The Kelly Company purchased a building for $75,000 in cash. What is the effect on current assets?

1. Increase in current assets
2. Decrease in current assets
3. No effect on current assets
4. Unable to determine

Match the following accounting principles, accounting assumptions, and qualitative characteristics with their descriptions.

1. Separate Entity Assumption
2. Unit of Measure Assumption
3. Conservatism
4. Comparability
5. Consistency
6. Materiality
7. Relevance
8. Reliability
9. Matching Principle
10. Historical Cost Principle
11. Time Period Assumption

• Matching Principle - ___________ Recognizes expenses in the same period when they are incurred in generating revenues
• Comparability - ___________ The quality that allows decision makers to analyze two or more companies within an industry and look for similarities and differences.
• Consistency - ___________ The quality that means that similar accounting methods have been applied over time within a company.
• Conservatism - ___________ The guideline that suggests accountants should take special care to not overstate revenues.

Which of the following would increase retained earnings?

1. an increase to an expense account.
2. an increase to a revenue account.
3. a cash dividend being declared and paid to stockholders.
4. issuance of additional shares of common stock.

A company had the following account balances at the end of its first year of operations. Find the missing amounts.

Cash	1,300	Accounts receivable	?
Inventory	400	Property and equipment	1200
Accounts payable	500	Salaries payable	800
Common Stock	1475	Retained earnings	525
Revenue	2500	Expenses	?
Net Income	570	Dividends	?

1. Determine Accounts Receivable
2. Determine Expenses
3. Determine Dividends

December 31	Total Assets	Total Liabilities
Year 1	135,000	88,000
Year 2	177,000	92,000

Determine Net Income (or Loss) for Year 2 assuming that dividends paid during the year amounted to $3,000.

A company had the following account balances at the end of its first year of operations. Find the missing amounts.

Net Income	560	Common Stock	1,600
Accounts Payable	500	Retained Earnings	550
Inventory	?	Revenue	?
Equipment	1,200	Expenses	1,760
Accounts receivable	700	Cash	1,000
Dividends	?	Wages Payable	900

1. Determine Inventory
2. Determine Revenue
3. Determine Dividends

Accounts payable	$12,000	Accounts Receivable	20,900
Furniture	5,000	Accumulated Depreciation	6,500
Building	82,000	Cash	21,500
Common Stock	?	Sales Revenue	90,700
Cost of Goods Sold	51,500	Depreciation Expense	1,450
Dividends	6,600	Note Payable (due 3/1 Year 4)	20,000
Marketable Securities	1,400	Prepaid Expenses	18,000
Salaries Payable	2,800	Land	38,000
Note Payable (due 5/30 Year 2)	12,400	Service Revenue	22,550
Retained Earnings (1/1 Year 1 )	39,700	Salary Expense	18,000
Accrued Expenses Payable	1,500	Unearned Revenue	30,500
Utilities Expense	5,400

1. Determine Total assets on December 31, Year 1
2. Determine Current Liabilities on December 31, Year 1
3. Determine Net Income for the year ended December 31, Year 1
4. Determine the total amount of Common Stock on December 31, Year 1

A company began operations at the start of Year 1.

During the year, it had cash sales of $50,000 and credit sales of $450,000. The company collected $420,000 in cash from the credit sales. The company purchased inventory costing $250,000 and paid $18,000 in dividends. The company incurred the following expenses:

Cost of goods sold	210,000	Rent expense	6,000
Salary expense	80,000	Depreciation expense	4,000
Interest expense	5,000	Income tax expense	57,000

Using this information, answer the following questions.

1. What would Operating Income on the Dec. 31, Year 1 Income Statement be reported as?
2. As of Dec. 31, Year 1, determine the ending balance in the Accounts Receivable
3. Determine Ending Retained Earnings as of December 31, Year 1

At the end of Year 2, a company has a retained earnings balance of 5,700. Compute the missing amounts in the following table.

	Year 1	Year 2
Beginning retained earnings	4,500	A
Revenues for the year	16,300	15,200
Expenses for the year	B	13,300
Dividends declared	1,000	1,500

	(B) Year 1 Expenses	(A) Year 2 Beginning retained earnings
1.	13,700	2,300
2.	14,500	5,300
3.	17,500	5,700
4.	19,500	6,100
5.	None of the above

What type of account is increased with a debit but is a decrease to retained earnings?

1. Liability
2. Asset
3. Revenue
4. Expense

Prepare the journal entry for the following transaction:

Purchased $16,000 of inventory, paid $12,000 in cash and the rest remained on account.

Prepare the journal entry for the following transaction:

Sold $90,000 of goods to customers, receiving $65,000 in cash and the remained on account.

Determine the effect on a company’s Assets and Net Income from the following transaction: land is purchased with cash.

