AC 210 Exam 1

Identify any unfavorable and favorable trends in the following income statements by preparing a vertical analysis. (Round percentages to two decimal places.) Apple Tree Corporation Income Statements For the Years Ended December 31 Year 2 Year 1 Revenue: Sales $675,000 $650,000 Rent revenue 180,000 230,000 Total revenue $855,000 $880,000 Operating expenses: Wages expense $ 90,500 $100,000 Rent expense 48,000 38,000 Utilities expense 9,000 8,700 Advertising expense 13,200 14,000 Insurance expense 15,000 15,000 Total operating expenses $175,700 $175,700 Net income $679,300 $704,300

Apple Tree Corporation Income Statements For the Years Ended December 31 Year 2 Year 1 Revenue: Sales $675,000 78.95% $650,000 73.86% Rent revenue 180,000 21.05% 230,000 26.14% Total revenue $855,000 100% $880,000 100% Operating expenses: Wages expense $ 90,500 10.58% $100,000 11.36% Rent expense 48,000 5.61% 38,000 4.32% Utilities expense 9,000 1.05% 8,700 0.99% Advertising expense 13,200 1.54% 14,000 1.59% Insurance expense 15,000 1.75% 15,000 1.70% Total operating expenses $175,700 20.55% $175,700 19.97% Net income $679,300 79.45% $704,300 80.03% For Year 2, the sales revenue increased as a percentage of total revenue, while the rent revenue decreased as a percentage of total revenue. Wages Expense and Advertising Expense show favorable trends. Rent Expense, Utilities Expense, and Insurance Expense all have unfavorable trends. Although Insurance Expense remains constant, because the total revenue decreased, it will cause the ratio to be a higher percentage of revenue. Strategy: First, take each line item as percentage of total revenue. Next, look for changes in this year and the previous year. If there are any, determine if each change is favorable or unfavorable. If favorable, it means the company is operating more efficiently. Unfavorable trends suggest that a company is not operating as efficiently as it could.

. Identify any favorable and unfavorable trends in the following income statements by preparing a vertical analysis. (Round percentages to two decimal places.) Becker Corporation Income Statements For the Years Ended December 31 Year 2 Year 1 Revenues $394,000 $212,500 Operating expenses: Wages expense $ 79,000 $ 65,000 Rent expense 19,000 18,000 Utilities expense 21,000 14,200 Interest expense 7,500 7,800 Total operating expenses $126,500 $105,000 Net income $267,500 $107,500

Becker Corporation Income Statements For the Years Ended December 31 Year 2 Year 1 Revenues $394,000 100% $212,500 100% Operating expenses: Wages expense $ 79,000 20.05% $ 65,000 30.59% Rent expense 19,000 4.82% 18,000 8.47% Utilities expense 21,000 5.33% 14,200 6.68% Interest expense 7,500 1.90% 7,800 3.67% Total operating expenses $126,500 32.11% $105,000 49.41% Net income $267,500 67.89% $107,500 50.59% The income statements show an increase in revenues. Net income as a percentage of the revenues also increased, showing a favorable trend. The expenses of the company are not increasing as rapidly as the revenues, indicating a favorable trend for the overall operating expenses and each operating expense, since each decreased as a percentage of revenues.

Brick Master has a September 30 year-end. At the end of the fiscal year, the company's assets are as follows: Machinery, $15,700, with $1,600 accumulated depreciation; Prepaid Rent, $1,200; a building bought on September 30 for $16,500; Cash, $2,250; and Accounts Receivable, $3,150. The common stock outstanding had a value of $2,250, while the retained earnings account had a balance of $3,900. The liabilities include Notes Payable, $22,700, which includes $3,200 due within the following year; Accounts Payable, $6,600; and Taxes Payable, $1,750. Prepare the company's balance sheet for the year-end.

Brick Master Balance Sheet September 30 Assets Current assets: Cash $ 2,250 Accounts receivable 3,150 Prepaid rent 1,200 Total current assets $ 6,600 Property, plant, and equipment: Building $16,500 Machinery $15,700 Accumulated depreciation 1,600 Book value 14,100 Total property, plant, and equipment 30,600 Total assets $37,200 Liabilities Current liabilities: Accounts payable $ 6,600 Current portion of long-term debt 3,200 Taxes payable 1,750 Total current liabilities $11,550 Notes payable 19,500 Total liabilities $31,050 Stockholders' Equity Common stock $ 2,250 Retained earnings 3,900 Total stockholders' equity 6,150 Total liabilities and stockholders' equity $37,200 Strategy: Begin with the heading, which includes the company name, balance sheet title, and the date of the balance sheet (you don't measure the changes in the account balances on the balance sheet). Separate the current assets and fixed assets, with current assets in order highest to lowest liquidity and total the amounts. Next, classify the liabilities as either current or long-term and total the amounts. Lastly, add the stockholders' equity, which includes the balance of common stock and retained earnings, to total liabilities and ensure the sum of total liabilities and stockholders' equity equals the total assets.

The common stock outstanding of Burns & Stevens Corporation had a value of $7,800 at year-end when Retained Earnings had a balance of $4,480. The company's only liabilities for the calendar year included two-year Notes Payable, $18,750; Accounts Payable, $2,300; and Interest Payable, $1,500. The company's asset balances were as follows: Building, $12,000, with $900 in accumulated depreciation; Accounts Receivable, $1,300; Short-Term Investments, $1,980; Land, $18,700; and Cash, $1,750. Prepare the corporation's balance sheet.

Burns & Stevens Corporation Balance Sheet December 31 Assets Current assets: Cash $ 1,750 Accounts receivable 1,300 Short-term investments 1,980 Total current assets $ 5,030 Property, plant, and equipment: Land $18,700 Building $12,000 Accumulated depreciation 900 Book value 11,100 Total property, plant, and equipment 29,800 Total assets $34,830 Liabilities Current liabilities: Accounts payable $ 2,300 Interest payable 1,500 Total current liabilities $ 3,800 Notes payable 18,750 Total liabilities $22,550 Stockholders' Equity Common stock $ 7,800 Retained earnings 4,480 Total stockholders' equity 12,280 Total liabilities and stockholders' equity $34,830

. Calculate working capital for the companies in each situation. Company A Company B Company C Current assets $16,080 $12,000 $17,850 Fixed assets 13,300 10,900 5,400 Current liabilities 15,000 14,500 19,800 Long-term liabilities 9,500 4,900 2,200

Company A Company B Company C Current assets $16,080 $12,000 $17,850 Fixed assets 13,300 10,900 5,400 Current liabilities 15,000 14,500 19,800 Long-term liabilities 9,500 4,900 2,200 Working capital 1,080 (2,500) (1,950)

Using the balance sheet below, calculate working capital. Sharp Sharks Balance Sheet June 30 Assets Cash $ 1,800 Marketable securities 1,750 Accounts receivable 5,400 Prepaid expenses 2,450 Property, plant, and equipment 18,050 Total assets $29,450 Liabilities Accounts payable $ 4,500 Unearned revenue 3,400 Accrued expenses 1,600 Current portion of long-term debt 1,300 Long-term debt 8,900 Total liabilities $19,700 Stockholders' Equity Stockholders' equity $ 9,750 Total liabilities and stockholders' equity $29,450

Current Assets ($1,800 + $1,750 + $5,400 + $2,450) - Current Liabilities ($4,500 + $3,400 + $1,600 + $1,300) = $600 Strategy: First, calculate current assets and current liabilities, if not directly given. Next, find the working capital by subtracting current liabilities from current assets.

3. Fill in the missing items for the following unadjusted trial balance for Ferris Co. as of September 30, 20Y5. ?? ?? ?? Debit Balances Credit Balances Cash 1,600 Accounts Receivable 1,300 Inventory ?? PP&E 8,750 Accounts Payable 5,050 Short-Term Loans 2,300 Notes Payable 1,700 Stockholders' Equity 5,000 Sales 10,000 Rent Revenue 6,800 Cost of Sales 8,000 Rental Expense 4,500 Wages Expense 2,300 Utilities Expense 2,000 ?? ??

