TEST BANK for Accounting Principles, Volume 1, 9th Canadian Edition by Jerry J. Weygandt, Donald E.

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 1 ACCOUNTING IN ACTION CHAPTER LEARNING OBJECTIVES 1. Identify the uses and users of accounting and the objective of financial reporting. Accounting is the information system that identifies, records, and communicates the economic events of an organization to a wide variety of interested users. Good accounting is important to people both inside and outside the organization. Internal users, such as management, use accounting information to plan, control, and evaluate business operations. External users include investors and creditors, among others. Accounting data are used by investors (owners or potential owners) to decide whether to buy, hold, or sell their financial interests. Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money based on the accounting information. The objective of financial reporting is to provide useful information to investors and creditors to make these decisions. Users need information about the business’s ability to earn a profit and generate cash. For our economic system to function smoothly, reliable and ethical accounting and financial reporting are critical. 2. Compare the different forms of business organization. The most common examples of business organization are proprietorships, partnerships, and corporations. Proprietorships and partnerships are not separate legal entities but are separate entities for accounting purposes; income taxes are paid by the owners and owners have unlimited liability. Corporations are separate legal entities as well as separate entities for accounting purposes; income taxes are paid by the corporation and owners of the corporation have limited liability. 3. Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Generally accepted accounting principles are a common set of guidelines that are used to prepare and report accounting information. The conceptual framework outlines some of the body of theory used by accountants to fulfill their goal of providing useful accounting information to users. Ethical behaviour is fundamental to fulfilling the objective of financial accounting. The reporting entity concept requires the business activities of each reporting entity to be kept separate from the activities of its owner and other economic entities. The going concern assumption presumes that a business will continue operations for enough time to use its assets for their intended purpose and to fulfill its commitments. The periodicity concept requires businesses to divide up economic activities into distinct periods of time. Qualitative characteristics include fundamental and enhancing characteristics that help to ensure accounting information is useful. Only events that cause changes in the business’s economic resources or changes to the claims on those resources are recorded. Recognition is the process of recording transactions and measurement is the process of determining the amount that should be recognized. The historical cost concept states that economic resources should be recorded at their historical (original) cost. Fair value may be

Test Bank for Accounting Principles, Ninth Canadian Edition

a more appropriate measure for certain types of resources. Generally, fair value is the amount the resource could be sold for in the market. The monetary unit concept requires that only transactions that can be expressed as an amount of money be included in the accounting records, and it assumes that the monetary unit is stable. The revenue recognition principle requires companies to recognize revenue when a performance obligation(s) is satisfied. The matching concept requires that costs be recognized as expenses in the same period as revenue is recognized when there is a direct association between the cost incurred and revenue recognized. In Canada, there are two sets of standards for profit-oriented businesses. Publicly accountable enterprises must follow International Financial Reporting Standards (IFRS) and private enterprises have the choice of following IFRS or Accounting Standards for Private Enterprises (ASPE). 4. Describe the elements of the financial statements and explain the accounting equation. Assets, liabilities, and owner’s equity are reported on the balance sheet. Assets are present economic resources controlled by the business as a result of past events and have the potential to produce economic benefits. Liabilities are present obligations of a business to transfer an economic resource as a result of past events. Owner’s equity is the owner’s claim on the company’s assets and is equal to total assets minus total liabilities. The balance sheet is based on the accounting equation: Assets = Liabilities + Owner’s equity. The Income statement reports the profit or loss for a specified period of time. Profit is equal to revenues minus expenses. Revenues are the increases in assets, or decreases in liabilities, that result from business activities that are undertaken to earn profit. Expenses are the cost of assets consumed or services used in a company’s business activities. They are decreases in assets or increases in liabilities, excluding withdrawals made by the owners, and result in a decrease to owner’s equity. The statement of owner’s equity summarizes the changes in owner’s equity during the period. Owner’s equity is increased by investments by the owner and profits. It is decreased by drawings and losses. Investments are contributions of cash or other assets by owners. Drawings are withdrawals of cash or other assets from the business for the owner’s personal use. Owner’s equity in a partnership is referred to as partners’ equity and in a corporation as shareholders’ equity. A cash flow statement summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. 5. Analyze the effects of business transactions on the accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (1) decrease in another asset, (2) increase in a liability, and/or (3) increase in owner’s equity. 6. Prepare financial statements. The income statement is prepared first. Expenses are deducted from revenues to calculate the profit or loss for a specific period of time. Then the statement of owner’s equity is prepared using the profit or loss reported in the income statement. The profit is added to (losses are deducted from) the owner’s equity at the beginning of the period. Drawings are then deducted to calculate owner’s equity at the end of the period. A balance sheet reports the assets, liabilities, and owner’s equity of a business as at the end of the accounting period. The owner’s equity

Test Bank for Accounting Principles, Ninth Canadian Edition

at the end of the period, as calculated in the statement of owner’s equity, is reported on the balance sheet in the owner’s equity section.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. Accounting is the information system that identifies, records, and communicates the economic events of an organization to a wide variety of interested users. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic

2. A working knowledge of accounting can be useful to doctors or lawyers. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic

3. The main objective of financial statements is to provide useful information to management. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic 4. Sales managers are an example of an external user of accounting information. Answer: False Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic 5. Creditors are an example of an internal user of accounting information. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic

6. Accounting information is used only by external users with a direct financial interest in a company. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic

7. In a proprietorship, there may be two or more owners. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic 8. One of the disadvantages of a proprietorship is that there is unlimited liability for the owner. Answer: True Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

9. Under the proprietorship form of business organization, no legal distinction is made between the business as an economic unit and its owner. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic 10. A partnership must have at least two people in the partnership. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic 11. In a partnership, all of the partners will generally have unlimited liability for the debts of the partnerships. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

12. A corporation may only be formed under federal legislation.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic 13. A corporation is only subject to the federal laws of corporations. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

14. A corporation may be formed under provincial, federal, or territorial legislation. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

15. A corporation’s ownership is divided into transferable shares. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

16. One of the main advantages of a corporation is limited liability for the shareholders of the corporation. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

17. Owners of a corporation are responsible for reporting the business profits on their personal income tax returns. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

18. An advantage of the corporation is that the shares of the corporation are easily transferable. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

19. Ethics are critical in the preparation of accounting information. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Generally Accepted Accounting Principles CPA: Professional and Ethical Behaviour AACSB: Ethics

20. Only the accountants should be concerned with ethics when the financial statements are being prepared. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Professional and Ethical Behaviour AACSB: Ethics 21. In a situation with an ethical consideration, there is only one ethical course of action that can be followed. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Professional and Ethical Behaviour AACSB: Ethics 22. A private company is one that issues shares to the public. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

23. GAAP stands for Generally Accepted Accounting Principles. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

24. In Canada, the main standard-setting body is the Accounting Standards Board. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

25. Corporations incorporated under provincial legislation report under ASPE and corporations incorporated under federal legislation report under IFRS. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

26. Publicly traded corporations can choose to report under either ASPE or IFRS. Answer: False Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

27. Both IFRS and ASPE are considered “principles-based” as opposed to “rules-based” standards. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic 28. The going concern assumption is the assumption that a company will continue to operate in the foreseeable future. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

29. The going concern assumption is the assumption that a company will NOT be successful in the foreseeable future. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

30. The reporting entity concept requires that an entity’s business activities be combined with the activities of its owner for financial reporting purposes. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

31. Recognition is the process of recording a transaction in the accounting records. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

32. Measurement is the process of determining the amount that should be recognized. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic 33. Fair value measurements are always more relevant to users of the financial statements. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

34. The cost and fair value of an asset are the same at the time of acquisition and in all subsequent periods. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

35. The monetary unit concept assumes that all transactions take place in Canadian dollars. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

36. The monetary unit concept prevents some relevant information from being recorded in the accounting records. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

37. An accounting transaction occurs when assets, liabilities, or owner’s equity items change as the result of some economic event. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

38. Assets are present obligations, arising from past events, to make a future payment or to provide services. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 39. Liabilities are the resources controlled by a business that are expected to provide future economic benefits. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

40. Accounts payable is the asset created when a company sells services or products to customers who promise to pay cash in the future. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

41. An obligation to pay cash to a supplier in the future is called accounts payable. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

42. The owner’s claim on the assets of the company is known as owner’s equity. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

43. Owner’s claims to total business assets take precedence over the claims of creditors because owners invest assets in the business and are liable for losses. Answer: False Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

44. Expenses are the cost of assets that are consumed or services used in ordinary business activities. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

45. A balance sheet presents the revenues and expenses, and the resulting profit or loss for a specific period of time. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

46. Profit results when a company’s expenses are higher than its revenues. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

47. A balance sheet reports the assets, liabilities, and owner’s equity at a specific date. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 48. An Income statement will give the answer to the question “Where did all the cash get used during this month?” Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 49. A cash flow statement is organized into three categories: operating, financing, and investing activities of the company. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 50. Revenues decrease owner’s equity and expenses increase owner’s equity. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

51. A balance sheet can also be called a statement of financial position. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

52. Purchasing supplies on credit will result in an increase in assets and an increase in liabilities. Answer: True Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

53. The annual report is a document that includes both financial and non-financial information. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 54. An external user could be a) a production manager. b) a marketing manager. c) the Canada Revenue Agency. d)the human resources director. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic

55. An external user would NOT include a) a creditor of the company. b) the Canada Revenue Agency. c) human resources personnel. d) the company’s bank. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic 56. Which of the following would NOT be considered an internal user of accounting information for ABC Company? a) president of the company b) production manager c) merchandise inventory clerk d) president of the employees' labour union Answer: d Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic 57. The main objective of the financial statements is a) to show the profit of a company. b) to allow customers to determine whether a company will honour its product warranties. c) to provide useful information to investors and creditors to make decisions about a business. d) to determine how many employees the company can afford to hire each year. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic

58. Which of the following would be considered an internal user of accounting information for ABC Company? a) president of the company b) the production manager c) the merchandise inventory clerk d) all of these Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic

59. Which of the following would NOT be considered an external user of accounting information for ABC Company? a) Bank of Montreal b) the Canada Revenue Agency c) the president of the company d) customers

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic 60. Internal users of accounting information do NOT a) run companies. b) plan. c) organize. d) evaluate risk for granting credit to the company. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic

61.In running a business, internal users must answer questions related to a) increases in union member benefits. b) whether or not there is enough cash to pay the bills. c) purchasing an ownership share in a business. d) the risks of lending money to the company. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic 62. Which of the following would NOT be considered an external user of accounting information for XYZ Company? a) L. Coombs, president of the labour union b) B. Beatrix, auditor for the Canada Revenue Agency c) J. Roberts, marketing manager

Test Bank for Accounting Principles, Ninth Canadian Edition

d) K. Richter, customer Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic 63. Which of the following would be considered an external user of accounting information for XYZ Company? a) J. Doe, president of the company b) the Canada Revenue Agency c) M. Smith, merchandise inventory clerk d) D. Reynolds, production manager Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic

64. An accounting system does NOT a) identify economic events. b) predict economic events. c) communicate economic events. d) record economic events. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Financial Reporting AACSB: Analytic 65. In general, which of the following names is least likely to be a corporation? a) ABC Shop Ltd.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) EFG Commercial c) LMNOP Inc. d) XYZ Retail Corp. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic 66. Which of the following is generally FALSE for a proprietorship? a) The owner suffers any losses. b) The owner is personally liable for all debts. c) A relatively large amount of capital is often needed to start the business. d) The owner receives any profits. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

67. Which of the following types of business organizations has a legal distinction between the business as an economic unit and the owner(s)? a) corporation b) partnership c) proprietorship d) none of these Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

68. Private business organizations a) issue publicly traded shares. b) require less accounting information for users. c) prepare a statement of retained earnings under ASPE. d) do not have the option to follow IFRS. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

69. If a business organization is private, has one or more owners, and the life of the organization is unlimited, which form of business organization would this be? a) corporation b) proprietorship c) partnership d) none of these Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic 70. The proprietorship form of business organization a) must have at least three owners in most provinces. b) is characterized by having a limited life. c) combines the records of the business with the personal records of the owner. d) is characterized by a legal distinction between the business as an economic unit and the owner. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

71. A business organized as a corporation a) is not a separate legal entity in most provinces. b) requires that shareholders be personally liable for the debts of the business. c) is owned by its shareholders. d) terminates when one of its original shareholders dies. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic 72. The partnership form of business organization a) is a separate legal entity. b) is a common form of organization for service-type businesses. c) enjoys an unlimited life. d) has limited liability. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

73. Which of the following is NOT an advantage of the corporate form of business organization? a) limited liability of shareholders b) transferability of ownership c) unlimited personal liability for shareholders d) unlimited life Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Compare the different forms of business organization.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

74. Judy and Marilyn met at law school and decide to start a small law practice after graduation. They agree to split revenues and expenses evenly. The most common form of business organization for a business such as this would be a a) not-for-profit organization. b) partnership. c) corporation. d) proprietorship. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

75. Which of the following forms of business organizations typically have their shares listed on the Toronto Stock Exchange? a) proprietorships b) private corporations c) public corporations d) partnerships Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

76. In regards to the corporate form of business organization, which of the following is true? a) Corporations may have only one owner or many owners. b) Corporate businesses are generally smaller in size than partnerships and proprietorships. c) The revenues of corporations in Canada are less than the combined revenues of partnerships and proprietorships. d) Corporations are separate legal entities organized exclusively under federal law.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic 77. Which of the following is NOT a characteristic of the corporate form of business organization? a) shares are transferable b) unlimited liability c) separate legal entity d) responsible for paying its own income taxes Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

78. All of the following are steps used to analyze ethical dilemmas EXCEPT a) discussing the ethical dilemma with applicable co-workers. b) considering alternative courses of action. c) identifying potential stakeholders. d) ignoring the situation because it is none of your business. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Professional and Ethical Behaviour AACSB: Ethics

79. Canadian accounting standards allow a choice of whether or not to use International Financial Reporting Standards for which type of company?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) public corporations b) only small private corporations c) banks d) all private corporations in Canada Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

80. ASPE requires less information in the financial statements of private corporations than IFRS requires because a) private corporations are smaller than public corporations. b) users of private corporation financial statements have the ability to obtain additional information from the corporation if required. c) public corporations have their information available on the Internet. d) public corporations may report in different foreign currencies. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

81. Generally accepted accounting principles are a) income tax regulations. b) standards that act as guidelines for reporting economic events. c) theories that are based on physical laws of the universe. d) principles that have been proven correct by academic researchers. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the

Test Bank for Accounting Principles, Ninth Canadian Edition

conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic 82. GAAP stands for a) Generally Accepted Auditing Procedures. b) Generally Accepted Accounting Principles. c) Generally Accepted Auditing Principles. d) Generally Accepted Accounting Procedures. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

83. Which of the following would violate the reporting entity concept? a) reporting amounts owed to the company’s suppliers as a liability on the balance sheet b) reporting equipment owned and used in the business as an asset on the balance sheet c) reporting withdrawals by the owner as drawings in the statement of owner’s equity d) reporting the owner’s personal sailboat as an asset on the balance sheet Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

84. The International Accounting Standards Board a) works to reduce differences in accounting practices across countries. b) promotes unique accounting applications. c) works to increase differences in accounting practices across countries. d) only operates in countries that speak English.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic 85. The going concern assumption a) states that a company will not operate long enough to utilize assets and fulfill obligations. b) assumes the company will continue to operate in the foreseeable future. c) is inconsistent with the historical cost measurement method. d) states that net worth is the most appropriate value at which to record assets. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic 86. Which of the following requires that the activities of a business be kept distinct from those of its owner(s)? a) reporting entity concept b) going concern assumption c) monetary unit concept d) historical cost principle Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

87. Mel Green is the proprietor (owner) of Green's, a retailer of athletic apparel. When recording the financial transactions of Green's, Mel does not record an entry for a car he purchased for personal use. Mel took out a personal loan to pay for the car. What accounting assumption guides Mel's behaviour in this situation? a) going concern assumption b) reporting entity concept c) periodicity concept d) monetary unit concept Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic 88. The historical cost measurement method requires that when assets are acquired, they be recorded at a) appraisal value. b) the amount paid. c) the amount the asset could be sold for. d) list price. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

89. The monetary unit concept requires a Canadian company reporting in Canada to use a) differing exchange rates for business transactions. b) several measures of economic activities. c) the Canadian dollar as the common unit of measure for all Canadian business transactions. d) estimates in measuring an economic event. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

90. Recognition in accounting means a) recognizing the difference between assets and liabilities. b) recognizing the difference between income and expenses. c) recognizing that initially transactions are recorded at fair value. d) the process of recording a transaction in the accounting records. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

91. Which of the following is NOT considered an enhancing qualitative characteristic? a) relevance b) comparability c) timeliness d) understandability Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

92. Which of the following steps should NOT be used to analyze the ethical dilemma of discovering a co-worker was stealing from the company? a) using the organization’s code of ethics to identify ethical situations

Test Bank for Accounting Principles, Ninth Canadian Edition

b) using personal ethics to identify ethical situations c) identifying potential stakeholders d) discussing the ethical dilemma with co-workers in the lunchroom Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Professional and Ethical Behaviour AACSB: Ethics 93. Individuals in business are ethical when a) their actions are legal. b) they consider the organization’s interest. c) their actions are responsible. d) all of these. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Professional and Ethical Behaviour AACSB: Ethics

94. Due to financial difficulties, Brandon Ltd. has decided to close its operations and declare bankruptcy. Which of the following concepts applies to the situation Brandon Ltd. is facing? a) reporting entity concept b) periodicity concept c) going concern assumption d) matching concept Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

95. Reliance Ltd. provided services to several clients on August 30 and recorded the revenue on September 15 when they received payment. Which of the following has been violated? a) reporting entity concept b) monetary unit concept c) going concern assumption d) matching concept Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

96. On September 10, Bulldozer Ltd. purchased a parcel of land for $225,000. Three months later, the land was appraised for $255,000 so Bulldozer adjusted their books to reflect the $30,000 increase in the value of the land. Which of the following has been violated? a) monetary unit concept b) going concern assumption c) historical cost measurement method d) none of these Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic 97. Emily Hogan recently opened a new business. The business has been very successful and as a reward for all her hard work Emily spent a day at the local spa. Emily paid for the spa using a company credit card and charged the amount to the expense account called Repairs Expense. Emily’s actions violated which of the following?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) going concern assumption b) monetary unit concept c) historical cost measurement method d) reporting entity concept Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Generally Accepted Accounting Principles Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

98. Bob’s Bowling has total assets of $110,000 and total liabilities of $24,000. At the beginning of the year, the owner’s equity was $65,000. During the year, Bob, the owner, withdrew $6,000. Based on this information, how much profit did Bob’s Bowling generate for the year? a) $86,000 b) $15,000 c) $27,000 d) $21,000 Answer: c Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 99. Riley Plumbing and Heating has a beginning balance of $42,000 in owner’s equity. During the year, the proprietorship earned revenues of $23,000 and the owner withdrew $5,000 for personal use. At the end of the year, the balance in owner’s equity was $38,000. How much were the company’s expenses for the year? a) $4,000 b) $22,000 c) $27,000 d) $60,000 Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 100. An increase in drawings will result in a) an increase in owner’s equity. b) an increase in total liabilities. c) a decrease in owner’s equity. d) an increase in total assets. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 101. On January 1, the owner of Blown Away Balloons invested $75,000 in the business. While the business had a loss of $18,000 in its first year, the owner still withdrew $2,500 for personal use. By how much did the equity increase? a) $57,000 b) $54,500 c) $59,500 d) $20,500 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

102. BST Realty has total liabilities of $21,000 and total assets of $50,000. Based on this information,

Test Bank for Accounting Principles, Ninth Canadian Edition

BST’s owner’s equity is a) $71,000 b) $0 c) $50,000 d) $29,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

103. Withdrawal of cash from a business by the owner for personal reasons will NOT affect which financial statement? a) Balance sheet b) Income statement c) Statement of owner’s equity d) Cash flow statement Answer: b Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

104. Which of the following is true when considering the accounting equation? a) An increase in an asset must always equal a decrease in a liability. b) For every transaction, an asset and a liability must be affected. c) An increase in a liability must equal a decrease in owner’s equity. d) An increase in an asset may result in a decrease in another asset. Answer: d Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe the elements of the financial statements and explain the accounting

Test Bank for Accounting Principles, Ninth Canadian Edition

equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 105. The common characteristic possessed by all assets is a) long life. b) great monetary value. c) tangible nature. d) potential future economic benefit. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

106. The accounting equation for a proprietorship may be expressed as a) Assets = Liabilities + Shareholders' Equity. b) Assets – Liabilities = Partners' Equity. c) Assets = Liabilities + Owner's Equity. d) all of these Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

107. The accounting equation for a corporation may be expressed as a) Assets = Liabilities + Shareholders' Equity. b) Assets – Liabilities = Partner’s Equity. c) Assets = Liabilities + Owner's Equity. d) all of these

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 108. An account receivable is recorded in the accounting records as a(n) a) liability. b) expense. c) asset. d) revenue. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 109. Spade Company has total liabilities of $10,000 and total assets of $15,000. Based on this information, Spade Company’s owner’s equity must be a) $10,000. b) $0. c) $5,000. d) $15,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

110. Liabilities a) are future economic benefits. b) are current or long-term obligations arising from past events. c) possess service potential. d) are things of value used by the business in its operation. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

111. Which of the following would best be described as an ownership claim on a company’s assets? a) expenses b) account receivable from the owner c) owner’s equity d) liabilities Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

112. Jack Smith owns and operates Jack’s Pizza Express. Jack should record the cost of wages paid to store employees as a(n) a) revenue. b) expense. c) liability. d) asset. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting

Test Bank for Accounting Principles, Ninth Canadian Edition

equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 113. Owner's equity is sometimes referred to as a) residual equity. b) leftovers. c) spoils. d) a second equity. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

114. In a proprietorship, owner’s equity is affected by all of the following EXCEPT a) the investment of cash by the owner. b) the purchase of a personal automobile by the owner using personal funds. c) the purchase of a computer for the owner’s son using cash generated by the business. d) the sale of goods by the business. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

115. When an owner, in a proprietorship or partnership, withdraws cash or other assets from a business for personal use, these withdrawals are termed a) expenses. b) salary. c) drawings. d) a credit line.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

116. Revenues would NOT result from a) sale of merchandise. b) initial investment of cash by owner. c) performance of services. d) rental of property to a tenant. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

117. Increases to owner's equity in a proprietorship will result from a) additional investments by owners. b) purchases of merchandise. c) withdrawals by the owner. d) sale of share capital. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

118. The basic accounting equation in a proprietorship CANNOT be restated as a) Assets – Liabilities = Owner's Equity. b) Assets – Owner's Equity = Liabilities c) Owner's Equity + Liabilities = Assets. d) Assets + Liabilities = Owner's Equity. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

119. Owner's equity in a proprietorship is increased by a) drawings. b) revenues. c) expenses. d) liabilities. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

120. Owner's equity in a proprietorship is decreased by a) assets. b) revenues. c) expenses. d) liabilities. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

121. Revenues in a proprietorship are a) the cost of assets consumed during the period. b) the gross increases in owner's equity resulting from business activities. c) the cost of services used during the period. d) actual or expected cash outflows. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

122. Profit results when a) Assets > Liabilities. b) Revenues = Expenses. c) Revenues > Expenses. d) Revenues < Expenses. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

123. A balance sheet in a proprietorship shows a) revenues, liabilities, and owner's equity. b) expenses, drawings, and owner's equity. c) revenues, expenses, and drawings. d) assets, liabilities, and owner's equity. Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 124. An income statement a) summarizes the changes in owner's equity for a specific period of time. b) reports the cash receipts and payments for a specific period of time. c) reports the assets, liabilities, and owner's equity at a specific date. d) presents the revenues and expenses for a specific period of time. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

125. The income statement is sometimes referred to as a) the statement of earnings. b) the statement of financial position. c) the cash flow statement. d) the statement of owner's equity. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic

126. The primary purpose of the cash flow statement is to report a) a company's investing transactions.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) a company's financing transactions. c) information about cash inflows and cash outflows of a company. d) the net increase or decrease in cash. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 127. Which of the following is considered a decrease to owner’s equity? a) sales revenues b) investments by owner c) drawings by owner d) service revenue Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model CPA: Financial Reporting AACSB: Analytic 128. Which of the following questions would NOT be answered by presenting the statement of cash flows? a) What was the change in the cash balance during the period? b) What amount of accounts receivable was considered uncollectible? c) What was the cash used for during the period? d) Where did the cash come from during the period? Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Section Reference: The Accounting Model

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

129. Which of the following accounts would NOT be found on the balance sheet? a) Cash b) Drawings c) Equipment d) Accounts Payable Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the elements of the financial statements and explain the accounting equation. Learning Objective: Prepare financial statements. Section Reference: The Accounting Model Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

130. Which of the following would NOT affect owner’s equity? a) a cash receipt from a customer in payment of account b) incurring an expense c) services provided for cash d) withdrawal of funds for personal use Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

131. Which of the following is an example of an economic event that should be recorded as an accounting transaction? a) the purchase of supplies b) the signing of a contract to build a new corporate headquarters c) the appointment of a new Chief Executive Officer d) the launch of a new marketing strategy

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic 132. Which of the following transactions would NOT affect Cash? a) payment to a supplier on account b) purchase of supplies on account c) payment of salaries for the week d) prepaying an insurance premium Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

133. An investment by a business’s owner increases the business’s cash and a) reduces its liabilities. b) reduces its total assets. c) increases its owner’s equity. d) increases its net earnings in the year in which the investment is made. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic 134. Partners' equity in a partnership is decreased by a) payment of dividends. b) drawings. c) owners’ investments.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) revenues. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

135. Shareholders' equity in a corporation is increased by a) an expense. b) shareholder purchase of newly issued common shares. c) payment of dividends. d) liabilities. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic 136. If total liabilities increased by $5,000, then a) assets must have decreased by $5,000. b) owner's equity must have increased by $5,000. c) assets must have increased by $5,000, or owner's equity must have decreased by $5,000. d) assets and owner's equity each increased by $2,500. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

137. The collection of a $600 account receivable a) increases an asset $600; decreases an asset $600.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) increases an asset $600; decreases a liability $600. c) decreases a liability $600; increases owner's equity $600. d) decreases an asset $600; decreases a liability $600. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

138. If an individual asset in a proprietorship is increased, then a) there may be an equal decrease in a specific liability. b) there may be an equal decrease in owner's equity. c) there may be an equal decrease in another asset. d) None of these is possible. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

139. If services are provided for credit in a proprietorship then a) assets will decrease. b) liabilities will increase. c) owner's equity will increase. d) liabilities will decrease. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

140. If expenses in a proprietorship are paid in cash, then a) assets will increase. b) liabilities will increase. c) owner's equity will increase. d) assets will decrease. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

141. If an owner makes a withdrawal of cash from a proprietorship, then a) there has been a violation of accounting principles. b) assets will decrease and owner's equity will increase. c) assets will decrease and owner's equity will decrease. d) assets will decrease and liabilities will increase. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic 142. If store rent has been paid in cash for the month, then a) a liability will increase. b) an asset will increase. c) owner's equity will decrease. d) owner's equity will increase. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

143. Two or more items could be affected by a transaction. Which of the following statements is INCORRECT? a) An increase in an asset may result in a decrease in another asset. b) An increase in an asset may result in a decrease in an asset and an increase in a liability. c) An increase in a liability may result in a decrease in an asset. d) An increase in a liability may result in a decrease in owner’s equity. Answer: c Bloomcode: Analysis Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic 144. The cost of advertising purchased for the current month is considered an expense, NOT an asset because a) the expense will generate future benefits. b) the advertising will generate future cash inflows. c) the benefits of the expense have already been used. d) the expense has not yet been used. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

145. Expenses do not have to be paid in cash at the time they are incurred. When payment is made at a later date, the liability account Accounts Payable will decrease and the asset account a) Cash will increase. b) Cash will decrease. c) will not be affected. d) Accounts Receivable will increase. Answer: b Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

146. Payment of a liability for an expense that has been previously recorded a) does not affect the owner’s equity account. b) only affects liability accounts. c) does not affect asset accounts. d) only affects asset accounts. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

147. Rock Support Ltd. and Pool Equipment Rentals Company sign a contract to rent equipment in the next two years. What is the impact of this event on the accounting equation for Rock? a) Assets increase and liabilities increase. b) Assets decrease and liabilities decrease. c) No impact on the accounting equation. d) Owner’s equity increases and assets increase. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

148. Which of the following accounts would be affected by the transaction “purchase supplies on credit”? a) Office Expense and Accounts Payable b) Office Expense and Cash c) Supplies and Cash d) Supplies and Accounts Payable

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic 149. If a new employee was hired on August 28 and agreed to a monthly salary of $1,500, the effect of the hiring on the accounting equation would be a) an equal decrease in total assets and owner’s equity. b) no effect as an accounting transaction has not occurred. c) an equal increase in total assets and total liabilities. d) an equal increase in total liabilities and owner’s equity. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic 150. If an owner withdraws cash from the business for personal use, the transaction results in a) an equal decrease in total assets and owner’s equity. b) an equal increase in total liabilities and owner’s equity. c) an equal decrease in total assets and total liabilities. d) an equal decrease in total liabilities and owner’s equity. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

151. If expenses are incurred using cash and credit, the transaction results in a) an increase in total assets, increase in total liabilities, and decrease in owners’ equity.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) an increase in owners’ equity, decrease in total liabilities, and increase in total assets. c) an equal increase in total liabilities and owners’ equity. d) a decrease in total assets, increase in total liabilities, and decrease in owners’ equity. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

152. If services have been provided to customers on account, the transaction results in a) an equal increase in total assets. b) an equal increase in total assets and owner’s equity. c) an equal increase in total assets and total liabilities. d) an equal increase in total liabilities and owner’s equity. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

153. If equipment has been purchased on account, the transaction results in a) an equal increase in total assets. b) an equal increase in total assets and owner’s equity. c) an equal increase in total assets and total liabilities. d) an equal increase in total liabilities and owner’s equity. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the effects of business transactions on the accounting equation. Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

154. The income statement for Meredith Ltd. is shown below: MEREDITH LTD. Income Statement For the Year Ended December 31, 2024

Sales revenue Sales .......................................................................................................... Less: Sales returns and allowances ...................................................... Sales discounts ............................................................................ Net sales .................................................................................................... Cost of goods sold ............................................................................................ Gross profit ....................................................................................................... Operating expenses Depreciation expense ............................................................................... Utilities expense ....................................................................................... Total operating expenses.................................................................. Profit from operations ...................................................................................... Other revenues Rent revenue ............................................................................................. Profit for the year .............................................................................................

$62,500 $1,800 3,300

22,900 2,200

5,100 57,400 20,000 37,400

25,100 12,300 10,000 $22,300

Where is the formatting error in the statement? a) The profit figure should be single-underlined. b) The sales discounts amount of $3,300 should be underlined. c) The depreciation and utilities expenses should be shown in the far-right column. d) The heading of the statement should not identify the period of time covered by the statement or the specific date. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare financial statements Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic 155. Lord’s Stationery started the year with total assets of $60,000 and total liabilities of $25,000. During the year, the business had a loss of $6,000, the owner withdrew $2,000, and during the year the owner made an additional investment of $4,000 in the business. The capital balance for Lord’s Stationery at the end of the year was a) $31,000. b) $23,000. c) $33,000. d) $39,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic 156. Seams-R-Us, a proprietorship, started the year with total assets of $120,000 and total liabilities of $90,000. During the year, the business recorded $150,000 in revenues and $158,000 in expenses. Jane Seams, the owner, withdrew $5,000. The capital balance for Seams-R-Us at the end of the year was a) $13,000. b) $17,000. c) $33,000. d) $43,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

157. Lawn Care Plus started the year with total assets of $75,000 and total liabilities of $50,000. During the year, the business recorded $140,000 in service revenues and $95,000 in expenses. Assuming that J. Lawn, Capital was $55,000 at the end of the year, how much did John Lawn, the owner, withdraw from the business? a) $30,000 b) $45,000 c) $10,000 d) $15,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

158. Bell’s Will Ring, a proprietorship, started the year with total liabilities of $60,000 and total equity of $50,000. During the year, the business recorded $80,000 in service revenues and $62,000 in expenses, and M. Bell, the owner, withdrew $4,000. Bell’s capital balance increased by what amount during the year? a) $18,000 b) $10,000 c) $14,000 d) $22,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic 159. Owner's equity in a proprietorship at the end of the period is equal to a) owner's capital at the beginning of the period plus profit minus liabilities. b) owner's capital at the beginning of the period plus profit minus drawings. c) profit. d) assets plus liabilities. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic 160. Shareholders' equity in a corporation at the end of the period is equal to a) shareholders' equity at the beginning of the period plus profit minus liabilities. b) share capital plus retained earnings. c) share capital plus dividends. d) share capital plus this year's profit. Answer: b Bloomcode: Application

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

161. If the owner's equity account increases from the beginning of the year to the end of the year, the best explanation for this change is a) profit is less than owner drawings. b) a loss is less than owner drawings. c) additional owner investments are less than a loss. d) profit is greater than owner drawings. Answer: d Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic 162. Max’s Small Engine Repair Shop, a proprietorship, started the year with total assets of $60,000 and total liabilities of $40,000. During the year, the business recorded $100,000 in repair revenues, $55,000 in expenses, and Max Freelandt, the owner, withdrew $10,000. Max’s capital balance at the end of the year was a) $55,000. b) $35,000. c) $65,000. d) $45,000. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

163. Joe’s Small Engine Repair Shop, a proprietorship, started the year with total assets of $45,000 and total liabilities of $35,000. During the year, the business recorded $150,000 in repair revenues, $105,000 in expenses, and Joe Asus, the owner, withdrew $20,000. The profit reported by Joe’s Small

Test Bank for Accounting Principles, Ninth Canadian Edition

Engine Repair Shop for the year was a) $35,000. b) $45,000. c) $20,000. d) $90,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

164. Brian’s Small Engine Repair Shop, a proprietorship, started the year with total assets of $50,000 and total liabilities of $30,000. During the year, the business recorded $120,000 in repair revenues, $70,000 in expenses, and Brian Simpson, the owner, withdrew $15,000. Brian’s capital balance increased by what amount during the year? a) $10,000 b) $45,000 c) $20,000 d) $35,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

165. In terms of the expanded accounting equation, the income statement is prepared from the data in the a) assets column. b) liabilities column. c) owner’s equity column. d) liabilities and owner’s equity column. Answer: c Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic 166. In regards to the order of preparing financial statements, which of the following sequences is correct? a) Income statement, balance sheet, statement of changes in owner’s equity, cash flow statement b) Balance sheet, income statement, cash flow statement, statement of changes in owner’s equity c) Income statement, statement of changes in owner’s equity, balance sheet, cash flow statement d) Income statement, statement of changes in owner’s equity, cash flow statement, balance sheet Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

167. The income statement is always prepared first in order to determine a) the total assets to be reported on the balance sheet. b) the cash outflow of the company. c) the profit or loss, which is then reported in the statement of changes in owner’s equity. d) the amount of investments or withdrawals used in the statement of changes in owner’s equity. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

168. If a company reported a loss in the first month of operations, the loss would reduce owner’s capital and would be a) added in the same section as owner’s investments. b) deducted in the same section as owner’s investments. c) deducted in the same section as owner’s drawings. d) added in the same section as owner’s drawings.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic 169. The heading of a balance sheet must identify the a) company, statement, and time period. b) statement and date. c) company, statement, and date. d) company and date. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

170. Which of the following would NOT be considered non-financial information disclosed in an annual report? a) company’s mission statement b) company’s market position c) company’s goals and objectives d) company’s key performance ratios Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare financial statements. Section Reference: Preparing Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Codes of conduct Profit Partnership Proprietorship Reporting entity concept

F. G. H. I. J.

Corporation Assets Equity Expenses Transactions

171. Rules for ethical business practices Answer: A Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the uses and users of accounting and the objective of financial reporting. Section Reference: Why Is Accounting Important? CPA: Professional and Ethical Behaviour AACSB: Ethics

172. Ownership is limited to one person Answer: D Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

173. A separate legal entity under federal, provincial, or territorial laws Answer: F Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

174. Reflective of two or more owners Answer: C Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

175. Economic events can be identified with a particular reporting entity Answer: E Bloomcode: Knowledge Difficulty: Easy Learning Objective: Compare the different forms of business organization. Section Reference: Forms of Business Organization CPA: Financial Reporting AACSB: Analytic

176. Consumed assets or services Answer: I Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

177. Ownership claims against the assets of the business

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: H Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

178. Results when revenues exceed expenses Answer: B Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

179. Resources controlled by a business with the potential for future economic benefit Answer: G Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Section Reference: Generally Accepted Accounting Principles CPA: Financial Reporting AACSB: Analytic

180. Economic events that cause changes in the business’s economic resources Answer: J Bloomcode: Knowledge Difficulty: Easy Learning Objective: Analyze the effects of business transactions on the accounting equation.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Transaction Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 2 THE RECORDING PROCESS CHAPTER LEARNING OBJECTIVES 1.

Describe how accounts, debits, and credits are used to record business transactions. Debit means left and credit means right. The normal balance of an asset is a debit because assets are on the left side of the accounting equation. Assets are increased by debits and decreased by credits. The normal balance of liabilities and owner’s capital is a credit because they are on the right side of the accounting equation. Liabilities and owner’s capital are increased by credits and decreased by debits. Revenues increase owner’s equity and therefore are recorded as credits because credits increase owner’s equity. Credits increase revenues and debits decrease revenues. Expenses and drawings decrease owner’s equity and therefore are recorded as debits because debits decrease owner’s equity. Expenses and drawings are increased by debits and decreased by credits.

2.

State how a journal is used in the recording process and journalize transactions. The steps in the recording process are the first three steps in the accounting cycle. These steps are: (a) analyze each transaction for its effect on the accounts, (b) record the transaction in a journal, and (c) transfer the journal information to the correct accounts in the ledger. A journal: (a) discloses the complete effect of a transaction in one place, (b) provides a chronological record of transactions, and (c) helps to prevent and locate errors because the debit and credit amounts for each entry can be easily compared.

3.

Explain how a ledger helps in the recording process and post transactions. The ledger is the entire group of accounts maintained by a company. The ledger provides the balance in each of the accounts. Posting is the procedure of transferring journal entries to the ledger accounts. After the journal entries have been posted, the ledger will show all of the increases and decreases that have been made to each account.

4.

Prepare a trial balance. A trial balance is a list of the accounts in the ledger and the account balances at a specific time. Its main purpose is to prove that debits and credits are equal after posting. A trial balance uncovers certain types of errors in journalizing and posting, and is useful in preparing financial statements. Preparing a trial balance is the fourth step in the accounting cycle.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 Identify each of the following accounts as an asset, liability, equity, revenue, or expense. 1. L. Ralph, Capital _____________ 2. Service Revenue _____________ 3. Accounts Payable _____________ 4. Supplies _____________ 5. Prepaid Advertising _____________ 6. Equipment _____________ 7. Cash _____________ 8. L. Ralph, Drawings _____________ 9. Salaries Expense _____________ 10. Repairs Expense _____________ 11. Accounts Receivable _____________ 12. Unearned Revenue _____________ 13. Rent Revenue _____________ Solution 1 (5 min.) 1. Equity 2.

Revenue

3.

Liability

4.

Asset

5.

Asset

6.

Asset

7.

Asset

8.

Equity

9.

Expense

10. Expense 11. Asset 12. Liability

Test Bank for Accounting Principles, Ninth Canadian Edition

13. Revenue Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 2 For the accounts listed below, indicate if the normal balance of the account is a debit or credit. Normal Balance Account Debit or Credit 1. Repairs Expense __________________ 2. Interest Receivable __________________ 3. Prepaid Insurance __________________ 4. Unearned Revenue __________________ 5. Insurance Expense __________________ 6. Service Revenue __________________ 7. Equipment __________________ 8. Notes Payable __________________ 9. Land __________________ 10. Owner’s Drawings __________________ Solution 2 (5 min.) 1.

Account Repairs Expense

Normal Balance Debit or Credit Debit

2.

Interest Receivable

Debit

3.

Prepaid Insurance

Debit

4.

Unearned Revenue

Credit

5.

Insurance Expense

Debit

6.

Service Revenue

Credit

7.

Equipment

Debit

8.

Notes Payable

Credit

Test Bank for Accounting Principles, Ninth Canadian Edition

9.

Land

10. Owner’s Drawings

Debit Debit

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 3 The following accounts relate to Navdeep’s Auto Sales: 1. Land 2. Service Revenue 3. Land 4. Notes Receivable 5. Navdeep, Capital 6. Sales 7. Prepaid Insurance 8. Interest Payable 9. Utilities Expense 10. Salaries Payable 11. Unearned Revenue 12. Navdeep, Drawings Instructions Use the form below to identify the type of account and its normal balance. The first one has been completed as an example. Type of Account Normal Balance Asset Liability Equity Debit Credit 1. __X__ ______ ___ __X__ _____ 2. _____ ______ ___ _____ _____ 3. _____ ______ ___ _____ _____ 4. _____ ______ ___ _____ _____ 5. _____ ______ ___ _____ _____ 6. _____ ______ ___ _____ _____ 7. _____ ______ ___ _____ _____ 8. _____ ______ ___ _____ _____ 9. _____ ______ ___ _____ _____ 10. _____ ______ ___ _____ _____ 11. _____ ______ ___ _____ _____

Test Bank for Accounting Principles, Ninth Canadian Edition

12.

_____

______

___

Solution 3 (10 min.)

_____

_____

1.

Type of Account Asset Liability __X__ ______

2.

_____

______

X__

_____

__X__

3.

__X__

______

___

__X__

_____

4.

__X__

______

___

__X__

_____

5.

_____

______

X__

_____

__X__

6.

_____

______

X__

_____

__X__

7.

__X__

______

___

__X__

_____

8.

_____

__X___

___

_____

__X__

9.

_____

______

X__

__X__

_____

10.

_____

__X___

___

_____

__X__

11.

_____

__X___

___

_____

__X__

12.

_____

______

X__

__X__

_____

Equity ___

Normal Balance Debit Credit __X__ _____

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 4 The chart of accounts used by Fortier Copy Company is listed below: 10 Cash 30 D. Fortier, Capital 12 Accounts Receivable 35 D. Fortier, Drawings 15 Supplies 40 Service Revenue 18 Equipment 51 Advertising Expense 22 Accounts Payable 53 Rent Expense 25 Notes Payable 54 Salaries Expense

Test Bank for Accounting Principles, Ninth Canadian Edition

28

Unearned Revenue

Instructions Indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate columns. —————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s) debited credited —————————————————————————————————————————— 1. Dan Fortier invests $90,000 cash to start the business. —————————————————————————————————————————— 2. Purchased three photocopy machines for $200,000, paying $50,000 cash and signing a 5-year, 6% note for the remainder. —————————————————————————————————————————— 3. Purchased $5,000 paper supplies on credit. —————————————————————————————————————————— 4. Cash service revenue amounted to $7,000. —————————————————————————————————————————— 5. Paid $500 cash for radio advertising. —————————————————————————————————————————— 6. Paid $800 on account for paper supplies purchased in transaction 3. —————————————————————————————————————————— 7. Dan Fortier withdrew $1,500 from the business for personal expenses. —————————————————————————————————————————— 8. Paid $1,200 cash for rent for the current month. —————————————————————————————————————————— 9. Received $2,000 cash advance from a customer for future copying. —————————————————————————————————————————— 10. Billed a customer for $450 for photocopy work done. —————————————————————————————————————————— 11. Paid $400 for salaries for the month. —————————————————————————————————————————— Solution 4 (15 min.) —————————————————————————————————————————— Number(s) of account(s) debited —————————————————————————————————————————— 1. Dan Fortier invests $90,000 cash to start the business. 10

Number(s) of account(s) credited

30

Test Bank for Accounting Principles, Ninth Canadian Edition

—————————————————————————————————————————— 2. Purchased three photocopy machines for $200,000, paying $50,000 cash and signing a 5-year, 6% note for the remainder. 18 —————————————————————————————————————————— 3. Purchased $5,000 paper supplies on credit. 15 —————————————————————————————————————————— 4. Cash service revenue amounted to $7,000. 10 —————————————————————————————————————————— 5. Paid $500 cash for radio advertising. 51 —————————————————————————————————————————— 6. Paid $800 on account for paper supplies purchased in transaction 3. 22 —————————————————————————————————————————— 7. Dan Fortier withdrew $1,500 from the business for personal expenses. 35 —————————————————————————————————————————— 8. Paid $1,200 cash for rent for the current month. 53 —————————————————————————————————————————— 9. Received $2,000 cash advance from a customer for future copying. 10 —————————————————————————————————————————— 10. Billed a customer for $450 for photocopy work done. 12 —————————————————————————————————————————— 11. Paid $400 for salaries for the month. 54 ——————————————————————————————————————————

10, 25 22 40 10

10 10 10 28

40 10

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 5 Indicate whether you would use a debit or a credit to record the following changes: Debit or Credit 1. An increase in Salaries Expense ____________________ 2. A decrease in Accounts Payable ____________________ 3. An increase in Prepaid Insurance ____________________ 4. An increase in Owner's Capital ____________________ 5. A decrease in Supplies ____________________

Test Bank for Accounting Principles, Ninth Canadian Edition

6. An increase in Owner's Drawings 7. An increase in Service Revenue 8. A decrease in Accounts Receivable 9. An increase in Rent Expense 10. A decrease in Equipment

____________________ ____________________ ____________________ ____________________ ____________________

Solution 5 (5 min.) 1. An increase in Salaries Expense

Debit ________

2.

A decrease in Accounts Payable

Debit ________

3.

An increase in Prepaid Insurance

Debit ________

4.

An increase in Owner's Capital

Credit _______

5.

A decrease in Supplies

Credit _______

6.

An increase in Owner's Drawings

Debit ________

7.

An increase in Service Revenue

Credit _______

8.

A decrease in Accounts Receivable

Credit _______

9.

An increase in Rent Expense

Debit ________

10. A decrease in Equipment

Credit _______

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 6 For the accounts listed below, indicate if the normal balance of the account is a debit or credit. Normal Balance Account Debit or Credit 1. Service Revenue __________________ 2. Cash __________________ 3. Accounts Receivable __________________ 4. Accounts Payable __________________ 5. Owner's Capital __________________

Test Bank for Accounting Principles, Ninth Canadian Edition

6. Prepaid Insurance 7. Insurance Expense 8. Owner's Drawings 9. Building 10. Notes Receivable Solution 6 (5 min.)

__________________ __________________ __________________ __________________ __________________ Normal Balance Debit or Credit Credit

1.

Account Service Revenue

2.

Cash

Debit

3.

Accounts Receivable

Debit

4.

Accounts Payable

Credit

5.

Owner's Capital

Credit

6.

Prepaid Insurance

Debit

7.

Insurance Expense

Debit

8.

Owner's Drawings

Debit

9.

Building

Debit

10. Notes Receivable

Debit

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 7 Using the accounts listed below, state the account to be debited and the account to be credited for each of the following transactions: 1. Owner invested cash in the business. 2. Purchased furniture for cash. 3. Invoiced for services provided. 4. Purchased supplies on account.

Test Bank for Accounting Principles, Ninth Canadian Edition

5. Paid for supplies purchased in 4. 6. Received payment from customer in 3. 7. Paid employee salaries. 8. Owner withdrew cash for personal use. 9. Purchased furniture on credit. 10. Owner used personal funds to purchase new computer equipment for use in the business. ACCOUNTS Cash Accounts Receivable Supplies Equipment Furniture Accounts Payable Solution 7 (10 min.) Debit 1. Cash

Owner’s Capital Owner’s Drawings Revenue Salaries Payable Salaries Expense

Credit Owner’s Capital

2.

Furniture

Cash

3.

Accounts Receivable

Revenue

4.

Supplies

Accounts Payable

5.

Accounts Payable

Cash

6.

Cash

Accounts Receivable

7.

Salaries Expense

Cash

8.

Owner’s Drawings

Cash

9.

Furniture

Accounts Payable

10.

Equipment

Owner’s Capital

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 8 Identify the account to be debited and the account to be credited for each of the following transactions: 1. Purchased equipment for cash and a note payable. 2. Accepted a cash deposit from a customer for a service to be provided next month. 3. Provided services on account. 4. Purchased supplies on account. 5. Received payment from the client in 3. 6. Provided services to customer in 2 and collected cash for the remaining work done. 7. Owner paid himself. 8. Paid in full for equipment purchased in 1. Solution 8 (10 min.) Debit 1. Equipment

Credit Cash, Notes Payable

2.

Cash

Unearned Revenue

3.

Accounts Receivable

Revenue

4.

Supplies

Accounts Payable

5.

Cash

Accounts Receivable

6.

Unearned Revenue, Cash

Revenue

7.

Owner’s Drawings

Cash

8.

Notes Payable

Cash

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 9 Eight transactions are recorded in the following T accounts: (1)

Cash 35,000 (2)

3,500

(5)

Accounts Receivable 27,500 (7)

22,500

Test Bank for Accounting Principles, Ninth Canadian Edition

(7)

22,500

(3) (4) (6) (8)

(3)

Supplies 1,950

1,950 2,225 8,000 4,500

(2)

T. Shaw, Capital (1)

35,000

(6)

Accounts Payable 8,000 (2)

10,000

(4)

Salaries Expense 2,225

Equipment 13,500 Service Revenue (5)

(8)

27,500

T. Shaw, Drawings 4,500

Instructions Indicate for each debit and each credit: a) whether an asset, liability, capital, drawings, revenue, or expense account was affected, and b) whether the account was increased (+) or decreased (–). Answers should be presented in the following chart form. Transaction (1) has been completed as an example. Transaction Account Debited Account Credited No. Type Effect Type Effect (1) (Example) Asset + Capital + —————————————————————————————————————————— (2) —————————————————————————————————————————— (3) —————————————————————————————————————————— (4) —————————————————————————————————————————— (5) —————————————————————————————————————————— (6) —————————————————————————————————————————— (7) ——————————————————————————————————————————

Test Bank for Accounting Principles, Ninth Canadian Edition

(8) —————————————————————————————————————————— Solution 9 (15 min.) Transaction Account Debited Account Credited No. Type Effect Type Effect (1) (Example) Asset + Capital + —————————————————————————————————————————— (2) Asset + Asset – Liability + —————————————————————————————————————————— (3) Asset + Asset – —————————————————————————————————————————— (4) Expense + Asset – —————————————————————————————————————————— (5) Asset + Revenue + —————————————————————————————————————————— (6) Liability – Asset – —————————————————————————————————————————— (7) Asset + Asset – —————————————————————————————————————————— (8) Drawings + Asset – —————————————————————————————————————————— Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 10 Analyze each of the following transactions by indicating which accounts are affected and whether they will increase or decrease. Transaction a) is completed as an example. a) The company’s owner, Mani Havarez, invested cash into the business. b) Received cash in advance for future services. c) Purchased a one-year insurance policy. d) Collected cash for payment of customer account. e) Performed a service on account. f) Equipment is purchased by issuing a 5-year note payable. Transaction a) Cash

Accounts

Increase x

Decrease

Test Bank for Accounting Principles, Ninth Canadian Edition

M. Havarez, Capital

x

b) c) d) e) f)

Solution 10 (10 min.) Transaction Accounts a) Cash M. Havarez, Capital b) Cash Unearned Revenue c) Prepaid Insurance Cash d) Cash Accounts Receivable e) Accounts Receivable Service Revenue f) Equipment Notes Payable

Increase x x x x x

Decrease

x x x x x x x

Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 11 Analyze each of the following transactions by indicating which accounts are affected and whether they will increase or decrease. Transaction (a) is completed as an example. a) The company paid cash to acquire land. b) Employee salaries are paid. c) Services were provided to a customer on account. d) Supplies were purchased on account. e) Office rent for September was paid in cash.

Test Bank for Accounting Principles, Ninth Canadian Edition

f)

The company’s owner, Paul Wong, withdrew cash from the business.

Transaction a) Land Cash b)

Accounts

Increase x

Decrease x

c) d) e) f)

Solution 11 (10 min.) Transaction Accounts a) Land Cash b) Salaries Expense Cash c) Accounts Receivable Service Revenue d) Supplies Accounts Payable e) Rent Expense Cash f) P. Wong, Drawings Cash

Increase x

Decrease x

x x x x x x x x x x

Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 12 Hannah Steel has operated a lawn care business for three months. The following transactions occurred in the fourth month: 1. Hannah decides that the business needs a new vehicle. A truck is purchased for $20,000 and

Test Bank for Accounting Principles, Ninth Canadian Edition

2. 3. 4. 5. 6. 7.

financed by a note payable for the full amount. (Hint: Use Vehicles) Hannah invested $5,000 of her own funds in the business. Invoices to customers were issued for services completed. The total invoices amount to $4,500. Paid $350 on account for supplies purchased the prior month. Collected $3,750 from customers for work completed and invoiced the prior month. Paid salaries of $250 to an assistant. Received $300 deposit from a new customer for whom work will be performed next month.

For each transaction, complete the information in the following table: Transaction:

1

2

3

4

5

6

7

1

2

3

4

5

6

7

Vehicles

Cash

Accounts Receivable

Accounts Payable

Cash

Salaries Expense

Cash

Asset

Asset

Asset

Liability

Asset

Owner’s equity

Asset

DR

DR

DR

CR

DR

DR

DR

Account debited (name) Type of account (asset, liability, owner’s equity) Normal balance of the account Is the account increased or decreased? Account credited (name) Type of account (asset, liability, owner’s equity) Normal balance of the account Is the account increased or decreased? Solution 12 (15 min.) Transaction: Account debited (name) Type of account (asset, liability, owner’s equity) Normal balance of the account

Test Bank for Accounting Principles, Ninth Canadian Edition

Is the account increased or decreased? Account credited (name) Type of account (asset, liability, owner’s equity) Normal balance of the account Is the account increased or decreased?

Increase

Increase

Increase

Decrease

Increase

Increase

Increase

Notes Payable

H. Steel, Capital

Service Revenue

Cash

Accounts Receivable

Cash

Unearned Revenue

Liability

Owner’s equity

Owner’s equity

Asset

Asset

Asset

Liability

CR

CR

CR

DR

DR

DR

CR

Increase

Increase

Increase

Decrease

Decrease

Decrease

Increase

Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 13 For each of the following accounts indicate: a) the type of account (Asset, Liability, Owner's capital, Owner’s drawings, Revenue, Expense), b) the debit and credit effects, and c) the normal account balance. Example 0. Cash

a) Asset account b) Debit increases, credit decreases c) Normal balance – debit ACCOUNTS

1. 2. 3. 4.

Accounts Payable Accounts Receivable D. Chester, Capital D. Chester, Drawings

Solution 13 (15 min.) 1. a) Liability account. b) Debit decreases, credit increases. c) Normal balance – credit.

5. 6. 7. 8.

Service Revenue Insurance Expense Notes Payable Equipment 5. a) Revenue account. b) Debit decreases, credit increases. c) Normal balance – credit.

Test Bank for Accounting Principles, Ninth Canadian Edition

2. a) Asset account. b) Debit increases, credit decreases. c) Normal balance – debit.

6. a) Expense account. b) Debit increases, credit decreases. c) Normal balance – debit.

3. a) Owner's capital account. b) Debit decreases, credit increases. c) Normal balance – credit.

7. a) Liability account. b) Debit decreases, credit increases. c) Normal balance – credit.

4. a) Owner's drawings account. b) Debit increases, credit decreases. c) Normal balance – debit.

8. a) Asset account. b) Debit increases, credit decreases. c) Normal balance – debit.

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 14 Mike’s Cycle Repair Shop has balances in the following accounts at the end of May: 1. Supplies 6. Owner’s Capital 2. Accounts Receivable 7. Prepaid Insurance 3. Unearned Revenue 8. Equipment 4. Salaries Payable 9. Accounts Payable 5. Service Revenue 10. Notes Payable Instructions For each of the accounts indicate: a) the type of account (Asset, Liability, Owner's capital, Owner’s drawings, Revenue, Expense), b) the debit and credit effects, and c) the normal account balance. Solution 14 (15 min.) 1. a) Asset account. b) Debit increases, credit decreases. c) Normal balance – debit.

6. a) Owner’s capital account. b) Debit decreases, credit increases. c) Normal balance – credit.

2. a) Asset account. b) Debit increases, credit decreases. c) Normal balance – debit.

7. a) Asset account. b) Debit increases, credit decreases. c) Normal balance – debit.

Test Bank for Accounting Principles, Ninth Canadian Edition

3. a) Liability account. b) Debit decreases, credit increases. c) Normal balance – credit.

8. a) Asset account. b) Debit increases, credit decreases. c) Normal balance – debit.

4. a) Liability account. b) Debit decreases, credit increases. c) Normal balance – credit.

9. a) Liability account. b) Debit decreases, credit increases. c) Normal balance – credit.

5. a) Revenue account. b) Debit decreases, credit increases. c) Normal balance – credit.

10. a) Liability account. b) Debit decreases, credit increases. c) Normal balance – credit.

Bloomcode: Comprehension Difficulty: Medium Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 15 For each transaction given, enter in the tabulation given below a "D" for debit and a "C" for credit to reflect the increases and decreases of the assets, liabilities, and owner's equity accounts. In some cases, there may be a "D" and a "C" in the same column. If there is not a transaction that needs to be recorded, leave the column blank. Transactions: 1. Owner invests cash in the business. 2. Pays insurance in advance for six months. 3. Hires new administrative assistant. 4. Purchases office supplies on account. 5. Pays electricity bill. 6. Borrows money from local bank. 7. Makes payment on account. 8. Receives cash from customers on account. 9. Provides services to customers on account. 10. Owner withdraws assets from the business. Transaction # 1 2 3 4 5 6 7 —————————————————————————————————————————— Assets —————————————————————————————————————————— Liabilities ——————————————————————————————————————————

8

9

10

Test Bank for Accounting Principles, Ninth Canadian Edition

Owner's Capital —————————————————————————————————————————— Owner's Drawings —————————————————————————————————————————— Revenues —————————————————————————————————————————— Expenses —————————————————————————————————————————— Solution 15 (15 min.)

Transaction # 1 2 3 4 5 6 7 8 9 10 —————————————————————————————————————————— Assets D D,C D C D C D,C D C —————————————————————————————————————————— Liabilities C C D —————————————————————————————————————————— Owner's Capital C —————————————————————————————————————————— Owner's Drawings D —————————————————————————————————————————— Revenues C —————————————————————————————————————————— Expenses D

Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic Exercise 16 The listing below includes all steps in the accounting cycle: Journalize/Post adjusting entries. Analyze business transactions. Journalize/Post closing entries. Journalize the transactions. Post to ledger accounts. Prepare adjusted trial balance. Prepare post-closing trial balance. Prepare financial statements.

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare unadjusted trial balance. Instructions Place the steps of the accounting cycle stated above in the correct order. Solution 16 (5 min.) 1. Analyze business transactions. 2.

Journalize the transactions.

3.

Post to ledger accounts.

4.

Prepare unadjusted trial balance.

5.

Journalize/Post adjusting entries.

6.

Prepare adjusted trial balance.

7.

Prepare financial statements.

8.

Journalize/Post closing entries.

9.

Prepare post-closing trial balance.

Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic Exercise 17 Based on the journal entries below, provide an explanation of the event that properly describes the transaction. a) Cash 45,000 J. Squires, Capital 45,000 b) Equipment Notes Payable

11,000

c) Accounts Receivable Service Revenue

500

d

800

Prepaid Insurance Cash

11,000

500 800

Test Bank for Accounting Principles, Ninth Canadian Edition

e) J. Squires, Drawings Cash

5,000

f)

3,250

Salaries Expense Cash

5,000

3,250

Solution 17 (10 min.) a) Owner invested cash of $45,000 into the business. b) Purchased equipment by signing a note for $11,000. c) Performed $500 of services for a customer on account. d) Purchased insurance policy that will expire in the future for $800 cash. e) Owner withdrew cash of $5,000 from the company. f) Paid salaries of $3,250 to employees for work performed. Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic Exercise 18 Pete Painter started a painting business in May. Prepare journal entries to record the transactions during the month of May detailed below. You may omit explanations of the transactions. 1. Pete started the business by investing cash of $10,000, equipment with a fair value of $2,500, and painting supplies with a fair value of $400. 2. Entered into a painting contract with a client for a total of $1,250 that provided a deposit of $250 prior to commencing any work. 3. Purchased painting supplies for $160 on account. 4. Received cash of $600 for painting services provided 5. Paid for one-year insurance in advance, $1,200. 6. Completed the painting contract in (2) above and received the balance owing in cash of $1,000. 7. Paid cash of $200 from the business bank account for Pete’s personal expenses. 8. Paid for the supplies purchase in (3) above. Solution 18 (15 min.) 1. Cash........................................................................................................... Equipment ................................................................................................ Supplies .................................................................................................... P. Painter, Capital ............................................................................. 2.

Cash........................................................................................................... Unearned Revenue ...........................................................................

10,000 2,500 400 12,900 250

250

Test Bank for Accounting Principles, Ninth Canadian Edition

3.

Supplies .................................................................................................... Accounts Payable..............................................................................

160

4.

Cash........................................................................................................... Service Revenue................................................................................

600

5.

Prepaid Insurance .................................................................................... Cash ...................................................................................................

1,200

6.

Unearned Revenue ................................................................................... Cash........................................................................................................... Service Revenue................................................................................

250 1.000

7.

P. Painter, Drawings ................................................................................. Cash ...................................................................................................

200

8.

Accounts Payable ..................................................................................... Cash ...................................................................................................

160

160

600

1,200

1,250 200

160

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic Exercise 19 Omer Duncan Concrete Limited completed the following transactions during the month of August: Aug. 1 Purchased equipment for $22,500, paying cash of $2,500 and signing a note payable for the remainder. 4 Omer Duncan (owner) purchased a new snowmobile for personal use, which he funded with excess cash held by the company, $12,000. 4 Completed finishing work for $1,700 on account. 5 Purchased supplies for $1,100 on account. 10 Received payment of $800 in advance for work to be performed next month. 15 Paid annual insurance premiums of $3,500, which provides coverage for one year. 17 Received payment in full from the work completed on August 4. 21 Paid for items purchased on August 5. 23 Omer Duncan invested additional cash of $10,000 into the business. 25 Paid cash of $400 for minor repairs to the company vehicle. 31 Paid the August utility bills for a total of $250. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare journal entries to record the transactions. You may omit explanations of the transactions. Solution 19 (15 min.) Aug. 1 Equipment ...................................................................................... Cash ................................................................................................ Notes Payable .............................................................................

22,500

4

O. Duncan, Drawings ...................................................................... Cash ............................................................................................

12,000

4

Accounts Receivable ...................................................................... Service Revenue ..........................................................................

1,700

5

Supplies .......................................................................................... Accounts Payable ........................................................................

1,100

10

Cash ................................................................................................ Unearned Revenue......................................................................

800

15

Prepaid Insurance .......................................................................... Cash .............................................................................................

3,500

17

Cash ................................................................................................ Accounts Receivable ...................................................................

1,700

21

Accounts Payable ........................................................................... Cash .............................................................................................

1,100

23

Cash ................................................................................................ O. Duncan, Capital ......................................................................

10,000

25

Repairs Expense ............................................................................. Cash .............................................................................................

400

31

Utilities Expense ............................................................................. Cash .............................................................................................

250

2,500 20,000

12,000 1,700

1,100

800 3,500

1,700

1,100

10,000 400

250

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic Exercise 20

Test Bank for Accounting Principles, Ninth Canadian Edition

On January 22, 2024, Billy Bob invested the following assets in a new sole proprietorship: cash of $36,000; Equipment with a value of $16,000; land with a value of $160,000; building with a value of $300,000. Billy Bob also transferred to the company a note payable of $50,000 that is secured by the land and building. Instructions Prepare the journal entry to record Billy Bob’s investments in the new business. Solution 20 (5 min.) 2024 Jan. 22 Cash .............................................................................................. Equipment ................................................................................... Land.............................................................................................. Building ........................................................................................ Notes Payable ...................................................................... Billy Bob, Capital ..................................................................

36,000 16,000 160,000 300,000

50,000 462,000

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic Exercise 21 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. The owner, Meghan Honour, invests $35,000 in cash to start a real estate office operating as a sole proprietorship. 2. Purchased $400 of supplies on credit. 3. Purchased equipment for $6,000, paying $2,500 in cash and signed a 30-day, $3,500, note payable. 4. Real estate commissions billed to clients amounted to $4,000. (Hint: Use Service Revenue) 5. Paid $700 in cash for the current month's rent. 6. Paid $200 cash on account for supplies purchased in transaction 2. 7. Received a bill for $500 for advertising for the current month. 8. Paid $2,200 cash for salaries. 9. Meghan withdrew $1,200 from the business for living expenses. 10. Received a cheque for $3,000 from a client in payment on account for commissions billed in transaction 4. Solution 21 (15 min.) 1. Cash ........................................................................................................ M. Honour, Capital .........................................................................

35,000 35,000

Test Bank for Accounting Principles, Ninth Canadian Edition

2.

Supplies .................................................................................................. Accounts Payable ...........................................................................

400

3.

Equipment .............................................................................................. Cash ................................................................................................ Notes Payable.................................................................................

6,000

4.

Accounts Receivable .............................................................................. Service Revenue .............................................................................

4,000

5.

Rent Expense .......................................................................................... Cash ................................................................................................

700

6.

Accounts Payable ................................................................................... Cash ................................................................................................

200

7.

Advertising Expense ............................................................................... Accounts Payable ...........................................................................

500

8.

Salaries Expense .................................................................................... Cash ................................................................................................

2,200

9.

M. Honour, Drawings.............................................................................. Cash ................................................................................................

1,200

10.

Cash ........................................................................................................ Accounts Receivable ......................................................................

3,000

400

2,500 3,500

4,000

700 200

500

2,200 1,200

3,000

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic Exercise 22 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. Received $25,000 cash as investment from Clay Gordon, the company’s owner. 2. Purchased equipment for $40,000, paying $15,000 in cash and giving a note payable for the remainder. 3. Paid $3,000 for a one-year insurance policy. 4. Billed customers for $22,500 of services provided on account. 5. Paid monthly rent of $1,500.

Test Bank for Accounting Principles, Ninth Canadian Edition

6. 7. 8. 9.

Performed $6,500 of services and immediately received $6,500 cash. Collected $2,000 from customers on account. Hired a secretary. Paid the secretary his first week’s salary of $700.

Solution 22 (10 min.) 1. Cash ........................................................................................................ C. Gordon, Capital ..........................................................................

25,000

2.

Equipment .............................................................................................. Cash ................................................................................................ Notes Payable.................................................................................

40,000

3.

Prepaid Insurance .................................................................................. Cash ................................................................................................

3,000

4.

Accounts Receivable .............................................................................. Service Revenue .............................................................................

22,500

5.

Rent Expense .......................................................................................... Cash ................................................................................................

1,500

6.

Cash ........................................................................................................ Service Revenue .............................................................................

6,500

7.

Cash ........................................................................................................ Accounts Receivable ......................................................................

2,000

8.

No transaction

9.

Salaries Expense .................................................................................... Cash ................................................................................................

25,000

700

15,000 25,000

3,000

22,500 1,500

6,500

2,000

700

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic Exercise 23 a) Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. The owner, Robbie Cobalt, invested $50,000 to start a record company operating as a sole proprietorship.

Test Bank for Accounting Principles, Ninth Canadian Edition

b)

2. Received a $10,000 deposit from a customer to produce a record. 3. Purchased $15,000 of sound equipment using cash and a $10,000 loan. 4. Paid six months rent in advance. Monthly rent is $750. 5. Provided services for $12,500, half of which was collected in cash at the time of the sale. 6. Paid staff salaries of $3,000. 7. Paid himself $2,500. 8. Collected the remaining outstanding balance on customer accounts. 9. Paid the outstanding loan, in full, from the purchase of the sound equipment. What is the cash balance that would appear on the trial balance at the end of the period?

Solution 23 (10 min.) a) 1. Cash ........................................................................................................ R. Cobalt, Capital ............................................................................

50,000 50,000

2.

Cash ........................................................................................................ Unearned Revenue .........................................................................

10,000

3.

Equipment .............................................................................................. Cash ................................................................................................ Notes Payable.............................. ...................................................

15,000

4.

Prepaid Rent........................................................................................... Cash ................................................................................................ ($750 x 6 months)

4,500

5.

Accounts Receivable .............................................................................. Cash.................................................... .................................................... Service Revenue .............................................................................

6,250 6,250

Salaries Expense .................................................................................... Cash ................................................................................................

3,000

7.

R. Cobalt, Drawings ................................................................................ Cash ................................................................................................

2,500

8.

Cash..................................................... ................................................... Accounts Receivable.......................................................................

6,250

9.

Notes Payable......................................................................................... Cash.................................................................................................

10,000

6.

b) The balance in the Cash account on the trial balance is $47,500. Cash (1) 50,000 5,000 (3)

10,000

5,000 10,000

4,500

12,500

3,000 2,500

6,250

10,000

Test Bank for Accounting Principles, Ninth Canadian Edition

(2) 10,000 (5) 6,250 (8) 6,250 Balance 47,500

4,500 (4) 3,000(6) 2,500 (7) 10,000 (9)

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic Exercise 24 Transactions for Far North Hauling Company for the month of November are presented below: 1. Chris Thompson invested an additional $66,000 cash in the business. 2. Purchased land costing $48,000 for cash. 3. Purchased equipment costing $45,000 for $14,500 cash and the remainder on account. 4. Purchased supplies on account for $1,800. 5. Paid $3,250 for a one-year insurance policy. 6. Received $6,000 cash for services performed. 7. Received $2,200 for services previously performed on account. 8. Paid salaries to employees for $2,500. 9. Paid $400 to Chris Thompson, the company’s owner. Instructions Journalize each transaction and identify each transaction by number. You may omit journal explanations. Solution 24 (10 min.) 1. Cash ........................................................................................................ C. Thompson, Capital .....................................................................

66,000

2.

Land ........................................................................................................ Cash ................................................................................................

48,000

3.

Equipment .............................................................................................. Cash ................................................................................................ Accounts Payable ...........................................................................

45,000

4.

Supplies .................................................................................................. Accounts Payable ...........................................................................

1,800

5.

Prepaid Insurance ..................................................................................

3,250

66,000

48,000

14,500 30,500 1,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash ................................................................................................ 6.

3,250

Cash ........................................................................................................ Service Revenue .............................................................................

6,000

7.

Cash ........................................................................................................ Accounts Receivable ......................................................................

2,200

8.

Salaries Expense .................................................................................... Cash ................................................................................................

2,500

9.

C. Thompson, Drawings ......................................................................... Cash ................................................................................................

400

6,000 2,200

2,500

400

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic Exercise 25 Joe’s Bike Repairs opened for business on November 1, 2024. The following transactions occurred in November: Nov. 1 Joe Amirkhani invested $5,000 cash in the business and contributed equipment valued at $2,300. 3 Purchased supplies for cash of $560. 5 Completed services for customers who paid cash of $400. 6 Paid $660 for a one-year insurance policy. 8 Completed services for a major customer and invoiced the customer $1,000. 15 Paid $125 for printing advertising brochures. The brochures were distributed the same day. 20 Received a bill from the utilities company for November utilities in the amount of $70. The amount is due December 4. 25 Entered into a contract with a new customer who will use Joe’s services for repairs on their entire fleet of rental bikes. The customer paid $800 in advance for repairs to be completed in December. 30 Joe withdrew $1,200 for personal use. 30 Received $600 cash from the customer billed on November 8. Instructions Journalize the above transactions. Explanations are not required. Solution 25 (10 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

Nov. 1

Cash .............................................................................................. Equipment ................................................................................... J. Amirkhani, Capital............................................................

5,000 2,300

3

Supplies........................................................................................ Cash ......................................................................................

560

5

Cash .............................................................................................. Service Revenue ...................................................................

400

6

Prepaid Insurance ....................................................................... Cash ......................................................................................

660

8

Accounts Receivable .................................................................... Service Revenue ...................................................................

1,000

15

Advertising Expense .................................................................... Cash ......................................................................................

125

20

Utilities Expense .......................................................................... Accounts Payable .................................................................

70

25

Cash .............................................................................................. Unearned Revenue ..............................................................

800

30

J. Amirkhani, Drawings ................................................................ Cash ......................................................................................

1,200

30

Cash .............................................................................................. Accounts Receivable ............................................................

600

7,300

560

400 660

1,000

125 70

800

1,200

600

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic Exercise 26 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. Irma Lepage invests $45,000 cash to start a law firm, Legal Lepage, operating as a proprietorship. 2. Paid $2,700 cash for the first three months’ rent. 3. Purchased equipment for $25,000, paying $8,500 in cash and signed a 30-day, 5% note payable for $16,500.

Test Bank for Accounting Principles, Ninth Canadian Edition

4. Paid $660 cash for the purchase of supplies. 5. Received a bill for $700 for advertising for the current month. 6. Billed $10,000 to clients for legal services. 7. Paid $700 cash on account for the advertising in transaction 5. 8. Paid $4,500 cash for salaries. 9. Irma withdrew $6,200 cash. 10. Received a cheque for $5,000 from a client in payment on account for services billed in transaction 6. Solution 26 (15 min.) 1. Cash........................................................................................................... I. Lepage, Capital ..............................................................................

45,000

2.

Prepaid Rent ............................................................................................. Cash ...................................................................................................

2,700

3.

Equipment ................................................................................................ Cash ................................................................................................... Notes Payable ...................................................................................

25,000

4.

Supplies .................................................................................................... Cash ...................................................................................................

660

5.

Advertising Expense ................................................................................. Accounts Payable..............................................................................

700

6.

Accounts Receivable ................................................................................ Service Revenue................................................................................

10,000

7.

Accounts Payable ..................................................................................... Cash ...................................................................................................

700

8.

Salaries Expense ....................................................................................... Cash ....................................................................................................

4,500

9.

I. Lepage, Drawings .................................................................................. Cash ...................................................................................................

6,200

10. Cash........................................................................................................... Accounts Receivable .........................................................................

