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Chapter 2—A Review of the Accounting Cycle
MULTIPLE CHOICE
- In an accrual accounting system a. all accounts have normal debit balances. b. a debit entry is recorded on the left-hand side of an account. c. liabilities, owner's capital, and dividends all have normal credit balances. d. revenues are recorded only when cash is received. ANS: B OBJ: LO 2
- A common business transaction that would not affect the amount of owners' equity is a. signing a note payable to purchase equipment. b. payment of property taxes. c. billing of customers for services rendered. d. payment of dividends. ANS: A OBJ: LO 2
- Failure to record the expired amount of prepaid rent expense would not a. understate expense. b. overstate net income. c. overstate owners' equity. d. understate liabilities. ANS: D OBJ: LO 3
- On June 30, a company paid $3,600 for insurance premiums for the current year and debited the amount to Prepaid Insurance. At December 31, the bookkeeper forgot to record the amount expired. The omission has the following effect on the financial statements prepared December 31: a. overstates owners' equity. b. overstates assets. c. understates net income. d. both (a) and (b). ANS: D OBJ: LO 3
- A chart of accounts is a. a subsidiary ledger. b. a listing of all account titles. c. a general ledger. d. a general journal. ANS: B OBJ: LO 2
- Which of the following criteria must be met before an event should be recorded for accounting purposes? a. The event must be an arm's-length transaction. b. The event must be repeatable in a future period. c. The event must be measurable in financial terms. d. The event must be disclosed in the reported footnotes. ANS: C OBJ: LO 2
- Adjusting entries normally involve
a. real accounts only. b. nominal accounts only. c. real and nominal accounts. d. liability accounts only. ANS: C OBJ: LO 3
- Which of the following is an item that is reportable in the financial records of an enterprise? a. The value of goodwill earned through business operations. b. The value of human resources. c. Changes in personnel. d. Changes in inventory costing methods. ANS: D OBJ: LO 1
- The balance in a deferred revenue account represents an amount that is Earned Collected a. Yes^ Yes b. Yes^ No c. No^ Yes d. No^ No ANS: C OBJ: LO 3
- The debit and credit analysis of a transaction normally takes place a. when the entry is posted to a subsidiary ledger. b. when the entry is recorded in a journal. c. when the trial balance is prepared. d. when the financial statements are prepared. ANS: B OBJ: LO 2
- A trial balance is useful because it indicates that a. owners' equity is correct. b. net income is correct. c. all entries were made correctly. d. total debits equal total credits. ANS: D OBJ: LO 3
- Which of the following would typically be considered a source document? a. Chart of accounts. b. General ledger. c. General journal. d. Invoice received from seller. ANS: D OBJ: LO 2
- Which of the following is not among the first five steps in the accounting cycle? a. Record transactions in journals. b. Record closing entries. c. Adjust the general ledger accounts. d. Post entries to general ledger accounts. ANS: B OBJ: LO 1
c. prepare financial statements. d. journalize and post adjusting entries. ANS: A OBJ: LO 1
- Which of the following is not presented in an income statement? a. Revenues. b. Expenses. c. Net Income. d. Dividends. ANS: D OBJ: LO 2
- On March 1, 2003, Forest Co. borrowed cash and signed a 36-month, interest-bearing note on which both the principal and interest are payable on February 28, 2006. At December 31, 2004, the liability for accrued interest should be a. 10 months' interest. b. 22 months' interest. c. 34 months' interest. d. 36 months' interest. ANS: B OBJ: LO 3
- An example of an adjusting entry involving a deferred revenue is a. Cash ...............................^ xxx Unearned Rental Revenue .......... xxx b. Rental Revenue .....................^ xxx Cash ............................. xxx c. Unearned Rental Revenue ............^ xxx Rental Revenue ................... xxx d. Accounts Receivable ................^ xxx Sales ............................ xxx ANS: C OBJ: LO 3
- The allowance for doubtful accounts is an example of a(n) a. expense account. b. contra account. c. adjunct account. d. control account. ANS: B OBJ: LO 2
