Financial Accounting IFRS, 3rd Edition solution manual

Financial Accounting IFRS, 3rd Edition

BY Weygandt, Kimmel, Kieso

CHAPTER 1 ACCOUNTING IN ACTION CHAPTER LEARNING OBJECTIVES 1. Explain what accounting is. Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. 2. Identify the users and uses of accounting. The major users and uses of accounting are as follows: (a) Management uses accounting information to plan, organize, and run the business. (b) Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, labor unions, and economic planners. 3. Understand why ethics is a fundamental business concept. Ethics are the standards of conduct by which actions are judged as right or wrong. Effective financial reporting depends on sound ethical behavior. 4. Explain accounting standards and the measurement principles. Accounting is based on standards, such as International Financial Reporting Standards (IFRS). IFRS generally uses one of two measurement principles, the historical cost principle or the fair value principle. Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation. 5. Explain the monetary unit assumption and the economic entity assumption. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption requires that the activities of each economic entity be kept separate from the activities of its owners and other economic entities. 6. State the accounting equation, and define its components. The basic accounting equation is: Assets = Liabilities + Equity Assets are resources a business owns. Liabilities are creditors' claims on total assets. Equity is the ownership claim on total assets. The expanded accounting equation is: Assets = Liabilities + Share Capital—Ordinary + Revenues – Expenses – Dividends Share capital—ordinary is affected when the company issues new ordinary shares in exchange for cash. Revenues are increases in assets resulting from income−earning activities. Expenses are the costs of assets consumed or services used in the process of earning revenue. Dividends are payments the company makes to its shareholders.

1-2

Test Bank for Financial Accounting: IFRS Edition, 3e

7. 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 increases, there must be a corresponding (1) decrease in another asset, or (2) increase in a specific liability, or (3) increase in equity. 8. Understand the five financial statements and how they are prepared. An income statement presents the revenues and expenses, and resulting net income or loss, for a specific period of time. A retained earnings statement summarizes the changes in retained earnings for a specific period of time. A statement of financial position reports the assets, liabilities, and equity at a specific date. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. A comprehensive income statement presents other comprehensive income items that are not included in the determination of net income. a

9. Explain the career opportunities in accounting. Accounting offers many different jobs in fields such as public and private accounting, government, and forensic accounting. Accounting is a popular major because there are many different types of jobs, with unlimited potential for career advancement.

TRUE-FALSE STATEMENTS 1.

Owners of business firms are the only people who need accounting information. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

2.

Transactions that can be measured in dollars and cents are recorded in the financial information system. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

3.

The hiring of a new company president is an economic event recorded by the financial information system. Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

4.

Management of a business enterprise is the major external user of information. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

5.

Accounting communicates financial information about a business enterprise to both internal and external users. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

6.

Accounting information is used only by external users with a financial interest in a business enterprise. Ans: F LO2 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

7.

Financial statements are the major means of communicating accounting information to interested parties. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

8.

Bookkeeping and accounting are one and the same because the bookkeeping function includes the accounting process. Ans: F LO2 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

9.

The origins of accounting are attributed to Luca Pacioli, a famous mathematician. For Instructor Use Only

Accounting in Action

1-3

Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

10.

The State Administration of Taxation in the People's Republic of China is an example of an internal user of accounting information. Ans: F LO2 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

11.

The German Confederation of Trade Unions is an example of an external user of accounting information. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

12.

Accountants rely on a fundamental business concept—ethical behavior—in reporting financial information. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

13.

The primary accounting standard-setting body in the United States is the International Accounting Standards Board. Ans: F LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

14.

The Financial Accounting Standards Board is a part of the International Accounting Standards Board. Ans: F LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

15.

The two primary accounting standard-setting bodies are the International Accounting Standards Board and the Financial Accounting Standards Board. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

16.

Most companies in the United States follow standards issued by the IASB. Ans: F LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

17.

International Financial Reporting Standards are determined by the IASB. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

18.

The process of reducing the differences between Generally Accepted Accounting Principles and International Financial Reporting Standards is known as convergence. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

19.

IFRS follows one measurement principle known as the historical cost principle. Ans: F LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

20.

Even though a partnership is not a separate legal entity, for accounting purposes the partnership affairs should be kept separate from the personal activities of the owners. Ans: T LO5 BT: C Difficulty; Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

21.

The economic entity assumption requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities. Ans: T LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

22.

The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records. Ans: T LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

23.

In order to possess future service potential, an asset must have physical substance. For Instructor Use Only

1-4

Test Bank for Financial Accounting: IFRS Edition, 3e Ans: F LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 24.

1-5

Owners' claims to total business assets take precedence over the claims of creditors because owners invest assets in the business and are liable for losses. Ans: F LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

25.

The basic accounting equation states that Assets = Liabilities. Ans: F LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

26.

Share capital is the total amount paid in by shareholders for shares purchased. Ans: T LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

27.

The principal source of equity is amounts paid in by shareholders. Ans: F LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

28.

Expenses are increases in equity that result from operating the business. Ans: F LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

29.

The two components of equity are retained earnings and share capital. Ans: T LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

30.

The purchase of an asset on account increases assets and decreases equity. Ans: F LO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

31.

Providing services for cash increases assets and equity. Ans: T LO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

32.

Accountants record both internal and external transactions. Ans: T LO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

33.

Internal transactions do not affect the basic accounting equation because they are economic events that occur entirely within one company. Ans: F LO7 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

34.

The purchase of store equipment for cash reduces the equity by an equal amount. Ans: F LO7 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

35.

The purchase of office equipment on credit increases total assets and total liabilities. Ans: T LO7 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

36.

The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company during a period. Ans: T LO8 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

37.

Net income for the period is determined by subtracting total expenses and dividends from total revenues. Ans: F LO8

38.

BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

The ending retained earnings balance is reported on the statement of financial position. Ans: T LO8 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

39.

The statement of financial position is also known as the balance sheet. Ans: T LO8

40

BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Compared to IFRS, GAAP tend to be simpler and less detailed. Ans: F LO8 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1-6 41.

Test Bank for Financial Accounting: IFRS Edition, 3e Foreign companies whose shares are traded on U.S. stock markets must use GAAP. Ans: F LO8

a

42.

BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

The study of accounting is not useful for a business career unless your career objective is to become an accountant. Ans: F LO9 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

a

43.

Expressing an opinion as to the fairness of the information presented in financial statements is a service performed by CAs and CPAs. Ans: T LO9 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Additional True-False Questions 44.

Identifying is the process of keeping a chronological diary of events measured in dollars and cents. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

45.

Management consulting includes examining the financial statements of companies and expressing an opinion as to the fairness of their presentation. Ans: F LO2 BT: K Difficulty; Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

46.

Accountants do not have to worry about issues of ethics. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting

47.

The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar. Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

48.

The basic accounting equation is in balance when the creditor and ownership claims against the business equal the assets. Ans: T LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

49.

External transactions involve economic events between the company and some other enterprise or party. Ans: T LO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

50.

In the retained earnings statement, revenues are listed first, followed by expenses, and net income (or net loss). Ans: F LO8 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Answers to True-False Statements Item

1. 2. 3. 4. 5. 6. 7. 8.

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

F T F F T F T F

9. 10. 11. 12. 13. 14. 15. 16.

T F T T F F T F

17. 18. 19. 20. 21. 22. 23. 24.

T T F T T T F F

25. 26. 27. 28. 29. 30. 31. 32.

F T F F T F T T

33. 34. 35. 36. 37. 38. 39. 40.

F F T T F T T F

41. 42. 43. 44. 45. 46. 47. 48.

F F T F F F F T

49. 50.

T F

For Instructor Use Only

Accounting in Action

1-7

MULTIPLE CHOICE QUESTIONS 51.

Accountants refer to an economic event as a a. purchase. b. sale. c. transaction. d. change in ownership. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

52.

The accounting process includes each of the following except a. communication. b. convergence. c. identification. d. recording. Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

53.

Communication of economic events is the part of the accounting process that involves a. identifying economic events. b. quantifying transactions into dollars and cents. c. preparing accounting reports. d. recording and classifying information. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

54.

Which of the following events cannot be quantified into dollars and cents and recorded as an accounting transaction? a. The appointment of a new accounting firm to perform an audit. b. The purchase of a new computer. c. The sale of store equipment. d. Payment of income taxes. Ans: a LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

55.

Recording of economic events involves a. keeping a systematic, chronological diary of events. b. analyzing reported information. c. explaining the meaning of reported data. d. preparing accounting reports. Ans: a LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

56.

The accounting process involves all of the following except a. identifying economic events that are relevant to the business. b. communicating financial information to users by preparing financial reports. c. recording non−quantifiable economic events. d. analyzing and interpreting financial reports. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1-8 57.

Test Bank for Financial Accounting: IFRS Edition, 3e The accounting process is correctly sequenced as a. identification, communication, recording. b. recording, communication, identification. c. identification, recording, communication. d. communication, recording, identification. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

58.

Which of the following techniques is not used by accountants to interpret and report financial information? a. Graphs. b. Special memos for each class of external users. c. Charts. d. Ratios. Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

59.

Bookkeeping primarily involves which of the following parts of the accounting process? a. Identification. b. Communication. c. Recording. d. Analysis. Ans: c LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

60.

Which of the following would not be considered an external user of accounting data for the GHI Company? a. Taxing authority representative. b. Management. c. Creditors. d. Customers. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

61.

Which of the following would not be considered internal users of accounting data for a company? a. The president of a company. b. The controller of a company. c. Creditors of a company. d. Salesmen of a company. Ans: c LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

62.

Which of the following is an external user of accounting information? a. Labor unions. b. Finance directors. c. Company officers. d. Managers. Ans: a LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 63.

1-9

Which one of the following is not an external user of accounting information? a. Regulatory agencies. b. Customers. c. Investors. d. All of these answer choices are correct. Ans: d LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

64.

Which of the following would not be considered an internal user of accounting data for GHI Company? a. President of the company. b. Production manager. c. Merchandise inventory clerk. d. President of the employees' labor union. Ans: d LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

65.

Internal users of accounting information include all of following except the a. CEO of Sony. b. Human Resources department at Hyundai. c. Marketing department at Braun. d. Shareholders of Airbus. Ans: d LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

66.

Internal users of accounting information include a. the shareholders of Royal Dutch Shell. b. the State Administration of Taxation of China. c. the Chief Financial officer of Credit Suisse. d. the International Accounting Standards Board. Ans: c LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

67.

External users of accounting information include all of following except a. the shareholders of Air Italy. b. the management of Pirelli. c. a potential customers of Olivetti. d. All of these answer choices are correct. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

68.

External users of accounting information include the a. lnternational Accounting Standards Board. b. shareholders of Ferragamo. c. Marketing department at Olivetti. d. CEO of Air Italy. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

69.

The origins of accounting are generally attributed to the work of a. Christopher Columbus. b. Abner Doubleday. c. Luca Pacioli. d. Leonardo da Vinci. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 10 70.

Test Bank for Financial Accounting: IFRS Edition, 3e Financial accounting provides economic and financial information for each of the following except a. creditors. b. investors. c. managers. d. other external users. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

71.

The final step in solving an ethical dilemma is to a. identify and analyze the principal elements in the situation. b. recognize an ethical situation. c. identify the alternatives and weigh the impact of each alternative on stakeholders. d. recognize the ethical issues involved. Ans: c LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

72.

The first step in solving an ethical dilemma is to a. identify and analyze the principal elements in the situation. b. identify the alternatives. c. recognize an ethical situation and the ethical issues involved. d. weigh the impact of each alternative on various stakeholders. Ans: c LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting

73.

Ethics are the standards of conduct by which one's actions are judged as a. right or wrong. b. honest or dishonest. c. fair or unfair. d. All of these answer choices are correct. Ans: d LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting

74.

The historical cost principle requires that companies record assets at their a. appraisal value. b. cost. c. market price. d. list price. Ans: b LO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

75.

IFRS are determined by the a. Internal Accounting Standards Body. b. International Accounting Studies Board. c. International Accounting Standards Board. d. International Auditors' Standards Body. Ans: c LO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

76.

GAAP stands for a. Generally Accepted Auditing Procedures. b. Generally Accepted Accounting Principles. c. Generally Accepted Auditing Principles. d. Generally Accepted Accounting Procedures. Ans: b LO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 77.

1 - 11

The Duce Company has five plants nationwide that cost $300 million. The current fair value of the plants is $500 million. The plants will be recorded and reported as assets at a. $300 million. b. $800 million. c. $200 million. d. $500 million. Ans: a LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

78.

Convergence refers to a. using the same accounting principles from one period to the next. b. use of the same accounting principles by all companies. c. the elimination of all accounting standard-setting bodies except the International Accounting Standards Board. d. the process of reducing the differences between IFRS and GAAP. Ans: d LO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

79.

The body that has the power to prescribe the accounting practices and standards used by most US companies is the a. FASB. b. IASB. c. GAAP. d. IFRS. Ans: a LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

80.

The fair value principle a. is one of the two costing principles followed by the IASB. b. is more useful than the historical cost principle for valuing some assets. c. dictates that an asset should be valued at the price at which it could be sold. d. All of these answer choices are correct. Ans: d LO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

81.

Most assets should be valued at cost because fair values a. are not useful for decision-making. b. may not be representationally faithful. c. are not relevant. d. may be higher or lower than historical cost. Ans: b LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

82.

Harrod's Inc. purchased land for ₤50,000 in 2007. At December 31, 2017, an appraisal determined the fair value of the land is ₤65,000. If Harrod's follows the historical cost principle, in the 2017 financial statements, the land will be reported at a. ₤50,000 on the statement of financial position. b. ₤65,000 on the statement of financial position. c. ₤50,000 on the income statement. d. ₤65,000 on the income statement. Ans: a LO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 12 83.

Test Bank for Financial Accounting: IFRS Edition, 3e Hyundai Inc. purchased land for W118,000,000 in 2005. At December 31, 2014, an appraisal determined the fair value of the land is W136,000,0000. If Hyundai follows the cost principle, the land will be reported on the statement of financial position at a. W100,000,000. b. W118,000,000. c. W136,000,000. d. W154,000,000. Ans: b LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

84.

Bumi Corporation purchased an investment in the ordinary shares of another corporation for Rp250,000,000 in 2015. The shares are actively traded on the Indonesian Stock Exchange. The fair value of the investment at December 31, 2017 is Rp268,000,000. If the company follows the fair value principle, the investment will be reported in the 2014 financial statement at a. Rp250,000,000 on the statement of financial position. b. Rp268,000,000 on the statement of financial position. c. Rp250,000,000 on the retained earnings statement. d. Rp268,000,000 on the retained earnings statement. Ans: b LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

85.

Asian Company purchased land for W92,000,000 in 2000. At December 31, 2017, an appraisal determined the fair value of the land is W106,000,000. The company has an investment in the ordinary shares of another company for which it paid W49,000,000 in 2015. The shares are actively traded on the South Korea Stock Exchange. The fair value of the investment at December 31, 2017 is W63,000,000. The land and investment will be reported on the December 31, 2017 statement of financial position at a. W92,000,000 and W49,000,000, respectively. b. W92,000,000 and W63,000,000, respectively. c. W106,000,000 and W49,000,000, respectively. d. W106,000,000 and W63,000,000, respectively. Ans: b LO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

86.

The proprietorship form of business organization a. must have at least three owners in most states. b. requires that the owner be personally liable for all debts of the business. 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. Ans: b LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

87.

The economic entity assumption requires that the activities a. of different entities can be combined if all the entities are corporations. b. must be reported to the Securities and Exchange Commission. c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners. d. of an entity be kept separate from the activities of its owner. Ans: d LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 88.

1 - 13

A business organized as a corporation a. is not a separate legal entity in most countries. 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. Ans: c LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

89.

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. Ans: b LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

90.

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 Ans: c LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

91.

A small neighborhood barber shop that is operated by its owner would likely be organized as a a. joint venture. b. partnership. c. corporation. d. proprietorship. Ans: d LO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

92.

John and Sam 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. joint venture. b. partnership. c. corporation. d. proprietorship. Ans: b LO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

93.

Which of the following is true regarding the corporate form of business organization? a. Corporations are the most prevalent form of business organization. b. Corporate businesses are generally smaller in size than partnerships and proprietorships. c. The revenues of corporations are greater than the combined revenues of partnerships and proprietorships. d. Corporations are separate legal entities organized exclusively under federal law. Ans: c LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 14 94.

Test Bank for Financial Accounting: IFRS Edition, 3e A basic assumption of accounting that requires activities of an entity be kept separate from the activities of its owner is referred to as the a. stand alone concept. b. monetary unit assumption. c. corporate form of ownership. d. economic entity assumption. Ans: d LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

95.

The assumption that enables accounting to quantify (measure) economic events is the a. economic entity assumption. b. cost principle. c. historical cost principle. d. monetary unit assumption. Ans: d LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

96.

A business whose owners enjoy limited liability is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship. Ans: c LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

97.

The common characteristic possessed by all assets is a. long life. b. great monetary value. c. tangible nature. d. future economic benefit. Ans: d LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

98.

Equity is best depicted by the following: a. Assets = Liabilities. b. Liabilities + Assets. c. Residual equity + Assets. d. Assets – Liabilities. Ans: d LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

99.

The basic accounting equation may be expressed as a. Assets − Equity = Liabilities. b. Assets – Liabilities = Equity. c. Assets = Liabilities + Equity. d. All of these answer choices are correct. Ans: d LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

100.

Liabilities a. are future economic benefits. b. are existing debts and obligations. c. possess service potential. d. are things of value used by the business in its operation. Ans: b LO6 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 101.

1 - 15

Liabilities of a company would not include a. notes payable. b. accounts payable. c. wages payable. d. cash. Ans: d LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

102.

Liabilities of a company are owed to a. debtors. b. benefactors. c. creditors. d. underwriters. Ans: c LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

103.

Equity can be described as a. creditorship claim on total assets. b. ownership claim on total assets. c. benefactor's claim on total assets. d. debtor claim on total assets. Ans: b LO6 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

104.

Equity is often referred to as a. residual equity. b. leftovers. c. spoils. d. second equity. Ans: a LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

105.

When assets are distributed to the shareholders of a corporation, these distributions are termed a. depletions. b. consumptions. c. dividends. d. a credit line. Ans: c LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

106.

A dividend is a. a distribution of the company's earnings to its shareholders. b. equal to liabilities minus equity. c. equal to assets minus equity. d. equal to revenues less expenses. Ans: a LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

107.

Revenues would not result from a. sale of merchandise. b. issuance of ordinary shares. c. performance of services. d. rental of property. Ans: b LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 16 108.

Test Bank for Financial Accounting: IFRS Edition, 3e Sources of increases to equity are a. issuance of shares. b. purchases of merchandise. c. dividends. d. expenses. Ans: a LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

109.

The basic accounting equation cannot be restated as a. Assets – Liabilities = Equity. b. Assets – Equity = Liabilities. c. Equity + Liabilities = Assets. d. Assets + Liabilities = Equity. Ans: d LO6 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

110.

Equity is decreased by all of the following except a. issuance of shares. b. dividends. c. expenses. d. net losses. Ans: a LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

111.

If total liabilities increased by ¥45,000 and equity increased by ¥10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥55,000 decrease b. ¥55,000 increase c. ¥35,000 increase d. ¥35,000 decrease Ans: b LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

112.

If total liabilities decreased by ¥45,000 and equity increased by ¥10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥55,000 increase b. ¥35,000 decrease c. ¥35,000 increase d. ¥45,000 decrease Ans: b LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

113.

If total liabilities decreased by ¥35,000 and equity increased by ¥5,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥30,000 decrease b. ¥30,000 increase c. ¥35,000 increase d. ¥40,000 increase Ans: a LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 114.

1 - 17

If total liabilities decreased by ¥45,000 and equity decreased by ¥10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥55,000 increase b. ¥35,000 increase c. ¥55,000 decrease d. ¥35,000 decrease Ans: c LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

115.

If total liabilities increased by ¥31,000 during a period of time and equity decreased by ¥9,000 during the same period, then the amount and direction of the period’s change in total assets is a(n) a. ¥31,000 increase. b. ¥40,000 increase. c. ¥22,000 decrease. d. ¥22,000 increase. Ans: d LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

116.

The equity section of a statement of financial position has two components: a. share capital and liablities. b. assets and liablities. c. share capital and retained earnings. d. share capital and assets. Ans: c LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

117.

A company increases its share capital by a. selling ordinary shares to its investors. b. performing services for cash. c. selling goods on account. d. paying dividends to its shareholders. Ans: a LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

118.

The retained earnings section of the statement of financial position is determined by a. assets,liabilities and share capital. b. revenues, expenses and share capital. c. share capital, dividends and residual equity. d. revenues, expenses and dividends. Ans: d LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

119.

All of the following transactions increase revenue except the a. sale of additional ordinary shares by British Airways. b. sale of clothing by the French Connection. c. performance of acccounting services by PricewaterhouseCoopers. d. sale of pertroleum by Royal Dutch Shell. Ans: a LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 18 120.

Test Bank for Financial Accounting: IFRS Edition, 3e As of December 31, 2017, Dolce & Gabanna Inc. had assets of €9,500,000, share capital of €3,500,000 and retained earnings of €4,000,000. Total liabilities as of that date are a. €0. b. €2,000,000. c. €6,000,000. d. €5,500,000. Ans: b LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

121.

On its December 31, 2017 statement of financial position, Adaro Corporation reported liabilities of Rp7,698,000,000, share capital of Rp3,993,000,000 and retained earnings of Rp6,303,000,000. Total assets as of December 31, 2017 are a. Rp14,001,000,000. b. Rp11,691,000,000. c. Rp10,296,000,000. d. Rp17,994,000,000. Ans: d LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

122.

As of December 31, 2017, Oxford-Welsh Inc. had assets of ₤9,780,000, liabilities of ₤2,970,000, and share capital of ₤4,230,000. Retained earnings as of that date are a. ₤2,580,000. b. ₤5,550,000. c. ₤6,810,000. d. ₤7,200,000. Ans: a LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

123.

As of December 31, 2017, Thames Company reported assets of ₤8,640,000, liabilities of ₤2,560,000 and retained earnings of ₤4,420,000. Share capital reported on the December 31, 2017 statement of financial position is a. ₤1,660,000. b. ₤1,860,000. c. ₤6,980,000. d. ₤6,080,000. Ans: a LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

124.

As of December 31, 2017, Deitrich Inc. had assets of €17,400,000, liabilities of €6,200,000, share capital of ₤4,400,000 and retained earnings of €6,800,000. Total equity as of that date is a. €4,400,000. b. €3,750,000. c. €11,200,000. d. €4,400,000. Ans: c LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

125.

As of December 31, 2017, Lojas Company reported assets of R$9,250,000, liabilities of R$2,750,000, share capital of R$2,475,000 and retained earnings of R$4,025,000. Total equity reported on the statement of financial position as of that date is a. R$1,550,000. b. R$6,500 000. c. R$4,025 000. d. R$2,475.000. Ans: b LO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 126.

1 - 19

On January 11, 2017, Britannica Corporation sold ordinary shares to investors for ₤6,550,000. This transaction will increase assets and a. decrease liabilities by ₤6,550,000. b. decrease equity by ₤6,550,000. c. increase revenues by ₤6,550,000. d. increase equity by ₤6,550,000. Ans: d LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

127.

Burgundy Inc. purchased supplies on account for €26,000. This transaction will a. increase liabilities and decrease equity by €26,000. b. increase assets and decrease equity by €26,000. c. increase assets and increase liabilities by €26,000. d. have no effect on the accounting equation. Ans: c LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

128.

Sao Paulo Company performed services on account for R$160,000. This transaction will a. increase assets and liabilities by R$160,000. b. increase assets and equity by R$160,000. c. increase liabilities and equity by R$160,000. d. have no effect on the accounting equation. Ans: b LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

129.

Bennoit Corporation paid dividends totaling €295,000 to its shareholders. This transaction will decrease assets and a. decrease equity by €295,000. b. decrease liabilities by €295,000. c. increase expenses by €295,000. d. have no effect on the accounting equation. Ans: a LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

130.

Gafisa Inc. performed services for R$390,000. The company collected R$130,000 in cash. The balance will be collected in 30 days. Performing services for R$390,000 will increase a. assets by R$130,000 and equity by R$260,000. b. assets by R$130,000, liablities by R$260,000 and equity by R$390,000. c. liabilites and equity by R$390,000. d. assets and equity by R$390,000. Ans: d LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

131.

On June 6, Wing Wah Inc. purchased supplies on account for HK$80,000. On June 30, the company paid half of the balance due. The June 30 payment will a. decrease Cash and increase Supplies Expense by HK$ 80,000. b. increase Cash and decrease Accounts Receivable by HK$40,000. c. decrease Cash and decrease Accounts Payable by HK$40,000. d. decrease Supplies and increase Supplies Expense by HK$40,000. Ans: c LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 20 132.

Test Bank for Financial Accounting: IFRS Edition, 3e On November 4, Vivo Company performed services on account for R$295,000. On November 26, the company collected the balance due. The November 26 transaction will increase a. Cash and Accounts Payable by R$295,000. b. Accounts Receivable and Service Revenue by R$295,000 c. Cash and decrease Accounts Receivable by R$295,000 d. Service Revenue and decrease Accounts Receivable by R$295,000. Ans: c LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

133.

Freirs Company paid the monthly rent of €6,000. This transaction will a. increase Cash and decrease Rent Expense by €6,000. b. decrease Cash and decrease Rent Expense by €6,000. c. decrease Cash and increase Rent Expense by €6,000. d. have no effect on the accounting equation. Ans: c LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

134.

Vita Corporation performed services on account for €22,000. This transaction will a. increase Cash and increase Service Revenue by €22,000. b. increase Accounts Receivable and increase Service Revenue by €22,000. c. decrease Accounts Payable and increase Cash by €22,000. d. increase Cash and decrease Accounts Receivable by €22,000. Ans: b LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

135.

On February 1, Potter Company paid £900 for advertisements to run during the month of February. This transaction will a. decrease Cash and increase Advertising Expense by £900. b. increase Advertising Expense and increase Accounts Payable by £900. c. decrease Accounts Payable and decrease Cash by £900. d. decrease Cash and decrease Advertising Expense by £900. Ans: a LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

136.

McDonagal Inc. sold ordinary shares for £2,200,000. This transaction will increase a. Cash and increase Retained Earnings by £2,200,000. b. Cash and increase Share Capital by £2,200,000. c. Service Revenue and increase Share Capital by £2,200,000. d. Service Revenue and increase Cash by £2,200,000. Ans: b LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

137.

An investment of cash by an owner of a business increases assets and a. increases liabilities. b. increases equity. c. decreases equity. d. decreases liabilities. Ans: b LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 138.

1 - 21

The purchase of supplies on account increases assets and a. also decreases assets so there is no net change. b. increases liabilities. c. decreases equity. d. increases equity.

Ans: b LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

139.

A payment on account decreases a. assets and equity. b. liabilities and equity. c. assets and liabilities. d. assets, liabilities and equity. Ans: c LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

140.

The accounting equation for Gudgeyes Enterprises is as follows: Assets Liabilities $280,000 = $120,000 +

Equity $160,000

If Gudgeyes purchases office equipment on account for $12,000, the accounting equation will change to Assets Liabilities Equity a. $280,000 = $120,000 + $160,000 b. $304,000 = $120,000 + $184,000 c. $304,000 = $152,000 + $152,000 d. $304,000 = $144,000 + $160,000 Ans: d LO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

141.

As of June 30, 2017, Dallas Company has assets of $210,000 and equity of $15,000. What are the liabilities for Dallas Company as of June 30, 2017? a. $225,000 b. $180,000 c. $195,000 d. $210,000 Ans: c LO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

142.

Equity is increased by a. dividends. b. revenues. c. expenses. d. liabilities. Ans: b LO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

143.

Equity is decreased by a. assets. b. revenues. c. expenses. d. liabilities. Ans: c LO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 22 144.

Test Bank for Financial Accounting: IFRS Edition, 3e If total liabilities increased by $6,000, then a. assets must have decreased by $6,000. b. equity must have increased by $6,000. c. assets must have increased by $6,000, or equity must have decreased by $6,000. d. assets and equity each increased by $3,000. Ans: c LO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

145.

Collection of a $500 accounts receivable a. increases an asset $500; decreases an asset $500. b. increases an asset $500; decreases a liability $500. c. decreases a liability $500; increases equity $500. d. decreases an asset $500; decreases a liability $500. Ans: a LO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

146.

Revenues are a. the cost of assets consumed during the period. b. gross increases in equity resulting from business activities. c. the cost of services used during the period. d. actual or expected cash outflows. Ans: b LO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

147.

If an individual asset is increased, then a. there must be an equal decrease in a specific liability. b. there must be an equal decrease in equity. c. there must be an equal decrease in another asset. d. None of these answer choices are correct. Ans: c LO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

148.

If services are rendered for credit, then a. assets will decrease. b. liabilities will increase. c. equity will increase. d. liabilities will decrease. Ans: c LO7 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

149.

If expenses are paid in cash, then a. assets will increase. b. liabilities will decrease. c. equity will increase. d. assets will decrease. Ans: d LO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

150.

If a corporation distributes cash to its shareholders, then a. there has been a violation of accounting principles. b. equity will increase. c. equity will decrease. d. there will be a new liability showing the shareholders owe money to the business. Ans: c LO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 151.

1 - 23

As of December 31, 2017, Sievers Company has assets of ₤180,000 and equity of ₤80,000. What are the liabilities for Sievers Company as of December 31, 2017? a. ₤100,000. b. ₤40,000. c. ₤60,000. d. ₤80,000. Ans: a LO7 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

152.

Which of the following events is not a business transaction? a. Issuance of shares in exchange for cash b. Hired employees c. Incurred utility expenses for the month d. Earned revenue for services provided Ans: b LO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

153.

Net income results when a. Assets > Liabilities. b. Revenues = Expenses. c. Revenues > Expenses. d. Revenues < Expenses. Ans: c LO8 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

154.

Retained earnings at the end of the period is equal to a. retained earnings at the beginning of the period plus net income minus liabilities. b. retained earnings at the beginning of the period plus net income minus dividends. c. net income. d. assets plus liabilities. Ans: b LO8 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

155.

A statement of financial position shows a. revenues, liabilities, and equity. b. expenses, dividends and equity. c. revenues, expenses, and dividends. d. assets, liabilities, and equity. Ans: d LO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

156.

An income statement a. summarizes the changes in equity for a specific period of time. b. reports the changes in assets, liabilities, and equity over a period of time. c. reports the assets, liabilities, and equity at a specific date. d. presents the revenues and expenses for a specific period of time. Ans: d LO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

157.

If the retained earnings account increases from the beginning of the year to the end of the year, then a. net income is less than dividends. b. net loss is less than dividends. c. the company must have sold shares. d. net income is greater than dividends. Ans: d LO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 24

Test Bank for Financial Accounting: IFRS Edition, 3e

Use the following information for questions 158–160. Carla’s Computer Repair Shop started the year with total assets of $720,000 and total liabilities of $480,000. During the year, the business recorded $1,200,000 in computer repair revenues, $680,000 in expenses, and the company paid dividends of $120,000. 158.

Equity at the end of the year was a. $640,000. b. $600,000. c. $760,000. d. $520,000. Ans: a LO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

159.

The net income reported by Carla's Computer Repair Shop for the year was a. $400,000. b. $520,000. c. $240,000. d. $1,080,000. Ans: b LO8 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

160.

Total equity changed by what amount from the beginning of the year to the end of the year? a. $120,000. b. $520,000. c. $240,000. d. $400,000. Ans: d LO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

161.

The statement of financial position is frequently referred to as a. an operating statement. b. the balance sheet. c. the statement of cash flows. d. the statement of changes in equity. Ans: b LO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

162.

The primary purpose of the statement of cash flows is to report a. a company's investing transactions. b. a company's financing transactions. c. information about cash receipts and cash payments of a company. d. the net increase or decrease in cash. Ans: c LO8 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

163.

All of the financial statements are for a period of time except the a. income statement. b. retained earnings statement. c. statement of financial position. d. statement of cash flows. Ans: c LO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 164.

1 - 25

The ending retained earnings amount is shown on a. the statement of financial position only. b. the retained earnings statement only. c. both the income statement and the retained earnings statement. d. both the statement of financial position and the retained earnings statement. Ans: d LO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

165.

Benito Company began the year with equity of €630,000. During the year, the company recorded revenues of €900,000, expenses of €684,000, and paid dividends of €72,000. What was Benito’s equity at the end of the year? a. €918,000. b. €774,000. c. €1,458,000. d. €846,000. Ans: b LO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

166.

Carter Company issued ordinary shares to Sam Carter in exchange for his investment of £80,000 cash in the business. The company recorded revenues of £740,000, expenses of £640,000, and paid dividends of £40,000. What was Carter's net income for the year? a. £60,000. b. £140,000. c. £100,000. d. £180,000. Ans: c LO8 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

167.

Marilu Company began the year with equity of $225,000. During the year, Marilu issued additional ordinary shares in exchange for cash of $315,000, recorded expenses of $900,000, and paid dividends of $60,000. If Marilu’s ending equity was $690,000, what was the company’s revenue for the year? a. $1,050,000. b. $1,110,000. c. $1,365,000. d. $1,425,000. Ans: b LO8 BT: AP Difficulty: Medium TOT: 2.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

168.

Nguyen Company began the year with equity of $651,000. During the year, Nguyen issued ordinary shares for $882,000, recorded expenses of $2,520,000, and paid dividends of $168,000. If Nguyen’s ending equity was $1,593,000, what was the company’s revenue for the year? a. $2,580,000. b. $2,748,000. c. $3,462,000. d. $3,630,000. Ans: b LO8 BT: AP Difficulty: Medium TOT: 2.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 26

Test Bank for Financial Accounting: IFRS Edition, 3e

Use the following information for questions 169–170. Saira’s Service Shop started the year with total assets of $300,000 and total liabilities of $240,000. During the year, the business recorded $630,000 in revenues, $330,000 in expenses, and paid dividends of $60,000. 169.

Equity at the end of the year was a. $360,000. b. $300,000. c. $240,000. d. $270,000. Ans: b LO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

170.

The net income reported by Saira’s Service Shop for the year was a. $240,000. b. $300,000. c. $180,000. d. $570,000. Ans: b LO8 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Use the following information for questions 171–172. Metzger Company compiled the following financial information as of December 31, 2017: Revenues Retained earnings (1/1/17) Equipment Expenses Cash Dividends Supplies Accounts payable Accounts receivable Share capital-ordinary 171.

€420,000 210,000 240,000 375,000 105,000 30,000 15,000 60,000 45,000 195,000

Metzger’s assets on December 31, 2017 are a. €825,000. b. €630,000. c. €360,000. d €405,000. Ans: d LO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

172.

Metzger’s equity on December 31, 2017 is a. €330,000. b. €300,000. c. €420,000. d. €375,000. Ans: c LO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 173.

1 - 27

Copper Company’s equity at the beginning of August 2017 was $900,000. During the month, the company earned net income of $180,000 and paid dividends of $60,000. At the end of August 2017, what is the amount of equity? a. $780,000 b. $900,000 c. $1,020,000 d. $1,140,000 Ans: c LO8 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

174.

On January 1, 2017, Affleck Company reported equity of $705,000. During the year, the company paid dividends of $30,000. At December 31, 2017, the amount of equity was $780,000. What amount of net income or net loss would the company report for 2017? a. Net income of $75,000 b. Net loss of $105,000 c. Net income of $45,000 d. Net income of $105,000 Ans: d LO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Use the following information for questions 175–177. Stahl Consulting started the year with total assets of €200,000 and total liabilities of €50,000. During the year, the business recorded €160,000 in catering revenues and €80,000 in expenses. Stahl issued ordinary shares of €30,000 and paid dividends of €50,000 during the year. 175.

The equity at the end of the year was a. €210,000. b. €180,000. c. €80,000. d. €20,000. Ans: a LO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

176.

The net income reported by Stahl Consulting for the year was a. €160,000. b. €110,000. c. €80,000. d. €30,000. Ans: c LO8 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

177.

Equity changed by what amount from the beginning of the year to the end of the year? a. €150,000 b. €140,000 c. €60,000 d. €30,000 Ans: c LO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 28 178.

Test Bank for Financial Accounting: IFRS Edition, 3e During the year 2017, Diego Company earned revenues of $180,000, had expenses of $100,000, purchased assets with a cost of $20,000 and paid dividends of $12,000. Net income for the year is a. $180,000. b. $80,000. c. $68,000. d. $60,000. Ans: b LO8 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

179.

At October 1, Smithson Enterprises reported equity of $280,000. During October, no capital shares were issued and the company earned net income of $32,000. If equity at October 31 totals $256,000, what amount of dividends were paid during the month? a. $0 b. $8,000 c. $24,000 d. $56,000 Ans: d LO8 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

180.

At October 1, Smithson Enterprises reported equity of $280,000. During October, no capital shares were issued and the company posted a net loss of $24,000. If equity at October 31 totals $256,000, what amount of dividends were paid during the month? a. $0 b. $8,000 c. $24,000 d. $84,000 Ans: a LO8 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

181.

At October 1, Smithson Enterprises reported equity of $280,000. During October, capital shares of $16,000 were issued and the company earned net income of $48,000. If equity at October 31 totals $320,000, what amount of dividends were paid during the month? a. $0 b. $24,000 c. $32,000 d. $40,000 Ans: b LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

182.

At October 1, Smithson Enterprises reported equity of $280,000. During October, capital shares of $40,000 were issued and the company posted a net loss of $24,000. If equity at October 31 totals $280,000, what amount of dividends were paid during the month? a. $0 b. $16,000 c. $24,000 d. $40,000 Ans: b LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 183.

1 - 29

During October, Mica Inc. sold ordinary shares for €800,000, earned revenue of €88,000, incurred expenses of €48,000, and paid dividends of €4,000. Net income for the month is a. €36,000. b. €40,000. c. €836,000. d. €840,000. Ans: b LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

184.

During January, Bruni Corporation earned revenue of €135,000, incurred expenses of €66,000, and paid dividends of €9,000. The income statement will report net income for the month of a. €60,000. b. €69,000. c. €78,000. d. €135,000. Ans: b LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

185.

During June, Sing Tao Inc. sold ordinary shares for HK$22,900,000, earned revenue of HK$4,040,000, incurred expenses of HK$2,060,000, and paid dividends of HK$60,000. Net income for June is a. HK$1,980,000. b. HK$1,920,000. c. HK$24,820,000. d. HK$26,940,000. Ans: a LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

186.

During May, Brunhilde Company earned revenue of €318,000, incurred expenses of €204,000, of which €144,000 were on account, and paid dividends of €48,000. Net income (loss) for the month is a. (€60,000). b. €66,000. c. €114,000. d. €174,000. Ans: c LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

187.

During 2017, Li & Fung Corporation earned revenue of HK$12,300,000, incurred expenses of expenses of HK$9,260,000, and paid dividends of HK$840,000. Net income for 2017 is a. HK$2,200,000. b. HK$3,040,000. c. HK$11,460,000. d. HK$12,300,000. Ans: b LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 30 188.

Test Bank for Financial Accounting: IFRS Edition, 3e During March, Bindi Company earned revenue of €540,000 on account of which €356,000 had been collected by the end of the month. The company incurred expenses of €312,000. The company paid all of its expenses in cash as well as paying dividends of €92,000. Net income (loss) for the month is a. (€48,000). b. €44,000. c. €136,000. d. €228,000. Ans: d LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

189.

Mica Inc. began operations in October, 2017. During October, Mica sold ordinary shares for €800,000, earned revenue of €88,000, incurred expenses of €48,000, and paid dividends of €4,000. Retained earnings at the end the month is a. €36,000. b. €40,000. c. €836,000. d. €840,000. Ans: a LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

190.

Mica Inc. began operations in October, 2017. During October, Mica sold ordinary shares for €800,000, earned revenue of €88,000, incurred expenses of €48,000, and paid dividends of €4,000. Equity at the end of the month is a. €36,000. b. €40,000. c. €836,000. d. €840,000. Ans: c LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

191.

Bruni Corporation began operations on January 1, 2017. During January, Bruni earned revenue of €135,000, incurred expenses of €66,000, and paid dividends of €9,000. Retained earnings at the end the month is a. €60,000. b. €69,000. c. €78,000. d. €135,000. Ans: a LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

192.

Sing Tao Inc. began operations on June 2, 2017. During June, Sing Tao sold ordinary shares for HK$22,900,000, earned revenue of HK$4,040,000, incurred expenses of HK$2,060,000, and paid dividends of HK$60,000. Retained earnings at June 30, 2017 a. HK$1,920,000. b. HK$1,980,000. c. HK$24,820,000. d. HK$26,941,000. Ans: a LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 193.

1 - 31

Sing Tao inc. began operations on June 2, 2017. During June, Sing Tao sold ordinary shares for HK$22,900,000, earned revenue of HK$4,040,000, incurred expenses of HK$2,060,000, and paid dividends of HK$60,000. Equity at the end of June is a. HK$1,920,000. b. HK$1,980,000. c. HK$24,820,000. d. HK$26,941,000. Ans: c LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

194.

Nigiri Inc. began operations on October 1, 2017. During October, Nigiri sold ordinary shares for ¥660,000,000, earned net income of ¥96,000,000, and paid dividends of ¥2,967,000. Retained earnings at the end of October is a. ¥756,000,000. b. ¥753,033,000. c. ¥96,000,000. d. ¥93,033,000. Ans: d LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

195.

Nigiri Inc. began operations on October 1, 2017. During October, Nigiri sold ordinary shares for ¥660,000,000, earned net income of ¥96,000,000, and paid dividends of ¥2,967,000. Equity at the end of October is a. ¥756,000,000. b. ¥753,033,000. c. ¥96,000,000. d. ¥93,033,000. Ans: b LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

196.

Le Bateau Company began operations on March 1, 2017. During March, Le Bateau sold ordinary shares for €9,000,000 and incurred a net loss of €1,220,000. Equity at the end of March is a. (€1,220,000). b. €7,780,000. c. €10,220,000. d. cannot be determined from the information given. Ans: b LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

197.

During July, its first period of operations, Aju Inc. sold ordinary shares for W1,440,000,000, earned net income of W195,000,000, and paid dividends of W40,500,000. Retained earnings at the end of July is a. W1,635,000,000. b. W1,594,500,000. c. W1,399,500,000. d. W154,500,000. Ans: d LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 32 198.

Test Bank for Financial Accounting: IFRS Edition, 3e During July, its first period of operations, Aju Inc. sold ordinary shares for W1,060,000,000, earned net income of W130,000,000, and paid dividends of W27,000,000. Equity at the end of July is a. W1,190,000,000. b. W1,163,000,000. c. W1,033,000,000. d. W103,000,000. Ans: b LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Use the following information for questions 199–203 O' Hara Company began operations on December 1, 2017. Presented below is selected information related to O' Hara Company at December 31, 2017. Equipment Cash Service Revenue Rent Expense Accounts Payable Share Capital-ordinary 199.

₤160,000 56,000 432,000 52,000 64,000 112,000

Utilities Expense Accounts Receivable Salaries and Wages Expense Notes Payable Dividends

₤ 24,000 108,000 188,000 40,000 60,000

At December 31, 2017, assets total a. £216,000. b. £280,000. c. £324,000. d. £388,000. Ans: c LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

200.

At December 31, 2017, liabilities total a. £64,000. b. £104,000. c. £148,000. d. £164,000. Ans: b LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

201.

Net income for the month of December is a. £108,000. b. £168,000. c. £224,000. d. £264,000. Ans: b LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

202.

Retained earnings at December 31, 2017 is a. £60,000. b. £88,000. c. £108,000. d. £220,000. Ans: c LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 203.

1 - 33

Equity at December 31, 2017, is a. £592,000. b. £484,000. c. £372,000. d. £220,000. Ans: d LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Use the following information for questions 204–208 EI Greco Corporation began operations on January 1, 2017. Presented below is selected information related to EI Greco at December 31, 2017. Equipment Cash Service Revenue Rent Expense Accounts Payable Share Capital-Ordinary Supplies 204.

€435,000 126,000 972,000 117,000 66,000 252,000 45,000

Utilities Expense Accounts Receivable Salaries and Wages Expense Notes Payable Dividends Salaries and Wages Payable Advertising Expense

€ 54,000 123,000 363,000 144,000 135,000 24,000 60,000

The statement of financial position at December 31, 2017 reports total assets of a. €480,000. b. €606,000. c. €684,000. d. €729,000. Ans: d LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

205.

The statement of financial position at December 31, 2017 reports total liabilities of a. €90,000. b. €180,000. c. €234,000. d. €357,000. Ans: c LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

206.

Net income (loss) reported on the income statement for the month of December is a. €378,000. b. €270,000. c. €243,000. d. €144,000. Ans: a LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

207.

Retained earnings reported on the statement of financial position at December 31, 2017 is a. €495,000. b. €378,000. c. €252,000. d. €243,000. Ans: d LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 34 208.

Test Bank for Financial Accounting: IFRS Edition, 3e The statement of financial position at December 31, 2017 reports equity of a. €840,000. b. €660,000. c. €360,000. d. €324,000. Ans: b LO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

a

209. All of the following are services offered by public accountants except a. budgeting. b. auditing. c. tax planning. d. consulting. Ans: a LO9 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

a

210. Which list below best describes the major services performed by public accountants? a. Bookkeeping, mergers, budgets. b. Employee training, auditing, bookkeeping. c. Auditing, taxation, management consulting. d. Cost accounting, production scheduling, recruiting. Ans: c LO9 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

a

211. Preparing tax returns and engaging in tax planning is performed by a. public accountants only. b. private accountants only. c. both public and private accountants. d. IRS accountants only. Ans: c LO9 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

a

212. A private accountant can perform many activities in a business organization but would not work in a. budgeting. b. accounting information systems. c. external auditing. d. tax accounting. Ans: c LO9 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Additional Multiple Choice Questions 213.

Which of the following is not part of the accounting process? a. Recording b. Identifying c. Financial decision making d. Communicating Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

214.

The first part of the accounting process is a. communicating. b. identifying. c. processing. d. recording. Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 215.

1 - 35

Keeping a systematic, chronological diary of events that are measured in dollars and cents is called a. communicating. b. identifying. c. processing. d. recording. Ans: d LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

216.

Internal users of accounting information include all of the following except a. company officers. b. investors. c. marketing managers. d. production supervisors. Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

217.

Most companies in the United States follow standards issued by the a. Financial Accounting Standards Board. b. International Accounting Standards Board. c. Internal Revenue Service. d. Securities and Exchange Commission. Ans: a LO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

218.

A proprietorship is a business a. owned by one person. b. owned by two or more persons. c. organized as a separate legal entity under state corporation law. d. owned by a governmental agency. Ans: a LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

219.

The Roy’s Downtown Diner received a bill of $400 from the Emeril Advertising Agency. The owner, Roy James, is postponing payment of the bill until a later date. The effect on specific items in the basic accounting equation is a. a decrease in Cash and an increase in Accounts Payable. b. a decrease in Cash and an increase in Retained Earnings. c. an increase in Accounts Payable and a decrease in Retained Earnings. d. a decrease in Accounts Payable and an increase in Retained Earnings. Ans: c LO7 BT: C Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

220.

Ryder Company purchases $600 of equipment from Montez Inc. for cash. The effect of this transaction on the components of the basic accounting equation of Ryder Company is a. an increase in assets and liabilities. b. a decrease in assets and liabilities. c. no change in total assets. d. an increase in assets and a decrease in liabilities. Ans: c LO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 36 221.

Test Bank for Financial Accounting: IFRS Edition, 3e Fontaine Fox Company buys a $12,000 van on credit. This transaction will affect the a. income statement only. b. statement of financial position only. c. income statement and retained earnings statement only. d. income statement, retained earnings statement, and statement of financial position. Ans: b LO7 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

222.

A net loss will result during a time period when a. assets exceed liabilities. b. assets exceed equity. c. expenses exceed revenues. d. revenues exceed expenses. Ans: c LO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

a

223. Auditing is a. the examination of financial statements by a CA or CPA in order to provide an opinion on their accuracy. b. a part of accounting that involves only recording of economic events. c. an area of accounting that involves such activities as cost accounting, budgeting, and accounting information systems. d. conducted by the Securities and Exchange Commission to ensure that registered financial statements are presented fairly. Ans: a LO9 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Answers to Multiple Choice Questions Item

Ans.

Item

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Item

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Item

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Item

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Item

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Item

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51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.

c b c a a c c b c b c a d d d c b b c c c c d b c

76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100.

b a d a d b a b b b b d c b c d b c d d c d d d b

101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125.

d c b a c a b a d a b b a c d c a d a b d a a c b

126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.

d c b a d c c c b a b b b c d c b c c a b c c d c

151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175.

a b c b d d d a b d b c c d b c b b b b d c c d a

176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200.

c c b d a b b b b a c b d a c a a c d b b d b c b

201. 202. 203. 204. 205. 206. 207. 208. a 209. a 210. a 211. a 212. 213. 214. 215. 216. 217. 218. 219. 220. 221. 222. a 223.

b c d d c a d b a c c c c b d b a a c c b c a

For Instructor Use Only

Accounting in Action

1 - 37

BRIEF EXERCISES BE 224 Match the following external users of financial accounting information with the type of decision that user will make with the information. a. b. c. d

Creditor Investor Regulatory Agency Taxing Authority

_______

(1) Is the company operating within prescribed guidelines?

_______

(2) Is the company complying with tax laws?

_______

(3) Is the company able to pay its debts?

_______

(4) Is the company a good investment?

Solution 224 1. 2. 3. 4.

c d a b

LO2 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BE 225 Match the following terms and definitions. a. Accounts receivable b. Creditor

c. Accounts payable d. Note payable

_______ (1) Amounts due from customers _______ (2) Amounts owed to suppliers for goods and services purchased _______ (3) Amounts owed to bank _______ (4) Party to whom money is owed Solution 225 1. 2. 3. 4.

a c d b

LO6 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 38

Test Bank for Financial Accounting: IFRS Edition, 3e

BE 226 Indicate which of these items is an asset (A), liability (L) or equity (E) account. _______

(1) Supplies

_______

(2) Dividends

_______

(3) Buildings

_______

(4) Note Payable

_______

(5) Taxes Payable

Solution 226 1. 2. 3. 4. 5.

Assets (A) Equity (E) Asset (A) Liability (L) Liability (L)

LO6 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BE 227 Use the accounting equation to answer the following questions. 1. Force 10 Sails Co. has total assets of $120,000 and total liabilities of $65,000. What is equity? 2. Marcy Fun Center has total assets of $225,000 and equity of $105,000. What are total liabilities? 3. Franco’s Restaurant has total liabilities of $50,000 and equity of $75,000. What are total assets?

Solution 227 1. $120,000 – $65,000 = $55,000 equity 2. $225,000 – $105,000 = $120,000 total liabilities 3. $50,000 + $75,000 = $125,000 total assets LO6 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action BE 228 Determine the missing items. Assets = Liabilities

+

Equity

¥85,000

¥52,000

(a)

(b)

¥28,000

¥34,000

¥89,000

(c)

¥55,000

Solution 228 a. ¥33,000 b. ¥62,000 c. ¥34,000 LO6 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BE 229 Classify each of these items as an asset (A), liability (L), or equity (E). _____ 1. Accounts receivable _____ 2. Accounts payable _____ 3. Share capital-ordinary _____ 4. Supplies _____ 5. Utilities expense _____ 6. Cash _____ 7. Note payable _____ 8. Equipment

Solution 229 1. 2. 3. 4.

A L E A

(5 min.) 5. 6. 7. 8.

E A L A

LO6 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 39

1 - 40

Test Bank for Financial Accounting: IFRS Edition, 3e

BE 230 Identify the impact on the accounting equation of each of the following transactions. 1. Purchase office supplies on account. 2. Paid secretary weekly salary. 3. Purchased office furniture for cash. 4. Received monthly utility bill to be paid at later time.

Solution 230 1. 2. 3. 4.

(5 min.)

Increase assets and increase liabilities. Decrease assets and decrease equity. Increase assets and decrease assets. Increase liabilities and decrease equity.

LO7 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BE 231 Statement of financial position amounts as of December 31, 2017 for Lori’s Tutoring Service are listed below. Prepare a statement of financial position in good form. Accounts Payable Accounts Receivable Cash Share Capital-Ordinary Solution 231

$

1,600 1,300 800 ?

(5 min.) LORI’S TUTORING SERVICE Statement of Financial Position December 31, 2017

Assets Accounts Receivable Cash Total assets

$1,300 800 $2,100

Equity and Liabilities Share Capital-Ordinary Accounts Payable Total equity and liabilities

LO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

$ 500 1,600 $2,100

Accounting in Action

1 - 41

BE 232 Identify whether the following items would be reported on the income statement (IS) or statement of financial position (FP). 1. 2. 3. 4. 5.

Cash Service Revenue Notes Payable Interest Expense Accounts Receivable

Solution 232 1. 2. 3. 4. 5.

Statement of Financial Position (FP) Income Statement (IS) Statement of Financial Position (FP) Income Statement (IS) Statement of Financial Position (FP)

LO8 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BE 233 Use the following information to calculate for the year ended December 31, 2017 (a) net income (net loss), (b) ending retained earnings, and (c) total assets. Supplies Operating expenses Accounts payable Accounts receivable Beginning retained earnings

¥ 1,000 12,000 9,000 3,000 5,000

Revenues Cash Dividends Notes payable Equipment

¥21,000 13,000 1,000 1,000 6,000

Solution 233 (a)

¥9,000

(b)

¥13,000

(c)

¥23,000

LO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 42

Test Bank for Financial Accounting: IFRS Edition, 3e

BE 234 Listed below in alphabetical order are the statement of financial position items of Rowan Company at December 31, 2017. Prepare a statement of financial position and include a complete heading. Accounts payable Accounts receivable Buildings Cash Equipment Share capital - ordinary

$

19,000 25,000 96,000 14,000 5,000 121,000

Solution 234 ROWAN COMPANY Statement of Financial Position December 31, 2017 ASSETS Buildings Equipment Accounts receivable Cash Total assets

$ 96,000 5,000 25,000 $ 14,000 $140,000 EQUITY AND LIABILITIES

Equity Share capital-ordinary Liabilities Accounts payable Total equity and liabilities

121,000 19,000 $140,000

LO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

EXERCISES Ex. 235 Determine the missing amount for each of the following. Assets = Liabilities + Equity 1. (a) €30,000 €75,000 2. €125,000 (b) €85,000 3. €140,000 €65,000 (c)

Solution 235 1. (a) = €105,000 (€30,000 + €75,000) 2. (b) = €40,000 (€125,000 - €85,000) 3. (c) = €75,000 (€140,000 - €65,000) LO6 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 43

Ex. 236 For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or equity item. Code Asset A Liability L Equity E _____

1. Rent Expense

____

6. Cash

_____

2. Equipment

____

7. Accounts Receivable

_____

3. Accounts Payable

____

8. Dividends

_____

4. Share Capital-Ordinary

____

9. Service Revenue

_____

5. Insurance Expense

____ 10. Notes Payable

Solution 236 1. 2. 3. 4. 5.

E A L E E

6. 7. 8. 9. 10.

A A E E L

LO6 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 237 At the beginning of the year, Keats Company had total assets of $750,000 and total liabilities of $250,000. Answer the following questions viewing each situation as being independent of the others. (1) If total assets increased $200,000 during the year, and total liabilities decreased $75,000, what is the amount of equity at the end of the year? (2) During the year, total liabilities increased $230,000 and equity decreased $90,000. What is the amount of total assets at the end of the year? (3) If total assets decreased $40,000 and equity increased $130,000 during the year, what is the amount of total liabilities at the end of the year?

For Instructor Use Only

1 - 44

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 237 Beginning Change Ending

Beginning Change Ending

Beginning Change Ending

Total Assets $750,000 200,000 $950,000

–

Total Liabilities $250,000 (75,000) $175,000

=

Total Liabilities $250,000 230,000 $480,000

Total Assets $750,000 $890,000 (2) Total Assets $750,000 (40,000) $710,000

Equity

=

$775,000 (1)

+

Equity $500,000 (90,000) $410,000

+

Equity $500,000 130,000 $630,000

Total Liabilities $250,000 =

$ 80,000 (3)

LO6 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 238 Jill's Car Cleaning has the following statement of financial position items: Equipment Accounts Payable Cash Supplies Accounts Receivable

Notes Payable Share Capital-Ordinary Retained Earnings

Identify which items are (1) Assets (2) Liabilities (3) Equity

Solution 238 (1) Assets— Equipment, Cash, Supplies, Accounts Receivable (2) Liabilities—Accounts Payable, Notes Payable (3) Equity—Share Capital-Ordinary, Retained Earnings LO6 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 239 On June 1, 2017, Bush Company prepared a statement of financial position that shows the following: Assets (no cash) .............................................................. ₤100,000 Liabilities .......................................................................... 75,000 Equity............................................................................... 25,000

For Instructor Use Only

Accounting in Action Ex. 239

1 - 45

(cont.)

