4-40 Test Bank – Chapter 4 – The Mechanics of Financial Accounting
13. Total assets, liabilities, and shareholders’ equity are $22,000, $5,000, and $17,000
before land costing $10,000 is purchased in exchange for a $1,000 note payable and
$9,000 cash. During the year, the company earned $50,000 of revenues of which only
$45,000 was collected. Expenses totaling $44,000 were incurred, but $2,000 of this had
not been paid by the end of the year. Show the amounts that would be reported on the
accounting equation as a result of these transactions.
Solution:
Assets Liabilities Shareholders’ Equity
14. Marian Company collected $8,000 cash in advance during March for services to be
performed in April and May. At the end of April an adjusting entry was made to debit
Unearned Revenue and credit Service Revenue for $4,200. The ending balance in the
Unearned Revenue account was $3,800.
A. What entry was made during March when the original $8,000 was collected?
B. How much will Marian report on its balance sheet as a liability at the end of April as a
result of the transactions?
Solution:
A. Cash
8,000
Unearned Revenue
8,000
B. $3,800 – the balance of the unearned revenue account
KP 3,4 BT: AP Difficulty: Moderate TOT: 4 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
15. On October 1, 2010, Edinboro Company rented a building from another company for
$90,000 for a two-year time period. Edinboro Company debited the rent expense
account on October 1 when the payment was made. What adjustment for rent is
necessary at December 31, 2010?
Solution:
Prepaid Rent
78,750
Rent Expense
78,750
($90,000 X 21/24)
KP 3, 4, App4B BT: AN Difficulty: Moderate TOT: 3 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
16. On January 1, 2010, Somerville Co. received $3,600 for a three-year service
subscription. Somerville credited a revenue account on January 1 for the cash received.
What adjusting entry must be made on December 31, 2010?
Solution:
Service Revenue
2,400
Unearned Service Revenue
2,400
($3,600 x 2/3)
KP 3, 4, App4B BT: AN Difficulty: Moderate TOT: 3 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
17. If interest payable on January 1 is $3,000, and during the current year interest expense
is $62,000, and cash payments for interest is $63,000, then what is the balance in the T-
account, Interest Payable, on December 31?
Solution:
18. Dena, Inc. began operations during 2010. During January of 2010, the following
transactions occurred:
• Received $80,000 from shareholders as initial investments
• Received cash of $50,000 for services performed during January
• Billed customers an additional $12,000 for services performed during January
• Borrowed $12,000 from NationsBank 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 of $35,000 for January
How much Net Income should Dena, Inc. report for January?
Solution:
19. On July 1, Sanders, Inc. borrowed $12,000 from another company on a 12%, one-year
note. Prepare the journal entries to record the note on July 1 and to accrue interest on
December 31.
Solution:
20. If interest payable on January 1 is $1,000, and during the current year interest is accrued
for $2,200, and cash payments for interest amount to $2,000, then what is the balance in
the T-account, Interest Expense, on December 31?
21. If accounts receivable on January 1 totals $21,000, and during the current year sales
revenue is $300,000, and cash receipts from customers is $296,000, then what is the
balance in Accounts Receivable on December 31?
Solution:
22. Interest receivable on January 1 is $5,000. During the current year interest revenue is
$65,000, and cash receipts from interest is $60,000. How much is the balance of Interest
Receivable on December 31?
Solution:
23. Retained earnings on January 1 was $27,000. During the current year net income is
$160,000. Cash payments for dividends declared totals $145,000. What is the retained
earnings balance on December 31?
Solution:
Use the information that follows taken from the unadjusted accounting records of
Sheena, Inc. for the year ending December 31, 2015 to answer problems 24 through 26.
