Test Bank For Intermediate Accounting, 9th Edition

Intermediate Accounting 9th Edition Spiceland Test Bank Full Download: http://testbanklive.com/download/intermediate-accounting-9th-edition-spiceland-test-bank/ Chapter 02 Review of the Accounting Process Answer Key True / False Questions 1. Owners’ equity can be expressed as assets minus liabilities. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Level of Difficulty: 1 Easy Topic Area: Accounting equation 2. Debits increase asset accounts and decrease liability accounts. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Level of Difficulty: 1 Easy Topic Area: Account relationships and records 3. Balance sheet accounts are referred to as temporary accounts because their balances are always changing. FALSE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation 2-1 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full download all chapters instantly please go to Solutions Manual, Test Bank site: testbanklive.com Blooms: Remember Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Level of Difficulty: 1 Easy Topic Area: Account relationships and records 4. After an unadjusted trial balance is prepared, the next step in the accounting processing cycle is the preparation of financial statements. FALSE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Level of Difficulty: 1 Easy Topic Area: Accounting processing cycle steps 5. Adjusting journal entries are recorded at the end of any period when financial statements are prepared. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Level of Difficulty: 1 Easy Topic Area: Analyze updating-Record adjusting entry 6. Accruals occur when the cash flow precedes either revenue or expense recognition. FALSE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. 2-2 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Level of Difficulty: 1 Easy Topic Area: Analyze updating-Identify type of adjustment 7. The adjusted trial balance contains only permanent accounts. FALSE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 1 Easy Topic Area: Trial balance―Adjusted 8. The income statement summarizes the operating activity of a firm at a particular point in time. FALSE AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 1 Easy Topic Area: Financial statement―Income Statement 9. The balance sheet can be considered a change or flow statement. FALSE AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 1 Easy Topic Area: Financial statement―Balance sheet 2-3 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10. The statement of cash flows summarizes transactions that caused cash to change during a reporting period. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 1 Easy Topic Area: Financial statement―Cash flow 11. The statement of shareholders’ equity discloses the changes in the temporary shareholders’ equity accounts. FALSE AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Financial statement―Shareholders equity 12. The post-closing trial balance contains only permanent accounts. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 1 Easy Topic Area: The closing process 2-4 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13. The closing process brings all temporary accounts to a zero balance and updates the balance in the retained earnings account. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 1 Easy Topic Area: The closing process 14. A reversing entry at the beginning of a period for salaries would include a debit to salaries expense. FALSE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-Appendix 2B Reversing Entries. Level of Difficulty: 2 Medium Topic Area: Reversing entries–Appendix B 15. The sale of merchandise on account would be recorded in a sales journal. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-Appendix 2C Subsidiary Ledgers and Special Journals. Level of Difficulty: 1 Easy Topic Area: Subsidiary ledger-Special journal–App C 2-5 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 16. The payment of cash to a supplier would be recorded in a purchases journal. FALSE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-Appendix 2C Subsidiary Ledgers and Special Journals. Level of Difficulty: 1 Easy Topic Area: Subsidiary ledger-Special journal–App C Multiple Choice Questions 17. The accounting equation can be stated as: A. A + L − OE = 0. B. A − L + OE = 0. C. -A + L − OE = 0. D. A − L − OE = 0. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Level of Difficulty: 2 Medium Topic Area: Accounting equation 2-6 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18. Examples of external transactions include all of the following except: A. Paying employee salaries. B. Purchasing equipment. C. Depreciating equipment. D. Collecting a receivable. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 19. Examples of internal transactions include all of the following except: A. Writing off an uncollectible account. B. Recording the expiration of prepaid insurance. C. Recording unpaid salaries. D. Paying salaries to company employees. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Analyze updating-Record adjusting entry 2-7 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 20. XYZ Corporation receives $100,000 from investors for issuing them shares of its stock. XYZ’s journal entry to record this transaction would include a: A. Debit to investments. B. Credit to retained earnings. C. Credit to common stock. D. Credit to revenue. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 21. Incurring an expense for advertising on account would be recorded by: A. Debiting liabilities. B. Crediting assets. C. Debiting an expense. D. Debiting assets. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 2-8 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 22. A sale on account would be recorded by: A. Debiting revenue. B. Crediting assets. C. Crediting liabilities. D. Debiting assets. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 23. Mary Parker Co. invested $15,000 in ABC Corporation and received common stock in exchange. Mary Parker Co.’s journal entry to record this transaction would include a: A. Debit to investments. B. Credit to retained earnings. C. Credit to common stock. D. Debit to expense. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 2-9 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 24. Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a 12% note for the balance. The journal entry to record this sale would include a: A. Credit to cash. B. Debit to cash discount. C. Debit to note receivable. D. Credit to note receivable. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 3 Hard Topic Area: Analyze transaction-Record journal entry 25. Somerset Leasing received $12,000 for 24 months’ rent in advance. How should Somerset record this transaction? A. Prepaid rent 12,000 Rent expense B. Cash 12,000 12,000 Deferred revenue C. Interest expense 12,000 12,000 Interest payable D. Salaries expense 12,000 12,000 Salaries payable 12,000 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 2-10 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26. Davis Hardware Company uses a perpetual inventory system. How should Davis record the sale of merchandise, costing $620, and sold on account for $960? A. Inventory 620 Accounts receivable Sales 620 960 Revenue from sales B. Accounts receivable 960 960 Sales revenue Cost of goods sold 960 620 Inventory C. 620 Inventory 620 Gain on sale 340 Sales revenue D. Accounts receivable 960 960 Sales revenue 620 Gain on sale 340 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 3 Hard Topic Area: Analyze transaction-Record journal entry 2-11 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 27. Ace Bonding Company purchased merchandise inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase? A. Inventory 2,000 Accounts payable B. 2,000 Cost of goods sold 2,000 Deferred revenue 1,000 Sales in advance C. Cost of goods sold 3,000 2,000 Inventory payable D. 2,000 Cost of goods sold 2,000 Profit 1,000 Sales payable 3,000 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 3 Hard Topic Area: Analyze transaction-Record journal entry 28. Which of the following accounts has a balance whereby debits normally exceed credits? A. Accounts payable. B. Accrued taxes. C. Accumulated depreciation. D. Advertising expense. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-03 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance. Level of Difficulty: 1 Easy 2-12 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Topic Area: Account relationships and records Topic Area: Determine account balance-Analyze entries 29. An example of a contra account is: A. Depreciation expense. B. Accounts receivable. C. Sales revenue. D. Accumulated depreciation. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Level of Difficulty: 1 Easy Topic Area: Analyze updating-Identify type of adjustment 30. Making insurance payments in advance is an example of: A. An accrued receivable transaction. B. An accrued liability transaction. C. A deferred revenue transaction. D. A prepaid expense transaction. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 02-02 Record transactions using the general journal format. Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Level of Difficulty: 1 Easy Topic Area: Analyze transaction-Record journal entry Topic Area: Analyze updating-Identify type of adjustment 2-13 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 31. Recording revenue before it is collected is an example of: A. A prepaid expense transaction. B. A deferred revenue transaction. C. An accrued liability transaction. D. An accrued receivable transaction. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Level of Difficulty: 1 Easy Topic Area: Analyze updating-Identify type of adjustment 32. When a magazine company collects cash for selling a subscription, it is an example of: A. An accrued liability transaction. B. An accrued receivable transaction. C. A prepaid expense transaction. D. A deferred revenue transaction. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 02-02 Record transactions using the general journal format. Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Level of Difficulty: 1 Easy Topic Area: Analyze transaction-Record journal entry Topic Area: Analyze updating-Identify type of adjustment 2-14 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 33. On December 31, 2017, Coolwear, Inc. had a balance in its prepaid insurance account of $48,400. During 2018, $86,000 was paid for insurance. At the end of 2018, after adjusting entries were recorded, the balance in the prepaid insurance account was 42,000. Insurance expense for 2018 would be: A. $6,400. B. $134,400. C. $86,000. D. $92,400. Feedback: Insurance expense = $48,400 + 86,000 − 42,000 = $92,400 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry Topic Area: Determine account balance-Analyze entries 34. Adjusting entries are primarily needed for: A. Cash basis accounting. B. Accrual accounting. C. Current value accounting. D. Manual accounting systems. AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Level of Difficulty: 1 Easy 2-15 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Topic Area: Analyze updating-Identify type of adjustment 35. Prepayments occur when: A. Cash flow precedes expense recognition. B. Sales are delayed pending credit approval. C. Customers are unable to pay the full amount due when goods are delivered. D. Manufactured goods await quality control inspections. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Identify type of adjustment 36. Accruals occur when cash flows: A. Occur before expense recognition. B. Occur after revenue or expense recognition. C. Are uncertain. D. May be substituted for goods or services. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Identify type of adjustment 2-16 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 37. On December 31, 2018, the end of Larry’s Used Cars’ first year of operations, the accounts receivable was $53,600. The company estimates that $1,200 of the year-end receivables will not be collected. Accounts receivable in the 2018 balance sheet will be valued at: A. $53,600. B. $54,800. C. $52,400. D. $1,200. Feedback: Accounts receivable = $53,600 − 1,200 = $52,400 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Identify type of adjustment Topic Area: Trial balance―Adjusted 2-17 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 38. Cal Farms reported supplies expense of $2,000,000 this year. The supplies account decreased by $200,000 during the year to an ending balance of $400,000. What was the cost of supplies the Cal Farms purchased during the year? A. $1,600,000. B. $1,800,000. C. $2,200,000. D. $2,400,000. Feedback: Supplies Bal. 600,000 ? Bal. 2,000,000 400,000 Supplies purchases: $400,000 + 2,000,000 − 600,000 = $1,800,000 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 2 Medium Topic Area: Determine account balance-Analyze entries 2-18 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 39. Which of the following is not an adjusting entry? A. Prepaid rent Rent expense B. Cash Deferred revenue C. Interest expense Interest payable D. Salaries expense Salaries payable AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry 40. The adjusting entry required when amounts previously recorded as deferred revenues are recognized includes: A. A debit to a liability. B. A debit to an asset. C. A credit to a liability. D. A credit to an asset. AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry 2-19 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 41. Which of the following accounts has a balance whereby credits normally exceed debits? A. Salary expense. B. Accrued income taxes payable. C. Land. D. Prepaid rent. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-03 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance. Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 1 Easy Topic Area: Account relationships and records Topic Area: Determine account balance—Analyze entries 42. When a tenant makes an end-of-period adjusting entry credit to the “Prepaid rent” account: A. (S)he usually debits cash. B. (S)he usually debits an expense account. C. (S)he debits a liability account. D. (S)he credits an owners’ equity account. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry 2-20 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 43. When a business makes an end-of-period adjusting entry with a debit to supplies expense, the usual credit entry is made to: A. Accounts payable. B. Supplies. C. Cash. D. Retained earnings. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 1 Easy Topic Area: Analyze updating-Record adjusting entry 44. The adjusting entry required to record accrued expenses includes: A. A credit to cash. B. A debit to an asset. C. A credit to an asset. D. A credit to liability. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry 2-21 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 45. Carolina Mills purchased $270,000 in supplies this year. The supplies account increased by $10,000 during the year to an ending balance of $66,000. What was supplies expense for Carolina Mills during the year? A. $300,000. B. $280,000. C. $260,000. D. $240,000. Feedback: Supplies Bal. 56,000 270,000 Bal. ? 66,000 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 2 Medium Topic Area: Determine account balance-Analyze entries Topic Area: Convert cash basis to accrual basis 2-22 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 46. Yummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2018, and charged the $4,200 premium to Insurance expense. At its December 31, 2018, yearend, Yummy Foods would record which of the following adjusting entries? A. Insurance expense 875 Prepaid insurance B. 875 Prepaid insurance 875 Insurance expense C. 875 Insurance expense 875 Prepaid insurance 3,325 Insurance payable D. Prepaid insurance 4,200 3,325 Insurance expense 3,325 Feedback: Entry on 8/1: Insurance expense Cash 4,200 4,200 Unused at 12/31: $4,200 × 19/24 = $3,325 AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry Topic Area: Convert cash basis to accrual basis 2-23 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 47. The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000. The current pay period ends on Friday, July 3. Neat Clothes is now preparing quarterly financial statements for the three months ended June 30. What is the adjusting entry to record accrued salaries at the end of June? A. Salaries expense 22,400 Prepaid salaries 9,600 Salaries payable B. Salaries expense 32,000 6,400 Salaries payable C. Prepaid salaries 6,400 9,600 Salaries payable D. Salaries expense 9,600 22,400 Salaries payable 22,400 Feedback: Amount accrued: $32,000 × 7/10 = $22,400 AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry 2-24 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 48. On September 1, 2018, Fortune Magazine sold 600 one-year subscriptions for $81 each. The total amount received was credited to deferred subscriptions revenue. What is the required adjusting entry at December 31, 2018? A. B. Deferred subscriptions revenue 48,600 Subscriptions revenue 16,200 Prepaid subscriptions 32,400 Deferred subscriptions revenue 16,200 Subscriptions revenue C. Deferred subscriptions revenue 16,200 16,200 Subscriptions payable D. Deferred subscriptions revenue 16,200 32,400 Subscriptions revenue 32,400 Feedback: Entry on 9/1: Cash Deferred subscriptions revenue 48,600 48,600 Amount recorded as revenue: $48,600 × 4/12 = $16,200 AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry 2-25 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 49. Mama’s Pizza Shoppe borrowed $8,000 at 9% interest on May 1, 2018, with principal and interest due on October 31, 2019. The company’s fiscal year ends June 30, 2018. What adjusting entry is necessary on June 30, 2018? A. No entry. B. Interest expense 240 Interest payable C. Interest expense 240 120 Interest payable D. Prepaid interest 120 120 Interest payable 120 Feedback: Accrued interest expense: $8,000 × 9% × 2/12 = $120 AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry 2-26 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 50. On September 15, 2018, Oliver’s Mortuary received a $6,000, nine-month note bearing interest at an annual rate of 10% from the estate of Jay Hendrix for services rendered. Oliver’s has a December 31 year-end. What adjusting entry will the company record on December 31, 2018? A. Interest receivable 175 Interest revenue B. Interest receivable 175 230 Interest revenue C. Interest receivable 230 175 Notes receivable D. Interest receivable 175 600 Interest revenue 175 Cash 425 Feedback: Accrued interest revenue: $6,000 × 10% × 3.5/12 = $175 AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry 2-27 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 51. In its first year of operations Acme Corp. had income before tax of $400,000. Acme made income tax payments totaling $150,000 during the year and has an income tax rate of 40%. What is the balance in income tax payable at the end of the year? A. $160,000 credit. B. $150,000 credit. C. $10,000 credit. D. $10,000 debit. Feedback: Income tax expense = $400,000 × 40% = $160,000 Income Tax Payable 150,000 160,000 10,000 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 3 Hard Topic Area: Analyze updating-Record adjusting entry Topic Area: Convert cash basis to accrual basis Topic Area: Determine account balance-Analyze entries 2-28 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 52. Eve’s Apples opened its business on January 1, 2018, and paid for two insurance policies effective that date. The liability policy was $36,000 for 18 months, and the crop damage policy was $12,000 for a two-year term. What is the balance in Eve’s prepaid insurance as of December 31, 2018? A. $9,000. B. $18,000. C. $30,000. D. $48,000. Feedback: Prepaid liability insurance: $36,000 x 6/18 $12,000 Prepaid hazard insurance: $12,000 x 12/24 6,000 Total prepaid insurance at 12/31/18 $18,000 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 3 Hard Topic Area: Determine account balance-Analyze entries Topic Area: Convert cash basis to accrual basis 2-29 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 53. Fink Insurance collected premiums of $18,000,000 from its customers during the current year. The adjusted balance in the Deferred premiums account increased from $6 million to $8 million dollars during the year. What is Fink’s revenue from insurance premiums recognized for the current year? A. $10,000,000. B. $16,000,000. C. $18,000,000. D. $20,000,000. Feedback: Cash collections $18,000,000 Deduct increase in deferred premiums ( 2,000,000) Insurance premium revenue $16,000,000 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 2 Medium Topic Area: Determine account balance-Analyze entries Topic Area: Convert cash basis to accrual basis 2-30 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 54. On November 1, 2018, Tim’s Toys borrows $30,000,000 at 9% to finance the holiday sales season. The note is for a six-month term and both principal and interest are payable at maturity. What is the balance of interest payable for the loan as of December 31, 2018? A. $112,500. B. $225,000. C. $450,000. D. $1,350,000. Feedback: Accrued interest payable = $30,000,000 × 9% × 2/12 = $450,000 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry Topic Area: Determine account balance-Analyze entries 55. An economic resource of an entity is: A. A revenue. B. An asset. C. A liability. D. A contra asset until used. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Level of Difficulty: 1 Easy Topic Area: Account relationships and records 2-31 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 56. Cost of goods sold is: A. An asset account. B. A revenue account. C. An expense account. D. A permanent equity account. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 1 Easy Topic Area: Analyze transaction-Record journal entry 57. The balance in retained earnings at the end of the year is determined by retained earnings at the beginning of the year: A. Plus revenues, minus liabilities. B. Plus accruals, minus deferrals. C. Plus net income, minus dividends. D. Plus assets, minus liabilities. AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 1 Easy Topic Area: Accounting equation Topic Area: Financial statement―Shareholders equity 2-32 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 58. In its first year of operations Best Corp. had income before tax of $500,000. Best made income tax payments totaling $210,000 during the year and has an income tax rate of 40%. What was Best’s net income for the year? A. $290,000. B. $294,000. C. $300,000. D. $306,000. Feedback: Income before tax $500,000 – (40% x $500,000) = $300,000 AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Financial statement―Income Statement 59. Dave’s Duds reported cost of goods sold of $2,000,000 this year. The inventory account increased by $200,000 during the year to an ending balance of $400,000. What was the cost of merchandise that Dave’s purchased during the year? A. $1,600,000. B. $1,800,000. C. $2,200,000. D. $2,400,000. Feedback: Inventory Ending Bal. 200,000 Purchases ? Bal. 400,000 2,000,000 To cost of goods sold AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze 2-33 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective: 02-02 Record transactions using the general journal format. Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 2 Medium Topic Area: Determine account balance—Analyze entries 60. Permanent accounts would not include: A. Interest expense. B. Salaries and wages payable. C. Prepaid rent. D. Deferred revenues. AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 2 Medium Topic Area: Account relationships and records Topic Area: The closing process 61. Permanent accounts would not include: A. Cost of goods sold. B. Inventory. C. Current liabilities. D. Accumulated depreciation. AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 2 Medium Topic Area: Account relationships and records Topic Area: The closing process 2-34 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 62. The purpose of closing entries is to transfer: A. Accounts receivable to retained earnings when an account is fully paid. B. Balances in temporary accounts to a permanent account. C. Inventory to cost of goods sold when merchandise is sold. D. Assets and liabilities when operations are discontinued. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 2 Medium Topic Area: The closing process 63. Temporary accounts would not include: A. Salaries payable. B. Depreciation expense. C. Supplies expense. D. Cost of goods sold. AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 2 Medium Topic Area: Account relationships and records Topic Area: The closing process 2-35 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 64. When converting an income statement from a cash basis to an accrual basis, expenses: A. Exceed cash payments to suppliers. B. Equal cash payments to suppliers. C. Are less than cash payments to suppliers. D. May exceed or be less than cash payments to suppliers. AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 2 Medium Topic Area: Convert cash basis to accrual basis 65. When the amount of revenue collected in advance decreases during an accounting period: A. Accrual-basis revenues exceed cash collections from customers. B. Accrual-basis net income exceeds cash-basis net income. C. Accrual-basis revenues are less than cash collections from customers. D. Accrual-basis net income is less than cash-basis net income. AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 3 Hard Topic Area: Convert cash basis to accrual basis 2-36 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 66. When converting an income statement from a cash basis to an accrual basis, which of the following is incorrect? A. An adjustment for depreciation reduces net income. B. A decrease in salaries payable decreases net income. C. A reduction in prepaid expenses decreases net income. D. An increase in accrued payables decreases net income. AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 2 Medium Topic Area: Convert cash basis to accrual basis 67. Molly’s Auto Detailers maintains its records on the cash basis. During 2018, Molly’s collected $72,000 from customers and paid $21,000 in expenses. Depreciation expense of $5,000 would have been recorded on the accrual basis. Over the course of the year, accounts receivable increased $4,000, prepaid expenses decreased $2,000, and accrued liabilities decreased $1,000. Molly’s accrual basis net income was: A. $38,000. B. $54,000. C. $49,000. D. $42,000. Feedback: Collections Payments for expenses Add: Increase in assets (accounts receivable) Deduct: Decrease in assets (accumulated depreciation) Decrease in assets (prepaid expenses) Add: Decrease in liabilities (accrued liabilities) Accrual basis net income $72,000 (21,000) 4,000 (5,000) (2,000) 1,000 $49,000 AACSB: Knowledge Application AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Blooms: Analyze 2-37 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 3 Hard Topic Area: Convert cash basis to accrual basis 68. Pat’s Custom Tuxedo Shop maintains its records on the cash basis. During this past year Pat’s collected $42,000 in tailoring fees, and paid $14,000 in expenses. Depreciation expense totaled $2,000. Accounts receivable increased $1,500, supplies increased $4,000, and accrued liabilities increased $2,500. Pat’s accrual basis net income was: A. $18,000. B. $34,000. C. $23,000. D. $29,000. Feedback: Collections Payments for expenses Add: Increase in assets (accounts receivable) Increase in assets (supplies) Deduct: Decrease in assets (accumulated depreciation) Deduct: Increase in liabilities (accrued liabilities) Accrual basis net income $42,000 (14,000) 1,500 4,000 (2,000) (2,500) $29,000 AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Blooms: Analyze Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 3 Hard Topic Area: Convert cash basis to accrual basis 2-38 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 69. The Hamada Company sales for 2018 totaled $150,000 and purchases totaled $95,000. Selected January 1, 2018, balances were: accounts receivable, $18,000; inventory, $14,000; and accounts payable, $12,000. December 31, 2018, balances were: accounts receivable, $16,000; inventory, $15,000; and accounts payable, $13,000. Net cash flows from these activities were: A. $45,000. B. $55,000. C. $58,000. D. $74,000. AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Blooms: Apply Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 3 Hard Topic Area: Convert cash basis to accrual basis 70. When the amount of interest receivable decreases during an accounting period: A. Accrual-basis interest revenue exceeds cash collection from borrowers. B. Accrual-basis net income exceeds cash-basis net income. C. Accrual-basis interest revenue is less than cash collection from borrowers. D. Accrual-basis net income is less than cash-basis net income. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 3 Hard Topic Area: Convert cash basis to accrual basis 2-39 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 71. When converting an income statement from a cash basis to an accrual basis, cash received for services: A. Exceeds service revenue. B. May exceed or be less than service revenue. C. Is less than service revenue. D. Equals service revenue. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 2 Medium Topic Area: Convert cash basis to accrual basis 2-40 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 72. Compared to the accrual basis of accounting, the cash basis of accounting produces a higher amount of income by the net decrease during the accounting period of: Accounts Receivable Accrued Liabilities a. Yes No b. No Yes c. Yes Yes d. No No A. Option a B. Option b C. Option c D. Option d AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 3 Hard Topic Area: Convert cash basis to accrual basis 2-41 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 73. On June 1, Royal Corp. began operating a service company with an initial cash investment by shareholders of $2,000,000. The company provided $6,400,000 of services in June and received full payment in July. Royal also incurred expenses of $3,000,000 in June that were paid in August. During June, Royal paid its shareholders cash dividends of $1,000,000. What was the company’s income before income taxes for the two months ended July 31 under the following methods of accounting? Cash Basis Accrual Basis a. $3,400,000 $3,400,000 b. $5,400,000 $2,400,000 c. $6,400,000 $3,400,000 d. $6,400,000 $2,400,000 A. Option a B. Option b C. Option c D. Option d Feedback: Collections Expenses incurred but not paid Accrual basis net income $6,400,000 (Cash basis income) (3,000,000) $3,400,000 Investment by shareholders and dividends to shareholders do not affect net income for either basis of accounting. AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Blooms: Analyze Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 3 Hard Topic Area: Convert cash basis to accrual basis 2-42 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 74. When Castle Corporation pays insurance premiums, the transaction is recorded as a debit to prepaid insurance. Additional information for the year ended December 31 is as follows: Prepaid insurance at January 1 $52,500 Insurance expense recognized during the year 218,750 Prepaid insurance at December 31 61,250 What was the total amount of cash paid by Castle for insurance premiums during the year? A. $218,750 B. $166,250 C. $210,000 D. $227,500 Prepaid Insurance Beg. Bal. 52,500 Cash paid ? Bal. 61,250 218,750 Insurance expense AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 2 Medium Topic Area: Determine account balance-Analyze entries 2-43 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Matching Questions 75. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. Number for TERM PHRASE term that matches the phrase. 1. Prepayments Assets or liabilities created when recognition 3 precedes cash flows. 2. Post-closing trial Assets or liabilities created when cash flows balance precede recognition. 3. Accruals A list of accounts and balances containing the 1 5 source data for preparation of financial statements. 4. Unadjusted trial balance A list of accounts and their balances prepared 4 before the effects of internal transactions are recorded. 