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
w
...
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 & D
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