Cash
$
500
Accounts Receivable
700
Prepaid Insurance
100
Supplies
200
Office Equipment
3,500
Accumulated Depreciation
Accounts Payable
Unearned Revenue
Contributed capital
Retained Earnings
Dividends
800
Service Fees Revenue
Wages Expense
2,000
Rent Expense
1,500
Supplies Expense
600
Totals
$9,900
The following information is needed for adjusting entries at the end of December.
a. On December 31, 2010, the insurance expired amounted to $80.
b. Of the unearned revenue, $250 of services had been performed.
c. Services have been performed for customers that have not yet been billed or paid
totaling $180.
d. The office equipment computation for 2010 depreciation amounts to $200.
24. What is the effect on net income of each of the adjusting entries necessary for Sheena,
Inc.?
Solution:
25. How much net income will Sheena report for the year ending December 31, 2015?
Solution:
Service Fees Revenue ($4,900 + $250 + $180)
$ 5,330
Expenses:
Wages Expense
$2,000
Rent Expense
1,500
Supplies Expense
600
Insurance Expense
80
Depreciation Expense
200
Total Expenses
4,380
Net income
$ 950
KP 3,5 BT: AN Difficulty: Moderate TOT: 4 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
26. Determine total liabilities for Sheena, Inc. for the year ending December 31, 2015.
Solution:
27. Interest receivable on January 1 and December 31 totals $4,800 and $3,600,
respectively. During the year, cash received from interest is $15,000. Determine interest
revenue for the current year.
Solution:
28. Accounts receivable on January 1 and December 31 is $18,000 and $21,500,
respectively. During the year, sales revenue is $260,000. What is the current year’s cash
received from customers?
Solution:
29. Inventory on January 1 and December 31 is $41,500 and $47,000, respectively. During
the year, cash paid to suppliers of inventory is $100,000. If all purchases of inventory are
for cash, how much is the current year’s cost of goods sold?
Solution:
30. Inventory on January 1 and December 31 is $40,000 and $35,000, respectively.
Accounts payable on January 1 and December 31 are $25,000 and $29,000,
respectively. During the year, cost of goods sold is $190,000. How much is the current
year’s cash payments to suppliers of inventory?
Solution:
31. The following are amounts from the accounting records of Farley Company before
adjusting entries have been for the year ending December 31, 2010.
Cash
$ 3,200
Accounts receivable
2,600
Supplies
2,100
Investment in Coca-Cola stock
10,000
Equipment
80,000
Accumulated depreciation
20,000
Accounts payable
4,800
Note payable 8%
20,000
Contributed capital
24,500
Retained earnings
11,800
Service revenue
42,600
Interest revenue
1,200
Supplies expense
5,000
Wage expense
20,000
Depreciation expense
0
Interest expense
2,000
The following adjustments have not been made as of December 31, 2010:
1. Wages accrued on 12/31/10 amounts to $1,100.
2. Three months’ interest on the note payable has not been paid or recognized.
3. Depreciation for 2010 amounts to $3,000.
4. Supplies on hand at 12/31/10 amounts to $700.
Prepare Farley’s balance sheet at December 31, 2010 after the adjusting process is
completed. Omit the heading.
Solution:
Balance Sheet:
32. Given below is the Accounts Receivable T-account. Accounts receivable on January 1
was $1,700. During the year, customers charged on account sales totaling $255,000.
The current year’s cash received from customers is $250,000. Post all amounts to this
account and calculate the account balance.
Accounts Receivable
Solution:
33. Lebron Company provides you, its auditor, with the following information that pertains to
its income for the year ending December 31, 2010:
Service revenue
$20,000
Salaries expenses
3,000
Rent expense
10,400
After you review the process Lebron used to derive this income statement, you discover
that the company had omitted adjusting entries on December 31, 2010. The following
adjusting information was omitted:
1. $500 of the $20,000 service revenue is for plumbing that will not be done until
January 10, 2011.
2. Employees earned $700 of salaries for work done on December 31, 2010, but they
will not be paid until January 2, 2011.
3. Depreciation for Lebron’s truck and tools amounted to $2,400 for 2010.
4. Rent expense is $800 a month. On December 31, 2010, Lebron paid $800 rent for
January, 2011, which is included in the rent expense given above.