Shortly thereafter, all of the assets were sold for cash. How would the statement of financial position appear immediately after the sale of the assets for cash for each of the following cases? Cash Received for the Assets

Assets

Balances Immediately After Sale – Liabilities = Equity

Cash A

₤110,000

₤________

₤________

₤________

Cash B

100,000

________

________

________

Cash C

90,000

________

________

________

Solution 239

Cash A Cash B Cash C

Cash Received for the Assets ₤110,000 100,000 90,000

Balances Immediately After Sale Assets – Liabilities = Equity ₤110,000 ₤75,000 ₤35,000 100,000 75,000 25,000 90,000 75,000 15,000

LO6 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 240 At the beginning of 2017, Bonds Company had total assets of $650,000 and total liabilities of $370,000. Answer each of the following questions. 1. If total assets increased $60,000 and equity decreased $90,000 during the year, determine the amount of total liabilities at the end of the year. 2. During the year, total liabilities decreased $75,000 and equity increased $50,000. Compute the amount of total assets at the end of the year. 3. If total assets decreased $100,000 and total liabilities increased $55,000 during the year, determine the amount of equity at the end of the year.

Solution 240 1. Ending Total Liabilities

= ($650,000 + $60,000) – ($650,000 – $370,000 - $90,000) = $710,000 – $190,000 = $520,000

2. Ending Total Assets

= ($370,000 – $75,000) + ($650,000 – $370,000 + $50,000) = $295,000 + $330,000 = $625,000

3. Ending Equity

= ($650,000 – $100,000) – ($370,000 + $55,000) = $550,000 – $425,000 = $125,000

LO6 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 46

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 241 Compute the missing amount in each category of the accounting equation. Assets $279,000 $223,000 $ ?

(a) (b) (c)

Liabilities $ ? $ 79,000 $173,000

Equity $143,000 $ ? $325,000

Solution 241 (a) $136,000 ($279,000 – $143,000 = $136,000). (b) $144,000 ($223,000 – $79,000 = $144,000). (c) $498,000 ($173,000 + $325,000 = $498,000). LO6 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 242 From the following list of selected accounts taken from the records of McDreamy Homeopathic Center, identify those that would appear on the statement of financial position. a. b. c. d. e.

Share Capital-Ordinary Service Revenue Land Salaries and Wages Expense Notes Payable

f. g. h. i. j.

Accounts Payable Cash Rent Expense Supplies Utilities Expense

Solution 242 a, c, e, f, g, i LO6 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 243 Selected transactions for Tall Timber Tree Service are listed below. 1. Made cash investment to start the business. 2. Paid for monthly advertising. 3. Purchased supplies on account. 4. Billed customers for services performed. 5. Paid cash dividends. 6. Received cash from customers billed in (4). 7. Incurred utilities expense on account. 8. Purchased additional supplies for cash. 9. Received cash from customers when service was performed.

For Instructor Use Only

Accounting in Action

1 - 47

Instructions List the numbers of the above transactions and describe the effect of each transaction on assets, liabilities, and owner’s equity. For example, the first answer is: (1) Increase in assets and increase in equity.

Solution 243 1. Increase in assets and increase in equity. 2. Decrease in assets and decrease in equity. 3. Increase in assets and increase in liabilities. 4. Increase in assets and increase in equity. 5. Decrease in assets and decrease in equity. 6. Increase in assets and decrease in assets. 7. Increase in liabilities and decrease in equity. 8. Increase in assets and decrease in assets. 9. Increase in assets and increase in equity. LO6, 7 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 244 Lawrence Legal Eagles Company entered into the following transactions during March 2017. 1. Purchased office equipment for $21,500 from Business Equipment, Inc. on account. 2. Paid $4,000 cash for March rent on office furniture. 3. Received $15,000 cash from customers for legal work billed in February. 4. Provided legal services to Amy Construction Company for $3,000 cash. 5. Paid Northern States Power Co. $11,000 cash for electric usage in March. 6. Lawrence invested an additional $32,000 in the business. 7. Paid Business Equipment, Inc. for the office equipment purchased in (1) above. 8. Incurred advertising expense for March of $1,200 on account. Instructions Indicate with the appropriate letter whether each of the transactions above results in: (a) an increase in assets and a decrease in assets. (b) an increase in assets and an increase in equity. (c) an increase in assets and an increase in liabilities. (d) a decrease in assets and a decrease in equity. (e) a decrease in assets and a decrease in liabilities. (f) an increase in liabilities and a decrease in equity. (g) an increase in equity and a decrease in liabilities. Solution 244 1. 2. 3. 4.

(c) (d) (a) (b)

5. 6. 7. 8.

(d) (b) (e) (f)

LO6, 7 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 48

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 245 Two items are omitted from each of the following summaries of statement of financial position and income statement data for two companys for the year 2017, Holly Enterprises and Craig Stevens. Holly Enterprises Beginning of year: Total assets € 98,000 Total liabilities 70,000 Total equity (a) End of year: Total assets 160,000 Total liabilities 120,000 Total equity 40,000 Changes during year in equity: Additional investment (b) Dividends 25,000 Total revenues 215,000 Total expenses 180,000 Instructions Determine the missing amounts.

Solution 245 (a)

Total assets (beginning of year) Total liabilities (beginning of year) Total equity (beginning of year)

€98,000 (70,000) €28,000

(b)

Total equity (end of year) Total equity (beginning of year) Increase in equity

€40,000 (28,000) €12,000

Total revenues Total expenses Net income

€215,000 (180,000) € 35,000

Increase in equity Less: Net income Add: Dividends Additional investment (c)

€12,000 (€35,000) 25,000)

Total assets (beginning of year) Total equity (beginning of year) Total liabilities (beginning of year)

(10,000) €2,000 €129,000 (80,000) € 49,000

For Instructor Use Only

Craig Stevens €129,000 (c) 80,000 180,000 50,000 130,000 25,000 (d) 100,000 65,000

Accounting in Action Solution 245 (cont.) (d) Total equity (end of year) Total equity (beginning of year) Increase in equity

1 - 49

€130,000 (80,000) € 50,000 €100,000 (65,000) € 35,000

Total revenues Total expenses Net income Increase in equity Less: Net income Additional investment Dividends

€50,000 € 35,000 25,000

(60,000) €(10,000)

LO6, 7 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 246 An analysis of the transactions made by K. T. Lang & Co., a law firm, for the month of July is shown below. Each increase and decrease in equity is explained. Assets

Cash + 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Accounts Receivable + Supplies +

+$15,000 - 2,000 750 + 2,500 +$6,600 - 1,500 - 2,500 650 + 550 550 - 3,500

=

Equipment

Liab.

Accounts = Payable +

Share Cap. +

Rev. - Exp.

- Div. Iss. Sh.

+$3,000

+$750 + $9,100

Serv. Rev.

− 1,500 − $650

+ 500

Solution 246 Investment Service revenue Dividends Rent expense Salaries expense Utilities expense Increase in equity

Equity Retained Earnings

+$15,000 +$5,000

Instructions (a) Determine how much equity increased for the month. (b) Compute the amount of net income for the month.

(a)

+

$15,000 9,100 (2,500) (650) (3,500) (500) $16,950

For Instructor Use Only

− $2,500 Div. Rent Exp.

− 3,500 − 500

Sal. Exp. Util. Exp.

1 - 50

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 246 (b)

(cont.)

Service revenue Rent expense Salaries expense Utilities expense Net income

$9,100 (650) (3,500) (500) $4,450

LO7 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 247 The Lim Company had the following assets and liabilities on the dates indicated. December 31 Total Assets Total Liabilities 2015 $530,000 $230,000 2016 $480,000 $210,000 2017 $590,000 $300,000 Lim began business on January 1, 2015, with an investment of $100,000. Instructions From an analysis of the change in equity during the year, compute the net income (or loss) for: (a) 2015, assuming Lim paid dividends of $25,000 for the year. (b) 2016, assuming Lim made an additional investment of $60,000 and paid no dividends in 2016. (c) 2017, assuming Lim made an additional investment of $10,000 and paid dividends of $30,000 in 2017. Solution 247 (a)

Equity—12/31/15 ($530,000 – $230,000) Equity—1/1/15 Increase in equity Add: Dividends Net income for 2015

$300,000 (100,000) 200,000 25,000 $225,000

(b)

Equity—12/31/16 ($480,000 – $210,000) Equity—1/1/16—see (a) Decrease in equity Less: Additional investment Net loss for 2016

$270,000 (300,000) (30,000) 60,000 $ (90,000)

(c)

Equity—12/31/17 ($590,000 – $300,000) Equity—1/1/17—see (b) Increase in equity Less: Additional investment

$290,000 (270,000) 20,000 (10,000) 10,000 30,000 $ 40,000

Add: Dividends Net income for 2017

LO7 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 51

Ex. 248 For each of the following, indicate whether the transaction affects revenue (R), expense (E), Dividends (D), Share Capital (SC), or no effect on equity (NOE). 1. 2. 3. 4. 5.

Made an investment to start the business. Billed customers for services performed. Purchased equipment on account. Paid monthly rent. Paid dividends.

Solution 248 1. 2. 3. 4. 5.

Share Capital (SC) Revenue (R) No effect (NOE) Expense (E) Dividends (D)

LO7 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 249 Presented below is a statement of financial position for Jim Henson Yard Service at December 31, 2017. JIM HENSON YARD SERVICE Statement of Financial Position December 31, 2017 Assets

Equity and Liabilities

Equipment Supplies Accounts receivable Cash

£11,000 9,000 6,000 13,000

Total assets

£39,000

Equity Share capital–ordinary Liabilities Accounts payable Notes payable Total equity & liabilities

₤16,000 8,000 15,000 ₤39,000

The following additional data are available for the year which began on January 1: All expenses (excluding supplies expense) total ₤6,000. Supplies on January 1 were ₤11,000 and ₤5,000 of supplies were purchased during the year. Net income for the year was ₤8,000 and dividends paid were ₤5,000. Instructions Determine the following: (Show all computations.) 1. Supplies used during the year. 2. Total expenses for the year. 3. Service revenues for the year. 4. Equity on January 1.

For Instructor Use Only

1 - 52

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 249 1. Computation of Supplies Used: Beginning Supplies, Jan. 1 Add: Purchases Less: Ending Supplies, Dec. 31 Equals: Supplies Used

₤11,000 5,000 (9,000) ₤ 7,000

2. Computation of Total Expenses: All Expenses (excluding supplies expense) Plus: Supplies Used Total Expenses

₤ 6,000 7,000 ₤13,000

3. Computation of Revenues: Net Income Plus: Total Expenses Total Revenues

₤ 8,000 13,000 ₤21,000

4. Computation of equity on January 1: Equity, December 31 Plus: Dividends Less: Net Income Equity, January 1

₤16,000 5,000 (8,000) ₤13,000

LO7 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA PC: Problem Solving

Ex. 250 Analyze the transactions of a business organized as a proprietorship described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease. Assets

=

Liabilities

+

Equity

1. Received cash for services rendered.

_______

_______

_______

2. Purchased office equipment on credit.

_______

_______

_______

3. Paid employees' salaries.

_______

_______

_______

4. Received cash from customer in payment on account.

_______

_______

_______

5. Paid telephone bill for the month.

_______

_______

_______

6. Paid for office equipment purchased in transaction 2.

_______

_______

_______

7. Purchased office supplies on credit.

_______

_______

_______

8. Paid dividends.

_______

_______

_______

9. Obtained a loan from the bank.

_______

_______

_______

10. Billed customers for services rendered.

_______

_______

_______

For Instructor Use Only

Accounting in Action

1 - 53

Solution 250 Assets =

Liabilities

1. Received cash for services rendered.

+

2. Purchased office equipment on credit.

+

3. Paid employees' salaries.

–

4. Received cash from customer in payment on account.

+,–

5. Paid telephone bill for the month.

–

6. Paid for office equipment purchased in transaction 2.

–

–

7. Purchased office supplies on credit.

+

+

8. Paid dividends

–

9. Obtained a loan from the bank.

+

10. Billed customers for services rendered.

+

+

Equity +

+ –

–

– + +

LO7 BT: C Difficulty: Medium TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 251 For each of the following, indicate whether the transaction increased (+), decreased (-), or had no effect (NE) on assets, liabilities, and equity using the following format. Assets = Liabilities + Equity 1. 2. 3. 4. 5.

Issued ordinary shares in exchange for cash. Billed customers for services performed. Purchased equipment on account. Paid dividends. Paid for equipment purchased in 3. above.

Solution 251 Assets 1. 2. 3. 4. 5.

+ + + – –

=

Liabilities NE NE + NE –

+

Equity + + NE – NE

LO7 BT: C Difficulty: Easy TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 54

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 252 Bill Phinnes decides to open a cleaning and laundry service near the local college campus that will operate as a corporation. Analyze the following transactions for the month of June in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. It is not necessary to identify the cause of changes in equity. Transactions (1) Issued ordinary shares in exchange for $20,000 cash on June 1. (2) Purchased laundry equipment for $5,000 paying $3,000 in cash and the remainder due in 30 days. (3) Purchased laundry supplies for $1,200 cash. (4) Received a bill from College News for $300 for advertising in the campus newspaper. (5) Cash receipts from customers for cleaning and laundry amounted to $1,500. (6) Paid salaries of $200 to student workers. (7) Billed the Lion Soccer Team $200 for cleaning and laundry services. (8) Paid $300 to College News for advertising that was previously billed in Transaction 4. (9) Paid dividends of $700. (10) Incurred utility expenses for month on account, $150. TransAccounts Accounts Share Retained action Cash + Receivable + Supplies + Equipment = Payable + Capital + Earnings (1) ——————————————————————————————————————————— Balance (2) ——————————————————————————————————————————— Balance (3) ——————————————————————————————————————————— Balance (4) ——————————————————————————————————————————— Balance (5) ——————————————————————————————————————————— Balance (6) ——————————————————————————————————————————— Balance (7) ——————————————————————————————————————————— Balance (8) ——————————————————————————————————————————— Balance

For Instructor Use Only

Accounting in Action Ex. 252

1 - 55

(cont.)

(9) ——————————————————————————————————————————— Balance (10) ——————————————————————————————————————————— Totals

Solution 252 TransAccounts Accounts Share Retained action Cash + Receivable + Supplies + Equipment = Payable + Capital + Earnings (1) +$20,000 +$20,000 ——————————————————————————————————————————— Balance $20,000 $20,000 (2) – 3,000 +$5,000 +$2,000 ——————————————————————————————————————————— Balance $17,000 $5,000 $2,000 $20,000 (3) – 1,200 +$1,200 ——————————————————————————————————————————— Balance $15,800 $1,200 $5,000 $2,000 $20,000 (4) + 300 – $300 ——————————————————————————————————————————— Balance $15,800 $1,200 $5,000 $2,300 $20,000 – $300 (5) + 1,500 + 1,500 ——————————————————————————————————————————— Balance $17,300 $1,200 $5,000 $2,300 $20,000 $1,200 (6) – 200 - 200 ——————————————————————————————————————————— Balance $17,100 $1,200 $5,000 $2,300 $20,000 $1,000 (7) +$200 + 200 ——————————————————————————————————————————— Balance $17,100 $200 $1,200 $5,000 $2,300 $20,000 $1,200 (8) – 300 – 300 ——————————————————————————————————————————— Balance $16,800 $200 $1,200 $5,000 $2,000 $20,000 $1,200 (9) – 700 – 700 ——————————————————————————————————————————— Balance $16,100 $200 $1,200 $5,000 $2,000 $20,000 $500 (10) + 150 – 150 ——————————————————————————————————————————— Totals $16,100 $200 $1,200 $5,000 $2,150 $20,000 $350

LO7 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 56

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 253 For each of the following, describe a transaction that will have the stated effect on the elements of the accounting equation. (a) Increase one asset and decrease another asset. (b) Increase an asset and increase a liability. (c) Decrease an asset and decrease a liability. (d) Increase an asset and increase equity. (e) Increase one asset, decrease one asset, and increase a liability.

Solution 253 (a) Receive cash from customers on account. Purchase supplies for cash. (b) Purchase supplies on account. Purchase equipment and signed a note payable. (c) Pay cash to reduce accounts payable. Pay cash to reduce a note payable. (d) Issued ordinary shares in exchange for cash. Render services on account or for cash. (e) Buy equipment with a cash down payment with the remainder financed by a note payable. LO7 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 254 The following transactions represent part of the activities of Tigger Company for the first month of its existence. Indicate the effect of each transaction upon the total assets of the business by one of the following phrases: increased total assets, decreased total assets, or no change in total assets. (a) Issued ordinary shares in exchange for cash. (b) Purchased a computer for cash. (c) Purchased office equipment with money borrowed from the bank. (d) Paid the first month's utility bill. (e) Collected an accounts receivable. (f) Paid dividends.

Solution 254 (a) (b) (c) (d) (e)

Increased total assets. No change in total assets. Increased total assets. Decreased total assets. No change in total assets.

For Instructor Use Only

Accounting in Action Solution 254 (f)

1 - 57

(cont.)

Decreased total assets.

LO7 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 255 Selected transactions for Parton Company are listed below. List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and equity. Sample: Issued ordinary shares in exchange for cash investment. The answer would be—Increase in assets and increase in equity. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Paid monthly utility bill. Purchased new display case for cash. Paid cash for repair work on security system. Billed customers for services performed. Received cash from customers billed in 4. Paid dividends. Incurred advertising expenses on account. Paid monthly rent. Received cash from customers when service was rendered.

Solution 255 1. 2. 3. 4. 5. 6. 7. 8. 9.

Decrease in assets and decrease in equity. No net change in assets. Decrease in assets and decrease in equity. Increase in assets and increase in equity. No net change in assets. Decrease in assets and decrease in equity. Increase in liabilities and decrease in equity. Decrease in assets and decrease in equity. Increase in assets and increase in equity.

LO7 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 256 A service proprietorship shows five transactions summarized below. The effect of each transaction on the accounting equation is shown, and also the new balance of each item in the equation. For each transaction (a) to (e) write an explanation of the nature of the transaction. Accounts EquipAccounts Cash + Rec. + ment + Land + Building = Payable + Equity ——————————————————————————————————————————— $5,000 $6,500 $10,000 $7,500 $50,000 $3,000 $76,000 a) –2,000 –2,000 3,000 6,500 10,000 7,500 50,000 1,000 76,000 b) +1,000 – 1,000 4,000 5,500 10,000 7,500 50,000 1,000 76,000

For Instructor Use Only

1 - 58

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 256

(cont.)

c) 4,000 d) +2,500 6,500 e) $6,500

5,500 5,500 +3,000 $8,500

+ 5,000 15,000

7,500

50,000

+5,000 6,000

15,000

7,500

50,000

6,000

$15,000

$7,500

$50,000

$6,000

76,000 + 2,500 78,500 + 3,000 $81,500

Solution 256 (a) (b) (c) (d) (e)

Paid cash to creditors. Received cash from customers on account. Bought equipment on account. Issued ordinary shares in exchange for cash. Services rendered on account.

LO7 BT: C Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 257 There are ten transactions listed below. Match the transactions that have the identical effect on the accounting equation. You should end up with 5 matches. a. b. c. d. e. f. g. h. i. j.

Receive cash from customers on account. Issue ordinary shares in exchange for cash. Pay cash to reduce an accounts payable. Purchase supplies for cash. Pay cash to reduce a notes payable. Purchase supplies on account. Issue ordinary shares in exchange for noncash assets. Purchase equipment with a note payable. Pay utilities with cash. Pay dividends.

Solution 257 Match #1 #2 #3 #4 #5

= a, d = c, e = f, h = b, g = i, j

LO7 BT: C Difficulty: Medium TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

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Ex. 258 An analysis of the transactions made by K. T. Lang & Co., a law firm, for the month of July is shown below. Each increase and decrease in equity is explained. Assets

Cash + 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

+€15,000 - 2,000 750 + 2,500 - 1,500 - 2,500 650 + 550 - 3,500

=

Accounts Receivable + Supplies +

Liab. +

Equipment =

Accounts Payable +

+€5,000

+€3,000

Equity Retained Earnings Share Cap + Rev. - Exp. +€15,000

Div. Iss. Share Serv. Rev.

+€750 + €9,100

+€6,600

Serv. Rev.

- 1,500 - €2,500 Div. - €650 Rent Exp. -

550 + 500

Instructions (a) Prepare an income statement for the month ending July 31, 2017. (b) Prepare a retained earnings statement for the month ending July 31, 2017. Solution 258 (a) K. T. LANG & CO. Income Statement For the Month Ended July 31, 2017 Revenues Service revenue Expenses Salaries and wages expense €3,500 Rent expense 650 Utilities expense 500 Total expenses Net income

€9,100

4,650 €4,450

(b) K. T. LANG & CO. Retained Earnings Statement For the Month Ended July 31, 2017 Retained earnings, July 1 Add: Net income Less: Dividends Retained earnings, July 31

€

0 4,450 4,450 2,500 1,950

LO8 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

- 3,500 Sal. Exp. - 500 Util. Exp.

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Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 259 An analysis of the transactions made by K. T. Lang & Co., a law firm, for the month of July is shown below. Assets = Liab. + Equity Retained Earnings Accounts Accounts Share Cash + Receivable + Supplies + Equipment = Payable + Cap. + Rev. - Exp. - Div. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

+€15,000 - 2,000 750 + 2,500 +€6,600 - 1,500 - 2,500 650 + 550 550 - 3,500

+€15,000 +€5,000

+€3,000

+€750 + €9,100 - 1,500 - €2,500 - € 650

+

- 3,500 500

500

Instructions Prepare a statement of financial position at July 31, 2017. Solution 259 K. T. LANG & CO. Statement of Financial Position July 31, 2017 Assets € 5,000 750 6,050 7,150 €18,950

Equipment Supplies Accounts receivable Cash Total assets Equity and Liabilities Equity Share capital-ordinary Retained earnings Liabilities Accounts payable Total equity and liabilities

€15,000 1,950

16,950 2,000 €18,950

LO8 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

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Ex. 260 The following information relates to Ty Ringo Co. for the year 2017. Retained earnings, January 1, 2017 Dividends Service revenue Salaries and wages expense

$ 47,000 6,000 65,500 29,000

Advertising expense $1,500 Rent expense 9,500 Utilities expense 3,400

Instructions After analyzing the data, prepare an income statement and a retained earnings statement for the year ending December 31, 2017

Solution 260 TY RINGO CO. Income Statement For the Year Ended December 31, 2017 Revenues Service revenue Expenses Salaries and wages expense Rent expense Utilities expense Advertising expense Total expenses Net income

$65,500 $29,000 9,500 3,400 1,500 43,400 $22,100

TY RINGO CO. Retained Earnings Statement For the Year Ended December 31, 2017 Retained earnings, January 1 Add: Net income Less: Dividends Retained earnings, December 31

$47,000 22,100 69,100 6,000 $63,100

LO8 BT: AP Difficulty: Easy TOT: 7 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 62

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 261 Cyn Sclose is the bookkeeper for Ayala Company. Cyn has been trying to get the statement of financial position of Ayala Company to balance. Ayala’s statement of financial position is as follows.

AYALA COMPANY Statement of Financial Position December 31, 2017 Assets

Liabilities

Equipment Supplies Cash Dividends

$48,000 7,100 17,400 6,200

Total assets

$78,700

Accounts payable Accounts receivable Share capital-ordinary Retained earnings Total equity and liabilities

Instructions Prepare a correct statement of financial position.

Solution 261 AYALA COMPANY Statement of Financial Position December 31, 2017 Assets Equipment Supplies Accounts receivable Cash Total assets

$48,000 7,100 12,500 17,400 $85,000 Equity and Liabilities

Equity Share capital-ordinary Retained earnings ($18,200 – $6,200) Liabilities Accounts payable Total equity and liabilities

$40,000 12,000

$52,000 33,000 $85,000

LO8 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analytical AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

$33,000 (12,500) 40,000 18,200 $78,700

Accounting in Action

1 - 63

Ex. 262 Presented below is information related to Smith and Jones, Attorneys at Law. Retained earnings, January 1, 2017 Service revenue—2017 Total expenses—2017 Assets, January 1, 2017 Liabilities, January 1, 2017 Assets, December 31, 2017 Liabilities, December 31, 2017 Dividends—2017

$ 23,000 300,000 231,000 85,000 62,000 168,000 85,000 59,000

Instructions Prepare the 2017 retained earnings statement for Smith and Jones, Attorneys at Law. Solution 262 SMITH AND JONES, ATTORNEYS AT LAW Retained Earnings Statement For the Year Ended December 31, 2017 Retained earnings, January 1 ........................................................ Add: Net income ............................................................................ Less: Dividends.............................................................................. Retained earnings, December 31 ...................................................

$ 23,000 69,000* 92,000 59,000 $ 33,000

*Legal service revenue................................................................... Total expenses ................................................................... Net income .........................................................................

$300,000 231,000 $ 69,000

LO8 BT: AP Difficulty: Medium TOT: 7 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 263 Prepare an income statement, a retained earnings statement, and a statement of financial position for the acupuncture practice of Lei Chen, from the items listed below for the month of September. Retained earnings, September 1 Share capital-ordinary Accounts payable Equipment Service revenue Dividends Supplies expense Cash Utilities expense Supplies Salaries and wages expense Accounts receivable Rent expense

¥12,000 30,000 7,000 27,000 24,000 6,000 3,500 8,000 700 2,800 9,000 14,000 2,000 For Instructor Use Only

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Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 263

(cont.)

LEI CHEN, ACUPUNCTURIST Income Statement For the Month Ended September 30, 2017 —————————————————————————————————————————— Revenues ¥ Expenses

¥

¥

Total expenses

¥

Net income

¥

LEI CHEN, ACUPUNCTURIST Retained Earnings Statement For the Month Ended September 30, 2017 —————————————————————————————————————————— Retained Earnings, September 1 ¥ Add: ¥ Less:

¥

LEI CHEN, ACUPUNCTURIST Statement of Financial Position September 30, 2017 —————————————————————————————————————————— Assets ¥

Total assets ¥ Equity and Liabilities Equity

¥

Liabilities

¥

Total equity and liabilities

¥

For Instructor Use Only

Accounting in Action

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Solution 263 LEI CHEN, ACUPUNCTURIST Income Statement For the Month Ended September 30, 2017 —————————————————————————————————————————— Revenues Service revenue ............................................................................. ¥24,000 Expenses Salaries and wages expense.......................................................... ¥9,000 Supplies expense ........................................................................... 3,500 Rent expense ................................................................................. 2,000 Utilities expense ............................................................................. 700 Total expenses ......................................................................... 15,200 Net income ............................................................................... ¥ 8,800

LEI CHEN, ACUPUNCTURIST Retained Earnings Statement For the Month Ended September 30, 2017 Retained Earnings, September 1 ......................................................... Add: Net income .................................................................................. Less: Dividends.................................................................................... Retained Earnings, September 30 .......................................................

¥12,000 8,800 20,800 6,000 ¥14,800

LEI CHEN, ACUPUNCTURIST Statement of Financial Position September 30, 2017 —————————————————————————————————————————— Assets Equipment............................................................................................ ¥27,000 Supplies ............................................................................................... 2,800 Accounts receivable ............................................................................. 14,000 Cash .................................................................................................... 8,000 Total assets .................................................................................... ¥51,800 Equity and Liabilities Equity Share capital-ordinary .................................................................... ¥30,000 Retained earnings .......................................................................... 14,800 Liabilities Accounts payable ........................................................................... Total liabilities and equity ............................................................... LO8 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

¥44,800 7,000 ¥51,800

1 - 66

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 264 Indicate whether the following items would appear on the statement of financial position (FP), income statement (IS), or retained earnings statement (RE). 1. 2. 3. 4. 5. 6.

Advertising expense Accounts receivable Dividends Rent revenue Salaries and wages payable Supplies

Solution 264

(5 min.)

1. Income statement (IS) 2. Statement of financial position (FP) 3. Retained earnings statement (RE)

4. Income statement (IS) 5. Statement of financial position (FP) 6. Statement of financial position (FP)

LO8 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 265 Listed below in alphabetical order are the statement of financial position items of Pieter Company at December 31, 2017. Prepare a statement of financial position and include a complete heading. Accounts Payable Accounts Receivable Buildings Cash Equipment Land Share Capital-Ordinary

$ 31,000 15,000 56,000 24,000 4,000 52,000 120,000

LO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Solution 265

(5 min.) PIETER COMPANY Statement of Financial Position December 31, 2017 ASSETS

Land Buildings Equipment Accounts receivable Cash Total assets

$ 52,000 56,000 4,000 15,000 24,000 $151,000

For Instructor Use Only

Accounting in Action Solution 265

1 - 67

(cont.) EQUITY and LIABILITIES

Share capital-ordinary Accounts payable Total equity and liabilities

$ 120,000 31,000 $151,000

LO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 266 One item is omitted in each of the following summaries of statement of financial position and income statement data for three different corporations, X, Y, and Z. Determine the amounts of the missing items, identifying each corporation by letter. Corporation X Y Z Beginning of the Year: Assets ₤380,000 ₤150,000 ₤199,000 Liabilities 270,000 105,000 168,000 End of the Year: Assets 450,000 185,000 195,000 Liabilities 280,000 95,000 149,000 During the Year: Issued additional ordinaryshares ? 79,000 80,000 Dividends Revenue Expenses

90,000 195,000 170,000

83,000 ? 113,000

Solution 266 Corporation X (₤125,000) Beginning equity (₤380,000 – ₤270,000) Additional investments (₤260,000 – ₤110,000 – ₤25,000) Net income for year (₤195,000 – ₤170,000) Less dividends Ending equity (₤450,000 – ₤280,000) Corporation Y (₤162,000) Beginning equity (₤150,000 – ₤105,000) Additional investments Net income for year [Revenues = ₤162,000 (₤113,000 + ₤49,000)] Less dividends Ending equity (₤185,000 – ₤95,000)

For Instructor Use Only

₤110,000 125,000 25,000 260,000 90,000 ₤170,000

₤ 45,000 79,000 49,000 173,000 83,000 ₤ 90,000

? 187,000 175,000

1 - 68

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 266

(cont.)

Corporation Z (₤77,000) Beginning equity (₤199,000 – ₤168,000) Additional investments Net income for year (₤187,000 – ₤175,000)

₤ 31,000 80,000 12,000 123,000 77,000 ₤ 46,000

Less dividends (₤123,000 – ₤46,000) Ending equity (₤195,000 – ₤149,000)

LO8 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA PC: Problem Solving

Ex. 267 Indicate in the space provided by each item whether it would appear on the Income Statement (IS), Statement of Financial Position (FP), or Retained Earnings Statement (RE): a.

____

Service Revenue

g. ___ Accounts Receivable

b.

____

Utilities Expense

h. ___ Retained Earnings (ending)

c.

____

Cash

i.

___ Equipment

d.

____

Accounts Payable

j.

_

Advertising Expense

e.

____

Supplies

k.

_

Dividends

f.

____

Salaries and Wages Expense

l.

_

Notes Payable

Solution 267 a. IS b. IS c. FP d. FP e. FP f. IS

g. h. i. j. k. l.

FP RE, FP FP IS RE FP

LO8 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 69

Ex. 268 At September 1, the statement of financial position accounts for Stanley’s Restaurant were as follows: Accounts Payable Accounts Receivable Buildings Cash Equipment

$ 3,800 11,600 68,000 10,000 18,700

Land Share Capital-Ordinary Notes Payable Supplies

$33,000 ? 48,000 6,600

The following transactions occurred during the next two days: The company issued additional ordinary shares for $22,000 cash invested in the business. The accounts payable were paid in full. (No payment was made on the notes payable.) Instructions Prepare a statement of financial position at September 3, 2017.

Solution 268 STANLEY'S RESTAURANT Statement of Financial Position September 3, 2017 ASSETS Land Buildings Equipment Supplies Accounts receivable Cash Total assets

$ 33,000 68,000 18,700 6,600 11,600 28,200 $166,100

For Instructor Use Only

1 - 70

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 268

(cont.) EQUITY and LIABILITIES

Share capital-ordinary Notes payable Accounts payable Total equity and liabilities

$118,100 48,000 -0- . $166,100

Cash ($10,000 + $22,000 – $3,800) = $28,200 Accounts payable ($3,800 – $3,800) = $0 Share capital: Beginning balance ($147,900 – $51,800) Additional investment Ending balance

$ 96,100 22,000 $118,100

LO8 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA PC: Problem Solving

Ex. 269 Presented below are items for Wilson Company at December 31, 2017. Accounts payable Accounts receivable Cash Equipment Share capital-ordinary Notes payable

€45,000 36,000 27,000 62,000 30,000 50,000

Compute each of the following: 1. Total assets. 2. Total liabilities.

Solution 269 1. Total assets = €125,000 (€36,000 + €27,000 + €62,000) 2. Total liabilities = €95,000 (€45,000 + €50,000) LO8 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 71

COMPLETION STATEMENTS 270.

Accounting is an information system that identifies, _____________, and _____________ the economic events of an organization.

271.

The mere recording of economic events is called ______________, and is just one part of the _______________ process.

272.

Accounting standards issued in the United States by the Financial Accounting Standards Board are called _________________.

273.

The ________________ principle states that companies should record assets at their cost. The _________________ assumption requires that the activities of an entity be kept separate from the activities of its owner.

274.

275.

The residual claim on total assets of a business is known as ________________ and is equal to total assets minus total liabilities.

276.

Dividends ________________ equity but are not expenses.

277.

The ________________ reports the assets, liabilities, and equity of a business enterprise at a specific date.

a

278. The three major services rendered by a public accountant are ______________, ________________, and management ________________.

a

279. Accountants who are employees of business enterprises are referred to as ________________ accountants.

Answers to Completion Statements 270. 271. 272. 273. 274.

records, communicates 275. equity bookkeeping, accounting 276. reduce generally accepted accounting principles 277. statement of financial position historical cost 278. auditing, taxation, management consulting a economic entity 279. private (or managerial)

LO1-8 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 72

Test Bank for Financial Accounting: IFRS Edition, 3e

MATCHING 280. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Convergence Bookkeeping IASB Proprietorship Economic entity assumption

F. G. H. I. J.

Corporation Assets Equities Expenses Transactions

____

1. Activities of an entity must be kept separate from its owner’s activities.

____

2. Consumed assets or services.

____

3. Ownership is limited to one person.

____

4. Process of reducing differences between IFRS and GAAP.

____

5. Creditor and ownership claims against the assets of the business.

____

6. A separate legal entity under state laws.

____

7. Accounting organization that issues standards.

____

8. Involves only the recording of economic events.

____

9. Future economic benefits.

____ 10. Economic events recorded by accountants.

Answers to Matching 1. 2. 3. 4. 5.

E I D A H

6. 7. 8. 9. 10.

F C B G J

LO1-8 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 73

SHORT-ANSWER ESSAY QUESTIONS S-A E 281 Your friend, James, made this comment: My major is biology and I plan to research for cures for major illnesses. Thus, I have no need to study accounting. What is your response to James? Solution 281 James, you are entering a dynamic profession and you have the opportunity to make important contributions to society. While science will be your profession and major concern, you will not be able to escape the need to understand accounting. Accounting staff and professionals will always be available to assist you. Here are some areas that will directly affect you: As a manager, you will need to review accounting information (both internal and external) and make decisions. Budgets will be an important part of your research activities. As an employee, you will be concerned about the financial information of your employer. Thus, you will need to be able to read the company’s financial statements. Also, as an investor, you will be interested in the financial statements of other companies. You will probably not be a preparer of the financial statements, but you do need an understanding of how they are prepared. You also need a good understanding of how to interpret the information on the financial statements. LO2 BT: S Difficulty: Hard TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting

S-A E 282 The information needs of a specific user of financial accounting information depends upon the kinds of decisions that user makes. Identify the major users of accounting information and discuss what questions financial accounting information answers for each group of users. Solution 282 The major users of accounting information are internal users and external users. Internal users are those who manage the business. External users are those outside the business who have either a present or potential financial interest. Financial accounting information may answer the following questions for internal users: 1. Is cash sufficient to pay our debts? 2. Can we afford to give employee pay raises this year? 3. What is the cost of manufacturing each unit of product? 4. Which product line is the most profitable? Questions answered by financial accounting information for external users include: 1. Is the company earning satisfactory income? 2. How does the company compare in size and profitability with competitors? 3. Will the company be able to pay its debts as they come due? LO2 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting S-A E 284

For Instructor Use Only

1 - 74

Test Bank for Financial Accounting: IFRS Edition, 3e

S-A E 283 The framework used to record and summarize the economic activities of a business enterprise is referred to as the accounting equation. State the basic accounting equation and define its major components. How are business transactions and financial statements related to the accounting equation? Solution 283 The basic accounting equation is expressed as follows: Assets = Liabilities + Equity Assets are defined as resources owned by the business. Liabilities are creditor claims against the assets of the business; or simply put, liabilities are existing debts and obligations. Equity is the ownership claim on the total assets of the business; it is equal to total assets minus total liabilities. Business transactions are economic events and activities that affect the elements of the basic accounting equation; that is, transactions cause increases or decreases in the assets, liabilities, and equity. The financial statements report the results and effects of transactions on the business' assets, liabilities, and equity. The statement of financial position is a summary expression of the basic accounting equation. LO6 BT: C Difficulty: Medium TOT: 4 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting

a

S-A E 284 The accounting profession provides many career opportunities for individuals. Identify the major fields that exist in accounting and comment on the major functions performed by individuals in each of these areas. a

Solution 284

The major fields that exist in accounting are in the areas of (1) public accounting, (2) private accounting, and (3) not-for-profit accounting. In public accounting, an accountant may practice as: (1) an auditor who examines the financial statements of companies and expresses an opinion as to the fairness of presentation; (2) a tax specialist who gives tax advice, prepares tax returns, and represents clients before governmental agencies; and (3) a management accountant who engages in the development of accounting and computer systems and the design of organizational systems. Private (managerial) accountants perform many different activities within a company. Private accountants may be involved in: cost accounting, budgeting, general financial accounting, accounting information systems, and tax accounting. LO9 BT: K Difficulty: Medium TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action S-A E 285

1 - 75

(Ethics)

Sam Dryer owns and operates Sam's Burgers, a small fast food store, located at the edge of City College campus in Newton, Ohio. After several very profitable years, Sam's Burgers began to have problems. Most of the problems were related to Sam's expansion of the eating area in the restaurant without corresponding increases in the food preparation area. Sam does not have the cash or financial backing to expand further. He has therefore decided to sell his business. Jerry Finney is interested in purchasing the business. However, he is located in another city and is unfamiliar with Newton. He has asked Sam why he is selling Sam's Burgers. Sam replies that his elderly mother requires extra care, and that his brother needs help in his manufacturing business. Both are true, but neither is his primary reason for selling. Sam reasons that Jerry should not have asked him anyway, since profitable businesses don't come up for sale. Required: 1. Identify the stakeholders in this situation. 2. Did Sam act ethically in not revealing fully his reasons for selling the business? Why or why not?

Solution 285 1. The stakeholders include Sam Dryer Jerry Finney Newton, Ohio students of City College City College persons financing the purchase of Sam's Burgers 2. Sam did not act ethically in not revealing fully his reasons for selling the business. Students might be of the opinion that a purchaser should investigate a business before purchasing it, rather than relying entirely on the seller's assertions. However, students should realize that Sam should have said something about his problems. He might ethically be allowed to put these in the best possible light, perhaps, but failure to disclose them at all is certainly unethical. This is especially true, since family concerns might well cause someone to sell a business that is otherwise doing well. Sam has shown an intent to deceive that is unethical, and might be actionable in court as well. LO3 BT: E Difficulty: Medium TOT: 5 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting

S-A E 286

(Communication)

Sue Havens is a friend of yours from high school. She decided to become a beautician after leaving high school, rather than to attend college. She recently opened her own shop, and has contracted her services to a local hospital. She is paid a monthly fee for her services, and receives a small gratuity from each of the patients. She has just received her first set of financial statements from her accountant. She is quite upset. The statements show a cash balance of $3,600 at the end of the month, but a net income of only

For Instructor Use Only

1 - 76

Test Bank for Financial Accounting: IFRS Edition, 3e

$500. She has written you a letter, asking you whether such a situation is possible, or whether she should find another accountant. Required: Write a short letter to your friend. Use proper form. Answer her question completely, but briefly.

Solution 286 Answers will vary. The instructor's requirements concerning proper form should be followed. The letter may be either business or personal. As a minimum, the letter should be in a recognizable form, and proper grammar and spelling should be used. Neat erasures and corrections might be allowed. A suggested personal letter follows:

1245 Lily Lane Buena Vista, AR 77661 (Date) Dear Sue, Congratulations on opening your business! I am sure you will do well, combining your creative genius with your talent for serving others. You asked about your financial statements. Of course, you realize that I am just an accounting student, but I do know that it is possible to have a large cash balance and little net income. You may have had expenses that were not paid in cash yet. These expenses reduce your income, but not your cash. I think that you should discuss the statements with the accountant who prepared them. He or she will be in the best position to explain the results. Thanks for the question. It really made me think. Sincerely, (signature) LO8 BT: C Difficulty: Medium TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 77

GAAP QUESTIONS 1. The Sarbanes-Oxley Act determines a. U.S tax regulations. b. internal control standards of U.S. publicly traded companies. c. internal control standards as enforced by the IASB. d. international tax regulations. Ans: B LO9 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

2. IFRS is considered to be more a. detailed than GAAP. b. rules-based and less principles-based than GAAP. c. principles-based and less rules-based than GAAP. d. None of these answer choices are correct. Ans: C LO9 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

3. Which of the following statements is false? a. Proprietorships, partnerships, and corporations are also found in countries that use IFRS. b. Non-U.S companies that trade shares in U.S markets must reconcile their accounting with GAAP. c. FASB and the IASB are working on a joint project related to the conceptual framework. d. GAAP is based on a conceptual framework that is similar to that used to develop IFRS. Ans: B LO9 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

4. Which of the following is true? a. Equity is defined under GAAP as the residual interest in the liabilities of the company. b. IFRS companies have agreed to adopt the Sarbanes-Oxley Act related to internal control in 2015. c. Transaction analysis is basically the same under GAAP and IFRS. d. Financial frauds have not occurred in U.S. companies because GAAP has detailed accounting and disclosure requirements. Ans: C LO9 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

CHAPTER 2 THE RECORDING PROCESS CHAPTER LEARNING OBJECTIVES 1. Explain what an account is and how it helps in the recording process. An account is a record of increases and decreases in specific asset, liability, and equity items. 2. Define debits and credits and explain their use in recording business transactions. The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, share capital-ordinary, retained earnings, and revenues are increased by credits and decreased by debits. 3. Identify the basic steps in the recording process. The basic steps in the recording process are: (a) analyze each transaction for its effects on the accounts, (b) enter the transaction information in a journal, (c) transfer the journal information to the appropriate accounts in the ledger. 4. Explain what a journal is and how it helps in the recording process. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effects of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared. 5. Explain what a ledger is and how it helps in the recording process. The ledger is the entire group of accounts maintained by a company. The ledger keeps in one place all the information about changes in specific account balances. 6. Explain what posting is and how it helps in the recording process. Posting is the transfer of journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. 7. Prepare a trial balance and explain its purposes. A trial balance is a list of accounts and their balances at a given time. Its primary purpose is to prove the equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.

2-2

Test Bank for Financial Accounting: IFRS Edition, 3e

TRUE-FALSE STATEMENTS 1.

A new account is opened for each transaction entered into by a business firm. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

2.

The recording process becomes more efficient and informative if all transactions are recorded in one account. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

3.

When the volume of transactions is large, recording them in tabular form is more efficient than using journals and ledgers. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

4.

An account is often referred to as a T-account because of the way it is constructed. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

5.

A debit to an account indicates an increase in that account. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

6.

If a revenue account is credited, the revenue account is increased. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

7.

The normal balance of all accounts is a debit. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

8.

Debit and credit can be interpreted to mean increase and decrease, respectively. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

9.

The double-entry system of accounting refers to the placement of a double line at the end of a column of figures. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

10.

A credit balance in a liability account indicates that an error in recording has occurred. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

11.

The dividends account is a subdivision of the retained earnings account and appears as an expense on the income statement. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

12.

Revenues are a subdivision of retained earnings. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

13.

Under the double-entry system, revenues must always equal expenses. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

14.

Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

15.

All accounts reported in the statement of financial position are increased by using debits on the left-hand side of the T-account. Ans: F LO2 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 16.

2-3

The rules for debit and credit and the normal balance of Share Capital–Ordinary are the same as for assets. Ans: F LO2 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

17.

Companies report share capital–ordinary and dividends in the equity section of the statement of financial position. Ans: F LO2 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

18.

Transaction information may be entered directly into the accounts without using a journal. Ans: T LO3 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

19.

Business documents can provide evidence that a transaction has occurred. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

20.

Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

21.

Transactions are entered in the ledger accounts and then transferred to journals. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

22.

All business transactions must be entered first in the general ledger. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

23.

A simple journal entry requires only one debit to an account and one credit to an account. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

24.

A compound journal entry requires several debits to one account and several credits to one account. Ans: F LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

25.

Transactions are recorded in alphabetic order in a journal. Ans: F LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

26.

A journal is also known as a book of original entry. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

27.

The complete effect of a transaction on the accounts is disclosed in the journal. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

28.

Entries that impact the income statement are called simple entries, whereas entries that impact the statement of financial position are called compound entries. Ans: F LO4 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

29.

The general ledger contains all the accounts that are reported on the statement of financial position, whereas the general journal contains all the accounts that are reported on the income statement. Ans: F LO5 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

30.

The chart of accounts lists accounts and the account numbers that identify their location in the ledger starting with the accounts that are reported on the income statement. Ans: F LO5 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2-4 31.

Test Bank for Financial Accounting: IFRS Edition, 3e The account titles used in journalizing transactions need not be identical to the account titles in the ledger. Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

32.

The chart of accounts is a special ledger used in accounting systems. Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

33.

A general ledger should be arranged in the order in which accounts are presented in the financial statements, beginning with the statement of financal position accounts. Ans: T LO5 BT:C K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

34.

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. Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

35.

Posting is the process of proving the equality of debits and credits in the trial balance. Ans: F LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

36.

After a transaction has been posted, the reference column in the journal should not be blank. Ans: T LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

37.

Posting involves transferring the journalized debits and credits to the statement of financial position. Ans: F LO6 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

38.

The trial balance lists accounts and their balances at a given point in time in the order in which they appear on the statement of financial position. Ans: F LO7 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

39.

When debits do not equal credits on the trial balance, this indicates that the company has net income that needs to be transferred to the retained earnings account. Ans: F LO7 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

40.

Errors on the statement of financial position are called transpositions and errors on the income statement are called irregularities. Ans: F LO7 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

41.

Currency signs are typically used only in the trial balance and the financial statements. Ans: T LO7 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

42.

The general rules of debit and credit, and the steps in the recording process–the journal, ledger, and chart of accounts–are the same under both GAAP and IFRS. Ans: T LO7 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

43.

A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Ans: T LO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process

2-5

Additional True-False Questions 44.

The double-entry system is a logical method for recording transactions and results in equal debits and credits for each transaction. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

45.

The normal balance of an expense is a credit. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

46.

The journal provides a chronological record of transactions. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

47.

The ledger is merely a bookkeeping device and therefore does not provide much useful data for management. Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

48.

The chart of accounts is a listing of the accounts and the account numbers which identify their location in the ledger. Ans: T LO6 BT: C Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

49.

The primary purpose of a trial balance is to prove the mathematical equality of the debits and credits after posting. Ans: T LO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

50.

The trial balance will not balance when incorrect account titles are used in journalizing or posting. Ans: F LO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Answers to True-False Statements Item

1. 2. 3. 4. 5. 6. 7. 8.

Ans.

Item

Ans.

F F F T F T F F

9. 10. 11. 12. 13. 14. 15. 16.

F F F T F F F F

Item

17. 18. 19. 20. 21. 22. 23. 24.

Ans.

F T T T F F T F

Item

25. 26. 27. 28. 29. 30. 31. 32.

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

F T T F F F F F

33. 34. 35. 36. 37. 38. 39. 40.

T F F T F F F F

41. 42. 43. 44. 45. 46. 47. 48.

T T T T F T F T

49. 50.

T F

For Instructor Use Only

2-6

Test Bank for Financial Accounting: IFRS Edition, 3e

MULTIPLE CHOICE QUESTIONS 51.

An account consists of a. one part. b. two parts. c. three parts. d. four parts. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

52.

The left side of an account is a. blank. b. a description of the account. c. the debit side. d. the balance of the account. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

53.

Which one of the following is not a part of an account? a. Credit side b. Trial balance c. Debit side d. Title Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

54.

An account is a part of the financial information system and is described by all except which one of the following? a. An account has a debit and credit side. 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. Ans: b LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

55.

The right side of an account a. is the correct side. b. reflects all transactions for the accounting period. c. shows all the balances of the accounts in the system. d. is the credit side. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

56.

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. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 57.

A T-account is a. a way of depicting the basic form of an account. b. what the computer uses to organize bytes of information. c. a special account used instead of a trial balance. d. used for accounts that have both a debit and credit balance. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

58.

Credits a. decrease both assets and liabilities. b. decrease assets and increase liabilities. c. increase both assets and liabilities. d. increase assets and decrease liabilities. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

59.

A debit to an asset account 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. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

60.

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. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

61.

The double-entry system requires that each transaction must be recorded a. in at least two different accounts. b. in two sets of books. c. in a journal and in a ledger. d. first as a revenue and then as an expense. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

62.

Which of the following accounts does not have a normal credit balance? a. Share Capital–Ordinary b. Revenue account c. Liability account d. Dividends Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2-7

2-8 63.

Test Bank for Financial Accounting: IFRS Edition, 3e Which one of the following represents the expanded basic accounting equation? a. Assets = Liabilities + Share Capital–Ordinary account + Retained Earnings + Dividends – Revenue – Expenses. b. Assets + Dividends + Expenses = Liabilities + Share Capital–Ordinary + Retained Earnings + Revenues. c. Assets – Liabilities – Dividends = Share Capital–Ordinary + Retained Earnings + Revenues – Expenses. d. Assets = Revenues + Expenses – Liabilities. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

64.

Which of the following correctly identifies normal balances of accounts? a. Assets Debit Liabilities Credit Equity Credit Revenues Debit Expenses Credit b. Assets Liabilities Equity Revenues Expenses

Debit Credit Credit Credit Credit

c. Assets Liabilities Equity Revenues Expenses

Credit Debit Debit Credit Debit

d. Assets Liabilities Equity Revenues Expenses

Debit Credit Credit Credit Debit

Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

65.

The best interpretation of the word credit is the a. offset side of an account. b. increase side of an account. c. right side of an account. d. decrease side of an account. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

66.

In recording an accounting transaction in a double-entry 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 only be two accounts affected by any transaction. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 67.

2-9

An accounting convention is best described as a. an absolute truth. b. an accounting custom. c. an optional rule. d. something that cannot be changed. Ans: b LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

68.

A debit is not the normal balance for which account listed below? a. Dividends b. Cash c. Accounts Receivable d. Service Revenue Ans: d LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

69.

An accountant has debited an asset account for $1,000 and credited a liability account for $500. What can be done to complete the recording of the transaction? a. Nothing further must be done. b. Debit an equity account for $500. c. Debit another asset account for $500. d. Credit a different asset account for $500. Ans: d LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

70.

An accountant has debited an asset account for $1,000 and credited a liability account for $500. Which of the following would be an incorrect way to complete the recording of the transaction? a. Credit an asset account for $500. b. Credit another liability account for $500. c. Credit an equity account for $500. d. Debit an equity account for $500. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

71.

Which of the following is not true of the terms debit and credit? a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

72.

An account will have a credit balance if the a. credits exceed the debits. b. first transaction entered was a credit. c. debits exceed the credits. d. last transaction entered was a credit. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 10 73.

Test Bank for Financial Accounting: IFRS Edition, 3e 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. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

74.

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 liabilities and decrease assets. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

75.

Assets normally show a. credit balances. b. debit balances. c. debit and credit balances. d. debit or credit balances. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

76.

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 the dividends 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 Ans: b LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

77.

If a company has overdrawn its bank balance, then a. its cash account will show a debit balance. b. its cash account will show a credit balance. c. the cash account debits will exceed the cash account credits. d. it cannot be detected by observing the balance of the cash account. Ans: b LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 78.

2 - 11

Which account below is not a subdivision of retained earnings? a. Dividends b. Revenues c. Expenses d. Share Capital-Ordinary Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

79.

When a company pays dividends a. the dividend doesn't have to be cash, it could be another asset. b. the dividends account will be increased with a credit. c. the retained earnings account will be directly increased with a debit. d. the dividends account will be decreased with a debit. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

80.

The Dividends 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 retained earnings. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

81.

Which of the following statements is not true? a. Expenses increase equity. b. Expenses have normal debit balances. c. Expenses decrease equity. d. Expenses are a negative factor in the computation of net income. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

82.

A credit to a liability account a. indicates an increase in the amount owed to creditors. b. indicates a decrease in the amount owed to creditors. c. is an error. d. must be accompanied by a debit to an asset account. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

83.

In the first month of operations, the total of the debit entries to the cash account amounted to $700 and the total of the credit entries to the cash account amounted to $500. The cash account has a a. $500 credit balance. b. $700 debit balance. c. $200 debit balance. d. $200 credit balance. Ans: c LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 12 84.

Test Bank for Financial Accounting: IFRS Edition, 3e Martin’s Mail Service purchased equipment for $8,000. Martin paid $1,000 in cash and signed a note for the balance. Martin debited the Equipment account, credited Cash and a. nothing further must be done. b. debited the retained earnings account for $7,000. c. credited another asset account for $1,000. d. credited a liability account for $1,000. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

85.

Taylor Industries purchased supplies for £1,000. They paid £500 in cash and agreed to pay the balance in 30 days. The journal entry to record this transaction would include a debit to an asset account for ₤1,000, a credit to a liability account for ₤500. Which of the following would be the correct way to complete the recording of the transaction? a. Credit an asset account for ₤500. b. Credit another liability account for ₤500. c. Credit the retained earnings account for ₤500. d. Debit the retained earnings account for ₤500. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

86.

On January 14, Ericsson Industries purchased supplies of $500 on account. The entry to record the purchase will include a. a debit to Supplies and a credit to Accounts Payable. b. a debit to Supplies Expense and a credit to Accounts Receivable. c. a debit to Supplies and a credit to Cash. d. a debit to Accounts Receivable and a credit to Supplies. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

87.

On June 1, 2017, Alma Inc. reported a cash balance of €18,000. During June, Alma made deposits of €4,500 and made disbursements totalling €24,000. What is the cash balance at the end of June? a. €1,500 debit balance b. €22,500 debit balance c. €1,500 credit balance d. €6,000 credit balance Ans: c LO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

88.

At January 1, 2017, LeAnna Industries reported retained earnings of $260,000. During 2017, LeAnna had a net loss of $60,000 and paid dividends of $40,000. At December 31, 2017, the amount of retained earnings is a. $260,000. b. $280,000. c. $200,000. d. $160,000. Ans: d LO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 89.

2 - 13

Omega Company pays its employees twice a month, on the 7th and the 21st. On June 21, Omega Company paid employee salaries of $4,000. This transaction would a. increase equity by $4,000. b. decrease the balance in Salaries and Wages Expense by $4,000. c. decrease net income for the month by $4,000. d. be recorded by a $4,000 debit to Salaries and Wages Payable and a $4,000 credit to Salaries and Wages Expense. Ans: c LO2 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

90.

In the first month of operations for Widget Industries, the total of the debit entries to the cash account amounted to ₤18,000 (₤10,000 investment by the owners and revenues of ₤8,000). The total of the credit entries to the cash account amounted to ₤10,000 (purchase of equipment ₤4,000 and payment of expenses ₤6,000). At the end of the month, the cash account has a(n) a. ₤6,000 credit balance. b. ₤6,000 debit balance. c. ₤8,000 debit balance. d. ₤8,000 credit balance. Ans: c LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

91.

Rusthe Company showed the following balances at the end of its first year: Cash Prepaid insurance Accounts receivable Accounts payable Notes payable Share capital-ordinary Dividends Revenues Expenses

$ 19,000 1,400 7,000 5,600 8,400 4,800 1,400 45,000 35,000

What did Rusthe Company show as total credits on its trial balance? a. $65,200 b. $63,800 c. $62,400 d. $66,600 Ans: b LO2 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA PC: PS

92.

Ayala Company showed the following balances at the end of its first year: Cash Prepaid insurance Accounts receivable Accounts payable Notes payable Share capital-ordinary Dividends Revenues Expenses

$11,000 500 2,500 2,000 6,000 4,000 500 15,000 12,500

For Instructor Use Only

2 - 14

Test Bank for Financial Accounting: IFRS Edition, 3e What did Ayala Company show as total credits on its trial balance? a. $27,500 b. $27,000 c. $26,500 d. $28,000 Ans: b LO2 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA PC: PS

93.

During February 2017, its first month of operations, the owner of Alona Enterprises invested cash of $125,000. Alona had cash revenues of $20,000 and paid expenses of $35,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28? a. $15,000 credit b. $110,000 debit c. $145,000 debit d. $90,000 credit Ans: b LO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

94.

Which of the following statements is true regarding debits and credits? a. On the income statement, debits are used to increase account balances, whereas on the statement of financial position, credits are used to increase account balances. b. The basic equation on the statement of financial position is Assets + Liabilities = Equity. c. The rules for debit and credit and the normal balance of Share Capital-Ordinary are the same as for liabilities. d. On the income statement, revenues are increased by debits whereas on the statement of financial position retained earnings is increased by a credit. Ans: c LO2 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

95.

Which of the following accounts is reported in the equity section of the statement of financial position? a. Dividends b. Share capital−ordinary c. Revenues d. All of these answer choices are correct. Ans: b LO2 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

96.

Revenues are a. impacted by debits and credits in the same way that expenses are impacted by debits and credits. b. a subdivision of equity, providing information about why equity increased. c. reported on the statement of financial position as a current item. d. All of these answer choices are correct. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 97.