5,000

45,000

2,700

8,500 16,500

660 700

10,000

700 4,500

6,200

5,000

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic Exercise 27 The chart of accounts used by Moe Printing is listed below: 1 Cash 8 2 Accounts Receivable 9 3 Supplies 10 4 Equipment 11 5 Accounts Payable 12 6 Notes Payable 13 7 Unearned Revenue

Interest Payable M. Philippe, Capital M. Philippe, Drawings Service Revenue Rent Expense Utilities Expense

Instructions Indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate columns. __________________________________________________________________________________ Account Account number(s) number(s) debited credited 1. Moe Philippe invests $120,000 cash to start the business. __________________________________________________________________________________ 2. Purchased three digital copy machines for $400,000, paying $100,000 cash and signing a 5-year, 6% note for the remainder. __________________________________________________________________________________ 3. Purchased $10,000 paper supplies on credit. __________________________________________________________________________________ 4. Paid $1,200 cash for rent for the current month. __________________________________________________________________________________ 5. Paid $400 cash for utilities for the current month. __________________________________________________________________________________ 6. Paid $2,000 on account for paper supplies purchased in transaction 3. __________________________________________________________________________________ 7. Moe Philippe withdrew $1,500 for personal expenses. __________________________________________________________________________________ 8. Received $9,000 cash for printing services. __________________________________________________________________________________ 9. Received $2,000 cash advance from a customer for future printing. __________________________________________________________________________________ 10. Billed a customer for $450 for printing services

Test Bank for Accounting Principles, Ninth Canadian Edition

completed. __________________________________________________________________________________ Solution 27 (15 min.) __________________________________________________________________________________ Account Account number(s) number(s) debited credited 1. Moe Philippe invests $120,000 cash to start the business. 1 9 __________________________________________________________________________________ 2. Purchased three digital copy machines for $400,000, paying $100,000 cash and signing a 5-year, 6% note for the remainder. 4 1, 6 __________________________________________________________________________________ 3. Purchased $10,000 paper supplies on credit. 3 5 __________________________________________________________________________________ 4. Paid $1,200 cash for rent for the current month. 12 1 __________________________________________________________________________________ 5. Paid $400 utilities cash for the current month. 13 1 __________________________________________________________________________________ 6. Paid $2,000 on account for paper supplies purchased in transaction 3. 5 1 __________________________________________________________________________________ 7. Moe Philippe withdrew $1,500 for personal expenses. 10 1 __________________________________________________________________________________ 8. Received $9,000 cash for printing services. 1 11 __________________________________________________________________________________ 9. Received $2,000 cash advance from a customer for future printing. 1 7 __________________________________________________________________________________ 10. Billed a customer for $450 for printing services completed. 2 11 __________________________________________________________________________________ Bloomcode: Analysis Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 28 The transactions of Got It Now Service Co. are recorded in the general journal below. The opening balances are displayed in T accounts below. General Journal ___________________________________________________________________________________ Date Account Titles and Explanation Debit Credit ___________________________________________________________________________________ 2024 Aug. 5 Accounts Receivable............................................................... 2,800 Service Revenue .............................................................. 2,800 10 Cash......................................................................................... 3,000 Service Revenue .............................................................. 3,000 19 Rent Expense .......................................................................... 1,000 Cash ................................................................................. 1,000 25 Cash......................................................................................... 1,400 Accounts Receivable ....................................................... 1,400 Instructions Post the journal entries to the T accounts and calculate the August 31 balances. General Ledger Cash

Accounts Receivable

Bal. fwd. 1,250

Bal. fwd. 800

J. Jackson, Capital Bal. fwd. 2,050

Service Revenue

Solution 28 (5 min.)

Bal. fwd. 8/10 8/25

Cash 1,250 8/19 3,000 1,400

Rent Expense

General Ledger

1,000

Bal. fwd. 8/5

Accounts Receivable 800 8/25 2,800

1,400

Test Bank for Accounting Principles, Ninth Canadian Edition

8/31 Bal.

4,650

8/31 Bal.

2,200

8/19

Rent Expense 1,000

8/31 Bal.

1,000

J. Jackson, Capital Bal. fwd. 2,050 8/31 Bal. 2,050 Service Revenue 8/5 8/10 8/31 Bal.

2,800 3,000 5,800

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic Exercise 29 Al’s Plumbing Services has the following account balances as at March 31: Cash ......................................................... $1,500 Accounts Receivable ............................... 2,100 Accounts Payable .................................... 650 A. Plumber, Capital.................................. 2,950 The following transactions took place during April: 1. Services of $3,100 were made on account. 2. Paid April rent of $1,100. 3. Bought $650 of supplies on account. 4. Collected $4,000 cash on outstanding customer accounts. 5. Made payments on account $500. Instructions a) Journalize April’s transactions. b) What are the April 30 account balances? Hint: You may wish to use T accounts. Solution 29 (15 min.) a)

Test Bank for Accounting Principles, Ninth Canadian Edition

1.

Accounts Receivable ................................................................................ Service Revenue................................................................................

3,100

2. Rent Expense........................................................ ...................................... .... Cash................................................................. ..................................

1,100

3. Supplies...................................................................................................... Accounts Payable..............................................................................

650

Cash........................................................................................................... Accounts Receivable .........................................................................

4,000

5.

Accounts Payable ..................................................................................... Cash ...................................................................................................

500

b)

Bal. fwd. 1,500 4,000 Bal

Accounts Receivable

1,100 500

Bal. fwd.

3,900

2,100 3,100

4,000

Bal. 1,200 A. Plumber Capital Bal. fwd. 2,950 Bal.

2,950

Service Revenue 3,100 Bal. 3,100 Accounts Payable Bal. fwd. 500 Bal. Bloomcode: Application Difficulty: Medium

Rent Expense 1,100 Bal. 1,100 Supplies

650 650

800

650

Bal.

650

1,100

650

4.

Cash

3,100

4,000

500

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic Exercise 30 The following transactions occurred for Carlos Computer Repair Company during the month of March 2024: Mar. 2 Carlos Button (owner) repaired a computer and immediately collected $140. 4 Carlos hired a new secretary who will begin working for Carlos starting next month and will be paid $2,500 per month. 8 Computer supplies were purchased for $600 on credit. 11 Completed work for a customer on account for $1,000. 16 Paid $600 regarding supplies purchased on March 8. 17 Purchased some used computers for $500 to be used as supplies. 19 Paid insurance premium of $170 that will expire in March 2025. 23 Collected $1,700 regarding a customer’s account. 27 Rented specialized equipment from Programming Wizards; $920 on account. 30 Carlos withdrew $2,000 cash for personal use. Instructions Record the above transactions directly to the T accounts below. Include dates beside the transactions in your T accounts to identify the entries. You must also determine the ending balance of each account. Cash Bal. fwd.

Accounts Receivable

10,260

Bal. fwd.

1,700

C. Button, Capital Bal. fwd.

Accounts Payable Bal. fwd.

8,900

400

Supplies

Test Bank for Accounting Principles, Ninth Canadian Edition

Bal. fwd.

Prepaid Insurance Bal. fwd.

C. Button, Drawings

0

Bal. fwd.

Service Revenue Bal. fwd.

220

0

Rental Expense 2,880

Bal. fwd.

0

Solution 30 (15 min.) Cash Bal fwd. Mar. 2

Mar. 23 Bal.

Accounts Receivable

10,260 140

1,700 8,830

Mar. 23 Mar. 17 Mar. 19

1,700 500 170

Mar. 30

2,000

Bal fwd. Mar. 16

1,700 600

Bal.

1,000

Mar. 11

C. Button, Capital Bal. fwd. Bal.

Prepaid Insurance Bal. fwd. Mar. 19 Bal.

0 170 170

8,900 8,900

C. Button, Drawings Bal. fwd. Mar. 30 Bal.

0 2,000 2,000

1,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Mar. 16

Accounts Payable Bal. fwd. Mar. 8 600 Mar. 27 Bal.

Supplies 400 600

Bal. fwd. Mar. 8 Mar. 17 Bal.

920 1,320

Service Revenue Bal. fwd. Mar. 2 Mar. 11 Bal.

220 600 500 1,320

Rental Expense 2,880 140 1,000 4,020

Bal. fwd. Mar. 27 Bal.

0 920 920

*No entry required for Mar 4 transaction Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic Exercise 31 Beam’s Mountain Tours opened for business December 1, 2024. The following T accounts include eight transactions that occurred in December 2024:

Bal.

Cash 65,000 (2) 22,500 (3) (4) (6) (8) 61,325

(3)

Supplies 1,950

(1) (7)

3,500 1,950 2,225 8,000 10,500

(5) Bal,

Accounts Receivable 23,500 (7) 1,000

(2)

Equipment 23,500

22,500

Test Bank for Accounting Principles, Ninth Canadian Edition

J. Beam, Capital (1)

(6)

Accounts Payable 8,000 (2)

(4)

Salaries Expense 2,225

65,000

Service Revenue (5)

20,000

J. Beam, Drawings 10,500

(8)

23,500

Instructions a) For each transaction, journalize the transaction, including an explanation for the entry. b) Determine the ending account balance for each account. c) Prepare a trial balance as at December 31, 2024. Solution 31 (20 min.) a) 1. Cash........................................................................................................... J. Beam, Capital ................................................................................ J. Beam invested cash in the business.

65,000

2.

Equipment ................................................................................................ Cash ................................................................................................... Accounts Payable.............................................................................. Purchased equipment for cash and accounts payable.

23,500

3.

Supplies .................................................................................................... Cash ................................................................................................... Purchased supplies for cash.

1,950

4.

Salaries Expense ....................................................................................... Cash ................................................................................................... Paid salaries to employees.

2,225

5.

Accounts Receivable ................................................................................ Service Revenue................................................................................ Issued invoices for services rendered in December.

23,500

6.

Accounts Payable ..................................................................................... Cash ................................................................................................... Made partial payment on accounts payable.

8,000

7.

Cash........................................................................................................... Accounts Receivable .........................................................................

22,500

65,000

3,500 20,000

1,950

2,225

23,500

8,000

22,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Collections from customers. 8.

J. Beam, Drawings .................................................................................... Cash ................................................................................................... Cash withdrawn by J. Beam for personal use.

10,500 10,500

b) (1) (7)

(3)

Cash 65,000 (2) 22,500 (3) (4) (6) (8) 61,325

Supplies 1,950

J. Beam, Capital (1)

(6)

Accounts Payable 8,000 (2)

(4)

Salaries Expense 2,225

c)

3,500 1,950 2,225 8,000 10,500

(5)

(2)

(8)

22,500

Equipment 23,500

Service Revenue (5)

65,000

20,000 12,000

Accounts Receivable 23,500 (7) 1,000

23,500

J. Beam, Drawings 10,500

Beam’s Mountain Tours Trial Balance December 31, 2024

Cash .................................................................................................................. Accounts receivable ......................................................................................... Supplies ............................................................................................................ Equipment ........................................................................................................ Accounts payable .............................................................................................

Debit $ 61,325 1,000 1,950 23,500

Credit

$ 12,000

Test Bank for Accounting Principles, Ninth Canadian Edition

J. Beam, capital ................................................................................................ J. Beam, drawings ............................................................................................ Service revenue ................................................................................................ Salaries expense ............................................................................................... Totals ......................................................................................................

10,500 2,225 $100,500

65,000 23,500 ________ $100,500

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting ACSB: Analytic Exercise 32 Pat’s Party Planning provides food services and bartending for private and corporate parties. Pat’s does not prepare the food, but does provide supplies such as dishes, linens, and ice for the event. The following transactions occurred in December 2024, the first month of the business operations: Dec. 1 Patty Peppermint invested $18,000 in the business. 3 Business purchased a used delivery van for $6,500 on account. (Hint: Use Vehicles) 5 Purchased supplies for cash, $1,300. 7 Signed contract to provide services at a party to be held in January. Received a deposit of $750 from the customer. 8 Provided services for a corporate party. Received full payment in the amount of $2,100. 10 Paid the staff who worked at the December 8 party, $900. 14 Provided services for a private party. Issued an invoice for $1,500 to the customer who will pay in January. 18 Paid $325 for an advertisement in the local newspaper. The ad began running every day for a week starting December 10. 23 Patty Peppermint withdrew $600 for personal use. 31 Paid for a one-year insurance policy on the delivery van for $1,800, effective Jan. 1 to Dec. 31, 2025. Instructions a) Prepare the journal entries for the above transactions. Explanations are not necessary. b) Prepare a trial balance at December 31, 2024 based on the above accounts. Solution 32 (25 min.) a) Dec. 1 Cash ................................................................................................ P. Peppermint, Capital ...........................................................

18,000 18,000

Test Bank for Accounting Principles, Ninth Canadian Edition

3

Vehicles ........................................................................................... Accounts Payable ...................................................................

6,500

5

Supplies .......................................................................................... Cash.........................................................................................

1,300

7

Cash ................................................................................................ Unearned Revenue .................................................................

750

8

Cash ................................................................................................ Service Revenue .....................................................................

2,100

10

Salaries Expense............................................................................. Cash.........................................................................................

900

14

Accounts Receivable ...................................................................... Service Revenue .....................................................................

1,500

18

Advertising Expense ....................................................................... Cash.........................................................................................

325

23

P. Peppermint, Drawings ............................................................... Cash.........................................................................................

600

31

Prepaid insurance .......................................................................... Cash.........................................................................................

1,800

(1) (4) (5)

(2)

Cash Acct type: Asset 18,000 (3) 750 (6) 2,100 (8) (9) (10) 15,925 Vehicles Acct type: Asset 6,500

Prepaid Insurance Acct type: Asset

1,300 900 325 600 1,800

(7)

Accounts Receivable Acct type: Asset 1,500

(3)

Supplies Acct type: Asset 1,300

Unearned Revenue Acct type: Liabilities

6,500

1300

750 2,100

900

1,500 325

600

1,800

Test Bank for Accounting Principles, Ninth Canadian Edition

(10)

1,800

Accounts Payable Acct type: Liabilities (2)

(4)

750

P. Peppermint, Capital Acct type: Owner’s Equity (1) 18,000

6,500

(9)

P. Peppermint, Drawings Acct type: Owner’s Equity 600

Service Revenue Acct type: Owner’s Equity (5) 2,100 (7) 1,500 3,600

(6)

Salaries Expense Acct type: Owner’s Equity 900

Advertising Expense Acct type: Owner’s Equity 325

b)

(8)

Pat’s Party Planning Trial Balance December 31, 2024

Cash .................................................................................................................. Accounts receivable ......................................................................................... Supplies ............................................................................................................ Prepaid insurance ............................................................................................ Vehicles ............................................................................................................. Accounts payable ............................................................................................. Unearned revenue............................................................................................ P. Peppermint, capital ..................................................................................... P. Peppermint, drawings ................................................................................. Service revenue ................................................................................................ Salaries expense ............................................................................................... Advertising expense ......................................................................................... Totals ...................................................................................................... Bloomcode: Application Difficulty: Medium

Debit $15,925 1,500 1,300 1,800 6,500

600 900 325 $28,850

Credit

$ 6,500 750 18,000 3,600 ______ $28,850

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic Exercise 33 Listed below are the transactions for August 2024, the first month of operations of Sassy’s Pet Grooming, owned and operated by Sassy Jordan. Aug. 1 Sassy invested $5,000 in the business, which was comprised of $3,500 in cash plus equipment valued at $1,500. 3 Paid rent of $400 for one month’s rent. 3 Hired a salesperson who will be paid on commission. 4 Purchases supplies on account for $125. 12 Purchased a used van for $6,000, paying cash of $1,000 and signing a one-year, 6% note payable for the balance. (Hint: Use Vehicles) 15 Completed services for clients. Of the services completed, $350 was paid in cash, and the remainder of $500 was on account. 18 Paid telephone expense of $60. 26 Received a utility bill for August of $110. 27 Collected $250 of the accounts receivable balance. 29 Billed clients for $400 in services. 30 Paid an assistant $225. 30 Sassy Jordan withdrew $500 for personal use. Instructions a) Journalize the transactions. b) Prepare a trial balance at August 31, 2024. Hint: You may want to use T accounts. Solution 33 (30 min.) a) Aug. 1 Cash .............................................................................................. Equipment ................................................................................... S. Jordan, Capital ................................................................. Aug. 3

Rent Expense ............................................................................... Cash ......................................................................................

Aug. 3

No transaction

Aug. 4

Supplies........................................................................................

3,500 1,500

400

125

5,000

400

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts Payable ................................................................. Aug. 12

125

Vehicles ........................................................................................ Cash ...................................................................................... Notes Payable ......................................................................

6,000

Cash .............................................................................................. Accounts Receivable .................................................................... Service Revenue ...................................................................

350 500

Aug. 18

Telephone Expense ..................................................................... Cash ......................................................................................

60

Aug. 26

Utilities Expense .......................................................................... Accounts Payable .................................................................

110

Aug. 27

Cash .............................................................................................. Accounts Receivable ............................................................

250

Aug. 29

Accounts Receivable .................................................................... Service Revenue ...................................................................

400

Aug. 30

Salaries Expense .......................................................................... Cash ......................................................................................

225

Aug. 30

S. Jordan, Drawings ..................................................................... Cash ......................................................................................

500

Aug. 15

8/31

Cash 3,500 8/3 350 8/12 250 8/18 8/30 8/30 Bal. 1,915

8/4 8/31

Supplies 125 Bal 125

8/ 12 8/31

Vehicles 6,000 Bal. 6,000

8/1 8/15 8/27

400 1,000 60 225 500

1,000 5,000

850 60

110

250 400

225

500

8/15 8/29 8/31

Accounts Receivable 500 8/27 400 Bal. 650

8/1 8/31

Equipment 1,500 Bal. 1,500

Accounts Payable 8/4 8/26

250

125 110

Test Bank for Accounting Principles, Ninth Canadian Edition

Notes Payable 8/12 8/31

8/30 8/31

S. Jordan, Drawings 500 Bal. 500

8/3 8/31

Rent Expense 400 Bal. 400

8/26 8/31

Utilities Expense 110 Bal. 110

b)

5,000 Bal. 5,000

8/31

Bal. 235

S. Jordan, Capital 8/1 8/31

5,000 Bal. 5,000

Service Revenue 8/15 8/29 8/31

850 400 Bal. 1,250

8/18 8/31

Telephone Expense 60 Bal. 60

8/30 8/31

Salaries Expense 225 Bal. 225

Sassy’s Pet Grooming Trial Balance August 31, 2024

Cash .................................................................................................................. Accounts receivable ......................................................................................... Supplies ............................................................................................................ Equipment ........................................................................................................ Vehicles ............................................................................................................. Accounts payable ............................................................................................. Notes payable................................................................................................... S. Jordan, capital ............................................................................................. S. Jordan, drawings.......................................................................................... Service revenue ................................................................................................ Rent expense .................................................................................................... Telephone expense .......................................................................................... Utilities expense ............................................................................................... Salaries expense ............................................................................................... Totals ......................................................................................................

Debit $ 1,915 650 125 1,500 6,000

500 400 60 110 225 $11,485

Credit

$ 235 5,000 5,000 1,250

______ $11,485

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic Exercise 34 Using the T accounts provided below, determine the amounts for (a) through (f): Cash 29,250 12,500

Bal.

(a) Supplies 1,950

Bal.

1,435

L. Mussle, Capital 2,800 Bal.

Accounts Receivable 27,500 2,950 (b)

9,500 1,950 4,225 8,000

(c)

Bal.

8,420

Bal.

Equipment 13,500 (d) 23,625

Sales Revenue

35,000 (e) 49,200

Bal.

22,500 27,500

7,500 1,800 690 (f) 16,670

Solution 34 (5 min) Cash 29,250 12,500

Bal.

(a) 18,075

9,500 1,950 4,225 8,000

Accounts Receivable 27,500 2,950 (b) 27,970 Bal.

8,420

22,500 27,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Supplies 1,950 Bal.

1,435

L. Mussle, Capital 2,800 Bal.

Equipment 13,500 (d) 10,125 23,625

(c) 515

Sales Revenue

35,000 (e) 17,000 49,200

Bal.

7,500 1,800 690 (f) 6,680 16,670

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic Exercise 35 Using the T accounts provided below, determine the amounts for (a) through (f): Cash 20,000 8,900 Bal.

7,650

4,000 2,200 500 (a)

Accounts Receivable (b) 5,320 Bal.

8,210

Bal.

Land 188,000 (d) 510,000

Prepaid Insurance 4,850 Bal.

0

M. Olypoli, Capital

(c)

35,000 49,110

M. Olypoli, Drawings 4,500 10,000

1,020 770 5,320

Test Bank for Accounting Principles, Ninth Canadian Edition

Bal.

6,890

(e) Bal.

(f)

Solution 35 (5 min) Cash 20,000 8,900

Bal.

Bal.

4,000 2,200 500 (a)14.550

7,650 Prepaid Insurance 4,850 0

M. Olypoli, Capital

Bal.

Accounts Receivable (b) 10,000 5,320

(c) 4,850

Bal.

8,210

Bal.

Land 188,000 (d) 322,000 510,000

1,020 770 5,320

M. Olypoli, Drawings 4,500 10,000 6,890

35,000 49,110 (e) 84,110 Bal.

(f) 21,390

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic Exercise 36 Jean Corriveau Company is a newly organized business. The list of accounts to be opened in the general ledger is as follows: Accounts Payable Prepaid Rent Accounts Receivable Rent Expense Cash Salaries Expense Equipment Salaries Payable Insurance Expense Service Revenue

Test Bank for Accounting Principles, Ninth Canadian Edition

J. Corriveau, Capital J. Corriveau, Drawings Prepaid Insurance

Supplies Supplies Expense

Organize the accounts into the order in which they should appear in the ledger of Jean Corriveau Company and assign account numbers. Use the following system to assign account numbers. 100–199 Assets 200–299 Liabilities 300–399 Owner's Equity 400–499 Revenues 500–599 Expenses Solution 36 (5 min.) There are several possible correct account number assignments. The following is one of the correct solutions. 101 112 113 114 115 160

Cash Accounts Receivable Supplies Prepaid Insurance Prepaid Rent Equipment

210 Accounts Payable 220 Salaries Payable 310 J. Corriveau, Capital 320 J. Corriveau, Drawings 410

Service Revenue

510 520 530 540

Salaries Expense Supplies Expense Rent Expense Insurance Expense

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic Exercise 37 The transactions of Coronation Baked Goods Delivery are recorded in the general journal below:

Test Bank for Accounting Principles, Ninth Canadian Edition

General Journal —————————————————————————————————————————— Date Account Titles and Explanation Ref. Debit —————————————————————————————————————————— 2024 Sept. 1 Cash......................................................................................... 15,000 M. Donut, Capital ............................................................ Invested cash in business.

J1 Credit

15,000

4

Vehicles ................................................................................... 30,000 Cash ................................................................................. Notes Payable ................................................................. Purchased truck, paid cash, and issued a two-year, 6% note payable.

10,000 20,000

8

Rent Expense .......................................................................... Cash ................................................................................. Paid September rent.

1,000

1,000

15

Prepaid Insurance .................................................................. Cash ................................................................................. Paid one-year liability insurance.

400

18

Cash......................................................................................... Service Revenue .............................................................. Received cash for delivery services.

2,500

20

Salaries Expense ..................................................................... Cash ................................................................................. Paid salaries for current period.

500

25

Utilities Expense ..................................................................... Accounts Payable............................................................ Received a bill for September utilities.

100

30

M. Donut, Drawings ................................................................ Cash ................................................................................. Withdrew cash for personal use.

750

30

Accounts Receivable............................................................... Service Revenue .............................................................. Billed customer for delivery service.

1,000

Instructions a) Post the journal entries to the accounts using the following general ledger. b) Prepare a trial balance on the form provided. General Ledger

400

2,500

500

100

750

1,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash Account No. 100 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————

Accounts Receivable Account No. 105 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————

Prepaid Insurance Account No. 110 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— Vehicles Account No. 150 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————

Accounts Payable Account No. 200 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————

Notes Payable Account No. 250 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— M. Donut, Capital Account No. 300 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————

M. Donut, Drawings Account No. 350 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance

Test Bank for Accounting Principles, Ninth Canadian Edition

——————————————————————————————————————————

Service Revenue Account No. 400 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————

Rent Expense Account No. 520 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— Salaries Expense Account No. 530 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————

Utilities Expense Account No. 550 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— CORONATION BAKED GOODS DELIVERY Trial Balance September 30, 2024 —————————————————————————————————————————— Accounts Debit —————————————————————————————————————————— Solution 37 (25 min.) a)

Credit

General Ledger Cash Account No. 100 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— 2024 Sept. 1 J1 15,000 15,000 4 J1 10,000 5,000 8 J1 1,000 4,000 15 J1 400 3,600

Test Bank for Accounting Principles, Ninth Canadian Edition

18 20 30

J1 J1 J1

2,500

500 750

6,100 5,600 4,850

Accounts Receivable Account No. 105 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— 2024 Sept. 30 J1 1,000 1,000

Prepaid Insurance Account No. 110 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— 2024 Sept. 15 J1 400 400

Vehicles Account No. 150 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— 2024 Sept. 4 J1 30,000 30,000

Accounts Payable Account No. 200 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— 2024 Sept. 25 J1 100 100 Notes Payable Account No. 250 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— 2024 Sept. 4 J1 20,000 20,000

Test Bank for Accounting Principles, Ninth Canadian Edition

M. Donut, Capital Account No. 300 —————————————————————————————————————————— Date Explanation Ref. Debit Credit —————————————————————————————————————————— 2024 Sept. 1 J1 15,000

Balance

15,000

M. Donut, Drawings Account No. 350 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— 2024 Sept. 30 J1 750 750

Service Revenue Account No. 400 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— 2024 Sept. 18 J1 2,500 2,500 30 J1 1,000 3,500

Rent Expense Account No. 520 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— 2024 Sept. 8 J1 1,000 1,000 Salaries Expense Account No. 530 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— 2024 Sep 20 J1 500 500 Utilities Expense Account No. 550 —————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance —————————————————————————————————————————— 2024

Test Bank for Accounting Principles, Ninth Canadian Edition

Sept. 25

J1

100

100

b)

Coronation Baked Goods Delivery Trial Balance September 30, 2024 —————————————————————————————————————————— Accounts Debit —————————————————————————————————————————— Cash .................................................................................................................. $ 4,850 Accounts receivable ......................................................................................... 1,000 Prepaid insurance ............................................................................................ 400 Vehicles ............................................................................................................. 30,000 Accounts payable ............................................................................................. Notes payable................................................................................................... M. Donut, capital .............................................................................................. M. Donut, drawings .......................................................................................... 750 Service revenue ................................................................................................ Rent expense .................................................................................................... 1,000 Salaries expense ............................................................................................... 500 Utilities expense ............................................................................................... 100 Totals ...................................................................................................... $38,600

Credit

$ 100 20,000 15,000 3,500 ______ $38,600

Bloomcode: Application Difficulty: Medium Learning Objective: Explain how a ledger helps in the recording process and post transactions. Learning Objective: Prepare a trial balance. Section Reference: The Ledger Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic Exercise 38 The transactions of Make it Quick Delivery Service are recorded in the general journal below. General Journal ___________________________________________________________________________________ Date Account Titles and Explanation Debit Credit ___________________________________________________________________________________ 2024 Sept. 1 Cash ................................................................................................ 25,000 J. Lough, Capital ..................................................................... 25,000 Owner invested cash in business. 4

Vehicles ........................................................................................... Cash.........................................................................................

40,000

10,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Notes Payable ......................................................................... Purchased truck, paid cash, and issued 2-year, 6% note payable.

30,000

8

Rent Expense .................................................................................. Cash......................................................................................... Paid September rent.

1,000

15

Prepaid Insurance .......................................................................... Cash......................................................................................... Paid one-year liability insurance.

1,400

18

Cash ................................................................................................ Service Revenue ..................................................................... Received cash for delivery services.

2,500

Salaries Expense............................................................................. Cash......................................................................................... Paid salaries for current period.

500

25

Utilities Expense ............................................................................. Accounts Payable ................................................................... Received a bill for September utilities.

100

30

J. Lough, Drawings ......................................................................... Cash......................................................................................... Paid drawings to owner.

750

30

Accounts Receivable ...................................................................... Service Revenue ..................................................................... Billed customer for delivery service.

1,000

20

500

General Ledger Cash

1,400

2,500

Instructions a) Post the journal entries to the accounts in the general ledger below. b) Prepare a trial balance on the form provided. a)

1,000

Accounts Receivable

100

750

1,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepaid Insurance

Vehicles

Accounts Payable

Notes Payable

J. Lough, Capital

J. Lough, Drawings

Service Revenue

Rent Expense

Salaries Expense

Utilities Expense

b)

MAKE IT QUICK DELIVERY SERVICE Trial Balance September 30, 2024 ___________________________________________________________________________________ Accounts Debit Credit ___________________________________________________________________________________ ___________________________________________________________________________________

Solution 38 (25 min.) a)

General Ledger

Test Bank for Accounting Principles, Ninth Canadian Edition

9/30 Bal.

Cash 25,000 9/4 2,500 9/8 9/15 9/20 9/30 13,850

9/15 9/30 Bal.

Prepaid Insurance 1,400 1,400

9/1 9/18

Accounts Payable 9/25 9/30 Bal.

9/20 9/30 Bal. b)

10,000 1,000 1,400 500 750

9/30

Accounts Receivable 1,000

9/30 Bal.

1,000

9/4 9/30 Bal.

Vehicles 40,000 40,000

100 100

Notes Payable 9/4 9/30 Bal.

J. Lough, Capital 9/1 9/30 Bal.

25,000 25,000

9/30 9/30 Bal.

J. Lough, Drawings 750 750

Service Revenue 9/18 9/30 9/30 Bal.

2,500 1,000 3,500

9/8

Rent Expense 1,000

9/30 Bal.

1,000

9/25 9/30 Bal.

Utilities Expense 100 100

Salaries Expense 500 500

30,000 30,000

MAKE IT QUICK DELIVERY SERVICE Trial Balance September 30, 2024 ___________________________________________________________________________________ Accounts Debit Credit ___________________________________________________________________________________ Cash .................................................................................................................. $13,850 Accounts receivable ......................................................................................... 1,000 Prepaid insurance ............................................................................................ 1,400 Vehicles ............................................................................................................. 40,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts payable ............................................................................................. Notes payable................................................................................................... J. Lough, capital ............................................................................................... J. Lough, drawings ........................................................................................... Service revenue ................................................................................................ Rent expense .................................................................................................... Salaries expense ............................................................................................... Utilities expense ............................................................................................... Totals ......................................................................................................

$ 100 30,000 25,000 750 1,000 500 100 $58,600

3,500

_______ $58,600

Bloomcode: Application Difficulty: Medium Learning Objective: Explain how a ledger helps in the recording process and post transactions. Learning Objective: Prepare a trial balance. Section Reference: The Ledger Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic Exercise 39 The trial balance of J. Doe Restoration Company shown below does not balance. J. DOE RESTORATION COMPANY Trial Balance September 30, 2024 Cash .................................................................................................................. Accounts receivable ......................................................................................... Supplies ............................................................................................................ Equipment ........................................................................................................ Accounts payable ............................................................................................. J. Doe, capital ................................................................................................... J. Doe, drawings ............................................................................................... Service revenue ................................................................................................ Salaries expense ............................................................................................... Repairs expense ............................................................................................... Totals ......................................................................................................

Debit $ 5,200 15,200 1,200 16,600

3,000 7,600 3,200 $52,000

Credit

$19,307 3,882 30,400 $53,589

An examination of the ledger and journal reveals the following errors: 1. Each of the above listed accounts has a normal balance per the general ledger. 2. Cash of $265 received from a customer on account was debited to Cash $625 and credited to Accounts Receivable $625. 3. A withdrawal of $600 by the owner was posted as a credit to J. Doe, Drawings, $600 and credit to Cash $600. 4. A debit of $600 was not posted to Salaries Expense.

Test Bank for Accounting Principles, Ninth Canadian Edition

5. 6. 7.

The purchase of equipment on account for $1,400 was recorded as a debit to Repairs Expense and a credit to Accounts Payable for $1,400. Services were performed on account for a customer, $1,020, for which Accounts Receivable was debited $1,020 and Service Revenue was credited $102. A payment on account for $304 was credited to Cash for $304 and credited to Accounts Payable for $403.

Instructions Prepare a correct trial balance. Solution 39 (25 min.)

J. DOE RESTORATION COMPANY Trial Balance September 30, 2024

Cash [$5,200 – $360 (2)].................................................................................... Accounts receivable [$15,200 + $360 (2)] ........................................................ Supplies ............................................................................................................ Equipment [$16,600 + $1,400 (5)] .................................................................... Accounts payable [$19,307 – $304 (7) – $403(7)] ............................................ J. Doe, capital ................................................................................................... J. Doe, drawings [$3,000 + $600 (3) + $600 (3)]................................................ Service revenue [$30,400 + $918 (6)] ............................................................... Salaries expense [$7,600 + $600 (4)] ................................................................ Repairs expense [$3,200 – $1,400 (5)].............................................................. Totals ........................................................................................................

Debit $ 4,840 15,560 1,200 18,000

4,200 8,200 1,800 $53,800

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic Exercise 40 The ledger accounts of Honolulu Lemon Gym at June 30, 2024 are shown below: Accounts Payable ............................ $ 6,100 Accounts Receivable ....................... 1,050 Building ............................................ 51,400 Cash.................................................. 12,000 Equipment ....................................... 24,000 Furniture…………………………….. 18,900 Notes Payable .................................. 49,000 Supplies ........................................... 350

Credit

$18,600 3,882 31,318 ______ $53,800

Test Bank for Accounting Principles, Ninth Canadian Edition

S. Khan, Capital ............................... S. Khan, Drawings ............................

63,100 10,500

Instructions Prepare a trial balance with the ledger accounts arranged in the proper financial statement order. Include the appropriate heading. All accounts have normal balances. Solution 40 (10 min.)

HONOLULU LEMON GYM Trial Balance September 30, 2024

Cash .................................................................................................................. Accounts receivable ......................................................................................... Supplies ............................................................................................................ Equipment ........................................................................................................ Furniture ........................................................................................................... Building............................................................................................................. Accounts payable ............................................................................................. Notes payable................................................................................................... S. Khan, capital ................................................................................................. S. Khan, drawings ............................................................................................. Totals ......................................................................................................

Debit $ 12,000 1,050 350 24,000 18,900 51,400

10,500 $118,200

Credit

$ 6,100 49,000 63,100 ______ $118,200

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic Exercise 41 Archie and Associates is a financial planning service. The account balances at July 31, 2024 are shown by the following alphabetical list: Accounts Payable ............................ $ 8,000 Accounts Receivable ....................... 41,000 Building ............................................ 120,000 Cash.................................................. 48,500 Equipment ....................................... 32,200 Furniture .......................................... 4,200 Land ................................................. 42,000 M. Archie, Capital ............................. 199,700 Notes Payable .................................. 75,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Notes Receivable ............................. Salaries Expense .............................. Service Revenue .............................. Supplies ........................................... Vehicles ............................................

8,100 2,000 60,000 1,800 42,900

Instructions Prepare a trial balance with the accounts arranged in financial statement order. All accounts have normal balances. Solution 41 (15 min.)

ARCHIE AND ASSOCIATES Trial Balance July 31, 2024

Cash ............................................................................................................ Accounts receivable ................................................................................... Supplies ...................................................................................................... Notes receivable ......................................................................................... Furniture ..................................................................................................... Equipment .................................................................................................. Vehicles ....................................................................................................... Building....................................................................................................... Land ............................................................................................................ Accounts payable ....................................................................................... Notes payable............................................................................................. M. Archie, capital ........................................................................................ Service revenue .......................................................................................... Salaries expense ......................................................................................... Totals ................................................................................................

Debit $ 48,500 41,000 1,800 8,100 4,200 32,200 42,900 120,000 42,000

2,000 $342,700

Credit

$ 8,000 75,000 199,700 60,000 $342,700

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic Exercise 42 Laurence and Associates is an accounting practice. The account balances at December 31, 2024, are shown by the following alphabetical list: A. Laurence, Capital......................... ....... $64,700 A. Laurence, Drawings ..................... ......... 40,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts Payable ............................ ........ 13,800 Accounts Receivable ....................... ......... 26,000 Cash.................................................. ......... 18,500 Equipment ....................................... ......... 32,200 Furniture .......................................... ......... 35,400 Notes Payable .................................. ......... 55,000 Notes Receivable ............................. ......... 19,100 Rent Expense ................................... ......... 12,000 Salaries Expense .............................. ......... 25,000 Service Revenue .............................. ....... 105,000 Supplies ........................................... .............. 800 Vehicles ............................................ ......... 29,500 Instructions Prepare a trial balance with the accounts arranged in financial statement order. Solution 42 (15 min.)

LAURENCE AND ASSOCIATES Trial Balance December 31, 2024

Cash .................................................................................................................. Accounts receivable ......................................................................................... Notes receivable ............................................................................................... Supplies ............................................................................................................ Equipment ........................................................................................................ Furniture ........................................................................................................... Vehicles ............................................................................................................. Accounts payable ............................................................................................. Notes payable................................................................................................... A. Laurence, capital .......................................................................................... A. Laurence, drawings ...................................................................................... Service revenue ................................................................................................ Rent expense .................................................................................................... Salaries expense ............................................................................................... Totals ...................................................................................................... Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

Debit $ 18,500 26,000 19,100 800 32,200 35,400 29,500

40,000 12,000 25,000 $238,500

Credit

$ 13,800 55,000 64,700 105,000 _______ $238,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 43 Kali’s Courier Service has the following account balances at the July 31, 2024 year end. The accounts all have normal balances and are shown in the following alphabetical list: Accounts Payable ............................ $10,800 Accounts Receivable ....................... 21,500 Cash.................................................. 10,200 Furniture .......................................... 5,500 Insurance Expense........................... 2,400 Notes Payable .................................. 42,500 Notes Receivable ............................. 1,800 Prepaid Insurance ........................... 1,200 R. Kali, Capital .................................. 39,800 R. Kali, Drawings .............................. 25,000 Rent Expense ................................... 12,500 Salaries Expense .............................. 30,500 Service Revenue .............................. 85,000 Supplies ........................................... 1,000 Supplies Expense............................. 10,000 Unearned Revenue .......................... 3,500 Vehicles ............................................ 60,000 Instructions Prepare a trial balance with the accounts arranged in financial statement order. Solution 43 (15 min.)

Kali’s Courier Service Trial Balance July 31, 2024

Cash .................................................................................................................. Accounts receivable ......................................................................................... Notes receivable ............................................................................................... Supplies ............................................................................................................ Prepaid insurance ............................................................................................ Furniture ........................................................................................................... Vehicles ............................................................................................................. Accounts payable ............................................................................................. Unearned revenue……………………………………………………. ............... Notes payable................................................................................................... R. Kali, capital ................................................................................................... R. Kali, drawings ............................................................................................... Service revenue ................................................................................................

Debit $ 10,200 21,500 1,800 1,000 1,200 5,500 60,000

25,000

Credit

$ 10,800 3,500 42,500 39,800 85,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Rent expense .................................................................................................... Supplies expense.............................................................................................. Insurance expense ........................................................................................... Salaries expense ............................................................................................... Totals ......................................................................................................

12,500 10,000 2,400 30,500 $181,600

_______ $181,600

Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic Exercise 44 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. 1. A payment of $600 to a creditor was recorded by a debit to Accounts Payable of $60 and a credit to Cash of $600. 2. A $480 payment for a printer was recorded by a debit to Equipment of $48 and a credit to Cash for $48. 3. An account receivable in the amount of $2,000 was collected in full. The collection was recorded by a credit to Cash for $2,000 and a credit to Accounts Receivable for $2,000. 4. An owner’s drawings was paid by issuing a cheque for $1,000. The payment was recorded by debiting Salaries Expense $1,000 and crediting Cash $1,000. 5. A payment of $600 from a customer on account was received and was credited to Cash and debited to Accounts Receivable. 6. A payment of $450 to a creditor was recorded as a debit to Cash and a credit to Accounts Payable. For each of the six cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others. Solution 44 (5 min.) 1. The trial balance totals will be unequal. The credit column will be $540 larger than the debit column. 2.

The trial balance will be incorrect but the totals will be equal.

3.

The trial balance totals will be unequal. The credit column will be $4,000 larger than the debit column.

4.

The trial balance will be incorrect but the totals will be equal.

5.

The trial balance will be incorrect but the totals will be equal.

Test Bank for Accounting Principles, Ninth Canadian Edition

6.

The trial balance will be incorrect but the totals will be equal.

Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic Exercise 45 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. 1. A payment of $700 to a creditor was recorded by a debit to Accounts Payable of $70 and a credit to Cash of $700. 2. A $340 payment for a printer was recorded by a debit to Equipment of $34 and a credit to Cash for $34. 3. An account receivable in the amount of $2,000 was collected in full. The collection was recorded by a debit to Cash for $2,000 and a debit to Accounts Payable for $2,000. 4. An account payable was paid by issuing a cheque for $800. The payment was recorded by a debit to Accounts Payable of $800 and a credit to Accounts Receivable of $800. Instructions For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others. Solution 45 (5 min.) 1. The trial balance totals will be unequal. The credit column will be $630 larger than the debit column. 2.

The trial balance will be incorrect but the totals will be equal.

3.

The trial balance totals will be unequal. The debit column will be $4,000 larger than the credit column.

4.

The trial balance will be incorrect but the totals will be equal.

Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 46 The bookkeeper for EverGreen Environmental Services made a number of errors in journalizing and posting as described below: 1. A debit posting to Accounts Receivable for $500 was omitted. 2. A payment of accounts payable for $600 was credited to Cash and debited to Accounts Receivable. 3. A credit to Accounts Receivable for $750 was posted as $75. 4. A cash purchase of equipment for $673 was journalized as a debit to Equipment and a credit to Notes Payable. The credit posting was made for $637. 5. A debit posting of $300 for purchase of supplies was credited to Supplies. 6. A debit to Repairs Expense for $482 was posted as $428. 7. A debit posting for Salaries Expense for $800 was made twice. 8. A cash purchase of supplies for $700 was journalized and posted as a debit to Supplies for $70 and a credit to Cash for $70. Instructions For each error, indicate (A) whether the trial balance will balance; if the trial balance will not balance, indicate (B) the amount of the difference, and (C) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error 1. is given as an example. (A) (B) (C) Error In Balance Difference Larger Column 1. No $500 Credit Solution 46 (15 min.) Error 1.

(A) In Balance No

(B) Difference $500

(C) Larger Column Credit

2.

Yes

—

—

3.

No

675

Debit

4.

No

36

Debit

5.

No

600

Credit

6.

No

54

Credit

7.

No

800

Debit

8.

Yes

—

—

Bloomcode: Evaluation Difficulty: Hard

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic Exercise 47 The trial balance of Karl’s Concrete Services shown below does not balance. Karl’s Concrete Services Trial Balance June 30, 2024 ___________________________________________________________________________________ Debit Credit Cash .................................................................................................................. $ 5,200 Accounts receivable ......................................................................................... 15,200 Supplies ............................................................................................................ 1,200 Equipment ........................................................................................................ 16,600 Accounts payable ............................................................................................. $19,610 K. Bruce, capital............................................................................................... 3,882 K. Bruce, drawings ........................................................................................... 3,000 Service revenue ................................................................................................ 30,400 Salaries expense ............................................................................................... 7,600 Repairs expense ............................................................................................... 3,200 ______ Totals ...................................................................................................... $52,000 $53,892 An examination of the ledger and journal reveals the following errors: 1. Each of the above listed accounts has a normal balance per the general ledger. 2. Cash of $260 received from a customer on account was debited to Cash $620 and credited to Accounts Receivable $620. 3. Drawings of $850 paid to the owner were posted as a credit to Drawings $850 and a credit to Cash $850. 4. Salaries Expense of $600 was omitted from the trial balance. 5. The purchase of equipment on account for $800 was recorded as a debit to Repairs Expense and a credit to Accounts Payable for $800. 6. Services were performed on account for a customer, $1,020, for which Accounts Receivable was debited $1,020 and Service Revenue was credited $102. 7. A payment on account for $219 was credited to Cash for $219 and credited to Accounts Payable for $291. Instructions Prepare a correct trial balance.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 47 (25 min.)

Karl’s Concrete Services Trial Balance June 30, 2024 ___________________________________________________________________________________ Debit Credit Cash [$5,200 – $360 (2)].................................................................................... $ 4,840 Accounts receivable [$15,200 + $360 (2)] ........................................................ 15,560 Supplies ............................................................................................................ 1,200 Equipment [$16,600 + $800 (5)] ....................................................................... 17,400 Accounts payable [$19,610 – $291 (7) – $219 (7)] ............................................ $19,100 K. Bruce, capital............................................................................................... 3,882 K. Bruce, drawings [$3,000 + $850 (3) + $850 (3)] ........................................... 4,700 Service revenue [$30,400 + $918 (6)] ............................................................... 31,318 Salaries expense [$7,600 + $600 (4)] ................................................................ 8,200 Repairs expense [$3,200 – $800 (5)]................................................................. 2,400 ______ Totals ........................................................................................................ $54,300 $54,300 Bloomcode: Evaluation Difficulty: Hard Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 2 THE RECORDING PROCESS CHAPTER LEARNING OBJECTIVES 1.

Describe how accounts, debits, and credits are used to record business transactions. Debit means left and credit means right. The normal balance of an asset is a debit because assets are on the left side of the accounting equation. Assets are increased by debits and decreased by credits. The normal balance of liabilities and owner’s capital is a credit because they are on the right side of the accounting equation. Liabilities and owner’s capital are increased by credits and decreased by debits. Revenues increase owner’s equity and therefore are recorded as credits because credits increase owner’s equity. Credits increase revenues and debits decrease revenues. Expenses and drawings decrease owner’s equity and therefore are recorded as debits because debits decrease owner’s equity. Expenses and drawings are increased by debits and decreased by credits.

2.

State how a journal is used in the recording process and journalize transactions. The steps in the recording process are the first three steps in the accounting cycle. These steps are: (a) analyze each transaction for its effect on the accounts, (b) record the transaction in a journal, and (c) transfer the journal information to the correct accounts in the ledger. A journal: (a) discloses the complete effect of a transaction in one place, (b) provides a chronological record of transactions, and (c) helps to prevent and locate errors because the debit and credit amounts for each entry can be easily compared.

3.

Explain how a ledger helps in the recording process and post transactions. The ledger is the entire group of accounts maintained by a company. The ledger provides the balance in each of the accounts. Posting is the procedure of transferring journal entries to the ledger accounts. After the journal entries have been posted, the ledger will show all of the increases and decreases that have been made to each account.

4.

Prepare a trial balance. A trial balance is a list of the accounts in the ledger and the account balances at a specific time. Its main purpose is to prove that debits and credits are equal after posting. A trial balance uncovers certain types of errors in journalizing and posting, and is useful in preparing financial statements. Preparing a trial balance is the fourth step in the accounting cycle.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. An account can have debit entries and credit entries. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

2. A debit to an asset account indicates an increase in that account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

3. The normal balance of all liability accounts is a debit. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

4. An asset is increased by a debit. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

5. The double-entry accounting system ensures that all the debits will equal all the credits in an entry. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

6. The normal balance in an asset account is a debit. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

7. The Owner’s Drawings account is a subdivision of the Owner's Capital account and appears as an expense on the income statement. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

8. The normal balance of a revenue account is a credit. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

9. The normal balance for the Cash account is a credit. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

10. Each time a transaction is recorded, one side of the entry will be to Cash. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 11. The use of different accounts is necessary to allow users to analyze the information. Answer: True Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

12. For transactions to be recorded correctly, debits must always be greater than credits. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 13. Source documents can provide evidence that a transaction has occurred. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

14. A transaction must be analyzed to determine which accounts it will affect. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

15. Transactions are entered in the trial balance and then transferred to journals. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

16. All business transactions must have a corresponding journal entry. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

17. The first step in the recording process is to enter the transaction information in a journal. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 18. The number and types of accounts used by different business enterprises are the same if generally accepted accounting principles are being followed by the enterprises. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

19. The accounting cycle is a series of steps followed by accountants in preparing financial statements. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

20. A simple journal entry requires only one debit to an account and one credit to an account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

21. A compound journal entry may require debits to several accounts and credits to several accounts. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 22. Transactions are recorded in alphabetical order in a journal. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

23. Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

24. Posting is the transfer of journal entries to the ledger accounts. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

25. The chart of accounts is a list of all the accounts in a company. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic 26. A chart of accounts should be arranged in alphabetical order for easier reference. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

27. A ledger is the entire group of accounts maintained by a company. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic 28. Posting is carried out before a trial balance is prepared. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic 29. For the trial balance to balance, the debits must equal the credits. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

30. If the trial balance balances, it proves that all of the entries have been made correctly.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic 31. If an entry has been posted to the accounts twice, the trial balance will still balance. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

32. Preparing the trial balance is the first step in the accounting cycle. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

33. A transposition error involves the reversing of numbers in the posting process. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

34. After a transaction has been posted, the trial balance will balance. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

35. A trial balance does NOT prove that all transactions have been recorded or that the ledger is correct. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

36. If a journal entry is posted twice, then this error will be found when the trial balance is produced. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic 37. If the trial balance is out of balance and the difference between the debits and the credits is divisible evenly by nine, then there is likely a transposition error. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

38. Errors in a trial balance may only be caused by an error in posting the journal entries to the accounts. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

39. If a journal entry is NOT posted to an account, then the trial balance will NOT balance. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

40. A trial balance that balances proves only that the debit accounts equal the credit accounts. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic 41. A trial balance is prepared at the end of an accounting period. Answer: True Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 42. The left side of an account is a) the date. b) a description of the account. c) the debit side. d) the balance of the account. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

43. Which one of the following is NOT a part of an account? a) credit side b) trial balance c) date d) title Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

44. An account is used as part of the recording process and is described by all EXCEPT which one of the following? a) An account can have either a debit or credit balance. b) An account is a source document. c) An account may be part of a manual or a computerized accounting system. d) An account has a title. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

45. The right side of an account a) is the date. b) reflects all transactions for the accounting period. c) is the debit side. d) is the credit side. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

46. An account consists of a) a title, a debit balance, and a credit balance. b) a title, a left side, and a debit balance. c) a title, a debit side, and a credit side. d) a title, a right side, and a debit balance. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

47. A T account a) is a way of depicting the basic form of an account. b) is listed in alphabetical order.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) has the debit transactions equal to the credit transactions. d) is used for accounts that have both a debit and credit balance. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

48. Which of the following statements about the tabular summary and account form of the Cash account is correct? a) All negative amounts in a tabular summary are cash payments and are recorded as debits under the account form. b) All positive amounts in the tabular summary are cash receipts and are recorded as credits under the account form. c) A positive cash balance in a tabular summary is reflected as a debit balance under the account form. d) Companies are required to use both a tabular summary and the account form. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

49. A debit to an asset account always indicates a) an error. b) a credit was made to a liability account. c) a decrease in the asset. d) an increase in the asset. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business

Test Bank for Accounting Principles, Ninth Canadian Edition

transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic 50. A debit to a liability account always indicates a) a liability has been incurred. b) an expense has been incurred. c) the liability has been decreased. d) a liability has been paid. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

51. The normal balance of any account is the a) left side. b) right side. c) side which increases that account. d) side which decreases that account. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

52. The side of the account where increases are recorded a) is always the left side. b) is always the right side. c) always creates a negative balance. d) is the same side as the normal balance for that account.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic 53. The double-entry system requires that each transaction must be recorded a) in at least two different accounts. b) twice. c) in a journal and in a ledger. d) as an asset and as a liability. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic 54. A credit is NOT the normal balance for which account listed below? a) Capital account b) Revenue account c) Liability account d) Drawings account Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

55. A debit is NOT the normal balance for

Test Bank for Accounting Principles, Ninth Canadian Edition

a) an expense account. b) a supplies account. c) an accounts payable account. d) an Owner’s Drawings account. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

56. Which one of the following is equivalent to the expanded basic accounting equation? a) Assets = Liabilities + Owner's Capital + Owner's Drawings – Revenues – Expenses. b) Assets + Owner's Drawings + Expenses = Liabilities + Owner's Capital + Revenues. c) Assets – Liabilities – Owner's Drawings = Owner's Capital + Revenues – Expenses. d) Assets = Revenues + Expenses – Liabilities. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic 57. Which of the following correctly identifies normal balances of accounts? a) Assets Debit Liabilities Credit Owner's Equity Credit Revenues Debit Expenses Credit b) Assets Debit Liabilities Credit Owner's Equity Credit Revenues Credit Expenses Credit c) Assets Credit Liabilities Debit

Test Bank for Accounting Principles, Ninth Canadian Edition

d)

Owner's Equity Revenues Expenses Assets Liabilities Owner's Equity Revenues Expenses

Debit Credit Debit Debit Credit Credit Credit Debit

Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic 58. To increase a liability account, the account is a) debited. b) credited. c) posted. d) journalized. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic 59. Which of the following is NOT true about an asset? a) Its normal balance is a debit. b) To increase an asset, a debit entry would be made. c) To increase it, a credit entry should be made. d) To decrease it, a credit entry should be made. Answer: c Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

60. Which of the following statements is true? a) Debits increase assets and increase liabilities. b) Credits decrease assets and decrease liabilities. c) Credits decrease assets and increase liabilities. d) Debits decrease assets and increase liabilities. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

61. An awareness of the normal balances of accounts would help you spot which of the following as an error in recording? a) a debit balance in an asset account b) a credit balance in an expense account c) a credit balance in a liabilities account d) a credit balance in a revenue account Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

62. Which account below is NOT a subdivision of owner's equity? a) Drawings b) Revenues

Test Bank for Accounting Principles, Ninth Canadian Edition

c) Expenses d) Liabilities Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

63. When an owner makes a withdrawal a) it does not have to be cash; it could be another asset. b) the Owner’s Drawings account will be increased with a credit. c) the Owner’s Capital account will be increased with a debit. d) the Owner’s Drawings account will be decreased with a debit. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

64. 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 increased with debits and decreased with credits. d) is not a proper subdivision of owner's equity. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

65. Which of the following statements is NOT true? a) Expenses increase owner's equity. b) Expenses have normal debit balances. c) Expenses decrease owner's equity. d) Expenses are a negative factor in the calculation of profit. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic 66. A credit to the Accounts Receivable account a) indicates an increase in the amount owed by customers. b) indicates a decrease in the amount owed by customers. c) is an error. d) must be accompanied by a debit to a liability account. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

67. Funds received before the delivery of goods and services would be shown as a) unearned revenue on the statement of earnings. b) unearned revenue on the balance sheet. c) a credit to cash. d) sales or service revenue on the statement of earnings. Answer: b Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

68. Of the following accounts, the one that normally has a debit balance is a) Accounts Payable. b) Interest Expense. c) L. Darnell, Capital. d) Service Revenue. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic 69. An account balance is a) not relevant in the accounting cycle. b) the sum of all credit transactions within an account. c) the net difference between the increases (including the beginning balance) and decreases recorded in the account. d) the sum of all debit transactions within an account. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic 70. What would the T account balance be if amounts of $300, $225, and $110 were entered on the left side of the account? a) $185 debit balance b) $635 debit balance

Test Bank for Accounting Principles, Ninth Canadian Edition

c) $185 credit balance d) $635 credit balance Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

71. What would the T account balance be if amounts of $100, $750, and $25 were entered on the right side of the account? a) $825 debit balance b) $875 debit balance c) $825 credit balance d) $875 credit balance Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic 72. What would the T account balance be if there was an opening debit balance of $500 and amounts of $50 and $25 were entered on the left side of the account? a) $575 debit balance b) $425 debit balance c) $425 credit balance d) $575 credit balance Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic 73. What would the T account balance be if there was an opening credit balance of $800 and amounts of $50 and $25 were entered on the left side of the account? a) $725 debit balance b) $875 debit balance c) $725 credit balance d) $875 credit balance Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic 74. What would the T account balance be if there was an opening debit balance of $1,000 and an amount of $200 was entered on the left side of the account and an amount of $35 was entered on the right side of the account? a) $835 debit balance b) $1,165 debit balance c) $765 credit balance d) $765 debit balance Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account CPA: Financial Reporting AACSB: Analytic

75. Betty Rogers provided $1,500 of programming services of which $1,000 was paid in cash and $500 on account. Which of the following is a correct way to record the transaction? a) Sales .......................................................................................................... 1,500 Cash ................................................................................................... 1,000 Accounts Receivable ......................................................................... 500 b) Cash........................................................................................................... 1,000 Accounts Receivable ................................................................................ 500

Test Bank for Accounting Principles, Ninth Canadian Edition

c) d)

Sales .................................................................................................. Cash........................................................................................................... Sales .................................................................................................. Cash........................................................................................................... Accounts Payable ..................................................................................... Sales ..................................................................................................

1,000 1,000 500

1,500 1,000

1,500

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 76. Scotty purchased computer equipment for $3,300, paying cash of $2,300 with the remainder on account. Which of the following is a correct way to record the transaction? a) Equipment ................................................................................................ 3,300 Cash ................................................................................................... 2,300 Accounts Receivable ......................................................................... 1,000 b) Cash........................................................................................................... 2,300 Accounts Payable ..................................................................................... 1,000 Equipment......................................................................................... 3,300 c) Equipment ................................................................................................ 3,300 Cash ................................................................................................... 2,300 Accounts Payable.............................................................................. 1,000 d) Cash........................................................................................................... 2,300 Equipment......................................................................................... 2,300 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

77. Which of the following journal entries is NOT a simple journal entry? a) Land .......................................................................................................... Building ..................................................................................................... Cash ................................................................................................... b) Salaries Expense ....................................................................................... Salaries Payable ................................................................................

60,500 105,500 1,500

166,000 1,500

Test Bank for Accounting Principles, Ninth Canadian Edition

c) d)

Equipment ................................................................................................ Notes Payable ................................................................................... Advertising Expense ................................................................................. Cash ...................................................................................................

13,250 800

13,250 800

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 78. An employee was paid $1,300 for two weeks salary. Which of the following journal entries is correct? a) Salaries Expense ....................................................................................... 1,300 Accounts Payable.............................................................................. 1,300 b) Cash........................................................................................................... 1,300 Salaries Expense ............................................................................... 1,300 c) Salaries Payable ....................................................................................... 1,300 Salaries Expense ............................................................................... 1,300 d) Salaries Expense ....................................................................................... 1,300 Cash ................................................................................................... 1,300 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

79. Marilyn Mouse invested $15,000 of her own money in Mouse Ltd. Which of the following journal entries is correct? a) Cash........................................................................................................... 15,000 M. Mouse, Capital .............................................................................. 15,000 b) Accounts Receivable ................................................................................ 15,000 M. Mouse, Capital .............................................................................. 15,000 c) M. Mouse, Drawings .................................................................................. 15,000 M. Mouse, Capital ......................................................................... 15,000 d) M. Mouse, Capital ..................................................................................... 15,000 Cash ................................................................................................... 15,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 80. Transactions are recorded for all of the following reasons EXCEPT a) when the transaction causes a change in the financial position of the company. b) to make all of the accounts balance. c) when evidence of the transaction is available. d) when there is a specific effect on the accounting equation. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

81. All of the following transactions should be recorded EXCEPT for a) providing services to customers. b) purchasing supplies on account. c) ordering equipment. d) incurring expenses. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

82. A debit to an expense account a) decreases owner’s equity. b) increases owner’s equity.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) directly affects the Owner’s Drawings account. d) has no effect on the balance sheet. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

83. Which of the following statements is NOT true? The book of original entry a) provides a chronological record of transactions. b) helps prevent and locate errors. c) is the same as the chart of accounts. d) helps ensure debits equal credits. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

84. In recording an accounting transaction in a double-entry accounting system, a) the number of debit accounts must equal the number of credit accounts. b) there must always be entries made on both sides of the accounting equation. c) the amount of the debits must equal the amount of the credits. d) there must be only two accounts affected by any transaction. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

85. The withdrawal of cash for personal use by the owners of a business requires a ______ to the

Test Bank for Accounting Principles, Ninth Canadian Edition

Owner’s Drawings account and a ______ to the Cash account. a) debit; debit b) debit; credit c) credit; credit d) credit; debit Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

86. An accountant has debited an asset account for $1,000 and credited a liability account for $500. What could be done to complete the recording of the transaction? a) Nothing further must be done. b) Debit an owner's equity account for $500. c) Debit another asset account for $500. d) Credit a different asset account for $500. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 87. An accountant has debited an expense account for $1,000 and credited an asset account for $500. Which of the following is a correct way to complete the recording of the transaction? a) Debit an asset account for $500. b) Credit a liability account for $500. c) Debit an owner's equity account for $500. d) Debit a liability account for $500. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

88. A company pays $5,000 to its short-term creditor. This would a) increase both the company’s assets and liabilities. b) decrease both the company’s assets and liabilities. c) decrease the company’s liquidity. d) increase the company’s owner’s equity. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 89. For the basic accounting equation to stay in balance, each transaction recorded must a) affect two or less accounts. b) affect two or more accounts. c) always affect exactly two accounts. d) affect the same number of asset and liability accounts. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

90. A company receives a year’s rent in advance. Which of the following statements pertaining to this event is NOT correct? a) The company’s assets decrease. b) The company’s assets increase. c) The company’s total equity remains unchanged. d) The company’s liabilities increase. Answer: a Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

91. If a company has received a payment from a customer, then a) its Cash account will be debited. b) its Cash account will be credited. c) the Cash account debits will be less than the Cash account credits. d) accounts receivable would be debited. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

92. The usual sequence of steps in the transaction recording process is a) journalize, analyze, post in ledger. b) analyze, journalize, post in ledger. c) journalize, post in ledger, analyze. d) post in ledger, journalize, analyze. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

93. In recording business transactions, evidence that an accounting transaction has taken place is obtained from a) source documents of the business. b) the Canada Revenue Agency. c) the marketing department. d) the trial balance.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 94. 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. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

95. All of the following activities are performed on a daily basis EXCEPT for a) collecting source documents. b) determining the impact of a transaction on the company’s financial position. c) preparing the journal entries. d) preparing the trial balance. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

96. Basic transaction analysis a) is reflected in the accounting records. b) is required before journalizing an entry. c) eliminates mistakes. d) is rarely required. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

97. The recording process occurs a) once a week. b) once a month. c) repeatedly during the accounting period. d) at the end of the accounting period. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 98. A journal provides a) the balances for each account. b) information about a transaction in several different places. c) a list of all accounts used in the business. d) a chronological record of transactions. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

99. When three or more accounts are required in one journal entry, the entry is referred to as a a) compound entry. b) double entry. c) multiple entry. d) simple entry. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

100. The journal entry to record the investment of cash by the owners of a business would require a debit to the Cash account and a credit to a) Investments. b) Revenue. c) Owner’s Capital. d) Accounts Receivable. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

101. Another name for journal is a) listing. b) book of original entry. c) book of accounts. d) book of source documents. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

102. A journal is useful for a) disclosing in one place the complete effect of a transaction. b) locating and preventing errors. c) providing a record of transactions. d) all of these Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

103. The name given to entering transaction data in the journal is a) debiting. b) listing. c) posting. d) journalizing. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 104. A journal entry a) must have the same number of debit entries as credit entries. b) must have a debit to an asset and a credit to a liability. c) only affects balance sheet accounts. d) must have the total of the debit entries equal to the credit entries. Answer: d Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

105. Journal entries are prepared a) only at the end of the month. b) only when cash is received or disbursed. c) whenever there is a business transaction that will generate an entry. d) only when financial statements are prepared. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

106. Which of the following journal entries records the cash collection for sales and outstanding accounts receivable? a) Accounts Receivable ................................................................................ 1,250 Cash ................................................................................................... 250 Sales. ................................................................................................. 1,000 b) Accounts Receivable ................................................................................ 1,000 Cash........................................................................................................... 250 Sales .................................................................................................. 1,250 c) Cash........................................................................................................... 1,250 Sales .................................................................................................. 1,000 Accounts Receivable ......................................................................... 250 d) Sales .......................................................................................................... 1,250 Accounts Receivable ......................................................................... 1,000 Cash ................................................................................................... 250 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

107. On June 1, 2024, Joanne White buys a copier machine for her business and finances this purchase with cash and a note. When journalizing this transaction, she will a) use two journal entries. b) make a compound entry. c) make a simple entry. d) wait until the end of the month to record the entry. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic 108. Which of the following journal entries correctly records the cash payment of salaries and advertising expenses? a) Advertising Expense. ................................................................................ 1,500 Salaries Expense ............................................................................... 550 Cash ................................................................................................... 950 b) Salaries Expense ....................................................................................... 1,500 Advertising Expense.......................................................................... 950 Cash ................................................................................................... 550 c) Cash........................................................................................................... 1,500 Salaries Expense ............................................................................... 550 Advertising Expense.......................................................................... 950 d) Salaries Expense ....................................................................................... 550 Advertising Expense ................................................................................. 950 Cash ................................................................................................... 1,500 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

109. A journal entry will NOT include a) account names.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) date of the transaction. c) the dollar amount of the transaction. d) account balance. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

110. Walker Company sells merchandise on credit to Felix Company. The entry for this transaction will include a a) credit to Accounts Payable for Walker Company. b) credit to Accounts Receivable for Felix Company. c) debit to Accounts Payable for Felix Company. d) debit to Accounts Receivable for Walker Company. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

111. Which of the following journal entries would NOT be considered a compound journal entry? a) Land .......................................................................................................... 60,500 Building ..................................................................................................... 105,500 Cash ................................................................................................... 166,000 b) Salaries Expense ....................................................................................... 1,500 Salaries Payable ................................................................................ 950 Cash ................................................................................................... 550 c) Equipment ................................................................................................ 10,500 Notes Payable ................................................................................... 10,500 d) Salaries Expense ....................................................................................... 550 Advertising Expense ................................................................................. 950 Cash ................................................................................................... 1,500 Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions CPA: Financial Reporting AACSB: Analytic

112. A chart of accounts is a) only necessary for manual systems. b) used only in companies with a complex business structure. c) the first step in designing an accounting system. d) a relatively simplistic way of classifying accounts. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic 113. The following is a record that contains all of the company’s accounts. a) journal b) tabular summary c) trial balance d) ledger Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

114. In the first month of operations, the total of the debit entries to the Cash account amounted to $900 and the total of the credit entries to the Cash account amounted to $500. The cash account has a a) $500 credit balance. b) $900 debit balance. c) $400 debit balance. d) $400 credit balance.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic 115. In the second month of operations, the total of the debit entries to the Cash account amounted to $900 and the total of the credit entries to the Cash account amounted to $500. The opening balance of the Cash account was $200. The Cash account has a a) $500 credit balance. b) $900 debit balance. c) $600 debit balance. d) $400 credit balance. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

116. In the second month of operations, the total of the debit entries to the Accounts Receivable account amounted to $500 and the total of the credit entries to the Accounts Receivable account amounted to $300. The opening balance of the Accounts Receivable account was $200. The Accounts Receivable account has a a) $500 debit balance. b) $300 debit balance. c) $400 debit balance. d) $0 balance. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

117. After a business transaction has been analyzed and entered in the book of original entry, the next step in the recording process is to transfer the information to a) the trial balance. b) owner's equity. c) ledger accounts. d) the journal. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic 118. After transaction information has been recorded in the journal, it is transferred to the a) trial balance. b) balance sheet. c) posting journal. d) ledger. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

119. The final step in the recording process is to transfer the journal information to the a) trial balance. b) financial statements. c) ledger. d) general journal. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

120. A chart of accounts does NOT include a) account balances. b) account numbers. c) account titles. d) list of all accounts. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

121. A chart of accounts for a company a) is a graph of the financial position of the company. b) indicates the amount of profit or loss for the period. c) lists the accounts and account numbers that identify their location in the ledger. d) shows the balance of each account in the general ledger. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic 122. A numbering system for a chart of accounts a) is prescribed by GAAP. b) is uniform for all businesses. c) usually starts with income statement accounts. d) usually starts with balance sheet accounts. Answer: d Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

123. The first step in designing an accounting system is the creation of the a) general ledger. b) general journal. c) trial balance. d) chart of accounts. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

124. For a sole proprietorship, the usual ordering of accounts in the general ledger is a) assets, liabilities, owner's capital, owner’s drawings, revenues, and expenses. b) assets, liabilities, owner’s drawings, owner's capital, expenses, and revenues. c) liabilities, assets, owner's capital, revenues, expenses, and owner’s drawings. d) owners' capital, assets, liabilities, owner’s drawings, expenses, and revenues. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

125. Management could determine the amounts due from customers by examining which ledger account? a) Service Revenue b) Accounts Payable c) Accounts Receivable d) Cash

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic 126. Management could determine the amounts owing to suppliers by examining which ledger account? a) Supplies b) Cash c) Accounts Payable d) Supplies Expense Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

127. The ledger accounts should be arranged in a) chronological order. b) alphabetical order. c) statement order. d) debit accounts first and then credit accounts. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

128. A three-column form of account is so named because it has columns for a) debit, credit, and account name. b) debit, credit, and reference.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) debit, credit, and balance. d) debit, credit, and date. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

129. The procedure of transferring journal entries to the ledger accounts is called a) journalizing. b) analyzing. c) reporting. d) posting. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

130. Posting a) is only done in a manual accounting system. b) accumulates the effects of journalized transactions in the individual accounts. c) involves transferring all debits and credits on a journal page to the trial balance. d) is accomplished by examining ledger accounts and seeing which ones need updating. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

131. After journal entries are posted, the reference column

Test Bank for Accounting Principles, Ninth Canadian Edition

a) of the general journal will show the account balance. b) of the general ledger will show journal page numbers. c) of the general journal will show "Dr" or "Cr." d) of the general ledger will show account numbers. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic 132. Posting to the general ledger in a manual accounting system is usually performed a) when the accountant is in the office. b) when the transaction is recorded. c) when financial statements are being prepared. d) when the Canada Revenue Agency performs an audit. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

133. Which of the following is a correct numbering system to identify accounts within the chart of accounts? a) 101–Cash; 201–Accounts Payable; 301–K. Clarke, Capital; 401–Service Revenue b) 101–K. Clarke, Capital; 201–Service Revenue; 301–Cash; 401–Accounts Payable c) 101–Cash; 201–Service Revenue; 301–Accounts Payable; 401–K. Clarke, Capital d) 101–Accounts Payable; 201–K. Clarke, Capital; 301–Service Revenue; 401–Cash Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

134. Which of the following is typically NOT included within a manual record general ledger? a) transaction date b) explanation c) posting reference d) account balance Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

135. In the first month of operations, the total of the debit entries to the Accounts Receivable account was $1,000 and the total of the credit entries to the Accounts Receivable account was $600. In the second month of operations, the total of the debit entries to the Accounts Receivable account was $200 and the total of the credit entries to the Accounts Receivable account was $500. At the end of the second month, the Accounts Receivable account has a a) $100 credit balance. b) $2,300 debit balance. c) $300 credit balance. d) $100 debit balance. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

136. Three employees are hired to begin work on November 1. Each employee is to receive a weekly salary of $600 for a five-day workweek (Monday–Friday), payable every two weeks. The first payment will be on November 15. How much would be posted to the Salaries Expense account on November 1 and November 15, respectively? a) $0, $3,600 b) $1,200, $3,600 c) $3,600, $0 d) $0, $1,200

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic 137. The beginning cash balance on November 1 was $12,500 and the ending cash balance on November 30 was $6,200. During the period, the company posted two transactions to the account, including a customer collection of $2,100. What was the other posting to the account? a) debit $20,800 b) debit $16,600 c) credit $8,400 d) credit $4,200 Answer: c Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

138. The beginning accounts payable balance on August 1 was $3,200 and the ending accounts payable balance was $7,300. During the period, the company posted three transactions to the account, including a payment to a supplier for $350 and a purchase on account for $425. What was the other posting to the account? a) credit $4,025 b) debit $3,325 c) credit $4,175 d) credit $4,100 Answer: a Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

139. Assume the following journal entries were posted for Betty Rogers in her first month of operations: Jan. 1 Cash ................................................................................................... 3,000 Accounts Receivable ......................................................................... 500 Service Revenue ........................................................................ Jan. 7 Cash ................................................................................................... 300 Service Revenue ........................................................................ Jan. 10 Supplies............................................................................................. 400 Cash ........................................................................................... What would be the balance in the Cash account at the end of the first month? a) credit $2,300 b) debit $3,100 c) credit $3,700 d) debit $2,900

3,500 300 400

Answer: d Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger CPA: Financial Reporting AACSB: Analytic

140. Brice Building Services showed the following account balances at the end of 2024: Cash ......................................................... $15,500 Accounts Receivable ............................... 5,250 Accounts Payable .................................... 4,150 Unearned Revenue .................................. 300 Service Revenue ...................................... 28,000 Brice, Capital ........................................... 17,875 Brice, Withdrawals .................................. 15,500 Supplies ................................................... 700 Salaries Expense...................................... 11,250 Utilities Expense ...................................... 2,125 Assuming all accounts have normal balances, what are the totals for the debit and credit columns in the trial balance? a) $50,025 b) $50,325 c) $34,825 d) $32,450 Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic 141. Robinson’s Handy Services showed the following account balances at the end of 2024: Cash ......................................................... $31,000 Accounts Receivable ............................... 10,500 Accounts Payable .................................... 7,600 Unearned Revenue .................................. 600 Service Revenue ...................................... 56,000 Robinson, Capital .................................... 35,750 Robinson, Withdrawals ........................... 31,000 Supplies ................................................... 1,400 Salaries Expense...................................... 22,500 Utilities Expense ...................................... 4,250 Robinson’s accountant made an error and did not post a credit to Accounts Payable for $700. If the correction is made, what would be the totals for the debit and credit columns in the trial balance? a) $99,950 b) $101,350 c) $99,250 d) $100,650 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic 142. List the following accounts in the correct order on a trial balance: Accounts Payable, Salaries Expense, Cash, Owner’s Capital, and Service Revenue. a) Owner’s Capital, Cash, Accounts Payable, Salaries Expense, Service Revenue b) Accounts Payable, Salaries Expense, Owner’s Capital, Service Revenue, Cash c) Cash, Accounts Payable, Owner’s Capital, Service Revenue, Salaries Expense d) Service Revenue, Salaries Expense, Cash, Owner’s Capital, Accounts Payable Answer: c Bloomcode: Application

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic 143. Crusoe Smith is the accountant for the Robinson Island Association. He has just prepared the association’s trial balance and discovered that the total debits are $40,185 and total credits are $40,585. Smith has likely made which of the following errors? a) Posted the journal entries to the wrong accounts. b) Posted a debit as a credit. c) Transposed two numbers during posting. d) Posted a credit as a debit. Answer: b Bloomcode: Evaluation Difficulty: Hard Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

144. The following trial balance prepared for Loomie Craft by the company’s accountant does not balance: Debit Credit Cash ......................................................... $14,000 Accounts receivable ................................ 1,500 Supplies ................................................... 400 Accounts payable .................................... 600 Unearned revenue................................... $ 500 P. Peppermint, capital ............................ 15,000 P. Peppermint, drawings ........................ Service revenue ....................................... 1,200 Salaries expense ...................................... 1,400 __________ Totals ............................................... $17,900 $16,700 What is the likely error? a) Posted the journal entries to the wrong accounts. b) Forgotten to make a journal entry. c) Transposed two numbers during posting. d) Entered a balance in the wrong column. Answer: d Bloomcode: Analysis

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

145. A trial balance does NOT include a) account names. b) account balances. c) journal entry details. d) date of trial balance. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

146. The following types of error(s) still allow the trial balance debit and credit columns to be equal. a) missed entries b) transposed numbers c) addition errors d) omitted accounts Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

147. A listing of the balances of all assets, liabilities, and owner's equity accounts is called a a) compound entry. b) general journal. c) trial balance. d) chart of accounts. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

148. A list of accounts and their balances at a given time is called a) a journal. b) a posting. c) a trial balance. d) an income statement. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

149. If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates a) no errors have been made. b) no errors can be discovered. c) all entries have been posted. d) the mathematical equality of the accounting equation. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic 150. A trial balance is a listing of a) transactions in a journal. b) the chart of accounts. c) general ledger accounts and balances. d) the totals from the journal pages.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic 151. Customarily, a trial balance in a manual system is prepared a) at the end of each day. b) after each journal entry is posted. c) at the end of an accounting period. d) only at the inception of the business. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

152. A trial balance would help in detecting which one of the following errors? a) a transaction that is not journalized b) a journal entry that is posted twice c) offsetting errors made in recording the transaction d) a transposition error when transferring the debit side of a journal entry to the ledger Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

153. Sebastian Piel is the accountant for the Canadian Athletic Association. He has just prepared the association’s trial balance and discovered that the total debits are $9,257 and total credits are $9,230. Sebastian has likely made which of the following errors?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) posted the journal entries to the wrong accounts b) posted a debit as a credit c) transposed two numbers during posting d) forgotten to make a journal entry Answer: c Bloomcode: Evaluation Difficulty: Hard Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic 154. Ladybug Creamery is producing its first financial statements for its bank. The trial balance does NOT balance. The company should a) create a new account called “Suspense” and use it to balance the trial balance. b) give the incorrect trial balance to the bank. c) ask the bank for more time to find the error. d) increase one of the larger accounts so that the trial balance will balance. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic 155. Frank’s Sports Adventures has hired a new accountant. When she reviewed the financial statements for the previous year, she found a significant error which would mean that the statements were wrong. She should NOT a) create a new account called “Suspense” and use it to correct the error. b) notify the management of the company immediately of the problem. c) research the journal entries to try and find the error. d) review all of the transactions for the past year for reasonableness. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

156. Flinn’s Forest Services showed the following account balances at the end of 2024: Cash ......................................................... $ 62,000 Accounts Receivable ............................... 21,000 Accounts Payable .................................... 16,600 Unearned Revenue .................................. 1,200 Service Revenue ...................................... 112,000 Flinn, Capital ........................................... 71,500 Flinn, Withdrawals................................... 62,000 Supplies ................................................... 2,800 Salaries Expense...................................... 45,000 Utilities Expense ...................................... 8,500 Assuming all accounts have normal balances, what are the totals for the debit and credit columns in the trial balance? a) $201,300 b) $200,100 c) $139,300 d) $129,800 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic 157. Which of the following is NOT a valid reason for a trial balance to be considered “out of balance”? a) an error in copying an account balance from the ledger to the trial balance b) a transposition error c) posting equally to both sides of an entry d) posting only one side of an entry Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Account Normal account balance Debit Revenue account Compound entry

F. G. H. I. J.

158. The side that increases the account balance.

Journal Posting Chart of accounts Trial balance Simple entry

____

Answer: B 159. An accounting record of increases and decreases in specific assets, liabilities, and owner's equity items.