5. Adjusted trial balance A list of only permanent accounts and their 2 balances prepared to show that the accounting equation is in balance. AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-03 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance. Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 1 Easy Topic Area: Analyze updating-Identify type of adjustment Topic Area: Trial balance―Adjusted Topic Area: Trial balance―Unadjusted Topic Area: The closing process 2-44 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 76. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. Number for TERM PHRASE term that matches the phrase. 1. Balance sheet Reports operating, investing, and financing 4 activities. 2. Adjusting entries Records internal transactions not previously 2 reported. 3. Expenses Portrays financial position at a point in time. 1 4. Statement of cash flows Represents outflows of resources incurred to 3 generate revenues. 5. Post-closing trial The last step in the accounting processing cycle. 5 balance AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Learning Objective: 02-06 Describe the four basic financial statements. Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 1 Easy Topic Area: Analyze updating-Identify type of adjustment Topic Area: Financial statement―Cash flow Topic Area: Financial statement―Balance sheet Topic Area: Accounting equation Topic Area: The closing process 2-45 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 77. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. Number for TERM PHRASE term that matches the phrase. 1. Periodic system Recorded when there are dispositions of assets for 5 consideration in excess of book values. 2. Prepayments Recorded when there are dispositions of assets for 4 consideration less than book values. 3. Perpetual system Requires adjusting entries to update the inventory 1 account. 4. Losses Requires entries to cost of goods sold account when 3 merchandise is sold. 5. Gains When cash flow precedes either expense or revenue 2 recognition. AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-02 Record transactions using the general journal format. Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Accounting equation Topic Area: Analyze transaction-Record journal entry Topic Area: Analyze updating-Identify type of adjustment 2-46 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 78. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. Number for TERM PHRASE term that matches the phrase. 1. General ledger Refers to the right side of an account. 2 2. Credit Asset and expense accounts normally have this type 4 of balance. 3. General journal Used to record any type of transaction in 3 chronological order. 4. Debit Contains all the accounts of an entity. 1 5. Closing entries Used to reset temporary accounts to a zero balance. 5 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 1 Easy Topic Area: Account relationships and records Topic Area: Accounting processing cycle steps Topic Area: The closing process 2-47 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 79. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. Number for TERM PHRASE term that matches the phrase. 1. Liabilities Transfer balances from journals to ledgers. 4 2. Retained earnings Record chronologically the effects of transactions in 3 debit/credit form. 3. Journalize Refers to nonowner claims against the assets of a 1 firm. 4. Post Represents the cumulative amount of net income, less 2 distributions to shareholders. 5. Special journals Used to record repetitive types of transactions. 5 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-Appendix 2C Subsidiary Ledgers and Special Journals. Level of Difficulty: 1 Easy Topic Area: Accounting processing cycle steps Topic Area: Subsidiary ledger-Special journal–App C Topic Area: Accounting equation 2-48 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 80. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. Number for TERM PHRASE term that matches the phrase. 1. Source documents Refers to inflows of assets from the sale of goods 2 and services. 2. Revenues Used to identify external transactions. 1 3. Transaction analysis Used to record repetitive types of transactions. 5 4. Deferred revenues Liabilities created by a customer’s prepayment. 4 5. Special journals Determines the effects of an event in terms of the 3 accounting equation. AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-Appendix 2C Subsidiary Ledgers and Special Journals. Level of Difficulty: 1 Easy Topic Area: Accounting processing cycle steps Topic Area: Subsidiary ledger-Special journal–App C Topic Area: Account relationships and records Topic Area: Accounting equation 2-49 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 81. Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. Number for TERM PHRASE term that matches the phrase. 1. Unadjusted trial Refers to inflows of assets from the sale of goods 9 balance and services. 2. Accrued receivables Records the effects of internal transactions. 6 3. Deferred revenues Cash received from a customer in advance of 3 providing a good or service. 4. Temporary accounts Last step in the accounting processing cycle. 10 5. Accrued liabilities Changes in the retained earnings component of 4 shareholders’ equity. 6. Adjusting entries Collection of storage areas, called accounts. 8 7. Prepaid expense Asset recorded when an expense is paid for in 7 advance. 8. General ledger Revenue recognized before cash is received. 2 9. Revenues A list of the general ledger accounts and their 1 balances. 10. Post-closing trial Expenses incurred but not yet paid. 5 balance AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-03 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance. Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Identify type of adjustment Topic Area: Trial balance―Unadjusted Topic Area: Accounting equation Topic Area: Account relationships and records Topic Area: The closing process 2-50 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-51 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Short Answer Questions Use the following to answer questions 82 – 93: The account titles to be responded to are provided in no particular order. Assume that all accounts have normal balances according to whether the account is increased by a debit or increased by a credit. Required: In column A, indicate whether a debit will: 1. Increase the account balance, or 2. Decrease the account balance. In column B, classify each account according to the following scheme. For contra accounts, indicate the classification of the account to which it relates. 1. A current asset in the balance sheet. 2. A noncurrent asset in the balance sheet. 3. A current liability in the balance sheet. 4. A long-term liability in the balance sheet. 5. A permanent equity account in the balance sheet. 6. A revenue account in the income statement. 7. An expense account shown in the income statement. 8. Account does not appear in either the balance sheet or the income statement. A Effect of a B Classification debit on account EXAMPLE: Advertising expense 1 7 82. Buildings and equipment (B&E) 2-52 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Answer: Effect Classification 1 2 Effect Classification 2 3 Buildings and equipment (B&E) AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-01 Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 83. Short-term notes payable Answer: Short-term notes payable AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-01 2-53 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 84. Cost of goods sold Answer: Effect Classification 1 7 Effect Classification 1 1 Cost of goods sold AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-01 Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 85. Accounts receivable Answer: Accounts receivable AACSB: Analytical Thinking AICPA: BB Critical Thinking 2-54 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-01 Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 86. Inventory Answer: Effect Classification 1 1 Effect Classification 2 3 Inventory AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-01 Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 87. Deferred revenue Answer: Deferred revenue AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement 2-55 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Blooms: Analyze Learning Objective: 02-01 Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 88. Property taxes payable Answer: Effect Classification 2 3 Effect Classification 2 5 Property taxes payable AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-01 Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 89. Retained earnings Answer: Retained earnings AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement 2-56 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Blooms: Analyze Learning Objective: 02-01 Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 90. Interest revenue Answer: Effect Classification 2 6 Interest revenue AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-01 Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 2-57 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 91. Supplies expense Answer: Effect Classification 1 7 Effect Classification 1 1 Supplies expense AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-01 Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 92. Prepaid rent Answer: Prepaid rent AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-01 Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 2-58 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 93. Common stock Answer: Effect Classification 2 5 Common stock AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-01 Learning Objective: 02-06 Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Accounting equation Topic Area: Distinguish among financial statements 2-59 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Use the following to answer questions 94 – 108: 1100 Cash 2170 Property taxes payable 1120 Short-term investments 2180 Rent payable 1130 Notes receivable 2200 Long-term notes payable 1140 Accounts receivable 3100 Common stock 1145 Loan receivable 3200 Retained earnings 1150 Interest receivable 5000 Sales revenue 1160 Other accrued receivables 5300 Interest revenue 1200 Inventory 6000 Cost of goods sold 1250 Supplies 6200 Advertising expense 1260 Prepaid expenses 6210 Miscellaneous expense 1320 Buildings and equipment (B&E) 6220 Depreciation expense 1325 Accumulated depreciation-B&E 6230 Insurance expense 2110 Short-term notes payable 6240 Property tax expense 2120 Interest payable 6250 Rent expense 2130 Accounts payable 6260 Supplies expense 2140 Deferred revenue 6270 Salaries and wages expense 2150 Salaries and wages payable 6400 Interest expense 2160 Dividends payable 6999 Income summary account Required: Using the chart of accounts provided, indicate by account number the account or accounts that would be debited and credited in the following transactions. Also enter the number 1, 2, or 3 to indicate the type of transaction as: (1) an external transaction, (2) an internal transaction recorded as an adjusting journal entry, or (3) a closing entry. The company uses a perpetual inventory system. All prepayments are initially recorded in permanent accounts. 