ACG Quiz 3

At the start of the month, a corporation reported retained earnings of $154,000. During the month, it incurred expenses of $10,000, earned revenues of $25,000, received $9,000 of cash from stockholders in exchange for additional common stock, and paid dividends of $6,000. What is the balance in retained earnings at the end of the month?

$163,000 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 = $154,000 + $25,000 - 10,000 - 6,000 = $163,000 Retained earnings normally has a credit balance. This is a profitable company, so its retained earnings balance would be a credit balance. Note: selling (i.e., issuing) additional common stock to shareholders in exchange for cash increases stockholders' equity and assets; it does not affect net income or retained earnings.

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 - DividendsEnding retained earnings = $0 + 45,000 - 22,000 - 5,000 = $18,000Retained earnings is an equity account; it normally has a credit balance.Note: This is the company's first-year so its beginning retained earnings is zero. Also, certain transactions do not affect retained earnings, such as borrowing money by issuing a note.

In its first month of operations, a company's cash account has total debit entries amounting to $27,500 and total credit entries amounting to $24,900. At the end of the month, the cash account has a

$2,600 debit balance. Solution: When a company begins, all of its accounts have a zero balance. This company has debit entries for cash of $27,500 and credits of $24,900 in its cash account during its first month. Debits increase asset accounts' balances, such as cash, and credits decrease assets' accounts balances. The balance in the cash account at the end of the period will be $2,600 debit balance (i.e., $27,500 dr. − $24,900 cr. = $2,600 dr.; when an account's debits exceed its credits, the account has a debit balance).

A company's financial records report the following accounts and balances at the end of the year: Accounts payable$ 3,200Accounts receivable 3,900Cash 13,300Common stock 4,800Dividends 1,400Interest expense 17,700Notes payable 4,400Prepaid insurance 1,900Retained earnings 1,600Service revenue 24,200 What would the company show as its total credits on its trial balance?

$38,200 Solution:Certain accounts normally have debit balances, including assets, expenses, and dividends. 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 $38,200 (i.e., 3,900 + 13,300 + 1,400 + 1,900 + 17,700 = 38,200).Other accounts normally have credit balances, including liabilities, equities, and revenues. This company's accounts that have credit balances include its liabilities (i.e., accounts payable, notes payable), equities (i.e., common stock, retained earnings), and revenues (i.e., service revenue). These sum to $38,200 (i.e., 3,200 + 4,800 + 4,400 + 1,600 + 24,200 = 38,200).Note: total debits equal total credits.

A company has the following accounts and account balances at the end of its first year: Accounts payable, $4,000 Cash, $20,000 Common stock, Not given Dividends, $1,000 Expenses, $17,000 Notes payable, $6,000 Prepaid insurance, $2,000 Revenues, $22,000What is the balance of its common stock account at the end of the first year?

$8,000 Solution:The basic accounting equation (i.e., Assets = Liabilities + Equity) must stay in balance. The accounting equation can be expanded as follows:Assets = Liabilities + Common stock + Retained earningsWilson's assets include cash and prepaid insurance (i.e., 20,000 + 2,000 = 22,000).Wilson's liabilities include accounts payable and notes payable (i.e., 4,000 + 6,000 = 10,000).This is Wilson Company's first year. Its retained earnings at the start of the first year is zero. Retained earnings increases y net income and it decreases by dividends.Wilson's retained earnings at the end of the first year equals retained earnings at the start of the current year plus current-year net income minus current year dividends (i.e., 0 + 22,000 - 17,000 - 1,000 = 4,000).Assets = liabilities + retained earnings + common stockCommon stock = Assets - liabilities - retained earningsCommon stock = 22,000 - 10,000 - 4,000Common stock = 8,000

A company started the year with $75,000 in its common stock account and a credit balance in retained earnings of $42,000. During the year, the company earned net income of $60,000 and declared and paid $17,500 of dividends. In addition, the company sold additional common stock amounting to $32,000. As a result, the amount of its retained earnings at the end of the year would be

$84,500 Solution: Ending retained earnings = $84,500 = Beginning Retained Earnings + Net Income - Dividends Ending retained earnings = 42,000 + 60,000 - 17,500

Which two accounts follow the rules of debit and credit in relation to increases and decreases in the same manner?

