Problem: Multiple Choice
Part A: Circle the one best answer.
Question 1. The ACE Company has five plants nationwide that cost $100 million. The current market value of the plants is $500 million. The plants will be recorded and reported as assets at
a. $100 million.
b. $600 million.
c. $400 million.
d. $500 million.
Question 2. An increase in an expense
a. increases revenues.
b. increases assets.
c. decreases liabilities.
d. decreases owner's equity.
Question 3. A proprietorship business with total owner's equity of $85,000 paid a $10,000 business debt. As a result of this transaction, total owner's equity
a. did not change.
b. increased by $10,000.
c. decreased by $10,000.
d. increased to $95,000.
Question 4. The right side of an account is always
a. the debit side.
b. the credit side.
c. the balance of that account.
d. carried forward to the next accounting period.
Question 5. In a service-type business, revenue is considered earned
a. at the end of the month.
b. at the end of the year.
c. when the service is performed.
d. when cash is received.
Question 6. The purpose of recording depreciation on productive assets is to
a. reflect the decline in the market value of the assets each period.
b. reduce income when the company has an exceptionally profitable year.
c. be in conformity with the revenue recognition principle.
d. allocate the original cost of productive assets to expense over its useful life.
Question 7. Logan Company debited Prepaid Insurance for $840 on July 1, 2010 for a one-year fire insurance policy. If the company prepares monthly financial statements, failure to make an adjusting entry on July 31 for the amount of insurance that has expired would cause:
a. assets to be overstated by $840 and expenses to be understated by $840.
b. expenses to be overstated by $70 and assets to be understated by $70.
c. assets to be overstated by $70 and expenses to be understated by $70.
d. expenses to be overstated by $840 and assets to be understated by $840.
Question 8. Which one of the following accounts is not closed at the end of an accounting period?
a. Owner's Capital account
b. Owner's Drawing account
c. Service Revenue account
d. Insurance Expense account
Question 9. Speedy Bike Company received a $940 check from a customer for the balance due. The transaction was erroneously recorded as a debit to Cash $490 and a credit to Service Revenue $490. The correcting entry is
a. debit Cash, $940; credit Accounts Receivable, $940.
b. debit Cash, $450 and Accounts Receivable, $490; credit Service Revenue, $940.
c. debit Cash, $450 and Service Revenue, $490; credit Accounts Receivable, $940.
d. debit Accounts Receivable, $940; credit Cash, $450 and Service Revenue, $490.
Question 10. During the year, Darla’s Pet Shop’s merchandise inventory decreased by $20,000. If the company’s cost of goods sold for the year was $300,000, purchases must have been
a. $320,000.
b. $280,000.
c. $260,000.
d. Unable to determine.
Problem B:
Match the items below by entering the appropriate letter in the space.
1. Partnership
2. Liabilities
3. Revenues
4. General ledger
5. Matching principle
6. Unearned revenues
7. Income summary
8. Intangible assets
9. Freight-out
10. Sales returns and allowances
A. Noncurrent resources that do not have a physical substance.
B. Freight costs incurred by the seller.
C. A liability created when cash is received in advance of performing a service for a customer.
D. The matching of efforts (expenses) with accomplishments (revenues).
E. A contra-revenue account.
F. An economic entity which is not a separate legal entity.
G. Creditorship claims on total assets.
H. Gross increases in owner's equity resulting from business activities entered into for the purpose of earning income.
I. Contains all assets, liabilities, and owner's equity accounts.
J. A temporary account used in closing revenue and expense accounts.
Problem C:
The following information for Starfleet Company is available on June 30, 2010, the end of a monthly accounting period. You are to prepare the necessary adjusting journal entries for Starfleet Company for the month of June for each situation given. Appropriate adjusting entries had been recorded in previous months. You may omit journal entry explanations.