	Assets	Net Income
A	Decreased	Decreased
B	Decreased	No effect
C	Increased	No effect
D	Increased	Increased
E	None of the above

The payment of a liability in cash will decrease stockholders’ equity.

True / False

A T-account shows total debits of $26,000 and total credits of $20,000; therefore, it has a $6,000 debit balance.

True / False?

A company experienced the following financial events on Sept. 29, Year 1. How many of these economic events would require a journal entry on that day?

1. The company signed a new contract with an employees’ union that requires a $2.00 per hour increase in wages and a longer lunch break, effective 10/1/Y1.
2. The company president is retiring and will be replaced by the vice president of finance who will be paid $50,000 more per year.
3. The company purchased a fire insurance policy for $5,000 that will pay $1,000,000 if the facility is destroyed. The policy insures the company from 11/1/Y1 - 10/31/Y2

---

1. One
2. Two
3. Three
4. None

Which of the following would not be considered an adjusting entry?

1. Debit insurance expense, credit prepaid insurance
2. Debit unearned revenue, credit revenue
3. Debit accounts payable, credit cash
4. Debit accounts receivable, credit service revenue

Which account would not appear in a closing journal entry?

1. Depreciation expense
2. Cost of Goods Sold
3. Rent receivable
4. Dividends
5. Service revenue

Which account is least likely to be debited when revenue is earned?

1. Unearned revenue
2. Cash
3. Accounts Receivable
4. Accounts Payable

On December 15, Year 1, a company receives an order from a customer for services to be performed on December 28, Year 1. Due to a backlog of orders, the company does not the perform the services until January 3, Year 2. The company sends a bill to the customer on January 4, Year 2 and the customer pays for the services on January 10, Year 2. When should revenue be recorded by the company, assuming the accrual method of accounting?

1. Dec. 15, Year 1
2. Dec. 28, Year 1
3. Jan. 3, Year 2
4. Jan. 4, Year 2
5. Jan. 10, Year 2

Which of the following is a requirement for revenue recognition under accrual accounting?

1. The customer has paid for the goods or services
2. The customer has signed a contract ordering goods are services
3. Delivery of the goods or services has been scheduled
4. The price of the goods or services is fixed
5. All of the above requirements

Salaries payable at the end of the period was $500. Salary expense for the period was $1,100 and $1,400 was paid to employees in cash.

What was salaries payable at the beginning of the period?

A company operates five days per week with a daily payroll of $6,000. Employees are paid every Friday. The last day of the accounting period is Thursday, October 31. What is the amount of Wage Expense to be recorded on the next payday, Friday, November 1?

1. $0
2. $30,000
3. $24,000
4. $12,000
5. $6,000

After the closing process is complete, which of the following is false?

1. All accounts with a non-zero balance will be shown on the balance sheet.
2. The net income or net loss and the dividends for the period have been transferred to the retained earnings account
3. All temporary accounts have a zero balance
4. None of the above are false

The following journal entries were recorded by a company during the month of September. What was net income for the month?

Determine Net Income for September

An electronics store had the following transactions in February:

1. Sold $90,000 of goods to customers, receiving $65,000 in cash and the remainder on account. The inventory had an original cost of $36,000.
2. Purchased $16,000 of inventory, paid $12,000 in cash and the rest remained on account.
3. Paid $2,000 for wages that were owed to employees from January.
4. Received a customer order and payment of $9,000 for an audio system to be delivered and installed in March
5. By February 28, accrued wages were $14,000.

What would Net Income (on an accrual basis) for the month of February would be?

A company’s prepaid rent account showing the beginning and ending balances for Year 1 is shown below: The Year 1 income statement reported $8,000 in rent expense. How much cash was paid for rent in Year 1?

1. $7,400
2. $5,600
3. $7,100
4. $8,600
5. None of the above

An advertising agency receives a $10,000 cash deposit from a client on February 15th for an advertising campaign which will begin in March. Which of the following statements is true for the agency (which uses accrual accounting)?

1. A liability will be reported on the balance sheet at the end of February
2. A prepaid asset will be reported on the balance sheet at the end of February
3. Revenue will be recorded and reported on the income statement for February
4. Cash from operations will be reported on the statement of cash flows in March
5. All of the above are true

Unadjusted Trial Balance December 31, Year 1
	Debits	Credits
Cash	33,900
Accounts Receivable	18,700
Supplies	1,800
Prepaid advertising	900
Equipment	15,000
Accounts Payable		1,200
Unearned Service Revenue		3,000
Common stock		24,000
Retained Earnings		11,200
Service Revenue		76,000
Salaries Expense	41,000
Rent expense	3,600
Utilities	500
	115,400	115,400

Additional Information:

1. Of the balance in the unearned service revenue accounts, $400 had not been earned by year end.
2. On 12/1/Y1, the company rented office space for $1,200 per month for three months and paid the entire $3,600 in cash.
3. On December 1, Year 1, the company paid $900 for six months of advertising.
4. A count of supplies on December 31, Year 1 showed $200 of supplies still on hand.
5. The equipment was purchased on Jan. 1, Year 1. The useful life is estimated to be 10 years. Straight-line depreciation is used and no salvage value is expected.
6. As of 12/31/Y1, salaries of $800 had been earned by employees but still not be paid until 1/1/Y2.

