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CHAPTER 1 ACCOUNTING IN ACTION CHAPTER LEARNING OBJECTIVES 1. Identify the activities and users associated with accounting. Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. The major users and uses of accounting are as follows: (a) Management uses accounting information to plan, organize, and run the business. (b) Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, and labor unions. 2. Explain the building blocks of accounting: ethics, principles, and assumptions. Ethics are the standards of conduct by which actions are judged as right or wrong. Effective financial reporting depends on sound ethical behavior. Accounting is based on standards, such as International Financial Reporting Standards (IFRS). IFRS generally uses one of two measurement principles, historical cost or fair value principle. Two main assumptions are the monetary unit assumption and the economic entity assumption. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption requires that the activities of each economic entity be kept separate from the activities of its owner(s) and other economic entities. 3. State the accounting equation, and define its components. The basic accounting equation is: Assets = Liabilities + Equity Assets are resources a business owns. Liabilities are creditors' claims on total assets. Equity is the ownership claim on total assets. The expanded accounting equation is: Assets = Liabilities + Share Capital—Ordinary + Revenues – Expenses – Dividends Share capital—ordinary is affected when the company issues new ordinary shares in exchange for cash. Revenues are the gross increase in equity resulting from business activities for the purpose of earning income. Expenses are the costs of assets consumed or services used in the process of earning revenue. Dividends are payments the company makes to its shareholders.

1-2

Test Bank for Financial Accounting: IFRS Edition, 4e

4. Analyze the effects of business transactions on the accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset increases, there must be a corresponding (1) decrease in another asset, or (2) increase in a specific liability, or (3) increase in equity. 5. Describe the five financial statements and how they are prepared. An income statement presents the revenues and expenses, and resulting net income or loss, for a specific period of time. A retained earnings statement summarizes the changes in retained earnings for a specific period of time. A statement of financial position reports the assets, liabilities, and equity at a specific date. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. A comprehensive income statement adds or subtracts any other comprehensive income to net income to arrive at comprehensive Income. a

6. Explain the career opportunities in accounting. Accounting offers many different jobs in fields such as public and private accounting, government, and forensic accounting. Accounting is a popular major because there are many different types of jobs, with unlimited potential for career advancement.

TRUE-FALSE STATEMENTS 1.

Owners of business firms are the only people who need accounting information. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Transactions that can be measured in dollars and cents are recorded in the financial information system. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

The hiring of a new company president is an economic event recorded by the financial information system. Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Management of a business enterprise is the major external user of information. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reportin g

Accounting communicates financial information about a business enterprise to both internal and external users. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Accounting information is used only by external users with a financial interest in a business enterprise. Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Financial statements are the major means of communicating accounting information to interested parties. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Bookkeeping and accounting are one and the same because the bookkeeping function includes the accounting process. Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

The origins of accounting are attributed to Luca Pacioli, a famous mathematician. For Instructor Use Only

Accounting in Action

1-3

Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

10.

The State Administration of Taxation in the People's Republic of China is an example of an internal user of accounting information. Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

11.

The German Confederation of Trade Unions is an example of an external user of accounting information. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

12.

Accountants rely on a fundamental business concept—ethical behavior—in reporting financial information. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

13.

The primary accounting standard-setting body in the United States is the International Accounting Standards Board. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

14.

The Financial Accounting Standards Board is a part of the International Accounting Standards Board. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

15.

The two primary accounting standard-setting bodies are the International Accounting Standards Board and the Financial Accounting Standards Board. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

16.

Most companies in the United States follow standards issued by the IASB. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

17.

International Financial Reporting Standards are determined by the IASB. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

18.

The process of reducing the differences between Generally Accepted Accounting Principles and International Financial Reporting Standards is known as convergence. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

19.

IFRS follows one measurement principle known as the historical cost principle. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

20.

Even though a partnership is not a separate legal entity, for accounting purposes the partnership affairs should be kept separate from the personal activities of the owners. Ans: T LO2 BT: C Difficulty; Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

21.

The economic entity assumption requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

22.

The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

23.

In order to possess future service potential, an asset must have physical substance. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1-4 24.

Test Bank for Financial Accounting: IFRS Edition, 4e Owners' claims to total business assets take precedence over the claims of creditors because owners invest assets in the business and are liable for losses. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

25.

The basic accounting equation states that Assets = Liabilities. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

26.

Share capital is the total amount paid in by shareholders for shares purchased. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

27.

The principal source of equity is amounts paid in by shareholders. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

28.

Expenses are increases in equity that result from operating the business. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

29.

The two components of equity are retained earnings and share capital. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

30.

The purchase of an asset on account increases assets and decreases equity. Ans: F LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

31.

Providing services for cash increases assets and equity. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

32.

Accountants record both internal and external transactions. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

33.

Internal transactions do not affect the basic accounting equation because they are economic events that occur entirely within one company. Ans: F LO4 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

34.

The purchase of store equipment for cash reduces the equity by an equal amount. Ans: F LO4 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

35.

The purchase of office equipment on credit increases total assets and total liabilities. Ans: T LO4 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

36.

The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company during a period. Ans: T LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

37.

Net income for the period is determined by subtracting total expenses and dividends from total revenues. Ans: F LO5

38.

BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

The ending retained earnings balance is reported on the statement of financial position. Ans: T LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

39.

The statement of financial position is also known as the balance sheet. Ans: T LO5

BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Compared to IFRS, GAAP tend to be simpler and less detailed. Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 41.

Foreign companies whose shares are traded on U.S. stock markets must use GAAP. Ans: F LO5

42.

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BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

The study of accounting is not useful for a business career unless your career objective is to become an accountant. Ans: F LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

43.

Expressing an opinion as to the fairness of the information presented in financial statements is a service performed by CAs and CPAs. Ans: T LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Additional True-False Questions 44.

Identifying is the process of keeping a chronological diary of events measured in dollars and cents. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

45.

Management consulting includes examining the financial statements of companies and expressing an opinion as to the fairness of their presentation. Ans: F LO1 BT: K Difficulty; Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

46.

Accountants do not have to worry about issues of ethics. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting

47.

The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

48.

The basic accounting equation is in balance when the creditor and ownership claims against the business equal the assets. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

49.

External transactions involve economic events between the company and some other enterprise or party. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

50.

In the retained earnings statement, revenues are listed first, followed by expenses, and net income (or net loss). Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

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Test Bank for Financial Accounting: IFRS Edition, 4e

MULTIPLE CHOICE QUESTIONS 51.

Accountants refer to an economic event as a a. purchase. b. sale. c. transaction. d. change in ownership. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

52.

The accounting process includes each of the following except a. communication. b. convergence. c. identification. d. recording. Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

53.

Communication of economic events is the part of the accounting process that involves a. identifying economic events. b. quantifying transactions into dollars and cents. c. preparing accounting reports. d. recording and classifying information. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

54.

Which of the following events cannot be quantified into dollars and cents and recorded as an accounting transaction? a. The appointment of a new accounting firm to perform an audit. b. The purchase of a new computer. c. The sale of store equipment. d. Payment of income taxes. Ans: a LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

55.

Recording of economic events involves a. keeping a systematic, chronological diary of events. b. analyzing reported information. c. explaining the meaning of reported data. d. preparing accounting reports. Ans: a LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

56.

The accounting process involves all of the following except a. identifying economic events that are relevant to the business. b. communicating financial information to users by preparing financial reports. c. recording nonquantifiable economic events. d. analyzing and interpreting financial reports. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 57.

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The accounting process is correctly sequenced as a. identification, communication, recording. b. recording, communication, identification. c. identification, recording, communication. d. communication, recording, identification. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

58.

Which of the following techniques is not used by accountants to interpret and report financial information? a. Graphs. b. Special memos for each class of external users. c. Charts. d. Ratios. Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

59.

Bookkeeping primarily involves which of the following parts of the accounting process? a. Identification. b. Communication. c. Recording. d. Analysis. Ans: c LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

60.

Which of the following would not be considered an external user of accounting data for the GHI Company? a. Taxing authority representative. b. Management. c. Creditors. d. Customers. Ans: b LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

61.

Which of the following would not be considered internal users of accounting data for a company? a. The president of a company. b. The controller of a company. c. Creditors of a company. d. Salesmen of a company. Ans: c LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

62.

Which of the following is an external user of accounting information? a. Labor unions. b. Finance directors. c. Company officers. d. Managers. Ans: a LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1-8 63.

Test Bank for Financial Accounting: IFRS Edition, 4e Which one of the following is not an external user of accounting information? a. Regulatory agencies. b. Customers. c. Investors. d. All of these answer choices are correct. Ans: d LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

64.

Which of the following would not be considered an internal user of accounting data for GHI Company? a. President of the company. b. Production manager. c. Merchandise inventory clerk. d. President of the employees' labor union. Ans: d LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

65.

Internal users of accounting information include all of following except the a. CEO of Sony. b. Human resources department at Hyundai. c. Marketing department at Braun. d. shareholders of Airbus. Ans: d LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

66.

Internal users of accounting information include a. the shareholders of Royal Dutch Shell. b. the State Administration of Taxation of China. c. the Chief Financial officer of Credit Suisse. d. the International Accounting Standards Board. Ans: c LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

67.

External users of accounting information include all of following except a. the shareholders of Air Italy. b. the management of Pirelli. c. a potential customers of Olivetti. d. All of these answer choices are correct. Ans: b LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

68.

External users of accounting information include the a. lnternational Accounting Standards Board. b. shareholders of Ferragamo. c. Marketing department at Olivetti. d. CEO of Air Italy. Ans: b LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

69.

The origins of accounting are generally attributed to the work of a. Christopher Columbus. b. Abner Doubleday. c. Luca Pacioli. d. Leonardo da Vinci. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 70.

1-9

Financial accounting provides economic and financial information for each of the following except a. creditors. b. investors. c. managers. d. other external users. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

71.

The final step in solving an ethical dilemma is to a. identify and analyze the principal elements in the situation. b. recognize an ethical situation. c. identify the alternatives and weigh the impact of each alternative on stakeholders. d. recognize the ethical issues involved. Ans: c LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

72.

The first step in solving an ethical dilemma is to a. identify and analyze the principal elements in the situation. b. identify the alternatives. c. recognize an ethical situation and the ethical issues involved. d. weigh the impact of each alternative on various stakeholders. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting

73.

Ethics are the standards of conduct by which one's actions are judged as a. right or wrong. b. honest or dishonest. c. fair or unfair. d. All of these answer choices are correct. Ans: d LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting

74.

The historical cost principle requires that companies record assets at their a. appraisal value. b. cost. c. market price. d. list price. Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

75.

IFRS are determined by the a. Internal Accounting Standards Body. b. International Accounting Studies Board. c. International Accounting Standards Board. d. International Auditors' Standards Body. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

76.

GAAP stands for a. Generally Accepted Auditing Procedures. b. Generally Accepted Accounting Principles. c. Generally Accepted Auditing Principles. d. Generally Accepted Accounting Procedures. Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 10 77.

Test Bank for Financial Accounting: IFRS Edition, 4e The Duce Company has five plants nationwide that cost $300 million. The current fair value of the plants is $500 million. The plants will be recorded and reported as assets at a. $300 million. b. $800 million. c. $200 million. d. $500 million. Ans: a LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

78.

Convergence refers to a. using the same accounting principles from one period to the next. b. use of the same accounting principles by all companies. c. the elimination of all accounting standard-setting bodies except the International Accounting Standards Board. d. the process of reducing the differences between IFRS and GAAP. Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

79.

The body that has the power to prescribe the accounting practices and standards used by most US companies is the a. FASB. b. IASB. c. GAAP. d. IFRS. Ans: a LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

80.

The fair value principle a. is one of the two costing principles followed by the IASB. b. is more useful than the historical cost principle for valuing some assets. c. dictates that an asset should be valued at the price at which it could be sold. d. All of these answer choices are correct. Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

81.

Most assets are generally valued at cost because fair values a. are not useful for decision-making. b. may not be representationally faithful. c. are not relevant. d. may be higher or lower than historical cost. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

82.

Harrod's Inc. purchased land for ₤50,000 in 2010. At December 31, 2020, an appraisal determined the fair value of the land is ₤65,000. If Harrod's follows the historical cost principle, in the 2020 financial statements, the land will be reported at a. ₤50,000 on the statement of financial position. b. ₤65,000 on the statement of financial position. c. ₤50,000 on the income statement. d. ₤65,000 on the income statement. Ans: a LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 83.

1 - 11

Hyundai Inc. purchased land for W118,000,000 in 2011. At December 31, 2020, an appraisal determined the fair value of the land is W136,000,0000. If Hyundai follows the cost principle, the land will be reported on the statement of financial position at a. W100,000,000. b. W118,000,000. c. W136,000,000. d. W154,000,000. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

84.

Bumi Corporation purchased an investment in the ordinary shares of another corporation for Rp250,000,000 in 2018. The shares are actively traded on the Indonesian Stock Exchange. The fair value of the investment at December 31, 2020 is Rp268,000,000. If the company follows the fair value principle, the investment will be reported in the 2020 financial statement at a. Rp250,000,000 on the statement of financial position. b. Rp268,000,000 on the statement of financial position. c. Rp250,000,000 on the retained earnings statement. d. Rp268,000,000 on the retained earnings statement. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

85.

Asian Company purchased land for W92,000,000 in 2003. At December 31, 2020, an appraisal determined the fair value of the land is W106,000,000. The company has an investment in the ordinary shares of another company for which it paid W49,000,000 in 2018. The shares are actively traded on the South Korea Stock Exchange. The fair value of the investment at December 31, 2020 is W63,000,000. The land and investment will be reported on the December 31, 2020 statement of financial position at a. W92,000,000 and W49,000,000, respectively. b. W92,000,000 and W63,000,000, respectively. c. W106,000,000 and W49,000,000, respectively. d. W106,000,000 and W63,000,000, respectively. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

86.

The proprietorship form of business organization a. must have at least three owners in most states. b. requires that the owner be personally liable for all debts of the business. c. combines the records of the business with the personal records of the owner. d. is characterized by a legal distinction between the business as an economic unit and the owner. Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

87.

The economic entity assumption requires that the activities a. of different entities can be combined if all the entities are corporations. b. must be reported to the Securities and Exchange Commission. c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners. d. of an entity be kept separate from the activities of its owner. Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 12 88.

Test Bank for Financial Accounting: IFRS Edition, 4e A business organized as a corporation a. is not a separate legal entity in most countries. b. requires that shareholders be personally liable for the debts of the business. c. is owned by its shareholders. d. terminates when one of its original shareholders dies. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

89.

The partnership form of business organization a. is a separate legal entity. b. is a common form of organization for service-type businesses. c. enjoys an unlimited life. d. has limited liability. Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

90.

Which of the following is not an advantage of the corporate form of business organization? a. Limited liability of shareholders b. Transferability of ownership c. Unlimited personal liability for shareholders d. Unlimited life Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

91.

A small neighborhood barber shop that is operated by its owner would likely be organized as a a. joint venture. b. partnership. c. corporation. d. proprietorship. Ans: d LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

92.

John and Sam met at law school and decide to start a small law practice after graduation. They agree to split revenues and expenses evenly. The most common form of business organization for a business such as this would be a a. joint venture. b. partnership. c. corporation. d. proprietorship. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

93.

Which of the following is true regarding the corporate form of business organization? a. Corporations are the most prevalent form of business organization. b. Corporate businesses are generally smaller in size than partnerships and proprietorships. c. The revenues of corporations are greater than the combined revenues of partnerships and proprietorships. d. Corporations are separate legal entities organized exclusively under federal law. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 94.

1 - 13

A basic assumption of accounting that requires activities of an entity be kept separate from the activities of its owner is referred to as the a. stand alone concept. b. monetary unit assumption. c. corporate form of ownership. d. economic entity assumption. Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

95.

The assumption that enables accounting to quantify (measure) economic events is the a. economic entity assumption. b. cost principle. c. historical cost principle. d. monetary unit assumption. Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

96.

A business whose owners enjoy limited liability is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

97.

The common characteristic possessed by all assets is a. long life. b. great monetary value. c. tangible nature. d. future economic benefit. Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

98.

Equity is best depicted by the following: a. Assets = Liabilities. b. Liabilities + Assets. c. Residual equity + Assets. d. Assets – Liabilities. Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

99.

The basic accounting equation may be expressed as a. Assets  Equity = Liabilities. b. Assets – Liabilities = Equity. c. Assets = Liabilities + Equity. d. All of these answer choices are correct. Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

100.

Liabilities a. are future economic benefits. b. are existing debts and obligations. c. possess service potential. d. are things of value used by the business in its operation. Ans: b LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 14 101.

Test Bank for Financial Accounting: IFRS Edition, 4e Liabilities of a company would not include a. notes payable. b. accounts payable. c. wages payable. d. cash. Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

102.

Liabilities of a company are owed to a. debtors. b. benefactors. c. creditors. d. underwriters. Ans: c LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

103.

Equity can be described as a. creditorship claim on total assets. b. ownership claim on total assets. c. benefactor's claim on total assets. d. debtor claim on total assets. Ans: b LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

104.

Equity is often referred to as a. residual equity. b. leftovers. c. spoils. d. second equity. Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

105.

When assets are distributed to the shareholders of a corporation, these distributions are termed a. depletions. b. consumptions. c. dividends. d. a credit line. Ans: c LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

106.

A dividend is a. a distribution of the company's earnings to its shareholders. b. equal to liabilities minus equity. c. equal to assets minus equity. d. equal to revenues less expenses. Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

107.

Revenues would not result from a. sale of merchandise. b. issuance of ordinary shares. c. performance of services. d. rental of property. Ans: b LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 108.

1 - 15

Sources of increases to equity are a. issuance of shares. b. purchases of merchandise. c. dividends. d. expenses. Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

109.

The basic accounting equation cannot be restated as a. Assets – Liabilities = Equity. b. Assets – Equity = Liabilities. c. Equity + Liabilities = Assets. d. Assets + Liabilities = Equity. Ans: d LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

110.

Equity is decreased by all of the following except a. issuance of shares. b. dividends. c. expenses. d. net losses. Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

111.

If total liabilities increased by ¥45,000 and equity increased by ¥10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥55,000 decrease b. ¥55,000 increase c. ¥35,000 increase d. ¥35,000 decrease Ans: b LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

112.

If total liabilities decreased by ¥45,000 and equity increased by ¥10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥55,000 increase b. ¥35,000 decrease c. ¥35,000 increase d. ¥45,000 decrease Ans: b LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

113.

If total liabilities decreased by ¥35,000 and equity increased by ¥5,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥30,000 decrease b. ¥30,000 increase c. ¥35,000 increase d. ¥40,000 increase Ans: a LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 16 114.

Test Bank for Financial Accounting: IFRS Edition, 4e If total liabilities decreased by ¥45,000 and equity decreased by ¥10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥55,000 increase b. ¥35,000 increase c. ¥55,000 decrease d. ¥35,000 decrease Ans: c LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

115.

If total liabilities increased by ¥31,000 during a period of time and equity decreased by ¥9,000 during the same period, then the amount and direction of the period’s change in total assets is a(n) a. ¥31,000 increase. b. ¥40,000 increase. c. ¥22,000 decrease. d. ¥22,000 increase. Ans: d LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

116.

The equity section of a statement of financial position has two components: a. share capital and liablities. b. assets and liablities. c. share capital and retained earnings. d. share capital and assets. Ans: c LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

117.

A company increases its share capital by a. selling ordinary shares to its investors. b. performing services for cash. c. selling goods on account. d. paying dividends to its shareholders. Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

118.

The retained earnings section of the statement of financial position is determined by a. assets,liabilities and share capital. b. revenues, expenses and share capital. c. share capital, dividends and residual equity. d. revenues, expenses and dividends. Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

119.

All of the following transactions increase revenue except the a. sale of additional ordinary shares by British Airways. b. sale of clothing by the French Connection. c. performance of acccounting services by PricewaterhouseCoopers. d. sale of pertroleum by Royal Dutch Shell. Ans: a LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 120.

1 - 17

As of December 31, 2020, Dolce & Gabanna Inc. had assets of €9,500,000, share capital of €3,500,000 and retained earnings of €4,000,000. Total liabilities as of that date are a. €0. b. €2,000,000. c. €6,000,000. d. €5,500,000. Ans: b LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

121.

On its December 31, 2020 statement of financial position, Adaro Corporation reported liabilities of Rp7,698,000,000, share capital of Rp3,993,000,000 and retained earnings of Rp6,303,000,000. Total assets as of December 31, 2020 are a. Rp14,001,000,000. b. Rp11,691,000,000. c. Rp10,296,000,000. d. Rp17,994,000,000. Ans: d LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

122.

As of December 31, 2020, Oxford-Welsh Inc. had assets of ₤9,780,000, liabilities of ₤2,970,000, and share capital of ₤4,230,000. Retained earnings as of that date are a. ₤2,580,000. b. ₤5,550,000. c. ₤6,810,000. d. ₤7,200,000. Ans: a LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

123.

As of December 31, 2020, Thames Company reported assets of ₤8,640,000, liabilities of ₤2,560,000 and retained earnings of ₤4,420,000. Share capital reported on the December 31, 2020 statement of financial position is a. ₤1,660,000. b. ₤1,860,000. c. ₤6,980,000. d. ₤6,080,000. Ans: a LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

124.

As of December 31, 2020, Deitrich Inc. had assets of €17,400,000, liabilities of €6,200,000, share capital of ₤4,400,000 and retained earnings of €6,800,000. Total equity as of that date is a. €4,400,000. b. €3,750,000. c. €11,200,000. d. €4,400,000. Ans: c LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

125.

As of December 31, 2020, Lojas Company reported assets of R$9,250,000, liabilities of R$2,750,000, share capital of R$2,475,000 and retained earnings of R$4,025,000. Total equity reported on the statement of financial position as of that date is a. R$1,550,000. b. R$6,500 000. c. R$4,025 000. d. R$2,475.000. Ans: b LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 18 126.

Test Bank for Financial Accounting: IFRS Edition, 4e On January 11, 2020, Britannica Corporation sold ordinary shares to investors for ₤6,550,000. This transaction will increase assets and a. decrease liabilities by ₤6,550,000. b. decrease equity by ₤6,550,000. c. increase revenues by ₤6,550,000. d. increase equity by ₤6,550,000. Ans: d LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

127.

Burgundy Inc. purchased supplies on account for €26,000. This transaction will a. increase liabilities and decrease equity by €26,000. b. increase assets and decrease equity by €26,000. c. increase assets and increase liabilities by €26,000. d. have no effect on the accounting equation. Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

128.

