Test Bank – Chapter 4 – The Mechanics of Financial Accounting 4-21
4-22 Test Bank – Chapter 4 – The Mechanics of Financial Accounting
68. On December 31, 2015, immediately after all the adjustments were made to Gilbert
Inc.’s accounting records for the 2015 fiscal year, but before the books were closed, the
retained earnings account reflected a deficit balance of $80,000. The sum of the pre-
closing balances of all of Gilbert’s temporary accounts was a net credit balance of
$10,000. Gilbert paid no dividends during 2015. On the balance sheet for January 1,
2016, the beginning balance in the retained earnings account will be
a. $0
b. $70,000 debit
c. $80,000 credit
d. $90,000 credit
69. On December 13, 2015, Tucson Corp. paid $12,000 for a two year property insurance
policy covering their corporate headquarters for the period December 15, 2015 to
December 15, 2017. The payment was charged to insurance expense. What adjusting
entry is needed at the end of December?
a.
Cash
12,000
Prepaid insurance
12,000
b.
Prepaid insurance
11,750
Insurance expense
11,750
c.
Insurance expense
12,000
Cash
12,000
d.
Insurance expense
11,750
Accounts payable
11,750
70. During Bisbee’s first year of business, office supplies were purchased for cash in the
amount of $4,600 and the amount was debited to supplies expense. At the end of the
first year, the physical count indicated that $425 of supplies was unused. How much
should be reported on the income statement at year end for office supplies expense?
a. $4,600
b. $4,175
c. $5,025
d. $425
71. During Bisbee’s first year of business, office supplies were purchased for cash in the
amount of $4,600 and the amount was debited to supplies expense. At the end of
the first year, the physical count indicated that $425 of supplies was unused. How
much should be reported on the balance sheet for office supplies?
a. $4,600
b. $4,175
c. $5,025
d. $425
Solution:
72. On January 1, Wages Payable for Flagstaff Company equals $19,000. By the end of
the current year, Wage Expense equals $345,000, and cash payments for wages
were $353,200. What is the balance in the T-account, Wages Payable, on December
31?
a. $17,500
b. $8,200
c. $25,700
d. $10,800
Solution:
73. On July 1, 2015, Erie Company rented a building from another company for $60,000
for a three-year time period. Erie Company debited the rent expense account when
the payment was made. What adjustment for rent is necessary at December 31,
2015?
a. $20,000
b. $40,000
c. $50,000
d. $60,000
74. Meadville, Inc. began operations during 2015. During January of 2015, the following
transactions occurred:
• Received $95,000 from shareholders as initial investments
• Received cash of $90,000 for services performed during January
• Billed customers an additional $12,000 for services performed during January
• Borrowed $11,500 from Regions Bank Company, and signed a one-year note
payable
• Paid rent in the amount of $5,000 for January
• Paid dividends in January amounting to $8,000
• Paid wages equal to $34,000 for January
How much Net Income should Meadville, Inc. report for January?
a. $120,000
b. $63,000
c. $132,000
d. $52,000
Solution:
75. On August 1, Amy Company borrowed $40,000 from another company on a 6%, one-
year note. The journal entry that Amy would record on August 1 would include which of
the following?
a. A debit to Notes Receivable for $40,000.
b. A credit to Cash for $40,000.
c. A credit to Notes Payable for $40,000.
d. A debit to Interest Expense for $2,400.
Solution:
AICPA BB: Critical Thinking AICPA FN: Reporting
76. On August 1, Amy Company borrowed $40,000 from another company on a 6%,
one-year note. The journal entry on December 31 would include which of the
following?
a. A debit to Notes Payable for $40,000.
b. A debit to Interest Receivable for $1,000.
c. A credit to Interest Payable for $2,400.
d. A debit to Interest Expense for $1,000.
