Question

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?A. Liabilities increased by $1.0 million in 2018B. Liabilities increased by $3.0 million in 2018C. Assets decreased by $5.0 million in 2018D. Retained earnings decreased by $10.0 million in 2018E. Retained earnings decreased by $7.0 million in 2018

Answer 1

Answer:

The right answer is A. Liabilities increased by $1.0 million in 2018

Explanation:

During 2017 and 2018, we have the following information:

+ In 2017, there is $2 million wages earned but not yet paid, so, Wages payable at the end of 2017 should be amounted to $2 million.

+ In 2018, there is another $8 million wages earned. At the same period, there is $7 million wages paid which is distributed as followed: $2 million to clear all Wages payable in 2017 and the other $5 million to clear $5 million out of $8 million wages payable in 2018. So, the only wages liability outstanding at the end of 2018 is the amount of $3 million earned in 2018 but not yet paid ($8 million - $5 million).

=> Liabilities in 2018 increases $1.0 million in comparison with the year 2017 ( $3 million - $2 million).