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3.7: Practice Questions

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    Multiple Choice

    1.

    LO 3.1That a business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally, is known as which of the following?

    1. separate entity concept
    2. monetary measurement concept
    3. going concern assumption
    4. time period assumption
    2.

    LO 3.1That companies can present useful information in shorter time periods such as years, quarters, or months is known as which of the following?

    1. separate entity concept
    2. monetary measurement concept
    3. going concern assumption
    4. time period assumption
    3.

    LO 3.1The system of using a monetary unit, such as the US dollar, to value the transaction is known as which of the following?

    1. separate entity concept
    2. monetary measurement concept
    3. going concern assumption
    4. time period assumption
    4.

    LO 3.1Which of the following terms is used when assuming a business will continue to operate in the foreseeable future?

    1. separate entity concept
    2. monetary measurement concept
    3. going concern assumption
    4. time period assumption
    5.

    LO 3.1The independent, nonprofit organization that sets financial accounting and reporting standards for both public- and private-sector businesses that use generally accepted accounting principles (GAAP) in the United States is which of the following?

    1. Financial Accounting Standards Board (FASB)
    2. generally accepted accounting principles (GAAP)
    3. Securities and Exchange Commission (SEC)
    4. conceptual framework
    6.

    LO 3.1The standards, procedures, and principles companies must follow when preparing their financial statements are known as which of the following?

    1. Financial Accounting Standards Board (FASB)
    2. generally accepted accounting principles (GAAP)
    3. Securities and Exchange Commission (SEC)
    4. conceptual framework
    7.

    LO 3.1These are used by the FASB, and it is a set of concepts that guide financial reporting.

    1. Financial Accounting Standards Board (FASB)
    2. generally accepted accounting principles (GAAP)
    3. Securities and Exchange Commission (SEC)
    4. conceptual framework
    8.

    LO 3.1This is the independent federal agency protecting the interests of investors, regulating stock markets, and ensuring companies adhere to GAAP requirements.

    1. Financial Accounting Standards Board (FASB)
    2. generally accepted accounting principles (GAAP)
    3. Securities and Exchange Commission (SEC)
    4. conceptual framework
    9.

    LO 3.1Which of the following is the principle that a company must recognize revenue in the period in which it is earned; it is not considered earned until a product or service has been provided?

    1. revenue recognition principle
    2. expense recognition (matching) principle
    3. cost principle
    4. full disclosure principle
    10.

    LO 3.1Which of the following is the principle that a business must report any business activities that could affect what is reported on the financial statements?

    1. revenue recognition principle
    2. expense recognition (matching) principle
    3. cost principle
    4. full disclosure principle
    11.

    LO 3.1Also known as the historical cost principle, ________ states that everything the company owns or controls (assets) must be recorded at their value at the date of acquisition.

    1. revenue recognition principle
    2. expense recognition (matching) principle
    3. cost principle
    4. full disclosure principle
    12.

    LO 3.1Which of the following principles matches expenses with associated revenues in the period in which the revenues were generated?

    1. revenue recognition principle
    2. expense recognition (matching) principle
    3. cost principle
    4. full disclosure principle
    13.

    LO 3.2Which of the following does not accurately represent the accounting equation?

    1. Assets – Liabilities = Stockholders’ Equity
    2. Assets – Stockholders’ Equity = Liabilities
    3. Assets = Liabilities + Stockholders’ Equity
    4. Assets + Liabilities = Stockholders’ Equity
    14.

    LO 3.2Which of these statements is false?

    1. Assets = Liabilities + Equity
    2. Assets – Liabilities = Equity
    3. Liabilities – Equity = Assets
    4. Liabilities = Assets – Equity
    15.

    LO 3.2Which of these accounts is an asset?

    1. Common Stock
    2. Supplies
    3. Accounts Payable
    4. Fees Earned
    16.

    LO 3.2Which of these accounts is a liability?

    1. Accounts Receivable
    2. Supplies
    3. Salaries Expense
    4. Accounts Payable
    17.

    LO 3.2If equity equals $100,000, which of the following is true?

    1. Assets exceed liabilities by $100,000.
    2. Liabilities exceed equity by $100,000.
    3. Assets + liabilities equal $100,000.
    4. None of the above is true.
    18.

    LO 3.3Which process of the accounting cycle often requires the most analytical thought?

    1. making a journal entry
    2. posting transactions to accounts
    3. summarizing the trial balance
    4. preparing the financial statements
    19.

    LO 3.3The step-by-step process to record business activities and events to keep financial records up to date is ________.

    1. day-to-day cycle
    2. accounting cycle
    3. general ledger
    4. journal
    20.

    LO 3.3One operating cycle of a business, which could be a month, quarter, or year, is commonly referred to as which of the following?

    1. period
    2. round
    3. tally
    4. mark
    21.

    LO 3.3 ________ takes all transactions from the journal during a period and moves the information to a general ledger (ledger).

    1. Hitching
    2. Posting
    3. Vetting
    4. Laxing
    22.

    LO 3.4Which of these events will not be recognized?

    1. A service is performed, but the payment is not collected on the same day.
    2. Supplies are purchased. They are not paid for; the company will be billed.
    3. A copy machine is ordered. It will be delivered in two weeks.
    4. Electricity has been used but has not been paid for.
    23.

    LO 3.4A company purchased a building twenty years ago for $150,000. The building currently has an appraised market value of $235,000. The company reports the building on its balance sheet at $235,000. What concept or principle has been violated?

    1. separate entity concept
    2. recognition principle
    3. monetary measurement concept
    4. cost principle
    24.

    LO 3.4What is the impact on the accounting equation when a current month’s utility expense is paid?

    1. both sides increase
    2. both sides decrease
    3. only the Asset side changes
    4. neither side changes
    25.

    LO 3.4What is the impact on the accounting equation when a payment of account payable is made?

    1. both sides increase
    2. both sides decrease
    3. only the Asset side changes
    4. neither side changes
    26.

    LO 3.4What is the impact on the accounting equation when an accounts receivable is collected?

    1. both sides increase
    2. both sides decrease
    3. only the Asset side changes
    4. the total of neither side changes
    27.

    LO 3.4What is the impact on the accounting equation when a sale occurs?

    1. both sides increase
    2. both sides decrease
    3. only the Asset side changes
    4. neither side changes
    28.

