Chapter 4

Chapter 4—Completing the Accounting Cycle
TRUE/FALSE
1. The trial balance may be listed on the work sheet instead of being prepared separately.
ANS: T DIF: 5 OBJ: 01
2. A work sheet is a financial statement that is an integral part of the financial statements.
ANS: F DIF: 1 OBJ: 01
3. The work sheet is a formal report presented to owners.
4. The totals of the Adjusted Trial Balance columns on a work sheet will always be the sum of the
Trial Balance column totals and the Adjustments column totals.
5. A work sheet heading is dated like a statement of owner's equity heading.
6. A work sheet contains nonfinancial information for a period of time.
7. If the work sheet does not have a separate pair of columns for the statement of owner's equity, the
capital and drawing account balances are extended to the Balance Sheet columns.
8. The Balance Sheet debit and credit columns are directly to the left of the Adjusted Trial Balance
columns on a work sheet.
9. After the account balances have been extended from the Adjusted Trial Balance columns on the
work sheet, the difference between the initial totals of the Balance Sheet debit and credit columns
is Net Income or Net Loss.
10. After Net Income or Loss is entered on the work sheet, the debit column total must equal the
credit column total for the Balance Sheet pair of columns.
11. After Net Income or Loss is entered on the work sheet, the debit column total must equal the
credit column total for the Income Statement pair of columns.
12. A net loss is shown on the work sheet in the credit columns of both the Income Statement
columns and the Balance Sheet columns.
13. Net income is shown on the work sheet in the credit columns of both the Income Statement
columns and the Balance Sheet columns.
14. A net loss is shown on the work sheet in the Income Statement credit column and the Balance
Sheet debit column.
15. Net income is shown on the work sheet in the Income Statement debit column and the Balance
Sheet credit column.
16. If the totals of the Income Statement debit and credit columns of a work sheet are $29,750 and
$25,000, respectively, after all account balances have been extended, the amount of the net loss is
$4,250.
17. The financial statements are prepared in the following order: (1) income statement, (2) statement
of owner's equity,(3) balance sheet.
18. On the income statement, miscellaneous expenses are usually presented as the last item without
regard for the dollar amount.
19. The usual presentation of the statement of owner's equity is (1) Net income or loss, (2) Beginning
capital, (3) Drawing, (4) Owner's contributions, (5) Ending capital.
20. The difference between a classified balance sheet and one that is not classified is that the
classified one has subheadings.
21. The difference between a classified balance sheet and one that is not classified is that the
classified one is used only by a company's owners or management.

22. Another name for current assets is property, plant, and equipment.
23. Liabilities that will not be due for 2 years are current liabilities.
24. Cash and other assets that may reasonably be expected to be realized in cash, sold, or consumed
through the normal operations of a business, usually within one year or less, are called current
assets.
25. Accounts receivable is an example of a current asset.
26. Land is an example of a fixed asset.
27. Fixed assets are also known as permanent assets.
28. Liabilities that will be due within a short time (usually one year or less) and that are to be paid
out of current assets are called current liabilities.
29. Depreciation Expense is a permanent account.
30. Accumulated Depreciation is an "offset" account against a fixed asset account (except for land).
31. The amount of the net income for a period appears on both the income statement and the
statement of owner's equity for that period.
32. The balance in the drawing account will appear on the income statement.
33. Accrued salaries payable is reported on the balance sheet as a current liability.

34. At the end of the fiscal period, prepaid expenses are reported on the balance sheet as expenses.
35. Office Supplies is an example of a current asset account.
36. Prepaid expenses that benefit a relatively short period of time are listed on the balance sheet as
current assets.
37. Prepaid insurance is listed on the balance sheet as a current asset.
38. Capital and Drawing are reported in the owner's equity section of the balance sheet.
39. Deferred expenses that benefit a relatively short period of time are listed on the balance sheet as
current assets.
40. Unearned revenues that will be earned in a relatively short period of time are listed on the balance
sheet as current liabilities.
41. Accrued expenses are ordinarily listed on the balance sheet as current assets.
42. Accrued revenues are ordinarily listed on the balance sheet as current assets.
43. At the end of the fiscal period, prepaid expenses that will expire within one year or the operating
cycle, whichever is greater, are reported on the balance sheet as fixed assets.
44. Office supplies is not an example of a prepaid expense.
45. Salaries owed but not yet paid are accrued liabilities and appear on the balance sheet.