Sao Paulo Company performed services on account for R$160,000. This transaction will a. increase assets and liabilities by R$160,000. b. increase assets and equity by R$160,000. c. increase liabilities and equity by R$160,000. d. have no effect on the accounting equation. Ans: b LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

129.

Bennoit Corporation paid dividends totaling €295,000 to its shareholders. This transaction will decrease assets and a. decrease equity by €295,000. b. decrease liabilities by €295,000. c. increase expenses by €295,000. d. have no effect on the accounting equation. Ans: a LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

130.

Gafisa Inc. performed services for R$390,000. The company collected R$130,000 in cash. The balance will be collected in 30 days. Performing services for R$390,000 will increase a. assets by R$130,000 and equity by R$260,000. b. assets by R$130,000, liablities by R$260,000 and equity by R$390,000. c. liabilites and equity by R$390,000. d. assets and equity by R$390,000. Ans: d LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

131.

On June 6, Wing Wah Inc. purchased supplies on account for HK$80,000. On June 30, the company paid half of the balance due. The June 30 payment will a. decrease Cash and increase Supplies Expense by HK$ 80,000. b. increase Cash and decrease Accounts Receivable by HK$40,000. c. decrease Cash and decrease Accounts Payable by HK$40,000. d. decrease Supplies and increase Supplies Expense by HK$40,000. Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 132.

1 - 19

On November 4, Vivo Company performed services on account for R$295,000. On November 26, the company collected the balance due. The November 26 transaction will increase a. Cash and Accounts Payable by R$295,000. b. Accounts Receivable and Service Revenue by R$295,000 c. Cash and decrease Accounts Receivable by R$295,000 d. Service Revenue and decrease Accounts Receivable by R$295,000. Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

133.

Freirs Company paid the monthly rent of €6,000. This transaction will a. increase Cash and decrease Rent Expense by €6,000. b. decrease Cash and decrease Rent Expense by €6,000. c. decrease Cash and increase Rent Expense by €6,000. d. have no effect on the accounting equation. Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

134.

Vita Corporation performed services on account for €22,000. This transaction will a. increase Cash and increase Service Revenue by €22,000. b. increase Accounts Receivable and increase Service Revenue by €22,000. c. decrease Accounts Payable and increase Cash by €22,000. d. increase Cash and decrease Accounts Receivable by €22,000. Ans: b LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

135.

On February 1, Potter Company paid £900 for advertisements to run during the month of February. This transaction will a. decrease Cash and increase Advertising Expense by £900. b. increase Advertising Expense and increase Accounts Payable by £900. c. decrease Accounts Payable and decrease Cash by £900. d. decrease Cash and decrease Advertising Expense by £900. Ans: a LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

136.

McDonagal Inc. sold ordinary shares for £2,200,000. This transaction will increase a. Cash and increase Retained Earnings by £2,200,000. b. Cash and increase Share Capital by £2,200,000. c. Service Revenue and increase Share Capital by £2,200,000. d. Service Revenue and increase Cash by £2,200,000. Ans: b LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

137.

An investment of cash by an owner of a business increases assets and a. increases liabilities. b. increases equity. c. decreases equity. d. decreases liabilities. Ans: b LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 20

Test Bank for Financial Accounting: IFRS Edition, 4e

138.

The purchase of supplies on account increases assets and a. also decreases assets so there is no net change. b. increases liabilities. c. decreases equity. d. increases equity. Ans: b LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

139.

A payment on account decreases a. assets and equity. b. liabilities and equity. c. assets and liabilities. d. assets, liabilities and equity. Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

140.

The accounting equation for Gudgeyes Enterprises is as follows: Assets Liabilities $280,000 = $120,000 +

Equity $160,000

If Gudgeyes purchases office equipment on account for $24,000, the accounting equation will change to Assets Liabilities Equity a. $280,000 = $120,000 + $160,000 b. $304,000 = $120,000 + $184,000 c. $304,000 = $152,000 + $152,000 d. $304,000 = $144,000 + $160,000 Ans: d LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

141.

As of June 30, 2020, Dallas Company has assets of $210,000 and equity of $15,000. What are the liabilities for Dallas Company as of June 30, 2020? a. $225,000 b. $180,000 c. $195,000 d. $210,000 Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

142.

Equity is increased by a. dividends. b. revenues. c. expenses. d. liabilities. Ans: b LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

143.

Equity is decreased by a. assets. b. revenues. c. expenses. d. liabilities. Ans: c LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 144.

1 - 21

If total liabilities increased by $6,000, then a. assets must have decreased by $6,000. b. equity must have increased by $6,000. c. assets must have increased by $6,000, or equity must have decreased by $6,000. d. assets and equity each increased by $3,000. Ans: c LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

145.

Collection of a $500 accounts receivable a. increases an asset $500; decreases an asset $500. b. increases an asset $500; decreases a liability $500. c. decreases a liability $500; increases equity $500. d. decreases an asset $500; decreases a liability $500. Ans: a LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

146.

Revenues are a. the cost of assets consumed during the period. b. gross increases in equity resulting from business activities. c. the cost of services used during the period. d. actual or expected cash outflows. Ans: b LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

147.

If an individual asset is increased, then a. there must be an equal decrease in a specific liability. b. there must be an equal decrease in equity. c. there must be an equal decrease in another asset. d. None of these answer choices are correct. Ans: c LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

148.

If services are rendered for credit, then a. assets will decrease. b. liabilities will increase. c. equity will increase. d. liabilities will decrease. Ans: c LO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

149.

If expenses are paid in cash, then a. assets will increase. b. liabilities will decrease. c. equity will increase. d. assets will decrease. Ans: d LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

150.

If a corporation distributes cash to its shareholders, then a. there has been a violation of accounting principles. b. equity will increase. c. equity will decrease. d. there will be a new liability showing the shareholders owe money to the business. Ans: c LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 22 151.

Test Bank for Financial Accounting: IFRS Edition, 4e As of December 31, 2020, Sievers Company has assets of ₤180,000 and equity of ₤80,000. What are the liabilities for Sievers Company as of December 31, 2020? a. ₤100,000. b. ₤40,000. c. ₤60,000. d. ₤80,000. Ans: a LO4 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

152.

Which of the following events is not a business transaction? a. Issuance of shares in exchange for cash b. Hired employees c. Incurred utility expenses for the month d. Earned revenue for services provided Ans: b LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

153.

Net income results when a. Assets > Liabilities. b. Revenues = Expenses. c. Revenues > Expenses. d. Revenues < Expenses. Ans: c LO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

154.

Retained earnings at the end of the period is equal to a. retained earnings at the beginning of the period plus net income minus liabilities. b. retained earnings at the beginning of the period plus net income minus dividends. c. net income. d. assets plus liabilities. Ans: b LO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

155.

A statement of financial position shows a. revenues, liabilities, and equity. b. expenses, dividends and equity. c. revenues, expenses, and dividends. d. assets, liabilities, and equity. Ans: d LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

156.

An income statement a. summarizes the changes in equity for a specific period of time. b. reports the changes in assets, liabilities, and equity over a period of time. c. reports the assets, liabilities, and equity at a specific date. d. presents the revenues and expenses for a specific period of time. Ans: d LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

157.

If the retained earnings account increases from the beginning of the year to the end of the year, then a. net income is less than dividends. b. net loss is less than dividends. c. the company must have sold shares. d. net income is greater than dividends. Ans: d LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 23

Use the following information for questions 158–160. Carla’s Computer Repair Shop started the year with total assets of $720,000 and total liabilities of $480,000. During the year, the business recorded $1,200,000 in computer repair revenues, $680,000 in expenses, and the company paid dividends of $120,000. 158.

Equity at the end of the year was a. $640,000. b. $600,000. c. $760,000. d. $520,000. Ans: a LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

159.

The net income reported by Carla's Computer Repair Shop for the year was a. $400,000. b. $520,000. c. $240,000. d. $1,080,000. Ans: b LO5 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

160.

Total equity changed by what amount from the beginning of the year to the end of the year? a. $120,000. b. $520,000. c. $240,000. d. $400,000. Ans: d LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

161.

The statement of financial position is frequently referred to as a. an operating statement. b. the balance sheet. c. the statement of cash flows. d. the statement of changes in equity. Ans: b LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

162.

The primary purpose of the statement of cash flows is to report a. a company's investing transactions. b. a company's financing transactions. c. information about cash receipts and cash payments of a company. d. the net increase or decrease in cash. Ans: c LO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

163.

All of the financial statements are for a period of time except the a. income statement. b. retained earnings statement. c. statement of financial position. d. statement of cash flows. Ans: c LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 24 164.

Test Bank for Financial Accounting: IFRS Edition, 4e The ending retained earnings amount is shown on a. the statement of financial position only. b. the retained earnings statement only. c. both the income statement and the retained earnings statement. d. both the statement of financial position and the retained earnings statement. Ans: d LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

165.

Benito Company began the year with equity of €630,000. During the year, the company recorded revenues of €900,000, expenses of €684,000, and paid dividends of €72,000. What was Benito’s equity at the end of the year? a. €918,000. b. €774,000. c. €1,458,000. d. €846,000. Ans: b LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

166.

Carter Company issued ordinary shares to Sam Carter in exchange for his investment of £80,000 cash in the business. The company recorded revenues of £740,000, expenses of £640,000, and paid dividends of £40,000. What was Carter's net income for the year? a. £60,000. b. £140,000. c. £100,000. d. £180,000. Ans: c LO5 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

167.

Marilu Company began the year with equity of $225,000. During the year, Marilu issued additional ordinary shares in exchange for cash of $315,000, recorded expenses of $900,000, and paid dividends of $60,000. If Marilu’s ending equity was $690,000, what was the company’s revenue for the year? a. $1,050,000. b. $1,110,000. c. $1,365,000. d. $1,425,000. Ans: b LO5 BT: AP Difficulty: Medium TOT: 2.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

168.

Nguyen Company began the year with equity of $651,000. During the year, Nguyen issued ordinary shares for $882,000, recorded expenses of $2,520,000, and paid dividends of $168,000. If Nguyen’s ending equity was $1,593,000, what was the company’s revenue for the year? a. $2,580,000. b. $2,748,000. c. $3,462,000. d. $3,630,000. Ans: b LO5 BT: AP Difficulty: Medium TOT: 2.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 25

Use the following information for questions 169–170. Saira’s Service Shop started the year with total assets of $300,000 and total liabilities of $240,000. During the year, the business recorded $630,000 in revenues, $330,000 in expenses, and paid dividends of $60,000. 169.

Equity at the end of the year was a. $360,000. b. $300,000. c. $240,000. d. $270,000. Ans: b LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

170.

The net income reported by Saira’s Service Shop for the year was a. $240,000. b. $300,000. c. $180,000. d. $570,000. Ans: b LO5 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Use the following information for questions 171–172. Metzger Company compiled the following financial information as of December 31, 2020: Revenues Retained earnings (1/1/20) Equipment Expenses Cash Dividends Supplies Accounts payable Accounts receivable Share capital-ordinary 171.

€420,000 210,000 240,000 375,000 105,000 30,000 15,000 60,000 45,000 195,000

Metzger’s total assets on December 31, 2020 are a. €825,000. b. €630,000. c. €360,000. d €405,000. Ans: d LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

172.

Metzger’s total equity on December 31, 2020 is a. €330,000. b. €300,000. c. €420,000. d. €375,000. Ans: c LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 26 173.

Test Bank for Financial Accounting: IFRS Edition, 4e Copper Company’s equity at the beginning of August 2020 was $900,000. During the month, the company earned net income of $180,000 and paid dividends of $60,000. At the end of August 2020, what is the amount of equity? a. $780,000 b. $900,000 c. $1,020,000 d. $1,140,000 Ans: c LO5 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

174.

On January 1, 2020, Affleck Company reported equity of $705,000. During the year, the company paid dividends of $30,000. At December 31, 2020, the amount of equity was $780,000. What amount of net income or net loss would the company report for 2020? a. Net income of $75,000 b. Net loss of $105,000 c. Net income of $45,000 d. Net income of $105,000 Ans: d LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Use the following information for questions 175–177. Stahl Consulting started the year with total assets of €200,000 and total liabilities of €50,000. During the year, the business recorded €160,000 in catering revenues and €80,000 in expenses. Stahl issued ordinary shares of €30,000 and paid dividends of €50,000 during the year. 175.

The equity at the end of the year was a. €210,000. b. €180,000. c. €80,000. d. €20,000. Ans: a LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

176.

The net income reported by Stahl Consulting for the year was a. €160,000. b. €110,000. c. €80,000. d. €30,000. Ans: c LO5 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

177.

Equity changed by what amount from the beginning of the year to the end of the year? a. €150,000 b. €140,000 c. €60,000 d. €30,000 Ans: c LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 178.

1 - 27

During the year 2020, Diego Company earned revenues of $180,000, had expenses of $100,000, purchased assets with a cost of $20,000 and paid dividends of $12,000. Net income for the year is a. $180,000. b. $80,000. c. $68,000. d. $60,000. Ans: b LO5 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

179.

At October 1, Smithson Enterprises reported equity of $280,000. During October, no capital shares were issued and the company earned net income of $32,000. If equity at October 31 totals $256,000, what amount of dividends were paid during the month? a. $0 b. $8,000 c. $24,000 d. $56,000 Ans: d LO5 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

180.

At October 1, Smithson Enterprises reported equity of $280,000. During October, no capital shares were issued and the company posted a net loss of $24,000. If equity at October 31 totals $256,000, what amount of dividends were paid during the month? a. $0 b. $8,000 c. $24,000 d. $84,000 Ans: a LO5 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

181.

At October 1, Smithson Enterprises reported equity of $280,000. During October, capital shares of $16,000 were issued and the company earned net income of $48,000. If equity at October 31 totals $320,000, what amount of dividends were paid during the month? a. $0 b. $24,000 c. $32,000 d. $40,000 Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

182.

At October 1, Smithson Enterprises reported equity of $280,000. During October, capital shares of $40,000 were issued and the company posted a net loss of $24,000. If equity at October 31 totals $280,000, what amount of dividends were paid during the month? a. $0 b. $16,000 c. $24,000 d. $40,000 Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 28 183.

Test Bank for Financial Accounting: IFRS Edition, 4e During October, Mica Inc. sold ordinary shares for €800,000, earned revenue of €88,000, incurred expenses of €48,000, and paid dividends of €4,000. Net income for the month is a. €36,000. b. €40,000. c. €836,000. d. €840,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

184.

During January, Bruni Corporation earned revenue of €135,000, incurred expenses of €66,000, and paid dividends of €9,000. The income statement will report net income for the month of a. €60,000. b. €69,000. c. €78,000. d. €135,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

185.

During June, Sing Tao Inc. sold ordinary shares for HK$22,900,000, earned revenue of HK$4,040,000, incurred expenses of HK$2,060,000, and paid dividends of HK$60,000. Net income for June is a. HK$1,980,000. b. HK$1,920,000. c. HK$24,820,000. d. HK$26,940,000. Ans: a LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

186.

During May, Brunhilde Company earned revenue of €318,000, incurred expenses of €204,000, of which €144,000 were on account, and paid dividends of €48,000. Net income (loss) for the month is a. (€60,000). b. €66,000. c. €114,000. d. €174,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

187.

During 2020, Li & Fung Corporation earned revenue of HK$12,300,000, incurred expenses of expenses of HK$9,260,000, and paid dividends of HK$840,000. Net income for 2020 is a. HK$2,200,000. b. HK$3,040,000. c. HK$11,460,000. d. HK$12,300,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 188.

1 - 29

During March, Bindi Company earned revenue of €540,000 on account of which €356,000 had been collected by the end of the month. The company incurred expenses of €312,000. The company paid all of its expenses in cash as well as paying dividends of €92,000. Net income (loss) for the month is a. (€48,000). b. €44,000. c. €136,000. d. €228,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

189.

Mica Inc. began operations in October, 2020. During October, Mica sold ordinary shares for €800,000, earned revenue of €88,000, incurred expenses of €48,000, and paid dividends of €4,000. Retained earnings at the end the month is a. €36,000. b. €40,000. c. €836,000. d. €840,000. Ans: a LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

190.

Mica Inc. began operations in October, 2020. During October, Mica sold ordinary shares for €800,000, earned revenue of €88,000, incurred expenses of €48,000, and paid dividends of €4,000. Equity at the end of the month is a. €36,000. b. €40,000. c. €836,000. d. €840,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

191.

Bruni Corporation began operations on January 1, 2020. During January, Bruni earned revenue of €135,000, incurred expenses of €66,000, and paid dividends of €9,000. Retained earnings at the end the month is a. €60,000. b. €69,000. c. €78,000. d. €135,000. Ans: a LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

192.

Sing Tao Inc. began operations on June 2, 2020. During June, Sing Tao sold ordinary shares for HK$22,900,000, earned revenue of HK$4,040,000, incurred expenses of HK$2,060,000, and paid dividends of HK$60,000. Retained earnings at June 30, 2020 a. HK$1,920,000. b. HK$1,980,000. c. HK$24,820,000. d. HK$26,941,000. Ans: a LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 30 193.

Test Bank for Financial Accounting: IFRS Edition, 4e Sing Tao inc. began operations on June 2, 2020. During June, Sing Tao sold ordinary shares for HK$22,900,000, earned revenue of HK$4,040,000, incurred expenses of HK$2,060,000, and paid dividends of HK$60,000. Equity at the end of June is a. HK$1,920,000. b. HK$1,980,000. c. HK$24,820,000. d. HK$26,941,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

194.

Nigiri Inc. began operations on October 1, 2020. During October, Nigiri sold ordinary shares for ¥660,000,000, earned net income of ¥96,000,000, and paid dividends of ¥2,967,000. Retained earnings at the end of October is a. ¥756,000,000. b. ¥753,033,000. c. ¥96,000,000. d. ¥93,033,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

195.

Nigiri Inc. began operations on October 1, 2020. During October, Nigiri sold ordinary shares for ¥660,000,000, earned net income of ¥96,000,000, and paid dividends of ¥2,967,000. Equity at the end of October is a. ¥756,000,000. b. ¥753,033,000. c. ¥96,000,000. d. ¥93,033,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

196.

Le Bateau Company began operations on March 1, 2020. During March, Le Bateau sold ordinary shares for €9,000,000 and incurred a net loss of €1,220,000. Equity at the end of March is a. (€1,220,000). b. €7,780,000. c. €10,220,000. d. cannot be determined from the information given. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

197.

During July, its first period of operations, Aju Inc. sold ordinary shares for W1,440,000,000, earned net income of W195,000,000, and paid dividends of W40,500,000. Retained earnings at the end of July is a. W1,635,000,000. b. W1,594,500,000. c. W1,399,500,000. d. W154,500,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 198.

1 - 31

During July, its first period of operations, Aju Inc. sold ordinary shares for W1,060,000,000, earned net income of W130,000,000, and paid dividends of W27,000,000. Equity at the end of July is a. W1,190,000,000. b. W1,163,000,000. c. W1,033,000,000. d. W103,000,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Use the following information for questions 199–203 O' Hara Company began operations on December 1, 2020. Presented below is selected information related to O' Hara Company at December 31, 2020. Equipment Cash Service Revenue Rent Expense Accounts Payable Share Capital-ordinary 199.

₤160,000 56,000 432,000 52,000 64,000 112,000

Utilities Expense Accounts Receivable Salaries and Wages Expense Notes Payable Dividends

₤ 24,000 108,000 188,000 40,000 60,000

At December 31, 2020, assets total a. £216,000. b. £280,000. c. £324,000. d. £388,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

200.

At December 31, 2020, liabilities total a. £64,000. b. £104,000. c. £148,000. d. £164,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

201.

Net income for the month of December is a. £108,000. b. £168,000. c. £224,000. d. £264,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

202.

Retained earnings at December 31, 2020 is a. £60,000. b. £88,000. c. £108,000. d. £220,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 32 203.

Test Bank for Financial Accounting: IFRS Edition, 4e Equity at December 31, 2020, is a. £592,000. b. £484,000. c. £372,000. d. £220,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Use the following information for questions 204–208 EI Greco Corporation began operations on January 1, 2020. Presented below is selected information related to EI Greco at December 31, 2020. Equipment Cash Service Revenue Rent Expense Accounts Payable Share Capital-Ordinary Supplies 204.

€435,000 126,000 972,000 117,000 66,000 252,000 45,000

Utilities Expense Accounts Receivable Salaries and Wages Expense Notes Payable Dividends Salaries and Wages Payable Advertising Expense

€ 54,000 123,000 363,000 144,000 135,000 24,000 60,000

The statement of financial position at December 31, 2020 reports total assets of a. €480,000. b. €606,000. c. €684,000. d. €729,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

205.

The statement of financial position at December 31, 2020 reports total liabilities of a. €90,000. b. €180,000. c. €234,000. d. €357,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

206.

Net income (loss) reported on the income statement for the month of December is a. €378,000. b. €270,000. c. €243,000. d. €144,000. Ans: a LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

207.

Retained earnings reported on the statement of financial position at December 31, 2020 is a. €495,000. b. €378,000. c. €252,000. d. €243,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 208.

1 - 33

The statement of financial position at December 31, 2020 reports equity of a. €630,000. b. €495,000. c. €378,000. d. €252,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

209.

All of the following are services offered by public accountants except a. budgeting. b. auditing. c. tax planning. d. consulting. Ans: a LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

210. Which list below best describes the major services performed by public accountants? a. Bookkeeping, mergers, budgets. b. Employee training, auditing, bookkeeping. c. Auditing, taxation, management consulting. d. Cost accounting, production scheduling, recruiting. Ans: c LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

211. Preparing tax returns and engaging in tax planning is performed by a. public accountants only. b. private accountants only. c. both public and private accountants. d. IRS accountants only. Ans: c LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

212. A private accountant can perform many activities in a business organization but would not work in a. budgeting. b. accounting information systems. c. external auditing. d. tax accounting. Ans: c LO6 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Additional Multiple Choice Questions 213.

Which of the following is not part of the accounting process? a. Recording b. Identifying c. Financial decision making d. Communicating Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

214.

The first part of the accounting process is a. communicating. b. identifying. c. processing. d. recording. Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 34 215.

Test Bank for Financial Accounting: IFRS Edition, 4e Keeping a systematic, chronological diary of events that are measured in dollars and cents is called a. communicating. b. identifying. c. processing. d. recording. Ans: d LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

216.

Internal users of accounting information include all of the following except a. company officers. b. investors. c. marketing managers. d. production supervisors. Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

217.

Most companies in the United States follow standards issued by the a. Financial Accounting Standards Board. b. International Accounting Standards Board. c. Internal Revenue Service. d. Securities and Exchange Commission. Ans: a LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

218.

