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Chapter 4
The Mechanics of Financial Accounting
Multiple Choice Questions
1. The accounting period is the time
a. the Controller decides to close the books.
b. between selling a product to a customer and collecting the cash from the customer.
c. that it usually takes to journalize and post events to the ledger.
d. covered by the income, cash flow, and shareholders’ equity statements.
Answer: D
2. An event that affects assets, liabilities, or shareholders’ equity is considered to be
a. timely.
b. objectively measured.
c. relevant.
d. capitalized.
Answer: C
3. An event for which an appropriate monetary measure can be derived is considered to be
a. objectively measured.
b. economically viable.
c. relevant.
d. capitalized.
Answer: A
4. If an event is considered to change assets, liabilities, or shareholders’ equity with an
appropriate monetary measure, then it is
a. considered a financial changing event.
b. listed on the U.S. stock exchange.

c. considered a debt or payable of a company.
d. recorded in the books of a company.
Answer: D
5. If assets are $1,000, liabilities are $600, and contributed capital is $200, then shareholders'
equity is
a. $400.
b. $1,500.
c. $700.
d. $300.
Answer: A
$1,000 - $600 = $400
6. Alberto Company paid its insurance premiums for a two-year insurance policy on May 1,
2009, and recorded them in a prepaid insurance account. The adjusting entry required at May
31, 2009, to recognize the one-month portion for the month of May will
a. increase an expense account and increase a liability account.
b. increase an expense account and decrease an asset account.
c. increase an asset account and decrease an expense account.
d. increase a revenue account and decrease an asset account.
Answer: B
7. Vera Company acquired a new forklift in exchange for signing a 6-month, 10%, $19,000
note dated May 1, 2009. Vera agreed to repay the entire principal at the end of the 6-month
period. Vera should:
a. record one month of interest expense only if the forklift runs as intended.
b. record all 6 months of expense when the interest is paid.
c. accrue one month of interest expense at May 31, 2009.
d. record the interest payments as prepaid interest when paid.

Answer: C
8. On May 31, 2009, the physical count of office supplies was $2,300. During June, supplies
were acquired at a cost of $1,600 and the company debited the Office Supplies Expense
account. At June 30, actual supplies on hand totaled $500. The credit part of the adjusting
entry required at the end of June is
a. Office Supplies Expense of $1,800.
b. Office Supplies of $1,800.
c. Office Supplies Expense of $3,300.
d. Office Supplies of $500.
Answer: B
9. Liabilities are $2,000, retained earnings are $1,000, and contributed capital is $4,000.
Assets must be
a. $3,000.
b. $7,000.
c. $5,000.
d. $6,000.
Answer: B
$2,000 + $1,000 + $4,000 = $7,000
10. Which one of the following changes describes the receipt of $2,000 from the issuance of
common stock?
a. Assets and shareholders’ equity increase by $2,000.
b. Assets and shareholders’ equity decrease by $2,000.
c. Assets and liabilities increase by $2,000.
d. Assets increase and shareholders’ equity decreases by $2,000.
Answer: A
11. A revenue account

a. is increased with a debit.
b. is not considered to be an item on the income statement.
c. is reported on the balance sheet at the end of the accounting period.
d. when offset with expenses ultimately leads to net income and an increase to retained
earnings.
Answer: D
12. The declaration of dividends
a. increases with a credit.
b. decreases retained earnings.
c. is necessary for proprietorships.
d. is an expense account on the income statement.
Answer: B
13. Which one of the following changes describes the receipt of $3,000 from the issuance of a
long-term note payable?
a. Assets and shareholders’ equity increase by $3,000.
b. Assets and shareholders’ equity decrease by $3,000.
c. Assets and liabilities increase by $3,000.
d. Assets and liabilities decrease by $3,000.
Answer: C
14. Which of the following changes describes the purchase of $2,000 of inventory through
payment on credit?
a. Assets and shareholders’ equity increase by $2,000.
b. Assets and shareholders’ equity decrease by $2,000.
c. Assets and liabilities increase by $2,000.
d. Assets and liabilities decrease by $2,000.

Answer: C
15. Providing $4,000 of services to customers on account causes
a. assets and shareholders’ equity to decrease by $4,000.
b. assets and shareholders’ equity to increase by $4,000.
c. assets and liabilities to increase by $4,000.
d. assets and liabilities to decrease by $4,000.
Answer: B
16. Which of the following changes describes the payment of $1,000 for cash dividends?
a. Assets and shareholders’ equity increase by $1,000.
b. Assets and shareholders’ equity decrease by $1,000.
c. Assets and liabilities increase by $1,000.
d. Assets and liabilities do not change.
Answer: B
17. The balance sheet reported supplies of $1,900 at December 31, 2009. On December 31,
2010, the actual supplies on hand amounted to $1,400. During the year, additional supplies
costing $1,500 were acquired and debited to the Supplies account. The adjusting entry
required at the end of December 31, 2010 is

Answer: D
18. Which of the following changes describes the purchase of $3,000 of equipment financed
by the issuance of a long-term note payable?

a. Assets and shareholders’ equity increase by $3,000.
b. Assets and shareholders’ equity decrease by $3,000.
c. Assets and liabilities decrease by $3,000.
d. Assets and liabilities increase by $3,000.
Answer: D
19. Acacia Company provided landscaping services and received $2,000 from customers
immediately. Which of the following occurred?
a. Assets and shareholders’ equity increase by $2,000.
b. Assets and shareholders’ equity decrease by $2,000.
c. Assets and liabilities increase by $2,000.
d. Assets and liabilities decrease by $2,000.
Answer: A
20. Lakesha Corp. purchased $2,000 of supplies on account. The supplies will be used over
the next few months. This event causes
a. assets and shareholders’ equity to increase by $2,000.
b. assets and shareholders’ equity to decrease by $2,000.
c. assets and expenses to decrease by $2,000.
d. assets and liabilities to increase by $2,000.
Answer: D
21. Which one of the following changes describes the payment of $800 for utilities for the
current month?
a. Assets and shareholders’ equity decrease by $800.
b. Assets and shareholders’ equity don’t change.
c. Assets and liabilities increase by $800.
d. Assets and liabilities decrease by $800.