Solution:
KP 3,4 BT: AP Difficulty: Moderate TOT: 2 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
77. If accounts receivable on January 1 totals $20,000, and during the current year sales
revenue is $112,000, and cash receipts from customers is $98,000, then what is the
balance in Accounts Receivable on December 31?
a. $13,000
b. $16,000
c. $34,000
d. $2,000
Solution:
78. Able Industries has the following information is related to its adjusting entries at the
end of December.
• On December 31, 2015, the insurance expired amounted to $100.
• Of the unearned revenue, $300 of services had been performed.
What is the net effect that the necessary adjusting entries for this information have
on net income for Able?
a. $400 increase.
b. $400 decrease.
c. $200 increase.
d. $200 decrease.
Solution:
79. Able Industries has the following information is related to its adjusting entries at the end
of December.
• Services have been performed for customers that have not yet been billed or paid
totaling $200.
• The office equipment computation for 2015 depreciation amounts to $480.
What is the net effect that the necessary adjusting entries for this information have on
net income for Able?
a. $280 increase.
b. $280 decrease.
c. $680 increase.
d. $680 decrease.
Solution:
80. Interest receivable on January 1 and December 31 totals $3,780 and $3,450,
respectively. During the year, cash received from interest is $11,000. Determine interest
revenue for the current year.
a. $3,115
b. $1,330
c. $12,330
d. $10,670
Solution:
81. Accounts receivable on January 1 and December 31 is $19,500 and $22,400,
respectively. During the year, sales revenue is $223,000. What is the current year’s cash
received from customers?
a. $3,900
b. $263,900
c. $220,100
d. $226,900
Solution:
4-28 Test Bank – Chapter 4 – The Mechanics of Financial Accounting
82. Inventory on January 1 and December 31 is $29,500 and $43,000, respectively. During
the year, cash paid to suppliers of inventory is $80,000. If all purchases of inventory are
for cash, how much is the current year’s cost of goods sold?
a. $14,500
b. $66,500
c. $94,500
d. $151,500
Solution:
83. Inventory on January 1 and December 31 is $46,000 and $42,000, respectively.
Accounts payable on January 1 and December 31 are $31,000 and $29,000,
respectively. During the year, cost of goods sold is $186,000. How much is the current
year’s cash payments to suppliers of inventory?
a. $184,000
b. $213,000
c. $181,000
d. $191,000
Solution:
84. Retained earnings on January 1 and December 31 are $65,000 and $58,000,
respectively. During the year, net income is $113,000. How much dividends did the
company declare and pay to the shareholders?
a. $177,000
b. $171,000
c. $107,000
d. $120,000
Solution:
Test Bank – Chapter 4 – The Mechanics of Financial Accounting 4-29
MATCHING QUESTIONS
1. For each transaction numbered 1 through 12 below, identify its effect on the accounting
equation by selecting from a through h below. You may use each letter more than once
or not at all.
Accounting Equation Effects
a. + A and + L
b. + A and + SE (Contributed Capital)
c. + A and + SE (Retained Earnings)
d. − A and − L
e. − A and − SE (Contributed Capital)
f. − A and − SE (Retained Earnings)
g. + A and − A
h. Not communicated by the formal accounting system
Effects
Transaction
1.
Purchased computer equipment for cash
2.
Received cash in exchange for the issue of a note payable
3.
Purchased building and land in exchange for a mortgage note payable
4.
Received cash in exchange for the issuance of common stock
5.
Purchased computer supplies on account
6.
Provided computer services to customers for cash
7.
Paid an account payable
8.
Provided computer services to customers on account
9.
Used computer supplies in the regular operations of the business (acquired
during a previous accounting period)
10.
Recognize part of the cost of the service potential of the company’s computer
11.
Secured a large contract with Allegheny Company to provide computer
services during the forthcoming year
12.
Declared and paid dividends to the owners of common stock
Solution:
KP 2,3 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic
2. For each transaction numbered 1 through 7 below, identify the effect (a through g) on
the accounting equation by placing the letter of the effect in the space provided. You
may use each letter more than once or not at all.