Ferris Co. Unadjusted Trial Balance September 30, 20Y5 Debit Balances Credit Balances Cash 1,600 Accounts Receivable 1,300 Inventory 2,400 PP&E 8,750 Accounts Payable 5,050 Short-Term Loans 2,300 Notes Payable 1,700 Stockholders' Equity 5,000 Sales 10,000 Rent Revenue 6,800 Cost of Sales 8,000 Rental Expense 4,500 Wages Expense 2,300 Utilities Expense 2,000 30,850 30,850

Green Duck earned fees of $64,300 for its fiscal year. Its expenses for the year are as follows: Rent Expense, $15,000; Interest Expense, $2,480; Salaries Expense, $22,560; Utilities Expense, $3,900; and Insurance Expense, $12,750. Prepare the company's income statement if the fiscal year ends on June 30.

Green Duck Income Statement For the Year Ended June 30 Fees earned $64,300 Expenses: Salaries expense $22,560 Rent expense 15,000 Insurance expense 12,750 Utilities expense 3,900 Interest expense 2,480 Total expenses 56,690 Net income $ 7,610

Put the following steps from the accounting cycle in order, including any missing steps and omitting any that are not steps in the accounting cycle. Prepare an end-of-period spreadsheet, post transactions to the ledger, prepare financial statements, prepare a post-closing trial balance, calculate ratios to analyze the financial statements, and journalize and post the closing entries.

In order: Analyze and record transactions in the journal, post transactions to the ledger, prepare an unadjusted trial balance, assemble and analyze adjustment data, prepare an end-of-period spreadsheet, journalize and post adjusting entries, prepare an adjusted trial balance, prepare financial statements, journalize and post closing entries to the ledger, and prepare a post-closing trial balance. Strategy: Thinking about the process of running a business is helpful when considering the steps in the accounting cycle. A company has activities for the year and must show those in transactions and ledgers. The unadjusted trial balance is a way to ensure amounts are in balance prior to adjusting entries. The adjusting entries must be calculated and recorded. The adjusted trial balance ensures amounts are in balance and no errors occurred when making the adjusting entries. The company must make financial statements from the balances. Closing entries should prepare the company for the next year, and the post-closing trial balance ensures that debits equal credits in the closing entries.

Given the information in Exercises 19 and 20, close the income summary account. Also prepare the closing entry for the dividends account, which had a balance of $8,900.

Income Summary 14,400 Retained Earnings 14,400 Retained Earnings 8,900 Dividends 8,900 Strategy: Closing entries include closing the revenue and expense accounts to Income Summary. To close the accounts, debit or credit for the account balance, whichever is opposite the normal balance. Income Summary is then closed to the retained earnings account (net income will increase the amount by crediting the account and a net loss will decrease the amount by debiting the account). The dividends account is closed by decreasing (debiting) the retained earnings account. Remembering normal balances is helpful when deciding to debit or credit an account in the closing process.

Happy Smiles Corp. incurred rent expense of $17,500, salaries expense of $18,950, utilities expense of $7,800, and interest expense of $750. Prepare the closing entries for these expenses.

Income Summary 45,000 Rent Expense 17,500 Salaries Expense 18,950 Utilities Expense 7,800 Interest Expense 750

The retained earnings account of Kinney Kare had a beginning balance of $9,300. The business suffered a net loss of $2,850 for the year and did not pay any dividends as a result. Prepare the retained earnings statement if the company's year ends on September 30, 20Y5.

Kinney Kare Retained Earnings Statement For the Year Ended September 30, 20Y5 Retained earnings, October 1, 20Y4 $ 9,300 Net loss $(2,850) Dividends 0 Change in retained earnings (2,850) Retained earnings, September 30, 20Y5 $ 6,450 Strategy: Begin with the title, which should include the company name, retained earnings statement title, and time period (for the year ended). First, show the beginning balance of retained earnings. Next, add the net income (or subtract the net loss). Then, subtract the amount of dividends paid. The difference represents the change in retained earnings. Add or subtract this amount to the beginning balance of retained earnings to find the ending retained earnings.

During its first year of operations, beginning August 1, 20Y5, Lazy Day Chairs produced net income of $2,300 and paid $750 in dividends. Prepare the retained earnings statement if the company has a calendar year-end.

Lazy Day Chairs Retained Earnings Statement For the Five Months Ended December 31, 20Y5 Retained earnings, August 1, 20Y5 $ 0 Net income $2,300 Dividends (750) Change in retained earnings 1,550 Retained earnings, December 31, 20Y5 $1,550

During the first year, Fox Supply has total assets of $15,000 and liabilities of $10,875. During the second year, assets increase by $1,375, and stockholders' equity increases by $950. How much is total liabilities at year-end?

Liabilities for the second year equaled $11,300 ($16,375 - $5,075).

Which steps in the accounting cycle are missing from the following list: Prepare financial statements, analyze transactions and record in the journal, journalize and post adjusting entries, prepare an adjusted trial balance, post transactions to the ledger, and assemble and analyze adjustment data.

Missing steps include: Prepare an unadjusted trial balance, prepare an optional end-ofperiod spreadsheet, journalize and post the closing entries, and prepare a post-closing trial balance.

Nicoletti & Parks, CPAs earned fees of $82,000 during the year. For the year, it had the following expenses: Salaries Expense, $40,000; Interest Expense, $1,200; Supplies Expense, $2,300; Insurance Expense, $10,000; Advertising Expense, $2,500; and Depreciation Expense, $3,750. Prepare the income statement if the company has a calendar year-end.

Nicoletti & Parks, CPAs Income Statement For the Year Ended December 31 Fees earned $82,000 Expenses: Salaries expense $40,000 Insurance expense 10,000 Depreciation expense 3,750 Advertising expense 2,500 Supplies expense 2,300 Interest expense 1,200 Total expenses 59,750 Net income $22,250 Strategy: Begin with the heading, which includes the company name, income statement title, and time period (for the year ended). First, list the revenues and total the amounts, if multiple. List the expenses in order from smallest to largest and total the amounts. Subtract the total expenses from the total revenue to find net income (or net loss).

Nixon Corp. had rent revenue of $40,950. Expenses for the year ended December 31 are as follows: Utilities Expense, $7,000; Salaries Expense, $15,300; Miscellaneous Expense, $2,000; and Rent Expense, $12,450. Prepare the company's income statement for the year.

Nixon Corp. Income Statement For the Year Ended December 31 Rent revenue $40,950 Expenses: Salaries expense $15,300 Rent expense 12,450 Utilities expense 7,000 Miscellaneous expense 2,000 Total expenses 36,750 Net income $ 4,200

Oak Tree Paper Company suffered a net loss of $3,200 during 20Y5. The company had beginning retained earnings of $7,400. The company also paid $900 in dividends during the year. Prepare the company's retained earnings statement for the year ended March 31, 20Y5.

Oak Tree Paper Company Retained Earnings Statement For the Year Ended March 31, 20Y5 Retained earnings, April 1, 20Y4 $ 7,400 Net loss $(3,200) Dividends (900) Change in retained earnings (4,100) Retained earnings, March 31, 20Y5 $ 3,300

Red Boat Co. had the following assets: Machinery, $7,450; Cash, $1,300; Land, $11,500; Prepaid Expenses, $3,150; Accounts Receivable, $2,750; Inventory, $5,500; and a building, $13,000. At year-end, on June 30, Retained Earnings had a balance of $5,750 and Common Stock had a balance of $3,000. The company's only liabilities are LongTerm Debt, $22,500; Accounts Payable, $5,950; and Accrued Expenses, $7,450. Prepare the company's balance sheet, distinguishing between current and long-term assets and liabilities.

