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Chapter 2
ANALYZING FOR BUSINESS TRANSACTIONS
True /False Questions
1. The first step in the processing of a transaction is to analyze the transaction and source
documents.
2. Preparation of a trial balance is the first step in processing a financial transaction.
3. Source documents provide evidence of business transactions and are the basis for
accounting entries.
4. Items such as sales tickets, bank statements, checks, and purchase orders are examples of a
business’s source documents.
5. An account is a record of increases and decreases in a specific asset, liability, equity,
revenue, or expense item.
6. A customer’s promise to pay on credit is classified as an account payable by the seller.
7. Dividends paid to the stockholders are a business expense.
8. The purchase of land and buildings will generally be recorded in the same ledger account.
9. Unearned revenues are classified as liabilities.
10. Cash paid to stockholders by the business of a corporation and used for personal expenses,
should be treated as an expense of the business.
11. When a company provides services for which cash will not be received until some future
date, the company should record the amount charged as accounts receivable.
12. A company’s chart of accounts is a list of all the accounts used and includes an
identification number assigned to each account.
13. An account’s balance is the difference between the total debits and total credits for the
account, including any beginning balance.
14. The right side of an account is called the debit side.
15. In a double-entry accounting system, the total dollar amount debited must always equal
the total dollar amount credited.
16. Increases in liability accounts are recorded as debits.
17. Debits increase asset and expense accounts.
18. Credits always increase account balances.
19. Crediting an expense account decreases it.
20. A revenue account normally has a debit balance.
21. Asset accounts are normally decreased by debits.
22. Debit means increase and credit means decrease for all accounts.
23. Asset accounts normally have debit balances and revenue accounts normally have credit
balances.
24. A dividend normally has a debit balance.
25. A debit entry is always an increase in the account.
26. A transaction that credits an asset account and credits a liability account must also affect
one or more other accounts.
27. A transaction that decreases a liability and increases an asset must also affect one or more
other accounts.
28. If insurance coverage for the next two years is paid for in advance, the amount of the
payment is debited to an asset account called Prepaid Insurance.
29. The purchase of supplies on credit should be recorded with a debit to Supplies and a credit
to Accounts Payable.
30. If a company purchases equipment paying cash, the journal entry to record this transaction
will include a debit to Cash.
31. If a company provides services to a customer on credit, the company providing the
service should credit Accounts Receivable.
32. When a company bills a customer for $700 for services rendered, the journal entry to
record this transaction will include a $700 debit to Services Revenue.
33. The debt ratio helps to assess the risk a company has of failing to pay its debts and is
helpful to both its owners and creditors.
34. The higher a company’s debt ratio, the lower the risk of a company not being able to meet
its obligations.
35. The debt ratio is calculated by dividing total assets by total liabilities.
36. A company that finances a relatively large portion of its assets with liabilities is said to
have a high degree of financial leverage.
37. If a company is highly leveraged, this means that it has relatively high risk of not being
able to repay its debt.
38. Booth Industries has liabilities of $105 million and total assets of $350 million. Its debt
ratio is 40.0%.
39. A journal entry that affects no more than two accounts is called a compound entry.
40. Posting is the transfer of journal entry information to the ledger.
41. Transactions are recorded first in the ledger and then transferred to the journal.
42. The journal is known as a book of original entry.
43. A general journal gives a complete record of each transaction in one place, and shows the
debits and credits for each transaction.
44. The general journal is known as the book of final entry because financial statements are
prepared from it.
45. At a given point in time, a business’s trial balance is a list of all of its general ledger
accounts and their balances
46. The ordering of accounts in a trial balance typically follows their identification number
from the chart of accounts, that is, assets first, then liabilities, then common stock and
dividends, followed by revenues and expenses.
47. The trial balance can serve as a replacement for the balance sheet, since total debits must
equal total credits.
48. A balanced trial balance is proof that no errors were made in journalizing transactions,
posting to the ledger, and preparing the trial balance.
49. If cash was incorrectly debited for $100 instead of correctly crediting it for $100, the cash
account’s balance will be overstated (too high).
50. The financial statement that summarizes the changes in retained earnings is called the
balance sheet.
51. The heading on every financial statement lists the three W’s—Who (the name of the
business); What (the name of the statement); and Where (the organization’s address)
52. If common stock account had a $10,000 credit balance at the beginning of the period, and
during the period, the stockholders invest an additional $5,000, the balance in the common
stock account listed on the trial balance will be equal to a debit balance of $5,000.
53. Dividends are not reported on a business’s income statement.
54. An income statement reports the revenues earned less the expenses incurred by a business
over a period of time.
55. The balance sheet reports the financial position of a company at a point in time.
56. The same four basic financial statements are prepared by both U.S. GAAP and IFRS.
57. Neither U.S. GAAP nor IFRS require the use of accrual basis accounting.
58. The accounting process begins with:
A. Analysis of business transactions and source documents.
B. Preparing financial statements and other reports.
C. Summarizing the recorded effect of business transactions.
D. Presentation of financial information to decision-makers.
E. Preparation of the trial balance.
59. All of the following statements regarding a sales invoice are true except:
A. A sales invoice is a type of source document.
B. A sales invoice is used by sellers to record the sale and for control.
C. A sales invoice is used by buyers to record purchases and monitor purchasing activity.
D. A sales invoice gives rise to an entry in the accounting process.
E. A sales invoice does not provide objective evidence about a transaction.
60. A business’s source documents may include all of the following except:
A. Sales tickets.
B. Ledgers.
C. Checks.
D. Purchase orders.
E. Bank statements.
61. A business’s source documents:
A. include the ledger.
B. Provide objective evidence that a transaction has taken place.
C. must be in electronic form.
D. are prepared internally to ensure accuracy.
E. include the chart of accounts.
62. A business’s record of the increases and decreases in a specific asset, liability, equity,
revenue, or expense is known as a(n):
A. Journal.
B. Posting.
C. Trial balance.
D. Account.
E. Chart of accounts.
63. An account used to record the stockholders’ investments in a business is called a(n):
A. Dividends account.
B. Common stock account.
C. Revenue account.
D. Expense account.
E. Liability account.
64. Identify the account used by businesses to record the transfer of assets from a business to
its owner for personal use:
A. A revenue account.
B. The dividends account.
C. The common stock account.
D. An expense account.
E. A liability account.
65. Identify the statement below that is correct.
A. When a future expense is paid in advance, the payment is normally recorded in a liability
account called Prepaid Expense.
B. Promises of future payment by the customer are called accounts receivable.
C. Increases and decreases in cash are always recorded in the common stock account.
D. An account called Land is commonly used to record increases and decreases in both the
land and buildings owned by a business.
E. Accrued liabilities include accounts receivable.
66. Unearned revenues are generally:
A. Revenues that have been earned and received in cash.
B. Revenues that have been earned but not yet collected in cash.
C. Liabilities created when a customer pays in advance for products or services before the
revenue is earned.
D. Recorded as an asset in the accounting records.
E. Increases to stockholders equity.
67. Prepaid expenses are generally:
A. Payments made for products and services that do not ever expire.
B. Classified as liabilities on the balance sheet.
C. Decreases in equity.
D. Assets that represent prepayments of future expenses.
E. Promises of payments by customers.
68. A company’s formal promise to pay (in the form of a promissory note) a future amount is
a(n):
A. Unearned revenue.
B. Prepaid expense.
C. Credit account.
D. Note payable.
E. Account receivable.
69. The record of all accounts and their balances used by a business is called a:
A. Journal.
B. Book of original entry.
C. General Journal.
D. Balance column journal.
E. Ledger.
70. A company’s ledger is:
A. A record containing increases and decreases in a specific asset, liability, equity, revenue, or
expense item.
B. A journal in which transactions are first recorded.
C. A collection of documents that describe transactions and events entering the accounting
process.
D. A list of all accounts a company uses with an assigned identification number.
E. A record containing all accounts and their balances used by the company.
71. A company’s list of accounts and the identification numbers assigned to each account is
called a:
A. Source document.
B. Journal.
C. Trial balance.
D. Chart of accounts.
E. General Journal.
72. The numbering system used in a company’s chart of accounts:
A. Is the same for all companies.
B. Is determined by generally accepted accounting principles.
C. Depends on the source documents used in the accounting process.
D. Typically begins with balance sheet accounts.
E. Typically begins with income statement accounts.
73. A debit:
A. Always increases an account.
B. Is the right-hand side of a T-account.
C. Always decreases an account.
D. Is the left-hand side of a T-account.
E. Is not need to record a transaction.
74. The right side of a T-account is a(n):
A. Debit.
B. Increase.
C. Credit.
D. Decrease.
E. Account balance.
75. Identify the statement below that is incorrect.
A. The normal balance of accounts receivable is a debit.
B. The normal balance of dividends is a debit.
C. The normal balance of unearned revenues is a credit.
D. The normal balance of an expense account is a credit.
E. The normal balance of the common stock account is a credit.
76. A credit is used to record an increase in all of the following accounts except:
A. Accounts Payable
B. Service Revenue
C. Unearned Revenue
D. Wages Expense
E. Common Stock
77. A debit is used to record an increase in all of the following accounts except:
A. Supplies
B. Cash
C. Accounts Payable
D. Dividends
E. Prepaid Insurance
78. Identify the account below that is classified as a liability in a company’s chart of
accounts:
A. Cash
B. Unearned Revenue
C. Salaries Expense
D. Accounts Receivable
E. Supplies
79. Identify the account below that is classified as an asset in a company’s chart of accounts:
A. Accounts Receivable
B. Accounts Payable
C. Common Stock
D. Unearned Revenue
E. Service Revenue
80. Identify the account below that is classified as an asset account:
A. Unearned Revenue
B. Accounts Payable
C. Supplies
D. Common Stock
E. Service Revenue
81. Identify the account below that is classified as a liability account:
A. Cash
B. Accounts Payable
C. Salaries Expense
D. Common Stock
E. Equipment
82. Identify the account below that impacts the Equity of a business:
A. Utilities Expense
B. Accounts Payable
C. Accounts Receivable
D. Cash
E. Unearned Revenue
83. A business uses a credit to record:
A. An increase in an expense account.
B. A decrease in an asset account.
C. A decrease in an unearned revenue account.
D. A decrease in a revenue account.
E. A decrease in an equity account.
84. A simple tool that is widely used in accounting to represent a ledger account and to
understand how debits and credits affect an account balance is called a:
A. Dividends account.
B. Equity account.
C. Drawing account.
D. T-account.
E. Balance column sheet.
85. Identify the statement below that is correct?
A. The left side of a T-account is the credit side.
B. Debits decrease asset and expense accounts, and increase liability, equity, and revenue
accounts.
C. The left side of a T-account is the debit side.
D. Credits increase asset and expense accounts, and decrease liability, equity, and revenue
accounts.
E. In certain circumstances the total amount debited need not equal the total amount credited
for a particular transaction.
86. An account balance is:
A. The total of the credit side of the account.
B. The total of the debit side of the account.
C. The difference between the total debits and total credits for an account including the
beginning balance.
D. Assets = liabilities + equity.
E. Always a credit.
87. Select the account below that normally has a credit balance.
A. Cash.
B. Office Equipment.
C. Wages Payable.
D. Dividends.
E. Sales Salaries Expense.
88. A debit is used to record which of the following:
A. A decrease in an asset account.
B. A decrease in an expense account.
C. An increase in a revenue account.
D. An increase in a contributed capital account.
E. An increase in the dividends account.
89. A credit entry:
A. Increases asset and expense accounts, and decreases liability, stockholders’ equity, and
revenue accounts.
B. Is always a decrease in an account.
C. Decreases asset and expense accounts, and increases liability, stockholders’ equity, and
revenue accounts.
D. Is recorded on the left side of a T-account.
E. Is always an increase in an account.
90. A double-entry accounting system is an accounting system:
A. That records each transaction twice.
B. That records the effects of transactions and other events in at least two accounts with equal
debits and credits.
C. In which each transaction affects and is recorded in two or more accounts but that could
include two debits and no credits.
D. That may only be used if T-accounts are used.
E. That insures that errors never occur.
91. Ralph Pine Consulting received its telephone bill in the amount of $300, and immediately
paid it. Pine’s general journal entry to record this transaction will include a
A. Debit to Telephone Expense for $300.
B. Credit to Accounts Payable for $300.
C. Debit to Cash for $300.
D. Credit to Telephone Expense for $300.
E. Debit to Accounts Payable for $300.
92. Golddigger Services, Inc. provides services to clients. On May 1, a client prepaid
Golddigger Services $60,000 for 6-months services in advance. Golddigger Services’ general
journal entry to record this transaction will include a:
A. Debit to Unearned Management Fees for $60,000.
B. Credit to Management Fees Earned for $60,000.
C. Credit to Cash for $60,000.
D. Credit to Unearned Management Fees for $60,000.
E. Debit to Management Fees Earned for $60,000.
93. Willow Rentals purchased office supplies on credit. The general journal entry made by
Willow Rentals will include a:
A. Debit to Accounts Payable.
B. Debit to Accounts Receivable.
C. Credit to Cash.
D. Credit to Accounts Payable.
E. Credit to Common Stock.
94. An asset created by prepayment of an insurance expense is:
A. Recorded as a debit to Unearned Revenue.
B. Recorded as a debit to Prepaid Insurance.
C. Recorded as a credit to Unearned Revenue.
D. Recorded as a credit to Prepaid Insurance.
E. Not recorded in the accounting records until the insurance period expires.
95. Richard Redden contributed $70,000 in cash and land worth $130,000 to open a new
business, RR Consulting, Inc. Which of the following general journal entries will RR
Consulting, Inc. make to record this transaction?
A. Debit Assets $200,000; credit Common Stock, $200,000.
B. Debit Cash and Land, $200,000; credit Common Stock, $200,000.
C. Debit Cash $70,000; debit Land $130,000; credit Common Stock, $200,000.
D. Debi Common Stock, $200,000; credit Cash $70,000, credit Land, $130,000.
E. Debit Common Stock, $200,000; credit Assets, $200,000.
96. Wiley Consulting purchased $7,000 worth of supplies and paid cash immediately. Which
of the following general journal entries will Wiley Consulting make to record this transaction?
A.
Accounts Payable 7,000
Supplies 7,000
B
Cash 7,000
Supplies 7,000
C.
Supplies 7,000
Cash 7,000
D.
Supplies 7,000
Accounts Payable 7,000
E.
Supplies Expense 7,000
Accounts Payable 7,000
97. J. Brown Consulting paid $500 cash for utilities for the current month. Given the choices
below, determine the general journal entry that J. Brown Consulting will make to record this
transaction.
A.
Utilities Expense 500
Cash 500
B.
Cash 500
Utilities Expense 500
C.
Cash 500
Accounts Payable 500
D.
Utilities Expense 500
Accounts Payable 500
E.
Prepaid Utilities 500
Accounts Payable 500
98. J. Brown Consulting paid $2,500 cash for a 5-month insurance policy which begins on
December 1. Given the choices below, determine the general journal entry that J. Brown
Consulting will make to record this transaction.
A.
Insurance Expense 2,500
Cash 2,500
B.
Cash 2,500
Insurance Expense 2,500
C.
Cash 2,500
Prepaid Insurance 2,500
D.
Prepaid Insurance 2,500
Cash 2,500
E.
Insurance Expense 2,500
Prepaid Insurance 2,500
99. ABC Catering received $800 cash from a customer for catering services to be provided
next month. Given the choices below, determine the general journal entry that ABC Catering
will make to record this transaction.
A.
Unearned Catering Revenue 800
Catering Revenue 800
B.
Cash 800
Accounts Receivable 800
C.
Cash 800
Unearned Catering Revenue 800
D.
Cash 800
Catering Revenue 800
E.
Accounts Receivable 800
Catering Revenue 800
100. Grills R Us Catering provided $1,000 of catering services and billed its client for the
amount owed. Given the choices below, determine the general journal entry that Grills R Us
Catering will make to record this transaction.
A.
Unearned Catering Revenue 1,000
Catering Revenue 1,000
B.
Catering Revenue 1,000
Accounts Receivable 1,000
C.
Accounts Receivable 1,000
Unearned Catering Revenue 1,000
D.
Accounts Receivable 1,000
Catering Revenue 1,000
E.
Cash 1,000
Catering Revenue 1,000
101. Trimble Graphic Design receives $1,500 from a client billed in a previous month for
services provided. Which of the following general journal entries will Trimble Graphic
Design make to record this transaction?
A.
Cash 1,500
Accounts Receivable 1,500
B.
Cash 1,500
Unearned Design Revenue 1,500
C.
Accounts Receivable 1,500
Unearned Design Revenue 1,500
D.
Cash 1,500
Design Revenue 1,500
E.
Accounts Receivable 1,500
Cash 1,500
102. The company paid $100 cash in dividends to J. Smith, the owner. Which of the following
general journal entries will Jay’s Limo Services, Inc. make to record this transaction?
A.
Dividends 100
Cash 100
B.
Cash 100
Dividends 100
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C.
Common Stock 100
Dividends 100
D.
Dividends 100
Common Stock 100
E.
Cash 100
Common Stock 100
103. Jay’s Limo Services, Inc. paid $300 cash to employees for work performed in the current
period. Which of the following general journal entries will Jay’s Limo Services, Inc. make to
record this transaction?
A.
Salaries Expense 300
Accounts Payable 300
B.
Cash 300
Salaries Expense 300
C.
Salaries Expense 300
Dividends 300
D.
Salaries Payable 300
Salaries Expense 300
E.
Salaries Expense 300
Cash 300
104. Able Graphics received a $400 utility bill for the current month’s electricity. It is not due
until the end of the next month which is when they intend to pay it. Which of the following
general journal entries will Able Graphics make to record this transaction?
A.
Utilities Expense 400
Cash 400
B.
Cash 400
Utilities Expense 400
C.
Utilities Expense 400
Accounts Payable 400
D.
Accounts Payable 400
Utilities Expense 400
E.
Utilities Payable 400
Cash 400
105. HH Consulting & Design provided $800 of consulting work and $100 of design work to
the same client. It billed the client for the total amount and is expecting to collect from the
customer next month. Which of the following general journal entries will HH Consulting &
Design make to record this transaction?
A.
Design Revenue 100
Consulting Revenue 800
Accounts Receivable 900
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B.
Accounts Payable 800
Design Revenue 100
Consulting Revenue 800
C.
