Access the Wiki Art Gallery (WAG) instructional case in Connect, and read the case in sufficient depth to answer the following questions.
1. Note 4 to WAG's financial statements indicates that the note payable increased from
$20,000 to $25,000. Assume this change in loan balance occurred when the terms of the loan were adjusted on May 31, 2011. Use the interest formula to calculate the amount of interest expense for the periods from October 1, 2010 to May 31, 2011, and from May 31, 2011 to September 30, 2011. What do your calculations suggest about the interest reported by WAG during the 2011 fiscal year?
a. Interest from October 1, 2010 to May 31, 2011 should be $1,000, and interest from May 31, 2011 to September 30, 2011 should be $1,500. These calculations suggest WAG understated its 2011 interest expense by $1,780.
b. Interest from October 1, 2010 to May 31, 2011 should be $667, and interest from May 31, 2011 to September 30, 2011 should be $500. These calculations suggest WAG understated its 2011 interest expense by $447.
c. Interest from October 1, 2010 to May 31, 2011 should be $1,000, and interest from May 31, 2011 to September 30, 2011 should be $500. These calculations suggest WAG understated its 2011 interest expense by $780.
d. Interest from October 1, 2010 to May 31, 2011 should be $800, and interest from May 31, 2011 to September 30, 2011 should be $400. These calculations suggest WAG understated its 2011 interest expense by $480.
2. What was the effect of Rob cutting his salary by $2,000?
a. It decreased WAG's selling price by $2,000.
b. It increased WAG's selling price by $2,000.
c. It increased WAG's selling price by $10,000.
d. This was a kind gesture that better aligned Rob's take-home pay with Stephen's cut in dividends. It had no effect on WAG's selling price.