Red Boat Co. Balance Sheet June 30 Assets Current assets: Cash $ 1,300 Accounts receivable 2,750 Inventory 5,500 Prepaid expenses 3,150 Total current assets $12,700 Property, plant, and equipment: Land $11,500 Building 13,000 Machinery 7,450 Total property, plant, and equipment 31,950 Total assets $44,650 Liabilities Current liabilities: Accounts payable $ 5,950 Accrued expenses 7,450 Total current liabilities $13,400 Long-term debt 22,500 Total liabilities $35,900 Stockholders' Equity Common stock $ 3,000 Retained earnings 5,750 Total stockholders' equity 8,750 Total liabilities and stockholders' equity $44,650

Identify any favorable and unfavorable trends in the following income statements by preparing a vertical analysis. (Round percentages to two decimal places.) Red Corporation Income Statements For the Years Ended December 31 Year 2 Year 1 Revenues $530,000 $525,000 Operating expenses: Wages expense $ 90,500 $ 88,000 Rent expense 35,500 35,000 Utilities expense 7,750 7,750 Insurance expense 15,000 12,000 Total operating expenses $148,750 $142,750 Net income $381,250 $382,250

Red Corporation Income Statements For the Years Ended December 31 Year 2 Year 1 Revenues $530,000 100% $525,000 100% Operating expenses: Wages expense $ 90,500 17.08% $ 88,000 16.76% Rent expense 35,500 6.70% 35,000 6.67% Utilities expense 7,750 1.46% 7,750 1.48% Insurance expense 15,000 2.83% 12,000 2.29% Total operating expenses $148,750 28.07% $142,750 27.19% Net income $381,250 71.93% $382,250 72.81% Although the revenues increased, the net income decreased due to increases in the operating expenses. The wages expense, rent expense, and insurance expense accounts demonstrate unfavorable trends. Although the utilities expense account remains constant, its percentage of revenues demonstrates a favorable trend. Total operating expenses increased as a percentage of revenues, which is an unfavorable trend.

Prepare the closing entry for Happy Smiles Corp., which had sales revenue of $55,200 and interest revenue of $4,200.

Sales Revenue 55,200 Interest Revenue 4,200 Income Summary 59,400

. Prepare Sibley Co.'s post-closing trial balance. The company's accounts on December 31 include Cash, $900; Notes Payable, $965; Accounts Receivable, $1,500; Accounts Payable, $2,900; Common Stock, $1,185; Retained Earnings, $1,000; Accrued Expenses, $2,400; Prepaid Expenses, $1,275; Machinery, $4,000, with $890 accumulated depreciation; and Land, $1,665.

Sibley Co. Post-Closing Trial Balance December 31 Debit Balances Credit Balances Cash 900 Accounts Receivable 1,500 Prepaid Expenses 1,275 Land 1,665 Machinery 4,000 Accumulated Depreciation 890 Accounts Payable 2,900 Accrued Expenses 2,400 Notes Payable 965 Common Stock 1,185 Retained Earnings 1,000 9,340 9,340 Strategy: The accounting cycle is used to ensure accuracy and efficiency of the information needed in a business. All steps are important to guarantee that the information is accurate.

At the beginning of the year, Duck Co.'s Accounts Payable had a credit balance of $1,300. The company made purchases of $1,700 on account. If the ending balance was a credit of $600, what were the cash payments to suppliers?

The company made cash payments of $2,400 ($1,300 + $1,700 - x = $600) to suppliers. Account: Rental Revenue Date Item Dr. Cr. Balance: Dr. Balance: Cr. Aug. 9 Earned revenue 890 890 Accounts Payable 1,300 1,700 ?? 600

. During the year, Keowee Corp. sold $1,550 of inventory. The company's beginning inventory was $1,200, and the ending inventory was $740. How much inventory did the company purchase during the year?

The company purchased $1,090 in inventory ($1,200 + x - $1,550 = $740). Inventory 1,200 ?? 1,550 740

Calculate Bixby Corporation's current ratio with the following information. Round to two decimal places. Determine if the company is in a stronger position in Year 1 or Year 2. Year 2 Year 1 Current assets $ 6,500 $ 6,550 Fixed assets 11,000 15,000 Current liabilities 7,250 9,000 Long-term liabilities 9,500 12,000

Year 2 Year 1 Current assets $ 6,500 $ 6,550 Fixed assets 11,000 15,000 Current liabilities 7,250 9,000 Long-term liabilities 9,500 12,000 Current ratio 0.90 0.73 The company is in a stronger position during Year 2.

. Prepare the adjusting entries for each situation for Sibley Co., which began operations on September 1. a. The company records a $1,750 depreciation expense on machinery. b. Upon inception, the company received $21,000 for one-year membership revenues. The company also has a calendar year-end. c. The company's attorney, who bills at $42 per hour and agrees to bill Sibley Co. upon settlement, spent 45 hours on a legal issue. He expects the issue to be resolved in March of the following year.

a. b. c. Depreciation Expense 1,750 Accumulated Depreciation—Machinery 1,750 Unearned Membership Revenue 7,000 Membership Revenue 7,000 Legal Expense 1,890 Legal Fees Payable 1,890

. Given the following amounts, calculate the working capital. a. Current assets of $480 and current liabilities of $285 b. Total assets of $5,090, long-term assets of $2,050, total liabilities of $3,500, and current liabilities of $2,200 c. Total assets of $8,450, long-term assets of $2,600, long-term liabilities of $2,200, and stockholders' equity of $1,500

a. $195; ($480 - $285) b. $840; [($5,090 - $2,050) - $2,200] c. $1,100; [($8,450 - $2,600) - ($8,450 - $1,500 - $2,200)]

. Calculate the current ratio for each situation. Round answers to two decimal places. Determine which company has the strongest position to pay current liabilities. a. Current assets of $1,780, total liabilities of $5,200, and current liabilities of $2,800 b. Current assets of $2,200, fixed assets of $8,670, stockholders' equity of $1,700, and long-term debt of $7,100 c. Current liabilities of $3,500, long-term debt of $2,700, stockholders' equity of $1,900, and fixed assets of $6,800

a. 0.64; ($1,780 ÷ $2,800) b. 1.06; [$2,200 ÷ ($2,200 + $8,670) - $1,700 - $7,100)] c. 0.37; [($3,500 + $2,700 + $1,900 - $6,800) ÷ $3,500] The company in situation b. has the strongest position. Strategy: First, calculate current assets and current liabilities if not directly given. Next, compute the current ratio by dividing current assets by current liabilities. The higher the current ratio, the better a position a company is in to pay its current liabilities with current assets.

With the following amounts, calculate the company's current ratio. Round to two decimal places. Compare the ratios in each situation to determine which has the strongest position. a. Current assets of $17,500 and current liabilities of $13,050 b. Total assets of $22,780, fixed assets of $5,760, and current liabilities of $16,900 c. Total liabilities of $17,900, current assets of $10,980, and long-term debt of $10,200

a. 1.34 ($17,500 ÷ $13,050) b. 1.01 [($22,780 - $5,760) ÷ $16,900] c. 1.43 [$10,980 ÷ ($17,900 - $10,200)] The company in situation c. has the strongest position.

Franco Corporation began operations on August 1, 20Y5. The company adopts a fiscal year that begins September 1. a. When does the company's first fiscal year occur? b. When is the second fiscal year?

a. August 1, 20Y5 to August 31, 20Y5 b. September 1, 20Y5 to August 31, 20Y6

. Ripa Co. adopts a fiscal year that ends March 31. It begins operations on August 1, 20Y5. a. When does the company's first fiscal year occur? b. When is the second fiscal year?

a. August 1, 20Y5 to March 31, 20Y6 b. April 1, 20Y6 to March 31, 20Y7

. Determine if each of the following accounts is a current asset, fixed asset, current liability, or long-term liability. a. Accounts Receivable b. Accrued Expenses c. Cash

a. Current asset b. Current liability c. Current asset

. Determine if each of the following accounts is a current asset, fixed asset, current liability, or long-term liability. a. Accounts Payable b. Machinery c. Notes Receivable, maturity in three years

a. Current liability b. Fixed asset c. Fixed asset

Determine if each of the following accounts is a current asset, fixed asset, current liability, or long-term liability. a. Current portion of Long-Term Debt b. Bonds Payable (matures in 10 years) c. Land

a. Current liability b. Long-term liability c. Fixed asset Strategy: Current assets are short-term assets, while fixed assets are assets the company intends to hold for longer periods of time to generate income. Current liabilities are used for short-term financing, while long-term liabilities will not be repaid within the upcoming year.

Dillman Pickle incorporates on July 2, 20Y5, and adopts a calendar year-end. a. When does the company's first fiscal year occur? b. When is the second fiscal year?

a. July 2, 20Y5 to December 31, 20Y5 b. January 1, 20Y6 to December 31, 20Y6 Strategy: A fiscal year is 12 months that ends on the last day of the twelfth month. During the first year, the fiscal year may be a short year, starting with the date of incorporation and ending on the fiscal year-end.