    LO 3.4What is the impact on the accounting equation when stock is issued, in exchange for assets?

    1. both sides increase
    2. both sides decrease
    3. only the Asset side changes
    4. neither side changes
    29.

    LO 3.5Which of the following accounts is increased by a debit?

    1. Common Stock
    2. Accounts Payable
    3. Supplies
    4. Service Revenue
    30.

    LO 3.5Which of the following accounts does not increase with a debit entry?

    1. Retained Earnings
    2. Buildings
    3. Prepaid Rent
    4. Electricity Expense
    31.

    LO 3.5Which of the following pairs increase with credit entries?

    1. supplies and retained earnings
    2. rent expense and unearned revenue
    3. prepaid rent and common stock
    4. unearned service revenue and accounts payable
    32.

    LO 3.5Which of the following pairs of accounts are impacted the same with debits and credits?

    1. Cash and Unearned Service Revenue
    2. Electricity Expense and Office Supplies
    3. Accounts Receivable and Accounts Payable
    4. Buildings and Common Stock
    33.

    LO 3.5Which of the following accounts will normally have a debit balance?

    1. Common Stock
    2. Fees Earned
    3. Supplies
    4. Accounts Payable
    34.

    LO 3.5What type of account is prepaid insurance?

    1. Stockholders’ Equity
    2. Expense
    3. Liability
    4. Asset
    35.

    LO 3.5Unearned service revenue occurs when which of the following occurs?

    1. company receives cash from a customer before performing the service
    2. company pays cash before receiving a service from a supplier
    3. company pays cash after receiving a service from a supplier
    4. company receives cash from a customer after performing a service
    36.

    LO 3.5Which set of accounts has the same type of normal balance?

    1. Cash, accounts payable
    2. Prepaid rent, unearned service revenue
    3. Dividends, common stock
    4. Accounts payable, retained earnings
    37.

    LO 3.5Which of these transactions requires a debit entry to Cash?

    1. paid balance due to suppliers
    2. sold merchandise on account
    3. collected balance due from customers
    4. purchased supplies for cash
    38.

    LO 3.5Which of these transactions requires a credit entry to Revenue?

    1. received cash from services performed this month
    2. collected balance due from customers
    3. received cash from bank loan
    4. refunded a customer for a defective product
    39.

    LO 3.5Which of these accounts commonly requires both debit and credit entries?

    1. Sales Revenue
    2. Utilities Expense
    3. Accounts Receivable
    4. Common Stock
    40.

    LO 3.5Which of the following accounting records is the main source of information used to prepare the financial statements?

    1. journal entries
    2. T-accounts
    3. trial balance
    4. chart of accounts
    41.

    LO 3.5Which of the following financial statements should be prepared first?

    1. Balance Sheet
    2. Income Statement
    3. Retained Earnings Statement
    4. Statement of Cash Flows

    Questions

    1.

    LO 3.1Explain what conservatism means, and give an example in your own words.

    2.

    LO 3.2State the accounting equation, and explain what each part represents.

    3.

    LO 3.2How do revenues and expenses affect the accounting equation?

    4.

    LO 3.2Does every transaction affect both sides of the accounting equation? Explain your answer.

    5.

    LO 3.3Which is the “book of original entry”?

    6.

    LO 3.4What is the effect on the accounting equation when a business purchases supplies on account?

    7.

    LO 3.4What is the effect on the accounting equation when a business pays the balance due on accounts payable?

    8.

    LO 3.4Is it still necessary to record a transaction if it has no net effect on the accounting equation? Explain your answer.

    9.

    LO 3.4Why does the combined total of the company’s liabilities and equity always equal the total of the company’s assets?

    10.

    LO 3.5What do the terms “debit” and “credit” mean?

    11.

    LO 3.5Will an accounts receivable balance increase with a debit or a credit entry? How do you know?

    12.

    LO 3.5What types of accounts will increase with a credit?

    13.

    LO 3.5What is a journal?

    14.

    LO 3.5Why is a journal referred to as the “book of original entry”?

    15.

    LO 3.5What does the term recognize mean?

    16.

    LO 3.5What are the rules you should follow when recording journal entries?

    17.

    LO 3.5What is the general ledger?

    18.

    LO 3.5Explain the steps in posting.

    19.

    LO 3.5What is a T-account? When would we use T-accounts?

    20.

    LO 3.5Explain normal balances. Give three examples of accounts that will normally have a debit balance and three accounts that will normally have a credit balance.

    21.

    LO 3.5What is a prepaid account? What type of account is it?

    22.

    LO 3.5What is an unearned account? What type of account is it?

    23.

    LO 3.5Explain what a T-account is and what purpose it serves.

    24.

    LO 3.5Can a credit entry be described as a generally positive or negative transaction? Explain.

    25.

    LO 3.5What types of accounts are increased with a debit?

    26.

    LO 3.5What types of accounts are increased with a credit?

    27.

    LO 3.5What does an account’s “normal balance” indicate?

    28.

    LO 3.5Does the order in which financial statements are prepared matter?

    29.

    LO 3.5Answer the following questions about the trial balance: What is the purpose of it? What is the primary usefulness of it?

    Exercise Set A

    EA1.

    LO 3.1Match the correct term with its definition.

    A. cost principle i. if uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount
    B. full disclosure principle ii. also known as the historical cost principle, states that everything the company owns or controls (assets) must be recorded at their value at the date of acquisition
    C. separate entity concept iii. (also referred to as the matching principle) matches expenses with associated revenues in the period in which the revenues were generated
    D. monetary measurement concept iv. business must report any business activities that could affect what is reported on the financial statements
    E. conservatism v. system of using a monetary unit by which to value the transaction, such as the US dollar
    F. revenue recognition principle vi. period of time in which you performed the service or gave the customer the product is the period in which revenue is recognized
    G. expense recognition principle vii. business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally
    EA2.

    LO 3.2Consider the following accounts, and determine if the account is an asset (A), a liability (L), or equity (E).

    1. Accounts Payable
    2. Cash
    3. Dividends
    4. Notes Payable
    EA3.

    LO 3.2Provide the missing amounts of the accounting equation for each of the following companies.

    A table with three columns. The second column is labeled Gianni. The third column is labeled Forest. The next row is, left to right: Assets, $222,000, $387,000. The next row is, left to right: Liabilities, ?, 7,000. The last row is, left to right: Equity, 147,000, ?. EA4.