46. Deferred expenses are expenses that are paid in advance of being used and appear on the income
statement.
47. The term "unearned" in the name of an account indicates the account represents a revenue.
48. Since the adjustments are entered on the work sheet, it is not necessary to record them in the
journal.
49. Since the adjustments are recorded on the work sheet, it is not necessary to post them in the
ledger.
50. Journalizing and posting the adjustments and closing entries updates the ledger for the new
accounting period.
51. The income summary account is closed to the owner's capital account.
52. The depreciation expense account is closed to the income summary account.
53. The drawing account is closed to the owner's capital account.
54. For a proprietorship, the balance of the income summary account is closed to the proprietor's
capital account at the end of the period.
55. For a proprietorship, the balance in the drawing account is closed to the capital account at the end
of the period.
56. The trial balance prepared after all of the temporary accounts have been closed is called a post-
closing trial balance.
57. Expense and revenue accounts are closed to the drawing account.
58. Entries required to close the balances of the temporary accounts at the end of the period are called
closing entries.
59. Preparation of the financial statements occurs after journalizing and adjusting entries have been
prepared in a manual system.
60. A period ending when an entity's activities have reached the lowest point in the annual operating
cycle is termed the fiscal year.
61. A period ending when an entity's activities have reached the highest point in the annual operating
cycle is termed the natural business year.
62. The most important output of the accounting cycle is the financial statements.
63. A work sheet is normally prepared as part of the accounting cycle in a computerized accounting
system.
64. In the accounting cycle of a manual accounting system, a trial balance is prepared before the
financial statements are prepared.
65. Solvency is essentially the ability of an organization to pay its bills.
66. Working capital is current assets less current liabilities.
67. Current ratio is current assets divided by accounts payable.
68. Reversing entries are required of all adjusting entries.
ANS: F DIF: 1 OBJ: App

69. Immediately after the reversing entry for accrued revenues has been posted, the fees earned
account will have a debit balance.
ANS: T DIF: 1 OBJ: App
70. Immediately after reversing entries have been recorded and posted, a credit balance in Salary
Expense, assuming no errors, represents a contra expense that needs to be set up on the chart of
accounts.
ANS: F DIF: 1 OBJ: App
MULTIPLE CHOICE
1. The work sheet is a:

a. formal statement issued to creditors
b. working paper often used by accountants to summarize adjusting entries
c. replacement for the ledger
d. replacement for a set of financial statements
ANS: B DIF: 5 OBJ: 01
2. The difference between the totals of the debit and credit columns of the Adjusted Trial Balance
columns on a work sheet:
a. is the amount of net income or loss
b. indicates there is an error on the work sheet
c. is not unusual when preparing the work sheet
d. is the net difference between revenue, expenses, and drawing
3. Net income appears on the work sheet in the:

a. debit column of the Balance Sheet columns
b. debit column of the Adjustments columns
c. debit column of the Income Statement columns
d. credit column of the Income Statement columns
ANS: C DIF: 3 OBJ: 01
4. A net loss appears on the work sheet in the:

a. debit column of the Balance Sheet columns
b. debit column of the Trial Balance columns
c. debit column of the Income Statement columns
d. credit column of the Adjustments columns
ANS: A DIF: 3 OBJ: 01
5. A net loss appears on the work sheet:

