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Test Bank Of Accounting Volume 1 Canadian 9th Edition By Horngren

 

Accounting, Vol. 1, 9e Cdn. Ed. (Horngren et al.)

Chapter 1   Accounting and the Business Environment

 

Objective 1-1

 

1) Financial statements provide information about business activities to decision makers.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

2) Investors provide money to a business to begin operations.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

3) Not-for-profit organizations need accounting information, as do profit-oriented organizations.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

4) The designation CA stands for Certified Public Accountant.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

 

5) Which of the following users of accounting information seek to assess the organization’s ability to make scheduled payments?

  1. A) creditors
  2. B) taxing authorities
  3. C) government regulatory agencies
  4. D) employees

Answer:  A

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

6) The primary objective of financial reporting is to provide information:

  1. A) to the federal government.
  2. B) about the profitability of the business.
  3. C) regarding the cash flows of the business.
  4. D) useful for making investment decisions and for assessing management’s stewardship.

Answer:  D

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

7) Which of the following statements best describes managerial accounting?

  1. A) Managerial accounting focuses on information for internal decision making.
  2. B) Managerial accounting focuses on outside investors and lenders.
  3. C) Managerial accounting provides information for the public.
  4. D) Managerial accounting provides information for taxing authorities.

Answer:  A

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

Match the following terms and definitions:

 

  1. A) account receivable
  2. B) proprietorship
  3. C) earnings estimate
  4. D) transaction
  5. E) generally accepted accounting principles
  6. F) corporation
  7. G) asset
  8. H) expense
  9. I) accounting
  10. J) liability
  11. K) limited-liability partnership
  12. L) revenue
  13. M) capital

 

8) The system that measures business activities and processes information into reports

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

Answers: 8) I

 

9) Describe the three forms of organizations and how they differ.

Answer:  A proprietorship has a single owner whereas a partnership has two or more individuals together as co-owners. In both of these forms of organization, the owners are individually liable for the debts of the business. A corporation is a business owned by shareholders, who may or may not have a part in the day-to-day operations of the business. The shareholders of a corporation are not legally liable for the debts of the business, and it is easier to transfer the ownership of a corporation than a proprietorship or partnership.

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

Objective 1-2

 

1) Rules of professional conduct for accountants apply to accountants working in public practice but not for accountants employed by companies.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

2) Some rules of conduct apply to accountants in public practice and not to those employed in industry.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

3) Audits are conducted by accountants internal to the organization so that the users of the financial information can have confidence in the accuracy of the financial reporting.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

4) Which of the following is not addressed by rules of professional conduct?

  1. A) competence
  2. B) confidentiality
  3. C) number of clients
  4. D) compliance with professional standards

Answer:  C

Diff: 2

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

5) The provincial securities commissions oversee operations of:

  1. A) all publicly accountable enterprises.
  2. B) banks and other federally constituted financial institutions.
  3. C) large investors from foreign counties.
  4. D) companies with publicly traded stock.

Answer:  D

Diff: 3

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

6) What classifications of Canadian corporations are required to use International Financial Reporting Standards (IFRS)?

  1. A) publicly accountable enterprises
  2. B) all companies
  3. C) private companies
  4. D) none

Answer:  A

Diff: 1

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

7) Audits conducted by external accountants express an opinion:

  1. A) that evaluates the effectiveness of management.
  2. B) that taxing authorities use to ensure that the correct of amount of tax owing has been calculated.
  3. C) that gives investors confidence their investment is not at risk.
  4. D) on whether or not the financial statements fairly reflect the economic events that occurred during the accounting period.

Answer:  D

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

8) Rules of professional conduct for accountants should:

  1. A) be considered a minimum standard of performance.
  2. B) not be seen as strict when the client requests certain requirements.
  3. C) be the same as those for lawyers or engineers.
  4. D) clearly spell out right from wrong in every situation.

Answer:  A

Diff: 1

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Comprehension

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

9) Why is it in the interest of a corporation for management to behave ethically?

Answer:  Since the financial health of a company is important to many different groups of users, these users must be confident that they can rely on the financial information they are given when they are making decisions. If the various stakeholders lose confidence then they will end their relationship with the company: shareholders may sell their investments or vote to replace the Board; lenders may stop lending or raise interest rates charged; regulators may impose fines or delist the company’s stock from the exchange; employees may leave their positions.

Diff: 3

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Comprehension

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

10) The members of all four professional accounting organizations in Canada are all governed by rules of professional conduct created by their respective organizations. Describe two of the rules of professional conduct presented in the text book.

Answer:  These rules concern the confidentiality of information the accountant is privy to, maintenance of the reputation of the profession, the need to perform accountancy work with integrity and due care, competence, refusal to be associated with false or misleading information, and compliance by the accountant with professional standards. Other rules are applicable only to those members in public practice, and deal with things like the need for independence, and how to advertise, seek clients, and conduct a practice.

Diff: 3

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

Objective 1-3

 

1) A proprietorship can have two owners, so long as they are husband and wife.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

2) In a corporation, the shareholders have liability for the actions of the corporation that extends beyond their investment.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

3) All of the following are forms of business organizations except:

  1. A) proprietorship.
  2. B) partnership.
  3. C) corporation.
  4. D) governmental unit.

Answer:  D

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

4) Which of the following forms of business organizations protect the personal assets of the owners from creditors of the business?

  1. A) proprietorship
  2. B) partnership
  3. C) corporation
  4. D) corporation and partnership

Answer:  C

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

5) Which of the following types of organizations have the entity legally separate from its owners?

  1. A) corporation
  2. B) proprietorship
  3. C) partnership
  4. D) sole proprietorship

Answer:  A

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

6) Which of the following sets of characteristics best describes those of a corporation?

  1. A) limited liability, definite life, shareholders are legally separate
  2. B) limited liability, indefinite life, shareholders are legally separate
  3. C) unlimited liability, definite life, shareholders are not legally separate
  4. D) unlimited liability, indefinite life, shareholders are not legally separate

Answer:  B

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

7) Partnerships and proprietorships:

  1. A) are separate legal entities from their owners, are for small businesses, and for financial reporting purposes do not keep the business affairs separate from those of the owners.
  2. B) are separate legal entities from their owners, are for small to large businesses, and for financial reporting purposes keep the business affairs separate from those of the owners.
  3. C) are not separate legal entities from their owners, are for small to large businesses, and for financial reporting purposes do not keep the business affairs separate from those of the owners.
  4. D) are not separate legal entities from their owners, are for small to large businesses, and for financial reporting purposes keep the business affairs separate from those of the owners.

Answer:  D

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  1-3 Describe and discuss the forms of business organizations

 

8) Which of the following is a feature of limited-liability partnerships?

  1. A) They are restricted to a limited number of partners who are liable for the business.
  2. B) Liability is limited to 150% of each partners investment in the business.
  3. C) Partner liability is unlimited but the liability of partner families is limited.
  4. D) Each partner is liable for his or her own actions.

Answer:  D

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  1-3 Describe and discuss the forms of business organizations

 

Match the following terms and definitions:

 

  1. A) account receivable
  2. B) proprietorship
  3. C) earnings estimate
  4. D) transaction
  5. E) generally accepted accounting principles
  6. F) corporation
  7. G) asset
  8. H) expense
  9. I) accounting
  10. J) liability
  11. K) limited-liability partnership
  12. L) revenue
  13. M) capital

 

9) A business owned by shareholders

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

10) Another name for the owner’s equity of a proprietorship

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

11) An entity with a single owner

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

Answers: 9) F 10) M 11) B

 

12) Describe the three forms of business ownership and include how the owners’ liability is affected by each form.

Answer:

Proprietorship A proprietorship has a single owner, called the proprietor, who often manages the business. Proprietorships tend to be small retail stores, restaurants, and service businesses, but also can be very large. From an accounting viewpoint, each proprietorship is distinct from its owner. Thus, the accounting records of the proprietorship do not include the proprietor’s personal accounting records. However, from a legal perspective, the business is the proprietor, so if the business cannot pay its debts, lenders can take the proprietor’s personal assets (cash and belongings) to pay the proprietorship’s debt.

Partnership A partnership joins two or more individuals together as co-owners. Accounting treats the partnership as a separate organization distinct from the personal affairs of each partner. But again, from a legal perspective, a partnership is the partners in a manner similar to a proprietorship. If the partnership cannot pay its debts, lenders can take each partner’s personal assets to pay the partnership’s debts.

Corporation A corporation is a business owned by shareholders. These are the people or other corporations who own shares of ownership in the business. From a legal perspective, a corporation is formed when the federal government or a provincial government approves its articles of incorporation. Unlike a proprietorship or a partnership, once a corporation is formed, it is a legal entity separate and distinct from its owners. The corporation operates as an “artificial person” that exists apart from its owners and that conducts business in its own name. The corporation has many of the rights that a person has. For example, a corporation may buy, own, and sell property. The corporation may enter into contracts and sue and be sued. Since corporations are entities separate from their owners, they will prepare financial reports separate from their owners.

Corporations differ significantly from proprietorships and partnerships in term of owners’ liability. If a proprietorship or partnership cannot pay its debts, lenders can take the owners’ personal assets to satisfy the business’s obligations. But if a corporation goes bankrupt, lenders cannot take the personal assets of the shareholders.

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

Objective 1-4

 

1) An organization, for accounting purposes, stands apart from other organizations and individuals as a separate accounting entity.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

2) The reliability characteristic means that accounting information is free from error and bias, i.e., objective.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

3) The going-concern assumption states an entity will remain in operation for only the next accounting period.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

4) Publicly accountable enterprises, generally speaking, are publicly traded or for which a strong public interest exists.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

5) Financial statement users having easier access to information is a reason for the development of Accounting Standards for Private Enterprises (ASPE).

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

6) The Accounting Standards Board is responsible for authorizing:

  1. A) the Canadian Institute of Chartered Accountants.
  2. B) the IFRS and ASPE accounting standards used in Canada.
  3. C) the code of professional conduct for accountants.
  4. D) the Securities and Exchange Commission.

Answer:  B

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

7) GAAP stands for:

  1. A) generally accepted auditing practices.
  2. B) generally accrued auditing procedures.
  3. C) generally accepted accounting principles.
  4. D) generally accrued accounting principles.

Answer:  C

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

8) According to GAAP, to be useful, accounting information must be all of the following except:

  1. A) relevant.
  2. B) comparable.
  3. C) subjective.
  4. D) reliable.

Answer:  C

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

 

9) Which of the following statements is false?

  1. A) Reliable data are verifiable.
  2. B) Reliable data may be supported by objective evidence.
  3. C) Owner opinions are one source of objective evidence.
  4. D) An independent appraisal is usually considered reliable.

Answer:  C

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

10) The principle that states that assets acquired by the business should be recorded at their exchange price is the:

  1. A) subjectivity principle.
  2. B) cost principle of measurement.
  3. C) revenue-recognition principle.
  4. D) matching principle.

Answer:  B

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

11) What is the qualitative characteristic that states that accounting records and statements are based on the most reliable data available so they are as accurate and useful as possible?

  1. A) Reliability
  2. B) Relevance
  3. C) Comparability
  4. D) Understandability

Answer:  A

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

 

12) The relevant measure of value of the assets of a company that is going out of business is:

  1. A) their current market value.
  2. B) their book value.
  3. C) their historical cost.
  4. D) the higher of their historical cost or current market value.

Answer:  A

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

13) Which of the following statements is true?

  1. A) The value of a dollar changes over time.
  2. B) German accountants record transactions in dollars.
  3. C) The stable-monetary-unit concept requires adjustments to the accounting records for the effects of inflation.
  4. D) High inflation rates indicate a dollar’s purchasing power is stable.

Answer:  A

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Evaluation

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

14) Which of the following statements is correct?

  1. A) Businesses classified as publicly accountable enterprises must use IFRS and other businesses must use ASPE.
  2. B) Businesses classified as publicly accountable enterprises may use IFRS or ASPE depending on their size.
  3. C) Businesses not classified as publicly accountable enterprises may not use IFRS.
  4. D) Businesses classified as publicly accountable enterprises must use IFRS and other businesses may use IFRS or ASPE.

Answer:  D

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

 

15) Both IFRS and ASPE:

  1. A) provide the detailed accounting treatment for every business transaction.
  2. B) are principles based.
  3. C) are specific guidelines that never require professional interpretation.
  4. D) are designed to meet the needs of publicly accountable enterprises in Canada.

Answer:  B

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

Match the following terms and definitions:

 

  1. A) account receivable
  2. B) proprietorship
  3. C) earnings estimate
  4. D) transaction
  5. E) generally accepted accounting principles
  6. F) corporation
  7. G) asset
  8. H) expense
  9. I) accounting
  10. J) liability
  11. K) limited-liability partnership
  12. L) revenue
  13. M) capital

 

16) Guidelines that govern how businesses report their financial statements to the public

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

Answers: 16) E

 

Match the assumption, principle, or constraint description with the appropriate term.

 

  1. A) understandability characteristic
  2. B) stable-monetary unit assumption
  3. C) cost/benefit constraint
  4. D) materiality constraint
  5. E) relevance principle
  6. F) cost principle of measurement
  7. G) recognition principle
  8. H) going-concern assumption
  9. I) reliability characteristic
  10. J) economic-entity assumption

 

17) Benefits of the information produced by an accounting system must be greater than the costs

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

18) Amounts may be ignored if the effect on a decision maker’s decision is not significant

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

19) Transactions are recorded based on the cash amount received or paid

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

20) Transactions are expressed using units of money

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

 

21) Assumes that a business is going to continue operations indefinitely

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

22) Business must keep its accounting records separate from its owner’s accounting records

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

Answers: 17) C 18) D 19) F 20) B 21) H 22) J

 

23) List and define three generally accepted accounting concepts/principles discussed in Chapter 1.

Answer:

  • Economic-Entity Assumption — An accounting entity is an organization or a section of an organization that stands apart from other organizations and individuals as a separate economic unit. From an accounting perspective, sharp boundaries are drawn around each entity so as not to confuse its affairs with those of other entities.
  • Reliability characteristic — Accounting records and statements are based on the most reliable data available so that they will be as accurate and as useful as possible.
  • Cost principle of measurement — States that acquired assets and services should be recorded at their actual cost. The cost of an asset should be maintained in the accounting records for as long as the business holds the asset.
  • Going-Concern Assumption — Holds that the entity will remain in operation for the foreseeable future.
  • Stable-Monetary-Unit Assumption — Assumes that the dollar’s purchasing power is relatively stable and thus ignores the effect of inflation in the accounting records.

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

24) Why has Canada, along with most other countries, adopted International Financial Reporting Standards?

Answer:  Many companies do business internationally and also seek to raise capital around the globe. For investors, it is difficult to assess and compare the financial statements of companies that have been prepared using different accounting standards. To address the concerns of international investors, regulatory groups and other interested parties, International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board have recently been adopted by or are in the process of being adopted by most of the industrialized countries of the world. Financial statements prepared under a common set of accounting standards (IFRS) will be more useful to decision makers around the globe.

Diff: 3

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

25) Why were Accounting Standards for Private Enterprises (ASPE) implemented in Canada?

Answer:  The IFRS standards are much more complex than many Canadian businesses require in preparing their financial statements. Most Canadian businesses are small to medium in size and are privately owned. The most significant users of their financial information are their creditors (likely their bank) and the government (for computing income taxes and sales taxes). Consequently, a second set of accounting standards, Accounting Standards for Private Enterprises, was developed for these types of businesses.

Diff: 3

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

Objective 1-5

 

1) The accounting equation can be stated as assets + liabilities = owner’s equity.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

2) Assets are economic resources of a business expected to be of benefit in the future.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

3) Owner’s equity is often referred to as net assets and represents the residual amount of business assets that can be claimed by the owner.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

4) An owner investment would increase the assets and decrease the liabilities of the firm.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

5) The purchase of supplies on account would have an effect on the owner’s equity of the firm.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

6) One way of increasing the equity of a business is to increase a liability.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

7) The recording of an owner withdrawal has the same effect on owner’s equity as the recording of an owner investment.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

8) When a revenue is recorded, the asset account cash is always increased along with owner’s equity.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

9) Increases in owner’s equity result from revenues and owner investments while decreases result from expenses and owner withdrawals.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

10) The accounting equation can be stated as:

  1. A) Assets = Liabilities – Owner’s Equity.
  2. B) Assets – Liabilities = Owner’s Equity.
  3. C) Liabilities = Assets + Owner’s Equity.
  4. D) Owner’s Equity = Assets + Liabilities.

Answer:  B

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

11) Liabilities are:

  1. A) insider claims to the business’s assets.
  2. B) outsider claims to the business’s assets.
  3. C) economic resources of a business.
  4. D) increases in owner’s equity earned by delivering goods or services.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

12) Owner’s equity is an:

  1. A) insider claim to the business’s assets.
  2. B) outsider claim to the business’s assets.
  3. C) obligation to pay cash today.
  4. D) obligation to pay cash in the future.

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

13) All of the following are assets except:

  1. A) land.
  2. B) cash.
  3. C) merchandise inventory.
  4. D) owner withdrawals.

Answer:  D

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

14) All of the following describe a liability except:

  1. A) investments by owners.
  2. B) economic obligations to creditors.
  3. C) debts to creditors.
  4. D) outsider claims.

Answer:  A

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

15) A promise by a customer to pay cash in the future is a(n):

  1. A) account receivable.
  2. B) liability.
  3. C) prepaid asset.
  4. D) note payable.

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

16) If owner’s equity is $135,000 and total liabilities are $90,000, then total assets would be:

  1. A) $45,000.
  2. B) $225,000.
  3. C) $90,000.
  4. D) $135,000.

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

17) Owner’s equity and total assets were $32,000 and $79,000 respectively at the beginning of the period. Assets increased 50% and liabilities decreased 60% during the period. What is owner’s equity at the end of the period?

  1. A) $47,000
  2. B) $43,300
  3. C) $99,700
  4. D) $105,700

Answer:  C

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

18) Total assets and total liabilities were $31,000 and $26,000 respectively at the beginning of the period. Assets increased by 20% and liabilities increased by 10% during the period. What is the owner’s equity at the end of the period?

  1. A) $8,600
  2. B) $65,800
  3. C) $290
  4. D) $5,000

Answer:  A

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

19) A business paid $8,500 to a creditor. The effect of this transaction is to:

  1. A) increase assets and decrease liabilities.
  2. B) increase assets and decrease owner’s equity.
  3. C) decrease liabilities and owner’s equity.
  4. D) decrease assets and decrease liabilities.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

20) If total liabilities decrease by $22,000 and owner’s equity increases by $8,000 during the period, then assets must have:

  1. A) increased $30,000.
  2. B) decreased $30,000.
  3. C) increased $14,000.
  4. D) decreased $14,000.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

21) If total liabilities are $98,000 and owner’s equity is $150,000, total assets would be:

  1. A) $52,000.
  2. B) $248,000.
  3. C) $98,000.
  4. D) $300,000.

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

22) If owner’s equity is $200,000 and total assets are $325,000, total liabilities would be:

  1. A) $200,000.
  2. B) $525,000.
  3. C) $125,000.
  4. D) $325,000.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

23) Earning revenue on account:

  1. A) decreases assets.
  2. B) increases liabilities.
  3. C) decreases owner’s equity.
  4. D) increases owner’s equity.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

24) The amount owed by an entity when it makes a purchase on account is termed a(n):

  1. A) accounts receivable.
  2. B) accounts payable.
  3. C) note receivable.
  4. D) note payable.

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

25) On December 31, the assets of a business include: Cash, $3,500, Accounts Receivable, $14,000, and Supplies, $1,050. The liabilities on December 31 total $7,600. The owner’s equity on December 31 is:

  1. A) $18,550.
  2. B) $25,100.
  3. C) $10,950.
  4. D) $11,100.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

26) Purchasing office equipment on account would:

  1. A) decrease owner’s equity.
  2. B) increase owner’s equity.
  3. C) have no effect on owner’s equity.
  4. D) decrease liabilities.