2 - 15

Basic steps in the recording process include all of the following except a. transfer the journal information to the appropriate account in the statement of financial position. b. analyze each transaction for its effect on the accounts. c. enter the transaction information in a journal. d. All of these answer choices are correct. Ans: a LO3 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

98.

At January 31, 2017, the balance in Bota Inc.’s supplies account was $2,000. During February, Bota purchased supplies of $2,400 and used supplies of $3,200. At the end of February, the balance in the supplies account should be a. $2,000 debit. b. $2,800 credit. c. $4,400 debit. d. $1,200 debit. Ans: d LO3 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

99.

At December 1, 2017, Gibson Company’s accounts receivable balance was €7,200. During December, Gibson had credit revenues of €30,000 and collected accounts receivable of €24,000. At December 31, 2017, the accounts receivable balance is a. €7,200 debit. b. €13,200 debit. c. €37,200 debit. d. €13,200 credit. Ans: b LO3 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

100.

At October 1, 2017, Padilla Industries had an accounts payable balance of $90,000. During the month, the company made purchases on account of $75,000 and made payments on account of $120,000. At October 31, 2017, the accounts payable balance is a. $90,000. b. $30,000. c. $45,000. d. $120,000. Ans: c LO3 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

101.

During 2017, its first year of operations, Yaspo’s Bakery had revenues of $200,000 and expenses of $110,000. The business paid dividends of $60,000. What is the amount of equity at December 31, 2017? a. $0 b. $60,000 debit c. $30,000 credit d. $90,000 credit Ans: c LO3 BT: AP Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 16 102.

Test Bank for Financial Accounting: IFRS Edition, 3e On July 7, 2017, Anaya Enterprises performed cash services of $1,400. The entry to record this transaction would include a. a debit to Service Revenue of $1,400. b. a credit to Accounts Receivable of $1,400. c. a debit to Cash of $1,400. d. a credit to Accounts Payable of $1,400. Ans: c LO3 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

103.

At September 1, 2017, Crews Co. reported equity of ₤272,000. During the month, Crews generated revenues of ₤40,000, incurred expenses of ₤24,000, purchased equipment for ₤10,000 and paid dividends of ₤4,000. What is the amount of equity at September 30, 2017? a. ₤272,000 b. ₤16,000 c. ₤274,000 d. ₤284,000 Ans: d LO3 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

104.

The final step in the recording process is to a. analyze each transaction. b. enter the transaction in a journal. c. prepare a trial balance. d. transfer journal information to ledger accounts. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

105.

The usual sequence of steps in the transaction recording process is: a. journal → analyze → ledger. b. analyze → journal → ledger. c. journal → ledger → analyze. d. ledger → journal → analyze. Ans: b LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

106.

In recording business transactions, evidence that an accounting transaction has taken place is obtained from a. business documents. b. the taxing authority. c. the public relations department. d. the IASB. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

107.

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 company's bank. b. equity. c. ledger accounts. d. financial statements. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 108.

2 - 17

The first step in the recording process is to a. prepare financial statements. b. analyze each transaction for its effect on the accounts. c. post to a journal. d. prepare a trial balance. Ans: b LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

109.

Evidence that would not help with determining the effects of a transaction on the accounts would be a(n) a. cash register sales tape. b. bill. c. advertising brochure. d. check. Ans: c LO3 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

110.

After transaction information has been recorded in the journal, it is transferred to the a. trial balance. b. income statement. c. book of original entry. d. ledger. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

111.

The usual sequence of steps in the recording process is to analyze each transaction, enter the transaction in the a. journal, and transfer the information to the ledger accounts. b. ledger, and transfer the information to the journal. c. book of accounts, and transfer the information to the journal. d. book of original entry, and transfer the information to the journal. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

112.

The final step in the recording process is to transfer the journal information to the a. trial balance. b. financial statements. c. ledger. d. file cabinets. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

113.

The recording process occurs a. once a year. b. once a month. c. repeatedly during the accounting period. d. infrequently in a manual accounting system. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 18 114.

Test Bank for Financial Accounting: IFRS Edition, 3e A compound journal entry involves a. two accounts. b. three accounts. c. three or more accounts. d. four or more accounts. Ans: c LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

115.

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. Ans: d LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

116.

When three or more accounts are required in one journal entry, the entry is referred to as a a. compound entry. b. triple entry. c. multiple entry. d. simple entry. Ans: a LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

117.

When only two accounts are required in one journal entry, the entry is referred to as a a. balanced entry. b. simple entry. c. posting. d. nominal entry. Ans: b LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

118.

Another name for the journal is the a. listing. b. book of original entry. c. book of accounts. d. book of source documents. Ans: b LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

119.

The standard format of a journal would not include a. a reference column. b. an account title column. c. a T-account. d. a date column. Ans: c LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 120.

Transactions in a journal are initially recorded in a. account number order. b. dollar amount order. c. alphabetical order. d. chronological order. Ans: d LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

121.

A journal is not useful for a. disclosing in one place the complete effect of a transaction. b. preparing financial statements. c. providing a record of transactions. d. locating and preventing errors. Ans: b LO4 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

122

A complete journal entry does not show a. the date of the transaction. b. the new balance in the accounts affected by the transaction. c. a brief explanation of the transaction. d. the accounts and amounts to be debited and credited. Ans: b LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

123.

The name given to entering transaction data in the journal is a. chronicling. b. listing. c. posting. d. journalizing. Ans: d LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

124.

The standard form of a journal entry has the a. debit account entered first and indented. b. credit account entered first and indented. c. debit account entered first at the extreme left margin. d. credit account entered first at the extreme left margin. Ans: c LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

125

When journalizing, the reference column is a. left blank. b. used to reference the source document. c. used to reference the journal page. d. used to reference the financial statements. Ans: a LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 19

2 - 20 126.

Test Bank for Financial Accounting: IFRS Edition, 3e On June 1, 2017 Quang Le buys a copier machine for his business and finances this purchase with cash and a note. When journalizing this transaction, he will a. use two journal entries. b. make a compound entry. c. make a simple entry. d. list the credit entries first, which is proper form for this type of transaction. Ans: b LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

127.

Which of the following journal entries is recorded correctly and in the standard format? a. Salaries and Wages Expense ............................................ 1,000 Cash ............................................................................ 2,500 Rent Expense . ................................................................... 1,500 b. Salaries and Wages Expense . ........................................... Rent Expense . ................................................................... Cash ............................................................................

1,000 1,500 2,500

c. Cash .................................................................................. Salaries and Wages Expense ...................................... Rent Expense ...............................................................

2,500

d. Salaries and Wages Expense ............................................ Rent Expense .................................................................... Cash . ...........................................................................

1,000 1,500

1,000 1,500

2,500

Ans: d LO4 BT: AN Difficulty: Easy TOT: 1 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS

128.

Which of the following statements is true regarding simple and compound entries? a. Simple entries can be prepared by anyone whereas compound entries need to be prepared by a skilled accountant. b. Simple entries are recorded on the income statement whereas compound entries are recorded on the statement of financial position. c. Simple entries involve one account, whereas compound entries involved 2 or more accounts. d. An example of a compound entry would be the purchase of a machine for $400 cash and a $2,000 note payable. Ans: d LO4 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

129.

Compound entries a. would include an entry to record the purchase of a computer for cash. b. include at least two debits or two credits. c. require that all credits be listed before the debits for entries affecting the statement of financial position. d. should be broken into their component parts and recorded as simple entries. Ans: b LO4 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 130.

2 - 21

Accounts maintained within the ledger that appear on the statement of financial position include all of the following except a. Salaries and Wages Expense. b. Interest Payable. c. Supplies. d. Share Capital-Ordinary. Ans: a LO5 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

131.

The entire group of accounts maintained by a company is called the a. statement of cash flows. b. general journal. c. general ledger. d. trial balance. Ans: c LO5 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

132.

An accounting record of the balances of all assets, liabilities, and equity accounts is called a. compound entry. b. general journal. c. general ledger. d. chart of accounts. Ans: c LO5 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

133.

The usual ordering of accounts in the general ledger is a. assets, liabilities, share capital−ordinary, retained earnings, dividends, revenues, and expenses. b. assets, liabilities, dividends, share capital−ordinary, retained earnings, expenses, and revenues. c. liabilities, assets, share capital−ordinary, retained earnings, revenues, expenses, and dividends. d. Share capital−ordinary, retained earnings, assets, liabilities, dividends, expenses, and revenues. Ans: a LO5 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

134.

Management could determine the amounts due from customers by examining which ledger account? a. Service Revenue b. Accounts Payable c. Accounts Receivable d. Supplies Ans: c LO5 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

135.

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. c. debit, credit, and balance. d. debit, credit, and date. Ans: c LO5 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 22 136.

Test Bank for Financial Accounting: IFRS Edition, 3e On August 13, 2017, Merrill Enterprises purchased equipment for $2,000 and supplies of $400 on account. Which of the following journal entries is recorded correctly and in the standard format? a. Equipment........................................................................... 2,000 Account Payable ........................................................... 2,400 Supplies ................................................................................. 400 b. Equipment........................................................................... Supplies .............................................................................. Accounts Payable .........................................................

2,000 400 2,400

c. Accounts Payable ............................................................... Equipment ..................................................................... Supplies ........................................................................

2,400

d. Equipment........................................................................... Supplies .............................................................................. Accounts Payable. ........................................................

2,000 400

2,000 400

2,400

Ans: d LO5 BT: AP Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

137.

Robitaille Company received a cash advance of $500 from a customer. As a result of this event, a. assets increased by $500. b. equity increased by $500. c. liabilities decreased by $500. d. revenues increased by $500. Ans: a LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

138.

Pastorek Company purchased equipment for $1,800 cash. As a result of this event, a. equity decreased by $1,800. b. total assets increased by $1,800. c. total assets remained unchanged. d. total liabilities increased by $1,800. Ans: c LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

139.

Root Company provided consulting services and billed the client $2,500. As a result of this event, a. assets remained unchanged. b. assets increased by $2,500. c. equity increased by $2,500. d. Both assets and equity increased by $2,500. Ans: d LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 140.

2 - 23

The first step in posting involves a. entering in the appropriate ledger account the date, journal page, and debit amount shown in the journal. b. writing in the journal the account number to which the debit amount was posted. c. writing in the journal the account number to which the credit amount was posted. d. entering in the appropriate ledger account the date, journal page, and credit amount shown in the journal. Ans: a LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

141.

A chart of accounts usually starts with a. asset accounts. b. expense accounts. c. liability accounts. d. revenue accounts. Ans: a LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

142.

The procedure of transferring journal entries to the ledger accounts is called a. journalizing. b. analyzing. c. reporting. d. posting. Ans: d LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

143.

A number in the reference column in a general journal indicates a. that the entry has been posted to a particular account. b. the page number of the journal. c. the dollar amount of the transaction. d. the date of the transaction. Ans: a LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

144.

A chart of accounts for a business firm a. is a graph. 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. Ans: c LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

145.

Posting a. should be performed in account number order. 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. Ans: b LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 24

Test Bank for Financial Accounting: IFRS Edition, 3e

146.

After journal entries are posted, the reference column a. of the general journal will be blank. 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. Ans: b LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

147.

The explanation column of the general ledger a. is completed without exception. b. is nonexistent. c. is used infrequently. d. shows account titles. Ans: c LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

148.

A numbering system for a chart of accounts a. is prescribed by IFRS. b. is uniform for all businesses. c. usually starts with income statement accounts. d. usually starts with statement of financial position accounts. Ans: d LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

149.

The first step in designing a computerized accounting system is the creation of the a. general ledger. b. general journal. c. trial balance. d. chart of accounts. Ans: d LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

150.

Posting a. accumulates the effects of ledger entries and transfers them to the general journal. b. is done only for income statement activity; activity related to the statement of financial position does not require posting. c. is done only once per year. d. is done by posting all the debits and credits of one entry before moving on to the next entry. Ans: d LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

151.

The trial balance a. is a listing of all the accounts and their balances in the order the accounts appear on the statement of financial position. b. has as its primary purpose to prove (check) that all journal entries were made for the period. c. can be used to uncover errors in journalizing and posting. d. is used to prepare the statement of financial position while the general ledger is used to prepare the income statement. Ans: c LO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 152.

2 - 25

Which of the following errors will prevent the trial balance from balance? a. A transaction is not journalized. b. Transposition error related to the statement of financial position. c. A journal entry is posted twice. d. A journal entry to purchase $100 worth of equipment is posted as a $1,000 purchase. Ans: b LO7 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

153.

Which of the following statements is false concerning use of currency signs? a. Currency signs do not appear in journals or ledgers. b. Currency signs are generally only shown for the first item in a column and for the column total. c. Currency signs are not typically used in the trial balance. d. All of these answer choices are correct. Ans: c LO7 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

154.

Which of the following statement is true regarding the recording process? a. Because IFRS rely more on fair value and less on historical cost than U.S. GAAP the double-entry accounting system is not widely used by companies who use IFRS. b. Both IFRS and U.S. GAAP, use the same general rules of debits and credits and the steps in the recording process. c. A trial balance using IFRS is organised by first showing the accounts from the statement of financial position followed by accounts from the income statement; a trial balance using U.S. GAAP is organized using the opposite order. d. All of the choices are correct regarding the recording process. Ans: b LO7 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

155.

Under U.S. GAAP a. currency signs are generally used in the journal, ledger, trial balance, and financial statements. b. Share Capital-Ordinary is referred to as Retained Earnings. c. the statement of financial position is often called the statement of changes in financial position. d. the rules of debits and credits, and the steps in the recording process are the same as under IFRS. Ans: d LO7 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

156.

The steps in preparing a trial balance include all of the following except a. listing the account titles and their balances. b. totaling the debit and credit columns. c. proving the equality of the two columns. d. transferring journal amounts to ledger accounts. Ans: d LO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 26 157.

Test Bank for Financial Accounting: IFRS Edition, 3e A trial balance may balance even when each of the following occurs except when a. a transaction is not journalized. b. a journal entry is posted twice. c. incorrect accounts are used in journalizing. d. a transposition error is made. Ans: d LO7 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

158.

A list of accounts and their balances at a given time is called a(n) a. journal. b. posting. c. trial balance. d. income statement. Ans: c LO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

159.

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. that all accounts reflect correct balances. d. the mathematical equality of the accounting equation. Ans: d LO7 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

160.

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. Ans: c LO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

161.

Customarily, a trial balance 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. Ans: c LO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

162.

A trial balance would only 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 are made in recording the transaction. d. A transposition error when transferring the debit side of journal entry to the ledger. Ans: d LO7 BT: C Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process

2 - 27

Additional Multiple Choice Questions 163.

An account is an individual accounting record of increases and decreases in specific a. liabilities. b. assets. c. expenses. d. assets, liabilities, and equity items. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

164.

A debit is not the normal balance for which of the following? a. Asset account b. Dividends account c. Expense account d. Share capital-ordinary account Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

165.

Which of the following rules is incorrect? a. Credits decrease the dividends account. b. Debits increase the share capital-ordinary account. c. Credits increase revenue accounts. d. Debits decrease liability accounts. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

166.

Which of the following statements is false? a. Revenues increase equity. b. Revenues have normal credit balances. c. Revenues are a positive factor in the computation of net income. d. Revenues are increased by debits. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

167.

Which of the following is the correct sequence of steps in the recording process? a. Posting, journalizing, analyzing b. Journalizing, analyzing, posting c. Analyzing, posting, journalizing d. Analyzing, journalizing, posting Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

168.

Which of the following is false about a journal? a. It discloses in one place the complete effects of a transaction. b. It provides a chronological record of transactions. c. It helps to prevent or locate errors because debit and credit amounts for each entry can be readily compared. d. It keeps in one place all the information about changes in specific account balances. Ans: d LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 28 169.

Test Bank for Financial Accounting: IFRS Edition, 3e Sternberg Company purchases equipment for $1,200 and supplies for $400 from Tran Co. for $1,600 cash. The entry for this transaction will include a a. debit to Equipment $1,200 and a debit to Supplies Expense $400 for Tran. b. credit to Cash for Tran. c. credit to Accounts Payable for Sternberg. d. debit to Equipment $1,200 and a debit to Supplies $400 for Sternberg. Ans: d LO4 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

170.

Wiser Inc. paid cash dividends of $300. The entry for this transaction will include a debit of $300 to a. Dividends. b. Supplies Expense. c. Shareholders' Expense. d. Salaries and Wages Expense. Ans: a LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

171.

On October 3, Josh Antonio, a carpenter, received a cash payment for services previously billed to a client. Josh paid his telephone bill, and he also bought supplies on credit. For the three transactions, at least one of the entries will include a a. credit to Retained Earnings. b. credit to Notes Payable. c. debit to Accounts Receivable. d. credit to Accounts Payable. Ans: d LO4 BT: C Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

172.

Posting of journal entries should be done in a. account number order. b. alphabetical order. c. chronological order. d. dollar amount order. Ans: c LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

173.

The chart of accounts is a a. list of accounts and their balances at a given time. b. device used to prove the mathematical accuracy of the ledger. c. listing of the accounts and the account numbers which identify their location in the ledger. d. required step in the recording process. Ans: c LO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

174.

Which of the following is incorrect regarding a trial balance? a. It proves that the debits equal the credits after posting. b. It proves that the company has recorded all transactions. c. A trial balance uncovers errors in journalizing and posting. d. A trial balance is useful in the preparation of financial statements. Ans: b LO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 175.

2 - 29

A trial balance will not balance if a. a journal entry is posted twice. b. a wrong amount is used in journalizing. c. incorrect account titles are used in journalizing. d. a journal entry is only partially posted. Ans: d LO7 BT: C Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Answers to Multiple Choice Questions Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68.

c c b b d c a b d c a d b d c c b d

69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.

d d b a b c b b b d a c a a c d a a

87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.

c d c c b b b c b b a d b c c c d d

105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122.

b a c b c d a c c c d a b b c d b b

123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140.

d c a b d d b a c c a c c d a c d a

141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158.

a d a c b b c d d d c b c b d d d c

159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175.

d c c d d d b d d d d a d c c b d

For Instructor Use Only

2 - 30

Test Bank for Financial Accounting: IFRS Edition, 3e

BRIEF EXERCISES BE 176 At June 1, 2017, Estrada Industries had an accounts receivable balance of ₤12,000. During the month, the company performed credit services of ₤30,000 and collected accounts receivable of ₤32,000. What is the balance in accounts receivable at June 30, 2017? Solution 176 The balance at the end of the month is ₤10,000, calculated as follows: Beginning accounts receivable Add: Credit sales Less: Collections Ending accounts receivable

₤12,000 30,000 (32,000) ₤10,000

LO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: RT AICPA BB: CT AICPA PC: PS

BE 177 J. B. Goode has the following transactions during April of the current year. Indicate (a) the effect on the accounting equation and (b) the debit-credit analysis. Apr. 1 4 16 27

Opens a law office, investing $20,000 in cash. Pays rent in advance for 6 months, $10,800 cash. Receives $8,000 from clients for services provided. Pays secretary $3,000 salary.

For Instructor Use Only

The Recording Process

2 - 31

Solution 177

(a) A u g .

Effect on Accounting Equation

(b)

Debit-Credit Analysis

The asset Cash is increased; the equity account Share Capital-Ordinary is increased.

Debits increase assets: debit Cash $20,000. Credits increase equity: credit Share Capital-Ordinary $20,000.

The4asset Prepaid Rent is increased; the asset Cash is decreased.

Debits increase assets: debit Prepaid Rent $10,800. Credits decrease assets: credit Cash $10,800.

The 16asset Cash is increased; the revenue Service Revenue is increased.

Debits increase assets: debit Cash $8,000. Credits increase revenues: credit Service Revenue $8,000.

The 27expense Salaries and Wages Expense is increased; the asset Cash is decreased.

Debits increase expenses: debit Salaries and Wages Expense $3,000. Credits decrease assets: credit Cash $3,000.

1

LO2 BT: C Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS

BE 178 For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance. Increase (+), Decrease (–). Debit_

_Credit_

Normal Balance

1. Salaries and Wages Expense.

_______

______

_______

2. Accounts Receivable.

_______

______

_______

3. Service Revenue.

_______

______

_______

4. Share Capital-Ordinary.

_______

______

_______

5. Dividends.

_______

______

_______

For Instructor Use Only

2 - 32

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 178 1. Salaries and Wages Expense.

Debit_ __ + __

_Credit_ ___–__

Normal Balance __ Dr___

2. Accounts Receivable.

__ +__

___–__

__ Dr___

3. Service Revenue.

__ –__

___+__

__ Cr___

4. Share Capital-Ordinary.

__ –__

___+__

__ Cr___

5. Dividends.

__ +_ _

___–__

__ Dr___

LO2 BT: K Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 179 For each of the following transactions of Chen Inc., identify the account to be debited and the account to be credited. 1. Purchased 18-month insurance policy for cash. 2. Paid weekly payroll. 3. Purchased supplies on account. 4. Received utility bill to be paid at later date.

Solution 179 Transaction 1 2 3 4

Debit Prepaid Insurance Salaries and Wages Expense Supplies Utilities Expense

Credit Cash Cash Accounts Payable Accounts Payable

LO4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 180 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction. 1. Kevin Diaz invested $40,000 cash in exchange for ordinary shares. 2. Hired an employee to be paid $400 per week, starting tomorrow. 3. Paid two years’ rent in advance, $7,200. 4. Paid the worker’s weekly salary. 5. Recorded revenue earned and received for the week, $1,500. Solution 180 1. Cash……. ....................................................................................... Share Capital-Ordinary ..........................................................

40,000 40,000

2. No entry, not a transaction. 3. Prepaid Rent .................................................................................. Cash ...................................................................................... For Instructor Use Only

7,200 7,200

The Recording Process Solution 180

2 - 33

(cont.)

4. Salaries and Wages Expense ........................................................ Cash ......................................................................................

400

5. Cash………. ................................................................................... Service Revenue ...................................................................

1,500

400

1,500

LO4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 181 Identify the impact on the accounting equation of the following transactions. 1. Purchased 36-month insurance policy for cash. 2. Purchased supplies on account. 3. Received utility bill to be paid at later date. 4. Paid utility bill previously accrued. Solution 181 1. 2. 3. 4.

Net effect is no change: Increases assets and decreases assets. Increases assets and increases liabilities. Increases liabilities and decreases equity. Decreases assets and decreases liabilities

LO4 BT: K Difficulty: Easy TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 182 Journalize the following transactions for Mercado Company for June 2017, the company’s first month of operations. You may omit explanations for the transactions. 1. Purchased equipment on account for $6,000. 2. Billed customers $5,000 for services performed. 3. Made payment of $1,500 on account for equipment purchased earlier in month. 4. Collected $2,400 on customer accounts. Solution 182 1. Equipment ...................................................................................... Accounts Payable ..................................................................

6,000

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

5,000

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

1,500

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

2,400

LO4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

6,000 5,000 1,500 2,400

2 - 34

Test Bank for Financial Accounting: IFRS Edition, 3e

BE 183 Use the information in BE 182 to answer the following questions. 1. What is the balance in Accounts Payable at June 30, 2017? 2. What is the balance in Accounts Receivable at June 30, 2017?

Solution 183 1. Accounts Payable at June 30, 2017: Beginning accounts payable Purchases on account Payments on account Ending accounts payable

$ 0 6,000 (1,500) $4,500

2. Accounts Receivable at June 30, 2017: Beginning accounts receivable Billed to customers Collections from customers Ending accounts receivable

$ 0 5,000 (2,400) $2,600

LO6 BT: AP Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS

BE 184 The transactions of the Buy It Now Store are recorded in the general journal below. You are to post the journal entries to T-accounts. General Journal ____________________________________________________________________________ Date Account Titles Debit Credit ____________________________________________________________________________ 2017 Aug. 5 Accounts Receivable 2,800 Service Revenue 2,800 10

Cash

5,000 Service Revenue

19

25

5,000

Rent Expense Cash

1,000

Cash

1,400

1,000

Accounts Receivable

For Instructor Use Only

1,400

The Recording Process BE 184

2 - 35

(cont.) General Ledger Cash

Accounts Receivable

Service Revenue

Rent Expense

Solution 184 General Ledger Cash 8/10 8/25

5,000 1,400

8/31 Bal.

5,400

Accounts Receivable 8/19

1,000

8/5

2,800

8/31 Bal.

1,400

Service Revenue 8/5 8/10 8/31 Bal.

8/25

1,400

Rent Expense 2,800 5,000 7,800

8/19

1,000

8/31 Bal.

1,000

LO6 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 185 Prepare a trial balance from the ledger accounts of Attica Company as of January 31, 2017. Accounts Payable Accounts Receivable Cash Share Capital-Ordinary Dividends

$ 500 2,000 3,000 2,200 1,000

Rent Expense Service Revenue Supplies Salaries and Wages Expense

For Instructor Use Only

$ 500 5,000 200 1,000

2 - 36

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 185 ATTICA COMPANY Trial Balance January 31, 2017

Cash Accounts Receivable Supplies Accounts Payable Share Capital-Ordinary Dividends Service Revenue Rent Expense Salaries and Wages Expense

Debit $3,000 2,000 200

Credit

$ 500 2,200 1,000 5,000 500 1,000 $7,700

$7,700

LO7 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 186 Prepare a corrected trial balance for Luzon Company. All accounts should have a normal balance. LUZON COMPANY Trial Balance March 31, 2017 Debit € 40,000

Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Unearned Service Revenue Notes Payable Share Capital-Ordinary Dividends Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense

Credit €30,000

2,500 60,000 25,000 10,000 20,000 54,000 1,500 55,000 15,000 5,000 10,000 €142,500

For Instructor Use Only

€185,500

The Recording Process Solution 186 LUZON COMPANY Trial Balance For the Quarter Ended 3/31/17 Debit € 40,000 30,000 2,500 60,000

Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Unearned Service Revenue Notes Payable Share Capital-Ordinary Dividends Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense

Credit

€ 25,000 10,000 20,000 54,000 1,500 55,000 15,000 5,000 10,000 €164,000

LO7 BT: AP Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS

For Instructor Use Only

€164,000

2 - 37

2 - 38

Test Bank for Financial Accounting: IFRS Edition, 3e

EXERCISES Ex. 187 The chart of accounts used by Ming Copy Company is listed below. You are to indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate boxes. CHART OF ACCOUNTS 101 Cash 209 Unearned Service Revenue 112 Accounts Receivable 311 Share Capital-Ordinary 126 Supplies 332 Dividends 157 Equipment 400 Service Revenue 200 Note Payable 610 Advertising Expense 201 Accounts Payable 729 Rent Expense ——————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s) debited credited 1. The company issues ordinary shares in exchange for ¥90,000,000 cash. ——————————————————————————————————————————— 2. Purchased three photocopy machines for ¥200,000,000, paying ¥50,000,000 cash and signing a 5-year, 10% note for the remainder. ——————————————————————————————————————————— 3. Purchased ¥5,000,000 supplies on credit. ——————————————————————————————————————————— 4. Cash photocopy revenue amounted to ¥7,000,000. ——————————————————————————————————————————— 5. Paid ¥500,000 cash for radio advertising. ——————————————————————————————————————————— 6. Paid ¥800,000 on account for supplies purchased in transaction 3. ——————————————————————————————————————————— 7. The company paid dividends of ¥1,500,000. ——————————————————————————————————————————— 8. Paid ¥1,200,000 cash for rent for the current month. ——————————————————————————————————————————— 9. Received ¥2,000,000 cash advance from a customer for future copying. ——————————————————————————————————————————— 10. Billed a customer for ¥450,000 for photocopy work done. ———————————————————————————————————————————

For Instructor Use Only

The Recording Process

2 - 39

Solution 187 ——————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s) debited credited 1. The company issues ordinary shares in exchange for ¥90,000,000 cash. 101 311 ——————————————————————————————————————————— 2. Purchased three photocopy machines for ¥200,000,000, paying ¥50,000,000 cash and signing a 5-year, 10% note for the remainder. 157 101,200 ——————————————————————————————————————————— 3. Purchased ¥5,000,000 supplies on credit. 126 201 ——————————————————————————————————————————— 4. Cash photocopy revenue amounted to ¥7,000,000. 101 400 ——————————————————————————————————————————— 5. Paid ¥500,000 cash for radio advertising. 610 101 ——————————————————————————————————————————— 6. Paid ¥800,000 on account for supplies purchased in transaction 3. 201 101 ——————————————————————————————————————————— 7. The company paid dividends of ¥1,500,000. 332 101 ——————————————————————————————————————————— 8. Paid ¥1,200,000 cash for rent for the current month. 729 101 ——————————————————————————————————————————— 9. Received ¥2,000,000 cash advance from a customer for future copying. 101 209 ——————————————————————————————————————————— 10. Billed a customer for ¥450,000 for photocopy work done. 112 400 ——————————————————————————————————————————— LO2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 40

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 188 Under a double-entry system, show how the entry in each statement is entered in the ledger by using debit or credit to indicate the increase or decrease in the affected account. Debit or Credit 1.

An increase in Salaries and Wages Expense.

_________________

2.

A decrease in Accounts Payable.

_________________

3.

An increase in Prepaid Insurance.

_________________

4.

An increase in Share Capital-Ordinary.

_________________

5.

A decrease in Supplies.

_________________

6.

An increase in Dividends.

_________________

7.

An increase in Service Revenue.

_________________

8.

A decrease in Accounts Receivable.

_________________

9.

An increase in Rent Expense.

_________________

10.

A decrease in Equipment.

_________________

Solution 188 1.

An increase in Salaries and Wages Expense.

Debit ______

2.

A decrease in Accounts Payable.

Debit ______

3.

An increase in Prepaid Insurance.

Debit ______

4.

An increase in Share Capital-Ordinary.

Credit ______

5.

A decrease in Supplies.

Credit ______

6.

An increase in Dividends.

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 ______

LO2 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process

2 - 41

Ex. 189 Selected transactions for Sweet Home, a property management company, in its first month of business, are as follows. Jan. 2 Issued ordinary shares to investors for $15,000 cash. 3 Purchased used car for $4,000 cash for use in business. 9 Purchased supplies on account for $500. 11 Billed customers $1,800 for services performed. 16 Paid $200 cash for advertising. 20 Received $700 cash from customers billed on January 11. 23 Paid creditor $300 cash on balance owed. 28 Paid dividends of $2,000. Instructions For each transaction indicate the following. (a) The basic type of account debited and credited (asset (A), liability (L), equity (E)). (b) The specific account debited and credited (cash, rent expense, service revenue, etc.). (c) Whether the specific account is increased (incr.) or decreased (decr). (d) The normal balance of the specific account. Use the following format, in which the January 2 transaction is given as an example. Account Debited (a) (b) (c) (d) Basic Specific Normal Date Type Account Effect Balance Jan. 2 A Cash Incr. Debit

(a) Basic Type E

Account Credited (b) (c) (d) Specific Normal Account Effect Balance Share Incr. Credit Cap.–Ord.

For Instructor Use Only

2 - 42

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 189 Account Debited (a) (b) (c) (d) Basic Specific Normal Date Type Account Effect Balance Jan. 2 A Cash Incr. Debit 3 9

A A

11 A 16 E

20 A 23 L

28 E

(a) Basic Type E

Equip. Supplies

Incr. Incr.

Debit Debit

A L

Accts Rec.

Incr.

Debit

E

Advert. Expense

Incr.

Debit

A

Incr.

Debit

Decr.

Dividends Incr.

Cash Accts. Pay.

Account Credited (b) (c) (d) Specific Normal Account Effect Balance Share Incr. Credit Cap.–Ord. Cash Decr. Debit Accts. Pay. Incr. Credit Service Revenue Incr. Credit Decr.

Debit

A

Cash Accts. Rec.

Decr.

Debit

Credit

A

Cash

Decr.

Debit

Debit

A

Cash

Decr.

Debit

LO2 BT: C Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA PC: PS

Ex. 190 For the accounts listed below, indicate if the normal balance of the account is a debit or credit. Normal Balance Debit or Credit

Accounts 1.

Service Revenue

_________________

2.

Rent Expense

_________________

3.

Accounts Receivable

_________________

4.

Accounts Payable

_________________

5.

Retained Earnings

_________________

6.

Supplies

_________________

7.

Insurance Expense

_________________

8.

Dividends

_________________

9.

Equipment

_________________

10.

Notes Payable

_________________ For Instructor Use Only

The Recording Process

2 - 43

Solution 190 Normal Balance Debit or Credit

Accounts 1.

Service Revenue

Credit

2.

Rent Expense

Debit

3.

Accounts Receivable

Debit

4.

Accounts Payable

Credit

5.

Retained Earnings

Credit

6.

Supplies

Debit

7.

Insurance Expense

Debit

8.

Dividends

Debit

9.

Equipment

Debit

10.

Notes Payable

Credit

LO2 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 191 For each of the following accounts, indicate the effects of (a) a debit and (b) the normal account balance. 1. Notes Payable 2. Prepaid Insurance 3. Salaries and Wages Expense 4. Service Revenue 5. Equipment 6. Share Capital-Ordinary

Solution 191 1. 2. 3. 4. 5. 6.

Notes Payable Prepaid Insurance Salaries and Wages Expense Service Revenue Equipment Share Capital-Ordinary

Debit Effect Decrease Increase Increase Decrease Increase Decrease

Normal Balance Credit Debit Debit Credit Debit Credit

LO2 BT: C Difficulty: Easy TOT: 7 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 44

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 192 During an accounting period, a business has numerous transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. ____ ____ ____ ____ ____

(1) (2) (3) (4) (5)

Advertising Expense Service Revenue Accounts Payable Accounts Receivable Share Capital-Ordinary

____ (6) Dividends ____ (7) Cash ____ (8) Salaries and Wages Expense ____ (9) Notes Payable ____ (10) Insurance Expense

Solution 192 (1) (2) (3) (4)

(a) (b) (c) (c)

(5) (6) (7) (8)

(b) (a) (c) (a)

(9) (10)

(c) (a)

LO2 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 193 Eight transactions are recorded in the following T-accounts: CASH (1) (7)

35,000 22,500

ACCOUNTS RECEIVABLE

(2) (3) (4) (6) (8)

3,500 1,950 2,225 8,000 4,500

(5)

SUPPLIES (3)

(2)

SHARE CAPITAL-ORDINARY

8,000

(2)

13,500

35,000

(5) DIVIDENDS

10,000

(8)

SALARIES AND WAGES EXPENSE (4)

22,500

SERVICE REVENUE

ACCOUNTS PAYABLE (6)

(7)

EQUIPMENT

1,950

(1)

27,500

2,225

For Instructor Use Only

4,500

27,500

The Recording Process Ex. 193

2 - 45

(cont.)

Indicate for each debit and each credit: (a) whether an asset, liability, equity, 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 Account Debited Account Credited No. Type Effect Type Effect ——————————————————————————————————————————— (1) (Example) Asset + Equity + ——————————————————————————————————————————— (2) ——————————————————————————————————————————— (3) ——————————————————————————————————————————— (4) ——————————————————————————————————————————— (5) ——————————————————————————————————————————— (6) ——————————————————————————————————————————— (7) ——————————————————————————————————————————— (8) ———————————————————————————————————————————

Solution 193 Transaction Account Debited Account Credited No. Type Effect Type Effect ——————————————————————————————————————————— (1) (Example) Asset + Equity + ——————————————————————————————————————————— (2) Asset + Asset – Liability + ——————————————————————————————————————————— (3) Asset + Asset – ——————————————————————————————————————————— (4) Expense + Asset – ——————————————————————————————————————————— (5) Asset + Revenue + ——————————————————————————————————————————— (6) Liability – Asset – ——————————————————————————————————————————— (7) Asset + Asset – ——————————————————————————————————————————— (8) Equity – Asset – LO2 BT: C Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 46

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 194 For each of the following accounts indicate (a) the type of account (Asset, Liability, Equity, 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 Share Capital-Ordinary Dividends

5. 6. 7. 8.

Service Revenue Insurance Expense Notes Payable Equipment

Solution 194 1. 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.

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. Equity 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. Equity account. b. Debit increases, credit decreases. c. Normal balance - debit.

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

LO2 BT: C Difficulty: Easy TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 195 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 equity accounts. In some cases there may be a "D" and a "C" in the same box. Transactions: 1. Shareholders invest cash in the business in exchange for ordinary shares. 2. Pays insurance in advance for six months. 3. Pays secretary's salary. 4. Purchases supplies on account. 5. Pays electricity bill. 6. Borrows money from local bank. 7. Makes payment on account. 8. Receives cash due from customers.

For Instructor Use Only

The Recording Process Ex. 195 9. 10.

2 - 47

(cont.)

Provides services on account. The company pays dividends.

1

2

3

4

Transaction # 5 6

7

8

9

10

1 D

2 D,C

3 C

4 D C

Transaction # 5 6 C D C

7 C D

8 D,C

9 D

10 C

Assets Liabilities Share Capital-Ordinary Dividends Revenues Expenses

Solution 195

Assets Liabilities Share Capital-Ordinary Dividends Revenues Expenses

C D C D

D

LO2 BT: C Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 196 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. The company issues ordinary shares in exchange for ₤25,000 cash. 2. Purchased ₤400 of supplies on credit. 3. Purchased equipment for ₤10,000, paying ₤3,000 in cash and signed a 30-day, ₤7,000, note payable. 4. Real estate commissions billed to clients amount to ₤4,000. 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 ₤600 for advertising for the current month. 8. Paid ₤2,200 cash for salaries. 9. The company paid dividends of ₤1,200. 10. Received a check for ₤3,000 from a client in payment on account for commissions billed in transaction 4.

For Instructor Use Only

2 - 48

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 196 1.

2.

3.

4. 5. 6. 7. 8. 9. 10.

Cash ......................................................................................... Share Capital-Ordinary ....................................................

25,000

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

400

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

10,000

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

4,000

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

700

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

200

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

600

Salaries and Wages Expense ................................................... Cash ................................................................................

2,200

Dividends .................................................................................. Cash ................................................................................

1,200

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

3,000

25,000

400

3,000 7,000 4,000 700 200 600 2,200 1,200

LO4 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 197 Identify the accounts to be debited and credited for each of the following transactions. 1. The owners invested $10,000 cash in the business in exchange for ordinary shares. 2. Purchased supplies on account for $1,000. 3. Billed customers $2,000 for services performed. 4. Paid salaries of $900. Solution 197 1. 2. 3. 4.

Account Debited Cash Supplies Accounts Receivable Salaries and Wages Expense

Account Credited Share Capital-Ordinary Accounts Payable Service Revenue Cash

LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

3,000

The Recording Process

2 - 49

Ex. 198 Transactions for Tom Petty Company for the month of October are presented below. Journalize each transaction and identify each transaction by number. You may omit journal explanations. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Issued ordinary shares in exchange for $50,000 cash. Purchased land costing $28,000 for cash. Purchased equipment costing $20,000 for $3,000 cash and the remainder on credit. Purchased supplies on account for $800. Paid $1,000 for a one-year insurance policy. Received $3,000 cash for services performed. Received $4,000 for services previously performed on account. Paid salaries to employees for $2,500. Paid dividends of $1,000.

Solution 198 1. Cash .............................................................................................. Share Capital-Ordinary ..........................................................

50,000

2. Land ............................................................................................... Cash ......................................................................................

28,000

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

20,000

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

800

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

1,000

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

3,000

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

4,000

8. Salaries and Wages Expense ........................................................ Cash ......................................................................................

2,500

9. Dividends ....................................................................................... Cash ......................................................................................

1,000

50,000

28,000

LO3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

3,000 17,000

800

1,000

3,000

4,000

2,500

1,000

2 - 50

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 199 Match the basic step in the recording process described by each of the following statements. A. Analyze each transaction B. Enter each transaction in a journal C. Transfer journal information to ledger accounts ____ 1. This step is called posting. ____ 2. Business documents are examined to determine the effects of transactions on the accounts. ____ 3. This step is called journalizing.

Solution 199 1. C

2. A

3. B

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 200 Prepare journal entries for each of the following transactions. 1. 2. 3. 4.

Performed services for customers on account €6,000. Purchased €20,000 of equipment on account. Received €3,000 from customers in transaction 1. The company paid dividends of €1,000.

Solution 200 1. Accounts Receivable ............................................................................ Service Revenue .........................................................................

6,000

2. Equipment ............................................................................................ Accounts Payable ........................................................................

20,000

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

3,000

4. Dividends ............................................................................................. Cash ............................................................................................

1,000

LO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

6,000

20,000

3,000

1,000

The Recording Process

2 - 51

Ex. 201 Glynn Company is a newly organized business. The list of accounts to be opened in the general ledger is as follows: Accounts Payable Prepaid Insurance Accounts Receivable Prepaid Rent Accumulated Depreciation Rent Expense Cash Salaries and Wages Expense Depreciation Expense Salaries and Wages Payable Equipment Service Revenue Insurance Expense Supplies Share Capital-Ordinary Supplies Expense Dividends Instructions Organize the accounts into the order in which they should appear in the ledger of Glynn Company and assign account numbers. Use the following system to assign account numbers. 1—199 200—299 300—399 400—499 500—599

Assets Liabilities Equity Revenues Expenses

Solution 201 There are several possible correct account number assignments. The following is one of the correct solutions. 101- Cash 112- Accounts Receivable 126- Supplies 130- Prepaid Insurance 140- Prepaid Rent 157- Equipment 158- Accumulated Depreciation 201- Accounts Payable 212- Salaries and Wages Payable 311- Share Capital-Ordinary 332- Dividends 400- Service Revenue 510- Salaries and Wages Expense 520- Supplies Expense 530- Rent Expense 540- Insurance Expense 550- Depreciation Expense LO5 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 52

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 202 The transactions of Medina Information Service are recorded in the general journal below. You are to post the journal entries to the accounts in the general ledger. After all entries have been posted, you are to prepare a trial balance on the form provided. General Journal J1 ——————————————————————————————————————————— Date Account Titles and Explanation Ref. Debit Credit ——————————————————————————————————————————— 2017 Sept. 1 Cash 35,000 Share Capital-Ordinary 35,000 (Issued ordinary shares for cash) 4

8

15

18

Equipment Cash Notes Payable (Paid cash and issued 2-year, 9%, note for equipment)

30,000

Rent Expense Cash (Paid September rent)

1,000

Prepaid Insurance Cash (Paid one-year liability insurance) Cash

10,000 20,000

1,000

400 400

2,500 Service Revenue (Received cash for delivery services)

20

25

30

30

2,500

Salaries and Wages Expense Cash (Paid salaries for current period)

500

Utilities Expense Accounts Payable (Received a bill for September utilities)

600

500

600

Dividends Cash (Paid dividends)

1,800

Accounts Receivable Service Revenue (Billed customer for delivery service)

2,000

For Instructor Use Only

1,800

2,000

The Recording Process Ex. 202

2 - 53

(cont.) General Ledger

Cash Account No. 101 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Accounts Receivable Account No. 112 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Prepaid Insurance Account No. 130 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Equipment Account No. 155 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Accounts Payable Account No. 201 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

For Instructor Use Only

2 - 54 Ex. 202

Test Bank for Financial Accounting: IFRS Edition, 3e (cont.)

Notes Payable Account No. 205 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Share Capital-Ordinary Account No. 311 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Dividends Account No. 332 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

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

Rent Expense Account No. 719 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

For Instructor Use Only

The Recording Process Ex. 202

2 - 55

(cont.)

Salaries and Wages Expense Account No. 726 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Utilities Expense Account No. 735 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

MEDINA INFORMATION SERVICE Trial Balance September 30, 2017 ——————————————————————————————————————————— Accounts Debit Credit ———————————————————————————————————————————

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

For Instructor Use Only

2 - 56

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 202 General Journal J1 ——————————————————————————————————————————— Date Account Titles and Explanation Ref. Debit Credit ——————————————————————————————————————————— 2017 Sept. 1 Cash 101 35,000 Share Capital-Ordinary 311 35,000 (Issued ordinary shares for cash) 4

8

15

18

Equipment 155 Cash 101 Notes Payable 205 (Paid cash and issued 2-year, 9%, note for equipment)

30,000

Rent Expense Cash (Paid September rent)

719 101

1,000

Prepaid Insurance Cash (Paid one-year liability insurance)

130 101

400

Cash

101 400

2,500

Salaries and Wages Expense Cash (Paid salaries for current period)

726 101

500

Utilities Expense Accounts Payable (Received a bill for September utilities)

735 201

600

Dividends Cash (Paid dividends)

332 101

1,800

Accounts Receivable Service Revenue (Billed customer for delivery service)

112 400

2,000

Service Revenue (Received cash for delivery services) 20

25

30

30

For Instructor Use Only

10,000 20,000

1,000

400

2,500

500

600

1,800

2,000

The Recording Process Solution 202

2 - 57

(cont.) General Ledger

Cash Account No. 101 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 1 J1 35,000 35,000 4 J1 10,000 25,000 8 J1 1,000 24,000 15 J1 400 23,600 18 J1 2,500 26,100 20 J1 500 25,600 30 J1 1,800 23,800

Accounts Receivable Account No. 112 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 30 J1 2,000 2,000

Prepaid Insurance Account No. 130 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 15 J1 400 400

Equipment Account No. 155 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 4 J1 30,000 30,000

Accounts Payable Account No. 201 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 25 J1 600 600

For Instructor Use Only

2 - 58

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 202

(cont.)

Notes Payable Account No. 205 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 4 J1 20,000 20,000

Share Capital-Ordinary Account No. 311 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 1 J1 35,000 35,000

Dividends Account No. 332 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 30 J1 1,800 1,800

Service Revenue Account No. 400 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 18 J1 2,500 2,500 30 J1 2,000 4,500 Rent Expense Account No. 719 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 8 J1 1,000 1,000 Salaries and Wages Expense Account No. 726 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 20 J1 500 500

For Instructor Use Only

The Recording Process Solution 202

2 - 59

(cont.)

Utilities Expense Account No. 735 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2017 Sept. 25 J1 600 600 MEDINA INFORMATION SERVICE Trial Balance September 30, 2017 ——————————————————————————————————————————— Accounts Debit Credit ——————————————————————————————————————————— Cash $ 23,800 Accounts Receivable 2,000 Prepaid Insurance 400 Equipment 30,000 Accounts Payable $ 600 Notes Payable 20,000 Share Capital-Ordinary 35,000 Dividends 1,800 Service Revenue 4,500 Rent Expense 1,000 Salaries and Wages Expense 500 Utilities Expense 600 Totals $60,100 $60,100 ____________________________________________________________________________ LO: 5, 6, 7 BT: AP Difficulty: Hard TOT: 25 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 203 The bookkeeper for Dole Yard Service 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 $650 was posted as $65. 4. A cash purchase of equipment for $561 was journalized as a debit to equipment and a credit to notes payable. The credit posting was made for $516. 5. A debit posting of $300 for purchase of supplies was credited to supplies. 6. A debit to insurance expense for $591 was posted as $519. 7. A debit posting for salaries expense for $900 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. For Instructor Use Only

2 - 60

Test Bank for Financial Accounting: IFRS Edition, 3e

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 203 (A) In Balance No Yes No No No No No Yes

Error 1 2 3 4 5 6 7 8

(B) Difference $500 — 585 45 600 72 900 —

(C) Larger Column Credit — Debit Debit Credit Credit Debit —

LO6 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS

Ex. 204 Post the following transactions to T-accounts and determine each account's ending balance. 1. Supplies ......................................................................................... Accounts Payable ..................................................................

2,000

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

4,000

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

3,500

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

1,000

2,000

4,000

3,500

1,000

Solution 204 Cash 3.

3,500

Bal.

2,500

Accounts Payable 4.

1,000

4.

For Instructor Use Only

1,000

1.

2,000

Bal.

1,000

The Recording Process Solution 204

2 - 61

(cont.) Accounts Receivable

2.

4,000

Bal.

500

3.

Service Revenue 3,500

2.

4,000

Bal.

4,000

Supplies 1.

2,000

Bal.

2,000

LO6 BT: AP Difficulty: Easy TOT: 6 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 205 The trial balance of Drysdale Company shown below does not balance. DRYSDALE COMPANY Trial Balance June 30, 2017 ——————————————————————————————————————————— Debit Credit Cash .............................................................................................. ₤ 2,600 Accounts Receivable...................................................................... 7,600 Supplies ......................................................................................... 600 Equipment...................................................................................... 8,300 Accounts Payable .......................................................................... ₤ 9,766 Share Capital-Ordinary .................................................................. 1,952 Dividends ....................................................................................... 1,500 Service Revenue............................................................................ 15,200 Salaries and Wages Expense ........................................................ 3,800 Maintenance and Repairs Expense................................................ 1,600 Totals .................................................................................... ₤26,000 ₤26,918 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 ₤170 received from a customer on account was debited to Cash ₤710 and credited to Accounts Receivable ₤710. 3. A dividend of ₤300 was posted as a credit to Dividends, ₤300 and credit to Cash ₤300. 4. A debit of ₤120 was not posted to Salaries and Wages Expense. 5. The purchase of equipment on account for ₤700 was recorded as a debit to Maintenance and Repairs Expense and a credit to Accounts Payable for ₤700. 6. Services were performed on account for a customer, ₤310, for which Accounts Receivable was debited ₤310 and Service Revenue was credited ₤31. 7. A payment on account for ₤225 was credited to Cash for ₤225 and credited to Accounts Payable for ₤252.

For Instructor Use Only

2 - 62

Test Bank for Financial Accounting: IFRS Edition, 3e

Instructions Prepare a correct trial balance.

Solution 205 DRYSDALE COMPANY Trial Balance June 30, 2017 ——————————————————————————————————————————— Debit Credit Cash [2,600 – 540 (2)] .................................................................... ₤ 2,060 Accounts Receivable [7,600 + 540 (2)] ........................................... 8,140 Supplies ......................................................................................... 600 Equipment [8,300 + 700 (5)] ........................................................... 9,000 Accounts Payable [9,766 – 477 (7)] ................................................ ₤9,289 Share Capital-Ordinary ................................................................... 1,952 Dividends [1,500 + 300 + 300 (3)] .................................................. 2,100 Service Revenue [15,200 + 279 (6)] ............................................... 15,479 Salaries and Wages Expense [3,800 + 120 (4)].............................. 3,920 Maintenance and Repairs Expense [1,600 – 700 (5)] ..................... 900 Totals ...................................................................................... ₤26,720 ₤26,720

LO7 BT: AN Difficulty: Hard TOT: 25 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS

Ex. 206 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. 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. 1. A payment of $800 to a creditor was recorded by a debit to Accounts Payable of $80 and a credit to Cash of $800. 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 $1,500 was collected in full. The collection was recorded by a debit to Cash for $1,500 and a debit to Accounts Payable for $1,500. 4. An account payable was paid by issuing a check for $800. The payment was recorded by debiting Accounts Payable $800 and crediting Accounts Receivable $800.

Solution 206 1. The trial balance totals will be unequal. The credit column will be $720 larger than the debit column. 2. The trial balance totals will be misstated but not unequal. For Instructor Use Only

The Recording Process Solution 206

2 - 63

(cont.)

3. The trial balance totals will be unequal. The debit column will be $3,000 larger than the credit column. 4. The trial balance totals will be misstated but not unequal. LO7 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS

Ex. 207 M. Caria and Associates is a financial planning service. The account balances at December 31, 2017 are shown by the following alphabetical list: Accounts Payable Accounts Receivable Buildings Cash Equipment Land Notes Payable Notes Receivable Share Capital-Ordinary Supplies

$

13,000 19,000 120,000 26,500 71,000 42,000 95,000 8,100 179,700 1,100

Instructions Prepare a trial balance with the accounts arranged in proper order.

For Instructor Use Only

2 - 64

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 207 M. CARIA AND ASSOCIATES Trial Balance December 31, 2017 Cash............................................................................................... Accounts Receivable ...................................................................... Supplies ......................................................................................... Notes Receivable ........................................................................... Equipment ...................................................................................... Buildings ........................................................................................ Land ............................................................................................... Accounts Payable........................................................................... Notes Payable ................................................................................ Share Capital-Ordinary ................................................................... Totals ....................................................................................

Debit $ 26,500 19,000 1,100 8,100 71,000 120,000 42,000

Credit

$

$287,700

13,000 95,000 179,700 $287,700

LO7 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 208 The ledger accounts of the Redlands Place Gym at June 30, 2017 are shown below: Accounts Payable Accounts Receivable Buildings Cash Dividends Equipment Notes Payable Share Capital-Ordinary Supplies

$ 14,100 1,050 81,400 20,000 10,500 12,900 49,000 63,100 350

Instructions Prepare a trial balance with the ledger accounts arranged in the proper order. Include the appropriate heading.

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Solution 208 REDLANDS PLACE GYM Trial Balance June 30, 2017

Cash .............................................................................................. Accounts Receivable...................................................................... Supplies ......................................................................................... Equipment...................................................................................... Buildings ........................................................................................ Accounts Payable .......................................................................... Notes Payable................................................................................ Share Capital-Ordinary .................................................................. Dividends ....................................................................................... Totals ....................................................................................

Debit $ 20,000 1,050 350 12,900 81,400

$ 14,100 49,000 63,100 10,500 $126,200

LO7 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 209 The ledger account balances for Perkins Company are listed below. Accounts Payable Accounts Receivable Cash Share Capital-Ordinary Dividends Service Revenue Salaries and Wages Expense Unearned Service Revenue Utilities Expense

€ 10,000 7,000 13,000 9,000 4,000 40,000 25,000 2,000 12,000

Instructions Prepare a trial balance in proper form for Perkins at December 31, 2017.

For Instructor Use Only

Credit

$126,200

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Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 209 PERKINS COMPANY Trial Balance December 31, 2017 Debit €13,000 7,000

Cash Accounts Receivable Accounts Payable Unearned Service Revenue Share Capital-Ordinary Dividends Service Revenue Salaries and Wages Expense Utilities Expense

Credit € 10,000 2,000 9,000

4,000 40,000 25,000 12,000 €61,000

€61,000

LO7 BT: AP Difficulty: Medium TOT: 8 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex 210 The bookkeeper for Stan Lei Auto Repair made a number of errors in journalizing and posting, as described below. 1. A credit posting of $500 to Accounts Receivable was omitted. 2. A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense. 3. A collection from a customer of $100 in payment of its account was journalized and posted as a debit to Cash $100 and a credit to Service Revenue $100. 4. A credit posting of $300 to Property Taxes Payable was made twice. 5. A cash purchase of supplies for $250 was journalized and posted as a debit to Supplies $25 and a credit to Cash $25. 6. A debit of $475 to Advertising Expense was posted as $457 Instructions For each error: (a) Indicate whether the trial balance will balance. (b) If the trial balance will not balance, indicate the amount of the difference. (c) Indicate 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.

Error (1)

(a) In Balance No

(b) Difference $500

(c) Larger Column debit

For Instructor Use Only

The Recording Process Solution 210

Error

(a) In Balance

(b) Difference

(c) Larger Column

1. 2. 3. 4. 5. 6.

No Yes Yes No Yes No

$500 — — 300 — 18

Debit — — Credit — Credit

LO7 BT: AN Difficulty: Hard TOT: 8 min. AACSB: Analytic AICPA BB: CT AICPA PC: PS

For Instructor Use Only

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Test Bank for Financial Accounting: IFRS Edition, 3e

COMPLETION STATEMENTS 211.

An _______________ is a record of increases and decreases in specific assets, liabilities, and equity items.

212.

The process of entering an amount on the left side of an account is called ____________ the account, and making an entry on the right side is called _________________ the account.

213.

______________, _______________, and _______________ have debit normal account balances whereas _______________, ________________, ________________, and ________________ have credit normal account balances.

214.

The

five

subdivisions

of

equity

are:

________________,

________________,

________________, ________________, and ________________. 215.

The basic steps in the recording process are: _______________ each transaction, enter the transaction in a ________________, and transfer the _______________ information to appropriate accounts in the ________________.

216.

A sales slip, a check, and a cash register tape are examples of ________________ used as evidence that a transaction has taken place.

217.

An accounting record where transactions are initially recorded in chronological order is called a ________________.

218.

When three or more accounts are required in one journal entry, the entry is referred to as a ________________ entry.

219.

The entire group of accounts and their balances maintained by a company is called the ________________.

220.

A two column list of all accounts and their balances at a given time is a ______________.

Answers to Completion Statements 211. account 212. debiting, crediting 213. Assets, expenses, dividends, share capital-ordinary, retained earnings, liabilities, revenues 214. share capital-ordinary, retained earnings, dividends, revenues, expenses 215. analyze, journal, journal, ledger

216. business documents 217. journal 218. compound 219. general ledger 220. trial balance

LO1-7 BT: K Difficulty: Easy TOT: 8 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

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MATCHING 221. 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.

Journal Posting Chart of accounts Trial balance Simple entry

____

1. An entry that involves three or more accounts.

____

2. Transferring journal entries to ledger accounts.

____

3. The side which increases an account.

____

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

____

5. A record of increases and decreases in specific assets, liabilities, and equity items.

____

6. Left side of an account.

____

7. An entry that involves only two accounts.

____

8. A book of original entry.

____

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

____ 10. Has a credit normal balance

Answers to Matching 1. 2. 3. 4. 5.

E G B H A

6. 7. 8. 9. 10.

C J F I D

LO1-7 BT: K Difficulty: Easy TOT: 3 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

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Test Bank for Financial Accounting: IFRS Edition, 3e

SHORT-ANSWER ESSAY QUESTIONS S-A E 222 An account is an important accounting record where financial information is stored until needed. Briefly explain (1) the nature of an account, (2) the different types of accounts, and (3) the manner in which an account is increased and decreased and its normal balance.

