Fundamental Financial Accounting Concepts Thomas Edmonds 10th Edition-Test Bank
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Sample Test
Fundamental Financial Accounting Concepts, 10e (Edmonds)
Chapter 3 The Double-Entry Accounting System
Indicate how each event affects the elements of financial
statements. Use the following letters to record your answer in the box shown
below each element. You do not need to enter amounts.
Increase = I Decrease
= D No Effect = NA
(Note that “No Effect” means that the event does not effect that
element of the financial statements or that the event causes an increase in
that element is offset by a decrease in that same element.)
1) A transaction recorded as a debit to Cash and a credit to
Common Stock.
Assets Liabilities
Stk. Equity
Revenues
Expenses
Net Income Stmt of Cash Flows
Answer: (I) (NA) (I) (NA) (NA) (NA) (I)
Debits increase asset accounts, such as cash, and credits
increase stockholders’ equity accounts, such as common stock.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
2) A transaction recorded as a debit to Accounts Receivable and
a credit to a revenue account.
Assets
Liabilities
Stk. Equity
Revenues
Expenses
Net Income Stmt of Cash Flows
Answer: (I) (NA) (I) (I) (NA) (I) (NA)
Debits increase asset accounts, such as accounts receivable, and
credits increase revenue accounts, which in turn increase stockholders’ equity
(retained earnings).
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
3) A transaction recorded as a debit to Cash and a credit to Accounts
Receivable.
Assets
Liabilities
Stk. Equity
Revenues
Expenses
Net Income Stmt of Cash Flows
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (I)
Debits increase asset accounts, such as cash, and credits
decrease asset accounts, such accounts receivable.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
4) A transaction recorded as a debit to Cash and a credit to
Unearned Revenue.
Assets
Liabilities
Stk. Equity
Revenues
Expenses
Net Income Stmt of Cash Flows
Answer: (I) (I) (NA) (NA) (NA) (NA) (I)
Debits increase asset accounts, such as cash, and credits
increase liability accounts, such as unearned revenue.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
5) A transaction recorded as a debit to Dividends and a credit
to Cash.
Assets Liabilities
Stk. Equity
Revenues
Expenses
Net Income Stmt of Cash Flows
Answer: (D) (NA) (D) (NA) (NA) (NA) (D)
Debits increase the dividends account, which in turn decreases
stockholders’ equity, and credits decrease asset accounts, such as cash.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
6) A transaction recorded as a debit to Cash and a credit to
Common Stock.
Assets
Liabilities
Stk. Equity
Revenues
Expenses
Net Income Stmt of Cash Flows
Answer: (I) (NA) (I) (NA) (NA) (NA) (I)
Debits increase asset accounts, such as cash, and credits
increase stockholders’ equity accounts, such as common stock.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
7) A transaction recorded as a debit to Office Supplies and a
credit to Accounts Payable.
Assets Liabilities
Stk. Equity
Revenues
Expenses
Net Income Stmt of Cash Flows
Answer: (I) (I) (NA) (NA) (NA) (NA) (NA)
Debits increase asset accounts, such as office supplies, and
credits increase liability accounts, such as accounts payable.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
8) An adjusting entry recorded as a debit to Rent Expense and a
credit to Prepaid Rent.
Assets
Liabilities
Stk. Equity
Revenues
Expenses
Net Income Stmt of Cash Flows
Answer: (D) (NA) (D) (NA) (I) (D) (NA)
Debits increase expense accounts, which in turn decrease
stockholders’ equity, and credits decrease asset accounts, such as prepaid
rent.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
9) An adjusting entry recorded as a debit to Unearned Revenue
and a credit to Service Revenue.
Assets
Liabilities
Stk. Equity
Revenues
Expenses
Net Income Stmt of Cash Flows
Answer: (NA) (D) (I) (I) (NA) (I) (NA)
Debits decrease liability accounts, such as unearned revenue,
and credits increase revenue accounts, which in turn increases stockholders’
equity.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
10) An adjusting entry recorded as a debit to Salaries Expense
and a credit to Salaries Payable.
Assets
Liabilities
Stk. Equity
Revenues Expenses
Net Income Stmt of Cash Flows
Answer: (NA) (I) (D) (NA) (I) (D) (NA)
Debits increase expenses, which in turn decreases stockholders’
equity (retained earnings), and credits increase liability accounts, such as
salaries payable.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
11) An adjusting entry recorded as a debit to Supplies Expense
and a credit to Supplies.
Assets
Liabilities
Stk. Equity
Revenues
Expenses
Net Income Stmt of Cash Flows
Answer: (D) (NA) (D) (NA) (I) (D) (NA)
Debits increase expenses, which in turn decreases stockholders’
equity (retained earnings), and credits decrease asset accounts, such as
supplies.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
12) What effect do debits have on asset accounts? On liability
accounts?
Answer: Debits increase asset accounts. Debits
decrease liability accounts.
Debits increase asset accounts; credits decrease asset accounts.
Debits decrease liability and stockholders’ equity accounts; credits increase
liability and stockholders’ equity accounts.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
13) What effect do credits have on asset accounts? On
stockholders’ equity accounts?
Answer: Credits decrease asset accounts. Credits
increase stockholders’ equity accounts.
Debits increase asset accounts; credits decrease asset accounts.
Debits decrease liability and stockholders’ equity accounts; credits increase
liability and stockholders’ equity accounts.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
14) What are the meanings of the terms “debit” and “credit” and
what are the effects of each on the various types of accounts?