Answer: A
22. Which of the following changes describes the payment of $20,000 for a new bulldozer?
a. Assets and shareholders’ equity decrease by $20,000.
b. Assets decrease and shareholders’ equity increases by $20,000.
c. No net change in total assets.
d. Assets decrease by $20,000.
Answer: C
23. Which of the following changes describes the collection of $6,000 from customers who
had charged on account for services preformed during a previous accounting period?
a. Assets and shareholders’ equity increase by $6,000.
b. Assets and liabilities increase by $6,000.
c. Assets and liabilities decrease by $6,000.
d. No changes in total assets, liabilities, or shareholders’ equity.
Answer: D
24. Employees were paid $8,000 on June 9, 2010 for five days work through Friday, June 3.
What adjusting entry was necessary at the company’s year end, Tuesday, May 31, 2010, as a
result of this?
a. Debit Wages Expense and credit Cash for $8,000
b. Debit Wages Expense and credit Shareholders’ equity for $4,800.
c. Debit Wages Payable and credit Wages Expense for $4,800.
d. Debit Wages Expense and credit Wages Payable for $3,200.
Answer: D
25. Which of the following changes describes the distribution of $2,000 of dividends to
owners?
a. Assets and net income decrease by $2,000.

b. Assets decreases and net income increases by $2,000.
c. Assets and shareholders’ equity decrease by $2,000.
d. Assets and liabilities decrease by $2,000.
Answer: C
26. An expense account
a. is increased with a credit.
b. ultimately decreases shareholders’ equity.
c. appears on the balance sheet at the end of the accounting period.
d. is not an income statement account.
Answer: B
27. In a trial balance, if total debits do not equal total credits when the accounts are totaled,
a. the bookkeeper must have made an error.
b. the expected inequality is corrected during the normal adjusting process.
c. no change is made because the amount of assets will typically exceed the amount of
liabilities.
d. the company will report a loss on its income statement because expenses are greater than
revenues.
Answer: A
28. Marks Corp. purchased supplies at a cost of $2,400 during 2010. At January 1, 2010,
supplies on hand amounted to $800. At December 31, 2010, supplies on hand are $400.
Supplies expense for 2010 are
a. $1,200.
b. $3,200.
c. $1,600.
d. $2,800.

Answer: D
29. On December 13, 2009, Michael Company received $8,000 in cash as a payment in
advance from a customer and credited Unearned Service Revenue. The balance in the
Unearned Service Revenue account was $2,000 at the beginning of December. At the end of
December, all but $500 had been earned. What adjusting entry is necessary at the end of
December?

Answer: C
30. Which of the following describes the receipt of $5,000 from the issuance of common
stock?
a. No entry
b. Debit shareholders’ equity and credit assets for $5,000
c. Debit assets and credit shareholders’ equity for $5,000
d. Debit liabilities and credit assets for $5,000
Answer: C
31. Which of the following debits and credits describes the payment of interest and principal
on a loan?
a. Debit an asset and credit a liability
b. Debit an asset, debit an expense, and debit a liability
c. Credit an asset, debit an expense, and debit a liability
d. Credit an asset and debit a liability
Answer: C

32. Favre Company paid for insurance in advance. Which transaction will Favre record?
a. Debit Cash and credit Insurance Expense.
b. Debit Prepaid Insurance and credit Cash.
c. Debit Prepaid Insurance and credit Accounts Payable.
d. Debit Cash and Credit Prepaid Insurance.
Answer: B
33. A company has a 4-month, 11%, $10,000 Notes Payable account in its general ledger at
the end of the year. The note matures two months after the end of the accounting period.
Which statement is True?
a. Interest revenue must be accrued at the end of the accounting period.
b. The notes payable could generate a gain if the note is paid off early.
c. The interest was paid when the cash was borrowed.
d. Interest expense must be accrued at the end of the accounting period.
Answer: D
34. Gilbert Company purchased equipment financed by the issuance of a 4-year note payable.
To record this, Gilbert will
a. debit assets and credit shareholders’ equity.
b. debit shareholders’ equity and credit liabilities.
c. debit assets and credit liabilities.
d. debit liabilities and credit assets.
Answer: C
35. Goodyear Co. purchased $2,000 of equipment with a $2,000 cash payment. Goodyear Co.
should
a. debit one asset and credit another asset for $2,000..
b. debit shareholders’ equity and credit assets for $2,000.

c. debit assets and credit liabilities for $2,000.
d. no entry
Answer: A
36. Buckeye Company received $1,000 from customers for services provided during the
current month. Buckeye will
a. debit liabilities and credit revenue for $1,000.
b. debit revenue and credit assets for $1,000.
c. debit assets and credit revenue for $1,000.
d. debit liabilities and credit assets for $1,000.
Answer: C
37. When an adjusting entry for depreciation expense for the accounting period is recorded,
a. assets and shareholders’ equity increase.
b. the amount of depreciation expense is subtracted from accumulated depreciation.
c. assets and shareholders’ equity decrease.
d. assets increase and shareholders’ equity decreases.
Answer: C
38. An asset account
a. has a debit balance.
b. is increased with a credit.
c. is a shareholders’ equity account because it has a book value.
d. will have a negative balance if the company’s expenses exceed revenues for the period.
Answer: A
39. When making adjustments to plant asset accounts,
a. the total dollar amount in the accumulated depreciation account will determine the amount
of depreciation expense for the current accounting period.