a. when revenue exceeds expenses
b. when expenses exceed revenues
c. every time the Adjusted Trial Balance columns do not balance on the initial totaling
d. every time the Income Statement columns do not balance on the initial totaling
6. After net income is entered on the work sheet, the Balance Sheet debit and credit columns must:
a. be the same amount as the total amount of the Income Statement debit and credit columns
b. equal each other
c. be the same amount as the total amount in the Adjusted Trial Balance debit and credit
columns
d. not be equal to each other and need not be the same total amounts as any other pair of
columns on the work sheet
7. If the work sheet does not contain a pair of columns for the Statement of Owner's Equity, the
capital and drawing amounts are:
a. omitted
b. extended to the Balance Sheet columns
c. extended to the Income Statement columns
d. extended to the Adjustments columns
8. Which of the following appears in the Balance Sheet columns of the work sheet?
a. Equipment
b. Fees Earned
c. Depreciation Expense
d. Supplies Expense
a. Unearned Fees
b. Rent Expense
c. Salaries Expense
d. Service Revenue
a. Accounts Receivable
b. Rent expense
c. Supplies Expense
d. Service Revenue
a. Prepaid Insurance
b. Wages Expenses
c. Rent Revenue
d. Service Revenue
12. An indication that the work sheet columns are in balance and the work sheet is completed is:
a. the word "Total" is written at the bottom of each pair of columns
b. each pair of columns is double underlined
c. each pair of columns has the totals circled
d. the final figures are written in ink
13. After all of the account balances have been extended to the Balance Sheet columns of the work
sheet, the totals of the Debit and Credit columns are $39,750 and $21,750, respectively. What is
the amount of net income or net loss for the period?
a. $18,000 net income
b. $18,000 net loss
c. $39,750 net income
d. $21,750 net income
14. After all of the account balances have been extended to the Balance Sheet columns of the work
sheet, the totals of the Debit and Credit columns are $30,750 and $69,750, respectively. What is
the amount of net income or net loss for the period?
b. $39,000 net loss
d. $69,750 net income
15. After all of the account balances have been extended to the Income Statement columns of the
work sheet, the totals of the debit and credit columns are $89,900 and $67,600, respectively.
What is the amount of the net income or net loss for the period?
b. $22,300 net loss
d. $67,600 net loss
16. After all of the account balances have been extended to the Income Statement columns of the
work sheet, the totals of the debit and credit columns are $92,300 and $67,600, respectively.
What is the amount of the net income or net loss for the period?
b. $24,700 net loss
d. $92,300 net loss
17. When preparing the statement of owner's equity, the beginning capital balance can always be
found:
a. in the Income Statement columns of the work sheet
b. in the statement of cash flows
c. in the general ledger
d. in the general journal
18. Unearned Fees appears on the:

a. balance sheet
b. statement of owner's equity
c. income statement
d. statement of cash flows
19. Accumulated Depreciation appears on the:

a. balance sheet
c. income statement
20. Salaries Payable appears on the:

a. balance sheet
c. income statement
21. Depreciation Expense appears on the:

a. balance sheet
c. income statement
22. Long-term Liabilities appears on the:

a. balance sheet
c. income statement
23. Accounts Receivable appears on the:

a. balance sheet
c. income statement
24. Accumulated Depreciation appears on the:

a. balance sheet in the current assets section
b. balance sheet in the fixed assets section
c. balance sheet in the long-term liabilities section
d. income statement as an operating expense
25. Notes Receivable due in 350 days appears on the:

b. balance sheet in the fixed assets section
c. balance sheet in the current liabilities section
d. income statement as an expense
26. Unearned Fees appears on the:

b. balance sheet as a current liability
c. balance sheet in the owner's equity section
d. income statement as revenue
27. Which one of the fixed asset accounts listed below will not have a related contra asset account?
a. Office Equipment
b. Land
c. Delivery Equipment
d. Building
28. The cost of office supplies to be used in future periods is ordinarily shown on the balance sheet as
a:
a. fixed asset
b. current asset
c. contra asset
d. current liability
29. Prepaid insurance is reported on the balance sheet as a:

a. current asset
b. fixed asset
c. current liability
d. long-term liability
30. At the end of an accounting year, in what statement would a balance in the prepaid insurance
account appear?
a. balance sheet
b. income statement
c. statement of cash flows
d. statement of owner's equity
31. Which of the following is reported on the Statement of Owner's Equity for the current year?
a. Accumulated depreciation
b. Owner's additional investment made during the current period
c. Rent expense
d. Wages payable
32. Adjusting entries are dated in the journal as of:

a. the date they are actually journalized
b. the last day of the accounting period
c. the first day of the accounting period
d. the middle of the accounting period
33. Adjusting entries:

a. need not be journalized since they appear on the work sheet
b. need not be posted if the financial statements are prepared from the work sheet
c. are not needed if reversing entries are prepared
d. must be journalized and posted
ANS: D DIF: 1 OBJ: 03
34. Closing entries:

a. need not be journalized if reversing entries are prepared
b. need not be posted if the financial statements are prepared from the work sheet
c. are not needed if adjusting entries are prepared
d. must be journalized and posted
35. Closing entries are dated in the journal as of:

a. the date they are actually journalized, although they are generally prepared after the end of
the accounting period
b. the last day of the accounting period, although they are actually journalized after the end
of the accounting period
c. the first day of the accounting period, although they are actually journalized after the end
of the accounting period
d. the first day of the subsequent accounting period
36. Which of the following accounts should be closed to Income Summary at the end of the fiscal
year?
a. Supplies Expense
b. Accumulated Depreciation
c. Prepaid Expenses
d. Unearned revenues
37. Which of the following accounts will not be closed to Income Summary at the end of the fiscal
year?
a. Salaries Expense
b. Fees Earned
c. Unearned Rent
d. Depreciation Expense
38. Which of the following accounts will be closed to Capital at the end of the fiscal year?
a. Rent Expense
b. Fees Earned
c. Income Summary
d. Depreciation Expense
39. Which of the following accounts ordinarily appears in the post-closing trial balance?
a. Drawing
b. Supplies Expense
c. Fees Earned
d. Unearned Rent
40. The entry to close the appropriate insurance account at the end of the accounting period is debit:
a. Income Summary; credit Prepaid Insurance
b. Prepaid Insurance; credit Income Summary
c. Insurance Expense; credit Income Summary
d. Income Summary; credit Insurance Expense
41. Which of the following accounts appears on a post-closing trial balance?

a. Insurance Expense
b. Prepaid Insurance
c. Drawing
d. Fees Earned
42. Which of the following accounts appears on a post-closing trial balance?

a. Insurance Expense
b. Fees Earned
c. Drawing
d. Unearned Fees
43. The following accounts were taken from the Adjusted Trial Balance columns of the work sheet:
Accumulated Depreciation $ 3,000

Fees Earned 20,000
Depreciation Expense 3,500
Insurance Expense 1,000
Prepaid Rent 4,000
Supplies 500
Net income for the period is:

a. $15,500
b. $ 8,000
c. $15,000
d. $11,000
44. The following accounts were taken from the Adjusted Trial Balance columns of the work sheet:

Fees Earned 25,000
Prepaid Insurance 4,000
Supplies 500
Supplies Expenses 4,500

a. $18,000
b. $7,500
c. $8,000
d. $19,000
45. A summary of selected ledger accounts appear below for A. Joe's Appliance Services for the 2002
calendar year end.
Joe Smith, Capital