Answer: “Debit” means the left side of an account
and refers to increases in asset, expense, and dividend accounts and decreases
in revenue, liability, and stockholders’ equity accounts. “Credit” means the
right side of the account and refers to increases in revenues, liabilities, and
stockholders’ equity accounts and decreases in asset, expense, and dividend
accounts.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Remember
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Measurement
15) Are liability accounts increased by debits or credits?
Answer: Credits
Debits decrease liability and stockholders’ equity accounts;
credits increase liability and stockholders’ equity accounts.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
16) Cornelius Company purchased supplies on account. What
account is credited?
Answer: Accounts Payable
Accounts Payable, a liability account, is increased with a
credit.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
17) What is a trial balance? Why do accountants regularly
prepare trial balances?
Answer: A trial balance is an internal accounting
schedule that ensures that debits and credits are equal. Debit balances are
listed in one column, and credit balances are listed in an adjacent column. The
columns are totaled and the totals are compared. If the debit total does not
equal the credit total, the accountant knows to search for an error.
Equal debits and credits in a trial balance provide evidence
rather than proof of accuracy. Even if the totals are equal, however, there may
be errors in the accounting records.
Difficulty: 1 Easy
Topic: Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
18) Explain the significance of the return-on-equity ratio. Who
(what category or type of financial statement users) would normally be most
interested in this ratio, and why?
Answer: The return-on-equity ratio measures the
relationship between net income and stockholders’ equity. The stockholders
would normally be most interested in this ratio because it measures how well
the company is using their investment to earn income.
Difficulty: 2 Medium
Topic: Assessing the Effective Use of Assets
Learning Objective: 03-05 Use a return-on-assets ratio, a
debt-to-assets ratio, and a return-on-equity ratio to analyze financial
statements.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Risk Analysis
19) What does the debt-to-assets ratio indicate about the level
of a company’s debt risk? Who would normally be most interested in this ratio?
Answer: The relationship between total debt and
total assets can be measured by the debt-to-assets ratio. With a high
debt-to-assets ratio, a company experiences a great degree of debt risk. A
company with a high debt-to-assets ratio may be forced into bankruptcy if it is
unable to meet the required payments on its outstanding debt. The company’s
creditors would likely be most interested in this ratio.
Difficulty: 1 Easy
Topic: Assessing the Effective Use of Assets
Learning Objective: 03-05 Use a return-on-assets ratio, a
debt-to-assets ratio, and a return-on-equity ratio to analyze financial
statements.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Risk Analysis
20) What is financial leverage? What financial ratio can be
increased by using financial leverage?
Answer: Financial leverage is the use of borrowed
money to increase return on stockholders’ investment. If a company can borrow
money at 8% and invest it at 10%, it can increase its return-on-equity ratio.
Difficulty: 1 Easy
Topic: Assessing the Effective Use of Assets
Learning Objective: 03-05 Use a return-on-assets ratio, a
debt-to-assets ratio, and a return-on-equity ratio to analyze financial
statements.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Risk Analysis
21) Which of the following accounts normally has a debit
balance?
1. A)
Prepaid Insurance
2. B)
Unearned Service Revenue
3. C)
Accounts Payable
4. D)
Common Stock
Answer: A
Explanation: Assets, such as prepaid insurance, normally
have a debit balance; that is, debits increase those accounts. Liabilities,
such as unearned revenue and accounts payable, normally have a credit balance;
that is, credits increase those accounts. Stockholders’ equity accounts, such
as common stock, normally have a credit balance; that is, credits increase
those accounts.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
[The following information applies to the questions displayed
below.]
Account No. Account Title
(1) Cash
(2)
Service Revenue
(3)
Accounts Receivable
(4)
Salaries Expense
(5)
Dividends
(6) Common
Stock
(7)
Salaries Payable
(8)
Retained Earnings
22) Which of the following is a true statement? (Note: A
statement may be true even if it does not identify all accounts that appear on
that particular financial statement.)
1. A)
Account numbers 2, 4, and 5 will appear on the income statement.
2. B)
Account numbers 1, 3, and 8 will appear on the balance sheet.
3. C)
Account numbers 2, 5, and 8 will appear on the statement of cash flows.
4. D)
Account numbers 4, 5, and 6 will appear on the statement of changes in
stockholders’ equity.
Answer: B
Explanation: A balance sheet reports assets, liabilities,
and stockholders’ equity as of a selected date (usually the end of an
accounting period). Cash and accounts receivable are asset accounts. Retained
earnings is a stockholders’ equity account.
Difficulty: 2 Medium
Topic: Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
23) Which of the following is a true statement? (Note: A
statement may be true even if it does not identify all accounts that have debit
balances on that particular financial statement).
1. A)
Account numbers 1, 3, and 5 normally have debit balances.
2. B)
Account numbers 2, 4, and 5 normally have debit balances.
3. C)
Account numbers 2, 5, and 8 normally have debit balances.
4. D)
Account numbers 4, 5, and 6 normally have debit balances.
Answer: A
Explanation: Asset, expense, and dividend accounts
normally have debit balances; liability, stockholders’ equity, and revenue
accounts normally have credit balances. Asset accounts include cash and accounts
receivable.
Difficulty: 2 Medium
Topic: Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
24) What is the term used to describe the left side of a
T-account?
1. A)
Equity Side
2. B)
Debit Side
3. C)
Credit Side
4. D)
Claims Side
Answer: B
Explanation: The left side of an account is the debit
side.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
25) What is the term used to describe the right side of a
T-account?