Prepare Lebron Company’s income statement after you include the results of the
adjusting information provided.
Solution:
Lebron Company
Income Statement
For the Year Ended December 31, 2010
Service revenue
$19,500
Expenses:
Salaries expenses
$3,700
Depreciation expense
2,400
Rent expense
9,600
15,700
Net income
$ 3,800
KP 2,3,4,5 BT: AN Difficulty: Difficult TOT: 8 min. AACSB: Analytic
34. Retained earnings on January 1 and December 31 are $72,000 and $69,000,
respectively. During the year, net income is $100,000. How much dividends did the
company declare and pay to the shareholders?
Solution:
35. Given below is a listing of selected accounts before adjusting entries for Duane
Corporation as of December 31.
Account Names
Account Balances
Unadjusted
Adjusted
Cash
$11,700
Supplies
3,000
Prepaid Rent
0
Salaries Payable
0
Unearned Revenue
0
Contributed capital
20,000
Retained Earnings
9,400
Revenue
45,000
Supplies Expense
0
Salaries Expense
24,600
Rent Expense
1,300
Complete the ‘Adjusted Account Balances’ column on the basis of the following
information:
a. Unused supplies amount to $400 on December 31.
b. $300 of rent is prepaid on December 31.
c. Unpaid salaries amount to $500 on December 31.
d. $1,200 of the $45,000 service revenue is not yet earned on December 31.
Solution:
Adjusted Amounts
Cash
$11,700
Supplies
400
Prepaid Rent
300
Salaries Payable
500
Unearned Revenue
1,200
Contributed capital
20,000
Retained Earnings
9,400
Revenue
43,800
Supplies Expense
2,600
Salaries Expense
25,100
Rent Expense
1,000
4-50 Test Bank – Chapter 4 – The Mechanics of Financial Accounting
KP 2,3,4,5 BT: AN Difficulty: Difficult TOT: 8 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
SHORT ESSAY QUESTIONS
1. Dora Manufacturing, a capital-intensive company that manufactures commercial snow
blowers, announced that it is expecting a record loss of $7,000,000 in 2010. However, it
also stated that its business is generating sufficient cash to meet its obligations due in
2010. How can Dora lose $7 million and still generate cash necessary to meet
obligations?
Solution:
Accounting accrual income includes charges (expenses) that do not require cash
2. How does the information presented in an income statement relate to the information
reported in a statement of shareholders’ equity?
Solution:
3. Describe a debit. How does it impact the accounts?
Solution:
Debit means ‘left.’ To debit an account means to place it on the left side of the journal
4. How do the concepts of economic events and objectivity relate?
Solution:
Economic events are reflected in the financial statements. Before each event is
5. Why are ‘expenses paid for in advance’ reported as assets? What happens to this
‘asset’ as time passes?
Solution:
6. Name two components of shareholders’ equity and describe what each consists of.
Solution:
7. What are journal entries and how they used in accounting?
Solution:
Journal entries are used to record the economic effects of events that impact the
8. What are revaluation adjustments?
Solution:
Revaluation adjustments serve to ‘restate’ accounts to keep their reported values in line
9. Why is the acquisition of merchandise inventory capitalized as an asset?
Solution:
10. How does the accrual for wages relate to the cash paid for wages expense?
Solution:
The payment of wages creates a debit to wages expense and a credit to cash. In
11. What purpose does a gain or loss associated with the sale of a plant asset serve?
Solution:
When a company sells a plant asset, receiving a dollar amount that does not match the
12. Why are ‘unearned revenues’ considered liabilities?
Solution:
13. Why do managers need to understand how economic events affect the financial
statements?
Solution:
14. What is depreciation?
Solution:
15. Explain the difference between temporary and permanent accounts. Please give four
examples of each.
Solution:
Temporary accounts include all income statement accounts and the dividend account.
16. Explain what is meant by a “contra account” and give two examples of contra accounts
that would be found on the balance sheet.