Question 1

Which of the following statements is true about control accounts?

Accepted Answer

Control accounts are used in accounting to monitor the balances in individual subsidiary accounts. The total balance of the control account must equal the total balance of all the individual subsidiary accounts that it represents. This helps in identifying any errors or discrepancies in the subsidiary accounts. Control accounts do not limit liabilities incurred or eliminate the need for ledger postings.

Question 2

Veronica Lodge borrowed $15,000 from a bank on January 1,2013 to finance her new business.She agrees to repay the bank on December 31,2013,with $750 interest on the loan.In addition to increasing cash,what else should Veronica record on January 1,2013?

Accepted Answer

When Veronica borrows $15,000, she increases her cash and also records an increase in her liabilities by the same amount, reflecting the amount she owes to the bank. The interest to be paid at the end of the term does not affect the initial liability recorded.

Question 3

Suzy Queue hires a salesperson for her business.Suzy agrees to pay the salesperson a commission of 10 percent of sales.By the end of the first month,the salesperson has done $50,000 of sales.Suzy wants to prepare accurate financial statements at the end of the month,but has not yet paid the salesperson.What journal entry should she make before preparing her financial statements for the month?

Accepted Answer

Suzy Queue should record the commission expense of $5,000 (10% of $50,000 sales) as a debit to commissions expense and a credit to commissions payable. This will show the liability of the commission owed to the salesperson in the financial statements. Option B is incorrect because it suggests recording the commission expense as prepaid when the expense has already been incurred by Suzy. Option C is incorrect because it suggests recording the full amount of sales as a commission expense, which is not accurate as only 10% is owed as commission to the salesperson. Option D is incorrect because it suggests recording the commission expense as prepaid when the payment for commissions has not been made yet.

Question 4

Macky McClung uses accrual accounting to keep the records of her toy store.She paid $15,000 on January 1 for rent for the three months January-March.To correctly report her expenses for the month of January,what must her accounting entry accomplish?

Accepted Answer

Accrual accounting requires expenses to be recognized in the period they are incurred, regardless of when payment is made. Since the rent payment of $15,000 covers three months, only $5,000 applies to January (the current period). Therefore, the accounting entry should increase expenses by $5,000 and decrease assets by $5,000 to accurately report expenses for the month of January.

Question 5

Herman Appliance buys and sells refrigerators.Herman starts the year with an inventory of $20,000.During the year,Herman buys refrigerators totaling $182,000.At year-end,Herman takes inventory and finds that he has $28,000 of refrigerators on hand.During the year,Herman's sales revenue was $256,000.What was Herman's gross profit on the sales for the year?

Accepted Answer

The answer of Herman Appliance buys and sells refrigerators.Herman starts...

Question 6

Which of the following formulations of the accounting equation is incorrect?

Accepted Answer

This formulation is incorrect because it shows assets being equal to liabilities minus equity, which violates the basic accounting equation. The correct equation is assets = liabilities + equity.

Question 7

Alberta's Appliances is a wholesaler that sells to retail stores on credit.Alberta's sales for the year were $250,000.During the year,it received payments of $220,000 from customers.At year-end,it establishes an allowance for uncollectible accounts equal to 5% of the unpaid receivables.How much should Alberta's report as net accounts receivable at December 31?

Accepted Answer

The net accounts receivable at December 31 is calculated as:

Total accounts receivable - Allowance for uncollectible accounts

Total accounts receivable = Sales on credit - Payments received

Sales on credit = $250,000 
Payments received = $220,000

Total accounts receivable = $250,000 - $220,000 = $30,000

Allowance for uncollectible accounts = 5% of the unpaid receivables = 5% of ($30,000 - $220,000) = $1,500

Net accounts receivable = $30,000 - $1,500 = $28,500

Therefore, the best choice is B, $28,500.

Question 8

Robert Plant invests $50,000 of his own money in a business.What journal entry should be made to record Robert's investment in the business?

Accepted Answer

When an owner invests personal funds into their business, the business's cash account (an asset) increases, so it is debited. Simultaneously, the owner's equity account increases, reflecting the owner's claim on the business assets, so it is credited. Hence, "debit cash; and credit Robert Plant, capital" accurately records the transaction.

Question 9

Alberta's Appliances is a wholesaler that sells to retail stores on credit.To provide for possible bad debts,Alberta established a $32,000 allowance for uncollectible accounts.One of its customers goes bankrupt and Alberta decided to write off the account as uncollectible.What journal entry should Alberta make to record the bankruptcy?

Accepted Answer

When a specific account is deemed uncollectible, the correct action is to remove the amount from accounts receivable and reduce the allowance for uncollectible accounts. This is done by debiting the allowance for uncollectible accounts and crediting accounts receivable, reflecting the write-off without impacting the current period's income statement.