Answer:  C

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

27) Purchasing a parcel of land for $100,000 by paying $10,000 in cash and signing a promissory note for the remainder would:

  1. A) decrease owner’s equity by $90,000.
  2. B) increase owner’s equity by $10,000.
  3. C) decrease liabilities by $90,000.
  4. D) increase total assets by $90,000.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

28) Collection of an account receivable would:

  1. A) decrease liabilities.
  2. B) have no effect on owner’s equity.
  3. C) decrease owner’s equity.
  4. D) increase total assets.

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

29) The payment of an account payable would:

  1. A) increase owner’s equity.
  2. B) decrease owner’s equity.
  3. C) have no effect on total assets.
  4. D) have no effect on owner’s equity.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

30) Transactions affecting owner’s equity include:

  1. A) owner withdrawals and owner investments.
  2. B) purchases of assets for cash.
  3. C) purchases of assets on account.
  4. D) only owner investments.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

31) Borrowing money from a bank would:

  1. A) have no effect on owner’s equity.
  2. B) decrease assets.
  3. C) decrease liabilities.
  4. D) increase revenues.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

32) Earning a revenue and immediately collecting the related cash would:

  1. A) decrease total assets.
  2. B) have no effect on owner’s equity.
  3. C) have no effect on total assets.
  4. D) increase owner’s equity.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

33) Earning a revenue on account would:

  1. A) have no effect on owner’s equity.
  2. B) increase owner’s equity.
  3. C) decrease owner’s equity.
  4. D) decrease total assets.

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

34) Earning a revenue on account would:

  1. A) have no effect on liabilities.
  2. B) decrease owner’s equity.
  3. C) increase accounts receivable.
  4. D) decrease total assets.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

35) The payment of rent each month for office space would:

  1. A) increase total assets.
  2. B) increase owner’s equity.
  3. C) decrease liabilities.
  4. D) increase expenses.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

36) A cash investment into the business by the owner would:

  1. A) increase liabilities and increase owner’s equity.
  2. B) increase total assets and decrease owner’s equity.
  3. C) increase owner’s equity and increase total assets.
  4. D) increase total assets and decrease liabilities.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

37) An owner investment of office furniture into the business would:

  1. A) decrease owner’s equity and decrease liabilities.
  2. B) increase total assets and increase liabilities.
  3. C) increase owner’s equity and increase total assets.
  4. D) decrease owner’s equity and increase liabilities.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

38) Purchasing office equipment on account would:

  1. A) increase total assets and increase liabilities.
  2. B) increase total assets and decrease owner’s equity.
  3. C) have no effect on total assets or liabilities.
  4. D) increase liabilities and decrease owner’s equity.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

39) Purchasing supplies for cash would:

  1. A) decrease total assets and decrease owner’s equity.
  2. B) increase total assets and increase liabilities.
  3. C) decrease liabilities and decrease total assets.
  4. D) have no effect on total assets.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

40) Purchasing a building for $120,000 by paying cash of $30,000 and obtaining a mortgage for $90,000 would:

  1. A) increase assets and increase liabilities by $90,000.
  2. B) increase owner’s equity by $90,000.
  3. C) increase liabilities by $30,000.
  4. D) decrease assets and decrease liabilities by $30,000.

Answer:  A

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

41) Purchasing a building for $150,000 by paying cash of $30,000 and obtaining a mortgage for $120,000 would:

  1. A) increase assets and liabilities by $150,000.
  2. B) increase liabilities by $120,000.
  3. C) increase liabilities by $30,000.
  4. D) decrease assets and liabilities by $120,000.

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

42) Receiving cash from a customer in payment of an account receivable would:

  1. A) decrease total assets and increase owner’s equity.
  2. B) increase owner’s equity and increase liabilities.
  3. C) increase total assets and decrease liabilities.
  4. D) have no effect on total assets or owner’s equity.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

43) A cash payment of an account payable would:

  1. A) decrease total assets and decrease owner’s equity.
  2. B) increase total assets and decrease liabilities.
  3. C) have no effect on total assets.
  4. D) decrease liabilities and decrease assets.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

44) A withdrawal of cash for personal use by an owner would:

  1. A) decrease total assets and decrease owner’s equity.
  2. B) increase owner’s equity and increase liabilities.
  3. C) decrease total assets and increase owner’s equity.
  4. D) increase total assets and decrease owner’s equity.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

45) Borrowing money and signing a note payable would:

  1. A) increase total assets and increase liabilities.
  2. B) decrease liabilities and increase total assets.
  3. C) increase liabilities and increase owner’s equity.
  4. D) increase total assets and increase owner’s equity.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

46) Receiving cash for services performed the same day would:

  1. A) increase owner’s equity and decrease total assets.
  2. B) decrease total assets and decrease liabilities.
  3. C) increase liabilities and increase total assets.
  4. D) increase owner’s equity and have no effect on liabilities.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

47) A business receives its bill for utilities for the current month that it plans to pay next month when the payment is due. This transaction causes:

  1. A) an increase in both assets and owner’s equity.
  2. B) a decrease in both owner’s equity and liabilities.
  3. C) an increase in both assets and liabilities.
  4. D) an increase in liabilities and a decrease in owner’s equity.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

48) Performing a service on account would:

  1. A) increase liabilities and decrease total assets.
  2. B) decrease liabilities and increase total assets.
  3. C) increase owner’s equity and decrease liabilities.
  4. D) increase total assets and increase owner’s equity.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

49) Collecting cash on account causes:

  1. A) assets to increase and owner’s equity to decrease.
  2. B) assets to increase and liabilities to increase.
  3. C) assets to increase and owner’s equity to increase.
  4. D) no change in total assets.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

50) A business acquires a parcel of land by issuing a note payable for $50,000. This transaction causes:

  1. A) total assets to increase.
  2. B) owner’s equity to increase.
  3. C) assets to increase and equity to increase.
  4. D) liabilities to decrease.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

51) Which of the following transactions would increase an asset and increase owner’s equity?

  1. A) payment of a note payable
  2. B) receipt of cash in payment of an account receivable
  3. C) owner investment of land into the business
  4. D) payment of the telephone bill

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

52) Which of the following transactions would both increase and decrease an asset?

  1. A) purchasing equipment for cash
  2. B) borrowing money from a bank
  3. C) performing a service and receiving the cash immediately
  4. D) purchasing office supplies on account

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

53) Which of the following transactions would increase an asset and increase a liability?

  1. A) payment of an account payable
  2. B) borrowing money from a bank
  3. C) an owner investment of cash into the business
  4. D) purchasing office equipment for cash

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

54) Which of the following transactions would increase one asset, decrease another asset, and increase a liability?

  1. A) purchasing supplies and equipment on account
  2. B) paying liabilities incurred last period
  3. C) owner investment of cash and equipment into the business
  4. D) purchasing land with a cash down payment and a note payable

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

55) Which of the following transactions would have no effect on total assets, total liabilities, or owner’s equity?

  1. A) payment of a liability
  2. B) borrowing cash by issuing a note payable
  3. C) purchasing supplies for cash
  4. D) purchasing supplies on account

Answer:  C

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

56) Determine net income for the period if beginning owner’s equity is $20,000, cash withdrawals by the owner amount to $7,000, and ending owner’s equity is $37,000.

  1. A) $10,000
  2. B) $27,000
  3. C) $24,000
  4. D) $13,000

Answer:  C

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

57) If beginning capital was $25,000, ending capital is $37,000, and the owner’s withdrawals were $23,000, the amount of net income or net loss for the period was:

  1. A) net loss of $35,000.
  2. B) net income of $35,000.
  3. C) net income of $14,000.
  4. D) net loss of $14,000.

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

58) Determine cash withdrawals for the period if net income is $34,000, beginning owner’s equity is $29,000, and ending owner’s equity is $45,000.

  1. A) $74,000
  2. B) $5,000
  3. C) $11,000
  4. D) $18,000

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

59) Total assets at the end of the period were $330,000 and liabilities were 25% of owner’s equity. Determine owner’s equity at the end of the period.

  1. A) $264,000
  2. B) $132,000
  3. C) $462,000
  4. D) $825,000

Answer:  A

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

Ace Builders had the following transactions in June: earned $4,000 “on account” that will be collected in cash next month; collected $3,000 from a customer that was owed from a previous month; incurred $500 of repair expense and paid cash to the repairman; paid $1,200 cash to a supplier that it owed from the previous month; paid out $800 in cash withdrawals to the owner.

 

 

60) For Ace Builders, what is the combined effect on owner’s capital from the June transactions?

  1. A) Up $2,700
  2. B) Up $3,500
  3. C) Up $4,500
  4. D) Down $800

Answer:  A

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

61) For Ace Builders, what is the combined effect on cash from the June transactions?

  1. A) Down $800
  2. B) Down $2,500
  3. C) Up $4,500
  4. D) Up $500

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

62) For Ace Builders, how much was the net income or net loss in June?

  1. A) $6,500 net income
  2. B) $3,500 net income
  3. C) $5,300 net income
  4. D) $2,500 net loss

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

ABC Delivery Service had the following transactions in June: earned $4,000 cash for services rendered; collected $2,500 from a customer “on account” for work completed the previous month; paid out $200 cash for plumbing services; received $3,500 of supplies and promised to pay one month later; paid out $1,000 in cash withdrawals to the owner.

 

63) For ABC Delivery Service, what is the combined effect on owner’s capital from the June transactions?

  1. A) Up $2,800
  2. B) Up $5,300
  3. C) Up $1,800
  4. D) Down $1,000

Answer:  A

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

64) For ABC Delivery Service, what is the combined effect on cash from the June transactions?

  1. A) Up $4,000
  2. B) Up $5,300
  3. C) Up $1,800
  4. D) Up $2,800

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

65) For ABC Delivery Service, how much was net income or net loss in June?

  1. A) $2,800 net income
  2. B) $1,800 net income
  3. C) $6,300 net loss
  4. D) $3,800 net income

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

Match the following terms and definitions:

 

  1. A) account receivable
  2. B) proprietorship
  3. C) earnings estimate
  4. D) transaction
  5. E) generally accepted accounting principles
  6. F) corporation
  7. G) asset
  8. H) expense
  9. I) accounting
  10. J) liability
  11. K) limited-liability partnership
  12. L) revenue
  13. M) capital

 

66) An event that affects the financial position of a particular entity and can be reliably measured

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

67) An increase in owner’s equity that is earned by delivering goods or services to customers

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

68) An economic resource that is expected to be of benefit in the future

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

69) An economic obligation payable to an individual or an organization outside of the business

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

70) A decrease in owner’s equity that occurs in the course of delivering goods or services to customers

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

Answers: 66) D 67) L 68) G 69) J 70) H

For the items listed below, choose the appropriate code letter to indicate whether the item is an asset, liability, or owner’s equity item:

 

Asset                          A

Liability                    L

Owner’s Equity      OE

 

  1. A) L
  2. B) A
  3. C) OE

 

71) Accounts receivable

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

72) Office supplies

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

73) Truck

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

74) Don Smith, Capital

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

75) Salary payable

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

76) Note payable

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

77) Cash

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

78) Land

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

79) Accounts payable

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

80) Office furniture

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

Answers: 71) B 72) B 73) B 74) C 75) A 76) A 77) B 78) B 79) A 80) B

 

 

81) Provide the accounting equation.

Answer:  Assets = Liabilities + Owner’s Equity

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

82) Determine the expenses for the current period based on the following data:

 

Net income for the current period        $55,000

Ending owner’s equity                               85,000

Beginning owner’s equity                          49,000

Owner withdrawals                                    19,000

Revenue for the current period                96,000

Answer:  Revenue – net income = expenses

$96,000 – $55,000 = $41,000

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

83) Determine the expenses for the current period based on the following data:

 

Net income for the current period         $15,000

Ending owner’s equity                                45,000

Beginning owner’s equity                          40,000

Owner withdrawals                                    10,000

Revenue for the current period                 90,000

Answer:  Revenue – net income = expenses

$90,000 – $15,000 = $75,000

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

84) Selected transactions for Sarah’s Kitchen are shown below. State the effect in dollars on the accounting equation of each transaction.

 

  1. a) Sarah Cook invests $20,000 cash into a business known as Sarah’s Kitchen.
  2. b) Sarah purchases kitchen supplies on account for $500.
  3. c) Sarah purchases a new oven for $6,500 cash.
  4. d) Sarah receives and pays the kitchen’s utilities bill amounting to $425.
  5. e) Kitchen revenue for the current period amounts to $2,500. (all revenue transactions involved cash)

 

Item Assets Liabilities Owner’s

Equity

a)
b)
c)
d)
e)
Totals

 

Answer:

Item Assets Liabilities Owner’s

Equity

a) 20,000 20,000
b) 500 500
c) 6,500

(6,500)

d) (425) (425)
e) 2,500 2,500
Totals 22,575 500 22,075

 

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

85) Selected transactions for Mac’s Garage are shown below. State the effect in dollars on the accounting equation of each transaction.

 

  1. a) George McGuire invests $4,000 cash into a business known as Mac’s Garage.
  2. b) George purchases supplies on account for $300.
  3. c) George purchases a new welder for $1,500 cash.
  4. d) George receives the garage’s telephone bill amounting to $100 to be paid next month.
  5. e) George withdraws $200 cash for personal use.
  6. f) Garage revenue for the current period amounts to $2,500. (all revenue transactions involved cash)

 

Item Assets Liabilities Owner’s

Equity

a)
b)
c)
d)
e)
f)
Totals

 

Answer:

Item Assets Liabilities Owner’s

Equity

a) 4,000 4,000
b) 300 300
c) 1,500

(1,500)

d) 100 (100)
e) (200) (200)
f) 2,500 2,500
Totals 6,600 400 6,200

 

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

86) Assets and liabilities for Stan’s Garage at the beginning and end of the current accounting period are as follows:

 

                                           January 1         December 31

Total assets                     $450,000               $690,000

Total liabilities              $325,000               $440,000

 

  1. a) Determine net income or net loss for the current year. The owner did not invest any additional assets during the year and made no withdrawals.

 

  1. b) Determine net income or net loss for the current year. The owner invested an additional $100,000 of assets into the business during the year and made no withdrawals.

Answer:

  1. a) Owner’s equity at the end of the year $250,000

Owner’s equity at the beginning of the year                 25,000

Net income                                                                        $125,000

 

  1. b) Owner’s equity at the end of the year $250,000

Owner’s equity at the beginning of the year              125,000

Increase in owner’s equity                                               125,000

Owner investment                                                           – 100,000

Net income                                                                           $25,000

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

87) For each of the following events, indicate the amount by which total assets increased or decreased.

 

  1. a) Purchased $400 of supplies on account.
  2. b) Earned $800 of revenue by performing a service for cash.
  3. c) Received utilities bill for $500, to be paid in the following period.
  4. d) Paid salaries to employees of $5,000.
  5. e) Purchased equipment for $1,600 on account.
  6. f) Purchased equipment for $5,000 cash.
  7. g) Collected $475 from a customer on an account receivable.
  8. h) Performed $3,000 of services on account.

Answer:

  1. a) $400 increase
  2. b) $800 increase
  3. c) $0
  4. d) $5,000 decrease
  5. e) $1,600 increase
  6. f) $0
  7. g) $0
  8. h) $3,000 increase

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

88) For each of the following events, indicate the amount by which liabilities increased or decreased.

 

  1. a) Owner invested cash of $20,000 and equipment valued at $10,500 into the business.
  2. b) Purchased $600 of supplies on account.
  3. c) Borrowed $10,000 from the bank, issuing a note payable.
  4. d) Performed a service for $1,500 and immediately collected the cash.
  5. e) Paid the employee salaries of $1,200.
  6. f) Purchased equipment for $550 cash.
  7. g) Received monthly rent bill of $1,300, to be paid in the following period.
  8. h) Performed a service on account for $2,300.

Answer:

  1. a) $0
  2. b) $600 increase
  3. c) $10,000 increase
  4. d) $0
  5. e) $0
  6. f) $0
  7. g) $1,300 increase
  8. h) $0

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

89) Following is a list of events for Manning Cleaning for the month of April. Show the effects in dollars of these events on the accounting equation by completing the table below.

 

April   1    Owner invested $10,000 cash and equipment valued at

$25,000 into the business.

3    Purchased $5,500 of equipment on account.

5    Purchased $400 of supplies for cash.

10    Bought a truck, paying $4,000 in cash and signing a note for $11,000.

14    Performed services for a customer for $1,850 cash.

15    Paid employee wages of $1,200.

18    Paid $2,000 on the equipment purchased on April 3.

24    Performed services for a customer on account, $2,500.

27    Collected $500 from the customer of April 24.

30    Owner withdrew $900 cash for personal use.

 

Date Cash A/R Supp. Equip Truck A/P N/P Capital
Apr. 1
3
5
10
14
15
18
24
27
30
Total

 

Answer:

Date Cash A/R Supp. Equip Truck A/P N/P Capital
Apr. 1 10,000 25,000 35,000
3 5,500 5,500
5 (400) 400
10 (4,000) 15,000 11,000
14 1,850 1,850
15 (1,200) (1,200)
18 (2,000) (2,000)
24 2,500 2,500
27 500 (500)
30 (900) (900)
Total 3,850 2,000 400 30,500 15,000 3,500 11,000 37,250

 

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

90) Following is a list of events for Sterling Moving for the month of January. Show the effects in dollars of these events on the accounting equation by completing the table below.

 

Jan.  1    Owner invested $30,000 cash into the business.

3    Purchased $1,500 of equipment with cash.

5    Purchased $400 of supplies on account.

12    Bought a car, paying $2,000 in cash and signing a note

for $10,000.

14    Performed services for a customer for $1,000 on account.

15    Paid employee wages of $600.

18    Paid $2,000 on the note payable for the car purchased on Jan. 12.

24    Performed services for a customer for cash, $2,500.

27    Collected $500 from the customer of Jan. 14.

30    Owner withdrew $400 cash for personal use.

 

Date Cash A/R Supp. Equip Car A/P N/P Capital
Jan. 1
3
5
12
14
15
18
24
27
30
Total

 

Answer:

Date Cash A/R Supp. Equip Car A/P N/P Capital
Jan. 1 30,000 30,000
3 (1,500) 1,500
5 400 400
12 (2,000) 12,000 10,000
14 1,000 1,000
15 (600) (600)
18 (2,000) (2,000)
24 2,500 2,500
27 500 (500)
30 (400) (400)
Total 26,500 500 400 1,500 12,000 400 8,000 32,500

 

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

91) For each of the following events, indicate the amount by which liabilities increased or decreased.

 

  1. a) Owner invested cash of $25,000 and equipment valued at $10,500 into the business.
  2. b) Purchased $600 of supplies on account.
  3. c) Borrowed $10,000 from the bank, issuing a note payable.
  4. d) Performed a service for $1,500 and immediately collected the cash.
  5. e) Paid the employee salaries of $1,200.
  6. f) Purchased equipment for $550 cash.
  7. g) Received monthly rent bill of $1,300, to be paid in the following period.
  8. h) Performed a service on account for $2,300.