94. TRANSACTION EXAMPLE: Sold $110,000,000 in common Account(s) Account(s) Transaction debited credited type 1100 3100 1 2-60 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. stock for cash. 94. Purchased building and equipment for $10,000,000, paying 20% cash and issuing a 30-year note for the balance. Answer: TRANSACTION Account(s) Account(s) Transaction debited credited type Purchased building and equipment for $10,000,000, paying 20% cash and issuing a 30-year note for the balance. 1320 1100, 2200 1 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 2-61 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 95. Invested idle cash in short-term money market funds. Answer: TRANSACTION Invested idle cash in short-term money market Account(s) Account(s) Transaction debited credited type 1120 1100 1 Account(s) Account(s) Transaction debited credited type 1200 2130 1 funds. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Purchased inventory on account. 96. Answer: TRANSACTION Purchased inventory on account. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze 2-62 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Sold inventory on account. 97. Answer: TRANSACTION Sold inventory on account. Account(s) Account(s) Transaction debited credited type 1140, 6000 5000, 1200 1 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 2-63 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Sold merchandise to a customer in exchange for a promissory note. 98. Answer: TRANSACTION Sold merchandise to a customer in exchange for Account(s) Account(s) Transaction debited credited type 1130, 6000 5000, 1200 1 a promissory note. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Accrued the interest recognized but not collected on notes receivable. 99. Answer: TRANSACTION Accrued the interest recognized but not collected Account(s) Account(s) Transaction debited credited type 1150 5300 2 on notes receivable. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement 2-64 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry Collected a note receivable at maturity, including the interest that had already been accrued. 100. Answer: TRANSACTION Collected a note receivable at maturity, including Account(s) Account(s) Transaction debited credited type 1100 1130, 1150 1 the interest that had already been accrued AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 2-65 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Collected cash on account from customers. 101. Answer: TRANSACTION Collected cash on account from customers. Account(s) Account(s) Transaction debited credited type 1100 1140 1 Account(s) Account(s) Transaction debited credited type 1100, 6000 5000, 1200 1 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 102. Sold inventory for cash. Answer: TRANSACTION Sold inventory for cash. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium 2-66 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Topic Area: Analyze transaction-Record journal entry Received payment for services to be performed next year. 103. Answer: TRANSACTION Received payment for services to be performed Account(s) Account(s) Transaction debited credited type 1100 2140 1 next year. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 2-67 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Salaries and wages have been recognized but are unpaid at the end of an accounting period. 104. Answer: TRANSACTION Accrued salaries and wages due but unpaid at Account(s) Account(s) Transaction debited credited type 6270 2150 2 the end of an accounting period. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry 2-68 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Closed the income summary account, assuming there was a net income for the period. 105. Answer: TRANSACTION Closed the income summary account, assuming Account(s) Account(s) Transaction debited credited type 6999 3200 3 Account(s) Account(s) Transaction debited credited type 2170 1100 1 there was a net income for the period. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 2 Medium Topic Area: The closing process Accrued property taxes were paid. 106. Answer: TRANSACTION Accrued property taxes were paid. AACSB: Analytical Thinking 2-69 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 107. Declared cash dividends on common stock that will be paid in the next month. Answer: TRANSACTION Declared cash dividends on common stock that Account(s) Account(s) Transaction debited credited type 3200 2160 1 will be paid in the next month. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 3 Hard Topic Area: Analyze transaction-Record journal entry 2-70 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Paid rent for the next three months. 108. Answer: TRANSACTION Paid rent for the next three months. Account(s) Account(s) Transaction debited credited type 1260 1100 1 AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 2-71 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 109. Rite Shoes was involved in the transactions described below. Required: Prepare the appropriate journal entry for each transaction. If an entry is not required, state “No Entry.” 1. Purchased $8,200 of inventory on account. 2. Paid weekly salaries and wages, $920. 3. Recorded sales for the first week: Cash: $7,100; On account: $5,300. 4. Paid for inventory purchased in event (1). 5. Placed an order for $6,200 of inventory. Answer: 1. Inventory 8,200 Accounts payable 2. Salaries and wages expense 8,200 920 Cash 3. 920 Cash 7,100 Accounts receivable 5,300 Sales revenue 4. Accounts payable Cash 5. 12,400 8,200 8,200 No Entry. AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 1 Easy Topic Area: Analyze transaction-Record journal entry 2-72 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 110. Prepare journal entries to record the following transactions of Daisy King Ice Cream Company. If an entry is not required, state “No Entry.” 1. Started business by issuing 10,000 shares of common stock for $20,000. 2. Signed a franchise agreement to pay royalties of 5% of sales. 3. Leased a building for three years at $500 per month and paid six months’ rent in advance. 4. Purchased equipment for $5,400, paying $1,000 down and signing a two-year, 10% note for the balance. 5. Purchased $1,800 of supplies on account. 6. Recorded cash sales of $800 for the first week. 7. Paid weekly salaries and wages, $320. 8. Paid for supplies purchased in item (5). 9. Paid royalties due on first week’s sales. 10. Recorded depreciation on equipment, $50. Answer: 1. Cash 20,000 Common stock 2. No Entry. 3. Prepaid rent 20,000 3,000 Cash 4. 5. Equipment 3,000 5,400 Cash 1,000 Notes payable 4,400 Supplies inventory 1,800 Accounts payable 6. Cash 1,800 800 Sales revenue 7. Salaries and wages expense 800 320 Cash 8. Accounts payable 320 1,800 Cash 9. Royalty expense 1,800 40 Cash 10. Depreciation expense Accumulated depreciation 40 50 50 2-73 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 02-02 Record transactions using the general journal format. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry 111. Flint Hills, Inc. has prepared a year-end 2018 trial balance. Certain accounts in the trial balance do not reflect all activities that have occurred. Required: Prepare adjusting journal entries, as needed, for the following items. 1. The Supplies account shows a balance of $540, but a count of supplies reveals only $210 on hand. 2. Flint Hills initially records the payments of all insurance premiums as expenses. The trial balance shows a balance of $420 in Insurance expense. A review of insurance policies reveals that $125 of insurance is unexpired. 3. Flint Hills employees work Monday through Friday, and salaries of $2,400 per week are paid each Friday. Flint Hills’ year-end falls on Tuesday. 4. On December 31, 2018, Flint Hills received a utility bill for December electricity usage of $190 that will be paid in early January of 2019. Answer: 1. Supplies expense 330 Supplies 2. Prepaid insurance 330 125 Insurance expense 3. Salaries expense 125 960 Salaries payable 4. Utilities expense Utilities payable 960 190 190 AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking 2-74 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AICPA: FN Measurement Blooms: Apply Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Record adjusting entry 2-75 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 112. The following is selected financial information for D. Kay Dental Laboratories for 2017 and 2018: 2017 2018 Retained earnings, January 1 $53,000 ? Net income 37,000 42,000 Dividends declared and paid 15,000 18,000 Common stock 70,000 ? Kay issued 2,000 shares of additional common stock in 2018 for $20,000. There were no other shareholder transactions. Required: Prepare a statement of shareholders’ equity for D. Kay Dental Laboratories for the year ended December 31, 2018. Answer: D. Kay Dental Laboratories Statement of Shareholders’ Equity For the Year Ended December 31, 2018 Total Common Retained Shareholders’ Stock Earnings Equity Balance, January 1, 2018 $70,000 Issue of common stock 20,000 Net income for 2018 Less: Dividends Balance, December 31, 2018 $75,000* $145,000 20,000 42,000 42,000 _______ – 18,000 – 18,000 $ 90,000 $ 99,000 $189,000 * Beginning balance, Retained Earnings = Ending balance at December 31, 2017: $53,000 + 37,000 − 15,000 = $75,000 AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement 2-76 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Blooms: Apply Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 3 Hard Topic Area: Financial statement―Shareholders equity 2-77 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 113. The Yankel Corporation’s controller prepares adjusting entries only at the end of the fiscal year. The following adjusting entries were prepared on December 31, 2018: Debit Interest expense Credit 1,800 Interest payable Insurance expense 1,800 60,000 Prepaid insurance Interest receivable 60,000 3,000 Interest revenue 3,000 Additional information: 1. The company borrowed $30,000 on June 30, 2018. Principal and interest are due on June 30, 2019. This note is the company’s only interest-bearing debt. 2. Insurance for the year on the company’s office buildings is $90,000. The insurance is paid in advance. 