Prepare the closing entries for Sibley Co. in each independent situation. a. The company earned membership revenues of $5,200 and rent revenue of $6,200. b. The company incurred start-up expenses of $1,550, wages expense of $3,400, utilities expense of $1,900, and miscellaneous expense of $600. c. Sibley Co. incurred a net loss of $4,650 during its first year

a. Membership Revenue 5,200 Rent Revenue 6,200 Income Summary 11,400 b. Income Summary 7,450 Organizational Expense 1,550 Wages Expense 3,400 Utilities Expense 1,900 Miscellaneous Expense 600 c. Retained Earnings 4,650 Income Summary 4,650

Determine if the following accounts are considered temporary or permanent. a. Accounts Receivable b. Wages Expense c. Salaries Payable

a. Permanent b. Temporary c. Permanent

Determine if the following accounts are considered temporary or permanent. a. Investment in Securities b. Rent Revenue c. Unearned Revenue

a. Permanent b. Temporary c. Permanent Strategy: Temporary accounts are found on the income statement, while permanent accounts are on the balance sheet. A company finds its net income for each year, so the revenue and expense accounts must be closed each year in order to do so. Balance sheet amounts carry over into later years, for example a note payable, because it will still be held (owed) by the company until it is disposed (paid).

Determine if the following accounts are considered temporary or permanent. a. Fees Earned b. Cost of Goods Sold c. Unearned Revenue

a. Temporary b. Temporary c. Permanent

Determine by how much, if at all, the adjusted trial balance will be incorrect due to the following independent errors. a. An adjusting entry for prepaid insurance debited the insurance payable account for $1,200 and credited the prepaid insurance account for $1,200. b. A journal entry debited the utilities expense account for $800 and credited the cash account for $700. c. While recording the accrued interest revenue, the accountant debited the interest receivable account for $300 and credited the interest revenue account for $30.

a. The totals will be equal, although the entries were not made to the correct accounts. b. The debits will be higher by $100. c. The debits will be higher by $270. Strategy: All journal entries should have equal debits and credits. If the journal entries do not have debits that add to the same amount of the credits, the unadjusted trial balance will not have equal debits and credits.

. Identify which items are steps in the accounting cycle. a. Post transactions to the ledger. b. Prepare an adjusted trial balance. c. Ensure transactions are authorized by the shareholders. d. Prepare a post-closing trial balance.

a. Yes b. Yes c. No d. Yes

Which financial statement (income statement, balance sheet, or retained earnings statement) would contain each of the following accounts? a. Machinery b. Legal Expense c. Retained Earnings

a. balance sheet b. income statement c. retained earnings statement and balance sheet

Which financial statement (income statement, balance sheet, or retained earnings statement) would contain each of the following accounts? a. Rent Revenue b. Dividends c. Legal Expenses Payable

a. income statement b. retained earnings statement c. balance sheet

Which financial statement (income statement, balance sheet, or retained earnings statement) would contain each of the following accounts? a. Net Income b. Accounts Receivable c. Cost of Goods Sold

a. retained earnings statement and income statement b. balance sheet c. income sheet Strategy: Revenue and expense items will flow into the income statement. Asset, liability, and stockholders' equity accounts flow into the balance sheet. The retained earnings statement will show the changes in the retained earnings account, which also includes the balances for net income (or loss) and dividends and will flow into the balance sheet.

Liabilities and retained earnings accounts normally have a __________ balance.

credit

Revenue accounts have a normal __________ balance.

credit

1. Balance of account = Debits - __________

credits

Working capital = __________ - Current liabilities

current assets

__________ = Current assets/current liabilities

current ratio

Revenue and expense accounts are closed to the __________ account

income summary

Beginning supplies + Supplies bought - __________ = Ending supplies

supplies expense

__________ accounts require closing entries

temporary

If a business has the following balances, how much is total liabilities? Assets Cash $ 5,000 Accounts receivable 2,575 Equipment 14,000 Liabilities Total liabilities ? Stockholders' Equity Common stock and additional paid-in capital $ 700 Retained earnings 1,900

$18,975; $21,575 = $18,975 + $2,600

. Accrued Revenue A law firm allows its clients to pay on the tenth of every month for services rendered rather than for each visit. Since the last billing cycle, the law firm provided 200 hours of services at $80 per hour. a. Find the amount of accrued revenue the law firm should record at the end of the year. b. Journalize the adjusting entry to record the asset for the accrued revenue.

. Accrued Revenue A law firm allows its clients to pay on the tenth of every month for services rendered rather than for each visit. Since the last billing cycle, the law firm provided 200 hours of services at $80 per hour. a. $16,000; 200 hours since last cycle × $80/hour b. Accounts Receivable 16,000 Fees Earned 16,000

Accrued Revenue An electrical company provides services for a new building at a rate of $50 per hour. Once completed, the owner of the building will pay for the total amount of hours worked. By the end of the year, the electrical company has worked 150 hours at the building and expects to finish the project after working an additional 50 hours in the next period. a. Calculate the accrued revenue the electrical company should record. b. Journalize the adjusting entry to record the asset.

. Accrued Revenue An electrical company provides services for a new building at a rate of $50 per hour. Once completed, the owner of the building will pay for the total amount of hours worked. By the end of the year, the electrical company has worked 150 hours at the building and expects to finish the project after working an additional 50 hours in the next period. a. $7,500; 150 hours × $50/hour Although the electrical company expects to spend 200 hours in total for the project, it can only record the amount of accrued revenue to date. The additional 50 hours will be recorded in the next period. b. Accounts Receivable 3,000 Fees Earned 3,000

. A company purchased a building for $200,000 on January 1 of Year 1. At the beginning of the third year, the company has accumulated depreciation of $25,000 for the building, with an annual depreciation expense of $12,500. a. Record the depreciation expense for the third year. b. Find the beginning and ending net book value of the building for the third year. c. Show how the building will be recorded on the balance sheet at the end of the third year.

A company purchased a building for $200,000 on January 1 of Year 1. At the beginning of the third year, the company has accumulated depreciation of $25,000 for the building, with an annual depreciation expense of $12,500. a. Depreciation Expense 12,500 Accumulated Depreciation—Building 12,500 b. Beginning: $175,000; $200,000 - $25,000 Ending: $162,500; $200,000 - $37,500 ($25,000 + $12,500) c. Building $200,000 Accumulated depreciation (37,500) Building, net $162,500

. Post the journal entry from Exercise 15 to the related accounts.

Account: Accounts Receivable Date Item Dr. Cr. Balance: Dr. Balance: Cr. Aug. 9 Earned revenue 890 890 Account: Rental Revenue Date Item Dr. Cr. Balance: Dr. Balance: Cr. Aug. 9 Earned revenue 890 890

Show how the journal entry from Exercise 14 would be posted to the related accounts.

Account: Inventory Date Item Dr. Cr. Balance: Dr. Balance: Cr. Sept. 22 Inventory purchased 1,200 1,200 Account: Accounts Payable Date Item Dr. Cr. Balance: Dr. Balance: Cr. Sept. 22 Inventory purchased 1,200 1,200

Post the journal entry from Exercise 13 to the related accounts.

Account: Salaries Expense Date Item Dr. Cr. Balance: Dr. Balance: Cr. Jan. 15 Expense paid 750 750 Account: Rent Expense Date Item Dr. Cr. Balance: Dr. Balance: Cr. Jan. 15 Expense paid 675 675 Account: Utilities Expense Date Item Dr. Cr. Balance: Dr. Balance: Cr. Jan. 15 Expense paid 250 250 Account: Legal Expense Date Item Dr. Cr. Balance: Dr. Balance: Cr. Jan. 15 Expense paid 130 130 Account: Cash Date Item Dr. Cr. Balance: Dr. Balance: Cr. Jan. 15 Expenses paid 1,805 1,805

Prepare the journal entry to correct an error for a journal entry showing a debit to Inventory and a credit to Accounts Payable for $1,400. The company actually paid for the purchase with cash.

Accounts Payable 1,400 Cash 1,400

. To record newly issued long-term debt of $2,750, the company's accountant credited Accounts Payable instead. Prepare the journal entry to correct the error.

