Chapter IV

Question 1

1. INCORRECT concerning worksheet?
   (a) Worksheet is essentially a working tool of accountant.
   (b) Worksheet is distributed to management and other interested parties.
   (c) Worksheet cannot be used as a basis for posting to ledger accounts.
   (d) Financial statements can be prepared directly from the worksheet before journalizing and posting the adjusting entries.

Answer 1

B

Question 2

2. In a worksheet, NI is entered in WHAT columns:
   (a) income statement (Dr) and balance sheet (Dr).
   (b) income statement (Cr) and balance sheet (Dr).
   (c) income statement (Dr) and balance sheet (Cr).
   (d) income statement (Cr) and balance sheet (Cr).

Answer 2

C

Question 3

3. In unadjusted trial balance of worksheet for year ended Company reported Equipment of $120,000. The year end adjusting entries require an adjustment of $15,000 for depreciation expense for the equipment. After adjustment, the following adjusted amount should be reported:
   (a) a debit of $105,000 for Equipment in the balance sheet column.
   (b) a credit of $15,000 for Depreciation Expense—Equipment in the income statement column.
   (c) a debit of $120,000 for Equipment in the balance sheet column.
   (d) a debit of $15,000 for Accumulated Depreciation—Equipment in the balance sheet column.

Answer 3

C

Question 4

4. An account that will have a zero balance after closing entries have been journalized and posted is:
   (a) Service Revenue.
   (b) Supplies.
   (c) Prepaid Insurance.
   (d) Accumulated Depreciation—Equipment.

Answer 4

A

Question 5

5. When a net loss has occurred, Income Summary is:
   (a) debited and Retained Earnings is credited.
   (b) credited and Retained Earnings is debited.
   (c) debited and Dividends are credited.
   (d) credited and Dividends are is debited.

Answer 5

B

Question 6

6. The closing process involves separate entries to close (1) expenses, (2) dividends, (3) revenues, and (4) income summary. The correct sequencing of the entries:
   (a) (4), (3), (2), (1)
   (b) (1), (2), (3), (4)
   (c) (3), (1), (4), (2)
   (d) (3), (2), (1), (4)

Answer 6

C

Question 7

7. Which types of accounts will appear in the post-closing trial balance?
   (a) Permanent (real) accounts.
   (b) Temporary (nominal) accounts.
   (c) Accounts shown in the income statement columns of a worksheet.
   (d) None of the above.

Answer 7

A

Question 8

8. All of the following are required steps in the accounting cycle except:
   (a) journalizing and posting closing entries.
   (b) preparing fi nancial statements.
   (c) journalizing the transactions.
   (d) preparing a worksheet.

Answer 8

D

Question 9

9. The proper order of the following steps in the accounting cycle is:
   (a) prepare unadjusted trial balance, journalize transactions, post to ledger accounts, journalize and post adjusting entries.
   (b) journalize transactions, prepare unadjusted trial balance, post to ledger accounts, journalize and post adjusting entries.
   (c) journalize transactions, post to ledger accounts, prepare unadjusted trial balance, journalize and post adjusting entries.
   (d) prepare unadjusted trial balance, journalize and post adjusting entries, journalize transactions, post to ledger accounts.

Answer 9

C

Question 10

10. When Ramirez Company purchased supplies worth $500, it incorrectly recorded a credit to Supplies for $5,000 and a debit to Cash for $5,000. Before correcting this error:
    (a) Cash is overstated and Supplies is overstated.
    (b) Cash is understated and Supplies is understated.
    (c) Cash is understated and Supplies is overstated.
    (d) Cash is overstated and Supplies is understated.

Answer 10

D

Question 11

11. Cash of $100 received at the time the service was performed was journalized and posted as a debit to Cash $100 and a credit to Accounts Receivable $100. Assuming the
    incorrect entry is not reversed, the correcting entry is:
    (a) debit Service Revenue $100 and credit Accounts Receivable $100.
    (b) debit Accounts Receivable $100 and credit Service Revenue $100.
    (c) debit Cash $100 and credit Service Revenue $100.
    (d) debit Accounts Receivable $100 and credit Cash $100.