- Iowa Cattle Company uses a periodic inventory system. Iowa purchased cattle from Big D Ranch at a cost of $27,000 on credit. The entry to record the receipt of the cattle would be a. Purchases ...........................^ 27, Accounts Payable .................. 27, b. Inventory ...........................^ 27, Accounts Payable .................. 27, c. Purchases ...........................^ 27, Cash .............................. 27, d. Inventory ...........................^ 27, Cash .............................. 27, ANS: A OBJ: LO 2
26.Which of the following is presented in a balance sheet? a. Prepaid Expenses. b. Revenues. c. Net Income. d. Gains. ANS: A OBJ: LO 2
- If an expense has been incurred but not yet recorded, then the end-of-period adjusting entry would involve a. a liability account and an asset account. b. a liability account and an expense account. c. an asset and an expense account. d. a receivable account and a revenue account. ANS: B OBJ: LO 3
- Failure to record depreciation expense at the end of an accounting period results in a. understated income. b. understated assets. c. overstated expenses. d. overstated assets. ANS: D OBJ: LO 3
- Iowa Cattle Company uses a perpetual inventory system. Iowa purchased cattle from Big D Ranch at a cost of $19,500, payable at time of delivery. The entry to record the delivery would be a. Purchases ...........................^ 19, Accounts Payable .................. 19, b. Inventory ...........................^ 19, Accounts Payable .................. 19, c. Purchases ...........................^ 19, Cash .............................. 19, d. Inventory ...........................^ 19, Cash .............................. 19, ANS: D OBJ: LO 2
- Beginning and ending Accounts Receivable balances were $28,000 and $24,000, respectively. If collections from clients during the period were $80,000, then total services rendered on account were apparently a. $76,000. b. $84,000. c. $104,000. d. $108,000. ANS: A OBJ: LO 2
- For a given year, beginning and ending total liabilities were $8,400 and $10,000, respectively. At year-end, owners' equity was $26,000 and total assets were $2,000 larger than at the beginning of the year. If new capital stock issued exceeded dividends by $2,400, net income (loss) for the year was apparently a. ($2,800). b. ($2,000). c. $400. d. $2,800. ANS: B OBJ: LO 2
- The following errors were made in preparing a trial balance: the $1,350 balance of Inventory was omitted; the $450 balance of Prepaid Insurance was listed as a credit; and the $300 balance of Salaries Expense was listed as Utilities Expense. The debit and credit totals of the trial balance would differ by a. $1,350. b. $1,800. c. $2,100. d. $2,250. ANS: D OBJ: LO 3
- Crescent Corporation's interest revenue for 2004 was $13,100. Accrued interest receivable on December 31, 2004, was $2,275 and $1,875 on December 31, 2003. The cash received for interest during 2004 was a. $1,350. b. $10,825. c. $12,700. d. $13,100. ANS: C OBJ: LO 2
- Sky Corporation's salaries expense for 2004 was $136,000. Accrued salaries payable on December 31, 2004, was $17,800 and $8,400 on December 31, 2003. The cash paid for salaries during 2004 was a. $126,600. b. $127,600. c. $145,400. d. $153,800. ANS: A OBJ: LO 2
- Winston Company sells magazine subscriptions for one- to three-year subscription periods. Cash receipts from subscribers are credited to Magazine Subscriptions Collected in Advance, and this account had a balance of $9,600,000 at December 31, 2004, before year-end adjustment. Outstanding subscriptions at December 31, 2004, expire as follows: During 2005 .................. $2,600, During 2006 .................. 3,200, During 2007 .................. 1,800, In its December 31, 2004, balance sheet, what amount should Winston report as the balance for magazine subscriptions collected in advance? a. $2,000, b. $3,800, c. $7,600, d. $9,600, ANS: C OBJ: LO 3
- L. Lane received $12,000 from a tenant on December 1 for four months' rent of an office. This rent was for December, January, February, and March. If Lane debited Cash and credited Unearned Rental Income for $12,000 on December 1, what necessary adjustment would be made on December 31? a. Unearned Rental Income .............^ 3, Rental Income .................... 3, b. Rental Income ......................^ 3, Unearned Rental Income ........... 3,
c. Unearned Rental Income .............^ 9, Rental Income .................... 9, d. Rental Income ......................^ 9, Unearned Rental Income ........... 9, ANS: A OBJ: LO 3