Accounts Payable 2,750 Long-Term Debt 2,750 First, determine the effect of the error and how the journal entry should have been recorded. If the error increased an account (with a debit), decrease the account (with a credit) to reverse the error. The correct account should be debited or credited accordingly in the correcting journal entry.

Do the following accounts have a normal debit or credit balance? a. Unearned Revenue b. Salaries Expense c. Interest Revenue

a. Credit b. Debit c. Credit

What would the journal entry look like for rental revenue earned on August 9, 20Y5, for $890 that the customers paid for on account?

Aug. 9 Accounts Receivable 890 Rental Revenue 890 purchased inventory on account

Would a debit or credit increase the following account balances? a. Common Stock b. Salaries Expense c. Sales

a. Credit b. Debit c. Credit

Given the following account balances, prepare an unadjusted trial balance for Bakeshop Corp. as of December 31, 20Y5. • Income Taxes Payable, credit balance $1,200 • Sales Revenue, credit balance $8,750 • PP&E, debit balance $7,500 • Cost of Sales, debit balance $5,500 • Accounts Payable, credit balance $1,240 • Interest Revenue, credit balance $1,500 • Cash, debit balance $2,000 • Rent Expense, debit balance $3,550 • Stockholders' Equity, credit balance $2,460 • Long-Term Debt, credit balance $7,400 • Accounts Receivable, debit balance $1,500 • Salaries Expense, debit balance $1,200 • Inventory, debit balance $1,300

Bakeshop Corp. Unadjusted Trial Balance December 31, 20Y5 Debit Balances Credit Balances Cash 2,000 Accounts Receivable 1,500 Inventory 1,300 PP&E 7,500 Accounts Payable 1,240 Income Taxes Payable 1,200 Long-Term Debt 7,400 Stockholders' Equity 2,460 Sales Revenue 8,750 Interest Revenue 1,500 Cost of Sales 5,500 Rent Expense 3,550 Salaries Expense 1,200 22,550 22,550

. Is the normal balance a debit or credit for the following accounts? a. Property, Plant, and Equipment b. Accounts Payable c. Sales

a. Debit b. Credit c. Credit

Cash flows from operating activities + __________ + Cash flows from financing activities = Net increase/decrease in cash

Cash flows from investing activities

When recording the journal entry for the purchase of new equipment for $5,500, the accountant made a debit to Land for $5,500. Prepare the journal entry to correct the error

Equipment 5,500 Land 5,500

Financial Accounting

External users utilize financial accounting to base decisions upon the financial information given.

Prepare the journal entry to record payment of salaries for $750, rent for $675, utilities for $250, and legal expenses for $130 on January 15, 20Y5.

Jan. 15 Salaries Expense 750 Rent Expense 675 Utilities Expense 250 Legal Expense 130 Cash 1,805 Expenses paid.

. Perform a horizontal analysis of the income statements below, showing changes in dollars and percentages (rounded to the nearest whole percentage). Determine if changes are favorable or unfavorable. Jeffy's Bike Store Income Statements For the Years Ended September 30 Year 2 Year 1 Rent revenue $100,000 $92,000 Operating expenses: Rent expense $ 12,000 $11,500 Interest expense 1,500 1,600 Utilities expense 3,200 2,660 Wages expense 5,500 5,000 Total operating expenses $ 22,200 $20,760 Net income $ 77,800 $71,240

Jeffy's Bike Store Income Statements For the Years Ended September 30 Increase (Decrease) Year 2 Year 1 Amount Percent Favorable? Rent revenue $100,000 $92,000 $8,000 9% Yes Operating expenses: Rent expense $ 12,000 $11,500 $ 500 4% No Interest expense 1,500 1,600 (100) (6)% Yes Utilities expense 3,200 2,660 540 20% No Wages expense 5,500 5,000 500 10% No Total operating expenses $ 22,200 $20,760 $1,440 7% No Net income $ 77,800 $71,240 $6,560 9% Yes

By performing a horizontal analysis on the following income statements, identify favorable and unfavorable trends. Show changes in amounts and percentages (rounded to the nearest whole percentage). Mig's Market Income Statements For the Years Ended October 31 Year 2 Year 1 Sales $79,000 $68,500 Cost of sales $17,550 $15,750 Operating expenses: Rent expense $13,200 $12,000 Salaries expense 11,500 13,000 Utilities expense 4,200 3,600 Legal expense 10,000 13,200 Total operating expenses $38,900 $41,800 Net income $22,550 $10,950

Mig's Market Income Statements For the Years Ended October 31 Increase (Decrease) Year 2 Year 1 Amount Percent Favorable? Sales $79,000 $68,500 $10,500 15% Yes Cost of sales $17,550 $15,750 $ 1,800 11% No Operating expenses: Rent expense $13,200 $12,000 $ 1,200 10% No Salaries expense 11,500 13,000 (1,500) (12)% Yes Utilities expense 4,200 3,600 600 17% No Legal expense 10,000 13,200 (3,200) (24)% Yes Total operating expenses $38,900 $41,800 $ (2,900) (7)% Yes Net income $22,550 $10,950 $11,600 106% Yes

Revenues - Expenses = __________

Net Income/ Net Loss

Beginning retained earnings + __________ - Dividends = Ending retained earnings

Net income (or subtract if a net loss)

Total liabilities ÷ Total stockholders' equity = __________

Ratio of liabilities to stockholders' equity

Record the journal entry to record the purchase of inventory on account for $1,200 on September 22, 20Y5.

Record the journal entry to record the purchase of inventory on account for $1,200 on September 22, 20Y5. Sept. 22 Inventory 1,200 Accounts Payable 1,200 Purchased inventory on account

Create Red Road Co.'s unadjusted trial balance for March 31, 20Y5, given the following balances (assume all accounts have a normal balance): • Property, Plant, and Equipment, $15,500 • Wages Expense, $8,750 • Rent Revenue, $3,500 • Unearned Revenue, $4,270 • Common Stock, $4,000 • Retained Earnings, $2,500 • Accounts Payable, $3,280 • Prepaid Expenses, $1,200 • Notes Payable, $3,950 • Fees Earned, $12,500 • Cash, $2,250 • Wages Payable, $4,150 • Rent Expense, $7,250 • Accounts Receivable, $3,200

Red Road Co. Unadjusted Trial Balance March 31, 20Y5 Debit Balances Credit Balances Cash 2,250 Accounts Receivable 3,200 Prepaid Expenses 1,200 PP&E 15,500 Accounts Payable 3,280 Unearned Revenue 4,270 Wages Payable 4,150 Notes Payable 3,950 Common Stock 4,000 Retained Earnings 2,500 Fees Earned 12,500 Rent Revenue 3,500 Rent Expense 7,250 Wages Expense 8,750 38,150 38,150 First, separate the balance sheet accounts from the income statement accounts. Next, list the balance sheet accounts, starting with assets, then liabilities, and stockholders' equity, as in a balance sheet. After the balance sheet accounts, the income statement accounts are listed, starting with revenues, just like an income statement.

Pepin Co. had an ending balance of $1,900 for Equipment. The company purchased $2,300 of equipment and retired $750 of equipment during the year. What was the beginning balance of the account?

The beginning balance in Equipment was $350 (x + $2,300 - $750 = $1,900). Strategy: The ending balance of an account can be found by combining the beginning balance with increases and subtracting decreases. For example, if the account is an asset, the balance will be a debit, additional debits will increase the balance, and credits will decrease the balance. Sometimes writing a formula can be helpful to find the missing amount. Equipment ?? 2,300 750 1,900

Shell Company's year 5 balance sheet had the following balances: stockholders' equity of $4,600 and liabilities of $3,800. During the next year, assets increased by $300 and liabilities decreased by $150. What was the change in stockholders' equity?

The change in stockholders' equity is $450 ($5,050 - $4,600).