Solution 222 An account is an individual accounting record of increases and decreases in specific asset, liability, and equity accounts. In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit side (it resembles the letter T). Accounts are classified as asset, liability, equity, revenue, and expense. Accounts with normal debit balances, such as assets and expenses, are increased when debited and decreased when credited. Accounts with normal credit balances, such as liabilities and revenues, are increased when credited and decreased when debited. LO1,2 BT: C Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

S-A E 223 Your roommate, a marketing major, thinks that debit means decrease and credit means increase. And, that every account can be debited and credited and as result, every account can have both a debit and a credit balance. Explain to your roommate (1) the meaning of debit and credit; (2) which accounts can only be debited, which can only be credited, and which can be both debited and credited; and (3) which accounts normally have debit balances and which credit balances.

Solution 223 The terms debit and credit mean the left and right side, respectively, of every account. Some accounts such as Dividends and Expenses are only debited; other accounts such as Share Capital-Ordinary and Revenues are only credited; and finally, some accounts such as Cash, Accounts Receivable, and Accounts Payable can be debited and credited. Accounts with debit balances include Assets, Dividends, and Expenses. Accounts with credit balances include Liabilities, Share Capital-Ordinary and Revenues. LO2 BT: C Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

S-A E 224 A fellow classmate is confused about how debits and credits relate to the basic accounting equation. State the basic accounting equation, convert it into the expanded accounting equation, and then explain how it ties into the rules for debits and credits.

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Solution 224 The basic accounting equation is: Assets = Liabilities + Equity The expanded equation divides Equity into its various parts, reflecting the shareholders' investment, dividends, revenues, and expenses: Assets = Liabilities + Share Capital-Ordinary + Retained Earnings – Dividends + Revenues – Expenses This expanded equation can then be re-arranged to explain why certain accounts have debit (lefthand) balances, while other accounts have credit (right-hand) balances, as follows: Assets + Dividends + Expenses = Liabilities + Share Capital-Ordinary + Retained Earnings + Revenues The accounts on the left-hand side of the equation have left-hand, or debit balances, while the accounts on the right-hand side of the equation have right-hand, or credit balances. Accounts with debit balances are increased with debits and decreased with credits, while accounts with credit balances are increased with credits and decreased with debits. LO2 BT: S Difficulty: Hard TOT: 10 min. AACSB: RT AICPA BB: CT AICPA PC: Communication

S-A E 225 Describe the process of preparing a trial balance. What is the purpose of preparing a trial balance? If a trial balance does not balance, identify what might be the reasons why it does not balance. If the trial balance does balance, does that insure that the ledger accounts are correct? Explain.

Solution 225 The process of preparing a trial balance consists of (1) listing the account titles and their debit or credit balances in the order in which they appear in the general ledger, (2) totaling the debit and credit columns, and (3) proving the equality of the total debits and total credits. The primary purpose of the trial balance is to prove the equality of the debits and credits after posting. A trial balance also uncovers errors in journalizing and posting because errors in journalizing and posting cause a trial balance not to balance. A trial balance does not prove that all transactions have been recorded or that the ledger is correct. The trial balance may balance even when (1) an entire transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalizing or posting, or (5) offsetting errors are made in recording the amount of a transaction or posting to the ledger. LO7 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

For Instructor Use Only

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Test Bank for Financial Accounting: IFRS Edition, 3e

S-A E 226 A classmate who is a computer science major thinks that accountants are obsolete. She states that computers can do the entire process without any human assistance. Discuss the steps in the recording process and indicate what role the computer plays in that process.

Solution 226 The initial step in the recording process is to analyze each transaction. This is done by analyzing the source documents to determine which accounts were affected. The computer is not able to perform this step. The second step is enter the transaction in the journal using a journal entry. The computer is not able to perform this step and does not know if the correct accounts are being debited and credited, nor if the correct amounts were entered. It is only able to test the equality of the debits and credits comprising the entry. The final step is to transfer the journal entry to the specific accounts in the ledger (posting). The computer can perform this step efficiently and effectively. LO3 BT: S Difficulty: Medium TOT: 7 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

S-A E 227 John Dough, a fellow employee, wants to understand the basic steps in the recording process. Identify and briefly explain the steps in the order in which they occur. Solution 227 The basic steps in the recording process are: 1.

Analyze each transaction. In this step, business documents are examined to determine the effects of the transaction on the accounts.

2.

Enter each transaction in a journal. This step is called journalizing and it results in making a chronological record of the transactions.

3.

Transfer journal information to ledger accounts. This step is called posting. Posting makes it possible to accumulate the effects of journalized transactions on individual accounts.

LO3 BT: C Difficulty: Medium TOT: 5min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

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S-A E 228 All recordable transactions are initially recorded in the journal. Discuss the contributions that the journal makes to the recording process. Solution 228 The journal makes several significant contributions to the recording process: (1) It discloses in one place the complete effects of a transaction; (2) It provides a chronological record of transactions; and, (3) It helps to prevent and locate errors because the debit and credit amounts for each entry can be readily compared. LO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

S-A E 229 A bookkeeping student has come to you for tutoring on the recording process. She is confused about the relationship between the chart of accounts and the ledger. Explain the purpose of the chart of accounts and the general ledger. In your explanation indicate the relationship between these two items as well. Solution 229 The chart of accounts lists all of the accounts that a company uses and their account numbers that identify their location in the ledger. The numbering system used to identify the accounts usually starts with the statement of financial position accounts followed by the income statement accounts. The general ledger contains all of the accounts of a company and their respective balances at any point in time. The ledger is organized by account number with assets coming first, then liabilities, equity, revenue, and expense accounts. LO5&6 BT: C Difficulty: Easy TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

S-A E 230 The process of transferring the information in the journal to the general ledger is called posting. Explain the posting process, including the importance of the journal page number and the account numbers. Solution 230 The posting process begins with locating the account(s) being debited in the general ledger. Then entering the date of the entry, the journal page number where the entry originated and debit portion of the entry in the date, reference and debit columns, respectively. Once this done, the account number(s) of the account(s) being debited is (are) entered in the reference column in the journal. Next, the credit portion of the journal entry is posted to the appropriate accounts in the ledger following the same steps as noted for the debit portion.

For Instructor Use Only

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Test Bank for Financial Accounting: IFRS Edition, 3e

The importance of the journal page number, in the reference column of each account in the general ledger accounts, is to indicate where to find the original entry. And, the general ledger account numbers, in the reference column of the journal, indicate that the entry has been posted. LO6 BT: S Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

S-A E 231 During a study session, a classmate states that it is not necessary to make journal entries and then post them to the ledger. She states that it is sufficient to analyze the transaction and simply record the information in T-accounts. What is your response to this statement? Be brief, yet concise.

Solution 231 You have a very good point regarding the steps of the accounting cycle. If a company only has a few transactions, it might be possible to simply analyze them and then record each in T-accounts. However, nearly all businesses have many transactions each day. There must be a systematic way to process these transactions. The steps of the accounting cycle represent this process. After analyzing each transaction, a journal entry needs to be prepared. The journal represents a chronological listing of every transaction for a business. This allows users to review past transactions. Your approach does not leave a trail that can be reviewed at a later date. Once the journal entries are made, posting allows each line of the journal to be transferred into the ledger. This process increases and decreases individual accounts in the ledger. At the end of the accounting period, the balance of each account is determined and the trial balance is prepared. Based on your approach, if someone saw a credit to cash for $10,000 and wondered what the debit was, that person would have to go through every ledger account to locate the corresponding debit. By having a general journal, the person can view the entire transaction, thus easily seeing the account that was debited. Your approach may work for a very simple business, but it would result in problems for the majority of businesses and accountants. LO4-6 BT: S Difficulty: Medium TOT: 7 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

S-A E 232 (Ethics) Jim Coleman, Jr. was appointed the manager of Maris Properties, a recently formed company that manages residential rental properties. Linda Grider is the accountant. She prepared a chart of accounts based on an analysis of the expenditures of the company. One of the largest expense categories is Travel and Entertainment. Mr. Coleman believes that it is important to maintain a presence in the social life of the city. In this, he sharply differs from his father, Jim Coleman, Sr. The elder Mr. Coleman has set up Maris Properties in order to test his son's management skills before allowing him to manage the more lucrative commercial property business. Mr. Coleman, Sr. provided the capital for Maris, and maintains close contact with the company. He allowed his son, however, to hire his own employees.

For Instructor Use Only

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S-A E 232 (cont.) Mr. Coleman has asked Ms. Grider to change the name of the Travel and Entertainment account to Property Development. He hopes to deflect his father's attention away from the amount he has spent on travel and entertainment until he has proven that his methods work. When Ms. Grider resisted, he reminded her that he, not his father, hired her. He also reminded her that she had been enthusiastic about his business plans when she was hired. Required: 1. Who are the stakeholders in this situation? 2. Should Ms. Grider agree to the change in the Travel and Entertainment account to Property Development? Explain.

Solution 232 1. The stakeholders in this situation include Mr. Coleman, Jr. Linda Grider Mr. Coleman, Sr. Bankers and others who might rely on the financial statements 2. Ms. Grider definitely should not agree to the name change. The intention of the person making the change is to deceive someone who has a right to know the affairs of the business, fully and completely. Though Ms. Grider was hired by Mr. Coleman, Jr., and though she may agree with his business methods, she cannot be a party to such deceit. LO1 BT: E Difficulty: Medium TOT: 7 min. AACSB: Ethics AICPA BB: CT AICPA PC: Professional Demeanor

S-A E 233 (Communication) A classmate is considering dropping his accounting class because he cannot understand the rules of debits and credits. a. Can the student be successful in the course without an understanding of the rules of debits and credits? b. Explain the rules of debits and credits in a way that will help him understand them.

Solution 233 a. No. Accounting is based on the double-entry system. This system records the dual effect of each transaction in the appropriate accounts, thus keeping the accounting equation in balance. Each transaction is analyzed and recorded using this dual effect system. If you do not have this basic understanding, the remaining chapters will become increasingly more difficult. You will not have the ability to make journal entries for the many new topics in these upcoming chapters.

For Instructor Use Only

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Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 233

(cont.)

b. You may be trying to memorize the rules of debits and credits, only to discover that this does not work. Here are some other ways to master this very important topic: •

Make sure that you understand the accounting equation. Assets equal the total of liabilities and equity. Equity is not an account but rather a group of accounts that includes share capital-ordinary, retained earnings, revenues, expenses, and dividends. Share capital-ordinary, retained earnings, and revenues cause equity to increase while expenses and dividends cause equity to decrease.

•

Next, make sure that you understand the accounting meaning of the terms debits and credits. For accounting, debit means left and credit means right. Don’t try to add any more to these definitions.

•

Then, work with the rules of debits and credits. These rules determine whether a debit or credit increases or decreases an account. Start with assets. Assets increase with a debit and thus decrease with a credit. Think about the cash account—when cash is received, the account is increased with a debit. When cash is paid, the account is decreased with a credit. The remaining accounts are on the right side of the equal sign in the accounting equation. All of the other rules of debits and credits keep the equation in balance. Liabilities, share capital-ordinary, retained earnings and revenues are all increased with credits. Expenses and dividends are the two accounts that cause equity to decrease, thus they must be increased with a debit.

LO2 BT: S Difficulty: Hard TOT: 10 min. AACSB: RT AICPA BB: CT AICPA PC: Communication

For Instructor Use Only

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GAAP QUESTIONS 1. The expanded accounting equation under GAAP is as follows a. Assets = Liabilities + Common Stock + Retained Earnings − Dividends − Revenues − Expenses. b. Assets = Liabilities + Common Stock + Retained Earnings − Dividends + Revenues − Expenses c. Assets + Liabilities = Common Stock + Retained Earnings − Dividends + Revenues − Expenses d. Assets = Liabilities + Common Stock − Retained Earnings − Dividends + Revenues − Expenses Ans: B LO7 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

2. A trial balance a. will not balance if a correct journal entry is posted twice. b. proves that all transactions have been recorded. c. proves that transactions are recorded correctly. d. is the same under GAAP and IFRS. Ans: D LO7 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

3. One difference between GAAP and IFRS is that a. the limitations of a trial balance are different between GAAP and IFRS. b. IFRS uses more fair value measurement than GAAP. c. GAAP uses a different posting process than IFRS. d. IFRS uses accruals accounting concepts and GAAP uses primarily the cash basis of accounting. Ans: B LO7 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

4. The general policy for using proper currency signs (dollar, yen, pound, etc) is the same for both GAAP and this textbook. This policy is as follows a. Currency signs are shown in trial balances and financial statements. b. Currency signs are shown for all compound journal entries. c. Currency signs are only shown in the trial balances. d. Currency signs only appear ledgers and journal entries Ans: A LO7 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

CHAPTER 3 ADJUSTING THE ACCOUNTS

CHAPTER LEARNING OBJECTIVES 1. Explain the time period assumption. The time period assumption assumes that the economic life of a business is divided into artificial time periods. 2. Explain the accrual basis of accounting. Accrual-basis accounting means that companies record events that change a company's financial statements in the periods in which those events occur, rather than in the periods in which the company receives or pays cash. 3. Explain the reasons for adjusting entries. Companies make adjusting entries at the end of an accounting period. Such entries ensure that companies record revenues in the period in which the performance obligation is satisfied and recognize expenses in the period in which they are incurred. 4. Identify the major types of adjusting entries. The major types of adjusting entries are deferrals (prepaid expenses and unearned revenues) and accruals (accrued revenues and accrued expenses). 5. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals to record the portion of the prepayment that represents the expense incurred or the revenue for services performed in the current accounting period. 6. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Companies make adjusting entries for accruals to record revenues for services performed and expenses incurred in the current accounting period that have not been recognized through daily entries. 7. Describe the nature and purpose of an adjusted trial balance. An adjusted trial balance shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. Its purpose is to prove the equality of the total debit balances and total credit balances in the ledger after all adjustments. a

8. Prepare adjusting entries for the alternative treatment of deferrals. Companies may initially debit prepayments to an expense account. Likewise they may credit unearned revenues to a revenue account. At the end of the period, these accounts may be overstated. The adjusting entries for prepaid expenses include a debit to an asset account and a credit to an expense account. Adjusting entries for unearned revenues include a debit to a revenue account and a credit to a liability account.

a

9. Discuss financial reporting concepts. To be judged useful, information should have the primary characteristics of relevance and faithful representation. In addition, it should be comparable, consistent, verifiable, timely, and understandable. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption states that economic events can be identified with a particular unit of

3-2

Test Bank for Financial Accounting: IFRS Edition, 3e accountability. The time period assumption states that the economic life of a business can be divided into artificial time periods and that meaningful accounting reports can be prepared for each period. The going concern assumption states that the company will continue in operation long enough to carry out its existing objectives and commitments. The historical cost principle states that companies should record assets at their cost. The fair value principle indicates that assets and liabilities should be reported at fair value. The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. The expense recognition principle dictates that efforts (expense) be matched with results (revenues). The full disclosure principle requires that companies disclose circumstances and events that matter to financial statements users. The cost constraint weighs the cost that companies incur to provide a type of information against its benefits to financial statement users.

For Instructor Use Only

Adjusting the Accounts

3-3

TRUE-FALSE STATEMENTS 1.

Many business transactions affect more than one time period.

Ans: T, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving

2.

The time period assumption states that the economic life of a business entity can be divided into artificial time periods.

Ans:T, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving

3.

The time period assumption is often referred to as the expense recognition principle.

Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving

4.

A company's calendar year and fiscal year are always the same.

Ans: F, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Communications, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

5.

Accounting time periods that are one year in length are referred to as interim periods.

Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

6.

Under International Financial Reporting Standards (IFRS) the time period assumption means companies must issue financial statements using a calendar year time period.

Ans: F, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

7.

International Financial Reporting Standards (IFRS) include a revenue recognition principle that states that “let the revenues follow the expenses.”

Ans: F, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

8.

Under International Financial Reporting Standards (IFRS) revenues occur when assets are used up or when liabilities are incurred to generate revenue.

Ans: F, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

9.

Under International Financial Reporting Standards (IFRS) the cash-basis of accounting requires companies to record transactions in the period in which the events occur.

Ans: F, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

10.

Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

Ans: F, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

11.

The cash basis of accounting is not in accordance with IFRS.

Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

12.

The expense recognition principle requires that efforts be matched with accomplishments.

Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

13.

Expense recognition is tied to revenue recognition.

Ans: T, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

14.

The revenue recognition principle dictates that revenue be recognized in the accounting period in which cash is received.

Ans: F, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3-4 15.

Test Bank for Financial Accounting: IFRS Edition, 3e Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.

Ans: F, LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

16.

An adjusting entry always involves two statement of financial position accounts.

Ans: F, LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

17.

Adjusting entries are often made because some business events are not recorded as they occur.

Ans: T, LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

18.

Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.

Ans: F, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

19.

A company must make adjusting entries every time it prepares an income statement and a statement of financial position.

Ans: T, LO 3, BT: K, Difficulty: Medium TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

20.

Adjusting entries are needed to enable financial statements to conform to International Financial Reporting Standards (IFRS).

Ans: T, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

21.

Types of adjusting entries include deferral of unearned revenue, which requires the company to record a liability on the statement of financial position.

Ans: T, LO 4, BT: K, Difficulty: Hard, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

22.

Revenue received before it is earned and expenses paid before being used or consumed are both initially recorded as liabilities.

Ans: F, LO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

23.

Accrued revenues are revenues which have been received but not yet earned.

Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

24.

The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.

Ans: F, LO 5, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

25.

Accumulated Depreciation is a liability account and has a credit normal account balance.

Ans: F, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

26.

A liability—revenue account relationship exists with an unearned rent revenue adjusting entry.

Ans: T, LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

27.

The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

Ans: F, LO 5, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

28.

Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

Ans: T, LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts 29.

3-5

A contra asset account is subtracted from a related account in the statement of financial position.

Ans: T, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Communications, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

30.

If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.

Ans: F, LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

31.

The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.

Ans: T, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

32.

Adjusting entries impact at least one income statement and at least one statement of financial position account.

Ans: T, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

33.

An adjusting entry that increases an expense on the income statement and decreases an asset on the statement of financial position is the result of prepaid expenses that expire with the passage of time.

Ans: T, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

34.

A contra account found on the statement of financial position behaves contrary to accounting rules by being debited on the right and credited on the left.

Ans: F, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

35.

Unearned revenue on the books of Chocolate Company, the landlord, can be a prepaid asset on the statement of financial position of its tenant, Cupcake, Inc.

Ans: T, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

36.

When a company receives cash for future service, it debits unearned revenue on the income statement and credits cash on the statement of financial position.

Ans: F, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

37.

Unearned revenue is reported on the income statement whereas deferred revenue is reported on the statement of financial position.

Ans: F, LO 5, BT: K, Difficulty: Medium TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

38.

An adjusting entry for accrued revenues increases an asset account on the statement of financial position and increases a revenue account on the income statement.

Ans: T, LO 6, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

39.

Accrued expenses result in an adjustment to both the income statement and the statement of financial position.

Ans: T, LO 6, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

40.

Accrued revenues are revenues that have been earned and received before financial statements have been prepared.

Ans: F, LO 6, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

41.

Financial statements can be prepared from the information provided by an adjusted trial balance.

Ans: T, LO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3-6 42.

Test Bank for Financial Accounting: IFRS Edition, 3e The accounts in the adjusted trial balance contain all the data the company needs to prepare its statement of financial position.

Ans: T, LO 7, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

43.

The total amount of debits on the adjusted trial balance will equal the amount of assets on the statement of financial position.

Ans: F, LO 7, BT: K, Difficulty: Hard, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

44.

In an adjusted trial balance, all assets and liabilities reported on the statement of financial position are properly stated.

Ans: T, LO 7, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

45.

Under GAAP revaluation to fair value of items such as land and building is permitted, which is not permitted under IFRS.

Ans: F, LO 7, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a

46.

The adjusting entry at the end of the period to record an expired cost may be different depending on whether the cost was initially recorded as an asset or an expense.

Ans: T, LO 8, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving a

47.

Rent received in advance and credited to a rent revenue account which is still unearned at the end of the period, will require an adjusting entry crediting a liability account for the amount still unearned.

Ans: T, LO 8, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a

48.

An adjusting entry requiring a credit to Insurance Expense indicates that the initial transaction was charged to an asset account.

Ans: F, LO 8, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a

49.

To be faithfully representative, accounting information should predict future events, confirm prior expectations, and be reported on a timely basis.

Ans: F, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a

50.

Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company.

Ans: T, LO 9, Bloom: C, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a

51.

Consistency in accounting means that a company uses the same accounting principles from one accounting period to the next accounting period.

Ans: T, LO 9, Bloom: C, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

52.

The quality of consistency pertains to the use of the same accounting principles by firms in the same industry.

Ans: F, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

53.

The time period assumption states that the business will remain in operation for the foreseeable future.

Ans: F, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics

For Instructor Use Only

Adjusting the Accounts a

54.

3-7

For accounting purposes, business transactions should be kept separate from the personal transactions of the stockholders of the business.

Ans: T, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: FSA a

55.

The economic entity assumption states that economic events can be identified with a particular unit of accountability.

Ans: T, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Reporting a

56.

The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.

Ans: T, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: FSA a

57.

The going concern assumption is that the business will continue in operation long enough to carry out its existing objectives and commitments.

Ans: T, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

58.

A common application of materiality is weighing the factual nature of cost figures versus the relevance of fair value.

Ans: F, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: FSA

Additional True-False Questions 59.

The expense recognition principle requires that expenses be matched with revenues.

Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

60.

In general, adjusting entries are required each time financial statements are prepared.

Ans: T, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

61.

Every adjusting entry affects one statement of financial position account and one income statement account.

Ans: T, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

62.

The Accumulated Depreciation account is a contra asset account that is reported on the statement of financial position.

Ans: T, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Communication, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

63.

Accrued revenues are amounts recorded and received but not yet earned.

Ans: F, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

64.

An adjusted trial balance should be prepared before the adjusting entries are made.

Ans: F, LO 7, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3-8 a

65.

Test Bank for Financial Accounting: IFRS Edition, 3e When a prepaid expense is initially debited to an expense account, expenses and assets are both overstated prior to adjustment.

Ans: F, LO 8, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

Answers to True-False Statements Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

T T F F F F F F F F

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

T T T F F F T F T T

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

T F F F F T F T T F

31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

T T T F T F F T T F

41. 42. 43. 44. 45. a 46. a 47. a 48. a 49. a 50.

T T F T F T T F F T

Item a

51. a 52. a 53. a 54. a 55. a 56. a 57. a 58. 59. 60.

Ans.

Item

Ans.

T F F T T T T F T T

61. 62. 63. 64. a 65.

T T F F F

MULTIPLE CHOICE QUESTIONS 66.

Monthly and quarterly time periods are called a. calendar periods. b. fiscal periods. c. interim periods. d. quarterly periods.

Ans: c, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

67.

The time period assumption states that a. a transaction can only affect one period of time. b. estimates should not be made if a transaction affects more than one time period. c. adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations. d. the economic life of a business can be divided into artificial time periods.

Ans: d, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

68.

An accounting time period that is one year in length, but does not begin on January 1, is referred to as a. a fiscal year. b. an interim period. c. the time period assumption. d. a reporting period.

Ans: a, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

69.

Adjustments would not be necessary if financial statements were prepared to reflect net income from a. monthly operations. b. fiscal year operations. c. interim operations. d. lifetime operations.

Ans: d, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts 70.

3-9

Management usually desires ________ financial statements and the taxing authorities require all businesses to file _________ tax returns. a. annual, annual b. monthly, annual c. quarterly, monthly d. monthly, monthly

Ans: b, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

71.

The time period assumption is also referred to as the a. calendar assumption. b. cyclicity assumption. c. periodicity assumption. d. fiscal assumption.

Ans: c, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

72.

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 if there is a profit or loss.

Ans: a, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

73.

Which of the following is not a common time period chosen by businesses as their accounting period? a. Daily b. Monthly c. Quarterly d. Annually

Ans: a, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

74.

Which of the following time periods would not be referred to as an interim period? a. Monthly b. Quarterly c. Semi-annually d. Annually

Ans: d, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

75.

The fiscal year of a business is usually determined by a. a government agency. b. Share holders. c. the business. d. the IASB.

Ans: c, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

76.

Which of the following is in accordance with IFRS? a. Accrual basis accounting b. Cash basis accounting c. Both accrual basis and cash basis accounting d. Neither accrual basis nor cash basis accounting

Ans: a, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

For Instructor Use Only

3 - 10 77.

Test Bank for Financial Accounting: IFRS Edition, 3e The revenue recognition principle dictates that revenue should be recognized in the accounting records a. when cash is received. b. when the performance obligation is satisfied. c. at the end of the month. d. in the period that income taxes are paid.

Ans: b, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

78.

In a service-type business, revenue is considered earned a. at the end of the month. b. at the end of the year. c. when the service is performed. d. when cash is received.

Ans: c, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

79.

The expense recognition principle matches a. customers with businesses. b. expenses with revenues. c. assets with liabilities. d. creditors with businesses.

Ans: b, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

80.

Ron's Hot Rod Shop follows the revenue recognition principle. Ron services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Ron on August 5. Ron receives the check in the mail on August 6. When should Ron show that the revenue was earned? a. July 31 b. August 1 c. August 5 d. August 6

Ans: a, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

81.

A company spends $10 million dollars for an office building. Over what period 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. After $10 million in revenue is earned.

Ans: c, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

82.

The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that a. assets should be matched with liabilities. b. efforts should be matched with accomplishments. c. dividends to shareholders should be matched with shareholders' investments. d. cash payments should be matched with cash receipts.

Ans: b, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

For Instructor Use Only

Adjusting the Accounts 83.

3 - 11

A flower shop makes a large sale and provides flowers to a customer for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows IFRS and applies the revenue recognition principle. When is the $1,000 considered to be earned? a. December 5. b. December 10. c. November 30. d. December 1.

Ans: c, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

84.

A candy factory's employees work overtime to finish an order that is sold and shipped on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. The overtime wages should be expensed in a. February. b. March. c. the period when the workers receive their checks. d. either in February or March depending on when the pay period ends.

Ans: a, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

85.

Expenses sometimes make their contribution to revenue in a different period than when they are paid. When wages are incurred in one period and paid in the next period, this often leads to which account appearing on the statement of financial position at the end of the time period? a. Due from Employees. b. Due to Employer. c. Salaries and Wages Payable. d. Salaries and Wages Expense.

Ans: c, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

86.

Under accrual-basis accounting a. cash must be received before revenue is recognized. b. net income 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 IFRS.

Ans: c, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

87.

Adjusting entries are required a. yearly. b. quarterly. c. monthly. d. every time financial statements are prepared.

Ans: d, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

88.

Which one of the following is not an application of revenue recognition? a. Recording revenue as an adjusting entry on the last day of the accounting period. b. Accepting cash from an established customer for services to be performed over the next three months. c. Billing customers on June 30 for services completed during June. d. Receiving cash for services performed.

Ans: b, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 12 89.

Test Bank for Financial Accounting: IFRS Edition, 3e Which statement is correct? a. As long as a company consistently uses the cash basis of accounting, IFRS allow its use. b. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles. c. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received. d. As long as management is ethical, there are no problems with using the cash basis of accounting.

Ans: b, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

90.

The following is selected information from Alpha-Beta-Gamma Corporation for the fiscal year ending October 31, 2017. Cash received from customers €600,000 Revenue earned 660,000 Cash paid for expenses 340,000 Cash paid for computers on November 1, 2016 that will be used for 3 years (annual depreciation is $32,000) 96,000 Expenses incurred, including interest, but excluding any depreciation 400,000 Proceeds from a bank loan, part of which was used to pay for the computers 200,000 Based on the accrual basis of accounting, what is Alpha-Beta-Gamma Corporation’s net income for the year ending October 31, 2017? a. €388,000. b. €228,000. c. €124,000. d. €260,000.

Ans: b, LO 2, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

91.

Wing Company had the following transactions during 2016: • • • •

Sales of ¥72,000 on account Collected ¥32,000 for services to be performed in 2017 Paid ¥10,000 cash in salaries Purchased airline tickets for ¥4,000 in December for a trip to take place in 2017

What is wing’s 2016 net income using accrual accounting? a. ¥62,000. b. ¥94,000. c. ¥90,000. d. ¥58,000. Ans: a, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

92.

Wing Company had the following transactions during 2016: • • • •

Sales of ¥72,000 on account Collected ¥32,000 for services to be performed in 2017 Paid ¥10,000 cash in salaries Purchased airline tickets for ¥4,000 in December for a trip to take place in 2017

For Instructor Use Only

Adjusting the Accounts

3 - 13

What is Wing’s 2016 net income using cash basis accounting? a. ¥94,000. b. ¥22,000. c. ¥90,000. d. ¥18,000. Ans: d, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

93.

Under International Financial Reporting Standards (IFRS) a. the cash-basis method of accounting is accepted. b. events are recorded in the period in which the event occurs. c. interim period financial statements are either a calendar year or a fiscal year. d. a fiscal year is an accounting time period encompassing less than 12 months.

Ans: b, LO 2, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

94.

The expense recognition principle refers to a. recognizing revenue in the period when it is earned. b. matching the revenue reported on the income statement with the receivable reported on the statement of financial position. c. letting expenses follow revenues. d. dividing the life of the business into artificial time periods.

Ans: c, LO 2, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

95.

When companies record transactions in the period in which the events occur, ______ is being applied. a. accrual-basis accounting. b. the time period assumption. c. the matching of the income statement with the statement of financial position. d. the expense recognition principle.

Ans: a, LO 2, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

96.

A small company may be able to justify using a cash basis of accounting if they have a. sales under $1,000,000. b. no accountants on staff. c. few receivables and payables. d. all sales and purchases on account.

Ans: c, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

97.

Which of the following adjustments would require decreasing the liabilities reported on the statement of financial position? a. A company uses $400 worth of supplies during the year. b. A company records $400 worth of depreciation on equipment. c. A company has earned $400 of revenue collected at the beginning of the year. d. A company records $400 of wages earned by employees that will be paid next year.

Ans: c, LO 3, BT: K, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

98.

Adjusting entries a. ensure that the revenue recognition and expense recognition principles are followed. b. are necessary to enable the financial statements to conform to International Financial Reporting Standards (IFRS). c. include both accruals and deferrals d. all of these answer choices are correct.

Ans: d, LO 3, BT: K, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

For Instructor Use Only

3 - 14 99.

Test Bank for Financial Accounting: IFRS Edition, 3e 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 incurred. d. when revenues are recorded in the period in which they are earned.

Ans: a, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

100. A company must make adjusting entries a. to ensure that the revenue recognition and expense recognition principles are followed. b. each time it prepares an income statement and a statement of financial position. c. to account for accruals or deferrals. d. all of these answer choices are correct. Ans: d, LO 3, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving

101.

Which one of the following is not a justification for adjusting entries? a. Adjusting entries are necessary to ensure that revenue recognition principles are followed. b. Adjusting entries are necessary to ensure that the expense recognition principle is followed. c. Adjusting entries are necessary to enable financial statements to be in conformity with IFRS. d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

Ans: d, LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

102.

An adjusting entry a. affects two statement of financial position accounts. b. affects two income statement accounts. c. affects a statement of financial position account and an income statement account. d. is always a compound entry.

Ans: c, LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

103.

The preparation of adjusting entries is a. straight forward because the accounts that need adjustment will be out of balance. b. often an involved process requiring the skills of a professional. c. only required for accounts that do not have a normal balance. d. optional when financial statements are prepared.

Ans: b, LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

104.

If a resource has been consumed but a bill has not been received at the end of the accounting period, then a. an expense should be recorded when the bill 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 bill is received.

Ans: c, LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts 105.

Accounts often need to be adjusted because a. there are never enough accounts to record all the transactions. b. many transactions affect more than one time period. c. there are always errors made in recording transactions. d. management can't decide what they want to report.

Ans: b, LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

106.

Adjusting entries are a. not necessary if the accounting system is operating properly. b. usually required before financial statements are prepared. c. made whenever management desires to change an account balance. d. made to statement of financial position accounts only.

Ans: b, LO 3, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

107.

Expenses incurred but not yet paid or recorded are called a. prepaid expenses. b. accrued expenses. c. interim expenses. d. unearned expenses.

Ans: b, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

108.

An asset—expense relationship exists with a. liability accounts. b. revenue accounts. c. prepaid expense adjusting entries. d. accrued expense adjusting entries.

Ans: c, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

109.

Adjusting entries can be classified as a. postponements and advances. b. accruals and deferrals. c. deferrals and postponements. d. accruals and advances.

Ans: b, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

110.

Accrued revenues are a. received and recorded as liabilities before they are earned. b. earned and recorded as liabilities before they are received. c. earned but not yet received or recorded. d. earned and already received and recorded.

Ans: c, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

111.

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.

Ans: a, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

3 - 15

3 - 16 112.

Test Bank for Financial Accounting: IFRS Edition, 3e 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 or recorded.

Ans: c, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

113.

Unearned revenues are a. received and recorded as liabilities before they are earned. b. earned and recorded as liabilities before they are received. c. earned but not yet received or recorded. d. earned and already received and recorded.

Ans: a, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

114.

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.

Ans: c, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

115.

Which of the following reflect the balances of prepayment accounts prior to adjustment? a. Statement of financial position accounts are understated and income statement accounts are understated. b. Statement of financial position accounts are overstated and income statement accounts are overstated. c. Statement of financial position accounts are overstated and income statement accounts are understated. d. Statement of financial position accounts are understated and income statement accounts are overstated.

Ans: c, LO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

116.

A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause a. expenses to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.

Ans: d, LO 5, BT:C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

117.

Bee-In-The-Bonnet Company purchased office supplies costing $8,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of supplies revealed $2,200 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be a. Debit Supplies Expense, $2,200; Credit Supplies, $2,200. b. Debit Supplies, $5,800; Credit Supplies Expense, $5,800. c. Debit Supplies Expense, $5,800; Credit Supplies, $5,800. d. Debit Supplies, $2,200; Credit Supplies Expense, $2,200.

Ans: c, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts 118.

3 - 17

If an adjustment is needed for unearned revenues, the a. liability and related revenue are overstated before adjustment. b. liability and related revenue are understated before adjustment. c. liability is overstated and the related revenue is understated before adjustment. d. liability is understated and the related revenue is overstated before adjustment.

Ans: c, LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

119.

The balance in the supplies account on June 1 was $5,200, supplies purchased during June were $3,500, and the supplies on hand at June 30 were $2,000. The amount to be used for the appropriate adjusting entry is a. $5,500. b. $3,500. c. $10,700. d. $6,700.

Ans: d, LO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

120.

Depreciation expense for a period is computed by taking the a. original cost of an asset – accumulated depreciation. b. depreciable cost ÷ depreciation rate. c. cost of the asset ÷ useful life. d. market value of the asset ÷ useful life.

Ans: c, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

121.

Accumulated Depreciation is a. an expense account. b. an equity account. c. a liability account. d. a contra asset account.

Ans: d, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

122.

Hercules Company purchased a computer for $4,500 on December 1. It is estimated that annual depreciation on the computer will be $900. If financial statements are to be prepared on December 31, the company should make the following adjusting entry: a. Debit Depreciation Expense, $900; Credit Accumulated Depreciation, $900. b. Debit Depreciation Expense, $75; Credit Accumulated Depreciation, $75. c. Debit Depreciation Expense, $3,600; Credit Accumulated Depreciation, $3,600. d. Debit Office Equipment, $4,500; Credit Accumulated Depreciation, $4,500.

Ans: b, LO 5, BT: AN, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

123.

Action Real Estate received a check for $24,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $24,000. Financial statements will be prepared on July 31. Action Real Estate should make the following adjusting entry on July 31: a. Debit Unearned Rent Revenue, $4,000; Credit Rent Revenue, $4,000. b. Debit Rent Revenue, $4,000; Credit Unearned Rent Revenue, $4,000. c. Debit Unearned Rent Revenue, $24,000; Credit Rent Revenue, $24,000. d. Debit Cash, $24,000; Credit Rent Revenue, $24,000.

Ans: a, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

3 - 18 124.

Test Bank for Financial Accounting: IFRS Edition, 3e 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.

Ans: b, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

125.

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.

Ans: d, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

126.

If a company fails to make an adjusting entry to record supplies expense, then a. equity will be understated. b. expense will be understated. c. assets will be understated. d. net income will be understated.

Ans: b, LO 5, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

127.

What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, € 41,000, and unexpired amounts per analysis of policies of € 8,000? a. Debit Insurance Expense, € 8,000; Credit Prepaid Insurance, € 8,000. b. Debit Insurance Expense, € 41,000; Credit Prepaid Insurance, € 41,000. c. Debit Prepaid Insurance, € 33,000; Credit Insurance Expense, € 33,000. d. Debit Insurance Expense, € 33,000; Credit Prepaid Insurance, € 33,000.

Ans: d, LO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

128.

At December 31, 2017, before any year-end adjustments, Cable Car Company's Insurance Expense account had a balance of £5,800 and its Prepaid Insurance account had a balance of £15,200. It was determined that £12,800 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be a. £12,800. b. £5,800. c. £18,600. d. £8,200.

Ans: c, LO 5, BT: AN, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

129.

Depreciation is the process of a. valuing an asset at its fair value. b. increasing the value of an asset over its useful life in a rational and systematic manner. c. allocating the cost of an asset to expense over its useful life in a rational and systematic manner. d. writing down an asset to its real value each accounting period.

Ans: c, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts 130.

3 - 19

A new accountant working for Unitas Company records $800 Depreciation Expense on store equipment as follows: Depreciation Expense ............................................ 800 Cash .............................................................. 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 statement of financial position as of December 31. c. overstate the book value of the depreciable assets at December 31. d. understate the book value of the depreciable assets as of December 31.

Ans: c, LO 5, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

131.

From an accounting standpoint, the acquisition of productive facilities 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.

Ans: d, LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

132.

The balance in the Prepaid Rent account before adjustment at the end of the year is ¥15,000, which represents three months’ rent paid on December 1. The adjusting entry required on December 31 is to a. debit Rent Expense, ¥5,000; credit Prepaid Rent, ¥5,000. b. debit Rent Expense, ¥10,000; credit Prepaid Rent ¥10,000. c. debit Prepaid Rent, ¥5,000; credit Rent Expense, ¥5,000. d. debit Prepaid Rent, ¥10,000; credit Rent Expense, ¥10,000.

Ans: a, LO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

133.

An accumulated depreciation account a. is a contra-liability account. b. increases on the debit side. c. is offset against total assets on the statement of financial position. d. has a normal credit balance.

Ans: d, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

134.

The difference between the cost of a depreciable asset and its related accumulated depreciation is referred to as the a. fair value of the asset. b. blue book value of the asset. c. book value of the asset. d. depreciated difference of the asset.

Ans: c, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

135.

If a business has several types of Non-current assets such as equipment, buildings, and trucks, a. there should be only one accumulated depreciation account. b. there should be a separate accumulated depreciation account for each type of asset. c. all the long-term asset accounts will be recorded in one general ledger account. d. there won't be a need for an accumulated depreciation account.

Ans: b, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

3 - 20

Test Bank for Financial Accounting: IFRS Edition, 3e

For Instructor Use Only

Adjusting the Accounts 136.

3 - 21

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 football games d. Sale of two-year magazine subscriptions

Ans: b, LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

137.

If 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 rent revenue. d. accrued rent revenue.

Ans: c, LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

138.

Unearned revenue is classified as a. an asset account. b. a revenue account. c. a contra-revenue account. d. a liability account.

Ans: d, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

139.

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 Service Revenue and credit Cash. b. debit Unearned Service Revenue and credit Service Revenue. c. debit Unearned Service Revenue and credit Prepaid Expense. d. debit Unearned Service Revenue and credit Accounts Receivable.

Ans: b, LO 5, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

140.

Speedy Clean Laundry purchased € 6,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only € 1,000 on hand. The adjusting entry that should be made by the company on June 30 is a. Debit Supplies Expense, €1,000; Credit Supplies, €1,000. b. Debit Supplies, €1,000; Credit Supplies Expense, €1,000. c. Debit Supplies, € 5,500; Credit Supplies Expense, € 5,500. d. Debit Supplies Expense, € 5,500; Credit Supplies, € 5,500.

Ans: d, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

141.

On July 1, Runner’s Sports Store paid $12,000 to Acme Realty for 4 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by Runner’s Sports Store is a. Debit Rent Expense, $12,000; Credit Prepaid Rent, $3,000. b. Debit Prepaid Rent, $3,000; Credit Rent Expense, $3,000. c. Debit Rent Expense, $3,000; Credit Prepaid Rent, $3,000. d. Debit Rent Expense, $12,000; Credit Prepaid Rent, $12,000.

Ans: c, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

3 - 22 142.

Test Bank for Financial Accounting: IFRS Edition, 3e Middle City College sold season tickets for the 2017 football season for $400,000. A total of 8 games will be played during September, October and November. In September, three games were played. The adjusting journal entry at September 30 a. is not required. No adjusting entries will be made until the end of the season in November. b. will include a debit to Cash and a credit to Ticket Revenue for $100,000. c. will include a debit to Unearned Ticket Revenue and a credit to Ticket Revenue for $150,000. d. will include a debit to Ticket Revenue and a credit to Unearned Ticket Revenue for $133,333.

Ans: c, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

143.

Middle City College sold season tickets for the 2017 football season for $400,000. A total of 8 games will be played during September, October and November. In September, two games were played. In October, three games were played. The balance in Unearned Ticket Revenue at October 31 is a. $0. b. $100,000. c. $150,000. d. $250,000.

Ans: c, LO 5, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

144.

Middle City College sold season tickets for the 2017 football season for $400,000. A total of 8 games will be played during September, October and November. Assuming all the games are played, the Unearned Ticket Revenue balance that will be reported on the December 31 statement of financial position will be a. $0. b. $150,000. c. $250,000. d. $400,000.

Ans: a, LO 5, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

145.

At March 1, 2017, Jupiter Corp. had supplies on hand of £1,000. During the month, Jupiter purchased supplies of £2,400 and used supplies of £2,000. The March 31 adjusting journal entry should include a a. debit to the supplies account for £2,000. b. credit to the supplies account for £1,000. c. debit to the supplies account for £2,400. d. credit to the supplies account for £2,000.

Ans: d, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

146.

Henry-K Company purchased a computer system for €5,400 on January 1, 2017. The company expects to use the computer system for 3 years. It has no residual value. Monthly depreciation expense on the asset is a. €0. b. €150. c. €1,800. d. €5,400.

Ans: b, LO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts 147.

3 - 23

Hardwood Supplies Inc. purchased a 12-month insurance policy on March 1, 2017 for ₤ 3,000. At March 31, 2017, the adjusting journal entry to record expiration of this asset will include a a. debit to Prepaid Insurance and a credit to Cash for ₤ 3,000. b. debit to Prepaid Insurance and a credit to Insurance Expense for ₤ 300. c. debit to Insurance Expense and a credit to Prepaid Insurance for ₤ 250 d. debit to Insurance Expense and a credit to Cash for ₤ 250.

Ans: c, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

148.

Daly Investments purchased an 18-month insurance policy on May 31, 2017 for ₤12,600. The December 31, 2017 statement of financial position would report Prepaid Insurance of a. ₤0 because Prepaid Insurance is reported on the Income Statement. b. ₤4,900. c. ₤7,700. d. ₤12,600.

Ans: c, LO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

149.

At March 1, Progressive Auto Inc. reported a balance in Supplies of €600. During March, the company purchased supplies for €2,250 and consumed supplies of €1,800. If no adjusting entry is made for supplies a. equity will be overstated by €1,800. b. expenses will be understated by €2,250. c. assets will be understated by €1,050 d. net income will be understated by €1,800.

Ans: a, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

150.

Y-B-2 Inc. pays its rent of €90,000 annually on January 1. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following will be true? a. Failure to make the adjustment does not affect the February financial statements. b. Expenses will be overstated by €7,500 and net income and equity will be understated by €7,500. c. Assets will be overstated by €15,000 and net income and equity will be understated by €15,000. d. Assets will be overstated by €7,500 and net income and equity will be overstated by €7,500.

Ans: d, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

151.

On January 1, 2016, P.T. Scope Company purchased a computer system for $8,100. The company expects to use the system for 3 years. The asset has no residual value. The book value of the system at December 31, 2017 is a. $0. b. $2,700. c. $5,400. d. $8,100.

Ans: b, LO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 24 152.

Test Bank for Financial Accounting: IFRS Edition, 3e On January 1, 2016, Grills and Grates Inc. purchased equipment for £90,000. The company is depreciating the equipment at the rate of £1,200 per month. At January 31, 2017, the balance in Accumulated Depreciation is a. £1,200. b. £14,400. c. £15,600. d. £74,400.

Ans: c, LO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

153.

On January 1, 2016, Masters and Masters Company purchased equipment for € 60,000. The company is depreciating the equipment at the rate of € 1,400 per month. The book value of the equipment at December 31, 2016 is a. € 0. b. €16,800. c. € 43,200. d. € 60,000.

Ans: c, LO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

154.

O.K.C. Company collected $21,000 in September of 2016 for 4 months of service which would take place from October of 2016 through January of 2017. The revenue reported from this transaction during 2016 would be a. 0. b. $15,750. c. $21,000. d. $5,025.

Ans: b, LO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

155.

Turner Company collected $26,000 in September of 2016 for 5 months of service which would take place from October of 2016 through February of 2017. The revenue reported from this transaction during 2016 would be a. $0. b. $15,600. c. $26,000. d. $10,400.

Ans: b, LO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

156.

Niagara Corporation purchased a one-year insurance policy in January 2016 for €24,000. The insurance policy is in effect from March 2016 through February 2017. If the company neglects to make the proper year-end adjustment for the expired insurance a. Net income and assets will be understated by €20,000. b. Net income and assets will be overstated by €20,000. c. Net income and assets will be understated by €4,000. d. Net income and assets will be overstated by €4,000.

Ans: b, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts 157.

3 - 25

James Corporation purchased a one-year insurance policy in January 2016 for € 24,000. The insurance policy is in effect from May 1, 2016 through April 30, 2017. If the company neglects to make the proper year-end adjustment for the expired insurance a. Net income and assets will be understated by € 16,000. b. Net income and assets will be overstated by € 16,000. c. Net income and assets will be understated by € 8,000. d. Net income and assets will be overstated by € 8,000.

Ans: b, LO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

158.

Sele, Inc. purchased supplies costing ₤7,000 on January 1, 2017 and recorded the transaction by increasing assets. At the end of the year ₤2,600 of the supplies are still on hand. How will the adjusting entry impact Sele, Inc.’s statement of financial position at December 31, 2017? a. Decreased Assets ₤2,600. b. Increased Equity ₤2,600. c. Increased Liabilities ₤4,400. d. Decreased Assets ₤4,400.

Ans: d, LO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

159.

Sele, Inc. purchased supplies costing ₤7,000 on January 1, 2017 and recorded the transaction by increasing assets. At the end of the year ₤2,600 of the supplies are still on hand. If Sele, Inc. does not make the appropriate adjusting entry, what is the impact on its statement of financial position at December 31, 2017? a. Assets overstated by ₤ 4,400. b. Equity understated by ₤ 4,400. c. Equity overstated by ₤ 2,600. d. Assets overstated by ₤ 2,600.

Ans: a, LO 5, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

160.

Sele, Inc. purchased a building on January 1, 2017 for ₤ 1,200,000. The useful life of the building is 10 years. What impact will the appropriate adjusting entry at December 31, 2017 have on its statement of financial position at December 31, 2017? a. Increased Equity ₤ 120,000. b. Increased Liabilities ₤ 120,000. c. Decreased Assets ₤ 120,000. d. Since the adjusting entry has offsetting debits and credits, there is no impact on the statement of financial position.

Ans: c, LO 5, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

161.

Sele, Inc. purchased a building on January 1, 2017 for ₤ 1,200,000. The useful life of the building is 10 years. The asset is reported on the December 31, 2017 statement of financial position at ₤ 1,080,000. What was the impact of the adjusting entry recorded by Sele, Inc.? a. Decreased Equity ₤ 120,000. b. Increased Liabilities ₤ 120,000. c. Increased Assets ₤ 120,000. d. All of these answer choices are correct.

Ans: a, LO 5, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 26 162.

Test Bank for Financial Accounting: IFRS Edition, 3e Iron Inn is a resort located in Canada. Wave Inn collects cash when guests make a reservation. During December 2016, Iron Inn collected €150,000 of cash and recorded the receipt by recognizing unearned revenue. By the end of the month Iron Inn had earned one third of this amount, the other two thirds will be earned during January 2017. The adjusting entry required at December 31, 2016 would impact the statement of financial position by a. Increased Equity €100,000. b. Decreased Liabilities €50,000. c. Increased Assets €150,000. d. Decreased Equity €50,000.

Ans: b, LO 5, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

163.

Iron Inn is a resort located in Canada. During December 2016 Wave Inn collects €200,000 cash related to a conference booked by the Spin Jammers. The conference is scheduled for February 12 and 13, 2017. Which of the following is true regarding how this transaction is reported on the December 31, 2016 statement of financial position? a. Spin Jammers reports unearned revenue of €200,000. b. Iron Inn reports a prepaid asset of €200,000. c. Iron Inn reports unearned revenue of €200,000. d. All of these answer choices are correct.

Ans: c, LO 5, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

164.

Bread Basket provides baking supplies to restaurants and grocery stores. During December 2017, Bread Basket’s employees worked 2,400 hours at an average rate of €15 per hour. At December 31, 2017, Bread Basket has paid €21,000 of salary expense. If Bread Basket fails to make the appropriate adjusting entry, which of the following is true regarding its December 31, 2017 statement of financial position? a. Equity is overstated by € 21,000. b. Equity is understated by € 15,000. c. Liabilities are understated by € 15,000. d. Liabilities are overstated by € 21,000.

Ans: c, LO 6, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

165.

Bread Basket provides baking supplies to restaurants and grocery stores. On November 1, 2017, Bread Basket signed a €600,000, 6-month note payable. The note requires Bread Basket to pay interest at an annual rate of 6%. Assuming Bread Basket makes the appropriate adjusting entry, what is the impact on its December 31, 2017 statement of financial position? a. An expense of € 18,000. b. An expense of € 6,000. c. A liability of € 6,000. d. An expense of €18,000 and a liability of.€18,000.

Ans: c, LO 6, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts 166.

3 - 27

Bread Basket provides baking supplies to restaurants and grocery stores. On November 1, 2017, Bread Basket signed a €700,000, 6-month note payable. The note requires Bread Basket to pay interest at an annual rate of 6%. Bread Basket’s accountant is a recent college graduate who lacks practical experience. Therefore, the appropriate adjusting entry is not made. What is the impact on its December 31, 2017 statement of financial position? a. Assets are overstated by € 21,000. b. Equity is overstated by € 21,000. c. Liabilities are understated by € 21,000. d. Liabilities are understated by € 7,000.

Ans: d, LO 6, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

167.

Iron Inn is a resort located in Canada. During December 2017 Spin Jammers held its annual conference at the resort. The charges related to the conference total € 400,000, of which 25% has been paid by Spin Jammers. When Iron Inn makes the appropriate adjusting entry, which of the following is a part of the adjustment made to its December 31, 2017 statement of financial position? a. Debit Cash € 300,000. b. Credit revenues € 300,000. c. Credit Cash € 300,000. d. Debit Cash and credit revenue € 300,000.

Ans: b, LO 6, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

168.

Which of the following statements is false regarding adjusting entries? a. Cash is neither debited nor credited as a result of adjusting entries. b. Each adjusting entry affects one statement of financial position account and one income statement account. c. Each adjusting entry affects one revenue account and one expense account. d. Adjusting entries involve accruals or deferrals.

Ans: c, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

169.

If an adjusting entry is not made for an accrued revenue, a. assets will be overstated. b. expenses will be understated. c. equity will be understated. d. revenues will be overstated.

Ans: c, LO 6, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

170.

If an adjusting entry is not made for an accrued expense, a. expenses will be overstated. b. liabilities will be understated. c. net income will be understated. d. equity will be understated.

Ans: b, LO 6, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 28 171.

Test Bank for Financial Accounting: IFRS Edition, 3e Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause a. net income 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.

Ans: c, LO 6, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

172.

Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause a. net income to be overstated. b. an understatement of assets and an understatement of revenues. c. an understatement of revenues and an understatement of liabilities. d. an understatement of revenues and an overstatement of liabilities.

Ans: b, LO 6, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

173.

Betty Carson has performed $500 of accounting services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Betty make? a. Debit Cash and credit Unearned Service Revenue b. Debit Accounts Receivable and credit Unearned Service Revenue c. Debit Accounts Receivable and credit Service Revenue d. Debit Unearned Service Revenue and credit Service Revenue

Ans: c, LO 6, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

174.

Betty Carson, an accountant, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will Betty make upon receipt of the payments? a. Debit Unearned Service 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

Ans: b, LO 6, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

175.

Sherman Air Charter signed a four-month note payable in the amount of $12,000 on September 1. The note requires interest at an annual rate of 6%. The amount of interest to be accrued at the end of September is a. $240. b. $60. c. $720. d. $180.

Ans: b, LO 6, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts 176.

3 - 29

Joyce’s Gifts signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $50,000 with annual interest of 6%. 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? a. Interest Expense ................................................................. 500 Interest Payable ......................................................... 500 b. Interest Expense ................................................................. 7,500 Interest Payable ......................................................... 7,500 c. Interest Expense ................................................................. 500 Cash .......................................................................... 500 d. Interest Expense ................................................................. 500 Note Payable ............................................................. 500

Ans: a, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

177.

Cindi’s Candies paid employee wages on and through Friday, January 26, and the next payroll will be paid in February. There are three more working days in January (29–31). Employees work 5 days a week and the company pays $900 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January? a. Salaries and Wages Expense ............................................. 900 Salaries and Wages Payable ..................................... 900 b. Salaries and Wages Expense ............................................. 4,500 Salaries and Wages Payable ..................................... 4,500 c. Salaries and Wages Expense ............................................. 2,700 Salaries and Wages Payable ..................................... 2,700 d. No adjusting entry is required.

Ans: c, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

178.

A company shows a balance in Salaries and Wages Payable of ¥48,000 at the end of the month. The next payroll amounting to ¥54,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries? a. Salaries and Wages Expense ............................................. 54,000 Salaries and Wages Payable ..................................... 54,000 b. Salaries and Wages Expense ............................................. 54,000 Cash .......................................................................... 54,000 c. Salaries and Wages Expense ............................................. 6,000 Cash .......................................................................... 6,000 d. Salaries and Wages Expense ............................................. 6,000 Salaries and Wages Payable .............................................. 48,000 Cash .......................................................................... 54,000

Ans: d, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

179.

A business pays weekly salaries of $30,000 on Friday for a five-day week ending on that day. The adjusting entry necessary at the end of the fiscal period ending on a Thursday is a. debit Salaries and Wages Payable, $24,000; credit Cash, $24,000. b. debit Salaries and Wages Expense, $24,000; credit Cash, $24,000. c. debit Salaries and Wages Expense, $24,000; credit Salaries and Wages Payable, $24,000. d. debit Salaries and Wages Expense, $6,000; credit Salaries and Wages Payable, $6,000.

Ans: c, LO 6, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 30 180.

Test Bank for Financial Accounting: IFRS Edition, 3e Jenni’s Music Store borrowed $60,000 from the bank signing a 7%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be a. b. c. d.

Debit Interest Expense, $4,200; Credit Interest Payable, $4200. Debit Interest Expense, $350; Credit Interest Payable, $350. Debit Note Payable, $4,200; Credit Cash, $4,200 Debit Cash, $1,050; Credit Interest Payable, $1,050.

Ans: b, LO 6, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

181.

Becki Jean Corporation issued a one-year, 6%, £500,000 note on April 30, 2017. Interest expense for the year ended December 31, 2017 was a. £30,000. b. £22,500. c. £20,000. d. £17,500.

Ans: c, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

182.

RAS Corporation issued a one-year, 6%, €400,000 note on August 31, 2017. Interest expense for the year ended December 31, 2017 was a. € 24,000. b. € 10,000. c. € 8,000. d. € 6,000.

Ans: c, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

183.

Employees at Julian Corporation are paid € 20,000 cash every Friday for working Monday through Friday. The calendar year accounting period ends on Wednesday, December 31. How much salary expense should be recorded two days later on January 2? a. € 20,000 b. € 12,000 c. None, matching requires the weekly salary to be accrued on December 31. d. € 8,000

Ans: d, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

184.

Can financial statements be prepared directly from the adjusted trial balance? a. They cannot. The general ledger must be used. b. Yes, adjusting entries have been recorded in the general journal and posted to the ledger accounts. c. No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose. d. They can because that is the only reason that an adjusted trial balance is prepared.

Ans: b, LO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

185.

The adjusted trial balance is prepared a. after financial statements are prepared. b. before the trial balance. c. to prove the equality of total assets and total liabilities. d. after adjusting entries have been journalized and posted.

Ans: d, LO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts 186.

3 - 31

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 IFRS. d. cannot be used to prepare financial statements.

Ans: b, LO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

187.

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.

Ans: d, LO 7, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

188.

A document prepared to prove the equality of debits and credits after all adjustments have been prepared is the a. adjusted statement of financial position. b. adjusted trial balance. c. adjusted financial statements. d. post-closing trial balance.

Ans: b, LO 7, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

189.

Similarities between International Financial Reporting Standards (IFRS) and U.S. GAAP include all of the following except a. Cash-basis accounting is not in accordance with either IFRS or U.S. GAAP. b. Both IFRS and U.S. GAAP allow revaluation of item such as land and building to fair value. c. Both IFRS and U.S. GAAP divide the economic life of companies into artificial time periods. d. The form and content of financial statements are very similar under IFRS and U.S. GAAP.