12/31 2,000 1/1 8,000
12/31 4,000
Joe Smith, Drawing

6/30 1,000 12/31 2,000
11/30 1,000
Income Summary
12/31 5,000 12/31 9,000
12/31 4,000

a. $2,000
b. $5,000
c. $-0-
d. $4,000
46. A summary of selected ledger accounts appear below for Martinez Auto Services for the 2000
calendar year end.
J. V. Martinez, Capital
12/31 5,000 1/1 3,000
12/31 20,000
R. V. Martinez, Drawing
6/30 1,000 12/31 5,000
11/30 4,000
Income Summary
12/31 5,000 12/31 25,000
12/31 20,000

a. $20,000
b. $23,000
c. $5,000
d. $20,000
47. A fiscal year:

a. ordinarily begins on the first day of a month and ends on the last day of the following
twelfth month
b. for a business is determined by the federal government
c. always begins on January 1 and ends on December 31 of the same year
d. should end at the height of the business's annual operating cycle
48. In the normal accounting cycle the:

a. financial statements are prepared after the adjusting entries are posted
b. financial statements are prepared before the closing entries are posted
c. adjusting and closing entries are journalized after the financial statements are prepared
d. post-closing trial balance is prepared before the closing entries are posted
49. In the accounting cycle of a manual accounting system, the last step is:
a. preparing the financial statements
b. journalizing the adjusting entries
c. posting the closing entries
d. preparing a post-closing trial balance
50. Work sheets are not usually prepared:

a. during the accounting cycle of a manual accounting system
b. during the accounting cycle of a computerized system
c. unless they must be presented to the bank when applying for a loan
d. if the financial statements are going to be prepared by an experienced accountant
51. The ability of a company to pay its debts is called:

a. working capital
b. current ratio
c. return on investment
d. solvency
52. A current ratio of 6.5 means that:

a. there are $6.50 in current assets available to pay each dollar of current liabilities.
b. the company cannot pay its debts as they come due
c. there are $6.50 in current assets for every $6.50 in current liabilities
d. there are $6 in current assets for every $5 in current liabilities
53. Reversing entries are:

a. used by all entities
b. simply the analysis and recording of entries in the subsequent period
c. needed to correct closing entries
d. not used by all entities
ANS: D DIF: 1 OBJ: App
54. A reversing entry reverses a(n):

a. closing entry
b. transaction entry
c. adjusting entry
d. correcting entry
ANS: C DIF: 1 OBJ: App
PROBLEM
1. The balances for the accounts listed below appeared in the Adjusted Trial Balance columns of the
work sheet. Indicate whether each balance should be extended to (a) the Income Statement
columns or (b) the Balance Sheet columns.
(1) Salaries Payable ____ (7) L. Wang, Drawing ____

(2) Fees Earned ____ (8) Equipment ____
(3) Accounts Payable ____ (9) Accounts Receivable ____
(4) L. Wang, Capital ____ (10) Accumulated Depreciation ____
(5) Supplies Expense ____ (11) Salary Expense ____
(6) Unearned Rent ____ (12) Depreciation Expense ____
ANS:
(a) Income statement: 2, 5, 11, 12

(b) Balance sheet: 1, 3, 4, 6, 7, 8, 9, 10
DIF: 1 OBJ: 01
2. Indicate whether each of the following would be reported in the financial statements as a(n) (a)
current asset, (b) current liability, (c) revenue, or (d) expense:
(1) Supplies ____ (5) Supplies Expense____

(2) Unearned Fees ____ (6) Prepaid Insurance ____
(3) Prepaid Advertising ____ (7) Accounts Payable ____
(4) Advertising Expense ____ (8) Fees Earned ____
ANS:
(1) current asset

(2) current liability
(3) current asset
(4) expense
(5) expense
(6) current asset
(8) revenue
DIF: 1 OBJ: 02
3. The following accounts were taken from the Adjusted Trial Balance columns of the work sheet
for the year ended June 30 for JB Co.:

Fees Earned 100,000
Rent Expense 44,000
Prepaid Insurance 9,000
Supplies 500
Supplies Expense 3,500
Prepare an income statement.
ANS:
JB Co.
Income Statement
For the Year Ended June 30, 20--
Fees earned $100,000

Expenses:
Rent expense $44,000
Depreciation expense 9,500
Supplies expense 3,500
Total expenses 57,000
Net income $43,000
=======
DIF: 3 OBJ: 02
4. The following revenue and expense account balances were taken from the Income Statement
columns of the work sheet for Martino Services Co. for the current fiscal year ended December
31:
Depreciation Expense $ 5,950

Miscellaneous Expense 2,200
Rent Expense 34,000
Service Revenue 99,000
Utilities Expense 6,000
Wages Expense 64,750
Prepare an income statement.
ANS:
Martino Services Co.

