Chapter 3: Processing Accounting Information
162. 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 descriptions of a 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
—
—
163. Explain what the chart of accounts is and how its numbering system works.
Chapter 3: Processing Accounting Information
164. 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.
165. How frequently should entries be posted from the journal to the ledger? How have computers improved the posting
process?
166. Explain the purpose of a trial balance and the limitation of the trial balance.
Chapter 3: Processing Accounting Information
Identify which of the following would be recorded as external events, recorded as internal events, or not
recorded.
a. Internal event
b. External event
c. Not recorded
167. The company hires a new secretary.
168. A customer pays its open account.
169. A vendor for a company’s supplies is paid an amount owed on account.
170. The company transfers work in process to finished goods inventory.
171. The company hires a new marketing firm for their new product
172. The company takes a count of the raw materials inventory and finds that an adjustment is needed.
173. The company signs a contract with the marketing firm and pays a retainer.
For each of the following accounts, indicate whether it is a balance sheet account or
an income statement account.
a. Balance sheet account
b. Income statement account
174. Prepaid Insurance
175. Cash
Chapter 3: Processing Accounting Information
176. Sales Revenue
177. Income Taxes Payable
178. Income Taxes Expense
179. Accounts Receivable
180. Accounts Payable
181. Retained Earnings
182. Furniture and Fixtures
183. Common Stock
184. Utilities Expense
185. Interest Revenue
Chapter 3: Processing Accounting Information
Choose from the following list of account titles the one that most accurately fits the description of
that account or is an example of that account. An account title may be used more than once or not at
all.
a. Cash
b. Prepaid Asset
c. Investments
d. Taxes Payable
e. Preferred Stock
f. Accounts Receivable
g. Land
h. Accounts Payable
i. Retained Earnings
j. Notes Receivable
k. Buildings
l. Notes Payable
m. Common Stock
186. A written obligation to repay a fixed amount, with interest, at some
time in the future
187. A plot of land held for speculation
188. An amount owed by a customer
189. Corporate income taxes owed to the state government
190. Ownership in a company that allows the owner to receive dividends
before common shareholders receive any distributions
191. Ten acres of land used as the site for a factory
192. Amounts owed on an open account to a vendor, due in 70 days
Chapter 3: Processing Accounting Information
193. A checking account at a bank
194. A warehouse used to store equipment
195. Claims by the owners on the undistributed net income of a business
196. Rent paid on an office building in advance of use of the facility
Each account has a normal balance. For the following list of accounts, indicate whether the normal
balance of each is a debit or a credit.
a. Debit
b. Credit
197. Cash
198. Prepaid Insurance
199. Retained Earnings
200. Bonds Payable
201. Investments
202. Capital Stock
203. Advertising Fees Earned
Chapter 3: Processing Accounting Information
204. Wages and Salaries Expense
205. Wages and Salaries Payable
206. Office Supplies
207. Dividends
208. Unearned Advertising Fees
209. A cash register tape would be a source document for which of the following?
a. Recording a purchase of inventory on credit
b. Recognizing a cash sale
c. Recording an invoice
d. Recording payroll
210. A cancelled check would be a source document for which of the following?
a. Recording a purchase of inventory on credit
b. Recording cash received on an customer account
c. Recording accrued payroll
d. Recording a cash payment to a creditor
211. Which one of the following best defines an external event in terms of accounting?
a. A measured event that must be recognized.
b. An event recognized in a set of financial statements.
c. A happening of consequence to an entity.
d. An interaction between an entity and its environment.
Chapter 3: Processing Accounting Information
212. All transactions refer to external events.
a. True
b. False
213. The payment of wages to employees is an internal event.
a. True
b. False
214. The use of equipment in a company is an external event.
a. True
b. False
215. Which one of the following best defines an internal event in terms of accounting?
a. Every type of transaction is an internal event.
b. An event recognized in a set of financial statements.
c. A happening of consequence to an entity.
d. An event occurring entirely within an entity.
216. A source document is a record used to accumulate amounts for each individual asset, liability, revenue,
expense, and component of stockholders’ equity.
a. True
b. False
217. Not all recognizable events are supported by a standard source document.
a. True
b. False
218. Debits are good and credits are bad in financial terms.
a. True
b. False
Chapter 3: Processing Accounting Information
219. Debit and credit would best be described as terms.
a. abnormal
b. increasing/decreasing
c. quantitative
d. locational
220. The term “chronological order” is best associated with:
a. a journal.
b. a trial balance.
c. credit entries.
d. capital stock.
221. A trial balance is a financial statement.
a. True
b. False
222. A trial balance can be as informal as an adding machine tape with the account titles penciled in next to the
debit and credit amounts.
a. True
b. False
223. Which of the following best describes a trial balance?
a. It is a required financial statement.
b. It is a financial statement that can be used in place of the income statement.
c. It is a numerical list of all accounts used by a company.
d. It is a tool used to prove the equality of debits and credits in the general ledger.
Chapter 3: Processing Accounting Information
Krenshaw Rentals
Use the five transactions for Krenshaw Rentals described below to answer the question(s) that follow(s).
Oct 1 Krenshaw purchases two new saws on credit at $375 each. The saws are added to
Krenshaw’s rental inventory. Payment is due in 30 days.
8 Krenshaw accepts advance deposits for tool rentals of $75.
15 Krenshaw receives a bill from Farmer’s Electric Company for $150. Payment is due
in 30 days.
20 Customers are charged $750 by Krenshaw for tool rentals. Payment is due
from the customers in 30 days.
31 Krenshaw receives $500 in payments from the customers that were billed
for rentals on October 20.
224. Refer to the transactions for Krenshaw Rentals.
Based on the October 15 transaction, Farmer’s Electric will record which of the following in its accounting
records?
a. A credit in Accounts Payable for $150.
b. A credit in Accounts Receivable for $150.
c. A debit in Accounts Payable for $150.
d. A debit in Accounts Receivable for $150.
225. Refer to the transactions for Krenshaw
Rentals.
Based on the October 31 transaction, Krenshaw will record which of the following in its accounting records?
a. A credit in Accounts Payable for $500.
b. A credit in Accounts Receivable for $500.
c. A debit in Accounts Payable for $500.
d. A debit in Accounts Receivable for $500.
Chapter 3: Processing Accounting Information
226. Refer to the transactions for Krenshaw Rentals.
Based on the October 15 transaction, Krenshaw will record which of the following in its accounting records?
a. A credit in Accounts Payable for $150.
b. A credit in Accounts Receivable for $150.
c. A debit in Accounts Payable for $150.
d. A debit in Accounts Receivable for $150.
227. Refer to the transactions for Krenshaw Rentals.
Based on the October 8 transaction, Krenshaw will record which of the following in its accounting records?
a. A credit in Rental Receivables for $75.
b. A credit in Rental Revenue for $75.
c. A credit in Tools for $75.
d. A credit in Unearned Deposit Payable for $75.