Ans: b, LO 7, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

190.

Cara, Inc. purchased supplies costing €7,500 on January 1, 2017 and recorded the transaction by debiting an expense. At the end of the year €3,000 of the supplies are still on hand. If Cara, Inc. does not make the appropriate adjusting entry, what is the impact on its statement of financial position at December 31, 2017? a. Assets understated by €4,500. b. Equity understated by €4,500. c. Equity overstated by €3,000. d. Assets understated by €3,000.

Ans: d, LO 8, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 32 191.

Test Bank for Financial Accounting: IFRS Edition, 3e Wave Inn is a resort located in Canada. Wave Inn collects cash when guests make a reservation. During December 2016, Wave Inn collected $90,000 of cash and recorded the receipt by recognizing revenue. By the end of the month Wave Inn had earned one third of this amount, the other two thirds will be earned during January 2017. The adjusting entry required at December 31, 2016 would impact the statement of financial position by a. Decreased Equity $60,000. b. Decreased Liabilities $60,000. c. Increased Assets $90,000. d. Increased Equity $30,000.

Ans: a, LO 8, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a

192. Myron is a barber who does his own accounting for his shop. When he buys supplies he routinely debits Supplies Expense. Myron purchased €3,000 of supplies in January and his inventory at the end of January shows €800 of supplies remaining. What adjusting entry should Myron make on January 31? a. Supplies Expense ............................................................... 800 Supplies ..................................................................... 800 b. Supplies Expense ............................................................... 3,000 Cash........................................................................... 3,000 c. Supplies .............................................................................. 800 Supplies Expense....................................................... 800 d. Supplies Expense ............................................................... 2,200 Supplies ..................................................................... 2.200

Ans: c, LO 8, BT: C, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving a

193. Alternative adjusting entries do not apply to a. accrued revenues and accrued expenses. b. prepaid expenses. c. unearned revenues. d. prepaid expenses and unearned revenues.

Ans: a, LO 8, BT:C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving a

194. Mike Conway is a lawyer who requires that his clients pay him in advance of legal services rendered. Mike routinely credits Service Revenue when his clients pay him in advance. In June Mike collected €20,000 in advance fees and completed 75% of the work related to these fees. What adjusting entry is required by Mike's firm at the end of June? a. Unearned Service Revenue ............................................... 15,000 Service Revenue ....................................................... 15,000 b. Unearned Service Revenue ............................................... 5,000 Service Revenue ....................................................... 5,000 c. Cash .................................................................................. 20,000 Service Revenue ....................................................... 20,000 d. Service Revenue ................................................................ 5,000 Unearned Service Revenue ....................................... 5,000

Ans: d, LO 8, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts

3 - 33

a

195. If prepaid expenses are initially recorded in expense accounts and have not all been used at the end of the accounting period, then failure to make an adjusting entry will cause a. assets to be understated. b. assets to be overstated. c. expenses to be understated. d. contra-expenses to be overstated.

Ans: a, LO 8, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a

196. If unearned revenues are initially recorded in revenue accounts and have not all been earned at the end of the accounting period, then failure to make an adjusting entry will cause a. liabilities to be overstated. b. revenues to be understated. c. revenues to be overstated. d. accounts receivable to be overstated.

Ans: c, LO 8, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a

197. On January 2, 2017, National Credit and Cash purchased a general liability insurance policy for ₤6,000 for coverage for the calendar year. The entire ₤6,000 was charged to Insurance Expense on January 2, 2017. If the firm prepares monthly financial statements, the proper adjusting entry on January 31, 2017, will be: a. Insurance Expense ............................................................. 5,500 Prepaid Insurance ...................................................... 5,500 b. Prepaid Insurance............................................................... 5,500 Insurance Expense .................................................... 5,500 c. Insurance Expense ............................................................. 500 Prepaid Insurance ...................................................... 500 d. Prepaid Insurance............................................................... 500 Insurance Expense .................................................... 500

Ans: b, LO 8, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving a

198. Information that is presented in a clear fashion, so that reasonably informed users of that information can interpret it is an example of a. relevance. b. faithful representation. c. understandability. d. comparability.

Ans: c, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

199. Accounting information should be verifiable in order to enhance a. comparability. b. faithful representation. c. consistency. d. relevance.

Ans: b, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics

For Instructor Use Only

3 - 34

Test Bank for Financial Accounting: IFRS Edition, 3e

a

200. If accounting information has relevance, it is useful in making predictions about a. future tax audits. b. new accounting principles. c. foreign currency exchange rates. d. the future events of a company.

Ans: d, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

201. Which one of the following is not an enhancing quality of useful information? a. Timelines b. Understandability c. Monetary Unit d. Comparability

Ans: c, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

202. All of the following are characteristics of accounting information except a. faithful representation. b. comparability. c. relevance. d. flexibility.

Ans: d, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

203. The two fundamental qualities of useful information are a. verifiability and timeliness. b. relevance and faithful representation. c. comparability and flexibility. d. understandability and consistency.

Ans: b, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

204. Relevant accounting information a. is information that has been audited. b. must be reported within the operating cycle or one year, whichever is longer. c. has been objectively determined. d. is information that is capable of making a difference in a business decision.

Ans: d, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

205. Characteristics associated with relevant accounting information are a. comparability and timeliness. b. predictive value and confirmatory value. c. neutral and verifiable. d. consistency and understandability.

Ans: b, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics

For Instructor Use Only

Adjusting the Accounts

3 - 35

a

206. Characteristics associated with faithfully representative accounting information are a. verifiable and timely. b. neutral and verifiable. c. complete and neutral. d. relevance and verifiable.

Ans: c, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

207. Which of the following statements is not true? a. Comparability means using the same accounting principles from year to year within a company. b. Faithful representation is the quality of information that gives assurance that it is free from error. c. Relevant accounting information must be capable of making a difference in the decision. d. The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decision.

Ans: b, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

208. An item is considered material if a. it doesn't cost a lot of money. b. it is of a tangible good. c. its size is likely to influence the decision of an investor or creditor. d. the cost of reporting the item is greater than its benefits.

Ans: c, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics

209.

A company using the same accounting principles from year to year is an application of a. timelines. b. consistency. c. full disclosure. d. materiality.

Ans: b, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

210. Which of the following is a constraint in accounting? a. Comparability. b. Cost. c. Consistency. d. Relevance.

Ans: b, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

211. The periodicity assumption states that the economic life of a business can be divided into a. equal time periods. b. cyclical time periods. c. artificial time periods. d. perpetual time periods.

Ans: c, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics

For Instructor Use Only

3 - 36

Test Bank for Financial Accounting: IFRS Edition, 3e

a

212. Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitment? a. Monetary unit assumption. b. Economic entity assumption. c. Periodicity assumption. d. Going concern assumption.

Ans: d, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

213. The economic entity assumption states that economic events a. of different entities can be combined if all the entities are corporations. b. must be reported to the IASB. c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners. d. of every entity can be separately identified and accounted for.

Ans: d, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

214. Which of the following is not an accounting assumption? a. Integrity. b. Going concern. c. Periodicity. d. Economic entity.

Ans: a, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

215. The periodicity assumption states a. the business will remain in operation for the foreseeable future. b. the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared. c. every economic entity can be separately identified and accounted for. d. only those things that can be expressed in money are included in the accounting records.

Ans: b, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

216. Valuing assets at their fair value rather than at their cost is inconsistent with the: a. economic entity assumption. b. historical cost principle. c. periodicity assumption. d. full disclosure principles.

Ans: b, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a

217. Jackson Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which of the following qualities of useful information has Jackson most likely violated? a. Comparability b. Relevance c. Faithful representation d. Consistency

Ans: c, LO 9, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics

For Instructor Use Only

Adjusting the Accounts 218.

3 - 37

Which of the following statements concerning accrual-basis accounting is incorrect? a. Accrual-basis accounting follows the revenue recognition principle. b. Accrual-basis accounting is the method required by IFRS. c. Accrual-basis accounting recognizes expenses when they are paid. d. Accrual-basis accounting follows the expense recognition principle.

Ans: c, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

219.

The revenue recognition principle dictates that revenue be recognized in the accounting period a. before it is earned. b. after it is earned. c. in which the performance obligation is satisfied. d. in which it is collected.

Ans: c, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

220.

An expense is recorded under the cash basis only when a. services are performed. b. it is earned. c. cash is paid. d. it is incurred.

Ans: c, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

221.

For prepaid expense adjusting entries a. an expense—liability account relationship exists. b. prior to adjustment, expenses are overstated and assets are understated. c. the adjusting entry results in a debit to an expense account and a credit to an asset account. d. none of these.

Ans: c, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

222.

Expenses paid and recorded as assets before they are used are called a. accrued expenses. b. interim expenses. c. prepaid expenses. d. unearned expenses.

Ans: c, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

223.

Sail & Surf Cruises purchased a five-year insurance policy for its ships on April 1, 2017 for €120,000. Assuming that April 1 is the effective date of the policy, the adjusting entry on December 31, 2017 is a. Prepaid Insurance............................................................... 18,000 Insurance Expense ...................................................... 18,000 b. Insurance Expense ............................................................. 18,000 Prepaid Insurance ....................................................... 18,000 c. Insurance Expense ............................................................. 24,000 Prepaid Insurance ....................................................... 24,000 d. Insurance Expense ............................................................. 6,000 Prepaid Insurance ....................................................... 6,000

Ans: b, LO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

3 - 38 224.

Test Bank for Financial Accounting: IFRS Edition, 3e CHS Company purchased a truck from JLS Corp. by issuing a 6-month, 8% note payable for $45,000 on November 1. On December 31, the accrued expense adjusting entry is a. No entry is required. b. Interest Expense ................................................................. 3,600 Interest Payable ........................................................... 3,600 c. Interest Expense ................................................................. 7,200 Interest Payable ........................................................... 7,200 d. Interest Expense ................................................................. 600 Interest Payable ........................................................... 600

Ans: d, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

225.

If the adjusting entry for depreciation is not made, a. assets will be understated. b. equity will be understated. c. net income will be understated. d. expenses will be understated.

Ans: d, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

226.

BJ, an employee of Walker Corp., will not receive her paycheck until April 2. Based on services performed from March 16 to March 31, her salary was $800. The adjusting entry for Walker Corp. on March 31 is a. Salaries and Wages Expense .............................................. 800 Salaries and Wages Payable ........................................ 800 b. No entry is required. c. Salaries and Wages Expense .............................................. 800 Cash ............................................................................. 800 d. Salaries and Wages Payable ............................................... 800 Cash ............................................................................. 800

Ans: a, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

227.

Which of the following statements related to the adjusted trial balance is incorrect? a. It shows the balances of all accounts at the end of the accounting period. b. It is prepared before adjusting entries have been made. c. It proves the equality of the total debit balances and the total credit balances in the ledger. d. Financial statements can be prepared directly from the adjusted trial balance.

Ans: b, LO 7, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

228.

Financial statements are prepared directly from the a. general journal. b. ledger. c. trial balance. d. adjusted trial balance.

Ans: d, LO 7, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts

3 - 39

Answers to Multiple Choice Questions Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89.

c d a d b c a a d c a b c b a c b c a c c d b b

90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113.

b a d b c a c c d a d d c b c b b b c b c a c a

114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.

c c d c c d c d b a b d b d c c c d a d c b b c

138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161.

d b d c c c a d b c c a d b c c b b b b d a c a

162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185.

b c c c d b c c b c b c b b a c d c b c c d b d

186. 187. 188. 189. 190. 191. a 192. a 193. a 194. a 195. a 196. a 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209.

b d b b d a c a d a c b c b d c d b d b c a c b

210. 211. 212. 213. 214. 215. 216. 217. 218. 219. 220. 221. 222. 223. 224. 225. 226. 227. 228.

b c d d a b b c c c c c c b d d a b d

BRIEF EXERCISES BE 229 State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued revenue (AR) or an accrued expense (AE). 1. Unrecorded interest on savings bonds is $245. 2. Property taxes that have been incurred but that have not yet been paid or recorded amount to $300. 3. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned. 4. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40 percent was still unexpired. Solution 229 1. 2. 3. 4.

(3 min.)

AR AE UR PE

LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 40

Test Bank for Financial Accounting: IFRS Edition, 3e

BE 230 Prepare adjusting entries for the following transactions. Omit explanations. 1. Depreciation on equipment is €800 for the accounting period. 2. There was no beginning balance of supplies and purchased €700 of office supplies during the period. At the end of the period €100 of supplies were on hand. 3. Prepaid rent had a €1,000 normal balance prior to adjustment. By year end €800 was unexpired. Solution 230

(6 min.)

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

800

2. Supplies Expense ........................................................................... Supplies ................................................................................. (€700 – €100)

600

3. Rent Expense ................................................................................. Prepaid Rent .......................................................................... (€1,000 – €800)

200

800

600

200

LO 5, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

BE 231 On June 1, during its first month of operations, Soufflé Masters purchased supplies for $3,500 and debited the supplies account for that amount. At June 30, an inventory of supplies showed $1,000 of supplies on hand. What adjusting journal entry should be made for June? Solution 231

(3 min.)

Supplies Expense....................................................................... Supplies ..........................................................................

2,500 2,500

LO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

BE 232 On January 1, Bit & Bridle, CPAs received an $18,000 cash retainer for services to be rendered ratably over the next 3 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is earned equally over the 3-month period, what adjusting journal entry should be made at January 31? Solution 232

(3 min.)

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

6,000 6,000

LO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts

3 - 41

BE 233 On February 1, Results Income Tax Service received a ₤4,000 cash retainer for tax preparation services to be rendered equally over the next 4 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is earned equally over the 4-month period, what balance would be reported on the February 28 statement of financial position for Unearned Revenue? Solution 233

(5 min.)

Revenue earned monthly = ₤4,000/ 4 months = ₤1,000 per month Feb 28 balance in Unearned Service Revenue = ₤4,000 - ₤1,000 revenue earned in February = ₤3,000 LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

BE 234 Jeff Anderer Enterprises purchased computer equipment on May 1, 2017 for $5,400. The company expects to use the equipment for 3 years. It has no residual value. 1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared (annual depreciation is $1,800)? 2. What is the book value of the equipment at May 31, 2017? Solution 234

(5 min.)

1. Depreciation Expense ................................................................ Accumulated Depreciation ................................................. 2. Cost Accumulated Depreciation Book value

150 150

$5,400 – 150 $5,250

LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

BE 235 Rhodes National purchased software on October 1, 2017 for ₤18,000. The company expects to use the software for 3 years. It has no residual value. 1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared? (annual depreciation is ₤6,000) 2. What balance will be reported on the December 31, 2017 statement of financial position for Accumulated Depreciation? Solution 235

(5 min.)

1. Depreciation Expense ................................................................ Accumulated Depreciation .................................................

500

2. Balance in Accumulated Depreciation at December 31, 2017: 3 months × ₤500 per month = ₤1,500 LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

500

3 - 42

Test Bank for Financial Accounting: IFRS Edition, 3e

BE 236 Daily Printings sold annual subscriptions to their magazine for $30,000 in December, 2016. The magazine is published monthly. The new subscribers received their first magazine in January, 2017. 1. What adjusting entry should be made in January if the subscriptions were originally recorded as a liability? 2. What amount will be reported on the January 2017 statement of financial position for Unearned Subscription Revenue? Solution 236

(5 min.)

1. Unearned Subscription Revenue .............................................. Subscription Revenue ....................................................

2,500 2,500

2. Unearned Subscription Revenue at January 31: $30,000 – $2,500 = $27,500 LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

BE 237 On January 1, 2017, Dimes and Quarters Corp. purchased a general liability insurance policy for $9,000 to provide coverage for the calendar year. 1. If the company recorded the policy as an asset when purchased, what is the adjusting journal entry that should be recorded at January 31, 2017? *2. If the company expensed the cost of the policy on January 1, 2017, what is the adjusting entry that should be recorded at January 31, 2017? Solution 237

(5 min.)

1. Insurance Expense ................................................................... Prepaid Insurance .............................................................

750

*2. Prepaid Insurance .................................................................... Insurance Expense............................................................

8,250

750

8,250

LO 5 and 8, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

BE 238 Identify the impact on the statement of financial position if the following information is not used to adjust the accounts. 1. Supplies consumed totaled ¥3,000. 2. Interest accrues on notes payable at the rate of ¥200 per month. 3. Insurance of ¥450 expired during the month. 4. Plant and equipment are depreciated at the rate of ¥1,200 per month.

For Instructor Use Only

Adjusting the Accounts Solution 238 1. 2. 3. 4.

3 - 43

(5 min.)

Assets overstated and equity overstated by ¥3,000. Liabilities understated and equity overstated by ¥200. Assets overstated and equity overstated by ¥450. Assets overstated and equity overstated by ¥1,200.

LO 6, BT: AN, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

BE 239 Determine the impact on the statement of financial position accounts if the following information is not used to adjust the accounts of Fortress Company for the month of January, 2017. Round answers to the nearest dollar. 1. The company rents extra office space to B & J, CPAs. B & J pays the $24,000 rent annually on January 1. 2. The company has an outstanding loan to its President in the amount of $120,000. The loan accrues interest at the annual rate of 6%. Principal and interest are due January 1, 2020. 3. The company completed work on a project during January that was not yet billed to the client. The client will be charged $2,500. Solution 239

(5 min.)

1. Liabilities overstated and equity understated by $2,000. 2. Assets understated and equity understated by $600. 3. Assets understated and equity understated by $2,500. LO 6, BT: AN, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

BE 240 For each of the following oversights, state whether total assets will be understated (U), overstated (O), or no affect (NA). _____

1.

Failure to record revenue earned but not yet received.

_____

2.

Failure to record expired prepaid rent.

_____

3.

Failure to record accrued interest on the bank savings account.

_____

4.

Failure to record depreciation.

_____

5.

Failure to record accrued wages.

_____

6.

Failure to recognize the earned portion of unearned revenues.

Solution 240 1. 2. 3. 4. 5. 6.

(5 min.)

U O U O NA NA

LO 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 44

Test Bank for Financial Accounting: IFRS Edition, 3e

BE 241 Ramona’s Music School borrowed $30,000 from the bank signing a 6%, 6-month note on November 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements, what adjusting entry should the company make at November 30 with regard to the note (round answer to the nearest dollar)? Solution 241

(3 min.)

Interest Expense ($30,000 × 6% × 1/12) ........................................ Interest Payable ...................................................................

150 150

LO 6, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

BE 242 The adjusted trial balance of Rocky Acre Spread Inc. on December 31, 2017 includes the following accounts: Accumulated Depreciation, ₤6,000; Depreciation Expense, ₤2,000; Note Payable ₤7,500; Interest Expense ₤150; Utilities Expense, ₤300; Rent Expense, ₤500; Service Revenue, ₤16,600; Salaries and Wages Expense, ₤4,000; Supplies, ₤200; Supplies Expense, ₤1,200; Salaries and Wages Payable, ₤600. Prepare an income statement for the month of December. Solution 242

(10 min.) Rocky Acre Spread Inc. Income Statement For the Month Ended December 31, 2017

Service Revenue Expenses: Salaries and Wages expense Depreciation expense Supplies expense Rent expense Utilities expense Interest expense Net Income

₤16,600 ₤4,000 2,000 1,200 500 300 150

8,150 ₤8,450

LO 7, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

BE 243 The adjusted trial balance of Allen’s Automotive Service Company on June 30, 2017 includes the following accounts: Supplies, $300; Accumulated Depreciation, $8,500; Salaries and Wages Payable, $550, Note Payable $5,000; Service Revenue, $24,100; Salaries and Wages Expense, $12,750; Depreciation Expense, $2,250; Supplies Expense, $1,000; Rent Expense, $400; Utilities Expense, $350; and Interest Expense $250. Prepare an income statement for the month of June.

For Instructor Use Only

Adjusting the Accounts Solution 243

3 - 45

(10 min.) Allen’s Automotive Service Company Income Statement For the Month Ended June 30, 2017

Service revenue Expenses: Salaries and wages expense Depreciation expense Supplies expense Rent expense Utilities expense Interest expense Net Income

$24,100 $12,750 2,250 1,000 400 350 250

17,000 $7,100

LO 7, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

BE 244 The adjusted trial balance of Wilcox Company at December 31, 2017 includes the following accounts: Retained Earnings $12,600; Dividends $6,000; Service Revenue $35,000; Salaries and Wages Expense $16,000; Insurance Expense $2,000; Rent Expense $3,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare a retained earnings statement for the year.

Solution 244

(5 min.)

WILCOX COMPANY Retained Earnings Statement For the Year Ended December 31, 2017 ——————————————————————————————————————————— Retained earnings, January 1 $12,600 Plus: Net Income 12,000* 24,600 Less: Dividends 6,000 Retained earnings, December 31 $18,600 *$35,000 − $16,000 − $2,000 − $3,500 − $500 − $1,000 LO 7, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

BE 245 The adjusted trial balance of Hanson Hawk Corporation at September 30, 2017 includes the following accounts: Retained Earnings €27,700; Dividends €9,750; Sales Revenue €44,800; Insurance Expense €1,950; Salaries and Wages Expense €18,000; Rent Expense €3,000; Supplies Expense €650; and Depreciation Expense €1,100. Prepare a retained earnings statement for the year.

For Instructor Use Only

3 - 46

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 245

(10 min.)

HANSON HAWK CORPORATION Retained Earnings Statement For the Year Ended September 30, 2017 ——————————————————————————————————————————— Retained earnings, January 1 €27,700 Plus: Net Income 20,100* 47,800 Less: Dividends 9,750 Retained earnings, December 31 €38,050 *€44,800 − €1,950 − €18,000 − €3,000 − €650 − €1,100 LO 7, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

a

BE 246

The following terms relate to the fundamental qualities of useful information. Match the key letter of the correct term with the descriptive statement below. a. b. c. d.

Confirmatory value Neutral Predictive value Relevant

e. f. g.

Faithful representation Timely Verifiable

_____ 1. Accounting information that is not biased toward one position or another. _____ 2. Providing information before it loses its capacity to influence decision. _____ 3. Independent measures, using the same methods, obtain similar results. _____ 4. Providing information that would make a difference in a business decision. _____ 5. Provide information that accurately depicts what really happened. _____ 6. Confirms or corrects prior decisions. LO 9, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 246

(5 min.)

1. b

3. g

5. e

2. f

4. d

6. a

For Instructor Use Only

Adjusting the Accounts

3 - 47

a

BE 247

Each of the following statements is justified by a fundamental quality or an enhancing quality of useful information. Write the letter in the blank next to each statement corresponding to the quality involved. a. b. c.

Comparability Understandability Verifiable

d. e. f.

Consistency Relevance Faithful representation

_____ 1. A company uses the same accounting principles from year to year. _____ 2. Information where independent measures, using the same methods, obtain similar results. _____ 3. Information presented in a clear and concise fashion. _____ 4. Information that makes a difference in a decision. _____ 5. Information accurately depicts what really happened. LO 9, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 247 1. d

2. c

(5 min.) 3. b

4. e

5. f

a

BE 248

Presented below are the basic assumptions and principles underlying financial statements. a. b. c.

Historical cost principle Economic entity assumption Full disclosure principle

d. e. f.

Going concern assumption Monetary unit assumption Periodicity assumption

Identify the basic assumption or principle that is described below. _____ 1. The economic life of a business can be divided into artificial time periods. _____ 2. The business will continue in operation long enough to carry out its existing objectives. _____ 3. Assets should be recorded at their cost. _____ 4. Economic events can be identified with a particular unit of accountability. _____ 5. Circumstances and events that make a difference to financial statement users should be disclosed. _____ 6. Only transaction data that can be expressed in terms of money should be included in the accounting records. LO 9, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 248 1. f

2. d

(5 min.) 3. a

4. b

5. c

6. e

For Instructor Use Only

3 - 48

Test Bank for Financial Accounting: IFRS Edition, 3e

EXERCISES Ex. 249 The statements of financial position of Claude Company include the following: 12/31/17 12/31/16 Interest Receivable €4,300 € -0Supplies 5,000 3,000 Salaries and Wages Payable 4,100 3,800 Unearned Service Revenue -04,000 The income statement for 2017 shows the following: Interest Revenue Service Revenue Supplies Expense Salaries and Wages Expense

€16,400 75,700 10,700 41,000

Instructions Calculate the following for 2017: 1. Cash received for interest. 2. Cash paid for supplies. 3. Cash paid for Salaries and wages. 4. Cash received for revenue. Solution 249

(15 min.) €12,100

1. Cash received for interest = Interest Revenue Less: Interest Receivable Cash Received

€16,400 4,300 €12,100 €12,700

2. Cash paid for supplies = Supplies Expense Less: Supplies (2016)

€10,700 3,000 7,700 5,000 €12,700

Add: Supplies (2017) Cash Paid 3. Cash paid for wages = Salaries and Wages Expense Add: Salaries and Wages Payable (2016)

€40,700

Less: Salaries and Wages Payable (2017) Cash Paid

€41,000 3,800 44,800 4,100 €40,700

4. Cash received for revenue = Service Revenue Less: Unearned Service Revenue (2017) Cash Received

€75,700 4,000 €71,700

€71,700

LO 2, BT: AP Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts

3 - 49

Ex. 250 Hal Corp. prepared the following income statement using the cash basis of accounting: HAL CORP. Income Statement, Cash Basis For the Year Ended December 31, 2016 Service revenue (does not include $25,000 of services rendered on account because the collection will not be until 2017) .................................................... Expenses (does not include $20,000 of expenses on account because payment will not be made until 2017) ............................................................... Net income.............................................................................................................

$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 January 1, 2016, paid for a two-year insurance policy on the automobile amounting to $2,400. This amount is included in the expenses above. Instructions (a) Recast the above income statement on the accrual basis in conformity with IFRS. Show computations and explain each change. (b)

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

Solution 250 (a)

(15 min.)

HAL CORP. Income Statement For the Year Ended December 31, 2016 Service revenue .............................................................................................. Expenses ........................................................................................................ Net income .....................................................................................................

$395,000 244,800 $150,200

Service revenue should include the $25,000 for services performed on account. The accrual basis states that revenue is reflected in the period when the service is performed. ($370,000 + $25,000 = $395,000). Expenses should include the $20,000 for expenses incurred but not yet paid. The accrual basis states that expenses should be reflected in the period when incurred. Expenses also should only include half of the $2,400 insurance premium since $1,200 applies to 2016. The other $1,200 is an asset and should be reflected on the statement of financial position as prepaid insurance. The $6,000 of depreciation for the automobile is included as an expense in 2016. ($220,000 + $20,000 – $1,200 + $6,000 = $244,800). (b) The accrual basis of accounting provides a better measure of income than the cash basis. The accrual basis is required under IFRS and recognizes revenues when earned and expenses when incurred. 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 earned and expenses when incurred. Additionally, expenses are not matched with revenues when earned; therefore, the expense recognition principle is violated. LO 2, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 50

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 251 Before month-end adjustments are made, the February 28 trial balance of Alice’s Adventures contains revenue of $7,000 and expenses of $3,900. Adjustments are necessary for the following items: • Depreciation for February is $1,500. • Revenue earned but not yet billed is $2,300. • Accrued interest expense is $700. • Revenue collected in advance that is now earned is $3,500. • Portion of prepaid insurance expired during February is $600. Instructions Calculate the correct net income for Alice’s Income Statement for February. Solution 251

(5 min.)

Net Income before Adjustments ($7,000 – $3,900)

$ 3,100

Add: Unearned Service Revenues Accrued Revenues

$3,500 2,300

Subtract: Depreciation Expense Interest Expense Insurance Expense

1,500 700 600

Net Income after Adjustments

5,800 8,900

2,800 $ 6,100

LO 3, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

Ex. 252 On December 31, 2017, Speedy Company prepared an income statement and statement of financial position and failed to take into account three adjusting entries. The incorrect income statement showed net income of ¥40,000. The statement of financial position showed total assets, ¥140,000; total liabilities, ¥45,000; and equity, ¥95,000. The data for the three adjusting entries were: (1) Depreciation of ¥9,000 was not recorded on equipment. (2) Salaries and Wages amounting to ¥6,000 for the last two days in December were not paid and not recorded. The next payroll will be in January. (3) Rent of ¥10,000 was paid for two months in advance on December 1. The entire amount was debited to Rent Expense when paid. Instructions Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses): Item

Net Income

Total Assets

Total Liabilities

Equity

Incorrect balances Effects of: Depreciation

¥ 40,000

¥140,000

¥ 45,000

¥ 95,000

Salaries and Wages Rent Correct Balances For Instructor Use Only

Adjusting the Accounts Solution 252 Item

(5 min.) Net Income

Incorrect balances Effects of: Depreciation Salaries and Wages Rent Correct Balances

Total Assets

Total Liabilities

Equity

¥40,000

¥140,000

¥45,000

¥95,000

(9,000) (6,000) 5,000 ¥30,000

(9,000) 6,000 5,000 ¥136,000

¥51,000

3 - 51

(9,000) (6,000) 5,000 ¥85,000

LO 3, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

Ex. 253 Indicate (a) the type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense), and (b) the accounts before adjustment (overstated or understated) for each of the following: 1. 2. 3. 4.

Supplies of $200 have been used. Salaries of $600 are unpaid. Rent received in advance totaling $300 has been earned. Services provided but not recorded total $500.

Solution 253 (7 min.) (a) Type of Adjustment 1. Prepaid Expense

(b) Accounts before Adjustment Assets Overstated Expenses Understated

2.

Accrued Expense

Expenses Understated Liabilities Understated

3.

Unearned Revenue

Liabilities Overstated Revenues Understated

4.

Accrued Revenue

Assets Understated Revenues Understated

LO 4, BT: AP, Difficulty: Medium, TOT: 7 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

Ex. 254 Wham Company accumulates the following adjustment data at December 31. 1. Revenue of $800 collected in advance has been earned. 2. Salaries of $600 are unpaid. 3. Prepaid rent totaling $450 has expired. 4. Supplies of $550 have been used. 5. Revenue earned but unbilled total $750. 6. Utility expenses of $400 are unpaid. 7. Interest of $150 has accrued on a note payable.

For Instructor Use Only

3 - 52

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 254

(cont.)

Instructions (a) For each of the above items indicate: 1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense). 2. The account relationship (expense/asset, liability/revenue, etc.). 3. The status of account balances before adjustment (understatement or overstatement). 4. The adjusting entry. (b) Assume net income before the adjustments listed above was $12,500. What is the adjusted net income? Prepare your answer in the tabular form presented below.

Type of Adjustment

Solution 254

Account Relationship

Account Balances Before Adjustment (Understatement or Overstatement)

Adjusting Entry

(20 min.)

(a) Type of Account Adjustment Relationship 1. Unearned revenue. L/R

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

Adjusting Entry Unearned Service Revenue Service Revenue

2. Accrued expense.

E/L

Exp. U Liab. U

Salary and Wages Expense Salaries and Wages Payable

3. Prepaid expense.

E/A

Exp. U Asset O

Rent Expense Prepaid Rent

4. Prepaid expense.

E/A

Exp. U Asset O

Supplies Expense Supplies

5. Accrued revenue.

A/R

Asset U Rev. U

Accounts Receivable Service Revenue

6. Accrued expense.

E/L

Exp. U Liab. U

Utilities Expense Accounts Payable

7. Accrued expense.

E/L

Exp. U Liab. U

Interest Expense Interest Payable

Codes: A = L = E =

Asset Liability Expense

R = O = U =

Revenue Overstatement Understatement

For Instructor Use Only

Adjusting the Accounts Solution 254

3 - 53

(cont.)

(b) Net income before adjustments ................................................... Add: Unearned service revenue (1) .......................................... Accrued revenue (5) ........................................................

$12,500 $800 750

Less: Accrued salaries (2) ......................................................... Prepaid rent expired (3) ................................................... Supplies used (4) ............................................................. Accrued utilities (6) .......................................................... Accrued interest (7) ......................................................... Adjusted net income ....................................................................

600 450 550 400 150

1,550 14,050

2,150 $11,900

LO 4, BT: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

Ex. 255 The adjusted trial balance of the Neighborly Lane Paving Company includes the following statement of financial position accounts that frequently require adjustment. For each account, indicate (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) Statement of Financial Position Accounts Type of Adjusting Entry Related Account 1. Supplies 2. Accounts Receivable 3. Prepaid Insurance 4. Accumulated Depreciation— Equipment 5. Interest Payable 6. Salaries and Wages Payable 7. Unearned Service Revenue Solution 255

(15 min.) (a)

Statement of Financial Position Accounts

(b)

Type of Adjusting Entry

Related Account

1. Supplies

Prepaid Expense

Supplies Expense

2. Accounts Receivable

Accrued Revenue

Service 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 and Wages Payable

Accrued Expense

Salaries and Wages Expense

7. Unearned Service Revenue

Unearned Revenues

Service Revenue

LO 4, BT: C, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 54

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 256 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: ____ 1. A revenue not yet earned; collected in advance. ____ 2. Office supplies on hand that will be used in the next period. ____ 3. Interest revenue collected; not yet earned. ____ 4. Rent not yet collected; already earned. ____ 5. An expense incurred; not yet paid or recorded. ____ 6. A revenue earned; not yet collected or recorded. ____ 7. An expense not yet incurred; paid in advance. ____ 8. Interest expense incurred; not yet paid. Solution 256 1. 2. 3. 4.

B A B C

(5 min.) 5. 6. 7. 8.

D C A D

LO 4, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

Ex. 257 The Aces, a semi-professional baseball team, prepare financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions: (a)

Paid $120,000 to Kansas City as advance rent for use of Kansas City Stadium for the six month period April 1 through September 30.

(b)

Collected $240,000 cash from sales of season tickets for the team's 20 home games. This amount was credited to Unearned Ticket Revenue.

During the month of April, the Aces played four home games and five road games. Instructions Prepare the adjusting entries required at April 30 for the transactions above.

For Instructor Use Only

Adjusting the Accounts Solution 257

3 - 55

(5 min.)

(a) Rent Expense ............................................................................... Prepaid Rent....................................................................... ($120,000 ÷ 6 = $20,000)

20,000

(b) Unearned Ticket Revenue ............................................................ Ticket Revenue................................................................... ($240,000 ÷ 20 = $12,000; $12,000 × 4 = $48,000)

48,000

20,000

48,000

LO 4 and 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

Ex. 258 On July 1, 2017, Patrick Company pays ₤12,000 to its insurance company for a 2-year insurance policy. Instructions Prepare the necessary journal entries for Patrick on July 1 and December 31.

Solution 258 July 1

Dec. 31

(5 min.)

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

12,000

Insurance Expense ............................................................. Prepaid Insurance (₤12,000 × 6/24) ...............................

3,000

12,000

3,000

LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

Ex. 259 On July 1, 2017, Jeffrey Underwriters Associates received $16,000 from a client for a 2-year insurance policy. Instructions Prepare the necessary journal entries for Jeffrey Underwriters Associates on July 1 and December 31. Solution 259 July 1

Dec. 31

(5 min.)

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

16,000

Unearned Service Revenue ................................................ Service Revenue ($16,000 × 6/24) ................................

4,000

16,000

LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

4,000

3 - 56

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 260 Trench and Fog Garment Company purchased equipment on June 1 for $108,000, paying $24,000 cash and signing a 6%, 2-month note for the remaining balance. The equipment is expected to depreciate $24,000 each year. Trench and Fog Garment Company prepares monthly financial statements. Instructions (a) Prepare the general journal entry to record the acquisition of the equipment on June 1st. (b) Prepare any adjusting journal entries that should be made on June 30th. (c) Show how the equipment will be reflected on Trench and Fog Garment Company’s statement of financial position on June 30th. Solution 260

(10 min.)

(a) June 1 Equipment ..................................................................... Cash ..................................................................... Notes Payable ...................................................... (To record acquisition of equipment and signing of a 2-month, 6% note)

108,000

(b) June 30 Depreciation Expense ................................................... Accumulated Depreciation—Equipment ............... (To record monthly depreciation) $24,000 ÷ 12 = $2,000/month

2,000

30 Interest Expense ........................................................... Interest Payable.................................................... (To accrue interest on notes payable) $84,000 × 6% × 1/12 = $420

420

(c) Assets Equipment Less: Accumulated Depreciation—Equipment

24,000 84,000

2,000

420

$108,000 2,000

$106,000

LO 5 and 6, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts

3 - 57

Ex. 261 Scotsman Company prepares monthly financial statements. Below are listed some selected accounts and their balances in the September 30 trial balance before any adjustments have been made for the month of September. SCOTSMAN COMPANY Trial Balance (Selected Accounts) September 30, 2017 ——————————————————————————————————————————— Debit Credit Supplies ............................................................................................... ₤ 2,700 Prepaid Insurance ................................................................................ 3,150 Office Equipment ................................................................................. 16,200 Accumulated Depreciation—Equipment ............................................... ₤1,000 Unearned Rent 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 office supplies revealed ₤800 on hand on September 30. 2. A two-year life insurance policy was purchased on June 1 for ₤3,600. 3. Office equipment depreciated ₤3,000 per year. 4. The amount of rent received in advance that remains unearned at September 30 is ₤400. Instructions Using the above additional information, prepare the adjusting entries that should be made by Scotsman Company on September 30. Solution 261

(10 min.)

1. Supplies Expense .......................................................................... Supplies ................................................................................ (To record the amount of office supplies used)

1,900

2. Insurance Expense ........................................................................ Prepaid Insurance ................................................................. (To record insurance expired ₤3,600 ÷ 24)

150

3. Depreciation Expense .................................................................... Accumulated Depreciation—Equipment ................................ (To record monthly depreciation ₤3,000 ÷ 12)

250

4. Unearned Rent Revenue ................................................................ Rent Revenue ....................................................................... (To record rent revenue earned)

800

1,900

150

250

LO 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

800

3 - 58

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 262 Prepare the required end-of-period adjusting entries for each independent case listed below. Case 1 Moonbeam Company began the year with a $3,000 balance in the Supplies account. During the year, $8,500 worth of additional office supplies were purchased. A physical count of office supplies on hand at the end of the year revealed that $4,400 worth of office supplies had been used during the year. No adjusting entry has been made until year end. Case 2 Western Company has a calendar year-end accounting period. On July 1, the company purchased office equipment for $30,000. It is estimated that the office equipment will depreciate $500 each month. No adjusting entry has been made until year end. Case 3 Ranch Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 3 tenants in $800 per month apartments and one tenant in the $1,000 per month apartment had not paid their August rent as of August 31st. Solution 262

(10 min.)

Case 1—December 31 Supplies Expense .............................................................. Supplies ................................................................. (To record office supplies used during the year) Case 2—December 31 Depreciation Expense ....................................................... Accumulated Depreciation—Equipment ................. (To record depreciation expense for six months) $500 × 6 months = $3,000 Depreciation Case 3—August 31 Accounts Receivable ......................................................... Rent Revenue ........................................................ (To accrue rent earned but not yet received)

4,400 4,400

3,000 3,000

3,400 3,400

LO 5 and 6, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts

3 - 59

Ex. 263 Angus 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. ANGUS INSURANCE AGENCY Income Statement For the Month Ended June 30 ——————————————————————————————————————————— Revenues Service Revenue ......................................................................... €35,000 Expenses Salaries and wages expense ....................................................... €6,000 Rent expense .............................................................................. 4,200 Depreciation expense .................................................................. 2,800 Advertising expense .................................................................... 800 Total expenses ............................................................................ 13,800 Net income........................................................................................... €21,200 Additional Data: When the income statement was prepared, the company 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 €20,000. 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 €4,000. The agency purchased additional supplies during the month for €3,500 in cash and €1,200 of supplies were on hand at June 30. 4. The agency purchased a new car at the beginning of the month for €24,000 cash. The car will depreciate €6,000 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 correct income statement. Solution 263

(15 min.)

ANGUS INSURANCE AGENCY Income Statement For the Month Ended June 30 ——————————————————————————————————————————— Revenues Service Revenue (€35,000 + €4,000) .......................................... €39,000 Expenses Salaries and wages expense (€6,000 + €5,300) .......................... €11,300 Supplies expense (€0 + €6,300) .................................................. 6,300 Rent expense .............................................................................. 4,200 Depreciation expense (€2,800 + €500) ........................................ 3,300 Utilities expense (€0 + €2,000) .................................................... 2,000 Advertising expense .................................................................... 800 Total expenses ................................................................... 27,900 Net income........................................................................................... €11,100 LO 5 and 6, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 60

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 264 One part of eight adjusting entries is given below. Instructions Indicate the account title for the other part of each entry. 1. Unearned Service 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. Solution 264 1. 2. 3. 4.

(5 min.)

Service Revenue Rent Expense Service Revenue Accumulated Depreciation

5. Utilities Payable 6. Interest Expense 7. Accounts Receivable or Unearned Service Revenue 8. Interest Revenue

LO 5 and 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

Ex. 265 For each of the following accounts, indicate (a) the type of adjusting entry (prepaid expense, accrued revenue, etc.) and (b) the related account in the adjusting entry. 1. Depreciation Expense 2. Salaries and Wages Payable 3. Accounts Receivable 4. Supplies 5. Unearned Service Revenue Solution 265

(5 min.)

Account 1. Depreciation Expense 2. Salaries and Wages Payable 3. Accounts Receivable 4. Supplies 5. Unearned Service Revenue

Type of Entry Prepaid expense Accrued expense Accrued revenue Prepaid expense Unearned revenue

Related Account Accum. Depreciation Salaries and Wages Expense Service Revenue Supplies Expense Service Revenue

LO 5 and 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts

3 - 61

Ex. 266 Prepare the necessary adjusting entry for each of the following: 1. Services provided but unrecorded totaled $900. 2. Accrued salaries at year-end are $1,000. 3. Depreciation for the year is $600. Solution 266

(5 min.)

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

900

2. Salaries and Wages Expense ........................................................ Salaries and Wages Payable .................................................

1,000

3. Depreciation Expense .................................................................... Accumulated Depreciation .....................................................

600

900

1,000

600

LO 5 and 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

Ex. 267 The following ledger accounts are used by the Chicago Heights Dog Track: Accounts Receivable Prepaid Advertising Prepaid Rent Unearned Ticket Revenue Advertising Expense Rent Expense Ticket Revenue Sales Revenue Instructions For each of the following 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 track facility for three months, $210,000. (b) On September 1, sold season tickets for admission to the racetrack. The racing season is year-round with 25 racing days each month. Season ticket sales totaled $840,000. (c) On September 1, borrowed $300,000 from First National Bank by issuing a 9% note payable due in three months. (d) On September 5, schedules for 20 racing days in September, 25 racing days in October, and 15 racing days in November were printed for $3,000. (e) The accountant for the concessions company reported that gross receipts for September were $160,000. Ten percent is due to the track and will be remitted by October 10.

For Instructor Use Only

3 - 62

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 267

(15 min.)

(a) Journal Entry Prepaid Rent .......................................................................... Cash .............................................................................

210,000

Adjusting Entry Rent Expense ........................................................................ Prepaid Rent .................................................................

70,000

(b) Journal Entry Cash ...................................................................................... Unearned Ticket Revenue .............................................

840,000

Adjusting Entry Unearned Ticket Revenue ..................................................... Ticket Revenue ............................................................. ($840,000 ÷ 12 = $70,000) (c) Journal Entry Cash ...................................................................................... Note Payable................................................................. Adjusting Entry Interest Expense .................................................................... Interest Payable ............................................................ ($300,000 × .09 × 1 ÷ 12 = $2,250) (d) Journal Entry Prepaid Advertising ................................................................ Cash ............................................................................. Adjusting Entry Advertising Expense .............................................................. Prepaid Advertising ....................................................... ($3,000 × 20 ÷ 60 = $1,000)

210,000

70,000

840,000 70,000 70,000

300,000 300,000 2,250 2,250

3,000 3,000 1,000 1,000

(e) Journal Entry None Adjusting Entry Accounts Receivable ............................................................. Sales Revenue ..............................................................

16,000 16,000

LO 6, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

Adjusting the Accounts

3 - 63

Ex. 268 Gwynn Company has an accounting fiscal year which 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 3,500 Thursday July 1 3,000 Friday July 2 2,400 Instructions (a) Prepare any necessary adjusting journal 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. Solution 268

(10 min.)

(a) June 30 Salaries and Wages Expense ....................................... Salaries and Wages Payable ............................... (To accrue salaries incurred but not yet paid)

10,300

(b) July 2

10,300 5,400

Salaries and Wages Payable ........................................ Salaries and Wages Expense ....................................... Cash .................................................................... (To record payment of July 2 payroll)

10,300

15,700

LO 6, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

Ex. 269 On Friday of each week, Earle Company pays its factory personnel weekly wages amounting to ₤60,000 for a five-day work week. 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 wages on the payday which is Friday, January 2 of the next year. Solution 269 (a) Dec. 31

(b) Jan. 2

(5 min.) Salaries and Wages Expense ....................................... Salaries and Wages Payable ...............................

36,000

Salaries and Wages Payable ........................................ Salaries and Wages Expense ....................................... Cash ....................................................................

36,000 24,000

36,000

60,000

LO 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

3 - 64

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 270 Presented below is the Trial Balance and Adjusted Trial Balance for Matsui Company on December 31. MATSUI COMPANY Trial Balance(in 000) December 31 ——————————————————————————————————————————— Before Adjustment After Adjustment Dr. Cr. Dr. Cr. Cash ¥ 2,000 ¥ 2,000 Accounts Receivable 2,800 3,900 Prepaid Rent 2,100 1,300 Supplies 1,200 700 Equipment 18,000 18,000 Accumulated Depreciation— Equipment ¥ 1,300 ¥ 1,500 Accounts Payable 2,700 3,200 Notes Payable 10,000 10,000 Interest Payable 120 Salaries and Wages Payable 600 Unearned Service Revenue 4,460 4,060 Share Capital-Ordinary 7,200 7,200 Dividends 3,200 3,200 Service Revenue 8,000 9,500 Salaries and Wages Expense 2,060 2,660 Utilities Expense 1,800 2,300 Rent Expense 500 1,300 Supplies Expense 500 Depreciation Expense 200 Interest Expense 120 Totals ¥33,660 ¥33,660 ¥36,180 ¥36,180 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 270

(15 min.)

Accounts Receivable ............................................................................ Service Revenue ......................................................................... (To record revenue earned but not yet received)

1,100

Rent Expense....................................................................................... Prepaid Rent................................................................................ (To record expiration of prepaid rent)

800

Supplies Expense................................................................................. Supplies....................................................................................... (To record supplies used)

500

For Instructor Use Only

1,100

800

500

Adjusting the Accounts Solution 270

3 - 65

(cont.)

Depreciation Expense .......................................................................... Accumulated Depreciation—Equipment ...................................... (To record depreciation expense)

200

Salaries and Wages Expense .............................................................. Salaries and Wages Payable....................................................... (To record salaries owed, not yet paid)

600

Interest Expense .................................................................................. Interest Payable .......................................................................... (To record accrued interest payable)

120

Unearned Service Revenue ................................................................. Service Revenue ......................................................................... (To record revenue earned)

400

Utilities Expense .................................................................................. Accounts Payable........................................................................ (To record receipt of utility bill)

500

200

600

120

400

500

LO 5 and 6, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

Ex. 271 Compute the net income for 2017 based on the following amounts presented on the adjusted trial balance of D-Lay Company. Accumulated Depreciation Depreciation Expense Salaries and Wages Expense Service Revenue Unearned Service Revenue Solution 271

$25,000 10,000 20,000 45,000 8,000

(5 min.)

Service Revenue Depreciation Expense Salaries and Wages Expense Net Income

$45,000 $10,000 20,000

30,000 $15,000

LO 7, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 66

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 272 Ben Cartwright Pest Control has the following balances in selected accounts on December 31, 2017. Accounts Receivable € 0 Accumulated Depreciation – Equipment 0 Equipment 6,650 Interest Payable 0 Notes Payable 20,000 Prepaid Insurance 3,000 Salaries and Wages Payable 0 Supplies 2,940 Unearned Service Revenue 36,000 All of the accounts have normal balances. The information below has been gathered at December 31, 2017. 1. Depreciation on the equipment for 2017 is €1,250. 2. Ben Cartwright Pest Control borrowed €20,000 by signing a 6%, one-year note on July 1, 2017. 3. Ben Cartwright Pest Control paid €3,000 for 12 months of insurance coverage on October 1, 2017. 4. Ben Cartwright Pest Control pays its employees total salaries of €10,000 every Monday for the preceding 5-day week (Monday-Friday). On Monday, December 27, 2017, employees were paid for the week ending December 24, 2017. All employees worked the five days ending December 31, 2017. 5. Ben Cartwright Pest Control performed disinfecting services for a client in December 2017. The client will be billed €3,000. 6. On December 1, 2017, Ben Cartwright Pest Control collected €36,000 for disinfecting processes to be performed from December 1, 2017, through May 31, 2018. 7. A count of supplies on December 31, 2017, indicates that supplies of €750 are on hand.

Instructions Prepare in journal form with explanations, the adjusting entries for the seven items listed for Ben Cartwright Pest Control. Solution 272 (1)

(2)

(3)

(15 min.)

Depreciation Expense.................................................................. Accumulated Depreciation - Equipment ................................. (To record depreciation for the period)

1,250

Interest Expense.......................................................................... Interest Payable ..................................................................... (To record accrued interest on note payable) [€20,000  6%  (6/12) = €600]

600

Insurance Expense ...................................................................... Prepaid Insurance .................................................................. (To recognize period insurance expense) [(€3000 / 12)  3 = €750]

750

For Instructor Use Only

1,250

600

750

Adjusting the Accounts Solution 272 (4)

(5)

(6)

(7)

3 - 67

(cont.)

Salaries and Wages Expense...................................................... Salaries and Wages Payable ................................................. (To record wages for the week)

10,000

Accounts Receivable ................................................................... Service Revenue ................................................................... (To record revenue earned but not yet received)

3,000

Unearned Service Revenue ........................................................ Service Revenue ................................................................... (To record revenue earned with prior payment)

6,000

Supplies Expense........................................................................ Supplies ................................................................................ (To record supplies expense) [€2,940 - €750 = €2,190]

2,190

10,000

3,000

6,000

2.190

LO 5, 6, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

Ex. 273 The trial balances before and after adjustments for Old Julian Company at the end of its fiscal year are presented below. Old Julian Company Trial Balance September 30, 2017 ——————————————————————————————————————————— Before Adjustment After Adjustment Dr. Cr. Dr. Cr. Cash $ 15,080 $ 15,080 Accounts Receivable 14,960 16,110 Supplies 2,760 885 Prepaid Insurance 5,800 1,450 Equipment 13,300 13,300 Accumulated Depreciation – Equip $ 5,220 $ 6,960 Accounts Payable 9,860 9,860 Salaries and Wages Payable 2,750 Unearned Service Revenue 2,175 1,150 Unearned Rent Revenue 2,100 525 Share Capital-Ordinary 18,395 18,395 Service Revenue 48,800 50,975 Rent Revenue 1,575 3,150 Salaries and Wages Expense 36,225 38,975 Supplies Expense 1,875 Insurance Expense 4,350 Depreciation Expense 1,740 $ 88,125 $ 88,125 $ 93,765 $ 93,765 0

Instructions Prepare the adjusting entries that were made.

For Instructor Use Only

0

3 - 68

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 273 (1)

(2)

(3)

(4)

(5)

(6)

(7)

(20 min.)

Accounts Receivable ................................................................... Service Revenue ................................................................... (To record services not yet billed to customers)

1,150

Supplies Expense ........................................................................ Supplies ................................................................................. (To record supplies expense)

1,875

Insurance Expense ...................................................................... Prepaid Insurance .................................................................. (To recognize period insurance expense)

4,350

Depreciation Expense ................................................................. Accumulated Depreciation - Equipment ................................. (To record depreciation for the period)

1,740

Salaries and Wages Expense ...................................................... Salaries and Wages Payable ................................................. (To record salaries payable)

2,750

Unearned Service Revenue ......................................................... Service Revenue ................................................................... (To record revenue earned with prior payment)

1,025

Unearned Rent Revenue ............................................................. Rent Revenue ........................................................................ (To record revenue earned with prior payment)

1,575

1,150

1,875

4,350

1,740

2,750

1,025

1,575

LO 7, BT: AP, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

Ex. 274 The Poway Animal Encounters operates a drive through tourist attraction. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the following: Prepaid Rent Equipment Accumulated Depreciation—Equipment Unearned Ticket Revenue

$18,000 30,000 5,500 400

Other data: 1. Three months' rent had been prepaid on April 1. 2. The equipment is being depreciated at $6,000 per year. 3. The unearned ticket revenue represents tickets sold for future visits. The tickets were sold at $4.00 each on April 1. During April, twenty of the tickets were used by customers.

For Instructor Use Only

Adjusting the Accounts Ex. 274

3 - 69

(cont.)

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 the Poway Animal Encounters on April 30.

Solution 274 (a)

(15 min.)

1. $9,000. The $18,000 balance on the adjusted trial balance reflects two months remaining on the prepaid lease. This indicates that the monthly lease is $9,000. 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 depreciation has been taken for 11 months. 3. 120 tickets were originally sold. Twenty tickets were used in April at $4.00 each. The adjusted trial balance shows a balance of $400 indicating that 100 tickets are still outstanding. By adding the 20 used in April to the 100 still remaining to be used, 120 tickets must have been sold on April 1.

(b)

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

9,000

2. Depreciation Expense............................................................ Accumulated Depreciation—Fencing ............................

500

3. Unearned Ticket Revenue ..................................................... Ticket Revenue ............................................................. (20 × $4 = $80)

80

9,000

500

LO 5, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

80

3 - 70

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 275 The adjusted trial balance of C.S. Financial Planners appears below. Using the information from the adjusted trial balance, you are to prepare for the month ending December 31, 2017: 1. an income statement. 2. a retained earnings statement. 3. a statement of financial position. C.S. Financial Planners Adjusted Trial Balance (in 000) December 31, 2017 ——————————————————————————————————————————— Debit Credit Cash..................................................................................................... ¥ 5,000 Accounts Receivable ............................................................................ 2,200 Supplies ............................................................................................... 2,800 Equipment ............................................................................................ 15,000 Accumulated Depreciation—Equipment ............................................... ¥ 4,500 Accounts Payable................................................................................. 3,300 Unearned Service Revenue ................................................................. 6,000 Share Capital-Ordinary ......................................................................... 10,000 Retained Earnings ................................................................................ 4,400 Dividends ............................................................................................. 2,500 Service Revenue .................................................................................. 4,300 Supplies Expense................................................................................. 600 Depreciation Expense .......................................................................... 2,500 Rent Expense....................................................................................... 1,900 ¥32,500 ¥32,500 Solution 275

(20 min.)

1.

C.S. Financial Planners Income Statement (in 000) For the Month Ended December 31, 2017 ——————————————————————————————————————————— Revenues Service revenue........................................................................... ¥ 4,300 Expenses Depreciation expense .................................................................. ¥2,500 Rent expense .............................................................................. 1,900 Supplies expense ........................................................................ 600 Total expenses ...................................................................... 5,000 Net loss ................................................................................................ ¥ (700) 2.

C.S. Financial Planners Retained Earnings Statement (in 000) For the Month Ended December 31, 2017 ——————————————————————————————————————————— Retained earnings, December 1 ........................................................... ¥4,400 Less: Net loss .................................................................................... ¥ 700 Dividends .................................................................................. 2,500 3,200 Retained earnings, December 31 ......................................................... ¥1,200

For Instructor Use Only

Adjusting the Accounts Solution 275

3 - 71

(Cont.)

3.

C.S. Financial Planners Statement of Financial Position (in 000) December 31, 2017 ——————————————————————————————————————————— Assets Equipment............................................................................................ ¥15,000 Less: Accumulated depreciation—equipment .................................... 4,500 ¥10,500 Supplies .............................................................................................. 2,800 Accounts receivable ............................................................................. 2,200 Cash .................................................................................................... 5,000 Total assets ................................................................................. ¥20,500 Equity and Liabilities Equity Share capital-ordinary ................................................................. Retained earnings ...................................................................... Liabilities Accounts payable ........................................................................ Unearned service revenue .......................................................... Total equity and liabilities ............................................................

¥10,000 1,200 3,300 6,000

¥11,200

9,300 ¥20,500

LO 7, BT: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

Ex. 276 Wild Animal Presentations initiated operations on July 1, 2017. To manage the company, officers and managers have requested monthly financial statements starting July 31, 2017. The adjusted trial balance amounts at July 31 are shown below. Debits Credits Cash $ 8,180 Accumulated Depreciation – Equipment $ 1,340 Accounts Receivable 810 Notes Payable 6,300 Prepaid Rent 865 Accounts Payable 1,140 Supplies 1,660 Salaries and Wages Payable 360 Equipment 11,400 Interest Payable 40 Dividends 600 Unearned Ticket Revenue 580 Salaries and Wages Expense 7,145 Share Capital-Ordinary 5,000 Rent Expense 1,740 Retained Earnings 5,640 Depreciation Expense 665 Ticket Revenue 12,635 Supplies Expense 190 Sales Revenue 655 Utilities Expense 390 Total credits $ 33,690 Interest Expense 45 Total debits $ 33,690

(a) Determine the net income for the month of July. (b) Determine the total assets and total liabilities at July 31, 2017 for Wild Animal Presentations. (c) Determine the amount that appears for Retained earnings at July 31, 2017.