Identify favorable and unfavorable trends from the income statements below by performing a horizontal analysis. Show changes in amounts and percentages (rounded to the nearest whole percentage). Wheeler & Fetch, CPA Income Statements For the Years Ended June 30 Year 2 Year 1 Fees earned $185,000 $179,500 Operating expenses: Rent expense $ 15,000 $ 13,400 Salaries expense 25,000 19,500 Utilities expense 6,700 6,500 Supplies expense 9,000 9,700 Total operating expenses $ 55,700 $ 49,100 Net income $129,300 $130,400

Wheeler & Fetch, CPA Income Statements For the Years Ended June 30 Increase (Decrease) Year 2 Year 1 Amount Percent Favorable? Fees earned $185,000 $179,500 $ 5,500 3% Yes Operating expenses: Rent expense $ 15,000 $ 13,400 $ 1,600 12% No Salaries expense 25,000 19,500 5,500 28% No Utilities expense 6,700 6,500 200 3% No Supplies expense 9,000 9,700 (700) (7)% Yes Total operating expenses $ 55,700 $ 49,100 $ 6,600 13% No Net income $129,300 $130,400 $(1,100) (1)% No

Accrued Revenue By the end of the year, a CPA firm has provided a client with 30 hours of service to prepare a tax return. The client agrees to pay for hours performed monthly on the fifteenth of the following month. The CPA firm bills clients $35 per hour. a. Calculate the accrued revenue the CPA firm should show in the year-end financial statements. b. Record the journal entry to show the adjustment.

a. $1,050; 30 hours × $35/hour b. Accounts Receivable 1,050 Fees Earned 1,050

. Unearned Revenue A magazine company sells a one-year subscription for $42 that will begin the month after the payment is received. During November, the company sells 200 subscriptions. The company did not sell any other subscriptions in the period. a. Find the adjustment needed at December 31 to record any revenue earned for the November subscriptions. b. Journalize the adjusting entry to record the revenue.

a. $1,400; $42 ÷ 12 months= $3.50 per month per subscription; $3.50 × 2 months × 200 subscriptions Unearned Subscription Revenue Subscription Revenue 8,400 1,400 1,400 1,400 7,000 b. Unearned Subscription Revenue 1,400 Subscription Revenue 1,400

. Prepaid Expense On June 1, Company A signed a rental agreement for a new building and paid $24,000 in advance for the year of rent beginning the same day. a. Determine the amount of the adjustment that should be made on December 31, the year-end for the rent on this building. b. Record the journal entry to show the adjustment.

a. $14,000; $24,000 ÷ 12 months = $2,000 rent expense per month; $2,000 × 7 months (June-December) b. Rent Expense 14,000 Prepaid Rent 14,000

Accrued Expense A company pays its employees every other Friday, with daily wages of $340, including weekends. The previous payday occurred on Friday, June 24. a. If the company's year ended June 30, what amount should the wages payable account on the balance sheet show? b. Journalize the adjusting entry to record the payables accrued

a. $2,040; $340/day × 6 days b. Wages Expense 2,040 Wages Payable 2,040

. Accrued Expense A company pays its telephone bill on the fifteenth of each month at a daily rate of $15. a. Calculate the amount of Telephone Utilities Payable at December 31. b. Journalize the adjusting entry to record the liability.

a. $240; $15/day × 16 days b. Telephone Expense 240 Telephone Utilities Payable 240 Strategy: T-Accounts and time lines can be helpful when determining the amount of the adjustment. A timeline can show the time period the adjustment should reflect and a visual of the amount for each month/day during the period. Journal entries will always have a balance sheet account and an income statement account. Remembering the normal balance of the accounts can help determine if an amount is a debit or credit.

Accrued Expense A business's lawyer charges $60 per hour to meet with the board of directors. The business pays for the expense on the fifth of every month. By the end of the year, the board members and lawyer had met 51 hours since the last pay period. a. How much should the business record as an accrued legal expense at year-end? b. Record the journal entry to make the adjustment

a. $3,060; 51 hours since last pay period × $60/hour b. Legal Expense 3,060 Legal Fees Payable 3,060

Determine if each of the following is a characteristic of a proprietorship, partnership, corporation, or limited liability company. a. Separate legal taxable entity b. Owned by one individual c. Combination of a corporation and partnership d. Combines the resources and skills of two or more individuals

a. Corporation b. Proprietorship c. Limited liability company d. Partnership

Would the following accounts have a normal debit or credit balance? a. Retained Earnings b. Fees Earned c. Rent Expense

a. Credit b. Credit c. Debit

Unearned Revenue A rental company owns a building from which it leases out multiple offices. During the year it received the following advance rental payments for one-year leases from separate tenants: $24,000 in June, $36,000 in August, and $12,000 in October. The leases started the first of the month following the payment. Assume that these are the only advance rental payments received and that no adjusting entries were made during the year. a. Find the balance of the unearned rent revenue account at year-end on December 31. Also, find the amount of the adjustment needed at year-end. b. Journalize the adjusting entry to record the revenue earned.

a. A T-account will be best to show the separate advanced payments and rent earned by December 31. Unearned Rent Revenue Rent Revenue 24,000 12,000 36,000 12,000 12,000 2,000 12,000 26,000 12,000 2,000 46,000 b. Unearned Rent Revenue 26,000 Rent Revenue 26,000

Unearned Revenue A new gym begins business in November, offering a special for its membership plan of one year for $240. During November, 12 people sign up for the plan starting December 1; during December, 20 people sign up for the plan starting December 15. a. Calculate the amount of the unearned revenue at year-end on December 31. b. Journalize the adjusting entry to record the revenue.

a. A T-account will be helpful because multiple signups and time periods were involved. The company will record the unearned revenue for the November and December signups when the memberships are sold. At the end of the year, the company will need to make adjustments for the revenue earned in December. For the November signups, the gym can show one month of revenue earned. For the December signups, the gym should only show half a month of revenue earned since the memberships started December 15. Unearned Membership Revenue Membership Revenue 2,880 440 4,800 240 440 200 7,240 b. Unearned Membership Revenue 440 Membership Revenue 440

Determine whether each of the following accounts is an asset, liability, revenue, expense, or stockholders' equity account. a. Equipment b. Utilities Incurred and Paid c. Unearned Revenue d. Sales e. Common Stock

a. Asset b. Expense c. Liability d. Revenue e. Stockholders' equity

Determine which type of account is being described in each of the following definitions. a. Resources of the company b. Stockholders' rights to assets of the company c. Sales of services or products d. Amounts owed by the company e. Consuming assets or services in order to produce revenue

a. Assets b. Stockholders' equity c. Revenues d. Liabilities e. Expenses

If a company does not record each of the following adjusting entries, determine the impact on the financial statements (overstated or understated assets, liabilities, stockholders' equity, revenues, expenses, net income). a. The company fails to adjust Prepaid Insurance for the last period. b. The accountant does not record an adjusting entry to Unearned Revenue for the month of December. c. The company fails to record an accrued expense

a. Assets overstated, stockholders' equity overstated, expenses understated, net income overstated b. Liabilities overstated, stockholders' equity understated, revenues understated, net income understated c. Liabilities understated, stockholders' equity overstated, expenses understated, net income overstated

If a company does not record each of the following adjusting entries, determine the impact on the financial statements (overstated or understated assets, liabilities, stockholders' equity, revenues, expenses, net income). a. Recording an accrued revenue b. Showing an adjustment to Prepaid Rent c. Making the year-end adjustment to Unearned Membership Revenue

a. Assets understated, stockholders' equity understated, revenues understated, net income understated b. Assets overstated, stockholders' equity overstated, expenses understated, net income overstated c. Liabilities overstated, stockholders' equity understated, revenues understated, net income understated

Which financial statements would include the following accounts? a. Machinery b. Common Stock c. Legal Expense

a. Balance sheet b. Balance sheet c. Income statement

Would the following accounts be found in a balance sheet or an income statement? a. Cash b. Interest Revenue c. Long-Term Debt

a. Balance sheet b. Income statement c. Balance sheet

Which financial statements would include the following accounts? a. Unearned Revenue b. Gain on Sale of Investment c. Rent Expense

a. Balance sheet b. Income statement c. Income statement

Determine the accounting assumption that relates to each of the following descriptions. a. Only the relevant economic data in an accounting system related to the activities of the business are observed. b. The financial reports are expressed in a single money unit. c. Financial condition and changes in financial condition are reported periodically on a consistent basis.

a. Business Entity Assumption b. monetary unit assumption c. time period assumption

Would a debit and credit increase or decrease the following account balances? a. Prepaid Insurance b. Interest Revenue c. Long-Term Debt

a. Debit increases, credit decreases b. Credit increases, only credits to the account, unless closing c. Debit decreases, credit increases

What is the effect of a debit and credit (increase or decrease) on the following account balances? a. Dividends b. Accounts Payable c. Equipment

a. Debit increases, credit decreases b. Debit decreases, credit increases c. Debit increases, credit decreases

What is the dollar effect on the company's unadjusted trial balance from the following errors? a. A debit to Equipment for $4,000 and a credit to Notes Payable for $400. b. A debit to Wages Expense for $450, Supplies Expense for $220, Utilities Expense for $550, and a credit to Cash for $1,270. c. A debit to Cash for $525 and a credit to Sales for $255.

a. Debits will be higher by $3,600. b. Credits will be higher by $50. c. Debits will be higher by $270. Unequal debits and credits in a journal entry will cause the unadjusted trial balance to be unbalanced. The effect from the journal entry (debits or credits are higher) will have the same effect on the unadjusted trial balance.