    LO 3.2Identify the financial statement on which each of the following accounts would appear: the income statement (IS), the retained earnings statement (RE), or the Balance Sheet (BS).

    1. Insurance Expense
    2. Accounts Receivable
    3. Office Supplies
    4. Sales Revenue
    5. Common Stock
    6. Notes Payable
    EA5.

    LO 3.2Cromwell Corporation has the following trial balance account balances, given in no certain order, as of December 31, 2018. Using the information provided, prepare Cromwell’s annual financial statements (omit the Statement of Cash Flows).

    Supplies $865; Fees earned 22,850; Accounts Receivable 2,580; Accounts payable 1,945; Office furniture 12,685; Rent expense 12,240; Retained earnings 3,600; Cash 4,695; Electricity expense 1,380; Common stock 10,000; Miscellaneous expenses 1,450; Dividend 2,500. EA6.

    LO 3.3From the following list, identify which items are considered original sources:

    1. prepaid insurance
    2. bank statement
    3. sales ticket
    4. general journal
    5. trial balance
    6. balance sheet
    7. telephone bill
    8. invoice from supplier
    9. company sales account
    10. income statement
    EA7.

    LO 3.4Indicate what impact the following transactions would have on the accounting equation, Assets = Liabilities + Equity.

    Impact 1 Impact 2
    A. Received cash from issuance of common stock
    B. Sold goods to customers on account
    C. Collected cash from customer sales made in previous month
    D. Paid cash to vendors for supplies delivered last month
    E. Purchased inventory on account

    Table3.4

    EA8.

    LO 3.4For the following accounts please indicate whether the normal balance is a debit or a credit.

    1. Sales
    2. Dividends
    3. Office Supplies
    4. Retained Earnings
    5. Accounts Receivable
    6. Prepaid Rent
    7. Prepaid Insurance
    8. Wages Payable
    9. Building
    10. Wages Expense
    EA9.

    LO 3.4Indicate what impact the following transactions would have on the accounting equation, Assets = Liabilities + Equity.

    Impact 1 Impact 2
    A. Paid monthly note payment to bank
    B. Sold inventory on account
    C. Bought supplies, to be paid for next month
    D. Received cash from sales this month
    E. Paid for inventory purchased on account last month

    Table3.5

    EA10.

    LO 3.4Identify the normal balance for each of the following accounts. Choose Dr for Debit; Cr for Credit.

    Normal balance
    A. Utilities Expense
    B. Cash
    C. Equipment
    D. Rent Revenue
    E. Preferred Stock
    F. Interest Payable

    Table3.6

    EA11.

    LO 3.4Identify whether each of the following transactions would be recorded with a debit (Dr) or credit (Cr) entry.

    Debit or credit?
    A. Cash increase
    B. Supplies decrease
    C. Accounts Payable increase
    D. Common Stock decrease
    E. Interest Payable decrease
    F. Notes Payable decrease

    Table3.7

    EA12.

    LO 3.4Identify whether each of the following transactions would be recorded with a debit (Dr) or credit (Cr) entry.

    Debit or credit?
    A. Equipment decrease
    B. Common Stock Sold increase
    C. Gas and Oil Expense increase
    D. Service revenue decrease
    E. Miscellaneous Expense decrease
    F. Bonds Payable decrease

    Table3.8

    EA13.

    LO 3.4Identify whether ongoing transactions posted to the following accounts would normally have only debit entries (Dr), only credit entries (Cr), or both debit and credit entries (both).

    Type of entry
    A. Accounts Payable
    B. Cash
    C. Gas and Oil Expense
    D. Rent Revenue
    E. Supplies Expense
    F. Common Stock

    Table3.9

    EA14.

    LO 3.5Determine whether the balance in each of the following accounts increases with a debit or a credit.

    1. Cash
    2. Common Stock
    3. Equipment
    4. Accounts Payable
    5. Fees Earned
    6. Electricity Expense
    EA15.

    LO 3.5Journalize for Harper and Co. each of the following transactions or state no entry required and explain why. Be sure to follow proper journal writing rules.

    1. A corporation is started with an investment of $50,000 in exchange for stock.
    2. Equipment worth $4,800 is ordered.
    3. Office supplies worth $750 are purchased on account.
    4. A part-time worker is hired. The employee will work 15–20 hours per week starting next Monday at a rate of $18 per hour.
    5. The equipment is received along with the invoice. Payment is due in three equal monthly installments, with the first payment due in sixty days.
    EA16.

    LO 3.5Discuss how each of the following transactions for Watson, International, will affect assets, liabilities, and stockholders’ equity, and prove the company’s accounts will still be in balance.

    1. An investor invests an additional $25,000 into a company receiving stock in exchange.
    2. Services are performed for customers for a total of $4,500. Sixty percent was paid in cash, and the remaining customers asked to be billed.
    3. An electric bill was received for $35. Payment is due in thirty days.
    4. Part-time workers earned $750 and were paid.
    5. The electric bill in “C” is paid.
    EA17.

    LO 3.5For each item that follows, indicate whether a debit or a credit applies.

    1. increase in prepaid insurance
    2. increase in utilities expense
    3. increase in commissions earned
    4. increase in supplies
    5. decrease in retained earnings
    6. decrease in income taxes payable
    7. increase in unearned revenue
    8. increase in salaries expense
    9. decrease in notes receivable
    10. increase in common stock
    EA18.

    LO 3.5Indicate whether each account that follows has a normal debit or credit balance.

    1. Unearned Revenue
    2. Office Machines
    3. Prepaid Rent
    4. Cash
    5. Legal Fees Earned
    6. Salaries Payable
    7. Dividends
    8. Accounts Receivable
    9. Advertising Expense
    10. Retained Earnings
    EA19.

    LO 3.5A business has the following transactions:

    • The business is started by receiving cash from an investor in exchange for common stock $20,000
    • The business purchases supplies on account $500
    • The business purchases furniture on account $2,000
    • The business renders services to various clients on account totaling $9,000
    • The business pays salaries $2,000
    • The business pays this month’s rent $3,000
    • The business pays for the supplies purchased on account.
    • The business collects from one of its clients for services rendered earlier in the month $1,500.

    What is total income for the month?

    EA20.

    LO 3.5Prepare journal entries to record the following transactions.