For Instructor Use Only

3 - 72

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 276 (a)

(b)

(15 min.) Revenues Ticket Revenue $ 12,635 Sales Revenue 655 Expenses Salaries and Wages Expense 7,145 Rent Expense 1,740 Depreciation Expense 665 Utilities Expense 390 Supplies Expense 190 Interest Expense 45 Net income

Assets Equipment $11,400 Accum. Deprec. – Equip 1,340 Supplies Prepaid Rent Accounts Receivable Cash Total assets

$ 10,060 1,660 865 810 8,180 $ 21,575

$ 13,290

10,175 $ 3,115

Liabilities Notes Payable Accounts Payable Salaries and Wages Payable Interest Payable Unearned Ticket Revenue Total liabilities

$ 6,300 1,140 360 40 580 $ 8,420

(c) Retained earnings, July 1, 2017 Plus: Net Income Less: Dividends Retained earnings, July 31, 2017

$ 5,640 3,115 8,755 600 $ 8,155

LO 7, BT: AP Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a

Ex. 277

1. Arrow Company prepares monthly financial statements. On July 1, the Supplies account had a balance of $3,000. During July, additional office supplies were purchased for $3,800 and that amount was debited to Supplies Expense. On July 31, a physical count of office supplies revealed that there was $1,800 on hand. Prepare the adjusting journal entry that Arrow Company should make on July 31. 2. Fletching Rental Agency prepares monthly financial statements. On September 1, a check for $8,400 was received from a tenant for six months’ rent. The full amount was credited to Rent Revenue. Prepare the adjusting entry the company should make on September 30. a

Solution 277

1. July 31

2. Sept. 30

(5 min.) Supplies Expense ......................................................... Supplies ............................................................... (To record supplies used)

1,200

Rent Revenue ............................................................... Unearned Rent Revenue ..................................... (To record unearned rent)

7,000

1,200

LO 8, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

For Instructor Use Only

7,000

Adjusting the Accounts

3 - 73

COMPLETION STATEMENTS 278.

The ______________ assumption divides the economic life of a business into artificial time periods.

Ans: time period, LO 1, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

279.

An accounting period that is one year in length is referred to as a ______________ year.

Ans: fiscal, LO 1, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

280.

The ______________ principle gives accountants guidance as to when revenue is to be recorded.

Ans: revenue recognition, LO 2, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

281.

In a service company, revenue is recognized when the service is ______________.

Ans: performed, LO 2, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

282.

The expense recognition ______________.

principle

attempts

to

match

______________

with

Ans: expenses, revenues, LO 2, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

283.

Expenses paid and recorded in an asset account before they are used or consumed are called ______________. Revenue received and recorded as a liability before it is recognized is referred to as ______________.

Ans: prepaid expenses, unearned revenue, LO 5, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

284.

Failure to adjust a prepaid expense account for the amount expired will cause ______________ to be understated and ________________ to be overstated.

Ans: expenses, assets, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

285.

Depreciation is a ______________ allocation process rather than a process of ______________.

Ans: cost, valuation, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

286.

Depreciation expense for a period is an ______________ rather than a factual measurement of cost that has expired.

Ans: estimate, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

287.

An adjusting entry recording accrued salaries for a period indicates that Salaries Expense has been ________________ but has not yet been ________________ or recorded.

Ans: incurred, paid, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 74 288.

Test Bank for Financial Accounting: IFRS Edition, 3e An adjusted trial balance proves the ______________ of the total debit and credit balances after all ______________ entries have been made.

Ans: equality, adjusting, LO 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective AICPA FN: Reporting, AICPA PC: Problem solving

289.

In accounting, _________________ results when different companies use the same accounting principles.

Ans: comparability, LO 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective AICPA FN: Reporting, AICPA PC: Problem solving

290.

______________ is a company-specific aspect of relevance where size is likely to influence the decision of an investor or creditor.

Ans: Materiality, LO 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective AICPA FN: Reporting, AICPA PC: Problem solving

Answers to Completion Statements 278. 279. 280. 281. 282. 283.

time period fiscal revenue recognition performed expenses, revenues prepaid expenses, unearned revenue

284. 285. 286. 287. 288. 289. 290.

expenses, assets cost, valuation estimate incurred, paid equality, adjusting comparability Materiality

For Instructor Use Only

Adjusting the Accounts

MATCHING 291. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Time period assumption Fiscal year Revenue recognition principle Prepaid expenses Expense recognition principle

F. G. H. I. J.

Accrued revenues Depreciation Accumulated depreciation Accrued expenses Book value

____

1. A twelve month accounting period

____

2. Expenses paid before they are incurred

____

3. Cost less accumulated depreciation

____

4. Divides the economic life of a business into artificial time periods

____

5. Efforts are related to accomplishments

____

6. A contra asset account

____

7. Recognition of revenue when the performance obligation is satisfied

____

8. Revenues earned but not yet received

____

9. Expenses incurred but not yet paid

____ 10. A cost allocation process

Answers to Matching 1. 2. 3. 4. 5.

B D J A E

6. 7. 8. 9. 10.

H C F I G

LO 1–3, BT: C, Difficulty: Medium, TOT: 8 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving

For Instructor Use Only

3 - 75

3 - 76

Test Bank for Financial Accounting: IFRS Edition, 3e

SHORT-ANSWER ESSAY QUESTIONS S-A E 292 The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the time period assumption and the revenue recognition and expense recognition principles provide guidance to accountants in preparing an income statement. Solution 292 The time period assumption divides the economic life of an accounting entity, such as a business enterprise, into arbitrary time periods. The revenue recognition and expense recognition principles are the basic rules for allocating revenues and expenses to these arbitrary time periods under accrual- basis accounting. The revenue recognition principle dictates the time period to which revenue is to be allocated and recognized; that is, on which income statement the revenue is to be reported. The expense recognition principle dictates the time period to which costs are allocated and recognized as expenses; that is, on which income statement the expenses are to be reported and matched against revenues in the determination of net income. LO 1, BT: C, Difficulty: Medium, TOT: 6 min., AACSB: Communication, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication

S-A E 293 In developing an accounting information system, it is important to establish procedures whereby all transactions that affect the components of the accounting equation are recorded. Why then, is it often necessary to adjust the accounts before financial statements are prepared even in a properly designed accounting system? Identify the major types of adjustments that are frequently made and give a specific example of each. Solution 293 Account balances must be adjusted before financial statements are prepared, even in a properly designed accounting system, because (1) some of the recorded transactions have been recognized prematurely and (2) some effects on components of the accounting equation have not been recorded. Prepayments and deferrals are types of adjustments of recorded transactions that must be allocated to future periods as well as the current period. Examples of deferral-type adjustments are: prepaid rent, prepaid insurance, and unearned revenue. Accruals are adjustments of unrecorded transactions that must be recognized in the current period. Examples of accrual-type adjustments are: salaries and wages payable, interest payable, and interest receivable. LO 3, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving

S-A E 294 You are visiting with a friend, Jim Bede, who wants to start a new business. During discussions on forming the business, Jim makes this statement: Our business will have accounts receivable and accounts payable. It will also acquire a substantial amount of computers and equipment. Will it be acceptable to use the cash basis of accounting? Prepare a response for Jim.

For Instructor Use Only

Adjusting the Accounts

3 - 77

Solution 294 Considering the proper basis of accounting to use is an important decision that should be addressed before the business is started. Thus, this is an excellent time to look at the differences between the cash and accrual basis of accounting. When the cash basis is used, revenue is recorded when cash is received and expenses are recorded when cash is paid. This is not an objective approach in determining net income because the receipt and payment of cash does not reflect the efforts and accomplishments of the business. Also, accounts receivable, accounts payable and depreciation are not recognized in the accounting records. The use of the accrual basis of accounting overcomes these problems. Revenue is recorded when service are performed and expenses are recorded when they are incurred. This represents an objective way of matching efforts and accomplishments of the accounting period. In addition, accounts receivable and accounts payable are recorded and their balances are shown on the statement of financial position. The business has access to these balances during the accounting period and can make important decisions about them. Since the business has computers, it is important to record a portion of their costs each accounting period. This process is called depreciation. Instead of showing the cost as an expense when the computers are purchased (cash basis), the cost is allocated to the accounting periods in which the computers are used (accrual basis). This makes net income more meaningful because it reflects a matching of the expense to the period in which revenues were earned. The cost of the computers, less the accumulation of depreciation that has been taken, is shown as an asset on the statement of financial position. Thus, the user can see that these assets are available for future use. Also, IFRS require the use of the accrual basis of accounting. It will be better to use the accrual basis of accounting. LO 3, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Communication, AICPA BB: None, AICPA FN: Decision modeling, AICPA PC: Communication

S-A E 295 The non-current liability section of Gamma Company’s statement of financial position includes the following accounts: Notes Payable Mortgage Payable Salaries and Wages Payable Accumulated Depreciation Total

$100,000 250,000 75,000 125,000 $550,000

Gamma Company is an established company and does not experience any financial difficulties or have any cash flow problems. Discuss at least two items that are questionable as non-current liabilities.

For Instructor Use Only

3 - 78

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 295 Salaries Payable should not be reported as a non-current liability. This represents the amounts owed to employees. If the company does not have any financial difficulties or cash flow problems, the salaries should be paid within one year. Accumulated Depreciation is a contra asset account. The balance is subtracted from the cost of the related asset in the Property, Plant, and Equipment section of the statement of financial position. Are all of the notes payable actually non-current (due after one year)? If not, the portion due within one year should be reported as a current liability instead. LO 7, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication a

S-A E 296

You and the CEO of your company are waiting on an elevator. You are going to the 25 th floor and the CEO is going to the 35th The CEO says "What is the difference between consistency and comparability?" You have two minutes to respond. What will you say? Solution 296 You have asked an excellent question and I am glad to respond. Consistency means that a company uses the same accounting principles and method each year. Decision makers can work accounting information, knowing that the company is consistently applying with the principles and method it has chosen. This is why it is so important that we carefully make these choices. There are procedures for making changes and communicating those changes to financial statement users. Comparability allows users to compare accounting information of different companies. The financial statement footnotes identify many of the principles and procedures that companies use. Comparisons can be made for companies within certain industries or other groupings. Ans: N/A, LO 9, Bloom: C, Difficulty: Medium, Min; 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting a

S-A E 297

Comparability and consistency are qualitative characteristics that make accounting information useful for decision-making purposes. Briefly explain the difference between these two characteristics and explain how they are related to each other. Solution 297 Comparability results when different companies use the same accounting principles and method, while consistency results when one company uses the same principles and methods from year to year. The two characteristics are related because information must possess relevance, faithful representation, comparability, and consistency to achieve the highest level of decision usefulness. In addition, accounting information for two entities cannot be comparable unless both companies practice consistency in their choice of principles and methods. Ans: N/A, LO 9, Bloom: C, Difficulty: Medium, Min; 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

For Instructor Use Only

Adjusting the Accounts

3 - 79

S-A E 298 (Ethics) Pen & Stamp is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Pen & Stamp introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-O-Pen, as the product was named, was an overwhelming success. The success of the product has Fran Henley, the manager of the New Products division, worried, however. She was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. She did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. She preferred to complete testing of the pen first, so that more confidence could be placed in the results. Top management, however, declined the tests. Ms. Henley then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable. Required: 1. Describe the alternatives that you as an accountant would have in this situation. 2. Indicate which alternative is best. Solution 298 The choices include: 1. Follow the manager's instructions. 2. Explain to the manager why you cannot follow her instructions. 3. Report the manager's actions to her superior. 4. Resign. There are probably other alternatives as well. Students should be able to come up with at least #1 and #2. Of the choices, #1 is unethical because it will cause the financial statements to be misleading. #3 and #4 are rather drastic measures that do not seem to be indicated, at least not yet. #2, therefore, is the best choice. LO 8, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Ethics, AICPA BB: None, AICPA FN: Decision modeling, AICPA PC: Professional demeanor

S-A E 299 (Communication) A new sales representative, Bill Godfrey, has just received his copy of the month-end financial reports. He is puzzled by the term "unearned revenue." He left the following e-mail message for you on the company's bulletin board system: What is this??? Creative Accounting, or what??? Line item 12 on year-to-date financials shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we earned it, or we didn't ... Right??! Is this how you guys lower our commissions? Reply to w.godfrey@sbd Required: Write a response to send to Bill. For Instructor Use Only

3 - 80

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 299 Since the answer is being prepared for a "bulletin board" type system, it can be in informal language and can respond in kind to the humor. However, proper grammar and spelling are essential, as is the message about what unearned revenue really is. A proposed message follows: Bill—What a pleasant surprise to hear from you! Maybe you can teach those other guys in your department something about living in the present! Do you know some of them still write me notes on paper??? Unbelievable, right??! Now to your question. Your unearned revenue is the sales you made that us smart guys in accounting didn't figure you had earned, so we just took it away from you! Might as well save the company some dough for our own bonuses, right?? Seriously, Bill—unearned revenue is the result of your getting customers of the kind we like—they pay in advance! When they pay before we can even get their products made or shipped, we can't count the money they pay us as revenue. What we actually have is a liability—an obligation to make and ship products. So that's how we (smart guys) in accounting count it—as a liability. You happened to have about 25% of your sales that fit in that category. When production can catch up with orders, you'll get credit for the sales. You will receive your commissions the same month the company records the revenue as “earned.” (Take heart—It'll seem like Christmas all over again.) Thanks again for actually using the system. Talk to me again sometime. . . Reply to mking@sbd LO 8, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Communication, AICPA BB: N, AICPA FN: Decision modeling, AICPA PC: Communication

For Instructor Use Only

Adjusting the Accounts

3 - 81

Another Perspective (GAAP) Question 1. GAAP (a) requires that revenue not be recognized until cash is received. (b) allows revenue to be recognized when a customer makes an order. (c) provides only general guidance on revenue recognition, compared to the detailed guidance provided by IFRS. (d) provides the same type of guidance as IFRS for revenue recognition. Ans: d, LO 10, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics

2. Which of the following statements is false? (a) GAAP uses the cash basis of accounting. (b) GAAP requires that revenue and costs must be capable of being measured reliably. (c) GAAP employs accrual accounting. (d) GAAP employs the time period assumption. Ans: a, LO 10, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics

3. As a result of the revenue recognition project by the FASB and IASB: (a) revenue is no longer recorded unless cash has been received. (b) revenue recognition places more emphasis on when changes occur in related expenses. (c) revenue recognition places more emphasis on when revenue is realized. (d) revenue recognition places more emphasis on when the performance obligation is satisfied. Ans: d, LO 10, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics

4. Which of the following is false? (a) IFRS has lower standards than GAAP that address revenue recognition. (b) Under IFRS, firms do not engage in the closing process. (c) Under IFRS, the term expense includes losses. (d) Under IFRS, the term income describes both revenues and gains. Ans: b, LO 10, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics

5. Accrual-basis accounting: (a) is not consistent with the GAAP conceptual frame work. (b) has been eliminated as a result of the IASB/FASB joint project on revenue recognition. (c) results in companies recording transactions that change a company’s financial statements. (d) is optional under GAAP. Ans: c, LO 10, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics

ANSWERS 1. d

2. a

3. d

4. b

5. c

For Instructor Use Only

CHAPTER 4 COMPLETING THE ACCOUNTING CYCLE CHAPTER LEARNING OBJECTIVES 1. Prepare a worksheet. The steps in preparing a worksheet are as follows: (a) Prepare a trial balance on the worksheet. (b) Enter the adjustments in the adjustments columns. (c) Enter adjusted balances in the adjusted trial balance columns. (d) Extend adjusted trial balance amounts to appropriate financial statement columns. (e) Total the statement columns, compute net income (or net loss), and complete the worksheet. 2. Explain the process of closing the books. Closing the books occurs at the end of an accounting period. The process is to journalize and post closing entries and then underline and balance all accounts. In closing the books, companies make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed. 3. Describe the content and purpose of a post-closing trial balance. A post-closing trial balance contains the balances in permanent accounts that are carried forward to the next accounting period. The purpose of this trial balance is to prove the equality of these balances. 4. State the required steps in the accounting cycle. The required 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. 5. Explain the approaches to preparing correcting entries. One way to determine the correcting entry is to compare the incorrect entry with the correct entry. After comparison, the company makes a correcting entry to correct the accounts. An alternative to a correcting entry is to reverse the incorrect entry and then prepare the correct entry. 6. Identify the sections of a classified statement of financial position. A classified statement of financial position categorizes assets as intangibles; property, plant, and equipment; long-term investments; and current assets. Liabilities are classified as either non-current or current. There is also an equity section, which varies with the form of business organization. a

7. Prepare reversing entries. Reversing entries are the opposite of the adjusting entries made in the preceding period. Some companies choose to make reversing entries at the beginning of a new accounting period to simplify the recording of later transactions related to the adjusting entries. In most cases, only accrued adjusting entries are reversed.

4-2

Test Bank for Financial Accounting: IFRS Edition, 3e

TRUE-FALSE STATEMENTS 1.

A worksheet is a mandatory form that must be prepared along with an income statement and statement of financial position.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

2.

If a worksheet is used, financial statements can be prepared before adjusting entries are journalized.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

3.

If total credits in the income statement columns of a worksheet exceed total debits, the enterprise has net income.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

4.

It is not necessary to prepare formal financial statements if a worksheet has been prepared because financial position and net income are shown on the worksheet.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5.

The adjustments on a worksheet can be posted directly to the accounts in the ledger from the worksheet.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

6.

The adjusted trial balance columns of a worksheet are obtained by subtracting the adjustment columns from the trial balance columns.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

7.

The balance of the depreciation expense account will appear in the income statement debit column of a worksheet.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

8.

The procedures used to prepare the worksheet are the same under both IFRS and GAAP.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

9.

The last 2 columns on a worksheet prepared under IFRS contains data for the Retained Earnings Statements.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

10.

The format of the data in the Statement of Financial Position columns of the worksheet is the same as the format of the Statement of Financial Position.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

11.

No permanent account balances are changed in the closing process.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

12.

Closing entries are unnecessary if the business plans to continue operating in the future and issue financial statements each year.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

Completing the Accounting Cycle 13.

4-3

The Dividends account is closed to the Income Summary account in order to properly determine net income (or loss) for the period.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

14.

After closing entries have been journalized and posted, all temporary accounts in the ledger should have zero balances.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

15.

Closing revenue and expense accounts to the Income Summary account is an optional bookkeeping procedure.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

16.

Closing the Dividends account to Retained Earnings is not necessary if net income is greater than dividends paid during the period.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

17.

The Dividends account is a permanent account whose balance is carried forward to the next accounting period.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

18.

Closing entries are journalized after adjusting entries have been journalized.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

19.

The amounts appearing on an income statement should agree with the amounts appearing on the post-closing trial balance.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

20.

The post-closing trial balance is entered in the first two columns of a worksheet.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

21.

The post-closing trial balance only contains Statement of Financial Position account balances.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

22.

The purpose of the post-closing trial balances is to prove the equality of the Statement of Financial Position.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

23.

The order of the accounts in the post-closing trial balance is the same order as the accounts appearing in the Statement of Financial Position.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

24.

The preparation of a Statement of Financial Position is a required step in the accounting cycle.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4-4 25.

Test Bank for Financial Accounting: IFRS Edition, 3e Step number 6 in the accounting cycle includes preparation of the Statement of Financial Position.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

26.

A business entity has only one accounting cycle over its economic existence.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

27.

Both correcting entries and adjusting entries always affect at least one statement of financial position account and one income statement account.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

28.

Correcting entries are made any time an error is discovered even though it may not be at the end of an accounting period.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

29.

An incorrect debit to Accounts Receivable instead of the correct account Notes Receivable does not require a correcting entry because total assets will not be misstated.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

30.

Correcting entries will never affect statement of financial position accounts.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

31.

Current assets are the first category of assets reported on the Statement of Financial Position.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

32.

IFRS permits the noncurrent classifications to be reported before the current classifications on the statement of financial position

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

33.

IFRS requires that current assets be reported on the statement of financial position in the order of their liquidity.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

34.

A company's operating cycle and fiscal year are usually the same length of time.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

35.

Cash and office supplies are both classified as current assets.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

36.

Long-term investments would appear in the property, plant, and equipment section of the statement of financial position.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 37.

4-5

A liability is classified as a current liability if the company is to pay it within the forthcoming year.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

38.

A company's liquidity is concerned with the relationship between long-term investments and long-term debt.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

39.

Intangible assets are customarily the first items listed on a classified statement of financial position.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

40.

The operating cycle of a company is determined by the number of years the company has been operating.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a

41.

Reversing entries are an optional bookkeeping procedure.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a

42.

Reversing entries will always affect statement of financial position accounts.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a

43.

The use of reversing entries will change the amounts reported in the statement of financial position.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

44.

After a worksheet has been completed, the statement columns contain all data that are required for the preparation of financial statements.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

45.

To close net income to Retained Earnings Income Summary is debited and Retained Earnings is credited.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

46.

In one closing entry, the Dividends account is credited and Income Summary is debited.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

47.

The post-closing trial balance will contain only statement of equity accounts and statement of financial position accounts.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

48.

The operating cycle of a company is the average time required to collect the receivables resulting from producing revenues.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

For Instructor Use Only

4-6 49.

Test Bank for Financial Accounting: IFRS Edition, 3e Current assets are listed in the reverse order of liquidity.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

50.

Current liabilities are obligations that the company is to pay within the coming year.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Answers to True-False Statements Item

1. 2. 3. 4. 5. 6. 7. 8.

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

F T T F F F T T

9. 10. 11. 12. 13. 14. 15. 16.

F F F F F T F F

17. 18. 19. 20. 21. 22. 23. 24.

F T F F T F F T

25. 26. 27. 28. 29. 30. 31. 32.

F F F T F F F T

33. 34. 35. 36. 37. 38. 39. 40.

F F T F T F T F

Item a

41. 42. 43. 44. 45. 46. 47. 48.

Ans.

Item

Ans.

T T F T T F F F

49. 50.

T T

MULTIPLE CHOICE QUESTIONS 51.

Preparing a worksheet involves a. two steps. b. three steps. c. four steps. d. five steps.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

52.

The adjustments entered in the adjustments columns of a worksheet are a. not journalized. b. posted to the ledger but not journalized. c. not journalized until after the financial statements are prepared. d. journalized before the worksheet is completed.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

53.

The information for preparing a trial balance on a worksheet is obtained from a. financial statements. b. general ledger accounts. c. general journal entries. d. business documents.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

Completing the Accounting Cycle 54.

4-7

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. adjustments columns of the worksheet.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

55.

If the total debit column exceeds the total credit column of the income statement columns on a worksheet, then the company has a. earned net income for the period. b. an error because debits do not equal credits. c. suffered a net loss for the period. d. to make an adjusting entry.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

56.

A worksheet is a multiple column form that facilitates the a. identification of events. b. measurement process. c. preparation of financial statements. d. analysis process.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

57.

Computing net income on the worksheet occurs in step a. two. b. three. c. four. d. five.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

58.

A worksheet can be thought of as a(n) a. permanent accounting record. b. optional device used by accountants. c. part of the general ledger. d. part of the journal.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

59.

The Supplies account appears in which of the following debit columns of the worksheet? a. Trial balance b. Adjusted trial balance c. Statement of financial position d. All of these answer choices are correct.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4-8 60.

Test Bank for Financial Accounting: IFRS Edition, 3e When constructing a worksheet, accounts are often needed that are not listed in the trial balance already entered on the worksheet from the ledger. Where should these additional accounts be shown on the worksheet? a. They should be inserted in alphabetical order into the trial balance accounts already given. b. They should be inserted in chart of account order into the trial balance already given. c. They should be inserted on the lines immediately below the trial balance totals. d. They should not be inserted on the trial balance until the next accounting period.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

61.

When using a worksheet, adjusting entries are journalized a. after the worksheet is completed and before financial statements are prepared. b. before the adjustments are entered on to the worksheet. c. after the worksheet is completed and after financial statements are prepared. d. before the adjusted trial balance is extended to the proper financial statement columns.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

62.

Assuming that there is a net loss for the period, debits equal credits in all but which section of the worksheet? a. Income statement columns b. Adjustments columns c. Trial balance columns d. Adjusted trial balance columns

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

63.

Adjusting entries are prepared from a. source documents. b. the adjustments columns of the worksheet. c. the general ledger. d. last year's worksheet.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

64.

The net income (or loss) for the period a. is found by computing the difference between the income statement credit column and the statement of financial position credit column on the worksheet. b. cannot be found on the worksheet. c. is found by computing the difference between the income statement columns of the worksheet. d. is found by computing the difference between the trial balance totals and the adjusted trial balance totals.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 65.

4-9

The worksheet does not show a. net income or loss for the period. b. revenue and expense account balances. c. the ending balance in Retained Earnings . d. the trial balance before adjustments.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

66.

If the total debits exceed total credits in the statement of financial position columns of the worksheet, equity a. will increase because net income has occurred. b. will decrease because a net loss has occurred. c. is in error because a mistake has occurred. d. will not be affected.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

67.

The income statement and statement of financial position columns of Reed Company's worksheet reflect the following totals:

Totals

Income Statement Dr. Cr. $58,000 $45,000

Statement of Financial Position Dr. Cr. $34,000 $47,000

The net income (or loss) for the period is a. $45,000 income. b. $13,000 income. c. $13,000 loss. d. not determinable. Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

68.

The income statement and statement of financial position columns of Reed Company's worksheet reflect the following totals:

Totals

Income Statement Dr. Cr. $58,000 $45,000

Statement of Financial Position Dr. Cr. $34,000 $47,000

To enter the net income (or loss) for the period into the above worksheet requires an entry to the a. income statement debit column and the statement of financial position credit column. b. income statement credit column and the statement of financial position debit column. c. income statement debit column and the income statement credit column. d. statement of financial position debit column and the statement of financial position credit column. Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 10 69.

Test Bank for Financial Accounting: IFRS Edition, 3e The Statement of Financial Position columns of the worksheet contain data for what financial statement? a. Income Statement. b. Retained Earnings Statement. c. Statement of Cash Flows. d. None of these answer choices are correct.

Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Use the following data, taken from the adjusted trial balance, for 70 and 71. Debit Cash Accounts Receivable Supplies Accounts Payable Unearned Service Revenue Share Capital-Ordinary Retained Earnings Dividends Service Revenue Salaries and Wages Expense Miscellaneous Expense Supplies Expense Salaries and Wages Payable Total 70.

Credit

€ 5,712 3,904 480 € 2,792 160 5,000 1,760 300 4,064 1,344 256 2,228 €14,224

448 €14,224

What amount will be reflected for Retained Earnings in the Statement of Financial Position columns of the worksheet? a. €1,996 b. €1,760 c. €1,696 d. €2,060

Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

71.

What will be the total of the Statement of Financial Position credit column? a. €14,224 b. €10,160 c. €13,988 d. €10,396

Ans: D, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

72.

Which of the following accounts is least likely to have its balance change on the worksheet? a. Salaries and Wages Payable. b. Supplies. c. Accumulated Depreciation. d. Share Capital-Ordinary.

Ans: D, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 73.

4 - 11

Which of the following permanent account is changed during the closing process? a. Share Capital-Ordinary. b. Retained Earnings. c. Unearned Service Revenue. d. None of these answer choices are correct.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

74.

The temporary account balances ultimately wind up in what account? a. Income Summary. b. Retained Earnings. c. Share Capital-Ordinary. d. Comprehensive Income.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

75.

The permanent accounts appear on which financial statement? a. Statement of Financial Position. b. Income Statement. c. Retained Earnings Statement. d. Statement of Cash Flows.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

76.

Closing entries are necessary for a. permanent accounts only. b. temporary accounts only. c. both permanent and temporary accounts. d. permanent or real accounts only.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

77.

Each of the following accounts is closed to Income Summary except a. Expenses. b. Dividends. c. Revenues. d. All of these answer choices are correct.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

78.

Closing entries are made a. in order to terminate the business as an operating entity. b. so that all assets, liabilities, and equity accounts will have zero balances when the next accounting period starts. c. in order to transfer net income (or loss) and dividends to Retained Earnings. d. so that financial statements can be prepared.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

4 - 12 79.

Test Bank for Financial Accounting: IFRS Edition, 3e Closing entries are a. an optional step in the accounting cycle. b. posted to the ledger accounts from the worksheet. c. made to close permanent or real accounts. d. journalized in the general journal.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

80.

The Income Summary account a. is a permanent account. b. appears on the statement of financial position. c. appears on the income statement. d. is a temporary account.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

81.

If Income Summary has a credit balance after revenues and expenses have been closed into it, the closing entry for Income Summary will include a a. debit to Retained Earnings. b. debit to Dividends. c. credit to Retained Earnings. d. credit to Dividends.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

82.

Closing entries are journalized and posted a. before the financial statements are prepared. b. after the financial statements are prepared. c. at management's discretion. d. at the end of each interim accounting period.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

83.

Closing entries a. are prepared before the financial statements. b. reduce the number of permanent accounts. c. cause the revenue and expense accounts to have zero balances. d. summarize the activity in every account.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

84.

Which of the following is a true statement about closing the books of a corporation? a. Expenses are closed to the Expense Summary account. b. Only revenues are closed to the Income Summary account. c. Revenues and expenses are closed to the Income Summary account. d. Revenues, expenses, and the Dividends account are closed to the Income Summary account.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

Completing the Accounting Cycle 85.

4 - 13

Closing entries may be prepared from all but which one of the following sources? a. Adjusted balances in the ledger b. Income statement and statement of financial position columns of the worksheet c. Statement of financial position d. Income and retained earnings statements

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

86.

In order to close the Dividends account, the a. income summary account should be debited. b. income summary account should be credited. c. retained earnings account should be credited. d. retained earnings account should be debited.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

87.

In preparing closing entries a. each revenue account will be credited. b. each expense account will be credited. c. the retained earnings account will be debited if there is net income for the period. d. the dividends account will be debited.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

88.

The most efficient way to accomplish closing entries is to a. credit the income summary account for each revenue account balance. b. debit the income summary account for each expense account balance. c. credit the dividends account balance directly to the income summary account. d. credit the income summary account for total revenues and debit the income summary account for total expenses.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

89.

The closing entry process consists of closing a. all asset and liability accounts. b. out the retained earnings account. c. all permanent accounts. d. all temporary accounts.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

90.

The final closing entry to be journalized is typically the entry that closes the a. revenue accounts. b. dividends account. c. retained earnings account. d. expense accounts.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

4 - 14 91.

Test Bank for Financial Accounting: IFRS Edition, 3e An error has occurred in the closing entry process if a. revenue and expense accounts have zero balances. b. the retained earnings account is credited for the amount of net income. c. the dividends account is closed to the retained earnings account. d. the statement of financial position accounts have zero balances.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

92.

The Income Summary account is an important account that is used a. during interim periods. b. in preparing adjusting entries. c. annually in preparing closing entries. d. annually in preparing correcting entries.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

93.

The balance in the income summary account before it is closed will be equal to a. the net income or loss on the income statement. b. the beginning balance in the retained earnings account. c. the ending balance in the retained earnings account. d. zero.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

94.

After closing entries are posted, the balance in the retained earnings account in the ledger will be equal to a. the beginning retained earnings reported on the retained earnings statement. b. the amount of the retained earnings reported on the statement of financial position. c. zero. d. the net income for the period.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

95.

The income statement for the month of June, 2017 of Taylor Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Supplies Expense Advertising Expense Insurance Expense Total expenses Net income

₤16,000 ₤4,000 3,000 600 400 200 8,200 ₤7,800

The entry to close the revenue account includes a a. debit to Income Summary for ₤7,800. b. credit to Income Summary for ₤7,800. c. debit to Income Summary for ₤16,000. d. credit to Income Summary for ₤16,000. Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 96.

4 - 15

The income statement for the month of June, 2017 of Taylor Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Supplies Expense Advertising Expense Insurance Expense Total expenses Net income

₤16,000 ₤4,000 3,000 600 400 200 8,200 ₤7,800

The entry to close the expense accounts includes a a. debit to Income Summary for ₤7,800. b. credit to Rent Expense for ₤3,000. c. credit to Income Summary for ₤8,200. d. debit to Salaries and Wages Expense for ₤2,000. Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

97.

The income statement for the month of June, 2017 of Taylor Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Supplies Expense Advertising Expense Insurance Expense Total expenses Net income

₤16,000 ₤4,000 3,000 600 400 200 8,200 ₤7,800

After the revenue and expense accounts have been closed, the balance in Income Summary will be a. ₤0. b. a debit balance of ₤7,800. c. a credit balance of ₤7,800. d. a credit balance of ₤16,000. Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 16 98.

Test Bank for Financial Accounting: IFRS Edition, 3e The income statement for the month of June, 2017 of Taylor Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Supplies Expense Advertising Expense Insurance Expense Total expenses Net income

₤16,000 ₤4,000 3,000 600 400 200 8,200 ₤7,800

The entry to close Income Summary to Retained Earnings includes a. a debit to Revenue for ₤16,000. b. credits to Expenses totalling ₤8,200. c. a credit to Income Summary for ₤7,800 d. a credit to Retained Earnings for ₤7,800. Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

99.

The income statement for the month of June, 2017 of Taylor Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Supplies Expense Advertising Expense Insurance Expense Total expenses Net income

₤16,000 ₤4,000 3,000 600 400 200 8,200 ₤7,800

At June 1, 2017, Taylor reported Retained Earnings of ₤70,000. The company paid no dividends during June. At June 30, 2017, the company will report Retained Earnings of a. ₤70,000. b. ₤86,000. c. ₤77,800. d. ₤62,200. Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 100.

4 - 17

The income statement for the year 2017 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)

$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)

The entry to close the revenue account includes a a. debit to Income Summary for $5,000. b. credit to Income Summary for $5,000. c. debit to Revenues for $150,000. d. credit to Revenues for $150,000. Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

101.

The income statement for the year 2017 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)

$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)

The entry to close the expense accounts includes a a. debit to Income Summary for $5,000. b. credit to Income Summary for $5,000. c. debit to Income Summary for $155,000. d. debit to Salaries and Wages Expense for $90,000. Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 18 102.

Test Bank for Financial Accounting: IFRS Edition, 3e The income statement for the year 2017 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)

$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)

After the revenue and expense accounts have been closed, the balance in Income Summary will be a. $0. b. a debit balance of $5,000. c. a credit balance of $5,000. d. a credit balance of $150,000. Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

103.

The income statement for the year 2017 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)

$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)

The entry to close Income Summary to Retained Earnings includes a. a debit to Revenue for $150,000. b. credits to Expenses totalling $155,000. c. a credit to Income Summary for $5,000. d. a credit to Retained Earnings for $5,000. Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 104.

4 - 19

The income statement for the year 2017 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)

$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)

At January 1, 2017, Poole reported Retained Earnings of $100,000. Dividends for the year totalled $20,000. At December 31, 2017, the company will report Retained Earnings of a. $35,000. b. $75,000. c. $80,000. d. $85,000. Ans: B, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

105.

The income statement for the year 2017 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)

$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)

After all closing entries have been posted, the Income Summary account will have a balance of a. $0. b. $5,000 debit. c. $5,000 credit. d. $75,000 credit. Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 20 106.

Test Bank for Financial Accounting: IFRS Edition, 3e The income statement for the year 2017 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)

$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 145,000 $ (5,000)

After all closing entries have been posted, the revenue account will have a balance of a. $0. b. $150,000 credit. c. $150,000 debit. d. $5,000 credit. Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

107.

A post-closing trial balance is prepared a. after closing entries have been journalized and posted. b. before closing entries have been journalized and posted. c. after closing entries have been journalized but before the entries are posted. d. before closing entries have been journalized but after the entries are posted.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

108.

All of the following statements about the post-closing trial balance are correct except it a. shows that the accounting equation is in balance. b. provides evidence that the journalizing and posting of closing entries have been properly completed. c. contains only permanent accounts. d. proves that all transactions have been recorded.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

109.

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 net income (or loss) for the period.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

110.

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. only if an error in the accounts is detected.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 111.

4 - 21

A post-closing trial balance will show a. zero balances for all accounts. b. zero balances for statement of financial position accounts. c. only statement of financial position accounts. d. only income statement accounts.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

112.

The purpose of the post-closing trial balance is to a. prove that no mistakes were made. b. prove the equality of the statement of financial position 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 statement of financial position accounts in alphabetical order for easy reference.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

113.

The balances that appear on the post-closing trial balance will match the a. income statement account balances after adjustments. b. statement of financial position account balances after closing entries. c. income statement account balances after closing entries. d. statement of financial position account balances after adjustments.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

114.

Which account listed below would be double ruled in the ledger as part of the closing process? a. Cash b. Retained Earnings c. Dividends d. Accumulated Depreciation

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

115.

A double rule applied to accounts in the ledger during the closing process implies that a. the account is an income statement account. b. the account is a statement of financial position account. c. the account balance is not zero. d. a mistake has been made, since double ruling is prescribed.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

116.

The heading for a post-closing trial balance has a date line that is similar to the one found on a. a statement of financial position. b. an income statement. c. a retained earnings statement. d. a worksheet.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 22 117.

Test Bank for Financial Accounting: IFRS Edition, 3e Which account balance will change between the adjusted trial balance and the postclosing trial balance? a. Retained Earnings b. Share Capital-Ordinary c. Interest Payable d. Accumulated Depreciation

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

118.

Which one of the following is usually prepared only at the end of a company's annual accounting period? a. Preparing financial statements b. Journalizing and posting adjusting entries c. Journalizing and posting closing entries d. Preparing an adjusted trial balance

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

119.

The step in the accounting cycle that is performed on a periodic basis (i.e., monthly, quarterly) is a. analyzing transactions. b. journalizing and posting adjusting entries. c. preparing a post-closing trial balance. d. posting to ledger accounts.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

120.

Which one of the following is an optional step in the accounting cycle of a business enterprise? a. Analyze business transactions b. Prepare a worksheet c. Prepare a trial balance d. Post to the ledger accounts

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

121.

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.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

122.

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

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

Completing the Accounting Cycle 123.

4 - 23

Which of the following steps in the accounting cycle may be performed most frequently? a. Prepare a post-closing trial balance b. Journalize closing entries c. Post closing entries d. Prepare a trial balance

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

124.

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

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

125.

The two optional steps in the accounting cycle are preparing a. a post-closing trial balance and reversing entries. b. a worksheet and post-closing trial balances. c. reversing entries and a worksheet. d. an adjusted trial balance and a post-closing trial balance.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

126.

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.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

127.

Correcting entries a. always affect at least one balance sheet account and one income statement account. b. affect income statement accounts only. c. affect statement of financial position accounts only. d. may involve any combination of accounts in need of correction.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

128.

Topeka Bike Company received a $920 check from a customer for the balance due. The transaction was erroneously recorded as a debit to Cash $290 and a credit to Service Revenue $290. The correcting entry is a. debit Cash, $920; credit Accounts Receivable, $920. b. debit Cash, $630 and Accounts Receivable, $290; credit Service Revenue, $920. c. debit Cash, $630 and Service Revenue, $290; credit Accounts Receivable, $920. d. debit Accounts Receivable, $920; credit Cash, $630 and Service Revenue, $290.

Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 24 129.

Test Bank for Financial Accounting: IFRS Edition, 3e 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 closing entries. d. cannot be corrected until the next accounting period.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

130.

A correcting entry a. must involve one statement of financial position 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.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

131.

An unacceptable way to make a correcting entry is to a. reverse the incorrect entry. b. erase the incorrect entry. c. compare the incorrect entry with the correct entry and make a correcting entry to correct the accounts. d. correct it immediately upon discovery.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

132.

Farr Company paid the weekly payroll on January 2 by debiting Salaries and Wages Expense for $75,000. The accountant preparing the payroll entry overlooked the fact that Salaries and Wages Expense of $45,000 had been accrued at year end on December 31. The correcting entry is a. Salaries and Wages Payable .............................................. 45,000 Cash ........................................................................ 45,000 b. Cash ................................................................................... 30,000 Salaries and Wages Expense .................................. 30,000 c. Salaries and Wages Payable .............................................. 45,000 Salaries and Wages Expense .................................. 45,000 d. Cash ................................................................................... 45,000 Salaries and Wages Expense .................................. 45,000

Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

Completing the Accounting Cycle 133.

4 - 25

Stine Company paid €850 on account to a creditor. The transaction was erroneously recorded as a debit to Cash of €580 and a credit to Accounts Receivable, €580. The correcting entry is a. Accounts Payable ............................................................... 850 Cash ....................................................................... 850 b. Accounts Receivable .......................................................... 580 Cash ....................................................................... 580 c. Accounts Receivable .......................................................... 580 Accounts Payable ................................................... 580 d. Accounts Receivable .......................................................... 580 Accounts Payable ............................................................... 850 Cash ....................................................................... 1,430

Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

134.

A lawyer collected $620 of legal fees in advance. He erroneously debited Cash for $260 and credited Accounts Receivable for $260. The correcting entry is a. Cash ................................................................................... 260 Accounts Receivable .......................................................... 360 Unearned Service Revenue .................................... 620 b. Cash ................................................................................... 620 Service Revenue ..................................................... 620 c. Cash ................................................................................... 360 Accounts Receivable .......................................................... 260 Unearned Service Revenue .................................... 620 d. Cash ................................................................................... 360 Accounts Receivable ............................................... 360

Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

135.

On May 25, Carlin Company received a $550 check from Andy Jeter for services to be performed in the future. The bookkeeper for Carlin Company incorrectly debited Cash for $550 and credited Accounts Receivable for $550. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should: a. debit Cash $550 and credit Unearned Service Revenue $550. b. debit Accounts Receivable $550 and credit Service Revenue $550. c. debit Accounts Receivable $550 and credit Cash $550. d. debit Accounts Receivable $550 and credit Unearned Service Revenue $550.

Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

4 - 26 136.

Test Bank for Financial Accounting: IFRS Edition, 3e On March 8, Fernetti Company bought office supplies on account from the Flint Company for $550. Fernetti Company incorrectly debited Equipment for $500 and credited Accounts Payable for $500. The entries have been posted to the ledger. the correcting entry should be: a. Supplies .............................................................................. 550 Accounts Payable ......................................................... 550 b. Supplies .............................................................................. 550 Accounts Payable ......................................................... 500 Equipment ..................................................................... 50 c. Supplies .............................................................................. 550 Equipment ..................................................................... 550 d. Supplies .............................................................................. 550 Equipment ..................................................................... 500 Accounts Payable ......................................................... 50

Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

137.

The following information (in thousands) is for Zháng Office Supplies: Zháng Office Supplies Statement of Financial Position December 31, 2017

Trademark Land Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance Inventory Accounts Receivable Cash Total Assets

¥360,000

¥280,000 Share Capital ¥480,000 Retained Earnings 1,000,000

¥400,000 80,000

¥1,480,000 320,000

680,000 Accounts 300,000 Payable Salaries Wages 120,000 Payable Mortgage 280,000 Payable

240,000

40,000 360,000

640,000

200,000 260,000 Total Equity ¥2,120,000 and Liabilities

¥ 2,120,000

The total amount of assets to be classified as current assets is a. ¥1,160,000. b. ¥860,000. c. ¥720,000. d. ¥580,000. Ans: B, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 138.

4 - 27

The following information (in thousands) is for Zháng Office Supplies: Zháng Office Supplies Statement of Financial Position December 31, 2017

Trademark Land Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance Inventory Accounts Receivable Cash Total Assets

¥360,000

¥280,000 Share Capital ¥480,000 Retained Earnings 1,000,000

¥400,000 80,000

¥1,480,000 320,000

680,000 Accounts 300,000 Payable Salaries Wages 120,000 Payable Mortgage 280,000 Payable

240,000

40,000 360,000

640,000

200,000 260,000 Total Equity ¥2,120,000 and Liabilities

¥ 2,120,000

The total amount of assets to be classified as property, plant, and equipment is a. ¥1,280,000. b. ¥680,000. c. ¥980,000. d. ¥760,000. Ans: B, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 28 139.

Test Bank for Financial Accounting: IFRS Edition, 3e The following information (in thousands) is for Zháng Office Supplies: Zháng Office Supplies Statement of Financial Position December 31, 2017

Trademark Land Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance Inventory Accounts Receivable Cash Total Assets

¥360,000

¥280,000 Share Capital ¥480,000 Retained Earnings 1,000,000

¥400,000 80,000

¥1,480,000 320,000

680,000 300,000 Accounts Payable 120,000 Salaries Wages Payable 280,000 Mortgage Payable 200,000

240,000

40,000 360,000

640,000

260,000 ¥2,120,000 Total Equity and Liabilities

¥ 2,120,000

The total amount of assets to be classified as investments is a. ¥0. b. ¥600,000. c. ¥300,000. d. ¥720,000. Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 140.

4 - 29

The following information (in thousands) is for Zháng Office Supplies: Zháng Office Supplies Statement of Financial Position December 31, 2017

Trademark Land Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance Inventory Accounts Receivable Cash Total Assets

¥360,000

¥280,000 Share Capital ¥480,000 Retained Earnings 1,000,000

¥400,000 80,000

¥1,480,000 320,000

680,000 300,000 Accounts Payable 120,000 Salaries Wages Payable 280,000 Mortgage Payable 200,000

240,000

40,000 360,000

640,000

260,000 ¥2,120,000 Total Equity and Liabilities

¥ 2,120,000

The total amount of liabilities to be classified as current liabilities is a. ¥280,000. b. ¥240,000. c. ¥600,000. d. ¥640,000. Ans: A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 30 141.

Test Bank for Financial Accounting: IFRS Edition, 3e The following information is for Acme Auto Supplies: Acme Auto Supplies Statement of Financial Position December 31, 2017

Trademark

$

Land

420,000 Share Capital Retained Earnings

$570,000

Buildings

$720,000 1,500,000

$600,000

Less:Accum. Depreciation Land Held for Investment Prepaid Insurance Inventory

180,000

420,000

990,000 480,000 Accounts 240,000 Payable Salaries/Wages 420,000 Payable

Accounts Receivable

Mortgage 300,000 Payable

Cash Total Assets

360,000 Total Equity $ 3,210,000 and Liabilities

390,000 60,000

540,000

990,000 $ 2,220,000 $ 3,210,000

The total dollar amount of assets to be classified as current assets is a. $1,320,000. b. $900,000. c. $1,800,000. d. $1,080,000. Ans: A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 142.

4 - 31

The following information is for Acme Auto Supplies: Acme Auto Supplies Statement of Financial Position December 31, 2017

Trademark Land Buildings

$ $570,000

420,000 Share Capital Retained Earnings

$720,000 1,500,000

$600,000

Less:Accum. Depreciation

180,000 420,000

990,000

Land Held for Investment

480,000

Prepaid Insurance

240,000 Accounts Payable

390,000

Inventory

420,000 Salaries/Wages Payable

60,000

Accounts Receivable

300,000 Mortgage Payable

Cash

360,000

Total Assets

$ 3,210,000 Total Equity and Liabilities

540,000

990,000 $ 2,220,000 $ 3,210,000

The total dollar amount of assets to be classified as property, plant, and equipment is a. $1,890,000. b. $1,470,000. c. $990,000. d. $1,170,000. Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 32

Test Bank for Financial Accounting: IFRS Edition, 3e

143.

The following information is for Acme Auto Supplies: Acme Auto Supplies Statement of Financial Position December 31, 2017

Trademark Land Buildings

$ $570,000

420,000 Share Capital Retained Earnings

$720,000 1,500,000

$600,000

Less:Accum. Depreciation

180,000 420,000

990,000

Land Held for Investment

480,000

Prepaid Insurance

240,000 Accounts Payable

390,000

Inventory

420,000 Salaries/Wages Payable

60,000

Accounts Receivable

300,000 Mortgage Payable

Cash

360,000

Total Assets

$ 3,210,000 Total Equity and Liabilities

540,000

990,000 $ 2,220,000 $ 3,210,000

The total dollar amount of assets to be classified as investments is a. $0. b. $900,000. c. $480,000. d. $1,080,000. Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 144.

4 - 33

The following information is for Acme Auto Supplies: Acme Auto Supplies Statement of Financial Position December 31, 2017

Trademark Land Buildings

$ $570,000

420,000 Share Capital Retained Earnings

$720,000 1,500,000

$600,000

Less:Accum. Depreciation

180,000 420,000

990,000

Land Held for Investment

480,000

Prepaid Insurance

240,000 Accounts Payable

390,000

Inventory

420,000 Salaries/Wages Payable

60,000

Accounts Receivable

300,000 Mortgage Payable

Cash

360,000

Total Assets

540,000

$ 3,210,000 Total Equity and Liabilities

990,000 $ 2,220,000 $ 3,210,000

The total dollar amount of liabilities to be classified as current liabilities is a. $390,000. b. $450,000. c. $930,000. d. $990,000. Ans: B, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

145.

All of the following are property, plant, and equipment except a. supplies. b. machinery. c. land. d. buildings.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

146.

The first item listed under current liabilities is usually a. accounts payable. b. notes payable. c. salaries and wages payable. d. taxes payable.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 34

Test Bank for Financial Accounting: IFRS Edition, 3e

147.

Equipment is classified in the statement of financial position as a. a current asset. b. property, plant, and equipment. c. an intangible asset. d. a long-term investment.

Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

148.

A current asset is a. the last asset purchased by a business. b. an asset which is currently being used to produce a product or service. c. usually found as a separate classification in the income statement. d. an asset that a company expects to convert to cash or use up within one year.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

149.

An intangible asset a. does not have physical substance, yet often is very valuable. b. is worthless because it has no physical substance. c. is converted into a tangible asset during the operating cycle. d. cannot be classified on the statement of financial position because it lacks physical substance.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

150.

Liabilities are generally classified on a statement of financial position 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.

Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

151.

Which of the following would not be classified as a non-current liability? a. Current maturities of long-term debt b. Bonds payable c. Mortgage payable d. Lease liabilities

Ans: A, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

152.

Which of the following liabilities are not related to the operating cycle? a. Salaries and wages payable b. Accounts payable c. Utilities payable d. Bonds payable

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 153.

4 - 35

Intangible assets include each of the following except a. copyrights. b. goodwill. c. land improvements. d. patents.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

154.

It is not true that current assets are assets that a company expects to a. realize in cash within one year. b. sell within one year. c. use up within one year. d. acquire within one year.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

155.

The operating cycle of a company is the average time that is required to go from cash to a. sales in producing revenues. b. cash in producing revenues. c. inventory in producing revenues. d. accounts receivable in producing revenues.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

156.

On a classified statement of financial position, current assets are customarily listed a. in alphabetical order. b. with the largest dollar amounts first. c. in the reverse order of liquidity. d. in the order of acquisition.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

157.

Intangible assets are a. listed under current assets on the statement of financial position. b. not listed on the statement of financial position because they do not have physical substance. c. non-current resources. d. listed as a long-term investment on the statement of financial position.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

158.

The relationship between current assets and current liabilities is important in evaluating a company's a. profitability. b. liquidity. c. market value. d. accounting cycle.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

For Instructor Use Only

4 - 36 159.

Test Bank for Financial Accounting: IFRS Edition, 3e The most important information needed to determine if companies can pay their current obligations is the a. net income for this year. b. projected net income for next year. c. relationship between current assets and current liabilities. d. relationship between short-term and non-current liabilities.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

160.

The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2017: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/18 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/17) Salaries and wages expense Service revenue Supplies Supplies expense

¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000

What is the company’s net income for the year ending December 31, 2017? a. ¥532,000 b. ¥168,000 c. ¥112,000 d. ¥48,000 Ans: B, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 161.

4 - 37

The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2017: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/18 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/17) Salaries and wages expense Service revenue Supplies Supplies expense

¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000

What is the balance that would be reported for equity at December 31, 2017? a. ¥408,000 b. ¥520,000 c. ¥576,000 d. ¥632,000 Ans: B, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

162.

The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2017: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/18 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/17) Salaries and wages expense Service revenue Supplies Supplies expense

For Instructor Use Only

¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000

4 - 38

Test Bank for Financial Accounting: IFRS Edition, 3e

Multiple Choice 162. (Cont.) What are total current assets at December 31, 2017? a. ¥104,000 b. ¥128,000 c. ¥144,000 d. ¥872,000 Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

163.

The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2017: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/18 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/17) Salaries and wages expense Service revenue Supplies Supplies expense

¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000

What is the book value of the equipment at December 31, 2017? a. ¥952,000 b. ¥840,000 c. ¥728,000 d. ¥680,000 Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

164.

The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2017: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/18 Prepaid insurance (12-month policy) For Instructor Use Only

¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000

Completing the Accounting Cycle Multiple Choice 164.

4 - 39

(Cont.)

Rent expense Retained earnings (1/1/17) Salaries and wages expense Service revenue Supplies Supplies expense

68,000 240,000 128,000 532,000 16,000 24,000

What are total current liabilities at December 31, 2017? a. ¥72,000 b. ¥280,000 c. ¥352,000 d. ¥0 Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

165.

The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2017: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/18 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/17) Salaries and wages expense Service revenue Supplies Supplies expense

¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000

What are total non-current liabilities at December 31, 2017? a. ¥0 b. ¥280,000 c. ¥352,000 d. ¥360,000 Ans: A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 40 166.

Test Bank for Financial Accounting: IFRS Edition, 3e The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2017: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/18 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/17) Salaries and wages expense Service revenue Supplies Supplies expense

¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000

What is total equity and liabilities at December 31, 2017? a. ¥704,000 b. ¥760,000 c. ¥872,000 d. ¥928,000 Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

167.

The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2017: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/18 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/17) Salaries and wages expense Service revenue Supplies Supplies expense

For Instructor Use Only

¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000

Completing the Accounting Cycle Multiple Choice 167.

4 - 41

(Cont.)

The sub-classifications for assets on the company’s classified statement of financial position would include all of the following except a. Current Assets. b. Property, Plant, and Equipment. c. Intangible Assets. d. Long-term Assets. Ans: D, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

168.

The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2017: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/18 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/17) Salaries and wages expense Service revenue Supplies Supplies expense

¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000

The current assets should be listed on Huang’s statement of financial position in the following order a. accounts receivable, prepaid insurance, equipment, cash. b. accounts receivable, prepaid insurance, supplies, cash. c. prepaid insurance, supplies, accounts, receivable, cash. d. equipment, supplies, prepaid insurance, accounts receivable, cash. Ans: C, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

169.

Which statement about long-term investments is not true? a. They will be held for more than one year. b. They are not currently used in the operation of the business. c. They include investments in shares of other companies and land held for future use. d. They can never include cash accounts.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

4 - 42 170.

Test Bank for Financial Accounting: IFRS Edition, 3e What is the order in which assets are generally listed on a classified statement of financial position? a. Current and long-term. b. Intangible assets; long-term investments; property, plant, and equipment; current. c. Long-term investments; property, plant, and equipment; intangible assets; current d. Intangible assets; property, plant, and equipment; long-term investments; current.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

171. These are selected account balances on December 31, 2017. Land (location of the corporation’s office building) Land (held for future use) Office Building Inventory Equipment Office Furniture Accumulated Depreciation

$400,000 600,000 2,900,000 800,000 1,800,000 400,000 1,200,000

What is the total amount of property, plant, and equipment that will appear on the statement of financial position? a. $5,700,000 b. $4,900,000 c. $6,900,000 d. $4,300,000 Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

172.

The following selected account balances appear on the December 31, 2017 statement of financial position of Chen Co. Land (location of the corporation’s office building) Land (held for future use) Office Building Inventory Equipment Office Furniture Accumulated Depreciation

$300,000 450,000 2,400,000 600,000 1,350,000 300,000 900,000

What is the total amount of property, plant, and equipment that will be reported on the statement of financial position? a. $4,500,000 b. $3,900,000 c. $5,400,000 d. $3,450,000 Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

173.

Which classification of assets will appear first in the Statement of Financial Position? a. Current Assets. b. Long-term investments. c. Property,Plant and Equipment. d. Intangible Assets.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 174.

4 - 43

Which classification of assets will appear last in the Statement of Financial Position? a. Intangible Assets. b. Current Assets. c. Long-term investments. d. Property,Plant and Equipment.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

175.

Which account will appear last under the current assets classification on the Statement of Financial Position? a. Accounts Receivable. b. Prepaid Expenses. c. Short-term investments. d. Cash.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

176.

Which of the following classification appears last in the Statement of Financial Position? a. Non-current Liabilities. b. Equity. c. Current Liabilities. d. Reserves.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

177.

Which of the following is in the proper position? a. Equity;Current Liabilities;Non-current Liabilities. b. Equity;Non-current Liabilities;Current Liabilities. c. Current Liabilities;Non-current Liabilities;Equity. d. Non-Current Liabilities; Current Liabilities;Equity.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

178.

The following data (in thousands) is available for Chang Company. Debit Credit Mortgage payable Prepaid expenses Equipment Patents Short-term investments Notes payable in 2018 Cash Accumulated depreciation Accounts payable Notes payable after 2018 Share capital-ordinary Retained earnings Accounts receivable Inventories Total

¥ 2,829 ¥ 2,640 34,500 792 11,070 1,443 8,004 16,965 4,332 1,104 30,000 9,189 5,088 3,768 ¥ 65,862

¥ 65,862

For Instructor Use Only

4 - 44

Test Bank for Financial Accounting: IFRS Edition, 3e

Multiple Choice 178.

(Cont.)

Total assets on the Statement of Financial Position for 2017 are: a. ¥65,862. b. ¥48,897. c. ¥82,827. d. ¥46,257. Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

179.