1. A)
Credit Side
2. B)
Claims Side
3. C)
Debit Side
4. D)
Equity Side
Answer: A
Explanation: The right side of an account is the credit
side.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
26) What is the term that is used to describe the difference
between the total debit and credit amounts in a T-account?
1. A)
Net Income
2. B)
Trial Balance
3. C)
Equality
4. D)
Account Balance
Answer: D
Explanation: For any given account, the difference between
the total debit and credit amounts is the account balance.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
27) Which of the following statements about debits is false?
1. A)
Debits Increase Assets.
2. B)
Debits Increase Expenses.
3. C)
Debits Decrease Liabilities.
4. D)
Debits Increase Liabilities.
Answer: D
Explanation: Debits increase asset accounts; credits
decrease asset accounts. Debits decrease liability and stockholders’ equity
accounts; credits increase liability and stockholders’ equity accounts.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
28) Warren Company began the accounting period with a $32,000
debit balance in its accounts receivable account. During the accounting period,
the company recorded revenue on account amounting to $88,000. The accounts
receivable account at the end of the accounting period contained a $16,000
debit balance. Based on this information, what is the amount of cash collected
from customers during the period?
1. A)
$104,000
2. B)
$40,000
3. C)
$72,000
4. D)
$84,000
Answer: A
Explanation: Beginning balance of accounts receivable +
Sales on account − Collections on account = Ending balance of accounts
receivable
$32,000 + $88,000 − Cash collected on account = $16,000
Cash collected on account = $104,000
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
29) Benson Co. purchased land and paid the full purchase price
in cash. Which of the following would be included in the journal entry
necessary to record this event?
1. A) A
debit to Land and a debit to Cash
2. B) A
debit to Cash and a credit to Land
3. C) A
credit to Land and a credit to Cash
4. D) A
debit to Land and a credit to Cash
Answer: D
Explanation: Land, an asset, is increased with a debit,
and cash, another asset, is decreased with a credit.
Difficulty: 2 Medium
Topic: The General Journal
Learning Objective: 03-02 Record transactions using the
general journal format.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
30) Which of the following statements regarding credit entries
is true?
1. A)
Credits decrease liability accounts.
2. B)
Credits increase asset accounts.
3. C)
Credits increase the common stock account.
4. D)
Credits increase asset and common stock accounts, and decrease liability
accounts.
Answer: C
Explanation: Debits increase asset accounts; credits
decrease asset accounts. Debits decrease liability and stockholders’ equity
accounts; credits increase liability and stockholders’ equity accounts. Common
Stock, a stockholders’ equity account, is increased with a credit.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
31) Which of the following accounts is increased with a debit?
1. A)
Insurance Expense
2. B)
Service Revenue
3. C)
Accounts Payable
4. D)
Common Stock
Answer: A
Explanation: Debits increase asset accounts; credits
decrease asset accounts. Debits decrease liability and stockholders’ equity
accounts; credits increase liability and stockholders’ equity accounts. Debit
entries increase expense accounts. Expenses, however, decrease stockholders’
equity (retained earnings). Debiting an expense account, therefore, reduces stockholders’
equity.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
32) Which of the following accounts is increased with a credit?
1. A)
Accounts Receivable
2. B)
Prepaid Rent
3. C)
Common Stock
4. D)
Dividends
Answer: C
Explanation: Debits increase asset accounts; credits
decrease asset accounts. Debits decrease liability and stockholders’ equity
accounts; credits increase liability and stockholders’ equity accounts.
Salaries Payable, a liability account, and Common Stock, a stockholders’ equity
account, are increased with credits.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
33) Which of the following accounts is decreased with a debit?
1. A)
Accounts Receivable
2. B)
Accounts Payable
3. C)
Prepaid Rent
4. D)
Rent Expense
Answer: B
Explanation: Debits increase asset accounts; credits
decrease asset accounts. Debits decrease liability and stockholders’ equity
accounts; credits increase liability and stockholders’ equity accounts.
Accounts Payable, a liability account, is decreased with a debit.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
34) Which of the following accounts is decreased with a credit?
1. A)
Unearned Revenue
2. B)
Prepaid Insurance
3. C)
Accounts Payable
4. D)
Service Revenue
Answer: B
Explanation: Debits increase asset accounts; credits
decrease asset accounts. Debits decrease liability and stockholders’ equity
accounts; credits increase liability and stockholders’ equity accounts. Prepaid
insurance, an asset account, is decreased with a credit.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
35) Which account is increased by a credit?
1. A)
Accounts Receivable
2. B)
Service Revenue
3. C)
Interest Expense
4. D)
Supplies
Answer: B
Explanation: Recognizing revenue earned for cash or on
account increases both assets and stockholders’ equity. The increase in assets
(cash or accounts receivable) is recorded with a debit, and the increase in
stockholders’ equity (service revenue) is recorded with a credit.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
36) The Baker Company purchased $1,000 of supplies on account.
How would this event be reflected in T-accounts?
1. A) On
the right side of the Supplies T-account
2. B) On
the left side of the Supplies T-account
3. C) On
the left side of the Accounts Payable T-account
4. D) On
the right side of the Cash T-account
Answer: B
Explanation: The purchase increased supplies, an asset
account, and increased accounts payable, a liability account. Therefore, $1,000
will appear as a debit on the left side of the supplies T-account and as a
credit on the right side of the accounts payable T-account.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
37) A transaction has been recorded in the T-accounts of Gibbs
Company as follows:
Cash
1,500
Unearned Revenue
1,500
Which of the following could be an explanation for this
transaction?