1. Starfleet Company purchased a 2-year insurance policy on February 1, 2010 and debited Prepaid Insurance for $2,400.
2. On January 1, 2010, a tenant in an apartment building owned by Starfleet Company paid $4,500 which represents six months' rent in advance. The amount received was credited to the Unearned Rent account.
3. On June 1, 2010, the balance in the Office Supplies account was $200. During June, office supplies costing $580 were purchased. A physical count of office supplies at June 30 revealed that there was $240 still on hand.
4. On March 31, 2010, Starfleet Company purchased a delivery van for $45,000. It is estimated that the annual depreciation will be $9,000.
5. Starfleet Company has two employees who earn $100 and $120 per day, respectively. They are paid each Friday for a five-day work week that begins each Monday. Assume June 30 is a Wednesday in 2010.
Problem D:
The end of the period account balances after adjustments of Green Cleaners and Laundry are as follows:
Account Balances
(After Adjustments)
Cash $8,000
Cleaning Supplies 3,500
Prepaid Rent 3,600
Equipment 128,000
Accumulated Depreciation—Equipment 20,000
Accounts Payable 11,500
A. Green, Capital 104,400
A. Green, Drawing 7,000
Dry Cleaning Revenues 24,000
Laundry Revenues 4,000
Cleaning Supplies Expense 5,000
Depreciation Expense 3,000
Rent Expense 900
Salaries Expense 3,400
Utilities Expense 1,500
Instructions:
Prepare the end of the period closing entries for Green Cleaners and Laundry. You may omit journal entry explanations.
Problem E:
Prepare the necessary general journal entries for the month of October for Bosco Company for each situation given below. Bosco uses a perpetual inventory system.
Oct. 5 Paid cash of $14,000 for operating expenses that were incurred and properly recorded in the previous period.
Oct. 8 Purchased merchandise for $25,000 on account. Credit terms: 2/10, n/30; Freight term: FOB Shipping Point.
Oct. 10 Paid freight bill of $450 for merchandise purchased on October 8.
Oct. 12 Borrowed $12,000 from Admire Bank signing an 8%, 3-month note.
Oct. 15 Paid for merchandise purchased on October 8. The company takes all discounts to which it is entitled.
Oct. 20 Sold merchandise for $16,000 to Tom Black on account. The cost of the merchandise sold was $10,000. Credit terms: 2/10, n/30.
Oct. 22 Purchased a 2-year insurance policy for $3,600 cash.
Oct. 25 Credited Tom Black’s account for $1,000 for merchandise returned by him from the sale on October 20. The cost of the merchandise returned was $625.
Oct. 29 Purchased office equipment for $20,000 paying $4,000 in cash and signing a 3-month, 9% note for the remainder.
Problem F:
Below is a partial listing of the adjusted account balances of Aston Department Store at year end on December 31, 2010.
Accounts Receivable $ 19,000
Cost of Goods Sold 255,000
Selling Expenses (includes depreciation) 35,000
Interest Expense 1,000
Accumulated Depreciation—Building 10,000
Sales Discounts 22,000
Merchandise Inventory 45,000
Administrative Expenses (includes depreciation) 20,000
Sales 340,000
Accounts Payable 14,000
Interest Revenue 800
Instructions:
Using whatever data you believe appropriate, prepare a multiple-step income statement for Aston Department Store for the year ended December 31, 2010.
Problem G:
The following errors were made in journalizing and posting transactions in May in the Silas Company.
1. An $800 payment for repairs incurred on account in May was debited to Salaries Expense $800 and credited to Accounts Payable $800.
2. A collection of $3,000 on account from a customer was recorded as a debit to Cash $300 and a credit to Accounts Receivable $300.
3. A bill for $750 for new office equipment was debited to Office Supplies $570 and credited to Accounts Payable $570.
4. The receipt of $800 from a customer for future service was recorded as a debit to Accounts Receivable $800 and a credit to Service Revenue $800.
Instructions:
Prepare the correcting entries at May 31 assuming the incorrect entry is not reversed. (Omit explanations.)