The following data (in thousands) is available for Chang Company. Debit Credit Mortgage payable Prepaid expenses Equipment Patents Short-term investments Notes payable in 2018 Cash Accumulated depreciation Accounts payable Notes payable after 2018 Share capital-ordinary Retained earnings Accounts receivable Inventories Total

¥ 2,829 ¥ 2,640 34,500 792 11,070 1,443 8,004 16,965 4,332 1,104 30,000 9,189 5,088 3,768 ¥ 65,862

¥ 65,862

The subtotal of the last asset classification on the 2014 Statement of Financial Position is: a. ¥17,535. b. ¥27,930. c. ¥34,500. d. ¥30,570. Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

180.

The following data (in thousands) is available for Chang Company. Debit Credit Mortgage payable Prepaid expenses Equipment Patents Short-term investments Notes payable in 2018 Cash Accumulated depreciation Accounts payable Notes payable after 2018 Share capital-ordinary

¥ 2,829 ¥ 2,640 34,500 792 11,070 1,443 8,004 16,965 4,332 1,104 30,000

For Instructor Use Only

Completing the Accounting Cycle Multiple Choice 180.

4 - 45

(Cont.)

Retained earnings Accounts receivable Inventories Total

9,189 5,088 3,768 ¥ 65,862

¥ 65,862

The subtotal of the first asset classification on the 2017 Statement of Financial Position is: a. ¥30,570 b. ¥27,930 c. ¥792 d. ¥11,070 Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

181.

The following data (in thousands) is available for Chang Company. Debit Credit Mortgage payable Prepaid expenses Equipment Patents Short-term investments Notes payable in 2018 Cash Accumulated depreciation Accounts payable Notes payable after 2018 Share capital-ordinary Retained earnings Accounts receivable Inventories Total

¥ 2,829 ¥ 2,640 34,500 792 11,070 1,443 8,004 16,965 4,332 1,104 30,000 9,189 5,088 3,768 ¥ 65,862

¥ 65,862

The subtotal of the last equity and liabilities classification on the 2017 Statement of Financial Position is: a. ¥5,775. b. ¥3,933. c. ¥39,189. d. ¥4,332. Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

182.

Which of the following is in the proper order? a. Cash; Short-term Investments; Accounts Receivable; Inventories; Supplies. b. Cash; Short-term Investments; Inventories; Accounts Receivable; Supplies. c. Supplies; Inventories; Accounts Receivables; Short-term Investments; Cash. d. Supplies; Accounts Receivables; Inventories; Short-term Investments; Cash.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 46 183.

Test Bank for Financial Accounting: IFRS Edition, 3e Which of the following accounts does not appear in the Statement of Financial Position? a. Retained Earnings b. Unearned Revenues c. Dividends d. Share Capital-Ordinary

Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a

184. 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 made when a business disposes of an asset it previously purchased. d. is made when a company sustains a loss in one period and reverses the effect with a profit in the next period.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a

185. 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.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

186.

The steps in the preparation of a worksheet do not include a. analyzing documentary evidence. b. preparing a trial balance on the worksheet. c. entering the adjustments in the adjustment columns. d. entering adjusted balances in the adjusted trial balance columns.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

187.

Statement of financial position accounts are considered to be a. temporary owner's equity accounts. b. permanent accounts. c. capital accounts. d. nominal accounts.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

188.

Income Summary has a credit balance of $12,000 in J. Wenger Co. after closing revenues and expenses. The entry to close Income Summary is a. credit Income Summary $12,000, debit Retained Earnings $12,000. b. credit Income Summary $12,000, debit Dividends $12,000. c. debit Income Summary $12,000, credit Dividends $12,000. d. debit Income Summary $12,000, credit Retained Earnings $12,000.

Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle 189.

4 - 47

The post-closing trial balance contains only a. income statement accounts. b. statement of financial position accounts. c. statement of financial position and income statement accounts. d. income statement, statement of financial position, and equity statement accounts.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

190.

Which of the following is an optional step in the accounting cycle? a. Adjusting entries b. Closing entries c. Correcting entries d. Reversing entries

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

191.

Which one of the following statements concerning the accounting cycle is incorrect? a. The accounting cycle includes journalizing transactions and posting to ledger accounts. b. The accounting cycle includes only one optional step. c. The steps in the accounting cycle are performed in sequence. d. The steps in the accounting cycle are repeated in each accounting period.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

192.

Correcting entries are made a. at the beginning of an accounting period. b. at the end of an accounting period. c. whenever an error is discovered. d. after closing entries.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

193.

On September 23, Riley Company received a $350 check from Jack Colaw for services to be performed in the future. The bookkeeper for Riley Company incorrectly debited Cash for $350 and credited Accounts Receivable for $350. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should a. debit Cash $350 and credit Unearned Service Revenue $350. b. debit Accounts Receivable $350 and credit Unearned Service Revenue $350. c. debit Accounts Receivable $350 and credit Cash $350. d. debit Accounts Receivable $350 and credit Service Revenue $350.

Ans: B, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

194.

All of the following are equity accounts except a. Retained Earnings. b. Share Capital. c. Investment in Share. d. Dividends.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 48 195.

Test Bank for Financial Accounting: IFRS Edition, 3e Current liabilities a. are obligations that the company is to pay within the forthcoming year. b. are listed in the statement of financial position in order of their expected maturity. c. are listed in the statement of financial position starting with accounts payable. d. should not include long-term debt that is expected to be paid within the next year.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a

196. The use of reversing entries a. is a required step in the accounting cycle. b. changes the amounts reported in the financial statements. c. simplifies the recording of subsequent transactions. d. is required for all adjusting entries.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Answers to Multiple Choice Questions Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70 71 72

d c b a c c d b d c c a b c c a c b b b d d

73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92 93 94

b b a b b c d d c b c c c d b d d b d c a b

95 96. 97. 98. 99. 100. 101 102. 103. 104. 105. 106 107. 108. 109. 110. 111. 112. 113. 114 115 116

d b c d c c c b c b a a a d a b c b b c a a

117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136 137 138

a c b b c c d c c c d c b c b c d c d d b b

139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158 159 160

c a a c c b a b b d a d a d c d b c c b c b

161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180 181 182

b c c c a c d c d d d d d b d c b b d c a c

183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196.

c b a a b d b d b c b c a c

For Instructor Use Only

Completing the Accounting Cycle

4 - 49

BRIEF EXERCISES BE 197 Use the following income statement for the year 2017 for Melges Company to prepare entries to close the revenue and expense accounts for the company. Service revenue Expenses: Salaries and wages expense Rent expense Insurance expense Total expenses Net income (loss)

€85,300 €40,000 25,000 6,500 71,500 €13,800

Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 197

(5 min.)

Service Revenue.................................................................................. Income Summary .....................................................................

85,300

Income Summary ................................................................................. Salaries and Wages Expense ................................................... Rent Expense ........................................................................... Insurance Expense ...................................................................

71,500

85,300

40,000 25,000 6,500

BE 198 The ledger of Hunter Company contains the following balances: Retained Earnings $60,000; Dividends $4,000; Service Revenue $95,000; Salaries and Wages Expense $59,000; and Rent Expense $18,000. Prepare the closing entries at December 31. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 198

(3 min.)

Service Revenue.................................................................................. Income Summary .....................................................................

95,000

Income Summary ................................................................................. Salaries and Wages Expense ................................................... Rent Expense ...........................................................................

77,000

Income Summary ................................................................................. Retained Earnings ....................................................................

18,000

Retained Earnings ............................................................................... Dividends .................................................................................

4,000

For Instructor Use Only

95,000

59,000 18,000

18,000

4,000

4 - 50

Test Bank for Financial Accounting: IFRS Edition, 3e

BE 199 At April 1, 2017, Rhodes Company reported a balance of $22,000 in the Retained Earnings account. Rhodes Company earned revenues of $50,000 and incurred expenses of $35,000 during April 2017. The company paid dividends of $10,000 during the month. (a) Prepare the entries to close Income Summary and the Dividends acccount at April 30, 2017. (b) What is the balance in Retained Earnings on the April 30, 2017 post-closing trial balance? Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 199

(3 min.)

(a) Income Summary .......................................................................... Retained Earnings............................................................

15,000

Retained Earnings......................................................................... Dividends .........................................................................

10,000

15,000

10,000

(b) $22,000 + $15,000 – $10,000 = $27,000 BE 200 Identify which of the following are temporary accounts of San Juan Company. (1) Retained Earnings (2) Dividends (3) Equipment (4) Accumulated Depreciation−Equipment (5) Depreciation Expense Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 200

(3 min.)

(2) Dividends, (5) Depreciation Expense BE 201 Identify which of the following accounts would have balances on a post-closing trial balance. (1) Service Revenue (2) Income Summary (3) Notes Payable (4) Interest Expense (5) Cash Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 201

(3 min.)

(3) Notes Payable, (5) Cash

For Instructor Use Only

Completing the Accounting Cycle

4 - 51

BE 202 At Westglow Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the necessary correcting entry for each of the following. a. A collection on account of ₤500 was debited to Cash €500 and credited to Service Revenue ₤500. b. The purchase of supplies on account for ₤1,270 was recorded as a debit to Supplies for ₤1,720 and a credit to Accounts Payable for ₤1,720. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 202

(4 min.)

a. Service Revenue ............................................................................ Accounts Receivable .......................................................... b Accounts Payable .......................................................................... Supplies .............................................................................

500 500 450 450

BE 203 At Outersanctum Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the necessary correcting entry for each of the following. a. A payment of $5,000 for salaries was recorded as a debit to Supplies Expense and a credit to Cash. b. A purchase of supplies on account for $1,000 was recorded as a debit to Equipment and a credit to Accounts Payable. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 203

(4 min.)

a. Salaries and Wages Expense ........................................................ Supplies Expense .................................................................. b. Supplies ......................................................................................... Equipment .............................................................................

For Instructor Use Only

5,000 5,000 1,000 1,000

4 - 52

Test Bank for Financial Accounting: IFRS Edition, 3e

BE 204 The following accounts were included on Haircut 101’s adjusted trial balance at December 31, 2017: Accounts payable Accounts receivable Cash Share capital-ordinary Retained earnings Dividends Interest expense Note payable, due 8/31/20 Supplies Service revenue Equipment

$ 2,000 7,500 11,000 15,000 25,000 10,000 3,000 60,000 1,000 39,000 5,000

(a) What are total current assets? (b) What are total current liabilities? Ans: N/A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 204

(4 min.)

(a) $7,500 + $11,000 + $1,000 = $19,500 (b) $2,000 BE 205 The following items are taken from the adjusted trial balance of Highlander Company for the month ending July 31, 2017: Accounts payable $ 2,000 Accounts receivable 5,000 Accumulated depreciation – equipment 8,000 Cash 2,200 Share capital-ordinary 22,000 Depreciation expense 2,000 Equipment 54,000 Retained earnings, 7/1/17 30,000 Service revenue 33,000 Supplies 1,200 Prepare the current assets section of Highlander’s classified statement of financial position. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 205

(4 min.)

Current assets: Supplies Accounts receivable Cash Total

$1,200 5,000 2,200 $8,400

For Instructor Use Only

Completing the Accounting Cycle

4 - 53

BE 206 The following information (in thousands) is available for Wang Company for the year ended December 31, 2017: Accounts payable ¥2,700 Accumulated depreciation−equipment 4,000 Share capital-ordinary 5,800 Retained earnings 4,000 Copyrights 4,500 Notes payable (due in 5 years) 7,500 Accounts receivable 1,500 Cash 2,600 Short-term investments 1,000 Equipment 7,500 Investment in long-term bonds 6,900 Instructions Use the above information to prepare a classified statement of financial position for the year ended December 31, 2017. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 206

(10 min.) WANG COMPANY Statement of Financial Position December 31, 2017 Assets

Intangible assets Copyrights Property, plant, and equipment Equipment Less:Accumulated depreciation–equipment Investments Investment in long-term bonds Current assets Accounts receivable Short-term investments Cash Total assets Equity and Liabilities Equity Share capital-ordinary Retained earnings Non-current liabilities Notes payable Current liabilities Accounts payable Total equity and liabilities

For Instructor Use Only

¥ 4,500 ¥ 7,500 4,000

3,500 6,900

1,500 1,000 2,600

¥ 5,800 4,000

5,100 ¥20,000

¥ 9,800

7,500 2,700

10,200 ¥20,000

4 - 54

Test Bank for Financial Accounting: IFRS Edition, 3e

BE 207 The following lettered items represent a classification scheme for a statement of financial position and the numbered items represent accounts found on balance sheets. In the blank next to each account, write the letter indicating to which category it belongs. A. Intangible assets B. Property, plant, and equipment C. Long-term investments D. Current assets

E. Equity F. Non-current liabilities G. Current liabilities H. Not on the statement of financial position

_____ 1.

Accumulated Depreciation

_____ 6.

Inventory

_____ 2.

Retained Earnings

_____ 7.

Patent

_____ 3.

Interest Expense

_____ 8.

Prepaid Insurance

_____ 4.

Income Taxes Payable

_____ 9.

Mortgage Payable

_____ 5.

Dividends

_____ 10.

Investment in long-term bonds

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 207 1. 2. 3. 4. 5.

B. E. H. G. H.

(5 min.) 6. 7. 8. 9. 10.

D. A. D. F. C.

a

BE 208

F. Scot Company prepared the following adjusting entries at year end on December 31, 2016: (a) Interest Expense.......................................................................... 100 Interest Payable .................................................................. 100 (b)

(c)

Interest Receivable ...................................................................... Interest Revenue.................................................................

150

Salaries and Wages Expense ...................................................... Salaries and Wages Payable ..............................................

4,000

150

4,000

In an effort to minimize errors in recording transactions, F. Scot Company utilizes reversing entries. Prepare reversing entries on January 1, 2017. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

Completing the Accounting Cycle a

Solution 208

(a)

(b)

(c)

4 - 55

(5 min.)

Reverse the entry to accrue interest expense. Interest Payable .......................................................................... Interest Expense .................................................................

100

Reverse the entry to accrue interest revenue. Interest Revenue ......................................................................... Interest Receivable .............................................................

150

Reverse the entry to accrue salaries and wages expense. Salaries and Wages Payable....................................................... Salaries and Wages Expense .............................................

4,000

For Instructor Use Only

100

150

4,000

4 - 56

Test Bank for Financial Accounting: IFRS Edition, 3e

EXERCISES Ex. 209 The worksheet for Norman Company has been completed through the adjusted trial balance. You are ready to extend each amount to the appropriate financial statement column. Indicate for each account, the financial statement column to which the account should be extended by placing a check mark () in the appropriate column. ——————————————————————————————————————————— Statement of Income Statement Financial Position Account Title Dr. Cr. Dr. Cr. ——————————————————————————————————————————— (1) Cash ——————————————————————————————————————————— (2) Retained Earnings ——————————————————————————————————————————— (3) Income Taxes Payable ——————————————————————————————————————————— (4) Interest Receivable ——————————————————————————————————————————— (5) Supplies ——————————————————————————————————————————— (6) Accounts Payable ——————————————————————————————————————————— (7) Short-term Investments ——————————————————————————————————————————— (8) Supplies Expense ——————————————————————————————————————————— (9) Unearned Service Revenue ——————————————————————————————————————————— (10) Equipment ——————————————————————————————————————————— (11) Depreciation Expense ——————————————————————————————————————————— (12) Interest Revenue ——————————————————————————————————————————— (13) Salaries and Wages Expense ——————————————————————————————————————————— (14) Dividends ——————————————————————————————————————————— (15) Accum. Deprec.—Equipment ——————————————————————————————————————————— (16) Utilities Expense ——————————————————————————————————————————— (17) Salaries and Wages Payable ——————————————————————————————————————————— (18) Accounts Receivable ——————————————————————————————————————————— (19) Notes Payable ——————————————————————————————————————————— (20) Service Revenue ——————————————————————————————————————————— Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle Solution 209

4 - 57

(10 min.)

Statement of Income Statement Financial Position Account Title Dr. Cr. Dr. Cr. ——————————————————————————————————————————— (1) Cash  ——————————————————————————————————————————— (2) Retained Earnings  ——————————————————————————————————————————— (3) Income Taxes Payable  ——————————————————————————————————————————— (4) Interest Receivable  ——————————————————————————————————————————— (5) Supplies  ——————————————————————————————————————————— (6) Accounts Payable  ——————————————————————————————————————————— (7) Short-term Investments  ——————————————————————————————————————————— (8) Supplies Expense  ——————————————————————————————————————————— (9) Unearned Service Revenue  ——————————————————————————————————————————— (10) Equipment  ——————————————————————————————————————————— (11) Depreciation Expense  ——————————————————————————————————————————— (12) Interest Revenue  ——————————————————————————————————————————— (13) Salaries and Wages Expense  ——————————————————————————————————————————— (14) Dividends  ——————————————————————————————————————————— (15) Accum. Deprec.—Equipment  ——————————————————————————————————————————— (16) Utilities Expense  ——————————————————————————————————————————— (17) Salaries and Wages Payable  ——————————————————————————————————————————— (18) Accounts Receivable  ——————————————————————————————————————————— (19) Notes Payable  ——————————————————————————————————————————— (20) Service Revenue  ——————————————————————————————————————————— Ex. 210 Indicate the worksheet column (income statement Dr., statement of financial position Cr., etc.) to which each of the following accounts would be extended. Account Worksheet Column a. Accounts Receivable ________________ b. Accumulated Depreciation ________________ c. Service Revenue ________________

For Instructor Use Only

4 - 58 d. e. f.

Test Bank for Financial Accounting: IFRS Edition, 3e Utilities Expense Dividends Retained Earnings

________________ ________________ ________________

Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 210 a. b. c. d. e. f.

(5 min.)

Statement of financial position Statement of financial position Income statement Income statement Statement of financial position Statement of financial position

Dr. Cr. Cr. Dr. Dr. Cr.

Ex. 211 The worksheet for Boone Mailing Center appears below. Using the adjustment data below, complete the worksheet. Add any accounts that are necessary. Adjustment data: (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 $4. Salaries and wages expense incurred at August 31 but not yet paid amounted to $12.

For Instructor Use Only

Completing the Accounting Cycle Ex. 211

4 - 59

(Cont.) BOONE MAILING CENTER Worksheet For the Month Ended August 31, 2017

Account Titles

Trial Balance

Adjustments

Adjusted Trial Balance

Debit

Debit

Debit

Cash

20

Accounts Receivable

12

Prepaid Rent

8

Supplies

10

Equipment

50

Accum. Depreciation— Equipment Accounts Payable

Credit

Credit

Debit

Credit

Statement of Financial Position Debit

Credit

10 20

Share Capital-Ordinary Dividends

Credit

Income Statement

15 2

Service Revenue

77

Depreciation Expense

6

Rent Expense Retained Earnings Salaries/Wages Expense

4 20

Totals

132

10 132

Supplies Expense Salaries/Wages Payable Totals Net Income Totals Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

4 - 60

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 211

(15 min.) BOONE MAILING CENTER Worksheet For the Month Ended August 31, 2017

Account Titles

Trial Balance

Adjustments

Adjusted Trial Balance

Debit

Debit

Debit

Credit

Credit

Credit

Income Statement Debit

Credit

Statement of Financial Position Debit

Cash

20

20

20

Accounts Receivable

12

12

12

Prepaid Rent

8

(a) 2

6

6

Supplies

10

(c) 6

4

4

Equipment

50

50

50

Accum. Depreciation— Equipment Accounts Payable

10 20

Share Capital-Ordinary Dividends

15

6

Rent Expense Retained Earnings Salaries/Wages Expense

4 20

Totals

132

20

20 15 2

77 (b) 8

14

(a) 2

6

10

77 14 6

10

10

(d) 12

32

32

(c) 6

6

6

132

Salaries/Wages Payable Totals

18

2 77

Depreciation Expense

18 15

2

Service Revenue

Supplies Expense

(b) 8

Credit

(d) 12 28

28

12 152

152

12 58

Net Income

19

Totals

77

For Instructor Use Only

77

94

75 19

77

94

94

Completing the Accounting Cycle

4 - 61

Ex. 212 The account balances (in thousands) appearing on the trial balance (below) were taken from the general ledger of Yang Bakery at October 31. Additional information (in thousands) for the month of October which has not yet been recorded in the accounts is as follows: (a) A physical count of supplies indicates ¥500 on hand at October 31. (b) The amount of insurance that expired in the month of October was ¥200. (c) Depreciation on equipment for October was ¥400. (d) Salaries owed for the month of October was ¥1,100 but will not be paid until November. Instructions Using the above information, complete the worksheet on the following page for Yang Bakery for the month of October. YANG BAKERY Worksheet For the Month Ended October 31, 2017 Trial Balance

Adjustments

Adjusted Trial Balance

Account Titles

Debit

Debit

Debit

Cash

1,000

Supplies

1,100

Prepaid Insurance

2,200

Equipment

24,000

Credit

Accum. Depreciation— Equipment Accounts Payable

4,500

Notes Payable

4,000

Share Capital-Ordinary

5,300

Credit

Debit

Credit

Statement of Financial Position Debit Credit

2,400

Retained Earnings Dividends Service Revenue

2,400

Utilities Expense

400

Totals

Credit

Income Statement

10,000 4,900 31,100

31,100

Supplies Expense Insurance Expense Depreciation Expense Salaries/Wages Expense Salaries/Wages Payable Totals Net Income Totals Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

4 - 62

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 212 (15 min.) YANG BAKERY Worksheet For the Month Ended October 31, 2017 Trial Balance Account Titles

Debit

Cash

1,000

Supplies

1,100

Prepaid Insurance

2,200

Equipment

24,000

Adjusted Trial Balance Debit Credit

Adjustments

Credit

Debit

Credit

Income Statement Debit

Credit

Statement of Financial Position Debit

1,000

1,000

(a) 600

500

500

(b) 200

2,000

2,000

24,000

24,000

Credit

Accum. Depreciation— Equipment Accounts Payable

4,500

4,900

4,900

2,400

2,400

2,400

Notes Payable

4,000

4,000

4,000

Share Capital-Ordinary

5,300

5,300

5,300

Retained Earnings Dividends Revenue

2,400

Utilities Expense

400

Totals

(c) 400

10,000

10,000

4,900 31,100

10,000

2,400

2,400 4,900

4,900

400

400

31,100

Supplies Expense

(a) 600

600

600

Insurance Expense

(b) 200

200

200

Depreciation Expense

(c) 400

400

400

Salaries / Wages Expense

(d) 1,100

1,100

1,100

Salaries / Wages Payable Totals

(d) 1,100 2,300

2,300

1,100 32,600

32,600

1,100 2,700

Net Income

2,200

Totals

4,900

4,900 4,900

The adjustments columns of the worksheet for Leonardo Company are shown below.

Accounts Receivable Prepaid Insurance Accumulated Depreciation Salaries and Wages Payable Service Revenue Salaries and Wages Expense Insurance Expense Depreciation Expense

Adjustments Debit Credit 800 600 700 500 800 500 600 700 2,600

2,600

For Instructor Use Only

27,700 2,200

Ex. 213

Account Titles

29,900 29,900

29,900

Completing the Accounting Cycle Ex. 213

4 - 63

(Cont.)

Instructions (a) Prepare the adjusting entries. (b) Assuming the adjusted trial balance amount for each account is normal, indicate the financial statement column to which each balance should be extended. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 213

(10 min.)

(a) Accounts Receivable ................................................................ Service Revenue ................................................................

800

Insurance Expense ................................................................... Prepaid Insurance...............................................................

600

Depreciation Expense .............................................................. Accumulated Depreciation ..................................................

700

Salaries and Wages Expense ................................................... Salaries and Wages Payable ..............................................

500

800 600 700

(b) Statement of Financial Position Dr. Cr. X X X X

Income Statement Dr. Cr. Accounts Receivable Prepaid Insurance Accum. Depreciation Salaries and Wages Payable Service Revenue Salaries and Wages Expense Insurance Expense Depreciation Expense

X X X X

Ex. 214 Selected worksheet data for East Carolina Company are presented below.

Account Titles Accounts Receivable Prepaid Rent Supplies Accumulated Depreciation Salaries and Wages Payable Service Revenue Rent Expense Depreciation Expense Supplies Expense Salaries and Wages Expense

Trial Balance Dr. Cr. ? 24,000 7,000 12,000 ? 86,000

?

Adjusted Trial Balance Dr. Cr. 31,000 20,000 ? ? 6,000 99,000 ? 9,000 5,000 49,000

For Instructor Use Only

500

4 - 64

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 214

(Cont.)

Instructions (a) Fill in the missing amounts. (b) Prepare the adjusting entries that were made. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 214 (a)

(10 min.)

Accounts Receivable—$18,000 ($31,000 – $13,000). Supplies—$2,000 ($7,000 – $5,000). Accumulated Depreciation—$21,000 ($12,000 + $9,000). Salaries and Wages Payable—$0 No liability recorded until adjustments are made. Rent Expense—$4,000 ($24,000 – $20,000). Salaries and Wages Expense—$43,000 ($49,000 – $6,000).

(b) Accounts Receivable ................................................................ Service Revenue.................................................................

13,000

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

4,000

Supplies Expense ..................................................................... Supplies ..............................................................................

5,000

Depreciation Expense ............................................................... Accumulated Depreciation−Equipment ...............................

9,000

Salaries and Wages Expense ................................................... Salaries and Wages Payable ..............................................

6,000

13,000 4,000 5,000 9,000 6,000

Ex. 215 These financial statement items (in thousands) are for Chen Company at year-end, July 31, 2017. Salaries and wages payable Salaries and wages expense Utilities expense Equipment Accounts payable Service revenue Rent revenue Share capital-ordinary

¥ 4,580 45,700 19,100 24,000 4,100 58,100 6,500 16,200

Note payable (Non-Current) Cash Accounts receivable Accumulated depreciation−equip. Dividends Depreciation expense Retained earnings (8/1/2016)

¥ 3,300 22,200 9,780 6,000 4,000 4,000 30,000

Instructions (a) Prepare an income statement and a retained earnings statement for the year. (b) Prepare a classified statement of financial position at July 31, 2017. Ans: N/A, LO: 1,6, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

Completing the Accounting Cycle Solution 215

4 - 65

(15 min.)

(a)

CHEN COMPANY Income Statement For the Year Ended July 31, 2017 ——————————————————————————————————————————— Revenues Service revenue .......................................................................... ¥58,100 Rent revenue............................................................................... 6,500 Total revenues ..................................................................... ¥64,600 Expenses Salaries and wages expense ....................................................... 45,700 Utilities expense .......................................................................... 19,100 Depreciation expense .................................................................. 4,000 Total expense ...................................................................... 68,800 Net loss ................................................................................................ ¥ (4,200) CHEN COMPANY Retained Earnings Statement For the Year Ended July 31, 2017 ——————————————————————————————————————————— Retained Earnings, August 1, 2016 ...................................................... ¥30,000 Less: Net loss ..................................................................................... ¥4,200 Dividends .................................................................................... 4,000 8,200 Retained Earnings, July 31, 2017 ........................................................ ¥21,800 (b)

CHEN COMPANY Statement of Financial Position July 31, 2017 ——————————————————————————————————————————— Assets Property, plant, and equipment Equipment ................................................................................... ¥24,000 Less: Accumulated depreciation−equip. ...................................... 6,000 ¥18,000 Current assets Accounts receivable .................................................................... 9,780 Cash ............................................................................................ 22,200 31,980 Total assets .......................................................................... ¥49,980 Equity and Liabilities Equity Share capital-ordinary………………………………………………… Retained earnings ....................................................................... Non-current liabilities Note payable ............................................................................... Current liabilities Accounts payable ........................................................................ Salaries and wages payable .......................................................... Total equity and liabilities........................................................

For Instructor Use Only

¥16,200 21,800

¥37,000 3,300

¥4,100 4,580

8,680 ¥49,980

4 - 66

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 216 Latitudes Company had the following adjusted trial balance. LATITUDES COMPANY Adjusted Trial Balance For the Month Ended June 30, 2017 Account Titles Cash Accounts Receivable Supplies Accounts Payable Unearned Service Revenue Share Capital-Ordinary Retained Earnings Dividends Service Revenue Salaries and Wages Expense Miscellaneous Expense Supplies Expense Salaries and Wages Payable

Debits $ 3,200 3,900 500

Credits

$ 1,800 200 4,000 800 300 5,100 1,800 300 2,300 $12,300

400 $12,300

(a) Prepare closing entries at June 30, 2017. (b) Prepare a post-closing trial balance. Ans: N/A, LO: 2,3 Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 216

(8–10 min.)

(a) Service Revenue .................................................................................. Income Summary......................................................................

5,100 5,100

Income Summary ................................................................................. Supplies Expense ..................................................................... Miscellaneous Expense ............................................................ Salaries and Wages Expense ...................................................

4,400

Income Summary ................................................................................. Retained Earnings ....................................................................

700

Retained Earnings ................................................................................ Dividends ..................................................................................

300

For Instructor Use Only

2,300 300 1,800

700

300

Completing the Accounting Cycle Solution 216

(Cont.)

(b) LATITUDES COMPANY Post-closing Trial Balance For the Month Ended June 30, 2017 Account Titles Cash Accounts Receivable Supplies Accounts Payable Unearned Service Revenue Share Capital-Ordinary Retained Earnings Dividends Service Revenue Salaries and Wages Expense Miscellaneous Expense Supplies Expense Salaries and Wages Payable

Debits $ 3,200 3,900 500

Credits

$ 1,800 200 4,000 1,200

$7,600

400 $7,600

Ex. 217 Vanguard Company had the following adjusted trial balance at December 31, 2017. VANGUARD COMPANY Adjusted Trial Balance For the Year Ended December 31, 2017 Account Titles Cash Accounts Receivable Equipment Accounts Payable Accumulated Depreciation−Equip. Share Capital - Ordinary Retained Earnings Dividends Service Revenue Unearned Rent Revenue Rent Revenue Salaries and Wages Expense Depreciation Expense Supplies Expense Utilities Expense

Debits ₤ 12,800 8,800 15,900

Credits

₤ 4,400 7,400 17,000 25,500 16,000 68,000 1,800 6,500 55,700 6,000 200 14,900 ₤130,300

For Instructor Use Only

₤130,300

4 - 67

4 - 68

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 217

(Cont.)

Instructions (a) Journalize the entries required to close the accounts. (b) Prepare a retained earnings statement for the year ended December 31, 2017. Ans: N/A, LO: 2,6 Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 217

(b)

(10 min.)

(a) Service Revenue ...................................................................... Rent Revenue ........................................................................... Income Summary ..........................................................

68,000 6,500

Income Summary...................................................................... Supplies Expense ......................................................... Depreciation Expense ................................................... Salaries and Wages Expense ....................................... Utilities Expense............................................................

76,800

Retained Earnings .................................................................... Income Summary ..........................................................

2,300

Retained Earnings .................................................................... Dividends ......................................................................

16,000

74,500

200 6,000 55,700 14,900

2,300

16,000

VANGUARD COMPANY Retained Earnings Statement For the Year Ended December 31, 2017 Retained Earnings, January 1 Less: Net loss Less: Dividends Retained Earnings, December 31

For Instructor Use Only

₤25,500 2,300 23,200 16,000 ₤ 7,200

Completing the Accounting Cycle

4 - 69

Ex. 218 At March 31, account balances after adjustments for Blowing Rock Stage Theatre are as follows: Accounts Cash Supplies Equipment Accumulated Depreciation—Equipment Accounts Payable Share Capital-Ordinary Retained Earnings Dividends Ticket Revenue Service Revenue Advertising Expense Supplies Expense Depreciation Expense Miscellaneous Expense Rent Expense Salaries and Wages Expense Utilities Expense

Account Balances (After Adjustment) $ 6,000 4,000 50,000 12,000 5,000 4,000 16,000 12,000 65,000 51,000 12,000 19,000 4,000 16,000 12,000 20,000 5,000

Instructions Prepare the closing journal entries for Blowing Rock Stage Theatre. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 218

(10 min.)

Mar. 31 Ticket Revenue .................................................................... Service Revenue .................................................................. Income Summary................................................... (To close revenue accounts)

65,000 51,000

31 Income Summary ................................................................. Advertising Expense .................................................. Supplies Expense ...................................................... Depreciation Expense ................................................ Miscellaneous Expense ............................................. Rent Expense ............................................................ Salaries and Wages Expense .................................... Utilities Expense ........................................................ (To close expense accounts)

88,000

31 Income Summary ................................................................. Retained Earnings ..................................................... (To transfer net income to retained earnings)

28,000

For Instructor Use Only

116,000

12,000 19,000 4,000 16,000 12,000 20,000 5,000

28,000

4 - 70

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 218

(Cont.)

31 Retained Earnings ................................................................ Dividends ................................................................... (To close dividends to retained earnings)

12,000 12,000

Ex. 219 Presented below is an adjusted trial balance for Cowell Company, at December 31, 2017. Cash Accounts receivable Prepaid insurance Equipment Depreciation expense Dividends Advertising expense Rent expense Salaries and wages expense Insurance expense

€10,700 20,000 15,000 35,000 7,000 1,500 1,400 800 5,000 1,600 €98,000

Accounts payable Notes payable Accumulated depreciation— equipment Service revenue Retained earnings Unearned service revenue Share capital-ordinary

€10,000 9,000 14,000 30,000 12,000 11,000 12,000 €98,000

Instructions (a) Prepare closing entries for December 31, 2017. (b) Determine the balance in the retained earnings account after the entries have been posted. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 219

(10 min.)

(a) Dec. 31 Service Revenue................................................................. Income Summary ....................................................... (To close revenue account)

30,000

31 Income Summary ................................................................ Depreciation Expense ................................................ Advertising Expense................................................... Rent Expense............................................................. Salaries and Wages Expense..................................... Insurance Expense..................................................... (To close expense accounts)

15,800

For Instructor Use Only

30,000

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

Completing the Accounting Cycle Solution 219

4 - 71

(Cont.)

31 Income Summary................................................................ Retained Earnings ..................................................... (To close net income to retained earnings)

14,200

31 Retained Earnings .............................................................. Dividends ................................................................... (To close dividends to retained earnings)

1,500

(b)

14,200

1,500

Retained Earnings 1,500 Bal.

12,000 14,200 24,700

Ex. 220 The adjusted account balances of the Quick-E Delivery Service at October 31 are as follows: Accounts Account Balances Cash $16,000 Accounts Receivable 15,000 Supplies 4,000 Prepaid Insurance 8,000 Equipment 300,000 Accumulated Depreciation— Equipment 120,000 Accounts Payable 19,000 Retained Earnings 105,000 Share Capital-Ordinary 100,000

Accounts Account Balances Service Revenue $90,000 Interest Revenue 8,000 Depreciation Expense 27,000 Insurance Expense 6,000 Salaries and Wages Expense 30,000 Supplies Expense 9,000 Utilities Expense 12,000 Dividends 15,000

Instructions Prepare the end of the period closing entries for the Quick-E Delivery Service. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 220 Oct 31

(10 min.)

Service Revenue ................................................................ Interest Revenue ................................................................ Income Summary ....................................................... (To close revenue accounts)

For Instructor Use Only

90,000 8,000 98,000

4 - 72

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 220 31

31

31

(Cont.)

Income Summary ................................................................ Depreciation Expense ................................................ Insurance Expense..................................................... Salaries and Wages Expense..................................... Supplies Expense....................................................... Utilities Expense ......................................................... (To close expense accounts)

84,000

Income Summary ................................................................ Retained Earnings ...................................................... (To close net income to retained earnings)

14,000

Retained Earnings .............................................................. Dividends ................................................................... (To close dividends to retained earnings)

15,000

27,000 6,000 30,000 9,000 12,000

14,000

15,000

Ex. 221 The income statement of Hall Marine Repairs is as follows: HALL MARINE REPAIRS Income Statement For the Month Ended April 30, 2017 Revenue Service Revenue ......................................................................... Expenses Salaries and Wages Expense ...................................................... Supplies Expense ........................................................................ Insurance Expense ...................................................................... Utilities Expense .......................................................................... Depreciation Expense.................................................................. Total Expenses..................................................................... Net Income ...........................................................................................

₤8,500 ₤3,900 1,050 600 400 350 6,300 ₤2,200

On April 1, the retained earnings account had a balance of ₤12,900. During April, the company paid ₤3,000 in dividends. Instructions (a) Prepare closing entries at April 30. (b) Prepare a retained earnings statement for the month of April. Ans: N/A, LO: 2,6 Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

Completing the Accounting Cycle Solution 221

4 - 73

(10 min.)

(a) Service Revenue .......................................................................... Income Summary .................................................................

8,500

Income Summary.......................................................................... Salaries and Wages Expense .............................................. Depreciation Expense .......................................................... Utilities Expense .................................................................. Insurance Expense .............................................................. Supplies Expense ................................................................

6,300

Income Summary.......................................................................... Retained Earnings................................................................

2,200

Retained Earnings ........................................................................ Dividends .............................................................................

3,000

(b)

8,500

3,900 350 400 600 1,050

2,200

3,000

HALL MARINE REPAIRS Retained Earnings Statement For the Month Ended April 30, 2017 ₤12,900 2,200 15,100 3,000 ₤12,100

Retained Earnings, April 1 Add: Net Income Less: Dividends Retained Earnings, April 30 Ex. 222

Identify which of the following accounts would appear in a post-closing trial balance. Accumulated Depreciation−Equip. Dividends Depreciation Expense Service Revenue Interest Payable Equipment Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 222

(3 min.)

The following accounts would appear in a post-closing trial balance: Accumulated Depreciation−Equip. Interest Payable Equipment

For Instructor Use Only

4 - 74

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 223 The trial balances of Barola Company follow with the accounts arranged in alphabetic order. Analyze the data and prepare (a) the adjusting entries and (b) the closing entries made by Barola Company. Trial Balances Unadjusted Adjusted Post-Closing Accounts Payable $10,000 $10,000 $10,000 Accounts Receivable 2,200 3,200 3,200 Accumulated Depreciation−Equip. 13,000 17,000 17,000 Cash 60,000 60,000 60,000 Depreciation Expense 0 4,000 0 Dividends 11,000 11,000 0 Equipment 75,000 75,000 75,000 Insurance Expense 0 16,300 0 Prepaid Insurance 17,800 1,500 1,500 Prepaid Rent 15,000 11,000 11,000 Retained Earnings 52,200 52,200 72,400 Rent Expense 0 4,000 0 Salaries and Wages Expense 38,000 45,000 0 Salaries and Wages Payable 0 7,000 7,000 Service Revenue 96,000 105,000 0 Share Capital-Ordinary 30,000 30,000 30,000 Supplies 3,200 700 700 Supplies Expense 2,000 4,500 0 Unearned Service Revenue 23,000 15,000 15,000 Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 223 (a)

(20 min.)

Adjusting Entries Depreciation Expense.................................................................. Accumulated Depreciation−Equip. ......................................

4,000 4,000

Insurance Expense ...................................................................... Prepaid Insurance ...............................................................

16,300

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

8,000

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

1,000

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

4,000

Supplies Expense ........................................................................ Supplies ..............................................................................

2,500

Salaries and Wages Expense ...................................................... Salaries and Wages Payable ..............................................

7,000

For Instructor Use Only

16,300 8,000 1,000 4,000 2,500 7,000

Completing the Accounting Cycle Solution 223 (b)

4 - 75

(Cont.)

Closing Entries Service Revenue ......................................................................... Income Summary................................................................

105,000 105,000

Income Summary ........................................................................ Insurance Expense ............................................................. Depreciation Expense......................................................... Rent Expense ..................................................................... Supplies Expense ............................................................... Salaries and Wages Expense .............................................

73,800

Income Summary ........................................................................ Retained Earnings ..............................................................

31,200

Retained Earnings ....................................................................... Dividends ...........................................................................

11,000

16,300 4,000 4,000 4,500 45,000 31,200 11,000

Ex. 224 Indicate the proper sequence of the steps in the accounting cycle by placing numbers 1-8 in the blank spaces. ____

a.

Analyze business transactions.

____

b.

Journalize and post adjusting entries.

____

c.

Journalize and post closing entries.

____

d.

Journalize the transactions

____

e.

Prepare a post-closing trial balance.

____

f.

Prepare a worksheet.

____

g.

Prepare financial statements.

____

h.

Post to ledger accounts.

Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 224 a. b. c. d.

1 6 7 2

(4 min.) e. f. g. h.

8 4 5 3

For Instructor Use Only

4 - 76

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 225 Ridge Properties discovered the following errors made in January 2017. Prepare the necessary correcting entry for each of the following. a. A collection on account of €570 from a customer was credited to Accounts Receivable €750 and debited to Cash €750. b. The purchase of supplies on account for €250 was recorded as a debit to Equipment €250 and a credit to Accounts Payable €250. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 225

(5 min.)

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

180

b. Supplies ......................................................................................... Equipment .............................................................................

250

180

250

Ex. 226 An examination of the accounts of Zin Company for the month of June revealed the following errors after the transactions were journalized and posted. Prepare correcting entries for each of the above assuming the erroneous entries are not reversed. 1. A collection of $750 from R. Joseph, a customer on account, was debited to Cash $750 and credited to Service Revenue, $750. 2. A payment for Advertising Expense costing $620 was debited to Utilities Expense, $260 and credited to Cash $260. 3. A bill for $710 for Supplies purchased on account was debited to Equipment, $170 and credited to Accounts Payable $170. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 226

(10 min.)

1. Service Revenue .................................................................................. Accounts Receivable ................................................................... (To correct error in recording collection of accounts receivable)

750

2. Advertising Expense ............................................................................. Utilities Expense .......................................................................... Cash ............................................................................................ (To correct errors in recording advertising expense)

620

3. Supplies ............................................................................................... Equipment ................................................................................... Accounts Payable ........................................................................ (To correct error in recording supplies)

710

For Instructor Use Only

750

260 360

170 540

Completing the Accounting Cycle

4 - 77

Ex. 227 An examination of the accounts of Freeman Company for the month of October revealed the following errors after the transactions were journalized and posted. Prepare correcting entries for each of the above assuming the erroneous entries are not reversed. (a)

A check for $700 was issued for goods previously purchased on account. The bookkeeper debited Accounts Receivable and credited Cash for $700.

(b)

A check for $580 was received as payment on account. The bookkeeper debited Accounts Payable for $850 and credited Accounts Receivable for $850.

(c)

When making the entry to record the year's depreciation expense, the bookkeeper debited Accumulated Depreciation for $1,500 and credited Cash for $1,500.

(d)

When accruing interest on a note payable, the bookkeeper debited Interest Receivable for $200 and credited Interest Payable for $200.

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 227 (a) (b)

(c)

(d)

(5 min.)

Accounts Payable........................................................................ Accounts Receivable ..........................................................

700

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

580 270

Cash ........................................................................................... Depreciation Expense ................................................................. Accumulated Depreciation ..................................................

1,500 1,500

Interest Expense ......................................................................... Interest Receivable .............................................................

200

700

850

3,000 200

Ex. 228 Betty Wright, CPA, was asked by the controller of Gore Company to review the accounting records before financial statements are prepared. Betty reviewed the records and found three errors. 1. Cash paid on accounts payable for $910 was recorded as a debit to Accounts Payable $190 and a credit to Cash $190. 2. The purchase of supplies on account for $500 was debited to Equipment $500 and credited to Accounts Payable $500. 3. The company paid dividends $1,500. The bookkeeper debited Accounts Receivable for $150 and credited Cash $150.

For Instructor Use Only

4 - 78

Test Bank for Financial Accounting: IFRS Edition, 3e

Ex. 228

(Cont.)

Instructions Prepare an analysis of each error showing the (a) incorrect entry. (b) correct entry. (c) correcting entry. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 228 1. (a)

(b)

(c)

2. (a)

(b)

(c)

3. (a)

(b)

(c)

(15 min.)

Incorrect Entry Accounts Payable ............................................................ Cash ........................................................................

190

Correct Entry Accounts Payable ............................................................ Cash ........................................................................

910

Correcting Entry Accounts Payable ............................................................ Cash ........................................................................

720

Incorrect Entry Equipment ........................................................................ Accounts Payable ....................................................

500

Correct Entry Supplies ........................................................................... Accounts Payable ....................................................

500

Correcting Entry Supplies ........................................................................... Equipment ...............................................................

500

Incorrect Entry Accounts Receivable........................................................ Cash ........................................................................

150

Correct Entry Dividends ......................................................................... Cash ........................................................................

1,500

Correcting Entry Dividends ......................................................................... Accounts Receivable ............................................... Cash ........................................................................

For Instructor Use Only

190

910

720

500

500

500

150

1,500 1,500 150 1,350

Completing the Accounting Cycle

4 - 79

Ex. 229 Harken Company discovered the following errors made in January 2017. 1. A payment of Salaries and Wages Expense of $600 was debited to Equipment and credited to Cash, both for $600. 2. A collection of $2,000 from a client on account was debited to Cash $200 and credited to Service Revenue $200. 3. The purchase of equipment on account for $680 was debited to Equipment $860 and credited to Accounts Payable $860. Instructions Correct the errors by reversing the incorrect entry and preparing the correct entry. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 229 1.

2.

3.

(10 min.)

Cash ...................................................................................... Equipment.........................................................................

600

Salaries and Wages Expense ............................................... Cash .................................................................................

600

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

200

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

2,000

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

860

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

680

600 600 200 2,000 860 680

Ex. 230 The following items (in thousands) were taken from the financial statements of Zhao Company. (All dollars are in thousands.) Mortgage payable Prepaid insurance Equipment Long-term investments Short-term investments Notes payable (due in 2017) Cash

¥2,443 880 13,500 764 3,690 981 3,168

Accumulated depreciation−equip. 3,655 Accounts payable 1,444 Notes payable (due after 2017) 368 Share capital-ordinary 6,000 Accounts receivable 1,696 Inventories 1,756 Retained earnings 10,563

For Instructor Use Only

4 - 80 Ex. 230

Test Bank for Financial Accounting: IFRS Edition, 3e (Cont.)

Instructions Prepare a classified statement of financial position in good form as of December 31, 2017. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 230

(10 min.)

ZHAO COMPANY Statement of Financial Position December 31, 2017 (in thousands) ——————————————————————————————————————————— Assets Property, plant, and equipment Equipment ................................................................................... ¥13,500 Less: Accumulated depreciation−equip........................................ (3,655) ¥ 9,845 Long-term investments ......................................................................... 764 Current assets Prepaid insurance........................................................................ 880 Inventories ................................................................................... 1,756 Accounts receivable..................................................................... 1,696 Short-term investments................................................................ 3,690 Cash ............................................................................................ 3,168 11,190 Total assets .......................................................................... ¥21,799 Equity and Liabilities Equity Share capital-ordinary.................................................................. ¥6,000 Retained earnings ....................................................................... 10,563 ¥16,563 Non-current liabilities Mortgage payable ........................................................................ 2,443 Notes payable (due after 2018) ................................................... 368 2,811 Current liabilities Notes payable (due in 2018) ........................................................ 981 Accounts payable ........................................................................ 1,444 2,425 Total equity and liabilities ..................................................... ¥21,799 Ex. 231 Compute the dollar amount of current assets based on the following account balances. Accounts Payable Accounts Receivable Equipment Short-term Investments

$11,000 16,000 93,000 20,000

Accumulated Depreciation−Equip. Cash Prepaid Rent

27,000 24,000 7,000

Ans: N/A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle Solution 231

4 - 81

(4 min.)

Current assets amount = $67,000 ($16,000 + $24,000 + $7,000 + $20,000) Ex. 232 The financial statement columns of the worksheet for The Coffee Pot at December 31, 2017, are as follows: THE COFFEE POT Worksheet For the Year Ended December 31, 2017 Statement of Income Statement Financial Position Accounts Debit Credit Debit Credit Cash 10,000 Accounts Receivable 7,000 Supplies 4,000 Prepaid Insurance 6,000 Equipment 219,000 Accumulated Depreciation—Equipment 29,000 Accounts Payable 19,000 Note Payable 60,000 Salaries and Wages Payable 13,000 Share Capital-Ordinary 50,000 Retained Earnings 62,000 Dividends 9,000 Service Revenue 123,000 Advertising Expense 21,000 Depreciation Expense 12,000 Insurance Expense 3,000 Rent Expense 17,000 Salaries and Wages Expense 42,000 Supplies Expense 6,000 Totals 101,000 123,000 255,000 233,000 Net Income 22,000 22,000 123,000 123,000 255,000 255,000 Instructions (a) Calculate the retained earnings balance that would appear on a Statement of financial position at December 31, 2017. (b) Prepare a classified statement of financial position for The Coffee Pot at December 31, 2017 assuming the note payable is a long-term liability. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 232 (a)

(15 min.)

Retained Earnings, January 1 Add: Net Income Less: Dividends Retained Earnings, December 31

€62,000 22,000 84,000 9,000 €75,000

For Instructor Use Only

4 - 82

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 232

(Cont.)

(b)

THE COFFEE POT Statement of Financial Position December 31, 2017 ——————————————————————————————————————————— Assets Property, plant, and equipment Equipment ............................................................................ €219,000 Less: Accumulated depreciation—equipment ....................... 29,000 Current assets Prepaid insurance ................................................................ 6,000 Supplies ............................................................................... 4,000 Accounts receivable ............................................................. 7,000 Cash..................................................................................... 10,000 Total assets ................................................................... Equity and Liabilities Equity Share capital-ordinary .......................................................... Retained earnings ................................................................ Non-current liabilities Note payable ........................................................................ Current liabilities Accounts payable ................................................................. Salaries and wages payable ................................................. Total equity and liabilities ..............................................

For Instructor Use Only

€50,000 75,000

€190,000

27,000 €217,000

€125,000 60,000

19,000 13,000

32,000 €217,000

Completing the Accounting Cycle

4 - 83

Ex. 233 The financial statement columns of the worksheet for Dr. Gumbo’s Catering Company as of December 31, 2017 are as follows: DR. GUMBO’S CATERING COMPANY Worksheet For the Year Ended December 31, 2017

Accounts Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation−Equip. Copyrights Accounts Payable Bonds Payable (due 2021) Share Capital-Ordinary Retained Earnings Dividends Service Revenue Salaries and Wages Expense Depreciation Expense Insurance Expense Income Tax Expense Totals Net Income

Income Statement Debit Credit

Statement of Financial Position Debit Credit 15,000 6,000 4,500 7,000 60,000 4,800 7,500 23,500 18,000 25,000 26,000 4,200

25,400 5,200 4,800 5,000 3,500 18,500 6,900 25,400

25,400

104,200

25,400

104,200

97,300 6,900 104,200

Instructions Prepare a classified statement of financial position for Dr. Gumbo’s Catering Company. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 84

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 233

(15 min.) DR. GUMBO’S CATERING COMPANY Statement of Financial Position December 31, 2017

Assets Current assets Prepaid insurance........................................................................ Supplies....................................................................................... Accounts receivable..................................................................... Cash ...........................................................................................

$ 7,000 4,500 6,000 15,000 32,500

Intangible assets Copyrights ................................................................................... Property, Plant, and Equipment Equipment ................................................................................... Less: Accumulated depreciation—equipment .............................. Total assets ........................................................................ Equity and Liabilities Equity Share capital-ordinary.................................................................. Retained earnings ....................................................................... Non-current liabilities Bonds payable ............................................................................. Current liabilities Accounts payable ........................................................................ Total equity and liabilities ....................................................

7,500 $60,000 4,800

$25,000 28,700*

55,200 $95,200

$53,700 18,000 23,500 $95,200

* Retained earnings = $28,700 ($26,000 + $6,900 – $4,200). Ex.234 The following are the major statement of financial position classification. Intangible assets (IA) Property, plant, and equipment (PPE) Long-term investments (LTI) Current assets (CA)

Equity (E) Non-current liabilities (NCL) Current Liabilities (CL)

Instructions Classify each of the following accounts taken from Rivera Company 's statement of financial position. _____ Accounts receivable _____ Building _____ Copyrights _____ Accounts payable _____ Interest payable _____ Retained earnings

_____ Mortgage payable _____ Share capital-ordinary _____ Accumulated depreciation _____ Land held for investment _____ Bonds payable _____ Inventory

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Completing the Accounting Cycle Solution 234 CA PPE IA CL CL E

4 - 85

(5 min.)

Accounts receivable Building Copyrights Accounts payable Interest Payable Retained earnings

NCL E PPE LTI NCL CA

Mortgage payable Share capital-ordinary Accumulated depreciation Land held for investment Bonds payable Inventory

Ex. 235 The following account balances appeared in the adjusted trial balance for Nguyen Inc.: Supplies ¥2,500; Inventories ¥3,000; Accounts Receivable ¥13,200; Cash ¥11,500; Prepaid Insurance ¥6,300; and Short-term Investments ¥7,600. Prepare the current assets section of the 2017 statement of financial position in proper format. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 235 (5 min.) Nguyen Inc. Partial Statement of Financial Position December 31, 2017 Current Assets Prepaid insurance Supplies Inventories Accounts receivable Short-term investments Cash Total current assets

¥ 6,300 2,500 3,000 13,200 7,600 11,500 ¥44,100

Ex. 236 The following items were taken from the post-closing trial balance of Aloma Macarty Company (All pounds are in thousands): Accumulated depreciation−equip. Accounts payable Notes payable due after 2018 Share capital-ordinary Retained earnings Accounts receivable Cash

£5,455 2,244 168 9,800 5,263 1,496 2,868

Mortgage payable Patent Equipment Land held for investment Short-term investments Notes payable due in 2018 Inventories

£ 743 680 14,300 464 3,490 681 1,056

Prepare a classified statement of financial position in good form as of December 31, 2017. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 86

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 236

(15 min.) Aloma Macarty Company Statement of Financial Position December 31, 2017 Assets

Intangible assets Patent .......................................................................................... Property, plant and equipment Equipment ................................................................................... Less: Accumulated depreciation−equip........................................ Long-term investments ......................................................................... Land held for investment ............................................................. Current assets ...................................................................................... Inventories ................................................................................... Accounts receivable..................................................................... Short-term investments................................................................ Cash ........................................................................................... Total assets ........................................................................ Equity and Liabilities Equity Share capital-ordinary.................................................................. Retained earnings ....................................................................... Non-current liabilities Mortgage payable ........................................................................ Notes payable due after 2018 ...................................................... Current liabilities Notes payable due in 2018 .......................................................... Accounts payable ........................................................................ Total equity and liabilities ....................................................

£ 680 £14,300 5,455

8,845 464

1,056 1,496 3,490 2,868

8,910 £18,899

£ 9,800 5,263

£15,063

743 168

911

681 2,244

2,925 £18,899

a

Ex. 237

North Company prepared the following adjusting entries at year end on December 31, 2017: (a) Interest Expense.......................................................................... 300 Interest Payable .................................................................. 300 (b) (c) (d) (e) (f)

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

1,500

Insurance Expense ...................................................................... Prepaid Insurance ...............................................................

1,200

Interest Receivable ...................................................................... Interest Revenue.................................................................

100

Supplies Expense ........................................................................ Supplies ..............................................................................

250

Salaries and Wages Expense ...................................................... Salaries and Wages Payable ..............................................

3,000

For Instructor Use Only

1,500 1,200 100 250 3,000

Completing the Accounting Cycle

4 - 87

Ex. 237 (Cont.) In an effort to minimize errors in recording transactions, North Company utilizes reversing entries. Instructions Prepare reversing entries on January 1, 2017, for the adjusting entries given where appropriate. Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a

Solution 237

(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. (a)

(d)

(f)

Reverse the entry to accrue interest expense. Interest Payable .......................................................................... Interest Expense .................................................................

300

Reverse the entry to accrue interest revenue. Interest Revenue ......................................................................... Interest Receivable .............................................................

100

Reverse the entry to accrue wages expense. Salaries and Wages Payable....................................................... Salaries and Wages Expense .............................................

3,000

300

100

3,000

a

Ex. 238

On December 31, 2016 the adjusted trial balance of the High Country Match Service shows the following selected data: Accounts Receivable, $7,000 Service Revenue, $60,000 Salaries and Wages Expense, $10,500 Salaries and Wages Payable, $2,500 Insurance Expense, $4,800 Income Tax Expense, $6,400 Income Taxes Payable, $2,400 Analysis indicates that adjusting entries were made for (a) $7,000 of commission revenue earned but not billed, (b) $2,500 of accrued but unpaid salaries and wages, and (c) $2,400 of income tax expense accrued but not paid. Instructions (a) Prepare the closing entries at December 31, 2016. (b) Prepare the reversing entries on January 1, 2017. (c) Enter the adjusted trial balance data in T-accounts. Post the entries in (a) and (b) and rule and balance the accounts. (d) Prepare the entries to record (1) the collection of the accrued service revenue on January 8, (2) payment of the income taxes on January 10, and (3) payment of all the salaries due ($3,000) on January 15. (e) Post the entries in (d) to the temporary accounts. (f) What is the salaries and wages expense for the month of January 2017? Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

4 - 88

Test Bank for Financial Accounting: IFRS Edition, 3e

a

Solution 238

(25 min.)

(a) (1) Service Revenue ................................................................... Income Summary ..........................................................

60,000

(2) Income Summary ................................................................... Salaries and Wages Expense ....................................... Insurance Expense ....................................................... Income Tax Expense.....................................................

21,700

(3) Income Summary ................................................................... Retained Earnings .........................................................

38,300

(b) (1) Service Revenue ................................................................... Accounts Receivable .....................................................

7,000

(2) Salaries and Wages Payable ................................................. Salaries and Wages Expense .......................................

2,500

(3) Income Taxes Payable .......................................................... Income Tax Expense.....................................................

