1.4-2) Presented below are the balances, listed in alphabetical order, of Duncan Heating, at December 1,
20X9:
Accounts Payable $ 8,100
Accounts Receivable 4,000
Cash 7,300
Land 15,300
Machinery 31,600
Merchandise Inventory 12,200
Long–term Debt Payable 20,700
Note Payable 2,200
Paid–in Capital 39,400
Following are the transactions for Duncan Heating for the month of December 20X9:
a. Sold inventory to a friend at cost, which was $800. The friend paid in cash.
b. Borrowed an additional $1,300 in notes payable.
c. Collected $1,900 from credit customers.
d. Paid $2,600 of the amount owed on account.
Prepare a balance sheet as of December 31, 20X9, considering the beginning balances and incorporating
the effects of the December 20X9 transactions.
1.4-3) Jeffrey Walsh began a sole proprietorship named Walsh, Inc., on June 1, 20X9. Following are the
transactions which occurred during the first 10 days of June, 20X9.
June 1 Jeffrey invested $6,600 cash in Walsh, Inc.
June 2 Walsh, Inc., acquired equipment costing $3,900. One–third of the balance was paid in cash with
the balance as a note.
June 4 Walsh, Inc., acquired inventory costing $2,200 half of which was paid in cash.
June 5 Walsh, Inc., acquired $200 in supplies on open account.
June 7 Jeffrey’s daughter, Sydney, purchased $600 of inventory, at cost and on open account from
Walsh, Inc.
June 9 Walsh, Inc., returned $100 of defective inventory and received a full credit.
June 10 Walsh, Inc., received $200 from Sydney, Jeffrey’s daughter, in partial settlement of her account.
Given these transactions, prepare a balance sheet for Walsh, Inc., as of June 10, 20X9.
1.4-4) Joseph, Jeremy, and Jacob began the JJJ Partnership on September 1, 20X9. Given the following
transactions, prepare a balance sheet for the partnership as of September 10, 20X9.
Sept. 1 The JJJ Partnership was formed as Joseph invested $6,300 in cash, Jeremy invested supplies
worth $4,100, and Jacob invested $7,400 in cash.
Sept. 2 JJJ acquired $3,600 in inventory, paying cash.
Sept. 4 JJJ acquired equipment costing $23,900, making a $3,500 cash down payment, with the balance
due on a note.
Sept. 5 JJJ returned $300 worth of defective inventory and received a refund.
Sept. 7 JJJ acquired inventory costing $800 on open account.
Sept. 8 JJJ sold inventory costing $1,700 at cost. The customer, a close friend, purchased the inventory
on account.
Sept. 9 JJJ paid $400 associated with the inventory acquired on September 7.
Sept. 10 JJJ received $400 from the customer who acquired inventory on September 8.
1.4-5) As the new accountant for Varney Industries, you are required to prepare monthly financial
statements. Upon opening the file with the previous month’s balance sheets, you notice that they have
been prepared incorrectly. Prepare a corrected January balance sheet based on the information below.
Balance Sheet for
Varney Industries
Prepared on
January 25, 2009
Assets Liabilities and Owners’ Equity
Merchandise inventory 8,000 Office supplies 1,000
Accounts payable 3,000 Long term debt 18,000
Cash 12,000 Owners equity 52,000
Owners’ equity 52,000 Prepaid expenses 2,000
Property and equipment 50,000
Learning Objective 1.5 Questions
1.5-1) Which of the following statements is false?
A) If a sole proprietorship fails, the creditors can obtain repayment from the personal assets of the single
owner.
B) If a partnership fails, the creditors can obtain repayment from the personal assets of the partners.
C) If a corporation fails, the creditors can obtain repayment from the personal assets of the stockholders.
D) A change in ownership among the partners results in the termination of the partnership.
E) Income taxes are not levied against sole proprietorships and partnerships.
1.5-2) Which of the following statements is false?
A) Most states require stock certificates to have some dollar amount printed on them.
B) Additional paid–in capital is part of total liabilities on the balance sheet.
C) The ultimate responsibility for management is delegated by stockholders to professional managers.
D) Typically, stock is sold for an amount above par value.
E) An advantage of the corporate form of organization is the separation of ownership and management.
1.5-3) Which of the following forms of business organizations protect the personal assets of the owners
from creditors of the business?
A) Partnerships
B) Corporations
C) Proprietorships
D) Partnerships and corporations
E) Partnerships and proprietorships
1.5-4) Which of the following statements is false?