b. depreciation expense is added to the plant asset account.
c. depreciation expense reduces net income.
d. the current market value of the long-lived asset determines the amount of depreciation
expense.
e. the accrual system is ignored.
Answer: C
40. During April, Tempe Corp. paid $4,000 on account for supplies that were purchased,
recorded, and used during March. In recording this transaction, Tempe will
a. debit Accounts Payable and credit Cash.
b. debit Shareholders’ equity and credit Accounts Payable.
c. debit Supplies Expense and credit Accounts Payable.
d. accrue an expense of $4,000.
Answer: A
41. When an adjusting entry that recognizes accrued interest revenue is recorded,
a. assets increase and liabilities increase.
b. shareholders’ equity increases and liabilities decrease.
c. assets decrease and liabilities decrease.
d. shareholders’ equity and assets increase.
Answer: D
42. All of the following statements are True except:
a. All economic events recorded in financial statements must be relevant.
b. All economic events recorded in financial statements must affect liabilities.
c. All economic events recorded in financial statements must be objectively measurable in
monetary terms.

d. All economic events recorded in financial statements must maintain the equality of the
accounting equation.
Answer: B
43. If the balance sheet is in balance,
a. assets must equal liabilities.
b. assets must exceed liabilities.
c. transactions recorded must be right.
d. errors may still exist.
Answer: D
44. Items and rights that a company acquires through objectively measurable transactions that
can be used in the future to generate economic benefits are
a. liabilities.
b. assets.
c. contributing capital.
d. revenues.
Answer: B
45. Scottsdale Corp. received several invoices in the mail for oil changes performed on its
company trucks during the last week of April. The total of the invoices was $800 and all are
due on May 13. What entry should Scottsdale make at April 30 as a result of receiving the
invoices?
a. Debit Accounts Receivable and credit Cash for $800.
b. Debit Maintenance Expense and credit Accounts Payable for $800.
c. Debit Maintenance Expense and credit Cash for $800.
d. Debit Prepaid Maintenance and credit Cash for $800.
Answer: B
46. Shareholders’ equity increases because of two primary reasons, which are the

a. sale of stock and the earning of income.
b. earning of income and the payment of dividends.
c. payment of dividends and payment of expenses.
d. collection of cash from customers and the payment of expenses to creditors.
Answer: A
47. Dobson Company sold stock for cash and received cash for services performed during the
current month. Which of the following summarizes the income statement impact of these
transactions for the current month?
a. Both the sale of stock and the performance of services increased revenues for the company.
b. Only the performance of services caused an increase in revenues.
c. Only the performance of services caused a decrease in revenues.
d. Only the sale of stock caused revenues to increase.
Answer: B
48. Subdivisions of assets, liabilities, and shareholders’ equity are called
a. revenues.
b. accounts.
c. contributed capital.
d. journals.
Answer: B
49. Which of the following sets of accounts is closed at the end of an accounting period?
a. Interest Expense, Interest Payable, Interest Receivable
b. Unearned Revenue, Sales Revenue, Interest Revenue
c. Interest Expense, Rent Revenue, Dividends
d. Retained Earnings, Sales Revenue, Unearned Revenue
Answer: C

50. The statement of cash flows provides information about
a. operating activities.
b. financing activities.
c. investing activities.
d. all of the above.
Answer: D
51. Phoenix Corp. paid rent of $12,000 per month for 3 months in advance on November 1,
2010. Phoenix accounting period ends on December 31, 2010. Which amount will be
reported at December 31, 2010?
a. Prepaid Rent of $4,000 on its December 31, 2010 balance sheet
b. Rent Payable of $12,000 on its December 31, 2010 balance sheet
c. Rent Expense of $12,000 on its income statement for the year ending December 31, 2010
d. Rent Expense of $4,000 on its income statement for the year ending December 31, 2010
Answer: A
52. Which one of the following is a characteristic of the double entry system?
a. For every debit in every account, there must be a corresponding credit of the same dollar
amount in the same account.
b. The total dollar value of debits must equal the total dollar amount of the credits in most of
the accounts.
c. For every asset recorded in the accounting records, there must be a corresponding liability
of the same dollar amount.
d. The total dollar amount of debits must equal the total dollar amount of the credits.
Answer: D
53. The statement of shareholders’ equity is a record of activity over a period of time of the
a. contributed capital accounts.
b. retained earnings account.

c. dividends account.
d. both a and b.
Answer: D
54. Journal entries are used to indicate how
a. much profit was earned during the accounting period.
b. events affect the retained earnings account.
c. events affect the accounting equation.
d. much dividends were paid to shareholders.
Answer: C
55. The accounting concepts that underlie the accrual system of accounting are
a. debits and credits.
b. revenue recognition and matching.
c. revenue recognition and debits equal credits.
d. matching and deferrals.
Answer: B
56. Recognition of a gain or loss may result from
a. the sale of goods to customers on account.
b. the sale of a company's common stock to an investor.
c. the sale of a non-current asset.
d. the revenue recognition process associated with selling products to customers.
Answer: C
57. Which one of the following transactions will ultimately cause a decrease in retained
earnings?
a. Payment of the current month's telephone bill
b. Collection of cash from a customer for services provided in the current month

c. Payment of the prior month’s account payable balance
d. Receipt of interest on a note receivable
Answer: A
58. What effect does recognizing accrued wages expense at the end of the accounting period
have on the accounting equation?
a. Assets decrease and shareholders’ equity decreases.
b. Liabilities increase and shareholders’ equity decreases.
c. Assets decrease and liabilities decrease.
d. Liabilities decrease and shareholders’ equity decreases.
Answer: B
59. A company sold vacant land that it had owned for three years. The difference between the
amount of cash receipts and the original cost of land owned by the company
a. is reported as a revenue or expense on the income statement.
b. represents the amount of gain or loss associated with the asset sold.
c. represents the amount of cash associated with the asset sold.
d. should be debited or credited directly to retained earnings.
Answer: B
60. What effect does recognizing revenue at the end of the accounting period for rent
received in advance have on the accounting equation?
a. Revenues increase and liabilities decrease.
b. Assets increase and shareholders’ equity increases.
c. Revenues decrease and liabilities decrease.
d. Liabilities increase and revenues decrease.
Answer: A
61. Which one of the following statements is True?