What is the dollar effect on the accounting equation (increase or decrease assets, liabilities, or stockholders' equity) from the following independent transactions? a. Brick Company pays $800 for rent expense for the month. b. Peach Company receives $290 in interest revenue. c. Purple Sun pays a dividend of $1,400 to shareholders.

a. Decrease assets and stockholders' equity by $800 b. Increase assets and stockholders' equity by $290 c. Decrease assets and stockholders' equity by $1,400

A piece of machinery that was purchased on July 1 has an original cost of $10,000. The company takes an annual depreciation of $1,500 a year. a. Record the depreciation expense for the third year. b. Find the net book value of the machinery after the first year. c. Find the net book value of the machinery after the third year. d. Show how the machinery will be recorded on the balance sheet at the end of the third year

a. Depreciation Expense 1,500 Accumulated Depreciation—Machinery 1,500 b. $8,500; $10,000 - $1,500 c. $5,500; $10,000 - $4,500 ($1,500/year × 3 years) The net book value is found by subtracting accumulated depreciation from the cost of the machinery. The accumulated depreciation account includes the total of the depreciation expenses recorded since the asset was purchased. Machinery Accumulated Depreciation Depreciation Expense 10,000 1,500 1,500 1,500 1,500 10,000 1,500 1,500 4,500 4,500 d. Machinery $10,000 Accumulated depreciation (4,500) Machinery, net $ 5,500

Determine the type of business entity from the following independent characteristics. a. Michael owns a fishing company that has resources limited to his own. b. Wyatt and Matthew own stock in their farming company. c. Jack and Jill are the only owners in a company whose resources are limited to their own. d. Owen has a business that is taxed like a partnership but has limited liability like a corporation.

a. Proprietorship b. Corporation c. Partnership d. Limited liability company

After three years, a company has accumulated depreciation of $9,000 on a piece of equipment. The company paid $21,000 for the equipment and records a depreciation expense of $3,000 per year. a. Record the depreciation expense for the fourth year. b. Find the net book value for the piece of equipment at the beginning and ending of the fourth year. c. Show how the equipment will be recorded on the balance sheet for the fourth year.

a. Depreciation Expense 3,000 Accumulated Depreciation—Equipment 3,000 b. Beginning: $12,000; $21,000 - $9,000 Ending: $9,000; $21,000 - 12,000 ($9,000 + $3,000) c. Equipment $ 21,000 Accumulated depreciation (12,000) Equipment, net $ 9,000 Strategy: First, determine the cost of the fixed asset. Next, find the amount of depreciation that should be shown for the time period. Dates are important to determine if the depreciation should be shown for a whole year or a few months of the year. The net book value will be the Cost - Accumulated Depreciation. The accumulated depreciation account is the total amount of depreciation expenses recorded to date for the asset.

. Which accounting principle relates to the following examples? a. Schoolhouse's equipment increases in value, but the balance sheet values the asset at its purchase price. b. In order to record the purchase of inventory, the accountant must verify the amounts with the purchase order. c. Starr Corporation records expenses in the same period as the related revenue.

a. Historical cost principle b. Measurement principle c. Expense recognition principle

Determine the dollar effect on the accounting equation (increase or decrease assets, liabilities, or stockholders' equity) from the following separate transactions. a. Dillon contributes $4,000 of cash to his corporation in exchange for common stock. b. Cowboy Corporation purchases equipment with a 10-year note payable for $1,600 and $400 cash. c. Queen Bee pays off $1,300 of accounts payable.

a. Increase assets and stockholders' equity by $4,000 b. Increase assets and liabilities by $1,600 c. Decrease assets and liabilities by $1,300

Prepaid Expense On December 15, Company B paid $18,000 for a six-month insurance policy starting on that day. a. How much should Company B show as Insurance Expense for the year ended December 31? What will be the balance of Prepaid Insurance at the end of the year? b. Record the journal entry to show the adjustment made on December 31

a. Insurance Expense: $1,500; $18,000 ÷ 6 months= $3,000 insurance expense per month; $3,000 × ½ month Prepaid Insurance: Use a T-account to find the balance at the end of the year. Prepaid Insurance 18,000 1,500 16,500 b. Insurance Expense 1,500 Prepaid Insurance 1,500 Strategy: T-Accounts and time lines can be helpful when determining the amount of the adjustment. A timeline can show the time period the adjustment should reflect and a visual of the amount for each month/day during the period. Journal entries will always have a balance sheet account and an income statement account. Remembering the normal balance of the accounts can help determine if an amount is a debit or credit.

If a company does not record each of the following adjusting entries, determine the impact on the financial statements (overstated or understated assets, liabilities, stockholders' equity, revenues, expenses, net income). a. Record an entry for any legal expenses accrued. b. Make an adjustment at year-end for utilities paid in advance at the beginning of the period. c. Record the revenue for services performed but not yet paid for by customers

a. Liabilities understated, stockholders' equity overstated, expenses understated, net income overstated b. Assets overstated, stockholders' equity overstated, expenses understated, net income overstated c. Assets understated, stockholders' equity understated, revenues understated, net income understated Strategy: The type of account that requires adjusting has a direct relationship with the balance sheet. For example, the prepaid expense account is an asset. If the account is overstated, the assets will be overstated. The corresponding account that should have been debited/credited in the adjusting entry determines the effect on the income statement. For example, expenses are debited when adjusting the prepaid expense account. If the entry is not made, expenses will be understated. Overstatement of expenses or understatement of revenues will cause net income to be understated, while the understatement of expenses and overstatement of revenues cause net income to be overstated. Since net income flows through to retained earnings, if net income is overstated, stockholders' equity will also be overstated.

Would each of the following accounts be an example of an asset, liability, revenue, expense, or stockholders' equity account? a. Salaries Payable b. Cost of Sales c. Common Stock d. Investment in Securities e. Fees Earned

a. Liability b. Expense c. Stockholders' equity d. Asset e. Revenue

. Do the following separate qualities describe a proprietorship, partnership, corporation, or limited liability company? a. Joe and Jack's business will have characteristics of a corporation and partnership. b. Howard will support his company using debt securities and stock. c. Katie is the only owner of her business and has full liability for any losses. d. Cooper and Eric operate a business together with personal liability

a. Limited liability company b. Corporation c. Proprietorship d. Partnership

Determine if each of the following is an example of a manufacturing, service, or merchandising business. a. Gas station b. Pencil producer c. Auto repairman

a. Merchandising b. Manufacturing c. Service

Are the following examples of a service, manufacturing, or merchandising business? a. Store selling school supplies b. Lawyer providing legal advice c. Car factory

a. Merchandising b. Service c. Manufacturing

Determine whether each of the following assets will require an adjusting entry for depreciation. a. Long-Term Investments b. Delivery Van c. Computers

a. No b. Yes c. Yes Strategy: Fixed assets are not current assets. They are also used to produce the operating income of the company. Land is never depreciated.