- Ingle Company paid $12,960 for a four-year insurance policy on September 1 and recorded the $12,960 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Ingle make on December 31, the end of the accounting period? a. Prepaid Insurance ..................^810 Insurance Expense ................ 810 b. Insurance Expense ..................^ 1, Prepaid Insurance ................ 1, c. Insurance Expense ..................^ 3, Prepaid Insurance ................ 3, d. Prepaid Insurance ..................^ 11, Insurance Expense ................ 11, ANS: B OBJ: LO 3
- Bannister Inc.'s fiscal year ended on November 30, 2004. The balance in the prepaid insurance account as of November 30, 2004, was $35,200 (before adjustment) and consisted of the following policies: Policy Date of Date of Balance in Number Purchase Expiration Account 279248 7/1/2004 6/30/2005 $14, 694421 12/1/2002 11/30/2004 9, 800616 4/1/2003 3/31/2005 11, $35, The adjusting entry required on November 30, 2004, would be a. Insurance Expense ...................^ 24, Prepaid Insurance ................. 24, b. Insurance Expense ...................^ 9, Prepaid Insurance ................. 9, c. Insurance Expense ...................^ 11, Prepaid Insurance ................. 11, d. Insurance Expense ...................^ 16, Prepaid Insurance ................. 16, ANS: A OBJ: LO 3
- Kite Company paid $24,900 in insurance premiums during 2004. Kite showed $3,600 in prepaid insurance on its December 31, 2004, balance sheet and $4,500 on December 31, 2003. The insurance expense on the income statement for 2004 was a. $16,800. b. $24,000. c. $25,800. d. $33,000. ANS: C OBJ: LO 3
- Thompson Company sublet a portion of its office space for ten years at an annual rental of $36,000, beginning on May 1. The tenant is required to pay one year's rent in advance, which
- The work sheet of PSI Company shows Income Tax Expense of $9,000 and Income Tax Payable of $9,000 in the Adjustments columns. What will be the ultimate disposition of these items on the work sheet? a. Income Tax Expense will appear as a debit of $9,000 and Income Tax Payable as credit in the Balance Sheet columns. b. Income Tax Expense will appear as a debit of $9,000 and Income Tax Payable as credit in the Income Statement columns. c. Income Tax Expense will appear as a debit of $9,000 in the Balance Sheet columns and Income Tax Payable as credit in the Income Statement columns. d. Income Tax Expense will appear as a debit of $9,000 in the Income Statement columns and Income Tax Payable as credit in the Balance Sheet columns. ANS: D OBJ: LO 3
- The following balances have been excerpted from Edwards' balance sheets: December 31, 2004 December 31, 2003 Prepaid Insurance ............ $ 6,000^ $ 7, Interest Receivable .......... 3,700^ 14, Salaries Payable ............. 61,500^ 53, Edwards Company paid or collected during 2004 the following items: Insurance premiums paid ...... $ 41, Interest collected ........... 123, Salaries paid ................ 481, The interest revenue on the income statement for 2004 was a. $90,500. b. $112,700. c. $117,500. d. $156,500. ANS: B OBJ: LO 3
- Chips-n-Bits Company sells service contracts for personal computers. The service contracts are for a one-year, two-year, or three-year period. All sales are for cash and all receipts are credited to Unearned Service Contract Revenues. This account had a balance of $144,000 at December 31, 2003, before year-end adjustment. Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of $36,000 at December 31, 2003. Service contracts still outstanding at December 31, 2003, expire as follows: During 2004 .................... $30, During 2005 .................... 45, During 2006 .................... 20, What amount should be reported as unearned service contract revenues in Chips-n-Bits December 31, 2003, balance sheet? a. $49, b. $59, c. $95, d. $108, ANS: C OBJ: LO 3
- Teller Inc. reported an allowance for doubtful accounts of $30,000 (credit) at December 31, 2004, before performing an aging of accounts receivable. As a result of the aging, Teller Inc. determined that an estimated $52,000 of the December 31, 2004, accounts receivable would prove uncollectible. The adjusting entry required at December 31, 2004, would be a. Doubtful Accounts Expense ...........^ 22, Allowance for Doubtful Accounts ... 22, b. Allowance for Doubtful Accounts .....^ 22, Accounts Receivable ............... 22, c. Doubtful Accounts Expense ...........^ 52, Allowance for Doubtful Accounts ... 52, d. Allowance for Doubtful Accounts .....^ 52, Doubtful Accounts Expense ......... 52, ANS: A OBJ: LO 3