Answer:

  1. a) $0
  2. b) $600 increase
  3. c) $10,000 increase
  4. d) $0
  5. e) $0
  6. f) $0
  7. g) $1,300 increase
  8. h) $0

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

92) For each of the following events, indicate the amount by which assets increased or decreased.

 

  1. a) Owner invested cash of $25,000 and equipment valued at $10,500 into the business.
  2. b) Purchased $600 of supplies on account.
  3. c) Borrowed $10,000 from the bank, issuing a note payable.
  4. d) Performed a service for $1,500 and immediately collected the cash.
  5. e) Paid the employee salaries of $1,200.
  6. f) Purchased equipment for $550 cash.
  7. g) Received monthly rent bill of $1,300, to be paid in the following month.
  8. h) Performed a service on account for $2,300.

Answer:

  1. a) $35,500 increase
  2. b) $600 increase
  3. c) $10,000 increase
  4. d) $1,500 increase
  5. e) $1,200 decrease
  6. f) $0
  7. g) $0
  8. h) $2,300 increase

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

93) For each of the following events, indicate the amount by which owner’s equity increased or decreased.

 

  1. a) Owner invested cash of $25,000 and equipment valued at $10,500 into the business.
  2. b) Purchased $600 of supplies on account.
  3. c) Borrowed $10,000 from the bank, issuing a note payable.
  4. d) Performed a service for $1,500 and immediately collected the cash.
  5. e) Paid the employee salaries of $1,200.
  6. f) Purchased equipment for $550 cash.
  7. g) Received monthly rent bill of $1,300, to be paid in the following month.
  8. h) Performed a service on account for $2,300.

Answer:

  1. a) $35,500 increase
  2. b) $0
  3. c) $0
  4. d) $1,500 increase
  5. e) $1,200 decrease
  6. f) $0
  7. g) $1,300 decrease
  8. h) $2,300 increase

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

94) For the following independent situations, determine the amount of net income or net loss.

 

  1. a) Revenues for the year were $200,000 and expenses were $103,000. The owner withdrew $40,000 for personal use and made an additional investment of $30,000 during the year.
  2. b) Revenues for the year were $249,000 and expenses were $136,000. The owner withdrew $55,000 for personal use and made no additional investments.
  3. c) Revenues for the year were $154,000 and expenses were $189,000. The owner made an additional investment of $90,000 and withdrew $67,000 for personal use.
  4. d) Revenues for the year were $150,000 and expenses were $101,000. The owner made no withdrawals during the year but invested $20,000 cash during the year into the business.

Answer:

  1. a) $97,000 net income ($200,000 – $103,000)
  2. b) $113,000 net income ($249,000 – $136,000)
  3. c) $35,000 net loss ($154,000 – $189,000)
  4. d) $49,000 net income ($150,000 – $101,000)

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

95) Describe how the accounting equation can be used to analyse business transactions.

Answer:  A transaction is an event that affects the financial position of an entity. and can be reliably recorded. Transactions affect a business’s assets, liabilities and owner’s equity. Therefore, transactions are often analysed in terms of their effect on the accounting equation.

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

Objective 1-6

 

1) The balance sheet lists all the entity’s assets, liabilities, and owner’s equity as of a specific date.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

2) An income statement is dated for a period of time such as “For the Year Ended December 31, 2014.”

Answer:  TRUE

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

3) The income statement must be prepared before the statement of owner’s equity since net income or net loss is added to or subtracted from the beginning balance in the owner’s capital account.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-6 Prepare and evaluate the financial statements

 

4) The income statement presents a summary of an entity’s revenues and liabilities over a period of time.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

5) The income statement shows how much the cash account either increased or decreased during the period.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

6) The financial statement that presents a summary of the assets, liabilities, and owner’s equity as of a specific date is the:

  1. A) statement of assets.
  2. B) balance sheet.
  3. C) statement of owner’s equity.
  4. D) cash flow statement.

Answer:  B

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

7) The statement that presents a summary of the revenues and expenses of an entity is called the:

  1. A) statement of owner’s equity.
  2. B) statement of financial position.
  3. C) income statement.
  4. D) balance sheet.

Answer:  C

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

8) The income statement presents a summary of the:

  1. A) cash inflows and outflows of an entity.
  2. B) revenues and expenses of an entity.
  3. C) assets and liabilities of an entity.
  4. D) changes that occurred in the owner’s equity of an entity.

Answer:  B

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

9) Which of the following financial statements reports owner’s equity as of the end of the accounting period?

  1. A) income statement and the balance sheet
  2. B) cash flow statement and the balance sheet
  3. C) statement of owner’s equity and the balance sheet
  4. D) cash flow statement and the income statement

Answer:  C

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

 

10) Which of the following statements should be prepared before the balance sheet is prepared?

  1. A) statement of owner’s equity
  2. B) statement of financial position
  3. C) income statement
  4. D) statement of owner’s equity and income statement

Answer:  D

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-6 Prepare and evaluate the financial statements

 

11) Assets are reported on the:

  1. A) income statement.
  2. B) income statement and balance sheet.
  3. C) statement of owner’s equity.
  4. D) balance sheet.

Answer:  D

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

12) Liabilities are reported on the:

  1. A) statement of owner’s equity.
  2. B) income statement.
  3. C) statement of owner’s equity and the income statement.
  4. D) balance sheet.

Answer:  D

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

13) Cash investments by the owner are reported on the:

  1. A) balance sheet.
  2. B) income statement.
  3. C) cash flow statement.
  4. D) income statement and the balance sheet.

Answer:  C

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

 

Table 1-1

 

Following is a random list showing the account balances of various assets, liabilities, revenues, and expenses for Spiffy’s Garage at December 31, 2014, the end of its first year of operations.

 

Accounts receivable $15,000
Accounts payable 3,500
Salary expense 4,500
Repairs expense 800
Truck 8,500
Equipment 6,300
Notes payable 8,200
Cash 6,800
Supplies expense 1,600
Service revenue 12,800
Gasoline expense 800
Salary payable 2,200

 

The owner, Spiffy Sloan, invested $22,600 at the beginning of the year and withdrew $5,000 during the year for personal use.

 

14) Refer to Table 1-1. The net income or loss for the year was:

  1. A) $12,800.
  2. B) $5,100.
  3. C) $5,900.
  4. D) $7,700.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

15) Refer to Table 1-1. Total assets at December 31, 2014, were:

  1. A) $31,600.
  2. B) $32,700.
  3. C) $36,200.
  4. D) $36,600.

Answer:  D

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

 

16) Refer to Table 1-1. Owner’s equity at December 31, 2014, was:

  1. A) $13,900.
  2. B) $22,700.
  3. C) $22,600.
  4. D) $18,700.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

17) Refer to Table 1-1. The statement of owner’s equity would show an ending capital balance of:

  1. A) $36,600.
  2. B) $3,900.
  3. C) $22,700.
  4. D) $22,600.

Answer:  C

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

18) Refer to Table 1-1. Total liabilities at December 31, 2014, were:

  1. A) $12,800.
  2. B) $13,900.
  3. C) $20,600.
  4. D) $22,600.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

19) Refer to Table 1-1. Not including the investment, the net change in owner’s equity for the year ended December 31, 2014, was:

  1. A) an increase of $5,100.
  2. B) a decrease of $7,800.
  3. C) an increase of $22,700.
  4. D) an increase of $100.

Answer:  D

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

 

20) Refer to Table 1-1. Total expenses for the year were:

  1. A) $5,300.
  2. B) $7,700.
  3. C) $7,800.
  4. D) $6,900.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

Table 1-2

 

Following is a list showing the account balances of various assets, liabilities, revenues, and expenses for Tim’s Landscaping at December 31, 2014, the end of its first year of operations.

 

Accounts receivable $30,000
Accounts payable 7,000
Salary expense 9,000
Repairs expense 1,600
Truck 17,000
Equipment 12,600
Notes payable 16,400
Cash 13,600
Supplies expense 3,200
Service revenue 25,600
Gasoline expense 1,600
Salary payable 4,400

 

The owner, Tim Brown, invested $45,200 during the year and withdrew $10,000 during the year for personal use.

 

21) Refer to Table 1-2. The net income or loss for the year was:

  1. A) $10,200.
  2. B) $25,600.
  3. C) $11,800.
  4. D) $15,400.

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

 

22) Refer to Table 1-2. The statement of owner’s equity would show an ending balance in the Capital account at December 31, 2014, of:

  1. A) $73,200.
  2. B) $7,800.
  3. C) $45,400.
  4. D) $45,200.

Answer:  C

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

23) Refer to Table 1-2. Not including the investment, the net change in owner’s equity for the year ended December 31, 2014, was:

  1. A) an increase of $200.
  2. B) an increase of $45,400.
  3. C) an increase of $10,200.
  4. D) a decrease of $15,600.

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

24) Refer to Table 1-2. Total liabilities at December 31, 2014, were:

  1. A) $25,600.
  2. B) $27,800.
  3. C) $41,200.
  4. D) $45,200.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

25) Refer to Table 1-2. Total assets at December 31, 2014, were:

  1. A) $65,400.
  2. B) $72,400.
  3. C) $73,200.
  4. D) $63,200.

Answer:  C

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

 

26) Refer to Table 1-2. Owner’s equity at December 31, 2014, was:

  1. A) $26,800.
  2. B) $45,400.
  3. C) $45,200.
  4. D) $37,400.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

27) Which of the following financial statements reports an increase or decrease in net cash during the time period covered?

  1. A) Income statement
  2. B) Trial balance
  3. C) Statement of owner’s equity
  4. D) Cash flow statement

Answer:  D

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

28) Which of the following amounts appears on both the income statement and statement of owner’s equity?

  1. A) Ending capital
  2. B) Net income
  3. C) Total revenues
  4. D) Drawings

Answer:  B

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

29) On the financial statements, which line item connects the balance sheet to the statement of cash flows?

  1. A) Owner’s equity (ending balance)
  2. B) Net income
  3. C) Total assets
  4. D) Cash (ending balance)

Answer:  D

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-6 Prepare and evaluate the financial statements

 

 

30) The financial statements should be prepared in what order?

  1. A) Income statement, statement of owner’s equity, balance sheet, statement of cash flows
  2. B) Statement of owner’s equity, balance sheet, income statement, statement of cash flows
  3. C) Balance sheet, statement of owner’s equity, income statement, statement of cash flows
  4. D) Balance sheet, income statement, statement of owner’s equity, statement of cash flows

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

31) Each financial statement includes a heading giving three pieces of data. Which of the following items is not included in these headings?

  1. A) Name of the financial statement
  2. B) Date or time period covered
  3. C) Name of the preparer of the statement
  4. D) Name of the business

Answer:  C

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

32) Which of the following financial statements uses net income or net loss taken directly from the income statement?

  1. A) Statement of owner’s equity
  2. B) Statement of cash flow
  3. C) Balance sheet
  4. D) Statement of expenditures

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

33) Which of the following financial statements lists the entity’s assets, liabilities, and owner’s equity as of a specific date?

  1. A) Balance sheet
  2. B) Statement of owner’s equity
  3. C) Income statement
  4. D) Statement of cash flows

Answer:  A

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

34) State whether the following accounts are assets, liabilities or owner’s equity.

 

  1. a) ________ Equipment
  2. b) ________ Capital
  3. c) ________ Supplies
  4. d) ________ Accounts payable
  5. e) ________ Accounts receivable
  6. f) ________ Wages payable
  7. g) ________ Cash

Answer:

  1. a) asset
  2. b) owner’s equity
  3. c) asset
  4. d) liability
  5. e) asset
  6. f) liability
  7. g) asset

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

35) State whether the following accounts would appear on an income statement, balance sheet, or statement of owner’s equity.

 

  1. a) ________ Equipment
  2. b) ________ Owner’s withdrawals
  3. c) ________ Utilities expense
  4. d) ________ Accounts payable
  5. e) ________ Accounts receivable
  6. f) ________ Service revenue
  7. g) ________ Cash
  8. h) ________ Beginning owner’s equity

Answer:

  1. a) balance sheet
  2. b) statement of owner’s equity
  3. c) income statement
  4. d) balance sheet
  5. e) balance sheet
  6. f) income statement
  7. g) balance sheet
  8. h) statement of owner’s equity

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

36) On January 1, 2014, Brad Thomas invested $30,000 in Thomas Repairs. During 2014, Brad withdrew $17,000 for personal use. Thomas Repairs reports the following balances on December 31, 2014:

 

Accounts receivable                                    $ 9,000

Accounts payable                                           4,200

Service revenue                                             25,550

Land                                                                   4,000

Rent expense                                                    4,500

Note payable                                                    3,800

Supplies                                                                900

Brad Thomas, Capital, Jan. 1, 2014                   0

Salary expense                                                 9,650

Cash                                                                 18,500

Brad Thomas, Withdrawals                     17,000

 

Prepare an income statement for the year ended December 31, 2014.

Answer:

Thomas Repairs

Income Statement

For the Year Ended December 31, 2014

 

Revenue:

Service revenue                                               $25,550

Expenses:

Salary expense                  $9,650

Rent expense                        4,500

Total expenses                                                   14,150

Net income                                                           $11,400

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

37) On January 1, 2014, Brad Thomas invested $30,000 in Thomas Repairs. During 2014, Brad withdrew $17,000 for personal use. Thomas Repairs reports the following balances on December 31, 2014:

 

Accounts receivable                                   $ 9,000

Accounts payable                                           4,200

Service revenue                                             25,550

Land                                                                   4,000

Rent expense                                                    4,500

Note payable                                                    3,800

Supplies                                                                900

Brad Thomas, Capital, Jan. 1, 2014                   0

Salary expense                                                9,650

Cash                                                                 18,500

Brad Thomas, Withdrawals                     17,000

 

Prepare a balance sheet dated December 31, 2014, for Thomas Repairs.

Answer:

Thomas Repairs

Balance Sheet

December 31, 2014

                      Assets                                                   Liabilities

Cash                               $18,500                Accounts payable                $ 4,200

Accounts receivable       9,000                Note payable                            3,800

Supplies                                900                Total liabilities                      $ 8,000

Land                                   4,000

                                                                                Owner’s equity

Brad Thomas, Capital         24,400

Total liabilities and

Total assets                  $32,400                 owner’s equity                    $32,400

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

38) Classify each event below as an operating activity, investing activity, or financing activity.

 

  1. a) ________ Owner invested cash into the entity.
  2. b) ________ Purchased equipment for cash.
  3. c) ________ Paid salaries of employees.
  4. d) ________ Collected cash on account and from cash customers.
  5. e) ________ Paid utilities for the current period.
  6. f) ________ Borrowed money from the bank.
  7. g) ________ Pay for interest on bank loan.
  8. h) ________ Owner withdraws cash from the business for personal use.

Answer:

  1. a) financing activity
  2. b) investing activity
  3. c) operating activity
  4. d) operating activity
  5. e) operating activity
  6. f) financing activity
  7. g) operating activity
  8. h) financing activity

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-6 Prepare and evaluate the financial statements

 

Table 1-2

 

Following is a list showing the account balances of various assets, liabilities, revenues and expenses for Tim’s Landscaping at December 31, 2014, the end of its first year of operations.

 

Accounts receivable $30,000
Accounts payable 7,000
Salary expense 9,000
Repairs expense 1,600
Truck 17,000
Equipment 12,600
Notes payable 16,400
Cash 13,600
Supplies expense 3,200
Service revenue 25,600
Gasoline expense 1,600
Salary payable 4,400

 

The owner, Tim Brown, invested $45,200 during the year and withdrew $10,000 during the year for personal use.

 

39) Refer to Table 1-2. Prepare an income statement for Tim’s Landscaping for the year ending December 31, 2014, the end of its first year of operations.

Answer:

Tim’s Landscaping

Income Statement

For the Year Ended December 31, 2014

Revenue:

Service revenue                                                    $25,600

Expenses:

Salary expense                          $9,000

Repairs expense                          1,600

Supplies expense                        3,200

Gasoline expense                        1,600

Total expenses                                                       15,400

Net income                                                               $10,200

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

40) Refer to Table 1-2. Prepare a statement of owner’s equity for Tim’s Landscaping for the year ending December 31, 2014, the end of its first year of operations.

Answer:

Tim’s Landscaping

Statement of Owner’s Equity

For the Year Ended December 31, 2014

 

Tim Brown, capital, Jan. 1, 2014                                                           $           0

Add: Owner investments during 2014                                                  45,200

Add: Net income for the year                                                                    10,200

55,400

Less: Withdrawals by owner                                                                    10,000

Tim Brown capital, Dec. 31, 2010                                                         $45,400

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

41) Refer to Table 1-2. Prepare a balance sheet dated December 31, 2014, for Tim’s Landscaping

Answer:

Tim’s Landscaping

Balance Sheet

December 31, 2014

                      Assets                                                   Liabilities

Cash                               $13,600                Accounts payable                $ 7,000

Accounts receivable    30,000                Salary payable                         4,400

Truck                                17,000                Note payable                          16,400

Equipment                     12,600                Total liabilities                   $ 27,800

                                                                                 Owner’s equity

Tim Brown, capital              45,400

Total liabilities and

Total assets                  $73,200                owner’s equity                    $73,200

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

42) Alice Li started Li Design Consultants on December 1, 2013, and invested $5,000 into the business. On December 12, she rendered services to three clients “on account” with total revenues earned of $4,500. She then incurred advertising expense on four different websites and promised to pay a total of $1,600 at a later date. On December 15, she purchased $900 of office supplies for cash. On December 20, she received $1,000 in cash payment from her first client and deposited it into the business account. On December 22, she incurred $2,000 for legal expense and paid cash. On December 31, she made a payment of $300 to one of the websites that she owed for advertising provided earlier in the month. No withdrawals were taken in December. Prepare an income statement for the month of December, a statement of owner’s equity for the month of December, and a balance sheet at December 31, 2013.

Answer:

Li Design Consultants

Income Statement

For the Month Ended December 31, 2013

Revenue:

Service revenue                                         $4,500

Expenses:

Advertising expense       $1,600

Legal expenses                    2,000

Total expenses                                         3,600

Net income                                                                                        $900

 

Li Design Consultants

Statement of Owner’s Equity

For the Month Ended December 31, 2013

 

Alice Li, capital, December 1, 2013                                                 $0

Add: Owner investments during December                          5,000

Add: Net income for December                                                     900

5,900

Less: Withdrawals by owner                                                              0

Alice Li, capital, December 31, 2013                                       $5,900

 

Li Design Consultants

Balance Sheet

December 31, 2013

                      Assets                                                   Liabilities

Cash                                 $2,800                Accounts payable                $ 1,300

Accounts receivable       3,500                Total liabilities                         1,300

Office supplies                    900

                                                                                 Owner’s equity

  1. Li, Capital 5,900

Total liabilities and

Total assets                     $7,200                owner’s equity                       $7,200

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

43) On January 1, 2013, William Kelly started Kelly’s Computer Service by investing $10,000. On January 3, the business borrowed $10,000 from a creditor and executed a Note payable with the principal and interest to be due in one year. On January 5, the business purchased $12,000 of equipment for cash. On January 8, Kelly’s rendered service to his first corporate client and earned $2,500 in cash. On January 12, Kelly’s incurred repair expense of $1,200 and promised to pay the repair contractor the following month. On January 18, Kelly’s rendered service to a new client in the amount of $6,000 “on account” (the client promised to pay the following month). At the end of January, Kelly took a withdrawal of $1,000. Prepare an income statement for the month of January, a statement of owner’s equity for the month of January, and a balance sheet at January 31, 2013.