    1. January 22, purchased, an asset, merchandise inventory
    2. on account for $2,800.
    3. February 10, paid creditor for part of January 22 purchase, $1,600
    EA21.

    LO 3.5Prepare journal entries to record the following transactions.

    1. July 1, issued common stock for cash, $15,000
    2. July 15, purchased supplies, on account, $1,800
    3. July 25, billed customer for accounting services provided, $950
    EA22.

    LO 3.5Prepare journal entries to record the following transactions.

    1. March 1, purchased land for cash, $20,000
    2. March 11, purchased merchandise inventory, on account, $18,500
    3. March 15, Sold merchandise to customer for cash, $555
    EA23.

    LO 3.5Post the following February transactions to T-accounts for Accounts Receivable and Cash, indicating the ending balance (assume no beginning balances in these accounts).

    1. provided legal services to customers for cash, $5,600
    2. provided legal services to customers on account, $4,700
    3. collected cash from customer accounts, $3,500
    EA24.

    LO 3.5Post the following November transactions to T-accounts for Accounts Payable and Inventory, indicating the ending balance (assume no beginning balances in these accounts).

    1. purchased merchandise inventory on account, $22,000
    2. paid vendors for part of inventory purchased earlier in month, $14,000
    3. purchased merchandise inventory for cash, $6,500
    EA25.

    LO 3.6Prepare an unadjusted trial balance, in correct format, from the alphabetized account information as follows. Assume all accounts have normal balances.

    Accounts payable $11,100; Accounts receivable 16,500; Administrative expense 54,712; Cash 64,888; Common stock 50,000; Service revenue 75,000.

    Exercise Set B

    EB1.

    LO 3.1Match the correct term with its definition.

    A. Financial Accounting Standards Board (FASB) i. used by the FASB, which is a set of concepts that guide financial reporting
    B. generally accepted accounting principles (GAAP) ii. independent, nonprofit organization that sets financial accounting and reporting standards for both public- and private-sector businesses that use generally accepted accounting principles (GAAP) here in the United States
    C. Securities and Exchange Commission (SEC) iii. standards, procedures, and principles companies must follow when preparing their financial statements
    D. conceptual framework iv. assumes a business will continue to operate in the foreseeable future
    E. going concern assumption v. independent federal agency protecting the interests of investors, regulating stock markets, and ensuring companies adhere to GAAP requirements
    F. time period assumption vi. companies can present useful information in shorter time periods such as years, quarters, or months
    EB2.

    LO 3.2Consider the following accounts and determine if the account is an asset (A), a liability (L), or equity (E).

    1. Accounts Receivable
    2. Sales Revenue
    3. Land
    4. Unearned Revenue
    EB3.

    LO 3.2Provide the missing amounts of the accounting equation for each of the following companies.

    A table with three columns. The second column is labeled Elias. The third column is labeled Patel. The next row is labeled, left to right: Assets, ?, $125,000. The next row is labeled, left to right: Liabilities, $33,000, ?. The last row is labeled, left to right: Equity, 186,000, 63,000. EB4.

    LO 3.3From the following list, identify which items are considered original sources:

    1. accounts receivable
    2. receipt from post office for post office box
    3. purchase order
    4. general ledger
    5. adjusted trial balance
    6. statement of retained earnings
    7. electric bill
    8. packing slip
    9. company expense account
    10. statement of cash flows
    EB5.

    LO 3.4Indicate what impact the following transactions would have on the accounting equation, Assets = Liabilities + Equity.

    Impact 1 Impact 2
    A. Paid this month’s utility bill
    B. Purchased supplies for cash
    C. Received cash for services performed
    D. Collected cash from customer accounts receivable
    E. Paid creditors on account

    Table3.10

    EB6.

    LO 3.4For the following accounts indicate whether the normal balance is a debit or a credit.

    1. Unearned Revenue
    2. Interest Expense
    3. Rent Expense
    4. Rent Revenue
    5. Accounts Payable
    6. Cash
    7. Supplies
    8. Accounts Payable
    9. Equipment
    10. Utilities Expense
    EB7.

    LO 3.4Which two accounts are affected by each of the following transactions?

    Account 1 Account 2
    A. Received cash from issuance of common stock
    B. Purchased land by issuing a note payable
    C. Paid balance on account for last month’s inventory purchases
    D. Received cash from customers for this month’s sales
    E. Sold merchandise to customers on account

    Table3.11

    EB8.

    LO 3.4Identify the normal balance for each of the following accounts. Choose Dr for Debit; Cr for Credit.

    Normal balance
    A. Insurance Expense
    B. Accounts Receivable
    C. Office Supplies
    D. Sales Revenue
    E. Common Stock
    F. Notes Payable

    Table3.12

    EB9.

    LO 3.4Identify whether each of the following transactions would be recorded with a debit (Dr) or credit (Cr) entry.

    Debit or credit?
    A. Cash decrease
    B. Supplies increase
    C. Accounts Payable decrease
    D. Common Stock increase
    E. Accounts Payable increase
    F. Notes Payable increase

    Table3.13

    EB10.

    LO 3.4Identify whether each of the following transactions would be recorded with a debit (Dr) or credit (Cr) entry.

    Debit or credit?
    A. Equipment increase
    B. Dividends Paid increase
    C. Repairs Expense increase
    D. Service revenue increase
    E. Miscellaneous Expense increase
    F. Bonds Payable increase

    Table3.14

    EB11.

    LO 3.4Identify whether ongoing transactions posted to the following accounts would normally have only debit entries (Dr), only credit entries (Cr), or both debit and credit entries (both).

    Type of entry
    A. Notes Payable
    B. Accounts Receivable
    C. Utilities Expense
    D. Sales Revenue
    E. Insurance Expense
    F. Dividends

    Table3.15

    EB12.

    LO 3.2LO 3.4West End Inc., an auto mechanic shop, has the following account balances, given in no certain order, for the quarter ended March 31, 2019. Based on the information provided, prepare West End’s annual financial statements (omit the Statement of Cash Flows).

    Electricity expense, $2,365; Accounts payable, 4,835; Dividends, 1,200; Garage machines, 145,000; Office supplies, 235; Repair revenue, 68,245; Mortgage interest expense, 12,240; Accounts receivable, 2,580; Retained earnings, 23,600; Miscellaneous expenses, 725; Cash, 10,745; Common stock, 150,000; Garage supplies, 1,565; Real estate tax expense, 5,200; Waiting room furniture, 3,450; Machine maintenance expense, 1,375; Mechanic shop, 185,000; Mortgage payable, 125,000.