A) Corporations are business organizations created under federal law.
B) One of the most notable characteristics of a corporation is the limited liability of the owners.
C) An advantage of corporations over other business entities is the ease of transfer of ownership.
D) The laws governing corporations vary from state to state.
E) Individuals can sell stock to each other without corporate involvement.
1.5-5) A corporation is an organization
A) with owners assuming personal liability for business losses.
B) that joins two or more people together as co–owners.
C) that is an “artificial being” created by individual state laws.
D) that gives stockholders control of everyday management decisions.
E) that does not sell stock to raise capital.
1.5-6) The form of organization that has limited liability for the owners is a(n)
A) corporation.
B) partnership.
C) proprietorship.
D) cartel.
E) interest group.
1.5-7) Which is a disadvantage of a corporation?
A) Limited liability
B) Easy transfer of ownership
C) Ease in raising ownership capital from potential stockholders
D) Management’s consumption of perquisites
E) Continuity of existence
1.5-8) A sole proprietorship is an organization with a single owner.
1.5-9) A sole proprietorship is an accounting entity, even though it has only a single owner.
1.5-10) The owners of a corporation have limited liability.
1.5-11) Corporations are the most important form of business ownership because they conduct the vast
majority of business.
1.5-12) The effects of the form of ownership of a business entity on income taxes may vary significantly.
1.5-13) Describe the three forms of business entities and state how they differ.
Learning Objective 1.6 Questions
1.6-1) Deborah Westerfelt owns 3,000 shares of $2.00 par value capital stock of Abron Enterprises.
Deborah Westerfelt sold 500 of these shares to Brian Tondra for $2,500. The effect of this transaction on
the accounts of Abron Enterprises would be to
A) increase the capital stock account by $1,000 and increase the cash account by $1,000.
B) increase the capital stock account by $1,000, increase the paid–in capital in excess of par account by
$1,500, and increase the cash account by $2,500.
C) decrease the capital stock account by $1,000 and increase the paid–in capital in excess of par account by
$1,000.
D) increase the capital stock account by $1,000 and decrease the paid–in capital in excess of par account by
$1,000.
E) There is no effect from this transaction on the accounts of Abron Enterprises.
1.6-2) Daniel Fox owns 500 shares of Vaughn Publishing Company. The capital stock of Vaughn
Publishing Company has a par value of $3 per share. Daniel Fox sells his 500 shares of Vaughn
Publishing stock to Ed Sullivan for $10 per share. The effect of this transaction on Vaughn Publishing
would be to
A) increase the cash account by $5,000 and increase the capital stock account by $5,000.
B) increase the cash account by $5,000, increase the capital stock account by $1,500, and increase the paid–
in capital in excess of par account by $3,500.
C) increase the cash account by $5,000 and decrease the capital stock account by $5,000.
D) increase the cash account by $5,000, decrease the capital stock account by $1,500, and decrease the
paid–in capital in excess of par account by $3,500.
E) Vaughn Publishing Company would not record this transaction but would note the change in
ownership.
1.6-3) Curtis White owns 600 shares of Sterling, Inc. The capital stock of Sterling, Inc., has a par value of
$5 per share. Curtis White sells his 600 shares of Sterling, Inc., stock to Maia Scott for $12 per share. The
effect of this transaction on Sterling, Inc., would be to
A) increase the cash account by $7,200 and increase the capital stock account by $7,200.
B) increase the cash account by $7,200 and decrease the capital stock account by $7,200.
C) increase the cash account by $7,200, increase the capital stock account by $3,000, and increase the paid–
in capital in excess of par account by $4,200.
D) Sterling, Inc., would not record this transaction but would note the change in ownership.
E) Sterling, Inc., records this transaction but would not note the change in ownership.
1.6-4) Fabian Company began business on July 1, 20X1, by selling 1,000 shares of $1 par value capital
stock at $20 per share. The effect of this transaction on Fabian Company would be to
A) increase the capital stock at par account by $20,000 and increase the cash account by $20,000.
B) increase the capital stock at par by $20,000 and decrease the cash account by $20,000.
C) decrease the capital stock at par by $20,000 and increase the cash account by $20,000.
D) increase the capital stock at par by $1,000, increase the paid–in capital in excess of par account by
$19,000, and increase the cash account by $20,000.
E) decrease the capital stock at par by $1,000, decrease the paid–in capital in excess of par account by
$19,000, and increase the cash account by $20,000.