Answer 11

B

Question 12

12. The correct order of presentation in a classified balance sheet for the following current assets is:
    (a) accounts receivable, cash, prepaid insurance, inventory.
    (b) cash, inventory, accounts receivable, prepaid insurance.
    (c) cash, accounts receivable, inventory, prepaid insurance.
    (d) inventory, cash, accounts receivable, prepaid insurance.

Answer 12

C

Question 13

13. A company has purchased a tract of land. It expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. The land should be reported as:
    (a) property, plant, and equipment.
    (b) land expense.
    (c) a long-term investment.
    (d) an intangible asset.

Answer 13

C

Question 14

14. In a classifi ed balance sheet, assets are usually classified using the following categories:
    (a) current assets; long-term assets; property, plant, and equipment; and intangible assets.
    (b) current assets; long-term investments; property, plant, and equipment; and tangible assets.
    (c) current assets; long-term investments; tangible assets; and intangible assets.
    (d) current assets; long-term investments; property, plant, and equipment; and intangible assets.

Answer 14

D

Question 15

15. Current assets are listed:
    (a) by expected conversion to cash.
    (b) by importance.
    (c) by longevity.
    (d) alphabetically.

Answer 15

A

Question 16

• 16. On December 31, Kevin Hartman Company correctly made an adjusting entry to recognize $2,000 of accrued salaries payable. On January 8 of the next year, total salaries of $3,400 were paid. Assuming the correct reversing entry was made on January 1, the entry on January 8 will result in a credit to Cash $3,400 and the following debit(s):
      (a) Salaries and Wages Payable $1,400 and Salaries and Wages Expense $2,000.
      (b) Salaries and Wages Payable $2,000 and Salaries and Wages Expense $1,400.
      (c) Salaries and Wages Expense $3,400.
      (d) Salaries and Wages Payable $3,400.

Answer 16

C

Question 17

1. “A worksheet is a permanent accounting record and its use is required in the accounting cycle.” Do you agree? Explain.

Answer 17

No. A worksheet is not a permanent accounting record. The use of a worksheet is an optional step in the accounting cycle.

Question 18

2. Purpose of the worksheet.

Answer 18

The worksheet is merely a device used to make it easier to prepare adjusting entries and the financial statements.

Question 19

3. What is the relationship, if any, between the amount shown in the adjusted trial balance column for an account and that account’s ledger balance?

Answer 19

The amount shown in the adjusted trial balance column for an account equals the account balance in the ledger after adjusting entries have been journalized and posted.

Question 20

4. If a company’s revenues are $125,000 and its expenses are $113,000,
   (a) in which financial statement columns of the worksheet will the net income of $12,000 appear?
   (b) When expenses exceed revenues, in which columns will the difference appear?

Answer 20

The net income of $12,000 will appear in the income statement debit column and the balance sheet credit column. A net loss will appear in the income statement credit column and the balance sheet debit column.

Question 21

5. Why is it necessary to prepare formal fi nancial statements if all of the data are in the statement columns of the worksheet?

Answer 21

Formal financial statements are needed because the columnar data are not properly arranged and classified for statement purposes. For example, a drawing account is listed with assets.

Question 22

6. Identify the account(s) debited and credited in each of the four closing entries, assuming the company has net income for the year.

Answer 22

(1) (Dr) Individual revenue accounts and (Cr) Income Summary.
(2) (Dr) Income Summary and (Cr) Individual expense accounts.
(3) (Dr) Income Summary and (Cr) Owner’s Capital (for net income).
(4) (Dr) Owner’s Capital and (Cr) Owner’s Drawing.

Question 23

7. Describe the nature of the Income Summary account and identify the types of summary data that may be posted to this account.

Answer 23

Income Summary is a temporary account that is used in the closing process. The account is debited for expenses and credited for revenues. The difference, either net income or loss, is then closed to the owner’s capital account.