    Prepare West End’s annual financial statements. (Omit the Statement of Cash Flows.)

    EB13.

    LO 3.5State whether the balance in each of the following accounts increases with a debit or a credit.

    1. Office Supplies
    2. Retained Earnings
    3. Salaries Expense
    4. Accounts Receivable
    5. Service Revenue
    EB14.

    LO 3.5Journalize each of the following transactions or state no entry required and explain why. Be sure to follow proper journal writing rules.

    1. A company is started with an investment of a machine worth $40,000. Common stock is received in exchange.
    2. Office furniture is ordered. The furniture worth $7,850 will be delivered in one week. The payment will be due forty-five days after delivery.
    3. An advertisement was run in the newspaper at a total cost of $250. Cash was paid when the order was placed.
    4. The office furniture is delivered.
    5. Services are performed for a client. The client was billed for $535.
    EB15.

    LO 3.5Discuss how each of the following transactions will affect assets, liabilities, and stockholders’ equity, and prove the company’s accounts will still be in balance.

    1. A company purchased $450 worth of office supplies on credit.
    2. The company parking lot was plowed after a blizzard. A check for $75 was given to the plow truck operator.
    3. $250 was paid on account.
    4. A customer paid $350 on account.
    5. Provided services for a customer, $500. The customer asked to be billed.
    EB16.

    LO 3.5For each of the following items, indicate whether a debit or a credit applies.

    1. increase in retained earnings
    2. decrease in prepaid rent
    3. increase in dividends
    4. decrease in salaries payable
    5. increase in accounts receivable
    6. decrease in common stock
    7. decrease in prepaid insurance
    8. decrease in advertising expense
    9. decrease in unearned service fees
    10. increase in office equipment
    EB17.

    LO 3.5Indicate whether each of the following accounts has a normal debit or credit balance.

    1. prepaid landscaping expense
    2. common stock
    3. delivery vans
    4. maintenance expense
    5. retained earnings
    6. office supplies
    7. revenue earned
    8. accounts payable
    9. unearned painting revenue
    10. interest payable
    EB18.

    LO 3.5Krespy Corp. has a cash balance of $7,500 before the following transactions occur:

    1. received customer payments of $965
    2. supplies purchased on account $435
    3. services worth $850 performed, 25% is paid in cash the rest will be billed
    4. corporation pays $275 for an ad in the newspaper
    5. bill is received for electricity used $235.
    6. dividends of $2,500 are distributed

    What is the balance in cash after these transactions are journalized and posted?

    EB19.

    LO 3.5A business has the following transactions:

    1. The business is started by receiving cash from an investor in exchange for common stock $10,000.
    2. Rent of $1,250 is paid for the first month.
    3. Office supplies are purchased for $375.
    4. Services worth $3,450 are performed. Cash is received for half.
    5. Customers pay $1,250 for services to be performed next month.
    6. $6,000 is paid for a one year insurance policy.
    7. We receive 25% of the money owed by customers in “D”.
    8. A customer has placed an order for $475 of services to be done this coming week.

    How much total revenue does the company have?

    EB20.

    LO 3.5Prepare journal entries to record the following transactions.

    1. November 19, purchased merchandise inventory, on account, $12,000
    2. November 29, paid creditor for part of November 19 purchase, $10,000
    EB21.

    LO 3.5Prepare journal entries to record the following transactions:

    1. December 1, collected balance due from customer account, $5,500
    2. December 12, paid creditors for supplies purchased last month, $4,200
    3. December 31, paid cash dividend to stockholders, $1,000
    EB22.

    LO 3.5Prepare journal entries to record the following transactions:

    1. October 9, issued common stock in exchange for building, $40,000
    2. October 12, purchased supplies on account, $3,600
    3. October 24, paid cash dividend to stockholders, $2,500
    EB23.

    LO 3.5Post the following August transactions to T-accounts for Accounts Payable and Supplies, indicating the ending balance (assume no beginning balances in these accounts):

    1. purchased supplies on account, $600
    2. paid vendors for supplies delivered earlier in month, $500
    3. purchased supplies for cash, $450
    EB24.

    LO 3.5Post the following July transactions to T-accounts for Accounts Receivable and Cash, indicating the ending balance (assume no beginning balances in these accounts):

    1. sold products to customers for cash, $8,500
    2. sold products to customers on account, $2,900
    3. collected cash from customer accounts, $1,600
    EB25.

    LO 3.6Prepare an unadjusted trial balance, in correct format, from the alphabetized account information as follows. Assume all accounts have normal balances.

    Accounts payable $8,005; Accounts receivable 12,500; Cash 56,015; Common stock 28,000; Fees earned revenue 75,510; Operating expense 43,000.

    Problem Set A

    PA1.

    LO 3.1For each of the following situations write the principle, assumption, or concept that justifies or explains what occurred.

    1. A landscaper received a customer’s order and cash prepayment to install sod at a house that would not be ready for installation until March of next year. The owner should record the revenue from the customer order in March of next year, not in December of this year.
    2. A company divides its income statements into four quarters for the year.
    3. Land is purchased for $205,000 cash; the land is reported on the balance sheet of the purchaser at $205,000.
    4. Brandy’s Flower Shop is forecasting its balance sheet for the next five years.
    5. When preparing financials for a company, the owner makes sure that the expense transactions are kept separate from expenses of the other company that he owns.
    6. A company records the expenses incurred to generate the revenues reported.
    PA2.

    LO 3.2Assuming the following account balances, what is the missing value?

    Assets $865,430; Liabilities ?; Equity 759,121. PA3.

    LO 3.2LO 3.4Assuming the following account balance changes for the period, what is the missing value?

    Assets $246,300; Liabilities ?; Common stock 160,000; Dividends 30,000; Revenue 245,800; Expenses 175,000. PA4.

    LO 3.2LO 3.4Assuming the following account balance changes for the period, what is the missing value?

    Assets $450,600; Liabilities 250,000; Common stock 120,000; Dividends ?; Revenue 433,600; Expenses 323,000. PA5.

    LO 3.2LO 3.4Identify the financial statement on which each of the following account categories would appear: the balance sheet (BS), the income statement (IS), or the retained earnings statement (RE). Indicate the normal balance (Dr for debit; Cr for credit) for each account category.