a. Accruals are adjustments that are recorded prior to the associated cash flow taking place.
b. Cash is used in the accrual process.
c. Accrual accounting recognizes revenues and expenses based on current period cash flows.
d. Accrual accounting may use either two asset or two liability accounts.
Answer: A
62. Which one of the following is a required characteristic of accruals and deferrals?
a. An asset or a liability will always be affected.
b. Cash is either increased or decreased as a result of recording an accrual or deferral.
c. Accruals record revenues, and expenses record deferrals.
d. An asset and an expense item will always be affected.
Answer: A
63. The main purpose of the adjusting process is
a. to remove the effects of all transactions recorded during the accounting period.
b. to make the account balances reflect the company’s True position according to the
guidelines of accrual accounting.
c. to get the accounting records ready for a new accounting period.
d. to identify the amount of cash available for dividends to be paid.
Answer: B
64. The biggest distinction between accruals and deferrals is
a. one emphasizes conservatism while the other promotes aggressive accounting positions.
b. how long a company must wait until the collection of cash occurs.
c. with accruals, no record of the activity has been made prior to the adjustment process, and
with deferrals, the activity has already been recorded in the accounting records, but the proper
amount of revenue or expense has not been recognized.

d. adjustments are necessary for accruals, whereas, adjustments are not necessary for
deferrals.
Answer: C
65. Closing entries result in net income being transferred to
a. a revenue account.
b. the cash account.
b. the contributed capital account.
d. the retained earnings account.
Answer: D
66. A multinational is
a. a company that prepares accruals and deferrals throughout the year as well as yearend.
b. a corporation that has no home country due to operations in several countries.
c. a corporation that has its home in one country but operates under the laws of other
countries as well.
d. a type of adjusting entry necessary for companies that trade with corporations in other
countries.
Answer: C
67. On December 31, 2010, immediately after all the adjustments were made to Kingman
Corp’s accounting records for the 2010 fiscal year, but before the books were closed, the
retained earnings account reflected a balance of $50,000. Kingman Corp’s net income for
2010 was $12,000. Kingman paid no dividends during 2010. On the balance sheet for January
1, 2011, the beginning balance in the retained earnings account will be
a. $0
b. $62,000
c. $48,000
d. $50,000

Answer: B
68. On December 31, 2010, immediately after all the adjustments were made to Gilbert Inc.’s
accounting records for the 2010 fiscal year, but before the books were closed, the retained
earnings account reflected a deficit balance of $80,000. The sum of the pre-closing balances
of all of Gilbert’s temporary accounts was a net credit balance of $18,000. Gilbert paid no
dividends during 2010. On the balance sheet for January 1, 2011, the beginning balance in the
retained earnings account will be
a. $0
b. $62,000 debit
c. $80,000 credit
d. $98,000 credit
Answer: B
69. On December 13, 2010, Tucson Corp. paid $24,000 for a two year property insurance
policy covering their corporate headquarters for the period December 15, 2010 to December
15, 2012. The payment was charged to insurance expense. What adjusting entry is needed at
the end of December?

Answer: B
70. During Bisbee’s first year of business, office supplies were purchased for cash in the
amount of $4,300 and the amount was debited to supplies expense. At the end of the first
year, the physical count indicated that $425 of supplies was unused. How much should be
reported on the income statement at year end for office supplies expense?
a. $4,300

b. $3,875
c. $4,725
d. $425
Answer: B
Office Supplies Expense = $4,300 – $425 = $3,875
Office Supplies = $425 (Unused supplies are reported on the balance sheet.)
71. During Bisbee’s first year of business, office supplies were purchased for cash in the
amount of $4,300 and the amount was debited to supplies expense. At the end of the first
year, the physical count indicated that $425 of supplies was unused. How much should be
reported on the balance sheet for office supplies?
a. $4,300
b. $3,875
c. $4,725
d. $425
Answer: D
Office Supplies Expense = $4,300 – $425 = $3,875
Office Supplies = $425 (Unused supplies are reported on the balance sheet.)
72. On January 1, Wages Payable for Flagstaff Company equals $18,500. By the end of the
current year, Wage Expense equals $345,000, and cash payments for wages were $353,200.
What is the balance in the T-account, Wages Payable, on December 31?
a. $17,500
b. $8,200
c. $25,700
d. $10,300
Answer: D

73. On July 1, 2010, Erie Company rented a building from another company for $90,000 for a
three-year time period. Erie Company debited the rent expense account when the payment
was made. What adjustment for rent is necessary at December 31, 2010?
a. $20,000
b. $40,000
c. $75,000
d. $80,000
Answer: C

74. Meadville, Inc. began operations during 2010. During January of 2010, the following
transactions occurred:
Received $80,000 from shareholders as initial investments
Received cash of $90,000 for services performed during January
Billed customers an additional $12,300 for services performed during January
Borrowed $11,500 from Regions Bank Company, and signed a one-year note payable
Paid rent in the amount of $4,925 for January
Paid dividends in January amounting to $8,000
Paid wages equal to $33,220 for January
How much Net Income should Meadville, Inc. report for January?
a. $119,655
b. $64,155
c. $131,155

d. $51,155
Answer: B
$90,000 + $12,300 – $4,925 – $33,220 = $64,155
75. On August 1, Amy Company borrowed $38,000 from another company on a 6%, one-year
note. The journal entry that Amy would record on August 1 would include which of the
following?
a. A debit to Notes Receivable for $38,000.
b. A credit to Cash for $38,000.
c. A credit to Notes Payable for $38,000.
d. A debit to Interest Expense for $2,220.
Answer: C