3. On August 31, 2018, Yankel lent money to a customer. The customer signed a note with principal and interest at 9% due in one year. Required: Determine the following: 1. What is the interest rate on the company’s note payable? 2. The 2018 insurance payment was made at the beginning of which month? 3. How much did Yankel lend its customer on August 31? 2-78 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Answer: 1. $1,800 represents six months of interest on a $30,000 note, or 50% of annual interest. $1,800 ÷ .50 = $3,600 in annual interest $3,600 ÷ $30,000 = 12% interest rate Or, Principal × Rate × Time = Interest $30,000 × Rate × 6/12 = $1,800 $1,800 ÷ $30,000 = .06 six-month rate To annualize the nine month rate: .06 × 12/6 =.12 or 12% 2. $90,000 ÷ 12 months = $7,500 per month in insurance $60,000 ÷ $7,500 = 8 months expired. The insurance was paid on May 1, eight months ago. 3. Principal × Rate × Time = Interest Principal × 9% × (4/12) = $3,000 Principal × 3% = $3,000 Principal = $100,000 Or $3,000 represents four months (September through December) in accrued interest, or $750 per month. $750 × 12 months = $9,000 in annual interest Principal × 9% = $9,000 Principal = $9,000 ÷ .09 = $100,000 note AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Blooms: Analyze 2-79 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Level of Difficulty: 3 Hard Topic Area: Analyze updating-Record adjusting entry Topic Area: Determine account balance-Analyze entries 2-80 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Use the following to answer questions 114 – 118: Suppose that Laramie Company’s adjusted trial balance ignored the following information. For each item of information, indicate what effects, if any, these omissions would have on the stated components of Laramie Company’s 2018 Income Statement and 12/31/18 Balance Sheet. Assume no income taxes. Use the following code for your answers and be sure to include the dollar amounts of the effects next to the letter O or U: N = No Effect O = Overstated U = Understated 114. 2018 Additional 12/31/18 12/31/18 12/31/18 Information Assets Liabilities Owners’ Equity 12/31/18 12/31/18 12/31/18 2018 Additional Information Assets Liabilities Owners’ Equity Net Income $2,000 interest on a N U 2,000 O 2,000 O2,000 Net Income $2,000 interest on a loan was not yet paid or recorded Answer: loan was not yet paid or recorded 2-81 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Determine account balance-Analyze entries Topic Area: Distinguish among financial statements 115. 12/31/18 12/31/18 12/31/18 2018 Assets Liabilities Owners’ Equity Net Income 12/31/18 12/31/18 12/31/18 2018 Additional Information Assets Liabilities Owners’ Equity Net Income The estimated O25,000 N O25,000 O25,000 Additional Information The estimated uncollectible accounts receivable is now zero and should be $25,000. Answer: uncollectible accounts receivable is now zero and should be $25,000. AACSB: Analytical Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial 2-82 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. balance. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Distinguish among financial statements Topic Area: Determine account balance-Analyze entries 116. 2018 Additional 12/31/18 12/31/18 12/31/18 Information Assets Liabilities Owners’ Equity Additional 12/31/18 12/31/18 12/31/18 2018 Information Assets Liabilities Owners’ Equity Net Income $10,000 of the paid U10,000 N U10,000 U10,000 Net Income $10,000 of the paid and recorded rent expense pertains to the year 2019. Answer: and recorded rent expense pertains to the year 2019. AACSB: Analytical Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium 2-83 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Topic Area: Determine account balance-Analyze entries Topic Area: Distinguish among financial statements 117. 12/31/18 12/31/18 12/31/18 2018 Assets Liabilities Owners’ Equity Net Income 12/31/18 12/31/18 12/31/18 2018 Additional Information Assets Liabilities Owners’ Equity Net Income $20,000 in depreciation O20,000 N O20,000 O20,000 Additional Information $20,000 in depreciation on some equipment was still unrecorded. Answer: on some equipment was still unrecorded. AACSB: Analytical Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Distinguish among financial statements Topic Area: Determine account balance-Analyze entries 2-84 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 118. 2018 12/31/18 12/31/18 12/31/18 Assets Liabilities Owners’ Equity 12/31/18 12/31/18 12/31/18 2018 Additional Information Assets Liabilities Owners’ Equity Net Income $4,000 in cash dividends O4,000 N O4,000 N Additional Information Net Income $4,000 in cash dividends declared and paid in December 2018 were unrecorded. Answer: declared and paid in December 2018 were unrecorded. AACSB: Analytical Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Determine account balance-Analyze entries Topic Area: Distinguish among financial statements 2-85 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Use the following to answer questions 119 – 124: You are reviewing O’Brian Co.’s adjusted trial balance for the year ended 12/31/18. You notice several omissions and incorrect items during your review, some of which are noted below. For each one, you are to determine what effect, if any, these items would have on the stated components of O’Brian Co.’s 2018 Income Statement and 12/31/18 Balance Sheet if they are not corrected or updated. Assume no income taxes. Use the following code for your answers. You need not include any dollar amounts. N = No Effect O = Overstated U = Understated 119. 12/31/18 12/31/18 Assets Liabilities 12/31/18 12/31/18 Additional Information Assets Liabilities Uncollectible accounts of O N Additional Information 12/31/18 2018 Owners’ Net Equity Income 12/31/18 2018 Owners’ Net Equity Income O O Uncollectible accounts of $7,000, as a percentage of sales, are estimated at the end of the year. The entry has not been recorded. Answer: $7,000, as a percentage of sales, are estimated at the end of the year. The entry has not been recorded. 2-86 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AACSB: Analytical Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Determine account balance-Analyze entries Topic Area: Distinguish among financial statements 2-87 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 120. Additional Information 12/31/18 12/31/18 Assets Liabilities 12/31/18 12/31/18 Assets Liabilities 12/31/18 2018 Owners’ Net Equity Income 12/31/18 2018 Owners’ Net Equity Income O O The journal entry for depreciation on equipment for 2018 was recorded for $48,000. The amount should have been $66,000. Answer: Additional Information The journal entry for depreciation O N on equipment for 2018 was recorded for $48,000. The amount should have been $66,000. AACSB: Analytical Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Distinguish among financial statements Topic Area: Determine account balance-Analyze entries 2-88 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 121. 12/31/18 12/31/18 Assets Liabilities 12/31/18 12/31/18 Additional Information Assets Liabilities Cash dividends declared O N Additional Information 12/31/18 2018 Owners’ Net Equity Income 12/31/18 2018 Owners’ Net Equity Income O N Cash dividends declared and paid on December 15, 2018, were not recorded. Answer: and paid on December 15, 2018, were not recorded. AACSB: Analytical Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 3 Hard Topic Area: Determine account balance-Analyze entries Topic Area: Distinguish among financial statements 2-89 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 122. Additional Information 12/31/18 12/31/18 Assets Liabilities 12/31/18 12/31/18 Assets Liabilities N U 12/31/18 2018 Owners’ Net Equity Income 12/31/18 2018 Owners’ Net Equity Income O O $10,000 of the rent revenue collected and recorded as revenue this year pertains to 2019. Answer: Additional Information $10,000 of the rent revenue collected and recorded as revenue this year pertains to 2019. AACSB: Analytical Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Determine account balance-Analyze entries Topic Area: Distinguish among financial statements 2-90 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 123. Additional Information 12/31/18 12/31/18 Assets Liabilities 12/31/18 12/31/18 Assets Liabilities U N 12/31/18 2018 Owners’ Net Equity Income 12/31/18 2018 Owners’ Net Equity Income U U Interest recognized during the year on a note receivable was not yet collected or recorded Answer: Additional Information Interest recognized during the year on a note receivable was not yet collected or recorded AACSB: Analytical Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Determine account balance-Analyze entries Topic Area: Distinguish among financial statements 2-91 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 124. Additional Information 12/31/18 12/31/18 Assets Liabilities 12/31/18 12/31/18 Assets Liabilities U N 12/31/18 2018 Owners’ Net Equity Income 12/31/18 2018 Owners’ Net Equity Income Supplies purchased during the year for $1,000 cash were recorded by a debit to Supplies Expense and a credit to Cash. Only $200 of supplies remain at the end of the year, but no further entries have been recorded. Answer: Additional Information Supplies purchased during the year for $1,000 cash U U were recorded by a debit to Supplies Expense and a credit to Cash. Only $200 of supplies remain at the end of the year, but no further entries have been recorded. AACSB: Analytical Thinking 2-92 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 02-05 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 3 Hard Topic Area: Determine account balance-Analyze entries Topic Area: Distinguish among financial statements 2-93 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Use the following to answer questions 125 – 127: The adjusted trial balance for China Tea Company at December 31, 2018, is presented below: Debit Cash 10,500 Accounts receivable 150,000 Prepaid rent 5,000 Inventory 25,000 Equipment 300,000 Accumulated depreciation– Credit 125,000 equipment Accounts payable 30,000 Notes payable–due in three months 30,000 Salaries payable 4,000 Interest payable 1,000 Common stock 200,000 Retained earnings 50,000 Sales revenue 400,000 Costs of goods sold 180,000 Salaries expense 120,000 Rent expense 15,000 Depreciation expense 30,000 Interest expense 2,000 Advertising expense 2,500 Totals 840,000 840,000 125. Prepare the closing entries for China Tea Company for the year ended December 31, 2018. 2-94 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Answer: 1. Sales revenue 400,000 Income summary 2. 