    Financial statement Normal balance
    Assets
    Common stock
    Dividends
    Expenses
    Liabilities
    Revenue

    Table3.16

    PA6.

    LO 3.4Indicate what impact (+ for increase; – for decrease) the following transactions would have on the accounting equation, Assets = Liabilities + Equity.

    Impact 1 Impact 2
    A. Issued stock for cash
    B. Purchased supplies on account
    C. Paid employee salaries
    D. Paid note payment to bank
    E. Collected balance on accounts receivable

    Table3.17

    PA7.

    LO 3.4Indicate how changes in the following types of accounts would be recorded (Dr for debit; Cr for credit).

    Increase Decrease
    A. Asset accounts
    B. Liability accounts
    C. Common stock
    D. Revenue
    E. Expense

    Table3.18

    PA8.

    LO 3.4Identify the normal balance (Dr for Debit; Cr for Credit) and type of account (A for asset, L for liability, E for equity, E-rev for revenue, E-exp for expense, and E-eq for equity) for each of the following items.

    Normal balance Account type
    A. Accounts Payable
    B. Supplies
    C. Inventory
    D. Common Stock
    E. Dividends
    F. Salaries Expense

    Table3.19

    PA9.

    LO 3.4Indicate the net effect (+ for increase; – for decrease; 0 for no effect) of each of the following transactions on each part of the accounting equation, Assets = Liabilities + Equity. For example, for payment of an accounts payable balance, A (–) = L (–) + E (0).

    1. sale of merchandise to customer on account
    2. payment on note payable
    3. purchase of equipment for cash
    4. collection of accounts receivable
    5. purchase of supplies on account
    PA10.

    LO 3.4Identify whether the following transactions would be recorded with a debit (Dr) or credit (Cr) entry. Indicate the normal balance of the account.

    Transaction Debit or credit? Normal balance
    A. Equipment increase
    B. Dividends Paid increase
    C. Repairs Expense increase
    D. Service revenue decrease
    E. Miscellaneous Expense increase
    F. Bonds Payable decrease

    Table3.20

    PA11.

    LO 3.5The following information is provided for the first month of operations for Legal Services Inc.:

    1. The business was started by selling $100,000 worth of common stock.
    2. Six months’ rent was paid in advance, $4,500.
    3. Provided services in the amount of $1,000. The customer will pay at a later date.
    4. An office worker was hired. The worker will be paid $275 per week.
    5. Received $500 in payment from the customer in “C”.
    6. Purchased $250 worth of supplies on credit.
    7. Received the electricity bill. We will pay the $110 in thirty days.
    8. Paid the worker hired in “D” for one week’s work.
    9. Received $100 from a customer for services we will provide next week.
    10. Dividends in the amount of $1,500 were distributed.

    Prepare the necessary journal entries to record these transactions. If an entry is not required for any of these transactions, state this and explain why.

    PA12.

    LO 3.5 Sewn for You had the following transactions in its first week of business.

    1. Jessica Johansen started Sewn for You, a seamstress business, by contributing $20,000 and receiving stock in exchange.
    2. Paid $2,250 to cover the first three months’ rent.
    3. Purchased $500 of sewing supplies. She paid cash for the purchase.
    4. Purchased a sewing machine for $1,500 paying $200 cash and signing a note for the balance.
    5. Finished a job for a customer earning $180. The customer paid cash.
    6. Received a $500 down payment to make a wedding dress.
    7. Received an electric bill for $125 which is due to be paid in three weeks.
    8. Completed an altering job for $45. The customer asked to be billed.

    Prepare the necessary journal entries to record these transactions. If an entry is not required for any of these transactions, state this and explain why.

    PA13.

    LO 3.5George Hoskin started his own business, Hoskin Hauling. The following transactions occurred in the first two weeks:

    1. George Hoskin contributed cash of $12,000 and a truck worth $10,000 to start the business. He received Common Stock in return.
    2. Paid two months' rent in advance, $800.
    3. Agreed to do a hauling job for a price of $1,200.
    4. Performed the hauling job discussed in “C.” We will get paid later.
    5. Received payment of $600 on the hauling job done in “D.”
    6. Purchased gasoline on credit, $50.
    7. Performed another hauling job. Earned $750, was paid cash.

    Record the following transactions in T-accounts. Label each entry with the appropriate letter. Total the T-accounts when you are done.

    PA14.

    LO 3.5Prepare journal entries to record the following transactions. Create a T-account for Cash, post any entries that affect the account, and calculate the ending balance for the account. Assume a Cash beginning balance of $16,333.

    1. February 2, issued stock to shareholders, for cash, $25,000
    2. March 10, paid cash to purchase equipment, $16,000
    PA15.

    LO 3.5Prepare journal entries to record the following transactions. Create a T-account for Accounts Payable, post any entries that affect the account, and tally ending balance for the account. Assume an Accounts Payable beginning balance of $5,000.

    1. February 2, purchased an asset, merchandise inventory, on account, $30,000
    2. March 10, paid creditor for part of February purchase, $12,000
    PA16.

    LO 3.5Prepare journal entries to record the following transactions for the month of July:

    1. on first day of the month, paid rent for current month, $2,000
    2. on tenth day of month, paid prior month balance due on accounts, $3,100
    3. on twelfth day of month, collected cash for services provided, $5,500
    4. on twenty-first day of month, paid salaries to employees, $3,600
    5. on thirty-first day of month, paid for dividends to shareholders, $800
    PA17.

    LO 3.5Prepare journal entries to record the following transactions for the month of November:

    1. on first day of the month, issued common stock for cash, $20,000
    2. on third day of month, purchased equipment for cash, $10,500
    3. on tenth day of month, received cash for accounting services, $14,250
    4. on fifteenth day of month, paid miscellaneous expenses, $3,200
    5. on last day of month, paid employee salaries, $8,600
    PA18.

    LO 3.5Post the following July transactions to T-accounts for Accounts Receivable, Sales Revenue, and Cash, indicating the ending balance. Assume no beginning balances in these accounts.

    1. on first day of the month, sold products to customers for cash, $13,660
    2. on fifth day of month, sold products to customers on account, $22,100
    3. on tenth day of month, collected cash from customer accounts, $18,500
    PA19.