____

Answer: A

160. Left side of an account.

____

Answer: C

161. Has a normal credit balance.

____

Answer: D

162. An entry that involves three or more accounts.

____

Answer: E

163. An entry that involves only two accounts.

____

Answer: J

164. A book of original entry. Answer: F

____

Test Bank for Accounting Principles, Ninth Canadian Edition

165. A list of all the accounts used by an enterprise.

____

Answer: H

166. Transferring journal entries to ledger accounts.

____

Answer: G

167. A list of accounts and their balances at a given time.

____

Answer: I Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe how accounts, debits, and credits are used to record business transactions. Section Reference: The Account Learning Objective: State how a journal is used in the recording process and journalize transactions. Section Reference: Analyzing and Recording Transactions Learning Objective: Explain how a ledger helps in the recording process and post transactions. Section Reference: The Ledger Learning Objective: Prepare a trial balance. Section Reference: The Trial Balance CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 3 ADJUSTING THE ACCOUNTS CHAPTER STUDY OBJECTIVES 1. Explain accrual basis accounting, and when to recognize revenues and expenses. In order to provide timely information, accountants divide the life of a business into specific time periods. Therefore, it is important to record transactions in the correct time period. Under accrual basis accounting, events that change a company’s financial statements are recorded in the periods in which the events occur, rather than in the periods in which the company receives or pays cash. The revenue recognition principle provides guidance about when to recognize revenues. In general, revenues are recorded when the goods are delivered or services are performed. Expenses are recorded in the same period as revenue is recognized, if there is a direct association between the revenues and expenses. If there is no association between revenues and expenses, expenses are recorded in the period they are incurred. 2. Describe adjusting entries and prepare adjusting entries for prepayments. Prepayments are either prepaid expenses or unearned revenues. Adjusting entries for prepayments record the portion of the prepayment that applies to the expense or revenue of the current accounting period. The adjusting entry for prepaid expenses debits (increases) an expense account and credits (decreases) an asset account. For a long-lived asset, the contra asset account Accumulated Depreciation is used instead of crediting the asset account directly. The adjusting entry for unearned revenues debits (decreases) a liability account and credits (increases) a revenue account. 3. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues and expenses that apply to the current accounting period and that have not yet been recognized through daily journal entries. The adjusting entry for accrued revenue debits (increases) a receivable account and credits (increases) a revenue account. The adjusting entry for an accrued expense debits (increases) an expense account and credits (increases) a liability account. 4. Describe the nature and purpose of an adjusted trial balance, and prepare one. An adjusted trial balance shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. It proves that the total of the accounts with debit balances is still equal to the total of the accounts with credit balances after the adjustments have been posted. Financial statements are prepared from an adjusted trial balance in the following order: (1) income statement, (2) statement of owner’s equity, and (3) balance sheet.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 On December 31, 2024, Eagle Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed profit of $40,000. The incorrect balance sheet showed total assets, $130,000; total liabilities, $60,000; and owner’s equity, $70,000. The data for the three adjusting entries were: 1. Depreciation of $9,000 was not recorded on equipment. 2. Salaries amounting to $10,000 for the last two days in December were not paid and not recorded. The next payroll will be in January. 3. Rent of $7,000 was paid for two months in advance on December 1. The entire amount was debited to Prepaid Rent when paid. Instructions Complete the following table to correct the financial statement amounts shown (indicate deductions with parentheses): Item Incorrect balances Effects of: Depreciation

Profit $40,000

Total Assets $130,000

Total Liabilities $60,000

Owner’s Equity $70,000

Item Incorrect balances Effects of: Depreciation

Profit $40,000

Total Assets $130,000

Total Liabilities $60,000

Owner’s Equity $70,000

(9,000)

(9,000)

Salaries

(10,000)

Rent

(3,500)

Correct Balances

$17,500

Salaries Rent Correct Balances Solution 1 (10 min.)

Bloomcode: Application Difficulty: Medium

(9,000) 10,000

(10,000)

(3,500)

_______

(3,500)

$117,500

$70,000

$47,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic Exercise 2 The following situations are independent: 1. Lisa’s Drywall Installation completes a $4,000 contract, starting work on June 16, and completing the work on July 15. The home builder pays them $1,000 in advance on June 15, $2,600 on July 15, and the balance ($400) when the home is sold in September. 2. An interior designer signs a contract in December 2023 to provide design services to a home builder, related to decorating a new show home. The contract is valued at $25,000 and the designer receives a 10% down payment upon signing the contract. All design work is done during January 2024. On February 1, 2024, the show home opens to the public and the home builder pays the 90% balance remaining on the contract. 3. A lawyer has a meeting with a new client on April 15 and agrees to represent her in a legal case. The fee negotiated is to be based on the number of hours the lawyer spends on the case. At the end of the meeting, the client pays the lawyer $500 as a “retainer.” The case involves research and negotiations that take place in May. On June 2, the lawyer invoices the client for $3,200 and the client pays the balance due ($2,700) in two equal instalments on June 15 and July 15. 4. On January 1 an insurance company receives $4,200 for a one-year insurance policy that will expire on December 31. Instructions For each situation, state in which month(s) the revenue will be recognized and calculate how much is recognized in each month, and explain why. Solution 2 (10 min.) 1. Half the work is done in June, so ½ x $4,000 = $2,000 is recognized in June and the balance of $2,000 in July. 2.

The entire fee of $25,000 is recognized in January because that is when the design work is completed.

3.

The entire revenue of $3,200 should be recognized in May because that is when the services were rendered.

4.

The insurance company will recognize $350/month each month for 12 months ($4,200/12).

Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 3 The balance sheets of Evergreen Company include the following: Dec 31, 2024 Interest Receivable $6,300 Supplies 5,000 Salaries Payable 3,600 Unearned Revenue -0-

Dec 31, 2023 $ -03,500 3,800 4,000

The income statement for 2024 shows the following: Interest Revenue $20,400 Service Revenue 41,700 Supplies Expense 8,700 Salaries Expense 37,000 Instructions Calculate the following for 2024: a) Cash received for interest. b) Cash paid for supplies. c) Cash paid for salaries. d) Cash received for services. Solution 3 (15 min.) a) Cash received for interest = Interest Revenue Less: Interest Receivable Cash Received b)

Cash paid for supplies = Supplies Expense Less: Supplies (2023) Add: Supplies (2024) Cash Paid

c)

d)

Cash paid for salaries = Salaries Expense Add: Salaries Payable (2023)

$14,100 $20,400 6,300 $14,100

$ 8,700 3,500 5,200 5,000 $10,200

Less: Salaries Payable (2024) Cash Paid

$37,000 3,800 40,800 3,600 $37,200

Cash received for services = Service Revenue

$41,700

$10,200

$37,200

$37,700

Test Bank for Accounting Principles, Ninth Canadian Edition

Less: Unearned Revenue (2023) Cash Received

4,000 $37,700

Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic Exercise 4 Below are two independent scenarios: 1. KES Inc. is a public company and is required to follow IFRS. The company recently received $50,000 for work to be performed next quarter. The bookkeeper recorded this transaction as a Debit to Cash and a Credit to Revenue. 2. Victory Visors Ltd. is a small private company and follows ASPE. At the end of the year, the company has four days of unpaid and unrecorded salaries amounting to $5,600. To provide for these expenses, Victory records a Debit to Salaries Expense and a Credit to Salaries Payable. Instructions a) Determine the basis of accounting used (accrual basis or cash basis). b) Prepare the correct entry for the opposite basis of accounting. (i.e., if cash basis is currently used, you must prepare the entry that would be recorded under accrual basis accounting). Solution 4 a) 1. Cash basis accounting is used. 2. Accrual basis of accounting is used. b)

1. DR Cash CR Unearned Revenue 2. No entry would be recorded under cash basis until the actual expenses are paid.

Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic Exercise 5 You receive $90,000 in year 1 for a job to be started and completed in year 2. However, you purchase materials and supplies to prepare for the upcoming job. Materials and supplies purchased in year 1 cost $66,000. In year 2, you determine that you would need to purchase an additional $58,000 in supplies.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions Determine the profit for years 1 and 2 under both accrual and cash accounting. Solution 5

Revenue Supplies Profit/(Loss)

Cash Basis Yr1 Yr2 90,000 0 (66,000) (58,000) 24,000 (58,000)

Accrual Basis Yr1 Yr2 0 90,000 0 (124,000) 0 (34,000)

Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic Exercise 6 Umbrella & Associates, a well-established law firm, performed work and recognized $450,000 in revenues during the year. The total cash collected from customers in the year was $560,000. The firm incurred expenses of $217,500, but had not paid for $29,170 of them at year end. In addition, Umbrella & Associates prepaid $34,000 for expenses that would be incurred the next year. Instructions Calculate Umbrella & Associates profit under: a) the cash basis of accounting b) the accrual basis of accounting Solution 6 (5 min.) a) Cash basis of accounting: Revenues—cash collected........................................................................... Less: Expenses—cash paid ($217,500 – $29,170 + $34,000) ....................... Profit for the year.........................................................................................

$560,000 222,330 $337,670

b) Accrual basis of accounting: Revenues recognized .................................................................................. Less: Expenses incurred .............................................................................. Profit for the year.........................................................................................

$450,000 217,500 $232,500

Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic Exercise 7 For each situation, state the correct revenue or expense amount to record each year following the revenue/expenses recognition criteria. 1. Revenue recognized in 2024 will be collected in 2025 in the amount of $22,500. 2. Received bills in 2025 for $16,300 for expenses incurred in 2024. 3. Consulting services performed in 2024 for $35,000. However, client only paid $2,000 in 2024 and will pay the remainder in 2025. 4. Purchased supplies for $13,000 for a job to be started and completed in 2025. 5. Purchased supplies for $2,300 for a job that was completed in 2024. 6. Advance payment of $88,000 received in 2024 for a contract to be completed equally in 2025 and 2026. 7. Purchased supplies for $40,000 in 2025 for a new contract that will begin and end in 2026. Solution 7 1.

Revenue

2024 22,500

2.

Expense

16,300

3.

Revenue

35,000

4.

Expense

5.

Expense

6.

Revenue

7.

Expense

2025

2026

13,000 2,300 44,000

44,000 40,000

Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic Exercise 8 Telecom Company prepared the following income statement using the cash basis of accounting: TELECOM COMPANY

Test Bank for Accounting Principles, Ninth Canadian Edition

Income Statement, Cash Basis For the Year Ended December 31, 2024 Service revenue (does not include $40,000 of services performed on account in 2024 because the collection will not be until 2025) ................................................ Expenses (does not include $25,000 of expenses incurred on account because payment will not be made until 2025) ......................................................................... Profit for the year .................................................................................................................

$370,000 220,000 $150,000

Additional data: 1. Depreciation on a company automobile for the year amounted to $6,000. This amount is not included in the expenses above. 2. On July 1, 2024, paid for a one-year insurance policy on the automobile amounting to $1,800. This amount is included in the expenses above. Instructions a) Prepare Telecom Company’s income statement on the accrual basis in conformity with generally accepted accounting principles. Show calculations and explain each change. b) Explain which basis (cash or accrual) provides a better measure of profit. Solution 8 (15 min.) a)

TELECOM COMPANY Income Statement For the Year Ended December 31, 2024

Service revenue ............................................................................................................ Expenses ....................................................................................................................... Profit for the year..........................................................................................................

$410,000 250,100 $159,900

Calculations:

b)

Service revenue Cash basis ..................................................................................................................... Include $40,000 for services performed on account in order to reflect revenue in the period when the service is performed ................... Total ..............................................................................................................................

40,000 $410,000

Expenses Cash basis ..................................................................................................................... Expenses incurred, not yet paid, to reflect in period incurred ................................... Depreciation expense................................................................................................... Less: portion of insurance that relates to Jan–June (1/2 x $1,800) ........................... Total ..............................................................................................................................

$220,000 25,000 6,000 (900) $250,100

$370,000

The accrual basis of accounting provides a better measure of profit than the cash basis. The

Test Bank for Accounting Principles, Ninth Canadian Edition

accrual basis is required under generally accepted accounting principles and recognizes revenues when there is an increase in assets or a decrease in liabilities and expenses are recognized when there is a decrease in assets or an increase in liabilities as a result of the company’s business activities. Revenues and expenses recognized under the accrual basis are related to the economic environment in which they occur and thus allow trends to be more meaningfully interpreted. The cash basis often fails to recognize revenue in the period when there is an increase in owner’s equity, and expenses when there is a decrease in owner’s equity. Additionally, expenses are not matched with revenues; when there is a direct link between the revenue recognized and the expenses, they should all be recognized in the same accounting period. Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic Exercise 9 The Fox Company prepared the following income statement using the cash basis of accounting: THE FOX COMPANY Income Statement, Cash Basis For the Year Ended December 31, 2024 Service revenue .................................................................................................................... Expenses ............................................................................................................................... Profit for the year .................................................................................................................

$460,000 220,000 $240,000

Additional data: 1. Service revenue includes $40,000 collected from a customer for whom services were provided in 2023, and who was billed in 2023. 2. There are an additional $15,000 of expenses that were incurred on account, for which payment will not be made until 2025. 3. Depreciation on a company automobile for the year amounted to $7,000. This amount is not included in the expenses above. 4. On December 1, 2024, paid $1,600 for two months’ rent (December and January). This amount is included in the expenses above. Instructions a) Prepare Fox’s income statement on the accrual basis in conformity with generally accepted accounting principles. Show calculations and explain each change.

Test Bank for Accounting Principles, Ninth Canadian Edition

b)

Explain which basis (cash or accrual) provides a better measure of profit.

Solution 9 (15 min.) a)

THE FOX COMPANY Income Statement For the Year Ended December 31, 2024

Service revenue ............................................................................................................ Expenses ....................................................................................................................... Profit for the year.......................................................................................................... Calculations: Service revenue, cash basis ......................................................................................... Less amount related to payment on services provided in prior year. In accordance with GAAP, this revenue should be included in 2023. ......................... Service revenue, accrual basis .................................................................................... Expenses, cash basis .................................................................................................... Plus expenses incurred on account – these should be recognized in the period in which they are incurred, not when they are paid ........................................ Depreciation expense should be recorded, even though not a cash expense........... Less: Rent for January 2025 will be recorded as an expense in the year to which the expense relates ....................................................................................... Expenses, accrual basis ............................................................................................... b)

$420,000 241,200 $178,800

$460,000 (40,000) $420,000 $220,000 15,000 7,000 (800) $241,200

The accrual basis of accounting provides a better measure of profit than the cash basis. The accrual basis is required under generally accepted accounting principles and recognizes revenues when there is an increase in assets or a decrease in liabilities and expenses are recognized when there is a decrease in assets or an increase in liabilities as a result of the company’s business activities. Revenues and expenses recognized under the accrual basis are related to the economic environment in which they occur and thus allow trends to be more meaningfully interpreted. The cash basis often fails to recognize revenue in the period when there is an increase in owner’s equity, and expenses when there is a decrease in owner’s equity.. Additionally, expenses are not matched with revenues; when there is a direct link between the revenue recognized and the expenses, they should all be recognized in the same accounting period.

Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 10 Before month-end adjustments are made, the August 31 trial balance of Mango Enterprise contains revenue of $18,000 and expenses of $8,800. Adjustments are necessary for the following items: Depreciation for August is $2,600. Revenue for services provided but not yet billed is $5,600. Accrued interest expense is $1,400. Revenue collected in advance that the service has now been performed is $7,000. Portion of prepaid insurance expired during August is $800. Instructions Calculate the correct profit for Mango for August. Solution 10 (5 min.) Profit before adjustments ($18,000 – $8,800) ................................. Add: Unearned revenues ................................................................ Accrued revenues................................................................... ................................................................................................ Subtract: Depreciation expense .................................................. Interest expense .......................................................... Insurance expense ....................................................... Profit for the month after adjustments ...........................................

$7,000 5,600 2,600 1,400 800

$ 9,200 12,600 21,800

4,800 $17,000

Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic Exercise 11 The Fluffy Bunnies, a semi-professional baseball team, prepares financial statements on a monthly basis. Its season begins in April, but in February the team engaged in the following transactions: 1. Paid $200,000 to the city of Toronto as advance rent for use of a stadium for the six-month period April 1 through September 30. 2. Collected $600,000 cash from sales of season tickets for the team's 20 home games. This amount was credited to Unearned Revenue. During the month of April, the Fluffy Bunnies played four home games and three road games. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare the adjusting entries required at April 30 for the transactions above. Solution 11 (5 min.) 1. Rent Expense ............................................................................ 33,333 Prepaid Rent ..................................................................... ($200,000 ÷ 6 = $33,333) 2.

Unearned Revenue ................................................................... 120,000 Revenue............................................................................. ($600,000 ÷ 20 = $30,000; $30,000 × 4 = $120,000)

33,333

120,000

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic Exercise 12 On December 1, 2024, Pitless Corp., a privately owned corporation, started operations. They signed a large contract to build a factory over a two-year time period. Their client Mr. Falconi paid them $150,000 in advance. Pitless will begin construction in two months’ time. In order to begin construction, Pitless purchased the following items: 1. Equipment for $160,000 on December 1, 2024, which was purchased on account. They expect this equipment to be useful for seven years. 2. A utility vehicle $36,000, which was purchased on account on December 1, 2024, to be used for 11 years. 3. On December 15, 2024, Pitless got an exceptional price on a plot of land. The land cost $275,000 and will be held for 10 years. At that point Pitless will expand operations and possibly change locations. The purchase was made for cash. 4. Pitless paid cash for two insurance policies: policy A obtained December 1, 2024 in the amount of $12,500 for 24 months and policy B obtained December 15, 2024 for $7,500 for 16 months. Pitless also paid $36,000 to rent a dump truck on December 1, 2024, to be used in construction for the next two years. Instructions a) Record all the transactions, including the Falconi payment. b) Prepare the year-end adjusting entries. (prepare separate entries for each insurance policy and round to the nearest dollar) c) Show how the Property, Plant, and Equipment will be reported on the balance sheet as at December 31, 2024. Solution 12 (5 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

a) Dec 1

Cash .............................................................................. 150,000 Unearned Revenue ..............................................

150,000

Dec 1

Equipment ................................................................... 160,000 Accounts Payable .................................................

160,000

Dec 1

Vehicles ........................................................................ Accounts Payable .................................................

36,000

36,000

Dec 1

Prepaid Insurance ....................................................... Cash ......................................................................

12,500

Prepaid Rent ................................................................ Cash ......................................................................

36,000

Dec 1

12,500

36,000

Dec 15

Land.............................................................................. 275,000 Cash ......................................................................

Dec 15

Prepaid Insurance........................................................ Cash ......................................................................

7,500

b) Depreciation Expense ...................................................................... 1,905 Accumulated Depreciation—Equipment .............................. $160,000/7 years = $22,857 x 1/12 = $1,905 depreciation per month Depreciation Expense ..................................................................... 273 Accumulated Depreciation—Vehicles ................................... $36,000/11years = $3,273 x 1/12 = $273 depreciation per month

275,000

7,500

1,905

273

No depreciation on Land. No entry to be made. Insurance Expense .......................................................................... Prepaid Insurance .................................................................. $12,500/24 months = $521 per month

521

Insurance Expense ........................................................................... Prepaid Insurance .................................................................. $7,500/16 months = $469 x 15/30 days = $235

235

Rent expense .................................................................................... Prepaid Rent...........................................................................

1,500

521

235

1,500

Test Bank for Accounting Principles, Ninth Canadian Edition

$36,000/24 months = $1,500 per month c) Property, Plant, and Equipment Land ..................................................................................................

$275,000

Equipment ........................................................................................ 160,000 Accumulated depreciation—equipment ......................................... (1,905)

158,095

Vehicles ............................................................................................. Accumulated depreciation—vehicles ..............................................

__35,727

36,000 (273)

Total ..................................................................................................

$468,822

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic Exercise 13 Beaver Zoo Ltd. operates a drive-through tourist attraction in Manitoba. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances from the April 30 adjusted trial balance: Prepaid Rent ............................................................................. $ 8,000 Equipment ................................................................................ 30,000 Accumulated Depreciation—Equipment ................................. 5,500 Unearned Revenue ................................................................... 500 Data used in preparing adjusting entries was: 1. Three months' rent had been prepaid on April 1. 2. The equipment is being depreciated over a five-year period. 3. The unearned revenue represents tickets sold for future zoo visits. The tickets were sold at $4 each on April 1. During April, 25 of the tickets were used by customers. Instructions a) Calculate the following: 1. Monthly rent expense 2. The age of the equipment in months 3. The number of tickets sold on April 1 b) Prepare the adjusting entries that were made by Beaver Zoo on April 30. Solution 13 (15 min.) a)

Test Bank for Accounting Principles, Ninth Canadian Edition

1.

$4,000. The $8,000 balance on the adjusted trial balance reflects two months remaining on the prepaid lease. This indicates that the monthly lease is $4,000.

2.

The equipment is 11 months old. By dividing annual depreciation ($6,000) by 12, the monthly depreciation expense is $500. The accumulated depreciation account shows $5,500, which means that $5,500 of the cost of the equipment has been allocated to expense. The company estimates that it has benefited from $5,500 of the total capital cost to date.

3.

150 tickets were originally sold. Twenty-five tickets were used in April at $4 each. The adjusted trial balance shows a balance of $500 indicating that 125 tickets are still outstanding. By adding the 25 used in April to the 125 still remaining to be used, 150 tickets must have been sold on April 1.

b) 1.

Rent Expense ............................................................................ Prepaid Rent .....................................................................

4,000

2.

Depreciation Expense............................................................... Accumulated Depreciation—Equipment .........................

500

3.

Unearned Revenue ................................................................... Revenue............................................................................. (25 × $4 = $100)

100

4,000

500

100

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic Exercise 14 For the following independent situations, prepare the required adjusting entries. 1. Larry’s Television Restoration Company prepares monthly financial statements. On July 1, the Supplies account had a balance of $3,000. During July, additional supplies were purchased for $3,800 and that amount was debited to Supplies. On July 31, a physical count of supplies revealed that there was $2,700 on hand. Prepare the adjusting entry that Larry should make on July 31. 2. Amberville Lumber Co. prepares monthly financial statements. On September 1, a cheque for $9,600 was received from a tenant for six months’ rent. The full amount was credited to Unearned Revenue. Prepare the adjusting entry the company should make on September 30. Solution 14 (5 min.) 1. July 31 Supplies Expense .................................................... Supplies ...........................................................

4,100

4,100

Test Bank for Accounting Principles, Ninth Canadian Edition

To adjust supplies to actual. ($3,000 + $3,800 – $2,700) 2.

Sept 30

Unearned Revenue ................................................. Rent Revenue ($9,600 x 1/6) ........................... To record rental revenue.

1,600

1,600

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic Exercise 15 Franklin Company accumulates the following adjustment data at December 31: 1. Services of $1,100 have been performed; the $1,100 was collected in advance and recorded as unearned revenue. 2. Salaries of $600 are unpaid. 3. Prepaid rent totalling $450 has expired. 4. Supplies of $550 have been used. 5. Services provided but unbilled totals $750. 6. Utility expenses of $300 are unpaid. 7. Interest of $250 has accrued on a note payable. Instructions a) For each of the above items, indicate: i. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense). ii. The account relationship (asset/liability, liability/revenue, etc.). iii. The status of account balances before adjustment (understatement or overstatement). iv. The accounts that will be affected. v. The profit effect. Prepare your answer in the tabular form presented below. The first item is shown for illustrative purposes. a)

1. b)

Account Balances Before Adjustment Profit Effect Type of Account (Understatement Increase Adjustment Relationship or Overstatement) Accounts Affected (Decrease) Unearned revenue L/R Liab. O Unearned Revenue Rev. U Service Revenue 1,100 Assume profit before the adjustments listed above was $21,500. What is the adjusted profit?

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 15 (20 min.) a)

1.

Type of Account Adjustment Relationship Unearned revenue L/R

Account Balances Before Adjustment (Understatement or Overstatement) Liab. O Rev. U

Accounts Affected Unearned Revenue Service Revenue

Profit Effect Increase (Decrease) 1,100

2.

Accrued expense

E/L

Exp. U Liab. U

Salaries Expense Salaries Payable

(600)

3.

Prepaid expense

E/A

Exp. U Asset O

Rent Expense Prepaid Rent

(450)

4.

Prepaid expense

E/A

Exp. U Asset O

Supplies Expense Supplies

(550)

5.

Accrued revenue

A/R

Asset U Rev. U

Accounts Receivable Service Revenue

750

6.

Accrued expense

E/L

Exp. U Liab. U

Utilities Expense Accounts Payable

(300)

7.

Accrued expense

E/L

Exp. U Liab. U

Interest Expense Interest Payable

(250)

Codes: A = Asset L = Liability E = Expense b)

R = Revenue O = Overstatement U = Understatement

Profit before adjustments ................................................... 1. Additional revenue ......................................................... 2. Salaries expense ............................................................. 3. Rent expense .................................................................. 4. Supplies expense ............................................................ 5. Additional revenue ......................................................... 6. Utilities expense ............................................................. 7. Interest expense ............................................................. Adjusted profit .....................................................................

$21,500 1,100 (600) (450) (550) 750 (300) (250) $21,200

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 16 Ellis Company accumulates the following adjustment data at December 31: 1. Services of $800 have been provided; all of the $800 was collected in advance. 2. Salaries of $600 are unpaid. 3. Prepaid rent totalling $450 has expired. 4. Supplies of $550 have been used. 5. Services provided but unbilled total $750. 6. Utility expenses of $200 are unpaid. 7. Interest of $250 has accrued on a note payable. 8. Depreciation of equipment is $300. Instructions a) For each of the above items indicate: i. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense). ii. The account relationship (asset/liability, liability/revenue, etc.). iii. The status of account balances before adjustment (understatement or overstatement). iv. The accounts that will be affected. v. The profit effect. Prepare your answer in the tabular form presented below. The first item is shown for illustrative purposes. a)

1. b)

Account Balances Before Adjustment Profit Effect Type of Account (Understatement Increase Adjustment Relationship or Overstatement) Accounts Affected (Decrease) Unearned revenue L/R Liab. O Unearned Revenue Rev. U Service Revenue 800 Assume profit before the adjustments listed above was $16,500. What is the adjusted profit?

Solution 16 (20 min.) a)

1.

Type of Account Adjustment Relationship Unearned revenue L/R

Account Balances Before Adjustment (Understatement or Overstatement) Liab. O Rev. U

Accounts Affected Unearned Revenue Service Revenue

Profit Effect Increase (Decrease) 800

Test Bank for Accounting Principles, Ninth Canadian Edition

2.

Accrued expense

E/L

Exp. U Liab. U

Salaries Expense Salaries Payable

(600)

3.

Prepaid expense

E/A

Exp. U Asset O

Rent Expense Prepaid Rent

(450)

4.

Prepaid expense

E/A

Exp. U Asset O

Supplies Expense Supplies

(550)

5.

Accrued revenue

A/R

Asset U Rev. U

Accounts Receivable Service Revenue

750

6.

Accrued expense

E/L

Exp. U Liab. U

Utilities Expense Accounts Payable

(200)

7.

Accrued expense

E/L

Exp. U Liab. U

Interest Expense Interest Payable

(250)

8.

Prepaid expense

E/A

Exp. U Asset O

Depreciation Expense Accum. Depreciation, Equipment

(300)

Codes: A = Asset L = Liability E = Expense b)

R = Revenue O = Overstatement U = Understatement

Profit before adjustments ................................................... 1. Additional revenue ......................................................... 2. Salaries expense ............................................................. 3. Rent expense .................................................................. 4. Supplies expense ............................................................ 5. Additional revenue ......................................................... 6. Utilities expense ............................................................. 7. Interest expense ............................................................. 8. Depreciation expense..................................................... Adjusted profit .....................................................................

$16,500 800 (600) (450) (550) 750 (200) (250) (300) $15,700

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 17 One part of an adjusting entry is given below: 1. Unearned Revenue is debited. 2. Prepaid Rent is credited. 3. Accounts Receivable is debited. 4. Depreciation Expense is debited. 5. Utilities Expense is debited. 6. Interest Payable is credited. 7. Service Revenue is credited (give two possible debit accounts). 8. Interest Receivable is debited. Instructions Indicate the account title for the other side of the entry. Solution 17 (5 min.) 1. Service Revenue 2.

Rent Expense

3. 4.

Service Revenue Accumulated Depreciation

5.

Utilities Payable

6.

Interest Expense

7.

Accounts Receivable or Unearned Revenue

8.

Interest Revenue

Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 18 The adjusted trial balance of Savana Company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate

Test Bank for Accounting Principles, Ninth Canadian Edition

a)

the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses), and b) the related account in the adjusting entry. a) b) Balance Sheet Account Type of Adjusting Entry Related Account 1. Supplies 2. Accounts Receivable 3. Prepaid Insurance 4. Accumulated Depreciation —Equipment 5. Interest Payable 6. Salaries Payable 7. Unearned Revenue Solution 18 (15 min.) Balance Sheet Account 1. Supplies

a) Type of Adjusting Entry Prepaid Expense

b) Related Account Supplies Expense

2.

Accounts Receivable

Accrued Revenue

Revenue

3.

Prepaid Insurance

Prepaid Expense

Insurance Expense

4.

Accumulated Depreciation —Equipment

Prepaid Expense

Depreciation Expense

5.

Interest Payable

Accrued Expense

Interest Expense

6.

Salaries Payable

Accrued Expense

Salaries Expense

7.

Unearned Revenue

Unearned Revenue

Revenue

Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 19 Pierson Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered.

Test Bank for Accounting Principles, Ninth Canadian Edition

PIERSON INSURANCE AGENCY Income Statement For the Month Ended June 30 Revenues Commission revenue ................................................................ Expenses Salaries expense ....................................................................... Advertising expense ................................................................. Rent expense ............................................................................ Depreciation expense............................................................... Total expenses .......................................................................... Profit for the month .........................................................................

$35,000 $6,000 800 4,200 2,800 13,800 $21,200

Additional data: When the income statement was prepared, the agency’s accountant neglected to take into consideration the following information: 1. A utility bill for $2,000 was received on the last day of the month for electric and gas service for the month of June. 2. A company insurance salesman sold a life insurance policy to a client for a premium of $28,000. The agency billed the client for the policy and is entitled to a commission of 20%. 3. Supplies on hand at the beginning of the month were $3,000. The agency purchased additional supplies during the month for $2,500 in cash and $2,200 of supplies were on hand at June 30. 4. The agency purchased a new car at the beginning of the month for $16,800 cash. The car is expected to have a useful life of four years. 5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5. Instructions Prepare a corrected income statement. Show calculations. Solution 19 (15 min.)

PIERSON INSURANCE AGENCY Income Statement For the Month Ended June 30

Revenues Commission revenue ($35,000 + $5,600) ................................. Expenses Salaries expense ($6,000 + $5,300) .......................................... $11,300 Advertising expense ................................................................. 800 Rent expense ............................................................................ 4,200 Depreciation expense ($2,800 + $350) ..................................... 3,150 Utilities expense ($0 + $2,000).................................................. 2,000 Supplies expense ($0 + $3,300) ................................................ 3,300 Total expenses ..................................................................

$40,600

24,750

Test Bank for Accounting Principles, Ninth Canadian Edition

Profit for the month .........................................................................

$15,850

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 20 Speedway Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered. SPEEDWAY INSURANCE AGENCY Income Statement For the Month Ended June 30 Revenues Commission revenue ................................................................ Expenses Salaries expense ....................................................................... $12,000 Advertising expense ................................................................. 800 Rent expense ............................................................................ 4,200 Depreciation expense............................................................... 2,800 Total expenses .......................................................................... Profit for the month .........................................................................

$40,000

19,800 $20,200

Additional data: When the income statement was prepared, the agency’s accountant neglected to take into consideration the following information: 1. A utility bill for $1,200 was received on the last day of the month for electric and gas service for the month of June. 2. A company insurance salesman sold a life insurance policy to a client for a premium of $28,000. The agency billed the client for the policy and is entitled to a commission of 20%. 3. Supplies on hand at the beginning of the month were $2,000. The agency purchased additional supplies during the month for $1,500 in cash and $2,200 of supplies were on hand at June 30. 4. The agency purchased a new car at the beginning of the month for $18,000 cash. The car will depreciate at $4,500 per year. 5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5. Instructions Prepare a corrected income statement. Show calculations.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 20 (15 min.)

SPEEDWAY INSURANCE AGENCY Income Statement For the Month Ended June 30

Revenues Commission revenue ($40,000 + $5,600) ................................. Expenses Salaries expense ($12,000 + $5,300) ........................................ $17,300 Advertising expense ................................................................. 800 Rent expense ............................................................................ 4,200 Depreciation expense ($2,800 + $375) ..................................... 3,175 Utilities expense ($0 + $1,200).................................................. 1,200 Supplies expense ($0 + $1,300) ................................................ 1,300 Total expenses .................................................................. Profit for the month..................................................................

$45,600

27,975 $17,625

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 21 Callison Company has an accounting fiscal year that ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred: Date Amount Monday June 28 $3,000 Tuesday June 29 3,800 Wednesday June 30 2,400 Thursday July 1 3,000 Friday July 2 2,400 The company also purchased a used car on June 1 for $6,000 cash. The vehicle has a useful life of five years. Instructions a) Prepare any necessary adjusting entries that should be made at year end on June 30. b) Prepare the journal entry to record the payment of the weekly payroll on July 2.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 21 (10 min.) a) June 30 Salaries Expense .......................................................... Salaries Payable ................................................... To accrue salaries incurred but not yet paid. June 30

b) July 2

9,200 9,200

Depreciation Expense .................................................. Accumulated Depreciation—Vehicles ................. To record depreciation. ($6,000 ÷ 5 yrs. × 1/12 = $100)

100

Salaries Payable........................................................... Salaries Expense .......................................................... Cash ...................................................................... To record payment of July 2 payroll.

9,200 5,400

100

14,600

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 22 Mason Flowers Company purchased a delivery truck (vehicles) on June 1 for $36,000, paying $16,000 cash and signing a 5%, two-month note for the remaining balance, interest to be paid at maturity. The truck is expected to have a six-year useful life. Mason Flowers Company prepares monthly financial statements. Instructions a) Prepare the journal entry to record the acquisition of the delivery truck on June 1. b) Prepare any adjusting entries that should be made on June 30 (round to the nearest dollar). c) Show how the delivery truck will be reflected on Mason Flowers Company's balance sheet on June 30. Solution 22 (10 min.) a) June 1 Vehicles ............................................................................ Cash ............................................................................ Notes Payable ............................................................ To record acquisition of delivery truck and signing of a two-month, 5% note.

36,000

16,000 20,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) June 30

30

Depreciation Expense ........................................................ Accumulated Depreciation—Vehicles ....................... To record monthly depreciation. $36,000 ÷ 6 = $6,000; $6,000 ÷ 12 = $500/month

500

Interest Expense ................................................................ Interest Payable ......................................................... To accrue interest on notes payable. $20,000 × 5% × 1/12 = $83

83

500

c) Assets Vehicles ........................................................................................... $36,000 Less: accumulated depreciation – Vehicles................................... 500

83

$35,500

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 23 In July Florenceville Potatoes signed a $50,000 note receivable for three years at 5%. Interest is due monthly on the 20th of each month. Florenceville has a December 31 year end, and adjusting entries are prepared at year end only. For calculation purposes assume each month has 30 days, and round amounts to the nearest dollar. Instructions Prepare the journal entries to record the following: a) receipt of interest on December 20 (round to the nearest dollar) b) the adjusting entry to accrue interest at December 31 c) receipt of interest on January 20 Solution 23 (10 min.) a) Dec 20 Cash .............................................................................. Interest Revenue ($50,000 x 5%/12) .................... b) Dec 31

Interest Receivable ($208 x 10/30) ..............................

208

69

208

Test Bank for Accounting Principles, Ninth Canadian Edition

Interest Revenue .................................................. c) Jan 20

Cash .............................................................................. Interest Receivable .............................................. Interest Revenue ($208 – $69) .............................

69

208

69 139

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 24 Jonah Company prepares annual financial statements. Below are some selected accounts and their balances in the September 30 trial balance before any adjustments have been made for the year ended September 30, 2024. JONAH COMPANY Trial Balance (Selected Accounts) September 30, 2024 Debit Credit Supplies ............................................................................................ $ 2,700 Prepaid Insurance ............................................................................ 5,400 Equipment ........................................................................................ 16,200 Accumulated Depreciation—Equipment......................................... $6,480 Unearned Revenue ........................................................................... 1,200 (Note: Debit column does not equal credit column because this is a partial listing of selected account balances.) An analysis of the account balances by the company's accountant provided the following additional information: 1. A physical count of supplies revealed $1,200 on hand on September 30. 2. A one-year life insurance policy was purchased on June 1 for $5,400. 3. Office equipment is expected to have a life of five years. Depreciation is recorded monthly. 4. The amount of rent received in advance that remains unearned at September 30 is $500. Instructions Prepare the adjusting entries that should be made by Jonah Company on September 30. Solution 24 (10 min.) 1. Supplies Expense ($2,700 – $1,200) ......................................... Supplies ............................................................

1,500

1,500

Test Bank for Accounting Principles, Ninth Canadian Edition

To record the amount of supplies used. 2.

3.

4.

Insurance Expense.................................................................... Prepaid Insurance ............................................................. To record insurance expired. ($5,400 ÷ 12 x 4)

1,800

Depreciation Expense............................................................... Accumulated Depreciation—Equipment ......................... To record monthly depreciation. ($16,200/5 x 1/12)

270

Unearned Revenue ................................................................... Rent Revenue .................................................................... To record rent revenue earned. ($1,200 – $500)

700

1,800

270

700

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 25 Harvey Auto Parts purchased new equipment on September 1 for $35,000, paying $10,000 cash and signing a 7%, 12-month note for the remaining balance, interest to be paid at maturity. The equipment is expected to have a 20-year useful life. Harvey Auto Parts prepares annual financial statements every December 31. Instructions a) Prepare the journal entry to record the acquisition of the equipment on September 1. b) Prepare any adjusting entries that should be made at year end, December 31 (round to the nearest dollar). c) Show how the equipment will be reflected on Harvey Auto Parts’ balance sheet on December 31. Solution 25 (10 min.) a) Sept 1 Equipment ......................................................................... Cash ............................................................................ Notes Payable ............................................................ To record acquisition of the equipment and signing of a 12-month, 7% note. b)

35,000

10,000 25,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Dec 31

31

Depreciation Expense ........................................................ Accumulated Depreciation—Equipment .................. To record monthly depreciation. $35,000 ÷ 20 = $1,750; $1,750 x 4/12 = $583 Interest Expense ................................................................ Interest Payable ......................................................... To accrue interest on notes payable. $25,000 × 7% × 4/12 = $583

583

583

583

583

c) Assets Equipment .............................................................................................. $35,000 Less: accumulated depreciation—equipment .............................. 583 $34,417 Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 26 One side of an adjusting entry is given below: 1. Interest Expense is debited. 2. Insurance Expense is debited. 3. Salaries Payable is credited. 4. Accumulated Depreciation – Equipment is credited. 5. Unearned Revenue is debited. 6. Interest Receivable is debited. 7. Accounts Receivable is debited. 8. Interest Payable is credited. Instructions Indicate the account title for the other side of the entry. Solution 26 (5 min.) 1. Interest Payable 2.

Prepaid Insurance

3.

Salaries Expense

Test Bank for Accounting Principles, Ninth Canadian Edition

4.

Depreciation Expense

5.

Revenue

6.

Interest Revenue

7.

Revenue

8.

Interest Expense

Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 27 Presented below are the trial balance and adjusted trial balance for Anger Company on December 31: ANGER COMPANY Trial Balance December 31

Cash Accounts receivable Prepaid insurance Supplies Equipment Accumulated depreciation— Equipment Accounts payable Salaries payable Unearned revenue F. Anger, capital F. Anger, drawings Service revenue Salaries expense Utilities expense Insurance expense Supplies expense

Before Adjustment Dr. Cr. $23,000 10,000 5,000 4,500 59,000

14,000 9,900 5,800 0 0

$ 6,000 1,800 0 3,700 90,700 30,700

After Adjustment Dr. Cr. $ 23,000 10,000 3,900 3,300 59,000

14,000 11,100 5,800 1,100 1,200

$ 6,600 1,800 1,200 2,500 90,700 31,900

Test Bank for Accounting Principles, Ninth Canadian Edition

Depreciation expense Interest expense Totals

0 ____1,700 $132,900

___________ $132,900

600 _____1,700 ___________ $34,700 $134,700

Instructions Prepare in journal form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance. Solution 27 (15 min.) Supplies Expense ............................................................................. Supplies .................................................................................... To record supplies used.

1,200

Insurance Expense ........................................................................... Prepaid Insurance .................................................................... To record expiration of prepaid insurance.

1,100

Depreciation Expense ...................................................................... Accumulated Depreciation—Equipment ................................. To record depreciation charges on equipment.

600

Salaries Expense............................................................................... Salaries Payable ....................................................................... To record salaries owed but not yet paid or recorded.

1,200

Unearned Revenue ........................................................................... Service Revenue ....................................................................... To record revenue for services provided.

1,200

1,200

1,100

600

1,200

1,200

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting CPA: Problem-Solving and Decision-Making AACSB: Analytic Exercise 28 The following entries were omitted from Alberta Auto’s accounting records: 1. Repair services of $6,000 has been not been recorded or collected. 2. Shop equipment has depreciated in the amount of $2,200. 3. Shop supplies totalling $5,200 have been received but not yet recorded. 4. Services of $1,750 relating to unearned revenue were provided during the period. 5. Insurance premiums expensed during the period include $1,000 of coverage relating to the

Test Bank for Accounting Principles, Ninth Canadian Edition

following period. Instructions State the effect (over/under and amount) of the omissions listed above on assets, liabilities, equity, and net income by completing the chart below. Assets

Liabilities

Equity

Net Income

Liabilities

Equity under $6,000 over $2,200

Net Income under $6,000 over $2,200

under $1,750 under $1,000

under $1,750 under $1,000

1. 2. 3. 4. 5. Solution 28 (10 min.)

1. 2. 3. 4. 5.

Assets under $6,000 over $2,200 under $5,200 under $1,000

under $5,200 over $1,750

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 29 Prepare the required end-of-period adjusting entries for each independent case listed below: Case 1 Thomas Company, a private company, began the year with a $3,000 balance in the Supplies account. During the year, $8,500 worth of additional supplies were purchased. A physical count of supplies on hand at the end of the year revealed a total of $5,100. No adjusting entry has been made. Case 2 Carson Company has a calendar year end. On July 1, the company purchased equipment for $28,800. It is estimated that the equipment will have a useful life of six years. No adjusting entry has been made.

Test Bank for Accounting Principles, Ninth Canadian Edition

Case 3 Chan Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that three tenants in $600-per month apartments and one tenant in a $1,000 per-month apartment had not paid their August rent as at August 31. Solution 29 (10 min.) Case 1 Dec 31 Supplies Expense ......................................................... Supplies ................................................................ To record office supplies used during the year. ($3,000 + $8,500 – $5,100) Case 2 Dec 31

Case 3 Aug. 31

6,400

Depreciation Expense .................................................. Accumulated Depreciation—Equipment ............ To record depreciation expense for six months. ($28,800 ÷ 6 years × 6/12 = $2,400 depreciation)

2,400

Accounts Receivable .................................................... Rent Revenue ....................................................... To accrue rent earned but not yet received. (3 x $600 + $1,000)

2,800

6,400

2,400

2,800

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 30 The ledger of Casper Consulting at January 31, 2024, includes the following selected accounts: Debit Credit Prepaid insurance ............................................................................ $ 3,600 Supplies ............................................................................................ 1,800 Building............................................................................................. 100,000 Land .................................................................................................. 60,000 Notes payable................................................................................... $90,000 Unearned revenue............................................................................ 8,000 Casper’s accountant is inexperienced, and he would like your help in preparing the company’s year-

Test Bank for Accounting Principles, Ninth Canadian Edition

end January 31, 2024, financial statements. Casper follows ASPE and makes adjusting entries only at year end. The accountant has provided you with the following information: 1. A one-year insurance policy costing $3,600 was purchased on January 1, 2024. At that time the full amount was debited to Prepaid Insurance. 2. A physical inventory count on January 31, 2024 revealed $800 in supplies remained. 3. Land and building were purchased on February 1, 2023, at a cost of $160,000. The building has an expected useful life of 20 years. The purchase was financed by paying $70,000 in cash and the balance on a two-year, 8% note payable. Interest on the note is due at maturity. 4. Unearned revenue is related to a client retainer paid on January 15, 2024. On January 31, 2024, services for one-quarter of this amount have been provided Instructions Prepare the adjusting entries required at January 31, 2024. Solution 30 (10 min.) 1. Insurance Expense.................................................................... Prepaid Insurance ............................................................. To record insurance expense. ($3,600 × 1/12)

300

2.

Supplies Expense...................................................................... Supplies............................................................................. To record supplies used. ($1,800 – $800)

1,000

3.

Depreciation Expense............................................................... Accumulated Depreciation—Building.............................. To record depreciation on the building. ($100,000/20 years)

5,000

4.

Interest Expense ....................................................................... Interest Payable ................................................................ To accrue interest on note payable. ($90,000 × 8%)

7,200

5.

Unearned Revenue ................................................................... Service Revenue................................................................ To record revenue for services provided.

2,000

300

1,000

5,000

7,200

2,000

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 31 The following ledger accounts are used by Crawford Indoor Paintball Park: Cash Accounts Receivable Prepaid Printing Prepaid Rent Unearned Revenue Interest Payable Interest Expense Printing Expense Rent Expense Admission Revenue Concession Revenue Instructions For each of the transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on September 30, the end of the fiscal year. a) On September 1, paid rent on the indoor park facility for three months, $180,000. b) On September 1, sold season tickets for admission to the indoor park. The tickets can be used for a period of one year. Season ticket sales totalled $900,000. c) On September 1, borrowed $150,000 from First Canadian Bank by issuing a 5% note payable due in three months, interest due on maturity. d) On September 6, schedules for 8 competition days in September, 10 days in October, and 7 competition days in November were advertised for $3,000. e) The concession is operated by an independent company, who pays Crawford 10% of the gross receipts. The accountant for the concession company reported that gross receipts for September were $140,000. The amount due to Crawford will be remitted by October 11. Solution 31 (15 min.) a) Journal Entry Sept 1 Prepaid Rent ................................................................ 180,000 Cash ......................................................................

180,000

Adjusting Entry Sept 30 Rent Expense ............................................................... Prepaid Rent.........................................................

60,000

60,000

b) Journal Entry Sept 1 Cash .............................................................................. 900,000 Unearned Revenue .............................................. Adjusting Entry Sept 30 Unearned Revenue ......................................................

75,000

900,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Admissions Revenue ............................................ ($900,000 ÷ 12 = $75,000)

75,000

c) Journal Entry Sept 1 Cash .............................................................................. 150,000 Notes Payable ...................................................... Adjusting Entry Sept 30 Interest Expense .......................................................... Interest Payable ................................................... ($150,000 × .05 × 1/12 = $625) d) Journal Entry Sept 6 Prepaid Advertising ..................................................... Cash ...................................................................... Adjusting Entry Sept 30 Advertising Expense .................................................... Prepaid Advertising.............................................. ($3,000 × 8 ÷ 25 = $960) e)

625

3,000

960

150,000

625

3,000

960

Journal Entry None

Adjusting Entry Sept 30 Accounts Receivable ......................................................... Concession Revenue....................................................

14,000

14,000

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 32 The following ledger accounts are used by Shawanda Race Track: Cash Accounts Receivable Prepaid Advertising Prepaid Rent Unearned Revenue

Test Bank for Accounting Principles, Ninth Canadian Edition

Note Payable Interest Payable Admission Revenue Concession Revenue Interest Expense Advertising Expense Rent Expense Instructions For each of the transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on November 30, the end of the fiscal year. a) On November 1, paid rent on the track facility for three months, $105,000. b) On November 1, sold season tickets for admission to the racetrack. The racing season is yearround with 25 racing days each month. Season ticket sales totalled $900,000. c) On November 1, borrowed $150,000 from their bank by issuing a 6% note payable due in three months. Interest is payable at maturity. d) On November 5, schedules for 20 racing days in November, 25 racing days in December, and 15 racing days in January were advertised for $3,000. e) The accountant for the concession company reported that gross receipts for November were $140,000. Ten percent is due to Shawanda and will be remitted by December 10. Solution 32 (15 min.) a) Journal Entry Prepaid Rent ............................................................................. 105,000 Cash ................................................................................... Adjusting Entry Rent Expense ............................................................................ Prepaid Rent ..................................................................... ($105,000/3 = $35,000 b)

Journal Entry Cash........................................................................................... 900,000 Unearned Revenue ........................................................... Adjusting Entry Unearned Revenue ................................................................... Admission Revenue .......................................................... ($900,000/12 = $75,000)

c)

35,000

75,000

Journal Entry Cash........................................................................................... 150,000 Note Payable .....................................................................

105,000

35,000

900,000

75,000

150,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Adjusting Entry Interest Expense ....................................................................... Interest Payable ................................................................ ([$150,000 x 6%] / 12 = $750) d)

Journal Entry Prepaid Advertising .................................................................. Cash ................................................................................... Adjusting Entry Advertising Expense ................................................................. Prepaid Advertising .......................................................... ($3,000 x 20 / 60 = $1,000)

e)

Journal Entry None Adjusting Entry Accounts Receivable ................................................................ Concession Revenue .........................................................

750

3,000

1,000

750

3,000

1,000

14,000 14,000

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 33 Frank’s Florist Shop records all prepaid costs as assets and all revenue collected in advance as liabilities, and makes adjustments only at its fiscal year end, which is June 30. All of Frank’s purchases are for cash unless stated otherwise. The following information relates to Frank’s June 30, 2024, year end, its first year of operations. 1. On July 2, 2023, Frank purchased equipment for $12,000. The equipment is expected to have a useful life of eight years. 2. On August 1, 2023, a one-year insurance policy was purchased for $1,740. 3. On February 1, 2024, a corporate customer paid $2,080 as full payment for a one-year contract for fresh flowers to be delivered to its offices every Monday morning. At June 30, 21 of the required 52 deliveries had been completed. 4. On July 2, 2023, Frank purchased enough supplies to last the entire first year of operations for $4,400. At June 30, 2024, Frank counted the supplies on hand, which amounted to $1,035. 5. On May 31, 2024, Frank borrows $20,000 from the bank to increase the amount of inventory and expand the business. The interest rate on the loan is 6% and requires monthly payments of interest on the first of each month. The principal is due in one year’s time. The first interest

Test Bank for Accounting Principles, Ninth Canadian Edition

6.

7.

payment is due July 1. Frank pays his store assistant on alternate Fridays. The last pay day in June was June 20 and the first pay day after year end is July 4. The assistant worked 30 hours during this period, of which 20 were in July, and the rest in June. The assistant earns $9.50 an hour. June 28 is a busy day and Frank has to make deliveries to numerous customers. On July 5, he reviews his June billings, and realizes that he made one large sale for $325 on June 30 for flowers that were delivered, but for which no invoice was issued. The sale was to a regular customer who will pay promptly when the invoice is sent.

Instructions a) For each transaction, prepare any adjusting entries required at June 30, 2024. b) Assume that before making the above adjustments, Frank’s Florist Shop’s profit was $6,570. Calculate what the correct profit is after recording all of the adjustments. Solution 33 (20 min.) a) 1. Depreciation Expense............................................................... Accumulated Depreciation - Equipment ......................... $12,000/8

1,500

2.

Insurance Expense.................................................................... Prepaid Insurance ............................................................. $1,740/12 x 11

1,595

3.

Unearned Revenue ................................................................... Sales Revenue ................................................................... $2,080/52 x 21

840

4.

Supplies Expense...................................................................... Supplies ........................................................................... $4,400 – $1,035

3,365

5.

Interest Expense ....................................................................... Interest Payable ................................................................ $20,000 x 6% x 1/12

100

6.

Salaries Expense ....................................................................... Salaries Payable ................................................................ 10 x $9.50

95

7.

Accounts Receivable ................................................................ Sales Revenue ...................................................................

325

b) Unadjusted profit ................................................................ Less: Depreciation expense.................................................

$ 6,570 (1,500)

1,500

1,595

840

3,365

100

95

325

Test Bank for Accounting Principles, Ninth Canadian Edition

Less: Insurance expense...................................................... Plus: Sales revenue .............................................................. Less: Supplies expense ........................................................ Less: Interest expense ......................................................... Less: Salaries expense ......................................................... Plus: Sales revenue .............................................................. Adjusted profit .....................................................................

(1,595) 840 (3,365) (100) (95) 325 $ 1,080

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 34 In January 2024 Edward started a business providing home repair services. The business is called Helpful Handyman, and the service is so popular that he has already hired 10 additional employees after being in business for just six months. On May 1, he rented an office with storage space for tools and supplies. It is now the end of June and he must prepare financial statements to present to his banker. The following amounts are taken from Helpful Handyman’s unadjusted trial balance at June 30, 2024. Assume all accounts are their normal balance (debit or credit). Loan receivable ........................................................................ $ 1,500 Accounts receivable ................................................................. 2,650 Accounts payable ..................................................................... 3,500 Bank loan payable .................................................................... 9,000 Service revenue ........................................................................ 385,600 Salaries expense ....................................................................... 38,400 Rent expense ............................................................................ 2,000 Additional information about the accounting records follows: 1. The loan receivable was made to an employee on June 1 and the employee is to pay interest at 12% annually in monthly instalments starting July 1. 2. Edward normally invoices customers when the jobs are complete. At June 30, there was $5,000 of work that had been completed near month end for which invoices had not yet been issued. 3. The bank loan bears interest at 6% and was taken out on April 1. Interest payments are due quarterly, so no interest has yet been paid. 4. The last pay day before June 30 was on June 25. Since then, the 10 employees have worked an average of 25 hours each, at a wage of $8.50 per hour. 5. Rent is $2,000 per month. The June rent has not yet been paid.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Prepare any adjusting entries required at June 30, 2024, based on the above information. Accounts not listed above may need to be set up. b) Calculate the adjusted balances of the accounts listed above and any new accounts set up in part a). Indicate whether the ending balances are a debit or credit. c) Assume that the unadjusted profit of Helpful Handyman is $60,000. Calculate the adjusted profit after the adjustments have been made. Solution 34 (15 min.) a) Interest Receivable ................................................................... Interest Revenue ............................................................... $1,500 x 12% x 1/12

15

15

Accounts Receivable ................................................................ Service Revenue................................................................

5,000

Interest Expense ....................................................................... Interest Payable ................................................................ $9,000 x 6% x 3/12

135

Salaries Expense ....................................................................... Salaries Payable ................................................................ 10 x 25 x $8.50

2,125

Rent Expense ............................................................................ Rent Payable .....................................................................

2,000

Loan receivable ........................................................................

1,500

DEBIT

Accounts receivable ($2,650 + $5,000) .....................................

7,650

DEBIT

Interest receivable ....................................................................

15

DEBIT

Accounts payable .....................................................................

3,500

CREDIT

Bank loan payable ....................................................................

9,000

CREDIT

Interest payable ........................................................................

135

CREDIT

Salaries payable .......................................................................

2,125

CREDIT

Rent payable .............................................................................

2,000

CREDIT

Service revenue ($385,600 + $5,000) ........................................ 390,600

CREDIT

5000

135

2,125

2,000

b)

Test Bank for Accounting Principles, Ninth Canadian Edition

c)

Interest revenue .......................................................................

15

CREDIT

Salaries expense ($38,400 + $2,125) ........................................

40,525

DEBIT

Rent expense ($2,000 + $2,000) ................................................

4,000

DEBIT

Interest expense .......................................................................

135

DEBIT

$60,000 + $15 + $5,000 – $135 – $2,125 – $2,000 = $60,755

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting CPA: Problem-Solving and Decision-Making AACSB: Analytic Exercise 35 Presented below are the trial balance and adjusted trial balance for Lankford Company on December 31: LANKFORD COMPANY Trial Balance December 31

Cash Accounts receivable Prepaid insurance Supplies Equipment Accumulated depreciation— Equipment Accounts payable Notes payable Interest payable Salaries payable Unearned revenue J. Lankford, capital

Before Adjustment Dr. Cr. $ 4,000 5,600 4,200 2,400 36,000 $ 2,600 5,400 20,000 0 0 8,920 14,400

After Adjustment Dr. Cr. $ 4,000 7,800 3,000 1,600 36,000 $ 3,000 6,000 20,000 240 1,200 8,720 14,400

Test Bank for Accounting Principles, Ninth Canadian Edition

J. Lankford, drawings Service revenue Salaries expense Utilities expense Insurance expense Supplies expense Depreciation expense Interest expense Totals

6,400 4,120 3,600 1,000 0 0 ________0 $67,320

6,400

16,000

5,320 4,200 2,200 800 400 _____240 $71,960

_________ $67,320

18,400

_________ $71,960

Instructions Prepare in journal form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance. Solution 35 (15 min.) Accounts Receivable ........................................................................ Service Revenue ....................................................................... To record revenue for services provided but not yet recorded.

2,200 2,200

Insurance Expense ........................................................................... Prepaid Insurance .................................................................... To record expiration of prepaid insurance.

1,200

Supplies Expense ............................................................................. Supplies .................................................................................... To record supplies used.

800

Depreciation Expense ...................................................................... Accumulated Depreciation—Equipment ................................. To record depreciation expense.

400

Salaries Expense............................................................................... Salaries Payable ....................................................................... To record salaries owed but not yet paid or recorded.

1,200

Interest Expense ............................................................................... Interest Payable........................................................................ To record accrued interest payable.

240

Unearned Revenue ........................................................................... Service Revenue ....................................................................... To record revenue for services provided.

200

Utilities Expense ............................................................................... Accounts Payable ..................................................................... To record receipt of utility bill.

600

1,200

800

400

1,200

240

200

600

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting CPA: Problem-Solving and Decision-Making AACSB: Analytic Exercise 36 Presented below are the trial balance and adjusted trial balance for Game Company on December 31. GAME COMPANY Trial Balance December 31 Before Adjustment After Adjustment Dr. Cr. Dr. Cr. Cash $ 3,000 $ 3,000 Accounts receivable 2,800 3,900 Prepaid rent 2,100 1,500 Supplies 1,200 500 Equipment 18,000 18,000 Accumulated depreciation — equipment $ 1,300 $ 1,800 Accounts payable 2,700 3,000 Notes payable 10,000 10,000 Interest payable 0 120 Salaries payable 0 400 Unearned revenue 4,460 4,260 S. Champagne, capital 8,200 8,200 S. Champagne, drawings 3,200 3,200 Service revenue 8,000 9,300 Salaries expense 2,060 2,460 Utilities expense 1,800 2,100 Rent expense 500 1,100 Supplies expense 0 700 Depreciation expense 0 500 Interest expense ______0 _______ ____120 _______ Totals $34,660 $34,660 $37,080 $37,080 Instructions Prepare in journal form, with explanations, the adjusting entries that explain the changes in the

Test Bank for Accounting Principles, Ninth Canadian Edition

balances from the trial balance to the adjusted trial balance. Solution 36 (20 min.) Accounts Receivable ........................................................................ Service Revenue ....................................................................... To record revenue for services provided but not yet recorded.

1,100

Rent Expense .................................................................................... Prepaid Rent ............................................................................. To record expiration of prepaid rent.

600

Supplies Expense ............................................................................. Supplies .................................................................................... To record supplies used.

700

Depreciation Expense ...................................................................... Accumulated Depreciation—Equipment ................................. To record depreciation expense.

500

Salaries Expense............................................................................... Salaries Payable ....................................................................... To record salaries owed but not yet paid or recorded.

400

Interest Expense ............................................................................... Interest Payable........................................................................ To record accrued interest payable.

120

Unearned Revenue ........................................................................... Service Revenue ....................................................................... To record revenue earned.

200

Utilities Expense ............................................................................... Accounts Payable ..................................................................... To record receipt of utility bill.

300

1,100

600

700

500

400

120

200

300

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting CPA: Problem-Solving and Decision-Making AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 37 The following amounts are taken from the unadjusted trial balance of Fitzpatrick Fashion at its year end, November 30, and are their normal balance (debit or credit). Fitzpatrick records adjusting entries annually when preparing its year-end financial statements. Prepaid rent .................................................... Supplies ........................................................... Unearned revenue .......................................... Service revenue .............................................. Rent expense ................................................... Supplies expense .............................................

$ 1,200 525 4,600 89,500 6,600 75

The following transactions are included in the above account balances: 1. On November 1, through a $1,200 cheque, Fitzpatrick’s bookkeeper paid both November and December rent and posted the full amount to Prepaid Rent. 2. On November 15, supplies were purchased on account for $225. On November 30, a count of actual supplies on hand shows the remaining supplies to be $60. 3. On August 31, a customer paid $4,600 in advance for a service contract. As at November 30, $2,300 of the work was complete. Instructions a) Journalize the transactions described as (1) through (3). Include the date, but no explanation is required. b) Prepare any adjusting entries required at November 30. c) Determine the adjusted ending balances of the accounts listed above. Indicate whether the ending balance is a debit or credit. d) Assuming that profit before adjusting entries were made is $4,600, calculate the adjusted profit. Solution 37 (20 min.) a) Nov 1 Prepaid Rent ................................................................ Cash ...................................................................... Nov 15

Supplies ...................................................................... Accounts Payable .................................................

225

Cash ...................................................................... Unearned Revenue ..............................................

4,600

Rent Expense ...................................................................... Prepaid Rent ..................................................................... (1/2 x $1,200)

600

Aug 31

b)

1,200

1,200

225 4,600

600

Test Bank for Accounting Principles, Ninth Canadian Edition

c)

d)

Supplies Expense...................................................................... Supplies ...................................................................... ($525 – $60)

465

Unearned Revenue ................................................................... Service Revenue................................................................

2,300

Prepaid rent ($1,200 – $600) .................................................... Supplies ($525 − $465) ............................................................. Unearned revenue ($4,600 – $2,300) ....................................... Service revenue ($89,500 + $2,300) .......................................... Rent expense ($6,600 + $600) ................................................... Supplies expense ($75 + $465) .................................................

$ 600 60 2,300 91,800 7,200 540

465

2,300

DEBIT DEBIT CREDIT CREDIT DEBIT DEBIT

$4,600 – $600 – $465 + $2,300 = $5,835

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting CPA: Problem-Solving and Decision-Making AACSB: Analytic Exercise 38 The following amounts are taken from the unadjusted trial balance of Poloski Company at its year end, April 30 and are their normal balance (debit or credit). Poloski records adjusting entries annually when preparing its year-end financial statements. Prepaid rent .......................................................... $ 2,100 Supplies ................................................................ 990 Unearned revenue ................................................ 8,000 Service revenue .................................................... 67,200 Rent expense ........................................................ 10,000 Supplies expense .................................................. 200 The following transactions are included in the above account balances: 1. On April 1, through a $2,100 cheque, Poloski’s accountant paid both April and May rent and posted the full amount to Prepaid Rent. 2. On April 22, supplies were purchased on account for $740. On April 30, a count of actual supplies

Test Bank for Accounting Principles, Ninth Canadian Edition

3.

on hand shows the remaining supplies to be $81. On January 1, a customer paid $8,000 in advance for a service contract. As at April 30, the work was 40% complete.

Instructions a) Journalize the transactions described as (1) through (3). Include the date, but no explanation is required. b) Prepare any adjusting entries required at April 30. c) Determine the adjusted ending balances of the accounts listed above. Indicate whether the ending balance is a debit or credit. d) Assuming that profit before adjusting entries were made is $12,850, calculate the adjusted profit. Solution 38 (20 min.) a) April 1 Prepaid Rent ................................................................ Cash ......................................................................

2,100 2,100

April 22

Supplies........................................................................ Accounts Payable .................................................

740

Jan 31

Cash .............................................................................. Unearned Revenue ..............................................

8,000

Rent Expense ........................................................................... Prepaid Rent ..................................................................... (1/2 x $2,100)

1,050

Supplies Expense...................................................................... Supplies............................................................................. ($990 - $81)

909

Unearned Revenue ................................................................... Service Revenue................................................................ (40% x $8,000)

3,200

740

8,000

b) 1,050

909

3,200

c) Prepaid rent ($2,100 – $1,050) ................................................. $ 1,050 Supplies ($990 – $909) .............................................................. 81 Unearned revenue ($8,000 – $3,200) ....................................... 4,800 Service revenue ($67,200 + $3,200) .......................................... 70,400 Rent expense ($10,000 – $1,050) .............................................. 11,050 Supplies expense ($200 + $909) ............................................... 1,109 (d) $12,850 – $1,050 – $909 + $3,200 = $14,091

DEBIT DEBIT CREDIT CREDIT DEBIT DEBIT

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting CPA: Problem-Solving and Decision-Making AACSB: Analytic Exercise 39 On Friday of each week, Morgan Company pays its factory personnel a weekly salary amounting to $60,000 for a five-day workweek. Instructions a) Prepare the necessary adjusting entry at year end, assuming December 31 falls on Wednesday. b) Prepare the journal entry for payment of the week's salaries on Friday, January 2 of the next year. Solution 39 (5 min.) a) Dec 31 Salaries Expense .......................................................... Salaries Payable ................................................... b) Jan 2

Salaries Payable........................................................... Salaries Expense .......................................................... Cash ......................................................................

36,000

36,000 24,000

36,000

60,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 40 The following three situations require adjusting entries to prepare financial statements as at May 31, 2024: 1. The company has a $660,000 note payable that requires 12% annual interest (1% per month) to be paid each month on the first day of the month. The interest was last paid on May 1 and the next payment is due on June 1. 2. The total weekly salaries expense for all employees is $12,600. This amount is paid at the end of the day on Friday of each week with five working days. May 31 falls on a Wednesday this year,

Test Bank for Accounting Principles, Ninth Canadian Edition

3.

which means that the employees had worked three days since the last payday. The next payday is June 2. On May 1, the company retained a lawyer at a flat fee of $2,200 for various services throughout the month of May. This amount is payable on June 10.

Instructions For each situation, prepare the adjusting entry and the entry that would be made to record the payment of the accrued liability in June 2024. Solution 40 (20 min.) 1. May 31 Interest Expense .......................................................... Interest Payable ................................................... ($660,000 x 1% = $6,600)

6,600

June 1

Interest Payable ........................................................... Cash ......................................................................

6,600

Salaries Expense .......................................................... Salaries Payable ................................................... ($12,600 x 3/5 = $7,560)

7,560

Salaries Expense .......................................................... Salaries Payable ($12,600 – $7,560) ............................ Cash ......................................................................

7,560 5,040

Legal Fees Expense ...................................................... Accounts Payable .................................................

2,200

Accounts Payable ........................................................ Cash ......................................................................

2,200

2. May 31

June 2

3. May 31

June 10

6,600

6,600

7,560

12,600

2,200

2,200

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 41 The total weekly payroll for Fly-By Airlines is $700,000 ($100,000 per day). The company operates seven days a week and pays employees each Wednesday for the previous Monday-Sunday workweek. Salaries were last paid on Wednesday, January 28 for the pay period ended January 25. The next pay

Test Bank for Accounting Principles, Ninth Canadian Edition

date is Wednesday February 4. The company’s year end is January 31. Instructions Prepare the journal entries to record the following: a) the payment of salaries on January 28 b) the adjusting entry to accrue salaries at year end c) the payment of salaries on February 4 Solution 41 (10 min.) a) Jan 28 Salaries Expense .......................................................... 700,000 Cash ...................................................................... b) Jan 31

c) Feb 4

700,000

Salaries Expense .......................................................... 600,000 Salaries Payable ...................................................

600,000

Salaries Expense .......................................................... 100,000 Salaries Payable........................................................... 600,000 Cash ......................................................................

700,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 42 In 2024, Micro Marvels signed a $70,000 note payable for two years at 5%. Interest is payable monthly on the 10th of each month. Micro has a December 31 year end, and adjusting entries are prepared at year end only. For calculation purposes, assume each month has 30 days, and round amounts to the nearest dollar. Instructions Prepare the journal entries to record the following: a) payment of interest on December 10 (round to the nearest dollar) b) the accrual of interest at December 31 (round to the nearest dollar) c) payment of interest on January 10 Solution 42 (10 min.) a) Dec 10 Interest Expense ($70,000 x 5%/12) ............................

292

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash ...................................................................... b) Dec 31 c) Jan 10

292

Interest Expense ($292 x 20/30) .................................. Interest payable ...................................................

195

Interest Payable ........................................................... Interest Expense ($292 – $195) .................................... Cash ......................................................................

195 97

195

292

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 43 Castona Inc., a publicly traded company, recently fired their accountant due to several errors discovered in the accounting records. Bill, President of Castona Inc., asked you to prepare the adjusting entries for the following transactions (round to the nearest dollar): 1. Signed a $72,000 contract to provide services over seven weeks. As of today, only two weeks of services have been completed, and no amounts have been received or recorded. 2. Received bills that have not yet been recorded: utilities, $700, Bill’s personal cellphone, $350, and property taxes, $1,750. 3. A note payable was obtained in the amount of $100,000 for two years. Interest is 4.75% annually. Interest on the note is due the 15th of each month. Assuming the last interest payment on June 15 was recorded correctly, record the proper entry (if any) for June 30. For calculation purposes, assume each month has 30 days, and round amounts to the nearest dollar. 4. One employee retired on Wednesday, June 28. There are four remaining employees, who work Monday to Friday. Each employee is paid $125 per day. The employees are paid every Monday for the five previous days that they have worked. June 30 is a Friday. Solution 43 Accounts Receivable ........................................................................ 20,571 Revenue .................................................................................... To record two weeks of revenue earned. ($72,000 x 2/7 weeks = $20,571) Utilities Expense ............................................................................... Property Tax Expense ...................................................................... Accounts Payable ..................................................................... Bill’s personal phone is not a “business expense.”

700 1,750

Interest Expense ...............................................................................

198

20,571

2,450

Test Bank for Accounting Principles, Ninth Canadian Edition

Interest Payable........................................................................ $100,000 x 4.75%/12 x 15/30 = $198

198

Salaries Expense............................................................................... Salaries Payable ....................................................................... $125 x 3 days = $375 $125 x 5 days x 4 employees = $2,500 Total = $2,500 + $375 = $2,875

2,875

2,875

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic Exercise 44 The adjusted trial balance of Kramer’s Legal Practice appears below: KRAMER’S LEGAL PRACTICE Adjusted Trial Balance December 31, 2024 Cash .................................................................................................. Accounts receivable ......................................................................... Office supplies .................................................................................. Equipment ........................................................................................ Accumulated depreciation—equipment ......................................... Furniture ........................................................................................... Accumulated depreciation—furniture ............................................ Accounts payable ............................................................................. Unearned revenue............................................................................ H. Kramer, capital............................................................................. H. Kramer, drawings......................................................................... Service revenue ................................................................................ Supplies expense.............................................................................. Depreciation expense ...................................................................... Rent expense ....................................................................................

Debit $ 6,400 1,200 1,800 8,000 6,000

2,500 600 2,500 1,900 $30,900

Instructions Using this information, prepare for the month ended December 31: a) an income statement b) a statement of owner’s equity c) a balance sheet

Credit

$ 2,500 1,500 6,000 3,000 12,400 5,500

_______ $30,900

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 44 (20 min.) a)

KRAMER’S LEGAL PRACTICE Income Statement For the Month Ended December 31, 2024

Revenues Service revenue ........................................................................ Expenses Depreciation expense............................................................... Rent expense ............................................................................ Office supplies expense ............................................................ Total expenses .................................................................. Profit for the month ......................................................................... b)

$5,500 $2,500 1,900 600

KRAMER’S LEGAL PRACTICE Statement of Owner's Equity For the Month Ended December 31, 2024

H. Kramer, capital, November 30..................................................... Add: Profit for the month ................................................................. .......................................................................................................... Less: Drawings ................................................................................. H. Kramer, capital, December 31 ..................................................... c)

5,000 $ 500

$12,400 500 12,900 (2,500) $10,400

KRAMER’S LEGAL PRACTICE Balance Sheet December 31, 2024

Assets Cash .................................................................................................. Accounts receivable ......................................................................... Supplies ............................................................................................ Equipment ................................................................... $8,000 Less: Accumulated depreciation—equipment........... 2,500 ......... Furniture ........................................................................ 6,000 Less Accumulated depreciation—furniture ................. 1,500 ......... Total assets ............................................................................

$ 6,400 1,200 1,800 5,500 4,500

Liabilities and Owner's Equity Liabilities Accounts payable ..................................................................... Unearned revenue ....................................................................