3. Income summary 400,000 349,500 Cost of goods sold 180,000 Salaries expense 120,000 Rent expense 15,000 Depreciation expense 30,000 Interest expense 2,000 Advertising expense 2,500 Income summary Retained earnings 50,500 50,500 AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 2 Medium Topic Area: The closing process 2-95 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 126. Prepare an income statement for China Tea Company for the year ended December 31, 2018. Answer: China Tea Company Income Statement For the Year Ended December 31, 2018 Sales revenue $400,000 Cost of goods sold 180,000 Gross profit 220,000 Other expenses: Salaries expense $120,000 Rent expense 15,000 Depreciation expense 30,000 Interest expense 2,000 Advertising expense 2,500 Total other expenses 169,500 Net income $ 50,500 AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Financial statement―Income Statement 2-96 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 127. Prepare a classified balance sheet for China Tea Company as of December 31, 2018. Answer: China Tea Company Balance Sheet At December 31, 2018 Assets Current assets: Cash $ 10,500 Accounts receivable 150,000 Inventory 25,000 Prepaid rent 5,000 Total current assets 190,500 Property and equipment: Equipment 300,000 Less: Accumulated depreciation 125,000 Total assets 175,000 $365,500 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 30,000 Notes payable 30,000 Salaries payable 4,000 Interest payable 1,000 Total current liabilities 65,000 Shareholders’ equity: Common stock $200,000 Retained earnings 100,500 Total shareholders’ equity 300,500 Total liabilities and shareholders’ equity $365,500 2-97 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Financial statement―Balance sheet 2-98 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Use the following to answer questions 128 and 129: The following information, based on the 12/31/18 Annual Report to Shareholders of Krafty Foods ($ in millions): Accounts payable 1,897 Accounts receivable (net) 3,131 Accrued liabilities and taxes 4,105 Cash and cash equivalents 162 Cost of sales 17,531 Current payables to parent and affiliates 1,652 Current portion of long-term debt 540 Deferred income taxes and other liabilities 10,311 Retained earnings as of 12/31/18 2,391 Goodwill and other intangible assets (net) 35,957 Income tax expense 1,565 Interest and other debt expense, net 1,437 Inventories 3,026 Long-term debt 8,134 Long-term notes payable to parent and affiliates 5,000 Marketing, general and administration expenses 11,460 Operating revenues 33,875 Other current assets 687 Other noncurrent assets 3,726 Other stockholders’ equity (2,568) Paid-in capital for common and preferred stock 23,655 Property, plant and equipment (net) Short-term borrowings 128. 9,109 681 Based on the information presented above, prepare the Income Statement for Krafty Foods for the year ended December 31, 2018. 2-99 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Answer: Krafty Foods Income Statement For the Year Ended December 31, 2018 ($ in millions) Operating revenues $33,875 Cost of sales 17,531 Gross profit 16,344 Marketing, general and administration Expenses 11,460 Operating income 4,884 Interest and other debt expense, net 1,437 Income before taxes 3,447 Income tax expense 1,565 Net income $ 1,882 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Financial statement―Income Statement 2-100 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 129. Based on the information presented above, prepare the 12/31/18 Balance Sheet for Krafty Foods. Answer: Krafty Foods Balance Sheet At December 31, 2018 ($ in millions) Assets Current assets: Cash and cash equivalents $ 162 Accounts receivable (net) 3,131 Inventories 3,026 Other current assets 687 Total current assets 7,006 Property, plant and equipment (net) 9,109 Goodwill and other intangible assets (net) 35,957 Other noncurrent assets 3,726 Total assets $55,798 Liabilities and Shareholders’ Equity Accounts payable $ 1,897 Accrued liabilities and taxes 4,105 Short-term borrowings 681 Current payables to parent and affiliates 1,652 Current portion of long-term debt 540 Total current liabilities 8,875 Long-term debt 8,134 Deferred income taxes and other liabilities 10,311 Long-term notes payable to parent and affiliates 5,000 Total liabilities Paid-in capital for common and preferred stock Retained earnings 32,320 $23,655 2,391 2-101 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Other stockholders’ equity (2,568) Total stockholders’ equity 23,478 Total liabilities and stockholders’ equity $55,798 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 3 Hard Topic Area: Financial statement―Balance sheet 2-102 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Use the following to answer questions 130 – 133: The December 31, 2018 (pre-closing) adjusted trial balance for Kline Enterprises was as follows: Account Title Debits Accounts payable Accounts receivable Credits 90,000 170,000 Accumulated depreciation – equipment 260,000 Common stock 490,000 Cash 26,000 Cost of goods sold 480,000 Depreciation expense 60,000 Equipment 700,000 Interest expense Inventory 4,000 150,000 Note payable (due in six months) 60,000 Rent expense 30,000 Retained earnings 62,000 Salaries and wages payable 8,000 Sales revenue Salaries expense TOTALS 770,000 120,000 1,740,000 1,740,000 Assuming no income taxes, compute the following, and place your answer in the space 130. provided: Kline’s 2018 net income (or loss): Answer: Kline’s 2018 net income (or loss) = $76,000 Computation: 770,000 − 480,000 − 60,000 − 4,000 – 30,000 − 120,000 2-103 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Financial statement―Income Statement 131. Assuming no income taxes, compute the following, and place your answer in the space provided: Kline’s 12/31/18 total current assets: Answer: Kline’s 12/31/18 total current assets = $346,000 Computation: 26,000 + 170,000 + 150,000 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Financial statement―Balance sheet 132. Assuming no income taxes, compute the following, and place your answer in the space provided: Kline’s 12/31/18 total current liabilities: Answer: Kline’s 12/31/18 total current liabilities = $158,000 Computation: 90,000 + 60,000 + 8,000 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area: Financial statement―Balance sheet 2-104 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 133. Assuming no income taxes, compute the following, and place your answer in the space provided: Kline’s 12/31/18 total shareholders’ equity: Answer: Kline’s 12/31/18 total owners’ equity = $628,000 Computation: 490,000 + 62,000 + $76,000 (Net Income), (or Total Assets − Total Liabilities) AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 2 Medium Topic Area Financial statement―Shareholders equity Topic Area: Financial statement―Balance sheet 2-105 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 134. Presented below is income statement information of the Nebraska Corporation for the year ended December 31, 2018. Sales revenue $620,000 Cost of goods sold $355,000 Salaries expense 90,000 Insurance expense 20,000 Dividend revenue 3,000 Depreciation expense 18,000 Miscellaneous expense 12,000 Income tax expense 35,000 Loss on sale of 8,000 Rent expense 10,000 investments Required: Prepare the necessary closing entries at December 31, 2018. Answer: December 31, 2018 Sales revenue Dividend revenue 620,000 3,000 Loss on sale of investments 8,000 Income summary Income summary 615,000 540,000 Salaries expense 90,000 Miscellaneous expense 12,000 Cost of goods sold 355,000 Insurance expense 20,000 Depreciation expense 18,000 Income tax expense 35,000 Rent expense 10,000 Income summary ($615,000 – 540,000) 75,000 2-106 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Retained earnings 75,000 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 2 Medium Topic Area: The closing process 2-107 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 135. Raintree Corporation maintains its records on a cash basis. At the end of each year the company’s accountant obtains the necessary information to prepare accrual basis financial statements. The following cash flows occurred during the year ended December 31, 2018: Cash receipts: From customers $450,000 Interest on note 3,000 Issue of common stock 50,000 Total cash receipts $503,000 Cash disbursements: Purchase of merchandise $220,000 Annual insurance payment 9,000 Payment of salaries 180,000 Dividends paid to shareholders 6,000 Annual rent payment 12,000 Total cash disbursements $427,000 Selected balance sheet information: 12/31/17 12/31/18 Cash $25,000 $101,000 Accounts receivable 42,000 70,000 Inventory 60,000 82,000 Prepaid insurance 2,000 ? Prepaid rent 7,000 ? Interest receivable 1,500 ? Note receivable 50,000 50,000 Equipment 150,000 150,000 Accumulated depreciation– (40,000) (55,000) equipment 2-108 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Accounts payable (for merchandise) 50,000 62,000 Salaries payable 20,000 28,000 Common stock 200,000 250,000 Additional information: 1. On June 30, 2017, Raintree lent a customer $50,000. Interest at 6% is payable annually on each June 30. Principal is due in 2021. 2. The annual insurance payment is made in advance on March 31. 3. Annual rent on the company’s facilities is paid in advance on September 30. Required: 1. Prepare an accrual basis income statement for 2018 (ignore income taxes). 2. Determine the following balance sheet amounts on December 31, 2018: a. Interest receivable b. Prepaid insurance c. Prepaid rent Answer: 1. Sales revenue: Cash collected from customers Add: Increase in accounts receivable Sales revenue $450,000 28,000 $478,000 Interest revenue: Cash received $3,000 Add: Amount accrued at the end of 2018 ($50,000 x .06 x 6/12) 1,500 (a) Deduct: Amount accrued at the end of 2017 (1,500) Interest revenue $3,000 Cost of goods sold: Cash paid for merchandise Add: Increase in accounts payable $220,000 12,000 2-109 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Purchases during 2018 232,000 Deduct: Increase in inventory (22,000) Cost of goods sold $210,000 Insurance expense: Cash paid $9,000 Add: Prepaid insurance expired during 2018 2,000 Deduct: Prepaid insurance on 12/31/18 ($9,000 x 3/12) (2,250) (b) Insurance expense $8,750 Salaries expense: Cash paid $180,000 Add: Increase in salaries payable 8,000 Salaries expense $188,000 Rent expense: Amount paid $12,000 Add: Prepaid rent on 12/31/17 expired during 2018 7,000 Deduct: Prepaid rent on 12/31/18 ($12,000 x 9/12) (9,000) (c) Rent expense $10,000 Depreciation expense: Increase in accumulated depreciation $15,000 Raintree Corporation Income statement For the Year Ended December 31, 2018 Sales revenue $478,000 Cost of goods sold 210,000 Gross profit 268,000 Operating expenses: Insurance $ 8,750 Salaries 188,000 Rent 10,000 Depreciation 15,000 Total operating expenses 221,750 2-110 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Operating income 46,250 Other income (expense): Interest revenue Net income 3,000 $49,250 2. a. Interest receivable (1/2 year x 3,000) $ 1,500 b. Prepaid insurance (1/4 year x 9,000) 2,250 c. Prepaid rent 9,000 (3/4 year x 12,000) AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Blooms: Analyze Learning Objective: 02-06 Describe the four basic financial statements. Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 3 Hard Topic Area: Convert cash basis to accrual basis Topic Area: Determine account balance—Analyze entries Topic Area: Financial statement―Income Statement 2-111 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 136. Silicon Chip Company’s fiscal year-end is December 31. At the end of 2018, it owed employees $22,000 in salaries and wages that will be paid on January 7, 2019. Required: 1. Prepare an adjusting entry to record accrued salaries and wages, a reversing entry on January 1, 2019, and an entry to record the payment of salaries and wages on January 7, 2019. 2. Prepare journal entries to record the accrued salaries and wages on December 31, 2018 and the payment of salaries and wages on January 7, 2019, assuming a reversing entry is not recorded. Answer: 1. December 31–adjusting entry Salaries and wages expense 22,000 Salaries and wages payable 22,000 January 1–reversing entry Salaries and wages payable 22,000 Salaries and wages expense 22,000 January 7–payment of salaries and wages Salaries and wages expense 22,000 Cash 22,000 2. December 31–adjusting entry Salaries and wages expense Salaries and wages payable 22,000 22,000 2-112 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. January 7–payment of salaries and wages Salaries and wages payable Cash 22,000 22,000 AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-Appendix 2B Reversing Entries. Level of Difficulty: 3 Hard Topic Area: Reversing entries–Appendix B Essay Questions 137. Describe the difference between external events and internal events, and provide two examples of each. Answer: External events involve an exchange between the company and a separate economic entity. Examples include purchasing inventory on account or borrowing money from a bank. Internal events directly affect the financial position of the company but do not involve exchange transactions with another entity. Examples include depreciation of equipment or use of supplies. AACSB: Communication AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Level of Difficulty: 2 Medium Topic Area: Account relationships and records 2-113 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 138. Describe what is meant by deferred revenue and provide two examples. Answer: Deferred revenue is created when a company receives cash from a customer for goods or services that will be provided in a future period. Examples include magazine subscriptions received in advance by a publishing firm or rent received in advance by a property leasing firm. A liability exists because of the obligation to provide the service. AACSB: Communication AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Identify type of adjustment Topic Area: Analyze transaction-Record journal entry 139. Describe what is meant by prepaid expenses and provide two examples. Answer: Prepaid expenses represent assets recorded when a cash disbursement creates benefits beyond the current period. Examples include insurance or rent paid in advance of use. AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Level of Difficulty: 2 Medium Topic Area: Analyze transaction-Record journal entry Topic Area: Analyze updating-Identify type of adjustment 2-114 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 140. What is an accrued liability? Answer: An accrued liability results from an expense being incurred prior to cash payment. Examples include interest and salaries and wages payable. AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Remember Learning Objective: 02-04 Identify and describe the different types of adjusting journal entries. Level of Difficulty: 2 Medium Topic Area: Analyze updating-Identify type of adjustment 141. What is the difference between permanent accounts and temporary accounts, and why does an accounting system have both types of accounts? Answer: Permanent accounts represent assets, liabilities, and shareholders’ equity at a point in time. Temporary accounts represent changes in retained earnings caused by dividend, revenue, expense, and gain and loss accounts. The temporary accounts are closed out annually to facilitate measuring income on an annual basis. Temporary accounts are a convenience to aid the preparation of financial statements by recording revenues and expenses in these accounts rather than directly into retained earnings. AACSB: Communication AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-01 Analyze routine economic events-transactions-and record their effects on a company’s financial position using the accounting equation format. Level of Difficulty: 2 Medium Topic Area: Account relationships and records 2-115 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 142. What is the purpose of the statement of cash flows? List the three major categories of cash flows and give an example of a cash transaction for each category. Answer: The purpose of the statement of cash flows is to summarize the transactions that caused cash to change during the reporting period. The statement of cash flows summarizes cash flows in three categories: operating, investing, and financing. Operating activities include cash flows related to transactions entering into the determination of net income, such as cash collections from customers, payments for purchases, and other receipts, such as interest and dividends. Investing activities include purchasing and selling equipment or certain investment securities. Financing activities include borrowing or repaying loans, issuing stock, and payment of dividends. AACSB: Communication AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-06 Describe the four basic financial statements. Level of Difficulty: 3 Hard Topic Area: Financial statement―Cash flow 143. What is the purpose of the closing process? Answer: The closing process serves a dual purpose: (1) the temporary accounts are reduced to a zero balance, ready to measure activity in the next accounting period, and (2) the balances of these temporary accounts are transferred to retained earnings to reflect the changes that have occurred in that account during the period. Revenue and expense accounts are first transferred to income summary. The net balance in income summary is then transferred to retained earnings. AACSB: Communication AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 02-07 Explain the closing process. Level of Difficulty: 2 Medium Topic Area: The closing process 2-116 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 144. Claymore Corporation maintains its book on a cash basis. During 2018, the company collected $825,000 in fees from its clients and paid $512,000 in expenses. You are able to determine the following information about accounts receivable, supplies, prepaid rent, salaries payable, and interest payable: January 1, 2018 December 31, 2018 $110,000 $120,000 Supplies 15,000 18,000 Prepaid rent 12,000 11,000 Salaries and wages payable 16,500 14,200 Interest payable 4,000 5,500 Accounts receivable In addition, 2018 depreciation expense on office equipment and furniture is $55,000. Required: Determine accrual basis net income for 2018. Answer: Cash basis net income ($825,000 – 512,000) $313,000 Add: Increase in accounts receivable ($120,000 – 110,000) 10,000 Increase in supplies ($18,000 – 15,000) 3,000 Decrease in salaries and wages payable ($16,500 – 14,200) 2,300 Deduct: Depreciation expense (55,000) Decrease in prepaid rent ($12,000 – 11,000) (1,000) Increase in interest payable ($5,500 – 4,000) (1,500) Accrual basis net income $270,800 2-117 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 02-08 Convert from cash basis net income to accrual basis net income. Level of Difficulty: 3 Hard Topic Area: Convert cash basis to accrual basis 2-118 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 145. The accounting system of Carlton and Sons consists of a general journal (GJ), a cash receipts journal (CR), a cash disbursements journal (CD), a sales journal (SJ), and a purchases journal (PJ). For each of the following, indicate which journal should be used to record the transaction. Transaction Journal 1. Received interest on a loan. 2. Received cash for services to be provided next month. 3. Purchased equipment for cash. 4. Purchased merchandise on account. 5. Sold merchandise on credit (the sale only, not the cost of the merchandise). 6. Sold merchandise for cash (the sale only, not the cost of the merchandise). 7. Paid advertising bill. 8. Recorded accrued salaries and wages payable. 9. Paid utility bill. 10. Recorded depreciation expense. 11. Sold equipment for cash. 12. Collected cash from customers on account. 13. Paid employee salaries and wages. 14. Paid interest on a loan. Answer: Transaction Journal 1. Received interest on a loan. CR 2. Received cash for services to be provided next month. CR 3. Purchased equipment for cash. CD 4. Purchased merchandise on account. PJ 2-119 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Intermediate Accounting 9th Edition Spiceland Test Bank Full Download: http://testbanklive.com/download/intermediate-accounting-9th-edition-spiceland-test-bank/ 5. Sold merchandise on credit SJ (the sale only, not the cost of the merchandise). 6. Sold merchandise for cash CR (the sale only, not the cost of the merchandise). 7. Paid advertising bill. CD 8. Recorded accrued salaries and wages payable. GJ 9. Paid utility bill. CD 10. Recorded depreciation expense. GJ 11. Sold equipment for cash. CR 12. Collected cash from customers on account. CR 13. Paid employee salaries and wages. CD 14. Paid interest on a loan. CD AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Learning Objective: 02-Appendix 2C Subsidiary Ledgers and Special Journals. Level of Difficulty: 2 Medium Topic Area: Subsidiary ledgers―Special journals―Appendix C 146. The accounting processing cycle: A. Is a three-wheeled vehicle used to deliver audit papers to clients. B. deals only with internal transactions. C. Is the process of bringing the company’s financial information up to date before preparing the financial statements. D. Is the process used to identify, analyze, record, and summarize transactions and prepare financial statements. Answer: D AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Remember Learning Objective: 02-01 Level of Difficulty: 1 Easy Topic Area: Accounting processing cycle steps 2-120 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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