A proprietorship is a business a. owned by one person. b. owned by two or more persons. c. organized as a separate legal entity under state corporation law. d. owned by a governmental agency. Ans: a LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

219.

Roy’s Downtown Diner received a bill of $400 from the Emeril Advertising Agency. The owner, Roy James, is postponing payment of the bill until a later date. The effect on specific items in the basic accounting equation is a. a decrease in Cash and an increase in Accounts Payable. b. a decrease in Cash and an increase in Retained Earnings. c. an increase in Accounts Payable and a decrease in Retained Earnings. d. a decrease in Accounts Payable and an increase in Retained Earnings. Ans: c LO4 BT: C Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

220.

Ryder Company purchases $600 of equipment from Montez Inc. for cash. The effect of this transaction on the components of the basic accounting equation of Ryder Company is a. an increase in assets and liabilities. b. a decrease in assets and liabilities. c. no change in total assets. d. an increase in assets and a decrease in liabilities. Ans: c LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action 221.

1 - 35

Fontaine Fox Company buys a $12,000 van on credit. This transaction will affect the a. income statement only. b. statement of financial position only. c. income statement and retained earnings statement only. d. income statement, retained earnings statement, and statement of financial position. Ans: b LO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

222.

A net loss will result during a time period when a. assets exceed liabilities. b. assets exceed equity. c. expenses exceed revenues. d. revenues exceed expenses. Ans: c LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

223.

Auditing is a. the examination of financial statements by a CA or CPA in order to provide an opinion on their accuracy. b. a part of accounting that involves only recording of economic events. c. an area of accounting that involves such activities as cost accounting, budgeting, and accounting information systems. d. conducted by the Securities and Exchange Commission to ensure that registered financial statements are presented fairly. Ans: a LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BRIEF EXERCISES BE 224 Match the following external users of financial accounting information with the type of decision that user will make with the information. a. b. c. d

Creditor Investor Regulatory Agency Taxing Authority

_______

(1) Is the company operating within prescribed guidelines?

_______

(2) Is the company complying with tax laws?

_______

(3) Is the company able to pay its debts?

_______

(4) Is the company a good investment?

Solution 224 1. 2. 3. 4.

c d a b

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Test Bank for Financial Accounting: IFRS Edition, 4e

1 - 36 BE 225

Match the following terms and definitions. a. Accounts receivable b. Creditor

c. Accounts payable d. Note payable

_______ (1) Amounts due from customers _______ (2) Amounts owed to suppliers for goods and services purchased _______ (3) Amounts owed to bank _______ (4) Party to whom money is owed Solution 225 1. 2. 3. 4.

a c d b

LO3 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BE 226 Indicate which of these items is an asset (A), liability (L) or equity (E) account. _______

(1) Supplies

_______

(2) Dividends

_______

(3) Buildings

_______

(4) Note Payable

_______

(5) Taxes Payable

Solution 226 1. 2. 3. 4. 5.

Assets (A) Equity (E) Asset (A) Liability (L) Liability (L)

LO3 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BE 227 Use the accounting equation to answer the following questions. 1. Force 10 Sails Co. has total assets of $120,000 and total liabilities of $65,000. What is equity? 2. Marcy Fun Center has total assets of $225,000 and equity of $105,000. What are total liabilities? 3. Franco’s Restaurant has total liabilities of $50,000 and equity of $75,000. What are total assets? For Instructor Use Only

Accounting in Action Solution 227 1. $120,000 – $65,000 = $55,000 equity 2. $225,000 – $105,000 = $120,000 total liabilities 3. $50,000 + $75,000 = $125,000 total assets LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BE 228 Determine the missing items. Assets = Liabilities

Equity

¥85,000

¥52,000

(a)

(b)

¥28,000

¥34,000

¥89,000

(c)

¥55,000

Solution 228 a. ¥33,000 b. ¥62,000 c. ¥34,000 LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BE 229 Classify each of these items as an asset (A), liability (L), or equity (E). _____ 1. Accounts receivable _____ 2. Accounts payable _____ 3. Share capital-ordinary _____ 4. Supplies _____ 5. Utilities expense _____ 6. Cash _____ 7. Note payable _____ 8. Equipment Solution 229 1. 2. 3. 4.

A L E A

(5 min.) 5. 6. 7. 8.

E A L A

LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 37

1 - 38

Test Bank for Financial Accounting: IFRS Edition, 4e

For Instructor Use Only

Accounting in Action

1 - 39

BE 230 Identify the impact on the accounting equation of each of the following transactions. 1. Purchase office supplies on account. 2. Paid secretary weekly salary. 3. Purchased office furniture for cash. 4. Received monthly utility bill to be paid at later time. Solution 230 1. 2. 3. 4.

(5 min.)

Increase assets and increase liabilities. Decrease assets and decrease equity. Increase assets and decrease assets. Increase liabilities and decrease equity.

LO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BE 231 Statement of financial position amounts as of December 31, 2020 for Lori’s Tutoring Service are listed below. Prepare a statement of financial position in good form. Accounts Payable Accounts Receivable Cash Share Capital-Ordinary Solution 231

1,600 1,300 800 ?

(5 min.) LORI’S TUTORING SERVICE Statement of Financial Position December 31, 2020

Assets Accounts Receivable Cash Total assets

$1,300 800 $2,100

Equity and Liabilities Share Capital-Ordinary Accounts Payable Total equity and liabilities

LO5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

$ 500 1,600 $2,100

Test Bank for Financial Accounting: IFRS Edition, 4e

1 - 40 BE 232

Identify whether the following items would be reported on the income statement (IS) or statement of financial position (FP). 1. 2. 3. 4. 5.

Cash Service Revenue Notes Payable Interest Expense Accounts Receivable

Solution 232 1. 2. 3. 4. 5.

Statement of Financial Position (FP) Income Statement (IS) Statement of Financial Position (FP) Income Statement (IS) Statement of Financial Position (FP)

LO5 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

BE 233 Use the following information to calculate for the year ended December 31, 2020 (a) net income (net loss), (b) ending retained earnings, and (c) total assets. Supplies Operating expenses Accounts payable Accounts receivable Beginning retained earnings

¥ 1,000 12,000 9,000 3,000 5,000

Revenues Cash Dividends Notes payable Equipment

¥21,000 13,000 1,000 1,000 6,000

Solution 233 (a)

¥9,000

(b)

¥13,000

(c)

¥23,000

LO5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 41

BE 234 Listed below in alphabetical order are the statement of financial position items of Rowan Company at December 31, 2020. Prepare a statement of financial position and include a complete heading. Accounts payable Accounts receivable Buildings Cash Equipment Share capital - ordinary

19,000 25,000 96,000 14,000 5,000 121,000

Solution 234 ROWAN COMPANY Statement of Financial Position December 31, 2020 ASSETS Buildings Equipment Accounts receivable Cash Total assets

$ 96,000 5,000 25,000 $ 14,000 $140,000 EQUITY AND LIABILITIES

Equity Share capital-ordinary Liabilities Accounts payable Total equity and liabilities

121,000 19,000 $140,000

LO5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

EXERCISES Ex. 235 Determine the missing amount for each of the following. Assets = Liabilities + Equity 1. (a) €30,000 €75,000 2. €125,000 (b) €85,000 3. €140,000 €65,000 (c) Solution 235 1. (a) = €105,000 (€30,000 + €75,000) 2. (b) = €40,000 (€125,000 - €85,000) 3. (c) = €75,000 (€140,000 - €65,000) LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Test Bank for Financial Accounting: IFRS Edition, 4e

1 - 42 Ex. 236

For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or equity item. Code Asset A Liability L Equity E ______ 1. Rent Expense

______ 6. Cash

______ 2. Equipment

______ 7. Accounts Receivable

______ 3. Accounts Payable

______ 8. Dividends

______ 4. Share Capital-Ordinary

______ 9. Service Revenue

______ 5. Insurance Expense

______ 10. Notes Payable

Solution 236 1. 2. 3. 4. 5.

E A L E E

6. 7. 8. 9. 10.

A A E E L

LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 237 At the beginning of the year, Keats Company had total assets of $750,000 and total liabilities of $250,000. Answer the following questions viewing each situation as being independent of the others. (1) If total assets increased $200,000 during the year, and total liabilities decreased $75,000, what is the amount of equity at the end of the year? (2) During the year, total liabilities increased $230,000 and equity decreased $90,000. What is the amount of total assets at the end of the year? (3) If total assets decreased $40,000 and equity increased $130,000 during the year, what is the amount of total liabilities at the end of the year?

For Instructor Use Only

Accounting in Action

1 - 43

Solution 237 Beginning Change Ending Beginning Change Ending Beginning Change Ending

Total Assets $750,000 200,000 $950,000

–

Total Liabilities $250,000 (75,000) $175,000

Total Liabilities $250,000 230,000 $480,000

Total Assets $750,000 $890,000 (2) Total Assets $750,000 (40,000) $710,000

Equity =

$775,000 (1)

Equity $500,000 (90,000) $410,000

Equity $500,000 130,000 $630,000

Total Liabilities $250,000 =

$ 80,000 (3)

LO3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 238 Jill's Car Cleaning has the following statement of financial position items: Equipment Accounts Payable Cash Supplies Accounts Receivable Identify which items are

Notes Payable Share Capital-Ordinary Retained Earnings

(1) Assets (2) Liabilities (3) Equity

Solution 238 (1) Assets— Equipment, Cash, Supplies, Accounts Receivable (2) Liabilities—Accounts Payable, Notes Payable (3) Equity—Share Capital-Ordinary, Retained Earnings LO3 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 239 On June 1, 2020, Bush Company prepared a statement of financial position that shows the following: Assets (no cash)............................................................... ₤100,000 Liabilities........................................................................... 75,000 Equity................................................................................ 25,000

For Instructor Use Only

1 - 44

Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 239

(cont.)

Shortly thereafter, all of the assets were sold for cash. How would the statement of financial position appear immediately after the sale of the assets for cash for each of the following cases? Cash Received for the Assets

Assets

Balances Immediately After Sale – Liabilities = Equity

Cash A

₤110,000

₤________

Cash B

100,000

________

Cash C

90,000

________

Solution 239

Cash A Cash B Cash C

Cash Received for the Assets ₤110,000 100,000 90,000

Balances Immediately After Sale Assets – Liabilities = Equity ₤110,000 ₤75,000 ₤35,000 100,000 75,000 25,000 90,000 75,000 15,000

LO3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 240 At the beginning of 2020, Bonds Company had total assets of $650,000 and total liabilities of $370,000. Answer each of the following questions. 1. If total assets increased $60,000 and equity decreased $90,000 during the year, determine the amount of total liabilities at the end of the year. 2. During the year, total liabilities decreased $75,000 and equity increased $50,000. Compute the amount of total assets at the end of the year. 3. If total assets decreased $100,000 and total liabilities increased $55,000 during the year, determine the amount of equity at the end of the year. Solution 240 1. Ending Total Liabilities = ($650,000 + $60,000) – ($650,000 – $370,000 - $90,000) = $710,000 – $190,000 = $520,000 2. Ending Total Assets

= ($370,000 – $75,000) + ($650,000 – $370,000 + $50,000)

= $295,000 + $330,000 = $625,000 3. Ending Equity

= ($650,000 – $100,000) – ($370,000 + $55,000)

= $550,000 – $425,000 = $125,000 LO3 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 45

Ex. 241 Compute the missing amount in each category of the accounting equation. Assets $279,000 $223,000 $ ?

(a) (b) (c)

Liabilities $ ? $ 79,000 $173,000

Equity $143,000 $ ? $325,000

Solution 241 (a) $136,000 ($279,000 – $143,000 = $136,000). (b) $144,000 ($223,000 – $79,000 = $144,000). (c) $498,000 ($173,000 + $325,000 = $498,000). LO3 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 242 From the following list of selected accounts taken from the records of McDreamy Homeopathic Center, identify those that would appear on the statement of financial position. a. b. c. d. e.

Share Capital-Ordinary Service Revenue Land Salaries and Wages Expense Notes Payable

f. g. h. i. j.

Accounts Payable Cash Rent Expense Supplies Utilities Expense

Solution 242 a, c, e, f, g, i LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 243 Selected transactions for Tall Timber Tree Service are listed below. 1. Made cash investment to start the business. 2. Paid for monthly advertising. 3. Purchased supplies on account. 4. Billed customers for services performed. 5. Paid cash dividends. 6. Received cash from customers billed in (4). 7. Incurred utilities expense on account. 8. Purchased additional supplies for cash. 9. Received cash from customers when service was performed.

For Instructor Use Only

Test Bank for Financial Accounting: IFRS Edition, 4e

1 - 46

Instructions List the numbers of the above transactions and describe the effect of each transaction on assets, liabilities, and equity. For example, the first answer is: (1) Increase in assets and increase in equity. Solution 243 1. Increase in assets and increase in equity. 2. Decrease in assets and decrease in equity. 3. Increase in assets and increase in liabilities. 4. Increase in assets and increase in equity. 5. Decrease in assets and decrease in equity. 6. Increase in assets and decrease in assets. 7. Increase in liabilities and decrease in equity. 8. Increase in assets and decrease in assets. 9. Increase in assets and increase in equity. LO3, 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 244 Lawrence Legal Eagles Company entered into the following transactions during March 2020. 1. Purchased office equipment for $21,500 from Business Equipment, Inc. on account. 2. Paid $4,000 cash for March rent on office furniture. 3. Received $15,000 cash from customers for legal work billed in February. 4. Provided legal services to Amy Construction Company for $3,000 cash. 5. Paid Northern States Power Co. $11,000 cash for electric usage in March. 6. Lawrence invested an additional $32,000 in the business. 7. Paid Business Equipment, Inc. for the office equipment purchased in (1) above. 8. Incurred advertising expense for March of $1,200 on account. Instructions Indicate with the appropriate letter whether each of the transactions above results in: (a) an increase in assets and a decrease in assets. (b) an increase in assets and an increase in equity. (c) an increase in assets and an increase in liabilities. (d) a decrease in assets and a decrease in equity. (e) a decrease in assets and a decrease in liabilities. (f) an increase in liabilities and a decrease in equity. (g) an increase in equity and a decrease in liabilities. Solution 244 1. 2. 3. 4.

5. 6. 7. 8.

(d) (b) (e) (f)

LO6, 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 47

Ex. 245 Two items are omitted from each of the following summaries of statement of financial position and income statement data for two companies for the year 2020, Holly Enterprises and Craig Stevens. Holly Enterprises Beginning of year: Total assets € 98,000 Total liabilities 70,000 Total equity (a) End of year: Total assets 160,000 Total liabilities 120,000 Total equity 40,000 Changes during year in equity: Additional investment (b) Dividends 25,000 Total revenues 215,000 Total expenses 180,000 Instructions Determine the missing amounts.

Solution 245 (a)

Total assets (beginning of year) Total liabilities (beginning of year) Total equity (beginning of year)

€98,000 (70,000) €28,000

(b)

Total equity (end of year) Total equity (beginning of year) Increase in equity

€40,000 (28,000) €12,000

Total revenues Total expenses Net income

€215,000 (180,000) € 35,000

Increase in equity Less: Net income Add: Dividends Additional investment (c)

€12,000 (€35,000) 25,000)

Total assets (beginning of year) Total equity (beginning of year) Total liabilities (beginning of year)

(10,000) €2,000 €129,000 (80,000) € 49,000

For Instructor Use Only

Craig Stevens €129,000 (c) 80,000 180,000 50,000 130,000 25,000 (d) 100,000 65,000

Test Bank for Financial Accounting: IFRS Edition, 4e

1 - 48

Solution 245 (cont.) (d) Total equity (end of year) Total equity (beginning of year) Increase in equity

€130,000 (80,000) € 50,000

Total revenues Total expenses Net income

€100,000 (65,000) € 35,000

Increase in equity Less: Net income Additional investment Dividends

€50,000 € 35,000 25,000

(60,000) €(10,000)

LO3, 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 246 An analysis of the transactions made by K. T. Lang & Co., a law firm, for the month of July is shown below. Each increase and decrease in equity is explained. Assets Cash + 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Accounts Receivable + Supplies +

+$15,000 - 2,000 750 + 2,500 +$6,600 - 1,500 - 2,500 650 + 550 550 - 3,500

= Equipment

Liab.

Accounts = Payable +

Share Cap. +

Rev. - Exp.

- Div. Iss. Sh.

+$3,000

+$750 + $9,100

Serv. Rev.

− 1,500 − $650 + 500

Solution 246 Investment Service revenue Dividends Rent expense Salaries expense Utilities expense Increase in equity

Equity Retained Earnings

+$15,000 +$5,000

Instructions (a) Determine how much equity increased for the month. (b) Compute the amount of net income for the month.

(a)

$15,000 9,100 (2,500) (650) (3,500) (500) $16,950

For Instructor Use Only

− $2,500 Div. Rent Exp.

− 3,500 − 500

Sal. Exp. Util. Exp.

Accounting in Action Solution 246 (b)

1 - 49

(cont.)

Service revenue Rent expense Salaries expense Utilities expense Net income

$9,100 (650) (3,500) (500) $4,450

LO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 247 The Lim Company had the following assets and liabilities on the dates indicated. December 31 Total Assets Total Liabilities 2018 $530,000 $230,000 2019 $480,000 $210,000 2020 $590,000 $300,000 Lim began business on January 1, 2018, with an investment of $100,000. Instructions From an analysis of the change in equity during the year, compute the net income (or loss) for: (a) 2018, assuming Lim paid dividends of $25,000 for the year. (b) 2019, assuming Lim made an additional investment of $60,000 and paid no dividends in 2019. (c) 2020, assuming Lim made an additional investment of $10,000 and paid dividends of $30,000 in 2020. Solution 247 (a)

Equity—12/31/18 ($530,000 – $230,000) Equity—1/1/18 Increase in equity Add: Dividends Net income for 2018

$300,000 (100,000) 200,000 25,000 $225,000

(b)

Equity—12/31/19 ($480,000 – $210,000) Equity—1/1/19—see (a) Decrease in equity Less: Additional investment Net loss for 2019

$270,000 (300,000) (30,000) 60,000 $ (90,000)

(c)

Equity—12/31/20 ($590,000 – $300,000) Equity—1/1/20—see (b) Increase in equity Less: Additional investment

$290,000 (270,000) 20,000 (10,000) 10,000 30,000 $ 40,000

Add: Dividends Net income for 2020

LO4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 50

Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 248 For each of the following, indicate whether the transaction affects revenue (R), expense (E), Dividends (D), Share Capital (SC), or no effect on equity (NOE). 1. 2. 3. 4. 5.

Made an investment to start the business. Billed customers for services performed. Purchased equipment on account. Paid monthly rent. Paid dividends.

Solution 248 1. 2. 3. 4. 5.

Share Capital (SC) Revenue (R) No effect (NOE) Expense (E) Dividends (D)

LO4 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 249 Presented below is a statement of financial position for Jim Henson Yard Service at December 31, 2020. JIM HENSON YARD SERVICE Statement of Financial Position December 31, 2020 Assets

Equity and Liabilities

Equipment Supplies Accounts receivable Cash

£11,000 9,000 6,000 13,000

Total assets

£39,000

Equity Share capital–ordinary Liabilities Accounts payable Notes payable Total equity & liabilities

₤16,000 8,000 15,000 ₤39,000

The following additional data are available for the year which began on January 1: All expenses (excluding supplies expense) total ₤6,000. Supplies on January 1 were ₤11,000 and ₤5,000 of supplies were purchased during the year. Net income for the year was ₤8,000 and dividends paid were ₤5,000. Instructions Determine the following: (Show all computations.) 1. Supplies used during the year. 2. Total expenses for the year. 3. Service revenues for the year. 4. Equity on January 1.

For Instructor Use Only

Accounting in Action

1 - 51

Solution 249 1. Computation of Supplies Used: Beginning Supplies, Jan. 1 Add: Purchases Less: Ending Supplies, Dec. 31 Equals: Supplies Used

₤11,000 5,000 (9,000) ₤ 7,000

2. Computation of Total Expenses: All Expenses (excluding supplies expense) Plus: Supplies Used Total Expenses

₤ 6,000 7,000 ₤13,000

3. Computation of Revenues: Net Income Plus: Total Expenses Total Revenues

₤ 8,000 13,000 ₤21,000

4. Computation of equity on January 1: Equity, December 31 Plus: Dividends Less: Net Income Equity, January 1

₤16,000 5,000 (8,000) ₤13,000

LO4 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA PC: Problem Solving

Ex. 250 Analyze the transactions of a business organized as a proprietorship described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease. Assets

Liabilities

Equity

1. Received cash for services rendered.

________

2. Purchased office equipment on credit.

________

3. Paid employees' salaries.

________

4. Received cash from customer in payment on account.

________

5. Paid telephone bill for the month.

________

6. Paid for office equipment purchased in transaction 2.

________

7. Purchased office supplies on credit.

________

8. Paid dividends.

________

9. Obtained a loan from the bank.

________

10. Billed customers for services rendered. ________

________

For Instructor Use Only

Test Bank for Financial Accounting: IFRS Edition, 4e

1 - 52

Solution 250 Assets =

Liabilities

1. Received cash for services rendered.

2. Purchased office equipment on credit.

3. Paid employees' salaries.

–

4. Received cash from customer in payment on account.

+,–

5. Paid telephone bill for the month.

–

6. Paid for office equipment purchased in transaction 2.

–

7. Purchased office supplies on credit.

8. Paid dividends

–

9. Obtained a loan from the bank.

10. Billed customers for services rendered.

Equity +

+ –

–

– + +

LO4 BT: C Difficulty: Medium TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 251 For each of the following, indicate whether the transaction increased (+), decreased (-), or had no effect (NE) on assets, liabilities, and equity using the following format. Assets = Liabilities + Equity 1. 2. 3. 4. 5.

Issued ordinary shares in exchange for cash. Billed customers for services performed. Purchased equipment on account. Paid dividends. Paid for equipment purchased in 3. above.