Cash 900
Consulting Revenue 800
Design Revenue 100
D.
Cash 900
Consulting Revenue 800
Design Revenue 100
E.
Accounts Receivable 900
Consulting Revenue 800
Design Revenue 100
106. Gi Gi’s Dance Studio provided $150 of dance instruction and rented out its dance studio
to the same client for another $100. The client paid immediately. Identify the general journal
entry below that Gi Gi’s will make to record the transaction.
A.
Rental Revenue 100
Instruction Revenue 150
Cash 250
B.
Accounts Payable 250
Rental Revenue 100
Instruction Revenue 150
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C.
Cash 250
Rental Revenue 100
Instruction Revenue 150
D.
Accounts Receivable 250
Rental Revenue 100
Instruction Revenue 150
E.
Unearned Revenue 250
Rental Revenue 100
Instruction Revenue 150
107. Geraldine Parker, the owner of Gi Gi’s Dance Studio, Inc., started the business by
investing $10,000 cash and donating a building worth $20,000. Identify the general journal
entry below that Gi Gi’s will make to record the transaction.
A.
Cash 10,000
Common Stock 30,000
B.
Common Stock 30,000
Cash 10,000
Building 20,000
C.
Cash 10,000
Building 20,000
Common Stock 30,000
D.
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Common Stock 30,000
Retained Earnings 30,000
E.
Cash & Building 30,000
Common Stock 30,000
108. Mary Martin, the owner of Martin Consulting, Inc., started the business by investing
$40,000 cash. Identify the general journal entry below that Martin Consulting, Inc. will make
to record the transaction.
A.
Cash 40,000
Common Stock 40,000
B.
Common Stock 40,000
Cash 40,000
C.
Investments 40,000
Cash 40,000
D.
Investments 40,000
Common Stock 40,000
E.
Cash 40,000
Increased Equity 40,000
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109. If cash is received from customers in payment for products or services that have not yet
been delivered to the customers, the business would record the cash receipt as:
A. A debit to an unearned revenue account.
B. A debit to a prepaid expense account.
C. A credit to an unearned revenue account.
D. A credit to a prepaid expense account.
E. No entry is required at the time of collection.
110. On May 31, the Cash account of Bottle’s R US had a normal balance of $5,000. During
May, the account was debited for a total of $12,200 and credited for a total of $11,500. What
was the balance in the Cash account at the beginning of May?
A. A $0 balance.
B. A $4,300 debit balance.
C. A $4,300 credit balance.
D. A $5,700 debit balance.
E. A $5,700 credit balance.
111. On April 30, Victor Services had an Accounts Receivable balance of $18,000. During
the month of May, total credits to Accounts Receivable were $52,000 from customer
payments. The May 31 Accounts Receivable balance was $13,000. What was the amount of
credit sales during May?
A. $ 5,000.
B. $47,000.
C. $52,000.
D. $57,000.
E. $32,000.
112. During the month of February, Victor Services had cash receipts of $7,500 and cash
disbursements of $8,600. The February 28 cash balance was $1,800. What was the February
1 beginning cash balance?
A. $700.
B. $1,100.
C. $2,900.
D. $0.
E. $4,300.
113. The following transactions occurred during July:
1. Received $900 cash for services provided to a customer during July.
2. Received $2,200 cash investment from Bob Johnson, the stockholder of the business.
3. Received $750 from a customer in partial payment of his account receivable which arose
from sales in June.
4. Provided services to a customer on credit, $375.
5. Borrowed $6,000 from the bank by signing a promissory note.
6. Received $1,250 cash from a customer for services to be rendered next year.
What was the amount of revenue for July?
A. $ 900.
B. $ 1,275.
C. $ 2,525.
D. $ 3,275.
E. $11,100.
114. If Taylor Willow, the owner of Willow Hardware Inc., uses cash of the business to
purchase a family automobile, the business should record this use of cash with an entry to:
A. Debit Automobiles and credit Cash.
B. Debit Cash and credit Salary Expense.
C. Debit Cash and credit Dividends.
D. Debit Dividends and credit Cash.
E. Debit Automobiles and credit Cash.
115. Larry Bar opened an frame shop and completed these transactions:
1. Larry started the shop by investing $40,000 cash and equipment valued at $18,000.
2. Purchased $70 of office supplies on credit.
3. Paid $1,200 cash for the receptionist’s salary.
4. Sold a custom frame service and collected a $1,500 cash on the sale.
5. Completed framing services and billed the client $200.
What was the balance of the cash account after these transactions were posted?
A. $300.
B. $41,500.
C. $40,300.
D. $38,500.
E. $38,700.
116. At the beginning of January of the current year, Little Mikey’s Catering ledger reflected
a normal balance of $52,000 for accounts receivable. During January, the company collected
$14,800 from customers on account and provided additional services to customers on account
totaling $12,500. Additionally, during January one customer paid Mikey $5,000 for services
to be provided in the future. At the end of January, the balance in the accounts receivable
account should be:
A. $54,700.
B. $49,700.
C. $2,300.
D. $54,300.
E. $49,300.
117. During the month of March, Harley’s Computer Services made purchases on account
totaling $43,500. Also during the month of March, Harley was paid $8,000 by a customer for
services to be provided in the future and paid $36,900 of cash on its accounts payable balance.
If the balance in the accounts payable account at the beginning of March was $77,300, what is
the balance in accounts payable at the end of March?
A. $83,900.
B. $91,900.
C. $6,600.
D. $75,900.
E. $4,900.
118. On January 1 of the current year, Jimmy’s Sandwich Company, Inc. reported
stockholders’ equity totaling $122,500. During the current year, total revenues were $96,000
while total expenses were $85,500. Also, during the current year the business paid $20,000
to the stockholders. No other changes in equity occurred during the year. If, on December 31
of the current year, total assets are $196,000, the change in stockholders’ equity during the
year was:
A. A decrease of $9,500.
B. An increase of $9,500.
C. An increase of $30,500.
D. A decrease of $30,500
E. An increase of 73,500.
119. Andrea Apple opened Apple Photography, Inc. on January 1 of the current year. During
January, the following transactions occurred and were recorded in the company’s books:
1. Andrea, the stockholder, invested $13,500 cash in the business.
2. Andrea contributed $20,000 of photography equipment to the business.
3. The company paid $2,100 cash for an insurance policy covering the next 24 months.
4. The company received $5,700 cash for services provided during January.
5. The company purchased $6,200 of office equipment on credit.
6. The company provided $2,750 of services to customers on account.
7. The company paid cash of $1,500 for monthly rent.
8. The company paid $3,100 on the office equipment purchased in transaction #5 above.
9. Paid $275 cash for January utilities.
Based on this information, the balance in the cash account at the end of January would be:
A. $41,450.
B. $12,225
C. $18,700.
D. $15,250.
E. $13,500.
120. Andrea Apple opened Apple Photography, Inc. on January 1 of the current year. During
January, the following transactions occurred and were recorded in the company’s books:
1. Andrea, the stockholder, invested $13,500 cash in the business.
2. Andrea contributed $20,000 of photography equipment to the business.
3. The company paid $2,100 cash for an insurance policy covering the next 24 months.
4. The company received $5,700 cash for services provided during January.
5. The company purchased $6,200 of office equipment on credit.
6. The company provided $2,750 of services to customers on account.
7. The company paid cash of $1,500 for monthly rent.
8. The company paid $3,100 on the office equipment purchased in transaction #5 above.
9. Paid $275 cash for January utilities.
Based on this information, the balance in the stockholders’ equity reported on the Balance
Sheet at the end of the month would be:
A. $31,400.
B. $39,200.
C. $31,150.
D. $40,175.
E. $30,875.
121. The debt ratio is used:
A. To measure the ratio of equity to expenses.
B. To assess the risk associated with a company’s use of liabilities.
C. Only by banks when a business applies for a loan.
D. To determine how much debt a firm should pay off.
E. To determine how much debt a company should borrow.
122. Identify the correct formula below used to calculate the debt ratio.
A. Total Equity/Total Liabilities.
B. Total Liabilities/Total Equity.
C. Total Liabilities/Total Assets.
D. Total Assets/Total Liabilities.
E. Total Equity/Total Assets.
123. Lu Lu’s Catering has a debt ratio equal to .3 and its competitor, Able’s Bakery, has a debt
ratio equal to .7. Determine the statement below that is correct.
A. Able’s Bakery has a smaller percentage of its assets financed with liabilities as compared
to Lu Lu’s.
B. Able’s Bakery’s financial leverage is less than Lu Lu’s
C. Able’s Bakery’s financial leverage is greater than Lu Lu’s.
D. Lu Lu’s has a higher risk from its financial leverage
E. Higher financial leverage involves lower risk.
124. Identify the statement that is incorrect.
A. Higher financial leverage involves higher risk.
B. Risk is higher if a company has more liabilities.
C. Risk is higher if a company has higher assets.
D. The debt ratio is one measure of financial risk.
E. Lower financial leverage involves lower risk.
125. The debt ratio of Company A is .31 and the debt ratio of Company B is .21. Based on
this information, an investor can conclude:
A. Company B has more debt than Company A.
B. Company B has a lower risk from its financial leverage.
C. Company A has a lower risk from its financial leverage.
D. Company A has 10% more assets than Company B.
E. Both companies have too much debt.
126. The debt ratio of Jackson’s Shoes is .9 and the debt ratio of Billy’s Catering is 1.0.
Based on this information, an investor can conclude:
A. Billy’s Catering finances a relatively lower portion of its assets with liabilities than
Jackson’s Shoes.