1. A)
Cash has been paid out to a company that will provide future services to Gibbs
Company.
2. B)
Gibbs has completed services for which they had earlier received cash in
advance.
3. C)
Gibbs has provided services to a customer on account.
4. D)
Gibbs has received cash for service to be provided in the future.
Answer: D
Explanation: Cash, an asset, has been increased with a
debit, and unearned revenue, a liability, has been increased with a credit.
This indicates that Gibbs has collected cash for services to be provided in the
future.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
38) A transaction has been recorded in the T-accounts of
Horowitz Corporation as follows:
Cash
25,000
Common Stock
25,000
Which of the following reflects how this event affects the
company’s financial statements?
Asset
=
Liab.
+ Stk.
Equity Rev.
–
Exp.
= Net
Inc.
Stmt of
Cash Flows
1. +
=
+
+
NA
NA
–
NA
=
NA +FA
2. +
=
NA
+
+
NA
–
NA
=
NA +FA
3. –
=
NA
+
–
–
–
NA =
–
+OA
4. –
=
–
+
NA
NA
–
+ =
–
-IA
1. A)
Option A
2. B)
Option B
3. C)
Option C
4. D)
Option D
Answer: B
Explanation: A debit to cash increases assets and a credit
to common stock increases stockholders’ equity. The income statement is not
affected, and the event is reported as a cash inflow from financing activities.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
39) A transaction has been recorded in the T-accounts of Powell
Corporation as follows:
Rent Expense
1,000
Prepaid Rent
1,000
Which of the following reflects how this event affects the
company’s financial statements?
Asset
=
Liab.
+ Stk.
Equity Rev.
−
Exp.
= Net Inc.
Stmt of
Cash Flows
1. + =
+
+
NA
NA
−
NA
=
NA +FA
2. −
=
NA
+
−
NA
−
+
=
− NA
3. +
=
NA
+
+ +
−
NA
=
+ +OA
4. −
=
−
+
NA
NA
−
+
=
− −OA
1. A) Option
A
2. B)
Option B
3. C)
Option C
4. D)
Option D
Answer: B
Explanation: A debit to rent expense increases expenses,
decreases net income, and decreases stockholders’ equity (retained
earnings). A credit to prepaid rent decreases assets.
The event does not affect cash flows.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
40) A transaction has been recorded in the T-accounts of Vernon
Company as follows:
Land
10,000
Cash
10,000
Which of the following reflects how this event affects the
company’s financial statements?
Asset
= Liab.
+ Stk.
Equity Rev.
–
Exp.
= Net
Inc.
Stmt of
Cash Flows
1. +
=
+
+
NA
NA
–
NA
=
NA +FA
2. +
=
NA
+
+
NA
–
NA
=
NA -FA
3. +
=
+
+
NA
NA
–
NA
=
NA -IA
4. NA =
NA
+
NA
NA
–
NA
=
NA -IA
1. A)
Option A
2. B)
Option B
3. C)
Option C
4. D)
Option D
Answer: D
Explanation: The debit to the Land T-account increases
total assets and the credit to the Cash T-account decreases total assets. The
increase is offset by the decrease and total assets do not change as a result
of this transaction. The income statement is not affected, and the transaction
is reported as a cash outflow for investing activities.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
41) The Wagner Company acquired $500,000 cash from the issue of
common stock. How would this transaction be recorded in the company’s
T-accounts?
A)
Cash
500,000
Common Stock
500,000
B)
Common Stock
500,000
Cash
500,000
C)
Common Stock
500,000
Retained Earnings
500,000
D)
Retained Earnings
500,000
Common Stock
500,000
Answer: A
Explanation: The event increases cash, an asset account,
and common stock, a stockholders’ equity account. It is recorded as a debit in
the Cash T-account and a credit to the Common Stock account.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
42) Fitzpatrick Company had $500 of accrued salary expenses that
will be paid during the following accounting period. How would the related
adjusting entry be recorded in the company’s T-accounts?
A)
Salaries Expense
500
Cash
500
B)
Cash
500
Salaries Expense
500
C)
Salaries Expense
500
Salaries Payable
500
D)
Salaries Payable
500
Salaries Expense
500
Answer: C
Explanation: The required adjusting entry increases
liabilities by crediting salaries payable and increases expenses by debiting
salaries expense.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
43) Bijan Corporation earned $4,000 of revenue that had been
deferred. How would the related adjusting entry be recorded in the company’s
T-accounts?
A)
Cash
4,000
Unearned Revenue
4,000
B)
Cash
4,000
Revenue
4,000
C)
Revenue
4,000
Unearned Revenue
4,000
D)
Unearned Revenue
4,000
Revenue
4,000
Answer: D
Explanation: The adjusting entry decreases unearned
revenue, a liability, and increases revenue. It is recorded as a debit to
unearned revenue and a credit to the revenue account.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
44) A transaction has been recorded in the T-accounts of Simpson
Company as follows:
Cash
850
Notes Payable
850
Which of the following could be an explanation for this
transaction?
850.
A) The company borrowed $850.
851.
B) The company loaned $850 to another company.
852.
C) The company repaid a $850 debt.
853.
D) Simpson acquired $850 cash from the issue of common stock.