- Comet Corporation's liability account balances at June 30, 2004, included a 10 percent note payable. The note is dated October 1, 2002, and carried an original principal amount of $600,000. The note is payable in three equal annual payments of $200,000 plus interest. The first interest and principal payment was made on October 1, 2003. In Comet's June 30, 2004, balance sheet, what amount should be reported as Interest Payable for this note? a. $10, b. $15, c. $30, d. $45, ANS: C OBJ: LO 3
- Scott Co. reported an allowance for doubtful accounts of $28,000 (credit) at December 31, 2004, before performing an aging of accounts receivable. As a result of the aging, Scott determined that an estimated $20,000 of the December 31, 2004, accounts receivable would prove uncollectible. The adjusting entry required at December 31, 2004, would be a. Doubtful Accounts Expense ...........^ 20, Allowance for Doubtful Accounts ... 20, b. Doubtful Accounts Expense ...........^ 20, Accounts Receivable ............... 20, c. Allowance for Doubtful Accounts .....^ 8, Doubtful Accounts Expense ......... 8, d. Doubtful Accounts Expense ...........^ 8, Allowance for Doubtful Accounts ... 8, ANS: C OBJ: LO 3
- The following balances have been excerpted from Edwards' balance sheets: December 31, 2004 December 31, 2003 Prepaid Insurance ............ $ 6,000^ $ 7, Interest Receivable .......... 3,700^ 14, Salaries Payable ............. 61,500^ 53, Edwards Company paid or collected during 2004 the following items: Insurance premiums paid ...... $ 41, Interest collected ........... 123, Salaries paid ................ 481,
b. lower under the cash basis than under the accrual basis. c. the same under the cash basis as under the accrual basis. d. not susceptible to measurement. ANS: C OBJ: LO 4 PROBLEMS
- The records of Jerick Corp. show the following information: (a) Purchased a three-year insurance policy for $7,200 on September 1, 2004, and recorded the premium payment in the asset account. (b) Borrowed $60,000 on a 1-year, 12% note on July 1, 2004. Interest is payable at maturity. (c) Collected $8,400 on October 1, 2004, to cover six months' rent paid in advance, and recorded the receipt in a liability account. (d) The Allowance for Doubtful Accounts shows an unadjusted balance of $300 (debit) as of December 31, 2004. Based on an aging of receivables, it is determined that the balance in the allowance account should be $1,775 at December 31, 2004. (e) Machinery purchased on January 1, 2004, for $300,000 is to be depreciated at the rate of 20 percent per year. Prepare journal entries to adjust the books of Jerick Corp. at December 31, 2004. ANS: (a) Insurance Expense ......................^800 Prepaid Insurance .................... 800 (b) Interest Expense .......................^ 3, Interest Payable ..................... 3, (c) Unearned Rental Income .................^ 4, Rental Income ........................ 4, (d) Doubtful Accounts Expense ..............^ 2, Allowance for Doubtful Accounts ...... 2, (e) Depreciation Expense--Machinery ........^ 60, Accumulated Depreciation--Machinery... 60, OBJ: LO 3
- The information listed below was obtained from the accounting records of Cahill Company as of June 30, 2004. (a) Payments to vendors of $1,700 were made for purchases on account during the year and were not recorded. (b) On June 28, 2004, Cahill received $5,400 in advance for services to be performed in July 2004. The $5,400 was credited to Sales Revenue. (c) Building and land were purchased in 1997 for $780,000. The building's fair market value was $650,000 at the time of purchase. The building is being depreciated over a 25-year life using the straight-line method, and assuming no salvage value. (d) On May 1, 2004, $120,000 was loaned to a shareholder on a 6-month note with interest at an annual rate of 8 percent. Interest is due at maturity. (e) Accrued salaries and wages are $2,740 at June 30, 2004. (f) The office supplies account has a balance of $3,170. An inventory of supplies revealed a total of $1,550.
Prepare journal entries to adjust the books of Cahill Company at June 30, 2004.
