单选题
Bug-Be-Gone is a residential pest control company that offers a 12 month home-service contract to eliminate insect infestation. Customers are required to prepay for the service at the beginning of each year. If Bug-Be-Gone erroneously records these payments as revenue and include the estimated cost of performing the service, what is the most likely effect on the firm' s liabilities and equity compared to the correct treatment? Liabilities Equity ①A. Understated Overstated ②B. Overstated Overstated ③C. Understated Understated
【正确答案】
A
【答案解析】When payment is received, the firm has an obligation to provide the service. This obligation is reported as a liability ' unearned revenue' as a liability, offsetting the increase in cash. If they book the revenue and estimated expenses of providing the service this will overstate equity (assuming revenue greater than expected expense) and liabilities will be understated.