B. Billy’s Catering has a lower risk from its financial leverage.
C. Jackson’s Shoes has a higher risk from its financial leverage.
D. Billy’s Catering has the exact same dollar amount of total liabilities and total assets.
E. Jackson’s Shoes has less equity per dollar of assets than Billy’s Catering.
127. Gi Gi’s Bakery has total assets of $425 million. Its total liabilities are $110 million. Its
equity is $315 million. Calculate the debt ratio.
A. 38.6%.
B. 13.4%.
C. 34.9%.
D. 25.9%.
E. 14.9%.
128. Happiness Catering has total assets of $385 million. Its total liabilities are $100 million
and its equity is $285 million. Calculate its debt ratio.
A. 35.1%.
B. 26.0%.
C. 38.5%.
D. 28.5%.
E. 58.8%.
129. All of the following statements accurately describe the debt ratio except.
A. It is of use to both internal and external users of accounting information.
B. A relatively high ratio is always desirable.
C. The dividing line for a high and low ratio varies from industry to industry.
D. Many factors such as a company’s age, stability, profitability and cash flow influence the
determination of what would be interpreted as a high versus a low ratio.
E. The ratio might be used to help determine if a company is capable of increasing its income
by obtaining further debt.
130. At the end of the current year, Leer Company reported total liabilities of $300,000 and
total equity of $100,000. The company’s debt ratio on the last year-end was:
A. 300%.
B. 33.3%
C. 75.0%.
D. 66.67%.
E. $400,000.
131. At the beginning of the current year, Trenton Company Inc.’s total assets were $248,000
and its total liabilities were $175,000. During the year, the company reported total revenues
of $93,000, total expenses of $76,000 and dividends of $5,000. There were no other changes
in stockholders’ equity during the year and total assets at the end of the year were $260,000.
Trenton Company’s debt ratio at the end of the current year is:
A. 70.6%.
B. 67.3%.
C. 32.7%.
D. 48.6%.
E. 1.42%.
132. The process of transferring general journal entry information to the ledger is called:
A. Double-entry accounting.
B. Posting.
C. Balancing an account.
D. Journalizing.
E. Not required unless debits do not equal credits.
133. A column in journals and ledger accounts that is used to cross reference journal and
ledger entries is the:
A. Account balance column.
B. Debit column.
C. Posting reference column.
D. Credit column.
E. Description column.
134. The chronological record of each complete transaction that has occurred is called the:
A. Account balance.
B. Ledger.
C. Journal.
D. Trial balance.
E. Cash account.
135. A business’s general journal provides a place for recording all of the following except:
A. The transaction date.
B. The names of the accounts involved.
C. The amount of each debit and credit.
D. An explanation of the transaction.
E. The balance in each account.
136. The balance column in a ledger account is:
A. An account entered on the balance sheet.
B. A column for showing the balance of the account after each entry is posted.
C. Another name for the dividends account.
D. An account used to record the transfers of assets from a business to its stockholders.
E. A simple form of account that is widely used in accounting to illustrate the debits and
credits required in recording a transaction.
137. A general journal is:
A. A ledger in which amounts are posted from a balance column account.
B. Not required if T-accounts are used.
C. A complete record of all transactions in chronological order from which transaction
amounts are posted to the ledger accounts.
D. Not necessary in electronic accounting systems.
E. A book of final entry because financial statements are prepared from it.
138. A record in which the effects of transactions are first recorded and from which
transaction amounts are posted to the ledger is a(n):
A. Account.
B. Trial balance.
C. Journal.
D. T-account.
E. Balance column account.
139. Smiles Entertainment had the following accounts and balances at December 31:
Account Debit Credit
Cash..................................... $10,000
Accounts Receivable...........
2,000
Prepaid Insurance ...............
2,400
Supplies................................
1,000
Accounts Payable................
$5,000
Common Stock...................
4,900
Service Revenue..................
7,000
Salaries Expense..................
500
Utilities Expense.................
1,000
Totals $16,900 $16,900
Using the information in the table, calculate the company’s reported net income for the
period.
A. $ 1,100
B. $ 4,000.
C. $ 4,500.
D. $10,400.
E. $ 5,500
140. Jackson Consulting, Inc. had the following accounts and balances at December 31:
Account Debit Credit
Cash..................................... $20,000
Accounts Receivable...........
6,000
Prepaid Insurance................
1,500
Supplies...............................
5,000
Accounts Payable................
$ 500
Common Stock....................
16,200
Dividends.............................
1,000
Service Revenue..................
20,000
Utilities Expense.................
2,000
Salaries Expense .................
1,200
Totals $36,700 $36,700
Using the information in the table, calculate Jackson Consulting Inc.’s reported net income for
the period.
A. $16,800
B. $15,800.
C. $15,300
D. $10,300.
E. $32,000
141. Bologna Lodging, Inc. had the following accounts and balances as of December 31:
Account Debit Credit
Cash..................................... $20,000
Accounts Receivable...........
2,000
Salaries Expense..................
500
Accounts Payable................
$4,000
Lodging Revenue.................
7,000
Utilities Expense.................
500
Prepaid Insurance ...............
1,400
Supplies................................
1,500
Common Stock....................
14,900
Totals $25,900 $25,900
Using the information in the table, calculate the total assets reported on Bologna’s balance
sheet for the period.
A. $ 24,900
B. $ 25,400.
C. $ 22,500.
D. $ 25,900.
E. $ 23,400
142. At the end of its first month of operations, Michael’s Consulting Services, Inc. reported
net income of $25,000. They also had account balances of: Cash, $18,000; Office Supplies,
$2,000 and Accounts Receivable $10,000. The stockholders’ total investment for this first
month was $5,000.
Calculate the ending balance in Stockholders’ Equity to be reported on the Balance Sheet.
A. $30,000
B. $25,000
C. $20,000
D. $ 5,000
E. $ 7,000
143. Identify the accounts that would normally have balances in the debit column of a
business’s trial balance.
A. Assets and expenses.
B. Assets and revenues.
C. Revenues and expenses.
D. Liabilities and expenses.
E. Liabilities and dividends.
144. Identify the accounts that would normally have balances in the credit column of a
business’s trial balance
A. Liabilities and expenses.
B. Assets and revenues.
C. Revenues and expenses.
D. Revenues and liabilities.
E. Dividends and liabilities
145. Which of the following is not a step in the accounting process?
A. Record relevant transactions and events in a journal
B. Post journal information to the ledger accounts
C. Prepare and analyze the trial balance.
D. Analyzing each transaction
E. Verify that revenues and expenses are equal.
146. A bookkeeper has debited an account for $3,500 and credited a liability account for
$2,000. Which of the following would be an incorrect way to complete the recording of this
transaction:
A. Credit another asset account for $1,500.
B. Credit another liability account for $1,500.
C. Credit an expense account for $1,500.
D. Credit the common stock account for $1,500.
E. Debit another asset account for $1,500.
147. A report that lists a business’s accounts and their balances, in which the total debit
balances should equal the total credit balances, is called a(n):
A. Account balance.
B. Trial balance.
C. Ledger.
D. Chart of accounts.
E. General Journal.
148. Identify the statement below that is true.
A. If the trial balance is in balance, it proves that no errors have been made in recording and
posting transactions.
B. The trial balance is a book of original entry.
C. Another name for the trial balance is the chart of accounts.
D. The trial balance is a list of all accounts from the ledger with their balances at a point in
time.
E. The trial balance is another name for the balance sheet as long as debits balance with
credits.
149. While in the process of posting from the journal to the ledger, a company failed to post a
$500 debit to the Equipment account. The effect of this error will be that:
A. The Equipment account balance will be overstated.
B. The trial balance will not balance.
C. The error will overstate the debits listed in the journal.
D. The total debits in the trial balance will be larger than the total credits.
E. The error will overstate the credits listed in the journal.
150. A $15 credit to Sales was posted as a $150 credit. By what amount is the Sales account in
error?
A. $150 understated.
B. $135 overstated.
C. $150 overstated.
D. $15 understated.
E. $135 understated.
151. At year-end, a trial balance showed total credits exceed total debits by $4,950. This
difference could have been caused by:
A. An error in the general journal where a $4,950 increase in Accounts Receivable was
recorded as an increase in Cash.
B. A net income of $4,950.
C. The balance of $49,500 in Accounts Payable being entered in the trial balance as $4,950.
D. The balance of $5,500 in the Office Equipment account being entered on the trial balance
as a debit of $550.
E. An error in the general journal where a $4,950 increase in Accounts Payable was recorded
as a decrease in Accounts Payable.
152. Identify the item below that would cause the trial balance to not balance?
A. A $1,000 collection of an account receivable was erroneously posted as a debit to Accounts
Receivable and a credit to Cash.
B. The purchase of office supplies on account for $3,250 was erroneously recorded in the
journal as $2,350 debit to Office Supplies and credit to Accounts Payable.
C. A $50 cash receipt for the performance of a service was not recorded at all.
D. The purchase of office equipment for $1,200 was posted as a debit to Office Supplies and a
credit to Cash for $1,200.