Answer: A
Explanation: The debit to Cash and credit to Notes Payable
indicates that cash, an asset account, increased and notes payable, a liability
account, increased. This would be caused by acquiring cash by issuing a note.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
45) A transaction has been recorded in the T-accounts of Hough
Company as follows:
Cash
500
Notes Payable
500
Which of the following reflects how this event affects the
company’s financial statements?
Asset
=
Liab.
+ Stk.
Equity Rev.
–
Exp.
= Net
Inc.
Stmt of
Cash Flows
1. +
=
+
+
NA
NA
–
+
=
–
+FA
2. +
=
+
+
NA
NA
–
NA
=
NA +OA
3. +
=
NA
+
+
+
–
NA
=
+ +OA
4. +
=
+
+
NA
NA
–
NA
=
NA +FA
1. A)
Option A
2. B) Option
B
3. C)
Option C
4. D)
Option D
Answer: D
Explanation: The debit to Cash and credit to Notes Payable
indicates that cash, an asset, and notes payable, a liability, both increased.
There is no effect on the income statement, and the event is reported as a cash
inflow from financing activities.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
46) On August 1, Year 1, Benjamin and Associates collected
$18,000 in advance for legal services to be rendered for one year. Which of the
following entries reflect the end-of-the-year adjustment to reflect revenue earned?
A)
Cash 7,500
Revenue
7,500
B)
Accounts Receivable 6,000
Revenue
6,000
C)
Cash 18,000
Unearned Revenue
10,500
Revenue
7,500
D)
Unearned Revenue 7,500
Revenue
7,500
Answer: D
Explanation: The adjusting entry will increase revenue and
decrease unearned revenue, a liability. The journal entry would be a debit to
unearned revenue and a credit to revenue. $18,000 ÷ 12 months = $1,500 per
month. August through December is five months. $1,500 × 5 = $7,500.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology; The General Journal
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.; 03-02 Record transactions using the
general journal format.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
47) The employees of Able Company have worked the last two weeks
of Year 1, but the employees’ salaries have not been paid or recorded as of
December 31, Year 1. The adjusting entry that Able should make to accrue these
unpaid salaries on December 31, Year 1 is:
1. A)
debit to Salaries Expense and credit to Cash.
2. B)
debit to Salaries Expense and credit to Salaries Payable.
3. C)
debit to Salaries Payable and credit to Salaries Expense.
4. D) no
entry is required until the employee is paid next period.
Answer: B
Explanation: Accruing salary expenses will increase
Salaries Expense and increase Salaries Payable, a liability. The journal entry
would be a debit to Salaries Expense and a credit to Salaries Payable.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
48) On October 1, Year 1, Senegal Company paid $1,200 in advance
for rent of office space for one year and recorded a journal entry debiting
Prepaid Rent and crediting Cash for $1,200. On December 31, Year 1, the
required adjusting entry was recorded. What are the adjusted account balances
at December 31, Year 1?
1. A)
Prepaid Rent, $300; Rent Expense, $900
2. B)
Prepaid Rent, $1,200; Rent Expense, $0
3. C)
Prepaid Rent, $0; Rent Expense, $1,200
4. D)
Prepaid Rent, $900; Rent Expense, $300
Answer: D
Explanation: This is similar in concept to making a
prepayment for insurance coverage. The monthly rent is $100 ($1,200 ÷ 12
months). By December 31, the company had rented (used) the office space for
three months. The Prepaid Rent account has an adjusted balance of $900 ($1,200
− $300). The Rent Expense account will reflect the rent for those three months
of $300 ($100 × 3).
Difficulty: 3 Hard
Topic: Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
49) During a company’s first year of operations, the asset
account, Office Supplies, was debited for $2,300 for the purchases of supplies.
At year-end, a physical count of the supplies on hand revealed that $825 of
unused supplies were available for future use. How will the related adjusting
entry affect the company’s financial statements?
475.
A) Expenses will increase and assets will decrease by $1,475.
476.
B) Assets and expenses will both increase by $825.
477.
C) Expenses and assets will both increase by $1,475.
478.
D) The related adjusting entry has no effect on net income or
the accounting equation.
Answer: A
Explanation: The company used $1,475 ($2,300 − $825)
supplies during its first year of operations. The adjusting entry debiting
supplies expense and crediting supplies will increase expenses and decrease
assets by $1,475.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
50) Why are adjusting entries recorded at the end of the
accounting period?
1. A)
The Cash account must be adjusted for the effects of the daily transactions
with customers and creditors.
2. B)
The company’s accounts must be adjusted to ensure that debits are equal to
credits prior to preparing the trial balance.
3. C)
Unrecorded accruals and deferrals must be recognized before the financial
statements can be prepared.
4. D)
The data from the temporary accounts (revenues, expenses, and dividends) must
be moved into the retained earnings account.
Answer: C
Explanation: At the end of the accounting period, a
company will have several unrecorded accruals and deferrals that must be
recognized before the financial statements can be prepared. As a result,
adjusting entries always involve (1) an asset or liability account and (2) a
revenue or expense account.
Difficulty: 2 Medium
Topic: Debit/Credit Terminology; The General Journal
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.; 03-02 Record transactions using the
general journal format.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
51) On November 1, Year 1, Shumate Company paid $1,200 in
advance for an insurance policy that covered the company for six months. Which
of the following will be included in the adjustment required on December 31,
Year 1?