    LO 3.5Post the following November transactions to T-accounts for Accounts Payable, Inventory, and Cash, indicating the ending balance. Assume no beginning balances in Accounts Payable and Inventory, and a beginning Cash balance of $36,500.

    1. purchased merchandise inventory on account, $16,000
    2. paid vendors for part of inventory purchased earlier in month, $12,000
    3. purchased merchandise inventory for cash, $10,500
    PA20.

    LO 3.6Prepare an unadjusted trial balance, in correct format, from the following alphabetized account information. Assume accounts have normal balances.

    Accounts payable $9,500; Accounts receivable 14,260; Cash 22,222; Common stock 30,000; Dividends 5,000; Equipment 12,000; Investments (short term) 25,444; Land 20,000; Notes payable 26,000; Retained earnings 12,815; Salaries expense 53,500; Service revenue 89,550; Supplies 2,750; Utility expense 12,689. PA21.

    LO 3.6Prepare an unadjusted trial balance, in correct format, from the following alphabetized account information. Assume all the accounts have normal balances.

    Accounts payable $26,000; Accounts receivable 8,000; Cash 29,000; Common stock 33,000; Dividends 9,000; Equipment 68,000; Notes payable (due next month) 29,000; Salaries expense 42,000; Salaries payable 2,000; Service revenue 75,000; Supplies 5,000; Transportation expense 4,000.

    Problem Set B

    PB1.

    LO 3.2Assuming the following account balances, what is the missing value?

    Assets $1,150,000; Liabilities 588,000; Equity ?. PB2.

    LO 3.2LO 3.4Assuming the following account balance changes for the period, what is the missing value?

    Assets $73,000; Liabilities 33,000; Common stock 10,000; Dividends 5,000; Revenue 120,000; Expenses ?. PB3.

    LO 3.2LO 3.4Assuming the following account balance changes for the period, what is the missing value?

    Assets ?; Liabilities $110,500; Common stock 60,000; Dividends 15,000; Revenue 785,000; Expenses 234,750. PB4.

    LO 3.2LO 3.4Identify the financial statement on which each of the following account categories would appear: the balance sheet (BS), the income statement (IS), or the retained earnings statement (RE).

    Financial statement Normal balance
    Accounts Receivable
    Automobile Expense
    Cash
    Equipment
    Notes Payable
    Service Revenue

    Table3.21

    PB5.

    LO 3.4Indicate what impact (+ for increase; – for decrease) the following transactions would have on the accounting equation, Assets = Liabilities + Equity.

    Transaction Impact 1 Impact 2
    A. Paid balance due for accounts payable
    B. Charged clients for legal services provided
    C. Purchased supplies on account
    D. Collected legal service fees from clients for current month
    E. Issued stock in exchange for a note receivable

    Table3.22

    PB6.

    LO 3.4Indicate how changes in these types of accounts would be recorded (Dr for debit; Cr for credit).

    Debit or credit?
    A. Asset accounts
    B. Liability accounts
    C. Common Stock
    D. Revenue
    E. Expense

    Table3.23

    PB7.

    LO 3.4Identify the normal balance (Dr for Debit; Cr for Credit) and type of account (A for asset, L for liability, E for equity, E-rev for revenue, E-exp for expense, and E-eq for equity) for each of the following accounts.

    Normal balance Account type
    A. Utility Expense
    B. Accounts Receivable
    C. Interest Revenue
    D. Retained Earnings
    E. Land
    F. Sales Revenue

    Table3.24

    PB8.

    LO 3.4Indicate the net effect (+ for increase; – for decrease; 0 for no effect) of each of the following transactions on each part of the accounting equation, Assets = Liabilities + Equity. For example, for payment of an accounts payable balance, A (–) = L (–) + E (0).

    1. Payment of principal balance of note payable
    2. Purchase of supplies for cash
    3. Payment of dividends to stockholders
    4. Issuance of stock for cash
    5. Billing customer for physician services provided
    PB9.

    LO 3.5Prepare journal entries to record the following transactions. Create a T-account for Cash, post any entries that affect the account, and calculate the ending balance for the account. Assume a Cash beginning balance of $37,400.

    1. May 12, collected balance due from customers on account, $16,000
    2. June 10, purchased supplies for cash, $4,444
    PB10.

    LO 3.5Prepare journal entries to record the following transactions. Create a T-account for Accounts Payable, post any entries that affect the account, and calculate the ending balance for the account. Assume an Accounts Payable beginning balance of $7,500.

    1. May 12, purchased merchandise inventory on account. $9,200
    2. June 10, paid creditor for part of previous month’s purchase, $11,350
    PB11.

    LO 3.5Prepare journal entries to record the following transactions that occurred in April:

    1. on first day of the month, issued common stock for cash, $15,000
    2. on eighth day of month, purchased supplies, on account, $1,800
    3. on twentieth day of month, billed customer for services provided, $950
    4. on twenty-fifth day of month, paid salaries to employees, $2,000
    5. on thirtieth day of month, paid for dividends to shareholders, $500
    PB12.

    LO 3.5Prepare journal entries to record the following transactions that occurred in March:

    1. on first day of the month, purchased building for cash, $75,000
    2. on fourth day of month, purchased inventory, on account, $6,875
    3. on eleventh day of month, billed customer for services provided, $8,390
    4. on nineteenth day of month, paid current month utility bill, $2,000
    5. on last day of month, paid suppliers for previous purchases, $2,850
    PB13.

    LO 3.5Post the following November transactions to T-accounts for Accounts Payable, Inventory, and Cash, indicating the ending balance. Assume no beginning balances in Accounts Payable and Inventory, and a beginning Cash balance of $21,220.

    1. purchased merchandise inventory on account, $9,900
    2. paid vendors for part of inventory purchased earlier in month, $6,500
    3. purchased merchandise inventory for cash, $4,750
    PB14.

    LO 3.5Post the following July transactions to T-accounts for Accounts Receivable, Sales Revenue, and Cash, indicating the ending balance. Assume no beginning balances in these accounts.

    1. sold products to customers for cash, $7,500
    2. sold products to customers on account, $12,650
    3. collected cash from customer accounts, $9,500
    PB15.

    LO 3.6Prepare an unadjusted trial balance, in correct format, from the following alphabetized account information. Assume all accounts have normal balances.