$6,000 3,000

10,000 $19,400

Test Bank for Accounting Principles, Ninth Canadian Edition

Total liabilities .................................................................. Owner's equity H. Kramer, capital ..................................................................... Total liabilities and owner's equity ..................................

$ 9,000 10,400 $19,400

Bloomcode: Application Difficulty: Medium Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 45 The adjusted trial balance of Jacks Financial Planners appears below: JACKS FINANCIAL PLANNERS Adjusted Trial Balance December 31, 2024 Debit Credit Cash .................................................................................................. $ 15,200 Accounts receivable ......................................................................... 2,200 Supplies ............................................................................................ 1,800 Equipment ........................................................................................ 15,000 Accumulated depreciation—equipment ......................................... $ 4,000 Accounts payable ............................................................................. 4,000 Unearned revenue............................................................................ 5,000 S. Jacks, capital ................................................................................ 24,400 S. Jacks, drawings ............................................................................ 2,500 Service revenue ................................................................................ 6,500 Supplies expense.............................................................................. 600 Depreciation expense ...................................................................... 2,500 Telephone expense .......................................................................... 400 Salaries expense ............................................................................... 1,800 Rent expense .................................................................................... 1,900 _________ $43,900 $43,900 Instructions Using the information from the adjusted trial balance, prepare the following for the year ended December 31: a) an income statement b) a statement of owner’s equity c) a balance sheet Solution 45 (20 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

a)

JACKS FINANCIAL PLANNERS Income Statement For the Year Ended December 31, 2024

Revenues Service revenue ...................................................................... Expenses Depreciation expense ............................................................ Rent expense .......................................................................... Salaries expense .................................................................... Telephone expense ................................................................ Supplies expense ................................................................... Total expenses .................................................................. Loss for the year ............................................................................... b)

$2,500 1,900 1,800 400 600

7,200 $(700)

JACKS FINANCIAL PLANNERS Statement of Owner’s Equity Year Ended December 31, 2024

S. Jacks, capital, December 31, 2023............................................... Less: Loss.................................................................................... Drawings ........................................................................... S. Jacks, capital, December 31, 2024............................................... c)

$6,500

$ 700 2,500

$24,400 (3,200) $21,200

JACKS FINANCIAL PLANNERS Balance Sheet December 31, 2024

Assets Cash .................................................................................................. Accounts receivable ......................................................................... Supplies ............................................................................................ Equipment ........................................................................................ $15,000 Less: Accumulated depreciation—equipment............................... 4,000 Total assets ............................................................................ Liabilities and Owner’s Equity Liabilities Accounts payable ................................................................... $4,000 Unearned revenue ................................................................. 5,000 Total liabilities .................................................................. Owner’s equity S. Jacks, capital ......................................................................

$15,200 2,200 1,800 11,000 $30,200

$ 9,000 _ 21,200

Test Bank for Accounting Principles, Ninth Canadian Edition

Total liabilities and owner’s equity ..................................

$30,200

Bloomcode: Application Difficulty: Medium Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 46 Lamburg Company has prepared the following adjusting entries at its fiscal year end on June 30, 2024: 1.

Salaries Expense ....................................................................... Salaries Payable ................................................................

17,000

2.

Unearned Revenue ................................................................... Service Revenue................................................................

22,500

3.

Interest Expense ....................................................................... Interest Payable ................................................................

175

4.

Rent Expense ............................................................................ Prepaid Rent .....................................................................

1,100

5.

Insurance Expense.................................................................... Prepaid Insurance .............................................................

175

17,000

22,500 175

1,100

175

The adjustment for depreciation has not yet been prepared for the current year. Lamburg’s building was purchased seven years ago. Lamburg follows straight-line depreciation and for the past six years depreciation has been properly recorded. Its land was purchased 11 years ago. Instructions a) Prepare an adjusting entry to record depreciation expense. Use the chart below. b) Using the chart below, prepare an adjusted trial balance in the last two columns. Use the middle two columns to record any increases and decreases to the account from the adjusting entries. If additional accounts are needed, add them at the bottom of the list of accounts in the trial balance. c) Prepare an income statement, statement of owner’s equity, and a balance sheet. Unadjusted Trial Balance DR Cash $ 5,000 Accounts receivable 14,000 Prepaid rent 11,000 Prepaid insurance 6,300

CR

Adjustments DR CR

Adjusted Trial Balance DR CR

Test Bank for Accounting Principles, Ninth Canadian Edition

Building Accumulated dep.— building Land Unearned revenue Bank loan payable K. Mackle, capital K. Mackle, drawings Service revenue Telephone expense Salaries expense

275,000

Totals

$566,550

$66,000 192,000 49,125 17,900 172,000 12,000 261,525 1,700 49,550

$566,550

Solution 46 a) Depreciation Expense ...................................................................... Accumulated Depreciation—Building ..................................... Balance in Acc. Dep account = $66,000, six years of depreciation has been taken $66,000/6 = $11,000/year Land is not depreciable.

11,000

11,000

b) Unadjusted Trial Balance DR Cash $ 5,000 Accounts receivable 14,000 Prepaid rent 11,000 Prepaid insurance 6,300 Building 275,000 Accumulated dep.— building Land 192,000 Unearned revenue Bank loan payable K. Mackle, capital K. Mackle, drawings 12,000 Service revenue Telephone expense 1,700

CR

Adjustments DR CR

Adjusted Trial Balance DR CR $ 5,000 14,000 1,100 9,900 175 6,125 275,000

$66,000

11,000

$77,000 192,000

49,125 17,900 172,000

22,500

26,625 17,900 172,000 12,000

261,525

22,500

284,025 1,700

Test Bank for Accounting Principles, Ninth Canadian Edition

Salaries expense Salaries payable Interest expense Interest payable Rent expense Insurance expense Depreciation expense Totals c)

49,550

17,000

66,550 17,000

175

17,000 175

175

$566,550

1,100 175 11,000 $566,550 $51,950

$51,950

175 1,100 175 11,000 $594,725

LAMBURG CORPORATION Income Statement For the Year Ended June 30, 2024

Revenues Service revenue ........................................................................ Expenses Salaries expense ....................................................................... $66,550 Depreciation expense............................................................... 11,000 Telephone expense .................................................................. 1,700 Rent expense ............................................................................ 1,100 Interest expense ....................................................................... 175 Insurance expense .................................................................... 175 Total expenses .................................................................. Profit for the year .............................................................................

$284,025

_ 80,700 $203,325

LAMBURG CORPORATION Statement of Owner’s Equity For the Year Ended June 30, 2024 K. Mackle, capital, June 30, 2023 ..................................................... Add: Profit ......................................................................................... .......................................................................................................... Less: Drawings .................................................................................. K. Mackle, capital, June 30, 2024 .....................................................

$172,000 203,325 375,325 (12,000) $363,325

LAMBURG CORPORATION Balance Sheet June 30, 2024 Assets Cash .................................................................................................. Accounts receivable ......................................................................... Prepaid rent ...................................................................................... Prepaid insurance ............................................................................

$ 5,000 14,000 9,900 6,125

$594,725

Test Bank for Accounting Principles, Ninth Canadian Edition

Land .................................................................................................. Building............................................................................................. $275,000 Less: Accumulated depreciation—building ................................... 77,000 Total assets ............................................................................

192,000 198,000 $425,025

Liabilities and Owner’s Equity

Liabilities Salaries payable ..................................................................... Interest payable ..................................................................... Unearned revenue ................................................................. Bank loan payable ................................................................. Total liabilities ............................................................. Owner’s equity K. Mackle, capital ................................................................... Total liabilities and owner’s equity .............................

$17,000 175 26,625 17,900 61,700 363,325 $425,025

Bloomcode: Application Difficulty: Medium Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting CPA: Problem-Solving and Decision-Making AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 3 ADJUSTING THE ACCOUNTS CHAPTER STUDY OBJECTIVES 1. Explain accrual basis accounting, and when to recognize revenues and expenses. In order to provide timely information, accountants divide the life of a business into specific time periods. Therefore, it is important to record transactions in the correct time period. Under accrual basis accounting, events that change a company’s financial statements are recorded in the periods in which the events occur, rather than in the periods in which the company receives or pays cash. The revenue recognition principle provides guidance about when to recognize revenues. In general, revenues are recorded when the goods are delivered or services are performed. Expenses are recorded in the same period as revenue is recognized, if there is a direct association between the revenues and expenses. If there is no association between revenues and expenses, expenses are recorded in the period they are incurred. 2. Describe adjusting entries and prepare adjusting entries for prepayments. Prepayments are either prepaid expenses or unearned revenues. Adjusting entries for prepayments record the portion of the prepayment that applies to the expense or revenue of the current accounting period. The adjusting entry for prepaid expenses debits (increases) an expense account and credits (decreases) an asset account. For a long-lived asset, the contra asset account Accumulated Depreciation is used instead of crediting the asset account directly. The adjusting entry for unearned revenues debits (decreases) a liability account and credits (increases) a revenue account. 3. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues and expenses that apply to the current accounting period and that have not yet been recognized through daily journal entries. The adjusting entry for accrued revenue debits (increases) a receivable account and credits (increases) a revenue account. The adjusting entry for an accrued expense debits (increases) an expense account and credits (increases) a liability account. 4. Describe the nature and purpose of an adjusted trial balance, and prepare one. An adjusted trial balance shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. It proves that the total of the accounts with debit balances is still equal to the total of the accounts with credit balances after the adjustments have been posted. Financial statements are prepared from an adjusted trial balance in the following order: (1) income statement, (2) statement of owner’s equity, and (3) balance sheet.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. Because accounting often requires estimates to be made to assess the effect of a transaction, the shorter the time period, the easier it becomes to determine the proper adjustments. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 2. An interim period of a company can be any time period of less than one year. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 3. A company needs to divide the life of its business into accounting periods in order to provide useful and relevant information to the people who use its financial statements. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

4. The fiscal year of the company must be the same as a calendar year. Answer: False Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

5. Accounting time periods that are more than one year in length are referred to as interim periods. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 6. Many business transactions will affect more than one accounting period. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

7. In the accrual basis of accounting, revenue is recognized when the cash for the transaction is received. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

8. The accrual basis of accounting requires adjustments to be made for prepaid, unearned, and accrued items.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 9. In the accrual basis of accounting, expenses are recognized when the services are used or the goods are consumed, not when the cash is paid. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 10. The cash basis of accounting is more useful than the accrual basis as the balance in the bank account is always reflected in the financial statements. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 11. The accrual basis of accounting is more complex than the cash basis of accounting as it involves such decisions as determining when to record revenues and expenses. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

12. The cash basis of accounting is not in accordance with generally accepted accounting principles. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

13. Revenue is recognized when there is a decrease in assets or an increase in liabilities as the result of the company’s business activities with its customers. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

14. An expense is recognized when there is an increase in assets or a decrease in liabilities from consuming a service or asset in the company’s business activities with its customers. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 15. Revenue is recognized when the service has been performed and the performance obligation is satisfied. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

16. Expense recognition is tied to revenue recognition when there is a direct association between the cost incurred and the earning of revenue. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

17. There is always a direct relationship between revenues and expenses. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

18. Adjusting entries are often made because some business events are NOT recorded as they occur. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

19. Adjusting entries are NOT necessary if the trial balance debit and credit columns balances are equal. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

20. Adjusting entries are needed every time financial statements are prepared. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

21. An adjusting entry will debit an asset to increase the asset. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 22. Adjusting entries are only necessary when year-end financial statements are prepared. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

23. Prepayments are typically made with cash. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 24. Prepayments must always be debited to an asset account and credited to a liability account. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

25. Unearned revenue, a cash payment that has been received in advance, is recorded as an asset of the business. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

26. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future. Answer: False Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 27. Unearned revenue is a prepayment that requires an adjusting entry when services are performed. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

28. To decrease an unearned revenue account, a credit entry to that account must be made. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

29. The straight-line method of depreciation will allocate a portion of the cost of the asset to each year of useful life of the asset. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

30. The useful life of an asset is always known at the time the asset is purchased. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

31. The annual depreciation expense can be calculated by dividing the cost of the asset by the useful life of the asset (in years). Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

32. Accumulated depreciation is a contra asset account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

33. Accumulated depreciation is shown as a deduction from the asset on the company’s balance sheet. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

34. The normal balance of the accumulated depreciation is a debit. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

35. Accumulated depreciation is shown in the liability section of the balance sheet because its normal balance is a credit. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

36. The difference between the cost of the asset and its accumulated depreciation is called the “carrying amount” of the asset. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

37. The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same. Answer: False Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 38. An adjusting entry will credit a liability to increase the liability. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

39. Accrued expenses are expenses that have been incurred but have not been recorded yet in the records. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

40. An adjusting entry always involves two balance sheet accounts. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

41. If an Interest Expense account is debited in an adjusting entry, then the account credited will be Interest Revenue.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic 42. If an Interest Receivable account is debited in an adjusting entry, then the account credited will be Interest Revenue. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

43. Shifter Corporation owes its employees $9,000 for the week ended September 30. The company will pay the employees October 5. The adjusting entry prepared on September 30 will include a debit to Salaries Expense and a credit to Cash for $9,000. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic 44. Financial statements should be prepared directly from the information in the unadjusted trial balance. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

45. If the debits equal the credits in the adjusted trial balance, it means that all of the entries have been made. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic

46. In the adjusted trial balance, if some of the adjusting entries have been posted twice, the debit totals will equal the credit totals on the trial balance. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic

47. An adjusted trial balance is necessary to prepare financial statements. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 48. Which of the following is NOT considered an interim reporting period for a calendar year end of December 31, 2024? a) March 31, 2024 b) June 30, 2024 c) September 30, 2024 d) all of the above are interim reporting periods Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

49. A business will divide the life of its business into specific accounting periods because a) a transaction can only affect one period of time. b) the number of transactions will be more evenly divided between periods. c) adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations. d) it will provide useful information to the business’s users. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

50. An accounting time period that is one year in length, which could, but does not need to begin on January 1, is referred to as a) a fiscal year. b) an interim period. c) a final reporting period. d) a report period. Answer: a

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Bloomcode: Knowledge Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

51. Management usually desires ______ financial statements and the Canada Revenue Agency requires all businesses to file ______ tax returns. a) annual, annual b) monthly, annual c) quarterly, monthly d) monthly, monthly Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

52. A company is required to prepare adjusting entries for its financial statements because a) the Canada Revenue Agency requires adjusting entries. b) the cash balance would not be properly reflected. c) long-term assets must be expensed when purchased. d) transactions may relate to more than one accounting period. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 53. In general, the shorter the time period, the difficulty of making the proper adjustments to accounts a) is increased. b) is decreased. c) is unaffected. d) depends on the number of transactions in the period.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 54. Which of the following is NOT a common accounting period chosen by businesses? a) daily b) monthly c) quarterly d) annually Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

55. Which of the following accounting periods would NOT be referred to as an interim period? a) monthly b) quarterly c) semi-annually d) annually Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

56. The fiscal year of a business is usually determined by a) the Canada Revenue Agency. b) the Tax Act.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) the business. d) provincial securities and exchange commissions. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

57. The revenue recognition criteria states that revenue of a business is recognized a) when cash is received. b) when the service is provided or the goods delivered. c) at the end of the year. d) in the period that the expenses are incurred. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

58. In a service-type business, revenue is recognized 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. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

59. Revenue will be recognized when the following occurs as a result of a business activity with a

Test Bank for Accounting Principles, Ninth Canadian Edition

customer. a) There is an increase in assets. b) There is an increase in liabilities. c) There is a decrease in assets. d) none of these Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

60. Expenses should be recognized, excluding transactions with owners, when which of the following occurs? a) There is an increase in assets. b) There is an increase in liabilities. c) There is a decrease in liabilities. d) none of these Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 61. A company spends $10 million for an office building. Over what period of time should the cost be written off? a) when the $10 million is expended in cash b) all in the first year c) over the useful life of the building d) over the physical life of the building Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

62. Expense recognition is tied to revenue recognition when a) cash has been received for the revenue. b) efforts should be matched with accomplishments. c) there is a direct association with the costs incurred and when the revenue is recognized. d) cash payments have been expended in the same accounting period. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 63. A dress shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and payment from the customer is received on December 10. The dress shop follows GAAP. When should the $1,000 of revenue be recognized? a) December 5 b) December 10 c) November 30 d) December 1 Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

64. A furniture factory's employees work overtime to finish an order that is sold on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. According to the expense recognition criteria, the overtime wages should be expensed in a) February. b) March. c) the period when the workers receive their cheques. d) either in February or March depending on when the pay period ends.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 65. On June 28, Richard Price Investments Ltd. provided consulting services to Maisie Company. Price billed Maisie on July 2 for $800 related to these services. On July 5, Maisie paid the invoice in full. Price’s only cost related to this sale was $250 in salaries. Price paid the salaries on July 3. Assuming Price has a June 30 year end, the company’s profit for the Maisie job on the June 30 financial statements should be a) $0. b) $800. c) $550. d) $250. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

66. Tantramar Construction has an October 31 year end. On October 20 Tantramar received a payment of $25,000 from Cantech Industries as an advance on the construction for the new head office of Cantech. Construction was to have started October 25 but due to an early snowfall, construction did not start until November 7. Construction is scheduled to be completed December 31. How much revenue should Tantramar report in its October 31 financial statements? a) $10,000 b) $5,000 c) $0 d) none of these Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

67. Under the accrual basis of accounting, a) cash must be disbursed before an expense is recognized. b) profit is calculated by matching cash outflows against cash inflows. c) events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. d) the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

68. Adjusting entries are needed a) every time cash is received. b) every time financial statements are prepared. c) every time expenses are incurred or revenue is performed. d) not at all if you are reporting on an annual basis. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

69. Public companies reporting under IFRS must prepare adjusting entries every a) month. b) day. c) year. d) quarter. Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

70. When using accrual basis accounting, financial statement preparers must a) provide a supplementary note detailing that accrual accounting has been used. b) state within a note that cash basis accounting is not acceptable under GAAP. c) provide no supplementary note because the underlying assumption is that the accrual basis of accounting is used on all financial statements. d) none of these Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic

71. Which of the following items is NOT classified as an adjusting entry? a) prepaid expenses b) accrued expenses c) unearned revenues d) owner’s capital Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 72. A 52-week period is called a(n) a) fiscal year. b) interim period. c) quarter. d) business period.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 73. On September 25, Dolly Maids provided services to two clients and billed the clients a total of $600. On October 15, both clients paid their invoice in full. Dolly Maids’ cost related to this sale was $250 in salaries, which was paid on October 3. Assuming Dolly Maids has a September 30 year end, the business’s profit on the September 30 financial statements should be a) $0. b) $600. c) $850. d) $350. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 74. Snow Belt Construction Ltd. has a November 30 year end. On November 18 Snow Belt received a payment from Williamson Industries Ltd. in the amount of $50,000 as an advance on the construction for the new head office of Williamson. Construction started December 4 and is scheduled to be completed by January 31. How much revenue should the company report in its November 30 financial statements? a) $50,000 b) $25,000 c) $16,667 d) $0 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

75. On January 1, 2024, customers owed Omni Company $45,000 for services provided in 2023. During 2024, Omni Co. received $187,500 cash from customers. On December 31, 2024, customers owed Omni $29,250 for services provided in 2024. How much revenue should Omni recognize in 2024 under the accrual basis of accounting? a) $142,500 b) $171,750 c) $181,500 d) $187,500 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues CPA: Financial Reporting AACSB: Analytic 76. The unadjusted trial balance of Candy Co. on June 30, 2024, includes the following selected accounts: CANDY CO. Trial Balance (Selected Accounts) June 30, 2024 Debit Credit Supplies ............................................................................................ $ 5,600 Prepaid insurance ............................................................................ 2,400 Equipment ........................................................................................ 48,000 Accumulated depreciation—equipment ......................................... $ 4,400 Unearned revenue............................................................................ 18,900 An analysis of the accounts shows that a one-year insurance policy for $2,400 was purchased on June 1, 2024. Which of the following reflects the adjusting entry for the month of June? a) Prepaid Insurance ........................................................................................ 2,400 Insurance Expense ................................................................................. 2,400 b) Insurance Expense ....................................................................................... 200 Prepaid Insurance .................................................................................. 200 c) Prepaid Insurance......................................................................................... 2,400 Cash .......................................................................................... 2,400 d) none of these Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 77. The unadjusted trial balance of Candy Co. on June 30, 2024, includes the following selected accounts: CANDY CO. Trial Balance (Selected Accounts) June 30, 2024 Debit Credit Supplies ............................................................................................ $ 5,600 Prepaid insurance ............................................................................ 2,400 Equipment ........................................................................................ 48,000 Accumulated depreciation—equipment ......................................... $ 4,400 Unearned revenue............................................................................ 18,900 An analysis of the accounts shows that supplies on hand at June 30, 2024, was $1,600. Which of the following reflects the adjusting entry for the month of June? a) Supplies .......................................................................................... 5,600 Cash .......................................................................................... 5,600 b) Supplies Expense ......................................................................................... 1,600 Supplies ....... .......................................................................................... 1,600 c) Supplies Expense .......................................................................................... 4,000 Supplies .......................................................................................... 4,000 d) Supplies .......................................................................................... 1,600 Supplies Expense ................................................................................... 1,600 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

78. The unadjusted trial balance of Candy Co. on June 30, 2024, includes the following selected accounts: CANDY CO. Trial Balance (Selected Accounts) June 30, 2024 Debit Credit

Test Bank for Accounting Principles, Ninth Canadian Edition

Supplies ............................................................................................ $ 5,600 Prepaid insurance ............................................................................ 2,400 Equipment ........................................................................................ 48,000 Accumulated depreciation—equipment ......................................... Unearned revenue............................................................................

$ 4,400 18,900

An analysis of the accounts shows that equipment was purchased on July 1, 2023 with an estimated useful life of 10 years. Which of the following reflects the adjusting entry for the month of June? a) Accumulated Depreciation - Equipment ..................................................... 400 Depreciation Expense ............................................................................ 400 b) Depreciation Expense .................................................................................. 4,800 Accumulated Depreciation - Equipment ............................................... 4,800 c) Equipment .......................................................................................... 48,000 Cash .......................................................................................... 48,000 d) Depreciation Expense .................................................................................. 400 Accumulated Depreciation – Equipment .............................................. 400 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

79. The unadjusted trial balance of Candy Co. on June 30, 2024, includes the following selected accounts: CANDY CO. Trial Balance (Selected Accounts) June 30, 2024 Debit Credit Supplies ............................................................................................ $ 5,600 Prepaid insurance ............................................................................ 2,400 Equipment ........................................................................................ 48,000 Accumulated depreciation—equipment ......................................... $ 4,400 Unearned revenue............................................................................ 18,900 An analysis of the accounts shows that one-quarter of services related to the unearned revenue was performed in June 2024. Which of the following reflects the adjusting entry for the month of June? a) Unearned Revenue ....................................................................................... 4,725 Revenue .......................................................................................... 4,725 b) Unearned Revenue....................................................................................... 18,900 Revenue ....... .......................................................................................... 18,900 c) Revenue .......................................................................................... 4,725

Test Bank for Accounting Principles, Ninth Canadian Edition

Unearned Revenue................................................................................. d) Unearned Revenue....................................................................................... Revenue ..........................................................................................

14,175

4,725 14,175

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

80. The unadjusted trial balance of Shelley Co. on August 31, 2024, includes the following selected accounts: SHELLEY CO. Trial Balance (Selected Accounts) August 31, 2024 Debit Credit Supplies ............................................................................................ $ 8,400 Prepaid rent ...................................................................................... 12,000 Building............................................................................................. 96,000 Accumulated depreciation—building ............................................. $ 8,800 Unearned revenue............................................................................ 15,100 An analysis of the accounts shows that rent of $12,000 was paid on August 1 for one year’s rent in advance. Which of the following reflects the adjusting entry for the month of June? a) Prepaid Rent .......................................................................................... 1,000 Rent Expense .......................................................................................... 1,000 b) Rent Expense ................................................................................................ 12,000 Cash ............. .......................................................................................... 12,000 c) Prepaid Rent .......................................................................................... 12,000 Cash .......................................................................................... 12,000 d) Rent Expense .......................................................................................... 1,000 Prepaid Rent .......................................................................................... 1,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

81. Adjusting entries are needed to ensure that revenue is recorded when ______ and expenses are recorded when ______. a) the service is provided, incurred b) collected, paid c) the service is provided, paid d) collected, incurred Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

82. What is the “maximum” time frame for preparing adjusting entries under both ASPE and IFRS (public companies)? a) ASPE prepares adjusting entries monthly, IFRS prepares adjusting entries monthly. b) IFRS prepares adjusting entries quarterly, ASPE prepares adjusting entries quarterly. c) ASPE prepares adjusting entries annually, IFRS prepares adjusting entries quarterly. d) IFRS prepares adjusting entries annually, ASPE prepares adjusting entries quarterly. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

83. Once an unadjusted trial balance has been prepared, the next step in the accounting cycle is a) calculate profit. b) calculate owner’s capital at the end of the period. c) analyze the accounts for adjusting entries that need to be made. d) prepare financial statements. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

84. Martin’s Cove Marina has a September 30 year end. On August 1, 2024, it purchased a new marine crane to assist it with the autumn pull out of the boats in the marina. The physical life of the crane is expected to be 15 years, but Martin plans to keep the crane for only 10 years as this represents the asset’s useful life to the company and at which point they will scrap it and buy a newer model. The original cost of the crane is $50,000. The amount of depreciation expense that Martin should show in its financial statements for the year ended September 30, 2024, is a) $556. b) $5,000. c) $3,333. d) $833. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

85. Accounts often need to be adjusted because a) there is difficulty determining in which period a transaction should be recorded. b) many transactions affect more than one accounting period. c) there are always errors made in recording transactions. d) management may direct expenses to be recorded in future periods to increase this period’s profit. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 86. Adjusting entries are a) not necessary if the accounting system is operating properly. b) usually required before financial statements are prepared. c) made when the cash basis of accounting is used.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) made to income statement accounts only. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

87. Adjusting entries are required a) because some costs expire with the passage of time and have not yet been journalized. b) when the company's profits are below the budget. c) when expenses are recorded in the period in which they are earned. d) when revenues are recorded in the period in which the service is provided. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 88. An adjusting entry a) affects two balance sheet accounts. b) affects two income statement accounts. c) affects a balance sheet account and an income statement account. d) is always a compound entry. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

89. The preparation of adjusting entries is a) straightforward because the accounts that need adjustment will be out of balance.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) required every time financial statements are prepared. c) only required for accounts that do not have a normal balance. d) optional when financial statements are prepared. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

90. An asset–expense relationship exists with a) liability accounts. b) revenue accounts. c) prepaid expense adjusting entries. d) accrued expense adjusting entries. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

91. ABC Company purchased supplies costing $4,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of supplies revealed $1,600 still on hand. The appropriate adjusting entry to be made at the end of the period would be a) debit Supplies Expense, $1,600; credit Supplies, $1,600. b) debit Supplies, $2,400; credit Supplies Expense, $2,400. c) debit Supplies Expense, $2,400; credit Supplies, $2,400. d) debit Supplies, $1,600; credit Supplies Expense, $1,600. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

92. Complan Harness Shop received $2,000 cash for harness services to be provided in the future. The full amount was credited to the liability account Unearned Fees. If the Harness services have been provided at the end of the accounting period and no adjusting entry is made, this would cause a) expenses to be overstated. b) profit to be overstated. c) liabilities to be understated. d) revenues to be understated. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 93. Prepaid expenses are a) paid and recorded in an asset account before they are used or consumed. b) paid and recorded in an asset account after they are used or consumed. c) incurred but not yet paid or recorded. d) incurred and already paid or recorded. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

94. Which of the following reflect the balances of prepayment accounts prior to adjustment? a) Balance sheet accounts are understated and income statement accounts are understated. b) Balance sheet accounts are overstated and income statement accounts are overstated. c) Balance sheet accounts are overstated and income statement accounts are understated. d) Balance sheet accounts are understated and income statement accounts are overstated. Answer: c Bloomcode: Analysis Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 95. Kookie Kutter Bakery purchased $6,500 worth of baking supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the baking supplies indicated only $3,000 on hand. The adjusting entry that should be made by the company on June 30 is a) debit Supplies Expense, $3,000; credit Supplies, $3,000. b) debit Supplies Expense, $3,500; credit Supplies, $3,000. c) debit Supplies, $3,500; credit Supplies Expense, $3,500. d) debit Supplies Expense, $3,500; credit Supplies, $3,500. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 96. On July 1 Don Harry Gallery paid $4,000 to Fairy Realty for four months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared for August 31, the adjusting entry to be made by Don Harry is a) debit Rent Expense, $4,000; credit Prepaid Rent, $4,000. b) debit Prepaid Rent, $2,000; credit Rent Expense, $2,000. c) debit Rent Expense, $3,000; credit Prepaid Rent, $3,000. d) debit Rent Expense, $2,000; credit Prepaid Rent, $2,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 97. Depreciation expense for a period can be calculated by taking the a) original cost of a long-lived asset – accumulated depreciation. b) original cost of a long-lived asset ÷ depreciation rate. c) original cost of a long-lived asset ÷ useful life.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) fair value of a long-lived asset ÷ useful life. Answer: c Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

98. Accumulated depreciation is a) an expense account. b) an owner's equity account. c) a liability account. d) a contra asset account. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 99. Laura Diamonds purchased a computer for $3,600 on December 1. It is estimated that the useful life of the computer will be three years. If financial statements are to be prepared on December 31, the company should make the following adjusting entry a) debit Depreciation Expense, $100; credit Computer, $100. b) debit Depreciation Expense, $100; credit Accumulated Depreciation, $100. c) debit Depreciation Expense, $1,200; credit Accumulated Depreciation, $1,200. d) debit Cash, $100; credit Accumulated Depreciation, $100. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

100. Patterson Realty Company received a cheque for $21,000 on July 1 which represents a six month advance payment of rent on a building it rents to a client. Unearned Revenue was credited for the full $21,000. Financial statements will be prepared on July 31. Patterson Realty should make the following adjusting entry on July 31 a) debit Unearned Revenue, $3,500; credit Rent Revenue, $3,500. b) debit Rent Revenue, $3,500; credit Unearned Revenue, $3,500. c) debit Unearned Revenue, $21,000; credit Rent Revenue, $21,000. d) debit Cash, $21,000; credit Rent Revenue, $21,000. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 101. As prepaid expenses expire with the passage of time, the correct adjusting entry will be a a) debit to an asset account and a credit to an expense account. b) debit to an expense account and a credit to an asset account. c) debit to an asset account and a credit to an asset account. d) debit to an expense account and a credit to an expense account. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

102. Which of the following would NOT appear on a company’s adjusted trial balance? a) ending owner’s capital b) beginning owner’s capital c) the company’s assets d) the company’s liabilities Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

103. If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month's financial statements? a) Failure to make an adjustment does not affect the financial statements. b) Expenses will be overstated and profit and owner's equity will be understated. c) Assets will be overstated and profit and owner's equity will be understated. d) Assets will be overstated and profit and owner's equity will be overstated. Answer: d Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

104. At December 31, 2024, before any year-end adjustments, the Wolf Company's Insurance Expense account had a balance of $725 and its Prepaid Insurance account had a balance of $2,900. It was determined that $1,500 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be a) $1,500. b) $725. c) $2,225. d) $1,125. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 105. At December 31, 2024, before any year-end adjustments, Doris Knitting Company's Insurance Expense account had a balance of $725 and its Prepaid Insurance account had a balance of $2,900. It was determined that $1,500 of the Prepaid Insurance had not expired. The adjusted balance for Insurance Expense for the year would be a) $1,500.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) $2,125. c) $2,225. d) $1,125. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

106. Fireworks Hut paid $18,200 for a one-year insurance policy on January 1 and recorded the entire amount as prepaid insurance. Before preparing its March 31 financial statements, the company should make which of the following adjusting entries? a) debit Cash, $9,100; credit Prepaid Insurance, $9,100. b) debit Cash, $18,200; credit Insurance Expense, $18,200. c) debit Insurance Expense, $4,550; credit Prepaid Insurance $4,550. d) debit Prepaid Insurance, $13,650; credit Insurance Expense, $13,650. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 107. Depreciation of a long-lived asset is the process of a) valuing a long-lived asset at its fair value. b) increasing the cost of a long-lived asset over the periods the asset provides benefits. c) allocating the cost of a long-lived asset to an expense over the periods the asset provides a benefit to the entity. d) writing down a long-lived asset to its real value each accounting period. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

108. A new accountant working for the Amherst Sobey’s store incorrectly records $800 Depreciation Expense on store equipment on December 31 as follows: Dr. Cr.

Depreciation Expense Cash

800 800

The effect of this entry is to a) adjust the accounts to their proper amounts on December 31. b) understate total assets on the balance sheet as at December 31. c) overstate the carrying amount of the long-lived assets as at December 31. d) understate the carrying amount of the long-lived assets as at December 31. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

109. From an accounting standpoint, the acquisition of production equipment can be thought of as a long-term a) accrual of expense. b) accrual of revenue. c) accrual of unearned revenue. d) prepayment for services. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 110. In calculating depreciation, the number of years of useful life of the asset is a) known with certainty. b) an estimate. c) the estimated time period before repairs or maintenance will be required.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) based on the cost of the asset. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

111. An accumulated depreciation account a) is a contra liability account. b) increases on the debit side. c) is offset against total assets on the balance sheet. d) has a normal credit balance. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 112. The difference between the cost of a long-lived asset and its related accumulated depreciation is referred to as the a) fair value of the long-lived asset. b) blue book value of the long-lived asset. c) carrying amount of the long-lived asset. d) depreciated difference of the long-lived asset. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

113. If a business has several types of long-lived assets such as equipment, buildings, and trucks,

Test Bank for Accounting Principles, Ninth Canadian Edition

a) there should be only one accumulated depreciation account. b) there should be separate accumulated depreciation accounts for each type of long-lived asset. c) all the long-lived asset accounts will be recorded in one general ledger account. d) there is no need for an accumulated depreciation account. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 114. Which of the following would NOT result in unearned revenue? a) rent collected in advance from tenants b) services performed on account c) sale of season tickets to hockey games d) sale of two-year magazine subscriptions Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

115. If a business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit a) Cash. b) Prepaid Rent. c) Unearned Revenue. d) Rent Revenue. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

116. If a business has received cash in advance of services performed and credits a liability account, the adjusting entry needed after the services are performed will be a) debit Unearned Revenue and credit Cash. b) debit Unearned Revenue and credit Service Revenue. c) debit Unearned Revenue and credit Prepaid Expense. d) debit Unearned Revenue and credit Accounts Receivable. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic 117. Backroad Company purchased a plot of land for $100,000 on January 1. It plans to hold the land for seven years and then sell it. What is the amount of annual depreciation to be recorded? a) $14,286 b) $0 c) $1,190 d) $10,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

118. Amortization is a term that means the same as depreciation. Which of the following standards does not generally use the term “Amortization” for depreciable assets? a) ASPE b) IFRS c) GAAP d) CICA Answer: b Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

119. Land is not a depreciable asset because a) the future value of land cannot be determined. b) land has an unlimited useful life. c) land may deteriorate in the future. d) land is classified as a current asset. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments CPA: Financial Reporting AACSB: Analytic

120. If a resource has been consumed but an invoice from the supplier has not been received at the end of the accounting period, then a) an expense should be recorded when the invoice is received. b) an expense should be recorded when the cash is paid out. c) an adjusting entry should be made recognizing the expense. d) it is optional whether to record the expense before the invoice is received. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

121. Accrued revenues a) are received and recorded as liabilities before the service is provided. b) are recorded as revenues before the service is provided. c) are the result when the service has been provided but not yet recorded. d) are the result when the service has been provided and revenue has already been recorded.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic 122. Accrued expenses are a) paid and recorded in an asset account before they are used or consumed. b) paid and recorded in an asset account after they are used or consumed. c) incurred but not yet paid or recorded. d) incurred and already paid and/or recorded. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

123. The Steel Company employs ten employees and pays each employee $100 per day. Assuming March 31 falls on a Wednesday and all employees are paid each Friday, how much salaries expense should be accrued for the March 31 year end? a) $1,000 b) $400 c) $3,000 d) $0 Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

124. Unearned revenues a) are recorded as liabilities before the service is provided.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) occur when the service has been provided and recorded as a liability before cash is received. c) occur when the service has been provided but not yet recorded. d) occur when the service has been provided and already recorded. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

125. A liability-revenue relationship exists with a) prepaid expense adjusting entries. b) accrued expense adjusting entries. c) unearned revenue adjusting entries. d) accrued revenue adjusting entries. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

126. The accounts of a business before an adjusting entry is made to record an accrued revenue reflect an a) understated liability and an overstated owner's capital. b) overstated asset and an understated revenue. c) understated expense and an overstated revenue. d) understated asset and an understated revenue. Answer: d Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

127. James Woods High School borrowed $20,000 from the bank, signing a 6%, three-month note on September 1. Principal and interest are payable to the bank on December 1. If the school prepares monthly financial statements and uses months to calculate interest, the adjusting entry that the school should make for interest on September 30 would be a) debit Interest Expense, $400; credit Interest Payable, $400. b) debit Interest Expense, $100; credit Interest Payable, $100. c) debit Note Payable, $1,200; credit Cash, $1,200. d) debit Cash, $100; credit Interest Payable, $100. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic 128. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause a) profit to be understated. b) an overstatement of assets and an overstatement of liabilities. c) an understatement of expenses and an understatement of liabilities. d) an overstatement of expenses and an overstatement of liabilities. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic 129. Lars Richards, CPA, has performed $2,000 of accounting services for a client but has not billed the client as at the end of the accounting period. What adjusting entry must Lars make? a) debit Cash and credit Unearned Revenue. b) debit Accounts Receivable and credit Unearned Revenue. c) debit Accounts Receivable and credit Service Revenue. d) debit Unearned Revenue and credit Service Revenue. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

130. Lars Richards, CPA, has billed his clients for services performed. He subsequently receives payments from his clients. What entry will he make upon receipt of the payments? a) Debit Unearned Revenue and credit Service Revenue. b) Debit Cash and credit Accounts Receivable. c) Debit Accounts Receivable and credit Service Revenue. d) Debit Cash and credit Service Revenue. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

131. Sand Company signed a four-month, 5%, $9,000 note payable on September 1. The amount of interest to be accrued at the end of September is a) $150. b) $450. c) $112.50. d) $37.50. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic 132. Hungry Bear Gifts signs a three-month, 6% note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 for $40,000. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) Interest Expense ...................................................................................... Interest Payable ........................................................................... b) Interest Expense...................................................................................... Interest Payable ........................................................................... c) Interest Expense ...................................................................................... Interest Payable ........................................................................... d) Interest Expense...................................................................................... Note Payable ...............................................................................

400 2,400 600 2,400

400 2,400 600 2,400

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic 133. Scary World Amusement Park paid employee salaries on and through Friday, August 25, and the next payroll will be paid September 5. There are four more working days in August (28–31). Employees work five days a week and the company pays $800 a day in salaries. What will be the adjusting entry to accrue salaries at the end of August? a) Salaries Expense...................................................................................... 800 Salaries Payable ........................................................................... 800 b) Salaries Expense ..................................................................................... 3,200 Salaries Payable ........................................................................... 3,200 c) Salaries Expense ...................................................................................... 4,000 Salaries Payable ........................................................................... 4,000 d) No adjusting entry is required. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic 134. Fast Wind Turbines shows a balance in Salaries Payable of $80,000 at the end of the month. The next payroll amounting to $100,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries? a) Salaries Expense...................................................................................... 100,000 Salaries Payable ........................................................................... 100,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Salaries Expense ..................................................................................... Cash .............................................................................................. c) Salaries Expense ...................................................................................... Cash .............................................................................................. d) Salaries Expense ..................................................................................... Salaries Payable ...................................................................................... Cash ..............................................................................................

80,000 20,000 20,000 80,000

80,000 20,000 100,000

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

135. Which of the following is NOT considered an accrued expense account? a) Depreciation Expense b) Salaries Expense c) Rent Expense d) Interest Expense Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

136. Three factors determine the amount of interest that has accumulated. Which factor listed below is NOT applicable in determining interest accumulation? a) annual interest rate b) principal amount of the note c) the amount of your next payment d) the length of the applicable interest period Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare adjusting entries for accruals.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

137. Why do salary expenses need to be accrued at the financial reporting date? a) Salaries incurred are an actual expense for the time period in which they are incurred. b) If not accrued, the company will not have to pay the amounts in the future. c) The liability account will be overstated if not accrued. d) The expense account will be overstated if not accrued. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

138. Francine Miller is the owner of Miller Designs. At the end of September, the first month of business, Francine is preparing the monthly financial statements. At September 30, Miller Designs owed its employees $1,200 in salaries that will be paid on October 3. Which of the following reflects the adjusting entry needed at September 30? a) Salaries Payable .......................................................................................... 1,200 Salaries Expense .................................................................................... 1,200 b) Salaries Expense .......................................................................................... 1,200 Salaries Payable ..................................................................................... 1,200 c) Salaries Payable .......................................................................................... 1,200 Cash .......................................................................................... 1,200 d) Salaries Expense .......................................................................................... 1,200 Cash .......................................................................................... 1,200 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

139. Francine Miller is the owner of Miller Designs. At the end of September, the first month of business, Francine is preparing the monthly financial statements. On September 1, Miller Designs

Test Bank for Accounting Principles, Ninth Canadian Edition

borrowed $60,000 from a local bank on a five-year term loan. The annual interest rate is 5% and interest is paid monthly on the first of each month. Which of the following reflects the adjusting entry needed at September 30? a) Interest Payable .......................................................................................... 1,000 Interest Expense ..................................................................................... 1,000 b) Interest Expense ........................................................................................... 3,000 Interest Payable...................................................................................... 3,000 c) Interest Expense .......................................................................................... 600 Cash .......................................................................................... 600 d) Interest Expense .......................................................................................... 250 Interest Payable...................................................................................... 250 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

140. Francine Miller is the owner of Miller Designs. At the end of September, the first month of business, Francine is preparing the monthly financial statements. Revenue for services performed in September but not yet billed or recorded at September 30 totalled $2,200. Which of the following reflects the adjusting entry needed at September 30? a) Accounts Receivable..................................................................................... 2,200 Service Revenue ..................................................................................... 2,200 b) Cash .............................................................................................................. 2,200 Service Revenue ..................................................................................... 2,200 c) Service Revenue .......................................................................................... 2,200 Accounts Receivable .............................................................................. 2,200 d) Accounts Receivable .................................................................................... 2,200 Unearned Revenue................................................................................. 2,200 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

141. Springs Crystal borrowed $40,000 from the bank, signing a 3%, three-month note on October 1.

Test Bank for Accounting Principles, Ninth Canadian Edition

Principal and interest are payable to the bank on January 1. If the company prepares monthly financial statements, which of the following adjusting entries would the company make for the interest on October 31? a) Interest Payable .......................................................................................... 900 Interest Expense ..................................................................................... 900 b) Interest Expense ........................................................................................... 100 Interest Payable...................................................................................... 100 c) Interest Expense .......................................................................................... 300 Cash .......................................................................................... 300 d) Interest Expense .......................................................................................... 1,200 Interest Payable...................................................................................... 1,200 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

142. Trotman Ltd. had a utility bill for $630 for September 30 that was not recorded. The company paid the bill on October 5. Which of the following reflects the adjusting entry required at September 30? a) Accounts Payable ......................................................................................... 630 Utilities Expense ..................................................................................... 630 b) Utilities Expense ........................................................................................... 630 Cash ............. .......................................................................................... 630 c) Utilities Expense .......................................................................................... 630 Accounts Payable ................................................................................... 630 d) none of these Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals CPA: Financial Reporting AACSB: Analytic

143. The adjusted trial balance for the year ended December 31 for Ming Company is presented below: MING COMPANY Adjusted Trial Balance

Test Bank for Accounting Principles, Ninth Canadian Edition

December 31 Dr. $ 6,000 7,800 3,000 1,000 36,000

Cr.

Cash Accounts receivable Prepaid rent Supplies Equipment Accumulated depreciation—equipment $ 3,600 Accounts payable 6,000 Notes payable 20,000 Interest payable 240 Salaries payable 800 Unearned revenue 8,520 D. Ming, capital 16,400 D. Ming, drawings 6,400 Service revenue 18,600 Salaries expense 4,920 Utilities expense 4,200 Rent expense 2,200 Supplies expense 1,400 Depreciation expense 1,000 Interest expense ____ 240________________ Totals $74,160 $74,160 How much is profit for the year? a) $13,160 b) $4,880 c) $4,640 d) $1,440 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic 144. The adjusted trial balance for the year ended December 31 for Ming Company is presented below: MING COMPANY Adjusted Trial Balance December 31 Dr.

Cr.

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash Accounts receivable Prepaid rent Supplies Equipment Accumulated depreciation— equipment Accounts payable Notes payable Interest payable Salaries payable Unearned revenue D. Ming, capital D. Ming, drawings Service revenue Salaries expense Utilities expense Rent expense Supplies expense Depreciation expense Interest expense Totals

$ 6,000 7,800 3,000 1,000 36,000

6,400

$ 3,600 6,000 20,000 240 800 8,520 16,400

18,600 4,920 4,200 2,200 1,400 1,000 ____ 240________________ $74,160 $74,160

How much are total liabilities? a) $30,640 b) $39,160 c) $27,040 d) $35,560 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic 145. The adjusted trial balance for the year ended December 31 for Ming Company is presented below: MING COMPANY Adjusted Trial Balance December 31 Cash Accounts receivable

Dr. $ 6,000 7,800

Cr.

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepaid rent Supplies Equipment Accumulated depreciation — equipment Accounts payable Notes payable Interest payable Salaries payable Unearned revenue D. Ming, capital D. Ming, drawings Service revenue Salaries expense Utilities expense Rent expense Supplies expense Depreciation expense Interest expense Totals

3,000 1,000 36,000

6,400

$ 3,600 6,000 20,000 240 800 8,520 16,400

18,600 4,920 4,200 2,200 1,400 1,000 ____ 240________________ $74,160 $74,160

How much are total assets? a) $50,200 b) $53,800 c) $50,800 d) $47,200 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic 146. The adjusted trial balance for the year ended December 31 for Ming Company is presented below: MING COMPANY Adjusted Trial Balance December 31 Cash Accounts receivable Prepaid rent

Dr. $ 6,000 7,800 3,000

Cr.

Test Bank for Accounting Principles, Ninth Canadian Edition

Supplies Equipment Accumulated depreciation — equipment Accounts payable Notes payable Interest payable Salaries payable Unearned revenue D. Ming, capital D. Ming, drawings Service revenue Salaries expense Utilities expense Rent expense Supplies expense Depreciation expense Interest expense Totals

1,000 36,000

6,400

$ 3,600 6,000 20,000 240 800 8,520 16,400 18,600

4,920 4,200 2,200 1,400 1,000 ____ 240________________ $74,160 $74,160

How much is owners’ capital at December 31? a) $16,400 b) $14,640 c) $27,040 d) $21,040 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic

147. The adjusted trial balance for the year ended December 31 for Ming Company is presented below: MING COMPANY Adjusted Trial Balance December 31 Cash Accounts receivable Prepaid rent Supplies

Dr. $ 6,000 7,800 3,000 1,000

Cr.

Test Bank for Accounting Principles, Ninth Canadian Edition

Equipment Accumulated depreciation — equipment Accounts payable Notes payable Interest payable Salaries payable Unearned revenue D. Ming, capital D. Ming, drawings Service revenue Salaries expense Utilities expense Rent expense Supplies expense Depreciation expense Interest expense Totals

36,000

6,400

$ 3,600 6,000 20,000 240 800 8,520 16,400

18,600 4,920 4,200 2,200 1,400 1,000 ____ 240_______________ $74,160 $74,160

How much is total revenue? a) $8,520 b) $18,600 c) $27,120 d) $4,640 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic

148. A company usually determines the amount of supplies used during a period by a) adding the supplies on hand to the balance of the Supplies account. b) summing the amount of supplies purchased during the period. c) taking the difference between the supplies purchased and the supplies paid for during the period. d) taking the difference between the balance of the Supplies account and the cost of supplies on hand. Answer: d Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic 149. Which of the following would be prepared immediately after all adjusting entries for a period have been made? a) the initial trial balance b) the adjusted trial balance c) the statement of owner’s equity d) the balance sheet Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic

150. An adjusted trial balance a) is prepared after the financial statements are completed. b) proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made. c) is a required financial statement under generally accepted accounting principles. d) proves that all adjusting entries have been made. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic

151. Which of the statements below is NOT true? a) An adjusted trial balance should show ledger account balances. b) An adjusted trial balance can be used to prepare financial statements. c) An adjusted trial balance proves the mathematical equality of debits and credits in the ledger. d) An adjusted trial balance is prepared before all transactions have been journalized.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic 152. Which of the following statements is prepared from the unadjusted trial balance? a) income statement b) statement of owner’s equity c) balance sheet d) none of these Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 153. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Interim period Fiscal year Unearned revenue Prepaid expenses Adjusted trial balance

F. G. H. I. J.

Accrued revenues Depreciation Accumulated depreciation Accrued expenses Carrying amount

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

An accounting period of less than 12 months An accounting period of 12 months or 52 weeks Expenses paid before they are incurred Original cost less accumulated depreciation Cash that has been received in advance of services being performed A contra asset account A cost allocation process A trial balance prepared after the adjusting entries have been made Service provided but not yet recorded Expenses incurred but not yet recorded

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 1. A 2. B 3. D 4. J 5. C 6. H 7. G 8. E 9. F 10. I Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain accrual basis accounting, and when to recognize revenues and expenses. Section Reference: Timing Issues Learning Objective: Describe adjusting entries and prepare adjusting entries for prepayments. Section Reference: Adjusting Entries and Prepayments Learning Objective: Prepare adjusting entries for accruals. Section Reference: Adjusting Entries for Accruals Learning Objective: Describe the nature and purpose of an adjusted trial balance, and prepare one. Section Reference: The Adjusted Trial Balance and Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 4 COMPLETION OF THE ACCOUNTING CYCLE CHAPTER STUDY OBJECTIVES 1. Prepare closing entries and a post-closing trial balance. At the end of an accounting period, the temporary account balances (revenue, expense, Income Summary, and Owner’s Drawings) are transferred to the Owner’s Capital account by journalizing and posting closing entries. Separate entries are made to close revenues and expenses to Income Summary; then Income Summary to Owner’s Capital; and, finally, Owner’s Drawings to Owner’s Capital. The temporary accounts begin the new period with a zero balance and the Owner’s Capital account is updated to show its end-of-period balance. A post-closing trial balance has the balances in permanent accounts (i.e., balance sheet accounts) that are carried forward to the next accounting period. The purpose of this trial balance, as with other trial balances, is to prove the equality of these account balances. 2. Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. The steps in the accounting cycle are (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize and post closing entries, and (9) prepare a post-closing trial balance. A work sheet may be used to help prepare adjusting entries and financial statements. Reversing entries are an optional step that may be used at the beginning of the next accounting period. Correcting entries are recorded whenever an error (an incorrect journal entry) is found. A correcting entry can be determined by comparing the incorrect entry with the journal entry that should have been recorded (the correct entry). The comparison will show which accounts need to be corrected and by how much. The correcting entry will correct the accounts. An equally acceptable alternative is to reverse the incorrect entry and then record the correct entry. 3. Prepare a classified balance sheet. In a classified balance sheet, assets are classified as current assets and non-current assets, which include long-term investments; property, plant, and equipment; intangible assets; and goodwill. Liabilities are classified as either current or non-current. Current assets are assets that are expected to be realized within one year of the balance sheet date. Current liabilities are liabilities that are expected to be paid from current assets within one year of the balance sheet date. The classified balance sheet also includes an equity section, which varies with the form of business organization. 4. Illustrate measures used to evaluate liquidity. One of the measures used to evaluate a company’s short-term liquidity is its working capital, which is the excess of current assets over current liabilities. This can also be expressed as the current ratio (current assets ÷ current liabilities). The acid-test ratio is a measure of the company’s immediate short-term liquidity and is calculated by dividing the sum of

Test Bank for Accounting Principles, Ninth Canadian Edition

cash, short-term investments, and receivables by current liabilities. Ratio trends can also be examined using visualizations. For example, current ratios for multiple years can be presented in a graph, visual, or table. 5. Prepare a work sheet (Appendix 4A). A work sheet is an optional multi-column form, used to assist in preparing adjusting entries and financial statements. The steps in preparing a work sheet are (1) prepare a trial balance on the work sheet; (2) enter the adjustments in the adjustment columns; (3) enter adjusted balances in the adjusted trial balance columns; (4) enter adjusted trial balance amounts in the correct financial statement columns; and (5) total the statement columns, calculate profit (or loss), and complete the work sheet. 6. Prepare reversing entries (Appendix 4B). Reversing entries are optional entries used to simplify bookkeeping. They are made at the beginning of the new accounting period and are the direct opposite of the adjusting entries made in the preceding period. Only accrual adjusting entries are reversed. If reversing entries are used, then subsequent cash transactions can be recorded without referring to the adjusting entries prepared at the end of the previous period.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 The following selected accounts appear in the adjusted trial balance for Bender Company: 1. Accumulated Depreciation 5. Supplies 2. Depreciation Expense 6. Accounts Payable 3. J. Bender, Capital 7. Service Revenue 4. J. Bender, Drawings Instructions Identify the accounts that would be included in the post-closing trial balance. Solution 1 (5 min.) The following are accounts that would be included in the post-closing trial balance. 1. Accumulated Depreciation 3.

J. Bender, Capital

5.

Supplies

6.

Accounts Payable

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic Exercise 2 The closing process requires only temporary accounts to be adjusted. Listed below are both temporary and permanent accounts. 1. Owner’s Drawings 2. Rent Expense 3. Accounts Payable 4. Cash 5. Owner’s Capital 6. Prepaid Expense 7. Depreciation Expense 8. Land 9. Unearned Revenue 10. Service Revenue

Test Bank for Accounting Principles, Ninth Canadian Edition

11. Notes Payable 12. Income Summary 13. Salaries Expense 14. Interest Payable 15. Accounts Receivable Instructions State which accounts are permanent (P) or temporary (T). Solution 2 1. T 2.

T

3.

P

4.

P

5.

P

6.

P

7.

T

8.

P

9.

P

10. T 11. P 12. T 13. T 14. P 15. P Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 3 All revenue accounts (totalling $600,000), expense accounts (totalling $650,000), and the Income Summary account have been closed for the year ended December 31, 2024, for Walford Productions, an unincorporated business. After closing those accounts, P. Walford, Capital has a balance of $115,000, and P. Walford, Drawings has a balance of $48,000. Instructions a) Journalize the entries required to complete the closing of the accounts. b) Prepare a statement of owner's equity for the year ended December 31, 2024. Solution 3 (10 min.) a) P. Walford, Capital ..................................................................................... P. Walford, Drawings ....................................................................... To close drawings to capital. b)

48,000

48,000

WALFORD PRODUCTIONS Statement of Owner's Equity Year Ended December 31, 2024 P. Walford, capital, January 1 .................................................................. Less: Loss ................................................................................................. Drawings ......................................................................................... P. Walford, capital, December 31 .............................................................

$50,000 48,000

$165,000 98,000 $ 67,000

Bloomcode: Application Difficulty: Medium Learning Objective 1: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic Exercise 4 The adjusted account balances of MacDonald Company, at December 31, 2024, are as follows: Cash .................................................... $12,700 Accounts payable........................ $12,000 Accounts receivable ........................... 22,000 Notes payable ............................. 7,000 Prepaid insurance .............................. 10,000 Accumulated depreciation— Equipment .......................................... 40,000 equipment .................................. 14,000 Depreciation expense ........................ 7,000 Service revenue........................... 27,000 B. MacDonald, drawings .................... 1,500 B. MacDonald, capital ................. 22,000 Advertising expense ........................... 400 Unearned service revenue .......... 16,000 Rent expense ...................................... 1,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Salaries expense ................................. Insurance expense .............................

2,000 600 $98,000

$98,000

Instructions a) Prepare closing entries for December 31, 2024. b) Determine the balance in B. MacDonald's capital account after the entries have been posted. Solution 4 (10 min.) a) Dec. 31 Service Revenue........................................................................... Income Summary ................................................................. To close revenue account.

b)

27,000

31 Income Summary ........................................................................ Depreciation Expense .......................................................... Advertising Expense ............................................................. Rent Expense ........................................................................ Salaries Expense .................................................................. Insurance Expense ............................................................... To close expense accounts.

11,800

31 Income Summary ........................................................................ B. MacDonald, Capital.......................................................... To close income summary to owner’s capital.

15,200

31 B. MacDonald, Capital ................................................................. B. MacDonald, Drawings ...................................................... To close drawings account.

1,500

B. MacDonald, Capital 22,000 15,200 1,500 Bal. 35,700

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

27,000

7,000 400 1,800 2,000 600

15,200

1,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 5 At March 31, 2024, account balances after adjustments for Maddux Cinema are as follows: Account Balances Accounts (After Adjustment) Cash .................................................................................................................. $ 6,000 Supplies ............................................................................................................ 4,000 Equipment ........................................................................................................ 50,000 Accumulated depreciation—equipment ......................................................... 12,000 Accounts payable ............................................................................................. 5,000 N. Maddux, capital............................................................................................ 20,000 N. Maddux, drawings ........................................................................................ 12,000 Admission revenue ........................................................................................... 69,250 Concession revenue ......................................................................................... 46,250 Interest revenue ............................................................................................... 500 Advertising expense ......................................................................................... 12,000 Supplies expense.............................................................................................. 19,000 Depreciation expense ...................................................................................... 4,000 Insurance expense ........................................................................................... 16,000 Rent expense .................................................................................................... 12,000 Salaries expense ............................................................................................... 13,000 Utilities expense ............................................................................................... 5,000 Instructions a) Prepare the closing journal entries for Maddux Cinema. b) Prepare a post-closing trial balance. Solution 5 (15 min.) a) Mar. 31 Admission Revenue ..................................................................... Concession Revenue.................................................................... Interest Revenue .......................................................................... Income Summary ................................................................. To close revenue accounts. 31 Income Summary ........................................................................ Advertising Expense ............................................................ Supplies Expense ................................................................ Depreciation Expense ......................................................... Insurance Expense .............................................................. Rent Expense ....................................................................... Salaries Expense .................................................................. Utilities Expense .................................................................. To close expense accounts.

69,250 46,250 500 116,000

81,000

12,000 19,000 4,000 16,000 12,000 13,000 5,000

Test Bank for Accounting Principles, Ninth Canadian Edition

31 Income Summary ........................................................................ N. Maddux, Capital ............................................................... To close income summary to owner’s capital.

35,000

31 N. Maddux, Capital ...................................................................... N. Maddux, Drawings .......................................................... To close drawings account.

12,000

b)

MADDUX CINEMA Post-Closing Trial Balance March 31, 2024 Cash .......................................................................................................... Supplies .................................................................................................... Equipment ................................................................................................ Accumulated depreciation–equipment .................................................. Accounts payable ..................................................................................... N. Maddux, capital ................................................................................... Total ................................................................................................

Debit $ 6,000 4,000 50,000

$60,000

35,000

12,000

Credit

$12,000 5,000 43,000 $60,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic Exercise 6 The adjusted account balances of Hobby Centre at July 31 are as follows: Accounts Account Balances Accounts Account Balances Cash .................................................. $ 11,000 Service revenue........................... $105,000 Accounts receivable ......................... 25,000 Interest revenue .......................... 8,000 Supplies ............................................ 4,000 Depreciation expense ................. 27,000 Prepaid insurance ............................ 8,000 Insurance expense ...................... 6,000 Buildings ........................................... 300,000 Salaries expense ......................... 30,000 Accumulated depreciation– ............ Supplies expense ........................ 9,000 buildings ........................................... 120,000 Utilities expense.......................... 12,000 Accounts payable ............................. 19,000 D. Fortier, capital .............................. 195,000 D. Fortier, drawings .......................... 15,000 Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare the end-of-year closing entries for Hobby Centre. Solution 6 (10 min.) Jul. 31 Service Revenue........................................................................... Interest Revenue .......................................................................... Income Summary ................................................................. To close revenue accounts.

105,000 8,000

31

Income Summary ........................................................................ Depreciation Expense .......................................................... Insurance Expense ............................................................... Salaries Expense .................................................................. Supplies Expense ................................................................. Utilities Expense................................................................... To close expense accounts.

84,000

31

Income Summary ........................................................................ D. Fortier, Capital ................................................................. To close income summary account to owner’s capital.

29,000

31

D. Fortier, Capital ......................................................................... D. Fortier, Drawings ............................................................. To close drawings account.

15,000

113,000

27,000 6,000 30,000 9,000 12,000

29,000

15,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic Exercise 7 The income statement of Marc’s Gamestation Repair is as follows: MARC’S GAMESTATION REPAIR Income Statement Month Ended April 30, 2024

Revenue Service revenue ........................................................................................ Expenses Salaries expense ....................................................................................... Depreciation expense............................................................................... Utilities expense ....................................................................................... Rent expense ............................................................................................ Supplies expense ......................................................................................

$17,000 $3,400 350 1,400 600 1,050

Test Bank for Accounting Principles, Ninth Canadian Edition

Total expenses................................................................................ Profit for the month .........................................................................................

6,800 $10,200

On April 1, the balance in Marc Luck, Capital was $11,200. During April, Marc withdrew $8,200 cash for personal use. Instructions a) Prepare closing entries at April 30. b) Prepare a statement of owner's equity for the month of April. Solution 7 (10 min.) a) Apr. 30 Service Revenue............................................................................ Income Summary .................................................................. To close revenue account.

17,000 17,000

30

Income Summary ......................................................................... Salaries Expense ................................................................... Depreciation Expense ........................................................... Utilities Expense.................................................................... Rent Expense ......................................................................... Supplies Expense .................................................................. To close expense accounts.

6,800

30

Income Summary ......................................................................... M. Luck, Capital ..................................................................... To close income summary to owner’s capital.

10,200

30

M. Luck, Capital............................................................................. M. Luck, Drawings ................................................................. To close drawings account.

8,200

b)

MARC’S GAMESTATION REPAIR Statement of Owner's Equity Month Ended April 30, 2024 M. Luck, capital, April 1............................................................................. Add: Profit for the month ......................................................................... Less: Drawings .......................................................................................... M. Luck, capital, April 30...........................................................................

Bloomcode: Application Difficulty: Medium

$11,200 10,200 21,400 8,200 $13,200

3,400 350 1,400 600 1,050

10,200

8,200

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic Exercise 8 The adjusted trial balance for Jurassic Services Company at December 31, 2024, is as follows: Jurassic Services Company Adjusted Trial Balance December 31, 2024 Cash .................................................................................................................. Accounts receivable ......................................................................................... Prepaid insurance ............................................................................................ Prepaid rent ...................................................................................................... Supplies ............................................................................................................ Equipment ........................................................................................................ Accumulated depreciation–equipment .......................................................... Furniture ........................................................................................................... Accumulated depreciation–furniture .............................................................. Accounts payable ............................................................................................. Salaries payable ............................................................................................... Unearned revenue............................................................................................ J. Jurassic, drawings ........................................................................................ J. Jurassic, capital ............................................................................................ Service revenue ................................................................................................ Salaries expense ............................................................................................... Depreciation expense ...................................................................................... Rent expense .................................................................................................... Insurance expense ........................................................................................... Supplies expense.............................................................................................. Advertising expense .........................................................................................

Debit $21,400 1,500 2,000 5,000 3,330 17,500 25,000

Credit

$5,200 4,250 8,400 12,200 6,700

15,000

58,567 33,500

24,387 4,500 5,500 2,200 700 800___________ $128,817 $128,817

Instructions a) Prepare the year-end closing entries for Jurassic Services Company at December 31, 2024. b) Prepare a post-closing trial balance. Solution 8 (15 min.) a) Dec. 31 Service Revenue............................................................................ Income Summary .................................................................. To close revenue account.

33,500

33,500

Test Bank for Accounting Principles, Ninth Canadian Edition

31

Income Summary ......................................................................... Salaries Expense ................................................................... Depreciation Expense ........................................................... Rent Expense ......................................................................... Insurance Expense ................................................................ Supplies Expense .................................................................. Advertising Expense .............................................................. To close expense accounts.

38,087

31

J. Jurassic, Capital ........................................................................ Income Summary .................................................................. To close income summary to owner’s capital.

4,587

31

J. Jurassic, Capital ........................................................................ J. Jurassic, Drawings............................................................. To close drawings account.

15,000

24,387 4,500 5,500 2,200 700 800

4,587

15,000

b) Jurassic Services Company Post-Closing Trial Balance December 31, 2024

Debit $21,400 1,500 2,000 5,000 3,330 17,500

Cash .................................................................................................................. Accounts receivable ......................................................................................... Prepaid insurance ............................................................................................ Prepaid rent ...................................................................................................... Supplies ............................................................................................................ Equipment ........................................................................................................ Accumulated depreciation–equipment .......................................................... Furniture ........................................................................................................... 25,000 Accumulated depreciation–furniture .............................................................. Accounts payable ............................................................................................. Salaries payable ............................................................................................... Unearned revenue............................................................................................ J. Jurassic, capital ............................................................................................ _________ $75,730 Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

Credit

$5,200 4,250 8,400 12,200 6,700 38,980 $75,730

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 9 The trial balances of Grant Company follow with the accounts arranged in alphabetical order: Trial Balances Unadjusted Adjusted Post-Closing Accounts payable .......................................... $10,000 $10,000 $10,000 Accounts receivable ...................................... 2,200 3,200 3,200 Accumulated depreciation–equipment ....... 13,000 17,000 17,000 Advertising expense ...................................... 0 11,300 0 Cash ............................................................... 60,000 60,000 60,000 Depreciation expense ................................... 0 4,000 0 Equipment ..................................................... 75,000 75,000 75,000 F. Grant, capital ............................................. 82,200 82,200 102,400 F. Grant, drawings ......................................... 16,000 16,000 0 Prepaid advertising ....................................... 12,800 1,500 1,500 Prepaid rent ................................................... 15,000 11,000 11,000 Rent expense ................................................. 0 4,000 0 Service revenue ............................................. 96,000 105,000 0 Supplies ......................................................... 3,200 700 700 Supplies expense........................................... 2,000 4,500 0 Unearned revenue......................................... 23,000 15,000 15,000 Salaries expense ............................................ 38,000 45,000 0 Salaries payable ............................................ 0 7,000 7,000 Instructions Analyze the data and prepare a) the adjusting entries, and b) the closing entries made by Grant Company. Solution 9 (20 min.) a) Adjusting Entries Depreciation Expense............................................................................... Accumulated Depreciation–Equipment ..........................................

4,000

Advertising Expense ................................................................................. Prepaid Advertising ..........................................................................

11,300

Unearned Revenue ................................................................................... Service Revenue................................................................................

8,000

Accounts Receivable ................................................................................ Service Revenue................................................................................

1,000

Rent Expense ............................................................................................ Prepaid Rent .....................................................................................

4,000

4,000

11,300 8,000

1,000

4,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b)

Supplies Expense...................................................................................... Supplies.............................................................................................

2,500

Salaries Expense ....................................................................................... Salaries Payable ................................................................................

7,000

Closing Entries Service Revenue ....................................................................................... Income Summary..............................................................................

105,000

Income Summary ..................................................................................... Advertising Expense.......................................................................... Depreciation Expense ....................................................................... Rent Expense..................................................................................... Supplies Expense .............................................................................. Salaries Expense ...............................................................................

68,800

Income Summary ..................................................................................... F. Grant, Capital ................................................................................

36,200

F. Grant, Capital ........................................................................................ F. Grant, Drawings.............................................................................

16,000

2,500

7,000

105,000

11,300 4,000 4,000 4,500 45,000 36,200

16,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic Exercise 10 Below is an adjusted trial balance.

ROSS ROCKBOLTS Adjusted Trial Balance December 31, 2024

Cash .................................................................................................................. Accounts receivable ......................................................................................... Supplies ............................................................................................................ Prepaid insurance ............................................................................................ Equipment ........................................................................................................ Accumulated depreciation–equipment .......................................................... Notes payable................................................................................................... Accounts payable .............................................................................................

Debit $13,500 4,550 175 1,100 8,350

Credit

$1,670 12,500 750

Test Bank for Accounting Principles, Ninth Canadian Edition

Unearned revenue............................................................................................ S. Ross, capital.................................................................................................. S. Ross, drawings.............................................................................................. Service revenue ................................................................................................ Depreciation expense ...................................................................................... Insurance expense ........................................................................................... Rent expense ....................................................................................................

5,000

1,250 8,175

47,500 1,670 12,500 25,000 _________ $71,845 $71,845

Instructions Prepare a post-closing trial balance. Solution 10

ROSS ROCKBOLTS Post-Closing Trial Balance December 31, 2024

Debit Cash .................................................................................................................. $13,500 Accounts receivable ......................................................................................... 4,550 Supplies ............................................................................................................ 175 Prepaid insurance ............................................................................................ 1,100 Equipment ........................................................................................................ 8,350 Accumulated depreciation–equipment .......................................................... Notes payable................................................................................................... Accounts payable ............................................................................................. Unearned revenue............................................................................................ S. Ross, capital.................................................................................................. _________ $27,675

Credit

$1,670 12,500 750 1,250 *11,505 $27,675

* S. Ross, capital = $8,175+ ($47,500 – $1,670 – $12,500 – $25,000) – $5,000 = $11,505 Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic Exercise 11 The adjusted account balances of Johanna Ltd. at December 31, 2024, are as follows: Accounts receivable ........................... Notes receivable ................................. Prepaid insurance .............................. Equipment ..........................................

$ 17,600 6,000 6,000 74,000

Bank indebtedness ..................... Accounts payable........................ Notes payable ............................. Accumulated depreciation–

$ 2,300 11,000 56,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Depreciation expense ........................ J. Johanna, drawings ......................... Maintenance expense ........................ Legal expense ..................................... Salaries expense ................................. Insurance expense .............................

22,900 16,000 2,200 3,300 20,000 1,800 $169,800

equipment................................... Service revenue........................... Rent revenue ............................... J. Johanna, capital ..................

9,200 62,500 10,000 18,000

___________ $169,800

Instructions a) Prepare closing entries for December 31, 2024. b) Prepare a post-closing trial balance at December 31, 2024. Solution 11 (15 min.) a) Dec. 31 Service Revenue........................................................................... Rent Revenue ............................................................................... Income Summary ................................................................. To close revenue accounts.

b)

62,500 10,000

31 Income Summary ........................................................................ Depreciation Expense .......................................................... Maintenance Expense .......................................................... Legal Expense....................................................................... Salaries Expense .................................................................. Insurance Expense ............................................................... To close expense accounts.

50,200

31 Income Summary ........................................................................ J. Johanna, Capital .............................................................. To close income summary to owner’s capital.

22,300

31 J. Johanna, Capital ...................................................................... J. Johanna, Drawings........................................................... To close drawings account.

16,000

72,500

22,900 2,200 3,300 20,000 1,800

22,300

16,000

JOHANNA LTD. Post-Closing Trial Balance December 31, 2024

Accounts receivable ........................... $ 17,600 Notes receivable ................................. 6,000 Prepaid insurance .............................. 6,000 Equipment .......................................... 74,000

Bank indebtedness ..................... Accounts payable........................ Notes payable ............................. Accumulated depreciation–

$ 2,300 11,000 56,800

Test Bank for Accounting Principles, Ninth Canadian Edition

$103,600

equipment J. Johanna, capital

9,200 24,300 $103,600

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic Exercise 12 The adjusted account balances of Yogi Company at December 31, 2024, are as follows: Accounts receivable ........................... $ 16,000 Notes receivable ................................. 13,000 Prepaid insurance .............................. 6,000 Machinery ........................................... 50,000 Depreciation expense ........................ 7,000 G. Yogi, drawings ................................ 4,500 Utilities expense ................................. 600 Rent expense ...................................... 3,000 Salaries expense ................................. 10,200 Insurance expense ............................. 700 $111,000

Bank indebtedness ..................... $ 14,000 Accounts payable........................ 6,000 Notes payable ............................. 10,000 Accumulated depreciation– machinery ................................... 16,000 Service revenue........................... 29,000 Interest revenue .......................... 2,000 G. Yogi, capital.......................... 18,000 Unearned revenue …………… 16,000 ___________ $111,000

Instructions a) Prepare closing entries for December 31, 2024. b) Determine the balance in G. Yogi's capital account after the entries have been posted. c) Prepare a post-closing trial balance at December 31, 2024. Solution 12 (15 min.) a) Dec. 31 Service Revenue........................................................................... Interest Revenue .......................................................................... Income Summary ................................................................. To close revenue accounts. 31 Income Summary ........................................................................ Depreciation Expense .......................................................... Utilities Expense................................................................... Rent Expense ........................................................................ Salaries Expense ..................................................................

29,000 2,000

21,500

31,000

7,000 600 3,000 10,200

Test Bank for Accounting Principles, Ninth Canadian Edition

Insurance Expense ............................................................... To close expense accounts.

b)

31 Income Summary ........................................................................ G. Yogi, Capital ..................................................................... To close income summary to owner’s capital.

9,500

31 G. Yogi, Capital ............................................................................. G. Yogi, Drawings.................................................................. To close drawings account.

4,500

G. Yogi, Capital

4,500

c)

700

Bal.

9,500

4,500

18,000 9,500 23,000

YOGI COMPANY Post-Closing Trial Balance December 31, 2024

Accounts receivable ........................... $16,000 Notes receivable ................................. 13,000 Prepaid insurance .............................. 6,000 Machinery ........................................... 50,000 $85,000

Bank indebtedness ..................... Accounts payable........................ Notes payable ............................. Accumulated depreciation– machinery Unearned revenue G. Yogi, capital

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic Exercise 13 Listed below are some of the steps required to complete the accounting cycle: 1. Analyze business transactions. 2. ___________________________ 3. Post to general ledger accounts.

$14,000 6,000 10,000 16,000 16,000 23,000 $85,000

Test Bank for Accounting Principles, Ninth Canadian Edition

4. 5. 6. 7. 8. 9.

Prepare a trial balance. ___________________________ ___________________________ ___________________________ Journalize and post closing entries. ___________________________

Instructions Fill in the blank with the appropriate step in the accounting cycle. Solution 13 2. Journalize the transactions. 5.

Journalize and post adjusting entries.

6.

Prepare an adjusted trial balance.

7.

Prepare financial statements.

9.

Prepare a post-closing trial balance.

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 14 Listed below are the steps in the accounting cycle: 1. Analyze business transactions. 2. Journalize the transactions. 3. Post to general ledger accounts. 4. Prepare a trial balance. 5. Journalize and post adjusting entries. 6. Prepare an adjusted trial balance. 7. Prepare financial statements. 8. Journalize and post closing entries. 9. Prepare a post-closing trial balance. Instructions Beside each step determine if the step can be performed daily (D), periodically (P) such as monthly,

Test Bank for Accounting Principles, Ninth Canadian Edition

quarterly, or annually, or only performed annually (A). Solution 14 1. D 2.

D

3.

D

4.

P

5.

P

6.

P

7.

P

8.

A

9.