E. The cash payment of a $750 account payable was posted as a debit to Accounts Payable
and a debit to Cash for $750.
153. The credit purchase of a new oven for $4,700 was posted to Kitchen Equipment as a
$4,700 debit and to Accounts Payable as a $4,700 debit. What effect would this error have on
the trial balance?
A. The total of the Debit column of the trial balance will exceed the total of the Credit column
by $4,700.
B. The total of the Credit column of the trial balance will exceed the total of the Debit column
by $4,700.
C. The total of the Debit column of the trial balance will exceed the total of the Credit column
by $9,400.
D. The total of the Credit column of the trial balance will exceed the total of the Debit column
by $9,400.
E. The total of the Debit column of the trial balance will equal the total of the Credit column.
154. On a trial balance, if the Debit and Credit column totals are equal, then:
A. All transactions have been recorded correctly.
B. All entries from the journal have been posted to the ledger correctly.
C. All ledger account balances are correct.
D. Equal debits and credits have been recorded for transactions.
E. The balance sheet would be correct.
155. Given the following errors, identify the one by itself that will cause the trial balance to be
out of balance.
A. A $200 cash salary payment posted as a $200 debit to Cash and a $200 credit to Salaries
Expense.
B. A $100 cash receipt from a customer in payment of her account posted as a $100 debit to
Cash and a $10 credit to Accounts Receivable.
C. A $75 cash receipt from a customer in payment of her account posted as a $75 debit to
Cash and a $75 credit to Cash.
D. A $50 cash purchase of office supplies posted as a $50 debit to Office Equipment and a
$50 credit to Cash.
E. An $800 prepayment from a customer for services to be rendered in the future was posted
as an $800 debit to Unearned Revenue and an $800 credit to Cash.
156. A $130 credit to Supplies was credited to Fees Earned by mistake. By what amounts are
the accounts under- or overstated as a result of this error?
A. Supplies, understated $130; Fees Earned, overstated $130.
B. Supplies, understated $260; Fees Earned, overstated $130.
C. Supplies, overstated $130; Fees Earned, overstated $130.
D. Supplies, overstated $130; Fees Earned, understated $130.
E. Supplies, overstated $260; Fees Earned, understated $130.
157. All of the following are asset accounts except:
A. Accounts Receivable.
B. Buildings.
C. Supplies expense.
D. Equipment.
E. Prepaid insurance.
158. Compare the list of accounts below and choose the list that contains only accounts that
would be classified as asset accounts on the Chart of Accounts .
A. Accounts Payable; Cash; Supplies.
B. Unearned Revenue; Accounts Payable; Dividends.
C. Building; Prepaid Insurance; Supplies Expense.
D. Cash; Prepaid Insurance; Equipment.
E. Notes Payable; Cash; Dividends
159. Which financial statement reports an organization’s financial position at a single point in
time?
A. Income statement.
B. Balance sheet.
C. Statement of retained earnings.
D. Cash flow statement.
E. Trial balance.
160. Joe Jackson opened Jackson’s Repairs, Inc. on March 1 of the current year. During
March, the following transactions occurred and were recorded in the company’s books:
1. Jackson invested $25,000 cash in the business.
2. Jackson contributed $100,000 of equipment to the corporation.
3. The company paid $2,000 cash to rent office space for the month.
4. The company received $16,000 cash for repair services provided during March.
5. The company paid $6,200 for salaries for the month.
6. The company provided $3,000 of services to customers on account.
7. The company paid cash of $500 for monthly utilities.
8. The company received $3,100 cash in advance of providing repair services to a customer.
Based on this information, net income for March would be:
A. $10,300.
B. $13,400
C. $5,300
D. $8,400
E. $13,500.
161. Joel Consulting received $3,000 from a customer for services provided. Joel’s general
journal entry to record this transaction will be:
A. Debit Services Revenue, credit Accounts Receivable.
B. Debit Cash, credit Accounts Payable.
C. Debit Cash, credit Accounts Receivable.
D. Debit Cash, credit Services Revenue.
E. Debit Accounts Payable, credit Services Revenue.
162. Wiley Hill opened Hill’s Repairs, Inc. on March 1 of the current year. During March, the
following transactions occurred and were recorded in the company’s books:
1. Wiley invested $25,000 cash in the corporation.
2. Wiley contributed $100,000 of equipment to the corporation.
3. The company paid $2,000 cash to rent office space for the month.
4. The company received $16,000 cash for repair services provided during March.
5. The company paid $6,200 for salaries for the month.
6. The company provided $3,000 of services to customers on account.
7. The company paid cash of $500 for monthly utilities.
8. The company received $3,100 cash in advance of providing repair services to a customer.
9. The company paid $5,000 cash in dividends to Wiley. (sole shareholder)
Based on this information, the balance in Stockholders’ Equity reported on the Balance Sheet
at the end of March would be:
A. $133,400.
B. $130,300
C. $125,300
D. $8,400
E. $13,500.
163. Match the following definitions and terms by placing the letter that identifies the best
definition in the blank space next to the term.
____ 1. Source documents
____ 2. Debit
____ 3. Posting
____ 4. Double-entry accounting
____ 5. Ledger
____ 6. Journal
____ 7. Account
____ 8. Credit
____ 9. T-account
____ 10. Trial balance
A. Decrease in an asset, and expense account, and increase in a liability, contributed capital,
retained earnings and revenue account; recorded on the right side of a T-account.
B. A record containing all the accounts of a company and their balances.
C. An accounting system where each transaction affects and is recorded in at least two
accounts; the sum of the debits for each entry must equal the sum of its credits.
D. A company’s chronological record of each transaction in one place that shows debits and
credits for each transaction.
E. An increase in an asset and expense account, and decrease in a liability, contributed capital,
retained earnings,
and revenue account; recorded on the left side of a T-account.
F. A record of the increases and decreases in a specific asset, liability, equity, revenue, or
expense item.
G. A representation of a ledger account used to understand the effects of transactions.
H.A list of accounts and their balances at a point in time.
I. The process of transferring journal entry information to the ledger accounts.
J. Verifiable evidence that transactions have occurred used to record accounting information.
1. J; 2. E; 3. I; 4. C; 5. B; 6. D; 7. F; 8. A; 9. G; 10. H
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 02-C1
Learning Objective: 02-C2
Learning Objective: 02-C3
Learning Objective: 02-C4
Learning Objective: 02-P2
Topic: Analyzing and Recording Process
Topic: The Account and Its Analysis
Topic: Ledger and Chart of Accounts
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Topic: Debits and Credits
Topic: Trial Balance
164. Provided below is a list of definitions and terms. Match them by placing the letter that
identifies the best definition in the blank space next to each term.
____ 1. Debit ____ 6. Chart of accounts
____ 2. Note payable ____ 7. Trial balance
____ 3. Ledger ____ 8. Credit
____ 4. Journal ____ 9. Account balance
____ 5. Debt ratio ____ 10. Balance column account
A. An increase in an asset, dividend, and expense account, and a decrease in a
liability, contributed capital, retained earnings, and revenue account; recorded on
the left side of a T-account.
B. A decrease in an asset and expense account, and an increase in a liability,
contributed capital, retained earnings, and revenue account; recorded on the right
side of a T-account.
C. A written promise to pay a definite sum of money on a specified future date.
D. The difference between total debits and total credits for an account including the
beginning balance.
E. A list of accounts and their balances at a point in time; the total debit balances
should equal the total credit balances.
F. A list of all accounts used by a company and the identification number assigned to
each account.
G. The ratio of total liabilities to total assets; used to reflect the risk associated with
the company’s debts.
H. An account with debit and credit columns for recording entries and another
column for showing the balance of the account after each entry.
I. A chronological record of each transaction in one place that shows debits and
credits for each transaction.
J. A record containing all accounts of a company and their balances.
1. A; 2. C; 3. J; 4. I; 5. G; 6. F; 7. E; 8. B; 9. D; 10. H
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 02-A2
Learning Objective: 02-C1
Learning Objective: 02-C2
Learning Objective: 02-C3
Learning Objective: 02-C4
Topic: Debt Ratio
Topic: Analyzing and Recording Process
Topic: The Account and Its Analysis
Topic: Ledger and Chart of Accounts
Topic: Debits and Credits
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education
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Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education
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165. Provided below is a list of definitions and terms. Match them by placing the letter that
identifies the best definition in the blank space next to each term.
____ 1. General journal
____ 2. Chart of accounts
____ 3. Note receivable
____ 4. T-account
____ 5. Unearned revenues
____ 6. Compound journal entry
____ 7. Posting reference column
____ 8. Posting
____ 9. Account
____ 10. Trial Balance
A. A simple form used as a helpful tool in understanding the effect of transactions and events
on specific accounts.
B. The most flexible type of journal, it can be used to record any kind of transaction.
C. A journal entry that affects at least three accounts.
D. A written promise from a customer to pay a definite sum of money on a specified future
date.
E. A record of the increases and decreases in a specific asset, liability, equity, revenue, or
expense item.
F. A list of all accounts used by a company and the identification number assigned to each
account.
G. The process of transferring journal entry information to the ledger.
H. A list of accounts and their balances at a point in time; the total debit balances should equal
the total credit balances.
I. A column in journals where individual account numbers are entered when entries are posted
to ledger accounts.
J. Liabilities created when customers pay in advance for products or services; satisfied by
delivering the products or services in the future.
