P1 Chapter 3 Review

On December 31, 2019, Avery Corporation paid $10,000 for next year's insurance policy. This transaction should be recorded as follows by Avery:

The insurance is for future periods, so it is considered prepaid insurance, an asset account, increased with a debit. This is paid for with cash resulting in a cash outflow, recorded with a credit to the cash account.

How would you journal the receipt of a utility bill, which will be paid for in later weeks?

The utilities expense account needs to be increased with a debit, and because the bill will be paid at a later date, the utilities payable account needs to be increased with a credit. An expense is recognized and a liability is recorded.

How would you journal when cash is received from a customer prior to delivery of the goods or services?

When cash is received before goods or services have been provided, cash is debited and unearned revenue (a liability account) is credited.

How would an auto repair shop prepare a journal when a customer will pay cash subsequent to delivery of goods or services?

When goods or services are transferred to a customer, on account, an account receivable (an asset) is created at the time of sale or service.

June's Printing Shop had the following information for office supplies: • Ordered $1,200 of supplies March 3 • Received half the order of supplies on March 16 • Used one-third of the received supplies during March What is the total amount that should be reported as supplies expense for the month of March?

$200 Explanation: One-half of goods ordered were received = $600. One-third of supplies received were used = $600 × 1/3 = $200.

Colby Corporation has provided the following information: • Operating revenues from customers were $199,700. • Operating expenses for the store were $111,000. • Interest expense was $9,200. • Gain from sale of plant and equipment was $3,300. • Dividend payments to Colby's stockholders were $7,700. • Income tax expense was $36,000. • Prepaid rent expense was $5,000. How much was Colby's net income?

$46,800 Explanation: Net income = $46,800 = $203,000 - $111,000 - $9,200 - $36,000.

Lantz Company has provided the following information: • Cash sales totaled $255,000 • Credit sales totaled $479,000. • Cash collections from customers for services yet to be provided totaled $88,000. • A $22,000 loss from the sale of property and equipment occurred.• Interest income was $7,700. • Interest expense was $19,900. • Supplies expense was $336,000. • Rent expense for the store was $36,000 • Wages expense was $49,000. • Other operating expenses totaled $79,000. • Unearned revenue was $4,000. What is the amount of Lantz's operating expenses?

$522,000 Explanation: Operating expenses = $522,000 = $336,000 + $36,000 + $49,000 + $79,000 + $22,000.

The following information has been provided by Hable Company: • Advertising expense $9,900 • Interest expense $3,700 • Rent expense for store $12,000 • Loss on sale of property and equipment $5,700 • Cost of goods sold $21,300 • Depreciation expense $7,100 • Prepaid (insurance) $1,000 How much were Hable's total expenses in calculating operating income?

$56,000 Explanation: Operating expenses = $56,000 = $9,900 + $12,000 + $5,700 + $21,300 + $7,100.

Lantz Company has provided the following information: • Cash sales totaled $255,000 • Credit sales totaled $479,000. • Cash collections from customers for services yet to be provided totaled $88,000. • A $22,000 loss from the sale of property and equipment occurred.• Interest income was $7,700. • Interest expense was $19,900. • Supplies expense was $336,000. • Rent expense for the store was $36,000 • Wages expense was $49,000. • Other operating expenses totaled $79,000. • Unearned revenue was $4,000. What is the amount of Lantz's operating revenues?

$734,000 Explanation: Operating revenues = $734,000 = $255,000 + $479,000.

Colby Corporation has provided the following information: • Operating revenues from customers were $199,700. • Operating expenses for the store were $111,000. • Interest expense was $9,200. • Gain from sale of plant and equipment was $3,300. • Dividend payments to Colby's stockholders were $7,700. • Income tax expense was $36,000. • Prepaid rent expense was $5,000. What is the amount of Colby's operating income (income from operations)?

$92,000 Explanation: Operating income (income from operations) = $92,000 = $199,700 + $3,300 - $111,000.

A company purchased supplies for cash, which will be consumed during future months. Which of the following correctly describes the impact of the supplies purchase on the financial statements? A. Total assets will remain unchanged. B. Total assets will decrease. C. Operating expenses will increase. D. Operating income will decrease.

A

Which of the following expenses does not affect the reporting of operating income? A. Income tax expense. B. Cost of goods sold. C. Depreciation expense. D. Rent expense.

A

Which of the following statements does NOT properly describe the accrual basis of accounting? A. Accrual accounting should not be used when providing financial statements to external decision makers. B. Revenues are recognized when the company transfers promised goods or services to customers regardless of the timing of cash flows. C. Generally accepted accounting principles require use of the accrual basis. D. Expenses are recognized when incurred in generating revenues regardless of the timing of cash flows.

A

Which of the following is correct when land costing $20,000 is sold for $29,000? The land was a component of property and equipment on the balance sheet. A. Revenues are debited for $29,000. B. Cost of goods sold is credited for $20,000. C. Gain on sale of land is credited for $9,000. D. Operating income increases $29,000.

C

Which of the following accounts normally have a debit balance? A. Prepaid expenses, Wages payable, Dividends. B. Cash, Utilities expense, Accounts receivable. C. Retained earnings, Cost of goods sold, Wages expense. D. Utilities expense, Prepaid expenses, Wages payable.