. Determine the dollar effect, if any, of the following errors on the unadjusted trial balance. a. The accountant records a payment of $1,600 for prepaid expenses as a debit to Prepaid Expenses for $16,000 and a credit to Cash for $16,000. b. To record the expense for wages, the company's books show a debit to Wages Expense for $3,200 and a credit to Cash for $2,300. c. When preparing the purchase of inventory, the accountant debited Inventory for $205 and credited Accounts Payable for $2,050.

a. No effect; the debits will still equal the credits. b. The debits will be higher than the credits by $900. c. The credits will be higher than the debits by $1,845.

a. Revenue is recorded when the services have been performed or goods are delivered to the customer. b. Amounts that are recorded and reported must be based upon independent, unbiased evidence and must be able to be confirmed by a third party. c. An item is recorded at its initial transaction price.

a. Revenue recognition principle b. Measurement principle c. Historical cost principle

Determine if each of the following businesses is an example of a manufacturing, service, or merchandising business. a. Accountant preparing a tax return b. Grocery store c. Clothing producer

a. Service b. Merchandising c. Manufacturing

By how much will the debits or credits totals be higher on the adjusted trial balance due to the following independent errors? a. The sale of goods was shown using a $300 debit to Cash and a $400 credit to Sales Revenue. b. The entry to record accrued revenues was made by debiting Accounts Receivable for $450 and crediting Accrued Legal Revenue for $45. c. When recording the interest expense, the accountant debited Interest Expense for $890 and Interest Payable for $800.

a. The credits will be higher by $100. b. The debits will be higher by $405. c. The debits will be higher by $90.

Will the following errors cause debits or credits to be higher on the unadjusted trial balance? If so, by how much? a. When preparing the journal entry to record the purchase of land and a building, the accountant debited Land for $12,000 and Cash for $25,000 and credited Building for $13,000. b. The accountant accidentally credited Rent Revenue for $1,300 rather than Interest Revenue when showing the cash received for interest on securities. c. The company's books show a debit of $4,500 to Accounts Receivable and a credit to Sales for $450.

a. The debits will be higher by $24,000. b. The unadjusted trial balance will be equal since debits still equal credits. c. The debits will be higher by $4,050.

. Will the following independent errors cause the debits or credits totals on the adjusted trial balance to be unequal? If so, by how much? a. The journal entry for Wages Expense was made for $10,450 instead of $10,550. b. The journal entry to record sales is accidentally recorded as a $500 debit to Cash, a $450 debit to Accounts Receivable, and a $5,000 credit to Sales Revenue. c. To record depreciation for the year, a $3,000 debit to Depreciation Expense and a $3,000 credit to Machinery were made.

a. The totals will be equal, although not at the right amount. b. The totals will be unequal. The credits will be higher by $4,050. c. The totals will be equal, although the entries were not made to the correct accounts.

Prepaid Expense At the beginning of the quarter, a company had $2,670 of supplies on hand. During the period, the company purchased $500 worth of supplies. At the end of the year, on December 31, the supplies on hand are $1,220. a. How much of an adjustment should the company make to show the use of the supplies? b. Record the journal entry to make the adjustment

a. Use a T-account to see how much of the supplies were used. To show the correct Supplies Expense, the purchase should also be shown in the account. Adding $2,670 and $500 shows the unadjusted balance ($3,170). To find the adjustment needed, subtract the ending balance ($1,220) from the unadjusted balance of $3,170 to find the Supplies Expense of $1,950. Supplies 2,670 500 ? 1,220 b. Supplies Expense 1,950 Supplies 1,950

Determine whether each of the following assets will be depreciated. a. Building b. Land c. Inventory

a. Yes b. No c. No

Do the following independent situations relate to an accrual or a cash basis of accounting? a. Upon startup in July, the company paid for its rent for the upcoming year, but only expensed half of the amount paid on its income statement. b. In January, the organization paid for cleaning services received in the previous period. The expense is recorded in January upon payment. c. The corporation receives payment on the fifteenth of the month for its hourly services. When preparing financial statements, the accountant records a journal entry for Accrued Revenues.

a. accrual b. cash c. accrual Strategy: Think of the cash basis of accounting as like putting money into a bank account. The income is shown when the money is put into the account, and the expenses are shown when the money comes out of the account. The accrual basis of accounting is similar to the interest on the account. It is shown on the bank statement when earned.

Determine whether each of the following is a characteristic of an accrual or a cash basis of accounting. a. The company received payments for one-year magazine subscriptions throughout the year. On the balance sheet, the company records a liability for Unearned Revenue. b. The corporation paid for a $12,000, one-year insurance policy beginning in September. The income statement shows an Insurance Expense of $12,000. c. The firm sold goods for $10,000 to customers and received payments of $8,000 by year-end, with $2,000 still in customer accounts. The company records Sales Revenue of $8,000 on its income statement for these goods.

a. accrual b. cash c. cash

Is each of the following an accrued revenue, an accrued expense, an unearned revenue, or a prepaid expense? a. A manufacturer pays its employees on the first and third Friday of every month. By the end of the period, employees have worked four days since the last pay period. b. An architect designs a building for a company, agreeing to bill at an hourly rate and receive payment upon completion. At the end of the year, the design is still in progress. c. A firm pays in advance for monthly rental of a delivery truck.

a. accrued expense b. accrued expense c. prepaid expense Strategy: First, determine if the item will be revenue or an expense to the company. Second, determine if it will create an asset or a liability to the company. Accrued revenues and prepaid expenses are assets, while accrued expenses and unearned revenue are liabilities.

Determine whether each of the following describes an accrued revenue, an accrued expense, an unearned revenue, or a prepaid expense. a. A company makes payments on the fifteenth of every month to its lawyer for hourly services. At the end of the year, the board members and lawyer have met for a total of 20 hours since the last billing cycle. b. A company receives payments during the year for a six-month or yearly subscription to its magazine. At the end of the year, some customers still have months left in their subscriptions. c. On December 1, a company paid rent for a three-month lease on a storage building starting that day.

a. accrued expense b. unearned revenue c. prepaid expense

Do the following situations describe an accrued revenue, an accrued expense, an unearned revenue, or a prepaid expense? a. A company provided cleaning services for its clients at an hourly rate that will be paid the following month. b. A business received payments throughout the year for membership contracts that expired within either six months or one year. At the end of the year, some contracts had not yet expired. c. A firm paid its predetermined telephone bill for the next six months.

a. accrued revenue b. unearned revenue c. prepaid expense

Determine if each of the following descriptions relates to an accrual or a cash basis of accounting. a. Company A records income when the payment is received from the customer. b. Company B records an accrued expense at year-end for any expenses incurred but not paid. c. When the customer buys an item and charges it to his account, Company C records it as sales revenue.

a. cash b. accrual c. accrual

Are the following stakeholders internal or external users in a company? Would each use managerial or financial accounting? a. Stockholders of a corporation b. Marketing manager c. Bank providing financial loans

a. external, financial accounting b. internal, managerial accounting c. external, financial accounting

Are the following examples of managerial or financial accounting? a. Creating an income statement b. Preparing a budget for the production department c. Valuing investments to record gains and losses for the period's financial statements

a. financial b. managerial c. financial

Would each of the following be an example of managerial or financial accounting? a. Preparing a valuation of the company's assets to apply for a bank loan b. Projecting sales to determine the amount of materials to purchase c. Allocating the marketing expense to various departments

a. financial b. managerial c. managerial

Determine whether each of the following accounts will require adjusting entries. a. Common Stock b. Prepaid Insurance c. Wages Payable

a. no b. yes c. yes

Does each of the following accounts need year-end adjusting entries? a. Accrued Legal Revenue b. Accounts Receivable c. Land

a. yes b. no c. no Strategy: The accounts that require adjustments include any accrued revenue, accrued expenses, unearned revenue, and prepaid expenses. Depreciation expense also must be adjusted at the end of the year

Determine whether each of the following accounts would need to be adjusted at the end of the period. a. Accumulated Depreciation b. Unearned Rent Revenue c. Cash

a. yes b. yes c. no

Determine whether each of the following assets will have a contra asset for Accumulated Depreciation. a. Equipment b. Machinery c. Notes Receivable

a. yes b. yes c. no

Asset accounts have a normal __________ balance

debit

Expense accounts have a normal __________ balance.

debit

The dividends account has a normal __________ balance

debit

Beginning accumulated depreciation + __________ - Accumulated depreciation for retiring assets = Ending depreciation

depreciation expense

The retained earnings account includes income statement accounts and the __________ account.

dividends

Assets = Liabilities + __________

equity/ stockholders equity

Beginning prepaid expense + Additional payments - __________ = Ending prepaid expense

expense

. __________ = Cost - Accumulated depreciation

net book value

Managerial Accounting

used by internal users of the company, such as managers