1.6-5) Mark, Inc., sold 500 shares of $2.00 par value capital stock in exchange for equipment worth $4,000.
The effect of this transaction on Mark, Inc., would be to
A) increase the equipment account by $1,000 and increase the capital at par by $1,000.
B) increase the equipment account by $4,000 and increase the capital at par by $4,000.
C) increase the equipment account by $4,000, increase the capital stock at par by $1,000, and increase the
paid–in capital in excess of par account by $3,000.
D) increase the equipment account by $4,000 and decrease the capital stock at par by $4,000.
E) increase the equipment account by $4,000, decrease the capital stock at par by $1,000, and decrease the
paid–in capital in excess of par account by $3,000.
1.6-6) Hanna Corporation repaid an $8,000 note payable by issuing 500 shares of its $4.00 par value
capital stock. The effect of this transaction on Hanna Corporation would be to
A) increase the capital stock at par by $8,000 and decrease the notes payable account by $8,000.
B) increase the capital stock at par by $2,000 and decrease the notes payable account by $2,000.
C) increase the capital stock at par by $2,000, increase the paid–in capital in excess of par account by
$6,000, and decrease the notes payable account by $8,000.
D) increase the capital stock at par by $2,000, decrease the paid–in capital in excess of par account by
$6,000, and decrease the notes payable account by $8,000.
E) increase the capital stock at par by $2,000, decrease the cash account by $6,000, and decrease the notes
payable account by $8,000.
1.6-7)
Ian Jones Company’s capital stock is currently selling for $30 per share. Ian Jones Company has the
following accounts included within the owners’ equity section of the balance sheet:
Capital stock, $1.00 par value, 15,000 shares issued $ 15,000
Additional paid–in capital $ 45,000
Assuming that the only transaction affecting these accounts was the sale of the company’s capital stock,
Ian Jones Company originally sold its capital stock for
A) $ 1.00 per share.
B) $ 4.00 per share.
C) $29.00 per share.
D) $30.00 per share.
E) The selling price of the capital stock cannot be determined from the information given.
1.6-8) Woodrich Industries began business on July 1, 20X2, by selling 1,000 shares of $10 par value capital
stock at $30 per share. The effect of this transaction on Woodrich Industries would be to
A) increase the capital stock at par by $10,000, increase the paid–in capital in excess of par account by
$20,000, and increase the cash account by $30,000.
B) decrease the capital stock at par by $30,000 and increase the cash account by $30,000.
C) increase the capital stock at par by $30,000 and increase the cash account by $30,000.
D) decrease the capital stock at par by $10,000, decrease the paid–in capital in excess of par account by
$20,000, and increase the cash account by $30,000.
E) increase paid–in capital in excess of par account by $30,000 and increase the cash account by $30,000.
1.6-9) The difference between the total amount the company receives for the stock and the par value is
called
A) stated value.
B) par value.
C) additional paid–in capital.
D) stockholders’ equity value.
E) common stock.
1.6-10) The two equity claims that Total paid–in capital is split between are
A) capital stock at par and owners’ equity.
B) capital stock at par and paid–in capital in excess of par.
C) capital stock at par and stockholders’ equity.
D) paid–in capital in excess of par and owners’ equity.
E) paid–in capital in excess of par and stockholders’ equity.
1.6-11) The board of directors’ duty is to manage a company.
1.6-12) Typically, a company sells its stock at par value.
1.6-13) Below are owners’ equity accounts for three different forms of business entities. List which form of
business entity each set of owners’ equity accounts is and explain how you arrived at your decision.
Business entity #1
Kyle McGinty, capital $300,000
Susan Tesny, capital 150,000
Emily Penn, capital 50,000
Kathy, Kosman, capital 10,000
Total capital $510,000
Business entity #2
Stockholders’ equity:
Paid–in capital:
Capital stock, 20,000 shares issued at par value of $5 per share $100,000
Paid–in capital in excess of par value 200,000
Total paid–in capital $300,000
Business entity #3
Mary Housel, capital $100,000
Learning Objective 1.7 Questions
1.7-1) The principal task of the FASB is to
A) be a link between the business community and the Securities and Exchange Commission (SEC).
B) establish GAAP.
C) discuss and recommend changes in GAAP to the SEC, which will make the final decision on a
particular issue’s acceptance and implementation.
D) act as a counsel and advocate for business in its dealings with the government, particularly, but not
solely, to the SEC.
E) review financial statements, so as to ensure adherence to GAAP.
