Income-smoothing has been applied to a German subsidiary of Company Inc, as it had an abnormally high operating income last year. Which of the following would the accountants working for the subsidiary likely have done?
A) Debited an expense account and credited an equity account.
B) Credited an expense account and debited an equity account.
C) Credited an expense account and debited a provision account appearing under the liabilities section.
D) Debited an expense account and credited a provision account appearing under the liabilities section.

Question

Quizplus · Accepted Answer

Income-smoothing involves manipulating the income statement to reduce fluctuations in reported income. In this case, the accountants would have debited an expense account (to reduce income) and credited a provision account (to create a liability that can be reversed in future periods to increase income).

Income-Smoothing Has Been Applied to a German Subsidiary of Company