Solution 251 Assets

Liabilities

Equity

–

LO4 BT: C Difficulty: Easy TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 53

Ex. 252 Bill Phinnes decides to open a cleaning and laundry service near the local college campus that will operate as a corporation. Analyze the following transactions for the month of June in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. It is not necessary to identify the cause of changes in equity. Transactions (1) Issued ordinary shares in exchange for $20,000 cash on June 1. (2) Purchased laundry equipment for $5,000 paying $3,000 in cash and the remainder due in 30 days. (3) Purchased laundry supplies for $1,200 cash. (4) Received a bill from College News for $300 for advertising in the campus newspaper. (5) Cash receipts from customers for cleaning and laundry amounted to $1,500. (6) Paid salaries of $200 to student workers. (7) Billed the Lion Soccer Team $200 for cleaning and laundry services. (8) Paid $300 to College News for advertising that was previously billed in Transaction 4. (9) Paid dividends of $700. (10) Incurred utility expenses for month on account, $150. TransAccounts Accounts Share Retained action Cash + Receivable + Supplies + Equipment = Payable + Capital + Earnings (1) ——————————————————————————————————————————— Balance (2) ——————————————————————————————————————————— Balance (3) ——————————————————————————————————————————— Balance (4) ——————————————————————————————————————————— Balance (5) ——————————————————————————————————————————— Balance (6) ——————————————————————————————————————————— Balance (7) ——————————————————————————————————————————— Balance (8) ——————————————————————————————————————————— Balance

For Instructor Use Only

1 - 54

Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 252

(cont.)

(9) ——————————————————————————————————————————— Balance (10) ——————————————————————————————————————————— Totals

Solution 252 TransAccounts Accounts Share Retained action Cash + Receivable + Supplies + Equipment = Payable + Capital + Earnings (1) +$20,000 +$20,000 ——————————————————————————————————————————— Balance $20,000 $20,000 (2) – 3,000 +$5,000 +$2,000 ——————————————————————————————————————————— Balance $17,000 $5,000 $2,000 $20,000 (3) – 1,200 +$1,200 ——————————————————————————————————————————— Balance $15,800 $1,200 $5,000 $2,000 $20,000 (4) + 300 – $300 ——————————————————————————————————————————— Balance $15,800 $1,200 $5,000 $2,300 $20,000 – $300 (5) + 1,500 + 1,500 ——————————————————————————————————————————— Balance $17,300 $1,200 $5,000 $2,300 $20,000 $1,200 (6) – 200 - 200 ——————————————————————————————————————————— Balance $17,100 $1,200 $5,000 $2,300 $20,000 $1,000 (7) +$200 + 200 ——————————————————————————————————————————— Balance $17,100 $200 $1,200 $5,000 $2,300 $20,000 $1,200 (8) – 300 – 300 ——————————————————————————————————————————— Balance $16,800 $200 $1,200 $5,000 $2,000 $20,000 $1,200 (9) – 700 – 700 ——————————————————————————————————————————— Balance $16,100 $200 $1,200 $5,000 $2,000 $20,000 $500 (10) + 150 – 150 ——————————————————————————————————————————— Totals $16,100 $200 $1,200 $5,000 $2,150 $20,000 $350 LO4 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 55

Ex. 253 For each of the following, describe a transaction that will have the stated effect on the elements of the accounting equation. (a) Increase one asset and decrease another asset. (b) Increase an asset and increase a liability. (c) Decrease an asset and decrease a liability. (d) Increase an asset and increase equity. (e) Increase one asset, decrease one asset, and increase a liability.

Solution 253 (a) Receive cash from customers on account. Purchase supplies for cash. (b) Purchase supplies on account. Purchase equipment and signed a note payable. (c) Pay cash to reduce accounts payable. Pay cash to reduce a note payable. (d) Issued ordinary shares in exchange for cash. Render services on account or for cash. (e) Buy equipment with a cash down payment with the remainder financed by a note payable. LO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 254 The following transactions represent part of the activities of Tigger Company for the first month of its existence. Indicate the effect of each transaction upon the total assets of the business by one of the following phrases: increased total assets, decreased total assets, or no change in total assets. (a) Issued ordinary shares in exchange for cash. (b) Purchased a computer for cash. (c) Purchased office equipment with money borrowed from the bank. (d) Paid the first month's utility bill. (e) Collected an accounts receivable. (f) Paid dividends. Solution 254 (a) (b) (c) (d) (e)

Increased total assets. No change in total assets. Increased total assets. Decreased total assets. No change in total assets.

For Instructor Use Only

1 - 56

Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 254 (f)

(cont.)

Decreased total assets.

LO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 255 Selected transactions for Parton Company are listed below. List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and equity. Sample: Issued ordinary shares in exchange for cash investment. The answer would be—Increase in assets and increase in equity. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Paid monthly utility bill. Purchased new display case for cash. Paid cash for repair work on security system. Billed customers for services performed. Received cash from customers billed in 4. Paid dividends. Incurred advertising expenses on account. Paid monthly rent. Received cash from customers when service was rendered.

Solution 255 1. 2. 3. 4. 5. 6. 7. 8. 9.

Decrease in assets and decrease in equity. No net change in assets. Decrease in assets and decrease in equity. Increase in assets and increase in equity. No net change in assets. Decrease in assets and decrease in equity. Increase in liabilities and decrease in equity. Decrease in assets and decrease in equity. Increase in assets and increase in equity.

LO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 256 A service proprietorship shows five transactions summarized below. The effect of each transaction on the accounting equation is shown, and also the new balance of each item in the equation. For each transaction (a) to (e) write an explanation of the nature of the transaction. Accounts EquipAccounts Cash + Rec. + ment + Land + Building = Payable + Equity ——————————————————————————————————————————— $5,000 $6,500 $10,000 $7,500 $50,000 $3,000 $76,000 a) –2,000 –2,000 3,000 6,500 10,000 7,500 50,000 1,000 76,000 b) +1,000 – 1,000 4,000 5,500 10,000 7,500 50,000 1,000 76,000

For Instructor Use Only

Accounting in Action Ex. 256

1 - 57

(cont.)

c) 4,000 d) +2,500 6,500 e) $6,500

5,500 5,500 +3,000 $8,500

+ 5,000 15,000

7,500

50,000

+5,000 6,000

15,000

7,500

50,000

6,000

$15,000

$7,500

$50,000

$6,000

76,000 + 2,500 78,500 + 3,000 $81,500

Solution 256 (a) (b) (c) (d) (e)

Paid cash to creditors. Received cash from customers on account. Bought equipment on account. Issued ordinary shares in exchange for cash. Provided services on account.

LO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 257 There are ten transactions listed below. Match the transactions that have the identical effect on the accounting equation. You should end up with 5 matches. a. b. c. d. e. f. g. h. i. j.

Receive cash from customers on account. Issue ordinary shares in exchange for cash. Pay cash to reduce an accounts payable. Purchase supplies for cash. Pay cash to reduce a notes payable. Purchase supplies on account. Issue ordinary shares in exchange for noncash assets. Purchase equipment with a note payable. Pay utilities with cash. Pay dividends.

Solution 257 Match #1 #2 #3 #4 #5

= a, d = c, e = f, h = b, g = i, j

LO4 BT: C Difficulty: Medium TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Test Bank for Financial Accounting: IFRS Edition, 4e

1 - 58 Ex. 258

An analysis of the transactions made by K. T. Lang & Co., a law firm, for the month of July is shown below. Each increase and decrease in equity is explained. Assets Cash + 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

+€15,000 - 2,000 750 + 2,500 - 1,500 - 2,500 650 + 550 - 3,500

Accounts Receivable + Supplies +

Liab. +

Equipment =

Accounts Payable +

+€5,000

+€3,000

Equity Retained Earnings Share Cap + Rev. - Exp. +€15,000

Div. Iss. Share Serv. Rev.

+€750 +€6,600

+ €9,100

Serv. Rev.

- 1,500 - €2,500 Div. - €650 Rent Exp. -

550 + 500

Instructions (a) Prepare an income statement for the month ending July 31, 2020. (b) Prepare a retained earnings statement for the month ending July 31, 2020. Solution 258 (a) K. T. LANG & CO. Income Statement For the Month Ended July 31, 2020 Revenues Service revenue Expenses Salaries and wages expense €3,500 Rent expense 650 Utilities expense 500 Total expenses Net income

€9,100

4,650 €4,450

(b) K. T. LANG & CO. Retained Earnings Statement For the Month Ended July 31, 2020 Retained earnings, July 1 Add: Net income Less: Dividends Retained earnings, July 31

€

0 4,450 4,450 2,500 1,950

LO5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

- 3,500 Sal. Exp. - 500 Util. Exp.

Accounting in Action

1 - 59

Ex. 259 An analysis of the transactions made by K. T. Lang & Co., a law firm, for the month of July is shown below. Assets = Liab. + Equity Retained Earnings Accounts Accounts Share Cash + Receivable + Supplies + Equipment = Payable + Cap. + Rev. - Exp. - Div. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

+€15,000 - 2,000 750 + 2,500 +€6,600 - 1,500 - 2,500 650 + 550 550 - 3,500

+€15,000 +€5,000

+€3,000

+€750 + €9,100 - 1,500 - €2,500 - € 650 +

- 3,500 500

500

Instructions Prepare a statement of financial position at July 31, 2020. Solution 259 K. T. LANG & CO. Statement of Financial Position July 31, 2020 Assets Equipment Supplies Accounts receivable Cash Total assets

€ 5,000 750 6,050 7,150 €18,950 Equity and Liabilities

Equity Share capital-ordinary Retained earnings Liabilities Accounts payable Total equity and liabilities

€15,000 1,950

16,950 2,000 €18,950

LO5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 60

Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 260 The following information relates to Ty Ringo Co. for the year 2020. Retained earnings, January 1, 2020 Dividends Service revenue Salaries and wages expense

$ 47,000 6,000 65,500 29,000

Advertising expense $1,500 Rent expense 9,500 Utilities expense 3,400

Instructions After analyzing the data, prepare an income statement and a retained earnings statement for the year ending December 31, 2020 Solution 260 TY RINGO CO. Income Statement For the Year Ended December 31, 2020 Revenues Service revenue Expenses Salaries and wages expense Rent expense Utilities expense Advertising expense Total expenses Net income

$65,500 $29,000 9,500 3,400 1,500 43,400 $22,100

TY RINGO CO. Retained Earnings Statement For the Year Ended December 31, 2020 Retained earnings, January 1 Add: Net income Less: Dividends Retained earnings, December 31

$47,000 22,100 69,100 6,000 $63,100

LO5 BT: AP Difficulty: Easy TOT: 7 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

1 - 61

Ex. 261 Cyn Sclose is the bookkeeper for Ayala Company. Cyn has been trying to get the statement of financial position of Ayala Company to balance. Ayala’s statement of financial position is as follows.

AYALA COMPANY Statement of Financial Position December 31, 2020 Assets

Liabilities

Equipment Supplies Cash Dividends

$48,000 7,100 17,400 6,200

Total assets

$78,700

Accounts payable Accounts receivable Share capital-ordinary Retained earnings Total equity and liabilities

Instructions Prepare a correct statement of financial position. Solution 261 AYALA COMPANY Statement of Financial Position December 31, 2020 Assets Equipment Supplies Accounts receivable Cash Total assets

$48,000 7,100 12,500 17,400 $85,000 Equity and Liabilities

Equity Share capital-ordinary Retained earnings ($18,200 – $6,200) Liabilities Accounts payable Total equity and liabilities

$40,000 12,000

$52,000 33,000 $85,000

LO5 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analytical AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

$33,000 (12,500) 40,000 18,200 $78,700

Test Bank for Financial Accounting: IFRS Edition, 4e

1 - 62 Ex. 262

Presented below is information related to Smith and Jones, Attorneys at Law. Retained earnings, January 1, 2020 Service revenue—2020 Total expenses—2020 Assets, January 1, 2020 Liabilities, January 1, 2020 Assets, December 31, 2020 Liabilities, December 31, 2020 Dividends—2020

$ 23,000 300,000 231,000 85,000 62,000 168,000 85,000 59,000

Instructions Prepare the 2020 retained earnings statement for Smith and Jones, Attorneys at Law. Solution 262 SMITH AND JONES, ATTORNEYS AT LAW Retained Earnings Statement For the Year Ended December 31, 2020 Retained earnings, January 1.......................................................... Add: Net income.............................................................................. Less: Dividends............................................................................... Retained earnings, December 31....................................................

$ 23,000 69,000* 92,000 59,000 $ 33,000

*Legal service revenue.................................................................... Total expenses.................................................................... Net income..........................................................................

$300,000 231,000 $ 69,000

LO5 BT: AP Difficulty: Medium TOT: 7 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 263 Prepare an income statement, a retained earnings statement, and a statement of financial position for the acupuncture practice of Lei Chen, from the items listed below for the month of September. Retained earnings, September 1 Share capital-ordinary Accounts payable Equipment Service revenue Dividends Supplies expense Cash Utilities expense Supplies Salaries and wages expense Accounts receivable Rent expense

¥12,000 30,000 7,000 27,000 24,000 6,000 3,500 8,000 700 2,800 9,000 14,000 2,000 For Instructor Use Only

Accounting in Action Ex. 263

1 - 63

(cont.)

LEI CHEN, ACUPUNCTURIST Income Statement For the Month Ended September 30, 2020 —————————————————————————————————————————— Revenues ¥ Expenses

Total expenses

Net income

LEI CHEN, ACUPUNCTURIST Retained Earnings Statement For the Month Ended September 30, 2020 —————————————————————————————————————————— Retained Earnings, September 1 ¥ Add: ¥ Less: ¥

LEI CHEN, ACUPUNCTURIST Statement of Financial Position September 30, 2020 —————————————————————————————————————————— Assets ¥

Total assets ¥ Equity and Liabilities Equity

Liabilities

Total equity and liabilities

For Instructor Use Only

1 - 64

Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 263 LEI CHEN, ACUPUNCTURIST Income Statement For the Month Ended September 30, 2020 —————————————————————————————————————————— Revenues Service revenue.............................................................................. ¥24,000 Expenses Salaries and wages expense........................................................... ¥9,000 Supplies expense............................................................................ 3,500 Rent expense.................................................................................. 2,000 Utilities expense.............................................................................. 700 Total expenses.......................................................................... 15,200 Net income................................................................................ ¥ 8,800 LEI CHEN, ACUPUNCTURIST Retained Earnings Statement For the Month Ended September 30, 2020 Retained Earnings, September 1.......................................................... Add: Net income.................................................................................... Less: Dividends..................................................................................... Retained Earnings, September 30........................................................

¥12,000 8,800 20,800 6,000 ¥14,800

LEI CHEN, ACUPUNCTURIST Statement of Financial Position September 30, 2020 —————————————————————————————————————————— Assets Equipment............................................................................................. ¥27,000 Supplies................................................................................................ 2,800 Accounts receivable.............................................................................. 14,000 Cash...................................................................................................... 8,000 Total assets..................................................................................... ¥51,800 Equity and Liabilities Equity Share capital-ordinary..................................................................... ¥30,000 Retained earnings........................................................................... 14,800 Liabilities Accounts payable............................................................................ Total liabilities and equity................................................................ LO5 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

¥44,800 7,000 ¥51,800

Accounting in Action

1 - 65

Ex. 264 Indicate whether the following items would appear on the statement of financial position (FP), income statement (IS), or retained earnings statement (RE). 1. 2. 3. 4. 5. 6.

Advertising expense Accounts receivable Dividends Rent revenue Salaries and wages payable Supplies

Solution 264

(5 min.)

1. Income statement (IS) 2. Statement of financial position (FP) 3. Retained earnings statement (RE)

4. Income statement (IS) 5. Statement of financial position (FP) 6. Statement of financial position (FP)

LO8 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 265 Listed below in alphabetical order are the statement of financial position items of Pieter Company at December 31, 2020. Prepare a statement of financial position and include a complete heading. Accounts Payable Accounts Receivable Buildings Cash Equipment Land Share Capital-Ordinary

$ 31,000 15,000 56,000 24,000 4,000 52,000 120,000

LO5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Solution 265

(5 min.) PIETER COMPANY Statement of Financial Position December 31, 2020 ASSETS

Land Buildings Equipment Accounts receivable Cash Total assets

$ 52,000 56,000 4,000 15,000 24,000 $151,000

For Instructor Use Only

1 - 66

Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 265

(cont.) EQUITY and LIABILITIES

Share capital-ordinary Accounts payable Total equity and liabilities

$ 120,000 31,000 $151,000

LO5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Ex. 266 One item is omitted in each of the following summaries of statement of financial position and income statement data for three different corporations, X, Y, and Z. Determine the amounts of the missing items, identifying each corporation by letter. Corporation X Y Z Beginning of the Year: Assets ₤380,000 ₤150,000 ₤199,000 Liabilities 270,000 105,000 168,000 End of the Year: Assets 450,000 185,000 195,000 Liabilities 280,000 95,000 149,000 During the Year: Issued additional ordinaryshares ? 79,000 80,000 Dividends Revenue Expenses

90,000 195,000 170,000

83,000 ? 113,000

Solution 266 Corporation X (₤125,000) Beginning equity (₤380,000 – ₤270,000) Additional investments (₤260,000 – ₤110,000 – ₤25,000) Net income for year (₤195,000 – ₤170,000) Less dividends Ending equity (₤450,000 – ₤280,000) Corporation Y (₤162,000) Beginning equity (₤150,000 – ₤105,000) Additional investments Net income for year [Revenues = ₤162,000 (₤113,000 + ₤49,000)] Less dividends Ending equity (₤185,000 – ₤95,000)

For Instructor Use Only

₤110,000 125,000 25,000 260,000 90,000 ₤170,000

₤ 45,000 79,000 49,000 173,000 83,000 ₤ 90,000

? 187,000 175,000

Accounting in Action Solution 266

1 - 67

(cont.)

Corporation Z (₤77,000) Beginning equity (₤199,000 – ₤168,000) Additional investments Net income for year (₤187,000 – ₤175,000)

₤ 31,000 80,000 12,000 123,000 77,000 ₤ 46,000

Less dividends (₤123,000 – ₤46,000) Ending equity (₤195,000 – ₤149,000)

LO5 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA PC: Problem Solving

Ex. 267 Indicate in the space provided by each item whether it would appear on the Income Statement (IS), Statement of Financial Position (FP), or Retained Earnings Statement (RE): a. ______ Service Revenue

g. ___ Accounts Receivable

b. ______ Utilities Expense

h. ___ Retained Earnings (ending)

c. ______ Cash

___ Equipment

d. ______ Accounts Payable

___ Advertising Expense

e. ______ Supplies

k. ___ Dividends

______ Salaries and Wages Expense

Solution 267 a. IS b. IS c. FP d. FP e. FP f. IS

g. h. i. j. k. l.

___ Notes Payable

FP RE, FP FP IS RE FP

LO5 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 68

Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 268 At September 1, the statement of financial position accounts for Stanley’s Restaurant were as follows: Accounts Payable Accounts Receivable Buildings Cash Equipment

$ 3,800 11,600 68,000 10,000 18,700

Land Share Capital-Ordinary Notes Payable Supplies

$33,000 ? 48,000 6,600

The following transactions occurred during the next two days: The company issued additional ordinary shares for $22,000 cash invested in the business. The accounts payable were paid in full. (No payment was made on the notes payable.) Instructions Prepare a statement of financial position at September 3, 2020. Solution 268 STANLEY'S RESTAURANT Statement of Financial Position September 3, 2020 ASSETS Land Buildings Equipment Supplies Accounts receivable Cash Total assets

$ 33,000 68,000 18,700 6,600 11,600 28,200 $166,100

For Instructor Use Only

Accounting in Action Solution 268

1 - 69

(cont.) EQUITY and LIABILITIES

Share capital-ordinary Notes payable Accounts payable Total equity and liabilities

$118,100 48,000 -0- . $166,100

Cash ($10,000 + $22,000 – $3,800) = $28,200 Accounts payable ($3,800 – $3,800) = $0 Share capital: Beginning balance ($147,900 – $51,800) Additional investment Ending balance

$ 96,100 22,000 $118,100

LO5 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA PC: Problem Solving

Ex. 269 Presented below are items for Wilson Company at December 31, 2020. Accounts payable

€45,000

Accounts receivable

36,000

Cash

27,000

Equipment

62,000

Share capital-ordinary

30,000

Notes payable

50,000

Compute each of the following: 1. Total assets. 2. Total liabilities. Solution 269 1. Total assets = €125,000 (€36,000 + €27,000 + €62,000) 2. Total liabilities = €95,000 (€45,000 + €50,000) LO5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 70

Test Bank for Financial Accounting: IFRS Edition, 4e

COMPLETION STATEMENTS 270.

Accounting is an information system that identifies, _____________, and _____________ the economic events of an organization.

271.

The recording of economic events is called ______________, and is just one part of the _______________ process.

272.

Accounting standards issued in the United States by the Financial Accounting Standards Board are called _________________.

273.

The ________________ principle states that companies should record assets at their cost. The _________________ assumption requires that the activities of an entity be kept separate from the activities of its owner.

274.

275.

The residual claim on total assets of a business is known as ________________ and is equal to total assets minus total liabilities.

276.

Dividends ________________ equity but are not expenses.

277.

The ________________ reports the assets, liabilities, and equity of a business enterprise at a specific date.

278.

The three major services rendered by a public accountant are ______________, ________________, and management ________________.

279.

Accountants who are employees of business enterprises are referred to as ________________ accountants.

Answers to Completion Statements 270. 271. 272. 273. 274.

records, communicates 275. equity bookkeeping, accounting 276. reduce generally accepted accounting principles 277. statement of financial position historical cost 278. auditing, taxation, management consulting a economic entity 279. private (or managerial)

LO1-5 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

Accounting in Action

MATCHING 280. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Convergence Bookkeeping IASB Proprietorship Economic entity assumption

F. G. H. I. J.

Corporation Assets Equities Expenses Transactions

______ 1. Activities of an entity must be kept separate from its owner’s activities. ______ 2. Consumed assets or services. ______ 3. Ownership is limited to one person. ______ 4. Process of reducing differences between IFRS and GAAP. ______ 5. Creditor and ownership claims against the assets of the business. ______ 6. A separate legal entity under state laws. ______ 7. Accounting organization that issues standards. ______ 8. Involves only the recording of economic events. ______ 9. Future economic benefits. ______ 10. Economic events recorded by accountants.

Answers to Matching 1. 2. 3. 4. 5.

E I D A H

6. 7. 8. 9. 10.