    Accounts payable $3,600; Accounts receivable 45,333; Building 156,000; Cash 50,480; Common Stock 110,000; Dividends 18,000; Equipment 33,500; Fees earned revenue 225,430; Land 18,000; Miscellaneous expense 5,123; Notes payable 85,500; Retained earnings 60,606; Salaries expense 151,900; Supplies 6,800.

    PB16.

    LO 3.6Prepare an unadjusted trial balance, in correct format, from the following alphabetized account information. Assume all accounts have normal balances.

    Accounts payable $18,000; Accounts receivable 4,000; Automobile 28,000; Cash 19,000; Common Stock 30,000; Dividends 16,000; Equipment 80,000; Insurance expense 8,000; Land 26,000; Notes payable (long term) 55,000; Salaries expense 37,000; Sales revenue 115,000. PB17.

    LO 3.6Prepare an unadjusted trial balance, in correct format, from the following alphabetized account information. Assume all accounts have normal balances.

    Accounts payable $3,600; Accounts receivable 45,333; Building 156,000; Cash 50,480; Common stock 110,000; Dividends 18,000; Equipment 33,500; Fees earned revenue 225,430; Land 18,000; Miscellaneous expense 5,123; Notes payable 85,500; Retained earnings 60,606; Salaries expense 151,900; Supplies 6,800. PB18.

    LO 3.6Prepare an unadjusted trial balance, in correct format, from the following alphabetized account information. Assume all accounts have normal balances.

    Accounts payable $18,000; Accounts receivable 4,000; Automobile 28,000; Cash 19,000; Common stock 30,000; Dividends 16,000; Equipment 80,000; Insurance expense 8,000; Land 26,000; Notes payable (long term) 55,000; Salaries expense 37,000; Sales revenue 115,000.

    Thought Provokers

    TP1.

    LO 3.1Is it possible to be too conservative? Explain your answer.

    TP2.

    LO 3.1Why is it important to learn all of this terminology when accounting is a quantitative subject?

    TP3.

    LO 3.2Assume that you are the controller of a business that provides legal services to clients. Suppose that the company has had a tough year, so the revenues have been lagging behind, based on previous years’ standards. What would you do if your boss (the chief executive officer [CEO] of the company) asked to reclassify a transaction to report loan proceeds of $150,000 as if the cash came from service fee revenue from clients instead. Would following the CEO’s advice impact the company’s accounting equation? How would reclassifying this one transaction change the outcome of the balance sheet, the income statement, and the statement of retained earnings? Would making this reclassification change the perception that users of the financial statements would have of the company’s current year success and future year potential?

    Write a memo, detailing your willingness (or not) to embrace this suggestion, giving reasons behind your decision. Remember to exercise diplomacy, even if you must dissent from the opinion of a supervisor. Note that the challenge of the assignment is to keep your integrity intact, while also keeping your job, if possible.

    TP4.

    LO 3.2Visit the website of the US Securities and Exchange Commission (SEC) (https://www.sec.gov/edgar/searchedga...anysearch.html). Search for the latest Form 10-K for a company you would like to analyze. Submit a short memo that

    1. Includes the name and ticker symbol of the company you have chosen.
    2. Reviews the company’s end-of-period Balance Sheet to determine the following:
      1. total assets
      2. total liabilities
      3. total equity
    3. Presents the company’s accounting equation at the end of the period, from the information you collected in (A), (B), and (C):
      1. provide the web link to the company’s Form 10-K to allow accurate verification of your answers
    TP5.

    LO 3.3Is the order in which we place information in the journal and ledger important?

    TP6.

    LO 3.4Visit the website of the SEC (https://www.sec.gov/edgar/searchedga...anysearch.html). Search for the latest Form 10-K for a company you would like to analyze. Submit a short memo that

    1. Includes the name and ticker symbol of the company you have chosen
    2. Reviews the company’s comparative Balance Sheet to gather the following information:
      1. Compare beginning and ending Assets totals, noting amount of change for the most recent period
      2. Compare beginning and ending Liabilities totals, noting amount of change for the most recent period
      3. Compare beginning and ending Equity totals, noting amount of change for the most recent period
    3. State the changes identified in (A), (B), and (C) in accounting equation format. If the “change” equation does not balance, explain why not. Hint: Double-check your calculations, and if the accounting equation change still does not balance, search for notes in the company’s files about prior period adjustments, which will often explain why balances may differ.
      1. Provide the web link to the company’s Form 10-K to allow accurate verification of your answers.
    TP7.

    LO 3.5Visit the website of the US Securities and Exchange Commission (SEC) (https://www.sec.gov/edgar/searchedga...anysearch.html). Search for the latest Form 10-K for a company you would like to. When you are choosing, make sure the company sells a product (has inventory on the Balance Sheet, and Cost of Goods Sold on the Income Statement). Submit a short memo:

    1. Include the name and ticker symbol of the company you have chosen.
    2. Follow the financial statement progression from the Income Statement to the Retained Earnings Statement to the Balance Sheet. Find the net income amount from the Income Statement and identify where it appears on the Statement of Retained Earnings (or the Statement of Stockholders’ Equity).
    3. On the statement found for instruction (A), find the ending retained earnings balance, and identify where it appears on the Balance Sheet for year-end.
    4. Provide the web link to the company’s Form 10-K to allow accurate verification of your answers.
    TP8.

    LO 3.6Analyze Trusty Company’s trial balance and the additional information provided to determine the following:

    1. what is causing the trial balance to be out of balance
    2. any other errors that require corrections that are identified during your analysis
    3. the effect (if any) that correcting the errors will have on the accounting equation
    Trusty Company, Trial Balance, Ending December 31, 2018. Debit accounts: Cash $77,500; Accounts receivable 5,600; Supplies 2,450; Equipment 11,200; Dividends 6,000; Advertising expense 4,350; Salaries expense 46,500; Total Debits $153,600. Credit accounts: Accounts payable $17,000; Notes payable 27,400; Common stock 20,000; Retained earnings 7,900; Service revenue 99,300; Total Credits $171,600.

    A review of transactions revealed the following facts:

    • A service fee of $18,000 was earned (but not yet collected) by the end of the period but was accidentally not recorded as revenue at that time.
    • A transposition error occurred when transferring the account balances from the ledger to the trial balance. Salaries expense should have been listed on the trial balance as $64,500 but was inadvertently recorded as $46,500.
    • Two machines that cost $9,000 each were purchased on account but were not recorded in company accounting records.

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