Accounting Equation Effects
a. Decrease in revenue and decrease in an asset
b. Increase in revenue and increase in an asset
c. Decrease in expense and increase in an asset
d. Increase in expense and decrease in an asset
e. Increase in revenue and decrease in a liability
f. Increase in expense and increase in a liability
g. Decrease in revenue and increase in a liability
1. Adjusting for the accrual of wages
2. Adjusting for the earning of unearned revenue
3. Adjusting for the accrual of interest revenue
4. Adjusting for the accrual of interest expense
5. Adjusting supplies expense reflecting that part of the supplies
expense that was not used
6. Adjusting inventory downward to reflect shrinkage resulting from
shoplifting
7. Adjusting prepaid rent for the portion used
Solution:
3. For each of the transactions listed in 1 through 5 below, indicate whether it involves a
deferral (D) or an accrual (A) by placing the letter of the correct response in the space
provided.
Answers
Transactions
1. ________ Industrial conveyer belt system acquired for cash
2. ________ Cash collected from customers for rental of office space for next year
3. ________ One year’s premium on equipment insurance paid in advance
4. ________ Property taxes owed to the state but not paid at year end
5. ________ Rent owed to a landlord for the current month
Solution:
4. For each transaction numbered 1 through 6, identify its effect on the accounting equation
by selecting from a through h below. You may use each letter more than once or not at
all.
Accounting Equation Effects
a. Debit assets and credit liabilities
b. Debit one asset and credit another asset
c. Debit assets and credit retained earnings/revenue
d. Debit liabilities and credit assets
e. Debit contributed capital and credit assets
f. Debit retained earnings and credit assets
g. Debit assets and credit contributed capital
h. Not communicated by the formal accounting system
____ 1. Received cash in exchange for the issue of common stock
____ 2. Received cash in exchange for the issue of a note payable
____ 3. Purchased building and land in exchange for a mortgage note payable
____ 4. Purchased computer equipment for cash
____ 5. Purchased computer supplies on account
____ 6. Provided computer services to customers for cash
5. For each transaction numbered 1 through 5 below, identify the effect (a through h) on
the accounting equation by placing the letter of the effect in the space provided. You
may use each letter more than once or not at all.
Accounting Equation Effects
a. Debit assets and credit liabilities
b. Debit assets and credit contributed capital
c. Debit assets and credit revenue
d. Debit retained earnings and credit assets
e. Debit contributed capital and credit assets
f. Debit expenses and credit assets
g. Debit one asset and credit another asset
h. Not communicated by the formal accounting system
1.
Received payment from a customer for amount owed from a previous
accounting period
2.
Provided computer services to customers on account
3.
Used supplies in the regular operations of the business
4.
Used up part of the service potential of the computer equipment
5.
Hired a new office manager to start to work next week
Solution:
6. The accounts for Jalisa Company are listed below, identified by number. Following the
list of accounts is a series of adjusting entries (a through f) prepared by Jalisa Company.
For each entry, identify the number(s) of the accounts to be debited and credited and
place them in the space provided adjacent to each adjusting entry.
Accounts
1. Cash
11. Notes Payable
2. Accounts Receivable
12. Common Stock
3. Prepaid Rent
13. Retained Earnings
4. Office Supplies
14. Service Revenue
5. Automobiles
15. Office Supplies Expense
6. Accumulated Depreciation
16. Utilities Expense
7. Accounts Payable
17. Salaries and Wages Expense
8. Interest Payable
18. Depreciation Expense
9. Salaries and Wages Payable
19. Interest Expense
10. Income Tax Payable
20. Income Tax Expense
Adjusting Entries
Debit
Credit
a. Provided legal services to clients that will pay next month
b. Accrued wages earned by employees that will be paid next month
c. Recognized office supplies used during the month
d. Recorded the current month of depreciation expense
e. Recorded monthly utilities expenses which are not yet paid
f. Recognized the amount of interest due to the bank on a note
Solution:
Test Bank – Chapter 4 – The Mechanics of Financial Accounting 4-35
SHORT PROBLEMS
1. Total assets, liabilities, and shareholders’ equity are $7,000, $5,000, and $1,000 before
a new machine is purchased for $500 cash. What are the new amounts of assets,
liabilities, and shareholders’ equity after this event?