76. On August 1, Amy Company borrowed $38,000 from another company on a 6%, one-year
note. The journal entry on December 31 would include which of the following?
a. A debit to Notes Payable for $38,000.
b. A debit to Interest Receivable for $950.
c. A credit to Interest Payable for $2,220.
d. A debit to Interest Expense for $950.
Answer: D

77. If accounts receivable on January 1 totals $17,375, and during the current year sales
revenue is $112,000, and cash receipts from customers is $97,855, then what is the balance in
Accounts Receivable on December 31?

a. $14,145
b. $16,375
c. $31,520
d. $2,230
Answer: C
$17,375 + $112,000 – $97,855 = $ 31,520
78. Able Industries has the following information is related to its adjusting entries at the end
of December.
On December 31, 2010, the insurance expired amounted to $100.
Of the unearned revenue, $335 of services had been performed.
What is the net effect that the necessary adjusting entries for this information have on net
income for Able?
a. $435 increase.
b. $435 decrease.
c. $235 increase.
d. $235 decrease.
Answer: C
Decrease in net income for $100.
Increase in net income for $335.
Results are a net increase of $235.
79. Able Industries has the following information is related to its adjusting entries at the end
of December.
Services have been performed for customers that have not yet been billed or paid totaling
$100.
The office equipment computation for 2010 depreciation amounts to $480.

What is the net effect that the necessary adjusting entries for this information have on net
income for Able?
a. $380 increase.
b. $380 decrease.
c. $580 increase.
d. $580 decrease.
Answer: B
Increase in net income for $100.
Decrease in net income for $480.
Results are a net decrease of $380.
80. Interest receivable on January 1 and December 31 totals $3,780 and $3,450, respectively.
During the year, cash received from interest is $11,000. Determine interest revenue for the
current year.
a. $3,115
b. $1,330
c. $12,330
d. $10,670
Answer: D
$3,450 + $11,000 – $3,780 = $10,670
81. Accounts receivable on January 1 and December 31 is $19,500 and $22,400, respectively.
During the year, sales revenue is $223,000. What is the current year's cash received from
customers?
a. $3,900
b. $263,900
c. $220,100
d.$226,900

Answer: C
$19,500 + $223,000 – $22,400 = $220,100
82. Inventory on January 1 and December 31 is $29,500 and $43,000, respectively. During
the year, cash paid to suppliers of inventory is $80,000. If all purchases of inventory are for
cash, how much is the current year's cost of goods sold?
a. $14,500
b. $66,500
c. $94,500
d. $151,500
Answer: B
$29,500 + $80,000 – $43,000 = $66,500
83. Inventory on January 1 and December 31 is $46,000 and $42,000, respectively. Accounts
payable on January 1 and December 31 are $31,000 and $29,000, respectively. During the
year, cost of goods sold is $186,000. How much is the current year's cash payments to
suppliers of inventory?
a. $184,000
b. $213,000
c. $181,000
d. $191,000
Answer: A
$46,000 – $31,000 + $29,000 – $42,000 – $186,000 = $184,000
84. Retained earnings on January 1 and December 31 are $65,000 and $58,000, respectively.
During the year, net income is $113,000. How much dividends did the company declare and
pay to the shareholders?
a. $177,000
b. $171,000

c. $107,000
d. $120,000
Answer: D
$65,000 + $113,000 – $58,000 = $120,000
Matching Questions
For each transaction numbered 1 through 12 below, identify its effect on the accounting
equation by selecting from a through h below. You may use each letter more than once or not
at all.

Answer:

1. g
2. a
3. a
4. b
5. a
6. c
7. d
8. c
9. f
10. f
11. h
12. f
2. For each transaction numbered 1 through 7 below, identify the effect (a through g) on the
accounting equation by placing the letter of the effect in the space provided. You may use
each letter more than once or not at all.

Answer:
1. f
2. e
3. b
4. f
5. c
6. d
7. d
3. For each of the transactions listed in 1 through 5 below, indicate whether it involves a
deferral (D) or an accrual (A) by placing the letter of the correct response in the space
provided.

Answer:
1. D
2. D
3. D
4. A
5. A
4. For each transaction numbered 1 through 6, identify its effect on the accounting equation
by selecting from a through h below. You may use each letter more than once or not at all.

____ 1. Received cash in exchange for the issue of common stock
____ 2. Received cash in exchange for the issue of a note payable
____ 3. Purchased building and land in exchange for a mortgage note payable
____ 4. Purchased computer equipment for cash
____ 5. Purchased computer supplies on account
____ 6. Provided computer services to customers for cash
Answer:
1. g
2. a
3. a
4. b
5. a
6. c
5. For each transaction numbered 1 through 5 below, identify the effect (a through h) on the
accounting equation by placing the letter of the effect in the space provided. You may use
each letter more than once or not at all.

Answer:
1. g
2. c
3. f
4. f
5. h
6. The accounts for Jalisa Company are listed below, identified by number. Following the list
of accounts is a series of adjusting entries (a through f) prepared by Jalisa Company. For each
entry, identify the number(s) of the accounts to be debited and credited and place them in the
space provided adjacent to each adjusting entry.