Answer:

Kelly’s Computer Service

Income Statement

For the Month Ended January 31, 2013

Revenue:

Service revenue                                         $8,500

Expenses:

Repairs expenses                                        1,200

Net income                                                                                     $7,300

 

Kelly’s Computer Service

Statement of Owner’s Equity

For the Month Ended January 31, 2013

 

William Kelly, capital, January 1, 2013                                                 $0

Add: Owner investments during January                                    10,000

Add: Net income for January                                                              7,300

17,300

Less: Withdrawals by owner                                                              1,000

William Kelly, capital, January 31, 2013                                    $16,300

 

Kelly’s Computer Service

Balance Sheet

January 31, 2013

 

                     Assets                                                   Liabilities

Cash                                $ 9,500                Accounts payable                $ 1,200

Accounts receivable       6,000                Notes payable                        10,000

Equipment                      12,000                Total liabilities                      11,200

                                                                                 Owner’s equity

  1. Kelly, Capital 16,300

Total liabilities and

Total assets                  $27,500                owner’s equity                     $27,500

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

44) Scott’s Camera Shop started 2014 with total assets of $80,000 and total liabilities of $40,000. During the year the business earned revenues of $120,000 and incurred expenses of $70,000. Scott made an additional $15,000 capital contributions during the year, and made withdrawals of $60,000. Prepare a statement of owner’s equity for 2014.

Answer:

Scott’s Camera Shop

Statement of Owner’s Equity

For the Year Ended December 31, 2014

 

Scott capital, January 1                                                    $ 40,000

Add: Investment by owner                                                15,000

Net income                                                                             50,000

105,000

Deduct: Withdrawals                                                       (60,000)

Scott capital, December 31                                             $ 45,000

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

45) Your best friend has asked you to review the financial status of her company before she goes to the bank to request a loan. Answer the following questions:

 

1) What will you need to review in order to make a sound decision?

2) What will the bank be looking for?

Answer:

1) A decision maker would like to have access to all the financial statements of a company for several years, including the income statement, balance sheet, statement of owner’s equity, and cash flow statement.

 

2) Specifically, the bank will be looking at the company’s ability to repay the loan. It will look at the amount of income generated by the company for the past several years as well as whether or not it has been increasing or decreasing. The amount of debt already owed by the company will also be an issue. The bank would like to see that owner’s equity exceeds total liabilities at the time of the loan request. Also, the owner’s withdrawals should not exceed the net income in any given period.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-6 Prepare and evaluate the financial statements

 

Table 2-1

 

The following is a list of the accounts and their balances appearing in the ledger of Henry Garage Repairs as of December 31, 2014, the company’s year end. The accounts are in alphabetical order and have normal balances.

 

Accounts payable                                $450

Accounts receivable                           1,250

Cash                                                           400

Equipment                                          12,600

Gasoline expense                                   600

Ian Henry, Capital                             6,600

Ian Henry, Withdrawals                     500

Notes payable                                    11,000

Rent expense                                       1,200

Repairs expense                                     650

Salary expense                                        700

Salary payable                                        100

Service revenue                                    8,250

Supplies                                                    200

Supplies expense                                   300

Truck                                                      8,000

 

46) Refer to Table 2-1. Prepare a Statement of Owner’s Equity for Henry Garage Repairs for the year ended December 31, 2014. Assume the capital amount did not change since January 1, 2014.

Answer:

Henry Garage Repairs

Statement of Owner’s Equity

For the Year Ended December 31, 2014

 

Ian Henry, Capital January 1, 2014                             $6,600

Add:  Net income for the year                                         4,800

11,400

Less:  Withdrawal by owner                                              500

Ian Henry, Capital December 31, 2014                  $10,900

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-6 Prepare and evaluate the financial statements

 

47) Refer to Table 2-1. Prepare an Income statement for Henry Garage Repairs for the year ended December 31, 2014.

Answer:

Henry Garage Repairs

Income Statement

For the Year Ended December 31, 2014

 

Service revenue                                                               $8,250

Gasoline expense                    $ 600

Rent expense                           1,200

Repairs expense                         650

Salary expense                            700

Supplies expense                       300                                  

Total expenses                                                                   3,450

Net income                                                                     $ 4,800

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-6 Prepare and evaluate the financial statements

 

Table 2-2

 

The following is a list of the accounts and their balances appearing in the ledger of Martin Mann Garage as of December 31, 2014, the company’s year end. The accounts are in alphabetical order and have normal balances.

 

Accounts payable                                        1,350

Accounts receivable                                     3,750

Cash                                                                 1,200

Equipment                                                   37,800

Gasoline expense                                         1,800

Martin Mann, Capital                              19,800

Martin Mann, Withdrawals                     1,500

Notes payable                                             33,000

Rent expense                                                 3,600

Repairs expense                                            1,950

Salary expense                                              2,100

Salary payable                                                  300

Service revenue                                           24,750

Supplies                                                              600

Supplies expense                                             900

Truck                                                              24,000

 

48) Refer to Table 2-2.  Prepare an Income statement for Martin Mann Garage for the year ended December 31, 2014.

Answer:

Martin Mann Garage

Income Statement

For the Year Ended December 31, 2014

 

Service revenue                                                           $24,750

Gasoline expense                 $1,800

Rent expense                           3,600

Repairs expense                      1,950

Salary expense                         2,100

Supplies expense                      900                                 

Total expenses                                                              10,350

Net income                                                                   $14,400

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-6 Prepare and evaluate the financial statements

 

49) Refer to Table 2-2. Prepare a Statement of Owner’s Equity for Martin Mann Garage for the year ended December 31, 2014. Assume the capital amount did not change since January 1, 2014.

Answer:

Martin Mann Garage

Statement of Owner’s Equity

for the year ended December 31, 2014

 

Martin Mann, Capital January 1, 2014                    $19,800

Add:  Net income for the year                                      14,400

34,200

Less:  Withdrawal by owner                                           1,500

Martin Mann, Capital December 31, 2014           $ 32,700

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-6 Prepare and evaluate the financial statements

 

50) Prepare a balance sheet dated December 31, 2013, for Canfield Enterprises based on the following transactions completed during 2013.

 

  1. a) Marilyn Canfield invested $16,000 cash and equipment valued at $6,000 into the business.
  2. b) Purchased $500 of supplies on account.
  3. c) Purchased $2,000 of equipment for cash.
  4. d) Purchased a building by issuing a $10,000 note.

Answer:

Canfield Enterprises

Balance Sheet

December 31, 2013

 

Assets                                                       Liabilities

Cash                                       $14,000             Accounts payable                  $     500

Supplies                                        500             Note payable                             10,000

Equipment                                8,000             Total liabilities                          10,500

Building                                  10,000

Owner’s equity

Marilyn Canfield, Capital      22,000

 

Total liabilities and

Total assets                          $32,500               owners’ equity                      $32,500

 

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

51) Given the following transactions in the month of July for Kootenay Outdoor Adventures, prepare journal entries; and, a trial balance and balance sheet as of July 31, 2013.

 

  1. a) Owner, Bill Thompson invested $35,000 cash and equipment with a value of $67,500 into the business.
  2. b) Purchased supplies on account, $250.
  3. c) Rented office space paying one month’s rent, $950.
  4. d) Performed guide service on account, $4,500.
  5. e) Purchased a truck by paying $4,000 cash and signing a promissory note for the balance of $29,800.
  6. f) Performed guiding service and immediately collected $2,900 cash.
  7. g) Owner, Bill Thompson withdrew $900 for personal use.

Answer:

Cash  35,000

Equipment                                                                      67,500

Thompson, capital                                                                102,500

Owner invested cash and equipment in the business.

 

Supplies                                                                               250

Accounts payable                                                                         250

Purchased supplies on account.

 

Rent expense                                                                       950                       

            Cash                                                                                                   950

Paid cash for one month’s rent.

 

Accounts receivable                                                       4,500

Service revenue                                                                           4,500

Performed service on account.

 

Truck                                                                                33,800

Cash                                                                                               4,000

Notes payable                                                                           29,800

Purchased a truck with cash and a promissory note.

 

Cash                                                                                    2,900

Service revenue                                                                           2,900

Performed service for cash.

 

Withdrawals                                                                       900

Cash                                                                                                   900

Owner withdrew cash for personal use.

 

 

Kootenay Outdoor Adventures

Trial Balance

July 31, 2013

 

Debit                   Credit

Cash                                                       $32,050

Accounts receivable                               4,500

Supplies                                                        250

Equipment                                              67,500

Truck                                                        33,800

Accounts payable                                                                    $250

Note payable                                                                          29,800

Bill Thompson, Capital                                                    102,500

Bill Thompson, Withdrawals                 900

Service revenue                                                                        7,400

Rent expense                                                950               _______

Total                                                     $139,950              $139,950

 

Kootenay Outdoor Adventures

Balance Sheet

July 31, 2013

 

                         Assets:                                           Liabilities and Owner’s Equity:

Cash                                       $32,050             Accounts payable                      $250

Accounts receivable               4,500             Notes payable                          29,800

Supplies                                        250                  Total liabilities                 $30,050

Equipment                              67,500

Truck                                        33,800             Bill Thompson, capital       108,050

$138,100                                                             $138,100

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

Accounting, Vol. 1, 9e Cdn. Ed. (Horngren et al.)

Chapter 3   Measuring Business Income: The Adjusting Process

 

Objective 3-1

 

1) The recognition criteria for revenues tell accountants when to record revenue by making a journal entry and the amount of revenue to record.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

2) The matching objective directs accountants as to when to record expenses on the income statement to be matched against liabilities on the balance sheet.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

3) The time-period assumption ensures that accounting information is reported at regular intervals.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

4) The matching objective directs accountants to measure expenses.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

 

5) An important fact related to accrual accounting is that:

  1. A) adjusting entries are not required.
  2. B) revenue is recorded when cash is received.
  3. C) expenses are recorded when incurred.
  4. D) revenue is recorded when cash is received and expenses are recorded when incurred.

Answer:  C

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

6) The concept that assists accountants in determining how often to prepare financial reports is the:

  1. A) Cost principle.
  2. B) Time-period assumption.
  3. C) Recognition criteria for revenue.
  4. D) Matching objective.

Answer:  B

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

7) The concept that assists accountants in determining when to recognize revenue in the accounts is the:

  1. A) Cost principle.
  2. B) Time-period assumption.
  3. C) Recognition criteria for revenue.
  4. D) Matching objective.

Answer:  C

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

8) The concept that requires that accountants record amortization expense on equipment is the:

  1. A) Cost principle.
  2. B) Time-period assumption.
  3. C) Recognition criteria for revenue.
  4. D) Matching objective.

Answer:  D

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

9) The concept that requires that accountants accrue wage expense at the end of the accounting period for unpaid wages is the:

  1. A) Cost principle.
  2. B) Time-period assumption.
  3. C) Recognition criteria for revenue.
  4. D) Matching objective.

Answer:  D

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  3-1 Apply the recognition criteria for revenues and expenses

10) The concept that requires that accountants accrue revenue at the end of the accounting period for work performed but not yet billed is the:

  1. A) Cost principle.
  2. B) Time-period assumption.
  3. C) Recognition criteria for revenue.
  4. D) Matching objective.

Answer:  C

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

11) The matching objective is the basis for recording:

  1. A) revenues.
  2. B) expenses.
  3. C) assets.
  4. D) liabilities.

Answer:  B

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

 

12) Robert Rogers, a professional accountant, performed accounting services for a client in December. A bill was mailed to the client on December 30. Robert received a cheque in the mail on January 5. The recognition criteria for revenues requires that which of the following accounts appears on the balance sheet at December 31?

  1. A) Prepaid expense
  2. B) Accounts receivable
  3. C) Unearned revenue
  4. D) Accounts payable

Answer:  B

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  3-1 Apply the recognition criteria for revenues and expenses

13) Sally Lee, a professional accountant, owns a computer used for the company’s business. The matching objective requires that which of the following accounts appears on the income statement for the year ended December 31?

  1. A) Amortization expense, computer
  2. B) Accumulated amortization, computer
  3. C) Depreciation receivable, computer
  4. D) Depreciation payable, computer

Answer:  A

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

14) Jas Singh owns a construction business. Which of the following principles/objectives/assumptions requires the equipment used in the business to be amortized?

  1. A) revenue recognition principle
  2. B) the reliability characteristic
  3. C) stable-monetary unit assumption
  4. D) matching objective

Answer:  D

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

Match the following:

 

  1. A) amortization
  2. B) cash-basis accounting
  3. C) accrual accounting
  4. D) unearned revenue
  5. E) accrued expense
  6. F) contra account
  7. G) book value
  8. H) recognition criteria for revenues
  9. I) accrued revenue
  10. J) matching objective

 

15) The basis for recording revenues

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

16) The basis for recording expenses

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

Answers: 15) H 16) J

 

Match the following descriptions with the most appropriate caption:

 

  1. A) tangible capital asset
  2. B) depreciation
  3. C) time-period assumption
  4. D) recognition value
  5. E) recognition criteria for revenues
  6. F) intangible capital asset
  7. G) accrued revenue
  8. H) carrying value
  9. I) matching objective
  10. J) unearned revenue
  11. K) adjusting entry
  12. L) cash-basis accounting

 

17) Ensures that accounting information is reported at regular intervals

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

18) The basis for recording expenses

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  3-1 Apply the recognition criteria for revenues and expenses

Answers: 17) C 18) I

 

 

19) For each of the following, state whether you agree or disagree with the accounting treatment. What concepts support your view?

  1. a) A company records all revenue when earned, whether it has been collected or not.
  2. b) Payment of a three-year insurance policy is charged to insurance expense and not adjusted.
  3. c) Because the December telephone bill did not arrive until January, no telephone expense was recorded for December.
  4. d) Management of Classic Cars requires the accountants to prepare monthly financial statements.

Answer:

  1. a) Agree. The recognition criteria for revenues state that revenue should be recognized as it is earned, regardless of when the cash is received.
  2. b) Disagree. The payment should be recorded as a prepaid expense or asset until consumed. Adjusting entries will be required to record the expense as time passes. The matching objective supports this conclusion. It states that expenses should be matched against revenues during the same time period. If the payment is recorded as an expense, the adjusting entry will require the transfer of the unused part to the appropriate asset account.
  3. c) Disagree. Whether or not the bill was received, the expense was incurred and should be recognized. The matching objective supports this position.
  4. d) Agree. The time-period assumption states that financial statements can be prepared as often as necessary, and should be prepared at regular intervals.

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Evaluation

Objective:  3-1 Apply the recognition criteria for revenues and expenses

 

Objective 3-2

 

1) Accrual accounting records the effect of every business transaction as it occurs.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

2) Accrual accounting records the effect of every business transaction as it occurs.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

3) Under accrual accounting receivables and payables are not recorded.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

4) The two most widely used methods of accounting are:

  1. A) financial and managerial.
  2. B) cash-basis and financial.
  3. C) accrual and managerial.
  4. D) accrual and cash-basis.

Answer:  D

Diff: 1

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

5) An accountant recognizes the impact of a business event when cash is received or paid in which basis of accounting?

  1. A) accrual
  2. B) managerial
  3. C) cash-basis
  4. D) financial

Answer:  C

Diff: 1

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

6) An accountant records revenue when earned under which basis of accounting?

  1. A) cash-basis
  2. B) accrual
  3. C) tax
  4. D) financial

Answer:  B

Diff: 1

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

7) Under the cash basis of accounting, the receipt of cash from a customer in advance of performing the service would be credited to a(n):

  1. A) prepaid asset account.
  2. B) deferred asset account.
  3. C) unearned revenue account.
  4. D) revenue account.

Answer:  D

Diff: 2

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Comprehension

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

8) Accrued expenses are expenses that have been:

  1. A) paid but not incurred.
  2. B) not paid but incurred.
  3. C) not paid and not incurred.
  4. D) paid and incurred.

Answer:  B

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

9) Accruals involve the recording of an expense or a revenue account:

  1. A) either before or at the same time the cash is paid or received.
  2. B) after the cash is paid or received.
  3. C) at the same time the cash is paid or received.
  4. D) before the cash is paid or received.

Answer:  D

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

10) Which of the following accounts are not used in cash-basis accounting?

  1. A) payables
  2. B) revenue
  3. C) equity
  4. D) expenses

Answer:  A

Diff: 2

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Comprehension

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

11) Which of the following situations would result in an increase in income under the accrual basis of accounting, but would not result in an increase in income under the cash-basis of accounting?

  1. A) cash received from a customer in advance of the service being performed
  2. B) writing off an uncollectable account receivable
  3. C) receipt of cash for services that were performed earlier on account
  4. D) performance of services on account

Answer:  D

Diff: 3

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Comprehension

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

12) Which of the following accounts would be used under the accrual basis of accounting, but not under the cash-basis of accounting?

  1. A) cash
  2. B) unearned revenue
  3. C) equipment
  4. D) salary expense

Answer:  B

Diff: 2

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

Match the following:

 

  1. A) amortization
  2. B) cash-basis accounting
  3. C) accrual accounting
  4. D) unearned revenue
  5. E) accrued expense
  6. F) contra account
  7. G) book value
  8. H) recognition criteria for revenues
  9. I) accrued revenue
  10. J) matching objective

 

13) An accounting system that records only transactions in which cash is received or paid

Diff: 2

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

14) An accounting system that records the impact of a business event as it occurs, regardless of whether the transaction affected cash

Diff: 2

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

15) An expense that has been incurred but not yet paid in cash

Diff: 2

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Knowledge

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

Answers: 13) B 14) C 15) E

 

16) Storemount Delivery reports the following transactions for May 2014:

 

May   1    Purchased a two-year insurance policy for cash, $1,800.

9    Performed a service on account, $800.

16    Paid wages to employees, $950.

18    Completed a job for a customer and collected $600 cash.

23    Collected $500 of the amount owed from May 9.

30    Accrued wages of $650.

 

Show the amount of revenue and expense recognized for each transaction during May 2014 under both the cash basis and the accrual basis of accounting by completing the following chart.

 

                         Cash-Basis Accounting

Date Revenue Expense

 

                             Accrual Accounting

Date Revenue Expense

 

Answer:         Cash-Basis Accounting

Date Revenue Expense
May 1 $1,800
16 $950
18 $600
23 $500

 

                             Accrual Accounting

Date Revenue Expense
May 1 $75
9 $800
16 $950
18 $600
30 $650

 

Diff: 2

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Application

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

17) Explain the difference between cash-basis and accrual accounting. Are adjusting entries necessary in both methods? Explain.

Answer:  The cash basis of accounting recognizes revenues and expenses only when cash is received or paid. No adjustments are necessary at the end of the accounting period. There is also no need for receivable or payable accounts.

Under accrual accounting, the accountant recognizes the impact of a business transaction on an entity when the transaction occurs, whether or not cash is received or paid. Adjustments are usually necessary at the end of the period to update certain asset and liability accounts and to recognize revenues that have been earned but not collected and expenses that have been incurred but not paid.