1. B; 2. F; 3. D; 4. A; 5. J; 6. C; 7. I; 8. G; 9. E; 10. H
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 02-C1
Learning Objective: 02-C2
Learning Objective: 02-C3
Learning Objective: 02-C4
Topic: Analyzing and Recording Process
Topic: The Account and Its Analysis
Topic: Ledger and Chart of Accounts
Topic: Debits and Credits
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McGraw-Hill Education
2-75
166. Identify each of the following accounts as a revenue (R), expense (E), asset (A),
liability (L), or equity ( SE) by placing initials (R,E,A,L or SE) in the blanks.
____ 1. Salary Expense
____ 2. Cash
____ 3. Equipment
____ 4. Common Stock
____ 5. Fees Revenue
____ 6. Accounts Receivable
____ 7. Accounts Payable
____ 8. Dividends
____ 9. Supplies
____ 10. Unearned Revenue
____ 11. Prepaid Insurance
____ 12. Office Furniture
1. E; 2. A; 3. A; 4. SE; 5. R; 6. A; 7. L; 8. SE; 9. A; 10. L; 11. A; 12. A
Blooms: Understand
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 2 Medium
Learning Objective: 02-C3
Topic: Ledger and Chart of Accounts
167. Review the transactions below and identify with an “X” those that would be posted as
a credit in the ledger (The first one has been done for you):
__X_1. Salary Payable was increased.
____ 2. Cash was decreased
____ 3. Equipment was increased
____ 4. Common Stock was increased
____ 5. Salaries Expense was increased
____ 6. Accounts Receivable was decreased
____ 7. Unearned Revenue was increased
____ 8. Dividends was increased
____ 9. Supplies was increased
____ 10. Building was increased
____ 11. Utilities Expense was increased
____ 12. Service Revenue was increased
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168. The following accounts appear on either the Income Statement (IS) or Balance Sheet
(BS). In the space to the left of each account, write the letters, IS or BS to identify the
statement on which the account appears.
____ 1. Office Equipment
____ 2. Rent Expense
____ 3. Unearned Fees Revenues
____ 4. Rent Expense
____ 5. Accounts Payable
____ 6. Common Stock
____ 7. Fees Revenue
____ 8. Cash
____ 9. Notes Receivable
____ 10. Wages Payable
1. BS; 2. IS; 3. BS; 4. IS; 5. BS; 6. BS; 7. IS; 8. BS; 9. BS; 10. BS
Blooms: Understand
AACSB: Communication
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 02-P3
Topic: Using a Trial Balance to Prepare Financial Statements
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Essay Questions
169. Miley Block, Inc. is a building consultant. Shown below are (a) several accounts in her
ledger with each account preceded by an identification number, and (b) several transactions
completed by Block. Indicate the accounts debited and credited when recording each
transaction by placing the proper account identification numbers to the right of each
transaction.
1. Accounts Payable 7. Telephone Expense
2. Accounts Receivable 8. Unearned Revenue
3. Cash 9. Common Stock
4. Consulting Fees Earned 10. Dividends
5. Office Supplies 11. Insurance Expense
6.
Office Supplies
Expense 12. Prepaid Insurance
Debit Credit
Example:
2 4
Completed consulting work for a client
who will pay at a later date.
A. Received cash in advance from a
customer for designing a building
B. Purchased office supplies on credit.
C. Paid for the supplies purchased in B
D. Received the telephone bill of the
business and immediately paid it.
E. Paid for a 3-year insurance policy
170. Drew Castle, Inc. is an insurance appraiser. Shown below are (a) several accounts in his
ledger with each account preceded by an identification number, and (b) several transactions
completed by Castle. Indicate the accounts debited and credited when recording each
transaction by placing the proper account identification numbers to the right of each
transaction.
1. Accounts Payable 8. Office Supplies Expense
2. Accounts Receivable 9. Prepaid Insurance
3. Appraisal Fees Earned 10. Salaries Expense
4. Cash 11. Telephone Expense
5. Insurance Expense 12. Unearned Appraisal Fees
6. Office Equipment 13. Common Stock
7. Office Supplies 14. Dividends
Debit Credit
Example:
Completed an appraisal for a client who
promised to pay at a later date. 2 3
A. Received cash in advance for appraising a
hail damage claim………………………….
B. Purchased office supplies on credit………
C. The company paid cash in dividends to the
Drew Castle. (sole shareholder)….
D. Received the telephone bill of the business
and immediately paid it…………………….
E. Paid the salary of the office assistant….
F. Paid for the supplies purchased
in transaction B…………………………..
G. Completed an appraisal for a client and
immediately collected cash for the work
done…
171. List the steps in processing transactions.
172. Describe what source documents are and the purpose they serve in a business.
173. Explain how accounts are used in recording information about a business’s transactions.
174. Explain the difference between a general ledger and a chart of accounts.
175. Explain debits and credits and their role in the accounting system of a business.
176. Explain the debt ratio and its use in analyzing a company’s financial condition.
177. Explain the recording and posting processes.
178. What is a trial balance? What is its purpose?
179. Describe the link between a business’s income statement, the statement of retained
earnings, and the balance sheet.
180. Identify by marking an X in the appropriate column, whether each of the following items
would likely serve as a source document. The first one is done as an example
Yes No
Ex. Credit card X
a. Credit card receipt
b. Purchase order
c. Invoice
d. Balance sheet
e. Bank statement
f. Journal entry
g. Telephone bill
h. Employee earnings record
181. Indicate whether a debit or credit entry would be required to record the following
changes in each account.
a. To decrease Cash.
b. To increase Common Stock.
c. To decrease Accounts Payable.
d. To increase Salaries Expense.
e. To decrease Supplies.
f. To increase Revenue.
g. To decrease Accounts Receivable.
h. To increase Dividends.
182. Using the following list of accounts and identification letters A through J for Homer’s
Management Co., Inc., enter the type of account and its normal balance into the table below.
The first item is filled in as an example:
A. Common Stock F. Prepaid Rent
B. Interest Payable G.Advertising Expense
C. Land H.Unearned Rent Revenue
D. Dividends I. Commissions Earned
E. Fees Earned J. Notes Receivable
Type of Account Normal Balance
Asset Liability Equity Debit Credit
A X X
B
C
D
E
F
G
H
I
J
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183. Rowdy Bolton began Bolton Office Services, Inc. in October and during that month
completed these transactions:
a. Invested $10,000 cash, and $15,000 of computer equipment.
b. Paid $500 cash for an insurance premium covering the next 12 months.
c. Completed a word processing assignment for a customer and collected $1,000 cash.
d. Paid $200 cash for office supplies.
e. Paid $2,000 for October’s rent.
Prepare journal entries to record the above transactions. Explanations are unnecessary.
184. BBB Company sends a $2,500 invoice to a customer for catering services it provided
during the month. Set up the necessary T-accounts below and show how this transaction
would be recorded directly in those accounts.
185. ABC Company made a $2,500 payment on account, to satisfy a previously recorded
account payable. Set up the necessary T-accounts below and show how this transaction would
be recorded directly in those accounts.
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186. The business paid $100 cash dividend to Charles Nice (the sole stockholder of the
corporation). Set up the necessary T-accounts below and show how this transaction would be
recorded directly in those accounts.
187. On December 3, the ABBJ Company paid $1,400 cash in salaries to office personnel.
Prepare the general journal entry to record this transaction.
188. On February 5, Teddy’s Catering purchased an oven that cost $35,000. The firm made a
down payment of $5,000 cash and signed a long-term note payable for the balance. Show the
general journal entry to record this transaction.
189. Jarrod Automotive, Inc. owned and operated by Jarrod Johnson, began business in
September of the current year. Jarrod, a mechanic, had no experience with recording business
transactions. As a result, Jarrod entered all of September’s transactions directly into the
ledger accounts. When he tried to locate a particular entry he found it confusing and time
consuming. He has hired you to improve his accounting procedures. The accounts in his
General Ledger follow:
Cash Equipment
9/01 (a) 4,200 9/4 (b) 550 9/1 (a) 800
9/11 (d) 150 9/4 (b) 2,550
9/15 (e) 190
Common Stock Notes Payable
9/1 (a) 5,000 9/4 (b) 2,000
Accounts Receivable Revenue
9/9 ( c) 275 9/15 (e) 190 9/9 ( c) 275
9/11 (d) 150
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Prepare the general journal entries, in chronological order (a) through (e), from the T-account
entries shown. Include a brief description of the probable nature of each transaction.
190. Pippa’s Paralegal Services, Inc. completed these transactions in February:
a. Purchased office supplies on account, $300.
b. Completed work for a client on credit, $500.
c. Paid cash for the office supplies purchased in (a).
d. Completed work for a client and received $800 cash.
e. Received $500 cash for the work described in (b).
f. Received $1,000 from a client for paralegal services to be performed in March.
Prepare journal entries to record the above transactions. Explanations are not necessary.
191. Larry Matt, Inc. completed these transactions during December of the current year:
Dec. 1 Began a financial services practice by investing $15,000 cash and office
equipment having a $5,000 value.
2 Purchased $1,200 of office equipment on credit.
3 Purchased $300 of office supplies on credit.
4 Completed work for a client and immediately received a payment of $900 cash.
8 Completed work for Precept Paper Co. on credit, $1,700.
10 Paid for the supplies purchased on credit on December 3.
14 Paid for the annual $960 premium on an insurance policy.
18 Received payment in full from Precept Paper Co. for the work completed on
December 8.