Answer:
a. 2, 14
b. 17, 9
c. 15, 4
d. 18, 6
e. 16, 7
f. 19, 8
Short Problems
1. Total assets, liabilities, and shareholders' equity are $7,000, $5,000, and $1,000 before a
new machine is purchased for $500 cash. What are the new amounts of assets, liabilities, and
shareholders' equity after this event?
Answer: Assets = $7,000
Liabilities = $5,000
Shareholders' equity = $1,000

2. Total assets, liabilities, and shareholders' equity are $14,000, $7,000, and $7,000 before a
new copy machine is purchased in exchange for a $1,000 note payable. What are the new
amounts of assets, liabilities, and shareholders' equity after this event?
Answer: Assets = $15,000
Liabilities = $8,000
Shareholders' equity = $7,000
3. Total assets, liabilities, and shareholders' equity are $5,000, $1,500, and $3,500 before
common stock is issued for $500 cash. What are the new amounts of assets, liabilities, and
shareholders' equity after this event?
Answer: Assets = $5,500
Liabilities = $1,500
Shareholders' equity = $4,000
4. Total assets, liabilities, and shareholders' equity are $6,000, $4,000, and $2,000 before
$1,000 is received in exchange for a $1,000 bond payable. What change occurred to
liabilities? Why is there no change in shareholders' equity?
Answer: Liabilities increased by $1,000, up to a total of $5,000. No change occurred to
shareholders’ equity because the company acquired an additional asset, cash of $1,000. The
transaction does not affect shareholders’ equity.
5. Mingo Company has been in business several years. During January of 2010, the following
transactions occurred:

Paid employees $6,000 for wages during January.

Paid $2,000 cash for other operating expenses of which $1,000 related to December
and the balance related to January.

Paid utilities and rent for January in the amount of $1,800.

Paid a cash dividend to shareholders in the amount of $900 during January.

How much is total Expenses that Mingo Company will report for January 2010? Why is this
amount different than the amount paid during the month?
Answer: $6,000 + $1,000 + $1,800 = $8,800

This amount differs due to the fact that expenses are calculated on the accrual basis and the
cash paid does not reflect the timing of when the amounts were incurred. In addition,
dividends are not expenses.
6. Ohio Company, a corporation, began operations on December 1, 2010. During January of
2011, the following transactions occurred:

Billed customers $12,000 for services performed during January.

Received payment from customers in the amount of $6,000 for services performed
and billed in December.

Received cash of $7,000 for services performed during January for customers who
paid cash immediately. (No bills were mailed.)

A. How much total Revenue should Ohio Company report for January, 2011?
B. Determine the increase in cash during January of 2011 as a result of these transactions.
Answer:A, $12,000 + $7,000 = $19,000
B. $6,000 + $7,000 = $13,000
7. During the first year of business, office supplies were purchased for cash in the amount of
$2,000 and the amount was debited to supplies expense. At the end of the first year, the
physical count indicated that $500 of supplies was unused. How much should be reported on
the income statement at year end for office supplies expense? On the balance sheet for office
supplies?
Answer:Supplies expense = $2,000 – $500 = $1,500
Office Supplies = $500 (Unused supplies are reported on the balance sheet.)
8. Total assets, liabilities, and shareholders’ equity are $4,000, $1,000, and $3,000 before
current period wages of $200 are paid. What are the new amounts of assets, liabilities, and
shareholders' equity after this event?
Answer: Assets = $3,800
Liabilities = $1,000
Shareholders' equity = $2,800

9. Wages Payable on January 1 equals $12,000. By the end of the current year, Wage Expense
equals $420,000, and cash payments for wages were $424,000. What is the balance in the Taccount, Wages Payable, on December 31?
Answer:

10. When a landlord records rent received in advance from a tenant in a revenue account, the
adjusting entry required at year end to allocate the rent to the proper periods has an impact on
financial statement elements. What effect (increase, decrease, no effect) does the required
adjustment have on each of the following elements?

Answer:

11. Total assets, liabilities, and shareholders' equity are $15,000, $6,000, and $9,000 before a
$2,000 note payable is paid. Determine the new amounts of assets, liabilities, and
shareholders' equity after this event?
Answer: Assets = $15,000 – $2,000 = $13,000
Liabilities = $6,000 – $2,000 = $4,000
Shareholders' equity = $9,000 – no change
12. Houston Times Publishing Inc. sells two-year magazine subscriptions. Cash receipts from
subscribers are credited to Unearned Subscriptions. On December 31, 2010, immediately
before the company made adjusting entries, the Unearned Subscriptions account had a

balance of $8,000. Outstanding subscriptions relating to magazines that have not been
delivered as of December 31, 2010, will be mailed to customers as follows:

At December 31, 2010, what amount should Houston Times Publishing Inc. report as the
balance for Unearned Subscriptions? Where should this amount be reported?
Answer: Unearned Subscriptions at December 31, 2010: $3,800 + $2,200 = $6,000
The Unearned Subscriptions should be reported on the balance sheet as a liability.
13. Total assets, liabilities, and shareholders' equity are $22,000, $5,000, and $17,000 before
land costing $10,000 is purchased in exchange for a $1,000 note payable and $9,000 cash.
During the year, the company earned $50,000 of revenues of which only $45,000 was
collected. Expenses totaling $44,000 were incurred, but $2,000 of this had not been paid by
the end of the year. Show the amounts that would be reported on the accounting equation as a
result of these transactions.
Answer:

14. Marian Company collected $8,000 cash in advance during March for services to be
performed in April and May. At the end of April an adjusting entry was made to debit
Unearned Revenue and credit Service Revenue for $4,200. The ending balance in the
Unearned Revenue account was $3,800.
A. What entry was made during March when the original $8,000 was collected?
B. How much will Marian report on its balance sheet as a liability at the end of April as a
result of the transactions?
Answer:

15. On October 1, 2010, Edinboro Company rented a building from another company for
$90,000 for a two-year time period. Edinboro Company debited the rent expense account on
October 1 when the payment was made. What adjustment for rent is necessary at December
31, 2010?
Answer:

16. On January 1, 2010, Somerville Co. received $3,600 for a three-year service subscription.
Somerville credited a revenue account on January 1 for the cash received. What adjusting
entry must be made on December 31, 2010?
Answer:

17. If interest payable on January 1 is $3,000, and during the current year interest expense is
$62,000, and cash payments for interest is $63,000, then what is the balance in the T-account,
Interest Payable, on December 31?
Answer: $3,000 + $62,000 – $63,000 = $2,000
18. Dena, Inc. began operations during 2010. During January of 2010, the following
transactions occurred:

