of the following statements is most accurate? • Liabilities increased by $1.0 million in 2018 • Liabilities increased by $3.0 million in 2018 • Assets decreased by $5.0 million in 2018 • Retained earnings decreased by $10.0 million in 2018 Retained earnings decreased by $7.0 million in 2018  Your answer is correct. Since wages were earned in 2017 but not yet paid, the opening balance sheet in 2018 would have an accrued wages liability of $2.0. These were paid in 2018, reversing the liability. However, since there is only $5.0 million in cash ($7.0 less the $2.0 million used to pay 2017 wages) available to pay wages earned in 2018, that leaves $3.0 million in earned wages unpaid, raising the accrued wages liability to $3.0 million. The net impact to the liability is $1.0 million (-$2.0 + $3 million). The only asset impacted is cash, which decreases by $7.0 million, while retained earnings decreases by $8.0 million, since wages are expensed when they are earned, not when they are paid. See Lesson: Payable, Accrued Expenses, Deferred Revenue & Debt Question 2 A company issued its CEO 100,000 shares of restricted stock in the beginning of 2018 that are restricted for two years. The current share price is $10. Based on the information provided, which of the following statements is true? • An unearned compensation liability in the amount of $1 million is created at the grant date • An unearned compensation asset in the amount of $1 million is created at the grant date • Stockholders' equity increases by $1 million at the grant date • An unearned compensation contra equity account in the amount of $500,000 is recognized at the grant date Stockholders' equity is unchanged at the grant date  Your answer is correct. The entire value of restricted stock issued at grant date is recognized as an equity account and is immediately offset by a contra equity account in the same amount so there is no change to stockholders’ equity at the grant date. This contra equity account is reversed over the service period. In this case, a $1 million contra equity account is created and reduced by $500,000 over the next two years, with an offsetting reduction in retained earnings. See Lesson: Stock Based Compensation Accounting: Journal Entries