1. A) A
debit to Prepaid Insurance for $400
2. B) A
credit to Prepaid Insurance for $400
3. C) A
debit to Insurance Expense for $1,200
4. D) A
credit to Insurance Expense for $1,200
Answer: B
Explanation: The monthly insurance cost is $200 ($1,200 ÷
6 months). By December 31, Year 1 the company had used the insurance coverage
for two months. The Insurance Expense account must be increased with a debit
for $400 ($200 × 2) and the Prepaid Insurance account must be decreased with a
credit for the same amount.
Difficulty: 3 Hard
Topic: The General Journal
Learning Objective: 03-02 Record transactions using the
general journal format.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
52) The closing entry for the Dividends account would involve
which of the following?
1. A) A
credit to Retained Earnings
2. B) A
credit to Dividends
3. C) A
credit to Common Stock
4. D) A
credit to Cash
Answer: B
Explanation: The closing entry to move the balance of the
dividends account to the retained earnings account would include a debit to
retained earnings to decrease that account. The credit to the dividends account
leaves a zero balance in that account.
Difficulty: 2 Medium
Topic: Closing Entries
Learning Objective: 03-04 Prepare closing entries in
general journal format.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
53) Which one of the following would not be included in a
closing entry?
1. A) A
credit to Rent Expense
2. B) A
debit to Unearned Revenue
3. C) A
debit to Service Revenue
4. D) A
credit to Dividends
Answer: B
Explanation: Closing entries move all current year data
from the temporary accounts (revenues, expenses, and dividends) into the
retained earnings account. The Unearned Revenue account is a liability account;
it is not closed.
Difficulty: 2 Medium
Topic: Closing Entries
Learning Objective: 03-04 Prepare closing entries in
general journal format.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
54) The trial balance of Barger Company at the end of the
accounting period, immediately prior to recording closing entries, showed the
following:
Debit Credit
Cash
16,000
Land
30,000
Notes Payable
19,400
Common Stock
9,000
Retained
Earnings
14,000
Service
Revenue
43,000
Expenses
38,400
Dividends
1,000
Total
$
85,400
$
85,400
What will the balance of the retained earnings account be after
the closing entries are recorded?
1. A)
$17,600
2. B)
$4,600
3. C)
$18,600
4. D)
$3,600
Answer: A
Explanation: Closing entries move all current year data
from the temporary accounts (revenues, expenses, and dividends) into the
retained earnings account.
Ending retained earnings = Beginning retained earnings +
Revenues − Expenses − Dividends.
Ending retained earnings = $14,000 + $43,000 − $38,400 − $1,000
= $17,600.
Difficulty: 3 Hard
Topic: Closing Entries; Trial Balance and Financial
Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.; 03-04 Prepare closing
entries in general journal format.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
55) Which of the following statements is true?
1. A)
Adjusting entries are recorded after the closing entries have been recorded.
2. B)
Equal totals in a trial balance guarantees that no errors were made in the
recording process.
3. C)
Debits are equal to credits only after closing entries have been recorded.
4. D)
The balance in the retained earnings account in the trial balance will equal
the retained earnings balance on the balance sheet only after closing entries
have been posted to the general ledger.
Answer: D
Explanation: Every entry (not only closing entries) must
include at least one debit to an account and at least one credit to an account.
This system is called double-entry accounting. Adjusting entries are recorded
before (rather than after) the closing entries are recorded. If the debit total
does not equal the credit total on the trial balance, the accountant knows to
search for an error. Even if the totals are equal, however, there may be errors
in the accounting records. Prior to posting closing entries, the balance in the
retained earnings account will be the balance at the beginning of the
accounting period. Only after closing entries are posted will the trial balance
reflect the same retained earnings account balance as the balance sheet.
Difficulty: 2 Medium
Topic: Closing Entries; Debit/Credit Terminology; Trial
Balance and Financial Statements
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.; 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.; 03-04 Prepare closing
entries in general journal format.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
56) Which of the following statement is true regarding the trial
balance?
1. A)
Incorrectly recording a cash sale as a sale on account would not cause the
trial balance to be out of balance.
2. B)
The income statement is prepared using the post-closing trial balance.
3. C) A
balance of debits and credits ensures that all transactions have been recorded
correctly.
4. D)
Trial balances are only prepared at the end of an accounting period.
Answer: A
Explanation: Even if the debit and credit totals on the
trial balance are equal, there may be errors in the accounting records. For
example, equal trial balance totals would not disclose errors like the
following: failure to record transactions; misclassifications (such as debiting
the wrong account); or incorrectly recording the amount of a transaction. The
income statement is prepared using the adjusted trial balance.
Difficulty: 2 Medium
Topic: Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
57) Which of the following statement year, Valley Packaging
Company’s adjusted trial balance showed a zero balance in retained earnings.
Which of the following is the most likely explanation for this?
1. A)
Valley reported zero net income in the current year.
2. B)
Valley’s trial balance will be out of balance until closing entries are
recorded.
3. C)
The current year was Valley’s first year in business.
4. D) An
error must have been made in preparing Valley’s trial balance.
Answer: C
Explanation: The retained earnings balance in an adjusted
trial balance will be its beginning balance because temporary accounts have not
yet been closed. A beginning balance in retained earnings of zero is most
likely due to the current year being the company’s first year in business.
Difficulty: 3 Hard
Topic: Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
58) The following account balances were taken from the adjusted
trial balance of Kendall Company:
Revenues
$
22,400
Operating Expenses
15,000
Dividends
4,500
Retained
Earnings
17,000
What is the Retained Earnings account balance that will be
included on the post-closing trial balance?