F C B G J

LO1-5 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 71

1 - 72

Test Bank for Financial Accounting: IFRS Edition, 4e

SHORT-ANSWER ESSAY QUESTIONS S-A E 281 Your friend, James, made this comment: My major is biology and I plan to research for cures for major illnesses. Thus, I have no need to study accounting. What is your response to James? Solution 281 James, you are entering a dynamic profession and you have the opportunity to make important contributions to society. While science will be your profession and major concern, you will not be able to escape the need to understand accounting. Accounting staff and professionals will always be available to assist you. Here are some areas that will directly affect you: As a manager, you will need to review accounting information (both internal and external) and make decisions. Budgets will be an important part of your research activities. As an employee, you will be concerned about the financial information of your employer. Thus, you will need to be able to read the company’s financial statements. Also, as an investor, you will be interested in the financial statements of other companies. You will probably not be a preparer of the financial statements, but you do need an understanding of how they are prepared. You also need a good understanding of how to interpret the information on the financial statements. LO1 BT: S Difficulty: Hard TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting

S-A E 282 The information needs of a specific user of financial accounting information depends upon the kinds of decisions that user makes. Identify the major users of accounting information and discuss what questions financial accounting information answers for each group of users. Solution 282 The major users of accounting information are internal users and external users. Internal users are those who manage the business. External users are those outside the business who have either a present or potential financial interest. Financial accounting information may answer the following questions for internal users: 1. Is cash sufficient to pay our debts? 2. Can we afford to give employee pay raises this year? 3. What is the cost of manufacturing each unit of product? 4. Which product line is the most profitable? Questions answered by financial accounting information for external users include: 1. Is the company earning satisfactory income? 2. How does the company compare in size and profitability with competitors? 3. Will the company be able to pay its debts as they come due? LO1 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting S-A E 284

For Instructor Use Only

Accounting in Action

1 - 73

S-A E 283 The framework used to record and summarize the economic activities of a business enterprise is referred to as the accounting equation. State the basic accounting equation and define its major components. How are business transactions and financial statements related to the accounting equation? Solution 283 The basic accounting equation is expressed as follows: Assets = Liabilities + Equity Assets are defined as resources owned by the business. Liabilities are creditor claims against the assets of the business; or simply put, liabilities are existing debts and obligations. Equity is the ownership claim on the total assets of the business; it is equal to total assets minus total liabilities. Business transactions are economic events and activities that affect the elements of the basic accounting equation; that is, transactions cause increases or decreases in the assets, liabilities, and equity. The financial statements report the results and effects of transactions on the business' assets, liabilities, and equity. The statement of financial position is a summary expression of the basic accounting equation. LO3 BT: C Difficulty: Medium TOT: 4 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting

S-A E 284 The accounting profession provides many career opportunities for individuals. Identify the major fields that exist in accounting and comment on the major functions performed by individuals in each of these areas. a

Solution 284

The major fields that exist in accounting are in the areas of (1) public accounting, (2) private accounting, and (3) not-for-profit accounting. In public accounting, an accountant may practice as: (1) an auditor who examines the financial statements of companies and expresses an opinion as to the fairness of presentation; (2) a tax specialist who gives tax advice, prepares tax returns, and represents clients before governmental agencies; and (3) a management accountant who engages in the development of accounting and computer systems and the design of organizational systems. Private (managerial) accountants perform many different activities within a company. Private accountants may be involved in: cost accounting, budgeting, general financial accounting, accounting information systems, and tax accounting. LO6 BT: K Difficulty: Medium TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 74

Test Bank for Financial Accounting: IFRS Edition, 4e

S-A E 285

(Ethics)

Sam Dryer owns and operates Sam's Burgers, a small fast food store, located at the edge of City College campus in Newton, Ohio. After several very profitable years, Sam's Burgers began to have problems. Most of the problems were related to Sam's expansion of the eating area in the restaurant without corresponding increases in the food preparation area. Sam does not have the cash or financial backing to expand further. He has therefore decided to sell his business. Jerry Finney is interested in purchasing the business. However, he is located in another city and is unfamiliar with Newton. He has asked Sam why he is selling Sam's Burgers. Sam replies that his elderly mother requires extra care, and that his brother needs help in his manufacturing business. Both are true, but neither is his primary reason for selling. Sam reasons that Jerry should not have asked him anyway, since profitable businesses don't come up for sale. Required: 1. Identify the stakeholders in this situation. 2. Did Sam act ethically in not revealing fully his reasons for selling the business? Why or why not? Solution 285 1. The stakeholders include Sam Dryer Jerry Finney Newton, Ohio students of City College City College persons financing the purchase of Sam's Burgers 2. Sam did not act ethically in not revealing fully his reasons for selling the business. Students might be of the opinion that a purchaser should investigate a business before purchasing it, rather than relying entirely on the seller's assertions. However, students should realize that Sam should have said something about his problems. He might ethically be allowed to put these in the best possible light, perhaps, but failure to disclose them at all is certainly unethical. This is especially true, since family concerns might well cause someone to sell a business that is otherwise doing well. Sam has shown an intent to deceive that is unethical, and might be actionable in court as well. LO2 BT: E Difficulty: Medium TOT: 5 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting

S-A E 286

(Communication)

Sue Havens is a friend of yours from high school. She decided to become a beautician after leaving high school, rather than to attend college. She recently opened her own shop, and has contracted her services to a local hospital. She is paid a monthly fee for her services, and receives a small gratuity from each of the patients. She has just received her first set of financial statements from her accountant. She is quite upset. The statements show a cash balance of $3,600 at the end of the month, but a net income of only

For Instructor Use Only

Accounting in Action

1 - 75

$500. She has written you a letter, asking you whether such a situation is possible, or whether she should find another accountant. Required: Write a short letter to your friend. Use proper form. Answer her question completely, but briefly. Solution 286 Answers will vary. The instructor's requirements concerning proper form should be followed. The letter may be either business or personal. As a minimum, the letter should be in a recognizable form, and proper grammar and spelling should be used. Neat erasures and corrections might be allowed. A suggested personal letter follows: 1245 Lily Lane Buena Vista, AR 77661 (Date) Dear Sue, Congratulations on opening your business! I am sure you will do well, combining your creative genius with your talent for serving others. You asked about your financial statements. Of course, you realize that I am just an accounting student, but I do know that it is possible to have a large cash balance and little net income. You may have had expenses that were not paid in cash yet. These expenses reduce your income, but not your cash. I think that you should discuss the statements with the accountant who prepared them. He or she will be in the best position to explain the results. Thanks for the question. It really made me think. Sincerely, (signature) LO5 BT: C Difficulty: Medium TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

1 - 76

Test Bank for Financial Accounting: IFRS Edition, 4e

GAAP QUESTIONS 1. The Sarbanes-Oxley Act determines a. U.S tax regulations. b. internal control standards of U.S. publicly traded companies. c. internal control standards as enforced by the IASB. d. international tax regulations. Ans: B LO6 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

2. IFRS is considered to be more a. detailed than GAAP. b. rules-based and less principles-based than GAAP. c. principles-based and less rules-based than GAAP. d. None of these answer choices are correct. Ans: C LO6 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

3. Which of the following statements is false? a. Proprietorships, partnerships, and corporations are also found in countries that use IFRS. b. Non-U.S companies that trade shares in U.S markets must reconcile their accounting with GAAP. c. FASB and the IASB are working on a joint project related to the conceptual framework. d. GAAP is based on a conceptual framework that is similar to that used to develop IFRS. Ans: B LO6 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

4. Which of the following is true? a. Equity is defined under GAAP as the residual interest in the liabilities of the company. b. IFRS companies have agreed to adopt the Sarbanes-Oxley Act related to internal control in 2018. c. Transaction analysis is basically the same under GAAP and IFRS. d. Financial frauds have not occurred in U.S. companies because GAAP has detailed accounting and disclosure requirements. Ans: C LO6 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

For Instructor Use Only

CHAPTER 2 THE RECORDING PROCESS CHAPTER LEARNING OBJECTIVES 1. Describe how accounts, debits, and credits are used to record business transactions. An account is a record of increases and decreases in specific asset, liability, and equity items. The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, share capital-ordinary, retained earnings, and revenues are increased by credits and decreased by debits. 2. Indicate how a journal is used in the recording process. The basic steps in the recording process are: (a) analyze each transaction for its effects on the accounts, (b) enter the transaction information in a journal, (c) transfer the journal information to the appropriate accounts in the ledger. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effects of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared. 3. Explain how a ledger and posting help in the recording process. The ledger is the entire group of accounts maintained by a company. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances. Posting is the transfer of journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. 4. Prepare a trial balance. A trial balance is a list of accounts and their balances at a given time. Its primary purpose is to prove the equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.

2-2

Test Bank for Financial Accounting: IFRS Edition, 4e

TRUE-FALSE STATEMENTS 1.

A new account is opened for each transaction entered into by a business firm. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

The recording process becomes more efficient and informative if all transactions are recorded in one account. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

When the volume of transactions is large, recording them in tabular form is more efficient than using journals and ledgers. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

An account is often referred to as a T-account because of the way it is constructed. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

A debit to an account indicates an increase in that account. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

If a revenue account is credited, the revenue account is increased. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

The normal balance of all accounts is a debit. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Debit and credit can be interpreted to mean increase and decrease, respectively. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

The double-entry system of accounting refers to the placement of a double line at the end of a column of figures. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

10.

A credit balance in a liability account indicates that an error in recording has occurred. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

11.

The dividends account is a subdivision of the retained earnings account and appears as an expense on the income statement. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

12.

Revenues are a subdivision of retained earnings. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

13.

Under the double-entry system, revenues must always equal expenses. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

14.

Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

15.

All accounts reported in the statement of financial position are increased by using debits on the left-hand side of the T-account. Ans: F LO1 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 16.

2-3

The rules for debit and credit and the normal balance of Share Capital–Ordinary are the same as for assets. Ans: F LO1 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

17.

Companies report share capital–ordinary and dividends in the equity section of the statement of financial position. Ans: F LO1 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

18.

Transaction information may be entered directly into the accounts without using a journal. Ans: T LO2 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

19.

Business documents can provide evidence that a transaction has occurred. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

20.

Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

21.

Transactions are entered in the ledger accounts and then transferred to journals. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

22.

All business transactions must be entered first in the general ledger. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

23.

A simple journal entry requires only one debit to an account and one credit to an account. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

24.

A compound journal entry requires several debits to one account and several credits to one account. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

25.

Transactions are recorded in alphabetic order in a journal. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

26.

A journal is also known as a book of original entry. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

27.

The complete effect of a transaction on the accounts is disclosed in the journal. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

28.

Entries that impact the income statement are called simple entries, whereas entries that impact the statement of financial position are called compound entries. Ans: F LO2 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

29.

The general ledger contains all the accounts that are reported on the statement of financial position, whereas the general journal contains all the accounts that are reported on the income statement. Ans: F LO3 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

30.

The chart of accounts lists accounts and the account numbers that identify their location in the ledger starting with the accounts that are reported on the income statement. Ans: F LO3 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2-4 31.

Test Bank for Financial Accounting: IFRS Edition, 4e The account titles used in journalizing transactions need not be identical to the account titles in the ledger. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

32.

The chart of accounts is a special ledger used in accounting systems. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

33.

A general ledger should be arranged in the order in which accounts are presented in the financial statements, beginning with the statement of financal position accounts. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

34.

The number and types of accounts used by different business enterprises are the same if generally accepted accounting principles are being followed by the enterprises. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

35.

Posting is the process of proving the equality of debits and credits in the trial balance. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

36.

After a transaction has been posted, the reference column in the journal should not be blank. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

37.

Posting involves transferring the journalized debits and credits to the statement of financial position. Ans: F LO3 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

38.

The trial balance lists accounts and their balances at a given point in time in the order in which they appear on the statement of financial position. Ans: F LO4 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

39.

When debits do not equal credits on the trial balance, this indicates that the company has net income that needs to be transferred to the retained earnings account. Ans: F LO4 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

40.

Errors on the statement of financial position are called transpositions and errors on the income statement are called irregularities. Ans: F LO4 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

41.

Currency signs are typically used only in the trial balance and the financial statements. Ans: T LO4 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

42.

The general rules of debit and credit, and the steps in the recording process–the journal, ledger, and chart of accounts–are the same under both GAAP and IFRS. Ans: T LO4 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

43.

A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process

2-5

Additional True-False Questions 44.

The double-entry system is a logical method for recording transactions and results in equal debits and credits for each transaction. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

45.

The normal balance of an expense account is a credit. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

46.

The journal provides a chronological record of transactions. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

47.

The ledger is merely a bookkeeping device and therefore does not provide much useful data for management. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

48.

The chart of accounts is a listing of the accounts and the account numbers which identify their location in the ledger. Ans: T LO3 BT: C Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

49.

The primary purpose of a trial balance is to prove the mathematical equality of the debits and credits after posting. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

50.

The trial balance will not balance when incorrect account titles are used in journalizing or posting. Ans: F LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2-6

Test Bank for Financial Accounting: IFRS Edition, 4e

MULTIPLE CHOICE QUESTIONS 51.

An account consists of a. one part. b. two parts. c. three parts. d. four parts. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

52.

The left side of an account is a. blank. b. a description of the account. c. the debit side. d. the balance of the account. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

53.

Which one of the following is not a part of an account? a. Credit side b. Trial balance c. Debit side d. Title Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

54.

An account is a part of the financial information system and is described by all except which one of the following? a. An account has a debit and credit side. b. An account is a source document. c. An account may be part of a manual or a computerized accounting system. d. An account has a title. Ans: b LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

55.

The right side of an account a. is the correct side. b. reflects all transactions for the accounting period. c. shows all the balances of the accounts in the system. d. is the credit side. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

56.

An account consists of a. a title, a debit balance, and a credit balance. b. a title, a left side, and a debit balance. c. a title, a debit side, and a credit side. d. a title, a right side, and a debit balance. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 57.

A T-account is a. a way of depicting the basic form of an account. b. what the computer uses to organize bytes of information. c. a special account used instead of a trial balance. d. used for accounts that have both a debit and credit balance. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

58.

Credits a. decrease both assets and liabilities. b. decrease assets and increase liabilities. c. increase both assets and liabilities. d. increase assets and decrease liabilities. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

59.

A debit to an asset account indicates a. an error. b. a credit was made to a liability account. c. a decrease in the asset. d. an increase in the asset. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

60.

The normal balance of any account is the a. left side. b. right side. c. side which increases that account. d. side which decreases that account. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

61.

The double-entry system requires that each transaction must be recorded a. in at least two different accounts. b. in two sets of books. c. in a journal and in a ledger. d. first as a revenue and then as an expense. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

62.

Which of the following accounts does not have a normal credit balance? a. Share Capital–Ordinary b. Revenue account c. Liability account d. Dividends Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2-7

2-8 63.

Test Bank for Financial Accounting: IFRS Edition, 4e Which one of the following represents the expanded basic accounting equation? a. Assets = Liabilities + Share Capital–Ordinary account + Retained Earnings + Dividends – Revenue – Expenses. b. Assets + Dividends + Expenses = Liabilities + Share Capital–Ordinary + Retained Earnings + Revenues. c. Assets – Liabilities – Dividends = Share Capital–Ordinary + Retained Earnings + Revenues – Expenses. d. Assets = Revenues + Expenses – Liabilities. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

64.

Which of the following correctly identifies normal balances of accounts? a. Assets Debit Liabilities Credit Equity Credit Revenues Debit Expenses Credit b. Assets Liabilities Equity Revenues Expenses

Debit Credit Credit Credit Credit

c. Assets Liabilities Equity Revenues Expenses

Credit Debit Debit Credit Debit

d. Assets Liabilities Equity Revenues Expenses

Debit Credit Credit Credit Debit

Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

65.

The best interpretation of the word credit is the a. offset side of an account. b. increase side of an account. c. right side of an account. d. decrease side of an account. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

66.

In recording an accounting transaction in a double-entry system a. the number of debit accounts must equal the number of credit accounts. b. there must always be entries made on both sides of the accounting equation. c. the amount of the debits must equal the amount of the credits. d. there must only be two accounts affected by any transaction. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 67.

2-9

An accounting convention is best described as a. an absolute truth. b. an accounting custom. c. an optional rule. d. something that cannot be changed. Ans: b LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

68.

A debit is not the normal balance for which account listed below? a. Dividends b. Cash c. Accounts Receivable d. Service Revenue Ans: d LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

69.

An accountant has debited an asset account for $1,000 and credited a liability account for $500. What can be done to complete the recording of the transaction? a. Nothing further must be done. b. Debit an equity account for $500. c. Debit another asset account for $500. d. Credit a different asset account for $500. Ans: d LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

70.

An accountant has debited an asset account for $1,000 and credited a liability account for $500. Which of the following would be an incorrect way to complete the recording of the transaction? a. Credit an asset account for $500. b. Credit another liability account for $500. c. Credit an equity account for $500. d. Debit an equity account for $500. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

71.

Which of the following is not true of the terms debit and credit? a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

72.

An account will have a credit balance if the a. credits exceed the debits. b. first transaction entered was a credit. c. debits exceed the credits. d. last transaction entered was a credit. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 10 73.

Test Bank for Financial Accounting: IFRS Edition, 4e For the basic accounting equation to stay in balance, each transaction recorded must a. affect two or less accounts. b. affect two or more accounts. c. always affect exactly two accounts. d. affect the same number of asset and liability accounts. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

74.

Which of the following statements is true? a. Debits increase assets and increase liabilities. b. Credits decrease assets and decrease liabilities. c. Credits decrease assets and increase liabilities. d. Debits decrease liabilities and decrease assets. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

75.

Assets normally show a. credit balances. b. debit balances. c. debit and credit balances. d. debit or credit balances. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

76.

An awareness of the normal balances of accounts would help you spot which of the following as an error in recording? a. A debit balance in the dividends account b. A credit balance in an expense account c. A credit balance in a liabilities account d. A credit balance in a revenue account Ans: b LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

77.

If a company has overdrawn its bank balance, then a. its cash account will show a debit balance. b. its cash account will show a credit balance. c. the cash account debits will exceed the cash account credits. d. it cannot be detected by observing the balance of the cash account. Ans: b LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

78.

Which account below is not a subdivision of retained earnings? a. Dividends b. Revenues c. Expenses d. Share Capital-Ordinary Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 79.

2 - 11

When a company pays dividends a. the dividend doesn't have to be cash, it could be another asset. b. the dividends account will be increased with a credit. c. the retained earnings account will be directly increased with a debit. d. the dividends account will be decreased with a debit. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

80.

The Dividends account a. appears on the income statement along with the expenses of the business. b. must show transactions every accounting period. c. is increased with debits and decreased with credits. d. is not a proper subdivision of retained earnings. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

81.

Which of the following statements is not true? a. Expenses increase equity. b. Expenses have normal debit balances. c. Expenses decrease equity. d. Expenses are a negative factor in the computation of net income. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

82.

A credit to a liability account a. indicates an increase in the amount owed to creditors. b. indicates a decrease in the amount owed to creditors. c. is an error. d. must be accompanied by a debit to an asset account. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

83.

In the first month of operations, the total of the debit entries to the cash account amounted to $700 and the total of the credit entries to the cash account amounted to $500. The cash account has a a. $500 credit balance. b. $700 debit balance. c. $200 debit balance. d. $200 credit balance. Ans: c LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

84.

Martin’s Mail Service purchased equipment for $8,000. Martin paid $1,000 in cash and signed a note for the balance. Martin debited the Equipment account, credited Cash and a. nothing further must be done. b. debited the retained earnings account for $7,000. c. credited another asset account for $1,000. d. credited a liability account for $7,000. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 12 85.

Test Bank for Financial Accounting: IFRS Edition, 4e Taylor Industries purchased supplies for £1,000. They paid £500 in cash and agreed to pay the balance in 30 days. The journal entry to record this transaction would include a debit to an asset account for ₤1,000, a credit to a liability account for ₤500. Which of the following would be the correct way to complete the recording of the transaction? a. Credit an asset account for ₤500. b. Credit another liability account for ₤500. c. Credit the retained earnings account for ₤500. d. Debit the retained earnings account for ₤500. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

86.

On January 14, Ericsson Industries purchased supplies of $500 on account. The entry to record the purchase will include a. a debit to Supplies and a credit to Accounts Payable. b. a debit to Supplies Expense and a credit to Accounts Receivable. c. a debit to Supplies and a credit to Cash. d. a debit to Accounts Receivable and a credit to Supplies. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

87.

On June 1, 2020, Alma Inc. reported a cash balance of €18,000. During June, Alma made deposits of €4,500 and made disbursements totalling €24,000. What is the cash balance at the end of June? a. €1,500 debit balance b. €22,500 debit balance c. €1,500 credit balance d. €6,000 credit balance Ans: c LO1 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

88.

At January 1, 2020, LeAnna Industries reported retained earnings of $260,000. During 2020, LeAnna had a net loss of $60,000 and paid dividends of $40,000. At December 31, 2020, the amount of retained earnings is a. $260,000. b. $280,000. c. $200,000. d. $160,000. Ans: d LO1 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

89.

Omega Company pays its employees twice a month, on the 7 th and the 21st. On June 21, Omega Company paid employee salaries of $4,000. This transaction would a. increase equity by $4,000. b. decrease the balance in Salaries and Wages Expense by $4,000. c. decrease net income for the month by $4,000. d. be recorded by a $4,000 debit to Salaries and Wages Payable and a $4,000 credit to Salaries and Wages Expense. Ans: c LO1 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 90.

In the first month of operations for Widget Industries, the total of the debit entries to the cash account amounted to ₤18,000 (₤10,000 investment by the owners and revenues of ₤8,000). The total of the credit entries to the cash account amounted to ₤10,000 (purchase of equipment ₤4,000 and payment of expenses ₤6,000). At the end of the month, the cash account has a(n) a. ₤6,000 credit balance. b. ₤6,000 debit balance. c. ₤8,000 debit balance. d. ₤8,000 credit balance. Ans: c LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

91.

Rusthe Company showed the following balances at the end of its first year: Cash Prepaid insurance Accounts receivable Accounts payable Notes payable Share capital-ordinary Dividends Revenues Expenses

$ 19,000 1,400 7,000 5,600 8,400 4,800 1,400 45,000 35,000

What did Rusthe Company show as total credits on its trial balance? a. $65,200 b. $63,800 c. $62,400 d. $66,600 Ans: b LO1 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA PC: PS

92.

2 - 13

Ayala Company showed the following balances at the end of its first year: Cash $11,000 Prepaid insurance 500 Accounts receivable 2,500 Accounts payable 2,000 Notes payable 6,000 Share capital-ordinary 4,000 Dividends 500 Revenues 15,000 Expenses 12,500 What did Ayala Company show as total credits on its trial balance? a. $27,500 b. $27,000 c. $26,500 d. $28,000 Ans: b LO1 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA PC: PS

For Instructor Use Only

2 - 14 93.

Test Bank for Financial Accounting: IFRS Edition, 4e During February 2020, its first month of operations, the owner of Alona Enterprises invested cash of $125,000. Alona had cash revenues of $20,000 and paid expenses of $35,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28? a. $15,000 credit b. $110,000 debit c. $145,000 debit d. $90,000 credit Ans: b LO1 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

94.