1.7-2) With respect to the role of the government in establishing accounting standards in the United
States, which of the following statements is incorrect?
A) Most accounting reporting requirements are determined by the FASB, which is a non–government
institution.
B) The SEC, and not the FASB, has the ultimate legal authority over most financial reporting to investors.
C) The FASB can act independently of the SEC and does not need the SEC’s support in establishing
accounting standards.
D) The SEC, which is an agency of the federal government, is empowered to ensure full and fair
disclosures by corporations.
E) The SEC is allowed to take an active role in establishing accounting standards.
1.7-3) The hierarchy (1 is top) of U.S. accounting rule–making responsibility is
A) 1. congress, 2. AICPA, 3. FASB.
B) 1. SEC, 2. IASB, 3. FASB.
C) 1. FASB, 2. IASB, 3. AICPA.
D) 1. congress, 2. SEC, 3. FASB.
E) 1. PCAOB, 2. FASB, 3. IASB.
Learning Objective 1.8 Questions
1.8-1) An auditor’s opinion is not
A) a report describing the auditor’s examination of transactions and financial statements.
B) included in the financial statements in the annual report issued by the corporation.
C) another name for independent opinion.
D) certified by the Securities Exchange Commission.
E) a third party review.
1.8-2) The auditor’s opinion includes all except which of the following statements?
A) The financial statements are in conformity with generally accepted accounting principles.
B) The financial statements are the responsibility of the company’s management.
C) The audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements.
D) The auditor’s responsibility is to express an opinion on the financial statements.
E) The financial statements are free of any and all misstatements.
1.8-3) Public accounting is
A) the field of accounting where accountants work for businesses, government agencies, or other
nonprofit organizations.
B) the field of accounting where services are offered to the general public on a fee basis.
C) a field of accounting where no audits occur.
D) the field that provides management with internal company reports.
E) unregulated.
1.8-4) Public accounting is
A) the field of accounting where accountants work for businesses, government agencies, or other
nonprofit organizations.
B) the field of accounting where services are offered to the general public on a fee basis.
C) a field of accounting were no audits occur.
D) done for publicly traded companies by four CPA firms.
1.8-5) Generally accepted accounting principles
A) are advisory guidelines for management.
B) are only applicable to balance sheets.
C) are to be followed in the preparation of financial statements.
D) can never be deviated from.
E) are uniform world–wide.
1.8-6) The credibility of the financial statements is the responsibility of the
A) external auditors.
B) stockholders.
C) management.
D) staff accountants.
E) external auditors and the staff accountants.
1.8-7) In order to write an audit opinion, a certified public accountant (CPA) in the United States must
A) have a master‘s degree.
B) pass a 4–day written national examination.
C) have 10 years’ qualifying experience.
D) adhere to standards of integrity and independence.
E) follow the client company’s code of conduct.
1.8-8) The Sarbanes–Oxley Act was passed in 2002 to regulate the accounting profession. Although the act
encompasses many aspects, what is one of the parts of the act?
A) Requires rotation every ten years of the lead audit or coordinating partner and the reviewing partner
on an audit
B) Established the Public Company Accounting Oversight Board
C) Requires all accounting firms to register with the SEC
D) Prohibits public accounting firms from auditing SEC regulated companies
E) Excludes certain industries from conducting business with public accounting firms
1.8-9) The auditor’s opinion is also called an independent opinion.
1.8-10) The auditor’s opinion is included with the annual report issued by the corporation.
1.8-11) An audit is an examination of transactions and financial statements.
1.8-12) Public accountants are those whose services are offered to the general public on a fee basis.
1.8-13) The American Institute of Certified Public Accountants prepares and grades a CPA exam on a
national basis.
1.8-14) The American Institute of Certified Public Accountants is responsible for establishing GAAP in
the United States
1.8-15) The U.S. Congress has charged the Financial Accounting Standards Board with the ultimate
responsibility for authorizing the generally accepted accounting principles.
Learning Objective 1.9 Questions
1.9-1) Professional ethics are
A) a code of professional conduct.
B) governed by the government of the United States.
C) for private accountants only.
D) for public accountants only.
E) set by the IASB.
1.9-2) The AICPA Code of Professional Ethics is especially concerned with integrity and independence.
1.9-3) Nonprofit organizations do not need to analyze financial statement information since their purpose
is not to increase net income like profit–seeking organizations.
1.9-4) How do generally accepted accounting principles present an ethical issue in financial accounting?