A

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 15 As Francine Smith was doing her year-end accounting, she noticed that the bookkeeper had made errors in recording several transactions. The erroneous transactions are as follows: 1. A cheque for $1,800 was issued for supplies previously purchased on account. The bookkeeper debited Accounts Receivable and credited Cash for $1,800. 2. A cheque for $340 was received as payment on account. The bookkeeper debited Accounts Payable for $430 and credited Accounts Receivable for $430. 3. When making the entry to record the year's depreciation expense for equipment, the bookkeeper debited Accumulated Depreciation–Equipment for $2,200 and credited Cash for $2,200. 4. When accruing the interest on a note payable, the bookkeeper debited Cash for $85 and credited Interest Payable for $85. Instructions Prepare the appropriate correcting entries. (Do not reverse the original entries.) Solution 15 (5 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

1.

Accounts Payable ..................................................................................... Accounts Receivable .........................................................................

1,800

2.

Cash........................................................................................................... Accounts Receivable ................................................................................ Accounts Payable..............................................................................

340 90

Cash........................................................................................................... Depreciation Expense............................................................................... Accumulated Depreciation–Equipment ..........................................

2,200 2,200

Interest Expense ....................................................................................... Cash ...................................................................................................

85

3.

4.

1,800

430

4,400

85

Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 16 The following errors were made in April 2024 by the accountant for Amanda’s Cleaning Services: 1. Equipment purchased for $4,600 was entered as a debit to Cash and a credit to Accumulated Depreciation–Equipment. 2. A payment was made to the telephone company for $195. It was a payment for the March telephone bill that had been recorded as Telephone Expense in March. The accountant recorded the April payment as a debit to Telephone Expense and a credit to Cash. 3. A customer paid a deposit for work that is to be completed in May 2024 in the amount of $500. The accountant recorded the deposit as a debit to Cash and a credit to Service Revenue. 4. Bank service charges were recorded as Debit Cash and Credit Bank Charges Expense for $52. Instructions Prepare the correcting entries for these errors at April 30, 2024. Solution 16 (10 min.) 1. Equipment ................................................................................................ Accumulated Depreciation–Equipment .................................................. Cash ...................................................................................................

4,600 4,600 9,200

2.

Accounts Payable ..................................................................................... Telephone Expense...........................................................................

195

3.

Service Revenue .......................................................................................

500

195

Test Bank for Accounting Principles, Ninth Canadian Edition

Unearned Revenue ........................................................................... 4.

Bank Charges Expense (2 x $52) ............................................................... Cash ...................................................................................................

500 104 104

Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 17 An examination of the accounts of Southpool Company for the month of June revealed the following errors after the transactions were journalized and posted: 1. A cheque for $750 from Lee Thompson, a customer on account, was debited to Cash $750 and credited to Service Revenue $750. 2. A payment for Advertising Expense costing $520 was debited to Utilities Expense $250 and credited to Cash $250. 3. A bill for $640 for supplies purchased on account was debited to Equipment $460 and credited to Accounts Payable $460. 4. A payment on account from a customer was credited to Cash $450 and debited to Accounts Receivable $450. 5. A new piece of computer equipment purchased for $5,500 was recorded as a debit to Cash of $5,500 and a credit to Repairs and Maintenance Expense of $5,500. Instructions Prepare correcting entries for each of the above, assuming the erroneous entries are not reversed. Explain how the transaction as originally recorded affected profit for the month of June. Solution 17 (10 min.) 1. Service Revenue ....................................................................................... Accounts Receivable ......................................................................... To correct error in recording collection of accounts receivable. The transaction as originally recorded overstated profit by $750.

750

2.

Advertising Expense ................................................................................. Utilities Expense ............................................................................... Cash ................................................................................................... To correct error in recording advertising expense. The transaction as originally recorded overstated profit by $270.

520

3.

Supplies .................................................................................................... Equipment.........................................................................................

640

750

250 270

460

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts Payable.............................................................................. To correct error in recording purchase of supplies. The transaction as originally recorded had no effect on profit.

180

4.

Cash........................................................................................................... Accounts Receivable (2 x $450) ........................................................ To correct error in recording collection from a customer. The transaction as originally recorded had no effect on profit.

900

5.

Equipment ................................................................................................ Repairs and Maintenance Expense .......................................................... Cash (2 x $5,500) ............................................................................... To correct error in recording purchase of computer equipment. The transaction as originally recorded overstated profit by $5,500.

900

5,500 5,500

11,000

Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 18 The new accountant for Wilson’s Giftware was in a hurry to record the transactions for the month of March, and made the following errors: 1. February utilities of $560 had been recorded as an Account Payable in February. When the account was paid in March, the accountant recorded the payment as a debit to Utilities Expense and a credit to Cash. 2. March 15th salaries totalling $4,750 were recorded as a debit to Supplies instead of to Salaries Expense. 3. A customer payment in the amount of $1,200 was credited to Accounts Receivable. However, the sale had never been invoiced or recorded and was a cash sale. 4. Samra Wilson withdrew $800 for personal use. The accountant recorded the entry as a debit to Cash and a credit to S. Wilson, Drawings. Instructions a) For each of the four errors, indicate the effect of the error on the balance sheet and income statement, indicating whether the assets, liabilities, owner’s equity, revenue, expenses, and profit are overstated (O), understated (U), or not affected (NA). Use the table below for your answer. b) For each of the four errors, prepare the correcting entries required at March 31. Table for part a) Error number

1.

2.

3.

4.

Test Bank for Accounting Principles, Ninth Canadian Edition

Assets Liabilities Owner’s Equity Revenue Expenses Profit Solution 18 (10 min.) a) Error number Assets Liabilities Owner’s Equity Revenue Expenses Profit b) 1.

1. NA O U NA O U

2. O NA O NA U O

3. U NA U U NA U

4. O NA O NA NA NA

Accounts Payable ..................................................................................... Utilities Expense ...............................................................................

560

Salaries Expense ....................................................................................... Supplies.............................................................................................

4,750

3.

Accounts Receivable ................................................................................ Sales Revenue ...................................................................................

1,200

4.

S. Wilson, Drawings (2 x $800) .................................................................. Cash ...................................................................................................

1,600

2.

560

4,750 1,200

1,600

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 19 When preparing the December 31 year-end financial statements for Bruce Productions, the following errors were discovered: 1. On January 1, equipment was purchased for $10,000 and was expected to have a useful life of four years. The accountant recorded depreciation expense (in the correct accounts) as $250. 2. A bank loan of $9,000 was taken on December 1, and the funds were deposited directly to Bruce

Test Bank for Accounting Principles, Ninth Canadian Edition

3. 4. 5.

Productions’ bank account. The accountant recorded the deposit as a debit to Cash and a credit to Revenue. The loan is at 6% and no interest has yet been paid or recorded. A customer payment in the amount of $450 was credited to Accounts Receivable and debited to Cash in the amount of $540. Salaries expenses of $2,200 were recorded as a credit to Cash and a debit to Telephone Expense. A payment of $3,500 made to a supplier on account was debited to Supplies instead of to Accounts Payable. This error was discovered before Supplies Expense was adjusted to the yearend actual balance.

Instructions a) For each of the errors, indicate the effect of the error on the balance sheet and income statement, indicating whether the assets, liabilities, owner’s equity, revenue, expenses, and profit are overstated (O), understated (U), or not affected (NA). Use the table below for your answer. b) For each of the errors, prepare the correcting entries required at December 31. Table for part a) Error number Assets Liabilities Owner’s Equity Revenue Expenses Profit

1.

2.

3.

4.

5.

1. O NA O NA U O

2. NA U O O U O

3. NA NA NA NA NA NA

4. NA NA NA NA NA NA

5. O O NA NA NA NA

Solution 19 (20 min.) a) Table for part a) Error number Assets Liabilities Owner’s Equity Revenue Expenses Profit b) 1.

2.

Depreciation Expense............................................................................... Accumulated Depreciation–Equipment .......................................... ($10,000 ÷ 4) – $250

2,250

Revenue .................................................................................................... Bank Loan Payable ........................................................................... Interest Expense ....................................................................................... Interest Payable ($9,000 x 6% x 1/12) ..............................................

9,000 45

2,250

9,000 45

Test Bank for Accounting Principles, Ninth Canadian Edition

3.

Accounts Receivable ................................................................................ Cash ($540 – $450) ............................................................................

90

4.

Salaries Expense ....................................................................................... Telephone Expense...........................................................................

2,200

5.

Accounts Payable ..................................................................................... Supplies.............................................................................................

3,500

90

2,200

3.500

Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 20 Andrea Zowkewych, CPA, was asked by Jeff Scott to review the accounting records and prepare the financial statements for his antique shop for the month ended January 31. Andrea reviewed the records and found three errors: 1. Cash paid on accounts payable for $830 was recorded as a debit to Accounts Payable $380 and a credit to Cash $380. 2. The purchase of supplies on account for $500 was debited to Equipment $500 and credited to Accounts Payable $500. 3. Jeff withdrew cash for $2,500 and the bookkeeper debited Accounts Receivable for $250 and credited Cash $250. Instructions Prepare an analysis of each error showing the a) incorrect entry. b) correct entry. c) correcting entry. Solution 20 (15 min.) 1. Incorrect Entry Accounts Payable.............................................................................. Cash ........................................................................................... Correct Entry Accounts Payable.............................................................................. Cash ........................................................................................... Correcting Entry Accounts Payable..............................................................................

380 830

450

380 830

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash ........................................................................................... 2.

3.

Incorrect Entry Equipment......................................................................................... Accounts Payable ...................................................................... Correct Entry Supplies............................................................................................. Accounts Payable ...................................................................... Correcting Entry Supplies............................................................................................. Equipment ................................................................................. Incorrect Entry Accounts Receivable ......................................................................... Cash ........................................................................................... Correct Entry J. Scott, Drawings ............................................................................. Cash ........................................................................................... Correcting Entry J. Scott, Drawings ............................................................................. Accounts Receivable ................................................................. Cash ...........................................................................................

450

500

500

500 500 500

250

2,500 2,500

500

250

2,500 250 2,250

Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 21 The following errors were discovered in May 2024 by the controller for Niagara Ltd.: 1. Niagara collected $3,000 of the account due from a client. This transaction was recorded as a debit to Cash and a credit to Revenue. 2. On May 6, routine repair expenses costing $450 to service the office computer equipment was recorded as a debit to Equipment and a credit to Cash. 3. On May 19, cash of $6,000 was received in advance by a client. Cash was debited and Revenue was credited for $6,000. 4. Niagara purchased equipment costing $1,100 on account. This transaction was recorded as a debit to Supplies and a credit to Accounts Payable for $11,000. 5. The Revenue account was credited for $500 of interest earned on an investment. Instructions Journalize the correcting entries required on May 31, 2024.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 21 (10 min.) 1. Revenue .................................................................................................... Accounts Receivable .........................................................................

3000

2.

Repairs Expense........................................................................................ Equipment.........................................................................................

450

3.

Revenue .................................................................................................... Unearned Revenue ...........................................................................

6,000

4.

Equipment ................................................................................................ Accounts Payable ($11,000 – $1,100) ....................................................... Supplies.............................................................................................

1,100 9,900

Revenue .................................................................................................... Interest Revenue ...............................................................................

500

5.

3,000 450

6,000

11,000

500

Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 22 The accountant of Narly Outdoor Store, a sole proprietorship owned and managed by Ron Narly, discovered the following errors in December 2024: 1. Narly signed a note with the bank to advance funds of $8,000 for the purchase of new equipment. This transaction was recorded as a debit to Advertising Expense and a credit to Accounts Payable. 2. Ron withdrew cash of $2,200 from the business bank account for personal use and this amount was recorded as Salaries Expense. 3. On December 6, Narly made a sale of $1,200 that consisted of cash of $200 and the balance on account. This transaction was recorded as a debit to Cash for $1,000, debit to Accounts Receivable for $200, and a credit to Sales Revenue for $1,200. 4. Narly purchased furniture costing $4,600 on account. This transaction was recorded as a debit to Accounts Receivable and a credit to Furniture for $4,600. Instructions Journalize the correcting entries required on December 31, 2024. Solution 22 (10 min.) 1. Equipment ................................................................................................ Accounts Payable .....................................................................................

8,000 8,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Advertising Expense.......................................................................... Notes Payable ...................................................................................

8,000 8,000

2.

R. Narly, Drawings .................................................................................... Salaries Expense ...............................................................................

2,200

3.

Accounts Receivable ($1,000 – $200) ....................................................... Cash ...................................................................................................

800

Furniture ($4,600 x 2) ................................................................................ Accounts Payable ............................................................................. Accounts Receivable .........................................................................

9,200

4.

2,200

800 4,600 4,600

Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 23 The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent data found on balance sheets. A. Current assets B. Investments C. Property, plant, and equipment D. Intangible assets E. Current liabilities F. Non-current liabilities G. Owner’s equity H. Not on the balance sheet _____ _____ _____ _____ _____

1. 2. 3. 4. 5.

Accumulated Depreciation S. Peters, Capital Interest Expense Salaries Payable Owner’s Capital

_____ _____ _____ _____ _____

6. 7. 8. 9. 10.

Inventory Patents Prepaid Rent Mortgage Payable Long-Term Investment

Instructions In the blank next to each account, write the letter indicating to which category it belongs. Solution 23 (5 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

1.

C

2.

G

3.

H

4.

E

5.

G

6.

A

7.

D

8.

A

9.

F

10. B Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic Exercise 24 A list of financial statement items for Slim Company at November 30, 2024, includes the following: Accounts receivable ........................... $7,250 Prepaid insurance ............... $1,700 Cash .................................................... 9,200 Supplies............................... 900 Short-term investments ..................... 3,100 Instructions Prepare the current assets section of the balance sheet listing the items in the sequence traditionally followed by Canadian companies. Solution 24 (5 min.)

SLIM COMPANY Balance Sheet (PARTIAL) November 30, 2024 Assets

Current Assets Cash...........................................................................................................

$9,200

Test Bank for Accounting Principles, Ninth Canadian Edition

Short-term investments ........................................................................... Accounts receivable ................................................................................. Supplies .................................................................................................... Prepaid insurance..................................................................................... Total current assets ..........................................................................

3,100 7,250 900 1,700

$22,150

Bloomcode: Application Difficulty: Medium Learning Objective 1: Prepare a classified balance sheet. Section Reference: Classified Balance SheetCPA: Financial Reporting AACSB: Analytic Exercise 25 The adjusted trial balance for Mosley Mosaic Tiles at December 31, 2024, is as follows: MOSLEY MOSAIC TILES Adjusted Trial Balance December 31, 2024 Cash .................................................................................................................. Accounts receivable ......................................................................................... Prepaid insurance ............................................................................................ Prepaid rent ...................................................................................................... Supplies ............................................................................................................ Equipment ........................................................................................................ Accumulated depreciation–equipment .......................................................... Furniture ........................................................................................................... Accumulated depreciation–furniture .............................................................. Accounts payable ............................................................................................. Salaries payable ............................................................................................... Unearned revenue............................................................................................ Mortgage payable (due in 2040) ...................................................................... M. Mosaic, drawings ......................................................................................... M. Mosaic, capital ............................................................................................. Service revenue ................................................................................................ Salaries expense ............................................................................................... Depreciation expense ...................................................................................... Rent expense .................................................................................................... Insurance expense ........................................................................................... Supplies expense.............................................................................................. Advertising expense .........................................................................................

Debit $31,400 26,500 2,000 5,000 3,330 17,500 25,000

15,000

Credit

$5,200 4,250 8,400 12,200 6,700 35,000 58,567 33,500

24,387 4,500 5,500 2,200 700 800___________ $163,817 $163,817

Instructions Use the above adjusted trial balance to prepare a classified balance sheet as at December 31, 2024.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 25 (15 min.)

MOSLEY MOSAIC TILES Balance Sheet December 31, 2024

Assets Current assets Cash........................................................................................................... Accounts receivable ................................................................................. Prepaid insurance..................................................................................... Prepaid rent .............................................................................................. Supplies .................................................................................................... Total current assets .......................................................................... Non-current assets Property, plant, and equipment Equipment ................................................................................................ Less: Accumulated depreciation.............................................................. Furniture ................................................................................................... Less: Accumulated depreciation.............................................................. Total property, plant, and equipment ............................................. Total assets……… ............................................................................

$31,400 26,500 2,000 5,000 3,330

17,500 5,200 25,000 4,250

$68,230

12,300 20,750 33,050 $101,280

Liabilities and Owner’s Equity Current liabilities Accounts payable ..................................................................................... Salaries payable ....................................................................................... Unearned revenue .................................................................................... Total current liabilities ..................................................................... Non-current liabilities Mortgage payable ..................................................................................... Total liabilities .................................................................................. Owner’s equity M. Mosaic, capital ..................................................................................... Total liabilities and owner’s equity .................................................. Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

$ 8,400 12,200 6,700

27,300 35,000 62,300 38,980 $101,280

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 26 The following information is available for Juxton Company for the year ended December 31, 2024: Accounts payable ..................................................................................... $ 2,700 Building (not currently used) ................................................................... 9,500 Accumulated depreciation–equipment .................................................. 4,000 K. Juxton, capital ...................................................................................... 20,800 Patents ...................................................................................................... 2,500 Notes payable (due in five years) ............................................................. 7,500 Accounts receivable ................................................................................. 1,500 Cash........................................................................................................... 2,600 Short-term investments ........................................................................... 1,000 Equipment ................................................................................................ 17,500 Long-term investments ............................................................................ 400 Instructions Use the above information to prepare a classified balance sheet as at December 31, 2024. Solution 26 (20 min.)

JUXTON COMPANY Balance Sheet December 31, 2024

Assets Current assets Cash........................................................................................................... Short-term investments ........................................................................... Accounts receivable ................................................................................. Total current assets .......................................................................... Non-current assets Investments Building ..................................................................................................... Long-term investments ............................................................................ Total investments ............................................................................. Property, plant, and equipment Equipment ................................................................................................ Less: Accumulated depreciation.............................................................. Intangible assets .............................................................................................. Total assets……… ............................................................................

$2,600 1,000 1,500

9,500 400

17,500 (4,000)

$ 5,100

9,900

13,500 2,500 $31,000

Liabilities and Owner’s Equity Current liabilities Accounts payable ..................................................................................... Non-current liabilities

$ 2,700

Test Bank for Accounting Principles, Ninth Canadian Edition

Notes payable ........................................................................................... Total liabilities .................................................................................. Owner’s equity K. Juxton, capital ...................................................................................... Total liabilities and owner’s equity ..................................................

7,500 10,200 20,800 $31,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic Exercise 27 The following are the adjusted account balances of Sally’s Salon and Spa as at June 30, 2024, the business year end. All accounts have normal balances. Accounts payable .......................................... $ 2,340 Notes receivable .................. $ 5,000 Accounts receivable ...................................... 500 Prepaid insurance................ 620 Accumulated depreciation–furniture ........... 2,000 Rent expense ....................... 24,000 Accumulated depreciation–equipment ....... 6,320 S. Juul-Hansen, capital ....... 11,760 Cash ............................................................... 3,250 S. Juul-Hansen, drawings.... 12,000 Furniture ........................................................ 6,000 Service revenue ................... 125,600 Depreciation expense ................................... 4,160 Equipment ........................... 15,800 Insurance expense ........................................ 2,000 Supplies ............................... 1,190 Interest expense ............................................ 100 Supplies expense ................. 4,560 Notes payable................................................ 14,000 Salaries expense .................. 82,840 Additional information: The note payable is due January 31, 2025. During the year, Sally Juul-Hansen invested $10,000. Instructions Prepare the income statement, statement of owner’s equity, and classified balance sheet for Sally’s June 30, 2024, year end in good format. Solution 27 (25 min.)

SALLY’S SALON AND SPA Income Statement For the Year Ended June 30, 2024

Service revenue ................................................................................................ Expenses Salaries expense ....................................................................................... Rent expense ............................................................................................

$125,600 $82,840 24,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Supplies expense ...................................................................................... Depreciation expense............................................................................... Insurance expense .................................................................................... Interest expense ....................................................................................... Profit for the year .............................................................................................

4,560 4,160 2,000 _ 100

117,660 $ 7,940

SALLY’S SALON AND SPA Statement of Owner’s Equity For the Year Ended June 30, 2024 S. Juul-Hansen, capital, July 1, 2023 ($11,760 – $10,000) .............................. Add: Profit ......................................................................................................... Investments ......................................................................................

$ 1,760 $ 7,940 10,000

Less: Drawings ........................................................................................... S. Juul-Hansen, capital, June 30, 2024 ............................................................

17,940 19 700 12,000 $ 7,700

SALLY’S SALON AND SPA Balance Sheet June 30, 2024 Assets Current assets Cash........................................................................................................... Accounts receivable ................................................................................. Notes receivable ....................................................................................... Supplies .................................................................................................... Prepaid insurance..................................................................................... Total current assets .......................................................................... Non-current assets Property, plant, and equipment Equipment ................................................................. $15,800 Less: Accumulated depreciation............................... 6,320 Furniture .................................................................... 6,000 Less: Accumulated depreciation............................... 2,000 Total assets ....................................................................................... Liabilities and Owner’s Equity Current liabilities Accounts payable ..................................................................................... Notes payable ........................................................................................... Total current liabilities ..................................................................... Owner’s equity

$ 3,250 500 5,000 1,190 620 10,560

$9,480 4,000

13,480 $24,040

$ 2,340 14,000 16,340

Test Bank for Accounting Principles, Ninth Canadian Edition

S. Juul-Hansen, capital ............................................................................ Total liabilities and owner’s equity ..................................................

7,700 $24,040

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic Exercise 28 The adjusted trial balance of Special Event Security Services (SESS), an unincorporated business owned and operated by Jim Popovich, is provided below: SPECIAL EVENT SECURITY SERVICES Adjusted Trial Balance September 30, 2024 Cash .................................................................................................................. Accounts receivable ......................................................................................... Prepaid insurance ............................................................................................ Land .................................................................................................................. Building............................................................................................................. Accumulated depreciation–building ............................................................... Equipment ........................................................................................................ Accumulated depreciation–equipment .......................................................... Accounts payable ............................................................................................. Interest payable ............................................................................................... Unearned revenue............................................................................................ Notes payable................................................................................................... J. Popovich, capital .......................................................................................... J. Popovich, drawings ...................................................................................... Service revenue ................................................................................................ Depreciation expense ...................................................................................... Insurance expense ........................................................................................... Interest expense ............................................................................................... Rent expense .................................................................................................... Salaries expense ...............................................................................................

Debit $ 10,000 8,500 1,100 50,000 260,000 18,000

36,000

Credit

$ 31,200 7,200 15,500 500 25,000 100,000 48,150 420,000

2,350 6,600 5,000 60,000 190,000___________ $647,550 $647,550

Additional information: The note payable is due in annual instalments of $10,000 principal plus interest. The next payment is due August 31, 2025. Jim Popovich invested $20,000 on June 1, 2024. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare, in good format, the income statement, statement of owner’s equity, and classified balance sheet for SESS for the year ended September 30, 2024. Solution 28 (25 min.) SPECIAL EVENT SECURITY SERVICES Income Statement For the Year Ended September 30, 2024 Service revenue ................................................................................................ Expenses Salaries expense ....................................................................................... Rent expense ............................................................................................ Insurance expense .................................................................................... Interest expense ....................................................................................... Depreciation expense............................................................................... Profit for the year .............................................................................................

$420,000 $190,000 60,000 6,600 5,000 2,350

263,950 $156,050

SPECIAL EVENT SECURITY SERVICES Statement of Owner’s Equity For the Year Ended September 30, 2024 J. Popovich, capital, October 1, 2023 ..................... ........................................ Add: Profit ....................................................................................................... Investments............................................................................................

$156,050 20,000

Less: Drawings................................................................................................. J. Popovich, capital, September 30, 2024 .......................................................

$ 28,150 176,050 204,200 (36,000) $168,200

SPECIAL EVENT SECURITY SERVICES Balance Sheet September 30, 2024 Assets

Current assets Cash........................................................................................................... Accounts receivable ................................................................................. Prepaid insurance..................................................................................... Total current assets .......................................................................... Non-current assets Property, plant, and equipment Land .......................................................................................................... Building ...................................................................... $260,000 Less: Accumulated depreciation............................... 31,200

$ 10,000 8,500 1,100 19,600

$ 50,000 228,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Equipment ................................................................. 18,000 Less: Accumulated depreciation............................... 7,200 Total assets ......................................................................................

10,800

289,600 $309,200

Liabilities and Owner’s Equity Current liabilities Accounts payable ..................................................................................... Interest payable ........................................................................................ Unearned revenue .................................................................................... Current portion of notes payable ............................................................ Total current liabilities .....................................................................

$15,500 500 25,000 10,000 51,000

Non-current liabilities Notes payable ........................................................................................... Total liabilities .................................................................................. Owner’s equity J. Popovich, capital .................................................................................. Total liabilities and owner’s equity ..................................................

90,000 141,000 168,200 $309,200

Bloomcode: Synthesis Difficulty: Hard Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic Exercise 29 The adjusted trial balance for Poor Company at December 31, 2024, is as follows: POOR COMPANY Adjusted Trial Balance December 31, 2024 Accounts receivable....................................................................................... Supplies.......................................................................................................... Prepaid rent ................................................................................................... Equipment ..................................................................................................... Accumulated depreciation–equipment........................................................ Bank indebtedness ........................................................................................ Accounts payable .......................................................................................... Salaries payable............................................................................................. Unearned revenue ......................................................................................... T. Poor, capital ...............................................................................................

Debit $ 21,000 4,600 2,200 110,000

Credit

$ 17,000 6,000 9,800 6,400 6,000 99,000

Test Bank for Accounting Principles, Ninth Canadian Edition

T. Poor, drawings ........................................................................................... Service revenue ............................................................................................. Utilities expense ............................................................................................ Depreciation expense .................................................................................... Insurance expense ......................................................................................... Rent expense.................................................................................................. Salaries expense ............................................................................................ Repairs expense ............................................................................................. ...................................................................................................................

19,500

102,800 17,000 10,000 5,000 15,000 36,700 6,000___________ $247,000 $247,000

Instructions a) Calculate the balance of T. Poor, Capital that would appear on a balance sheet at December 31, 2024. b) Prepare a classified balance sheet for Poor Company at December 31, 2024. c) Calculate working capital and the current and acid-test ratios for Poor Company. Solution 29 (15 min.) a) T. Poor, capital, January 1 ............................................................................... Add: Profit ......................................................................................................... Less: Drawings .................................................................................................. T. Poor, capital, December 31 .......................................................................... 1

$ 99,000 13,1001 112,100 19,500 $92,600

$102,800 – $17,000 – $10,000 – $5,000 – $15,000 – $36,700 – $6,000 = $13,100

b)

POOR COMPANY Balance Sheet December 31, 2024

Assets Current assets Accounts receivable ................................................................................. Supplies .................................................................................................... Prepaid rent .............................................................................................. Total current assets .......................................................................... Non-current assets Property, plant, and equipment Equipment ................................................................................................ Less: Accumulated depreciation.............................................................. Total assets .......................................................................................

$ 21,000 4,600 2,200 27,800

$110,000 17,000

93,000 $120,800

Liabilities and Owner's Equity

Current liabilities Bank indebtedness ...................................................................................

$ 6,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts payable ..................................................................................... Salaries payable ....................................................................................... Unearned revenue .................................................................................... Total current liabilities ..................................................................... Owner's equity T. Poor, capital.......................................................................................... Total liabilities and owner's equity .................................................. c)

Working capital Current ratio

9,800 6,400 6,000 28,200 92,600 $120,800

= Current assets – Current liabilities = $27,800 – $28,200 = $(400) = Current assets ÷ Current liabilities = $27,800 ÷ $28,200 = 0.99:1

Acid-test ratio = (Cash + Short-Term Investments + Accounts Receivable) ÷ Current liabilities = ($0 + $0 + $21,000) ÷ $28,200 = 0.74:1 Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 30 The adjusted trial balance for DVD Concepts at December 31, 2024, is as follows: DVD CONCEPTS Adjusted Trial Balance December 31, 2024 Cash ................................................................................................................ Accounts receivable....................................................................................... Supplies.......................................................................................................... Prepaid insurance .......................................................................................... Equipment ..................................................................................................... Accumulated depreciation–equipment........................................................ Accounts payable .......................................................................................... Notes payable ................................................................................................ Salaries payable............................................................................................. J. Yan, capital ................................................................................................. J. Yan, drawings .............................................................................................

Debit $ 8,000 16,000 6,000 8,000 210,000

12,000

Credit

$ 25,000 20,000 71,000 3,000 109,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Rent revenue .................................................................................................. Advertising expense....................................................................................... Depreciation expense .................................................................................... Insurance expense ......................................................................................... Rent expense.................................................................................................. Salaries expense ............................................................................................ Supplies expense ........................................................................................... ...................................................................................................................

133,000

26,000 12,000 4,000 15,000 38,000 6,000___________ $361,000 $361,000

Instructions a) Calculate the balance of J. Yan, Capital that would appear on a balance sheet at December 31, 2024. b) Prepare a classified balance sheet for DVD Concepts at December 31, 2024, assuming the note payable is payable on November 30, 2026. c) Calculate working capital and the current and acid-test ratios for DVD Concepts. Round to two decimal places. Solution 30 (15 min.) a) J. Yan, capital, January 1 ................................................................................. Add: Profit ......................................................................................................... Less: Drawings .................................................................................................. J. Yan, capital, December 31 ............................................................................ 1

$109,000 32,0001 141,000 12,000 $129,000

$133,000 – $26,000 – $12,000 – $4,000 – $15,000 – $38,000 – $6,000 = $32,000

b)

DVD CONCEPTS Balance Sheet December 31, 2024 Assets

Current assets Cash........................................................................................................... Accounts receivable ................................................................................. Supplies .................................................................................................... Prepaid insurance..................................................................................... Total current assets .......................................................................... Non-current assets Property, plant, and equipment Equipment ................................................................................................ Less: Accumulated depreciation.............................................................. Total assets ....................................................................................... Liabilities and Owner's Equity

$ 8,000 16,000 6,000 8,000 38,000 $210,000 25,000

185,000 $223,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Current liabilities Accounts payable ..................................................................................... Salaries payable ....................................................................................... Total current liabilities ..................................................................... Non-current liabilities Notes payable ........................................................................................... Total liabilities .................................................................................. Owner's equity J. Yan, Capital ........................................................................................... Total liabilities and owner's equity .................................................. c)

Working capital

Current ratio

$ 20,000 3,000 23,000 71,000 94,000 129,000 $223,000

= Current assets – Current liabilities = $38,000 – $23,000 = $15,000 = Current assets ÷ Current liabilities = $38,000 ÷ $23,000 = 1.65:1

Acid-test ratio = (Cash + Accounts Receivable) ÷ Current liabilities = ($8,000 + $16,000) ÷ $23,000 = 1.04:1 Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 31 The adjusted trial balance for Novakowski Company as at December 31, 2024, is as follows: NOVAKOWSKI COMPANY Adjusted Trial Balance December 31, 2024 Cash .................................................................................................................. Accounts receivable ......................................................................................... Prepaid insurance ............................................................................................ Supplies ............................................................................................................ Equipment ........................................................................................................ Accumulated depreciation–equipment .......................................................... Patents.............................................................................................................. Accumulated amortization–patents ...............................................................

Debit $20,000 4,000 7,000 4,500 48,000 7,500

Credit

$ 4,800 1,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts payable ............................................................................................. Bonds payable, due in 2026 ............................................................................. M. Novakowski, capital .................................................................................... M. Novakowski, drawings ................................................................................ Service revenue ................................................................................................ Salaries expense ............................................................................................... Depreciation expense ...................................................................................... Amortization expense ...................................................................................... Insurance expense ........................................................................................... Interest expense ............................................................................................... Totals ................................................................................................................

21,500 18,000 46,000 4,200

23,400 5,200 6,000 300 5,000 3,500___________ $115,200 $115,200

Instructions a) Prepare a classified balance sheet for Novakowski Company. b) Calculate working capital and the current and acid-test ratios for Novakowski Company. Solution 31 (15 min.) a)

NOVAKOWSKI COMPANY Balance Sheet December 31, 2024 Assets

Current assets Cash........................................................................................................... Accounts receivable ................................................................................. Prepaid insurance..................................................................................... Supplies .................................................................................................... Total current assets .......................................................................... Non-current assets Property, plant, and equipment Equipment ................................................................................................ Less: Accumulated depreciation.............................................................. Intangible assets Patents ..................................................................................................... Less: Accumulated amortization ............................................................. Total assets ....................................................................................... Liabilities and Owner's Equity Current liabilities Accounts payable .................................................................................... Non-current liabilities Bonds payable ......................................................................................... Total liabilities ............................................................................... Owner's equity

$20,000 4,000 7,000 4,500 35,500 $48,000 4,800 7,500 1,500

43,200 6,000 $84,700

$21,500 18,000 39,500

Test Bank for Accounting Principles, Ninth Canadian Edition

M. Novakowski, capital............................................................................ Total liabilities and owner's equity ...............................................

45,200* $84,700

*M. Novakowski, capital = $45,200 ($46,000 + $3,400** – $4,200) **Profit = $3,400 ($23,400 – $5,200 – $6,000 – $300 – $5,000 – $3,500) b)

Working capital

Current ratio

= Current assets – Current liabilities = $35,500 – $21,500 = $14,000 = Current assets ÷ Current liabilities = $35,500 ÷ $21,500 = 1.65:1

Acid-test ratio = (Cash + Accounts Receivable) ÷ Current Liabilities = ($20,000 + $4,000) ÷ $21,500 = 1.12:1 Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 32 The following items are taken from the adjusted trial balance of Sutch Video Productions at December 31, 2024: Accounts payable ............................................................................................. $ 15,000 Accounts receivable ......................................................................................... 11,000 Accumulated depreciation–equipment .......................................................... 28,000 Advertising expense ......................................................................................... 21,000 Cash .................................................................................................................. 24,000 Depreciation expense ...................................................................................... 12,000 J. Sutch, capital ................................................................................................ 102,000 J. Sutch, drawings ............................................................................................ 15,000 Insurance expense ........................................................................................... 3,000 Notes payable (due 2026) ................................................................................ 70,000 Prepaid insurance ............................................................................................ 6,000 Rent expense .................................................................................................... 17,000 Salaries expense ............................................................................................... 34,000 Salaries payable ............................................................................................... 3,000 Service revenue ................................................................................................ 145,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Supplies ............................................................................................................ Supplies expense.............................................................................................. Equipment ........................................................................................................

4,000 6,000 210,000

Instructions a) Calculate the profit. b) Calculate the balance of owner’s equity that would appear on a balance sheet at December 31, 2024. c) Prepare a classified balance sheet for Sutch Video Productions at December 31, 2024. d) Calculate the working capital and the current ratio. Which of the two measures is preferable for comparing Sutch’s liquidity with its competitors? e) Calculate the acid-test ratio for the company. What could the company do to improve this ratio? Solution 32 (20 min.) a) Profit = $52,000 ($145,000 – $21,000 – $12,000 – $3,000 – $17,000 – $34,000 – $6,000) b) J. Sutch, capital, January 1 .............................................................................. Add: Profit ......................................................................................................... Less: Drawings .................................................................................................. J. Sutch, capital, December 31 ........................................................................ c)

$102,000 52,000 154,000 15,000 $139,000

SUTCH VIDEO PRODUCTIONS Balance Sheet December 31, 2024

Assets Current assets Cash........................................................................................................... Accounts receivable ................................................................................. Supplies ................................................................................................... Prepaid insurance..................................................................................... Total current assets .......................................................................... Non-current assets Property, plant, and equipment Equipment ................................................................................................ Less: Accumulated depreciation.............................................................. Total assets ....................................................................................... Liabilities and Owner’s Equity Current liabilities Accounts payable .....................................................................................

$24,000 11,000 4,000 6,000 45,000 $210,000 28,000

$15,000

182,000 $227,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Salaries payable ....................................................................................... Total current liabilities ..................................................................... Non-current liabilities Notes payable ........................................................................................... Total liabilities .................................................................................. Owner’s equity J. Sutch, capital ........................................................................................ Total liabilities and owner’s equity ..................................................

3,000

18,000 70,000 88,000 139,000 $227,000

d)

Working capital ($45,000 – $18,000) = $27,000 Current ratio: $45,000 ÷ $18,000 = 2.5:1 The current ratio is preferable when comparing two companies. Using a percentage to compare companies removes the effect of size from the comparison.

e)

Acid-test ratio: ($24,000 + $11,000) ÷ $18,000 = 1.94:1 To improve this ratio, the company could reduce the current liabilities.

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 33 The following items are taken from the financial statements of Maxon Services for 2024: Accounts payable ............................................................................................. $18,500 Accounts receivable ......................................................................................... 4,000 Accumulated depreciation–equipment .......................................................... 4,800 Accumulated amortization–patents ............................................................... 10,000 Bonds payable, due 2030 ................................................................................. 18,000 Cash .................................................................................................................. 24,000 M. Maxon, capital.............................................................................................. 41,000 Advertising expense ......................................................................................... 3,000 Depreciation expense ...................................................................................... 4,000 Amortization expense ...................................................................................... 800 M. Maxon, drawings.......................................................................................... 5,300 Equipment ........................................................................................................ 48,000 Interest expense ............................................................................................... 2,500 Patents.............................................................................................................. 17,500 Salaries expense ............................................................................................... 15,200

Test Bank for Accounting Principles, Ninth Canadian Edition

Service revenue ................................................................................................ Supplies ............................................................................................................

36,500 4,500

Instructions a) Prepare an income statement and a classified balance sheet for Maxon Services. b) Calculate the following ratios and values: 1. Current ratio 2. Working capital 3. Acid-test ratio Solution 33 (25 min.) a)

MAXON SERVICES Income Statement For the Year Ended December 31, 2024

Service revenue ................................................................................................ Expenses Depreciation expense ......................................................................... Amortization expense ......................................................................... Interest expense .................................................................................. Advertising expense ............................................................................ Salaries expense.................................................................................. Profit for the year .............................................................................................

$36,500 $ 4,000 800 2,500 3,000 15,200

25,500 $11,000

MAXON SERVICES Balance Sheet December 31, 2024 Assets Current assets Cash............................................................................................................ Accounts receivable .................................................................................. Supplies ..................................................................................................... Total current assets ........................................................................... Non-current assets Property, plant, and equipment Equipment ................................................................................................. Less: Accumulated depreciation............................................................... Intangible assets Patents ....................................................................................................... Less: Accumulated amortization .............................................................. Total assets ........................................................................................

$24,000 4,000 4,500

48,000 4,800 17,500 10,000

$32,500

43,200 7,500 $83,200

Test Bank for Accounting Principles, Ninth Canadian Edition

Liabilities and Owner’s Equity

Current liabilities Accounts payable ..................................................................................... Non-current liabilities Bonds payable .......................................................................................... Total liabilities .................................................................................. Owner’s equity M. Maxon, capital* .................................................................................... Total liabilities and owner’s equity ..................................................

$18,500 18,000 36,500 46,700 $83,200

*M. Maxon, capital, December 31, 2024 = $46,700 ($41,000 + $11,000 – $5,300) b)

1. 2. 3.

Current ratio: $32,500 ÷ $18,500 = 1.76:1 Working capital: $32,500 – $18,500 = $14,000 Acid-test ratio: ($24,000 + $4,000) ÷ $18,500 = 1.51:1

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 34 The adjusted account balances of Saint Company at December 31, 2024, are as follows: Accounts receivable ........................... $ 16,000 Bank indebtedness ..................... $ 14,000 Notes receivable ................................. 13,000 Accounts payable........................ 6,000 Prepaid insurance .............................. 6,000 Notes payable ............................. 10,000 Equipment .......................................... 50,000 Accumulated depreciation– Depreciation expense ........................ 7,000 equipment................................... 16,000 G. Saint, drawings .............................. 4,500 Service revenue........................... 29,000 Utilities expense ................................. 600 Interest revenue .......................... 2,000 Rent expense ...................................... 3,000 G. Saint, capital ........................ 18,000 Salaries expense ................................. 10,200 Unearned revenue …………… 16,000 Insurance expense ............................. 700 $111,000 $111,000 Instructions a) Calculate the balance of G. Saint, Capital that would appear on a balance sheet at December 31, 2024. b) Prepare a classified balance sheet for Saint Company at December 31, 2024. Assume that the note

Test Bank for Accounting Principles, Ninth Canadian Edition

c)

receivable is expected to be collected in 120 days and the note payable is due October 1, 2026. Calculate the working capital and the current and acid-test ratios for Saint Company. Also, briefly interpret each ratio result.

Solution 34 (15 min.) a) G. Saint, capital, January 1 .............................................................................. Add: Profit for the period ................................................................................. Less: Drawings .................................................................................................. G. Saint, capital, December 31 ......................................................................... 1

$18,000 9,5001 27,500 4,500 $23,000

$29,000 + $2,000 – $7,000 – $600 – $3,000 – $10,200 – $700 = $9,500

b)

SAINT COMPANY Balance Sheet December 31, 2024 Assets

Current assets Accounts receivable ................................................................................. Notes receivable ....................................................................................... Prepaid insurance..................................................................................... Total current assets .......................................................................... Non-current assets Property, plant, and equipment Equipment ................................................................................................ Less: Accumulated depreciation.............................................................. Total assets ....................................................................................... Liabilities and Owner's Equity Current liabilities Bank indebtedness ................................................................................... Accounts payable ..................................................................................... Unearned revenue .................................................................................... Total current liabilities ..................................................................... Non-current liabilities Notes payable ........................................................................................... Total liabilities .................................................................................. Owner's equity G. Saint, capital......................................................................................... Total liabilities and owner's equity .................................................. c)

Working capital

= Current assets – Current liabilities = $35,000 – $36,000 = $(1,000)

$16,000 13,000 6,000 35,000

$50,000 16,000

34,000 $69,000

$14,000 6,000 16,000 36,000 10,000 46,000 23,000 $69,000

Test Bank for Accounting Principles, Ninth Canadian Edition

This negative working capital suggests that the company will have a difficult time meeting its shortterm obligations as their current liabilities exceed current assets. Current ratio

= Current assets ÷ Current liabilities = $35,000 ÷ $36,000 = 0.97:1

This current ratio indicates that Saint Company has $0.97 of current assets for every dollar of current liabilities. This ratio suggests that the company will have a difficult time meeting its short-term obligations as the ratio falls below 1. Acid-test ratio = (Cash + Short-Term Investments + Accounts Receivable) ÷ Current liabilities = ($0 + $0 + $16,000) ÷ $36,000 = 0.44:1 Similar to the current ratio, this ratio indicates that Saint Company has $0.44 of highly liquid assets for every dollar of current liabilities. This ratio suggests that the company will have a difficult time meeting its short-term obligations as the ratio falls well below 1. Bloomcode: Synthesis Difficulty: Hard Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 35 The following data are taken from the financial statements of Marlow Company as at the end of the year 2024. Accounts payable .................. $14,000 Profit .................................... 24,000 Accounts receivable .............. 33,000 Supplies ............................... 4,300 Cash ....................................... 27,000 Total assets ......................... 125,000 Other current liabilities ......... 8,500 Total liabilities..................... 100,000 Prepaid insurance ................. 1,000 Salaries payable .................. 2,500 Instructions a) Calculate Marlow Company’s working capital, current ratio, and acid-test ratio. b) Explain what additional information you would require in order to use the three measures to evaluate Marlow’s liquidity. Solution 35 (5 min.) a) Working capital = Current assets – Current liabilities = ($27,000 + $33,000 + $1,000 + $4,300) – ($14,000 + $8,500 + $2,500) = $40,300

Test Bank for Accounting Principles, Ninth Canadian Edition

Current ratio = Current assets ÷ Current liabilities = $65,300 ÷ $25,000 = 2.61:1 Acid-test ratio = (Cash + Accounts Receivable) ÷ Current liabilities = ($27,000 + $33,000) ÷ $25,000 = 2.4:1 b)

In order to use this information to evaluate Marlow’s liquidity, you would need to compare the amounts to Marlow’s prior-year calculations, to industry averages, or to the results for a competitor of similar size. Changes in the general economic environment would also be important to evaluate the possible cause(s) of changes from one year to the next.

Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 36 Kean’s Biotechnologies is located in Kelowna, British Columbia. It is a leader in the development of computer-adapted bio-technical scanning and the pre-eminent company operating in this industry. The following data (in millions) were taken from Kean’s most recent financial statements. December 31 2024 2023 2022 Current assets $87,406 $66,847 $62,441 Current liabilities 26,242 18,986 16,841 Instructions a) Calculate the working capital and current ratio for each year. b) Discuss Kean’s liquidity in 2024 compared to the previous two years. c) Compare the purpose of the current ratio to the acid-test ratio and explain what additional information would be needed to calculate the acid-test ratio for Kean’s Biotechnologies. Solution 36 (10 min.) a) ($ in millions) Working capital

Current ratio

b)

2024 $87,406 – $26,242 = $61,164

2023 $66,847 – $18,986 = $47,861

2022 $62,441 – $16,841 = $45,600

$87,406 ÷ $26,242 = 3.3:1

$66,847 ÷ $18,986 = 3.5:1

$62,441 ÷ $16,841 = 3.7:1

Although the dollar amount of working capital has increased, the amount of current assets available per dollar of current liabilities has decreased as evidenced by the declining current ratio. Kean’s liquidity has weakened from 2022 to 2024.

Test Bank for Accounting Principles, Ninth Canadian Edition

c)

The acid-test ratio uses only highly liquid current assets when computing the ratio, so it will always be less than the current ratio. To calculate the acid-test ratio, a breakdown of the current assets would be necessary as only cash, accounts receivable, and short-term investments would be used in the numerator of the ratio. The acid-test ratio will give an indication of whether the company is highly liquid or less so.

Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 37 The following data is taken from the financial statements of Dellmont Company: Accounts payable .................. $28,000 Profit ................................. $ 50,000 Accounts receivable .............. 65,000 Service revenue ................ 500,000 Cash ....................................... 56,000 Salaries payable ............... 7,000 Other current liabilities ......... 20,000 Owner’s equity ................. 169,000 Prepaid insurance ................. 2,500 Total assets ...................... 325,000 Additional information: Information taken from the financial statements of Dellmont’s major competitor: Current assets...................... $250,000 Current liabilities ................. 131,000 Service revenue ................... 980,000 Information taken from industry publications: Average current ratio is 2.5:1 Average acid-test ratio is 1.9:1 Instructions Calculate Dellmont’s working capital and current and acid-test ratios, and comment on the company’s liquidity. Solution 37 (10 min.) Dellmont working capital

= Current assets – Current liabilities = $123,500 – $55,000 = $68,500

Dellmont current ratio

= Current assets ÷ Current liabilities = $123,500 ÷ $55,000 = 2.25:1

Dellmont acid-test ratio

= (Cash + Accounts receivable) ÷ Current liabilities = ($56,000 + $65,000) ÷ $55,000 = 2.2:1

Test Bank for Accounting Principles, Ninth Canadian Edition

Competitor working capital

= Current assets – Current liabilities = $250,000 – $131,000 = $119,000

Competitor current ratio

= Current assets ÷ Current liabilities = $250,000 ÷ $131,000 = 1.9:1

Dellmont’s major competitor is approximately twice its size when comparing total revenue. Because of the size difference, it is difficult to use working capital to determine whether Dellmont or its competitor is more liquid, although the competitor’s working capital is almost twice that of Dellmont. Once the current ratios are compared, it appears that Dellmont is doing better than the competitor, but both are lagging the industry average. There is insufficient information to calculate the competitor’s acid-test ratio, but when Dellmont’s acid-test ratio is compared to the industry average, it shows that Dellmont’s current assets are highly liquid and Dellmont is doing better than the industry average. Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 38 The work sheet for Anger Company appears below. Adjustment data: a) A physical count revealed that $3,300 of supplies remained on hand at year end. b) $1,100 of insurance previously recorded as prepaid has lapsed during the year. c) Depreciation charged on equipment totalled $600. d) Salaries expense incurred at December 31 but not yet paid amounted to $1,200. e) Unearned revenue of $1,350 was considered earned during the year. Instructions Using the above information, complete the following work sheet for Anger Company for the year ended December 31, 2024.

Account Titles Cash

Unadjusted Trial Balance Debit Credit 23,000

ANGER COMPANY Work Sheet Year Ended December 31, 2024 Adjusted Adjustments Trial Balance Debit Credit Debit Credit

Income Statement Debit Credit

Balance Sheet Debit

Credit

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts receivable Supplies

10,000 4,500

Prepaid insurance

5,000

Equipment

59,000

Accum. depreciation– equipment Accounts payable

6,000

Unearned revenue

3,700

F. Anger, capital

90,700

1,800

F. Anger, drawings

14,000

Service revenue

30,700

Salaries expense

9,900

Utilities expense

5,800

Interest expense

1,700

____

132,900

132,900

Totals Salaries payable Supplies expense Insurance expense Depreciation expense Totals Profit Totals

Solution 38 (20 min.)

Account Titles Cash Accounts receivable Supplies

Unadjusted Trial Balance Debit Credit 23,000

ANGER COMPANY Work Sheet Year Ended December 31, 2024 Adjusted Adjustments Trial Balance Debit Credit Debit Credit 23,000

10,000 4,500

a)

Income Statement Debit

Credit

Balance Sheet Debit Credit 23,000

10,000

10,000

3,300

3,300

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepaid insurance Equipment Accumulated depreciation– equipment Accounts payable Unearned revenue F. Anger, capital F. Anger, drawings Service revenue Salaries expense Utilities expense Interest expense Totals Salaries payable Supplies expense Insurance expense Depreciation expense Totals Profit Totals

1,200 b) 1,100

5,000 59,000 6,000

3,900

3,900

59,000

59,000

c) 600

1,800 3,700

e) 1,350

90,700 14,000

6,600

1,800

1,800

2,350

2,350

90,700

90,700

14,000 e) 1,350

30,700 d) 1,200

9,900 5,800 1,700 132,900

6,600

14,000 32,050

32,050

11,100

11,100

5,800 1,700

5,800 1,700

132,900 d) 1,200 a) 1,200 b) 1,100 c) 600 5,450

5,450

1,200

1,200

1,200

1,200

1,100

1,100

600

600

134,700

134,700

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic Exercise 39 The work sheet for Plateo Rental Company appears below (in thousands). Adjustment data:

21,500 10,550 32,050

32,050

113,200

32,050

113,200

102,650 10,550 113,200

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b) c) d)

Prepaid rent expired during August, $2. Depreciation expense on equipment for the month of August, $8. Supplies on hand on August 31 amounted to $6. Salaries expense incurred at August 31 but not yet paid amounted to $12. PLATEO RENTAL COMPANY Work Sheet Month Ended August 31, 2024

Account Titles Cash Accounts receivable Prepaid rent

Unadjusted Trial Adjustments Balance Debi Credi Debit Credit t t 20 12 8

Supplies

10

Equipment

50

Accumulated depreciatio n– equipment Accounts payable D. Plateo, capital D. Plateo, drawings Rent revenue Depreciation expense Rent expense Salaries expense Totals

Totals Profit

10

20 30 2 72 6 4 20 132

132

Adjusted Trial Balance Debit

Credit

Income Statement Debit

Credit

Balance Sheet Debit

Credit

Test Bank for Accounting Principles, Ninth Canadian Edition

Totals Instructions Using the adjustment data, complete the above work sheet. Add any accounts that are necessary. Solution 39 (15 min.)

Account Titles Cash Accounts receivable Prepaid rent Supplies Equipment Accumulated depreciation– equipment Accounts payable D. Plateo, capital D. Plateo, drawings Rent revenue Depreciation expense Rent expense Salaries expense Totals Supplies expense Salaries payable Totals Profit Totals

PLATEO RENTAL COMPANY Work Sheet Month Ended August 31, 2024 Unadjusted Adjusted Income Balance Adjustments Trial Balance Trial Balance Statement Sheet Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit 20 20 20 12 8 10 50

a) 2 c) 4

10

12

12

6 6 50

6 6 50

b) 8

20 30 2

18

18

20 30

20 30

2 72

2 72

72

6

b) 8

14

14

4 20 132

a) 2 d) 12

6 32

6 32

132 c) 4

4 d) 12

26

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

26

4 12

152

152

12 56 16 72

72

96

72

96

80 16 96

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 40 The account balances appearing on the trial balance were taken from the general ledger of Giovanni's Copy Shop at June 30. Additional information for the month of June that has not yet been recorded in the accounts is as follows: a) A physical count of supplies indicates $600 on hand at June 30. b) The amount of insurance that expired in the month of June was $400. c) Depreciation on equipment for June was $800. d) Rent owed on the copy shop for the month of June was $1,000 but will not be paid until July. Instructions Using the above information, complete the following work sheet for Giovanni's Copy Shop for the month of June.

Account Titles Cash

GIOVANNI’S COPY SHOP Work Sheet Month Ended June 30, 2024 Unadjusted Adjusted Income Adjustments Balance Sheet Trial Balance Trial Balance Statement Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit 400

Supplies

1,700

Prepaid insurance

2,200

Equipment

24,000

Accum. depreciation– equipment Accounts payable

5,000 1,400

Notes payable

4,000

B. Giovanni, capital

15,300

B. Giovanni, drawings

2,400

Revenue Utilities expense Totals Supplies expense Insurance expense Depreciation expense Rent expense Rent payable

5,400 400 31,100

31,100

Test Bank for Accounting Principles, Ninth Canadian Edition

Totals Profit Totals Solution 40 (15 min.)

Account Titles Cash Supplies Prepaid insurance Equipment Accum. depreciation– equipment Accounts payable Notes payable B. Giovanni, capital B. Giovanni, drawings Revenue Utilities expense Totals Supplies expense Insurance expense Depreciation expense Rent expense

Unadjusted Trial Balance Debit Credit 400 1,700 2,200

GIOVANNI’S COPY SHOP Work Sheet Month Ended June 30, 2024 Adjusted Adjustments Trial Balance Debit Credit Debit Credit 400 a) 600 1,100 b) 400 1,800

24,000

c) 800

Debit Credit 400

1,800 24,000

5,800

5,800

1,400 4,000

1,400 4,000

1,400 4,000

15,300

15,300

15,300

2,400

2,400 5,400

2,400 5,400

400

5,400

400

400

1,100

1,100

400

400

c) 800

800

800

d) 1,000

1,000

1,000

31,100

a) 1,100 b) 400

Rent payable

Totals Profit Totals

Balance Sheet

600

24,000

5,000

31,100

Income Statement Debit Credit

d) 1,000 3,300

3,300

1,000 32,900

32,900

1,000 3,700 1,700 5,400

5,400

29,200

5,400

29,200

27,500 1,700 29,200

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic Exercise 41 The unadjusted trial balance of Jackson’s Web Services at December 31, 2024 follows. Additional data regarding the accounts follows: 1. Actual supplies on hand are $750. 2. Depreciation expense for 2024 has not yet been recorded, but has been calculated as $1,600. 3. Amounts recorded as Unearned Revenue are for services that were provided in December. No additional work needs to be done for these customers. 4. Salaries expense of $1,000 for the last week of December has not been paid yet, and should be recorded as Accounts Payable. Instructions a) Complete the following work sheet for December 2024. b) Calculate profit for the year. c) Calculate the balance in E. Jackson, Capital at December 31, 2024, after closing entries are made.

Test Bank for Accounting Principles, Ninth Canadian Edition

JACKSON’S WEB SERVICES Work Sheet Year Ended December 30, 2024

Cash Accounts receivable Supplies Equipment Accumulated depreciation– equipment Accounts payable Unearned revenue E. Jackson, capital E. Jackson, drawings Service revenue Depreciation expense Salaries expense Supplies expense Advertising expense Telephone expense

Unadjusted Trial Balance Debit Credit 5,240

Adjustments

Adjusted Trial Balance

Income Statement

Balance Sheet

1,900 2,800 8,200 820 2,680 1,450 5,010 5,500 65,000

40,000 320 6,200 4,800 74,960 74,960

Solution 41 (25 min) JACKSON’S WEB SERVICES Work Sheet Year Ended December 30, 2024

Cash Accounts receivable Supplies

Unadjusted Trial Balance Debit Credit 5,240

Adjusting Entries Debit Credit

1,900 2,800

1.

2,050

Adjusted Trial Balance Debit Credit 5,240

Income Statement Debit Credit

Balance Sheet Debit Credit 5,240

1,900

1,900

750

750

Test Bank for Accounting Principles, Ninth Canadian Edition

Equipment Accumulated depreciation– equipment Accounts payable Unearned revenue E. Jackson, capital E. Jackson, drawings Service revenue Depreciation expense Salaries expense Supplies expense Advertising expense Telephone expense

8,200

8,200 820

2.

2,680 1,450 5,010

4. 3.

8,200

1,600

2,420

2,420

1,000

3,680 0 5,010

3,680 0 5,010

1,450

5,500

5,500 65,000

3.

1,450

5,500 66,450

66,450

2.

1,600

1,600

1,600

4. 1.

1,000 2,050

41,000 2,370

41,000 2,370

6,200

6,200

6,200

4,800

4,800

4,800

40,000 320

74,960

74,960

6,100

6,100

77,560

77,560

55,970 10,480 66,450

66,450

21,590

66,450

21,590

b) Profit for the year ($66,450 – $55,970) = $10,480 c) Ending owner’s capital ($5,010 + $10,480 – $5,500) = $9,990 Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic Exercise 42 The unadjusted trial balance for Lavish Company at December 31, 2024, is as follows: LAVISH COMPANY Unadjusted Trial Balance December 31, 2024 Accounts receivable …………………………………………………….. Supplies..........................................................................................................

Debit $ 21,000 4,600

Credit

11,110 10,480 21,590

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepaid rent ................................................................................................... Equipment ..................................................................................................... Accumulated depreciation–equipment........................................................ Bank indebtedness ........................................................................................ Accounts payable .......................................................................................... Notes payable ................................................................................................ Unearned revenue ......................................................................................... K. Lavish, capital ............................................................................................ K. Lavish, drawings ........................................................................................ Service revenue ............................................................................................. Utilities expense ............................................................................................ Insurance expense ......................................................................................... Rent expense.................................................................................................. Salaries expense ............................................................................................ Repairs expense ............................................................................................. Totals ........................................................................................................

2,200 110,000

19,500

$ 17,000 6,000 9,800 6,400 6,000 99,000 102,800

27,000 5,000 15,000 36,700 6,000___________ $247,000 $247,000

The following information was prepared by Lavish Company’s controller to help prepare the December 31, 2024, adjusting entries: 1. The company has earned revenue totalling $6,500 that has not been invoiced. 2. The expired portion of prepaid rent is $700. 3. The earned portion of the unearned revenue at December 31, 2024, is $2,200. 4. Depreciation expense for the equipment has been calculated as $11,000. 5. Employees have earned but have not been paid salaries of $5,800. Instructions a) Prepare the adjusting entries that Lavish Company should record at the year ended December 31, 2024. b) Complete the work sheet in the form provided below. c) Prepare the appropriate reversing entries relating to the adjustments made in a) above.

Account Titles Accounts receivable Supplies Prepaid rent Equipment Accum. depreciation– equipment

LAVISH COMPANY Work Sheet Year Ended December 31, 2024 Unadjusted Trial Adjusted Adjustments Balance Trial Balance Debit Credit Debit Credit Debit Credit

Income Statement Debit Credit

Balance Sheet Debit Credit

Test Bank for Accounting Principles, Ninth Canadian Edition

Bank indebtedness Accounts payable Notes payable Unearned revenue K. Lavish, capital K. Lavish, drawings Service revenue Utilities expense Insurance expense Rent expense Salaries expense Repairs expense Totals Other: Depreciation expense Salaries payable Totals Profit Totals Solution 42 (20 min.) a) 1. Accounts Receivable ................................................................................ Service Revenue................................................................................

6,500

2.

Rent Expense ............................................................................................ Prepaid Rent .....................................................................................

700

3.

Unearned Revenue ................................................................................... Service Revenue................................................................................

2,200

4.

Depreciation Expense............................................................................... Accumulated Depreciation–Equipment ..........................................

11,000

5.

Salaries Expense ....................................................................................... Salaries Payable ................................................................................

5,800

b)

6,500

700 2,200

11,000

5,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Account Titles Accounts receivable Supplies

Unadjusted Trial Balance Debit Credit 21,000

2,200

Equipment

110,000

Accum. depreciation– equipment Bank indebtedness Accounts payable Notes payable

Utilities expense Insurance expense Rent expense Salaries expense Repairs expense Totals

6,500

4,600

Prepaid rent

Unearned revenue K. Lavish, capital K. Lavish, drawings Service revenue

LAVISH COMPANY Work Sheet Year Ended December 31, 2024 Adjusted Adjustments Trial Balance Debit Credit Debit Credit

700

17,000

Income Statement Debit Credit

Balance Sheet Debit

27,500

27,500

4,600

4,600

1,500

1,500

110,000

110,000 28,000

28,000

6,000

6,000

6,000

9,800

9,800

9,800

6,400

6,400

6,400

3,800

3,800

99,000

99,000

6,000

11,000

Credit

2,200

99,000 19,500

19,500 6,500 2,200

102,800

19,500 111,500

111,500

27,000

27,000

27,000

5,000

5,000

5,000

15,000

700

15,700

15,700

36,700

5,800

42,500

42,500

6,000

6,000

11,000

11,000

6,000 247,000 247,000

Other: Depreciation expense Salaries payable Totals

11,000 5,800

5,800

5,800

26,200 26,200 270,300 270,300 107,200 111,500 163,100 158,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Profit

4,300

Totals c) 1.

4,300

111,500 111,500 163,100 163,100

Service Revenue ....................................................................................... Accounts Receivable .........................................................................

2.

No reversing entry necessary

3.

No reversing entry necessary

4.

No reversing entry necessary

5.

Salaries Payable ....................................................................................... Salaries Expense ...............................................................................

6,500

5,800

6,500

5,800

Bloomcode: Synthesis Difficulty: Hard Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic Exercise 43 The following are selected unadjusted account balances as at December 31, 2024, the year end of Joseph’s Law Firm: Accounts receivable .............. $50,600 Prepaid insurance ................. 12,600 Salaries payable .................... -0Service revenue ..................... 456,000 Insurance expense ................ 8,200 Salaries expense .................... 115,000 Additional information was obtained from a review of the law firm’s records: 1. Work done for clients in December that will be invoiced in January is $9,800. 2. Prepaid insurance includes $12,600 paid for a one-year policy that was effective December 1, 2024. 3. Salaries are paid monthly on the 15th of each month. The salaries earned by employees from December 16 to 31 total $5,000. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b)

Prepare the December 31, 2024, adjusting entries required for these items. Prepare the reversing entries required for January 1, 2025.

Solution 43 (10 min.) a) 2024 Dec. 31 Accounts Receivable ...................................................................... Service Revenue .....................................................................

9,800

31 Insurance Expense ......................................................................... Prepaid Insurance ($12,600 ÷ 12 x 1) .....................................

1,050

31 Salaries Expense............................................................................. Salaries Payable .....................................................................

5,000

b) 2025 Jan. 1

Service Revenue ............................................................................. Accounts Receivable...............................................................

1

Insurance – reversing entry not required

1

Salaries Payable ............................................................................. Salaries Expense .....................................................................

9,800

1,050

5,000

9,800 9,800

5,000

5,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic Exercise 44 Expo Company prepared the following adjusting entries at year end on December 31, 2024: 1. Interest Expense ....................................................................................... 300 Interest Payable ................................................................................ 2.

Unearned Revenue ................................................................................... Service Revenue................................................................................

1,500

3.

Insurance Expense.................................................................................... Prepaid Insurance .............................................................................

1,200

4.

Interest Receivable ................................................................................... Interest Revenue ...............................................................................

150

300

1,500 1,200

150

Test Bank for Accounting Principles, Ninth Canadian Edition

5.

Supplies Expense...................................................................................... Supplies.............................................................................................

250

6.

Salaries Expense ....................................................................................... Salaries Payable ................................................................................

3,000

250

3,000

In an effort to minimize errors in recording transactions, Expo Company utilizes reversing entries. Instructions Prepare reversing entries on January 1, 2025, where appropriate. Solution 44 (15 min.) Reversing entries are appropriate for adjusting entries related to accrued revenues and accrued expenses. Three of the entries given are accruals and need to be reversed. 1.

Interest Payable........................................................................................ Interest Expense ............................................................................... Reverse the entry to accrue interest expense.

300

4.

Interest Revenue....................................................................................... Interest Receivable ........................................................................... Reverse the entry to accrue interest revenue.

150

Salaries Payable ....................................................................................... Salaries Expense ............................................................................... Reverse the entry to accrue salaries expense.

3,000

6.

300

150

3,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic Exercise 45 Transaction and adjustment data for Portiski Company for the year ended September 30 (newly formed September 1) is as follows: 1. September 24 (initial salary entry): $12,000 of salaries earned between September 1 and September 24 are paid. 2. September 30 (adjusting entry): Salaries earned between September 25 and September 30 are $5,000. These will be paid in the October 8 payroll. 3. October 8 (subsequent salary entry): Total salary payroll amounting to $9,000 was paid. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare two sets of journal entries as specified below. The first set of journal entries should assume that the company does not use reversing entries, and the second set should assume that reversing entries are utilized by the company. Assume no reversing entries a) Initial Salary Entry Sept. 24

Assume reversing entries

b) Adjusting Entry Sept. 30 c) Closing Entry Sept. 30 d) Reversing Entry Oct. 1 e) Subsequent Salary Entry Oct. 8 Solution 45 (20 min.) Assume no reversing entries a) Initial Salary Entry Sept. 24 Salaries Expense Cash

Assume reversing entries 12,000

12,000

12,000

Salaries Expense Cash

b) Adjusting Entry Sept. 30 Salaries Expense 5,000 Salaries Payable

Salaries Expense Salaries Payable

5,000

5,000

c) Closing Entry Sept. 30 Income Summary 17,000 Salaries Expense

17,000

Income Summary 17,000 Salaries Expense

17,000

Salaries Payable Salaries Expense

5,000

5,000

Salaries Expense Cash

9,000

d) Reversing Entry Oct. 1 None

e) Subsequent Salary Entry Oct. 8 Salaries Payable Salaries Expense Cash Bloomcode: Application Difficulty: Medium

5,000 4,000

9,000

12,000

5,000

9,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic Exercise 46 On December 31, 2024, selected accounts of Brolin Personnel Agency, after all year-end adjusting entries, show the following data: Accounts Receivable 12/31/24 8,000

Revenue 12/31/24

80,000

12/31/24

Interest Expense 10,500

Interest Payable 12/31/24

2,500

12/31/24

Utilities Expense 4,800

Accounts Payable 12/31/24

2,400

Analysis indicates that adjusting entries were made for 1. $8,000 of commission revenue earned but not billed, 2. $2,500 of accrued interest, and 3. $2,400 of utilities expense accrued. Instructions a) Prepare the closing entries for revenue and expenses at December 31, 2024. b) Prepare the reversing entries on January 1, 2025. c) Prepare the entries to record (1) the collection of the accrued commission on January 8, (2) payment of the utility bill on January 10, and (3) payment of all the interest due ($3,100) on January 15. d) What is the interest expense for the month of January 2025, assuming the debt was retired on January 15? Solution 46 (25 min.) a) (1) Revenue............................................................................................. Income Summary ......................................................................

b)

80,000 80,000

(2) Income Summary.............................................................................. Interest Expense ........................................................................ Utilities Expense ........................................................................

15,300

(1) Revenue.............................................................................................

8,000

10,500 4,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts Receivable .................................................................

c)

(2) Interest Payable ............................................................................... Interest Expense ........................................................................

2,500

(3) Accounts Payable.............................................................................. Utilities Expense ........................................................................

2,400

(1) Jan. 8

Cash .............................................................................. Revenue ................................................................

8,000

(2) Jan. 10

Utilities Expense ........................................................... Cash.......................................................................

2,400

Interest Expense ........................................................... Cash.......................................................................

3,100

(3) Jan. 15

d)

8,000

2,500 2,400

8,000

2,400 3,100

Interest expense for January 2025 is $600 ($3,100 – $2,500).

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic Exercise 47 On August 31, 2024, selected accounts of Lorraine’s Real Estate, after all year-end adjusting entries, show the following data: Accounts Receivable 08/31/24 8,000

Revenue 08/31/24

80,000

Interest Receivable 08/31/24 2,500

Interest Revenue 08/31/24

10,500

Telephone Expense 08/31/24 8,600

Accounts Payable 08/31/24

1,600

Analysis indicates that adjusting entries were made for

Test Bank for Accounting Principles, Ninth Canadian Edition

1. 2. 3.

$8,000 of commission revenue earned but not billed, $2,500 of accrued interest, and $1,600 of telephone expense accrued.

Instructions a) Prepare the closing entries at August 31, 2024. b) Prepare the reversing entries on September 1, 2024. c) Prepare the entries to record (1) the collection of the accrued commission on September 8, (2) payment of the telephone bill on September 10, and (3) receipt of all the interest due ($4,200) on September 15. d) What is the interest revenue for the month of September 2024, assuming the principal balance was fully repaid on September 15? Solution 47 (25 min.) a) (1) Revenue............................................................................................. Interest Revenue ............................................................................... Income Summary ......................................................................

b)

c)

d)

80,000 10,500

(2) Income Summary.............................................................................. Telephone Expense ...................................................................

8,600

(1) Revenue............................................................................................. Accounts Receivable ................................................................

8,000

(2) Interest Revenue ............................................................................... Interest Receivable ...................................................................

2,500

(3) Accounts Payable.............................................................................. Telephone Expense ...................................................................

1,600

(1) Sept. 8

Cash .............................................................................. Revenue ................................................................

8,000

(2) Sept. 10

Telephone Expense ...................................................... Cash.......................................................................

1,600

(3) Sept. 15

Cash .............................................................................. Interest Revenue...................................................

4,200

Interest revenue for September 2024 is $1,700 ($4,200 – $2,500).

