ACG CHAPTER 3

At the start of the month, a corporation reported retained earnings of $136,000. During the month, it earned $20,000, incurred expenses of $12,000, purchased equipment for $5,000 and paid dividends of $2,000. What is the balance in retained earnings at the end of the month?

$142,000 credit Solution: Ending retained earnings = Beginning retained earnings + revenues for the current period - expenses for the current period - dividends for the current period. Ending retained earnings = $136,000 + $20,000 - 12,000 − 2,000 = $142,000

At the start of the current year, investors contribute $10,000 to a newly formed corporation. During the year, the corporation earned revenues of $45,000, paid expenses of $22,000, and paid dividends to the owners of $5,000. It also borrowed $10,000 by issuing a note. At the end of the year, the balance in retained earnings will be

$18,000 credit Solution: Ending retained earnings = Beginning retained earnings + Revenues - Expenses - Dividends. Ending retained earnings = $0 + 45,000 - 22,000 - 5,000 = $18,000

A company began the year with $86,000 in its common stock account and a credit balance in retained earnings of $35,000. During the year, the company earned net income of $50,000 and declared and paid $12,000 of dividends. In addition, the company sold additional common stock amounting to $32,000. Based on this information, what is the ending total of stockholders' equity?

$191,000 Solution: Stockholders' equity = common stock + retained earnings Stockholders' equity = (86,000 + 32,000) + (35,000 + 50,000 - 12,000) = $191,000

At the start of the month, a company reported a $34,000 debit balance in its cash account. During the month, the company debited cash for $30,000 and credits cash for $42,000. At the end of the month, the cash account has a

$22,000 debit balance Solution: The ending cash balance = the beginning cash balance + cash receipts occurring during the period - cash payments occurring during the period. The ending cash balance = $34,000 + 30,000 − 42,000 = $22,000.

A company's financial records report the following accounts and balances at the end of the year: What would the company show as its total credits on its trial balance?

$43,200 Solution: This company's accounts that have debit balances include its assets (i.e., accounts receivable, cash, prepaid insurance, accounts receivable), expenses (i.e., interest expense), and dividends. These sum to $43,200 (i.e., 4,900 + 14,300 + 2,400 + 2,900 + 18,700 = 43,200).

Prior to recording its closing entries, a company has the following accounts and account balances at the end of its first year: Accounts payable, $4,000 Cash, $22,000 Common stock, Not given Dividends, $4,000 Expenses, $17,000 Notes payable, $3,000 Prepaid insurance, $5,000 Revenues, $28,000 What is the balance of its retained earnings at the start of its second year?

$7,000 Solution: Ending retained earnings = Beginning retained earnings + Revenue - Expenses - Dividends Ending retained earnings = $0 + 28,000 - 17,000 - 4,000 = $7,000 By the way, the company repeats this process annually transferring each year's revenues, expenses, and dividends to retained earnings.

Which of the following events is not recorded in a company's accounting records?

A decision to offer a company's services in a new geographic area

Which of the following is true with regards to a trial balance?

A trial balance may uncover errors in journalizing and posting

Which of the following is the correct sequence of events in the recording process?

Analyze a transaction; record it in the journal; post it to the ledger

A trial balance would only help in detecting which one of the following errors?

For a given transaction, the account that should have been credited was credited but no account was debited

Which of the following is true with regards to the dividends account?

It is neither a revenue nor an expense account and it normally has a debit balance

What type of account is unearned revenue?

Liability

If a company receives cash from an owner in exchange for shares of the company's common stock, then

assets increase and stockholders' equity increases Solution: Receiving cash from stockholders as an investment in the company by stockholders is a contribution to capital. This transaction increases the company's cash by the amount of cash received and it increases the company's stockholders' equity (specifically, it increases the common stock account).

A company issues a note payable in exchange for cash. This transaction will immediately affect the

balance sheet and cash flows statement only

When a company performs a service but has not yet received payment, it

debits Accounts Receivable and credits Service Revenue Solution: When a company performs a service it recognize revenue so it credits the revenue account. If the company has not yet received payment, the customer owes the company so the company increases its accounts receivable. Increase assets, such as accounts receivable, by debiting them.

A certain company records wages only when it pays them. Recording the payment of wages

decreases assets and decreases stockholders' equity Solution: When employees earn wages, the company incurs wage expense. Since the company records wages (i.e., wage expense) when it pays employees their wages, this transaction reduces assets (e.g., it reduces cash) and it reduces stockholders' equity (i.e., it increases wage expense which reduces retained earnings and stockholders' equity).

Retained earnings is decreased by

expenses

The effects of paying for a one-year insurance policy that will expire next year on the basic accounting equation are to

increase assets and decrease assets by the same amount. Total assets do not change Solution: Payment for a one-year insurance policy that will benefit more than one accounting period is recorded as a decrease in cash and an increase in a different asset called prepaid insurance. This transaction is an asset exchange where one asset is exchanged for an equal amount of a different asset. Total assets does not change

The effects of receiving cash from a customer in exchange for performing services on the basic accounting equation are to

increase assets and increase stockholders' equity Solution: Assets = Liabilities + Stockholders' Equity Receiving cash increases assets and increases the company's revenue, and an increase in revenue will increase the company's retained earnings and equity. Thus, assets increase and equity increases.

If a previously unrecorded expense is recorded when it is paid with cash recording the the transaction will

increase expenses and decrease assets Solution: When an expense is paid with cash, cash (i.e., assets) will be decreased and expenses will be increased. Increasing expenses will reduce net income which reduces retained earnings. Liabilities will not be affected. For example, when a company pays a previously unrecorded insurance bill, it will decrease cash and increase its "insurance expense."

A transaction that increases an unearned revenue

increases an asset and increases a liability Solution: Unearned revenue is a liability account used to report the services and/or merchandise owed to customers as a result of customers having paid in advance. Increasing unearned revenue increases liabilities. The liability is created by the customer's advance payment, so cash increases (i.e., assets increase). The company will not earn the revenue until later when it provides the services and/or merchandise to the customer.

If cash is received in advance from a customer

liabilities will increase and assets will increase Solution: Receiving cash in advance means that the business receives cash from a customer before the company provides the merchandise or services being sold to the customer. This creates an obligation or a liability to the company. We call this liability "unearned revenue." Liabilities increase and assets (i.e., cash) increase.

A journal is least useful for

reporting the balances of each account affected by the journal entry Solution: Transactions are recorded in chronological order in journals. This step occurs before transferring the amounts to the ledger. Journals have the following features:1. Journals discloses the complete effect of each transaction in one place.2. Journals provide a chronological record of transactions.3. Journals help prevent errors because debits and credits can be readily compared.Journals do not display T-accounts, but ledgers do display T-accounts to help track the balance of each account.

If a transaction affected two accounts and total liabilities decreased by $4,000, then

total assets must have decreased by $4,000 or total stockholders' equity must have increased by $4,000 The accounting equation: Assets = Liabilities + Equity The accounting equation must always be in balance. Every transaction has two effects on the accounting equation. If total liabilities decreased by $4,000 and the transaction affected only two accounts, then either (i) total assets decreased by $4,000 or (ii) total equity increased by $4,000.