Question 10

A theater producer's accounting year ends on June 30.Which of the following year-end transactions or events results in an accounting entry referred to as a deferral?

Accepted Answer

Deferrals involve recognition of revenue or expenses that are prepaid or collected before the related goods or services are delivered. In this case, receiving payment for future performances (July and August) before those performances occur is a deferral, as the revenue is recognized before the service is provided.

Question 11

After you have closed an entity's books,what happens to the account balances?

Accepted Answer

When closing an entity's books, the revenue and expense accounts will be closed out to a temporary account called income summary, which will then be closed out to the retained earnings account. This process will result in all revenue and expense accounts having zero balances. The asset and liability accounts will carry forward their balances to the next accounting period.

Question 12

What is the accounting effect of using the accrual basis of accounting?

Accepted Answer

The accrual basis of accounting recognizes revenues when they are earned, even if cash has not been received. Similarly, expenses are recognized when they are incurred, even if cash has not been paid yet. This gives a more accurate picture of a company's financial performance, as it reflects the underlying economic activities rather than just the timing of when cash changes hands.

Question 13

Glen Turner purchases a high-speed copying machine on credit for his printing business.The machine is expected to have a useful life of four years.What journal entry should be made at the time the copying equipment is received?

Accepted Answer

The journal entry should reflect the acquisition of the copying machine on credit. Therefore, the equipment account should be debited, while the accounts payable account should be credited. This entry recognizes and records the acquisition of the new equipment and the obligation to pay the supplier later.

Question 14

John pays cash to buy auto insurance for a three-year period starting January 1.What is the accounting effect of this transaction on John's records when he makes the payment?

Accepted Answer

The payment for auto insurance for a three-year period is initially recorded as a prepaid expense (an asset increases) because it represents future economic benefits. Cash, another asset, decreases because of the payment.

Question 15

What adjusting journal entry is made when an entity wants to prepare financial statements,owes interest on a borrowing during the year,but hasn't paid either the loan or the interest?

Accepted Answer

The correct adjusting journal entry for owing interest on a borrowing that hasn't been paid is to debit interest expense (to recognize the expense in the income statement) and credit interest payable (to recognize the liability on the balance sheet). This reflects the accrual basis of accounting, where expenses are recognized when incurred, not necessarily when paid.

Question 16

Assume that an organization's operations result in a net profit for the year.When the books are closed,what is the accounting effect of the journal entry that closes out the net profit?

Accepted Answer

The journal entry that closes out the net profit involves transferring the net profit amount to the owner's equity account. Specifically, it is added to the opening balance of owner's equity, increasing the overall equity in the organization. This reflects the fact that the profits generated during the year ultimately belong to the owners of the business. Option A is incorrect because the net profit is not necessarily added directly to the cash balance, although it may eventually be used for investing or other purposes. Option B is also incorrect for the same reason, as the net profit is not subtracted from the cash balance. Option D is not relevant to the closing entry for net profit, as it deals with liabilities rather than equity.

Question 17

A hospital's accounting year ends on June 30.Which of the following events requires the hospital to record an expense accrual at June 30?

Accepted Answer

The hospital's staff worked during the week ended June 30, but are not paid until July 5, therefore an expense accrual is necessary to record the unpaid wages at the end of the accounting period. This is an example of an accrued expense. The other options do not require an accrual because they do not involve expenses incurred but not yet paid or recorded. Option A involves salaries to be paid in the future, option B involves a purchase order for a future purchase, and option D involves receiving goods but not using them until a later date.

Question 18

A business borrows $100,000 from a bank on July 1,2008.Under the agreement with the bank,the loan must be repaid in full on June 30,2009,with interest at 6% a year.The business wants to prepare financial statements for the year ended December 31,2008.How much interest expense should it report for that year?

Accepted Answer

The interest expense for the year ended December 31, 2008 will be calculated for the six months from July 1, 2008, to December 31, 2008.

Interest expense = Principal x Rate x Time

Where, 
Principal = $100,000 
Rate = 6% per annum 
Time = 6/12 = 0.5 years

Therefore,

Interest expense = $100,000 x 6% x 0.5 = $3,000

So, the correct answer is B, $3,000.

Question 19

An owner of a business withdraws cash from his business.Which of the following accounts would need to be reduced to record this transaction?

Accepted Answer

Since the owner withdraws cash from the business, it means that the owner's equity account would be reduced as the owner's claim on the business has decreased.

Question 20

Why would the accrual basis of accounting be preferable to the cash basis?

Accepted Answer

The accrual basis of accounting measures the financial performance of a business by comparing revenues earned with expenses incurred during a specific period, regardless of when the cash was actually received or paid. This allows for a more accurate assessment of the profitability and financial health of the business. The cash basis, on the other hand, only looks at the inflows and outflows of cash, disregarding the timing of actual transactions and potentially leading to misleading financial statements.

Quiz 15: Fundamentals of Accounting