A. Record the necessary adjusting journal entries.
B. Determine net income after adjustments.

Unadjusted Trial Balance December 31
	Debits	Credits
Cash	7,100
Accounts Receivable	6,200
Supplies	1,200
Accounts Payable		1,500
Notes Payable		6,000
Unearned Revenue		400
Common Stock		2,600
Retained Earnings		1,900
Dividends	600
Revenues		10,200
Salaries Expense	5,100
Rent expense	2,400
	22,600	22,600

Additional Information:

1. Supplies used during the year totaled $750.
2. Of the balance in the Unearned Revenue account, 60% had been completed.
3. Accrued salaries at December 31 were $900
4. On December 1, the company prepaid $2,400 for 4 months of rent. This transaction was recorded with a debit to Rent Expense
5. The note is a 6-month, 4% loan obtained from the bank on November 1.

Required:

1. Prepare all necessary adjusting entries as of December 31. (There are 5 of them.)
2. Determine Net Income for the year ending December 31.

Columbia, Inc. had the following transaction in February:

1. Columbia sold inventory for $7,200. $3,500 was received in cash and the remainder was on account. The inventory cost was $4,000.
2. Columbia purchased new inventory costing $6,000. $3,000 was paid in cash and the remainder was on account.
3. Columbia paid $1,200 for February wages and an additional $400 for wages incurred in the last week of January. $300 of wages incurred in the last week of February will be paid March 5.
4. Columbia received $1,000 from customers at deposits on orders to be delivered March 9.
5. Columbia collected $800 on accounts receivable.

Columbia should report how much revenue in February?

1. $7,200
2. $5,300
3. $8,000
4. $9,000
5. None of the above

Columbia should report how much expense in February?

1. $11,200
2. $5,900
3. $5,500
4. $5,200
5. None of the above

For each transaction listed, determine the effect on the February financial statements. Indicate + for increase, or – for decrease. Leave the cell blank if there is no effect.

		Balance Sheet			Income Statement
	Transaction	Assets	Liabilities	SHE	Revenue	Expenses	Net Income
1	Paid wages earned in January	—	—
2	Prepaid rent expired	—		—		+	—
3	Performed service which customer had paid for in January		—	+	+		+
4	Collected on credit sales made in Jan.
5	Depreciation on equipment was recorded	—		—		+	—
6	Hired a new manager and signed a contract to pay her $60,000 per year.
7	Dividends were declared an immediately paid	—		—
8	Purchased shares of another company’s stock for cash
9	Performed a service for a customer, collected three fourths in cash and balance on account.	+		+	+		+
10	Purchased a patent, paying cash
11	Incurred expenses, paid four-fifths in cash and put the balance on account	—	+	—		+	—

For each of the following independent situations, determine the effect of ignoring the required 12/31 year-end adjusting entry. Would assets, liabilities, and equity be understated (U) or overstated (O) if the entry is not made? If there would be no effect, leave the cell blank.

	Assets	Liability	Equity
Cash was received on Dec. 1 when a 2-year lease was signed. Rent revenue was credited on that date.		—	+
Interest is incurred but not yet paid on a long-term note payable		—	+
Equipment with a 5-year life has been used 1 year	—		+
One-half of a prepaid insurance policy has expired	+		+

The following accounts reflect the correct Year 1 year-end balances after adjustment but before closing.

Accumulated depreciation	225	Accounts payable	52
Accounts receivable	280	Cash	76
Common stock	100	Cost of goods sold	420
Depreciation expense	60	Dividends	20
Equipment	600	Interest expense	4
Inventory	90	Note payable, due 8/1/Y4	63
Prepaid rent	10	Rent expense	40
Retained earnings, 1/1/Y1	400	Salary expense	125
Sales revenue	855	Unearned revenue	30

1. Determine total assets
2. Determine total liabilities
3. What are retained earnings on the Dec. 31, Year 1 balance sheet?
4. Prepare the correct entry to close the Income Summary accounts.

Which of the following would not be included in the Cash and Cash Equivalents on a Balance Sheet dated December 31, Year 1.