2,400

60,000 10,500 4,800 6,400 38,300

7,000 2,500 2,400

(c) and (e) Accounts Receivable (A)

7,000

(R)

Service Revenue 7,000

(C) (R)

Salaries and Wages Expense (A) (D)

10,500 3,000

(C) (R)

10,500 2,500

60,000 7,000

6,400 2,400

(C) (R)

(R)

4,800

(C)

2,500

(A)

2,500

Income Taxes Payable 6,400 2,400

(R)

Insurance Expense (A)

60,000 7,000

Salaries and Wages Payable

Income Tax Expense (A) (D)

(A) (D)

4,800

Legend A = Adjusted trial balance amount C = Closing R = Reversing D = January Transaction entries

For Instructor Use Only

2,400

(A)

2,400

Completing the Accounting Cycle a

Solution 238

(Cont.)

(d)

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

7,000

Income Tax Expense............................................ Cash ............................................................

2,400

Salaries and Wages Expense .............................. Cash ............................................................

3,000

(1) Jan. 8

(2) Jan. 10

(3) Jan. 15

(f)

4 - 89

7,000

2,400

3,000

Salaries and wages expense for January is $500 ($3,000 – $2,500).

a

Ex. 239

Transaction and adjustment data for Alcortt Company for the calendar year end is as follows: 1. December 24 (initial salary entry): ₤18,000 of salaries and wages earned between December 1 and December 24 are paid. 2. December 31 (adjusting entry): Salaries and wages earned between December 25 and December 31 are ₤3,000. These will be paid in the January 8 payroll. 3. January 8 (subsequent salary entry): Total salary payroll amounting to ₤11,000 was paid. Instructions 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)

Assume reversing entries

Initial Salary Entry

Dec. 24

(b)

Adjusting Entry

Dec. 31

For Instructor Use Only

4 - 90

Test Bank for Financial Accounting: IFRS Edition, 3e

a

Ex. 239

(c)

(Cont.)

Closing Entry

Dec. 31

(d)

Reversing Entry

Jan. 1

(e)

Subsequent Salary Entry

Jan. 8 Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a

Solution 239

(20 min.)

Assume no reversing entries (a)

Assume reversing entries

Initial Salary Entry

Dec. 24 Salaries and Wages Expense 18,000 Salaries and Wages Expense 18,000 Cash 18,000 Cash 18,000 (b)

Adjusting Entry

Dec. 31 Salaries and Wages Expense 3,000 Salaries and Wages Payable 3,000 (c)

Salaries and Wages Expense 3,000 Salaries and Wages Payable 3,000

Closing Entry

Dec. 31 Income Summary 21,000 Income Summary 21,000 Salaries and Wages Expense 21,000 Salaries and Wages Expense 21,000 (d)

Reversing Entry

Jan. 1 None

Salaries and Wages Payable 3,000 Salaries and Wages Expense

For Instructor Use Only

3,000

Completing the Accounting Cycle Solution 239

4 - 91

(Cont.)

(e) Subsequent Salary Entry Jan. 8 Salaries and Wages Payable Salaries and Wages Expense Cash

3,000 8,000

Salaries and Wages Expense 11,000 Cash 11,000 11,000

COMPLETION STATEMENTS 240.

The first step in preparing a worksheet is to prepare a ______________ from the general ledger accounts.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

241.

The account balances appearing in the adjusted trial balance columns are extended to the ______________ columns and the ______________ columns.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

242.

The process of transferring net income (or loss) for the period to Retained Earnings is accomplished by making ______________ entries.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

243.

At the end of an accounting period, all revenue and expense accounts are closed to a temporary account called ______________.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

244.

The Dividends account is closed to the ______________ account at the end of the accounting period.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

245.

After all closing entries have been journalized and posted, the final step in the accounting cycle is to prepare a ______________ trial balance.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

246.

The preparation of a ______________ and ______________ entries are two optional steps in the accounting cycle.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

247.

Two permanent accounts that are part of the equity are ______________ and ______________.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

248.

The four major classifications of assets in a classified statement of financial position are: ________________, ________________, ________________ and ________________.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

4 - 92 249.

Test Bank for Financial Accounting: IFRS Edition, 3e The ______________ of a company is the average time that it takes to purchase inventory, selll it on account, and then collect cash from customers.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

250.

Assets that do not have a physical substance yet often are very valuable are called ______________ assets.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

251.

Liabilities are generally classified as either ______________ or ______________ on a classified statement of financial position.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Answers to Completion Statements 240. trial balance 241. income statement, statement of financial position 242. closing 243. Income Summary 244. Retained Earnings 245. post-closing 246. worksheet, reversing

247. Share Capital-Ordinary, Retained Earnings 248. Intangible Assets, Property, Plant, and Equipment; Long-Term Investments; Current Assets 249. operating cycle 250. intangible 251. current, non-current

For Instructor Use Only

Completing the Accounting Cycle

4 - 93

MATCHING 252. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Worksheet Permanent accounts Closing entries Income Summary Reversing entry

F. G. H. I. J.

Share Capital−Ordinary Current assets Operating cycle Non-current liabilities Correcting entries

____

1. Obligations that a company expects to pay after one year.

____

2. A part of equity in a corporation.

____

3. An optional tool which facilitates the preparation of financial statements.

____

4. A temporary account used in the closing process.

____

5. Statement of financial position accounts whose balances are carried forward to the next period.

____

6. The average time that it takes to go from cash to cash in producing revenues.

____

7. Entries to correct errors made in recording transactions.

____

8. The exact opposite of an adjusting entry made in a previous period.

____

9. Entries at the end of an accounting period to transfer the balances of temporary accounts to Retained Earnings.

____ 10. Assets that a company expects to pay or convert to cash or use up within one year. Ans: N/A, LO: 1-6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

Answers to Matching 1. 2. 3. 4. 5.

I F A D B

6. 7. 8. 9. 10.

H J E C G

For Instructor Use Only

4 - 94

Test Bank for Financial Accounting: IFRS Edition, 3e

SHORT-ANSWER ESSAY QUESTIONS S-A E 253 A worksheet is an optional working tool used by accountants to facilitate the preparation of financial statements. Consider the steps followed in preparing a worksheet. How does the use of a worksheet assist the accountant. Could financial statements be prepared without a worksheet? Evaluate how the process would differ. Consider factors such as timeliness, accuracy, and efficiency in your evaluation. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA

Solution 253 The worksheet organizes the accountant's work in preparing the income statement and the statement of financial position. The worksheet contains the general ledger trial balance, the adjusting entries, and an adjusted trial balance (if 10-column). The columns for these trial balances and entries allow the accountant to prove the equality of the debits and credits at each step of the process. From the adjusted trial balance the statement of financial position and income statement amounts are obtained and entered in the appropriate columns. Preparing financial statements without the use of a worksheet would be less organized and probably more prone to errors. And, if errors are made, they will probably be less easy to detect and locate, and, therefore, less efficient and more time consuming. S-A E 254 Journalizing and posting closing entries is a required step in the accounting cycle. Discuss why it is necessary to close the books at the end of an accounting period. If closing entries were not made, how would the preparation of financial statements be affected? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: Reporting

Solution 254 Closing entries are prepared to close the income statement accounts (the temporary accounts) of the current year in order to start the next year. Income statement (temporary) accounts are cumulative in nature but only for a year. The closing entries are what separate the accounting periods. The next year's accumulation of income statement data can begin once the accounts are cleared and the balances transferred through the closing entries to equity. S-A E 255 Give the definition of current assets and current liabilities and provide two examples of each. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 255 Current assets are assets that a company expects to convert to cash or use up within one year. Examples of current assets include cash, supplies, short-term investments, accounts receivable, and inventory. Current liabilities are obligations that the company is to pay within the current year. Examples of current liabilities are accounts payable, salaries and wages payable, and income taxes payable. For Instructor Use Only

Completing the Accounting Cycle

4 - 95

S-A E 256 Identify the two equity accounts in a corporation and indicate the purpose of each. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 256 The two accounts and the purpose of each are: (1) Share capital-ordinary is used to record investments of assets in the business by the owners (shareholders). (2) Retained earnings is used to record net income retained in the business. S-A E 257 Distinguish between a reversing entry and an adjusting entry. Are reversing entries required? Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 257 A reversing entry is the exact opposite, both in amount and in account titles, of an adjusting entry and is made at the beginning of the new accounting period. Reversing entries are an optional step in the accounting cycle. S-A E 258

(Ethics)

Under Protection provides underground storage facilities for companies desiring off-site storage of sensitive documents, computer records, and other items. They have developed a sophisticated surveillance and security system which they initially used in their own facilities, and have recently started to market elsewhere as well. The underground storage facilities are made from natural caves in some instances (reinforced and modified as appropriate) and from excavations of natural rock formations in others. The land was purchased over ten years ago for a total of $2.5 million. The modifications have cost approximately $15 million more. The company has never depreciated its storage facilities because the market value of the property has continued to rise. Presently, the market price is between $30 and $40 million. Joe Goll, a new accounting manager, questioned this depreciation policy. Tim North, the controller, has told him that he needn't worry about it. For one thing, he says, this is really a special form of Land account, which should not be depreciated at all. For another, this is a privately held company, and so they don't need to worry about misleading investors. All the owners know about and approve the depreciation policy. Required: What are the ethical issues in this situation? Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

For Instructor Use Only

4 - 96

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 258 The ethical issue is one of integrity. Even though the storage facilities are underground, that does not mean that they can be accounted for simply as land. The structural improvements and surveillance mechanisms will not last forever, and therefore their cost should be allocated over the periods that are benefited. Net income is being overstated because the depreciation expense, at zero, is being understated. A second issue is the harm that may be incurred by outside parties because of the misrepresentation in the financial statements. Even though the owners know about the (lack of) depreciation, they may still use their financial statements to obtain loans. Private investors and bankers should be able to rely on the financial statements. A third issue is that of the integrity of the accountants themselves. If they are being asked to ignore a basic principle of accounting so openly now, they should certainly ask themselves what lies ahead. S-A E 259 (Ethics) You are the controller for WNC Home Media. During the beginning of January 2014, when the company was adjusting and closing the accounting records for the calender year, you were home sick with the flu. You therefore relied on your assistant to complete much of the work. The company reported net income for 2014 of $125,000, down from $140,000 in 2013. In February, after the financial statements have been issued and distributed to the company’s investors and creditors, you discover that your assistant overlooked adjustments to insurance expense, depreciation expense and utilties expense resulting in an overstatement of net income by $12,500. You immediately inform the company president of the overstatement and suggest correcting the errors and re-issuing the financial statements.The company president is concerned that investors were not happy about the lower profits reported in 2014. He feels that 2015 is going to be a better year for the company. Therefore he prefers to keep quiet about the financial statement errors in 2014 and adjust the accounting records for the errors in 2015. Required: (a) Who are the stakeholders in this situation? (b) What are the ethical issues in this situation? (c) What would you do as controller in this situation? Ans: N/A, LO: 6, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 259 (a) The stakeholders in this situation are the company investors and creditors as well as anyone else who might rely on the 2014 financial statements to make an investing or credit decision. The company president, controller and assistant controller are also stakeholders. (b) The ethical issue in this situation concerns misleading financial statement users. If the errors are not corrected for the 2014 financial statements, investors and creditors will think the company is more profitable that it actually is. Assets are likely overstated and liabilities understated on the statement of financial position so that the company’s financial position appears better than it actually is. The financial statement users, including investors and banks from which the company may obtain additional financing, may be harmed by reliance on the misleading financial statements. The integrity of the company, its President and the controller are all at stake in this situation, (c) The controller should insist that the President of the company allow the errors to be corrected and revised financial statements issued. If the President refuses, the controller should be prepared to resign. For Instructor Use Only

Completing the Accounting Cycle S-A E 260

4 - 97

(Communication)

You have recently started to work for Payne Holmes, manufacturers of cemetery markers and monuments. During your first month at work, you inadvertently recorded as revenue, about $3,000 of prepayments from Tang Company. The financial statements had been released within the company when you discovered your error. The month-end closing had not been completed, however, and you were able to correct the accounts without incident. Required: Prepare a short note to accompany the re-released financial statements explaining the mistake. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 260 MEMO TO:

Department Managers

FROM: Lisa Cross, Accounting RE:

Month-End Reports

****ATTACHED FINANCIAL STATEMENTS REPLACE THOSE ISSUED JULY 5**** *****DESTROY ALL EARLIER COPIES OF JUNE 30 FINANCIAL STATEMENTS**** An error was made in the recording of Tang Company's prepayment. The entire $3,000 was recorded as revenue. Since Tang's order had not been completed or shipped, it should have been recorded as unearned revenue, which is a liability. If you have sent any of your summary reports to corporate headquarters, please contact the Accounting Department immediately for correction codes. I am sincerely sorry for any inconvenience or delays caused by this error.

For Instructor Use Only

4 - 98

Test Bank for Financial Accounting: IFRS Edition, 3e

GAAP QUESTIONS 1. Which of the following statements is false? a. Under GAAP, the statement of financial position is usually referred to as the statement of assets and equity. b. The FASB and IASB are working on a joint conceptual framework project. c. Under IFRS, companies sometimes net liabilities against assets to report "net assets". d. Assets equals liabilities plus stockholders' equity. Ans: A, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

2. A company has purchased a trust of land and expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. Under GAAP, the land should be reported as a. a long-term investment. b. an intangible asset. c. property, plant, and equipment. d. land expense. Ans: A, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

3. Current assets under GAAP are listed generally a. alphabetically. b. by order of liquidity. c. in the reverse order of their expected conversion to cash. d. by importance. Ans: B, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

4. Companies that use GAAP a. do not have any guidelines as to what should be reported on their balance sheet. b. generally reported current assets before non-current assets on their balance sheet. c. often offset assets against liabilities and shown net assets and net liabilities on their balance sheet rather than the underlying detailed line items. d. may report all their assets on their balance sheet at fair value. Ans: B, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS CHAPTER LEARNING OBJECTIVES 1. Identify the differences between service and merchandising companies. Because of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual and a periodic inventory system. 2. Explain the recording of purchases under a perpetual inventory system. The company debits the Inventory account for all purchases of merchandise and, freight-in, and credits it for purchase discounts and purchase returns and allowances. 3. Explain the recording of sales revenues under a perpetual inventory system. When a merchandising company sells inventory, it debits Accounts Receivable (or Cash) and credits Sales Revenue for the selling price of the merchandise. At the same time, it debits Cost of Goods Sold and credits Inventory for the cost of the inventory items sold. Sales returns and allowances and sales discounts are debited. 4. Explain the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company applies to a merchandising company. A worksheet is again an optional step. Under a perpetual inventory system, the company must adjust the Inventory account to agree with the physical count. 5. Prepare an income statement for a merchandiser. The income statement usually has the following components: sales revenues, cost of goods sold, gross profit, operating expenses, other income and expense, and interest expense. a

6. Prepare a worksheet for a merchandising company. The steps in preparing a worksheet for a merchandising company are the same as for a service company. The unique accounts for a merchandising company are Inventory, Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.

a

7. Explain the recording of purchases and sales of inventory under a periodic inventory system. In recording purchases under a periodic system, companies must make entries for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording sales, companies must make entries for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.

5-2

Test Bank for Financial Accounting: IFRS Edition, 3e

TRUE-FALSE STATEMENTS 1.

Retailers and wholesalers are both considered merchandisers.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

2.

The steps in the accounting cycle are different for a merchandising company than for a service company.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3.

Companies using International Financial Reporting Standards (IFRS) use a perpetual inventory system, while companies using U.S. GAAP use a periodic inventory system.

Ans: F, LO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

4.

Companies using a perpetual inventory system record credit purchases of inventory on the statement of financial position by increasing inventory and decreasing liabilities.

Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5.

Companies using a perpetual inventory system record all credit purchases on the statement of financial position by increasing inventory and increasing liabilities.

Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6.

Global Care uses a perpetual inventory system and purchased wheelchairs under terms FOB destination. The freight charges associated with the wheelchairs will be added to the inventory account on Global Care’s statement of financial position.

Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

7.

When the buyer pays an invoice within the discount period, the amount of the discount increases the merchandise inventory account reported on the statement of financial position.

Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

8.

Inventory purchased for $2,500 subject to terms 2/10, net 30 could end up being reported on the statement of financial position at an amount greater than $2,500 if the discount isn’t taken by the buyer.

Ans: F, LO: 2, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

9.

Purchase returns are recorded by the buyer as a decrease to inventory on the statement of financial position.

Ans: T, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10.

Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

11.

A periodic inventory system requires a detailed inventory record of inventory items.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

Accounting for Merchandising Operations 12.

5-3

Freight terms of FOB Destination means that the seller pays the freight costs.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

13.

Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

14.

Sales revenues are earned during the period cash is collected from the buyer.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15.

The Sales Returns and Allowances account and the Sales Discounts account are both classified as expense accounts.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

16.

The revenue recognition principle applies to merchandisers by recognizing sales revenues when they are earned.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

17.

Sales allowances and sales discounts are both designed to encourage customers to pay their accounts promptly.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

18.

To grant a customer a sales return, the seller credits Sales Returns and Allowances.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

19.

Sales returns and allowances is reported on the statement of financial position as a contra account to cost of goods sold.

Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

20.

Sales of $2,500 subject to terms 2/10, net 30 could end up being reported on the statement of financial position as an account receivable at an amount greater than $2,500 if the discount isn’t taken by the buyer.

Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

21.

When goods are returned, the seller reduces the account receivable and increases the merchandise inventory accounts reported on the statement of financial position.

Ans: T, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

22.

When goods are returned, the seller records the returned merchandise at its market value on the statement of financial position.

Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

23.

Closing entries impact the income statement but do not have an impact on the statement of financial position.

Ans: F, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

24.

Under International Financial Reporting Standards (IFRS) use of a worksheet by a merchandising company is strictly optional.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

5-4 25.

Test Bank for Financial Accounting: IFRS Edition, 3e A company's unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

26.

For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

27.

A merchandising company has different types of adjusting entries than a service company.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

28.

Net sales is sales revenue less sales returns and allowances and sales discounts.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29.

Other income and expense excludes revenues and expenses that are unrelated to the company’s main line of operations.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30.

Operating expenses are different for merchandising and service companies.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

31.

Merchandise inventory is classified as a current asset in a classified statement of financial position.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32.

Gain on sale of equipment and interest expense are reported under other income and expense in a merchandiser income statement.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

33.

If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

34.

Gross profit represents the merchandising profit of a company.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

35.

Gross profit rate is computed by dividing cost of goods sold by net sales.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

36.

Under International Financial Reporting Standards (IFRS) operating expenses may be presented by nature or by function.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

37.

Under International Financial Reporting Standards (IFRS) when operating expenses are presented by nature additional disclosures are required regarding the function of certain expenses.

Ans: F, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

For Instructor Use Only

Accounting for Merchandising Operations 38.

5-5

International Financial Reporting Standards allow different presentation formats for operating expenses including by magnitude.

Ans: F, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

39.

IFRS requires companies to mark the recorded values of certain types of assets and liabilities to their historical cost at the end of each reporting period.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

40.

IFRS requires a single-step income statement, but U.S GAAP allows either the single-step or the multiple-step income statement.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

41.

IFRS requires 3 years of income statements, U.S. GAAP requires 2 years of income statements.

Ans: F, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

42.

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are undertaking a project to rework the structure of financial statements. The proposed structure will adopt the major groupings used on the statement of financial position: current and non-current assets and liabilities, followed by equity.

Ans: F, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a

43.

In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a

44.

Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a

45.

Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a

46.

Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a

47.

Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

48.

Merchandise inventory is reported as a long-term asset on the statement of financial position.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

5-6 49.

Test Bank for Financial Accounting: IFRS Edition, 3e Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

50.

The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

51.

Sales should be recorded in accordance with the expense recognition principle.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

52.

Sales returns and allowances and sales discounts are subtracted from sales revenue in reporting net sales in the income statement.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53.

A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

54.

If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

55.

The major difference between the statement of financial position of a service company and a merchandising company is inventory.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to True-False Statements Item

1. 2. 3. 4. 5. 6. 7. 8.

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

T F F F F F F F

9. 10. 11. 12. 13. 14. 15. 16.

T T F T T F F T

17. 18. 19. 20. 21. 22. 23. 24.

F F F F T F F T

25. 26. 27. 28. 29. 30. 31. 32.

T T F T F F T F

33. 34. 35. 36. 37. 38. 39. 40.

T T F T F F F F

41. 42. a 43. a 44. a 45. a 46. a 47. 48.

F F T F T F T F

49. 50. 51. 52. 53. 54. 55.

T F F T T F T

MULTIPLE CHOICE QUESTIONS 56.

Net income from operations is gross profit less a. financing expenses. b. operating expenses. c. other income and expense. d. other expenses.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

Accounting for Merchandising Operations 57.

5-7

Which of the following would not be considered a merchandising company? a. Retailer b. Wholesaler c. Service firm d. Dot Com firm

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

58.

A merchandising company that sells directly to consumers is a a. retailer. b. wholesaler. c. broker. d. service company.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

59.

Two categories of expenses for 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.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60.

The primary source of revenue for merchandising companies is a. investment income. b. service fees. c. the sale of merchandise. d. the sale of fixed assets the company owns.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

61.

Sales revenue less cost of goods sold is called a. gross profit. b. net profit. c. net income. d. marginal income.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

62.

After gross profit is calculated, operating expenses are deducted to determine a. gross margin. b. net income. c. gross profit on sales. d. net margin.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

63.

Cost of goods sold is determined only at the end of the accounting period in a. a perpetual inventory system. b. a periodic inventory system. c. both a perpetual and a periodic inventory system. d. neither a perpetual nor a periodic inventory system.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

5-8 64.

Test Bank for Financial Accounting: IFRS Edition, 3e Which of the following expressions is incorrect? a. Gross profit – operating expenses = net income b. Sales – cost of goods sold – operating expenses = net income c. Net income + operating expenses = gross profit d. Operating expenses – cost of goods sold = gross profit

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

65.

Detailed records of the cost of each inventory purchase and sale are not maintained under a a. perpetual inventory system. b. periodic inventory system. c. double entry accounting system. d. single entry accounting system.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

66.

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 determines cost of goods sold only at the end of the accounting period.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

67.

In a perpetual inventory system, cost of goods sold is recorded a. on a daily basis. b. on a monthly basis. c. on an annual basis. d. with each sale.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

68.

If a company determines cost of goods sold each time a sale occurs, it a. must have a computer accounting system. b. uses a combination of the perpetual and periodic inventory systems. c. uses a periodic inventory system. d. uses a perpetual inventory system.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

69.

Under a perpetual inventory system, acquisition of merchandise for resale is debited to the a. Inventory account. b. Purchases account. c. Supplies account. d. Cost of Goods Sold account.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

For Instructor Use Only

Accounting for Merchandising Operations 70.

5-9

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. Sales. d. Inventory.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

71.

The Inventory account is used in each of the following except the entry to record a. goods purchased on account. b. the return of goods purchased. c. payment of freight on goods sold. d. payment within the discount period.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

72.

A buyer would record a payment within the discount period under a perpetual inventory system by crediting a. Accounts Payable. b. Inventory. c. Purchase Discounts. d. Sales Discounts.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

73.

If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the a. Inventory account will be increased. b. Inventory account will not be affected. c. seller will bear the freight cost. d. carrier will bear the freight cost.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

74.

Freight costs paid by a seller on merchandise sold to customers will cause an increase a. in the selling expense of the buyer. b. in operating expenses for the seller. c. to the cost of goods sold of the seller. d. to a contra-revenue account of the seller.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

75.

Hicks Company purchased merchandise from Beyer Company with freight terms of FOB shipping point. The freight costs will be paid by the a. seller. b. buyer. c. transportation company. d. buyer and the seller.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

For Instructor Use Only

5 - 10 76.

Test Bank for Financial Accounting: IFRS Edition, 3e Geran Company purchased merchandise inventory with an invoice price of $15,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Geran Company pays within the discount period? a. $15,000 b. $14,700 c. $13,500 d. $13,800

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

77.

Reese Company purchased merchandise with an invoice price of $3,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? a. 10% b. 12% c. 18% d. 36%

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

78.

If a company is given credit terms of 2/10, n/30, it should a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time. b. pay within the discount period and recognize a savings. c. pay within the credit period but don't take the trouble to invest the cash while waiting to pay the bill. d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

79.

In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited by the buyer to a. Inventory. b. Purchase Discounts. c. Purchase Allowance. d. Sales Discounts.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

80.

Tony’s Market recorded the following events involving a recent purchase of merchandise: Received goods for $90,000, terms 2/10, n/30. Returned $1,800 of the shipment for credit. Paid $450 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory a. increased by $86,436. b. increased by $88,650. c. increased by $86,877. d. increased by $86,886.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

Accounting for Merchandising Operations 81.

5 - 11

Stan’s Market recorded the following events involving a recent purchase of merchandise: Received goods for $50,000, terms 2/10, n/30. Returned $1,000 of the shipment for credit. Paid $250 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory a. increased by $48,020. b. increased by $49,250. c. increased by $48,265. d. increased by $48,270.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

82.

Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods are recorded in a. Freight Expense. b. Freight-In. c. Inventory. d Freight-Out.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

83.

Rasner Co. returned defective goods costing $9,000 to Markum Company on April 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Rasner Co. on April 19, in receiving full credit is: a. Accounts Payable ............................................................... Inventory ....................................................................

9,000

b. Accounts Payable ............................................................... Inventory............................................................................. Cash ..........................................................................

9,000 270

c. Accounts Payable ............................................................... Purchase Discounts ................................................... Inventory ....................................................................

9,000

d. Accounts Payable ............................................................... Inventory .................................................................... Cash ..........................................................................

9,000

9,000

9,270 270 8,730 270 8,730

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

5 - 12 84.

Test Bank for Financial Accounting: IFRS Edition, 3e Mather Company made a purchase of merchandise on credit from Underwood Company on August 8, for $8,000, terms 3/10, n/30. On August 17, Mather makes the appropriate payment to Underwood. The entry on August 17 for Mather Company is: a. Accounts Payable ............................................................... Cash...........................................................................

8,000

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

7,760

c. Accounts Payable ............................................................... Purchase Returns and Allowances ............................. Cash...........................................................................

8,000

d. Accounts Payable ............................................................... Inventory .................................................................... Cash...........................................................................

8,000

8,000 7,760 240 7,760 240 7,760

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

85.

Computers For You is a retailer specializing in selling computers and related equipment. Which of the following would not be reported in the merchandise inventory account reported on the statement of the financial position for Computers For You at December 31, 2017? a. Computers purchased for resale during November 2017. b. Shelving materials purchased during December 2017. c. Freight costs related to the computers purchased in November. d All of these answer choices are correct.

Ans: B, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

86.

Computers For You is a retailer specializing in selling computers and related equipment. During 2017, Computers For You sells $200,000 of merchandise to Sandcastles, Inc. Computers For You incurs $24,000 of freight costs associated with these sales. Which of the following is true regarding how this $24,000 is treated on the financial statements? a. Computers For You will report the $24,000 as part of inventory on the statement of financial position. b. Sandcastles, Inc. will report the $24,000 as part of inventory on the statement of financial position. c. Computers For You will report the $24,000 as part of operating expenses on the income statement. d. Sandcastles, Inc. will report the $24,000 as an accounts receivable on the statement of financial position.

Ans: C, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

Accounting for Merchandising Operations 87.

5 - 13

Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. During December 2017, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Advanced Communications, Inc. was dissatisfied with 25% of the merchandise it received due to inferior quality. On December 21, 2017, Advanced Communications, Inc. returns the goods to Touch Tronix, Inc. for credit. Which of the following is true regarding the statement of financial position for Advanced Communications, Inc. at December 31, 2017? a. Assets will increase by €425,000 and liabilities will increase by €425,000. b. Assets will decrease by €425,000 and liabilities will decrease by €425,000. c. Assets will decrease by €550,000 and liabilities will decrease by €550,000. d Assets will increase by €550,000 and liabilities will increase by €550,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

88.

Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. On December 10, 2017, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10, net 30. On December 18, 2017, Advanced Communications, Inc. paid the account in full. Advanced Communications, Inc. uses a perpetual inventory system. Which of the following is true regarding the impact on the statement of financial position for Advanced Communications, Inc. when the payment is made on December 18, 2017? a. Cash decreased by €1,666,000. b. Inventory decreased by €34,000. c. Accounts payable decreases by €1,700,000. d Inventory decreased by €44,000.

Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

89.

Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. On December 10, 2017, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10, net 30. On December 18, 2017, Advanced Communications, Inc. paid the account in full. Advanced Communications, Inc. uses a perpetual inventory system. Which of the following is true regarding the impact on the statement of financial position for Advanced Communications, Inc. when the payment is made on December 18, 2017? a. Assets decreased by €2,200,000. b. Assets increased by €44,400. c. Liabilities decreased by €2,156,000. d Liabilities decreased by €1,700,000.

Ans: A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

5 - 14 90.

Test Bank for Financial Accounting: IFRS Edition, 3e Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. On December 10, 2017, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10, net 30. Advanced Communications, Inc. paid €32,500 in freight charges. On December 13, 2017, Advanced Communications, Inc. returned 5% of the goods due to inferior quality. On December 18, 2017, Advanced Communications, Inc. paid the account in full. Advanced Communications, Inc. uses a perpetual inventory system. If Advanced Communications, Inc. has not yet sold any of these goods, what is the ending balance in the inventory account after the payment is made? a. €0 b. €1,615,200. c. €2,080,700. d €2,164,300.

Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

91.

Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. During December 10, 2017, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Advanced Communications, Inc. was dissatisfied with 25% of the merchandise it receives due to inferior quality. On December 21, 2017, Advanced Communications, Inc. returns the goods to Touch Tronix, Inc. for credit. Which of the following is true regarding the statement of financial position and the income statement for Touch Tronix, Inc. at December 31, 2017? a. Assets will decrease by €125,000 and income will decrease by €125,000. b. Assets will decrease by €425,000 and income will decrease by €425,000. c. Assets will increase by €425,000 and income will decrease by €425,000. d Assets will increase by €550,000 and income will decrease by €550,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

92.

Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. On December 10, 2017, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10, net 30. On December 18, 2017, Advanced Communications, Inc. paid the account in full. Which of the following is true regarding the impact on the statement of financial position for Touch Tronix, Inc. when the payment is made on December 18, 2017? a. Assets decreased by €2,200,000. b. Assets decreased by €44,000. c. Assets increased by €2,156,000. d Assets decreased by €32,500.

Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

Accounting for Merchandising Operations 93.

5 - 15

On July 9, Neal Company sells goods on credit to Al Dolan for $9,000, terms 1/10, n/60. Neal receives payment on July 18. The entry by Neal on July 18 is: a. Cash ................................................................................... Accounts Receivable..................................................

9,000

b. Cash ................................................................................... Sales Discounts ......................................................... Accounts Receivable..................................................

9,000

c. Cash ................................................................................... Sales Discounts .................................................................. Accounts Receivable..................................................

8,910 90

d. Cash ................................................................................... Sales Discounts ......................................................... Accounts Receivable..................................................

9,090

9,000 90 8,910

9,000 90 9,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

94.

On November 2, 2017, Griffey Company has cash sales of €7,000 from merchandise having a cost of €5,000. The entries to record the day's cash sales will include: a. a €5,000 credit to Cost of Goods Sold. b. a €7,000 credit to Cash. c. a €5,000 credit to Inventory. d a €7,000 debit to Accounts Receivable.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

95.

A credit sale of ₤6,400 is made on April 25, terms 2/10, n/30, on which a return of ₤400 is granted on April 28. What amount is received as payment in full on May 4? a. ₤5,880 b. ₤6,272 c. ₤6,400 d ₤6,000

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

96.

The entry to record the receipt of payment within the discount period on a sale of ¥17,500 with terms of 2/10, n/30 will include a credit to a. Sales Discounts for ¥350. b. Cash for ¥1,715. c. Accounts Receivable for ¥17,500. d. Sales Revenue for ¥17,500.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

97.

The collection of a ¥12,000 account within the 2 percent discount period will result in a a. debit to Sales Discounts for ¥240. b. debit to Accounts Receivable for ¥11,760. c. credit to Cash for ¥11,760. d. credit to Accounts Receivable for ¥11,760.

Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

5 - 16 98.

Test Bank for Financial Accounting: IFRS Edition, 3e Company X sells $1,000 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y's check? a. $700 b. $980 c. $900 d. $800

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

99.

Birk Company sells merchandise on account for $8,000 to Kiner Company with credit terms of 2/10, n/30. Kiner Company returns $1,600 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? a. $7,840 b. $7,872 c. $6,400 d. $6,272

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

100.

The collection of a $1,500 account after the 2 percent discount period will result in a a. debit to Cash for $1,470. b. debit to Accounts Receivable for $1,500. c. debit to Cash for $1,500. d. debit to Sales Discounts for $30.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

101.

The collection of a ¥12,000 account after the 2 percent discount period will result in a a. debit to Cash for ¥11,760. b. credit to Accounts Receivable for ¥12,000. c. credit to Cash for ¥12,000. d. debit to Sales Discounts for ¥240.

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

102.

In a perpetual inventory system, the Cost of Goods Sold account is used a. only when a cash sale of merchandise occurs. b. only when a credit sale of merchandise occurs. c. only when a sale of merchandise occurs. d. whenever there is a sale of merchandise or a return of merchandise sold.

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

103.

Sales revenues are usually considered earned 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.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Accounting for Merchandising Operations 104.

5 - 17

A sales invoice is a source document that a. provides support for goods purchased for resale. b. provides evidence of incurred operating expenses. c. provides support for credit sales. d. serves only as a customer receipt.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

105.

Sales revenue a. may be recorded before cash is collected. b. will always equal cash collections in a month. c. only results from credit sales. d. is only recorded after cash is collected.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

106.

The journal entry to record a credit sale is a. Cash Sales Revenue b. Cash Service Revenue c. Accounts Receivable Service Revenue d. Accounts Receivable Sales Revenue

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

107.

The Sales Returns and Allowances account is classified as a(n) a. asset account. b. contra−asset account. c. expense account. d. contra−revenue account.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108.

A credit sale of $3,600 is made on July 15, terms 2/10, n/30, on which a return of $200 is granted on July 18. What amount is received as payment in full on July 24? a. $3,600 b. $3,332 c. $3,400 d $3,528

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

109.

When goods are returned that relate to a prior cash sale, 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.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

5 - 18 110.

Test Bank for Financial Accounting: IFRS Edition, 3e The Sales Returns and Allowances account does not provide information to management about a. inferior merchandise. b. the percentage of credit sales versus cash sales. c. inefficiencies in filling orders. d. errors in billing customers.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

111.

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 sales return.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

112.

The credit terms offered to a customer by a business firm are 2/10, n/30, which means that a. the customer must pay the bill within 10 days. b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date. c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date. d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

113.

Company A sells ¥9,000 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B's check? a. ¥6,300 b. ¥8,820 c. ¥8,100 d. ¥7,200

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

114.

Ball Company sells merchandise on account for ₤5,000 to Edds Company with credit terms of 2/10, n/30. Edds Company returns ₤1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? a. ₤4,900 b. ₤4,920 c. ₤4,000 d. ₤3,920

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

For Instructor Use Only

Accounting for Merchandising Operations 115.

5 - 19

Moses Company sells merchandise on account for $8,000 to Lane Company with credit terms of 2/10, n/30. Lane Company returns $1,200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Moses Company make upon receipt of the check? a. Cash ................................................................................... 6,800 Accounts Receivable.................................................. 6,800 b. Cash ................................................................................... Sales Returns and Allowances ........................................... Accounts Receivable..................................................

6,664 1,336

c. Cash ................................................................................... Sales Returns and Allowances ........................................... Sales Discounts .................................................................. Accounts Receivable..................................................

6,664 1,200 136

d. Cash ................................................................................... Sales Discounts .................................................................. Sales Returns and Allowances ................................... Accounts Receivable..................................................

7,840 160

8,000

8,000

1,200 6,800

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

116.

Which of the following would not be classified as a contra account? a. Sales Revenue b. Sales Returns and Allowances c. Accumulated Depreciation d. Sales Discounts

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

117.

Which of the following accounts has a normal credit balance? a. Sales Returns and Allowances b. Sales Discounts c. Sales d. Freight-Out

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

118.

When a seller grants credit for returned goods, the account that is credited is a. Sales Revenue. b. Sales Returns and Allowances. c. Inventory. d. Accounts Receivable.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

119.

The respective normal account balances of Sales Revenue, Sales Returns and Allowances, and Sales Discounts are a. credit, credit, credit. b. debit, credit, debit. c. credit, debit, debit. d. credit, debit, credit.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

5 - 20 120.

Test Bank for Financial Accounting: IFRS Edition, 3e A merchandising company using a perpetual system will make a. the same number of adjusting entries as a service company does. b. one more adjusting entry than a service company does. c. one less adjusting entry than a service company does. d. different types of adjusting entries compared to a service company.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

121.

In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance of a. sales revenue. b. inventory. c. sales discounts. d. freight-out.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

122.

A merchandising company using a perpetual system may record an adjusting entry by a. debiting Income Summary. b. crediting Income Summary. c. debiting Cost of Goods Sold. d. debiting Sales Revenue.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

123.

When the physical count of RNA Company inventory had a cost of $3,500 at year end and the unadjusted balance in Inventory was $3,600, RNA will have to make the following entry: a. Cost of Goods Sold ............................................................. Inventory ....................................................................

100

b. Inventory ............................................................................. Cost of Goods Sold ....................................................

100

c. Income Summary ................................................................ Inventory ....................................................................

100

d. Cost of Goods Sold ............................................................. Inventory ....................................................................

3,600

100 100 100 3,600

Ans: A, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

124.

Mineral Makers (MM) Company keeps its inventory records using a perpetual system. At December 31, 2017 the unadjusted balance in the Inventory account is $64,000. Through a physical count on December 31, 2017, MM determines that its actual inventory at yearend is $62,500. Which of the following is true regarding the statement of financial position and the income statement of MM at December 31, 2017? a. Inventory is increased and cost of goods sold is decreased by $1,500. b. Inventory is decreased and cost of goods sold is increased by $1,500. c. Inventory is increased and cost of goods sold is increased by $1,500. d. Inventory is decreased and cost of goods sold is decreased by $1,500.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

Accounting for Merchandising Operations 125.

5 - 21

The sales revenue section of an income statement for a retailer would not include a. Sales discounts. b. Sales revenue. c. Net sales. d. Gross profit.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

126.

Rowland Company reported the following balances at June 30, 2017: Sales Revenue Sales Returns and Allowances Sales Discounts Cost of Goods Sold

$32,000 1,000 500 15,500

Net sales for the month is a. $32,000. b. $31,000. c. $30,500. d. $16,500. Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

127.

Maxwell Company's financial information is presented below. Sales Revenue Sales Returns and Allowances Net Sales

€

???? 50,000 780,000

Cost of Goods Sold Gross Profit

€450,000 ????

The missing amounts above are: Sales Revenue Gross Profit a. €830,000 €330,000 b. €730,000 €330,000 c. €830,000 €380,000 d. €730,000 €380,000 Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

128.

The operating expense section of an income statement for a wholesaler would not include a. freight-out. b. utilities expense. c. cost of goods sold. d. insurance expense.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

129.

Income from operations will always 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.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

For Instructor Use Only

5 - 22 130.

Test Bank for Financial Accounting: IFRS Edition, 3e All of the following items would be reported as other income and expense except a. interest expense. b. casualty losses. c. dividend revenue. d. loss from employees' strikes.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

131.

If a company has net sales of $800,000 and cost of goods sold of $520,000, the gross profit rate is a. 65%. b. 35%. c. 46%. d. 54%.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

132.

A company shows the following balances: Sales Revenue Sales Returns and Allowances Sales Discounts Cost of Goods Sold

¥1,500,000 270,000 30,000 900,000

What is the gross profit rate? a. 60% b. 75% c. 40% d. 25% Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

133.

The gross profit rate is computed by dividing gross profit by a. cost of goods sold. b. net income. c. net sales. d. sales revenue.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

134.

In terms of liquidity, inventory is a. more liquid than cash. b. more liquid than accounts receivable. c. more liquid than prepaid expenses. d. less liquid than store equipment.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

135.

On a classified statement of financial position, inventory is classified as a. an intangible asset. b. property, plant, and equipment. c. a current asset. d. a long-term investment.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

Accounting for Merchandising Operations 136.

5 - 23

Gross profit for a merchandiser is net sales minus a. operating expenses. b. cost of goods sold. c. sales discounts. d. cost of goods available for sale.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137.

During 2017, Yoder Enterprises generated revenues of $180,000. The company’s expenses were as follows: cost of goods sold of $90,000, operating expenses of $36,000 and a loss on the sale of equipment of $6,000. Yoder’s gross profit is a. $180,000. b. $90,000. c. $54,000. d. $48,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

138.

During 2017, Yoder Enterprises generated revenues of $180,000. The company’s expenses were as follows: cost of goods sold of $90,000, operating expenses of $36,000 and a loss on the sale of equipment of $6,000. Yoder’s income from operations is a. $180,000. b. $90,000. c. $54,000. d. $36,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

139.

During 2017, Yoder Enterprises generated revenues of $180,000. The company’s expenses were as follows: cost of goods sold of $90,000, operating expenses of $36,000 and a loss on the sale of equipment of $6,000. Yoder’s net income is a. $180,000. b. $90,000. c. $54,000. d. $48,000.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

5 - 24 140.

Test Bank for Financial Accounting: IFRS Edition, 3e Financial information is presented below: Operating Expenses € 90,000 Net Sales 300,000 Cost of Goods Sold 165,000 Gross profit would be a. €210,000. b. €45,000. c. €135,000. d. €300,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

141.

Financial information is presented below: Operating Expenses € 90,000 Net Sales 300,000 Cost of Goods Sold 165,000 The gross profit rate would be a. .70. b. .15. c. .30. d. .45.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

142.

Financial information is presented below: Operating Expenses € 270,000 Sales Returns and Allowances 78,000 Sales Discounts 36,000 Sales Revenue 900,000 Cost of Goods Sold 402,000 Gross profit would be a. €462,000. b. €384,000. c. €420,000. d. €498,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Accounting for Merchandising Operations 143.

5 - 25

Financial information is presented below: Operating Expenses € 270,000 Sales Returns and Allowances 78,000 Sales Discounts 36,000 Sales Revenue 900,000 Cost of Goods Sold 402,000 The gross profit rate would be a. .535. b. .489. c. .511. d. .553.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

144.

Financial information is presented below: Operating Expenses € 270,000 Sales Returns and Allowances 78,000 Sales Discounts 36,000 Sales Revenue 960,000 Cost of Goods Sold 462,000 The amount of net sales on the income statement would be a. €924,000. b. €846,000. c. €960,000. d. €996,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

145.

Financial information is presented below: Operating Expenses € 270,000 Sales Returns and Allowances 78,000 Sales Discounts 36,000 Sales Revenue 960,000 Cost of Goods Sold 462,000 Gross profit would be a. €462,000. b. €420,000. c. €384,000. d. €498,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

5 - 26 146.

Test Bank for Financial Accounting: IFRS Edition, 3e Financial information is presented below: Operating Expenses € 270,000 Sales Returns and Allowances 78,000 Sales Discounts 36,000 Sales Revenue 960,000 Cost of Goods Sold 462,000 The gross profit rate would be a. .454. b. .546. c. .500. d. .538.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

147.

If a company has sales of $630,000, net sales of $600,000, and cost of goods sold of $450,000, the gross profit rate is a. 71%. b. 75% c. 25%. d. 29%.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

148.

Murray’s Fashions sold merchandise for $152,000 cash during the month of July. Returns that month totaled $3,200. If the company’s gross profit rate is 40%, Murray’s will report monthly net sales revenue and cost of goods sold of a. $152,000 and $60,800. b. $148,800 and $59,520. c. $148,800 and $89,280. d. $152,000 and $89,280.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

149.

During August, 2017, Joe’s Supply Store generated revenues of $150,000. The company’s expenses were as follows: cost of goods sold of $60,000 and operating expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the sale of a delivery truck of $5,000. Joe’s gross profit for August, 2017 is a. $150,000. b. $95,000. c. $90,000. d. $80,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Accounting for Merchandising Operations 150.

5 - 27

During August, 2017, Joe’s Supply Store generated revenues of $150,000. The company’s expenses were as follows: cost of goods sold of $60,000 and operating expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the sale of a delivery truck of $5,000. Joe’s other income and expense (loss) for the month of August, 2017 is a. $0. b. $2,500. c. $5,000. d. $7,500.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

151.

During August, 2017, Joe’s Supply Store generated revenues of $150,000. The company’s expenses were as follows: cost of goods sold of $60,000 and operating expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the sale of a delivery truck of $5,000. Joe’s income from operations for the month of August, 2017 is a. $150,000. b. $97,500. c. $92,500. d. $80,000.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

152.

During August, 2017, Joe’s Supply Store generated revenues of $150,000. The company’s expenses were as follows: cost of goods sold of $60,000 and operating expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the sale of a delivery truck of $5,000. Joe’s net income for August, 2017 is a. $90,000. b. $87,500. c. $82,500. d. $80,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

153.

Operating expenses include salaries, utilities, advertising, and depreciation. International Financial Reporting Standards allow different presentation formats including by a. magnitude. b. nature. c. position. d. classification.

Ans: B, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

5 - 28 154.

Test Bank for Financial Accounting: IFRS Edition, 3e Operating expenditures include salaries, utilities, advertising, and depreciation. Presentation of operating expenses by nature a. provides very detailed information, with numerous line items. b. aggregates costs into groupings based on the primary functional activities in which the company engages. c. requires disclosures of additional details regarding the nature of certain expenses. d. All of these answer choices are correct.

Ans: A, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

155.

International Financial Reporting Standards call for companies to mark the recorded values of certain types of assets and liabilities to fair value each period. These unrealized gains and losses are excluded from net income but included in comprehensive income and include all of the following except a. adjustments to pension plan assets. b. gains from foreign currency translation. c. unrealized losses on certain types of investments. d. adjustment to fixed assets for depreciation.

Ans: D, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

156.

Which of the following statements is true regarding International Financial Reporting Standards (IFRS) and U.S. GAAP? a. IFRS allows both the perpetual and periodic systems, but U.S GAAP permits only the perpetual system. b. IFRS requires a single-step income statement, but U.S. GAAP allows either the single-step or the multiple-step income statement. c. U.S. GAAP allows operating expenses to be reported by either function or nature, IFRS requires reporting by function. d. IFRS requires 2 years of income statements, U.S. GAAP requires 3 years of income statements.

Ans: D, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

157.

Which of the following statements is true regarding the project to rework the structure of financial statements undertaken by the International Accounting Standard Board (IASB) and the Financial Accounting Standards Board (FASB)? a. The proposed changes to the financial statements would result in considerably more detail than currently seen under IFRS and U.S. GAAP. b. The proposed structure is meant to draw attention away from net income. c. The proposed structure will adopt major groupings similar to those currently used by the statement of cash flows (operating, investing, and financial). d. All of these answer choices are correct.

Ans: D, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

Accounting for Merchandising Operations

5 - 29

a

158. Sampson Company's accounting records show the following for the year ending December 31, 2017: Purchase Discounts Freight-In Purchases Beginning Inventory Ending Inventory Purchase Returns

₤

28,000 39,000 1,000,050 117,500 144,000 32,000

Using the periodic system, the cost of goods purchased is a. ₤901,050. b. ₤1,021,050. c. ₤1,043,050. d. ₤979,050. Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a

159. Sampson Company's accounting records show the following for the year ending December 31, 2017: Purchase Discounts Freight-In Purchases Beginning Inventory Ending Inventory Purchase Returns

₤

28,000 39,000 1,000,050 117,500 144,000 32,000

Using the periodic system, the cost of goods sold is a. ₤1,005,550. b. ₤994,550. c. ₤952,550. d. ₤1,047,550. Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a

160. The following information is available for Norton Company: Sales Revenue Ending Inventory Purchases

$390,000 36,000 290,000

Freight-In $30,000 Purchase Returns and Allowances 15,000 Beginning Inventory 45,000

Norton's cost of goods sold is a. $365,000. b. $350,000. c. $314,000. d. $305,000. Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

For Instructor Use Only

5 - 30

Test Bank for Financial Accounting: IFRS Edition, 3e

a

161. At the beginning of September, 2017, GLF Company reported Inventory of $8,000. During the month, the company made purchases of $28,400. At September 30, 2017, a physical count of inventory reported $9,600 on hand. Cost of goods sold for the month is a. $1,600. b. $28,400. c. $26,800. d. $36,400.

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a

162. At the beginning of the year, Meng Company had an inventory of ¥500,000. During the year, the company purchased goods costing ¥2,000,000. If Meng Company reported ending inventory of ¥600,000 and sales of ¥2,500,000, the company’s cost of goods sold and gross profit rate must be a. ¥1,250,000 and 50%. b. ¥1,900,000 and 24%. c. ¥1,250,000 and 24%. d. ¥1,900,000 and 76%.

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

163. During the year, Carla’s Pet Shop’s merchandise inventory decreased by $40,000. If the company’s cost of goods sold for the year was $650,000, purchases must have been a. $690,000. b. $610,000. c. $570,000. d. Unable to determine.

a

Ans: B, LO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a

164. Cost of goods available for sale is computed by adding a. beginning inventory to net purchases. b. beginning inventory to the cost of goods purchased. c. net purchases and freight-in. d. purchases to beginning inventory.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a

165. The Freight-In account a. increases the cost of merchandise purchased. b. is contra to the Purchases account. c. is a permanent account. d. has a normal credit balance.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a

166. Net purchases plus freight-in determines a. cost of goods sold. b. cost of goods available for sale. c. cost of goods purchased. d. total goods available for sale.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

Accounting for Merchandising Operations

5 - 31

a

167. Powers Company has the following account balances: Purchases $99,000 Sales Returns and Allowances 12,800 Purchase Discounts 8,000 Freight-In 6,000 Delivery Expense 8,000 The cost of goods purchased for the period is a. $107,000. b. $97,000. c. $105,000. d. $92,200.

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

168. Gould Shoe Store has a beginning inventory of €45,000. During the period, purchases were €250,000; purchase returns, €6,000; and freight-in €15,000. A physical count of inventory at the end of the period revealed that €30,000 was still on hand. The cost of goods available for sale was a. €286,000. b. €274,000. c. €304,000. d. €316,000.

a

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a

169. In a periodic inventory system, a return of defective merchandise to a supplier is recorded by crediting a. Accounts Payable. b. Inventory. c. Purchases. d. Purchase Returns and Allowances.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a

170. Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system? a. Cash received on account with a discount b. Payment of freight costs on a purchase c. Return of merchandise sold d. Sale of merchandise on credit

Ans: A, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

5 - 32

Test Bank for Financial Accounting: IFRS Edition, 3e

a

171. The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be a. Accounts Payable Purchase Returns and Allowances b. Purchase Returns and Allowances Accounts Payable c. Accounts Payable Inventory d. Inventory Accounts Payable

Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a

172. Under a periodic inventory system, acquisition of merchandise is debited to the a. Inventory account. b. Cost of Goods Sold account. c. Purchases account. d. Accounts Payable account.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a

173. Which of the following accounts has a normal credit balance? a. Purchases b. Sales Returns and Allowances c. Freight-In d. Purchase Discounts

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a

174. The respective normal account balances of Purchases, Purchase Discounts, and FreightIn are a. credit, credit, debit. b. debit, credit, credit. c. debit, credit, debit. d. debit, debit, debit.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a

175. In a worksheet for a merchandising company, Inventory would appear in the a. trial balance and adjusted trial balance columns only. b. trial balance and statement of financial position columns only. c. trial balance, adjusted trial balance, and statement of financial position columns. d. trial balance, adjusted trial balance, and income statement columns.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a

176. The Inventory account balance appearing in a worksheet represents the a. ending inventory. b. beginning inventory. c. cost of merchandise purchased. d. cost of merchandise sold.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

Accounting for Merchandising Operations 177.

5 - 33

Cole Company has sales revenue of ₤24,000, cost of goods sold of ₤16,000 and operating expenses of ₤6,000 for the year ended December 31. Cole's gross profit is a. ₤18,000. b. ₤8,000. c. ₤2,000. d. ₤0.

Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

178.

Logan Company made a purchase of merchandise on credit from Claude Corporation on August 3, for $7,500, terms 2/10, n/45. On August 10, Logan makes the appropriate payment to Claude. The entry on August 10 for Logan Company is a. Accounts Payable ............................................................... 7,500 Cash ............................................................................ 7,500 b. Accounts Payable ............................................................... 7,350 Cash ............................................................................ 7,350 c. Accounts Payable ............................................................... 7,500 Purchase Returns and Allowances .............................. 150 Cash ............................................................................ 7,350 d. Accounts Payable ............................................................... 7,500 Inventory ..................................................................... 150 Cash ............................................................................ 7,350

Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

179.

Cartier Company purchased inventory from Pissaro Company. The shipping costs were $400 and the terms of the shipment were FOB shipping point. Cartier would have the following entry regarding the shipping charges: a. There is no entry on Cartier's books for this transaction. b. Freight Expense ................................................................. 400 Cash .......................................................................... 400 c. Freight-Out ......................................................................... 400 Cash .......................................................................... 400 d. Inventory............................................................................. 400 Cash .......................................................................... 400

Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

180.

In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting a. Purchases. b. Purchase Returns. c. Purchase Allowance. d. Inventory.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

For Instructor Use Only

5 - 34 181.

Test Bank for Financial Accounting: IFRS Edition, 3e On October 4, 2017, Terry Corporation had credit sales transactions of $2,800 from merchandise having cost $1,900. The entries to record the day's credit transactions include a a. debit of $2,800 to Inventory. b. credit of $2,800 to Sales Revenue. c. debit of $1,900 to Inventory. d. credit of $1,900 to Cost of Goods Sold.

Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

182.

Which of the following accounts is not closed to Income Summary? a. Cost of Goods Sold b. Inventory c. Sales Revenue d. Sales Discounts

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

183.

In the Clark Company, sales were $480,000, sales returns and allowances were $30,000, and cost of goods sold was $315,000. The gross profit rate was a. 70%. b. 30%. c. 34%. d. 66%.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

184.

Net sales is sales revenue less a. sales discounts. b. sales returns. c. sales returns and allowances. d. sales discounts and sales returns and allowances.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

185.

In the statement of financial position, ending inventory is reported a. in current assets immediately following prepaid expenses. b. in current assets immediately following accounts receivable. c. in current assets immediately following cash. d. under property, plant, and equipment.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a

186. Cost of goods purchased is computed by adding a. beginning inventory to freight-in. b. beginning inventory to net purchases. c. beginning inventory to purchases and freight-in. d. freight-in to net purchases.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

Accounting for Merchandising Operations

5 - 35

Answers to Multiple Choice Questions Item

56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74.

Ans.

b c a c c a b b d b b d d a d c b a b

Item

75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93.

Ans.

b b c b a d d c a d b c c d a c a b c

Item

94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112.

Ans.

c a c a b d c b d c c a d d b b b a c

Item

113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131.

Ans.

b d c a c d c b a c a b d c a c d a b

Item

132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.

Ans.

d c c c b b c d c d b b b c a c c c d

Item

151. 152. 153. 154. 155. 156. 157. a 158. a 159. a 160. a 161. a 162. a 163. a 164. a 165. a 166. a 167. a 168. a 169.

Ans.

d b b a d d d d c c c b b b a c b c d

Item a

170. 171. a 172. a 173. a 174. a 175. a 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. a 186. a

Ans.

a a c d c c a b d d d b b b d a d

BRIEF EXERCISES BE 187 Presented here are the components in Ferrell Company’s income statement. Determine the missing amounts. _Sales Revenue_ €75,000 (c)

Cost of Goods Sold (a) €56,000

Gross _Profit €40,000 €59,000

Operating Expenses (b) €48,000

Net Income €17,000 (d)

Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 187 a. b. c. d.

(5 min.)

€35,000 €23,000 €115,000 €11,000

BE 188 Prepare the necessary journal entries on the books of Jayhawk Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations): (a) Jayhawk purchased $45,000 of merchandise on account, terms 2/10, n/30. (b) Returned $4,000 of damaged merchandise for credit. (c) Paid for the merchandise purchased within 10 days. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

For Instructor Use Only

5 - 36

Test Bank for Financial Accounting: IFRS Edition, 3e

Solution 188 (5 min.) (a) Inventory...................................................................................... Accounts Payable ............................................................

45,000

(b)

Accounts Payable ........................................................................ Inventory ..........................................................................

4,000

Accounts Payable ($45,000 – $4,000) ......................................... Inventory ($41,000 × .02) ................................................. Cash ($41,000 – $820) ....................................................

41,000

(c)

45,000

4,000

820 40,180

BE 189 Bryant Company sold goods on account to Kolmer Enterprises with terms of 2/10, n/30. The goods had a cost of $600 and a selling price of $900. Both Bryant and Kolmer use a perpetual inventory system. Record the sale on the books of Bryant and the purchase on the books of Kolmer. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 189

(3 min.)

Journal entry on Bryant’s books: Accounts Receivable.... ................................................................. Sales Revenue. ....................................................................

900

Cost of Goods Sold….................................................................... Inventory ..............................................................................

600

900 600

Journal entry on Kolmer’s books: Inventory ....................................................................................... Accounts Payable .................................................................

900 900

BE 190 Richter Company sells merchandise on account for $2,500 to Lynch Company with credit terms of 3/10, n/60. Lynch Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Richter Company make upon receipt of the check and the damaged merchandise? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 190

(3 min.)

Sales Returns and Allowances ...................................................... Sales Discounts ($2,300 × .03) .................................................... Cash ($2,500 – $200 – $69) .......................................................... Accounts Receivable ...........................................................

For Instructor Use Only

200 69 2,231 2,500

Accounting for Merchandising Operations

5 - 37

BE 191 Nen Company uses a perpetual inventory system. During May, the following transactions and events occurred. May

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