Diff: 2

Learning Outcome:  A-04 Compare and contrast cash-basis accounting and accrual accounting

Skill:  Comprehension

Objective:  3-2 Distinguish accrual-basis accounting from cash-basis accounting

 

Objective 3-3

 

1) The adjusting entry to record $500 of expired insurance would include a debit to insurance expense.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

2) Revenue that has been earned but not yet collected is called an accrued revenue.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

3) Adjusting entries only involve income statement accounts.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

4) Adjusting entries assign revenues to the period in which they are earned and expenses to the period in which they are incurred.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

5) The process of allocating the cost of property, plant and equipment to expense over their useful lives is called amortization.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

6) The cost of a property, plant, and equipment asset less its accumulated amortization is referred to as historical cost.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

7) The adjusting entry to record accrued salaries includes a debit to salary expense.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

8) Failure to adjust for an accrued expense will overstate expenses and understate net income.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

9) Failure to adjust for accrued revenue results in net income being understated and assets being understated.

Answer:  TRUE

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

10) Every adjusting entry affects an account on the income statement and an account on the balance sheet.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

11) The financial statements will contain errors if they are prepared before the adjusting entries are completed.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

12) When a prepaid expense is recorded initially as an asset, the adjusting entry transfers the used portion of the asset to the expense account.

Answer:  TRUE

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

13) Unearned revenue recorded initially as unearned revenue is adjusted by debiting a liability account.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

14) Adjusting journal entries impact both the income statement and the balance sheet.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

15) The concept underlying accounting for property, plant and equipment and amortization expense is the same as for prepaid expenses.

Answer:  TRUE

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

16) Accountants use the Accumulated Amortization account to show the cumulative sum of all amortization expense from the date of acquiring the asset.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

17) Under accrual accounting, the receipt of cash from a customer in advance of performing the service would be credited to a(n):

  1. A) unearned revenue account.
  2. B) prepaid asset account.
  3. C) accrued revenue account.
  4. D) deferred asset account.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

18) Deferrals involve the recording of an expense or a revenue account:

  1. A) either before or after the cash is paid or received.
  2. B) after the cash is paid or received.
  3. C) before the cash is paid or received.
  4. D) either before or at the same time the cash is paid or received.

Answer:  B

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

19) The primary difference between deferred and accrued expenses is that accrued expenses:

  1. A) have been paid but deferred expenses haven’t.
  2. B) have not been paid but deferred expenses have.
  3. C) involve assets instead of liabilities.
  4. D) There is no difference between deferred and accrued expenses.

Answer:  B

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

20) Accrued revenue has:

  1. A) not been earned nor received.
  2. B) been earned but not received.
  3. C) not been earned but has been received.
  4. D) been earned and received.

Answer:  B

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

21) Unearned revenue has:

  1. A) been earned but the cash has not been received.
  2. B) not been earned nor has the cash been received.
  3. C) been earned and the cash has been received.
  4. D) not been earned but the cash has been received.

Answer:  D

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

22) Failure to record the adjusting entry for amortization:

  1. A) overstates assets and overstates equity.
  2. B) understates assets and overstates equity.
  3. C) overstates assets and understates equity.
  4. D) understates assets and understates equity.

Answer:  A

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

23) Failure to record an accrued expense:

  1. A) overstates expenses.
  2. B) overstates liabilities.
  3. C) understates liabilities.
  4. D) overstates assets.

Answer:  C

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

24) Failure to record an accrued revenue:

  1. A) overstates liabilities.
  2. B) overstates revenue.
  3. C) overstates assets.
  4. D) understates assets.

Answer:  D

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

25) On September 1, 2014, Two Sisters Company pays $36,000 cash for six months rent. The balance in prepaid rent on December 31, 2014, after adjustment, would be:

  1. A) $6,000.
  2. B) $24,000.
  3. C) $12,000.
  4. D) $0.

Answer:  C

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

26) On November 1, 2013, Two Sisters Company pays $36,000 cash for six months rent and debits prepaid rent at the time of the payment. The amount of the adjusting entry on December 31, 2013, would be:

  1. A) $12,000.
  2. B) $24,000.
  3. C) $6,000.
  4. D) $0.

Answer:  A

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

27) Sabrina’s Fabric Land bought $5,000 of equipment at the beginning of 2015. Amortization expense on the 2015 income statement is $400. What is the balance in accumulated amortization on December 31, 2015?

  1. A) $5,000
  2. B) $400
  3. C) $4,600
  4. D) $0

Answer:  B

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

 

28) The supplies account shows a beginning balance of $3,000. Assume the supplies account shows an entry as a debit for $5,500 representing supplies purchased during the period and the supplies inventory at year end is $1,700. The adjusting entry involves a:

  1. A) debit to supplies expense for $6,800.
  2. B) debit to supplies for $6,800.
  3. C) debit to supplies expense for $1,700.
  4. D) debit to supplies for $1,700.

Answer:  A

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

29) A business pays weekly salaries on Friday of $25,000 for a five-day week ending on Friday. Assuming the fiscal period ends on a Wednesday, the adjusting entry for accrued salaries would involve a:

  1. A) debit to salary payable for $10,000.
  2. B) debit to salary expense for $15,000.
  3. C) credit to salary payable for $10,000.
  4. D) credit to salary expense for $15,000.

Answer:  B

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

30) Stanley Fuel Services records $8,000 of service revenue being received in advance and $4,500 of service revenue being accrued. Unearned revenue has a year-end balance of $4,900. The effect of these entries on total service revenue for the year is an increase of:

  1. A) $7,600.
  2. B) $12,900.
  3. C) $9,400.
  4. D) $4,900.

Answer:  A

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

 

31) Stan’s Shoe Repairs recorded $2,000 of unearned service revenue being earned and the collection of $4,000 cash for service revenue previously accrued. The impact of these two entries on total service revenue is:

  1. A) a decrease of $2,000.
  2. B) an increase of $4,000.
  3. C) an increase of $6,000.
  4. D) an increase of $2,000.

Answer:  D

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

32) Nuyen Services Company records the payment of $500 cash for a previously accrued expense and the accrual of $325 for another expense. The impact of these two entries on total expenses and net income is:

A)

Total Expenses Net Income
increase by $825 decrease by $325

 

B)

Total Expenses Net Income
increase by $825 decrease by $825

 

C)

Total Expenses Net Income
increase by $325 decrease by $325

 

D)

Total Expenses Net Income
increase by $325 decrease by $825

 

Answer:  C

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

33) At the end of the fiscal period, Wilf Carter Services omitted the adjusting entry for accrued salaries. The effect of this error on the financial statements is to:

  1. A) overstate net income.
  2. B) understate assets.
  3. C) understate net income.
  4. D) overstate liabilities.

Answer:  A

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

34) At the end of the fiscal period, Wilf Carter Services omitted the adjusting entry for amortization on equipment. The effect of this error on the financial statements is to:

  1. A) understate liabilities.
  2. B) understate owner’s equity.
  3. C) overstate expenses.
  4. D) overstate assets.

Answer:  D

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

35) If an adjustment for prepaid insurance is not made at year end, net income will be:

  1. A) unaffected.
  2. B) understated.
  3. C) overstated.
  4. D) correct this year but incorrect next year.

Answer:  C

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

36) A company began operations and purchased $5,000 of supplies. By year end, $2,700 was still on hand. The adjusting entry at year end would include a:

  1. A) debit to supplies of $5,000.
  2. B) credit to supplies for $2,700.
  3. C) credit to supplies for $2,300.
  4. D) debit to supplies expense for $2,700.

Answer:  C

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

37) The entry for amortization has what effect on the financial statements?

  1. A) increases assets and decreases liabilities
  2. B) decreases net income and increases assets
  3. C) increases expenses and decreases assets
  4. D) decreases assets and increases liabilities

Answer:  C

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

 

38) An accrued expense adjustment entry has the following effect on the balance sheet:

  1. A) decreases liabilities.
  2. B) increases assets.
  3. C) increases liabilities.
  4. D) correct this year but incorrect next year.

Answer:  C

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

39) Prepaid insurance shows a beginning balance of $500 and an ending balance of $2,800. The insurance expense account was debited during the adjusting process for $1,800. How much cash was spent for insurance?

  1. A) $1,500
  2. B) $4,100
  3. C) $1,000
  4. D) $3,300

Answer:  B

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

40) Prepaid rent shows a beginning balance of $500 and an ending balance of $600. During the year, prepaid rent was debited for $2,200. What is the amount of rent expense shown on the current year’s income statement?

  1. A) $2,100
  2. B) $1,700
  3. C) $1,600
  4. D) $2,700

Answer:  A

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

 

41) Prepaid rent shows a beginning balance of $3,600 and an ending balance of $2,900. The income statement for the current period reports rent expense of $3,200. What was the amount of rent purchased during the year?

  1. A) $6,100
  2. B) $6,800
  3. C) $2,500
  4. D) $400

Answer:  C

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

42) Unearned revenue shows a beginning balance of $4,700 and an ending balance of $3,400. The adjusting entry shows a credit to service revenue for $10,200. How much cash was received in advance during the year?

  1. A) $8,900
  2. B) $10,200
  3. C) $14,900
  4. D) $13,600

Answer:  A

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

43) Accumulated amortization shows a beginning balance of $9,300 and an ending balance of $10,700. How much amortization expense was reported on the current year’s income statement?

  1. A) $9,300
  2. B) $1,200
  3. C) $1,400
  4. D) $10,700

Answer:  C

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

 

44) Equipment with a cost of $103,000 has a useful life of four years. Using straight-line amortization, what is the book value after three years?

  1. A) $77,250
  2. B) $103,000
  3. C) $25,750
  4. D) $51,500

Answer:  C

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

45) Accumulated amortization on an asset plus its book value equals:

  1. A) amortization expense for the current year.
  2. B) amortization expense to be recorded in future years.
  3. C) amortization expense recorded in past years.
  4. D) the cost of the equipment.

Answer:  D

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

46) If a required prepaid adjustment had not been made, the financial statements would have been affected as follows:

  1. A) net income overstated, assets overstated, liabilities unaffected, and owner’s equity overstated.
  2. B) net income understated, assets unaffected, liabilities overstated, and owner’s equity understated.
  3. C) net income overstated, assets understated, liabilities understated, and owner’s equity unaffected.
  4. D) net income understated, assets understated, liabilities understated, and owner’s equity unaffected.

Answer:  A

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

47) If a required accrued expense adjustment had not been made, the financial statements would have been affected as follows:

  1. A) net income understated, assets overstated, liabilities unaffected, and owner’s equity understated.
  2. B) net income overstated, assets unaffected, liabilities understated, and owner’s equity overstated.
  3. C) net income understated, assets overstated, liabilities understated, and owner’s equity unaffected.
  4. D) net income overstated, assets overstated, liabilities understated, and owner’s equity overstated.

Answer:  B

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

 

48) If a required unearned revenue adjustment had not been made, the financial statements would have been affected as follows:

  1. A) net income understated, assets overstated, liabilities unaffected, and owner’s equity overstated.
  2. B) net income overstated, assets unaffected, liabilities understated, and owner’s equity unaffected.
  3. C) net income understated, assets unaffected, liabilities overstated, and owner’s equity understated.
  4. D) net income overstated, assets overstated, liabilities overstated, and owner’s equity unaffected.

Answer:  C

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

49) If the adjusting entry to record the current periods prepaid rent expired is omitted:

  1. A) current assets will be overstated.
  2. B) current assets will be understated.
  3. C) current liabilities will be overstated.
  4. D) current liabilities will be understated.

Answer:  A

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

50) On September 1, 2013, a company paid $8,400 in advance for two years insurance and debited prepaid insurance. The December 31, 2013, adjusting entry should include a debit to:

  1. A) insurance expense for $1,400.
  2. B) insurance expense for $7,000.
  3. C) prepaid insurance for $2,800.
  4. D) prepaid insurance for $1,400.

Answer:  A

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

51) Net income is reported on the income statement at $63,000. Adjusting entries for accrued salaries of $600 and amortization on equipment of $1,500 were accidentally omitted. The correct net income is:

  1. A) $65,100.
  2. B) $62,400.
  3. C) $61,500.
  4. D) $60,900.

Answer:  D

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

 

52) Net income is reported on the income statement at $75,000. Adjusting entries for accrued revenues of $6,000 and unearned revenue earned during the current period of $2,500 were accidentally omitted. The correct net income is:

  1. A) $83,500.
  2. B) $81,000.
  3. C) $77,500.
  4. D) $78,500.

Answer:  A

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

53) Assume the cash was received in the last accounting period. If the adjusting entry to record revenue earned during the current period is not recorded:

  1. A) assets will be overstated.
  2. B) assets will be understated.
  3. C) liabilities will be understated.
  4. D) liabilities will be overstated.

Answer:  D

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

54) An accrued expense adjustment has the following effect on the financial statements:

  1. A) increases expenses and increases net income.
  2. B) increases expenses and decreases assets.
  3. C) increases expenses and increases liabilities.
  4. D) decreases expenses and increases liabilities.

Answer:  C

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

55) The type of account and normal balance of accumulated amortization is:

  1. A) liability; credit.
  2. B) asset; debit.
  3. C) contra asset; credit.
  4. D) contra asset; debit.

Answer:  C

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

 

56) The balance in prepaid rent after adjustment represents:

  1. A) a liability on the balance sheet.
  2. B) an expense on the income statement.
  3. C) revenue on the income statement.
  4. D) an asset on the balance sheet.

Answer:  D

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

57) The balance in unearned revenue after adjustment represents:

  1. A) an asset on the balance sheet.
  2. B) an expense on the income statement.
  3. C) a liability on the balance sheet.
  4. D) revenue on the income statement.

Answer:  C

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

58) A liability that arises from an expense that the business has incurred but has not yet paid is called a(n):

  1. A) deferred asset.
  2. B) accrued asset.
  3. C) accrued expense.
  4. D) deferred expense.

Answer:  C

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

59) A company accepted $6,000 on August 1 for services to be performed evenly over the next 12 months. The adjusting entry on December 31 would include a:

  1. A) debit to unearned revenue $2,500.
  2. B) debit to service revenue for $2,500.
  3. C) debit to unearned revenue for $3,500.
  4. D) credit to service revenue for $3,500.

Answer:  A

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

 

60) Unearned revenue was not adjusted to show $3,000 of revenue earned during the current period. What is the effect of this error on the balance sheet?

  1. A) liabilities are overstated
  2. B) liabilities are understated
  3. C) assets are overstated
  4. D) assets are understated

Answer:  A

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

61) On April 1 of the current year, Wood Services received $15,000 for services to be performed evenly over the next 12 months. Wood Services initially recorded the $15,000 as unearned service revenue. The adjusting entry on December 31 of the current year will include a:

  1. A) debit to service revenue for $11,250.
  2. B) debit to service revenue for $3,750.
  3. C) debit to unearned service revenue for $3,750.
  4. D) credit to service revenue for $11,250.

Answer:  D

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

62) On October 1 of the current year, Wood Services received $15,000 for services to be performed evenly over the next 12 months. Wood Services initially recorded the $15,000 as unearned service revenue. The adjusting entry on December 31 of the current year will include a:

  1. A) debit to service revenue for $11,250.
  2. B) debit to service revenue for $3,750.
  3. C) debit to unearned service revenue for $3,750.
  4. D) debit to unearned service revenue for $11,250.

Answer:  C

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

 

63) Net income is reported on the income statement at $40,000. Adjusting entries for accrued revenues of $5,000 and unearned revenue earned during the current period of $2,000 were accidentally omitted. The correct net income is:

  1. A) $33,000.
  2. B) $37,000.
  3. C) $47,000.
  4. D) $43,000.

Answer:  C

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

64) Net income is reported on the income statement at $30,000. Adjusting entries for accrued revenues of $2,000 and unearned revenue earned during the current period of $5,500 were accidentally omitted. The correct net income is:

  1. A) $22,500.
  2. B) $37,500.
  3. C) $33,500.
  4. D) $26,500.

Answer:  B

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

65) Net income is reported on the income statement at $25,000. Adjusting entries for accrued revenues of $4,000 and unearned revenue earned during the current period of $1,500 were accidentally omitted. The correct net income is:

  1. A) $27,500.
  2. B) $22,500.
  3. C) $19,500.
  4. D) $30,500.

Answer:  D

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

Real Losers, a diet magazine, collected $360,000 in subscription revenue in May. Each subscriber will receive an issue of the magazine for each of the next 12 months, beginning with the June issue. The company uses the accrual method of accounting.

 

66) By the end of December, how much subscription revenue will Real Losers have earned?

  1. A) $180,000
  2. B) $240,000
  3. C) $360,000
  4. D) $210,000

Answer:  D

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

67) What will be the balance in the unearned revenue account on the Real Losers balance sheet on December 31?

  1. A) $150,000
  2. B) $0
  3. C) $180,000
  4. D) $120,000

Answer:  A

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

68) If Real Losers records subscription money collected as revenue when received, then what will be the balance in the unearned revenue account on December 31?

  1. A) $150,000
  2. B) $0
  3. C) $180,000
  4. D) $120,000

Answer:  A

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

69) The January 1, 2013, balance in the Prepaid Insurance account was $3,150 and represented the unexpired portion of a two-year policy purchased October 1, 2012. What is the required year-end adjusting journal entry on December 31, 2013?

A)

Dr. Insurance Expense 1,575
    Cr. Prepaid Insurance     1,575

 

B)

Dr. Insurance Expense 1,800
    Cr. Prepaid Insurance     1,800

 

C)

Dr. Prepaid Insurance 1,575
    Cr. Insurance Expense     1,575

 

D)

Dr. Prepaid Insurance 3,150
    Cr. Insurance Expense     3,150

 

Answer:  B

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

70) Employees of Ajax Renovations work Monday through Friday and are paid every Friday for work done that week. The daily payroll is $1,200 and the last payday was Friday December 28. What is the required adjusting journal entry, if any, on December 31?

A)

Dr. Wages Expense 1,200
    Cr. Wages Payable     1,200

 

B)

Dr. Wages Expense 2,400
    Cr. Wages Payable     2,400

 

  1. C) No entry is required

D)

Dr. Wages Expense 3,600
    Cr. Wages Payable     3,600

 

Answer:  A

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

71) Johnson Bookkeeping has a computer that was purchased July 1, 2013, for $1,800. Ms. Johnson thinks that the computer will be obsolete by June 30, 2015, and will have no value at that time. What is the required adjusting journal entry on December 31, 2013?