Income Statement
For the Year Ended December 31, 20--
Service revenue $ 99,000

Operating expenses:
Wages expense $64,750
Rent expense 34,000
Utilities expense 6,000
Insurance expense 5,900
Miscellaneous expense 2,200
Total operating expenses 122,950
Net loss $(23,950)
========
DIF: 3 OBJ: 02
5. A summary of selected ledger accounts appear below for B. B. Boon Services for the current
calendar year.
B. B. Boon, Capital B. B. Boon, Drawing

12/31 15,000 1/1 20,000 3/31 12,000 12/31 15,00
0
12/31 45,000 12/22 3,000
Income Summary
12/31 19,000 12/31 64,000
12/31 45,000
Prepare a statement of owner's equity.
ANS:
B. B. Boon Services
Statement of Owner's Equity
B. B. Boon, capital, 1/1/20-- $20,000

Net income $ 45,000
Less withdrawals 15,000 30,000
B. B. Boon, capital, 12/31/20-- $50,000
=======
DIF: 3 OBJ: 02
6. The following data were taken from the balance sheet columns of the work sheet for the current
fiscal year ending September 30 for B. Mass Company:
Accumulated Depreciation-Trucks $20,000

Prepaid Rent 4,000
Supplies 500
Unearned Fees 5,300
Trucks 29,000
Cash 2,000
B. Mass, Capital ?
Prepare a classified balance sheet.
ANS:
B. Mass Company
Balance Sheet
September 30, 20--
Assets Liabilities
Current assets:
Cash $ 2,000 Current
liabilities:
Supplies 500 Unearned fees $ 5,300
Prepaid rent 4,000
Total current
assets $ 6,500 Owner's Equity
Property, plant, B. Mass, capital 10,200
and equipment:
Trucks $29,000 Total liabilities
and owner's equity $15,500
Less accum. =======
depreciation 20,000
Total prop-
erty, plant
and equipment
Total assets 9,000
$15,500
=======
DIF: 3 OBJ: 02
7. Indicate whether each of the following would be reported in the section of financial statements
identified as (a) current asset, (b) property, plant, and equipment, (c) current liability, (d) revenue,
or (e) expense:
(1) Automobile ___

(2) Accumulated depreciation ____
(3) Rent expense ____
(4) Fees earned ____
(5) Salaries payable ____
(6) Prepaid rent ____
(7) Store supplies ____
(8) Advertising expense ____
(9) Unearned rent ____
ANS:
(1) property, plant, and equipment

(2) property, plant, and equipment
(3) expense
(4) revenue
(6) current asset
(7) current asset
(8) expense
DIF: 1 OBJ: 02
8. The balances in the ledger of Camp Ground Services as of December 31, before adjustments, are
as follows:
Cash $ 4,500 Tom Aba, Capital $33,050

Supplies 4,150 Tom Aba, Drawing 2,900
Prepaid Insurance 8,700 Service Revenue 52,500
Equipment 42,000 Salary Expense 26,600
Accumulated Rent Expense 5,000
Depreciation 10,200 Miscellaneous Expense 1,900
Adjustment data are as follows: supplies on hand, December 31, $1,000; insurance expired for
December, $900; depreciation on equipment for December, $1,500; salaries accrued, December
31, $1,000.
(a) Prepare a ten-column work sheet for Camp Ground Services for December.
(b) On the basis of the work sheet in (a), present the following in good order: (1)
income statement, (2) statement of owner's equity (no additional investments were
made during the month), and (3) balance sheet.
(c) On the basis of the work sheet in (a), journalize the closing entries as of December
31, 20--.
ANS:
(a)
Camp Ground Services )