Assuming that the ending inventory is $97,900, prepare the entry to adjust the inventory accounts.
- The following account balances pertain to the Henryville Manufacturing Co. at September 30,
2004 (before adjusting entries).
- (a) Accounts Payable 1, ANS: - Cash 1,
- (b) Sales Revenue 5, - Unearned Sales Revenue 5,
- (c) Depreciation Expense--Building 26, - Accumulated Depreciation--Building 26,
- (d) Interest Receivable 1, - Interest Revenue 1,
- (e) Salaries and Wages Expense 2, - Salaries and Wages Payable 2,
- (f) Office Supplies Expense 1, - Office Supplies 1, - OBJ: LO
- Inventory, January 1, 2004 $188, 3. Caddis Co. had these unadjusted account balances on December 31, 2004:
- Purchases 142,
- Freight-In 12,
- Purchase Discounts 2,
- Purchase Returns and Allowance 26,
- Purchase Discounts 2, ANS:
- Purchase Returns and Allowances 26,
- Cost of Goods Sold 217,
- Purchases 142,
- Freight-In 12,
- Inventory 90,
- Accounts Receivable $ 40, Debit Credit
- Allowance for Doubtful Accounts $ 2,
- Inventory 99,
- Prepaid Insurance 2,
- Equipment 300,
- Accumulated Depreciation 125,
- Notes Payable 48,
- Unearned Revenue 72,
Provide the appropriate journal entries to record the preceding transactions. Adjust the accounts at year-end assuming that no entries have been made between the transaction date and year-end and assuming that: (1) transactions were originally recorded in asset and liability accounts. (2) transactions were originally recorded in revenue and expense accounts. ANS: (1) Insurance: 2004 June 15 Prepaid Insurance .......... 5, Cash ..................... 5, Oct. 31 Insurance Expense ($5,400 ´ 4/12) ........... 1, Prepaid Insurance ........ 1, Equipment rental: Oct. 1 Cash ....................... 6, Unearned Rent Revenue .... 6, Oct. 31 Unearned Rent Revenue ($6,930 ´ 1/9) ............ 770 Rent Revenue ............. 770 (2) Insurance: 2004 June 15 Insurance Expense .......... 5, Cash ..................... 5, Oct. 31 Prepaid Insurance ($5,400 ´ 8/12) ........... 3, Insurance Expense ........ 3, Equipment rental: Oct. 1 Cash ....................... 6, Rent Revenue ............. 6, Oct. 31 Rent Revenue ($6,930 ´ 8/9) 6, Unearned Rent Revenue .... 6, OBJ: LO 2, LO 3
- Record the following transactions and events of Royal Wulff Company in general journal form. If the item does not require a journal entry, write "no entry." (a) Sold merchandise costing $4,500 for $1,000 cash and $7,000 on open account. A perpetual inventory system is used. (b) Purchased land and building for $100,000 cash and a $300,000 mortgage. The land was recently appraised at $60,000 and the building at $340,000. (c) Received payment on account, $12,000. (d) Estimated that utilities expense for the coming six months will total $7,600. (e) Declared a cash dividend totaling $13,500. The dividend will be paid in six weeks. ANS: (a) Cash .................................^ 1, Accounts Receivable ............... 7, Sales .......................... 8,
Cost of Goods Sold ............. 4, Inventory ................... 4, (b) Land .................................^ 60, Building ............................. 340, Cash .............................. 100, Mortgage Payable .................. 300, (c) Cash .................................^ 12, Accounts Receivable ............... 12, (d) No entry ............................. (e) Dividends (or Retained Earnings) .....^ 13, Dividends Payable ................. 13, OBJ: LO 2
- For each of the journal entries below, write a description of the underlying event. Assume that for prepaid expenses original debits are made to an expense account. (a) Allowance for Doubtful Accounts ......^ xxx Accounts Receivable ................ xxx (b) Interest Expense .....................^ xxx Notes Payable ........................ xxx Cash ............................... xxx (c) Cash .................................^ xxx Unearned Revenue ................... xxx (d) Supplies on Hand .....................^ xxx Supplies Expense ................... xxx (e) Cash .................................^ xxx Accounts Receivable ................ xxx ANS: (a) Write-off of an uncollectible account. (b) Cash payment on a note payable. Part of the payment is for principal and part is for interest. (c) Received cash in advance for products or services not yet delivered. (d) Adjusting entry to record supplies on hand. (e) Received customer payment on account. OBJ: LO 2