A)

Dr. Accumulated Amortization, Computer 450
    Cr. Amortization Expense, Computer     450

 

B)

Dr. Accumulated Expense, Computer 900
    Cr. Amortization Amortization, Computer     900

 

C)

Dr. Accumulated Amortization, Computer 900
    Cr. Amortization Expense, Computer     900

 

D)

Dr. Accumulated Expense, Computer 450
    Cr. Amortization Amortization, Computer     450

 

Answer:  D

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

Match the following:

 

  1. A) amortization
  2. B) cash-basis accounting
  3. C) accrual accounting
  4. D) unearned revenue
  5. E) accrued expense
  6. F) contra account
  7. G) book value
  8. H) recognition criteria for revenues
  9. I) accrued revenue
  10. J) matching objective

 

72) A revenue that has been earned but not yet received in cash

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

73) An asset’s cost less accumulated amortization

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

74) An account that always has a companion account, and whose normal balance is opposite that of the companion account

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

75) A liability created when a business collects cash from customers in advance of doing work for a customer

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

76) Expense associated with allocating the cost of a property, plant, and equipment asset over its useful life

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

Answers: 72) I 73) G 74) F 75) D 76) A

For each of the items or entries described, indicate with a code letter, provided below, the effect of the transaction or the correction of the error described on the corrected net income:

 

Net income would increase       I

Net income would decrease      D

No effect on net income               N/E

 

  1. A) I
  2. B) D
  3. C) N/E

 

77) Service revenue has been collected but not earned, and remains in the unearned revenue account.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

78) Service revenue has been collected but is now earned, and remains in the unearned revenue account.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

79) Wages owing to employees at the period end have not been accrued.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

80) Supplies have been used during the year and the supplies account has not yet been adjusted.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

81) Supplies have been used during the year and the supplies account was adjusted with a debit to the supplies expense account and a credit to the supplies account.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

82) The amount of amortization expense recorded for the building is too low.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

83) Interest accrued on the note payable was accrued for an amount that was too high.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

84) Services rendered but not yet billed were debited to accounts receivable and credited to service revenue.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

85) Services rendered but not yet billed were debited to accounts receivable and credited to unearned service revenue.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

86) Prepaid insurance was not adjusted for the amount used up in the period.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

87) The amount of accrued revenue was credited to revenue as an adjustment.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

88) An electricity bill received at the end of the accounting period was not yet accrued.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

89) An electricity bill received at the end of the accounting period was debited to utilities expense and credited to accounts payable.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-3 Make adjusting entries

 

Answers: 77) C 78) A 79) B 80) B 81) C 82) B 83) A 84) C 85) A 86) B 87) C 88) B 89) C

 

Match the following descriptions with the most appropriate caption:

 

  1. A) tangible capital asset
  2. B) depreciation
  3. C) time-period assumption
  4. D) recognition value
  5. E) recognition criteria for revenues
  6. F) intangible capital asset
  7. G) accrued revenue
  8. H) carrying value
  9. I) matching objective
  10. J) unearned revenue
  11. K) adjusting entry
  12. L) cash-basis accounting

 

90) Deferred revenue

Diff: 1

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

91) Property, plant, and equipment

Diff: 1

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

92) Amortization

Diff: 1

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

Answers: 90) J 91) A 92) B

 

93) On December 31, 2013, Manfred Repairs omitted the following adjusting entries:

 

  1. a) Accrued wages of $5,000 owed to employees
  2. b) Accrued revenue for services rendered of $5,500

 

Assuming the financial statements are prepared before the errors are discovered, state the effects of each error on the financial statement elements by completing the chart.

 

Error a Error b
Overstated Understated Overstated Understated
Assets at Dec. 31, 2013, would be
Liabilities at Dec. 31, 2013, would be
Net income for 2013 would be
Owner’s equity at Dec. 31, 2013, would be

 

Answer:

Error a Error b
Overstated Understated Overstated Understated
Assets at Dec. 31, 2013, would be -0- -0- -0- $5,500
Liabilities at Dec. 31, 2013, would be -0- $5,000 -0- -0-
Net income for 2013 would be $5,000 -0- -0- $5,500
Owner’s equity at Dec. 31, 2013, would be $5,000 -0- -0- $5,500

 

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

94) Compute the amounts indicated for each of the following independent situations.

 

Situation
A B C D
Beginning supplies balance ? $1,550 $2,600 $2,595
Payments for supplies during the year $3,800 ? $3,500 $1,600
Ending supplies balance $2,500 $2,370 ? $2,600
Supplies expense on the income statement $1,400 $1,900 $3,150 ?

 

Answer:

Situation
A B C D
Beginning supplies balance $100 $1,550 $2,600 $2,595
Payments for supplies during the year $3,800 $2,720 $3,500 $1,600
Ending supplies balance $2,500 $2,370 $2,950 $2,600
Supplies expense on the income statement $1,400 $1,900 $3,150 $1,595

 

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

 

95) Compute the amounts indicated for each of the following independent situations.

 

Situation
A B C D
Beginning supplies balance ? $2,100 $1,500 $1,400
Payments for supplies during the year $1,400 ? $3,550 $1,950
Ending supplies balance $2,500 $4,500 ? $1,700
Supplies expense on the income statement $1,600 $1,600 $1,800 ?

 

Answer:

Situation
A B C D
Beginning supplies balance $2,700 $2,100 $1,500 $1,400
Payments for supplies during the year $1,400 $4,000 $3,550 $1,950
Ending supplies balance $2,500 $4,500 $3,250 $1,700
Supplies expense on the income statement $1,600 $1,600 $1,800 $1,650

 

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

96) Compute the amounts indicated for each of the following independent situations.

 

Situation
A B C D
Beginning prepaid insurance balance ? $1,300 $600 $3,300
Payments for insurance during the year $2,500 ? $4,300 $2,600
Ending prepaid insurance balance $1,400 $4,250 ? $600
Insurance expense on the income statement $2,600 $1,700 $1,150 ?

 

Answer:

Situation
A B C D
Beginning prepaid insurance balance $1,500 $1,300 $600 $3,300
Payments for insurance during the year $2,500 $4,650 $4,300 $2,600
Ending prepaid insurance balance $1,400 $4,250 $3,750 $600
Insurance expense on the income statement $2,600 $1,700 $1,150 $5,300

 

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

97) Prepare adjusting entries for the following items on December 31, the end of the fiscal year for Carson Carpets. The company initially records cash received in advance of performing the service as a liability, and prepaid expenses as current assets.

 

  1. a) Amortization on equipment, $2,500
  2. b) Services performed but unbilled, $3,500
  3. c) Salaries owed to employees at year end, $2,500
  4. d) Unearned service revenue earned, $5,500
  5. e) Supplies used during the year, $3,200
  6. f) Prepaid rent expired during the year, $7,500

Answer:

                                                               General Journal

Date Accounts Debit Credit
Dec.

31

 

Amortization Expense

 

2,500

 
       Accumulated Amortization   2,500
31 Account Receivable 3,500  
       Service Revenue   3,500
31 Salary Expense 2,500  
       Salary Payable   2,500
31 Unearned Service Revenue 5,500  
       Service Revenue   5,500
31 Supplies Expense 3,200  
       Supplies   3,200
31 Rent Expense 7,500  
       Prepaid Rent   7,500

 

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

98) Prepare adjusting entries for the following items on December 31, the end of the fiscal year for Eddison Don Repairs. The company initially records cash received in advance of performing the service as a liability, and prepaid expenses as current assets.

 

  1. a) Amortization on truck, $500
  2. b) Services performed but unbilled, $3,000
  3. c) Salaries owed to employees at year end, $2,500
  4. d) Unearned service revenue earned, $5,500
  5. e) Supplies used during the year, $200
  6. f) Prepaid rent expired during the year, $4,500
  7. g) Prepaid insurance now expired $400

Answer:

                                                                General Journal

Date Accounts Debit Credit
Dec.

31

 

Amortization Expense

 

500

 
       Accumulated Amortization   500
31 Account Receivable 3,000  
       Service Revenue   3,000
31 Salary Expense 2,500  
       Salary Payable   2,500
31 Unearned Service Revenue 5,500  
       Service Revenue   5,500
31 Supplies Expense 200  
       Supplies   200
31 Rent Expense 4,500  
       Prepaid Rent   4,500
31 Insurance Expense 400
       Prepaid Insurance 400

 

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

99) Based on the partial trial balance and the partial adjusted trial balance shown below, prepare the six missing adjusting entries. The adjusting entries should be dated December 31.

 

Account                                          Trial Balance                            Adjusted Trial Balance

Debit Credit Debit Credit
Accounts Receivable 101,600 107,800
Supplies 5,000 3,200
Prepaid Insurance 10,600 7,800
Accumulated Amortization 55,300 60,200
Salary Payable 1,800
Unearned Service Revenue 13,500 12,100
Service Revenue 215,900 219,500
Salary Expense 110,600 112,400
Insurance Expense 2,800
Supplies Expense 1,800
Amortization Expense 9,900

 

Answer:                                            General Journal

Date Accounts Debit Credit
Dec.

31

 

Accounts Receivable

 

6,200

 
       Service Revenue   6,200
31 Supplies Expense 1,800  
       Supplies   1,800
31 Insurance Expense 2,800  
       Prepaid Insurance   2,800
31 Amortization Expense 4,900  
       Service Revenue   4,900
31 Unearned Service Revenue 1,400  
       Service Revenue   1,400
31 Salary Expense 1,800  
       Salary Payable   1,800

 

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

100) State the effect on net income, total assets, and total liabilities if the following adjustments were not made.

 

  1. a) Service revenue earned but not yet collected, $2,400.
  2. b) Utilities expense incurred but not yet recorded, $1,200.
  3. c) Unearned revenue earned during the period, $5,600.
  4. d) Supplies used during the period, $1,700.
  5. e) Amortization on buildings, $26,000.

 

 

Item Effect on

Net Income

Effect on

Total Assets

Effect on Total

Liabilities

a)
b)
c)
d)
e)

 

Answer:

 

Item Effect on

Net Income

Effect on

Total Assets

Effect on Total

Liabilities

a) Understated $2,400 Understated $2,400 No effect
b) Overstated $1,200 No effect Understated $1,200
c) Understated $5,600 No effect Overstated $5,600
d) Overstated $1,700 Overstated $1,700 No effect
e) Overstated $26,000 Overstated $26,000 No effect

 

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

Table 3-1

 

The unadjusted trial balance of Danvon Collection Services at December 31, 2014 follows.

 

Debit                    Credit

Cash                                                                $ 4,800

Accounts receivable                                     10,400

Prepaid insurance                                          2,000

Prepaid rent                                                      1,000

Office supplies                                                    400

Equipment                                                      16,500

Accumulated amortization                                                      $2,400

Salaries payable                                                                                      0

Interest payable                                                                                       0

Unearned service revenue                                                               600

Note payable                                                                                    8,000

Ted Danvon, capital                                                                    15,200

Ted Danvon, withdrawals                           3,000

Service revenue                                                                             32,700

Salaries expense                                           20,500

Amortization expense                                           0

Rent expense                                                            0

Insurance expense                                                  0

Office supplies expense                                        0

Interest expense                                                  300                _______

$58,900                 $58,900

 

 

 

101) Refer to Table 3-1. Given the following information, prepare the necessary adjusting entries at year end, December 31, 2014, for Danvon Collection Services.

 

  1. a) A count revealed that $100 of office supplies were still on hand at December 31, 2014.
  2. b) The accountant has determined that the prepaid insurance balance at December 31, 2014, should be in the amount of $450.
  3. c) The equipment is amortized at the rate of $200 per month.
  4. d) The accountant has determined that the unearned service revenue balance at December 31, 2014, should be in the amount of $350.
  5. e) Interest of $200 on the note payable has accrued to the end of the year.
  6. f) Salaries accrued at December 31, 2014, amounted to $650.
  7. g) The accountant has determined that the prepaid rent balance at December 31, 2014, should be in the amount of $100.

Answer:

                                                            General Journal

Date Accounts Debit Credit
Dec. 31 Office Supplies Expense 300  
       Office Supplies   300
31 Insurance Expense 1,550  
       Prepaid Insurance   1,550
31 Amortization Expense 2,400  
       Accumulated Amortization   2,400
31 Unearned Service Revenue 250  
       Service Revenue   250
31 Interest Expense 200  
       Interest Payable   200
31 Salaries Expense 650  
       Salaries Payable   650
31 Rent Expense 900
       Prepaid Rent 900

 

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

Table 3-3

 

The unadjusted trial balance of Holitzner Roof Repairs appears below as at December 31, 2014.

 

Debit                    Credit

Cash                                                                 $5,300

Accounts receivable                                       7,600

Roofing supplies                                             1,100

Equipment                                                        6,000

Accumulated amortization                                                       $1,200

Salaries payable                                                                              1,100

Interest payable

Unearned service revenue                                                               300

Note payable                                                                                  10,000

Carmen Holitzner, capital                                                           6,400

Carmen Holitzner, withdrawals                                                   600

Service revenue                                                                                3,000

Salaries expense                                                 500

Amortization expense

Rent expense                                                    2,100

Roofing supplies expense

Interest expense                                             _____                     _____

$22,600                 $22,600

 

 

102) Refer to Table 3-3. Given the following information, prepare the necessary adjusting entries at year end, December 31, 2014.

 

  1. a) A physical count reveals only $520 of roofing supplies are on hand at December 31, 2014.
  2. b) The equipment is amortized at a rate of $120 per month.
  3. c) Unearned service revenue amounted to $200 at December 31, 2014.
  4. d) Accrued salary expense at December 31, 2014, amounts to $150.
  5. e) Interest accrued on the note payable at December 31, 2014, amounts to $50.

Answer:

                                                            General Journal

Date Accounts Debit Credit
Dec. 31 Roofing Supplies Expense 580  
       Roofing Supplies   580
31 Amortization Expense 1,440  
       Accumulated Amortization   1,440
31 Unearned Service Revenue 100  
       Service Revenue   100
31 Salaries Expense 150  
       Salaries Payable   150
31 Interest Expense 50  
       Interest Payable   50

 

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-3 Make adjusting entries

 

103) Based on the partial trial balance and the partial adjusted trial balance shown below, prepare the six missing adjusting entries. The adjusting entries should be dated December 31.

 

Account                                          Trial Balance                            Adjusted Trial Balance

Debit Credit Debit Credit
Accounts Receivable 101,600 110,000
Supplies 5,000 3,800
Prepaid Insurance 10,600 5,800
Accumulated Amortization 55,300 57,300
Salary Payable 1,500
Unearned Service Revenue 13,500 13,000
Service Revenue 215,900 224,800
Salary Expense 110,600 112,100
Insurance Expense 4,800
Supplies Expense 1,200
Amortization Expense 2,000

 

Answer:

                                                            General Journal

Date Accounts Debit Credit
Dec.

31

 

Accounts Receivable

 

8,400

 
       Service Revenue   8,400
31 Supplies Expense 1,200  
       Supplies   1,200
31 Insurance Expense 4,800  
       Prepaid Insurance   4,800
31 Amortization Expense 2,000  
       Accumulated Amortization   2,000
31 Unearned Service Revenue 500  
       Service Revenue   500
31 Salary Expense 1,500  
       Salary Payable   1,500

 

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

104) Sam Miyagi began Miyagi Landscaping in 2012. He performed his own bookkeeping using an accounting software package he purchased for that purpose. Sam selected January 31 as his year end to coincide with the slower time of year for the business. In February 2013, Sam provided his accountant, Mary Tang, with the source documents and a backup copy of the software. Mary determined the following:

 

Sam purchased a second-hand truck and trailer on February 28, 2012, in anticipation of starting Miyagi Landscaping. The vehicle stayed in Sam’s garage uninsured until April 1, 2012, which was the starting date of his business. Sam paid $12,000 for the truck; he estimates that it will have a useful life in the business of five years at which time he thinks its value will be $0. Sam debited the asset account, Truck, for the cost of the vehicle.

 

On April 1, 2012, a one-year vehicle insurance policy was purchased in the amount of $1,800. The account Prepaid Insurance was debited for the full amount.

 

Gardening supplies were purchased throughout the year. The Gardening Supplies account had a year-end balance of $24,000; a count showed $400 of supplies on hand on January 31, 2013.

 

On January 15, 2013 Sam signed a contract to do monthly lawn maintenance for the municipality starting on May 1. The six-month contract will be paid on a monthly basis in the amount of $1,500 starting May 31.

 

On January 31, Miyagi Landscaping had $2,800 still owing from customers. This amount was unrecorded in the accounting system.

 

Required:

Journalize the adjusting entries for the January 31, 2013, year end. Explanations are not required.

 

Date Accounts Debit Credit

 

Answer:                                                    Journal

Date

2013

Accounts Debit Credit
Jan. 31 Amortization Expense, Truck 2,000
       Accumulated Amortization,

Truck

2,000
($12,000 / 60 months) × 10 months
31 Insurance Expense 1,500
       Prepaid Insurance 1,500
31 Gardening Supplies Expense 23,600  
       Gardening Supplies   23,600
31 MEMO: signed municipal contract on January 15, 2013. Six-month contract starting May 1, 2013, in the total amount of $9,000, with payment to be received at the end of each month.    
31 Accounts Receivable 2,800  
       Landscaping Revenue   2,800

 

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

105) Janet Smythe started her personal coaching business, Smythe Personal Coaching, on November 1, 2014. Janet records purchasing supplies as assets and cash received from clients on deposit as unearned revenue. The following transactions occurred during the first month of operations:

 

Nov. 1     Janet Smythe invested $25,000 personal cash in the business by depositing that amount in the         bank account titled Smythe Personal Coaching. The business gave capital to Smythe.

 

Nov. 1     Paid the November rent on the office space, $1,500.

 

Nov. 3     Purchased a computer and printer for use in the business; she used her personal credit card in         the amount of $1,800. The computer has an expected life of three years with no salvage value.

 

Nov. 5     Purchased office supplies in the amount of $75 on an account she set up with the store, Ace              Office Depot.

 

Nov. 10   Received $500 from her first client, Robert Jones, as payment in advance for coaching fees.                 (Record this amount in the account Unearned Coaching Revenue.)

 

Nov. 17   Travelled to Montreal to attend a personal coaches conference. The conference lasted one week         and costs were: travel $1,500; conference registration fee, $750. Used cash from the business to          pay for the expenses.

 

Nov. 25   Paid Ace Office Depot the amount owing from November 5.

 

Nov. 30   Counted the office supplies and estimated that there was $25 of supplies remaining. Robert              Jones had received $100 of coaching during the month.

 

Required:

Prepare journal entries for the above transactions and the appropriate corresponding adjusting journal entries necessary to prepare financial statements for the month of November.

 

Date Accounts Debit Credit

 

 

Answer:                                                         Journal

Date

2014

 

Accounts

 

Debit

 

Credit

Nov. 1 Cash 25,000
       Janet Smythe, Capital 25,000
Owner investment to begin business.
1 Rent Expense (or Prepaid Rent) 1,500
       Cash 1,500
Paid rent for the month of November.
3 Computer 1,800
       Janet Smythe, Capital 1,800
Owner contributed computer to the business.
5 Office Supplies 75
       Accounts Payable 75
Purchased office supplies on account.
10 Cash 500
       Unearned Coaching Revenue 500
Received payment in advance for coaching.
17 Travel Expenses 1,500
Conference Expenses 750
       Cash 2,250
To pay for conference and travel expenses.
25 Accounts Payable 75
        Cash 75
  Paid for office supplies purchased on November 5.
30 Office Supplies Expense 50
        Office Supplies 50
To record supplies used during November.
30 Unearned Coaching Revenue 100
       Coaching Revenue 100
To record coaching revenue earned during November.
30 Amortization Expense, Computer 50
       Accum. Amortization, Computer 50
To record amortization for the month of November, calculated as (1,800/36 months) × 1 month = $50.

 

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-3 Make adjusting entries

 

106) The steps in the accounting cycle (excluding the preparation of the worksheet) are listed below in random order. List the steps in the proper sequence, inserting the number 1 to 11.