Question 24

8. What are the content and purpose of a post-closing trial balance?

Answer 24

The post-closing trial balance contains only balance sheet accounts. Its purpose is to prove the equality of the permanent account balances that are carried forward into the next accounting period.

Question 25

9. Which of the following accounts would not appear in the post-closing trial balance? Interest Payable; Equipment; Depreciation Expense; Dividends; Unearned Service Revenue; Accumulated Depreciation—Equipment; and Service Revenue.

Answer 25

The accounts that will not appear in the post-closing trial balance are Depreciation Expense; Jennifer Shaeffer, Drawing; and Service Revenue.

Question 26

10. Distinguish between a reversing entry and an adjusting entry. Are reversing entries required?

Answer 26

A reversing entry is the exact opposite, both in amount and in account titles, of an adjusting entry and is made at the beginning of the new accounting period. Reversing entries are an optional step in the accounting cycle.

Question 27

11. Indicate, in the sequence in which they are made, the three required steps in the accounting cycle that involve journalizing.

Answer 27

The steps that involve journalizing are: (1) journalize the transactions, (2) journalize the adjusting entries, and (3) journalize the closing entries.

Question 28

12. Identify, in the sequence in which they are prepared, the three trial balances that are often used to report financial information about a company.

Answer 28

The three trial balances are the: (1) trial balance, (2) adjusted trial balance, and (3) post-closing trial balance.

Question 29

13. How do correcting entries differ from adjusting entries?

Answer 29

Correcting entries differ from adjusting entries because they: (1) are not a required part of the accounting cycle, (2) may be made at any time, and (3) may affect any combination of accounts.

Question 30

14. What standard classifi cations are used in preparing a classified balance sheet?

Answer 30

The standard classifications in a balance sheet are: - Assets - Liabilities and Owner’s Equity - Current Assets Current Liabilities - Long-term Investments Long-term Liabilities - Property, Plant, and Equipment Owner’s Equity - Intangible Assets

Question 31

15. What is meant by the term “operating cycle?”

Answer 31

A company’s operating cycle is the average time required to go from cash to cash in producing revenues. The operating cycle of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers.

Question 32

16. Define current assets. What basis is used for arranging individual items within the current assets section?

Answer 32

Current assets are assets that a company expects to convert to cash or use up in one year. Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. Companies usually list current assets in the order in which they expect to convert them into cash.

Question 33

17. Distinguish between long-term investments and property, plant, and equipment.

Answer 33

Long-term investments are generally investments in stocks and bonds of other companies that are normally held for many years. Property, plant, and equipment are assets with relatively long useful lives that a company is currently using in operating the business.

Question 34

18. (a) What is the term used to describe the owners’ equity section of a corporation? (b) Identify the two owners’ equity accounts in a corporation and indicate the purpose of each.

Answer 34

(a) The owner’s equity section for a corporation is called stockholders’ equity. (b) The two accounts and the purpose of each are: (1) Capital stock is used to record investments of assets in the business by the owners (stockholders). (2) Retained earnings is used to record net income retained in the business.

Question 35

*20. Cigale Company prepares reversing entries. If the adjusting entry for interest payable is reversed, what type of an account balance, if any, will there be in Interest Payable and Interest Expense after the reversing entry is posted?

Answer 35

After reversing entries have been made, the balances will be Interest Payable, zero balance; Interest Expense, a credit balance.

Question 36

* 21. At December 31, accrued salaries payable totaled $3,500. On January 10, total salaries of $8,000 are paid. (a) Assume that reversing entries are made at January 1. Give the January 10 entry, and indicate the Salaries and Wages Expense account balance after the entry is posted. (b) Repeat part (a) assuming reversing entries are not made.

Answer 36

(a) Jan. 10 Salaries Expense.........................................8,000 Cash.....................................................................................8,000 Because of January 1 reversing entry that credited Salaries Expense for $3,500, Salaries Expense will have a debit balance of $4,500 which equals the expense for the current period. (b) Jan. 10 Salaries Payable ................................................... 3,500 Salaries Expense................................................... 4,500 Cash............................................................................................... 8,000 Note that Salaries Expense will again have a debit balance of $4,500.