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B)

90,500

8,600

8,000 2,500

1,600

8,000 1,600

4,200

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 4 COMPLETION OF THE ACCOUNTING CYCLE CHAPTER STUDY OBJECTIVES 1. Prepare closing entries and a post-closing trial balance. At the end of an accounting period, the temporary account balances (revenue, expense, Income Summary, and Owner’s Drawings) are transferred to the Owner’s Capital account by journalizing and posting closing entries. Separate entries are made to close revenues and expenses to Income Summary; then Income Summary to Owner’s Capital; and, finally, Owner’s Drawings to Owner’s Capital. The temporary accounts begin the new period with a zero balance and the Owner’s Capital account is updated to show its end-of-period balance. A post-closing trial balance has the balances in permanent accounts (i.e., balance sheet accounts) that are carried forward to the next accounting period. The purpose of this trial balance, as with other trial balances, is to prove the equality of these account balances. 2. Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. The steps in the accounting cycle are (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize and post closing entries, and (9) prepare a post-closing trial balance. A work sheet may be used to help prepare adjusting entries and financial statements. Reversing entries are an optional step that may be used at the beginning of the next accounting period. Correcting entries are recorded whenever an error (an incorrect journal entry) is found. A correcting entry can be determined by comparing the incorrect entry with the journal entry that should have been recorded (the correct entry). The comparison will show which accounts need to be corrected and by how much. The correcting entry will correct the accounts. An equally acceptable alternative is to reverse the incorrect entry and then record the correct entry. 3. Prepare a classified balance sheet. In a classified balance sheet, assets are classified as current assets and non-current assets, which include long-term investments; property, plant, and equipment; intangible assets; and goodwill. Liabilities are classified as either current or non-current. Current assets are assets that are expected to be realized within one year of the balance sheet date. Current liabilities are liabilities that are expected to be paid from current assets within one year of the balance sheet date. The classified balance sheet also includes an equity section, which varies with the form of business organization. 4. Illustrate measures used to evaluate liquidity. One of the measures used to evaluate a company’s short-term liquidity is its working capital, which is the excess of current assets over current liabilities. This can also be expressed as the current ratio (current assets ÷ current liabilities). The acid-test ratio is a measure of the company’s immediate short-term liquidity and is calculated by dividing the sum of

Test Bank for Accounting Principles, Ninth Canadian Edition

cash, short-term investments, and receivables by current liabilities. Ratio trends can also be examined using visualizations. For example, current ratios for multiple years can be presented in a graph, visual, or table. 5. Prepare a work sheet (Appendix 4A). A work sheet is an optional multi-column form, used to assist in preparing adjusting entries and financial statements. The steps in preparing a work sheet are (1) prepare a trial balance on the work sheet; (2) enter the adjustments in the adjustment columns; (3) enter adjusted balances in the adjusted trial balance columns; (4) enter adjusted trial balance amounts in the correct financial statement columns; and (5) total the statement columns, calculate profit (or loss), and complete the work sheet. 6. Prepare reversing entries (Appendix 4B). Reversing entries are optional entries used to simplify bookkeeping. They are made at the beginning of the new accounting period and are the direct opposite of the adjusting entries made in the preceding period. Only accrual adjusting entries are reversed. If reversing entries are used, then subsequent cash transactions can be recorded without referring to the adjusting entries prepared at the end of the previous period.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. Closing entries are necessary if the business plans to continue operating in the future and issue financial statements each year. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

2. The Owner's Drawings account is closed to the Income Summary account in order to properly determine profit (or loss) for the period. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

3. After closing entries have been journalized and posted, all temporary accounts in the ledger should have zero balances. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

4. Cash is a temporary account and it should be zero after all closing entries have been posted. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

5. Closing entries are an optional part of the accounting cycle. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 6. Closing revenue and expense accounts to the Income Summary account is an optional bookkeeping procedure. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 7. Closing the Owner’s Drawings account to the Owner’s Capital account is NOT necessary if profit is greater than owner's drawings during the period. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

8. The Owner's Drawings account is a permanent account whose balance is carried forward to the next accounting period. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

9. Closing entries are journalized after adjusting entries have been journalized. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

10. After the closing entries are posted to the accounts, a trial balance will show balances only in the balance sheet accounts. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

11. The amounts appearing on an income statement should agree with the amounts appearing on the post-closing trial balance. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

12. In a post-closing trial balance, the profit of the business will be one of the temporary accounts. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

13. Reversing entries are an optional part of the accounting cycle. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

14. The final step in the accounting cycle is the pre-closing trial balance. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

15. The last three steps in the accounting cycle include prepare financial statements, journalize and post closing entries, and prepare a post-closing trial balance.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 16. A company has only one accounting cycle over its economic existence. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 17. The accounting cycle begins at the start of a new accounting period. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 18. Both correcting entries and adjusting entries always affect at least one balance sheet account and one income statement account. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

19. Correcting entries are made any time an error is discovered even though it may NOT be at the end of an accounting period. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 20. Correcting entries will only be done at the same time as the adjusting entries are being prepared. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 21. An incorrect debit to Accounts Receivable instead of the correct account Notes Receivable does NOT require a correcting entry because total assets will be correct. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

22. Current assets are normally listed on the balance sheet in reverse order of liquidity. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

23. For an entity’s reporting under International Financial Reporting Standards, “non-current assets” is typically presented on the balance sheet. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

24. Another name for the balance sheet is the statement of financial position. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic 25. All Canadian public companies must follow International Financial Reporting Standards. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

26. Cash and office supplies are both classified as current assets. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic 27. Long-term investments would appear in the property, plant, and equipment section of the balance sheet. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic 28. A liability is classified as a current liability if it is to be settled within one year from the balance sheet date or in the company’s normal operating cycle. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic 29. Common Canadian practice shows current assets as the first items listed on a classified balance sheet. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

30. IFRS uses the alternate statement name of “Statement of Financial Position” in the written standards, whereas ASPE uses the name “Balance Sheet.” Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

31. The current ratio is the ratio of current liabilities divided by current assets. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 32. Macy’s Hair Salon has current assets of $26,000 and current liabilities of $16,500. Its current ratio is 0.63 to 1. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

33. Yousef Manufacturing Company’s current ratio is 2:1. The company has $50,000 in current liabilities; current assets must be $25,000. Answer: False Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

34. The difference between current assets and current liabilities is called working capital. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

35. The acid-test ratio is a measure of a company’s long-term liquidity. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic *36. Drawings will appear in the balance sheet debit column of a work sheet. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

*37. If a company has a loss in the period, the amount of the loss will appear in the income statement credit column and the balance sheet debit column of the work sheet. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*38. The balance of the Depreciation Expense account will appear in the income statement debit column of a work sheet. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*39. If a work sheet is used, financial statements can be prepared before adjusting entries are journalized. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic *40. If total credits in the income statement columns of a work sheet exceed total debits, the company has a profit. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*41. It is NOT necessary to prepare formal financial statements if a work sheet has been prepared because financial position and profit are shown on the work sheet. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*42. The adjustments on a work sheet can be posted directly to the accounts in the ledger from the work sheet. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*43. When all columns are in balance, the preparation of a work sheet will help ensure that no errors were made in the accounting records. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

*44. A reversing entry is made at the beginning of the next accounting period and is the exact opposite of the adjusting entry that was made in the previous period. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic *45. Reversing entries are more relevant in corporations. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

*46. Reversing entries are used to reverse accrued revenues and expenses. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

*47. Reversing entries are used to reverse adjusting entries originally recorded to account for the lapse of prepaid expenses. Answer: False Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 48. Closing entries are made a) in order to terminate the business as an operating entity. b) so that all assets, liabilities, and Owner's Capital accounts will have zero balances when the next accounting period starts. c) in order to transfer profit (or loss) and Owner's Drawings to the Owner's Capital account. d) so that financial statements can be prepared. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

49. Closing entries are a) an optional step in the accounting cycle. b) posted to the ledger accounts from the work sheet. c) made to close permanent or real accounts. d) journalized in the general journal. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 50. The Owner’s Capital account is a) a permanent account. b) closed to the Owner’s Drawings account at the end of the accounting period. c) closed to the Income Summary account at the end of the accounting period. d) a temporary account. Answer: a Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 51. Which of the following is an example of a temporary account that will be closed to Income Summary at the end of the accounting period? a) Accumulated Depreciation–Equipment b) Land c) Accounts Payable d) Service Revenue Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

52. Closing entries are journalized and posted a) before the financial statements are prepared. b) after the financial statements are prepared. c) when the business is closing its doors. d) at the end of each interim accounting period. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

53. 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) close all of the permanent accounts. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

54. Which of the following is a true statement about closing the books of a proprietorship? a) Expenses are closed to the Owner’s Drawings account. b) Only revenues are closed to the Income Summary account. c) Only revenues and expenses are closed to the Income Summary account. d) Revenues, expenses, and the Owner's Drawings account are closed to the Income Summary account. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

55. In order to close a revenue account, the a) Income Summary account should be credited. b) Income Summary account should be debited. c) Owner’s Drawings account should be credited. d) Owner’s Drawings account should be debited. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 56. In order to close the Owner's Drawings account, the a) Income Summary account should be debited. b) Income Summary account should be credited. c) Owner's Capital account should be credited.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) Owner's Capital account should be debited. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

57. In preparing closing entries, a) every revenue account will be credited. b) every expense account will be credited. c) the Owner's Capital account will be debited if there is profit for the period. d) the Owner's Drawings account will be debited. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 58. To close the Depreciation Expense account, a) Income Summary is debited and Owner’s Capital is credited. b) Income Summary is debited and Depreciation Expense is credited. c) Income Summary is credited and Owner’s Capital is debited. d) Income Summary is credited and Depreciation Expense is debited. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

59. The closing entry process consists of closing a) all asset and liability accounts.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) out the Owner's Capital account. c) all permanent accounts. d) all temporary accounts. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

60. When is a post-closing trial balance prepared? a) when reversing entries are required b) after adjusting entries but before closing entries c) after both adjusting and closing entries have been posted d) after the balance sheet has been prepared Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

61. An error has occurred in the closing entry process if a) all the revenue and expense accounts have zero balances. b) the Owner's Capital account is credited for the amount of profit. c) the Owner's Drawings account is closed to the Owner's Capital account. d) all the balance sheet accounts have zero balances. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

62. Closing entries are journalized in the a) trial balance. b) general journal. c) general ledger. d) chart of accounts. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

63. The balance in the Owner’s Drawings account after all closing entries have been posted will be equal to a) zero. b) the profit (or loss) for the period. c) the cash withdrawn by the owner during the period. d) the balance in the Owner’s Capital account. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 64. After closing entries are posted, the balance in the Owner's Capital account in the ledger will be equal to a) the beginning Owner's Capital reported on the statement of owner's equity. b) the amount of the Owner's Capital reported on the balance sheet. c) zero. d) the profit (or loss) for the period. Answer: b Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

65. A post-closing trial balance will show a) only permanent account balances. b) only temporary account balances. c) zero balances for all accounts. d) the amount of profit (or loss) for the period. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 66. A post-closing trial balance should be prepared a) before closing entries are posted to the ledger accounts. b) after closing entries are posted to the ledger accounts. c) before adjusting entries are posted to the ledger accounts. d) after adjusting entries are posted to the ledger accounts. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

67. A post-closing trial balance will show a) zero balances for all accounts. b) zero balances for balance sheet accounts. c) only balances for balance sheet accounts. d) only balances for income statement accounts. Answer: c Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 68. The purpose of the post-closing trial balance is to a) ensure that all adjusting entries were made. b) prove the equality of the balance sheet account balances that are carried forward into the next accounting period. c) prove the equality of the income statement account balances that are carried forward into the next accounting period. d) list all the balance sheet accounts in alphabetical order for easy reference. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 69. The balances that appear on the post-closing trial balance will match the a) income statement account balances before adjustments. b) balance sheet account balances after closing entries. c) income statement account balances before closing entries. d) balance sheet account balances before adjustments. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

70. The heading for a post-closing trial balance has a date line that is similar to the one found on a) a balance sheet. b) an income statement. c) a statement of owner's equity. d) the work sheet.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 71. Assets, liabilities, and equity accounts are considered a) temporary accounts. b) closing accounts. c) permanent accounts. d) contra accounts. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

72. The account used to temporarily hold the profit or loss before being transferred to the capital account is called a) Income Summary account. b) Closing account. c) Drawings account. d) Contra account. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

73. The adjusted trial balance of Service Plus Company appears below: SERVICE PLUS COMPANY Adjusted Trial Balance

Test Bank for Accounting Principles, Ninth Canadian Edition

December 31, 2024 Cash .................................................................................................................. Accounts receivable.......................................................................................... Merchandise inventory .................................................................................... Equipment ........................................................................................................ Accumulated depreciation–equipment .......................................................... Accounts payable ............................................................................................. M. Plus, capital.................................................................................................. M. Plus, drawings.............................................................................................. Service revenue ................................................................................................ Depreciation expense....................................................................................... Supplies expense.............................................................................................. Rent expense .................................................................................................... Salaries expense ............................................................................................... Which of the following would be the entry to close the Drawings account? a) Income Summary ......................................................................................... M. Plus, Drawings ................................................................................... b) M. Plus, Capital ............................................................................................. M. Plus, Drawings ................................................................................... c) M. Plus, Drawings.......................................................................................... Income Summary ................................................................................... d) M. Plus, Drawings ......................................................................................... M. Plus, Capital .......................................................................................

Debit $ 13,400 15,000 35,000 250,000

20,000

Credit

$ 20,000 14,000 136,000

250,000 40,000 9,600 16,000 21,000___________ $420,000 $420,000 20,000 20,000 20,000 20,000

20,000 20,000 20,000 20,000

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

74. The adjusted trial balance of Service Plus Company appears below: SERVICE PLUS COMPANY Adjusted Trial Balance December 31, 2024 Cash .................................................................................................................. Accounts receivable.......................................................................................... Merchandise inventory .................................................................................... Equipment ........................................................................................................ Accumulated depreciation–equipment ..........................................................

Debit $ 13,400 15,000 35,000 250,000

Credit

$ 20,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts payable ............................................................................................. M. Plus, capital.................................................................................................. M. Plus, drawings.............................................................................................. Service revenue ................................................................................................ Depreciation expense....................................................................................... Supplies expense.............................................................................................. Rent expense .................................................................................................... Salaries expense ...............................................................................................

20,000

14,000 136,000

250,000 40,000 9,600 16,000 21,000___________ $420,000 $420,000 Which of the following would be the entry to close the Service Revenue account? a) Income Summary ......................................................................................... 250,000 Service Revenue ..................................................................................... 250,000 b) Service Revenue ........................................................................................... 250,000 M. Plus, Drawings ................................................................................... 250,000 c) M. Plus, Capital ............................................................................................. 250,000 Service Revenue ..................................................................................... 250,000 d) Service Revenue ........................................................................................... 250,000 Income Summary ................................................................................... 250,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

75. The adjusted trial balance of Service Plus Company appears below: SERVICE PLUS COMPANY Adjusted Trial Balance December 31, 2024 Cash .................................................................................................................. Accounts receivable.......................................................................................... Merchandise inventory .................................................................................... Equipment ........................................................................................................ Accumulated depreciation–equipment .......................................................... Accounts payable ............................................................................................. M. Plus, capital.................................................................................................. M. Plus, drawings.............................................................................................. Service revenue ................................................................................................ Depreciation expense....................................................................................... Supplies expense.............................................................................................. Rent expense ....................................................................................................

Debit $ 13,400 15,000 35,000 250,000

20,000 40,000 9,600 16,000

Credit

$ 20,000 14,000 136,000 250,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Salaries expense ...............................................................................................

21,000___________ $420,000 $420,000 Which of the following would be the entry to close the Accounts Receivable account? a) None of the choices is correct. b) Accounts Receivable .................................................................................... 15,000 Income Summary ................................................................................... 15,000 c) M. Plus, Capital ............................................................................................. 15,000 Accounts Receivable .............................................................................. 15,000 d) Income Summary ......................................................................................... 15,000 Accounts Receivable .............................................................................. 15,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

76. The adjusted trial balance of Service Plus Company appears below: SERVICE PLUS COMPANY Adjusted Trial Balance December 31, 2024 Cash .................................................................................................................. Accounts receivable.......................................................................................... Merchandise inventory .................................................................................... Equipment ........................................................................................................ Accumulated depreciation–equipment .......................................................... Accounts payable ............................................................................................. M. Plus, capital.................................................................................................. M. Plus, drawings.............................................................................................. Service revenue ................................................................................................ Depreciation expense....................................................................................... Supplies expense.............................................................................................. Rent expense .................................................................................................... Salaries expense ...............................................................................................

Debit $ 13,400 15,000 35,000 250,000

20,000

Credit

$ 20,000 14,000 136,000

250,000 40,000 9,600 16,000 21,000___________ $420,000 $420,000 What would be the balance in the Income Summary account after closing revenues and expenses? a) $143,400 debit balance b) $163,400 credit balance c) $163,400 debit balance d) $143,400 credit balance

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic 77. The adjusted trial balance of Service Plus Company appears below: SERVICE PLUS COMPANY Adjusted Trial Balance December 31, 2024 Cash .................................................................................................................. Accounts receivable.......................................................................................... Merchandise inventory .................................................................................... Equipment ........................................................................................................ Accumulated depreciation–equipment .......................................................... Accounts payable ............................................................................................. M. Plus, capital.................................................................................................. M. Plus, drawings.............................................................................................. Service revenue ................................................................................................ Depreciation expense....................................................................................... Supplies expense.............................................................................................. Rent expense .................................................................................................... Salaries expense ...............................................................................................

Debit $ 13,400 15,000 35,000 250,000

20,000

Credit

$ 20,000 14,000 136,000

250,000 40,000 9,600 16,000 21,000___________ $420,000 $420,000 What would be the balance in the M. Plus, Capital account after closing all temporary accounts? a) $279,400 credit balance b) $299,400 credit balance c) $163,400 credit balance d) $143,400 credit balance

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books CPA: Financial Reporting AACSB: Analytic

78. On May 10, a $300 cash collection on account from a customer is journalized and posted as a debit

Test Bank for Accounting Principles, Ninth Canadian Edition

to Cash $300 and as a credit to Service Revenue $300. Which of the following journal entries is the correcting journal entry? a) Accounts Receivable..................................................................................... 300 Service Revenue ..................................................................................... 300 b) Service Revenue ........................................................................................... 300 Accounts Payable ................................................................................... 300 c) Service Revenue .......................................................................................... 300 Accounts Receivable .............................................................................. 300 d) Service Revenue .......................................................................................... 300 Cash ........................................................................................................ 300 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 79. On August 22, Darcy’s Things purchased supplies on account that cost $1,150. The transaction was journalized and posted as a debit to Equipment for $115 and as a credit to Accounts Payable for $115. Which of the following journal entries is the correcting journal entry? a) Equipment .................................................................................................... 1,035 Accounts Payable ................................................................................... 1,035 b) Supplies Expense ......................................................................................... 1,150 Accounts Payable ................................................................................... 1,035 Equipment .............................................................................................. 115 c) Supplies ........................................................................................................ 1,035 Accounts Payable ................................................................................... 1,035 d) Supplies ........................................................................................................ 1,150 Accounts Payable ................................................................................... 1,035 Equipment .............................................................................................. 115 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

80. On September 5, Mighty Wear purchased supplies on account for $325, debiting Supplies and crediting Accounts Payable for $235. Which of the following journal entries is the correcting journal entry? a) Accounts Payable ......................................................................................... 90 Supplies .................................................................................................. 90 b) Accounts Payable ......................................................................................... 90 Supplies Expense ................................................................................... 90 c) Supplies ........................................................................................................ 90 Accounts Payable ................................................................................... 90 d) Supplies Expense ......................................................................................... 90 Supplies .................................................................................................. 90 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

81. Frontier Range received $285 on account from a customer. The transaction was erroneously recorded as a debit to Cash of $582 and a credit to Accounts Payable of $582. The correcting entry is a) Accounts Payable .................................................................... 582 Cash ................................................................................... 297 Accounts Receivable ......................................................... 285 b) Accounts Receivable ............................................................... 582 Cash ................................................................................... 297 Accounts Payable .............................................................. 285 c) Accounts Payable .................................................................... 582 Accounts Receivable ......................................................... 582 d) Cash ......................................................................................... 297 Accounts Receivable ......................................................... 297 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

82. On August 1, Sudbury Curling Club provided services on account for $800. Sudbury Curling Club received the entire balance on August 31 and recorded the payment by debiting Cash for $800 and crediting Service Revenue for $800. The correcting entry is a) Accounts Receivable..................................................................................... 800 Cash ........................................................................................................ 800 b) Service Revenue ........................................................................................... 800 Accounts Receivable .............................................................................. 800 c) Cash .............................................................................................................. 800 Accounts Receivable .............................................................................. 800 d) Service Revenue ........................................................................................... 800 Accounts Payable ................................................................................... 800 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 83. Which one of the following is an optional step in the accounting cycle of a business enterprise? a) Analyze business transactions. b) Prepare a work sheet. c) Prepare a trial balance. d) Post to the ledger accounts. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 84. 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.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

85. Which of the following steps in the accounting cycle would NOT generally be performed daily? a) Journalize transactions. b) Post to ledger accounts. c) Prepare adjusting entries. d) Analyze business transactions. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

86. Which of the following steps in the accounting cycle may be performed more frequently than annually? a) Prepare a post-closing trial balance. b) Journalize closing entries. c) Post closing entries. d) Prepare a trial balance. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

87. Which of the following depicts the proper sequence of steps in the accounting cycle? a) journalize the transactions, analyze business transactions, prepare a trial balance b) prepare a trial balance, prepare financial statements, prepare adjusting entries c) prepare a trial balance, prepare adjusting entries, prepare financial statements d) prepare a trial balance, post to ledger accounts, post adjusting entries Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

88. The two optional steps in the accounting cycle are preparing a) a post-closing trial balance and reversing entries. b) a work sheet and a post-closing trial balance. c) reversing entries and a work sheet. d) an adjusted trial balance and a post-closing trial balance. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

89. The first required step in the accounting cycle is a) reversing entries. b) journalizing transactions in the book of original entry. c) analyzing transactions. d) posting transactions. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the

Test Bank for Accounting Principles, Ninth Canadian Edition

preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 90. Which of the following is the final step in the accounting cycle? a) Journalize the transactions. b) Post to ledger accounts. c) Preparing a post-closing trial balance. d) Journalize and post closing entries. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

91. Aladdin Company received a $350 cheque from a customer for the balance due on an account receivable. The transaction was erroneously recorded as a debit to Cash of $530 and a credit to Service Revenue of $530. The correcting entry is a) debit Accounts Receivable $350; credit Cash $350. b) debit Accounts Receivable $180; credit Cash $180. c) debit Service Revenue $530; credit Cash $180; credit Accounts Receivable $350. d) debit Service Revenue $530; credit Cash $350; credit Accounts Receivable $180. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 92. Vader Boats issued a $350 cheque to a supplier for the balance due on an account payable. The transaction was erroneously recorded as a credit to Cash of $530 and a debit to Repairs Expense of $530. The correcting entry is a) debit Accounts Payable $350; credit Cash $350.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) debit Accounts Payable $180; credit Cash $180. c) debit Cash $180; debit Accounts Payable $350; credit Repairs Expense $530. d) debit Cash $350; debit Accounts Payable $180; credit Repairs Expense $530. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 93. If errors occur in the recording process, they a) should be corrected as adjustments at the end of the period. b) should be corrected as soon as they are discovered. c) should be corrected when preparing annual financial statements. d) cannot be corrected until the next accounting period. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 94. A correcting entry a) must involve one balance sheet account and one income statement account. b) is another name for a closing entry. c) may involve any combination of accounts. d) is a required step in the accounting cycle. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

95. On January 1, Luc’s Furniture Repair Shop purchased supplies on account for $800. Luc paid the entire balance on January 31 and recorded the payment by debiting Supplies for $800 and crediting Cash for $800. On the January 31 financial statements, a) assets and expenses will be understated. b) assets and liabilities will be overstated. c) expenses and liabilities will be overstated. d) assets and liabilities will be understated. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

96. On August 1, Sudbury Curling Club provided services on account for $800. Sudbury Curling Club received the entire balance on August 31 and recorded the payment by debiting Cash for $800 and crediting Service Revenue for $800. On the August 31 financial statements, a) assets and revenue will be understated. b) assets and liabilities will be overstated. c) assets and revenue will be overstated. d) assets and liabilities will be understated. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 97. Pool Company paid the weekly payroll on January 2 by debiting Wages Expense for $40,000. The accountant preparing the payroll entry overlooked the fact that Wages Expense of $24,000 had been accrued at year end on December 31. The correcting entry is a) Wages Payable ........................................................................ 24,000 Cash ................................................................................... 24,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Cash ......................................................................................... Wages Expense .................................................................. c) Wages Payable ......................................................................... Wages Expense .................................................................. d) Cash ......................................................................................... Wages Expense ..................................................................

16,000 24,000 24,000

16,000 24,000 24,000

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

98. The Debt Company paid $630 on account to a creditor. The transaction was erroneously recorded as a debit to Cash of $360 and a credit to Accounts Receivable of $360. The correcting entry is a) Accounts Payable .................................................................... 630 Cash ................................................................................... 630 b) Accounts Receivable ............................................................... 360 Cash ................................................................................... 360 c) Accounts Receivable ............................................................... 360 Accounts Payable .............................................................. 360 d) Accounts Receivable ............................................................... 360 Accounts Payable .................................................................... 630 Cash ................................................................................... 990 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 99. The Lakes Company received $630 on account from a customer. The transaction was erroneously recorded as a debit to Cash of $360 and a credit to Accounts Payable of $360. The correcting entry is a) Accounts Payable .................................................................... 630 Cash ......................................................................................... 270 Accounts Receivable ......................................................... 900

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Accounts Payable .................................................................... Cash ................................................................................... c) Accounts Payable .................................................................... Accounts Receivable ......................................................... d) Accounts Payable .................................................................... Cash ......................................................................................... Accounts Receivable .........................................................

360 360 360 270

360 360 630

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 100. A lawyer collected $860 of legal fees in advance. He erroneously debited Cash for $680 and credited Accounts Receivable for $680. The correcting entry is a) Cash ......................................................................................... 680 Accounts Receivable ............................................................... 180 Unearned Revenue ........................................................... 860 b) Cash ......................................................................................... 860 Service Revenue ................................................................ 860 c) Cash ......................................................................................... 180 Accounts Receivable ................................................................ 680 Unearned Revenue ........................................................... 860 d) Cash ......................................................................................... 180 Accounts Receivable ......................................................... 180 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

101. Kingston Marina noticed an error in their financial statements after the financial statements had been submitted to their bank. The company is applying for a new loan to install a new wharf. The controller of Kingston should

Test Bank for Accounting Principles, Ninth Canadian Edition

a) wait until the bank has approved the loan to notify them of the mistake. b) inform Kingston’s management and assume that they will tell the bank. c) inform Kingston’s management, inform the bank, and provide corrected financial statements. d) do nothing or resign. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

102. Under IFRS, which terms are used as a heading to the balance sheet? a) Classified Balance Sheet or Statement of Financial Position b) Balance Sheet or Classified Balance Sheet c) Statement of Financial Position or Balance Sheet d) Balance of Assets and Liabilities or Statement of Assets and Liabilities Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic 103. Office equipment is classified on the balance sheet as a) a current asset. b) property, plant, and equipment. c) a current liability. d) a long-term investment. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

104. A current asset is a) an expense incurred in the business. b) an asset that is currently being used to produce a product or service. c) usually found as a separate classification in the income statement. d) expected to be realized in cash, sold, or consumed within one year of the balance sheet. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

105. The standard classification and order of the asset section of a classified balance sheet is a) long-term investments; current assets; property, plant, and equipment; intangible assets; goodwill. b) current assets; long-term investments; property, plant, and equipment; intangible assets; goodwill. c) intangible assets; current assets; long-term investments; property, plant, and equipment; goodwill. d) property, plant, and equipment; intangible assets; long-term investments; current assets. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

106. An intangible asset a) derives its value from the rights and privileges it provides the owner. b) is a liability because it has no physical substance. c) is never amortized because it has an indefinite life. d) cannot be classified on the balance sheet because it lacks physical substance. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

107. Liabilities are generally classified on a balance sheet as a) small liabilities and large liabilities. b) present liabilities and future liabilities. c) tangible liabilities and intangible liabilities. d) current liabilities and non-current liabilities. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic 108. Which of the following would NOT be classified a non-current liability? a) current maturities of long-term debt b) bonds payable c) mortgage payable d) lease liabilities Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

109. The current portion of a long-term liability is reported on the balance sheet as a a) deferred interest expense. b) current asset. c) current liability. d) non-current liability. Answer: c Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic 110. On a classified balance sheet of a Canadian company, current assets are customarily listed a) in alphabetical order. b) with the largest dollar amounts first. c) in the order of liquidity. d) in the order of acquisition. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

111. Intangible assets are a) listed under current assets on the balance sheet. b) not listed on the balance sheet because they do not have physical substance. c) listed as a separate category on the balance sheet. d) listed as a long-term investment on the balance sheet. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

112. Bracebridge Industries has the following select account balances: Cash $10,000; Accounts Receivable $3,100; Inventory $21,000; Equipment $32,000; Goodwill $40,000; Accumulated Depreciation–Equipment $6,400; Supplies $2,300; and Patents $18,000. What would be the total to be reported as non-current assets on its balance sheet? a) $65,600 b) $83,600 c) $90,000 d) $92,300

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic 113. Bracebridge Industries has the following select account balances: Cash $10,000; Accounts Receivable $3,100; Inventory $21,000; Equipment $32,000; Goodwill $40,000; Accumulated Depreciation–Equipment $6,400; Supplies $2,300; and Patents $18,000. What would be the total to be reported as current assets on its balance sheet? a) $15,400 b) $34,100 c) $36,400 d) $66,100 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

114. Level Ltd. has the following select account balances: Cash $20,000; Accounts Receivable $8,900; Equipment $60,000; Long-term Equity Investment $5,000; Accumulated Depreciation–Equipment $10,000; Supplies $1,000; Prepaid Insurance $2,400; Inventory $6,000; and Patents $10,000. What would be the total to be reported as non-current assets? a) $65,000 b) $71,000 c) $72,000 d) $66,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

115. Level Ltd. has the following select account balances: Cash $20,000; Accounts Receivable $8,900; Equipment $60,000; Long-term Equity Investment $5,000; Accumulated Depreciation–Equipment $10,000; Supplies $1,000; Prepaid Insurance $2,400; Inventory $6,000; and Patents $10,000. What would be the total to be reported as current assets? a) $35,900 b) $38,300 c) $32,300 d) $29,900 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic

116. Montgomery Ltd. has the following select account balances: Accounts Payable $6,000; Accounts Receivable $4,200; Unearned Revenue $4,200; Debt Investment $5,000; Accumulated Depreciation– Equipment $2,000; Mortgage Payable (due in five years) $80,000; Supplies $1,200; Prepaid Insurance $2,400; Current portion of notes payable $2,500; Inventory $6,000; and Patents $10,000. What would be the total to be reported as current liabilities? a) $8,500 b) $12,700 c) $17,700 d) $10,900 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet CPA: Financial Reporting AACSB: Analytic 117. Spanish Industries has the following current assets and liabilities on the company’s balance sheet: Cash $17,000; Accounts Receivable $8,200; Inventory $54,000; Prepaid Rent $3,000; Accounts Payable $23,000; and Unearned Revenue $5,500. The company’s working capital would be a) $56,200.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) $53,700. c) $50,700. d) $33,700. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

118. Spanish Industries has the following current assets and liabilities on the company’s balance sheet: Cash $17,000; Accounts Receivable $8,200; Inventory $54,000; Prepaid Rent $3,000; Accounts Payable $23,000; and Unearned Revenue $5,500. The company’s current ratio would be (round to two decimal places) a) 3.44:1 b) 2.78:1 c) 1.70:1 d) 2.88:1 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 119. Moorehouse Ltd. has the following selected financial information at September 30, 2024: Cash $4,190, Accounts Receivable $1,258, Unearned Revenue $3,900, current assets of $28,300, and current liabilities of $28,500. The company’s working capital would be a) $200. b) $1,548. c) $(200). d) $0. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate measures used to evaluate liquidity.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

120. Moorehouse Ltd. has the following selected financial information at September 30, 2024: Cash $4,190, Accounts Receivable $1,258, Unearned Revenue $3,900, current assets of $28,300, and current liabilities of $28,500. The company’s current ratio would be (round to two decimal places) a) 1.40:1 b) 0.99:1 c) 0.80:1 d) 0.19:1 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

121. Moorehouse Ltd. has the following selected financial information at September 30, 2024: Cash $4,190, Accounts Receivable $1,258, Unearned Revenue $3,900, current assets of $28,300, and current liabilities of $28,500. The company’s acid-test ratio would be (round to two decimal places) a) 1.40:1 b) 0.99:1 c) 0.80:1 d) 0.19:1 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 122. The relationship between current assets and current liabilities is important in evaluating a company's a) profitability. b) liquidity. c) market value.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) turnover. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

123. Important information needed to determine if companies can pay their current obligations is the a) profit for this year. b) projected profit for next year. c) relationship between current assets and current liabilities. d) relationship between current and non-current liabilities. Answer: c Bloomcode: Analysis Difficulty: Medium Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 124. The current ratio is expressed as a) current assets divided by current liabilities. b) current assets minus current liabilities. c) current liabilities divided by non-current liabilities. d) current assets minus owner’s equity. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

125. The current ratio is a measure of a) efficiency.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) leverage. c) profitability. d) a company's liquidity. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

126. The current ratio should be interpreted by considering all but a) general economic and industry conditions. b) other special financial information. c) other firms in the same or related industry. d) other firms in unrelated industries. Answer: d Bloomcode: Analysis Difficulty: Medium Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

127. Which of the following will be affected by a reclassification of assets from current to non-current? a) total assets b) current ratio c) income summary d) accounts payable turnover Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

128. Which of the following will be affected by a reclassification of liabilities from current to noncurrent? a) total assets b) total liabilities c) working capital d) inventory turnover Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

129. Which of the following would NOT affect the acid-test ratio? a) increasing supplies from a purchase on account b) decreasing accounts receivable from a collection on account c) increasing cash from a cash sale d) increasing prepaid insurance from a cash payment Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 130. Spanish Industries has the following current assets and liabilities on the company’s balance sheet: Cash $17,000; Accounts Receivable $8,200; Inventory $54,000; Prepaid Rent $3,000; Accounts Payable $23,000; and Unearned Revenue $5,500. The company’s acid-test ratio would be a) 1.12:1 b) 0.38:1 c) 0.88:1 d) 1.07:1 Answer: c Bloomcode: Application Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic *131. After the adjusting entries are journalized and posted to the accounts in the general ledger, the balance of each account should agree with the balance shown on the a) adjusted trial balance. b) post-closing trial balance. c) the general journal. d) adjustment columns of the work sheet. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*132. The account, Supplies, will appear in the debit columns of the work sheet for all columns EXCEPT the a) trial balance. b) adjusted trial balance. c) balance sheet. d) income statement. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*133. When constructing a work sheet, accounts are often needed that are NOT listed in the trial balance already entered on the work sheet from the ledger. Where should these additional accounts be shown on the work sheet? a) They should be inserted in alphabetical order into the trial balance accounts already given. b) They should be inserted in the chart of accounts by highest dollar value. c) They should be inserted on the lines immediately below the trial balance totals.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) They should not be inserted on the trial balance until the next accounting period. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*134. When using a work sheet, adjusting entries are journalized a) after the work sheet is completed and before financial statements are prepared. b) before the adjustments are entered on to the work sheet. c) after the work sheet is completed and after financial statements have been prepared. d) before the adjusted trial balance is extended to the proper financial statement columns. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic *135. Assuming that there is a loss for the period, which column will the loss balance be entered in? a) income statement credit column b) adjustment credit column c) trial balance debit column d) adjusted trial balance debit column Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*136. When preparing a work sheet, the profit (or loss) for the period a) is found by calculating the difference between the income statement credit column and the balance

Test Bank for Accounting Principles, Ninth Canadian Edition

sheet credit column on the work sheet. b) cannot be found on the work sheet. c) is found by calculating the difference between the income statement column totals on the work sheet. d) is found by calculating the difference between the trial balance totals and the adjusted trial balance totals. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*137. The work sheet does NOT show a) profit or loss for the period. b) revenue and expense account balances. c) the ending balance in the Owner's Capital account. d) the trial balance before adjustments. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic *138. If the total debits exceed total credits in the balance sheet columns of the work sheet, owner's equity a) will increase because profit has occurred. b) will decrease because a loss has occurred. c) is in error because a mistake has occurred. d) will not be affected. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A)

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

*139. The unadjusted trial balance columns of the work sheet show the balance in the Prepaid Insurance account at $2,250. The adjustments columns show that $625 of this insurance was used during the period. Assuming there is no other charge to insurance expense during the year, what amount would be shown as Insurance Expense in the income statement column? a) $1,625 debit b) $625 credit c) $625 debit d) $2,250 debit Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*140. The income statement and balance sheet columns of Stella Company's work sheet reflect the following totals: Income Statement Balance Sheet Dr. Cr. Dr. Cr. Totals $55,000 $50,000 $34,000 $39,000 The profit (or loss) for the period is a) $50,000 profit. b) $5,000 profit. c) $5,000 loss. d) The profit (or loss) is not determinable. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic

*141. The income statement and balance sheet columns of Stella Company's work sheet reflect the following totals:

Test Bank for Accounting Principles, Ninth Canadian Edition

Income Statement Balance Sheet Dr. Cr. Dr. Cr. Totals $55,000 $50,000 $34,000 $39,000 To enter the profit (or loss) for the period into the above work sheet requires an entry to the a) income statement debit column and the balance sheet credit column. b) income statement credit column and the balance sheet debit column. c) income statement debit column and the income statement credit column. d) balance sheet debit column and the balance sheet credit column. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic *142. The unadjusted trial balance columns of a work sheet show the balance in the Supplies account at $1,825. The adjustments columns show that $345 of supplies were used during the period. What amount would be shown as Supplies Expense in the income statement column? a) $1,480 debit b) $345 debit c) $1,825 debit d) $2,170 debit Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic *143. The unadjusted trial balance columns of a work sheet show the balance in the Prepaid Insurance account at $2,250. The adjustments columns show that $625 of this insurance was used during the period. Assuming there is no other charge to insurance expense during the year, what amount would be shown as Prepaid Insurance in the balance sheet column? a) $1,625 debit b) $2,875 debit c) $625 debit d) $2,250 debit

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic *144. The unadjusted trial balance columns of a work sheet show the balance in the Supplies account at $1,825. The adjustments columns show that $345 of supplies were used during the period. What amount would be shown as Supplies in the balance sheet column? a) $2,170 debit b) $1,825 debit c) $345 debit d) $1,480 debit Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic *145. The income statement and balance sheet columns of Roosevelt Company's work sheet reflect the following totals: Income Statement Balance Sheet Dr. Cr. Dr. Cr. Totals $110,000 $122,000 $52,000 $40,000 The profit (or loss) for the period is a) $122,000 profit. b) $12,000 profit. c) $12,000 loss. d) The profit (or loss) is not determinable. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

*146. The income statement and balance sheet columns of Harris Company's work sheet reflect the following totals: Income Statement Balance Sheet Dr. Cr. Dr. Cr. Totals $55,000 $61,000 $27,000 ? How much is the credit total for the Balance Sheet? a) $6,000 b) $34,000 c) $33,000 d) $21,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) CPA: Financial Reporting AACSB: Analytic *147. Farmer Framer Company has a note receivable with a customer. On June 30, Farmer recorded an adjusting entry to accrue $425 of interest earned on the note. On July 31, Farmer collected $500 cash from the customer for interest earned from January 1 to July 31. Assuming Farmer recorded the adjusting entry at June 30, which of the following would be the reversing entry on July 1? a) Interest Receivable ....................................................................................... 425 Interest Revenue .................................................................................... 425 b) Interest Revenue .......................................................................................... 500 Interest Receivable ................................................................................. 500 c) Interest Receivable ....................................................................................... 500 Interest Revenue .................................................................................... 500 d) Interest Revenue .......................................................................................... 425 Interest Receivable ................................................................................. 425 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

*148. Farmer Framer Company will pay employees $2,500 for salaries earned between June 24 and June 28 on the July 8 payroll. On July 8, the salaries paid was $5,000 as the salaries earned between July 1 and July 5 were $2,500. Assuming Farmer recorded the adjusting entry at June 30, which of the following would be the reversing entry on July 1? a) Salaries Expense ........................................................................................... 5,000 Salaries Payable ..................................................................................... 5,000 b) Salaries Payable ........................................................................................... 2,500 Salaries Expense .................................................................................... 2,500 c) Salaries Expense ........................................................................................... 2,500 Salaries Payable ..................................................................................... 2,500 d) Salaries Payable ........................................................................................... 5,000 Salaries Expense .................................................................................... 5,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic *149. Farmer Framer Company will pay employees $2,500 for salaries earned between June 24 and June 28 on the July 8 payroll. On July 8, the salaries paid was $5,000 as the salaries earned between July 1 and July 5 were $2,500. Assuming Farmer recorded the adjusting entry at June 30 and the reversing entry on July 1, which of the following would be the subsequent salary entry on July 8? a) Salaries Expense ........................................................................................... 2,500 Cash........................................................................................................... 2,500 b) Salaries Payable ........................................................................................... 2,500 Cash........................................................................................................... 2,500 c) Salaries Expense ........................................................................................... 5,000 Cash........................................................................................................... 5,000 d) Salaries Payable .......................................................................................... 5,000 Cash........................................................................................................... 5,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

*150. Farmer Framer Company has a note receivable with a customer. On June 30, Farmer recorded an adjusting entry to accrue $425 of interest earned on the note. On July 31, Farmer collected $500 cash from the customer for interest earned from January 1 to July 31. Assuming Farmer recorded the adjusting entry at June 30 and the reversing entry on July 1, which of the following would be the subsequent interest entry on July 31? a) Cash .............................................................................................................. 500 Interest Revenue .................................................................................... 500 b) Cash .............................................................................................................. 500 Interest Receivable ................................................................................. 500 c) Cash .............................................................................................................. 425 Interest Revenue .................................................................................... 425 d) Cash .............................................................................................................. 425 Interest Receivable ................................................................................. 425 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

*151. Farmer Framer Company will pay employees $2,500 for salaries earned between June 24 and June 28 on the July 8 payroll. On July 8, the salaries paid was $5,000 as the salaries earned between July 1 and July 5 were $2,500. Assuming Farmer recorded both the adjusting and closing entry at June 30, but did not record a reversing entry, which of the following would be the subsequent salary entry on July 8? a) Salaries Expense ........................................................................................... 5,000 Salaries Payable ..................................................................................... 2,500 Cash ........................................................................................................ 2,500 b) Salaries Payable ........................................................................................... 5,000 Cash ........................................................................................................ 5,000 c) Cash .............................................................................................................. 5,000 Salaries Payable ..................................................................................... 2,500 Salaries Expense .................................................................................... 2,500 d) Salaries Payable ........................................................................................... 2,500 Salaries Expense ........................................................................................... 2,500 Cash ........................................................................................................ 5,000 Answer: d Bloomcode: Application Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic *152. Reversing entries are used to reverse two types of adjusting entries: a) accrued revenue and unearned revenues. b) prepayments and unearned revenues. c) accrued revenue and expenses. d) prepayments and accrued expenses. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

*153. Although it may look unusual, when preparing a reversing entry you may create a) a debit balance in an asset account. b) a credit balance a liability account. c) no change; all accounts remain in the same balance. d) a credit balance in an expense account. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

*154. Reversing entries are useful a) whenever adjusting entries are prepared. b) only when accruals are journalized in the current period. c) only when accruals have been journalized in the previous period. d) whenever correcting entries are prepared. Answer: a

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

*155. A reversing entry a) reverses entries that were made in error. b) is the exact opposite of an adjusting entry made in a previous period. c) is the same as the adjusting entry made in a previous period. d) is made when a company sustains a loss in one period and reverses the effect with a profit in the next period. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

*156. If a company utilizes reversing entries, they will a) be made at the beginning of the next accounting period. b) not actually be posted to the general ledger accounts. c) be made before the post-closing trial balance. d) be part of the adjusting entry process. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS *157. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. ____ ____ ____ ____

Work sheet Permanent accounts Closing entries Drawings Reversing entry

F. G. H. I. J.

Share capital Current assets Income Summary Non-current liabilities Correcting entries

1. A temporary account used to account for owner withdrawals 2. Balance sheet accounts whose balances are carried forward to the next period 3. A temporary account used to close revenues and expenses 4. Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent Owner's Equity account ____ 5. Entries to correct errors made in recording transactions ____ 6. Obligations expected to be paid after one year ____ 7. Resources that are expected to be realized in cash, sold, or consumed within one year of the balance sheet ____ 8. An optional tool that facilitates the preparation of financial statements ____ 9. The exact opposite of an adjusting entry made in a previous period ____ 10. Investments by all of the shareholders

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 1.

D

2.

B

3.

H

4.

C

5.

J

6.

I

7.

G

8.

A

9.

E

10. F Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare closing entries and a post-closing trial balance. Section Reference: Closing the Books Learning Objective: Explain the steps in the accounting cycle, including optional steps, and the preparation of correcting entries. Section Reference: Summary of the Accounting Cycle Learning Objective: Prepare a classified balance sheet. Section Reference: Classified Balance Sheet Learning Objective: Illustrate measures used to evaluate liquidity. Section Reference: Using the Information in the Financial Statements Learning Objective: Prepare a work sheet. Section Reference: Work Sheets (Appendix 4A) Learning Objective: Prepare reversing entries. Section Reference: Reversing Entries (Appendix 4B) CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS CHAPTER STUDY OBJECTIVES 1. Describe the differences between service and merchandising companies. A service company performs services. It has service or fee revenue and operating expenses. A merchandising company sells goods. It has merchandise inventory, sales revenue, cost of goods sold, gross profit, and operating expenses. A merchandising company has a longer operating cycle than a service company. Merchandising companies must decide if they want to spend the extra resources to use a perpetual inventory system in which inventory records are updated with each purchase and sale. The benefit of the perpetual system is that it provides better information and control over inventory than a periodic system in which inventory records are updated only at the end of the accounting period. 2. Prepare entries for purchases under a perpetual inventory system. The Merchandise Inventory account is debited (increased) for all purchases of merchandise and freight, if freight is paid by the buyer. It is credited (decreased) for purchase returns and allowances and purchase discounts. Purchase discounts are cash reductions to the net invoice price for early payment. 3. Prepare entries for sales under a perpetual inventory system using the earnings approach. When inventory is sold, two entries are required: (1) Accounts Receivable (or Cash) is debited and Sales is credited for the selling price of the merchandise. (2) Cost of Goods Sold (an expense) is debited (increased) and Merchandise Inventory (a current asset) is credited (decreased) for the cost of the inventory items sold. Contra revenue accounts are used to record sales returns and allowances, and sales discounts. If the returned merchandise can be sold again in the future, an additional entry is made to increase Merchandise Inventory (a debit) and decrease Cost of Goods Sold (a credit). Freight costs paid by the seller are recorded as an operating expense. A contra revenue account is used to record sales discounts. 4. Perform the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company is also done for a merchandising company. An additional adjusting entry may be required under a perpetual inventory system. The Merchandise Inventory account must be adjusted to agree with the physical inventory count if there is a difference in the amounts. Merchandising companies have additional temporary accounts that must also be closed at the end of the accounting year. 5. Prepare single-step and multiple-step income statements. In a single-step income statement, all data are classified under two categories (revenues or expenses), and profit (loss) is determined by one step. A multiple-step income statement shows several steps in determining profit (loss). Net sales is calculated by deducting sales returns and allowances, and sales discounts from sales. Next, gross profit is calculated by deducting the cost of goods sold from net sales. Profit (loss) from operations is then calculated by

Test Bank for Accounting Principles, Ninth Canadian Edition

deducting operating expenses from gross profit. Total non-operating activities are added to (or deducted from) profit from operations to determine profit (loss) for the period. 6. Calculate the gross profit margin and profit margin. The gross profit margin, calculated by dividing gross profit by net sales, measures the gross profit earned for each dollar of sales. The profit margin, calculated by dividing profit by net sales, measures the profit earned for each dollar of sales. Both are measures of profitability that are closely watched by management and other interested parties. 7. Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold (Appendix 5A). In a periodic inventory system, separate temporary expense and contra expense accounts are used to record (a) purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs paid by the buyer. Purchases − purchase returns and allowances − purchase discounts = net purchases. Net purchases + freight in = cost of goods purchased. In a periodic inventory system, only one journal entry is made to record a sale of merchandise: Accounts Receivable (or Cash) is debited and Sales is credited. Cost of goods sold is not recorded at the time of the sale. Instead, it is calculated as follows at the end of the period after the ending inventory has been counted: Beginning inventory + cost of goods purchased = cost of goods available for sale. Cost of goods available for sale − ending inventory = cost of goods sold. 8. Prepare entries for sales under a perpetual inventory system using the contract-based approach (Appendix 5B). The contract-based approach to revenue recognition is used by companies that follow IFRS. The core principle of this approach is that revenue is recognized when a performance obligation is complete and the amount of revenue recorded is the consideration (i.e., Cash) a company expects to receive. Merchandisers that offer their customers a right of return are obligated to provide a refund if requested by the buyer. The seller will estimate the potential return from a customer at the time of sale and will credit the liability account Refund Liability. At the same time, the seller estimates the cost of expected returned merchandise and debits an account called Estimated Inventory Returns. Refund Liability and Estimated Inventory Returns are balance sheet accounts. Merchandisers that offer their customers a cash discount for prompt payment will determine the probability that a customer will take advantage of the discount and the sales revenue recorded is reduced accordingly. If the customer does not take advantage of the discount, Sales revenue is credited to reflect the additional amount received.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 Below are four independent scenarios: 1. A store manager checks the computer system to determine if there is enough inventory to fill a customer order. 2. A year-end inventory count is completed to determine the cost of goods sold. 3. A month-end inventory count is completed to verify the accuracy of the inventory balances. 4. As inventory is received, all items are scanned and input immediately into the inventory records. Instructions For each scenario determine if a perpetual or a periodic inventory system is used. Solution 1 1. perpetual 2.

periodic or perpetual

3.

perpetual

4.

perpetual

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic Exercise 2 Listed below are various accounts: 1. Merchandise inventory 2. Salaries expense 3. Cost of goods sold 4. Depreciation expense 5. Supplies 6. Advertising expense 7. Sales 8. Insurance expense 9. Accounts receivable 10. Rent expense Instructions State which accounts would be classified as operating expenses.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 2 2. Salaries expense 4.

Depreciation expense

6.

Advertising expense

8.

Insurance expense

10. Rent expense Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic Exercise 3 Discuss the difference between the periodic and perpetual inventory systems. Solution 3 (5 min.) In a perpetual inventory system, the company keeps detailed records of each inventory purchase and sale. This system continuously shows the quantity and cost of the inventory that should be on hand for every item. In a periodic inventory system, companies do not keep detailed inventory records of the goods on hand throughout the period. Instead, the cost of goods sold is determined only at the end of the accounting period. Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic Exercise 4 Quigley Landscaping sells mowers and other lawn maintenance equipment. The following information relates to its inventory of mowers, which is accounted for using the perpetual inventory method: June 3 Purchased 35 mowers at $400 each from Greensborough Equipment; terms 2/10, net 30, FOB shipping point. 4 The correct company paid freight of $1,200 on the June 3 purchase. 10 Returned four of the mowers purchased on June 3. 30 Paid the Greensborough account in full.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Prepare the journal entries to record these transactions. b) Determine the ending balance in the Merchandise Inventory account at June 30. There was no inventory at the beginning of the period. c) Determine what the ending balance would be if Quigley had paid the Greensborough account on June 12 instead of on June 30. Solution 4 (15 min.) a) June 3 Merchandise Inventory (35 × $400) ............................................... Accounts Payable ...................................................................

14,000

4

Merchandise Inventory .................................................................. Cash ........................................................................................

1,200

10

Accounts Payable (4 × $400) .......................................................... Merchandise Inventory ..........................................................

1,600

Accounts Payable ($14,000 – $1,600) ............................................ Cash ........................................................................................

12,400

30

b) Purchase........................................................................................................... Freight ..............................................................................................................

14,000

1,200

1,600

Returns ............................................................................................................. Ending inventory..............................................................................................

$14,000 1,200 15,200 (1,600) $13,600

c) Ending inventory per part b) ........................................................................... Less discount ($14,000 – $1,600) × 2% ............................................................ Ending inventory..............................................................................................

$13,600 (248) $13,352

12,400

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic Exercise 5 Below are six independent scenarios: 1. Krusty Company sells DVDs to Sunny industries, FOB destination. 2. Bell purchases various products, FOB shipping point. 3. Yogi Company orders 500 yoga mats. Yogi has recorded the freight charges of $200 to inventory. 4. No Fees Company sells products with a promise that they will ensure all products reach their

Test Bank for Accounting Principles, Ninth Canadian Edition

5. 6.

destination free of charge to the customer. Thor Company advises all customers that they only ensure products meet the specified shipping point. Easy Does It Company purchases 700 chairs, FOB shipping point.

Instructions For each scenario determine who is responsible for paying and recording the freight charges: Buyer (B) or Seller (S). Solution 5 1. S 2.

B

3.

B

4.

S

5.

B

6.

B

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic Exercise 6 Below are five independent scenarios: 1. $50 discount for each 100 products ordered 2. $100 discount for accounts paid within 30 days 3. 5% discount for purchases over $1,000 4. 10% discount for purchases paid for in full in 10 days 5. $1,000 discount for purchases made in excess of $10,000 Instructions State whether each item is a quantity discount (Q) or a purchase discount (P). Solution 6 1. Q 2.

P

3.

Q

Test Bank for Accounting Principles, Ninth Canadian Edition

4.

P

5.

Q

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic Exercise 7 Sandy Company purchases various types of beach toys for sale to consumers. Listed below are the transactions for the month of June. Sandy uses a perpetual inventory system. June 1 Purchased 18 water tubes for $250 each terms n/30 FOB destination. 8 Returned two tubes purchased on June 1 due to defects. Received a full refund for the defective tubes. 10 Freight charges of $85 for the June 1 transaction are paid by the responsible party. 11 Made a complaint about competitive pricing. Received a $200 credit for the water tubes purchased on June 1. 15 Purchased 92 water tubes for $225 each on account, terms 2/10, n/30. 18 Made payment for the amount owing for the June 1 transaction. 20 Made payment for the amount owing for the June 15 transaction. Instructions a) Journalize the transactions using the perpetual inventory system. b) Determine the balance of the Merchandise Inventory account at the end of June. (There was no inventory at the beginning of the month.) Solution 7 (10 min.) a) June 1 Merchandise Inventory .................................................................. Accounts Payable (18 × $250) ................................................ 8

Accounts Payable........................................................................... Merchandise Inventory ..........................................................

4,500

4,500

500 500

10

No entry, freight paid by the seller.

11

Accounts Payable........................................................................... Merchandise Inventory ..........................................................

200

15

Merchandise Inventory .................................................................. Accounts Payable (92 × $225) ................................................

20,700

200 20,700

Test Bank for Accounting Principles, Ninth Canadian Edition

b)

18

Accounts Payable ($4,500 – $500 – $200)...................................... Cash ........................................................................................

3,800

20

Accounts Payable........................................................................... Merchandise Inventory ($20,700 × 2%) ................................. Cash ........................................................................................

20,700

3,800

414 20,286

Inventory balance is determined as $4,500 – $500 – $200 + $20,700 – $414 = $24,086

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic Exercise 8 Griffin Company purchases and resells various electronics to consumers. Listed below are the transactions for the month of September. Griffin has a beginning inventory balance of $5,900 at August 31. Sept. 1 Purchased $11,000 of merchandise inventory; terms 1/15, n/30. 7 Purchased for cash $9,900 of merchandise inventory. 9 Contacted a major supplier to place an order for $55,000 to be shipped on October 31. 10 Purchased $16,500 of merchandise inventory; terms 2/15, n/45. 11 Purchased $2,700 of supplies; terms n/15. 15 Paid for the merchandise purchased on September 1. 18 Paid for the supplies purchased on September 11. Oct. 20 Paid for the September 10 purchase. Instructions a) Journalize the transactions using the perpetual inventory system. b) Determine the balance of the Merchandise Inventory account at September 30. Solution 8 (10 min.) a) Sept. 1 Merchandise Inventory .................................................................. Accounts Payable ................................................................... 7

Merchandise Inventory .................................................................. Cash ........................................................................................

9

No entry required.

10

Merchandise Inventory .................................................................. Accounts Payable ...................................................................

11,000

11,000

9,900 9,900

16,500

16,500

Test Bank for Accounting Principles, Ninth Canadian Edition

11

Supplies .......................................................................................... Accounts Payable ...................................................................

2,700

15

Accounts Payable........................................................................... Cash ........................................................................................ Merchandise Inventory ($11,000 x 1%)..................................

17,000

18

Accounts Payable........................................................................... Cash ........................................................................................

2,700

Oct. 20

Accounts Payable........................................................................... Cash ........................................................................................

16,500

b)

2,700

16,890 110

2,700

16,500

Inventory balance at September 30: $5,900 + $11,000 + $9,900 + $16,500 – $110 = $43,190

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic Exercise 9 50 Cent Lollypops purchases and resells assorted candies to consumers. Listed below are the transactions for the month of September. 50 Cent has a beginning inventory balance of $6,350 at August 31. Sept. 2 Purchased $11,000 of merchandise inventory; terms 1/15, n/30. 5 Sold all merchandise inventory included in the opening balance for $8,500 cash. 7 Purchased for cash $9,900 of merchandise inventory. 10 Purchased $16,500 of merchandise inventory; terms 2/15, n/45. 11 Sold all merchandise inventory originally purchased on September 2 for $18,500 on account. 18 Paid for the merchandise purchased on September 2. 18 Paid for the September 10 purchase. Instructions a) Journalize the transactions using the perpetual inventory system. b) Determine the balance of the Merchandise Inventory account at September 30. Solution 9 (10 min.) a) Sept. 2 Merchandise Inventory .................................................................. Accounts Payable ................................................................... 5

Cash ................................................................................................ Sales........................................................................................

11,000 11,000 8,500

8,500

Test Bank for Accounting Principles, Ninth Canadian Edition

b)

5

Cost of Goods Sold ......................................................................... Merchandise Inventory ..........................................................

6,350

7

Merchandise Inventory .................................................................. Cash ........................................................................................

9,900

10

Merchandise Inventory .................................................................. Accounts Payable ...................................................................

16,500

11

Accounts Receivable ...................................................................... Sales........................................................................................

18,500

11

Cost of Goods Sold ......................................................................... Merchandise Inventory ..........................................................

11,000

18

Accounts Payable........................................................................... Cash ........................................................................................

11,000

18

Accounts Payable........................................................................... Cash ........................................................................................ Merchandise Inventory ($16,500 x 2%)..................................

16,500

6,350

9,900

16,500 18,500

11,000

11,000 16,170 330

Inventory balance at September 30: $6,350 + $11,000 – $6,350 + $9,900 + $16,500 – $11,000 – $330 = $26,070

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic Exercise 10 On August 31, Boathouse Marine had an inventory of 20 boats at a cost of $1,800 each. Boathouse does not expect any returns from sales of boats. The company uses a perpetual inventory system. During September, the following transactions and events occurred: Sept. 3 Purchased 40 boats at $1,800 each from Hillside Fibreglass. The boats were shipped FOB destination, terms n/30. 3 The appropriate party paid the freight costs. 6 Received credit of $7,200 for the return of four boats purchased on September 3 that were defective. 7 Paid for the September 3 purchase.

Test Bank for Accounting Principles, Ninth Canadian Edition

9 13 21

Sold 20 boats for $3,000 each to Billington Yacht Club on credit. Cash sale of 15 boats for $3,000 each to Birch Island Ferry. Purchased 25 boats at $1,800 each from Johnson Supply, terms n/30.

Instructions a) Journalize the September transactions for Boathouse Marine, using a perpetual inventory system. b) Determine the number of boats the company should have remaining on September 30. Solution 10 (15 min.) a) Sept. 3 Merchandise Inventory (40 × $1,800) ............................................ Accounts Payable ................................................................... 3

No entry for freight. It would be paid for by Hillside.

6

Accounts Payable ........................................................................... Merchandise Inventory ..........................................................

7,200

7

Accounts Payable ($72,000 – $7,200)............................................. Cash ........................................................................................

64,800

9

Accounts Receivable (20 × $3,000)................................................. Sales........................................................................................

60,000

Cost of Goods Sold (20 × $1,800) ................................................... Merchandise Inventory ..........................................................

36,000

Cash (15 × $3,000) .......................................................................... Sales........................................................................................

45,000

Cost of Goods Sold (15 × $1,800) ................................................... Merchandise Inventory ..........................................................

27,000

Merchandise Inventory (25 × $1,800) ............................................ Accounts Payable ...................................................................

45,000

13

21

b)

72,000

72,000

7,200

64,800

60,000 36,000

45,000

27,000 45,000

46 boats Sept. 3 on hand: 20 boats + 40 – 4 – 20 – 15 + 25 = 46 boats

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic Exercise 11 On August 31, Stanton Supply had an inventory of 20 backpacks at a cost of $18 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred: Sept. 3 Purchased 40 backpacks at $20 each from Janzen, terms n/30. Received a 10% quantity discount. 6 Received credit of $72 for the return of four backpacks purchased on September 3 that were defective. 7 Paid for the September 3 purchase. 9 Sold 20 backpacks for $30 each to McGill Books, terms n/30. The cost of the backpacks was $18 each. 13 Cash sales of 15 backpacks for $30 each to Calvin Office Supply. 21 Purchased 25 backpacks at $18 each from Coleman Company, terms 2/10, n/30. 30 A physical inventory count indicated an ending inventory balance of $774. Instructions Journalize the September transactions for Stanton Supply, using a perpetual inventory system. Solution 11 (15 min.) Sept. 3 Merchandise Inventory [(40 × $20) × 90%] .................................... Accounts Payable ...................................................................

720 720

6

Accounts Payable ........................................................................... Merchandise Inventory ..........................................................

72

7

Accounts Payable ($720 – $72) ...................................................... Cash ........................................................................................

648

9

Accounts Receivable (20 × $30)...................................................... Sales........................................................................................

600

Cost of Goods Sold (20 × $18) ....................................................... Merchandise Inventory ..........................................................

360

Cash (15 × $30) ............................................................................... Sales........................................................................................

450

Cost of Goods Sold (15 × $18) ....................................................... Merchandise Inventory ..........................................................

270

Merchandise Inventory (25 × $18) ................................................ Accounts Payable ...................................................................

450

Cost of Goods Sold .........................................................................

54

13

21 30

72

648

600

360 450

270

450

Test Bank for Accounting Principles, Ninth Canadian Edition

Merchandise Inventory .......................................................... $360 + $720 – $72 – $360 – $270 + $450 = $828 $828 – $774 = $54

54

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic Exercise 12 On September 30, Keiler Motorcycle Shop had an inventory of 20 dirt bikes at a cost of $1,150 each. During the month of October, the following transactions occurred: Oct. 3 Purchased 10 bikes at a cost of $1,150 each from Lyons Bike Company, terms n/30. 6 Sold 10 bikes for $1,500 each, terms n/30. 6 Freight of $250 on the October 6 sale was FOB shipping point. 7 Received credit from Lyons Bike Company for the return of two defective bikes. 19 Purchased eight bikes from Huffy Cycle Company at a cost of $1,125 each, terms 2/10, n/30. 20 Freight of $220 on the October 19 purchase was FOB shipping point. 29 Paid for the October 19 purchase. Instructions Using a perpetual inventory system, prepare the journal entries to record the transactions. Solution 12 (20 min.) Oct.

3

Merchandise Inventory .................................................................. Accounts Payable ...................................................................

11,500

6

Accounts Receivable ...................................................................... Sales........................................................................................

15,000

Cost of Goods Sold ......................................................................... Merchandise Inventory ..........................................................

11,500

11,500

15,000

6

No entry. Freight is paid by buyer.

7

Accounts Payable ........................................................................... Merchandise Inventory ..........................................................

2,300

19

Merchandise Inventory .................................................................. Accounts Payable ...................................................................

9,000

11,500

2,300

9,000

Test Bank for Accounting Principles, Ninth Canadian Edition

20

Merchandise Inventory .................................................................. Cash ........................................................................................

220

29

Accounts Payable ........................................................................... Merchandise Inventory ($9,000 × 2%) ................................... Cash ........................................................................................

9,000

220

180 8,820

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic Exercise 13 ToneLife Music sells musical instruments. The following data relates to ToneLife’s inventory of guitars. On December 31, 2023, ToneLife had 12 guitars in inventory at a cost of $250 each. During January, the following transactions occurred: Jan. 1 Purchased 15 guitars at $250 each from International Music Centre (IMC) on account, terms n/30 4 Sold two guitars for cash at $370 each. 6 One of the two guitars sold on January 4 was returned because it was defective. A full cash refund was paid. 7 The defective guitar was returned to IMC for a credit on account. 16 Sold 21 guitars at $300 on account, terms 2/10, n/30. 18 Purchased 10 guitars from IMC for $250 each on account, terms n/30. 25 Paid the full amount owing to IMC. 26 Collected the balance owing from the January 16 sale. Instructions Using the perpetual inventory system, prepare the journal entries to record ToneLife Music’s January transactions. Solution 13 (20 min.) Jan. 1

4

Merchandise Inventory (15 × $250) ............................................... Accounts Payable ..................................................................

3,750

Cash (2 × $370) ............................................................................... Sales .......................................................................................

740

Cost of Goods Sold (2 × $250) ........................................................

500

3,750 740

Test Bank for Accounting Principles, Ninth Canadian Edition

Merchandise Inventory .......................................................... 6

500

Sales Returns and Allowances....................................................... Cash ........................................................................................

370

Merchandise Inventory .................................................................. Cost of Goods Sold .......................................................

250

7

Accounts Payable........................................................................... Merchandise Inventory ..........................................................

250

16

Accounts Receivable (21 × $300) ................................................... Sales .......................................................................................

6,300

Cost of Goods Sold (21 × $250) ...................................................... Merchandise Inventory ..........................................................

5,250

18

Merchandise Inventory (10 × $250) ............................................... Accounts Payable ..................................................................

2,500

25

Accounts Payable ($3,750 – $250 + $2,500)................................... Cash ........................................................................................

6,000

Cash ($6,300 – $126) ................................................. .................... Sales Discounts ($6,300 × 2%) .................................. .................... Accounts Receivable ......................................... ....................

6,174 126

26

370 250

250

6,300 5,250

2,500

6,000

6,300

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic Exercise 14 High Roller sells gold necklaces. On November 30, 2024, High Roller had 230 necklaces in inventory at cost of $120 each. During December, the following transactions occurred: Dec. 1 Purchased 500 necklaces at $120 each from Mountain Gold Fashions on account, terms n/30. 4 Returned 30 necklaces purchased from Mountain because they were defective. 9 Paid the balance due on the Mountain account payable. 12 Sold 600 necklaces for $250 each, terms n/30, FOB destination. 13 Freight of $250 on the December 12 sale paid by the appropriate party. 16 Purchased 150 necklaces from Green Wholesale Jewellers for $120, terms n/30.

Test Bank for Accounting Principles, Ninth Canadian Edition

17

Sold 30 necklaces for cash, $325 each.

Instructions Using the perpetual inventory system, prepare the journal entries to record the transactions. Solution 14 (20 min.) Dec. 1

Merchandise Inventory (500 × $120) ............................................. Accounts Payable .......................... ........................................

60,000

4

Accounts Payable (30 × $120) ........................................................ Merchandise Inventory ..........................................................

3, 600

9

Accounts Payable ($60,000 – $3,600) ............................................ Cash ........................................................................................

56,400

12

Accounts Receivable (600 × $250) ................................................. Sales........................................................................................

150,000

Cost of Goods Sold (600 × $120) .................................................... Merchandise Inventory ..........................................................

72,000

13

Delivery Expense ............................................................................ Cash ........................................................................................

250

16

Merchandise Inventory (150 × $120) ............................................. Accounts Payable ...................................................................

18,000

17

Cash (30 × $325) ............................................................................. Sales........................................................................................

9,750

Cost of Goods Sold (30 × $120) ...................................................... Merchandise Inventory ..........................................................

3,600

60,000 3,600

56,400

150,000 72,000

250

18,000

9,750 3,600

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic Exercise 15 Martin Sports Equipment sells a variety of sports items. The following data relates to Martin’s inventory of golf club sets. Martin is a private company following ASPE and recognizes revenue using the earnings

Test Bank for Accounting Principles, Ninth Canadian Edition

approach. On March 1, 2024, Martin had 22 sets of clubs in inventory at a cost of $395 each. During March, the following transactions occurred: Mar. 2 Sold seven sets of clubs on account to Flex Golf Club for $560 each, terms 2/10, n/30. 4 Flex Golf Club returned two sets of clubs. Martin returned the clubs to inventory. 11 Flex Golf Club paid the account in full. 15 Purchased eight sets of clubs from Taylor Sports Canada at $395, terms n/30. 17 Freight of $600 on the purchase from Taylor was FOB destination and was paid by the appropriate party. 18 Sold six sets of clubs at $560 each for cash, and gave a 5% discount to the customer for paying cash. 22 Purchased 11 sets of clubs from Lopez Golf for $400 each, terms 3/10, n/30. 24 Returned one set of clubs to Lopez Golf because they were defective. 31 Paid the Lopez Golf account. Instructions Using the perpetual inventory system, prepare the journal entries to record the transactions. Solution 15 (20 min.) Mar. 2

Accounts Receivable (7 × $560) ..................................................... Sales........................................................................................

3,920

Cost of Goods Sold (7 × $395) ........................................................ Merchandise Inventory ..........................................................

2,765

Sales Returns and Allowances (2 × $560) ...................................... Accounts Receivable ..............................................................

1,120

Merchandise Inventory (2 × $395) ................................................. Cost of Goods Sold .................................................................

790

Cash ($2,800 – $56) ........................................................................ Sales Discounts ($2,800 × 2%) ....................................................... Accounts Receivable ($3,920 – $1,120)..................................

2,744 56

15

Merchandise Inventory (8 × $395) ................................................. Accounts Payable ...................................................................

3,160

17

No entry. Freight is paid by Taylor.

18

Cash ($3,360 – $168) ...................................................................... Sales Discounts ($3,360 × 5%) ....................................................... Sales (6 × $560) .......................................................................

3,192 168

Cost of Goods Sold (6 × $395) ........................................................ Merchandise Inventory ..........................................................

2,370

4

11

3,920

2,765

1,120

790

2,800

3,160

3,360

2,370

Test Bank for Accounting Principles, Ninth Canadian Edition

22

Merchandise Inventory (11 × $400) ............................................... Accounts Payable ...................................................................

4,400

24

Accounts Payable........................................................................... Merchandise Inventory ..........................................................

400

30

Accounts Payable ($4,400 – $400) ................................................. Merchandise Inventory ($4,000 × 3%) ................................... Cash ($4,000 – $120) ...............................................................

4,000

4,400

400

120 3,880

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic Exercise 16 The following information is for Cappelio Appliance Company, which uses the perpetual inventory system: June 2 Sold 70 toaster ovens to Motor Inn for $7,700 on account. Credit terms: n/30. Quantity discounts of 10% are given on all orders of 65 or more items. Cost of each toaster oven was $50. 5 Cash sales of 50 toaster ovens amounted to $5,500. Cost was $50 each. 8 Credited the Motor Inn account for $495 as an adjustment on five damaged units purchased by Motor Inn on June 2. The units cost $250 and were scrapped. 15 Received a cheque from Motor Inn in full payment of its account. Instructions Record the above transactions in the general journal. Solution 16 (15 min.) June 2

5

Accounts Receivable ...................................................................... Sales........................................................................................ ($7,700 × 10% quantity discount = $770 quantity discount) ($7,700 – $770 quantity discount = $6,930)

6,930

Cost of Goods Sold (70 × $50) ........................................................ Merchandise Inventory ..........................................................

3,500

Cash ................................................................................................

5,500

6,930

3,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Sales........................................................................................

5,500

Cost of Goods Sold (50 × $50) ........................................................ Merchandise Inventory ..........................................................

2,500

8 . Sales Returns and Allowances…………………………………….. Accounts Receivable...............................................................

495

15

Cash ................................................................................................ Accounts Receivable............................................................... ($6,930 – $495 = $6,435)

2,500

6,435

495

6,435

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic Exercise 17 Jabari Company produces and sells various types of beach toys. Jabari is a private company following ASPE and recognizes revenue using the earnings approach. Listed below are the transactions for the month of June: June 1 Sold 18 water tubes for $250 each, terms n/30 FOB destination. Each tube cost $95. 8 Customer returned two tubes due to defects. Issued a full refund and scrapped the defective tubes. 10 Freight charges of $85 paid by the responsible party. 11 Customer complained about competitive pricing. Granted customer a $200 credit for tubes purchased. 15 Sold 92 tubes for $225 each, terms 2/10, n/30. Each tube cost $95. 18 Received payment in full for June 1 transaction. 20 Received payment in full for June 15 transaction. Instructions a) Journalize transactions using the perpetual inventory system. b) Determine the amount of net sales to be reported on the income statement of Jabari Company. Solution 17 (15 min.) a) June 1 Accounts Receivable ...................................................................... Sales (18 × $250) ..................................................................... Cost of Goods Sold ......................................................................... Merchandise Inventory (18 × $95)..........................................

4,500

1,710

4,500

1,710

Test Bank for Accounting Principles, Ninth Canadian Edition

8

Sales Returns and Allowances....................................................... Accounts Receivable ..............................................................

500

10

Delivery Expense ............................................................................ Cash ........................................................................................

85

11

Sales Returns and Allowances....................................................... Accounts Receivable ..............................................................

200

Accounts Receivable ...................................................................... Sales (92 × $225) .....................................................................

20,700

Cost of Goods Sold ......................................................................... Merchandise Inventory (92 × $95)..........................................

8,740

Cash ($4,500 – $500 – $200) ........................................................... Accounts Receivable ..............................................................

3,800

Cash ................................................................................................ Sales Discounts ($20,700 × 2%) ..................................................... Accounts Receivable .............................................................

20,286 414

15

18

20

b) Net Sales is determined as: Sales ................................................................................................................. Less: Sales discounts ....................................................................................... Sales returns and allowances .................................................................. Net Sales...........................................................................................................

500

85

200 20,700

8,740

3,800

$414 700

20,700

$25,200 (1,114) $24,086

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic Exercise 18 On June 1, Bridgette sold merchandise on account to Nepal for $16,000, terms 2/10, n30. Bridgette acquired this merchandise inventory at a cost of $8,750. On June 10, Nepal returned merchandise with a sales price of $500. The merchandise that was returned could not be resold and was sent to recycling. On June 11, Bridgette received payment from Nepal for the balance due. Instructions Prepare journal entries to record the transactions for Bridgette under a perpetual inventory system. Solution 18 (10 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

June 1

10

11

Accounts Receivable ...................................................................... Sales........................................................................................

16,000

Cost of Goods Sold ......................................................................... Merchandise Inventory ..........................................................

8,750

Sales Returns and Allowances....................................................... Accounts Receivable ..............................................................

500

Cash ($15,500 – $310) .................................................................... Sales Discounts ($15,500 x 2%) ..................................................... Accounts Receivable ..............................................................

15,190 310

16,000

8,750

500

15,500

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic Exercise 19 Moca Capa Company sells beverage supplies. The following transactions occurred during the month of November: Nov. 4 Sold merchandise for $800 on account to Java Joe, terms 2/10, n/30, FOB destination. The original cost of the merchandise to Moca Capa was $300. 5 The correct company paid freight charges of $30. 8 Java Joe returned goods with a selling price of $100 and a cost of $38. The goods are restored to inventory. 14 Received the correct payment from Java Joe. Instructions Prepare journal entries to record the transactions for Moca Capa Company under a perpetual inventory system. Solution 19 (10 min.) Nov. 4

Accounts Receivable ...................................................................... Sales........................................................................................

800

4

Cost of Goods Sold ......................................................................... Merchandise Inventory ..........................................................

300

5

Delivery Expense ............................................................................ Cash ........................................................................................

30

8

Sales Returns and Allowances.......................................................

100

800 300

30

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts Receivable .............................................................. 8

14

100

Merchandise Inventory .................................................................. Cost of Goods Sold .................................................................

38

Cash ($700 – $14) ........................................................................... Sales Discounts ($700 x 2%) .......................................................... Accounts Receivable ..............................................................

686 14

38

700

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic Exercise 20 The trial balance of Luigi Fur Company at its year end of December 31 shows Cash $376,560; Merchandise Inventory $76,000; Luigi, Capital $420,000; Sales $365,500; Sales Discounts $1,990; Cost of Goods Sold $201,000; Rent Revenue $14,000; Delivery Expense $4,200; Rent Expense $14,750; Salaries Expense $45,000; and Luigi, Drawings $80,000. Luigi Fur Company’s statement of owner’s equity for the year showed profit of $112,560 and closing owner’s capital of $452,560. Instructions a) Prepare the closing entries for the above accounts. b) Create T accounts for Income Summary and Luigi, Capital, and post the closing entries to these T accounts. Solution 20 (15 min.) a) Dec. 31 Sales ............................................................................................... Rent Revenue ................................................................................. Income Summary ...................................................................

365,500 14,000 379,500

31

Income Summary........................................................................... Sales Discounts ...................................................................... Cost of Goods Sold ................................................................. Delivery Expense .................................................................... Rent Expense .......................................................................... Salaries Expense ....................................................................

266,940

31

Income Summary........................................................................... Luigi, Capital...........................................................................

112,560

31

Luigi, Capital .................................................................................. Luigi, Drawings .......................................................................

80,000

1,990 201,000 4,200 14,750 45,000

112,560 80,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Clos.

Income Summary 266,940 Clos.

Clos.

112,560

379,500

Bal.

112,560

Bal.

0

Luigi, Capital Bal. Clos. 80,000 Clos.

420,000 112,560

Bal.

452,560

Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 21 The adjusted trial balance of Small Book Company appears below. The company uses a perpetual inventory system. SMALL BOOK COMPANY Adjusted Trial Balance December 31, 2024 Debit Credit Cash .................................................................................................................. $ 3,400 Accounts receivable ......................................................................................... 15,000 Merchandise inventory .................................................................................... 35,000 Equipment........................................................................................................ 150,000 Accumulated depreciation—equipment ......................................................... $ 20,000 Accounts payable ............................................................................................. 12,000 HST recoverable ............................................................................................... 1,000 HST payable ..................................................................................................... 1,400 J. Small, capital ................................................................................................ 132,000 J. Small, drawings ............................................................................................ 20,000 Sales ................................................................................................................. 250,000 Sales returns and allowances .......................................................................... 14,000 Cost of goods sold ............................................................................................ 140,000 Rent expense .................................................................................................... 16,000 Salaries expense .............................................................................................. ___21,000___________ $ 415,400 $ 415,400 Instructions Prepare the end of the year closing entries. Solution 21 (15 min.) Dec. 31

Sales ...............................................................................................

250,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Income Summary .................................................................. To close credit balance account.

250,000

31

Income Summary........................................................................... Sales Returns and Allowances ............................................... Cost of Goods Sold ................................................................. Rent Expense.......................................................................... Salaries Expense .................................................................... To close accounts with debit balances.

191,000

31

Income Summary........................................................................... J. Small, Capital ..................................................................... To close income summary to capital.

59,000

31

J. Small, Capital ............................................................................. J. Small, Drawings.................................................................. To close drawings account to capital.

20,000

14,000 140,000 16,000 21,000

59,000

20,000

Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 22 The adjusted trial balance of Singh Company includes the following income statement accounts: Debit Credit Sales ................................................................................................................. $550,000 Sales Returns and Allowances ......................................................................... $ 27,000 Cost of Goods Sold ........................................................................................... 346,400 Delivery Expense .............................................................................................. 2,000 Advertising Expense ......................................................................................... 15,000 Rent Expense .................................................................................................... 19,000 Salaries Expense .............................................................................................. 45,000 Utilities Expense............................................................................................... 18,000 Depreciation Expense ...................................................................................... 7,500 It also includes the following accounts: Merchandise Inventory .................................................................................... M. Singh, Capital .............................................................................................. M. Singh, Drawings........................................................................................... Singh Company uses a perpetual inventory system. Instructions

Debit $ 42,000 38,000

Credit $50,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare the closing entries for Singh Company. Solution 22 (15 min.) Dec. 31

Sales ............................................................................................... Income Summary ..................................................................