2. Total assets, liabilities, and shareholders’ equity are $14,000, $7,000, and $7,000 before
a new copy machine is purchased in exchange for a $1,000 note payable. What are the
new amounts of assets, liabilities, and shareholders’ equity after this event?
3. Total assets, liabilities, and shareholders’ equity are $5,000, $1,500, and $3,500 before
common stock is issued for $500 cash. What are the new amounts of assets, liabilities,
and shareholders’ equity after this event?
4. Total assets, liabilities, and shareholders’ equity are $6,000, $4,000, and $2,000 before
$1,000 is received in exchange for a $1,000 bond payable. What change occurred to
liabilities? Why is there no change in shareholders’ equity?
5. Mingo Company has been in business several years. During January of 2010, the
following transactions occurred:
• Paid employees $6,000 for wages during January.
• Paid $2,000 cash for other operating expenses of which $1,000 related to
December and the balance related to January.
• Paid utilities and rent for January in the amount of $1,800.
• Paid a cash dividend to shareholders in the amount of $900 during January.
How much is total Expenses that Mingo Company will report for January 2010? Why is
this amount different than the amount paid during the month?
Solution:
6. Ohio Company, a corporation, began operations on December 1, 2010. During January
of 2011, the following transactions occurred:
• Billed customers $12,000 for services performed during January.
• Received payment from customers in the amount of $6,000 for services
performed and billed in December.
• Received cash of $7,000 for services performed during January for customers
who paid cash immediately. (No bills were mailed.)
A. How much total Revenue should Ohio Company report for January, 2011?
B. Determine the increase in cash during January of 2011 as a result of these
transactions.
Solution:
7. During the first year of business, office supplies were purchased for cash in the amount
of $2,000 and the amount was debited to supplies expense. At the end of the first year,
the physical count indicated that $500 of supplies was unused. How much should be
reported on the income statement at year end for office supplies expense? On the
balance sheet for office supplies?
Solution:
8. Total assets, liabilities, and shareholders’ equity are $4,000, $1,000, and $3,000 before
current period wages of $200 are paid. What are the new amounts of assets, liabilities,
and shareholders’ equity after this event?
9. Wages Payable on January 1 equals $12,000. By the end of the current year, Wage
Expense equals $420,000, and cash payments for wages were $424,000. What is the
balance in the T-account, Wages Payable, on December 31?
10. When a landlord records rent received in advance from a tenant in a revenue account,
the adjusting entry required at year end to allocate the rent to the proper periods has an
impact on financial statement elements. What effect (increase, decrease, no effect) does
the required adjustment have on each of the following elements?
Assets
Revenues
Liabilities
Expenses
Shareholders’ equity
Solution:
11. Total assets, liabilities, and shareholders’ equity are $15,000, $6,000, and $9,000 before
a $2,000 note payable is paid. Determine the new amounts of assets, liabilities, and
shareholders’ equity after this event?
12. Houston Times Publishing Inc. sells two-year magazine subscriptions. Cash receipts
from subscribers are credited to Unearned Subscriptions. On December 31, 2010,
immediately before the company made adjusting entries, the Unearned Subscriptions
account had a balance of $8,000. Outstanding subscriptions relating to magazines that
have not been delivered as of December 31, 2010, will be mailed to customers as
follows:
During 2011 $3,800
During 2012 2,200
At December 31, 2010, what amount should Houston Times Publishing Inc. report as the
balance for Unearned Subscriptions? Where should this amount be reported?
Solution:
