Question

Delta Company performed $20,000 of services on account and recorded the amount due as a typical account receivable. Over time, it became apparent that the customer would not be able to pay quickly, so Delta required the customer to sign a six-month, 11 percent promissory note on February 1, Year 2. The company then reclassified the existing account receivable as a note receivable. Which of the following will result from this action?
a. both assets and liabilities decrease.
b. both assets and revenues decrease.
c. revenues decrease and liabilities increase.
d. no impact on the accounting equation.

Answer 1

Answer:

D) No impact on the accounting equation.

Explanation:

• Nothing would happen since the amount to be received would remain the same i-e $20,000, so there is no chance for increase in liabilities. Moreover, the there is no new services so that asset should be impacted.
• What there has been done is just classifying the payment which the Delta thought that they would receive earlier, but now it is being realized that it will take long, so just to not make any mistake or confusion for future this was done.