550,000

31

Income Summary........................................................................... Sales Returns and Allowances ............................................... Cost of Goods Sold ................................................................. Delivery Expense .................................................................... Salaries Expense .................................................................... Rent Expense.......................................................................... Advertising Expense............................................................... Utilities Expense..................................................................... Depreciation Expense ............................................................

479,900

31

Income Summary........................................................................... M. Singh, Capital ....................................................................

70,100

31

M. Singh, Capital ............................................................................ M. Singh, Drawings.................................................................

38,000

550,000

27,000 346,400 2,000 45,000 19,000 15,000 18,000 7,500

70,100

38,000

Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 23 The following is a random list of the accounts and their balances for Gordon Auto Sales (a proprietorship owned by A. Gordon) on December 31, 2024. The company uses a perpetual inventory system. Accounts Payable ............................................................................................. $ 426,000 Merchandise Inventory .................................................................................... 652,500 Sales ................................................................................................................. 2,500,000 Interest Expense ............................................................................................... 2,500 Salaries Expense .............................................................................................. 275,000 Cost of Goods Sold ........................................................................................... 1,950,000 Cash .................................................................................................................. 53,000 A. Gordon, Capital ............................................................................................ 35,000 A. Gordon, Drawings ........................................................................................ 20,000 Accounts Receivable ........................................................................................ 8,000 A physical count of inventory on December 31, 2024, reveals $ 671,575 on hand. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b) c)

Prepare the entry to adjust inventory. Prepare the closing entries on December 31, 2024. Prepare the post-closing trial balance.

Solution 23 (20 min.) a) Dec. 31 Merchandise Inventory ($ 671,575 − $ 652,500) .............................................. Cost of Goods Sold ................................................................................... b) Dec. 31 Sales ................................................................................................................. Income Summary .....................................................................................

19,075

2,500,000

Income Summary............................................................................................. Interest Expense ....................................................................................... Salaries Expense....................................................................................... Cost of Goods Sold ($1,950,000 − $19,075)..............................................

2,208,425

Income Summary ($2,500,000 − $2,208,425) .................................................. A. Gordon, Capital ....................................................................................

291,575

A. Gordon, Capital ............................................................................................ A. Gordon, Drawings.................................................................................

20,000

c)

GORDON AUTO SALES Post-Closing Trial Balance December 31, 2024

Cash .................................................................................................................. Accounts receivable ......................................................................................... Merchandise inventory .................................................................................... Accounts payable ............................................................................................. A. Gordon, capital............................................................................................. Totals ........................................................................................................ *($35,000 + $291,575 – $20,000) = $ 306,575

19,075

2,500,000

2,500 275,000 1,930,925

291,575

20,000

Debit $ 53,000 8,000 671,575 _______ $732,575

Credit

$ 426,000 306,575* $732,575

Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 24

Test Bank for Accounting Principles, Ninth Canadian Edition

Fahar Company has a current inventory balance of $ 864,200. Instructions Prepare the ending inventory adjustment required assuming a year-end inventory account revealed the following balance: a) $ 862,500 b) $ 922,600 c) $ 864,200 Solution 24 a) Cost of Goods Sold ........................................................................................... Merchandise Inventory ............................................................................ ($864,200 – $862,500) b) Merchandise Inventory .................................................................................... Cost of Goods Sold ................................................................................... ($922,600 – $864,200) c)

1,700 1,700

58,400

58,400

No entry

Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 25 Fahar Company has an inventory balance of $903,950 on December 31, 2024. During 2025 Fahar purchased merchandise for $97,500 and sold merchandise that had a cost of $714,220. Instructions a) Prepare the adjusting entry assuming the inventory count on December 31, 2024 revealed a balance of $914,450. b) Prepare the adjusting entry assuming the inventory count on December 31, 2025 revealed a balance of $292,370. Solution 25 a) Dec. 31 Merchandise Inventory .................................................................................... Cost of Goods Sold ................................................................................... ($914,450 – $903,950)

10,500

10,500

Test Bank for Accounting Principles, Ninth Canadian Edition

b) First, calculate balance in Merchandise Inventory account. Opening balance .............................................................................................. Purchases ......................................................................................................... Cost of Goods Sold ........................................................................................... Inventory balance ............................................................................................

$ 914,450 97,500 (714,220) 297,730

Dec. 31 Cost of Goods Sold ........................................................................................... Merchandise Inventory ............................................................................ ($297,730 – $292,370)

5,360

Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic Exercise 26 Using a perpetual inventory system, state the missing items identified by the “?”. 1. Net sales – Cost of goods sold =? 2. Gross profit – Operating expenses =? 3. Sales –? –? = Net sales 4. Profit from operations +? –? = Profit 5. Cost of goods sold + Gross profit on sales =? Solution 26 (5 min.) 1. Gross profit 2.

Profit from operations

3.

Sales returns and allowances, sales discounts

4.

Other revenues, Other expenses

5.

Net sales

Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

5,360

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 27 Two items are missing in each of the following columns and are identified by a letter. Sales ................................................................................................................. $ a) Sales returns and allowances .......................................................................... 22,000 Net sales ........................................................................................................... 490,000 Cost of goods sold ............................................................................................ 240,000 Gross profit ....................................................................................................... b)

$ 900,000 35,000 c) 610,000 d)

Instructions Assuming the company uses a perpetual inventory system, calculate the missing amounts and identify them by letter. Solution 27 (5 min.) a) $512,000 b)

$250,000

c)

$865,000

d)

$255,000

Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 28 The adjusted account balances of Johanna Ltd. at December 31, 2024, are as follows: Accounts receivable ....................... $ 6,000 Accounts payable ..................... $ 11,000 Notes receivable ............................ 6,000 Unearned revenue .................... 2,300 Merchandise inventory .................. 17,600 Notes payable ........................... 56,800 Equipment...................................... 74,000 Accumulated depreciation— Depreciation expense .................... 22,900 equipment .............................. 9,200 J. Johanna, drawings..................... 16,000 Sales .......................................... 62,500 Utilities expense............................. 2,200 Rent revenue............................. 10,000 Sales discounts .............................. 3,300 J. Johanna, capital ................... 18,000 Cost of goods sold.......................... 20,000 Sales returns and allowances........ ____1,800 ___________ $169,800 $169,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Prepare a multi-step income statement for the year ended December 31, 2024. b) Prepare closing entries for December 31, 2024. c) Prepare a post-closing trial balance at December 31, 2024. Solution 28 (20 min.) a)

JOHANNA LTD. Income Statement For the Year Ended December 31, 2024

Sales revenue Sales.......................................................................................................... Less: Sales returns and allowances ..................................................... Sales discounts ............................................................................ Net sales ................................................................................................... Cost of goods sold ............................................................................................ Gross profit ....................................................................................................... Operating expenses Depreciation expense .............................................................................. Utilities expense ....................................................................................... Total operating expenses ................................................................. Profit from operations ..................................................................................... Other revenues Rent revenue ............................................................................................ Profit for the year ............................................................................................. b) Dec.

$ 1,800 3,300

22,900 2,200

$62,500 5,100 57,400 20,000 37,400

25,100 12,300 10,000 $22,300

31 Sales ............................................................................................. Rent Revenue............................................................................... Income Summary ................................................................ To close revenue accounts to income summary.

62,500 10,000

31 Income Summary ........................................................................ Depreciation Expense.......................................................... Utilities Expense .................................................................. Sales Discounts .................................................................... Cost of Goods Sold .............................................................. Sales Returns and Allowances ............................................ To close expense accounts to income summary.

50,200

31 Income Summary ........................................................................ J. Johanna, Capital .............................................................. To close income summary to owner’s capital.

22,300

31 J. Johanna, Capital......................................................................

16,000

72,500

22,900 2,200 3,300 20,000 1,800

22,300

Test Bank for Accounting Principles, Ninth Canadian Edition

J. Johanna, Drawings .......................................................... To close drawings to capital. c)

16,000

JOHANNA LTD. Post-Closing Trial Balance December 31, 2024

Accounts receivable ......................................................................................... Notes receivable............................................................................................... Merchandise inventory .................................................................................... Equipment……………………………………………………………………….. Accumulated depreciation—equipment……………………………………… Accounts payable ............................................................................................. Unearned revenue………………………………………………………………. Notes payable……………………………………………………………………. J. Johanna, capital ........................................................................................... Totals ........................................................................................................

Debit $ 6,000 6,000 17,600 74,000

_______ $103,600

Credit

$ 9,200 11,000 2,300 56,800 24,300 $103,600

Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 29 Raji’s Hardware’s trial balance at its year end of December 31, 2024, is provided below. Raji’s uses the perpetual inventory system. A count of the inventory on hand shows the actual amount on hand is $26,500. All other year-end adjusting entries have been made. RAJI’S HARDWARE Trial Balance December 31, 2024 Cash .................................................................................................................. Accounts receivable ......................................................................................... Merchandise inventory .................................................................................... Long-term investment ..................................................................................... Accounts payable............................................................................................. Interest payable ............................................................................................... Notes payable, due 2030 ................................................................................. J. Raji, capital ................................................................................................... J. Raji, drawings ...............................................................................................

Debit $ 3,500 9,250 26,100 10,000

6,000

Credit

$ 11,100 100 5,000 10,270

Test Bank for Accounting Principles, Ninth Canadian Edition

Sales ................................................................................................................. Sales returns and allowances.......................................................................... Sales discounts ................................................................................................ Cost of goods sold............................................................................................ Salaries expense .............................................................................................. Advertising expense ......................................................................................... Rent expense .................................................................................................... Interest expense...............................................................................................

620 300 122,500 26,000 4,500 12,600 100 $221,470

195,000

_______ $221,470

Instructions a) Prepare the adjusting entry to record the correct inventory amount. b) Prepare the closing entries. c) Prepare a multiple-step income statement for Raji’s Hardware. Solution 29 (30 min.) a) Dec. 31 Merchandise Inventory ($26,500 – $26,100) .................................. Cost of Goods Sold.................................................................. b) Dec. 31

c)

400

Sales ................................................................................................ Income Summary....................................................................

195,000

Income Summary............................................................................ Sales Returns and Allowances ............................................... Sales Discounts ....................................................................... Cost of Goods Sold ($122,500 – $400) .................................... Salaries Expense ..................................................................... Advertising Expense ............................................................... Rent Expense .......................................................................... Interest Expense .....................................................................

166,220

Income Summary............................................................................ J. Raji, Capital .........................................................................

28,780

J. Raji, Capital ................................................................................. J. Raji, Drawings ......................................................................

6,000

400

195,000

620 300 122,100 26,000 4,500 12,600 100 28,780

6,000

RAJI’S HARDWARE Income Statement For the Year Ended December 31, 2024

Sales revenue Sales .................................................................................................... Less: Sales returns and allowances................................................ Sales discounts ......................................................................

$620 300

$195,000 920

Test Bank for Accounting Principles, Ninth Canadian Edition

Net sales .............................................................................................. Cost of goods sold............................................................................................ Gross profit....................................................................................................... Operating expenses Salaries expense ................................................................................. Rent expense ....................................................................................... Advertising expense ............................................................................ Profit from operations ..................................................................................... Non-operating expenses Other expenses Interest expense .................................................................................. Profit for the year .............................................................................................

194,080 122,100 71,980 26,000 12,600 4,500

43,100 28,880 100 $ 28,780

Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 30 The following information is taken from the general ledger of Ben’s BMX Bikes at September 30, 2024: Accounts payable............................................ $ 3,900 Accounts receivable ........................................ 2,150 B. Toews, capital ............................................. 6,920 B. Toews, drawings ......................................... 5,000 Cash ................................................................. 1,180 Cost of goods sold........................................... 45,800 Delivery expense ............................................. 1,000 Insurance expense .......................................... 720 Merchandise inventory ................................... 5,800 Rent expense ................................................... 4,800 Salaries expense ............................................. 12,620 Sales revenue .................................................. 68,500 Sales returns and allowances......................... 250 A physical count of the inventory indicates that the actual amount on hand is $5,450. Ben’s uses the perpetual inventory system. Instructions a) Prepare the journal entry to adjust inventory. b) Prepare the closing entries. c) Prepare the post-closing trial balance.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) e)

Prepare a multiple-step income statement. Calculate Ben’s gross profit margin (round to one decimal place).

Solution 30 (20 min.) a) Sept. 30 Cost of Goods Sold ($5,800 – $5,450) ............................................. Merchandise Inventory ........................................................... b) Sept. 30

c)

350

Sales Revenue ................................................................................. Income Summary ....................................................................

68,500

30

Income Summary............................................................................ Cost of Goods Sold ($45,800 + $350) ...................................... Delivery Expense .................................................................... Insurance Expense .................................................................. Rent Expense ........................................................................... Salaries Expense ..................................................................... Sales Returns and Allowances ................................................

65,540

30

Income Summary ($68,500 – $65,540) ........................................... B. Toews, Capital .....................................................................

2,960

30

B. Toews, Capital ............................................................................ B. Toews, Drawings .................................................................

5,000

BEN’S BMX BIKES Post-Closing Trial Balance September 30, 2024

Cash .................................................................................................................. Accounts receivable ......................................................................................... Merchandise inventory .................................................................................... Accounts payable............................................................................................. B. Toews, capital ..............................................................................................

d)

350

68,500 46,150 1,000 720 4,800 12,620 250

2,960

5,000

Debit $1,180 2,150 5,450 ______ $8,780

Credit

$3,900 4,880 $8,780

BEN’S BMX BIKES Income Statement Year Ended September 30, 2024

Sales revenue Sales .................................................................................................... Less: Sales returns and allowances.................................................... Cost of goods sold............................................................................................ Gross profit.......................................................................................................

$68,500 250

$68,250 46,150 22,100

Test Bank for Accounting Principles, Ninth Canadian Edition

Operating expenses Salaries expense ................................................................................. Rent expense....................................................................................... Delivery expense ................................................................................. Insurance expense .............................................................................. Profit for the year ............................................................................................. e)

12,620 4,800 1,000 720

19,140 $2,960

Gross profit margin = Gross profit ÷ Net sales = $22,100 ÷ $68,250 = 32.4%

Bloomcode: Synthesis Difficulty: Hard Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 31 Financial information is provided for three different businesses: Company A Sales .................................................................................. $45,000 Sales returns and allowances........................................... 350 Net sales ............................................................................ a) Cost of goods sold............................................................. b) Gross profit........................................................................ 17,650 Operating expenses .......................................................... 10,000 Profit from operations ...................................................... c) Other income .................................................................... d) Profit .................................................................................. $ 8,150 Instructions Calculate the missing amounts. Solution 31 (10 min.) a) $44,650 b)

$27,000

c)

$7,650

d)

$500

e)

$105

Company B $18,200 e) 18,095 10,100 f) 5,000 g) 1,200 h)

Company C i) 1,200 119,100 j) 61,100 k) l) 3,500 $ 16,000

Test Bank for Accounting Principles, Ninth Canadian Edition

f)

$7,995

g)

$2,995

h)

$4,195

i)

$120,300

j)

$58,000

k)

$48,600

l)

$12,500

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 32 Ambrose Company gathered the following condensed data for the year ended December 31, 2024: Cost of goods sold ............................................................................................ $1,026,000 Net sales ........................................................................................................... 1,875,000 Salaries expense .............................................................................................. 426,000 Interest expense ............................................................................................... 87,000 Rent expense .................................................................................................... 349,500 Rent revenue .................................................................................................... 57,000 The company uses a perpetual inventory system. Instructions Prepare a single-step income statement in good form. Solution 32 (10 min.)

AMBROSE COMPANY Income Statement For the Year Ended December 31, 2024

Revenues Net sales ................................................................................................... Rent revenue ............................................................................................ Total revenues .................................................................................. Expenses

$1,875,000 57,000 1,932,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Cost of goods sold .................................................................................... $1,026,000 Salaries expense....................................................................................... 426,000 Rent expense ............................................................................................ 349,500 Interest expense ....................................................................................... 87,000 Total expenses .................................................................................. 1,888,500 Profit for the year ............................................................................................. $ 43,500 Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 33 Kingbridge Range Company has sales in 2024 of $2,650,000. During the year, the company had $50,000 in sales returns and $30,000 in sales discounts. The cost of these sales was $1,800,000. Operating expenses excluding salaries were $150,000 and salaries incurred during the year were $300,000. Kingbridge uses a perpetual inventory system. Instructions Prepare a multiple-step income statement for Kingbridge Range Company for the year ended December 31, 2024. Solution 33 (10 min.)

KINGBRIDGE RANGE COMPANY Income Statement For the Year Ended December 31, 2024

Sales revenue Sales.......................................................................................................... Less: Sales returns and allowances ..................................................... Sales discounts ............................................................................ Net sales ................................................................................................... Cost of goods sold ............................................................................................ Gross profit ....................................................................................................... Operating expenses Salaries expense....................................................................................... Other operating expenses........................................................................ Total operating expenses ................................................................. Profit for the year ............................................................................................. Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting

$50,000 30,000

300,000 150,000

$2,650,000 80,000 2,570,000 1,800,000 770,000

450,000 $ 320,000

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic Exercise 34 The adjusted trial balance of Cochrane Company includes the following accounts: Debit Sales ............................................................................ .................................... Sales returns and allowances ..................................... .................................... Cost of goods sold ....................................................... .................................... Salaries expense ......................................................... .................................... Advertising expense .................................................... .................................... Rent expense ............................................................... .................................... Delivery expense ......................................................... .................................... Utilities expense.......................................................... .................................... Depreciation expense ................................................. .................................... Interest revenue .......................................................... .................................... Interest expense .......................................................... ....................................

Credit $595,000

$ 47,000 371,400 47,000 10,000 18,000 7,000 12,000 12,500 4,000 3,000

The company uses a perpetual inventory system. Instructions Prepare a multiple-step income statement for the year ended December 31, 2024. Solution 34 (25 min.)

COCHRANE COMPANY Income Statement For the Year Ended December 31, 2024

Sales revenue Sales ................................................................................................................. Less: Sales returns and allowances ................................................................. Net sales ........................................................................................................... Cost of goods sold ............................................................................................ Gross profit ....................................................................................................... Operating expenses Salaries expense.................................................................................. Advertising expense ............................................................................ Rent expense ....................................................................................... Delivery expense ................................................................................. Utilities expense .................................................................................. Depreciation expense ......................................................................... Profit from operations ..................................................................................... Other revenues and gains Interest revenue .................................................................................. Other expenses Interest expense ..................................................................................

$595,000 47,000 548,000 371,400 176,600 $47,000 10,000 18,000 7,000 12,000 12,500

4,000 3,000

106,500 70,100

Test Bank for Accounting Principles, Ninth Canadian Edition

Net non-operating revenue ................................................................ Profit for the year .............................................................................................

1,000 $ 71,100

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 35 Financial information is presented here for two companies: Pippy Company Sales ....................................................................................................... $ 90,000 Sales Returns ......................................................................................... ? Net Sales................................................................................................. 81,000 Cost of Goods Sold ................................................................................. 56,000 Gross Profit............................................................................................. ? Operating Expenses ............................................................................... 15,000 Profit ....................................................................................................... ?

Hum Company ? $ 5,000 95,000 ? 38,000 ? 15,000

Instructions a) Fill in the missing amounts. Show all calculations. b) Calculate the gross profit margin and profit margin for each company (round to one decimal place). Solution 35 (15 min.) a) Pippy Company Sales ....................................................................................................... *Sales returns......................................................................................... Net sales .................................................................................................

$90,000 (9,000) $81,000

Net sales ................................................................................................. Cost of goods sold.................................................................................. *Gross profit ...........................................................................................

$81,000 (56,000) $25,000

Gross profit............................................................................................. Operating expenses ............................................................................... *Profit .....................................................................................................

$25,000 (15,000) $10,000

Hum Company *Sales...................................................................................................... Sales returns .......................................................................................... Net sales .................................................................................................

$100,000 (5,000) $ 95,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Net sales ................................................................................................. *Cost of goods sold ................................................................................ Gross profit.............................................................................................

$95,000 (57,000) $38,000

Gross profit............................................................................................. *Operating expenses ............................................................................. Profit ....................................................................................................... *Indicates missing amount

$38,000 (23,000) $15,000

b) Profit margin .................................. Gross profit margin ........................

Pippy Company $10,000 ÷ $81,000 = 12.3% $25,000 ÷ $81,000 = 30.9%

Hum Company $15,000 ÷ $95,000 = 15.8% $38,000 ÷ $95,000 = 40.0%

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 36 Presented below are the balances from the adjusted trial balance of Katie’s Pet Supplies as at its fiscal year end, June 30, 2024. All accounts are their normal balance (debit or credit). Katie’s uses the perpetual inventory system. Accounts payable............................. $ 34,850 K. Milani, capital ......................... $ 50,770 Accounts receivable ......................... 27,300 K. Milani, drawings ..................... 24,000 Accum. depreciation–equipment ... 32,000 Merchandise inventory............... 55,000 Accum. Depreciation–furniture….. . 1,500 Notes payable ............................. 47,000 Advertising expense……………… .. 3,200 Notes receivable ......................... 14,000 Cash .................................................. 9,500 Prepaid rent ................................ 1,500 Cost of goods sold............................ 195,000 Rent expense .............................. 14,000 Depreciation expense……………... 4,000 Salaries expense ......................... 46,800 Equipment........................................ 80,000 Salaries payable ......................... 6,200 Delivery expense .............................. 6,200 Sales discounts ........................... 100 Furniture …………………………… 4,500 Sales returns and allowances … 1,000 Insurance expense ........................... 2,200 Sales revenue…………………. .. 320,000 Interest expense …………………… 2,350 Supplies ...................................... 900 Interest payable ............................... 280 Supplies expense ........................ 1,750 Interest revenue ............................... 700 Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b) c) d)

Prepare a single-step income statement. Prepare a multiple-step income statement. Calculate Katie’s gross profit margin (round to one decimal place). Katie’s gross profit margin for 2023 was 45%. Comment on the change in gross profit margin from the prior year.

Solution 36 (30 min.) a)

KATIE’S PET SUPPLIES Income Statement For the Year Ended June 30, 2024

Revenue Sales revenue ...................................................................................... Interest revenue .................................................................................. Expenses Cost of goods sold............................................................................... Salaries expense ................................................................................. Rent expense....................................................................................... Delivery expense ................................................................................. Depreciation expense ......................................................................... Advertising expense............................................................................ Interest expense.................................................................................. Insurance expense .............................................................................. Supplies expense ................................................................................ Sales discounts ................................................................................... Sales returns and allowances............................................................. Profit for the year ............................................................................................. b)

$320,000 700 195,000 46,800 14,000 6,200 4,000 3,200 2,350 2,200 1,750 100 1,000

$320,700

276,600 $ 44,100

KATIE’S PET SUPPLIES Income Statement For the Year Ended June 30, 2024

Revenue Sales revenue ........................................................................................... Less: Sales discounts ............................................................................ Sales returns and allowances .....................................................

100 1,000

Cost of goods sold............................................................................................ Gross profit....................................................................................................... Operating expenses Salaries expense ...................................................................................... Rent expense ............................................................................................ Delivery expense ...................................................................................... Depreciation expense ............................................................................. Advertising expense .................................................................................

46,800 14,000 6,200 4,000 3,200

$320,000 1,100 318,900 195,000 123,900

Test Bank for Accounting Principles, Ninth Canadian Edition

Insurance expense ................................................................................... Supplies expense ..................................................................................... Profit from operations ..................................................................................... Other revenue Interest revenue ...................................................................................... Other expense Interest expense ...................................................................................... Net non-operating revenue (loss)............................................................ Profit for the year .............................................................................................

2,200 1,750

78,150 45,750

700 (2,350) (1,650) $ 44,100

c) Gross profit margin = Gross profit ÷ Net sales = $ 123,900 ÷ $ 318,900 = 38.9% d) Katie’s gross profit margin has decreased from 2023 by 6 percentage points. This could be either because selling prices have declined, or because Katie is paying more for merchandise than in the prior year, or both. Bloomcode: Synthesis Difficulty: Hard Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 37 The adjusted account balances of Johanna Fabrics at December 31, 2024, are as follows: Accounts receivable ............................ $ 6,000 Bank overdraft ............................ $ 2,300 Notes receivable ................................. 6,000 Accounts payable ....................... 11,000 Merchandise inventory ....................... 17,600 Notes payable ............................. 56,800 Equipment........................................... 74,000 Accumulated depreciation– Depreciation expense ......................... 22,900 equipment ................................ 9,200 J. Johanna, drawings.......................... 16,000 Sales ............................................ 62,500 Utilities expense.................................. 2,200 Rent revenue............................... 10,000 Sales discounts ................................... 3,300 J. Johanna, capital ................... 18,000 Cost of goods sold............................... 20,000 Sales returns and allowances............. 1,800 ___________ $169,800 $169,800 Instructions a) Prepare a multi-step income statement for the year ended December 31, 2024. b) Compute the gross profit margin and profit margin for Johanna Fabrics (round to the nearest whole percentage). Solution 37 (15 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

a)

JOHANNA FABRICS Income Statement (Multi-Step) For the Year Ended December 31, 2024

Sales revenue Sales.......................................................................................................... Less: Sales returns and allowances ..................................................... Sales discounts ............................................................................ Net sales ................................................................................................... Cost of goods sold ............................................................................................ Gross profit ....................................................................................................... Operating expenses Depreciation expense .............................................................................. Utilities expense ....................................................................................... Total operating expenses ................................................................. Profit from operations ..................................................................................... Other revenues Rent revenue ............................................................................................ Profit for the year .............................................................................................

$ 1,800 3,300

22,900 2,200

$62,500 5,100 57,400 20,000 37,400

25,100 12,300 10,000 $22,300

b) Gross profit margin = $37,400/$57,400 = 65% Profit margin = $22,300/$57,400 = 39% Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 38 Kingbridge Range Company has sales in 2024 of $2,650,000. During the year, the company had $80,000 in sales returns. The cost of these sales was $1,800,000. Operating expenses excluding salaries and wages were $150,000 and salaries and wages incurred during the year were $300,000. Kingbridge uses a perpetual inventory system. Instructions Calculate Kingbridge Range Company’s gross profit margin and profit margin for 2024 (round to one decimal place). Solution 38 (5 min.) Gross profit margin = Gross profit ÷ Net sales = $770,000 ÷ $2,570,000 = 30.0% Profit margin = Profit ÷ Net sales = $320,000 ÷ $2,570,000 = 12.5%

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 39 Tantramar Shipbuilding Company had the following information available at its year end September 30, 2024. Advertising Expense................................................ $15,000 Cost of Goods Sold .................................................. 476,500 Depreciation Expense ............................................. 41,000 Delivery Expense ..................................................... 7,500 Interest Revenue ..................................................... 11,000 Salaries Expense ..................................................... 65,000 Supplies ................................................................... 6,000 Supplies Expense .................................................... 7,500 Sales ........................................................................ 750,000 Sales Discounts ....................................................... 12,800 Sales Returns and Allowances................................ 25,700 Instructions a) Calculate the gross profit margin for Tantramar (round to one decimal place). b) Calculate the profit from operations for Tantramar. c) Calculate the profit margin for Tantramar (round to one decimal place). d) List three actions that Tantramar could take to increase its profit margin. e) If last year’s gross profit margin was 39%, comment on the company’s results this year. Solution 39 (20 min.) a) Sales ................................................................................................................. Sales Discounts ........................................................................................ Sales Returns and Allowances ................................................................. Net Sales........................................................................................................... Cost of Goods Sold ........................................................................................... Gross Profit.......................................................................................................

$750,000 (12,800) (25,700) 711,500 476,500 $235,000

Gross profit margin = Gross profit ÷ Net sales = $ 235,000 ÷ $ 711,500= 33.0% b) Operating Expenses Advertising Expense .................................................................................

$15,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Depreciation Expense .............................................................................. Delivery Expense ...................................................................................... Salaries Expense ...................................................................................... Supplies Expense ..................................................................................... Profit from Operations..................................................................................... Interest Revenue .............................................................................................. Profit for the year .............................................................................................

41,000 7,500 65,000 7,500

136,000 99,000 11,000 $110,000

Profit from Operations = $ 99,000 c)

Profit margin = Profit ÷ Net sales = $ 110,000 ÷ $ 711,500 = 15.5%

d)

Tantramar could increase sales, reduce the sales returns, give less sales discounts, reduce expenses, or increase its interest revenue.

e)

Tantramar has a lower gross profit margin than last year, and management should be concerned with this trend. It could possibly signify that there has been a decrease in selling prices or an increase in the cost of merchandise purchased, or both.

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 40 Hernandez Clothing Store employs the perpetual inventory system and prepares monthly financial statements with an October 31 year end. All accounts have been adjusted except for merchandise inventory. A physical count of merchandise inventory on November 30, 2024, indicates that $21,000 was on hand. A partial listing of account balances follows: Accounts Receivable .................................................. $ 9,000 Merchandise Inventory .............................................. 23,000 Salaries Expense ........................................................ 600 Sales Returns and Allowances ................................... 1,800 Delivery Expense ........................................................ 1,200 Cost of Goods Sold ..................................................... 31,000 Sales ........................................................................... 55,000 Instructions a) Prepare a partial income statement for Hernandez Clothing Store for the month ended November 30, 2024. The income statement should show items through the gross profit category. b) Calculate Hernandez’s gross profit margin for November 2024 (round to one decimal place).

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 40 (10 min.) a)

HERNANDEZ CLOTHING STORE (Partial) Income Statement For the Month Ended November 30, 2024

Sales revenues Sales.......................................................................................................... Less: Sales returns and allowances ......................................................... Net sales ................................................................................................... Cost of goods sold ($31,000 + $2,000) ............................................................. Gross profit ....................................................................................................... b)

$55,000 1,800 53,200 33,000 $20,200

Gross profit margin = Gross profit ÷ Net sales = $20,200 ÷ $53,200 = 38.0%

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 41 The following information is taken from the financial statements of Down Home Deli for the past three years. The owner, John Walton, is quite pleased to see that sales are growing steadily. 2024 2023 2022 Sales .................................................... $61,500 $50,400 $42,000 Cost of goods sold............................... 27,670 21,170 16,800 Profit from operations ........................ 7,530 6,050 4,620 Profit for the year ................................ 3,075 4,030 2,940 Instructions a) Calculate gross profit margin, profit margin, and profit margin using profit from operations (round to one decimal place). b) Comment on whether the Deli is, in fact, doing better over the three years as John believes. Solution 41 (15 min.) a) Gross profit margin Profit margin Profit

2024 2023 ($61,500 – $27,670) ÷ ($50,400 – $21,170) ÷ $61,500 = 55.0% $50,400 = 58.0% ($3,075 ÷ $61,500) = 5.0% ($4,030 ÷ $50,400) = 8.0% ($7,530 ÷ $61,500) = ($6,050 ÷ $50,400) = 12.0%

2022 ($42,000 – $16,800 ÷ $42,000 = 60.0% ($2,940 ÷ $42,000) = 7.0% ($4,620 ÷ $42,000) = 11.0%

Test Bank for Accounting Principles, Ninth Canadian Edition

margin(operating)

12.2%

b) The deli’s sales have increased significantly from year to year, and profit has grown marginally (from $2,940 to $3,075) over the three years. However, the gross profit margin has decreased from 60% to 55%, so John is not increasing his prices at the same rate as his merchandise costs go up. Because the profit margin based on profit from operations has increased (from 11% to 12.2%), it would appear that he has had sufficient savings in operating expenses to compensate for the decrease in gross profit margin. Unfortunately, other (non-operating) costs seem to have gone up as well, since the profit margin has decreased (from 7% to 5%) at the same time as the operating profit margin increased. Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic Exercise 42 The Cost of Goods Sold sections of three companies’ financial statements are provided below. All of the companies use the periodic inventory method. A B C Beginning inventory ............................................... $ 1,100 $ 90 $ 580 Purchases ................................................................ 105,000 e) 49,700 Purchase returns and allowances .......................... 3,500 110 750 Purchase discounts................................................. a) 65 230 Net purchases ......................................................... 101,030 6,665 h) Freight in ................................................................. b) f) 990 Cost of goods purchased ........................................ 103,080 6,875 i) Cost of goods available for sale.............................. c) g) j) Ending inventory..................................................... d) 125 840 Cost of goods sold................................................... 102,400 6,840 k) Instructions Determine the missing amounts. Solution 42 (15 min.) a) $470 b)

$2,050

c)

$104,180

d)

$1,780

e)

$6,840

Test Bank for Accounting Principles, Ninth Canadian Edition

f)

$210

g)

$6,965

h)

$48,720

i)

$49,710

j)

$50,290

k)

$49,450

Bloomcode: Synthesis Difficulty: Hard Learning Objective: Prepare the entries for purchases and sales under a periodic inventory system and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic Exercise 43 On January 1, University Supplies had an inventory of 30 MP3 Players at a cost of $80 each. The company uses a periodic inventory system. During January the following transactions occurred: Jan. 7 Purchased 60 MP3 players at $75 each from Digital Co. for cash. 9 Paid freight of $80 on the MP3 players purchased from Digital Co. 10 Returned two players to Digital Co. for $150 because they did not meet specifications. 12 Sold 26 MP3 players costing $80 (including freight) for $120 each, terms n/30. 14 Granted credit on account to customer of January 12 for $120 related to the return of one MP3 player. Instructions Journalize the January transactions. Solution 43 (10 min.) Jan. 7

Purchases (60 × $75) ...................................................................... Cash ........................................................................................

4,500

9

Freight in ........................................................................................ Cash ........................................................................................

80

10

Cash ................................................................................................ Purchase Returns and Allowances ........................................

150

12

Accounts Receivable (26 × $120) ...................................................

3,120

4,500

80 150

Test Bank for Accounting Principles, Ninth Canadian Edition

Sales........................................................................................ 14

Sales Returns and Allowances ...................................................... Accounts Receivable ..............................................................

3,120 120 120

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the entries for purchases and sales using the earnings approach under a periodic inventory system and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic Exercise 44 Consider the information in Exercise 43. On January 31, a physical count revealed 63 MP3 players on hand: five at a cost of $80, and the remainder at a cost of $75. Instructions Calculate the cost of goods sold for January. Solution 44 (5 min.) Merchandise Inventory, January 1 .................................................................. Purchases ......................................................................................................... Less: Purchase returns and allowances .......................................................... Net Purchases .................................................................................................. Add: Freight in .................................................................................................. Cost of goods purchased ................................................................................. Cost of goods available for sale....................................................................... Merchandise Inventory, January 31 (5 × $80) + (58 × $75) .............................. Cost of goods sold............................................................................................

$4,500 150 4,350 80

$2,400

4,430 6,830 4,750 $2,080

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic Exercise 45 On August 1, Frank’s Electronics had an inventory of four laptops at a cost of $300 each. During the month of August, the following transactions occurred: Aug . 3 Purchased 40 laptops at a cost of $300 each from Keyboard Equipment Company, terms n/30. 6 Sold 40 laptops to College Central Bookstore for $500 each, terms n/30.

Test Bank for Accounting Principles, Ninth Canadian Edition

7 19 20

Received credit from Keyboard Equipment Company for the return of two defective laptops. Purchased 20 laptops from Packard Plus Company at a cost of $250 each, terms n/30. Paid freight of $100 on the August 19 purchase.

Instructions Prepare the journal entries to record the transactions assuming the company uses a periodic inventory system. Solution 45 (15 min.) Aug. 3

Purchases ....................................................................................... Accounts Payable ...................................................................

12,000

6

Accounts Receivable ...................................................................... Sales........................................................................................

20,000

7

Accounts Payable ........................................................................... Purchase Returns and Allowances ........................................

600

19

Purchases ....................................................................................... Accounts Payable ...................................................................

5,000

20

Freight In ........................................................................................ Cash ........................................................................................

100

12,000 20,000

600

5,000 100

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic Exercise 46 Rebecca’s Equestrian Supplies sells riding saddles. On July 1, 2024, Rebecca had nine saddles in inventory at a cost of $900 each. During July, the following transactions occurred: July 1 Purchased five saddles at $900 each from North Country Equipment on account, terms net 30. 4 Returned one of the saddles purchased from North Country because it was defective. 9 Paid the balance due on the North Country account payable. 12 Sold eight saddles for $1,250 each, terms n/30. 13 Paid freight of $250 on the July 12 sale. 16 Purchased seven saddles from Anders Tack Suppliers for $900 each, terms n/30. 17 Sold six saddles for cash, $1,080 each. 31 Counted the saddles on hand and determined the total cost of the remaining inventory was $5,400.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Using the periodic inventory system, prepare the journal entries to record the transactions. b) Calculate the July cost of goods sold. c) Calculate Rebecca’s gross profit margin (round to one decimal place). Solution 46 (20 min.) a) July 1 Purchases (5 × $900) ....................................................................... Accounts Payable .................................................................... 4

4,500

Accounts Payable............................................................................ Purchase Returns and Allowances .........................................

900

9

Accounts Payable ($4,500 – $900) .................................................. Cash .........................................................................................

3, 600

12

Accounts Receivable (8 × $1,250) ................................................... Sales.........................................................................................

10,000

13

Delivery Expense ............................................................................. Cash .........................................................................................

250

16

Purchases (7 × $900) ....................................................................... Accounts Payable ....................................................................

6,300

17

Cash (6 × $1,080) ............................................................................. Sales ........................................................................................

6,480

b) Merchandise Inventory, July 1, 2024 (9 × $900) .............................................. Purchases ($4,500 + $6,300) ............................................................................ Less: Purchase returns and allowances .......................................................... Cost of goods purchased ................................................................................. Cost of goods available for sale....................................................................... Merchandise Inventory, July 31, 2024 ............................................................. Cost of goods sold............................................................................................ c) Net sales ($10,000 + $6,480) ............................................................................ Less: Cost of goods sold................................................................................... Gross profit....................................................................................................... Gross profit margin = Gross profit ÷ Net Sales = $3,880 ÷ $ 16,480 = 23.5% Bloomcode: Application Difficulty: Medium

4,500

900 3,600

10,000

250

$10,800 900

6,300

6,480

$ 8,100 9,900 18,000 5,400 $12,600

$16,480 12,600 $ 3,880

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic Exercise 47 Millwood Framing sells picture frames. On February 1, 2024, Millwood had 420 frames in inventory at a cost of $10.50 each. During February, the following transactions occurred: Feb. 2 Sold 355 frames on account for $24 each, terms 2/10 n/30. 11 Customer paid the account in full. 15 Purchased 250 frames from Mitch’s Art Supplies at $10.50, terms n/30. 17 Freight of $600 on the purchase from Mitch’s was FOB destination and was paid by the appropriate party. 18 Sold 200 frames at $25 each for cash, providing a 5% cash discount to the customer. 19 Purchased 90 frames from Canada Wood Products for $10.71 each, terms 2/10 n/30. 21 Returned five frames to Canada Wood Products because they were defective. 27 Paid the Canada Wood Products account within the discount period. 28 Counted the remaining inventory and determined that it has a value of $2,119. Instructions a) Using the periodic inventory system, prepare the journal entries to record the transactions. (round all amounts to the nearest dollar) b) Calculate the cost of goods sold in February. c) Calculate the gross profit and gross profit margin for February. (round to one decimal place) Solution 47 (25 min.) Feb. 2

Accounts Receivable (355 × $24) ................................................... Sales........................................................................................

8,520

Cash ($8,520 – $170) ...................................................................... Sales Discounts ($8,520 × 2%) ....................................................... Accounts Receivable ..............................................................

8,350 170

15

Purchases (250 × $10.50) ............................................................... Accounts Payable ...................................................................

2,625

17

No entry. Freight is paid by Mitch’s.

18

Cash ................................................................................................ Sales Discounts ($5,000 × 5%) ....................................................... Sales (200 × $25) .....................................................................

4,750 250

Purchases (90 × $10.71) .................................................................

964

11

19

8,520

8,520 2,625

5,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts Payable ................................................................... 21

27

964

Accounts Payable (5 × $10.71) ....................................................... Purchase Returns and Allowances ........................................

54

Accounts Payable ($964 – $54) ...................................................... Purchase Discounts [($964 − $54) × 2%] ................................ Cash ($910 – $18)....................................................................

910

b) Merchandise Inventory, Feb 1, 2024 (420 × $10.50) ........................................ Purchases ($2,625 + $964) ............................................................................... Less: purchase discounts................................................................................. Less: Purchase returns and allowances .......................................................... Cost of goods purchased ................................................................................. Cost of goods available for sale....................................................................... Merchandise Inventory, Feb 28, 2024.............................................................. Cost of goods sold............................................................................................ c) Sales ($8,520 + $5,000)..................................................................................... Less: Sales discounts ($170+ $250) ................................................................. Net sales ........................................................................................................... Less: Cost of goods sold................................................................................... Gross profit.......................................................................................................

54

$3,589 (18) (54)

18 892 $4,410

3,517 7,927 2,119 $5,808 $13,520 (420) 13,100 5,808 $ 7,292

Gross profit margin = Gross profit ÷ Net sales = $7,292 ÷ $13,100 = 55.7% Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic Exercise 48 Carter Company purchases and resells various electronics to consumers. Listed below are certain transactions for the month of September. Carter has a beginning inventory balance of $5,900 at September 1. Sept. 1 Purchased $11,000 of merchandise inventory, terms 1/15, n/30. 7 Purchased for cash $9,900 of merchandise inventory. 9 Contacted a major supplier to place an order for $55,000 to be shipped on October 31. 10 Purchased $16,500 of merchandise inventory, terms 2/15, n/45. 11 Purchased $2,700 of supplies, terms n/15. 15 Paid for the merchandise purchased on September 1.

Test Bank for Accounting Principles, Ninth Canadian Edition

18 Oct. 20

Paid for the supplies purchased on September 11. Paid for the September 10 purchase.

Instructions a) Journalize the transactions using the periodic inventory system. b) Assume that Carter’s year end is September 30 and that the physical inventory count revealed that inventory on hand carries a cost of $41,500. Prepare the appropriate closing entries required to update the inventory account. Solution 48 (15 min.) a) Sept. 1 Purchases ....................................................................................... Accounts Payable ...................................................................

11,000 11,000

7

Purchases ....................................................................................... Cash ........................................................................................

9

No entry required.

10

Purchases ....................................................................................... Accounts Payable ...................................................................

16,500

11

Supplies .......................................................................................... Accounts Payable ...................................................................

2,700

15

Accounts Payable........................................................................... Cash ........................................................................................ Purchase Discounts ($11,000 x 1%) .......................................

11,000

18

Accounts Payable........................................................................... Cash ........................................................................................

2,700

Oct. 20

Accounts Payable........................................................................... Cash ........................................................................................

16,500

Income Summary........................................................................... Merchandise Inventory ..........................................................

5,900

Merchandise Inventory .................................................................. Income Summary ...................................................................

41,500

b) Sept. 30

9,900

9,900

16,500

2,700

10,890 110

2,700 16,500

5,900

41,500

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A)

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic Exercise 49 Jan Jenga Company manufactures and sells various kids’ toys. Listed below are the transactions for the month of September: Sept. 2 Sold merchandise on account for $2,100; terms 2/10, n/30, FOB destination. 7 Paid $225 in cash to ship the merchandise sold on September 2. 9 The customer of September 2 returned half of the amount purchased because it was the incorrect product; it was returned to inventory. 15 Sold merchandise to a customer on account for $3,800; terms 2/10, n/30, FOB destination. 16 Collected the amount owing from the customer of September 2. 19 Sold merchandise to a customer for cash of $1,200. 22 The customer of September 15 paid the amount owing. Instructions a) Journalize the transactions using the periodic inventory system. b) Assume that Jan Jenga’s year end is September 30 and that the physical inventory count revealed that inventory on hand carries a cost of $29,900. Prepare the appropriate closing entries required to update the inventory account. The last time the inventory was counted was during the prior yearend procedures at which point the total was $35,250. Solution 49 (15 min.) a) Sept. 2 Accounts Receivable ...................................................................... Sales........................................................................................ 7

2,100

Delivery Expense ............................................................................ Cash ........................................................................................

225

9

Sales Returns and Allowances ($2,100 x 50%) …………………... Accounts Receivable ..............................................................

1,050

15

Accounts Receivable ...................................................................... Sales........................................................................................

3,800

16

Cash ($2,100 – $1,050) ................................................................... Accounts Receivable ..............................................................

1,050

19

Cash ................................................................................................ Sales........................................................................................

1,200

22

Cash ................................................................................................ Sales Discounts ($3,800 × 2%) ....................................................... Accounts Receivable ..............................................................

3,724 76

2,100

225 1,050

3,800

1,050 1,200

3,800

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Sept. 30

Income Summary........................................................................... Merchandise Inventory ..........................................................

35,250

Merchandise Inventory .................................................................. Income Summary...................................................................

29,900

35,250

29,900

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic Exercise 50 Jan Jenga Company manufactures and sells various kids’ toys. Jan Jenga is a public company following IFRS and records revenue using the contract-based approach. The company estimated that its product return rate is 15%. Listed below are the transactions for the month of September: Sept. 2 Sold merchandise on account with a cost of $1,500 for $2,100; terms2/10, n/30, FOB destination. 7 Paid $225 in cash to ship the merchandise sold on September 2. 9 The customer of September 2 returned half of the amount purchased because it was the incorrect product; it was returned to inventory. 15 Sold merchandise to a customer on account for $3,800 that cost $2,280; terms 2/10, n/30, FOB destination. 16 Collected the amount owing from the customer of September 2. 19 Sold merchandise to a customer for cash of $1,200 that cost $720. 22 The customer of September 15 paid the amount owing. Instructions a) Journalize transactions using the perpetual inventory system. b) Determine the amount of net sales to be reported on the income statement of Jan Jenga Company. Solution 50 (15 min.) a) Sept. 2 Accounts Receivable ...................................................................... Refund Liability ($2,100 x 15%).............................................. Sales........................................................................................

7

2,100 315 1,785

Cost of Goods Sold ......................................................................... Estimated Inventory Returns ($1,500 x 15%) ................................ Merchandise Inventory .........................................................

1,275 225

Delivery Expense ............................................................................ Cash ........................................................................................

225

1,500 225

Test Bank for Accounting Principles, Ninth Canadian Edition

9

15

16

19

22

Refund Liability ............................................................................. Accounts Receivable ..............................................................

1,050

Merchandise Inventory ($1,500 x 50%) ......................................... Estimated Inventory Returns ................................................

750

Accounts Receivable ...................................................................... Refund Liability ($3,800 x 15%).............................................. Sales........................................................................................

3,800

Cost of Goods Sold ......................................................................... Estimated Inventory Returns ($2,280 x 15%) ................................ Merchandise Inventory ..........................................................

1,938 342

Cash ($2,100 – $1,050) ................................................................... Accounts Receivable ..............................................................

1,050

Cash ................................................................................................ Refund Liability ($1,200 x 15%).............................................. Sales........................................................................................

1,200

Cost of Goods Sold ......................................................................... Estimated Inventory Returns ($720 x 15%) ................................... Merchandise Inventory ..........................................................

612 108

Cash ................................................................................................ Sales Discounts ($3,800 × 2%) ....................................................... Accounts Receivable .............................................................

3,724 76

b) Net sales is determined as: Sales ($1,785 + $3,230 + $1,020) ...................................................................... Less: Sales discounts ....................................................................................... Net Sales...........................................................................................................

1,050

750

570 3,230

2,280

1,050 180 1,020

720

3,800

$6,035 76 $5,959

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales in a perpetual inventory system using the contract-based approach. Section Reference: Recording Sales of Merchandise–Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic Exercise 51 The following information is for Cappelio Appliance Corporation, which uses the perpetual inventory system and the contract-based approach to revenue recognition: June 2 Sold 70 toaster ovens to Motor Inn for $7,700 on account, terms n/30. Quantity discounts of

Test Bank for Accounting Principles, Ninth Canadian Edition

5 8 15

10% are given on all orders of 65 or more items. Cost of each toaster oven was $50. Cappelio provides a flexible return policy and expects a sales return rate of 10%. Cash sales of 50 toaster ovens amounted to $5,500. Cost was $50 each. There is no right of return. Credited the Motor Inn account for $495 as an adjustment on five damaged units purchased by Motor Inn on June 2. The units cost $250 and were scrapped. Received a cheque from Motor Inn in full payment of its account.

Instructions Record the transactions in the general journal. Solution 51 (15 min.) June 2

5

8

15

Accounts Receivable ...................................................................... Sales ($6,930 – $693) .............................................................. Refund Liability To record sales of merchandise to the Motor Inn. ($7,700 × 10% quantity discount = $770 quantity discount) ($7,700 – $770 quantity discount = $6,930) ($6,930 x 10% = $ 693)

6,930

Cost of Goods Sold ($3,500 – $350) ............................................... Estimated Inventory Returns ($3500 x 10%)…………………….. . Merchandise Inventory ..........................................................

3,150 350

Cash ................................................................................................ Sales........................................................................................ To record cash sales.

5,500

Cost of Goods Sold (50 × $50) ........................................................ Merchandise Inventory ..........................................................

2,500

Cost of Goods Sold ........................................................................ Estimated Inventory Returns ................................................

250

Refund Liability .............................................................................. Accounts Receivable...............................................................

495

Cash ................................................................................................ Accounts Receivable ($6,930 – $495 = $6,435).......................

6,435

6,237 693

3,500

5,500

2,500

250 495

6,435

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach. Section Reference: Recording Sales of Merchandise–Contract-Based Approach (Appendix 5B)

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic Exercise 52 Fairway Sports Equipment sells a variety of sports items. The following data relates to Fairway’s inventory of golf club sets. On March 1, 2024, Fairway had 22 sets of clubs in inventory at a cost of $395 each. Management expects approximately 10% of sales to be returned. During March, the following transactions occurred: Mar. 2 Sold seven sets of clubs on account to Flex Golf Club for $560 each, terms, n/30. 4 Flex Golf Club returned two sets of clubs. Fairway returned the clubs to inventory. 11 Flex Golf Club paid the account in full. 15 Purchased eight sets of clubs from Taylor Sports Canada at $395, terms n/30. 17 Freight of $600 on the purchase from Taylor was FOB destination and was paid by the appropriate party. 18 Sold six sets of clubs at $530 each for cash. 22 Purchased 11 sets of clubs from Lopez Golf for $400 each, terms 3/10 n/30. 24 Returned one set of clubs to Lopez Golf because they were defective. 31 Paid the Lopez Golf account. Instructions Using the perpetual inventory system and the contract-based approach, prepare the journal entries to record the transactions (round all amounts to the nearest dollar). Solution 52 (20 min.) Mar. 2 Accounts Receivable (7 × $560) ..................................................... Sales ($3,920 – $392) .............................................................. Refund Liability ......................................................................

3,920

Cost of Goods Sold ($2,765 – $277) ............................................... Estimated Inventory Returns ($2,765 x 10%) ................................ Merchandise Inventory ..........................................................

2,488 277

Refund Liability (2 × $560) ............................................................. Accounts Receivable ..............................................................

1,120

Merchandise Inventory (2 × $395) ................................................. Estimated Inventory Returns ................................................

790

11

Cash ................................................................................... Accounts Receivable ($3,920 – $1,120)..................................

2,800

15

Merchandise Inventory (8 × $395) ................................................. Accounts Payable ...................................................................

3,160

4

17

No entry. Freight is paid by Taylor.

3,528 392

2,765

1,120 790

2,800

3,160

Test Bank for Accounting Principles, Ninth Canadian Edition

18

Cash ................................................................................... Refund Liability ($3,180 x 10%).............................................. Sales ($3,180 – $318) ..............................................................

3,180

Cost of Goods Sold ($2,370 – $237) ............................................... Estimated Inventory Returns ($2,370 x 10%) ................................ Merchandise Inventory (6 x $395) ..........................................

2,133 237

22

Merchandise Inventory (11 × $400) ............................................... Accounts Payable ...................................................................

4,400

24

Accounts Payable........................................................................... Merchandise Inventory ..........................................................

400

Accounts Payable ($4,400 – $400) ................................................. Merchandise Inventory ($4,000 × 3%) ................................... Cash ($4,000 – $120) ...............................................................

4,000

30

318 2,862

2,370

4,400

400 120 3,880

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach. Section Reference: Recording Sales of Merchandise–Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic Exercise 53 Beachy Company produces and sells various types of beach toys. The company provides a flexible return policy and management estimates that returns will approximate 15%. Listed below are the transactions for the month of June: June 1 Sold 18 water tubes for $250 each terms n/30 FOB destination. Each tube cost $95. 8 Customer from June 1 returned two tubes due to defects. The defective tubes were scrapped. 10 Freight charges of $85 paid by the responsible party. 15 Sold 92 tubes for $225 each terms n/30. Each tube cost $95. 18 Received payment in full for June 1 transaction. 20 Received payment in full for June 15 transaction. Instructions Journalize the transactions using the perpetual inventory system and the contract-based approach to revenue recognition (round all amounts to the nearest dollar). Solution 53 (15 min.) a) June 1 Accounts Receivable (18 x $250) ...................................................

4,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Sales ($4,500 – $675) .............................................................. Refund Liability ($4,500 x 15%)..............................................

3,825 675

Cost of Goods Sold ($1,710 – $257) ............................................... Estimated Inventory Returns ($1,710 x 15%) ................................ Merchandise Inventory (18 × $95)..........................................

1,453 257

Refund Liability ($250 x 2) ............................................................. Accounts Receivable ..............................................................

500

Cost of Goods Sold ($95 x 2) .......................................................... Estimated Inventory Returns .................................................

190

10

Delivery Expense ............................................................................ Cash ........................................................................................

85

15

Accounts Receivable (92 x $225) ................................................... Sales ($20,700 – $3,105) ......................................................... Refund Liability ($20,700 x 15%)............................................

20,700

Cost of Goods Sold ($8,740 – $1,311) ............................................ Estimated Inventory Returns ($8,740 x 15%) ................................ Merchandise Inventory (92 × $95)..........................................

7,429 1,311

Cash ($4,500 – $500) ...................................................................... Accounts Receivable ..............................................................

4,000

Cash ................................................................................................ Accounts Receivable ..............................................................

20,700

8

18

20

1,710

500 190

85

17,595 3,105

8,740

4,000 20,700

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach. Section Reference: Recording Sales of Merchandise–Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic Exercise 54 On August 1, Marcus Ltd. sold merchandise on account to Bethesda Inc. for $32,000, net 30. Marcus acquired this merchandise inventory at a cost of $17,500. Marcus has a stated return policy of 10 days from the date of sale and estimates that returns will be 5% of sales. On August 10, Bethesda returned merchandise with a sales price of $1,600 and a cost of $ 875. The goods were returned to inventory. On June 30, Marcus received payment from Bethesda for the balance due. Instructions Prepare journal entries to record the transactions for Marcus under a perpetual inventory system using

Test Bank for Accounting Principles, Ninth Canadian Edition

the contract-based approach. (round all amounts to the nearest dollar) Solution 54 (10 min.) Aug. 1

Accounts Receivable ...................................................................... Sales ($32,000 – $1,600) ......................................................... Refund Liability (5% x $32,000)

32,000

1

Cost of Goods Sold ......................................................................... Estimated Inventory Returns ($17,500 x 5%) ................................ Merchandise Inventory ..........................................................

16,625 875

10

Refund Liability .............................................................................. Accounts Receivable ..............................................................

1,600

10

Merchandise Inventory .................................................................. Estimated Inventory Returns .................................................

875

Cash ................................................................................................ Accounts Receivable ..............................................................

30,400

30

30,400 1,600

17,500

1,600

875 30,400

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach. Section Reference: Recording Sales of Merchandise – Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic Exercise 55 Moca Capa Company sells beverage supplies. The company has a return policy of 10 days from the date of sale. Moca Capa’s management estimates that returns will be 15% of sales. The following transactions occurred during the month of November: Nov. 4 Sold merchandise for $800 on account to Java Joe, n/30, FOB destination. The original cost of the merchandise to Moca Capa was $300. 5 The correct company pays freight charges of $30. 8 Java Joe returned goods with a selling price of $100 and a cost of $38. The goods are restored to inventory. 14 Received the correct payment from Java Joe. Instructions Prepare journal entries to record the transactions for Moca Capa Company under a perpetual inventory system using the contract-based approach. Solution 55 (10 min.) Nov. 4

Accounts Receivable ......................................................................

800

Test Bank for Accounting Principles, Ninth Canadian Edition

Sales........................................................................................ Refund Liability ($800 x 15%)................................................. 4

680 120

Cost of Goods Sold ......................................................................... Estimated Inventory Returns ($300 x 15%) ................................... Merchandise Inventory ..........................................................

255 45

5

Delivery Expense ............................................................................ Cash ........................................................................................

30

8

Refund Liability .............................................................................. Accounts Receivable ..............................................................

100

8

Merchandise Inventory .................................................................. Estimated Inventory Returns .................................................

38

14

Cash ($800 – $100) ......................................................................... Accounts Receivable ..............................................................

700

300

30 100

38

700

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach. Section Reference: Recording Sales of Merchandise – Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic Exercise 56 Tundra Sports Ltd. sells a variety of sports items. GameSports Ltd. is a public company that sells a variety of sports equipment and follows IFRS using the contract-based approach when recording revenue. GameSports offers all of its customers terms of 2/10, n/60 but accepts no returns. On July 1, 2024, GameSports had 50 tennis racquets in inventory at a cost of $60 each. Management expects all of its customers to take advantage of the sales discount offered. During July, the following transactions occurred: July 2 Sold 20 racquets on account to Northern Racquet Club for $150 each, terms 2/10 n/60. 11 Northern Racquet Club paid the account in full. 18 Sold 10 racquets on account to Southern Racquet Club for $175 each, terms 2/10 n/60. Sept. 15 Southern Racquet Club paid the account in full. Instructions Using the perpetual inventory system, prepare the journal entries to record the transactions. Solution 56 (15 min.) July 2

Accounts Receivable ...................................................................... Sales [(20 × $150) x .98] ..........................................................

2,940

2,940

Test Bank for Accounting Principles, Ninth Canadian Edition

Cost of Goods Sold ......................................................................... Merchandise Inventory (20 x $60) ..........................................

1,200

11

Cash ................................................................................................ Accounts Receivable ..............................................................

2,940

18

Accounts Receivable ...................................................................... Sales [(10 × $175) x .98] ..........................................................

1,715

Cost of Goods Sold ......................................................................... Merchandise Inventory (10 x $60) ..........................................

600

Cash ................................................................................................ Sales [(10 × $175) x .02] .......................................................... Accounts Receivable ..............................................................

1,750

Sept. 15

1,200

2,940

1,715 600

35 1,715

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales in a perpetual inventory system using the contract-based approach Section Reference: Recording Sales of Merchandise – Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic

CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS CHAPTER STUDY OBJECTIVES 1. Describe the differences between service and merchandising companies. A service company performs services. It has service or fee revenue and operating expenses. A merchandising company sells goods. It has merchandise inventory, sales, cost of goods sold, gross profit, and operating expenses. A merchandising company has a longer operating cycle than a service company. Merchandising companies must decide if they want to spend the extra resources to use a perpetual inventory system in which inventory records are updated with each purchase and sale. The benefit of the perpetual system is that it provides better information and control over inventory than a periodic system in which inventory records are updated only at the end of the accounting period. 2. Prepare entries for purchases under a perpetual inventory system. The Merchandise Inventory account is debited (increased) for all purchases of merchandise and freight, if freight is paid by the buyer. It is credited (decreased) for purchase returns and allowances and purchase discounts. Purchase discounts are cash reductions to the net invoice price for early payment. 3. Prepare entries for sales under a perpetual inventory system using the earnings approach. When inventory is sold, two entries are required: (1) Accounts Receivable (or Cash) is debited and Sales is credited for the selling price of the merchandise. (2) Cost of Goods Sold (an expense) is debited (increased) and Merchandise Inventory (a current asset) is credited (decreased) for the cost of the inventory items sold. Contra revenue accounts are used to record sales returns and allowances, and sales discounts. If the returned merchandise can be sold again in the future, an additional entry is made to increase Merchandise Inventory (a debit) and decrease Cost of Goods Sold (a credit). Freight costs paid by the seller are recorded as an operating expense. A contra revenue account is used to record sales discounts. 4. Perform the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company is also done for a merchandising company. An additional adjusting entry may be required under a perpetual inventory system. The Merchandise Inventory account must be adjusted to agree with the physical inventory count if there is a difference in the amounts. Merchandising companies have additional temporary accounts that must also be closed at the end of the accounting year. 5. Prepare single-step and multiple-step income statements. In a single-step income statement, all data are classified under two categories (revenues or expenses), and profit (loss) is determined in one step. A multiple-step income statement shows several steps in determining profit (loss). Net sales is

Test Bank for Accounting Principles, Ninth Canadian Edition

calculated by deducting sales returns and allowances, and sales discounts from sales. Next, gross profit is calculated by deducting the cost of goods sold from net sales. Profit (loss) from operations is then calculated by deducting operating expenses from gross profit. Total non-operating activities are added to (or deducted from) profit from operations to determine profit (loss) for the period. 6. Calculate the gross profit margin and profit margin. The gross profit margin, calculated by dividing gross profit by net sales, measures the gross profit earned for each dollar of sales. The profit margin, calculated by dividing profit by net sales, measures the profit earned for each dollar of sales. Both are measures of profitability that are closely watched by management and other interested parties. 7. Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold (Appendix 5A). In a periodic inventory system, separate temporary expense and contra expense accounts are used to record (a) purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs paid by the buyer. Purchases − purchase returns and allowances − purchase discounts = net purchases. Net purchases + freight in = cost of goods purchased. In a periodic inventory system, only one journal entry is made to record a sale of merchandise: Accounts Receivable (or Cash) is debited and Sales is credited. Cost of goods sold is not recorded at the time of the sale. Instead, it is calculated as follows at the end of the period after the ending inventory has been counted: Beginning inventory + cost of goods purchased = cost of goods available for sale. Cost of goods available for sale − ending inventory = cost of goods sold. 8. Prepare entries for sales under a perpetual inventory system using the contract-based approach (Appendix 5B). The contract-based approach to revenue recognition is used by companies that follow IFRS. The core principle of this approach is that revenue is recognized when a performance obligation is complete and the amount of revenue recorded is the consideration (i.e., Cash) a company expects to receive. Merchandisers that offer their customers a right of return are obligated to provide a refund if requested by the buyer. The seller will estimate the potential return from a customer at the time of sale and will credit the liability account Refund Liability. At the same time, the seller estimates the cost of expected returned merchandise and debits an account called Estimated Inventory Returns. Refund Liability and Estimated Inventory Returns are balance sheets accounts. Merchandisers that offer their customers a cash discount for prompt payment will determine the probability that a customer will take advantage of the discount and the sales recorded is reduced accordingly. If the customer does not take advantage of the discount, Sales is credited to reflect the additional amount received.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1) A retail company and a service company have different ways of measuring profit. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

2) A service company will NOT have to measure gross profit. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 3) Operating expenses will only occur in a merchandising company. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

4) An operating cycle is the average time that it takes to go from cash to cash in producing revenues. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. 5-3

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

5) The normal operating cycle of a merchandising company is shorter than the cycle of a service company. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

6) The cost of goods available for sale can be defined as inventory. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

7) The cost of goods that have been sold in a merchandising company are called cost of goods sold. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 8) Service revenue minus operating expenses equals gross profit. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

9) A periodic system of inventory will give the company more control over their inventory. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 10) A perpetual inventory system makes it easier for the company to answer questions about the availability of merchandise. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 11) A physical count of the inventory system at year end is only required in the periodic system of inventory. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 12) In a periodic inventory system, detailed records of the goods on hand are kept throughout the

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Test Bank for Accounting Principles, Ninth Canadian Edition

period. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 13) A perpetual inventory system requires that the company only determine the cost of goods sold at the end of the accounting period. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 14) In the perpetual system of inventory, the account Merchandise Inventory is debited when merchandise is purchased for resale to customers. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

15) A quantity discount is a reduction in price based on the number of items purchased. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

16) A quantity discount is the same as a purchase discount. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

17) Purchase discounts are offered to customers for the early payment of the balance due. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

18) Every seller offers purchase discounts. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 19) If sales terms are FOB destination, the buyer is responsible for getting the goods to their intended destination. Answer: False

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Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

20) FOB shipping point means that the seller is responsible for the freight costs. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 21) If a company purchases goods FOB shipping point, the purchasing company will be responsible for the payment of the freight costs. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 22) Freight costs are always a separate cost to the purchasing company. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 23) When a company returns merchandise to its supplier under a perpetual inventory system, the Merchandise Inventory account will be debited. Assume the company uses the earnings approach for

Test Bank for Accounting Principles, Ninth Canadian Edition

revenue recognition. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

24) Under a perpetual inventory system, any freight that is incurred when purchasing the inventory is debited to the Merchandise Inventory account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

25) In a perpetual inventory system, there are two journal entries when making a sale of goods. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

26) Using the perpetual inventory system and the earnings approach, an entry is required to increase cost of goods sold and decrease merchandise inventory when goods are sold. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings

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Test Bank for Accounting Principles, Ninth Canadian Edition

approach Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 27) A Sales Returns and Allowances account is only used in a perpetual inventory system under the earnings approach. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 28) A large balance in the Sales Returns and Allowances account may indicate that the merchandise that is being sold is of inferior quality. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 29) The Sales Returns and Allowances account is a contra revenue account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

30) The Sales Discounts account is a contra revenue account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

31) Sales discounts are only used in a perpetual inventory system. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales using the earnings approach under a perpetual inventory system. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

32) There are additional steps required in the accounting cycle for a merchandising company than for a service company. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

33) A single-step income statement is named because there is only one step in determining profit. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements

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Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

34) A single-step income statement is only prepared when using the periodic inventory system. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

35) A single-step income statement is considered more useful because it provides a detailed breakdown of all the categories of expenses. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

36) The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic 37) In a multiple-step income statement, operating expenses are deducted from gross profit to give the profit from operations. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

38) If gross profit is $80,000 and operating expenses are $55,000, then the profit from operations is $25,000. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

39) Non-operating expenses are any expenses that are not related to the company’s main operations. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

40) Profit is the final outcome of a company’s operating and non-operating activities. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

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Test Bank for Accounting Principles, Ninth Canadian Edition

41) If there are no “non-operating” activities, then profit from operations equals the company’s profit. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

42) Gross profit is NOT presented on the single-step income statement. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic 43) Gross profit margin is calculated by dividing cost of goods sold by net sales. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

44) Gross profit margin is net sales divided by cost of goods sold. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

45) To increase their gross profit margin, a company could increase their sales with the same cost of goods sold. Answer: True Bloomcode: Analysis Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 46) To increase their gross profit margin, a company could decrease their cost of goods sold with the same sales. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 47) To increase their gross profit margin, a company could decrease their operating expenses. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

48) An increase in a company’s gross profit resulting from a decrease in cost of goods sold will mean an increase in gross profit margin. Answer: True Bloomcode: Comprehension

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Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

49) Gross profit margin is an example of a liquidity ratio. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 50) An increase in sales will always increase a company’s gross profit margin. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

51) A decrease in cost of goods sold will always increase a company’s gross profit margin. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

52) An increase in profit when accompanied with a decrease in net sales will increase profit margin. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

53) A company can improve its profit margin by increasing its gross profit margin. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

54) Artist Company has net sales of $350,000 and cost of goods sold is $275,000. If all other expenses equal $40,000, the company’s profit margin is 10%. Answer: True Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

55) In a periodic inventory system, detailed records of each inventory purchase are maintained. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

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Test Bank for Accounting Principles, Ninth Canadian Edition

56) Under a periodic inventory system, the Merchandise Inventory account is updated when the sale is recorded. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic 57) When a company returns merchandise to its supplier under a periodic inventory system, the Purchases account is credited. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

58) In the periodic system of accounting, the cost of goods sold is not recorded at the time of sale of goods. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

59) Purchases is a temporary account reported on the income statement as an expense. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic 60) Cost of goods sold, in a periodic inventory system, is determined by adding the cost of goods purchased to the ending inventory. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic 61) Net purchases is determined by adding purchase returns and allowances to total purchases. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic 62) Cost of goods available for sale, in a periodic inventory system, less beginning inventory is equal to cost of goods purchased. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.

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Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

63) The contract-based approach to revenue recognition is used by companies that follow IFRS. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference: Recording Sales of Merchandise–Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic

64) When using the contract-based approach to revenue recognition, the amount of revenue recognized reflects the consideration the business expects to receive. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference: Recording Sales of Merchandise—Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic 65) When using the contract-based approach to revenue recognition, when the customer returns goods for refund, the account Refund Liability is credited. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference: Recording Sales of Merchandise—Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic 66) When using the contract-based approach to revenue recognition, if the customer returns goods for refund, but the goods are damaged or defective and can no longer be sold, the account Cost of Goods

Test Bank for Accounting Principles, Ninth Canadian Edition

Sold is credited. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference: Recording Sales of Merchandise—Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic 67) When using the contract-based approach to revenue recognition where a sales discount is offered to the customer, the potential reduction of revenue should be recognized at the time of the sale. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference: Recording Sales of Merchandise—Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic 68) When using the contract-based approach to revenue recognition where a sales discount is offered to the customer but the customer fails to pay within the discount period, the amount of the discount estimated at the time of the sale will be credited to Sales when the account is collected. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference: Recording Sales of Merchandise—Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic

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Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 69) A company that sells goods to customers is known as a a) proprietorship. b) corporation. c) merchandising company. d) service company. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

70) Which of the following companies would NOT be considered a merchandising company? a) MEC Mountain Equipment Co-op b) Walmart c) Air Canada d) Best Buy Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 71) A merchandiser differs from a service-type business in that it a) sells goods to customers. b) has more employees. c) only operates in one country. d) requires more government regulation. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

72) Two categories of expenses in merchandising companies are a) cost of goods sold and financing expenses. b) operating expenses and financing expenses. c) cost of goods sold and operating expenses. d) sales and cost of goods sold. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

73) Which of the following represents the function of the wholesaler? a) Buy products from manufacturers and sell to retailers. b) Buy products from other wholesalers and sell to consumers. c) Buy products from manufacturers and sell to consumers. d) Buy products from retailers and sell to consumers. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 74) Which of the following represents the function of the retailer? a) Buy products from manufacturers and sell to wholesalers. b) Buy products from manufacturers and wholesalers and sell to consumers. c) Buy products from other retailers and sell to manufacturers. d) Buy products from other retailers and sell to wholesalers. Answer: b Bloomcode: Knowledge

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Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 75) Which of the following statements is correct? a) Under a periodic system, the Merchandise Inventory account is only updated once per period. b) Under a perpetual system, the Merchandise Inventory account is only updated once per period. c) Cost of goods sold computed under a periodic system would be higher than under a perpetual system. d) The value of inventory computed under a periodic system would be lower than under a perpetual system. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

76) Sales less the cost of goods sold equals a) operating expenses. b) gross profit. c) ending inventory. d) profit. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 77) In a periodic inventory system, the inventory is adjusted a) each time inventory is purchased. b) each time inventory is sold. c) when inventory is counted at the end of the accounting period. d) always at the end of each month.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 78) If a company determines cost of goods sold each time a sale occurs, it a) must have a computer accounting system. b) must have a service business. c) uses a periodic inventory system. d) uses a perpetual inventory system. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

79) The operating cycle of a merchandising company differs from that of a service company in all of the following except that it a) is usually longer in days. b) is usually shorter in days. c) involves the purchase of inventory. d) involves the sale of merchandise. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

80) When contrasting a perpetual inventory system to a periodic system, the a) perpetual system requires less clerical work. b) perpetual system provides better control over inventories.

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Test Bank for Accounting Principles, Ninth Canadian Edition

c) periodic system requires more clerical work. d) periodic system provides better control over inventories. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

81) All of the following are operating expenses EXCEPT a) expenses incurred to pay employees. b) expenses incurred to pay interest on bank loans. c) expenses incurred for delivery expense. d) expenses incurred to pay for advertising. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 82) Which of the following statements is correct? a) A service company does not have a Cost of Goods Sold account because it does not sell goods. b) A service company does have a Cost of Goods Sold account because it sells a service. c) A merchandising company does not have a Cost of Goods Sold account because it does not sell goods. d) A merchandising company does not have a Cost of Goods Sold account because it only sells a service. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

83) Which of the following is a true statement about inventory systems? a) Periodic inventory systems require more detailed inventory records. b) Perpetual inventory systems require more detailed inventory records. c) A periodic system requires cost of goods sold be determined after each sale. d) A perpetual system is specifically designed for companies that sell low unit-value items. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

84) How much is cost of goods sold if Houston Ltd. has beginning inventory of $1,500, cost of goods purchased of $2,800, and ending inventory of $750? a) $550 b) $2,050 c) $3,550 d) $5,050 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 85) How much is cost of goods available for sale if Houston Ltd. has beginning inventory of $1,500, cost of goods purchased of $2,800, and ending inventory of $750? a) $4,300 b) $2,250 c) $3,550 d) $2,050 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting

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Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic 86) How much is beginning inventory if Riley Ltd. has cost of goods purchased of $1,000, ending inventory of $750, and cost of goods sold of $1,360? a) $390 b) $3,110 c) $1,610 d) $1,110 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 87) How much is ending inventory if Malcolm Ltd. has cost of goods available for sale of $5,300, beginning inventory of $2,100, and cost of goods sold of $1,480? a) $1,720 b) $3,820 c) $4,680 d) $3,200 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Describe the differences between service and merchandising companies. Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic 88) How much is beginning inventory if Parry Ltd. has cost of goods purchased of $1,500, ending inventory of $750, and cost of goods available for sale of $2,825? a) $575 b) $1,325 c) $2,075 d) $3,575 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Describe the differences between service and merchandising companies.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Merchandising Operations CPA: Financial Reporting AACSB: Analytic

89) Brodo Gaggins purchased five units of merchandise on account for $3,300 each. Assuming the company uses a perpetual inventory system, which of the following journal entries would be recorded for the purchase? a) Merchandise Inventory ................................................................................ 16,500 Accounts Payable ................................................................................... 16,500 b) Purchases ..................................................................................................... 16,500 Accounts Payable ................................................................................... 16,500 c) Cost of Goods Sold ....................................................................................... 16,500 Accounts Payable ................................................................................... 16,500 d) Merchandise Inventory ................................................................................ 16,500 Accounts Receivable .............................................................................. 16,500 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 90) On August 1, Darcy’s Things purchased merchandise on account costing $28,000 from Electronics Supply Co. On August 7, Darcy’s returned five defective units that cost $400 each. Electronics Supply refunded Darcy’s for the merchandise as they have a stated policy that any products may be returned within 15 days of the date of sale. Assuming Darcy’s uses a perpetual inventory system, which of the following journal entries would be recorded for the return of merchandise purchased on account that is not yet paid? a) Accounts Payable ......................................................................................... 2,000 Purchases ............................................................................................... 2,000 b) Accounts Payable ......................................................................................... 2,000 Merchandise Inventory .......................................................................... 2,000 c) Accounts Payable.......................................................................................... 2,000 Purchase Returns and Allowances ........................................................ 2,000 d) Accounts Payable ......................................................................................... 2,000 Cost of Goods Sold ................................................................................. 2,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system.