Received $80,000 from shareholders as initial investments

Received cash of $50,000 for services performed during January

Billed customers an additional $12,000 for services performed during January

Borrowed $12,000 from NationsBank Company, and signed a one-year note payable

Paid rent in the amount of $5,000 for January

Paid dividends in January amounting to $8,000

Paid wages of $35,000 for January

How much Net Income should Dena, Inc. report for January?
Answer: $50,000 + $12,000 – $5,000 – $35,000 = $22,000
19. On July 1, Sanders, Inc. borrowed $12,000 from another company on a 12%, one-year
note. Prepare the journal entries to record the note on July 1 and to accrue interest on
December 31.
Answer:

20. If interest payable on January 1 is $1,000, and during the current year interest is accrued
for $2,200, and cash payments for interest amount to $2,000, then what is the balance in the
T-account, Interest Expense, on December 31?
Answer: $2,200
21. If accounts receivable on January 1 totals $21,000, and during the current year sales
revenue is $300,000, and cash receipts from customers is $296,000, then what is the balance
in Accounts Receivable on December 31?
Answer: $21,000 + $300,000 – $296,000 = $25,000
22. Interest receivable on January 1 is $5,000. During the current year interest revenue is
$65,000, and cash receipts from interest is $60,000. How much is the balance of Interest
Receivable on December 31?
Answer: $5,000 + $65,000 – $60,000 = $10,000
23. Retained earnings on January 1 was $27,000. During the current year net income is
$160,000. Cash payments for dividends declared totals $145,000. What is the retained
earnings balance on December 31?
Answer: $27,000 + $160,000 – $145,000 = $42,000

Use the information that follows taken from the unadjusted accounting records of Sheena,
Inc. for the year ending December 31, 2010 to answer problems 24 through 26.

The following information is needed for adjusting entries at the end of December.
a. On December 31, 2010, the insurance expired amounted to $80.
b. Of the unearned revenue, $250 of services had been performed.
c. Services have been performed for customers that have not yet been billed or paid totaling
$180.
d. The office equipment computation for 2010 depreciation amounts to $200.
24. What is the effect on net income of each of the adjusting entries necessary for Sheena,
Inc.?
Answer:

25. How much net income will Sheena report for the year ending December 31, 2010?
Answer:

26. Determine total liabilities for Sheena, Inc. for the year ending December 31, 2010.
Answer:

27. Interest receivable on January 1 and December 31 totals $4,800 and $3,600, respectively.
During the year, cash received from interest is $15,000. Determine interest revenue for the
current year.
Answer: $3,600 + $15,000 – $4,800 = $13,800
28. Accounts receivable on January 1 and December 31 is $18,000 and $21,500, respectively.
During the year, sales revenue is $260,000. What is the current year's cash received from
customers?
Answer: $18,000 + $260,000 – $21,500 = $256,500
29. Inventory on January 1 and December 31 is $41,500 and $47,000, respectively. During
the year, cash paid to suppliers of inventory is $100,000. If all purchases of inventory are for
cash, how much is the current year's cost of goods sold?
Answer: $41,500 + $100,000 – $47,000 = $94,500
30. Inventory on January 1 and December 31 is $40,000 and $35,000, respectively. Accounts
payable on January 1 and December 31 are $25,000 and $29,000, respectively. During the
year, cost of goods sold is $190,000. How much is the current year's cash payments to
suppliers of inventory?
Answer: $40,000 – $25,000 + $29,000 – $35,000 – $190,000 = $181,000

31. The following are amounts from the accounting records of Farley Company before
adjusting entries have been for the year ending December 31, 2010.

The following adjustments have not been made as of December 31, 2010:
1. Wages accrued on 12/31/10 amounts to $1,100.
2. Three months' interest on the note payable has not been paid or recognized.
3. Depreciation for 2010 amounts to $3,000.
4. Supplies on hand at 12/31/10 amounts to $700.
Prepare Farley’s balance sheet at December 31, 2010 after the adjusting process is completed.
Omit the heading.
Answer:

32. Given below is the Accounts Receivable T-account. Accounts receivable on January 1
was $1,700. During the year, customers charged on account sales totaling $255,000. The
current year's cash received from customers is $250,000. Post all amounts to this account and
calculate the account balance.

Answer: Debits of $1,700 and $255,000. Credit of $250,000. Balance is $6,700.
33. Lebron Company provides you, its auditor, with the following information that pertains to
its income for the year ending December 31, 2010:

After you review the process Lebron used to derive this income statement, you discover that
the company had omitted adjusting entries on December 31, 2010. The following adjusting
information was omitted:

1. $500 of the $20,000 service revenue is for plumbing that will not be done until January 10,
2011.
2. Employees earned $700 of salaries for work done on December 31, 2010, but they will not
be paid until January 2, 2011.
3. Depreciation for Lebron’s truck and tools amounted to $2,400 for 2010.
4. Rent expense is $800 a month. On December 31, 2010, Lebron paid $800 rent for January,
2011, which is included in the rent expense given above.
Prepare Lebron Company's income statement after you include the results of the adjusting
information provided.
Answer:

34. Retained earnings on January 1 and December 31 are $72,000 and $69,000, respectively.
During the year, net income is $100,000. How much dividends did the company declare and
pay to the shareholders?
Answer: $72,000 + $100,000 – $69,000 = $103,000
35. Given below is a listing of selected accounts before adjusting entries for Duane
Corporation as of December 31.