Work Sheet )
For the Month Ended December 31, 20-- )
)
Trial Balance Adjustments )
Account Title Dr. Cr. Dr. Cr. )
Cash 4,500 ..... ..... ..... )

Supplies 4,150 ..... ..... (a) )
3,150
Prepaid Insurance 8,700 ..... ..... (b) 900 )
Equipment 42,000 ..... ..... ..... )
Accumulated ..... 10,200 ..... (c) )
Depreciation 1,500
Tom Aba, Capital ..... 33,050 ..... ..... )
Tom Aba, Drawing 2,900 ..... ..... ..... )
Service Revenue ..... 52,500 ..... ..... )
Salary Expense 26,600 ..... (d) 1,000 ..... )
Rent Expense 5,000 ..... ..... ..... )
Miscellaneous Expense 1,900 ..... ..... ..... )
95,750 95,750 )
)
Supplies Expense ..... ..... (a) 3,150 ..... )
Insurance Expense ..... ..... (b) 900 ..... )
Depreciation Expense ..... ..... (c) 1,500 ..... )
Salaries Payable ..... ..... ..... d) 1,000 )
Net Income 6,550 6,550 )
)
(
( Adjusted
(Trial Balance Income Statement Balance Sheet
( Dr. Cr. Dr. Cr. Dr. Cr.
(
( 4,500 ..... ..... ..... 4,500 .....
( 1,000 ..... ..... ..... 1,000 .....
( 7,800 ..... ..... ..... 7,800 .....
(42,000 ..... ..... ..... 42,000 .....
( ..... 11,700 ..... ..... ..... 11,700
( ..... 33,050 ..... ..... ..... 33,050
( 2,900 ..... ..... ..... 2,900 .....
( ..... 52,500 ..... 52,500 ..... .....
(27,600 ..... 27,600 ..... ..... .....
( 5,000 ..... 5,000 ..... ..... .....
( 1,900 ..... 1,900 ..... ..... .....
( 3,150 ..... 3,150 ..... ..... .....
( 900 ..... 900 ..... ..... .....
( 1,500 ..... 1,500 ..... ..... .....
( ..... 1,000 ..... ..... ..... 1,000
(98,250 98,250 40,050 52,500 58,200 45,750
(====== ====== 12,450 ...... ...... 12,450
( 52,500 52,500 58,200 58,200
( ====== ====== ====== ======
(b) (1)
Camp Ground Services

Income Statement
For the Month Ended December 31, 20--
Service revenue $52,500

Operating expenses:
Salary expense $27,600
Rent expense 5,000
Insurance expense 900
Miscellaneous expense 1,900
Total operating expenses 40,050
Net income $12,450
=======
(2)

Statement of Owner's Equity
For the Month Ended December 31, 20--
Tom Aba, capital, December 1, 20-- $33,050

Net income for the month $12,450
Less withdrawals 2,900
Increase in owner's equity 9,550
Tom Aba, capital, December 31, 20-- $42,600
=======
(3)

Balance Sheet
December 31, 20--
Assets Liabilities
Current assets:
Cash $ 4,500 Current
liabilities:
Supplies 1,000 Salaries payable $
1,000
Prepaid insurance 7,800
Total current
assets $13,30 Owner's Equity
0
Tom Aba, capital 42,60
0
Property, plant, and Total liabilities
equipment: and owner's equity $43,60
0
Equipment... $42,000 ======
=
Less accumulated
depreciation 11,700
Total property,
plant, and
equipment 30,30
0
Total assets $43,60
0
======
=
(c)
Closing Entries
Jan. 31 Service Revenue 52,500
Income Summary 52,500
31 Income Summary 40,050

