Check your answer
Write your response and explain your reasoning.
Linden Peak manufactures sensors. It is a corporation with a subsidiary organized as a limited liability company (LLC). It uses accrual accounting and reports in thousands of US dollars for the year ended December 31.
Answer each question using only these facts:
- Legal form: Do the corporation and LLC labels by themselves establish tax treatment or which activities belong in the financial reports? Explain.
- Economic entity: An owner pays a personal bill from a personal account. Should Linden Peak record that payment? Explain.
- Reporting units: An asset line shows 900, but its account label is missing. What dollar amount does it represent? Does the scale tell you which asset it is or how its amount was measured?
- Reporting period: Employees perform services in December and are paid in January. Which year's income statement includes the expense? How does that statement's period differ from the year-end balance-sheet date?
- Going concern: Management claims the company is certain to survive because current assets exceed current liabilities. Does that comparison establish the conclusion? Name additional evidence needed to evaluate the company's ability to continue operating.
Compare your reasoning with the worked answer
Legal form: Corporation and limited liability company describe legal organization. They do not by themselves establish tax treatment or which activities must be included in the financial reports.
Owner payment: Do not record it in Linden Peak's accounts; the owner paid a personal bill with personal funds.
Units: 900 × $1,000 = $900,000. The scale does not identify the asset or tell whether its amount represents cost or another measurement.
Period: Under the stated accrual accounting, the December employee service is an expense of the year ended December 31, with a liability until payment in January. The income statement covers a period; the balance sheet describes the position on December 31.
Going concern: A comparison of current assets and current liabilities does not establish when cash will be collected or payments will fall due. Consider cash forecasts, debt payment dates, access to financing, and management's plans under the applicable going-concern guidance before deciding what accounting and disclosures are required.