 

  1. a) Prepare a post closing trial balance ________
  2. b) Prepare an adjusted trial balance ________
  3. c) Analyse transactions as they occur ________
  4. d) Prepare an unadjusted trial ________
  5. e) Compute the adjusted balance in each

of the ledger accounts                                                 ________

  1. f) Post the journal entries to the ledger accounts ________
  2. g) Journalize adjusting journal entries ________
  3. h) Journalize and post closing entries ________
  4. i) Prepare financial statements ________
  5. j) Compute the unadjusted balance in each

of the ledger accounts                                                  ________

  1. k) Journalize the transactions ________

Answer:  a)          11

  1. b) 8
  2. c) 1
  3. d) 5
  4. e) 7
  5. f) 3
  6. g) 6
  7. h) 10
  8. i) 9
  9. j) 4
  10. k) 2

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-3 Make adjusting entries

 

107) On December 1, 2013, Parsons Sales sold machinery to a Janet’s Vegetables for $2,000. Janet could not pay at the time of sale, but agreed to pay 9 months later, and signed a 9-month note at 12% interest. Parsons accrues interest only at year-end. On September 1, 2014 Parsons collected the whole amount due

 

Parsons Sales uses the periodic method for recording inventory transactions. Janet’s Vegetables will be using the equipment in the business.

 

Provide all of the required journal entries for Parson Sales for 2013 and 2014; and, for Janet’s Vegetables the 2013 required journal entries, assuming a one-year useful life and $200 estimated residual value for the equipment.

 

                                          General Journal-Parsons Sales

Date Accounts Debit Credit

 

 

                                     General Journal-Janet’s Vegetables

Date Accounts Debit Credit

 

 

Answer:

                                          General Journal-Parsons Sales

Date Accounts Debit Credit
2013
Dec 01 Notes receivable 2,000
           Sales 2,000
 Dec 31 Interest receivable 20
            Interest revenue 20
($2,000 × 12%) × 1/12 = $20
2014
 Sep 01 Cash 2,180
             Notes receivable 2,000
              Interest receivable 20
              Interest revenue 160
 $2,000 × 12%) × 8/12 = $160

 

                                     General Journal-Janet’s Vegetables

Date Accounts Debit Credit
2013
Dec 01 Equipment 2,000
           Notes payable 2,000
 Dec 31 Interest expense 20
            Interest  payable 20
($2,000 × 12%) × 1/12 = $20
 Dec 31 Depreciation expense, equipment  150
             Accum. depreciation, equip. 150
($2,000 – $200)/12 months

 

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Application

Objective:  3-3 Make adjusting entries

 

 

Objective 3-4

 

1) The adjusted trial balance includes all accounts contained in the ledger with updated, adjusted balances.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-4 Prepare an adjusted trial balance

2) Capital on the adjusted trial balance represents capital at the end of the accounting period.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-4 Prepare an adjusted trial balance

 

3) All accounts in the general ledger appear on a company’s:

  1. A) income statement.
  2. B) balance sheet.
  3. C) adjusted trial balance.
  4. D) statement of owner’s equity.

Answer:  C

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-4 Prepare an adjusted trial balance

 

4) Combining the amounts from the unadjusted trial balance with the adjustments gives rise to the:

  1. A) unadjusted trial balance.
  2. B) adjusted trial balance.
  3. C) balance sheet.
  4. D) income statement.

Answer:  B

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-4 Prepare an adjusted trial balance

 

 

5) Financial statements are prepared from:

  1. A) an adjusted trial balance.
  2. B) an unadjusted trial balance.
  3. C) the general journal.
  4. D) the previous year’s financial statements.

Answer:  A

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-4 Prepare an adjusted trial balance

6) Pattie’s Event Planning Service collects the fees from its customers in advance. At January 1, 2013, the balance of the unearned revenue account was a credit of $4,000. During January and February, the company collected $2,000 and $1,000 respectively. During the two-month period, the company rendered services of $5,500. At the end of February, the unadjusted trial balance will show what balance in unearned revenues?

  1. A) debit balance of $1,500
  2. B) credit balance of $1,500
  3. C) debit balance of $7,000
  4. D) credit balance of $7,000

Answer:  B

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-4 Prepare an adjusted trial balance

 

Jacob’s Event Planning Service has just prepared the unadjusted trial balance, which shows the following balances:

 

Salary expense:          debit $8,000

Service revenue:         credit $3,000

Interest expense:        $0

 

7) Late in this month, Jacob signed a contract with a new client, providing event planning services for an upcoming event. The work will be started and completed in the following month at which time the company will collect the full amount of $900 from this client. The company makes accrual adjustments monthly. The adjusted balance of service revenue, as shown on the adjusted trial balance for this month, should be a:

  1. A) credit balance of $2,100.
  2. B) credit balance of $900.
  3. C) debit balance of $900.
  4. D) credit balance of $3,000.

Answer:  D

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-4 Prepare an adjusted trial balance

 

8) If Jacob’s Event Planning Service had rendered one-third of the services covered by the contract in the month the contract was signed, then the final balance of service revenue, as shown on the adjusted trial balance, should be a:

  1. A) credit balance of $2,100.
  2. B) credit balance of $600.
  3. C) debit balance of $600.
  4. D) credit balance of $3,300.

Answer:  D

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-4 Prepare an adjusted trial balance

9) Given the following adjustment data, state whether the resulting adjustment will be a deferral or an accrual.

 

  1. a) Recorded salaries earned by employees at end of month, payment to be made early next month.
  2. b) Recorded service revenue received in advance from clients.
  3. c) Estimated current month’s utilities bill and recorded the amount. The bill is to be received and paid next month.
  4. d) Prepaid insurance was used during the month.
  5. e) Supplies were used during the month.
  6. f) Performed services on account, payment to be received next month.

Answer:  a) accrual

  1. b) deferral
  2. c) accrual
  3. d) deferral
  4. e) deferral
  5. f) accrual

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-4 Prepare an adjusted trial balance

 

10) The following unadjusted account balances and adjustment data are for Nugent Consulting as of December 31, 2014:

 

Cash                                                                               $12,900

Prepaid insurance                                                          2,000

Office supplies                                                                 1,300

Office equipment                                                          10,500

Accumulated amort.-office equipment                    3,500

Accounts payable                                                           2,900

Salary payable                                                                         0

Unearned service revenue                                            4,500

Neela Nugent, Capital                                                11,750

Neela Nugent, Withdrawals                                       5,600

Service revenue                                                             13,350

Salary expense                                                                 3,700

Amort. expense-office equipment                                      0

Supplies expense                                                                    0

Insurance expense                                                                  0

 

Adjustment data:

Office supplies on hand December 31, 2014, $250

Prepaid insurance expired during 2014, $325

Unearned service revenue, December 31, 2014, $2,500

Amortization on equipment for 2014, $1,800

Accrued salaries, $900

 

 

Fill in the trial balance, adjustments, and adjusted trial balance columns in the following table.

 

Nugent Consulting

Preparation of Adjusted Trial Balance

December 31, 2014

 

            Account                      Trial Balance                        Adjustments                 Adjusted Trial Balance

Debit Credit Debit Credit Debit Credit
Cash
Prepaid Insurance
Office Supplies
Office Equipment
Accumulated Amort-Office Equipment
Accounts Payable
Salary Payable
Unearned Service Revenue
Neela Nugent, Capital
Neela Nugent, Withdrawals
Service Revenue
Salary Expense
Amortization Expense-Office Equipment
Supplies Expense
Insurance

Expense

Total

 

 

Answer:

Nugent Consulting

Preparation of Adjusted Trial Balance

December 31, 2014

 

          Account                      Trial Balance                        Adjustments               Adjusted Trial Balance

Debit Credit Debit Credit Debit Credit
Cash 12,900 12,900
Prepaid Insurance 2,000 325 1,675
Office Supplies 1,300 1,050 250
Office Equipment 10,500 10,500
Accumulated Amort-Office Equipment 3,500 1,800 5,300
Accounts Payable 2,900 2,900
Salary Payable 900 900
Unearned Service Revenue 4,500 2,000 2,500
Neela Nugent, Capital 11,750 11,750
Neela Nugent, Withdrawals 5,600 5,600
Service Revenue 13,350 2,000 15,350
Salary Expense 3,700 900 4,600
Amortization Expense-Office Equipment 1,800 1,800
Supplies Expense 1,050 1,050
Insurance

Expense

325 325
Total 36,000 36,000 6,075 6,075 38,700 38,700

 

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  3-4 Prepare an adjusted trial balance

 

11) Prepare an adjusted trial balance based on the following adjustment data and the unadjusted trial balance.

 

Tudhope Plumbing

Unadjusted Trial Balance

December 31, 2014

 

                                                                                     Debit                  Credit

Cash                                                                       $12,000

Accounts receivable                                             20,500

Office supplies                                                         9,500

Prepaid insurance                                                10,200

Equipment                                                              80,500

Accum. amort.-equipment                              $30,900

Accounts payable                                                 15,500

Unearned service revenue                                 20,600

Mike Tudhope, Capital                                       80,200

Mike Tudhope, Withdrawals                           20,600

Service revenue                                                     63,700

Salary expense                                                      30,600

Advertising expense                                            15,400

Utilities expense                                                      9,900

Miscellaneous expense                                         1,700                    _______

Total                                                                     $210,900                   $210,900

 

Adjustment data:

 

  1. a) Office supplies on hand on December 31, 2014, amount to $4,600.
  2. b) During the year, $5,400 of prepaid insurance expired.
  3. c) Amortization on equipment for the year is $12,400.
  4. d) Unearned service revenue on December 31, 2014, amounts to $6,800.
  5. e) Salaries owed to employees on December 31, 2014, amount to $3,300.

 

Answer:

Tudhope Plumbing

Adjusted Trial Balance

December 31, 2014

 

                                                                                     Debit                       Credit

Cash                                                                       $12,000

Accounts receivable                                             20,500

Office supplies                                                         4,600

Prepaid insurance                                                  4,800

Equipment                                                              80,500

Accum. amort.-equipment                              $43,300

Accounts payable                                                 15,500

Unearned service revenue                                    6,800

Salary payable                                                         3,300

Mike Tudhope, Capital                                       80,200

Mike Tudhope, Withdrawals                            20,600

Service revenue                                                      77,500

Salary expense                                                       33,900

Advertising expense                                            15,400

Utilities expense                                                      9,900

Miscellaneous expense                                         1,700

Supplies expense                                                    4,900

Insurance expense                                                  5,400

Amort. expense-equipment                               12,400                   _______

Total                                                                     $226,600                  $226,600

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-4 Prepare an adjusted trial balance

 

12) The following unadjusted account balances and adjustment data are for Global Advertising as of December 31, 2014:

 

Cash                                                                                               $14,000

Prepaid insurance                                                                          3,000

Office supplies                                                                                    900

Office equipment                                                                          15,500

Accumulated amort.-office equipment                                    4,500

Accounts payable                                                                           1,600

Salary payable                                                                                         0

Unearned service revenue                                                           5,500

Bill Johnson, Capital                                                                   14,900

Bill Johnson, Withdrawals                                                        11,000

Service revenue                                                                             29,700

Salary expense                                                                              11,800

Amort. expense-office equipment                                                     0

Supplies expense                                                                                    0

Insurance expense                                                                                 0

 

Adjustment data:

Office supplies on hand December 31, 2014, $500

Prepaid insurance expired during 2014, $275

Unearned service revenue, December 31, 2014, $1,500

Amortization on equipment for 2014, $2,800

Accrued salaries, $1,800

 

Fill in the trial balance, adjustments, and adjusted trial balance columns in the following table.

 

 

Global Advertising

Preparation of Adjusted Trial Balance

December 31, 2014

 

          Account                      Trial Balance                        Adjustments               Adjusted Trial Balance

Debit Credit Debit Credit Debit Credit
Cash
Prepaid Insurance
Office Supplies
Office Equipment
Accumulated Amort-Office Equipment
Accounts Payable
Salary Payable
Unearned Service Revenue
Bill Johnson, Capital
Bill Johnson, Withdrawals
Service Revenue
Salary Expense
Amortization Expense-Office Equipment
Supplies Expense
Insurance

Expense

Total

 

 

Answer:

Global Advertising

Preparation of Adjusted Trial Balance

December 31, 2014

 

          Account                      Trial Balance                        Adjustments               Adjusted Trial Balance

Debit Credit Debit Credit Debit Credit
Cash 14,000 14,000
Prepaid Insurance 3,000 275 2,725
Office Supplies 900 400 500
Office Equipment 15,500 15,500
Accumulated Amort-Office Equipment 4,500 2,800 7,300
Accounts Payable 1,600 1,600
Salary Payable 1,800 1,800
Unearned Service Revenue 5,500 4,000 1,500
Bill Johnson, Capital 14,900 14,900
Bill Johnson, Withdrawals 11,000 11,000
Service Revenue 29,700 4,000 33,700
Salary Expense 11,800 1,800 13,600
Amortization Expense-Office Equipment 2,800 2,800
Supplies Expense 400 400
Insurance

Expense

275 275
Total 56,200 56,200 9,275 9,275 60,800 60,800

 

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  3-4 Prepare an adjusted trial balance

 

13) The steps in the accounting cycle (excluding the preparation of the worksheet) are listed below in random order. List the steps in the proper sequence, inserting the number 1 to 11.

 

  1. a) Prepare a post closing trial balance ________
  2. b) Prepare an adjusted trial balance ________
  3. c) Analyse transactions as they occur ________
  4. d) Prepare an unadjusted trial balance ________
  5. e) Compute the adjusted balance in each

of the ledger accounts                                                  ________

  1. f) Post the journal entries to the ledger accounts ________
  2. g) Journalize adjusting journal entries ________
  3. h) Journalize and post closing entries ________
  4. i) Prepare financial statements ________
  5. j) Compute the unadjusted balance in each

of the ledger accounts                                                  ________

  1. k) Journalize the transactions ________

Answer:

  1. a) 11
  2. b) 8
  3. c) 1
  4. d) 5
  5. e) 7
  6. f) 3
  7. g) 6
  8. h) 10
  9. i) 9
  10. j) 4
  11. k) 2

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-4 Prepare an adjusted trial balance

 

Objective 3-5

 

1) The income statement should be prepared after the balance sheet is prepared.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

 

2) Accrual accounting provides several opportunities for unethical accounting.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

3) Net income appears on the:

  1. A) balance sheet.
  2. B) income statement.
  3. C) statement of owner’s equity.
  4. D) income statement and the statement of owner’s equity.

Answer:  D

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

4) The financial statement that lists the revenue and expense accounts is referred to as the:

  1. A) statement of owner’s equity.
  2. B) balance sheet.
  3. C) cash flow statement.
  4. D) income statement.

Answer:  D

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

5) The balance sheet reports the:

  1. A) assets, equity, and revenues at a certain point in time.
  2. B) assets, liabilities, and equity at a certain point in time.
  3. C) assets, expenses, and revenues for a period of time.
  4. D) assets, liabilities, and equity for a period of time.

Answer:  B

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

 

6) The ________ is/are transferred from the income statement to the statement of owner’s equity.

  1. A) ending capital
  2. B) withdrawals
  3. C) net income
  4. D) beginning capital

Answer:  C

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

7) The ________ is/are transferred from the statement of owner’s equity to the balance sheet.

  1. A) net income
  2. B) beginning capital
  3. C) ending capital
  4. D) withdrawals

Answer:  C

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

8) The heading of the income statement includes in the proper order:

  1. A) title of the statement; name of the entity, date of the statement.
  2. B) name of the entity; title of the statement; date of the statement.
  3. C) title of the statement; name of the entity, period covered by the statement.
  4. D) name of the entity; title of the statement; period covered by the statement.

Answer:  D

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

9) The links among the financial statements are:

  1. A) net income from the income statement to the statement of owner’s equity.
  2. B) net income from the statement of owner’s equity to the balance sheet.
  3. C) ending capital from the income statement to the statement of owner’s equity.
  4. D) ending capital from the statement of owner’s equity to the income statement.

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

Match the following descriptions with the most appropriate caption:

 

  1. A) tangible capital asset
  2. B) depreciation
  3. C) time-period assumption
  4. D) recognition value
  5. E) recognition criteria for revenues
  6. F) intangible capital asset
  7. G) accrued revenue
  8. H) carrying value
  9. I) matching objective
  10. J) unearned revenue
  11. K) adjusting entry
  12. L) cash-basis accounting

 

10) The asset’s cost less accumulated amortization

Diff: 1

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

Answers: 10) H

 

11) Based on the following adjusted trial balance, prepare an income statement for Summers Company for the year ended December 31, 2013.

 

Summers Company

Adjusted Trial Balance

December 31, 2013

 

                                                                                     Debit                     Credit

Cash                                                                       $10,500

Accounts receivable                                             20,000

Supplies                                                                     2,700

Office furniture                                                      10,000

Accum. amort.-office furniture                                                        $4,350

Salary payable                                                                                            760

Unearned service revenue                                                                   1,140

Jody Summers, Capital                                                                      12,550

Jody Summers, Withdrawals                              2,800

Service revenue                                                                                     40,060

Salary expense                                                         8,360

Rent expense                                                            2,850

Amort. expense-office furn.                                     350

Supplies expense                                                    1,300               _______

Total                                                                       $58,860                 $58,860

Answer:

Summers Company

Income Statement

For the Year Ended December 31, 2013

 

Revenue:

Service revenue                                                                               $40,060

Expenses:

Salary expense                                                      $8,360

Rent expense                                                            2,850

Supplies expense                                                    1,300

Amortization expense-office furniture                350

 

Total expenses                                                                                  12,860

Net income                                                                                          $27,200

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

12) Based on the following adjusted trial balance, prepare a balance sheet for Dave Scott and Associates (a proprietorship) on December 31, 2014. You will have to compute the owner’s capital account balance on December 31, 2014.

 

Dave Scott and Associates

Adjusted Trial Balance

December 31, 2014

 

                                                                             Debit                    Credit

Cash                                                               $13,600

Accounts receivable                                       2,000

Office supplies                                                    700

Prepaid insurance                                          1,200

Equipment                                                      15,600

Accum. amort.-equipment                                                         $3,900

Accounts payable                                                                           6,800

Salary payable                                                                                 1,100

Unearned service revenue                                                               800

Dave Scott, Capital                                                                       22,900

Dave Scott, Withdrawals                              4,900

Service revenue                                                                                9,250

Advertising expense                                      1,400

Amort. expense-equipment                         1,300

Supplies expense                                               500

Insurance expense                                             650

Utilities expense                                              2,900                _______

Total                                                               $44,750                 $44,750

 

Answer:                           Dave Scott and Associates

Balance Sheet

December 31, 2014

 

                                                               Assets

Current assets

Cash                                                               $13,600

Accounts receivable                                       2,000

Office supplies                                                    700

Prepaid insurance                                          1,200

Total current assets                                                                   $17,500

 

Property, plant and equipment

Equipment                                                   $15,600

Less: accumulated amort.                            3,900

11,700

Total assets                                                                                  $29,200

 

                                                               Liabilities

Current liabilities

Accounts payable                                        $ 6,800

Salary payable                                                 1,100

Unearned service revenue                               800

Total current liabilities                                                               $ 8,700

 

                                                         Owner’s equity

Dave Scott, Capital                                                                      20,500

Total liabilities and owner’s equity                                      $29,200

 

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

 

13) Based on the following adjusted account balances, prepare a statement of owner’s equity for the MacMahan Services for the year ended December 31, 2014.