27 The company paid $650 cash in dividends to the owner. (sole shareholder)
30 Paid $175 cash for the December utility bills.
30 Received $2,000 from a client for financial services to be rendered next year.
Prepare general journal entries to record these transactions.
192. Mary Sunny began business as Sunny Law Firm, Inc. on November 1. Record the
following November transactions by making entries directly to the T-accounts provided. Then,
prepare a trial balance, as of November 30.
a) Mary invested $15,000 cash and a law library valued at $6,000.
b) Purchased $7,500 of office equipment from John Bronx on credit.
c) Completed legal work for a client and received $1,500 cash in full payment.
d) Paid John Bronx. $3,500 cash in partial settlement of the amount owed.
e) Completed $4,000 of legal work for a client on credit.
f) The company paid $2,000 cash in dividends to the owner. (sole shareholder)
g) Received $2,500 cash as partial payment for the legal work completed for the client in (e).
h) Paid $2,500 cash for the legal secretary’s salary.
Cash Office Equipment Dividends
Accounts
Receivable Accounts Payable Legal Fees Earned
Law Library Common Stock Salaries Expense
193. Jerry’s Butcher Shop, Inc. had the following assets and liabilities at the beginning and
end of the current year:
Assets Liabilities
Beginning of the year........................................... $114,000 $68,000
End of the year............................................. 135,000 73,000
If Jerry made no investments in the business and withdrew no assets during the year, what
was the amount of net income earned by Jerry’s Butcher Shop, Inc.?
194. Jerry’s Butcher Shop, Inc. had the following assets and liabilities at the beginning and
end of the current year:
Assets Liabilities
Beginning of the year........................................... $114,000 $68,000
End of the year............................................. 135,000 73,000
If Jerry invested an additional $12,000 in the business during the year, but withdrew no
assets during the year, what was the amount of net income earned by Jerry’s Butcher Shop,
Inc.?
195. Jerry’s Butcher Shop, Inc. had the following assets and liabilities at the beginning and
end of the current year:
Assets Liabilities
Beginning of the year........................................... $114,000 $68,000
End of the year............................................. 135,000 73,000
If Jerry made no investments in the business but withdrew $5,000 during the year, what was
the amount of net income earned by Jerry’s Butcher Shop, Inc.?
196. Jerry’s Butcher Shop, Inc. had the following assets and liabilities at the beginning and
end of the current year:
Assets Liabilities
Beginning of the year........................................... $114,000 $68,000
End of the year............................................. 135,000 73,000
If Jerry invested an additional $12,000 in the business and withdrew $5,000 during the year,
what was the amount of net income earned by Jerry’s Butcher Shop, Inc.?
197. A company had total assets of $350,000, total liabilities of $101,500 and total equity of
$248,500. Calculate the company’s debt ratio.
198. Jackson Advertising Co. had assets of $475,000; liabilities of $275,500; and equity of
$199,500. Calculate its debt ratio.
199. List the four steps in recording transactions.
1. Analyze each transaction and event from source documents.
2. Record relevant transactions and events in a journal.
3. Post journal entry information to ledger accounts.
4. Prepare and analyze the trial balance.
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 02-C1
Topic: Analyzing and Recording Process
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200. Given each of the following errors, indicate on the table below the amount by which the
trial balance will be out of balance and which trial balance column (debit or credit) will have
the larger total as a result of the error.
a. $100 debit to Cash was debited to the Cash account twice.
b. $1,900 credit to Sales was posted as a $190 credit.
c. $5,000 debit to Office Equipment was debited to Office Supplies.
d. $625 debit to Prepaid Insurance was posted as a $62.50 debit.
e. $520 credit to Accounts Payable was not posted.
Error
Amount Out
of Balance
Column Having
Larger Total
a.
b.
c.
d.
e.
201. After preparing an (unadjusted) trial balance at year-end, R. Chang of Chang Window
Company, Inc. discovered the following errors:
1. Cash payment of the $225 telephone bill for December was recorded twice.
2. Cash payment of a note payable was recorded as a debit to Cash and a debit to Notes
Payable for $1,000.
3. A $900 cash dividend paid to the owner was recorded to the correct accounts as $90.
4. An additional investment of $5,000 cash by the owner was recorded as a debit to Common
Stock and a credit to Cash.
5. A credit purchase of office equipment for $1,800 was recorded as a debit to the Office
Equipment account with no offsetting credit entry.
Using the form below, indicate whether the error would cause the trial balance to be out of
balance by placing an X in either the yes or no column. Would the error cause the trial
balance to be out of balance?
Error Yes No
1.
2.
3.
4.
5.
Would the error cause the trial balance to be out of balance?
202. The balances for the accounts of Milo’s Management Co., Inc. for the year ended
December 31 are shown below. Each account shown had a normal balance.
Accounts payable….. $ 6,500 Wages expense……… 36,000
Accounts receivable... 7,000 Rent expense………... 6,000
Cash………………… ?
Office supplies. 1,200
Building……………. 125,000
Supplies expense…… 21,500 Land…………………. 50,000
Common stock……….. 118,700
Unearned management
fees 4,000
Management revenue. 175,000 Dividends
48,00
0
Calculate the correct balance for Cash and prepare a trial balance.
203. At year-end, Henry Laundry Service, Inc. noted the following errors in its trial balance:
1. It understated the total debits to the Cash account by $500 when computing the account
balance.
2. A credit sale for $311 was recorded as a credit to the revenue account, but the offsetting
debit was not posted.
3. A cash payment to a creditor for $2,600 was never recorded.
4. The $680 balance of the Prepaid Insurance account was listed in the credit column of the
trial balance.
5. A $24,900 van purchase was recorded as a $24,090 debit to Equipment and a $24,090 credit
to Notes Payable.
6. A purchase of office supplies for $150 was recorded as a debit to Office Equipment. The
offsetting credit entry was correct.
7. An additional investment of $4,000 by Del Henry was recorded as a debit to Common
Stock and as a credit to Cash.
8. The cash payment of the $510 utility bill for December was recorded (but not paid) twice.
9. The revenue account balance of $79,817 was listed on the trial balance as $97,817.
10. A $1,000 cash withdrawal by the stockholder was recorded as a $100 debit to Dividends
and $100 credit to cash.
Using the form below, indicate whether each error would cause the trial balance to be out of
balance, the amount of any imbalance, and whether a correcting journal entry is required.
Would the error
cause the trial
balance to be out
of balance? Amount of
Imbalance
Correcting
Journal Entry
Required
Error Yes No Yes No
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
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1. X $500 X
2. X 311 X
3. X 0 X
4. X 1,360 X
5. X 0 X
6. X 0 X
7. X 0 X
8. X 0 X
9. X 18,000 X
10. X 0 X
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 02-P1
Learning Objective: 02-P2
Topic: Journalizing and Posting Transactions
Topic: Preparing a Trial Balance
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204. The following trial balance is prepared from the general ledger of HG’s Auto
Maintenance, Inc.
HG’S AUTO MAINTENANCE, Inc.
Trial Balance
October 31
Debit
Credit
Cash.............................................................................. $1,975
Accounts receivable..................................................... 2,800
Supplies......................................................................... 500
Shop equipment............................................................ 13,000
Office equipment.......................................................... 6,600
Accounts payable......................................................... $ 4,510
Common stock.............................................................. 22,000
Dividends...................................................................... 4,200
Repair fees earned........................................................ 11,875
Supplies expense..........................................................
8,600
Totals............................................................................. $37,675 $38,385
Because the trial balance did not balance, you decided to examine the accounting records. You
found that the following errors had been made:
1. A purchase of supplies on account for $245 was posted as a debit to Supplies and as a debit
to Accounts Payable.
2. An investment of $500 cash by the owner was debited to Common Stock and credited to
Cash.
3. In computing the balance of the Accounts Receivable account, a debit of $600 was omitted
from the computation.
4. One debit of $300 to the Dividends account was posted as a credit.
5. Office equipment purchased for $800 was posted to the Shop Equipment account.
6. One entire entry was not posted to the general ledger. The transaction involved the receipt
of $125 cash for repair services performed for cash.
Prepare a corrected trial balance for the HG’s Auto Maintenance, Inc.e as of October 31.
205. Figgaro Company Inc.’s accounts and their balances, as of the end of August, are
included below. All accounts have normal balances:
Accounts receivable…... $36,000 Cash……………………. $ 28,000
Equipment…………….. 59,000
Common stock
Advertising expense……
1,000
5,000
Service revenues earned. 75,000 Accounts payable………. 31,000
Rent expense…………... 3,600 Dividends.. 24,000
Office supplies………… 1,500 Salaries expense……….. 30,000
Notes payable…………. 22,000 Retained earnings…….. 58,100
a. Calculate net income.
b. Determine the amount of retained earnings to be shown on the August 31 balance sheet.
206. Based on the following trial balance for Sally’s Salon, Inc, prepare an income statement,
statement of retained earnings, and a balance sheet. Sally Crawford made no additional
investments in the company during the year.
Sally’s Salon, Inc.