1. A)
$19,900
2. B)
$7,400
3. C)
$2,900
4. D)
$24,400
Answer: A
Explanation: Ending retained earnings = Beginning balance
+ Revenues − Expenses − Dividends
Ending retained earnings = $17,000 + $22,400 − $15,000 − $4,500
= $19,900
Difficulty: 2 Medium
Topic: Closing Entries; Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.; 03-04 Prepare closing
entries in general journal format.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
59) What effect will the following closing entry have on the
retained earnings account?
Service
Revenue
18,800
Interest
Expense
750
Operating Expenses
15,500
Retained Earnings
2,550
1. A)
Retained earnings will remain unchanged.
2. B)
Retained earnings will decrease by $2,550.
3. C)
Retained earnings will increase by $2,550.
4. D)
Retained earnings will be transferred to the income statement.
Answer: C
Explanation: A credit to retained earnings of $2,550 (to
close the service revenue, interest expense, and operating expenses accounts)
will increase retained earnings by $2,550.
Difficulty: 2 Medium
Topic: Closing Entries
Learning Objective: 03-04 Prepare closing entries in
general journal format.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
60) During Year 5, Magellan Corporation earned net income of
$32,000 and paid cash dividends of $8,500 to its stockholders. Which of the
following choices reflects the effect of closing entries on the company’s
financial statements?
1. A)
The income statement will report net income of $23,500 after the closing
entries have been posted to the ledger accounts.
2. B)
The balance sheet will report retained earnings of $23,500 after the closing
entries have been posted to the ledger accounts.
3. C)
The balance sheet will report retained earnings of $32,000 after the closing
entries have been posted to the ledger accounts.
4. D)
The amounts reported on the financial statements will not be affected by the
closing entries.
Answer: D
Explanation: Closing entries are recorded after financial
statements have been prepared. Therefore, they do not have any effect on the
financial statements. The balance sheet will report retained earnings of
$23,500 after the closing entries have been posted to the ledger accounts only
if this is the company’s first year of operations.
Difficulty: 3 Hard
Topic: Closing Entries
Learning Objective: 03-04 Prepare closing entries in
general journal format.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
61) Nelson Company began operations on December 1, Year 1. The
following transactions and adjustments were recorded in December and posted to
the company’s ledger accounts:
1) Acquired $9,000 cash from the issue of common stock to its
stockholders.
2) Provided services on account for $7,500.
3) Paid $4,500 cash for land.
4) Owed $3,000 of salaries expenses to employees for work done
in December that will be paid during January.
5) Purchased $900 of supplies on account to be used in January.
6) Collected $3,900 from customers.
What is the total of the debit account balances that will be
reported on the company’s adjusted trial balance at December 31, Year 1?
1. A)
$12,000
2. B)
$20,400
3. C)
$6,900
4. D)
$28,800
Answer: B
Explanation: Ending Cash balance = $9,000 − $4,500 +
$3,900 = $8,400
Ending accounts receivable balance = $7,500 − $3,900 = $3,600
Debit balances = Cash of $8,400 + Accounts receivable of $3,600
+ Land of $4,500 + Salaries expenses of $3,000 + Supplies of $900 = $20,400
To check:
Credit balances = Accounts payable of $900 + Salaries payable of
$3,000 + Revenue of $7,500 + Common stock of $9,000 = $20,400
Difficulty: 3 Hard
Topic: Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
62) How would the trial balance column totals be affected if a
$600 credit to Service Revenue was erroneously posted as a $600 debit to
Salaries Expense?
1. A)
The credit column of the trial balance would be $600 more than the debit
column.
2. B)
The debit column of the trial balance would be $1,200 more than the credit
column.
3. C)
The credit column of the trial balance would be $1,200 more than the debit
column.
4. D)
The debit column of the trial balance would be $600 more than the credit
column.
Answer: B
Explanation: The error would cause the debit column to be
overstated by $600 and the credit column to be understated by $600. The
difference between the two column totals would be $1,200.
Difficulty: 3 Hard
Topic: Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
63) The following is a trial balance of Barnhart Company as
December 31, Year 1:
Account Title: Debit
Credit
Cash 12,500
Accounts Receivable 3,250
Accounts
Payable
2,800
Common Stock
6,600
Retained
Earnings
4,500
Service
Revenue
7,450
Operating Expenses 5,100
Dividends
500
Totals 21,350
21,350
What is the total amount of assets that will be reported on the
balance sheet prepared as of December 31, Year 1?
1. A)
$21,350
2. B)
$12,500
3. C)
$15,750
4. D)
$23,200
Answer: C
Explanation: The two asset accounts listed on the trial
balance are Cash and Accounts Receivable. Total assets = $12,500 + $3,250 =
$15,750
Difficulty: 3 Hard
Topic: Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
64) The following is a random list of the adjusted account
balances of Wyoming Company as of the end of the current accounting period:
Cash 34,000 Accounts
Receivable 9,400
Accounts
Payable
7,400 Service
Revenue
34,400
Land 48,000 Retained
Earnings
32,400
Operating Expenses
22,800 Common Stock 40,000
What is the total of the credit account balances that will be
shown on the adjusted trial balance?
1. A)
$112,200
2. B)
$114,200
3. C)
$116,200
4. D)
$79,800
Answer: B
Explanation: Credit balances = Accounts payable of $7,400
+ Service revenue of $34,400 + Retained earnings of $32,400 + Common stock of
$40,000 = $114,200
To check:
Debit balances = Cash of $34,000 + Land of $48,000 + Accounts
receivable of $9,400 + Operating expenses of $22,800 = $114,200
Difficulty: 3 Hard
Topic: Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and explain
how it is used to prepare financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
65) Which of the following errors would cause the debit side of
a trial balance to be larger than the credit side?