Which of the following statements is true regarding debits and credits? a. On the income statement, debits are used to increase account balances, whereas on the statement of financial position, credits are used to increase account balances. b. The basic equation on the statement of financial position is Assets + Liabilities = Equity. c. The rules for debit and credit and the normal balance of Share Capital-Ordinary are the same as for liabilities. d. On the income statement, revenues are increased by debits whereas on the statement of financial position retained earnings is increased by a credit. Ans: c LO1 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

95.

Which of the following accounts is reported in the equity section of the statement of financial position? a. Dividends b. Share capitalordinary c. Revenues d. All of these answer choices are correct. Ans: b LO1 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

96.

Revenues are a. impacted by debits and credits in the same way that expenses are impacted by debits and credits. b. a subdivision of equity, providing information about why equity increased. c. reported on the statement of financial position as a current item. d. All of these answer choices are correct. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

97.

Basic steps in the recording process include all of the following except a. transfer the journal information to the appropriate account in the statement of financial position. b. analyze each transaction for its effect on the accounts. c. enter the transaction information in a journal. d. All of these answer choices are correct. Ans: a LO2 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 98.

2 - 15

At January 31, 2020, the balance in Bota Inc.’s supplies account was $2,000. During February, Bota purchased supplies of $2,400 and used supplies of $3,200. At the end of February, the balance in the supplies account should be a. $2,000 debit. b. $2,800 credit. c. $4,400 debit. d. $1,200 debit. Ans: d LO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

99.

At December 1, 2020, Gibson Company’s accounts receivable balance was €7,200. During December, Gibson had credit revenues of €30,000 and collected accounts receivable of €24,000. At December 31, 2020, the accounts receivable balance is a. €7,200 debit. b. €13,200 debit. c. €37,200 debit. d. €13,200 credit. Ans: b LO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

100.

At October 1, 2020, Padilla Industries had an accounts payable balance of $90,000. During the month, the company made purchases on account of $75,000 and made payments on account of $120,000. At October 31, 2020, the accounts payable balance is a. $90,000. b. $30,000. c. $45,000. d. $120,000. Ans: c LO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

101.

During 2020, its first year of operations, Yaspo’s Bakery had revenues of $200,000 and expenses of $110,000. The business paid dividends of $60,000. What is the amount of retained earnings at December 31, 2020? a. $0 b. $60,000 debit c. $30,000 credit d. $90,000 credit Ans: c LO2 BT: AP Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

102.

On July 7, 2020, Anaya Enterprises performed services for cash of $1,400. The entry to record this transaction would include a. a debit to Service Revenue of $1,400. b. a credit to Accounts Receivable of $1,400. c. a debit to Cash of $1,400. d. a credit to Accounts Payable of $1,400. Ans: c LO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 16 103.

Test Bank for Financial Accounting: IFRS Edition, 4e At September 1, 2020, Crews Co. reported equity of ₤272,000. During the month, Crews generated revenues of ₤40,000, incurred expenses of ₤24,000, purchased equipment for ₤10,000 and paid dividends of ₤4,000. What is the amount of equity at September 30, 2020? a. ₤272,000 b. ₤16,000 c. ₤274,000 d. ₤284,000 Ans: d LO2 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

104.

The final step in the recording process is to a. analyze each transaction. b. enter the transaction in a journal. c. prepare a trial balance. d. transfer journal information to ledger accounts. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

105.

The usual sequence of steps in the transaction recording process is: a. journal  analyze  ledger. b. analyze  journal  ledger. c. journal  ledger  analyze. d. ledger  journal  analyze. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

106.

In recording business transactions, evidence that an accounting transaction has taken place is obtained from a. business documents. b. the taxing authority. c. the public relations department. d. the IASB. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

107.

After a business transaction has been analyzed and entered in the book of original entry, the next step in the recording process is to transfer the information to a. the company's bank. b. equity. c. ledger accounts. d. financial statements. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

108.

The first step in the recording process is to a. prepare financial statements. b. analyze each transaction for its effect on the accounts. c. post to a journal. d. prepare a trial balance. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 109.

2 - 17

Evidence that would not help with determining the effects of a transaction on the accounts would be a(n) a. cash register sales tape. b. bill. c. advertising brochure. d. check. Ans: c LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

110.

After transaction information has been recorded in the journal, it is transferred to the a. trial balance. b. income statement. c. book of original entry. d. ledger. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

111.

The usual sequence of steps in the recording process is to analyze each transaction, enter the transaction in the a. journal, and transfer the information to the ledger accounts. b. ledger, and transfer the information to the journal. c. book of accounts, and transfer the information to the journal. d. book of original entry, and transfer the information to the journal. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

112.

The final step in the recording process is to transfer the journal information to the a. trial balance. b. financial statements. c. ledger. d. file cabinets. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

113.

The recording process occurs a. once a year. b. once a month. c. repeatedly during the accounting period. d. infrequently in a manual accounting system. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

114.

A compound journal entry involves a. two accounts. b. three accounts. c. three or more accounts. d. four or more accounts. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 18

Test Bank for Financial Accounting: IFRS Edition, 4e

115.

A journal provides a. the balances for each account. b. information about a transaction in several different places. c. a list of all accounts used in the business. d. a chronological record of transactions. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

116.

When three or more accounts are required in one journal entry, the entry is referred to as a a. compound entry. b. triple entry. c. multiple entry. d. simple entry. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

117.

When only two accounts are required in one journal entry, the entry is referred to as a a. balanced entry. b. simple entry. c. posting. d. nominal entry. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

118.

Another name for the journal is the a. listing. b. book of original entry. c. book of accounts. d. book of source documents. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

119.

The standard format of a journal would not include a. a reference column. b. an account title column. c. a T-account. d. a date column. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

120.

Transactions in a journal are initially recorded in a. account number order. b. dollar amount order. c. alphabetical order. d. chronological order. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 121.

2 - 19

A journal is not useful for a. disclosing in one place the complete effect of a transaction. b. preparing financial statements. c. providing a record of transactions. d. locating and preventing errors. Ans: b LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

122

A complete journal entry does not show a. the date of the transaction. b. the new balance in the accounts affected by the transaction. c. a brief explanation of the transaction. d. the accounts and amounts to be debited and credited. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

123.

The name given to entering transaction data in the journal is a. chronicling. b. listing. c. posting. d. journalizing. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

124.

The standard form of a journal entry has the a. debit account entered first and indented. b. credit account entered first and indented. c. debit account entered first at the extreme left margin. d. credit account entered first at the extreme left margin. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

125

When journalizing, the reference column is a. left blank. b. used to reference the source document. c. used to reference the journal page. d. used to reference the financial statements. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

126.

On June 1, 2020 Quang Le buys a copier machine for his business and finances this purchase with cash and a note. When journalizing this transaction, he will a. use two journal entries. b. make a compound entry. c. make a simple entry. d. list the credit entries first, which is proper form for this type of transaction. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 20 127.

Test Bank for Financial Accounting: IFRS Edition, 4e Which of the following journal entries is recorded correctly and in the standard format? a. Salaries and Wages Expense ............................................. 1,000 Cash ............................................................................. 2,500 Rent Expense ..................................................................... 1,500 b. Salaries and Wages Expense ............................................. Rent Expense ..................................................................... Cash .............................................................................

1,000 1,500 2,500

c. Cash ................................................................................... Salaries and Wages Expense ....................................... Rent Expense ...............................................................

2,500

d. Salaries and Wages Expense ............................................. Rent Expense ..................................................................... Cash .............................................................................

1,000 1,500

2,500

Ans: d LO2 BT: AN Difficulty: Easy TOT: 1 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS

128.

Which of the following statements is true regarding simple and compound entries? a. Simple entries can be prepared by anyone whereas compound entries need to be prepared by a skilled accountant. b. Simple entries are recorded on the income statement whereas compound entries are recorded on the statement of financial position. c. Simple entries involve one account, whereas compound entries involved 2 or more accounts. d. An example of a compound entry would be the purchase of a machine for $400 cash and a $2,000 note payable. Ans: d LO2 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

129.

Compound entries a. would include an entry to record the purchase of a computer for cash. b. include at least two debits or two credits. c. require that all credits be listed before the debits for entries affecting the statement of financial position. d. should be broken into their component parts and recorded as simple entries. Ans: b LO2 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

130.

Accounts maintained within the ledger that appear on the statement of financial position include all of the following except a. Salaries and Wages Expense. b. Interest Payable. c. Supplies. d. Share Capital-Ordinary. Ans: a LO3 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 131.

2 - 21

The entire group of accounts maintained by a company is called the a. statement of cash flows. b. general journal. c. general ledger. d. trial balance. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

132.

An accounting record of the balances of all assets, liabilities, and equity accounts is called a. compound entry. b. general journal. c. general ledger. d. chart of accounts. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

133.

The usual ordering of accounts in the general ledger is a. assets, liabilities, share capitalordinary, retained earnings, dividends, revenues, and expenses. b. assets, liabilities, dividends, share capitalordinary, retained earnings, expenses, and revenues. c. liabilities, assets, share capitalordinary, retained earnings, revenues, expenses, and dividends. d. Share capitalordinary, retained earnings, assets, liabilities, dividends, expenses, and revenues. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

134.

Management could determine the amounts due from customers by examining which ledger account? a. Service Revenue b. Accounts Payable c. Accounts Receivable d. Supplies Ans: c LO3 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

135.

A three column form of account is so named because it has columns for a. debit, credit, and account name. b. debit, credit, and reference. c. debit, credit, and balance. d. debit, credit, and date. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 22 136.

Test Bank for Financial Accounting: IFRS Edition, 4e On August 13, 2020, Merrill Enterprises purchased equipment for $2,000 and supplies of $400 on account. Which of the following journal entries is recorded correctly and in the standard format? a. Equipment........................................................................... 2,000 Account Payable............................................................ 2,400 Supplies................................................................................. 400 b. Equipment........................................................................... Supplies............................................................................... Accounts Payable..........................................................

2,000 400 2,400

c. Accounts Payable................................................................ Equipment...................................................................... Supplies.........................................................................

2,400

d. Equipment........................................................................... Supplies............................................................................... Accounts Payable..........................................................

2,000 400

2,400

Ans: d LO3 BT: AP Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

137.

Robitaille Company received a cash advance of $500 from a customer. As a result of this event, a. assets increased by $500. b. equity increased by $500. c. liabilities decreased by $500. d. revenues increased by $500. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

138.

Pastorek Company purchased equipment for $1,800 cash. As a result of this event, a. equity decreased by $1,800. b. total assets increased by $1,800. c. total assets remained unchanged. d. total liabilities increased by $1,800. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

139.

Root Company provided consulting services and billed the client $2,500. As a result of this event, a. assets remained unchanged. b. assets increased by $2,500. c. equity increased by $2,500. d. Both assets and equity increased by $2,500. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 140.

2 - 23

The first step in posting involves a. entering in the appropriate ledger account the date, journal page, and debit amount shown in the journal. b. writing in the journal the account number to which the debit amount was posted. c. writing in the journal the account number to which the credit amount was posted. d. entering in the appropriate ledger account the date, journal page, and credit amount shown in the journal. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

141.

A chart of accounts usually starts with a. asset accounts. b. expense accounts. c. liability accounts. d. revenue accounts. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

142.

The procedure of transferring journal entries to the ledger accounts is called a. journalizing. b. analyzing. c. reporting. d. posting. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

143.

A number in the reference column in a general journal indicates a. that the entry has been posted to a particular account. b. the page number of the journal. c. the dollar amount of the transaction. d. the date of the transaction. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

144.

A chart of accounts for a business firm a. is a graph. b. indicates the amount of profit or loss for the period. c. lists the accounts and account numbers that identify their location in the ledger. d. shows the balance of each account in the general ledger. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

145.

Posting a. should be performed in account number order. b. accumulates the effects of journalized transactions in the individual accounts. c. involves transferring all debits and credits on a journal page to the trial balance. d. is accomplished by examining ledger accounts and seeing which ones need updating. Ans: b LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 24

Test Bank for Financial Accounting: IFRS Edition, 4e

146.

After journal entries are posted, the reference column a. of the general journal will be blank. b. of the general ledger will show journal page numbers. c. of the general journal will show "Dr" or "Cr". d. of the general ledger will show account numbers. Ans: b LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

147.

The explanation column of the general ledger a. is completed without exception. b. is nonexistent. c. is used infrequently. d. shows account titles. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

148.

A numbering system for a chart of accounts a. is prescribed by IFRS. b. is uniform for all businesses. c. usually starts with income statement accounts. d. usually starts with statement of financial position accounts. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

149.

The first step in designing a computerized accounting system is the creation of the a. general ledger. b. general journal. c. trial balance. d. chart of accounts. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

150.

Posting a. accumulates the effects of ledger entries and transfers them to the general journal. b. is done only for income statement activity; activity related to the statement of financial position does not require posting. c. is done only once per year. d. is done by posting all the debits and credits of one entry before moving on to the next entry. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

151.

The trial balance a. is a listing of all the accounts and their balances in the order the accounts appear on the statement of financial position. b. has as its primary purpose to prove (check) that all journal entries were made for the period. c. can be used to uncover errors in journalizing and posting. d. is used to prepare the statement of financial position while the general ledger is used to prepare the income statement. Ans: c LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 152.

2 - 25

Which of the following errors will prevent the trial balance from balancing? a. A transaction is not journalized. b. Transposition error related to the statement of financial position. c. A journal entry is posted twice. d. A journal entry to purchase $100 worth of equipment is posted as a $1,000 purchase. Ans: b LO4 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

153.

Which of the following statements is false concerning use of currency signs? a. Currency signs do not appear in journals or ledgers. b. Currency signs are generally only shown for the first item in a column and for the column total. c. Currency signs are not typically used in the trial balance. d. All of these answer choices are correct. Ans: c LO4 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

154.

Which of the following statement is true regarding the recording process? a. Because IFRS rely more on fair value and less on historical cost than U.S. GAAP the double-entry accounting system is not widely used by companies who use IFRS. b. Both IFRS and U.S. GAAP, use the same general rules of debits and credits and the steps in the recording process. c. A trial balance using IFRS is organised by first showing the accounts from the statement of financial position followed by accounts from the income statement; a trial balance using U.S. GAAP is organized using the opposite order. d. All of the choices are correct regarding the recording process. Ans: b LO4 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

155.

Under U.S. GAAP a. currency signs are generally used in the journal, ledger, trial balance, and financial statements. b. Share Capital-Ordinary is referred to as Retained Earnings. c. the statement of financial position is often called the statement of changes in financial position. d. the rules of debits and credits, and the steps in the recording process are the same as under IFRS. Ans: d LO4 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

156.

The steps in preparing a trial balance include all of the following except a. listing the account titles and their balances. b. totaling the debit and credit columns. c. proving the equality of the two columns. d. transferring journal amounts to ledger accounts. Ans: d LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 26 157.

Test Bank for Financial Accounting: IFRS Edition, 4e A trial balance may balance even when each of the following occurs except when a. a transaction is not journalized. b. a journal entry is posted twice. c. incorrect accounts are used in journalizing. d. a transposition error is made. Ans: d LO4 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

158.

A list of accounts and their balances at a given time is called a(n) a. journal. b. posting. c. trial balance. d. income statement. Ans: c LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

159.

If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates a. no errors have been made. b. no errors can be discovered. c. that all accounts reflect correct balances. d. the mathematical equality of the accounting equation. Ans: d LO4 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

160.

A trial balance is a listing of a. transactions in a journal. b. the chart of accounts. c. general ledger accounts and balances. d. the totals from the journal pages. Ans: c LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

161.

Customarily, a trial balance is prepared a. at the end of each day. b. after each journal entry is posted. c. at the end of an accounting period. d. only at the inception of the business. Ans: c LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

162.

A trial balance would only help in detecting which one of the following errors? a. A transaction that is not journalized. b. A journal entry that is posted twice. c. Offsetting errors are made in recording the transaction. d. A transposition error when transferring the debit side of a journal entry to the ledger. Ans: d LO4 BT: C Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process

2 - 27

Additional Multiple Choice Questions 163.

An account is an individual accounting record of increases and decreases in specific a. liabilities. b. assets. c. expenses. d. assets, liabilities, and equity items. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

164.

A debit is not the normal balance for which of the following type of account? a. Asset account b. Dividends account c. Expense account d. Share capital-ordinary account Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

165.

Which of the following rules is incorrect? a. Credits decrease the dividends account. b. Debits increase the share capital-ordinary account. c. Credits increase revenue accounts. d. Debits decrease liability accounts. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

166.

Which of the following statements is false? a. Revenues increase equity. b. Revenues have normal credit balances. c. Revenues are a positive factor in the computation of net income. d. Revenues are increased by debits. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

167.

Which of the following is the correct sequence of steps in the recording process? a. Posting, journalizing, analyzing b. Journalizing, analyzing, posting c. Analyzing, posting, journalizing d. Analyzing, journalizing, posting Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

168.

Which of the following is false about a journal? a. It discloses in one place the complete effects of a transaction. b. It provides a chronological record of transactions. c. It helps to prevent or locate errors because debit and credit amounts for each entry can be readily compared. d. It keeps in one place all the information about changes in specific account balances. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 28 169.

Test Bank for Financial Accounting: IFRS Edition, 4e Sternberg Company purchases equipment for $1,200 and supplies for $400 from Tran Co. for $1,600 cash. The entry for this transaction will include a a. debit to Equipment $1,200 and a debit to Supplies Expense $400 for Tran. b. credit to Cash for Tran. c. credit to Accounts Payable for Sternberg. d. debit to Equipment $1,200 and a debit to Supplies $400 for Sternberg. Ans: d LO2 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

170.

Wiser Inc. paid cash dividends of $300. The entry for this transaction will include a debit of $300 to a. Dividends. b. Supplies Expense. c. Shareholders' Expense. d. Salaries and Wages Expense. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

171.

On October 3, Josh Antonio, a carpenter, received a cash payment for services previously billed to a client. Josh paid his telephone bill, and he also bought supplies on credit. For the three transactions, at least one of the entries will include a a. credit to Retained Earnings. b. credit to Notes Payable. c. debit to Accounts Receivable. d. credit to Accounts Payable. Ans: d LO2 BT: C Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

172.

Posting of journal entries should be done in a. account number order. b. alphabetical order. c. chronological order. d. dollar amount order. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

173.

The chart of accounts is a a. list of accounts and their balances at a given time. b. device used to prove the mathematical accuracy of the ledger. c. listing of the accounts and the account numbers which identify their location in the ledger. d. required step in the recording process. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

174.

Which of the following is incorrect regarding a trial balance? a. It proves that the debits equal the credits after posting. b. It proves that the company has recorded all transactions. c. A trial balance uncovers errors in journalizing and posting. d. A trial balance is useful in the preparation of financial statements. Ans: b LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process 175.

A trial balance will not balance if a. a journal entry is posted twice. b. a wrong amount is used in journalizing. c. incorrect account titles are used in journalizing. d. a journal entry is only partially posted. Ans: d LO4 BT: C Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 29

Test Bank for Financial Accounting: IFRS Edition, 4e

2 - 30

BRIEF EXERCISES BE 176 At June 1, 2020, Estrada Industries had an accounts receivable balance of ₤12,000. During the month, the company performed credit services of ₤30,000 and collected accounts receivable of ₤32,000. What is the balance in accounts receivable at June 30, 2020? Solution 176 The balance at the end of the month is ₤10,000, calculated as follows: Beginning accounts receivable Add: Credit sales Less: Collections Ending accounts receivable

₤12,000 30,000 (32,000) ₤10,000

LO1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: RT AICPA BB: CT AICPA PC: PS

BE 177 J. B. Goode has the following transactions during April of the current year. Indicate (a) the effect on the accounting equation and (b) the debit-credit analysis. Apr. 1 Opens a law office, investing $20,000 in cash. 4 Pays rent in advance for 6 months, $10,800 cash. 16 Receives $8,000 from clients for services provided. 27 Pays secretary $3,000 salary.

For Instructor Use Only

The Recording Process

2 - 31

Solution 177

(a) A u g .

Effect on Accounting Equation

(b)

Debit-Credit Analysis

The asset Cash is increased; the equity account Share Capital-Ordinary is increased.

Debits increase assets: debit Cash $20,000. Credits increase equity: credit Share Capital-Ordinary $20,000.

The asset Prepaid Rent is increased; the asset Cash is decreased.

Debits increase assets: debit Prepaid Rent $10,800. Credits decrease assets: credit Cash $10,800.

The asset Cash is increased; the revenue Service Revenue is increased.

Debits increase assets: debit Cash $8,000. Credits increase revenues: credit Service Revenue $8,000.

The expense Salaries and Wages Expense is increased; the asset Cash is decreased.

Debits increase expenses: debit Salaries and Wages Expense $3,000. Credits decrease assets: credit Cash $3,000.

1 6

2 7

LO1 BT: C Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS

BE 178 For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance. Increase (+), Decrease (–). Debit_

_Credit_

Normal Balance

1. Salaries and Wages Expense.

________

2. Accounts Receivable.

________

3. Service Revenue.

________

4. Share Capital-Ordinary.

________

5. Dividends.

________

For Instructor Use Only

2 - 32

Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 178 1. Salaries and Wages Expense.

Debit_ __ +____

_Credit_ ___–____

Normal Balance __ Dr___

2. Accounts Receivable.

__ +____

___–____

__ Dr___

3. Service Revenue.

__ –____

___+____

__ Cr___

4. Share Capital-Ordinary.

__ –____

___+____

__ Cr___

5. Dividends.

__ +____

___–____

__ Dr___

LO1 BT: K Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 179 For each of the following transactions of Chen Inc., identify the account to be debited and the account to be credited. 1. Purchased 18-month insurance policy for cash. 2. Paid weekly payroll. 3. Purchased supplies on account. 4. Received utility bill to be paid at later date. Solution 179 Transaction 1 2 3 4

Debit Prepaid Insurance Salaries and Wages Expense Supplies Utilities Expense

Credit Cash Cash Accounts Payable Accounts Payable

LO2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 180 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction. 1. Kevin Diaz invested $40,000 cash in exchange for ordinary shares. 2. Hired an employee to be paid $400 per week, starting tomorrow. 3. Paid two years’ rent in advance, $7,200. 4. Paid the worker’s weekly salary. 5. Recorded revenue earned and received for the week, $1,500. Solution 180 1. Cash……......................................................................................... Share Capital-Ordinary...........................................................

40,000 40,000

2. No entry, not a transaction. 3. Prepaid Rent................................................................................... Cash....................................................................................... For Instructor Use Only

7,200 7,200

The Recording Process Solution 180

2 - 33

(cont.)