Trial Balance
December 31
Cash..........................................................................................$ 7,500
Accounts receivable................................................................. 475
Beauty supplies........................................................................ 2,500
Beauty shop equipment...........................................................17,000
Accounts payable..................................................................... $ 745
Common stock......................................................................... 1,000
Retained earnings
Dividends 36,000 21,155
Revenue earned........................................................................ 72,000
Beauty supplies expense.......................................................... 3,425
Rent expense............................................................................ 6,000
Wages expense.........................................................................
22,000
Totals........................................................................................$ 94,900 $ 94,900
207. George Butler owned a tugboat and was tired of his current job. He decided to open a
business, Butler, Inc., that provides day tugboat tours to tourists along the Mississippi River
near his hometown. Prepare journal entries to record the following transactions.
May 1 Butler invested $20,000 cash and his tugboat valued at $90,000 in the business.
May 2 Butler paid $3,000 cash for office equipment to help him keep track of business activities.
May 3 Butler bought boating supplies costing $2,500 on credit.
May 4 Butler paid the river master $500 cash for the first month’s dock rental.
May 5 Butler paid $1,800 cash for a six-month insurance policy.
May 10 Butler received $2,000 cash from clients for his first tour.
May 12
Butler provided a $3,500 tour on credit, the customer has agreed to pay within
10 days
May 19 Butler paid for the boating supplies originally purchased on May 3.
May 22 Butler receives payment on the account from the client entry on May 12.
May 25 Butler received $2,750 cash for additional tours.
May 31 Butler paid his crew member a salary of $1,000.
May 31 The company paid $2,000 cash in dividends to the owner. (sole shareholder)
Answer
:
May 1
Cash……………………………………. 20,000
Tugboat………………………….……… 90,000
Common Stock………. 110,000
Stockholder invested in business.
2 Office Equipment……………………….. 3,000
Cash……………………………... 3,000
Purchased office equipment.
3 Boating Supplies…………………………. 2,500
Accounts Payable…….…………. 2,500
Purchased supplies on account.
4 Rent expense…………………………….. 500
Cash………..……………………..
Paid for dock rent.
5 Prepaid Insurance……………………….. 1,800
Cash………..……………………. 1,800
Paid for six month insurance policy.
10 Cash……………………………………... 2,000
Tugboat Tour Revenue…….… .. 2,000
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Recorded tour revenue.
12 Accounts Receivable……………………. 3,500
Tugboat Tour Revenue ……… 3,500
Recorded tour revenue provided on
account.
19 Accounts Payable……………………….. 2,500
Cash……..………….…………….. 2,500
Paid on account.
22 Cash……………………………………... 3,500
Accounts Receivable…………….. 3,500
Record collection on account.
25 Cash……………………………………... 2,750
Tugboat Tour Revenue …..…….. 2,750
Recorded tour revenue.
31 Salary expense………………………….. 1,000
Cash……………….…………….. 1,000
Paid assistant’s salary.
31 Dividends…... 2,000
Cash……………………………. 2,000
Record dividends.
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 02-P1
Topic: Journalizing and Posting Transactions
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208. Based on the following trial balance for Barry’s Automotive Shop, Inc., prepare an
income statement, statement of retained earnings, and a balance sheet. Barry made no
additional investments in the company during the year.
Barry’s Automotive Shop, Inc.
Trial Balance
December 31
Cash..................................................................................... $ 13,500
Accounts receivable............................................................ 1,500
Supplies................................................................................ 500
Repair shop equipment........................................................ 27,000
Service truck........................................................................ 33,000
Accounts payable................................................................ $ 2,600
Common stock
Retained earnings
1,000
38,525
Dividends............................................................................. 36,000
Service revenue................................................................... 125,000
Supplies expense................................................................. 3,425
Rent expense........................................................................ 18,000
Utilities expense.................................................................. 5,000
Gas expense......................................................................... 7,200
Wages expense....................................................................
22,000
Totals....................................................................................
$ 167,125
167,125
209. For each of the accounts in the following table (1) identify the type of account as an
asset, liability, equity, revenue, or expense, and (2) identify the normal balance of the account.
Account Type Normal Balance
a. Wages Expense
b. Accounts Receivable
c. Commissions Earned
d. Salaries Payable
e. Common Stock
f. Unearned Advertising Revenue
g. Salaries Expense
h. Magazine Subscription Revenue
i. Dividends
j. Prepaid Insurance
210. For each of the following accounts, identify whether a debit or credit yields the indicated
change
a. To increase Fees Earned
b. To decrease Cash
c. To decrease Unearned Revenue
d. To increase Accounts Receivable
e. To increase Common Stock
f. To decrease Notes Payable
g. To increase Prepaid Rent
h. To increase Salaries Expense
i. To increase Accounts Payable
j. To decrease Prepaid Insurance
211. Indicate on which of the financial statements the following items appears. Use I for
income statement, E for statement of retained earnings, and B for balance sheet. More than
one statement may be appropriate for some items.
a. Fees Earned
b. Cash
c. Unearned Revenue
d. Rent expense
e. Retained Earnings
f. Notes Payable
g. Prepaid Rent
h. Salaries Expense
i. Notes Payable
j. Dividends
212. Jason Hope decided to open a hotel, set up as a corporation, in his hometown. Prepare
journal entries to record the following transactions. Hope uses the accounts Room Rental
Revenue and Event Revenue. All expenses for special events are recorded as Event Expense.
June 1 Hope invested $400,000 into the business
June 2 Hope purchased an existing building and land for the hotel costing
$900,000. The purchase appraisal allocated $100,000 for land and
$800,000 to the building. Hope paid $250,000 and financed the remainder
with a mortgage note payable.
June 3 Paid $6,000 for a six month insurance policy on the hotel.
June 5 Purchased linens and other supplies costing $4,000 on account.
June 10 Received advance payments of $12,000 from customers that will be
staying at the hotel in July. Payments will be refunded if the customer
cancels within 7 days of their scheduled arrival time.
June 14 Received cash payments of $13,000 from current customers staying at the
hotel in June.
June 15 Paid the staff $2,000 for the first semi-monthly payroll.
June 16 Paid $500 for general maintenance and repairs expense.
June 17 Received $10,000 payment for a wedding reception during the weekend..
June 18 Paid the caterer $2,500 for providing catering services for the wedding
reception.
June 18 Paid Fixture Rentals $1,000 for table and chair rental.
June 19 Paid the florist $2,000 for flowers for the event.
June 24 Paid for the linens and supplies purchased on June 5.
June 25 Recorded an additional $5,000 from current hotel customers for June.
June 30 Paid the staff $2,000 for the second semi-monthly payroll.
June 30 The company paid $4,000 cash in dividends to the owner. (sole
shareholder)
213. For each of the following (1) identify the type of account as an asset, liability, equity,
revenue, or expense, and (2) identify the normal balance of the account.
Account Title Account Type Normal Balance
(Debit or Credit)
a. Prepaid Insurance
b. Accounts Payable
c. Common Stock
d. Utilities expense
e. Land
f. Services revenue
g. Notes Receivable
h. Advertising expense
i. Unearned Revenue
j. Service Revenue
214. The steps in the accounting process focus on analyzing and recording financial
transactions and events within a company. Those steps are shown below. Using the number
system of 1 as the first step and 4 as the last step in the process, number the steps in the
correct order in which they would occur (1 thru 4).
_____Record relevant transactions and events in a journal,
_____Post journal information to the ledger accounts
_____Prepare and analyze the trial balance
_____Analyzing each transaction
215. _____________ and ______________ are the starting points for the analyzing and
recording process.
216. The second step in the analyzing and recording process is to record the transactions and
events in the book of original entry, called the ______________.
217. The third step in the analyzing and recording process is to post the information to the
___________________.
218. _________________ documents identify and describe transactions and events and
provide objective evidence and amounts for recording.
219. Revenues and expenses are two categories of ____________________ accounts.
220. The _______________________ is a record containing all accounts used by a company
as well as the transactions and ending balances of each of the accounts.
221. ___________________ are promises of payment from customers to sellers.
222. Unearned revenue is classified as a(an) _______________ on a business’s balance sheet.
223. The four categories of equity accounts are ________________, __________________,
224. A _______________ is a list of all the accounts used by a company and their
identification codes but does not contain the balances.
225. A record containing all the separate accounts for a company as well as all of their
balances is called the___________________
226. _____________________________ requires that each transaction affect, and be
recorded in, at least two accounts. It also means that total amounts debited must equal total
amounts credited for each transaction.
227. The _____________________ is found by determining the difference between total
debits and total credits for an account, including any beginning balance
228. To increase an asset account we would _______________ it and to increase a liability
account, we would______________ it.
229. Funky Music purchased $25,000 of equipment for cash. The Equipment asset account is
_______________ for $25,000 and the cash account is _______________ for $25,000.
230. Jackson Brown Footwear had total liabilities of $130 million and total assets of $375
million. Its debt ratio was _______________.
231. _______________ is the process of transferring journal entry information from the
journal to the ledger.
232. A ____________ gives a complete record of each transaction in one place, and shows
debits and credits for each transaction.
233. A more structured format that is similar to a T-account in that it has columns for debits
and credits, but that is different in that it has columns for transaction date, explanation, and
the account balance is the _____________________.
234. The posting process is the link between the _______________ and the _____________.
235. You increase the Service Revenue account on the ___________side of its account.
236. You decrease the Accounts Payable account on the ___________side of its account.
