APPENDIX I
ACCOUNTING FOR SOLE PROPRIETORSHIPS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES
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2
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4
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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TF
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MC
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MC
26.
MC
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MC
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MC
46.
BE
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TF
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TF
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MC
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MC
30.
MC
33.
MC
47.
BE
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TF
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TF
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MC
28.
MC
31.
MC
34.
MC
48.
BE
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TF
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TF
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MC
36.
MC
50.
BE
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TF
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TF
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TF
37.
MC
40.
MC
43.
MC
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BE
11.
TF
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TF
17.
TF
38.
MC
41.
MC
44.
MC
12.
TF
15.
TF
18.
TF
39.
MC
42.
MC
45.
MC
Note: TF = True-False C = Completion Ma = Matching
MC = Multiple Choice Ex = Exercise SA = Short-Answer Essay
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
I-2
CHAPTER LEARNING OBJECTIVES
1. Identify the differences in equity accounts between a corporation and a sole
proprietorship. A sole proprietorship uses a permanent owner’s equity capital account
instead of Common Stock and Retained Earnings. Withdrawals of cash or other assets by
the owner for personal use are recorded in a temporary drawing account.
2. Understand what accounts increase and decrease owner’s equity. Investments by the
owner and revenue increase owner’s equity. Owner’s drawings and expenses decrease
owner’s equity.
3. Describe the differences between a retained earnings statement and an owner’s
equity statement. A sole proprietor prepares an owner’s equity statement rather than a
retained earnings statement. The owner’s equity statement shows the beginning balance in
the owner’s capital account (instead of Retained Earnings, as shown in the retained earnings
statement), plus any investments made by the owner, less any drawings (in place of
Dividends, shown in the retained earnings statement).
4. Explain the process of closing the books for a sole proprietorship. In closing the books
for a sole proprietorship, separate entries are made to close revenues and expenses to
Income Summary, Income Summary to Owner’s Capital, and Owner’s Drawing to Owner’s
Capital.
TRUE-FALSE STATEMENTS
1. The primary differences between accounting and reporting for a sole proprietorship and a
corporation involves accounting for revenues and expenses.
2. In a sole proprietorship there is no need to separate owner’s investments from net income
retained for dividends as a sole proprietorship does not declare dividends.
3. The ownership claim on total assets is known as owner’s equity in a sole proprietorship.
4. In a proprietorship, owner’s equity is increased by revenues and expenses.
5. Decreases in owner’s equity of a sole proprietorship are caused by owner’s drawing and
expenses.
6. Drawings are decreases in owner’s equity that result from operating the business.
Accounting for Sole Proprietorships
I-3
7. The basic steps in the accounting process apply to all forms of business.
8. The primary differences between the financial statements of a corporation and a sole
proprietorship relate to the way equity is reported.
9. A sole proprietorship prepares a retained earnings statement and uses the title Retained
Earnings title on its balance sheet.
10. Closing entries for a proprietorship formally recognize in the ledger the transfer of net
income (or net loss) and owner’s drawing to the retained earnings account.
11. In the closing process for a sole proprietor, the revenue and expense accounts are closed,
in the same manner as for a corporation, to another temporary account, Income Summary.
12. Income Summary is closed with a debit to Income Summary and a credit to Owner’s
Drawing account.
13. Closing entries result in the transfer of net income or loss into the owner’s capital account.
14. The Owner’s Drawing account bypasses the Income Summary account when it is being
closed.
15. After all closing entries have been posted, the balance of the Income Summary account
will be zero.
16. The post-closing trial balance is prepared prior to the closing entries.
17. As with a corporation, the purpose of a proprietorship post-closing trial balance is to prove
the equality of the temporary account balances that are carried forward into the next
accounting period.
18. The post-closing trial balance will contain only permanent balance sheet accounts.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
I-4
Answers to True-False Statements
MULTIPLE CHOICE QUESTIONS
19. The basic accounting equation for a sole proprietorship is:
a. Assets = Liabilities plus Stockholder’s equity.
b. Assets = Liabilities plus Common Stock.
c. Assets = Liabilities plus Owner’s Equity.
d. Assets = Liabilities plus Retained Earnings.