B

Which of the following costs is most likely to be the largest expense reported on the income statement of a merchandiser, such as Wal-Mart Stores, Inc.? A. Utilities expense. B. Cost of goods sold. C. Advertising expense. D. Income tax expense.

B

A company receives a $50,000 cash deposit from a customer on October 15 but will not deliver the goods until November 20. Which of the following statements is true? A. Cash will be reported on the statement of cash flows for the month of November. B. Revenue will be recorded and reported on the income statement for October. C. A liability will be reported on the balance sheet at the end of October. D. A prepaid asset will be reported on the balance sheet at the end of October.

C

A landlord collected $5,000 cash from a tenant for December 2019's rent but the contract rate set for the tenant's December rent is $8,000. Which of the following is true with respect to the landlord's financial statements using generally accepted accounting principles? A. $8,000 would be reported on the statement of cash flows. B. $8,000 would appear on the balance sheet as rent receivable. C. $8,000 would appear on the income statement as rent revenue. D. $5,000 would appear on the balance sheet as prepaid rent.

C

Daring Dolls, Inc. received an order to provide SuperDolls for a big department store. The store paid Daring Dolls in advance for the order of SuperDolls. Which of the following describes what will occur when Daring Dolls recognizes revenue? A. Cash will be increased. B. Accounts receivable will be increased. C. Unearned revenue will be decreased. D. Unearned revenue will be increased.

C

Which of the following correctly describes the impact of collecting cash from customers for services to be provided in the future? A. Assets and stockholders' equity increase. B. Assets and revenues increase. C. Assets and liabilities increase. D. Assets and operating income increase.

C

Which of the following is not a proper application of the revenue recognition principle? A. Recording the sale of merchandise on credit as sales revenue. B. Recording rent received in advance as unearned rent revenue. C. Recording interest revenue when cash is collected rather than when earned. D. Reducing the unearned service revenue account for service revenue performed at the end of the accounting period.

C

Which of the following is not reported as an operating expense on the income statement? A. Wages expense. B. Rent expense. C. Interest expense. D. Cost of goods sold.

C

Mama June Pizza Company sold land costing $39,000 for $51,000 cash. Which of the following statements concerning the land sale is correct? A. The land account was credited for $51,000. B. The revenue account was debited for $51,000. C. Operating income increased $12,000. D. Income before income taxes increased $51,000.

C Explanation: The excess cash received over the cost of the land is recognized as a gain on sale of land. This is recorded as part of operating income (before income taxes).

Which of the following accounts normally have a credit balance? A. Unearned revenue; Prepaid rent; Sales revenue. B. Sales revenue; Expenses; Retained earnings. C. Sales revenue; Cash; Unearned revenue. D. Accounts payable; Retained earnings; Sales revenue.

D

Which of the following best describes the operating cycle? A. It is the length of the manufacturing process. B. It is the time that elapses from the purchase of inventory on account to the sale of inventory on account. C. It is the time that elapses from the completion of the manufacturing process to the cash collection from sale of the manufactured goods. D. It is the time that elapses from the cash payment to suppliers to collection of cash from customers.

D

Which of the following correctly applies the revenue recognition principle? A. Recognize revenue in December 2019 for products manufactured but not yet delivered to customers. B. Recognize cash received in advance from customers as revenue when the product is not yet shipped. C. Not recognize service revenue in 2019 until the cash is received in 2020. D. Recognize revenue in December 2019 for products sold but not yet paid for in full.

D

Which of the following does not correctly describe the cash basis of accounting? A. It is not accepted for external reporting purposes. B. Revenues are recognized when cash is collected from customers. C. Expenses are recognized when they are paid for. D. Recognize revenues when earned and expenses when incurred.

D

Which of the following statements is false? A. Expense accounts have a debit balance. B. Revenue accounts have a credit balance. C. Gain accounts have a credit balance. D. Loss accounts have a credit balance.

D

Zeppelin Company received cash during January for services to be provided in February. Which of the following statements does NOT accurately describe the impact on the financial statements when Zeppelin provides the services during February? A. Unearned revenue decreased and was debited. B. Revenue increased and was credited. C. Stockholders' equity will increase. D. Total assets will increase.

D

Which of the following statements is false? A. An expense is a cost incurred to generate revenues. B. Selling assets at a gain does not result in earning revenue. C. Revenues are reported on the income statement as they are earned. D. Revenues result in an increase in net income and additional paid-in capital.

D Explanation: Revenues result in an increase in net income and retained earnings. Revenues have no impact on additional paid-in capital.

How would you journal when a company has incurred an expense for work performed but has not yet paid for theses wages to employees?

Expenses are recorded (with a debit entry) when incurred. When they have been incurred and not paid, the wages payable account needs to be increased with a credit entry.

The primary difference between revenues and gains is:

Gains are increases in net assets from periodically selling assets (other than inventory), while revenues are increases from major or central ongoing operations of a business.

What best describes the expense recognition principle?

It requires expenses to be recorded when incurred to generate revenues.