- The following data are from a comparison of the balance sheets of Brassie Company as of December 31, 2004, and December 31, 2003: Accounts Receivable ..................... increase $7, Inventory ............................... decrease 4, Accounts Payable ........................ increase 2, (all accounts payable relate to inventory purchases) Prepaid Insurance ....................... decrease 1, Wages Payable ........................... decrease 670
Summary transactions for February: (a) Collected $100 on open account (b) Purchased $130 inventory for $20 cash and the remainder on open account. (c) Bought new equipment costing $200 for $50 cash, with the remainder due on a mortgage payable. (d) Paid $85 on open account. (e) Recorded depreciation expense of $35. (f) Sold goods costing $90 for $30 cash and $120 on open account. What is Coachman's total equity at the end of February? ANS: Retained Earnings Begin 635 (e) 35 (f) 90 (f) 150 660 Total equity = Retained Earnings $660 + Common Stock $300 = $960. OBJ: LO 2
- Account balances taken from the ledger of Middler Company on December 31, 2004, are as follows: Accounts Payable ...................................... $119, Accounts Receivable ................................... 139, Advertising Expense ................................... 12, Accumulated Depreciation--Buildings ................... 31, Allowance for Doubtful Accounts ....................... 2, Buildings ............................................. 315, Capital Stock, $10 par ................................ 450, Cash .................................................. 45, Dividends ............................................. 12, Freight-In ............................................ 10, Insurance Expense ..................................... 2, Interest Expense ...................................... 5, Interest Revenue ...................................... 1, Inventory, December 31, 2003 .......................... 104, Land .................................................. 78, Long-Term Investments ................................. 12, Mortgage Payable ...................................... 43, Notes Payable--Short-Term ............................. 24, Office Expense ........................................ 28, Purchases ............................................. 521, Purchase Discounts .................................... 12, Retained Earnings, December 31, 2003 .................. 13, Sales ................................................. 745, Sales Discounts ....................................... 24, Sales Returns ......................................... 14, Selling Expense ....................................... 94, Supplies Expense ...................................... 3, Real Estate and Payroll Taxes ......................... 19,
Adjustments on December 31, 2004, are required as follows: (a) The inventory on hand is $135,915. (b) The allowance for doubtful accounts is to be increased to a balance of $6,250. (c) Buildings are depreciated at the rate of 5 percent per year. (d) Accrued selling expenses are $6,075. (e) There are supplies of $1,050 on hand. (f) Prepaid insurance at December 31, 2004, totals $1,290. (g) Accrued interest on long-term investments is $360. (h) Accrued real estate and payroll taxes are $1,170. (i) Accrued interest on the mortgage is $240. (j) Income tax is estimated to be 30 percent of the income before income tax (round to nearest dollar). (1) Prepare an eight-column work sheet. (2) Prepare adjusting and closing entries. ANS: (1) Middler Company Work Sheet For Year Ended December 31, 2004 Trial Balance Adjustment Debit Credit Debit Credit Cash .................. 45, Accounts Receivable ... 139, Allowance for Doubtful Accounts ............ 2,550 (b) 3, Inventory ............. 104,850 (a) 31, Interest Receivable ... (g) 360 Prepaid Insurance ..... (f) 1, Supplies on Hand ...... (e) 1, Long-Term Investments. 12, Land .................. 78, Buildings ............. 315, Accumulated Depreciation-- ...... Buildings ............. 31,500 (c) 15, Accounts Payable ...... 119, Selling Expense Payable (d) 6, Real Estate and Payroll Taxes Payable ......... (h) 1, Interest Payable ...... (i) 240 Income Taxes Payable (0.30 x $29,535) ..... (j) 8, Notes Payable--Short- Term ................ 24, Mortgage Payable ...... 43, Capital Stock, $10 par 450, Retained Earnings, Dec. 31, 2003 ....... 13, Dividends ............. 12, Sales ................. 745, Sales Discounts ....... 24, Sales Returns ......... 14,