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Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 91) On November 1, Mighty Wear purchased merchandise for a total of $16,500 from Ames Supplies. The terms were 2/10, n/ 30, FOB destination. On November 10, Mighty Wear paid Ames Supplies. Assuming Mighty Wear uses a perpetual inventory system, which of the following journal entries would Mighty Wear record for the payment? a) Accounts Payable ......................................................................................... 16,500 Purchases ............................................................................................... 330 Cash ........................................................................................................ 16,170 b) Accounts Payable ......................................................................................... 16,500 Purchase Discounts................................................................................ 330 Cash ........................................................................................................ 16,170 c) Accounts Payable.......................................................................................... 16,500 Merchandise Inventory .......................................................................... 330 Cash ........................................................................................................ 16,170 d) Accounts Payable ......................................................................................... 16,500 Cost of Goods Sold ................................................................................. 330 Cash ........................................................................................................ 16,170 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 92) On November 1, Mighty Wear purchased merchandise for a total of $16,500 from Ames Supplies. The terms were 2/10, n/ 30, FOB destination. On November 3, the correct company paid the freight of $100. Assuming Mighty Wear uses a perpetual inventory system, which of the following would be Mighty Wear’s correct entry? a) Delivery Expense .......................................................................................... 100 Cash ........................................................................................................ 100 b) Merchandise Inventory ................................................................................ 100 Cash ........................................................................................................ 100 c) Freight In ....................................................................................................... 100 Cash ........................................................................................................ 100 d) No entry Answer: d Bloomcode: Application Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 93) On November 1, Mighty Wear purchased merchandise for a total of $16,500 from Ames Supplies. The terms were 2/10, n/ 30, FOB shipping point. On November 3, the correct company paid the freight of $100. Assuming Mighty Wear uses a perpetual inventory system, which of the following would be Mighty Wear’s correct entry? a) Delivery Expense .......................................................................................... 100 Cash ........................................................................................................ 100 b) Merchandise Inventory ................................................................................ 100 Cash ........................................................................................................ 100 c) Freight In ....................................................................................................... 100 Cash ........................................................................................................ 100 d) No entry Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

94) The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit a) Accounts Payable. b) Purchase Returns and Allowances. c) Purchase Discounts. d) Merchandise Inventory. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 95) Under a perpetual inventory system, acquisition of merchandise for resale is debited to the a) Merchandise Inventory account. b) Cost of Goods Sold account.

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Test Bank for Accounting Principles, Ninth Canadian Edition

c) Purchase Returns and Allowances account. d) Purchases account. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

96) A sales invoice sent by a seller is used by a purchaser as a source document that a) provides support for goods purchased for resale. b) is required before a sale can be recorded. c) provides irrevocable evidence of a sale. d) serves only as a customer receipt. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases under perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

97) Under a perpetual inventory system, the following entry would be made to record a purchase of inventory on account: a) Merchandise Inventory ................................................................................ xxx Accounts Payable ................................................................................... xxx b) Purchases ..................................................................................................... xxx Accounts Payable ................................................................................... xxx c) Cost of Goods Sold ....................................................................................... xxx Accounts Payable ................................................................................... xxx d) Merchandise Inventory ................................................................................ xxx Accounts Receivable .............................................................................. xxx Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

98) Under a perpetual inventory system, the following entry would be made to record the return of merchandise purchased on account that is not yet paid: a) Accounts Payable ......................................................................................... xxx Purchases ............................................................................................... xxx b) Accounts Payable ......................................................................................... xxx Merchandise Inventory .......................................................................... xxx c) Accounts Payable.......................................................................................... xxx Purchase Returns and Allowances ........................................................ xxx d) Accounts Payable ......................................................................................... xxx Cost of Goods Sold ................................................................................. xxx Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

99) In a perpetual inventory system, a merchandiser will record the purchase of individual inventory items in a (an) ______ account. a) contra b) subsidiary c) expense d) general ledger Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 100) The detailed individual data from the inventory subsidiary ledger are summarized in the a) gross profit. b) cost of goods sold. c) merchandise inventory control account.

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Test Bank for Accounting Principles, Ninth Canadian Edition

d) accounts payable control account. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

101) In a perpetual inventory system, the entry to record the purchase of merchandise inventory on account would require a a) debit to the Merchandise Inventory account and a credit to the Accounts Payable account. b) debit to the Accounts Payable account and a credit to the Merchandise Inventory account. c) debit to the Merchandise Inventory account and a credit to the Cash account. d) credit to the Merchandise Inventory account and a debit to the Accounts Receivable account. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

102) Sackville Company purchased merchandise from Amherst Company with freight terms of FOB shipping point. The freight costs will be paid by a) Amherst Company. b) Sackville Company. c) the transportation company. d) Amherst and Sackville, who will share the freight costs. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

103) Rivergold Company purchased merchandise from Saltmine Company with freight terms of FOB destination point. The freight costs will be paid by a) Saltmine Company. b) Rivergold Company. c) the transportation company. d) Saltmine and Rivergold, who will share the freight costs. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

104) Using a perpetual inventory system, the cost of freight in a) increases the cost of merchandise inventory. b) is always paid by the seller. c) is reflected in an expense account called Freight In. d) reflects the cost of delivering goods to customers. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 105) Falcon Company recently made a $10,000 purchase from a major supplier. Shipping costs were $200, terms FOB shipping point. To record this purchase, Falcon Company will need to debit the a) Merchandise Inventory account for $10,000. b) Cost of Goods Sold account for $200. c) Merchandise Inventory account for $10,200. d) Cost of Goods Sold account for $10,200. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise

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Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

106) Eastdome Company recently made a $20,000 purchase from a major supplier. Shipping costs were $400, terms FOB destination point. To record this purchase, Eastdome Company will need to debit the a) Merchandise Inventory account for $20,000. b) Cost of Goods Sold account for $400. c) Merchandise Inventory account for $20,400. d) Cost of Goods Sold account for $20,400. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

107) If a purchaser returns goods purchased on account to the supplier under a perpetual inventory system, the purchaser would debit a) Cost of Goods Sold. b) Accounts Payable. c) Merchandise Inventory. d) Purchase Returns. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 108) Which of the following best represents the journal entry by the buyer to record the return of goods purchased on account under a perpetual inventory system? a) a debit to Accounts Receivable and a credit to Purchase Returns and Allowances b) a debit to Accounts Receivable and a credit to Merchandise Inventory c) a debit to Accounts Payable and a credit to Purchase Returns and Allowances d) a debit to Accounts Payable and a credit to Merchandise Inventory

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 109) In a perpetual inventory system, a separate account is maintained for each separate inventory item. These separate accounts are referred to as a) contra accounts. b) subsidiary accounts. c) control accounts. d) purchase accounts. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

110) Selling terms 2/10, n/30 indicates which of the following? a) The purchaser is required to pay the entire bill within 10 days. b) The purchaser can take a 20% discount if they pay within 30 days. c) The purchaser can take a 2% discount if they pay within 10 days. d) The purchaser can take a 2% discount if they pay within 30 days. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

111) The term n/30 means a) the entire bill must be paid within 30 days. b) the purchaser must pay 3% interest if their payment is late.

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Test Bank for Accounting Principles, Ninth Canadian Edition

c) the seller is offering a 30% discount for early payment. d) the seller is expected to deliver the goods within 30 days. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

112) If a company purchases inventory for $160,000 with terms 2/10, n/30 and pays within the discount period, the amount of cash paid is a) $ 165,000. b) $ 163,200. c) $ 156,800. d) $ 160,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

113) B&B Company receives a discount from its largest supplier for each order that exceeds 100 units. This discount is referred to as a a) sales discount. b) purchase discount. c) quantity discount. d) merchandise discount. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

114) FOB means a) free on board. b) freight on board. c) freight on back order. d) free on buyer. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

115) A company buys merchandise costing $25,000 with terms of 2/10, n/30. The amount of the credit entry to the Merchandise Inventory account, when the discount is taken, will be a) $250. b) $300. c) $500. d) $0. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

116) A company makes a purchase for $250 on December 1, terms 2/10, n/30. How much will the discount be if the amount is paid on December 16? a) $5 b) $0 c) $10 d) $25 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system.

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Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

117) Farm Company has an offer to purchase 100 seeds for $100, 200 seeds for $150, or 300 seeds for $175. This offer includes a a) purchase discount. b) quantity discount. c) purchase return. d) special merchandise terms. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic 118) Assuming a purchase on account not yet paid, a purchase return in a perpetual inventory system requires a a) debit to Accounts Payable and a credit to Merchandise Inventory. b) debit to Cost of Goods Sold and a credit to Merchandise Inventory. c) debit to Sales and a credit to Merchandise Inventory. d) debit to Sales Returns and Allowances and a credit to Accounts Receivable. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise CPA: Financial Reporting AACSB: Analytic

119) GST/HST paid on the purchase of inventory is a) an additional cost that must be absorbed by the merchandising company. b) not included in inventory because it is recoverable. c) recorded as an operating expense on the income statement. d) recorded as additional freight costs and included in the calculation of the cost of goods sold. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 120) The Sales Returns and Allowances account is classified as a) an asset account. b) a contra asset account. c) an expense account. d) a contra revenue account. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 121) Which of the following best represents the journal entry to record the return of defective goods sold to customers on account and not yet collected under the earnings approach? Assume the goods returned will be discarded. a) a debit to Sales Returns and Allowances and a credit to Accounts Receivable b) a debit to Merchandise Inventory and a credit to Accounts Receivable c) a debit to Sales Returns and Allowances and a credit to Accounts Payable d) a debit to Merchandise Inventory and a credit to Accounts Payable Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 122) The Sales Discounts account is classified as a) an asset account.

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Test Bank for Accounting Principles, Ninth Canadian Edition

b) a contra asset account. c) an expense account. d) a contra revenue account. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 123) As an incentive for customers to purchase a large number of items at one time, a business may offer its customers a) a sales discount. b) free delivery. c) a sales allowance. d) a quantity discount. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 124) As an incentive for customers to pay their accounts promptly, a business may offer its customers a) a sales discount. b) free delivery. c) a sales allowance. d) a quantity discount. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

125) For many merchandisers, the performance obligation is completed when a) cash is received from credit sales. b) an order is received. c) goods have been transferred from the seller to the buyer. d) adjusting entries are made. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

126) In a perpetual inventory system, cost of goods sold is recorded a) on a daily basis. b) at the end of the accounting period. c) on an annual basis. d) with each sale. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

127) In a perpetual system, assuming the company uses the earnings approach, the required entry(ies) to record the sale of merchandise for $1,000 on credit for goods costing the company $600 would include a) a debit to Cost of Goods Sold and credit to Merchandise Inventory for $600. b) a debit to Accounts Receivable and credit to Merchandise Inventory for $1,000. c) a debit to Accounts Receivable and credit to Sales for $ 1,000. d) both a) and c)

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Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 128) Freight costs incurred by the seller on outgoing merchandise are recorded as a) delivery expense. b) merchandise inventory. c) freight in. d) cost of goods sold. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 129) Freight costs incurred by the seller on outgoing merchandise is shown on the income statement as part of a) Cost of Goods Sold. b) Operating Expenses. c) Sales Revenue. d) Liabilities. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 130) A Sales Returns and Allowances account is not debited if a customer

Test Bank for Accounting Principles, Ninth Canadian Edition

a) returns defective merchandise. b) receives a credit for merchandise of inferior quality. c) utilizes a prompt payment incentive. d) returns goods that are not in accordance with specifications. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

131) If a customer agrees to keep merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales a) discount. b) return. c) contra asset. d) allowance. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

132) The HST collected on a sale of merchandise is recorded as a) a selling expense. b) a liability. c) sales revenue. d) cost of goods sold. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.

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Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

133) Assuming the company uses the earnings approach, when goods are returned in a saleable condition and the initial transaction was for cash, a) the Sales Returns and Allowances account should not be used. b) the Cash account will be credited. c) Sales Returns and Allowances will be credited. d) Accounts Receivable will be credited. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

134) The Sales Returns and Allowances account does not provide information to management about a) possible inferior merchandise. b) the percentage of credit sales versus cash sales. c) inefficiencies in filling orders. d) errors in overbilling customers. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 135) A sales discount is not a) offered as an incentive to customers to pay quickly. b) a contra revenue account. c) a normal debit balance. d) a cash savings to the seller.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 136) Trish Company sells merchandise on account for $2,400 to Trash Company. Trash Company returns $800 (cost $500) of merchandise that was damaged, along with a cheque to settle the account. What entry does Trish Company make upon receipt of the cheque? The damaged inventory is sent to recycling. Assume that Trish Company uses the earnings approach. a) Cash .............................................................................................................. 1,600 Accounts Receivable .............................................................................. 1,600 b) Cash .............................................................................................................. 1,568 Sales Returns and Allowances ...................................................................... 832 Accounts Receivable .............................................................................. 2,400 c) Cash .............................................................................................................. 1,600 Sales Returns and Allowances ...................................................................... 800 Accounts Receivable .............................................................................. 2,400 d) Cash .............................................................................................................. Sales Returns and Allowances ............................................................... Accounts Receivable ..............................................................................

2,400 800 1,600

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 137) Which of the following would be classified as a contra account? a) Sales b) Sales Returns and Allowances c) Merchandise Inventory d) Unearned Revenue Answer: b

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Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

138) Which of the following accounts has a normal credit balance? a) Sales Returns and Allowances b) Delivery Expense c) Sales d) Selling Expense Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

139) Atom Electric returned to Neutron Inc. five damaged fuses. Neutron accepted the return and issued a credit note for $200 to Atom for the merchandise it had purchased on account. Assuming that Atom Electric and Neutron use the earnings approach, to record the return Neutron’s accountant must a) debit Cash and credit Sales for $200. b) debit and credit Cash for $200. c) debit Sales Returns and Allowances and credit Cash for $200. d) debit Sales Returns and Allowances and credit Accounts Receivable for $200. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

140) Freight costs paid by a seller on merchandise sold to customers will cause an increase a) in the selling expenses of the buyer. b) in the operating expenses of the seller. c) to the cost of goods sold of the seller. d) to a contra revenue account of the seller. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

141) The respective normal account balances of Merchandise Inventory, Sales Returns and Allowances, and Cost of Goods Sold are a) credit, credit, credit. b) debit, debit, debit. c) debit, credit, credit. d) debit, debit, credit. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

142) When recording a credit sale in a perpetual inventory system, all of the following accounts are affected EXCEPT a) Sales. b) Accounts Receivable. c) Merchandise Inventory. d) Cash. Answer: d Bloomcode: Knowledge Difficulty: Easy

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Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

143) Assuming the company uses the earnings approach, when recording a return of a credit sale in a perpetual inventory system for merchandise that is in a saleable condition, all of the following accounts are affected EXCEPT a) Sales Returns and Allowances. b) Accounts Receivable. c) Merchandise Inventory. d) Cash. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

144) A company uses the Sales Returns and Allowances account to record a) a discount offered for a large quantity purchase. b) a discount received from a supplier to encourage prompt payment. c) returns of inventory to suppliers. d) customer returns of prior sales. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic

145) A merchandiser would normally give a single sales figure (the sum of all its individual sales accounts) on the income statement because a) the details are not relevant to most users of the income statement.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) merchandisers only have one product available for sale. c) perpetual inventory systems cannot separate various sales items. d) it is too time consuming to separate all individual sales terms. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 146) What entry will the seller record if shipping terms are FOB destination and the seller pays for the freight? a) debit Delivery Expense and credit Cash b) debit Freight In and credit Cash c) debit Cost of Goods Sold and credit Cash d) debit Merchandise Inventory and credit Cash Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 147) What is one of the two journal entries that the seller will record to update inventory for the cost of goods returned assuming the company uses the earnings approach and the returned merchandise is not damaged? a) debit Sales Returns and Allowances and credit Accounts Receivable b) debit Accounts Receivable and credit Sales c) debit Merchandise Inventory and credit Cost of Goods Sold d) debit Merchandise Inventory and credit Accounts Receivable Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings

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Test Bank for Accounting Principles, Ninth Canadian Edition

approach. Section Reference: Recording Sales of Merchandise–Earnings Approach CPA: Financial Reporting AACSB: Analytic 148) Maddens Tools sold 10 units of merchandise inventory on account for $550 each, which cost $325 each. Maddens has a stated policy that any products may be returned within 20 days of the date of sale. Based on past experience, the company’s management estimates returns to be 10% of sales. Assuming the company uses a perpetual inventory system and the earnings approach, which of the following set of journal entries would be recorded for the sale? a) Accounts Receivable..................................................................................... 5,500 Merchandise Inventory .......................................................................... 5,500 Cost of Goods Sold ....................................................................................... 3,250 Sales .......................................................................................... 3,250 b) Accounts Receivable .................................................................................... 3,250 Sales ............ .......................................................................................... 3,250 Purchases .......... .......................................................................................... 5,500 Cost of Goods Sold ................................................................................. 5,500 c) Accounts Receivable ..................................................................................... 5,500 Cost of Goods Sold ................................................................................. 5,500 Sales .......................................................................................... 3,250 Merchandise Inventory .......................................................................... 3,250 d) Accounts Receivable .................................................................................... 5,500 Sales .......................................................................................... 5,500 Cost of Goods Sold ........................................................................................ 3,250 Merchandise Inventory .......................................................................... 3,250

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise—Earnings Approach CPA: Financial Reporting AACSB: Analytic 149) On August 1, Darcy’s Things purchased merchandise on account costing $28,000 from Electronics Supply Co. On August 7, Darcy’s returned five defective units of goods, which cost $400 each. Electronics Supply refunded Darcy’s for the merchandise as they have a stated policy that any products may be returned within 15 days of the date of sale. Based on past experience, the company’s management estimates returns to be 10% of sales. Assuming Electronics Supply uses a perpetual inventory system and the earnings approach, which of the following journal entries would be recorded for the return of defective merchandise sold on account and not yet paid?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) Sales.............................................................................................................. Accounts Receivable .............................................................................. b) Merchandise Inventory ................................................................................ Accounts Receivable .............................................................................. c) Sales Returns and Allowances ..................................................................... Accounts Receivable .............................................................................. d) Cost of Goods Sold ....................................................................................... Accounts Receivable ..............................................................................

2,000 2,000 2,000 2,000

2,000 2,000 2,000 2,000

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise—Earnings Approach CPA: Financial Reporting AACSB: Analytic 150) On November 1, Mighty Wear purchased merchandise for a total of $16,500 from Ames Supplies. The terms were 2/10, n/ 30, FOB destination. On November 10, Mighty Wear paid Ames Supplies. Assuming Ames Supplies uses a perpetual inventory system and the earnings approach, which of the following journal entries would Ames Supplies record for the receipt of payment? a) Cash .............................................................................................................. 16,170 Purchases ..................................................................................................... 330 Accounts Receivable .............................................................................. 16,500 b) Cash .............................................................................................................. 16,170 Sales Discounts............................................................................................. 330 Accounts Receivable .............................................................................. 16,500 c) Cash .............................................................................................................. 16,170 Purchase Discounts ....................................................................................... 330 Accounts Receivable .............................................................................. 16,500 d) Cash ............................................................................................................. 16,170 Merchandise Inventory ................................................................................ 330 Accounts Receivable .............................................................................. 16,500 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise—Earnings Approach CPA: Financial Reporting AACSB: Analytic

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Test Bank for Accounting Principles, Ninth Canadian Edition

151) On November 1, Mighty Wear purchased merchandise for a total of $16,500 from Ames Supplies. The terms were 2/10, n/ 30, FOB destination. On November 3, the correct company paid the freight of $100. Assuming Ames Supplies uses a perpetual inventory system, which of the following journal entries would the company record? a) Delivery Expense .......................................................................................... Cash ........................................................................................................ b) Merchandise Inventory ................................................................................ Cash ........................................................................................................ c) Freight In ....................................................................................................... Cash ........................................................................................................ d) No entry

100 100 100

100 100 100

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise—Earnings Approach CPA: Financial Reporting AACSB: Analytic 152) On November 1, Mighty Wear purchased merchandise for a total of $16,500 from Ames Supplies. The terms were 2/10, n/ 30, FOB shipping point. On November 3, the correct company paid the freight of $100. Assuming Ames Supplies uses a perpetual inventory system, which of the following journal entries would the company record? a) Delivery Expense .......................................................................................... Cash ........................................................................................................ b) Merchandise Inventory ................................................................................ Cash ........................................................................................................ c) Freight In ....................................................................................................... Cash ........................................................................................................ d) No entry

100 100 100

100 100 100

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach. Section Reference: Recording Sales of Merchandise—Earnings Approach CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

153) Assuming Grants Hardware’s accounting records show an ending inventory balance of $186,000 and a physical count shows a balance of $ 179,000, which of the following journal entries would the company record? a) Cost of Goods Sold ....................................................................................... 7,000 Merchandise Inventory .......................................................................... 7,000 b) Merchandise Inventory ................................................................................ 7,000 Cash ........................................................................................................ 7,000 c) Sales .............................................................................................................. 7,000 Cost of Goods Sold ................................................................................. 7,000 d) Merchandise Inventory ................................................................................ 7,000 Cost of Goods Sold ................................................................................. 7,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 154) Assuming Grants Hardware’s accounting records show an ending inventory balance of $142,000 and a physical count shows a balance of $ 145,500, which of the following journal entries would the company record? a) Cost of Goods Sold ....................................................................................... 3,500 Merchandise Inventory .......................................................................... 3,500 b) Merchandise Inventory ................................................................................ 3,500 Cash ........................................................................................................ 3,500 c) Sales .............................................................................................................. 3,500 Cost of Goods Sold ................................................................................. 3,500 d) Merchandise Inventory ................................................................................ 3,500 Cost of Goods Sold ................................................................................. 3,500 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 155) The trial balance of Luigi Fur Company at its year end of December 31 shows Cash $376,560; Merchandise Inventory $76,000; Luigi, Capital $420,000; Sales $365,500; Sales Discounts $1,990; Cost of Goods Sold $201,000; Rent Revenue $14,000; Delivery Expense $4,200; Rent Expense $14,750; Salaries Expense $45,000; and Luigi, Drawings $80,000. Luigi Fur Company’s statement of owner’s 5-55

Test Bank for Accounting Principles, Ninth Canadian Edition

equity for the year showed profit of $112,560 and closing owner’s capital of $452,560. Which of the following would be the entry to close the Sales Discounts account? a) Income Summary ......................................................................................... 1,990 Sales Discounts ...................................................................................... 1,990 b) Luigi, Capital................................................................................................. 1,990 Sales Discounts ...................................................................................... 1,990 c) Sales Discounts ............................................................................................. 1,990 Income Summary ................................................................................... 1,990 d) Sales Discounts ............................................................................................ 1,990 Luigi, Capital........................................................................................... 1,990 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 156) The adjusted trial balance of Small Book Company appears below. SMALL BOOK COMPANY Adjusted Trial Balance December 31, 2024 Cash .................................................................................................................. Accounts receivable.......................................................................................... Merchandise inventory .................................................................................... Equipment ........................................................................................................ Accumulated depreciation—equipment ......................................................... Accounts payable ............................................................................................. HST recoverable ............................................................................................... HST payable ...................................................................................................... J. Small, capital ................................................................................................ J. Small, drawings ............................................................................................ Sales.................................................................................................................. Sales returns and allowances .......................................................................... Cost of goods sold ............................................................................................ Rent expense .................................................................................................... Salaries expense ...............................................................................................

Debit $ 3,400 15,000 35,000 150,000

1,000

20,000 14,000 140,000 16,000 21,000 $ 415,400

Credit

$ 20,000 12,000 1,400 132,000 250,000

_______ $ 415,400

How much will the balance in the J. Small, Capital account be after closing entries are posted? a) $191,000 b) $171,000 c) $59,000

Test Bank for Accounting Principles, Ninth Canadian Edition

d) $39,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 157) The adjusted account balances of Johanna Ltd. at December 31, 2024, are as follows: Accounts receivable ........................... $6,000 Bank overdraft ............................ $ 2,300 Notes receivable ................................. 6,000 Accounts payable........................ 11,000 Merchandise inventory ...................... 17,600 Notes payable ............................. 56,800 Equipment .......................................... 74,000 Accumulated depreciation— Depreciation expense ........................ 22,900 equipment ................................ 9,200 J. Johanna, drawings ......................... 16,000 Sales ............................................ 62,500 Utilities expense ................................. 2,200 Rent revenue ............................... 10,000 Sales discounts................................... 3,300 J. Johanna, capital .................. 18,000 Cost of goods sold .............................. 20,000 Sales returns and allowances ............ 1,800 _______ $ 169,800 $ 169,800 How much will the balance in the J. Johanna, Capital account be after closing entries are posted? a) $40,300 b) $56,300 c) $22,300 d) $24,300 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

158) Using a perpetual inventory system, if Shady Phone’s accounting records show an ending inventory balance of $25,000 and a physical count shows a balance of $23,000, it is necessary to a) debit its inventory records. b) purchase additional inventory. c) remove the nonexistent inventory from its records. 5-57

Test Bank for Accounting Principles, Ninth Canadian Edition

d) credit Cost of Goods Sold. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

159) Using a perpetual inventory system, if Walford Harness Shop’s accounting records show an ending inventory balance of $43,000 and a physical count shows a balance of $45,000, it is necessary to a) debit its inventory records to adjust to actual. b) purchase additional inventory. c) credit sales. d) credit Purchase Returns and Allowances. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

160) The journal entry to record a shortage of inventory at the end of the accounting period is Debit Credit a) Cost of Goods Sold Merchandise Inventory b) Merchandise Inventory Sales c) Accounts Receivable Sales d) Accounts Receivable Merchandise Inventory Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

161) In a perpetual inventory system, the Merchandise Inventory account should equal the actual merchandise on hand a) at all times. b) only after the physical inventory account has occurred. c) only at the beginning of the accounting period. d) only at the end of the accounting period. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

162) All of the following accounts are closed at the end of the accounting period EXCEPT a) Sales Returns and Allowances. b) Delivery Expense. c) Cost of Goods Sold. d) Merchandise Inventory. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic 163) Assuming the company uses the earnings approach for revenue recognition, in a perpetual system, if the accounting records show an ending inventory balance of $22,000 and a physical count shows a balance of $20,000, it is necessary to a) debit Merchandise Inventory and credit Cost of Goods Sold for $2,000. b) debit Cost of Goods Sold and credit Sales Returns and Allowances for $2,000. c) debit Cost of Goods Sold and credit Merchandise Inventory for $2,000. d) debit Sales Returns and Allowances and credit Merchandise Inventory for $2,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Perform the steps in the accounting cycle for a merchandising company.

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Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

164) When using a perpetual inventory system, the adjusting entry required when merchandise inventory records do not agree with the physical count a) has an effect on cost of goods sold. b) has no effect on cost of goods sold. c) requires reporting a loss when actual is higher than records. d) requires reporting a gain when actual is lower than records. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

165) A physical inventory should be taken a) after every purchase of merchandise. b) after every sale. c) at or near the balance sheet date. d) only if a computer accounting system is used. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

166) Taking a physical inventory count involves all of the following EXCEPT a) counting the units on hand. b) applying unit costs to each item of inventory on hand. c) evaluating whether inventory needs to be written off as obsolete. d) totalling the cost of each item of inventory to determine the total cost of goods on hand. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Perform the steps in the accounting cycle for a merchandising company. Section Reference: Completing the Accounting Cycle CPA: Financial Reporting AACSB: Analytic

167) Which of the following expressions is INCORRECT? a) Gross profit – operating and non-operating expenses = profit. b) Sales – cost of goods sold – operating and non-operating expenses = profit. c) Profit + operating and non-operating expenses = gross profit. d) Operating expenses – cost of goods sold = gross profit. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic 168) Assuming the company uses the earnings approach for revenue recognition, the sales revenue section of an income statement for a retailer would not include a) sales returns and allowances. b) sales. c) net sales. d) cost of goods sold. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic 169) The operating expense section of an income statement for a wholesaler would NOT include a) office supplies expense. b) telephone expense. c) cost of goods sold. d) insurance expense.

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Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic 170) Profit from operations will result if a) the cost of goods sold exceeds operating expenses. b) revenues exceed cost of goods sold. c) revenues exceed operating expenses. d) gross profit exceeds operating expenses. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

171) Gross profit for a merchandising concern is net sales minus a) operating expenses. b) cost of goods sold. c) sales returns and allowances. d) cost of goods available for sale. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

172) Which of the following does NOT belong on a single-step income statement? a) net sales b) salaries expense

Test Bank for Accounting Principles, Ninth Canadian Edition

c) gross profit d) rent revenue Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

173) Gross profit does NOT appear a) on a multiple-step income statement. b) on a single-step income statement. c) to be relevant in analyzing the operation of a merchandising company. d) on the income statement if the periodic inventory system is used because it cannot be calculated. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

174) Which of the following is NOT a true statement about a multiple-step income statement? a) Operating expenses may be classified as selling and administrative expenses. b) There may be a section for non-operating activities. c) There may be a section for operating assets. d) There is a section for cost of goods sold. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic

175) Under IFRS, expenses must be classified on an income statement on the basis of

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Test Bank for Accounting Principles, Ninth Canadian Edition

a) size. b) importance. c) nature or function. d) usual or unusual expenses. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic 176) Franklin Ltd. has the following account balances: Sales $65,500, Cost of Goods Sold $23,000, Depreciation Expense $18,500, Sales Discounts $3,300, Interest Revenue $1,200, Utilities Expense $800, and Sales Returns and Allowances $1,800. How much would Franklin Ltd. report as net sales on the company’s multiple-step income statement? a) $70,600 b) $66,700 c) $61,600 d) $60,400 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic 177) Franklin Ltd. has the following account balances: Sales $65,500, Cost of Goods Sold $23,000, Depreciation Expense $18,500, Sales Discounts $3,300, Interest Revenue $1,200, Utilities Expense $800, and Sales Returns and Allowances $1,800. How much would Franklin Ltd. report as gross profit on the company’s multiple-step income statement? a) $42,500 b) $40,700 c) $37,400 d) $39,200 Answer: c Bloomcode: Application Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic 178) Franklin Ltd. has the following account balances: Sales $65,500, Cost of Goods Sold $23,000, Depreciation Expense $18,500, Sales Discounts $3,300, Interest Revenue $1,200, Utilities Expense $800, and Sales Returns and Allowances $1,800. How much would Franklin Ltd. report as profit from operations on the company’s multiple-step income statement? a) $19,300 b) $18,100 c) $24,400 d) $36,600 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic 179) Franklin Ltd. has the following account balances: Sales $65,500, Cost of Goods Sold $23,000, Depreciation Expense $18,500, Sales Discounts $3,300, Interest Revenue $1,200, Utilities Expense $800, and Sales Returns and Allowances $1,800. How much would Franklin Ltd. report as nonoperating activities on the company’s multiple-step income statement? a) $1,200 b) $18,500 c) $19,700 d) no non-operating activities to report Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic 180) Brooklyn Ltd. has the following account balances: Sales $110,500, Cost of Goods Sold $66,000, Interest Revenue $400, Depreciation Expense $22,000, Sales Discounts $4,200, Interest Expense $1,500, Utilities Expense $800, Rent Revenue $1,000, and Sales Returns and Allowances $2,400. How much would Brooklyn Ltd. report as the net non-operating activities amount on the company’s multiple-step income statement? a) net non-operating revenue $100 5-65

Test Bank for Accounting Principles, Ninth Canadian Edition

b) net non-operating expense $22,100 c) no net non-operating activities to report d) net non-operating expense $100 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements CPA: Financial Reporting AACSB: Analytic 181) A company shows the following balances: Sales .......................................................................................................... $1,500,000 Sales returns and allowances .................................................................. 375,000 Cost of goods sold .................................................................................... 850,000 Operating expenses .................................................................................. 125,000 What is the gross profit margin? (round to the nearest percentage) a) 43% b) 35% c) 10% d) 24% Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

182) A company shows the following balances: Sales .......................................................................................................... $1,500,000 Sales returns and allowances .................................................................. 375,000 Cost of goods sold .................................................................................... 850,000 Operating expenses .................................................................................. 125,000 What is the company’s profit margin? (round to the nearest percentage) a) 8% b) 10% c) 13% d) 55% Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 183) A company shows the following balances: Sales .......................................................................................................... $1,750,000 Sales returns and allowances .................................................................. 425,000 Sales discounts ......................................................................................... 80,000 Cost of goods sold .................................................................................... 750,000 Operating expenses .................................................................................. 125,000 What is the gross profit margin? (round to the nearest percentage) a) 57% b) 40% c) 37% d) 21% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

184) A company shows the following balances: Sales .......................................................................................................... $1,750,000 Sales returns and allowances .................................................................. 425,000 Sales discounts ......................................................................................... 80,000 Cost of goods sold .................................................................................... 750,000 Operating expenses .................................................................................. 125,000 What is the company’s profit margin? (round to the nearest percentage) a) 40% b) 50% c) 21% d) 30% Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin.

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Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 185) A company shows the following balances: Sales .......................................................................................................... Sales discounts ......................................................................................... Cost of goods sold .................................................................................... Operating expenses .................................................................................. What is the gross profit margin? (round to the nearest percentage) a) 37% b) 39% c) 34% d) 32%

$850,000 22,000 520,000 40,000

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

186) Assuming all other financial statement elements remain unchanged, the profit margin will improve when a) sales revenue increases. b) gross profit decreases. c) operating expenses increase. d) the cost of goods sold increases. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

187) Profit margin measures the extent by which selling price covers a) operating expenses. b) the cost of goods sold. c) all expenses.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) income taxes. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

188) If a company has net sales of $250,000 and cost of goods sold of $175,000, the gross profit margin is a) 70%. b) 30%. c) 15%. d) 100%. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

189) ABC Manufacturing has net sales of $150,000, cost of goods sold of $95,000, and operating expenses of $30,000. The profit margin rounded to the nearest percentage is a) 37%. b) 40%. c) 15%. d) 17%. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

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Test Bank for Accounting Principles, Ninth Canadian Edition

190) ABC Manufacturing has net sales of $150,000, cost of goods sold of $95,000, and operating expenses of $30,000. The gross profit margin rounded to the nearest percentage is a) 37%. b) 40%. c) 15%. d) 17%. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

191) A company shows the following balances: Sales .......................................................................................................... $1,000,000 Sales returns and allowances .................................................................. 250,000 Cost of goods sold .................................................................................... 600,000 Operating expenses .................................................................................. 75,000 What is the gross profit margin? a) 60% b) 80% c) 40% d) 20% Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

192) A company shows the following balances: Sales .......................................................................................................... $1,000,000 Sales returns and allowances .................................................................. 250,000 Cost of goods sold .................................................................................... 600,000 Operating expenses .................................................................................. 75,000 What is the company’s profit margin? a) 8% b) 10%

Test Bank for Accounting Principles, Ninth Canadian Edition

c) 15% d) 30% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

193) Assuming the company uses the earnings approach for revenue recognition, which of the following is not needed to calculate the gross profit margin? a) sales b) sales returns and allowances c) cost of goods sold d) operating expenses Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

194) Profit margin is calculated as a) profit ÷ sales revenue. b) profit ÷ net sales. c) gross profit ÷ sales revenue. d) gross profit ÷ cost of goods sold. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 195) In a profitable company, the gross profit margin will normally be ______ the profit margin.

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Test Bank for Accounting Principles, Ninth Canadian Edition

a) higher than b) lower than c) equal to d) The gross profit margin and the profit margin can never be the same. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 196) If sales have decreased in the past year and the cost of goods sold remains the same, this will create a) an increase in gross profit margin. b) an increase in profit margin. c) a decrease in gross profit margin. d) a decrease in cost of goods sold. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements CPA: Financial Reporting AACSB: Analytic 197) The Purchase Returns and Allowances account is classified as a) an asset account. b) a contra asset account. c) an expense account. d) a contra expense account. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic 198) The Purchase Discounts account is classified as a) an asset account. b) a contra asset account. c) an expense account. d) a contra expense account. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic 199) Which of the following accounts has a normal debit balance? a) Purchase Returns and Allowances b) Purchase Discounts c) Sales d) Sales Discounts Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

200) Using a periodic inventory system, the cost of freight in a) increases the cost of merchandise inventory. b) is debited to the Purchases account. c) is reflected in an expense account called Freight In. d) reflects the cost of delivering goods to customers. Answer: c Bloomcode: Knowledge Difficulty: Easy

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Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

201) Midgic Farm Store had a beginning merchandise inventory of $9,000. During the period, purchases were $35,000; purchase returns, $1,500; and freight in $3,000. A physical count of inventory at the end of the period revealed that $6,000 was still on hand. Using a periodic inventory system, the cost of goods sold was a) $ 44,000. b) $ 39,500. c) $ 45,500. d) $ 42,500. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

202) The calculation of net purchases includes all of the following EXCEPT a) freight in. b) delivery expense. c) purchases discounts. d) purchases returns. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

203) In a periodic inventory system, when the buyer pays for freight costs, this entails a) a debit to the Freight In account.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) a debit to the Purchases account. c) a debit to the Merchandise Inventory account. d) a debit to the Sales account. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic 204) In a periodic inventory system, the cost of goods sold is calculated as a) beginning inventory plus the cost of goods purchased less ending inventory. b) ending inventory less cost of goods purchased. c) beginning inventory less cost of goods purchased. d) cost of goods purchased plus ending inventory less beginning inventory. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic 205) Yatsu Limited has the following information in its accounting records as at December 31, 2024: Purchases.................................................................................................. $129,860 Freight in ................................................................................................... 4,500 Purchase returns and allowances............................................................ 12,550 Beginning inventory ................................................................................. 57,000 A physical inventory count revealed that there was $68,000 in ending inventory. Net purchases are a) $129,860. b) $134,360. c) $121,810. d) $117,310. Answer: d Bloomcode: Application

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Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

206) Yatsu Limited has the following information in its accounting records as at December 31, 2024: Purchases.................................................................................................. $129,860 Freight in ................................................................................................... 4,500 Purchase returns and allowances............................................................ 12,550 Beginning inventory ................................................................................. 57,000 A physical inventory count revealed that there was $68,000 in ending inventory. The cost of goods purchased is a) $ 129,860. b) $ 134,360. c) $ 121,810. d) $ 117,310. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

207) Yatsu Limited has the following information in its accounting records as at December 31, 2024: Purchases ................................................................................................ $129,860 Freight in ................................................................................................... 4,500 Purchase returns and allowances............................................................ 12,550 Beginning inventory ................................................................................. 57,000 A physical inventory count revealed that there was $68,000 in ending inventory. The cost of goods sold is a) $ 129,860. b) $ 134,360. c) $ 116,310. d) $ 110,810. Answer: d Bloomcode: Application

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

208) The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be Debit Credit a) Accounts Payable Purchase Returns and Allowances b) Purchases Returns and Allowances Accounts Payable c) Accounts Payable Merchandise Inventory d) Merchandise Inventory Accounts Payable Answer: a Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

209) Assuming the company uses the earnings approach for revenue recognition, under a periodic inventory system, the sale of merchandise on credit requires a debit to a) Merchandise Inventory. b) Sales. c) Accounts Receivable. d) Cash. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

210) Assuming the company uses the earnings approach for revenue recognition, under a periodic

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Test Bank for Accounting Principles, Ninth Canadian Edition

inventory system, the sale of merchandise on credit requires a credit to a) Merchandise Inventory. b) Sales. c) Accounts Receivable. d) Cash. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

211) Assuming the company uses the earnings approach for revenue recognition, under a periodic inventory system, the return of merchandise sold on credit requires a credit to a) Merchandise Inventory. b) Sales. c) Accounts Receivable. d) Cash. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

212) Assuming the company uses the earnings approach for revenue recognition, in a periodic system, the required entry(ies) to record the sale of merchandise for $1,000 on credit for goods costing the company $600 would be a) a debit to Cost of Goods Sold and credit to Merchandise Inventory for $600. b) a debit to Accounts Receivable and credit to Merchandise Inventory for $1,000. c) a debit to Accounts Receivable and credit to Sales for $1,000. d) both a) and c) Answer: c Bloomcode: Application

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

213) In a periodic system, if the accounting records show an opening inventory balance of $15,000 and a physical count shows a balance of $20,000, it is necessary to a) debit Income Summary and credit Merchandise Inventory for $15,000. b) debit Merchandise Inventory and credit Cost of Goods Sold for $5,000. c) debit Merchandise Inventory and credit Income Summary for $20,000. d) both a) and c) Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

214) Maddens Tools sold 10 units of merchandise inventory on account for $550 each, which cost $325 each. Maddens has a stated policy that any products may be returned within 20 days of the date of sale. Based on past experience, the company’s management estimates returns to be 10% of sales. Assuming the company uses a periodic inventory system and the earnings approach, which of the following journal entries would be recorded for the sale? a) Accounts Receivable..................................................................................... 5,500 Merchandise Inventory............................................................................. 5,500 b) Accounts Receivable .................................................................................... 3,250 Sales .......................................................................................................... 3,250 Purchases ..................................................................................................... 5,500 Cost of Goods Sold ................................................................................... 5,500 c) Accounts Receivable ..................................................................................... 5,500 Sales .......................................................................................................... 5,500 d) Accounts Receivable .................................................................................... 5,500 Sales .......................................................................................................... 5,500 Cost of Goods Sold ........................................................................................ 3,250 Merchandise Inventory............................................................................. 3,250

Answer: c

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Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic 215) Rolster Flower Centre had a beginning merchandise inventory of $13,500. During the period, purchases were $52,500; purchase returns, $2,250; and freight in, $4,500. A physical count of inventory at the end of the period revealed that $9,000 was still on hand. Using a periodic inventory system, the cost of goods sold was a) $ 54,750. b) $ 61,500. c) $ 50,550. d) $ 59,250. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic 216) Madison Electronics had a beginning merchandise inventory of $8,000. During the period, purchases were $35,000; purchase returns, $2,000; purchase discounts, $500, and delivery expense, $3,000. A physical count of inventory at the end of the period revealed that $12,000 was still on hand. Using a periodic inventory system, the cost of goods sold was a) $ 28,500. b) $ 31,000. c) $ 31,500. d) $ 34,250. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

217) On February 1, Bluenose Ltd. purchased merchandise for a total of $33,000 from Rednose Ltd. Supplies. The terms were 2/10, n/ 30, FOB destination. On November 10, Bluenose paid Rednose. Assuming Rednose uses a periodic inventory system and the earnings approach, which of the following journal entries would Rednose record for the receipt of payment? a) Cash .............................................................................................................. 32,340 Purchases ..................................................................................................... 660 Accounts Receivable .............................................................................. 33,000 b) Cash .............................................................................................................. 32,340 Sales Discounts............................................................................................. 660 Accounts Receivable .............................................................................. 33,000 c) Cash .............................................................................................................. 32,340 Purchase Discounts ....................................................................................... 660 Accounts Receivable .............................................................................. 33,000 d) Cash ............................................................................................................. 32,340 Merchandise Inventory ................................................................................ 660 Accounts Receivable .............................................................................. 33,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic 218) On September 1, Robinson Gift Store purchased merchandise on account costing $56,000 from One of a Kind Ltd. On September 10, Robinson Gift returned three defective units, which cost $300 each. One of a Kind issued Robinson Gift a credit for the merchandise. Assuming Robinson Gift uses a periodic inventory system, which of the following journal entries would be recorded for the return of merchandise purchased on account? a) Accounts Payable ......................................................................................... 900 Purchases ............................................................................................... 900 b) Accounts Payable ......................................................................................... 900 Merchandise Inventory .......................................................................... 900 c) Accounts Payable.......................................................................................... 900 Purchase Returns and Allowances ........................................................ 900 d) Accounts Payable ......................................................................................... 900 Cost of Goods Sold ................................................................................. 900 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using

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Test Bank for Accounting Principles, Ninth Canadian Edition

the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic 219) Maddens Tools sold 10 units of merchandise inventory on account for $550 each, which cost $325 each. Maddens has a stated policy that any products may be returned within 20 days of the date of sale. Based on past experience, the company’s management estimates returns to be 10% of sales. Assuming the company uses a perpetual inventory system and the contract-based approach, which of the following set of journal entries would be recorded for the sale? a) Accounts Receivable..................................................................................... 5,500 Merchandise Inventory .......................................................................... 5,500 Cost of Goods Sold ....................................................................................... 3,250 Sales .......................................................................................... 3,250 b) Accounts Receivable .................................................................................... 5,500 Refund Liability ...................................................................................... 550 Sales ............ .......................................................................................... 4,950 Estimated Inventory Returns ....................................................................... 325 Cost of Goods Sold ....................................................................................... 2,925 Merchandise Inventory .......................................................................... 3,250 c) Accounts Receivable ..................................................................................... 5,500 Sales .......................................................................................... 5,500 Cost of Goods Sold ........................................................................................ 3,250 Merchandise Inventory .......................................................................... 3,250 d) Accounts Receivable .................................................................................... 4,950 Refund Liability .......................................................................................... 550 Sales .......................................................................................... 5,500 Cost of Goods Sold ........................................................................................ 3,250 Estimated Inventory Returns ................................................................. 325 Merchandise Inventory .......................................................................... 2,925

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference Recording Sales of Merchandise –Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic 220) On August 1, Darcy’s Things purchased merchandise on account costing $28,000 from Electronics Supply Co. On August 7, Darcy’s returned five defective units, which cost $400 each. Electronics Supply refunded Darcy’s for the merchandise as they have a stated policy that any products may be returned within 15 days of the date of sale. Based on past experience, the company’s management

Test Bank for Accounting Principles, Ninth Canadian Edition

estimates returns to be 10% of sales. Assuming Electronics Supply uses a perpetual inventory system and the contract-based approach, which of the following journal entries would be recorded for the return of defective merchandise sold on account? a) Refund Liability ............................................................................................ 2,000 Accounts Receivable .............................................................................. 2,000 b) Merchandise Inventory ................................................................................ 2,000 Accounts Receivable .............................................................................. 2,000 c) Sales Returns and Allowances ..................................................................... 2,000 Refund Liability ...................................................................................... 2,000 d) Cost of Goods Sold ....................................................................................... 2,000 Accounts Receivable .............................................................................. 2,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference Recording Sales of Merchandise–Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic

221) On November 1, Mighty Wear purchased merchandise for a total of $16,500 from Ames Supplies. The merchandise cost Ames Supplies a total of $13,200. The terms were 2/10, n/ 30, FOB destination. Management estimates that based on past experience with Mighty Wear, it is probable it will pay within 10 days. Ames Supplies has a stated no returns policy. On November 10, Mighty Wear paid Ames Supplies. Assuming Ames Supplies uses a perpetual inventory system and the contract-based approach, which of the following journal entries would Ames Supplies record for the sale of the merchandise? a) Accounts Receivable..................................................................................... 16,500 Sales ....................................................................................................... 16,500 Cost of Goods Sold ....................................................................................... 13,200 Merchandise Inventory .......................................................................... 13,200 b) Accounts Receivable .................................................................................... 16,170 Sales Discounts............................................................................................. 330 Sales ....................................................................................................... 16,500 Cost of Goods Sold ....................................................................................... 13,200 Merchandise Inventory .......................................................................... 13,200 c) Accounts Receivable ..................................................................................... 16,170 Sales ....................................................................................................... 16,170 Cost of Goods Sold ....................................................................................... 13,200 Merchandise Inventory .......................................................................... 13,200 d) Accounts Receivable .................................................................................... 16,170 Merchandise Inventory ......................................................................... 16,170 Cost of Goods Sold ....................................................................................... 12,936

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Test Bank for Accounting Principles, Ninth Canadian Edition

Sales .......................................................................................................

12,936

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference Recording Sales of Merchandise–Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic 222) On November 1, Mighty Wear purchased merchandise for a total of $16,500 from Ames Supplies. The merchandise cost Ames Supplies a total of $13,200. The terms were 2/10, n/ 30, FOB destination. Management estimates that based on past experience with Mighty Wear, it is probable it will pay within 10 days. Ames Supplies has a stated no returns policy. On November 10, Mighty Wear paid Ames Supplies. Assuming Ames Supplies uses a perpetual inventory system and the contract-based approach, which of the following journal entries would Ames Supplies record for the receipt of payment? a) Cash .............................................................................................................. 16,500 Sales ....................................................................................................... 16,500 b) Cash .............................................................................................................. 16,170 Accounts Receivable .............................................................................. 16,170 c) Accounts Receivable ..................................................................................... 16,170 Cash ........................................................................................................ 16,170 d) Cash ............................................................................................................. 16,500 Accounts Receivable.............................................................................. 16,500 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference Recording Sales of Merchandise–Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic 223) On March 1, Peabody Tools sold $65,000 of merchandise at a cost of $52,000. The company has a stated policy that any products may be returned within 30 days of the date of sale. Based on past experience, Peabody’s management estimates returns to be 8% of sales. Assuming Peabody uses a perpetual inventory system and the contract-based approach, which of the following journal entries would be recorded at the end of the month if no returns were made within the return period? a) Refund Liability ............................................................................................ 5,200 Estimated Inventory Returns ................................................................. 5,200 Cost of Goods Sold ....................................................................................... 4,160

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts Receivable .............................................................................. b) Refund Liability ............................................................................................ Accounts Receivable .............................................................................. Estimated Inventory Returns ....................................................................... Cost of Goods Sold ................................................................................. c) Sales Returns and Allowances ..................................................................... Refund Liability ...................................................................................... Estimated Inventory Returns ....................................................................... Cost of Goods Sold ................................................................................. d) Refund Liability ........................................................................................... Sales ....................................................................................................... Cost of Goods Sold ....................................................................................... Estimated Inventory Returns .................................................................

5,200 4,160 5,200 4,160 5,200 4,160

4,160 5,200 4,160 5,200 4,160 5,200 4,160

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference Recording Sales of Merchandise–Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic 224) Assume that Trish Company uses the contract-based approach for revenue recognition and estimates returns of merchandise sold of 20%. Trish Company sells merchandise on account for $2,400 to Trash Company. Trash Company returns $800 (cost $500) of merchandise that was the wrong colour, along with a cheque to settle the account. What entry does Trish Company make upon receipt of the cheque and the returned merchandise? a) Cash .............................................................................................................. 1,600 Accounts Receivable .............................................................................. 1,600 b) Cash .............................................................................................................. 1,600 Refund Liability ............................................................................................. 800 Accounts Receivable .............................................................................. 2,400 c) Cash .............................................................................................................. 1,600 Refund Liability ............................................................................................. 800 Merchandise Inventory ................................................................................. 500 Accounts Receivable .............................................................................. 2,400 Estimated Inventory Returns ................................................................. 500 d) Cash .............................................................................................................. 2,400 Refund Liability ...................................................................................... 800 Accounts Receivable .............................................................................. 1,600 Answer: c Bloomcode: Application

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Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference: Recording Sales of Merchandise–Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic 225) Assume that Atom Electric and Neutron Inc. use the contract-based approach for revenue recognition and estimates returns of merchandise sold of 7%. Atom Electric returned to Neutron Inc. five damaged fuses that were sent to recycling. Neutron accepted the return and refunded the $200 Atom had paid for the order. To record this return, Neutron’s accountant must a) debit Cash and credit Sales for $200. b) debit Sales Returns and Allowances and credit Cash for $200. c) debit Refund Liability and credit Cash for $200. d) debit Sales Returns and Allowances and credit Accounts Receivable for $200. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference: Recording Sales of Merchandise –Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic 226) Assuming the company uses the contract-based approach for revenue recognition, if returned merchandise is not damaged and can be sold again, the seller must record two journal entries. What will the seller record to update inventory for the cost of the goods returned? a) debit Sales Returns and Allowances and credit Accounts Receivable b) debit Accounts Receivable and credit Sales c) debit Merchandise Inventory and credit Estimated Inventory Returns d) debit Merchandise Inventory and credit Accounts Receivable Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Reference Recording Sales of Merchandise–Contract-Based Approach (Appendix 5B) CPA: Financial Reporting AACSB: Analytic 227) Stratton Inc. uses the contract-based approach to revenue recognition. The company offers a 2% sales discount to Murphy Ltd. and reduced sales by the full 2% at the point of sale. Murphy did not

Test Bank for Accounting Principles, Ninth Canadian Edition

take advantage of the discount when it paid Stratton for the balance owing. When recording the collection on account, Stratton will a) credit Sales for the amount of the discount. b) debit Sales Discounts for the amount of the discount. c) debit Sales for the amount of the discount. d) debit Accounts Receivable for the amount of the discount. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare entries for sales under a perpetual inventory system using the contractbased approach Section Recording Sales with Sales Discounts CPA: Financial Reporting AACSB: Analytic

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Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 228. Match the items below by entering the appropriate code letter in the space provided. (Some answers may be used more than once.) A. B. C. D. E. F.

Net sales Subsidiary account Purchase discount Periodic inventory system FOB destination FOB shipping point

G. H. I. J. K.

Delivery expense Cost of goods purchased Cost of goods sold Perpetual inventory system Gross profit margin

___

1. Debits to Merchandise Inventory

___

2. A discount gained through early payment

___

3. The Merchandise Inventory account balance should equal ending inventory, at all times

___

4. Separate account maintained for each different product

___

5. Freight terms that require the seller to pay the freight cost

___

6. Sales less sales returns and allowances and sales discounts

___

7. Freight cost to deliver goods to customers reported as an operating expense

___

8. Freight terms that require the buyer to pay the freight cost

___

9. Deducted from net sales to calculate gross profit

___ 10. Requires a physical count of goods on hand to calculate cost of goods sold ___ 11. A calculation of gross profit divided by net sales

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 1.

H

2.

C

3.

J

4.

B

5.

E

6.

A

7.

G

8.

F

9.

I

10. D 11. K Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare entries for purchases under a perpetual inventory system. Section Reference: Recording Purchases of Merchandise Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach Section Reference: Recording Sales of Merchandise Learning Objective: Prepare single-step and multiple-step income statements. Section Reference: Merchandising Financial Statements Learning Objective: Calculate the gross profit margin and profit margin. Section Reference: Using the Information in the Financial Statements Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold. Section Reference: Periodic Inventory System (Appendix 5A) CPA: Financial Reporting AACSB: Analytic

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Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 6 INVENTORY COSTING CHAPTER STUDY OBJECTIVES 1. Describe the steps in determining inventory quantities. The steps in determining inventory quantities are (1) taking a physical inventory of goods on hand, and (2) determining the ownership of goods in transit, on consignment, and in similar situations. 2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination. Costs are allocated to the Cost of Goods Sold account each time a sale occurs in a perpetual inventory system. The cost is determined by specific identification or by one of two cost formulas: FIFO (first-in, first-out) and weighted average. Specific identification is used for goods that are not ordinarily interchangeable. This method tracks the actual physical flow of goods, allocating the exact cost of each merchandise item to cost of goods sold and ending inventory. The FIFO cost formula assumes a first-in, first-out cost flow for sales. Cost of goods sold consists of the cost of the earliest goods purchased. Ending inventory is determined by allocating the cost of the most recent purchases to the units on hand. The weighted average cost formula is used for goods that are homogeneous or non-distinguishable. Under weighted average, a new weighted (moving) average unit cost is calculated after each purchase and applied to the number of units sold. Inventory is updated by subtracting cost of goods sold for each sale from the previous ending inventory balance. 3. Explain the financial statement effects of inventory cost determination methods. Specific identification results in the best match of costs and revenues on the income statement. When prices are rising, weighted average results in a higher cost of goods sold and lower profit than FIFO. Weighted average results in a better match on the income statement because it results in an expense amount made up of more current costs. On the balance sheet, FIFO results in an ending inventory that is closest to the current (replacement) value and the best balance sheet valuation. All three methods result in the same cash flow. 4. Determine the financial statement effects of inventory errors. An error in beginning inventory will have a reverse effect on profit in the current year (e.g., an overstatement of beginning inventory results in an overstatement of cost of goods sold and an understatement of profit). An error in the cost of goods purchased will have a reverse effect on profit (e.g., an overstatement of purchases results in an overstatement of cost of goods sold and an understatement of profit). An error in ending inventory will have a similar effect on profit (e.g., an overstatement of ending inventory results in an understatement of cost of goods sold and an overstatement of profit). If ending inventory errors are

Test Bank for Accounting Principles, Ninth Canadian Edition

not corrected in the following period, their effect on profit for the second period is reversed and total profit for the two years will be correct. On the balance sheet, ending inventory errors will have the same effects on total assets and total owner’s equity, and no effect on liabilities. 5. Value inventory at the lower of cost and net realizable value. The cost of the ending inventory is compared with its net realizable value. If the net realizable value is lower, a writedown is recorded, which results in an increase in cost of goods sold, and a reduction in inventory. The writedown is reversed if the net realizable value of the inventory increases, but the value of the inventory can never be higher than its original cost. 6. Demonstrate the presentation and analysis of inventory. Ending inventory is reported as a current asset on the balance sheet at the lower of cost and net realizable value. Cost of goods sold is reported as an expense on the income statement. Additional disclosures include the cost determination method. The inventory turnover ratio is a measure of liquidity. It is calculated by dividing the cost of goods sold by average inventory. It can be converted to days sales in inventory by dividing 365 days by the inventory turnover ratio. 7. Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A). Under the FIFO cost formula, the cost of the most recent goods purchased is allocated to ending inventory. The cost of the earliest goods on hand is allocated to cost of goods sold. Under the weighted average cost formula, the total cost available for sale is divided by the total units available to calculate a weighted average unit cost. The weighted average unit cost is applied to the number of units on hand at the end of the period to determine ending inventory. Cost of goods sold is calculated by subtracting ending inventory from the cost of goods available for sale. The main difference between applying cost formulas in a periodic inventory system and applying cost formulas in a perpetual inventory system is the timing of the calculations. In a periodic inventory system, the cost formula is applied at the end of the period. In a perpetual inventory system, the cost formula is applied at the date of each sale to determine the cost of goods sold. 8. Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B). Two methods of estimating inventories are the gross profit method and the retail inventory method. Under the gross profit method, the gross profit margin is applied to net sales to determine the estimated cost of goods sold. The estimated cost of goods sold is subtracted from the cost of goods available for sale to determine the estimated cost of the ending inventory. Under the retail inventory method, a cost-to-retail ratio is calculated by dividing the cost of goods available for sale by the retail value of the goods available for sale. This ratio is then applied to the ending inventory at retail to determine the estimated cost of the ending inventory.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 Woodland Printers uses the perpetual inventory system. On September 30, 2024, the company’s year end, a physical count was taken of the inventory on hand. The cost of the inventory on hand was determined to be $325,400. However, the accountant has questions about the following items: 1. On the store shelves, the staff counted seven paintings held by Woodland on consignment from a local artist. The paintings are included on the inventory count at a cost of $4,200. 2. On September 30, a shipment of goods was sent to a customer, FOB destination. The cost of the goods shipped is $7,800, and freight, which is to be paid by Woodland, will cost $200. These items are not included in the inventory count. Delivery is expected to take three days. 3. On October 2, a freight company delivered goods that cost $10,000 to Woodland’s warehouse. The goods had been shipped by the vendor on September 29, FOB shipping point. Freight on this shipment will amount to $500 and will be paid by the appropriate party. The goods are not included on the inventory count. 4. On September 30, a loyal customer visited Woodland’s retail shop and asked that certain items be set aside for him. The goods set aside have a cost of $1,300. The customer intends to let Woodland know no later than October 2 whether or not he wishes to finalize the sale and have the goods shipped to his home. The freight will cost $50 and will be paid by Woodland. The salesperson was fairly sure the customer will take the items, and so Woodland prepared the sales invoice on September 30. The items are not included on the inventory count. 5. Residing in Woodland’s warehouse is merchandise costing $5,000 that was purchased in September and found to be defective. Woodland’s purchasing manager has arranged with the vendor to accept return of the goods and has packaged them for return shipment. The vendor processed a credit to Woodland’s account on September 28, and has arranged to have the goods picked up on October 1. The items are included on the inventory count. Instructions Calculate the correct inventory balance at September 30, 2024. For each of the above items, explain the basis of your treatment of the item. Solution 1 (15 min.) List $325,400

Unadjusted inventory balance

1.

(4,200)

The goods on consignment do not belong to Woodland.

2.

7,800

Because they were sent FOB destination, the goods belong to Woodland until delivered.

3.

10,500

The goods are the responsibility of Woodland from the shipping point. Include freight-in in the merchandise inventory cost.

4.

1,300

Because the sale is not final, the goods belong to Woodland, not the customer.

Test Bank for Accounting Principles, Ninth Canadian Edition

5.

(5,000) ___________ $335,800

Because the vendor has approved the return and processed the credit, these goods should not be included in Woodland’s inventory. Adjusted inventory balance

Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities. Section Reference: Determining Inventory Quantities CPA: Financial Reporting AACSB: Analytic Exercise 2 Stockholm Furniture Sales uses the periodic inventory system. On April 30, 2024, the company’s year end, a physical count was taken of the inventory on hand in both the warehouse and the retail store area for the purpose of determining cost of goods sold and ending inventory value. The preliminary inventory list prepared by the warehouse manager shows a total inventory on hand of $738,000. The following are items that the warehouse manager noted on a separate sheet. None of these items are currently part of the final inventory listing because the manager was not sure how they should be treated for inventory purposes. 1. On April 30, Stockholm shipped an order to a customer, FOB shipping point. The cost of the goods shipped is $9,650. Freight, which is to be paid by the appropriate party, will cost $375. 2. On April 30, a customer visited Stockholm’s shop and selected a desk that they wanted to purchase and paid for it in full. The sales price of the desk was $3,500, and the cost was $2,200. The customer intends to send a truck to pick up the desk no later than May 2. The freight will cost $50 and will be paid by the customer. A “Sold” sign has been placed on the desk but it is still on display in the store. 3. Residing in Stockholm’s warehouse is furniture costing $21,000 that was purchased in April and needs to be returned. The goods were specially ordered for a customer who has since decided not to buy them after all. Stockholm’s supplier has agreed to accept return of the goods and will allow a full credit on Stockholm’s account as soon as they are received. A freight company is scheduled to pick up the merchandise on the morning of May 1, and so they have been set aside near the loading dock. 4. Stockholm sells some of its merchandise in smaller towns by placing samples on consignment with local hardware stores. The manager noted that 15 desks at a cost of $1,200 each and 30 chairs at $75 each are currently out on consignment. 5. On May 2, a freight company delivered goods that cost $65,000 to Stockholm’s warehouse. The goods had been shipped by the vendor on April 29, FOB destination. Freight on this shipment will amount to $400 and will be paid by the appropriate party. Instructions Calculate the correct inventory balance at April 30, 2024. For each of the above items, explain the basis of your treatment of the item. Solution 2 (15 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

List

$738,000

Unadjusted inventory balance

1.

0

Because the sale is FOB shipping point, the customer has already taken title at April 30. The freight is the customer’s responsibility.

2.

0

The sale was completed on April 30, so the desk does not belong to Stockholm and should not be included in their inventory.

3.

21,000

The goods are in Stockholm’s possession, and at this point they have not yet received a credit from the vendor, so the goods should be included in inventory.

4.

20,250

The goods belong to Stockholm even though they are not in their possession. Total cost is ($1,200 x 15) + ($75 x 30) = $20,250

5.

0 ___________ $779,250

Because the goods are shipped FOB destination, Stockholm does not receive title until they arrive. The vendor is responsible for the freight. Adjusted inventory balance

Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities. Section Reference: Determining Inventory Quantities CPA: Financial Reporting AACSB: Analytic Exercise 3 Fyodorov Company, using a periodic inventory system, has just completed a physical inventory count at year end, December 31, 2024. Only the items on the shelves, in storage, and in the receiving area were counted. The inventory amounted to $60,000. During the audit, the independent CPA discovered the following additional information: 1. There were goods in transit on December 31, 2024, from a supplier with terms FOB destination, costing $8,000. Because the goods had not arrived, they were excluded from the physical inventory count. 2. On December 27, 2024, a regular customer purchased goods for cash amounting to $1,000 and left them for pickup on January 4, 2025. Fyodorov Company had paid $500 for the goods and, because they were on hand, included them in the physical inventory count. 3. Fyodorov Company, on the date of the inventory count, received notice from a supplier that goods ordered earlier, at a cost of $4,000, had been delivered to the transportation company on December 28, 2024; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2024, it was excluded from the physical inventory. 4. On December 31, 2024, there were goods in transit to customers, with terms FOB shipping point, amounting to $800 (expected delivery on January 8, 2025). Because the goods had been shipped, they were excluded from the physical inventory count.

Test Bank for Accounting Principles, Ninth Canadian Edition

5.

6.

On December 31, 2024, Fyodorov Company shipped $2,500 worth of goods to a customer, FOB destination, in Thunder Bay. The goods arrived in Thunder Bay on January 5, 2025. Because the goods were not on hand, they were not included in the physical inventory count. Fyodorov Company, as the consignee, had goods on consignment that cost $8,000. Because these goods were on hand at December 31, 2024, they were included in the physical inventory count.

Instructions Analyze the above information for Fyodorov Company and calculate the correct amount for the ending inventory. Explain the basis for your treatment of each item. Solution 3 (20 min.) List: $60,000

Unadjusted inventory balance

1.

0

2.

– 500

Goods should be excluded. The customer owns them.

3.

+ 4,000

Goods belong to Fyodorov. Title passed when supplier delivered the goods to the transportation company.

4.

0

5.

+ 2,500

Goods were shipped FOB destination. Fyodorov retains title until the customer receives them.

6.

– 8,000

These goods are owned by the consignor, not the consignee, and should not be included in Fyodorov's inventory.

_________ $58,000

Because the goods were shipped FOB destination, the title will pass to Fyodorov upon arrival. Properly excluded.

Because the goods were shipped FOB shipping point, Fyodorov no longer has title to these goods. Properly excluded.

Corrected inventory balance

Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities. Section Reference: Determining Inventory Quantities CPA: Financial Reporting AACSB: Analytic Exercise 4 Dark Force Coffee is a sole proprietorship owned by Han Vader. The company is in its second year of operations and only has one coffee blend available in one size. Han does not have any background in accounting and would like your expertise to determine the individual and total impact of the following items on the ending inventory balance for the company’s December 31, 2024, year end. 1. Han keeps all inventory in his basement, which he claims has a total cost of $40,000 (500 units).

Test Bank for Accounting Principles, Ninth Canadian Edition

2. 3.

Of this amount, 50 units costing $3,000 spilled and could not be salvaged or sold. Han has 80 units with a cost of $5,500 loaded in a delivery van ready to be shipped to customers. The terms of these sales are FOB destination. Han has decided to try and sell goods on consignment for the first time. At year end, Han has shipped out 100 units on consignment for a total cost of $7,750. These goods have not yet been sold by the consignee at year end and Han has not received any proceeds.

Solution 4 (10 min.) 1. The damaged goods (50 units) costing $3,000 should not be included in the ending inventory balance. This leaves 450 units with a cost of $37,000 to be included in ending inventory. 2.

The terms FOB destination implies that title to the goods remain with Dark Force until the goods have reached the destination and delivery is complete. All 80 units costing $5,500 should be included in ending inventory.

3.

Legal title to the goods on consignment remains with Dark Force until ultimate sale to the end consumer since the consignee is only acting as an agent to facilitate the sale. As a result, the 100 units costing $7,750 should be included in ending inventory.

Total impact on the December 31, 2024, ending inventory = 450 + 80 + 100 = 630 units; $37,000 + $5,500 + $7,750 = $50,250 Bloomcode: Analysis Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities. Section Reference: Determining Inventory Quantities CPA: Financial Reporting AACSB: Analytic Exercise 5 Mana Company uses the perpetual inventory system and the weighted average cost formula. The following information is available for the month of June: Date Explanation Units Unit Cost June 1 Beginning Inventory 200 $10 15 Purchase 300 11 17 Sale 250 ? 24 Purchase 400 12 Instructions Prepare a schedule to show cost of goods sold and the value of the ending inventory for the month of June. Solution 5 (10 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

Date June 1 15 17 24

Units

Purchases Cost Total

300

$11

Cost of goods sold Units Cost Total

$3,300 250

400 700

Cost of Goods Sold: Ending Inventory:

12

4,800 $8,100

250

$10.60

$2,650

Inventory balance Units Cost Total 200 $10.00 $2,000 500 10.60 5,300 250 10.60 2,650 650 11.46 7,450

$2,650

$2,650 $7,450

Check: Beginning Inventory + Purchases − Cost of Goods Sold = Ending Inventory: $2,000 + $8,100 – $2,650 = $7,450 Bloomcode: Application Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination. Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting AACSB: Analytic Exercise 6 Gabbins Company uses the perpetual inventory system and the FIFO cost formula. Purchases Sales Units Unit Cost Units Selling Price/Unit Mar. 1 Beginning inventory 100 $50 3 Purchase 60 $60 4 Sales 70 $100 10 Purchase 200 $70 16 Sales 80 $110 19 Sales 80 $110 25 Sales 50 $110 30 Purchase 40 $75 Instructions a) Using the inventory and sales data above, calculate the value assigned to cost of goods sold in March and to the ending inventory at March 31. b) Prepare the journal entries to record the sales on March 4 and March 19. All sales are made on credit. Solution 6 (20 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

a) Date Mar. 1

Units

3

60

Purchases Cost Total $60

$3,600

4 10

200

70

19 25 40 300 Ending Inventory: Cost of Goods Sold:

70

$50

30 50 10 70 50

50 60 60 70 70

$3,500

14,000

16

30

Cost of goods sold Units Cost Total

75

4,500 5,500 3,500

3,000 $20,600

280

Inventory balance Units Cost Total 100 $50 $5,000 100 50 60 60 8,600 30 50 60 60 5,100 30 50 60 60 200 70 19,100 10 60 200 70 14,600 130 80 80 40

70 70 70 75

9,100 5,600 8,600

$17,000

$8,600 $17,000

Check: Beginning Inventory + Purchases − Cost of Goods Sold = Ending Inventory: $5,000 + $20,600 − $17,000 = $8,600 b) Mar.

Mar.

4

19

Accounts Receivable .................................................................... Sales (70 x $100) ...................................................................

7,000

Cost of Goods Sold....................................................................... Merchandise Inventory (70 x $50)........................................

3,500

Accounts Receivable .................................................................... Sales (80 x $110) ...................................................................

8,800

Cost of Goods Sold....................................................................... Merchandise Inventory [(10 x $60) + (70 x $70)] ..................

5,500

7,000

3,500 8,800

5,500

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination. Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic Exercise 7 Willets Coffee Equipment sells European style coffee makers and uses a perpetual inventory system. Its inventory records show that on June 1, Joe Coffee had 12 units on hand at a cost of $220 each. Transactions related to the purchase and sale of coffee makers in June were as follows: Per unit Date Transaction Units Cost Sales price June 10 Sale 3 $510 15 Sale 4 $510 20 Purchase 5 $230 22 Purchase 6 $240 30 Sale 10 $500 Instructions For each of the following cost formulas, calculate the ending inventory at June 30 and the cost of goods sold for the month of June. Prove the cost of goods sold calculations. a) FIFO b) Weighted average (Round to the nearest cent) Solution 7 (25 min.) a) FIFO Purchases Cost of goods sold Inventory balance Date Units Cost Total Units Cost Total Units Cost Total June 1 12 $220 $2,640 10 3 $220 $660 9 220 1,980 15 4 220 880 5 220 1,100 20 5 $230 $1,150 5 220 5 230 2,250 22 6 240 1,440 5 220 5 230 6 240 3,690 30

5 5 $2,590

220 230

1,100 1,150 $3,790

6

240

1,440

Check: $2,640 + $2,590 − $3,790 = $1,440 b)

Weighted Average

Date Units

Purchases Cost Total

Units

Cost of goods sold Cost Total

Units

Inventory balance Cost Total

Test Bank for Accounting Principles, Ninth Canadian Edition

June 1 10 15 20 22 30

5 6

$230 240

3 4

$220 220

$660 880

10

230.63

2,306.30 $3,846.30

1,150 1,440 $2,590

12 9 5 10 16 6

$220 220 220 225 230.63 230.62

$2,640 1,980 1,100 2,250 3,690 1,383.70

Check: $2,640 + $2,590 − $3,846.30 = $1,383.70 Bloomcode: Application Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination. Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting AACSB: Analytic Exercise 8 In July, Brilliant Jewellers Company purchased the following items: Date # Rings Cost per ring Purchased July 2 1 $15,000 5 2 9,250 10 1 750 19 3 12,500 20 4 945 On July 22, one ring from the July 2 purchase was sold for $19,500 and two rings from the July 20 purchase were sold for $1,520 each. All sales and purchases are made on credit.

Instructions a) Calculate ending inventory and cost of goods sold using specific identification. b) Prepare the journal entry to record the July 22 sale. Solution 8 a) Specific Identification

Date July 2

Purchases Cost of goods sold Units Cost Total Units Cost Total 1 $15,000 $15,000

Units 1

Inventory balance Cost $15,000

Total $15,000

Test Bank for Accounting Principles, Ninth Canadian Edition

5 10

2

9,250

18,500

1 2 1 2 1 1 2 1 3 1 2 1 3 4 2 1 3 2 8

15,000 9,250 15,000 9,250 750 15,000 9,250 750 12,500 15,000 9,250 750 12,500 945 9,250 750 12,500 945

1

750

750

Accounts Receivable .................................................................... Sales [($19,500 + ($1,520 x 2)] ..............................................

22,540

Cost of Goods Sold....................................................................... Merchandise Inventory [($15,000 + ($945 x 2)]....................

16,890

3

12,500

37,500

19 4

945

3,780

20

1 2

22 11

$75,530

3

15,000 945

15,000 1,890

$16,890

33,500

34,250

71,750

75,530

58,640 $58,640

Cost of Goods Sold = $16,890 Ending Inventory = $58,640 Check: $75,530 − $16,890 = $58,640 b) July

22

22,540

16,890

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination. Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting AACSB: Analytic Exercise 9 Fly Company uses a perpetual inventory system. Beginning inventory is 2,500 T-shirts at a cost $2.50 per shirt. During the year Fly had the following inventory transactions: Jan.

12

Purchased

500 units @ $2.15 per unit

Test Bank for Accounting Principles, Ninth Canadian Edition

Feb. July Aug. Dec.

18 1 29 19

Sold Purchased Sold Purchased

1,350 units @ $6.50 per unit 1,000 units @ $2.65 per unit 1,475 units @ $7.50 per unit 500 units @ $3.05 per unit

All purchases and sales are on account.

Instructions a)

Calculate the cost of goods sold and ending inventory using weighted average. Round per unit amounts to two decimal places.

b) Prepare journal entries to record the February 18 and the August 29 sales. All sales and purchases are made in cash. Round amounts to the nearest dollar.

Solution 9 a) Weighted Average

Date Jan. 1 Jan. 12 Feb. 18 July 1 Aug. 29 Dec. 19 Total

Units

Purchases Cost

500

$2.15

$1,075

1,000

2.65

2,650

500 2,000

3.05

Total

1,525 $5,250

Cost of goods sold Units Cost Total

1,350

$2.44

$3,294