1. A money market account
2. 6 month commercial paper, acquired Nov. 1, Year 1
3. 3 month certificate of deposit, acquired Dec. 15, Year 1
4. 100 share of GE stock, acquired December 1, Year 1; expected sale date of February 15, Year 2
5. 12 month treasury bill, acquired October 15, Year 1

The treasurer of a company was preparing a bank reconciliation as of March 31. The following items were identified:

• The balance per books was $9,600
• Interest earned on the checking account during March was $10.
• Outstanding checks totaled $875.
• A customer’s NSF check in the amount of $40 was returned with the March bank statement.
• Deposits in transit amounted to $530.
• During March, the bookkeeper for the company recorded payment of an account payable incorrectly as $136. The check was paid by the bank in the correct amount of $361.
• The bank incorrectly credited the company’s account $140 for a check deposited by another company.

What is the balance per the bank statement on March 31?

1. 9,550
2. 9,140
3. 10,280
4. 9,830
5. 8,860

Determine the effect on a company’s Assets and net Income from the following transaction: bad debt expense is recorded by a company using the allowance method to account for bad debts.

	Assets	Net Income
A	Decreased	Decreased
B	Decreased	No effect
C	Increased	No effect
D	Increased	Increased
F	None of the above

Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account has what effect on the following accounts (indicate Increase, Decrease, or No Effect)

1. Allowance for Doubtful Accounts
2. Net Income
3. Net Realizable Value of Accounts Receivable

Ladies Resale Is a consignment store that sells ladies used clothing. Dorothy May took clothes to the resale shop on December 15 to be sold on consignment. The clothes have not been sold as of December 31. Which company should include the inventory on its December 31 balance sheet?

1. Ladies Resale
2. Dorothy May

Allied Company purchased goods from Baker Company on December 28. Allied agreed to pick up the goods from Baker. On December 31 the goods were in Baker’s warehouse separated and identified as Allied’s. Which company should include the inventory on its December 31 balance sheet?

1. Allied Company
2. Baker Company

Determine the effect on a company’s Assets and Net Income from the following transaction: a patent is amortized at year end.

	Assets	Net Income
A	Decreased	Decreased
B	Decreased	No effect
C	Increased	No effect
D	Increased	Increased
E	None of the above

The following is available for a company’s machine on December 31, Year 1:

Cost	6,000	Method	Double Declining Balance
Salvage Value	1,500	Purchased	January 1, Year 1
Accumulated Depreciation	2,400	Expected Life	5 years

How much depreciation expense will be recorded in Year 3?

1. $864
2. $1,824
3. $1,164
4. $840
5. $660

Listed below are selected items from the financial statements of a company for the year ended December 31, Year 1.

Salaries Payable	63,000
Accounts payable	35,000
Current Maturity of Long-Term Debt	25,000
Bonds payable, due December 31, Year 20	2,200,000
Premium on Bonds Payable	14,000
Estimated Warranty Liability	10,000
Note Payable, due Dec. 31, Year 4	75,000
Unearned Revenue	25,000
Note Payable, due June 1, Year 2	8,000
Discount on Note Payable due June 1, Year 2	500

1. Determine the Total Current Liabilities to be on a classified balance sheet at December 31, Year 1.
2. Determine the Total Long-Term Liabilities to be reported on a classified balance sheet at December 31, Year 1.

A company provides a warranty on its products that it sells to customers. The warranty liability account had $1,200 balance on April 1. The company had sales of $67,000 in April and estimated warranty repairs at 3% of sales. During the month, the company actually paid out $2,400 for warranty repairs.

Determine the April 30 balance in the estimated warranty liability account.

A 5% stock dividend would increase the number of outstanding shares by 5% and would reduce the par value of the stock by 5%

True / False

For the following event, choose the answer statement which properly demonstrates the effect on the financial statements.

A Company declares and distributes a 45% stock dividend.

	Assets	Liability	Retained Earnings	Shareholder's Equity
A	Increase			Increase
B			Decrease
C		Increase	Decrease	Decrease
D	Decrease		Decrease	Decrease
E	No effect on financials

When bonds are sold for more than the face amount, this means that the:

1. Maturity value will be greater than the face amount
2. Bonds are sold at a discount
3. Coupon rate of interest is more than the market rate of interest
4. The company will not have to record interest expense on the bond
5. The cash interest payment will be less than interest expense each period

If Elonu Corporation issued $1,000,000 of 10-year, 9% bonds payable on January 1 at 95, market interest rates were

1. less than 9%
2. greater than 9%
3. equal to 9%
4. not enough information to determine

What effect does depreciation expense have on the Statement of Cash Flows (indirect method)?

1. Add to net income in operating activities
2. Subtract from net income in operating activities
3. Cash inflow from investing activities
4. Cash outflow from investing activities
5. Would not appear on the statement of cash flows

Which of the following could not appear on the statement of cash flows in the operating activity section as an adjustment to net income (indirect method)?

1. subtract loss on sale of investments
2. add amortization expense
3. subtract decrease in accounts payable
4. subtract increase in prepaid insurance
5. all of the above could be adjustments to net income in the operating activity section