 

Service revenue                                                                        8,300

Advertising expense                                                              1,100

Salary expense                                                                         6,800

Mandy MacMahan, Capital, Jan. 1, 2014                        5,150

Insurance expense                                                                     900

Supplies expense                                                                    1,350

Mandy MacMahan, Withdrawals                                     3,200

Answer:  MacMahan Services

Statement of Owner’s Equity

For the Year Ended December 31, 2014

 

Mandy MacMahan, Capital, Jan. 1, 2014              $5,150

Less: Net loss for the year                                             1,850

3,300

Less: Withdrawals for the year                                   3,200

Mandy MacMahan, Capital, Dec. 31, 2014             $ 100

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

Table 3-5

 

The adjusted trial balance of Sally’s Landscaping as at December 31, 2014 follows:

 

Debit                    Credit

Accounts receivable                                    $ 8,000

Cash                                                                    3,000

Equipment                                                      35,000

Gardening supplies                                       2,000

Accounts payable                                                                        $ 2,000

Bank loan payable (due in 2017)                                             11,000

Accumulated amortization, equipment                                  4,000

Salaries payable                                                                              1,000

Sally Ng, capital                                                                           15,000

Sally Ng, withdrawals                                  2,000

Landscaping revenue                                                                 67,000

Amortization expense                                  4,000

Gardening supplies expense                      4,000

Interest expense                                              1,000

Salaries expense                                           41,000

_______                _______

$100,000               $100,000

 

 

14) Refer to Table 3-5. Prepare a balance sheet for Sally’s Landscaping.

Answer:                                   Sally’s Landscaping

Balance Sheet

December 31, 2014

 

Assets

Current Assets:

Cash                                                                     $3,000

Accounts receivable                                           8,000

Gardening Supplies                                           2,000

Total current assets                                                                   $13,000

Property, Plant and Equipment:

Equipment                                                       $35,000

Less: Accumulated amortization                  4,000                   31,000

 

Total Assets                                                                                         $44,000

 

Liabilities and Owner’s Equity

Current Liabilities

Accounts payable                                             $2,000

Wages payable                                                  $1,000

Total current liabilities                                                               $3,000

Long-Term Liabilities:

Bank loan                                                                                         $11,000

Total Liabilities                                                                                  $14,000

Owner’s Equity:

Sally Li, capital                                                                                 30,000

Total Liabilities and Owner Equity                                              $44,000

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Analysis

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

 

15) Refer to Table 3-5. Prepare the statement of owner’s equity for Sally’s Landscaping.

Answer:

Sally’s Landscaping

Statement of Owner’s Equity

For the Year Ended December 31, 2014

 

Sally Li, Capital, January 1, 2014                                    $ 5,000

Add: Investments during year                                          10,000

Add: Net income for the year                                            17,000

Total                                                                                      32,000

Less: Withdrawals during year                                          2,000

Sally Li, Capital, December 31, 2014                              30,000

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Analysis

Objective:  3-5 Prepare the financial statements from the adjusted trial balance

 

Objective 3-6

 

1) Accrual accounting is not relevant under international financial reporting standards (IFRS).

Answer:  FALSE

Diff: 1

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  3-6 Describe the adjusting-process implications of international financial reporting standards (IFRS)

 

2) The concept of accrual accounting is accepted around the world.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  3-6 Describe the adjusting-process implications of international financial reporting standards (IFRS)

 

3) The use of IFRS for publicly accountable enterprises has the same impact on the adjusting process as the use of ASPE.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  3-6 Describe the adjusting-process implications of international financial reporting standards (IFRS)

 

4) Companies reporting under IFRS and ASPE do not go through the same adjusting process.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  3-6 Describe the adjusting-process implications of international financial reporting standards (IFRS)

 

5) IFRS specify that depreciation is the term to be used, whereas ASPE allow both amortization and depreciation to be used.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  3-6 Describe the adjusting-process implications of international financial reporting standards (IFRS)

 

6) One of the differences between IFRS and ASPE is that:

  1. A) ASPE is used mostly in Europe.
  2. B) IFRS uses accrual accounting; ASPE uses cash-basis accounting.
  3. C) IFRS uses cash-basis accounting; ASPE uses accrual accounting.
  4. D) to record amortization, IFRS uses the word depreciation; ASPE allows both depreciation and amortization to be used.

Answer:  D

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  3-6 Describe the adjusting-process implications of international financial reporting standards (IFRS)

 

7) The accounting guidelines for all countries recommend:

  1. A) the adoption of IFRS.
  2. B) the use of cash-basis accounting.
  3. C) the adoption of ASPE.
  4. D) the use of accrual accounting.

Answer:  D

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  3-6 Describe the adjusting-process implications of international financial reporting standards (IFRS)

 

8) Companies reporting under IFRS and ASPE go through the same adjusting process. What is the most significant difference between IFRS and ASPE in the terms used in the amortization journal entries?

Answer:  IFRS specify that depreciation is the term to be used, whereas ASPE allow both amortization and depreciation to be used. Thus, you will see the terms Accumulated Depreciation and Depreciation Expense on IFRS financial statements. ASPE companies might choose to use the IFRS terms to be consistent with companies reporting under IFRS.

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  3-6 Describe the adjusting-process implications of international financial reporting standards (IFRS)

 

Objective 3-A1

 

1) A prepaid expense recorded initially as an expense is adjusted by crediting the asset account.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

2) When a prepaid expense is recorded initially as an expense, the adjusting entry transfers the unused portion of the expense to the asset account.

Answer:  TRUE

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

3) A liability account is credited when a prepaid expense is recorded initially as an expense.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

4) When a prepaid expense is initially recorded as an expense, the adjusting entry:

  1. A) transfers the used portion to an asset account.
  2. B) transfers the unused portion to an asset account.
  3. C) transfers the used portion to an expense account.
  4. D) there is no need for an adjusting entry.

Answer:  B

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

5) Lynnwood Services prepaid 24 months of rent in advance on October 1, 2014. Lynnwood Services debited rent expense for the entire amount of $12,000. The adjusting entry on December 31, 2014, would include a:

  1. A) debit to prepaid rent for $1,500.
  2. B) debit to prepaid rent for $10,500.
  3. C) credit to rent expense for $1,500.
  4. D) debit to rent expense for $10,500.

Answer:  B

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

6) Lynnwood Services prepaid six months of insurance in advance on July 1, 2014. Lynnwood Services debited insurance expense for the entire amount of $12,000. The adjusting entry on December 31, 2014, would include:

  1. A) a debit to prepaid insurance for $6,000.
  2. B) a debit to prepaid insurance for $12,000.
  3. C) a credit to insurance expense for $12,000.
  4. D) No adjustment is necessary on December 31, 2014.

Answer:  D

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

7) When a prepaid expense is initially recorded as an expense, the adjusting entry would include a:

  1. A) debit to a contra account.
  2. B) debit to a prepaid expense account.
  3. C) debit to an unearned expense account.
  4. D) debit to an unearned revenue account.

Answer:  B

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

8) When a prepaid expense is initially recorded as an expense, the adjusting entry has the following effect on net income:

  1. A) no effect.
  2. B) decrease.
  3. C) increase.
  4. D) current income is correct but next period’s income is incorrect.

Answer:  C

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

9) The balance in the Office Supplies account had a debit balance on January 1, 2013, that equalled the $240 of supplies on hand. During the year, the company purchased $4,200 of supplies that were debited to the Office Supplies Expense account. The proprietor estimates that the cost of supplies remaining on hand on December 31 is $960. What is the required adjusting journal entry on December 31?

A)

Dr. Office Supplies Expense 3,480
    Cr. Office Supplies       3,480

 

B)

Dr. Office Supplies Expense 960
    Cr. Office Supplies       960

 

C)

Dr. Office Supplies 3,480
    Cr. Office Supplies Expense       3,480

 

D)

Dr. Office Supplies 720
    Cr. Office Supplies Expense       720

 

Answer:  D

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

For each of the items or entries described, indicate with a code letter, provided below, the effect of the transaction or the correction of the error described on the corrected net income:

 

Net income would increase       I

Net income would decrease      D

No effect on net income               N/E

 

  1. A) I
  2. B) D
  3. C) N/E

 

10) Prepaid rent was originally recorded to rent expense and no adjustment has yet been made.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

Answers: 10) A

 

11) Lawson Delivery initially records all prepaid expenses as expenses and all unearned revenues as revenues. Given the following information, prepare the necessary adjusting entries at year end, December 31, 2014.

 

  1. a) On January 3, 2014, $3,500 of supplies were purchased. A count revealed $700 still on hand at December 31, 2014.
  2. b) On January 4, 2014, a $3,150 payment was made to an insurance agency for two and a half years of insurance.
  3. c) On June 30, 2014, received nine months’ rent in advance from a tenant, $8,100.
  4. d) On August 1, 2014, received six months’ rent in advance from a tenant, $4,800.

Answer:

                                                            General Journal

Date Accounts Debit Credit
Dec. 31 Supplies 700  
       Supplies Expense   700
31 Prepaid Insurance 1,890  
       Insurance Expense   1,890
31 Rent Revenue 2,700  
       Unearned Rent Revenue   2,700
31 Rent Revenue 800  
       Unearned Rent Revenue   800

 

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

12) Sandhill Construction initially records all prepaid expenses as expenses and all unearned revenues as revenues. Given the following information, prepare the necessary adjusting entries at year end, December 31, 2014.

 

  1. a) On January 3, 2014, $2,500 of supplies were purchased. A count revealed $300 still on hand at December 31, 2014.
  2. b) On January 4, 2014, a $21,000 payment was made to an insurance agency for two and a half years of insurance.
  3. c) On June 30, 2014, received nine months payment in advance from a customer, $16,200.
  4. d) On August 1, 2014, received six months payment in advance from a customer, $9,600.

Answer:                                            General Journal

Date Accounts Debit Credit
Dec. 31 Supplies 300  
       Supplies Expense   300
31 Prepaid Insurance 12,600  
       Insurance Expense   12,600
31 Rent Revenue 5,400  
       Unearned Rent Revenue   5,400
31 Rent Revenue 1,600  
       Unearned Rent Revenue   1,600

 

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

Table 3-2

 

The unadjusted trial balance of Danvon Collection Services at December 31, 2014 follows. Danvon records payments for insurance, rent and supplies to the expense accounts; and, cash received in advance from customers as revenue.

 

Debit                    Credit

Cash                                                                 $4,800

Accounts receivable                                     10,400

Prepaid insurance

Prepaid rent

Office supplies

Equipment                                                      16,500

Accumulated amortization                                                      $2,400

Salaries payable

Interest payable

Unearned service revenue                                                               600

Note payable                                                                                    8,000

Ted Danvon, capital                                                                    15,200

Ted Danvon, withdrawals                           3,000

Service revenue                                                                             42,500

Salaries expense                                           20,500

Amortization expense

Rent expense                                                  16,200

Insurance expense                                          2,200

Office supplies expense                                   600

Interest expense                                                  500                  ______

$71,700                 $71,700

 

 

13) Refer to Table 3-2. Given the following information, prepare the necessary adjusting entries at year end, December 31, 2014, for Danvon Collection Services.

 

  1. a) A count revealed that $100 of office supplies were still on hand at December 31, 2014.
  2. b) The accountant has determined that the prepaid insurance balance at December 31, 2014, should be in the amount of $450.
  3. c) The equipment is amortized at the rate of $200 per month.
  4. d) The accountant has determined that the unearned service revenue balance at December 31, 2014 should be in the amount of $350.
  5. e) Interest of $200 on the note payable has accrued to the end of the year.
  6. f) Salaries accrued at December 31, 2014 amounted to $650.
  7. g) The accountant has determined that the prepaid rent balance at December 31, 2014 should be in the amount of $100.

Answer:                                            General Journal

Date Accounts Debit Credit
Dec. 31 Office Supplies 100  
       Office Supplies Expense   100
31 Prepaid Insurance 450  
       Insurance Expense   450
31 Amortization Expense 2,400  
       Accumulated Amortization   2,400
31 Service Revenue 350  
       Unearned Service Revenue   350
31 Interest Expense 200  
       Interest Payable   200
31 Salaries Expense 650  
       Salaries Payable   650
31 Prepaid Rent 100
       Rent Expense 100

 

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

14) At the end of 2014, Sam Lim had catering supplies on hand in the amount of $9,000. During 2015, the business paid $89,000 for additional catering supplies. At year end, the company’s catering supplies on hand totalled $5,000.

 

Required:

1) The 2015 year-end adjusting journal entry if Sam Lim records cash paid for supplies as an expense.

 

Date Accounts Debit Credit

 

2) The 2015 year-end adjusting journal entry if Sam Lim records cash paid for supplies as an asset.

 

Date Accounts Debit Credit

 

Answer:

1) Purchases recorded as an expense.

 

Dr. Catering Supplies Expense 4,000
    Cr. Catering Supplies     4,000

 

2) Purchases recorded as an asset.

 

Dr. Catering Supplies Expense 93,000
    Cr. Catering Supplies     93,000

 

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-A1 Account for prepaid expenses initially recorded as an expense

 

Objective 3-A2

 

1) Unearned revenue recorded initially as revenue is adjusted by debiting a liability account.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue

2) An asset account is debited when unearned revenue is recorded initially as a revenue.

Answer:  TRUE

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue

 

3) When an unearned revenue is initially recorded as a revenue, the adjusting entry:

  1. A) transfers the earned portion to a liability account.
  2. B) transfers the earned portion to a revenue account.
  3. C) transfers the unearned portion to a revenue account.
  4. D) transfers the unearned portion to a liability account.

Answer:  D

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue

 

4) When an unearned revenue is initially recorded as a revenue, the adjusting entry would include a:

  1. A) debit to a liability.
  2. B) credit to a liability.
  3. C) debit to an asset.
  4. D) credit to revenue.

Answer:  B

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Knowledge

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue

 

5) When an unearned revenue is initially recorded as a revenue, the adjusting entry would affect net income as follows:

  1. A) decrease.
  2. B) no effect.
  3. C) increase.
  4. D) current income is correct and next periods income is incorrect.

Answer:  A

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue

 

6) When an unearned revenue is initially recorded as a revenue, the adjusting entry has the following effect on the financial statements:

  1. A) net income increases and assets decrease.
  2. B) revenue increases and liabilities decrease.
  3. C) net income increases and owner’s equity increases.
  4. D) revenue decreases and owner’s equity decreases.

Answer:  D

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Comprehension

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue

 

7) On April 1 of the current year, Wood Services received $15,000 for services to be performed evenly over the next 12 months. Wood Services initially recorded the $15,000 as service revenue. The adjusting entry on December 31 of the current year will include a:

  1. A) debit to service revenue for $11,250.
  2. B) debit to service revenue for $3,750.
  3. C) debit to unearned service revenue for $3,750.
  4. D) credit to unearned service revenue for $11,250.

Answer:  B

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue

 

8) On October 1 of the current year, Wood Services received $15,000 for services to be performed evenly over the next 12 months. Wood Services initially recorded the $15,000 as service revenue. The adjusting entry on December 31 of the current year will include a:

  1. A) debit to service revenue for $11,250.
  2. B) debit to service revenue for $3,750.
  3. C) debit to unearned service revenue for $3,750.
  4. D) debit to unearned service revenue for $11,250.

Answer:  A

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue

 

9) On December 21, 2014, Mr. Bagger received and deposited $790 from a customer, Mrs. McCartney, who paid in advance of the work. He recorded the receipt by crediting a revenue account, Computer Service Fees Earned. As of December 31, none of the work had been completed. What, if any, is the required adjusting journal entry on December 31?

  1. A) No entry is required

B)

Dr. Unearned Computer Service Fees 790
       Cr. Computer Service Fees Earned 790

 

C)

Dr. Computer Service Fees Earned 790
       Cr. Accounts Receivable 790

 

D)

Dr. Computer Service Fees Earned 790
      Cr. Unearned Computer Service Fees 790

 

Answer:  D

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue

 

 

10) Clayton Consulting initially records all prepaid expenses as expenses and all unearned revenues as revenues. Given the following information, prepare the necessary adjusting entries at year end, December 31, 2014.

 

  1. a) On January 3, 2014, $500 of supplies were purchased. A count revealed $100 still on hand at December 31, 2010.
  2. b) On January 4, 2014, a $10,500 payment was made to an insurance agency for two and a half years of insurance.
  3. c) On October 30, 2014, received four months’ rent in advance from a tenant, $8,000.
  4. d) On August 1, 2014, received six months’ rent in advance from a tenant, $2,400.

Answer:                                            General Journal

Date Accounts Debit Credit
Dec. 31 Supplies 100  
       Supplies Expense   100
31 Prepaid Insurance 6,300  
       Insurance Expense   6,300
31 Rent Revenue 4,000  
       Unearned Rent Revenue   4,000
31 Rent Revenue 400  
       Unearned Rent Revenue   400

 

Diff: 3

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue

 

Table 3-4

 

The unadjusted trial balance of Holitzner Roof Repairs appears below as at December 31, 2014. Holitzner records purchases of roof supplies to the expense account, and cash received in advance from customers as revenue.

 

Debit                    Credit

Cash                                                                 $5,300

Accounts receivable                                       7,300

Roofing supplies

Equipment                                                        6,000

Accumulated amortization                                                       $1,200

Salaries payable                                                                              1,100

Interest payable

Unearned service revenue

Note payable                                                                                  10,000

Carmen Holitzner, capital                                                           6,400

Carmen Holitzner, withdrawals                                                   600

Service revenue                                                                                3,000

Salaries expense                                                 500

Amortization expense

Rent expense                                                    2,100

Roofing supplies expense                            1,100

Interest expense                                             _____                     _____

$22,300                 $22,300

 

 

11) Refer to Table 3-4. Given the following information, prepare the necessary adjusting entries at year end, December 31, 2014.

 

  1. a) A physical count reveals only $520 of roofing supplies are on hand at December 31, 2014.
  2. b) The equipment is amortized at a rate of $120 per month.
  3. c) Unearned service revenue amounted to $200 at December 31, 2014.
  4. d) Accrued salary expense at December 31, 2014, amounts to $150.
  5. e) Interest accrued on the note payable at December 31, 2014, amounts to $50.

Answer:                                            General Journal

Date Accounts Debit Credit
Dec. 31 Roofing Supplies 520  
       Roofing Supplies Expense   520
31 Amortization Expense 1,440  
       Accumulated Amortization   1,440
31 Service Revenue 200  
       Unearned Service Revenue   200
31 Salaries Expense 150  
       Salaries Payable   150
31 Interest Expense 50  
       Interest Payable   50

 

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Application

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue

 

12) At the end of 2014, Sam Lim had a liability to catering customers for deposits received of $5,000. During 2015, the business received additional cash advances of $75,000. At year end, the company’s cash deposits on hand from customers amounted to $8,000.

 

Required:

1) The 2015 year-end adjusting journal entry if Sam Lim records cash deposits received by customers as revenue.

 

Date Accounts Debit Credit

 

2) The 2015 year end adjusting journal entry if Sam Lim records cash deposits received by customers as a liability.

 

Date Accounts Debit Credit

 

Answer:

1) Deposits recorded as a revenue.

 

Dr. Catering Revenue 3,000
    Cr. Unearned Catering Revenue     3,000

 

2) Deposits recorded as liabilities.

 

Dr. Unearned Catering Revenue 72,000
    Cr. Catering Revenue     72,000

 

Diff: 2

Learning Outcome:  A-05 Define and record adjusting and closing entries

Skill:  Analysis

Objective:  3-A2 Account for unearned (deferred) revenue initially recorded as a revenue