4. Salaries and Wages Expense......................................................... Cash.......................................................................................

400

5. Cash………..................................................................................... Service Revenue....................................................................

1,500

400 1,500

LO2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 181 Identify the impact on the accounting equation of the following transactions. 1. Purchased 36-month insurance policy for cash. 2. Purchased supplies on account. 3. Received utility bill to be paid at later date. 4. Paid utility bill previously accrued. Solution 181 1. 2. 3. 4.

Net effect is no change: Increases assets and decreases assets. Increases assets and increases liabilities. Increases liabilities and decreases equity. Decreases assets and decreases liabilities

LO2 BT: K Difficulty: Easy TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 182 Journalize the following transactions for Mercado Company for June 2020, the company’s first month of operations. You may omit explanations for the transactions. 1. Purchased equipment on account for $6,000. 2. Billed customers $5,000 for services performed. 3. Made payment of $1,500 on account for equipment purchased earlier in the month. 4. Collected $2,400 on customer accounts. Solution 182 1. Equipment....................................................................................... Accounts Payable...................................................................

6,000

2. Accounts Receivable....................................................................... Service Revenue....................................................................

5,000

3. Accounts Payable............................................................................ Cash.......................................................................................

1,500

4. Cash................................................................................................ Accounts Receivable..............................................................

2,400

LO2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

6,000 5,000 1,500 2,400

Test Bank for Financial Accounting: IFRS Edition, 4e

2 - 34 BE 183

Use the information in BE 182 to answer the following questions. 1. What is the balance in Accounts Payable at June 30, 2020? 2. What is the balance in Accounts Receivable at June 30, 2020? Solution 183 1. Accounts Payable at June 30, 2020: Beginning accounts payable Purchases on account Payments on account Ending accounts payable

$ 0 6,000 (1,500) $4,500

2. Accounts Receivable at June 30, 2020: Beginning accounts receivable Billed to customers Collections from customers Ending accounts receivable

$ 0 5,000 (2,400) $2,600

LO3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS

BE 184 The transactions of the Buy It Now Store are recorded in the general journal below. You are to post the journal entries to T-accounts. General Journal _____________________________________________________________________________ Date Account Titles Debit Credit _____________________________________________________________________________ 2020 Aug. 5 Accounts Receivable 2,800 Service Revenue 2,800 10

Cash

5,000 Service Revenue

19 25

5,000

Rent Expense Cash

1,000

Cash

1,400

1,000

Accounts Receivable

For Instructor Use Only

1,400

The Recording Process BE 184

2 - 35

(cont.) General Ledger Cash

Accounts Receivable

Service Revenue

Rent Expense

Solution 184 General Ledger Cash 8/10 8/25

5,000 1,400

8/31 Bal.

5,400

Accounts Receivable 8/19

1,000

8/5

2,800

8/31 Bal.

1,400

Service Revenue 8/5 8/10 8/31 Bal.

8/25

1,400

Rent Expense 2,800 5,000 7,800

8/19

1,000

8/31 Bal.

1,000

LO3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 185 Prepare a trial balance from the ledger accounts of Attica Company as of January 31, 2020. Accounts Payable Accounts Receivable Cash Share Capital-Ordinary Dividends

$ 500 2,000 3,000 2,200 1,000

Rent Expense Service Revenue Supplies Salaries and Wages Expense

For Instructor Use Only

$ 500 5,000 200 1,000

Test Bank for Financial Accounting: IFRS Edition, 4e

2 - 36

Solution 185 ATTICA COMPANY Trial Balance January 31, 2020 Cash Accounts Receivable Supplies Accounts Payable Share Capital-Ordinary Dividends Service Revenue Rent Expense Salaries and Wages Expense

Debit $3,000 2,000 200

Credit

$ 500 2,200 1,000 5,000 500 1,000 $7,700

$7,700

LO4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

BE 186 Prepare a corrected trial balance for Luzon Company. All accounts should have a normal balance. LUZON COMPANY Trial Balance March 31, 2020 Debit € 40,000

Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Unearned Service Revenue Notes Payable Share Capital-Ordinary Dividends Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense

Credit €30,000

2,500 60,000 25,000 10,000 20,000 54,000 1,500 55,000 15,000 5,000 10,000 €142,500

For Instructor Use Only

€185,500

The Recording Process Solution 186 LUZON COMPANY Trial Balance March 31, 2020 Debit € 40,000 30,000 2,500 60,000

Credit

€ 25,000 10,000 20,000 54,000 1,500 55,000 15,000 5,000 10,000 €164,000

LO4 BT: AP Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS

For Instructor Use Only

€164,000

2 - 37

2 - 38

Test Bank for Financial Accounting: IFRS Edition, 4e

EXERCISES Ex. 187 The chart of accounts used by Ming Copy Company is listed below. You are to indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate boxes. CHART OF ACCOUNTS 101 Cash 209 Unearned Service Revenue 112 Accounts Receivable 311 Share Capital-Ordinary 126 Supplies 332 Dividends 157 Equipment 400 Service Revenue 200 Note Payable 610 Advertising Expense 201 Accounts Payable 729 Rent Expense ——————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s) debited credited 1. The company issues ordinary shares in exchange for ¥90,000,000 cash. ——————————————————————————————————————————— 2. Purchased three photocopy machines for ¥200,000,000, paying ¥50,000,000 cash and signing a 5-year, 10% note for the remainder. ——————————————————————————————————————————— 3. Purchased ¥5,000,000 supplies on credit. ——————————————————————————————————————————— 4. Cash photocopy revenue amounted to ¥7,000,000. ——————————————————————————————————————————— 5. Paid ¥500,000 cash for radio advertising. ——————————————————————————————————————————— 6. Paid ¥800,000 on account for supplies purchased in transaction 3. ——————————————————————————————————————————— 7. The company paid dividends of ¥1,500,000. ——————————————————————————————————————————— 8. Paid ¥1,200,000 cash for rent for the current month. ——————————————————————————————————————————— 9. Received ¥2,000,000 cash advance from a customer for future copying. ——————————————————————————————————————————— 10. Billed a customer for ¥450,000 for photocopy work done. ———————————————————————————————————————————

For Instructor Use Only

The Recording Process

2 - 39

Solution 187 ——————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s) debited credited 1. The company issues ordinary shares in exchange for ¥90,000,000 cash. 101 311 ——————————————————————————————————————————— 2. Purchased three photocopy machines for ¥200,000,000, paying ¥50,000,000 cash and signing a 5-year, 10% note for the remainder. 157 101,200 ——————————————————————————————————————————— 3. Purchased ¥5,000,000 supplies on credit. 126 201 ——————————————————————————————————————————— 4. Cash photocopy revenue amounted to ¥7,000,000. 101 400 ——————————————————————————————————————————— 5. Paid ¥500,000 cash for radio advertising. 610 101 ——————————————————————————————————————————— 6. Paid ¥800,000 on account for supplies purchased in transaction 3. 201 101 ——————————————————————————————————————————— 7. The company paid dividends of ¥1,500,000. 332 101 ——————————————————————————————————————————— 8. Paid ¥1,200,000 cash for rent for the current month. 729 101 ——————————————————————————————————————————— 9. Received ¥2,000,000 cash advance from a customer for future copying. 101 209 ——————————————————————————————————————————— 10. Billed a customer for ¥450,000 for photocopy work done. 112 400 ——————————————————————————————————————————— LO1 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

Test Bank for Financial Accounting: IFRS Edition, 4e

2 - 40 Ex. 188

Under a double-entry system, show how each item is entered in the ledger by using debit or credit to indicate the increase or decrease in the affected account. Debit or Credit 1.

An increase in Salaries and Wages Expense.

___________________

A decrease in Accounts Payable.

___________________

An increase in Prepaid Insurance.

___________________

An increase in Share Capital-Ordinary.

___________________

A decrease in Supplies.

___________________

An increase in Dividends.

___________________

An increase in Service Revenue.

___________________

A decrease in Accounts Receivable.

___________________

An increase in Rent Expense.

___________________

10.

A decrease in Equipment.

___________________

Solution 188 1.

An increase in Salaries and Wages Expense.

Debit________

A decrease in Accounts Payable.

Debit________

An increase in Prepaid Insurance.

Debit________

An increase in Share Capital-Ordinary.

Credit_______

A decrease in Supplies.

Credit_______

An increase in Dividends.

Debit________

An increase in Service Revenue.

Credit_______

A decrease in Accounts Receivable.

Credit_______

An increase in Rent Expense.

Debit________

10.

A decrease in Equipment.

Credit_______

LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process

2 - 41

Ex. 189 Selected transactions for Sweet Home, a property management company, in its first month of business, are as follows. Jan. 2 Issued ordinary shares to investors for $15,000 cash. 3 Purchased used car for $4,000 cash for use in business. 9 Purchased supplies on account for $500. 11 Billed customers $1,800 for services performed. 16 Paid $200 cash for advertising. 20 Received $700 cash from customers billed on January 11. 23 Paid creditor $300 cash on balance owed. 28 Paid dividends of $2,000. Instructions For each transaction indicate the following. (a) The basic type of account debited and credited (asset (A), liability (L), equity (E)). (b) The specific account debited and credited (cash, rent expense, service revenue, etc.). (c) Whether the specific account is increased (incr.) or decreased (decr). (d) The normal balance of the specific account. Use the following format, in which the January 2 transaction is given as an example. Account Debited (a) (b) (c) (d) Basic Specific Normal Date Type Account Effect Balance Jan. 2 A Cash Incr. Debit

Account Credited (a) (b) (c) (d) Basic Specific Normal Type Account Effect Balance E Share Incr. Credit Cap.–Ord.

For Instructor Use Only

Test Bank for Financial Accounting: IFRS Edition, 4e

2 - 42

Solution 189 Account Debited (a) (b) (c) (d) Basic Specific Normal Date Type Account Effect Balance Jan. 2 A Cash Incr. Debit 3 9

A A

11 A 16 E

20 A 23 L

28 E

(a) Basic Type E

Equip. Supplies

Incr. Incr.

Debit Debit

A L

Accts Rec.

Incr.

Debit

Advert. Expense

Incr.

Debit

Incr.

Debit

Decr.

Dividends Incr.

Cash Accts. Pay.

Account Credited (b) (c) (d) Specific Normal Account Effect Balance Share Incr. Credit Cap.–Ord. Cash Decr. Debit Accts. Pay. Incr. Credit Service Revenue Incr. Credit Decr.

Debit

Cash Accts. Rec.

Decr.

Debit

Credit

Cash

Decr.

Debit

Cash

Decr.

Debit

LO1 BT: C Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA PC: PS

Ex. 190 For the accounts listed below, indicate if the normal balance of the account is a debit or credit. Normal Balance Debit or Credit

Accounts 1.

Service Revenue

__________________

Rent Expense

__________________

Accounts Receivable

__________________

Accounts Payable

__________________

Retained Earnings

__________________

Supplies

__________________

Insurance Expense

__________________

Dividends

__________________

Equipment

__________________

10.

Notes Payable

__________________ For Instructor Use Only

The Recording Process

2 - 43

Solution 190 Normal Balance Debit or Credit

Accounts 1.

Service Revenue

Credit

Rent Expense

Debit

Accounts Receivable

Debit

Accounts Payable

Credit

Retained Earnings

Credit

Supplies

Debit

Insurance Expense

Debit

Dividends

Debit

Equipment

Debit

10.

Notes Payable

Credit

LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 191 For each of the following accounts, indicate the effects of (a) a debit and (b) the normal account balance. 1. Notes Payable 2. Prepaid Insurance 3. Salaries and Wages Expense 4. Service Revenue 5. Equipment 6. Share Capital-Ordinary Solution 191 1. 2. 3. 4. 5. 6.

Notes Payable Prepaid Insurance Salaries and Wages Expense Service Revenue Equipment Share Capital-Ordinary

Debit Effect Decrease Increase Increase Decrease Increase Decrease

Normal Balance Credit Debit Debit Credit Debit Credit

LO1 BT: C Difficulty: Easy TOT: 7 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

Test Bank for Financial Accounting: IFRS Edition, 4e

2 - 44 Ex. 192

During an accounting period, a business has numerous transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. _____ _____ _____ _____ _____

(1) (2) (3) (4) (5)

Advertising Expense Service Revenue Accounts Payable Accounts Receivable Share Capital-Ordinary

______ (6) Dividends ______ (7) Cash ______ (8) Salaries and Wages Expense ______ (9) Notes Payable ______(10) Insurance Expense

Solution 192 (1) (2) (3) (4)

(a) (b) (c) (c)

(5) (6) (7) (8)

(b) (a) (c) (a)

(9) (10)

LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 193 Eight transactions are recorded in the following T-accounts: CASH (1) (7)

35,000 22,500

ACCOUNTS RECEIVABLE

(2) (3) (4) (6) (8)

3,500 1,950 2,225 8,000 4,500

(5)

SUPPLIES (3)

(2)

SHARE CAPITAL-ORDINARY

8,000

(2)

13,500

35,000

(5) DIVIDENDS

10,000

(8)

SALARIES AND WAGES EXPENSE (4)

22,500

SERVICE REVENUE

ACCOUNTS PAYABLE (6)

(7)

EQUIPMENT

1,950

(1)

27,500

2,225

For Instructor Use Only

4,500

27,500

The Recording Process Ex. 193

2 - 45

(cont.)

Indicate for each debit and each credit: (a) whether an asset, liability, equity, revenue, or expense account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be presented in the following chart form: Transaction Account Debited Account Credited No. Type Effect Type Effect ——————————————————————————————————————————— (1) (Example) Asset + Equity + ——————————————————————————————————————————— (2) ——————————————————————————————————————————— (3) ——————————————————————————————————————————— (4) ——————————————————————————————————————————— (5) ——————————————————————————————————————————— (6) ——————————————————————————————————————————— (7) ——————————————————————————————————————————— (8) ——————————————————————————————————————————— Solution 193 Transaction Account Debited Account Credited No. Type Effect Type Effect ——————————————————————————————————————————— (1) (Example) Asset + Equity + ——————————————————————————————————————————— (2) Asset + Asset – Liability + ——————————————————————————————————————————— (3) Asset + Asset – ——————————————————————————————————————————— (4) Expense + Asset – ——————————————————————————————————————————— (5) Asset + Revenue + ——————————————————————————————————————————— (6) Liability – Asset – ——————————————————————————————————————————— (7) Asset + Asset – ——————————————————————————————————————————— (8) Equity – Asset – LO1 BT: C Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 46

Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 194 For each of the following accounts indicate (a) the type of account (Asset, Liability, Equity, Revenue, Expense), (b) the debit and credit effects, and (c) the normal account balance. Example 0. Cash

a. Asset account b. Debit increases, credit decreases c. Normal balance - debit Accounts

1. 2. 3. 4.

Accounts Payable Accounts Receivable Share Capital-Ordinary Dividends

5. 6. 7. 8.

Service Revenue Insurance Expense Notes Payable Equipment

Solution 194 1. a. Liability account. b. Debit decreases, credit increases. c. Normal balance - credit.

5. a. Revenue account. b. Debit decreases, credit increases. c. Normal balance - credit.

2. a. Asset account. b. Debit increases, credit decreases. c. Normal balance - debit.

6. a. Expense account. b. Debit increases, credit decreases. c. Normal balance - debit.

3. a. Equity account. b. Debit decreases, credit increases. c. Normal balance - credit.

7. a. Liability account. b. Debit decreases, credit increases. c. Normal balance - credit.

4. a. Equity account. b. Debit increases, credit decreases. c. Normal balance - debit.

8. a. Asset account. b. Debit increases, credit decreases. c. Normal balance - debit.

LO1 BT: C Difficulty: Easy TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 195 For each transaction given, enter in the tabulation given below a "D" for debit and a "C" for credit to reflect the increases and decreases of the assets, liabilities, and equity accounts. In some cases there may be a "D" and a "C" in the same box. Transactions: 1. Shareholders invest cash in the business in exchange for ordinary shares. 2. Pays insurance in advance for six months. 3. Pays secretary's salary. 4. Purchases supplies on account. 5. Pays electricity bill. 6. Borrows money from local bank. 7. Makes payment on account. 8. Receives cash due from customers.

For Instructor Use Only

The Recording Process Ex. 195 9. 10.

2 - 47

(cont.)

Provides services on account. The company pays dividends.

Transaction # 5 6

1 D

2 D,C

3 C

4 D C

Transaction # 5 6 C D C

7 C D

8 D,C

9 D

10 C

Assets Liabilities Share Capital-Ordinary Dividends Revenues Expenses

Solution 195

Assets Liabilities Share Capital-Ordinary Dividends Revenues Expenses

C D C D

LO1 BT: C Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 196 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. The company issues ordinary shares in exchange for ₤25,000 cash. 2. Purchased ₤400 of supplies on credit. 3. Purchased equipment for ₤10,000, paying ₤3,000 in cash and signed a 30-day, ₤7,000, note payable. 4. Real estate commissions billed to clients amount to ₤4,000. 5. Paid ₤700 in cash for the current month's rent. 6. Paid ₤200 cash on account for supplies purchased in transaction 2. 7. Received a bill for ₤600 for advertising for the current month. 8. Paid ₤2,200 cash for salaries. 9. The company paid dividends of ₤1,200. 10. Received a check for ₤3,000 from a client in payment on account for commissions billed in transaction 4.

For Instructor Use Only

Test Bank for Financial Accounting: IFRS Edition, 4e

2 - 48

Solution 196 1. 2. 3.

4. 5. 6. 7. 8. 9. 10.

Cash.......................................................................................... Share Capital-Ordinary.....................................................

25,000

Supplies..................................................................................... Accounts Payable.............................................................

400

Equipment................................................................................. Cash................................................................................. Notes Payable..................................................................

10,000

Accounts Receivable................................................................. Service Revenue..............................................................

4,000

Rent Expense............................................................................ Cash.................................................................................

700

Accounts Payable...................................................................... Cash.................................................................................

200

Advertising Expense.................................................................. Accounts Payable.............................................................

600

Salaries and Wages Expense.................................................... Cash.................................................................................

2,200

Dividends................................................................................... Cash.................................................................................

1,200

Cash.......................................................................................... Accounts Receivable........................................................

3,000

25,000 400 3,000 7,000 4,000 700 200 600 2,200 1,200

LO2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 197 Identify the accounts to be debited and credited for each of the following transactions. 1. The owners invested $10,000 cash in the business in exchange for ordinary shares. 2. Purchased supplies on account for $1,000. 3. Billed customers $2,000 for services performed. 4. Paid salaries of $900. Solution 197 1. 2. 3. 4.

Account Debited Cash Supplies Accounts Receivable Salaries and Wages Expense

Account Credited Share Capital-Ordinary Accounts Payable Service Revenue Cash For Instructor Use Only

3,000

The Recording Process LO2 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

2 - 49

2 - 50

Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 198 Transactions for Tom Petty Company for the month of October are presented below. Journalize each transaction and identify each transaction by number. You may omit journal explanations. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Issued ordinary shares in exchange for $50,000 cash. Purchased land costing $28,000 for cash. Purchased equipment costing $20,000 for $3,000 cash and the remainder on account. Purchased supplies on account for $800. Paid $1,000 for a one-year insurance policy. Received $3,000 cash for services performed. Received $4,000 for services previously performed on account. Paid salaries to employees for $2,500. Paid dividends of $1,000.

Solution 198 1. Cash................................................................................................ Share Capital-Ordinary...........................................................

50,000

2. Land................................................................................................ Cash.......................................................................................

28,000

3. Equipment....................................................................................... Cash....................................................................................... Accounts Payable...................................................................

20,000

4. Supplies .......................................................................................... Accounts Payable ..................................................................

800

5. Prepaid Insurance........................................................................... Cash.......................................................................................

1,000

6. Cash................................................................................................ Service Revenue....................................................................

3,000

7. Cash................................................................................................ Accounts Receivable..............................................................

4,000

8. Salaries and Wages Expense......................................................... Cash.......................................................................................

2,500

9. Dividends........................................................................................ Cash.......................................................................................

1,000

50,000 28,000

LO2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

3,000 17,000 800 1,000 3,000 4,000 2,500 1,000

The Recording Process

2 - 51

Ex. 199 Match the basic step in the recording process described by each of the following statements. A. Analyze each transaction B. Enter each transaction in a journal C. Transfer journal information to ledger accounts ____ 1. This step is called posting. ____ 2. Business documents are examined to determine the effects of transactions on the accounts. ____ 3. This step is called journalizing. Solution 199 1. C

2. A

3. B

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 200 Prepare journal entries for each of the following transactions. 1. 2. 3. 4.

Performed services for customers on account €6,000. Purchased €20,000 of equipment on account. Received €3,000 from customers in transaction 1. The company paid dividends of €1,000.

Solution 200 1. Accounts Receivable............................................................................. Service Revenue..........................................................................

6,000

2. Equipment............................................................................................. Accounts Payable.........................................................................

20,000

3. Cash ..................................................................................................... Accounts Receivable....................................................................

3,000

4. Dividends.............................................................................................. Cash.............................................................................................

1,000

LO2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

6,000 20,000 3,000 1,000

2 - 52

Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 201 Glynn Company is a newly organized business. The list of accounts to be opened in the general ledger is as follows: Accounts Payable Prepaid Insurance Accounts Receivable Prepaid Rent Accumulated Depreciation Rent Expense Cash Salaries and Wages Expense Depreciation Expense Salaries and Wages Payable Equipment Service Revenue Insurance Expense Supplies Share Capital-Ordinary Supplies Expense Dividends Instructions Organize the accounts into the order in which they should appear in the ledger of Glynn Company and assign account numbers. Use the following system to assign account numbers. 1—199 200—299 300—399 400—499 500—599

Assets Liabilities Equity Revenues Expenses

Solution 201 There are several possible correct account number assignments. The following is one of the correct solutions. 101- Cash 112- Accounts Receivable 126- Supplies 130- Prepaid Insurance 140- Prepaid Rent 157- Equipment 158- Accumulated Depreciation 201- Accounts Payable 212- Salaries and Wages Payable 311- Share Capital-Ordinary 332- Dividends 400- Service Revenue 510- Salaries and Wages Expense 520- Supplies Expense 530- Rent Expense 540- Insurance Expense 550- Depreciation Expense LO3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process

2 - 53

Ex. 202 The transactions of Medina Information Service are recorded in the general journal below. You are to post the journal entries to the accounts in the general ledger. After all entries have been posted, you are to prepare a trial balance on the form provided. General Journal J1 ——————————————————————————————————————————— Date Account Titles and Explanation Ref. Debit Credit ——————————————————————————————————————————— 2020 Sept. 1 Cash 35,000 Share Capital-Ordinary 35,000 (Issued ordinary shares for cash) 4

Equipment Cash Notes Payable (Paid cash and issued 2-year, 9%, note for equipment)

30,000

Rent Expense Cash (Paid September rent)

1,000

Prepaid Insurance Cash (Paid one-year liability insurance) Cash

10,000 20,000

1,000 400 400 2,500

Service Revenue (Received cash for delivery services) 20

2,500

Salaries and Wages Expense Cash (Paid salaries for current period)

500

Utilities Expense Accounts Payable (Received a bill for September utilities)

600

500

600

Dividends Cash (Paid dividends)

1,800

Accounts Receivable Service Revenue (Billed customer for delivery service)

2,000

For Instructor Use Only

1,800

2,000

2 - 54

Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 202

(cont.) General Ledger

Cash Account No. 101 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Accounts Receivable Account No. 112 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Prepaid Insurance Account No. 130 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Equipment Account No. 155 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Accounts Payable Account No. 201 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

For Instructor Use Only

The Recording Process Ex. 202

2 - 55

(cont.)

