At the Beginning of 2013, Gannon Company Received a Three-Year

question 105

Multiple Choice

At the beginning of 2013, 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 2013 year-end statement of financial position and $1,000 as sales revenue for 2013. What effect did this accounting for the note have on Gannon's net earnings for 2013, 2014, 2015, and its retained earnings at the end of 2015, respectively?

• A) Overstate, overstate, understate, zero
• B) Overstate, understate, understate, understate
• C) Overstate, overstate, overstate, overstate
• D) None of these answer choices are correct.

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Definitions:

Production Machinery

Equipment and machines used in the manufacturing process to produce goods and products.

Capital Equipment

Long-term assets such as machinery, vehicles, or large tools that a business uses in its operations to produce goods or services.

Leverage Ratio

A financial ratio indicating the level of debt used by a company to finance its assets, relative to its equity.

Tax Burden

The total amount of income, property, and sales tax that an individual or corporation must pay to various government agencies.