978-1337276337 Test Bank Chapter 3 Part 5

Chapter 3

Page 78

207. Several accounts from the financial statements of Madison Company are listed below. In the two columns provided

for answers, indicate the type of account and the normal account balance. Use the following identification codes for your

answers:

Type of Account Normal Balance

A) Prepaid Insurance _______ _______

B) Retained Earnings _______ _______

C) Dividends _______ _______

D) Capital Stock _______ _______

E) Accounts Payable _______ _______

F) Wages and Salaries Expense _______ _______

G) Interest Income _______ _______

H) Wages and Salaries Payable _______ _______

I) Investments _______ _______

J) Decorating Fees Earned _______ _______

ANSWER:

Type of Account Normal Balance

Chapter 3

Page 80

208. Karen’s Flower Shop began business as a corporation in 2017. Several transactions which occurred early in 2017 are

described below. Record each transaction in proper form, excluding written explanations, in the general journal provided.

A)

January 23, 2017: Stockholders invested cash of $70,000 in the business and received 7,000 shares common stock

as evidence of their ownership interest.

B)

February 1, 2017: Rent of $1,600 was paid for the month of February.

C)

February 7, 2017: Equipment with a cost of $3,000 was purchased on credit; payment is due within 30 days.

D)

February 14, 2017: Bills totaling $5,400 were presented to customers for flower arrangements created and

delivered; $2,900 was received in cash immediately; the balance of $2,500 is due within 10 days.

E)

February 18, 2017: Full payment was made for the equipment purchased on February 7.

F)

February 22, 2017: Payment of $1,900 was received from customers with balances due from February 14.

G)

February 28, 2017: Employee salaries of $3,300 were paid.

General Journal

Date Account Titles and Explanations Post Ref. Debit Credit

ANSWER: Date Account Titles and Explanations Post Ref. Debit Credit

Chapter 3

Page 82

210. Described below are several transactions that an organization like the Hummingbird Co. might record. Several

accounts from the organization’s financial statements also are listed below. Using these account titles, record each

transaction in proper journal entry format in the general journal provided. A written explanation for each journal entry is

not required.

Accounts:

Cash Common Stock

Accounts Receivable Sales Revenue

Musical Instruments Selling Expenses

Accounts Payable General & Administrative Salaries Expense

Deposits Received in Advance

A) Customers are mailed bills for tickets, $225,000.

B) Customers pay for tickets in advance, $130,000.

C) Administrative employees are paid their monthly salaries, $14,000.

D) An invoice is received for new musical instruments purchased, $15,200; payment is due in 30 days.

E) Payments received from customers for amounts billed in a previous transaction amount to $135,000.

F) Payment is made for the instruments invoice received in a previous transaction.

General Journal

Account Titles and Explanations Debit Credit

Chapter 3

Page 85

212. Refer to the transactions for Terry Company.

Use the transactions incurred by the Terry Company to set up T accounts and post each transaction to the T accounts.

Chapter 3

Page 86

213. Refer to the Terry Company transactions.

Required

Indicate the economic effects of each transaction above on the accounting equation. Use the following format for your

answers. Show the dollar amounts in the appropriate columns and use a “+” (plus) sign to indicate an increase and a “–”

(minus) sign to indicate a decrease.

Transaction

Date

Assets

Liabilities Stockholders’

Equity

ANSWER:

Chapter 3

Page 87

214. Several terms that represent components of a bookkeeping system are listed below. For each term, write a brief

explanation of how that component is used in a bookkeeping system. Space is provided for your answer immediately

below each term.

A) Accounts

B) Chart of accounts

C) Double-entry system with debits and credits

D) General journal

E) General ledger

F) Trial balance

ANSWER: Brief explanations of components of a bookkeeping system.

Chapter 3

Page 89

216. The following list of accounts was taken from the general ledger of Bassett Corporation on December 31, 2017. The

bookkeeper thought it would be helpful if the accounts were arranged in alphabetical order. Each account contains the

balance that is normal for that type of account; for example, Cash normally has a debit balance. Prepare a trial balance as

of this date with the accounts arranged in the following order: (1) assets, (2) liabilities, (3) stockholders’ equity, (4)

revenues, (5) expenses, and (6) dividends.

Accounts Payable $ 8,650

Accounts Receivable 5,325

Automobiles 9,200

Buildings 150,000

Capital Stock 100,000

Cash 11,500

Commissions Expense 2,600

Commissions Revenue 12,750

Dividends 2,000

Equipment 85,000

Heat, Light, and Water Expense 1,400

Income Tax Expense 1,700

Income Taxes Payable 2,500

Interest Revenue 1,300

Land 50,000

Notes Payable 90,000

Office Salaries Expense 6,000

Office Supplies 500

Retained Earnings 110,025

Chapter 3

Page 91

219. Provide at least three source documents and the related event for which each would provide the evidence to record.

220. Briefly explain what accountants mean when they refer to the double-entry system of

accounting.

Chapter 3

Page 92

221. There are three elements to the accounting equation: assets, liabilities, and stockholders’ equity. Below are five

possible types of transactions. For each of these five types, write a description of an example that would illustrate this type

of transaction.

Type Example of Transaction Assets = Liabilities + Stockholders’ Equity

1. Increase Increase —

2. Increase — Increase

3. Decrease Decrease —

4. Decrease — Decrease

5. Decrease

Increase — —

ANSWER: Student answers may vary but could include something like the following:

Chapter 3

Page 93

222. Explain what the chart of accounts is and how its numbering system works.

223. You have just taken a job as the accountant for a stucco repair firm whose accounting year ends on December 31. As

part of the management team, you receive a year-end bonus directly related to the firm’s earnings for the year. One of

your duties is to review the journal entries recorded by the bookkeepers. A new bookkeeper prepared the following

journal entry:

Dec. 12 Cash 20,000

Service Revenue 20,000

To record deposit from client.

You notice that the explanation for the journal entry refers to the amount as a deposit, and the bookkeeper explains to you

that the firm plans to provide the services to the client in March of the following year.

Required

1. Did the bookkeeper prepare the correct journal entry to account for the client’s deposit? Explain your answer.

2. What is your responsibility in this situation as the new accountant for the firm? Explain your answer.

ANSWER:

Chapter 3

Page 94

224. How frequently should entries be posted from the journal to the ledger? How have computers improved the posting

process?

225. Explain the purpose of a trial balance and the limitation of the trial balance.