1. A)
Revenue earned on account was recorded with a debit to Cash and a credit to
Revenue.
2. B)
Purchase of supplies on account was recorded with a credit to Supplies and a
debit to Accounts Payable.
3. C)
Land purchased with cash was recorded with a debit to the Land account and a
credit to Accounts Payable.
4. D)
None of these answer choices would cause the debit side of the trial balance to
be larger than the credit side.
Answer: D
Explanation: Equal trial balance totals would not disclose
errors in misclassifications; that is, debiting the wrong account or crediting
the wrong account. Even though the balances in the individual accounts would be
incorrect as a result of each of the errors described, the totals in the trial
balance would be in balance.
Difficulty: 2 Medium
Topic: Trial Balance and Financial Statements
Learning Objective: 03-04 Prepare closing entries in
general journal format.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
66) Which of the following statements is true regarding a trial
balance that balances?
1. A)
All transactions have been properly recorded.
2. B)
There are no missing transactions.
3. C)
This equality can only be achieved after closing entries have been recorded and
posted to the ledger accounts.
4. D)
The equality of debits and credits has been proven.
Answer: D
Explanation: The trial balance only proves the equality of
debits and credits. It does not detect missing or incorrect entries that were
recorded with equal debits and credits. If the debit total does not equal the
credit total on the trial balance, adjusted trial balance, or post-closing
trial balance, the accountant knows to search for an error.
Difficulty: 1 Easy
Topic: Trial Balance and Financial Statements
Learning Objective: 03-03 Prepare a trial balance and
explain how it is used to prepare financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
67) Explain how the following general journal entry affects the
accounting equation.
Accounts Receivable 500
Service
Revenue
500
1. A)
Both assets and stockholders’ equity increase.
2. B)
Both liabilities and assets increase.
3. C)
Assets increase and stockholders’ equity decreases.
4. D)
Liabilities increase and stockholders’ equity decreases.
Answer: A
Explanation: A debit to accounts receivable increases
assets and a credit to service revenue increases stockholders’ equity (retained
earnings).
Difficulty: 2 Medium
Topic: The General Journal
Learning Objective: 03-02 Record transactions using the
general journal format.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
68) The following transaction has been recorded in the general journal
entry:
Accounts
Payable 1,200
Cash
1,200
Which of the following could be an explanation for this
transaction?
1. A)
Provided services on account.
2. B)
Paid cash to settle accounts payable.
3. C)
Collected cash from customers.
4. D)
Borrowed money to support operating activities.
Answer: B
Explanation: The journal entry shows a decrease in cash
and a decrease in accounts payable, which could be explained by the payment of
cash to settle accounts payable.
Difficulty: 3 Hard
Topic: The General Journal
Learning Objective: 03-02 Record transactions using the
general journal format.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
69) The following transaction has been recorded in the general
journal:
Interest
Expense
150
Interest
Payable
150
How will this transaction affect the company’s financial
statements after it is posted to the ledger accounts?
1. A)
Decreases Total Liabilities
2. B)
Increases Retained Earnings
3. C)
Decreases Total Assets
4. D)
Decreases Stockholders’ Equity
Answer: D
Explanation: The debit to interest expense represents an
increase in the interest expense account, which is actually a decrease in
stockholders’ equity (retained earnings). Debiting an expense account,
therefore, reduces stockholders’ equity. The credit to interest payable
increases total liabilities.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology; The General Journal
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.; 03-02 Record transactions using the
general journal format.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
70) A transaction has been recorded in the general journal of
Van Buren Company as follows:
Cash 5,000
Service
Revenue
5,000
Which of the following describes how this entry affects the
company’s financial statements when it is posted to the ledger accounts?
Asset
=
Liab.
+ Stk.
Equity Rev.
–
Exp.
= Net
Inc.
Stmt of
Cash Flows
1. +
=
+
+
NA
NA –
+
=
–
NA
2. +-
=
NA
+
NA
+
–
NA
=
+ +OA
3. +
=
NA
+
+
+
–
NA
=
+ +FA
4. +
=
NA
+
+
+
–
NA =
+ +OA
1. A)
Option A
2. B)
Option B
3. C)
Option C
4. D)
Option D
Answer: D
Explanation: The debit to cash increases assets and the
credit to service revenue increases revenue, which increases net income and
stockholders’ equity (retained earnings). The transaction is reported as a cash
inflow from operating activities.
Difficulty: 3 Hard
Topic: Debit/Credit Terminology; The General Journal
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.; 03-02 Record transactions using the
general journal format.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
71) A transaction has been recorded in the general journal of
Todd Company as follows:
Supplies
800
Accounts
Payable
800
Which of the following could be an explanation for this
transaction?
1. A)
Incurred supplies expense
2. B)
Purchased supplies on account
3. C)
Used supplies
4. D)
Purchased supplies with cash
Answer: B
Explanation: The purchase of supplies on account would
increase supplies (a debit) and increase accounts payable (a credit).
Difficulty: 3 Hard
Topic: Debit/Credit Terminology; The General Journal
Learning Objective: 03-01 Record business events in
T-accounts using debit/credit terminology.; 03-02 Record transactions using the
general journal format.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
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