Complete the ‘Adjusted Account Balances’ column on the basis of the following information:
a. Unused supplies amount to $400 on December 31.
b. $300 of rent is prepaid on December 31.
c. Unpaid salaries amount to $500 on December 31.
d. $1,200 of the $45,000 service revenue is not yet earned on December 31.
Answer:

Short Essay Questions
1. Dora Manufacturing, a capital-intensive company that manufactures commercial snow
blowers, announced that it is expecting a record loss of $7,000,000 in 2010. However, it also
stated that its business is generating sufficient cash to meet its obligations due in 2010. How
can Dora lose $7 million and still generate cash necessary to meet obligations?

Answer: Accounting accrual income includes charges (expenses) that do not require cash
payments during the current year. Depreciation expense is typically the most significant
expense that does not require a current cash payment. The cash payment associated with
depreciation occurs when an investment in plant and equipment is made, not when those
assets are used. Dora Manufacturing, having capital-intensive operations, records a
significant amount of depreciation expense. As an approximation of cash flow from
operations, the depreciation expense is added back into income (loss). Therefore, Dora would
have a positive cash flow from operations if depreciation expense is greater than $7 million.
2. How does the information presented in an income statement relate to the information
reported in a statement of shareholders’ equity?
Answer:An income statement reports the amount of net income or loss for a period. The
amount of net income or loss is added or subtracted to retained earnings, which is a
component of shareholder’s equity to determine the ending retained earnings balance. The
changes in retained earnings for the year are reported on the statement of shareholders’
equity.
3. Describe a debit. How does it impact the accounts?
Answer: Debit means ‘left.’ To debit an account means to place it on the left side of the
journal entry. A debit increases assets, expenses, and dividends. A debit decreases revenues,
liabilities, and shareholders’ equity.
4. How do the concepts of economic events and objectivity relate?
Answer: Economic events are reflected in the financial statements. Before each event is
recorded, two characteristics must be met. Each event must be relevant and objective. The
dollar amounts to be assigned to the accounts on the financial statements must be determined
in an objective manner. To be objective, the information must be unbiased and present a clear
financial picture of the company.
5. Why are ‘expenses paid for in advance’ reported as assets? What happens to this ‘asset’ as
time passes?
Answer: When a company pays for an expense in advance, the company expects future
benefits from that payment. Assets are defined as items expected to provide future benefits.
As time passes, that future benefit is consumed, and the cost is then reported as an expense.

6. Name two components of shareholders’ equity and describe what each consists of.
Answer: Two components of shareholders’ equity are contributed capital and retained
earnings. Contributed capital is the dollar value of the assets contributed by the shareholders.
Retained earnings is the dollar value of the assets generated by operating activities that have
been retained in the business.
7. What are journal entries and how they used in accounting?
Answer: Journal entries are used to record the economic effects of events that impact the
financial statements of a company. Each entry consists of at least one debit and one credit.
The components of a journal entry either increase or decrease individual accounts within the
accounting system. Total debits must equal total credits in every journal entry.
8. What are revaluation adjustments?
Answer: Revaluation adjustments serve to ‘restate’ accounts to keep their reported values in
line with existing facts. For example, most short-term investments are valued at fair value,
the amount they are selling for in the market. Because the fair value at the end of the year is
not always the same dollar amount as reported in the short-term investment account during
the year, an adjustment must be made to the balance in the investment account so it will equal
the fair value at the end of the year.
9. Why is the acquisition of merchandise inventory capitalized as an asset?
Answer: Assets are items and rights that a company acquires through objectively measurable
transactions that can be used in the future to generate economic benefits (i.e., more assets).
Inventories are capitalized because they are expected to generate revenues in the future when
they are sold.
10. How does the accrual for wages relate to the cash paid for wages expense?
Answer:The payment of wages creates a debit to wages expense and a credit to cash. In
situations where the cost of wages have been incurred but the actual cash outflow will not
occur until the next accounting period, the wages expense must be accrued. The accrual
creates a debit to wages expense and a credit to a liability account, wages payable. The cash
flows associated with the expenses occur after the accruals have taken place.
11. What purpose does a gain or loss associated with the sale of a plant asset serve?

Answer: When a company sells a plant asset, receiving a dollar amount that does not match
the recorded for the asset on the balance sheet, then a gain or loss must be recognized in the
amount of the difference between the proceeds and the balance sheet carrying amount.
12. Why are ‘unearned revenues’ considered liabilities?
Answer: Unearned revenues are amounts received in advance of the actual earnings process.
Since the amount represented by the unearned revenue represents a future outflow of assets or
requires services to be provided, it represents an obligation and must be recorded as a
liability.
13. Why do managers need to understand how economic events affect the financial
statements?
Answer: Managers are often faced with situations that require a decision in which economic
consequences must be considered. Managers must understand how transactions affect
financial statements in order to prevent, modify, or otherwise change their presentation in the
financial statements, so that records reflect accurate data.
14. What is depreciation?
Answer: Depreciation is a process of allocating the cost of buildings and equipment. When a
plant asset is acquired, it is capitalized—placed on the balance sheet. As time passes, the cost
of this plant asset is used in the earnings process and the cost is allocated against the related
revenue according to the matching principle.
15. Explain the difference between temporary and permanent accounts. Please give four
examples of each.
Answer: Temporary accounts include all income statement accounts and the dividend
account. They are called “temporary” accounts because their balances do not carry forward
from one fiscal period to the next, but rather are restarted with a zero balance at the beginning
of a new accounting period. Examples include sales, cost of goods sold, depreciation
expense, and dividends. Permanent accounts are accounts that accumulate their balances from
year to year. All the balance sheet accounts are considered permanent. Examples include
cash, accumulated depreciation, accounts payable, and retained earnings.
16. Explain what is meant by a “contra account” and give two examples of contra accounts
that would be found on the balance sheet.

Answer: A contra account is a balance sheet account that is used to offset other balance sheet
accounts. Examples include accumulated depreciation, accumulated amortization and the
allowance for doubtful accounts.

Test Bank for Financial Accounting: In an Economic Context
Jamie Pratt, Michael F. Peters
9780470635292, 9781119537571, 9781119444367

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