Notes Payable Account No. 205 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Share Capital-Ordinary Account No. 311 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Dividends Account No. 332 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Service Revenue Account No. 400 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Rent Expense Account No. 719 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

For Instructor Use Only

2 - 56

Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 202

(cont.)

Salaries and Wages Expense Account No. 726 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

MEDINA INFORMATION SERVICE Trial Balance September 30, 2020 ——————————————————————————————————————————— Accounts Debit Credit ———————————————————————————————————————————

———————————————————————————————————————————

For Instructor Use Only

The Recording Process

2 - 57

Solution 202 General Journal J1 ——————————————————————————————————————————— Date Account Titles and Explanation Ref. Debit Credit ——————————————————————————————————————————— 2020 Sept. 1 Cash 101 35,000 Share Capital-Ordinary 311 35,000 (Issued ordinary shares for cash) 4

Equipment 155 Cash 101 Notes Payable 205 (Paid cash and issued 2-year, 9%, note for equipment)

30,000

Rent Expense Cash (Paid September rent)

719 101

1,000

Prepaid Insurance Cash (Paid one-year liability insurance)

130 101

400

Cash

101 400

2,500

Salaries and Wages Expense Cash (Paid salaries for current period)

726 101

500

Utilities Expense Accounts Payable (Received a bill for September utilities)

735 201

600

Dividends Cash (Paid dividends)

332 101

1,800

Accounts Receivable Service Revenue (Billed customer for delivery service)

112 400

2,000

Service Revenue (Received cash for delivery services) 20

For Instructor Use Only

10,000 20,000

1,000

400

2,500

500

600

1,800

2,000

2 - 58

Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 202

(cont.) General Ledger

Cash Account No. 101 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 1 J1 35,000 35,000 4 J1 10,000 25,000 8 J1 1,000 24,000 15 J1 400 23,600 18 J1 2,500 26,100 20 J1 500 25,600 30 J1 1,800 23,800 Accounts Receivable Account No. 112 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 30 J1 2,000 2,000 Prepaid Insurance Account No. 130 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 15 J1 400 400 Equipment Account No. 155 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 4 J1 30,000 30,000 Accounts Payable Account No. 201 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 25 J1 600 600

For Instructor Use Only

The Recording Process Solution 202

2 - 59

(cont.)

Notes Payable Account No. 205 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 4 J1 20,000 20,000 Share Capital-Ordinary Account No. 311 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 1 J1 35,000 35,000

Dividends Account No. 332 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 30 J1 1,800 1,800 Service Revenue Account No. 400 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 18 J1 2,500 2,500 30 J1 2,000 4,500 Rent Expense Account No. 719 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 8 J1 1,000 1,000 Salaries and Wages Expense Account No. 726 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 20 J1 500 500

For Instructor Use Only

2 - 60

Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 202

(cont.)

Utilities Expense Account No. 735 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 25 J1 600 600 MEDINA INFORMATION SERVICE Trial Balance September 30, 2020 ——————————————————————————————————————————— Accounts Debit Credit ——————————————————————————————————————————— Cash $ 23,800 Accounts Receivable 2,000 Prepaid Insurance 400 Equipment 30,000 Accounts Payable $ 600 Notes Payable 20,000 Share Capital-Ordinary 35,000 Dividends 1,800 Service Revenue 4,500 Rent Expense 1,000 Salaries and Wages Expense 500 Utilities Expense 600 Totals $60,100 $60,100 _____________________________________________________________________________ LO: 3, 4,

BT: AP Difficulty: Hard TOT: 25 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 203 The bookkeeper for Dole Yard Service made a number of errors in journalizing and posting as described below: 1. A debit posting to accounts receivable for $500 was omitted. 2. A payment of accounts payable for $600 was credited to cash and debited to accounts receivable. 3. A credit to accounts receivable for $650 was posted as $65. 4. A cash purchase of equipment for $561 was journalized as a debit to equipment and a credit to notes payable. The credit posting was made for $516. 5. A debit posting of $300 for the purchase of supplies was credited to supplies. 6. A debit to insurance expense for $591 was posted as $519. 7. A debit posting for salaries expense for $900 was made twice. 8. A cash purchase of supplies for $700 was journalized and posted as a debit to supplies for $70 and a credit to cash for $70. For Instructor Use Only

The Recording Process

2 - 61

Instructions For each error, indicate (a) whether the trial balance will balance; if the trial balance will not balance, indicate (b) the amount of the difference, and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error (1) is given as an example. (A) (B) (C) Error In Balance Difference Larger Column 1 No $500 Credit

Solution 203 (A) In Balance No Yes No No No No No Yes

Error 1 2 3 4 5 6 7 8

(B) Difference $500 — 585 45 600 72 900 —

LO3 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS

Ex. 204 Post the following transactions to T-accounts and determine each account's ending balance. 1. Supplies.......................................................................................... Accounts Payable...................................................................

2,000

2. Accounts Receivable....................................................................... Service Revenue....................................................................

4,000

3. Cash ............................................................................................... Accounts Receivable..............................................................

3,500

4. Accounts Payable............................................................................ Cash.......................................................................................

1,000

2,000 4,000 3,500 1,000

Solution 204 Cash 3.

3,500

Bal.

2,500

Accounts Payable 4.

1,000

For Instructor Use Only

1,000

2,000

Bal.

1,000

Test Bank for Financial Accounting: IFRS Edition, 4e

2 - 62

Solution 204

(cont.) Accounts Receivable

4,000

Bal.

500

Service Revenue 3,500

4,000

Bal.

4,000

Supplies 1.

2,000

Bal.

2,000

LO3 BT: AP Difficulty: Easy TOT: 6 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 205 The trial balance of Drysdale Company shown below does not balance. DRYSDALE COMPANY Trial Balance June 30, 2020 ——————————————————————————————————————————— Debit Credit Cash................................................................................................ ₤ 2,600 Accounts Receivable....................................................................... 7,600 Supplies.......................................................................................... 600 Equipment....................................................................................... 8,300 Accounts Payable............................................................................ ₤ 9,766 Share Capital-Ordinary.................................................................... 1,952 Dividends........................................................................................ 1,500 Service Revenue............................................................................. 15,200 Salaries and Wages Expense......................................................... 3,800 Maintenance and Repairs Expense................................................. 1,600 Totals...................................................................................... ₤26,000 ₤26,918 An examination of the ledger and journal reveals the following errors: 1. Each of the above listed accounts has a normal balance per the general ledger. 2. Cash of ₤170 received from a customer on account was debited to Cash ₤710 and credited to Accounts Receivable ₤710. 3. A dividend of ₤300 was posted as a credit to Dividends, ₤300 and credit to Cash ₤300. 4. A debit of ₤120 was not posted to Salaries and Wages Expense. 5. The purchase of equipment on account for ₤700 was recorded as a debit to Maintenance and Repairs Expense and a credit to Accounts Payable for ₤700. 6. Services were performed on account for a customer, ₤310, for which Accounts Receivable was debited ₤310 and Service Revenue was credited ₤31. 7. A payment on account for ₤225 was credited to Cash for ₤225 and credited to Accounts Payable for ₤252. For Instructor Use Only

The Recording Process

2 - 63

Instructions Prepare a correct trial balance. Solution 205 DRYSDALE COMPANY Trial Balance June 30, 2020 ——————————————————————————————————————————— Debit Credit Cash [2,600 – 540 (2)]..................................................................... ₤ 2,060 Accounts Receivable [7,600 + 540 (2)]............................................ 8,140 Supplies.......................................................................................... 600 Equipment [8,300 + 700 (5)]............................................................ 9,000 Accounts Payable [9,766 – 477 (7)]................................................. ₤9,289 Share Capital-Ordinary.................................................................... 1,952 Dividends [1,500 + 300 + 300 (3)]................................................... 2,100 Service Revenue [15,200 + 279 (6)]................................................ 15,479 Salaries and Wages Expense [3,800 + 120 (4)].............................. 3,920 Maintenance and Repairs Expense [1,600 – 700 (5)]...................... 900 Totals....................................................................................... ₤26,720 ₤26,720

LO4 BT: AN Difficulty: Hard TOT: 25 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS

Ex. 206 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others. 1. A payment of $800 to a creditor was recorded by a debit to Accounts Payable of $80 and a credit to Cash of $800. 2. A $480 payment for a printer was recorded by a debit to Equipment of $48 and a credit to Cash for $48. 3. An account receivable in the amount of $1,500 was collected in full. The collection was recorded by a debit to Cash for $1,500 and a debit to Accounts Payable for $1,500. 4. An account payable was paid by issuing a check for $800. The payment was recorded by debiting Accounts Payable $800 and crediting Accounts Receivable $800. Solution 206 1. The trial balance totals will be unequal. The credit column will be $720 larger than the debit column. 2. The trial balance totals will be misstated but not unequal. For Instructor Use Only

Test Bank for Financial Accounting: IFRS Edition, 4e

2 - 64

Solution 206

(cont.)

3. The trial balance totals will be unequal. The debit column will be $3,000 larger than the credit column. 4. The trial balance totals will be misstated but not unequal. LO4 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS

Ex. 207 M. Caria and Associates is a financial planning service. The account balances at December 31, 2020 are shown by the following alphabetical list: Accounts Payable Accounts Receivable Buildings Cash Equipment Land Notes Payable Notes Receivable Share Capital-Ordinary Supplies

13,000 19,000 120,000 26,500 71,000 42,000 95,000 8,100 179,700 1,100

Instructions Prepare a trial balance with the accounts arranged in proper order.

For Instructor Use Only

The Recording Process

2 - 65

Solution 207 M. CARIA AND ASSOCIATES Trial Balance December 31, 2020 Cash................................................................................................ Accounts Receivable....................................................................... Supplies.......................................................................................... Notes Receivable............................................................................ Equipment....................................................................................... Buildings.......................................................................................... Land................................................................................................ Accounts Payable............................................................................ Notes Payable................................................................................. Share Capital-Ordinary.................................................................... Totals......................................................................................

Debit $ 26,500 19,000 1,100 8,100 71,000 120,000 42,000

Credit

$ $287,700

13,000 95,000 179,700 $287,700

LO4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 208 The ledger accounts of the Redlands Place Gym at June 30, 2020 are shown below: Accounts Payable Accounts Receivable Buildings Cash Dividends Equipment Notes Payable Share Capital-Ordinary Supplies

$ 14,100 1,050 81,400 20,000 10,500 12,900 49,000 63,100 350

Instructions Prepare a trial balance with the ledger accounts arranged in the proper order. Include the appropriate heading.

For Instructor Use Only

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Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 208 REDLANDS PLACE GYM Trial Balance June 30, 2020 Cash................................................................................................ Accounts Receivable....................................................................... Supplies.......................................................................................... Equipment....................................................................................... Buildings.......................................................................................... Accounts Payable............................................................................ Notes Payable................................................................................. Share Capital-Ordinary.................................................................... Dividends........................................................................................ Totals......................................................................................

Debit $ 20,000 1,050 350 12,900 81,400

$ 14,100 49,000 63,100 10,500 $126,200

LO4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex. 209 The ledger account balances for Perkins Company are listed below. Accounts Payable Accounts Receivable Cash Share Capital-Ordinary Dividends Service Revenue Salaries and Wages Expense Unearned Service Revenue Utilities Expense

€ 10,000 7,000 13,000 9,000 4,000 40,000 25,000 2,000 12,000

Instructions Prepare a trial balance in proper form for Perkins at December 31, 2020.

For Instructor Use Only

Credit

$126,200

The Recording Process

2 - 67

Solution 209 PERKINS COMPANY Trial Balance December 31, 2020 Debit €13,000 7,000

Cash Accounts Receivable Accounts Payable Unearned Service Revenue Share Capital-Ordinary Dividends Service Revenue Salaries and Wages Expense Utilities Expense

Credit € 10,000 2,000 9,000

4,000 40,000 25,000 12,000 €61,000

€61,000

LO4 BT: AP Difficulty: Medium TOT: 8 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

Ex 210 The bookkeeper for Stan Lei Auto Repair made a number of errors in journalizing and posting, as described below. 1. A credit posting of $500 to Accounts Receivable was omitted. 2. A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense. 3. A collection from a customer of $100 in payment of its account was journalized and posted as a debit to Cash $100 and a credit to Service Revenue $100. 4. A credit posting of $300 to Property Taxes Payable was made twice. 5. A cash purchase of supplies for $250 was journalized and posted as a debit to Supplies $25 and a credit to Cash $25. 6. A debit of $475 to Advertising Expense was posted as $457 Instructions For each error: (a) Indicate whether the trial balance will balance. (b) If the trial balance will not balance, indicate the amount of the difference. (c) Indicate the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error (1) is given as an example. Error (1)

(a) In Balance No

(b) Difference $500

For Instructor Use Only

2 - 68

Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 210

Error

(a) In Balance

(b) Difference

1. 2. 3. 4. 5. 6.

No Yes Yes No Yes No

$500 — — 300 — 18

Debit — — Credit — Credit

LO4 BT: AN Difficulty: Hard TOT: 8 min. AACSB: Analytic AICPA BB: CT AICPA PC: PS

For Instructor Use Only

The Recording Process

2 - 69

COMPLETION STATEMENTS 211.

An _______________ is a record of increases and decreases in specific assets, liabilities, and equity items.

212.

The process of entering an amount on the left side of an account is called ____________ the account, and making an entry on the right side is called _________________ the account.

213.

______________, _______________, and _______________ have debit normal account balances whereas _______________, ________________, ________________, and ________________ have credit normal account balances.

214.

The

five

subdivisions

equity

are:

________________,

________________, ________________, and ________________. 215.

The basic steps in the recording process are: _______________ each transaction, enter the transaction in a ________________, and transfer the _______________ information to appropriate accounts in the ________________.

216.

A sales slip, a check, and a cash register tape are examples of ________________ used as evidence that a transaction has taken place.

217.

An accounting record where transactions are initially recorded in chronological order is called a ________________.

218.

When three or more accounts are required in one journal entry, the entry is referred to as a ________________ entry.

219.

The entire group of accounts and their balances maintained by a company is called the ________________.

220.

A two column list of all accounts and their balances at a given time is a ______________.

Answers to Completion Statements 211. account 212. debiting, crediting 213. Assets, expenses, dividends, share capital-ordinary, retained earnings, liabilities, revenues 214. share capital-ordinary, retained earnings, dividends, revenues, expenses 215. analyze, journal, journal, ledger

216. business documents 217. journal 218. compound 219. general ledger 220. trial balance

LO1-4 BT: K Difficulty: Easy TOT: 8 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

Test Bank for Financial Accounting: IFRS Edition, 4e

2 - 70

MATCHING 221. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Account Normal account balance Debit Revenue account Compound entry

F. G. H. I. J.

Journal Posting Chart of accounts Trial balance Simple entry

______ 1. An entry that involves three or more accounts. ______ 2. Transferring journal entries to ledger accounts. ______ 3. The side which increases an account. ______ 4. A list of all the accounts used by an enterprise. ______ 5. A record of increases and decreases in specific assets, liabilities, and equity items. ______ 6. Left side of an account. ______ 7. An entry that involves only two accounts. ______ 8. A book of original entry. ______ 9. A list of accounts and their balances at a given time. ______ 10. Has a credit normal balance

Answers to Matching 1. 2. 3. 4. 5.

E G B H A

6. 7. 8. 9. 10.

C J F I D

LO1-4 BT: K Difficulty: Easy TOT: 3 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

For Instructor Use Only

The Recording Process

2 - 71

SHORT-ANSWER ESSAY QUESTIONS S-A E 222 An account is an important accounting record where financial information is stored until needed. Briefly explain (1) the nature of an account, (2) the different types of accounts, and (3) the manner in which an account is increased and decreased and its normal balance. Solution 222 An account is an individual accounting record of increases and decreases in specific asset, liability, and equity accounts. In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit side (it resembles the letter T). Accounts are classified as asset, liability, equity, revenue, and expense. Accounts with normal debit balances, such as assets and expenses, are increased when debited and decreased when credited. Accounts with normal credit balances, such as liabilities and revenues, are increased when credited and decreased when debited. LO1 BT: C Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

S-A E 223 Your roommate, a marketing major, thinks that debit means decrease and credit means increase. And, that every account can be debited and credited and as result, every account can have both a debit and a credit balance. Explain to your roommate (1) the meaning of debit and credit; (2) which accounts can only be debited, which can only be credited, and which can be both debited and credited; and (3) which accounts normally have debit balances and which credit balances.

Solution 223 The terms debit and credit mean the left and right side, respectively, of every account. Some accounts such as Dividends and Expenses are only debited; other accounts such as Share Capital-Ordinary and Revenues are only credited; and finally, some accounts such as Cash, Accounts Receivable, and Accounts Payable can be debited and credited. Accounts with debit balances include Assets, Dividends, and Expenses. Accounts with credit balances include Liabilities, Share Capital-Ordinary and Revenues. LO1 BT: C Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting

S-A E 224 A fellow classmate is confused about how debits and credits relate to the basic accounting equation. State the basic accounting equation, convert it into the expanded accounting equation, and then explain how it ties into the rules for debits and credits.

For Instructor Use Only

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Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 224 The basic accounting equation is: Assets = Liabilities + Equity The expanded equation divides Equity into its various parts, reflecting the shareholders' investment, dividends, revenues, and expenses: Assets = Liabilities + Share Capital-Ordinary + Retained Earnings – Dividends + Revenues – Expenses This expanded equation can then be re-arranged to explain why certain accounts have debit (lefthand) balances, while other accounts have credit (right-hand) balances, as follows: Assets + Dividends + Expenses = Liabilities + Share Capital-Ordinary + Retained Earnings + Revenues The accounts on the left-hand side of the equation have left-hand, or debit balances, while the accounts on the right-hand side of the equation have right-hand, or credit balances. Accounts with debit balances are increased with debits and decreased with credits, while accounts with credit balances are increased with credits and decreased with debits. LO1 BT: S Difficulty: Hard TOT: 10 min. AACSB: RT AICPA BB: CT AICPA PC: Communication

S-A E 225 Describe the process of preparing a trial balance. What is the purpose of preparing a trial balance? If a trial balance does not balance, identify what might be the reasons why it does not balance. If the trial balance does balance, does that insure that the ledger accounts are correct? Explain. Solution 225 The process of preparing a trial balance consists of (1) listing the account titles and their debit or credit balances in the order in which they appear in the general ledger, (2) totaling the debit and credit columns, and (3) proving the equality of the total debits and total credits. The primary purpose of the trial balance is to prove the equality of the debits and credits after posting. A trial balance also uncovers errors in journalizing and posting because errors in journalizing and posting cause a trial balance not to balance. A trial balance does not prove that all transactions have been recorded or that the ledger is correct. The trial balance may balance even when (1) an entire transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalizing or posting, or (5) offsetting errors are made in recording the amount of a transaction or posting to the ledger. LO4 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

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The Recording Process

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S-A E 226 John Dough, a fellow employee, wants to understand the basic steps in the recording process. Identify and briefly explain the steps in the order in which they occur. Solution 226 The basic steps in the recording process are: 1.

Analyze each transaction. In this step, business documents are examined to determine the effects of the transaction on the accounts.

Enter each transaction in a journal. This step is called journalizing and it results in making a chronological record of the transactions.

Transfer journal information to ledger accounts. This step is called posting. Posting makes it possible to accumulate the effects of journalized transactions on individual accounts.

LO2 BT: C Difficulty: Medium TOT: 5min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

S-A E 227 All recordable transactions are initially recorded in the journal. Discuss the contributions that the journal makes to the recording process. Solution 227 The journal makes several significant contributions to the recording process: (1) It discloses in one place the complete effects of a transaction; (2) It provides a chronological record of transactions; and, (3) It helps to prevent and locate errors because the debit and credit amounts for each entry can be readily compared. LO2 BT: C Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

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Test Bank for Financial Accounting: IFRS Edition, 4e

S-A E 228 A bookkeeping student has come to you for tutoring on the recording process. She is confused about the relationship between the chart of accounts and the ledger. Explain the purpose of the chart of accounts and the general ledger. In your explanation indicate the relationship between these two items as well. Solution 228 The chart of accounts lists all of the accounts that a company uses and their account numbers that identify their location in the ledger. The numbering system used to identify the accounts usually starts with the statement of financial position accounts followed by the income statement accounts. The general ledger contains all of the accounts of a company and their respective balances at any point in time. The ledger is organized by account number with assets coming first, then liabilities, equity, revenue, and expense accounts. LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

S-A E 229 The process of transferring the information in the journal to the general ledger is called posting. Explain the posting process, including the importance of the journal page number and the account numbers. Solution 229 The posting process begins with locating the account(s) being debited in the general ledger. Then entering the date of the entry, the journal page number where the entry originated and debit portion of the entry in the date, reference and debit columns, respectively. Once this done, the account number(s) of the account(s) being debited is (are) entered in the reference column in the journal. Next, the credit portion of the journal entry is posted to the appropriate accounts in the ledger following the same steps as noted for the debit portion. The importance of the journal page number, in the reference column of each account in the general ledger accounts, is to indicate where to find the original entry. The general ledger account numbers, in the reference column of the journal, indicate that the entry has been posted. LO3 BT: S Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication

S-A E 230 During a study session, a classmate states that it is not necessary to make journal entries and then post them to the ledger. She states that it is sufficient to analyze the transaction and simply record the information in T-accounts. What is your response to this statement? Be brief, yet concise.

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