20. As compared to a corporation, the accounting for a sole proprietorship is similar except
for:
a. equity transactions.
b. the recognition of revenues.
c. the timing of expenses.
d. the recognition of liabilities.
21. The primary difference between accounting and reporting for a sole proprietorship and a
corporation involves accounting for:
a. revenues.
b. asset purchases.
c. recognition of liabilities.
d. equity transactions.
22. The classification and normal balance of the drawings account is:
a. revenue with a credit balance.
b. an expense with a debit balance.
c. a liability with a credit balance.
d. Owner’s equity with a debit balance.
23. An investment by the owner of a sole proprietorship:
a. increases assets and liabilities.
b. increases assets and owner’s equity.
c. increases liabilities and owner’s equity.
d. All of these.
Accounting for Sole Proprietorships
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24. Which one of the following represents the expanded basic accounting equation for a sole
proprietorship?
a. Assets = Liabilities + Owner’s Equity + Drawings – Revenue – Expenses
b. Assets + Drawings + Expenses = Liabilities + Owner’s Equity + Revenues
c. Assets – Liabilities – Drawings = Owner’s Equity + Revenues – Expenses
d. Assets = Revenues + Expenses – Liabilities
25. For a sole proprietorship a revenue
a. increases assets and owner’s equity.
b. increases assets and decreases owner’s equity.
c. leaves total assets unchanged.
d. decreases assets and increases owner’s equity.
26. Owner’s equity is increased by
a. withdrawals.
b. revenues.
c. expenses.
d. liabilities.
27. If total owner’s equity increased by $5,000, then
a. assets must have decreased by $5,000.
b. liabilities must have increased by $5,000.
c. assets must have increased by $5,000, or liabilities must have decreased by $5,000.
d. assets and owner’s equity each increased by $2,500.
28. For a sole proprietorship the payment of a liability
a. decreases assets and liabilities.
b. Increases assets and decreases owner’s equity.
c. Leaves total assets unchanged.
d. decreases assets and increases owner’s equity.
29. For a sole proprietorship a withdrawal by an owner
a. increases assets and owner’s equity.
b. increases assets and decreases owner’s equity.
c. decreases assets and decreases owner’s equity.
d. Increases assets and increases owner’s equity.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
I-6
30. Which of the following items has no effect on owner’s equity?
a. Revenue
b. Purchase of land
c. Owner’s withdrawal
d. Expense
31. Payments to owners are called
a. expenses.
b. liabilities.
c. dividends.
d. withdrawals.
32. Withdrawals by an owner
a. increase expenses.
b. decrease owner’s equity.
c. decrease revenues.
d. are called a net loss.
33. The first step in the recording process for a sole proprietorship is to
a. prepare financial statements.
b. analyze the transaction in terms of its effect on the accounts.
c. post to a journal.
d. prepare a trial balance.
34. The usual sequence of steps in the recording process is to
a. analyze each transaction, enter the transaction in the journal, and transfer the
information to the ledger accounts.
b. analyze each transaction, enter the transaction in the ledger, and transfer the
information to the journal.
c. analyze each transaction, enter the transaction in the book of accounts, and transfer
the information to the journal.
d. analyze each transaction, enter the transaction in the book of original entry, and
transfer the information to the journal.
35. The Owner’s Drawings account
a. appears on the income statement along with the expenses of the business.
b. must show transactions every accounting period.
c. is shown as a decrease on the owner’s equity statement.
d. is not a proper subdivision of owners’ equity.
Accounting for Sole Proprietorships
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36. A list of accounts and their balances at a given time is called a(n):
a. journal.
b. posting.
c. trial balance.
d. income statement.
37. Closing entries:
a. are prepared before the financial statements.
b. reduce the number of permanent accounts.
c. cause the revenue and expense accounts to have zero balances.
d. summarize the activity in every account.
38. Which of the following is a true statement about closing the books of a sole proprietorship?
a. Expenses are closed to the Expense Summary account.
b. Only revenues are closed to the Income Summary account.
c. Revenues and expenses are closed to the Income Summary account.
d. Revenues, expenses, and the Dividends account are closed to the Income Summary
account.
39. The closing entry process consists of closing:
a. all asset and liability accounts.
b. out the owner’s capital account.
c. all permanent accounts.
d. all temporary accounts.
40. A post-closing trial balance will show:
a. only balance sheet accounts.
b. zero balances for balance sheet accounts.
c. zero balances for all accounts.
d. only income statement accounts.
41. The purpose of the post-closing trial balance is to
a. prove that no mistakes were made.
b. prove the equality of the permanent account balances that are carried forward into the
next accounting period.
c. prove the equality of the temporary account balances that are carried forward into the
next accounting period.
d. list all the balance sheet accounts in alphabetical order for easy reference.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
I-8
42. The final step in the accounting cycle is to prepare
a. closing entries.
b. financial statements.
c. a post-closing trial balance.
d. adjusting entries.
43. Use the following information from the income statement of the AAA Janitorial Service.
Revenues
Service Revenue $5,500
Expenses
Salaries and wages expense $ 1,150
Advertising expense 600
Rent expense 300
Supplies expense 300
Insurance expense 100
Total expenses 2,450
Net Income $3,050
The entry to close the Janitorial Service Revenue account includes a
a. debit to Service Revenue for $5,500.
b. credit to Service Revenue for $5,500.
c. debit to Income Summary for $5,500.
d. debit to the Owner’s, Capital account for $5,500.
44. Use the following information from the income statement of the AAA Janitorial Service.
Revenues
Service Revenue $5,500
Expenses
Salaries and wages expense $ 1,150
Advertising expense 600
Rent expense 300
Supplies expense 300
Insurance expense 100
Total expenses 2,450
Net Income $3,050
The entry to close the expense accounts includes a
a. credit to Income Summary for $2,450.
b. debit to Income Summary for $2,450.
c. debit to Salaries and Wages Expense for $1,150.
d. credit to the Owner’s Capital account for $2,450.
Accounting for Sole Proprietorships
I-9
45. Use the following information from the income statement of the AAA Janitorial Service.
Revenues
Service Revenue $5,500
Expenses
Salaries and wages expense $ 1,150
Advertising expense 600
Rent expense 300
Supplies expense 300
Insurance expense 100
Total expenses 2,450
Net Income $3,050
The entry to close the Income Summary includes a
a. credit to Income Summary for $3,050.
b. debit to Income Summary for $3,050.
c. debit to the Owner’s Capital account for $3,050.
d. credit to Common Stock for $3,050.
Answers to Multiple Choice Questions
BRIEF EXERCISES
Be. 46
Presented here are five economic events. For each item, indicate whether the event increased (+),
decreased (-), or had no effect (NE) on assets, liabilities, and owners’ equity.
Owner’s
Assets = Liabilities + Equity
1. Owner invested cash in the business. _______ ______ _______
2. Purchased supplies on account. _______ ______ _______
3. Paid employees’ salaries. _______ ______ _______
4. Owner made a cash withdrawal. _______ ______ _______
5. Expenses paid in cash. _______ ______ _______
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
I-10
Solution Be 46 (5 min.)
Be. 47
In the space provided by each item mark each transaction as affecting owner’s investment (I),
owner’s drawing (D), revenue (R), expense (E), or not affecting owner’s equity (NOE).
a. _____ Received cash for services performed
b. _____ Paid cash to purchase equipment
c. _____ Owner withdrew cash.
d. _____ Paid utilities.
e. _____ Owner invested cash into the business.
Be. 48
Determine the missing items.
Assets = Liabilities + Owner’s Equity
$85,000 $49,000 (a)
(b) $42,000 $44,000
$104,000 (c) $44,000
Accounting for Sole Proprietorships
I-11
Be. 49
Marsha Gupta was reviewing her business activities at the end of the year (2014) and decided to
prepare an owner’s equity statement. At the beginning of the year her assets were $370,000,
liabilities were $250,000, and owner’s capital was $120,000. The net income for the year was
$330,000. Owner’s withdrawals of $100,000 were paid during the year.
Prepare an owner’s equity statement in good form.
Be. 50
The following selected accounts appear in the adjusted trial balance for Federer Company.
Identify the accounts that would be included in the post-closing trial balance.
1. Accumulated Depreciation 5. Supplies
2. Depreciation Expense 6. Accounts Payable
3. Garner, Capital 7. Service Revenue
4. Drawing
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting
Solution 50 (5 min.)