(i) Equipment and (ii) Selling Expense Solution:Assets, expenses, and dividends are increased by debits. Liabilities equities, and revenues are increased with credits. Equipment is an asset account, and advertising expense is an expense account; both are increased by debits.

Which of the following is an example of a source document that provides evidence of a transaction?

A sales slip recording a sale of services to a customer Solution:The recording process does steps in a certain order. The first step is to analyze each transaction in terms of its effects on the accounts. This begins with examining a source document that provides evidence of a transaction or event that needs to be recorded. Examples of source documents include a bill or invoice, a cash register document, and a sales slip. The second step is to enter the transaction information in the journal (i.e., journalize the transaction). Third, transfer the journal information to the appropriate accounts in the ledger (i.e., post it to the ledger).

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

Discussing with a customer the services a company offers.

Which of the following two accounts are both increased with debits?

Dividends and Accounts Receivable

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

For a given transaction, the account that should have been debited was debited but no account was credited Solution: A trial balance lists accounts and their balances at a given point in time. A purpose of the trial balance is to confirm that the total of the debit balances equals the total of the credit balances. However, a trial balance has limits. A trial balance helps uncover certain errors, such as recording a different amount debited than the amount credited, omitting part of a journal entry or recording the entire journal entry using only debits (or using only credits). A trial balance does not prove that all transactions have been recorded nor does it proves that transactions have been recorded correctly. For example, a trial balance will confirm that total debit balances equal total credit balances even if a transaction were recorded twice or if it was not recorded even once. Both total debits and total credits would be wrong by the same amount. Another error not uncovered by a trial balance is recording a transaction in the wrong accounts.

What type of account is unearned revenue?

Liability

If a company buys supplies on account, then

assets increase and liabilities increase. Solution:Buying supplies indicates that supplies are acquired, and supplies are assets so assets increase. Buying "on account" indicates that cash has not been paid. Rather, a liability is created for the amount owed. This transaction increases an asset (i.e., supplies) and increases a liability (i.e., accounts payable). Stockholders' equity is not affected.

Powell Company purchased equipment for $500 cash. As a result of this event,

assets increased and decreased by the same amount. Total assets remained unchanged. Solution: A purchase of equipment for cash is recorded as an increase in equipment (which is an asset) and a decrease in cash (which is an asset). Thus, an asset exchange occurs with one asset increasing and another decreasing. Total assets is unchanged.

Customarily, a trial balance is prepared

at the end of an accounting period. Solution:A trial balance lists accounts and their balances at a given point in time. Accounts are listed in the same order that they appear in the ledger, including assets, liabilities, equities, dividends, revenues, and expenses. Account balances appear in either of two columns. The left-side column reports the debit balances and the right side column reports the credit balance. A company prepares a trial balance at the end of the accounting period and before it prepares its financial statements. A purpose of the trial balance is to confirm that the total of the debit balances equals the total of the credit balances.

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

balance sheet and cash flows statement only. Solution:When issuing a note payable in exchange for cash, the company issuing the note collects cash (which increases its assets) and increases the liabilities. Collecting cash also appears on the cash flows statement. Issuing a note payable does not affect income statement accounts (e.g., revenues and expenses). Issuing a note also does not affect retained earnings.

Transactions in a journal are recorded in

chronological order. 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.

The effects of paying a dividend on the basic accounting equation are to

decrease assets and decrease stockholders' equity. Solution:Basic accounting equation: Assets = Liabilities + Stockholders' Equity Paying a dividend decreases cash (i.e., decreases assets) and decreases retained earnings which is an equity account. Thus, asset decrease and equity decreases.

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

increase expenses and decrease assets.

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.