Salary Expense 27,600
Rent Expense 5,000
Insurance Expense 900

Pam Els, Capital 12,450
31 Tom Aba, Capital 2,900

Tom Aba, Drawing 2,900
DIF: 5 OBJ: 02,03

9. On the basis of the following data taken from the Adjusted Trial Balance columns of the work
sheet for the year ended October 31 for Pelavin Co., journalize the four closing entries.
Cash $ 21,500
Accounts Receivable 45,200
Supplies 5,000
Equipment 169,900
Accounts Payable 42,500
C. Pelavin, Capital 152,600
C. Pelavin, Drawing 30,000
Fees Earned 404,500
Rent Expense 60,000
$668,600 $668,600
======== ========
ANS:
Oct. 31 Fees Earned 404,500


Rent Expense 60,000

C. Pelavin, Capital 7,500
31 C. Pelavin, Capital 30,000

C. Pelavin, Drawing 30,000
DIF: 3 OBJ: 03
10. After all adjustments have been made, but before the accounts have been closed, the following
balances were taken from the ledger:
Accounts payable $ 40,000 Rent expense $ 21,400

Accounts receivable 54,500 Salary expense 66,000
Accumulated Salaries payable 150
depreciation 83,325 Service revenue 151,000
Cash 7,150 Supplies 2,500
Depreciation expense 23,500 Supplies expense 3,500
Equipment 155,000 Pat Smythe capital 100,950
Insurance expense 8,600 Pat Smythe, 28,000
drawing
Prepaid insurance 5,275
Journalize the entries to close the appropriate accounts.
ANS:
Service Revenue 151,000


Rent Expense 21,400

Pat Smythe, Capital 28,000
Pat Smythe, Capital 28,000

Pat Smythe, Drawing 28,000
DIF: 3 OBJ: 03
11. The following balance sheet contains errors.
Lopez Services Co.

Balance Sheet
Assets Liabilities
Current assets: Current liabilities:
Cash $ 6,170 Accounts receivable $
9,000
Accounts 8,500 Accum. depr- 13,525
payable building
Supplies 1,590 Accum. depr- 6,340
equipment
Prepaid 345 Net income 12,500
insurance
Land 25,000
Total current $41,605 Total liabilities $
assets 41,365
Owner's Equity
Property, plant, Wages payable $
and equipment: 500
Building $45,500 Matty Lopez, 74,49
capital 0
Equipment 28,250 Total owner's $
equity 74,990
Total
property,
plant, and
equipment 73,75
0
Total liabilities
and
Total assets $116,35 owner's equity $116,35
5 5
======= =======
= =
(a) List the errors in the balance sheet above and (b) prepare a corrected balance sheet.
ANS:
(a) (1) Date of statement should be "December 31, 20--" and not "For the Year Ended
"December 31, 20--."
(2) Accounts payable should be a current liability.
(3) Land should be a fixed asset.
(4) Accumulated depreciation should be deducted from the related fixed asset.
(5) An adding error was made in determining the amount of total assets.
(6) Accounts receivable should be a current asset.
(7) Net income would be reported on the income statement.
(8) Wages payable should be a current liability.
A corrected balance sheet would be as follows:
Lopez Services Co.

Balance Sheet )
December 13, 20-- )
)
Assets )
Current assets: )
Cash $ 6,170 )
Accounts receivable 9,000 )
Supplies 1,590 )
Prepaid insurance 345 )
Total current assets $17,105 )
Property, plant, and equipment: )
Land $25,000 )
Building $45,500 )
Less accum. depreciation 13,525 31,975 )
Equipment 28,250 )
Less accum. depreciation 6,340 21,910 )
Total property, plant, and )
equipment 78,885 )
Total assets $95,990 )
======= )
( Liabilities
(Current liabilities:
( Accounts payable $ 8,500
( Wages payable 500
(Total liabilities $ 9,000
(
( Owner's Equity
(Matty Lopez, capital 86,990
(
(Total liabilities and
( owner's equity $95,990
=======
DIF: 5 OBJ: 03
12. Prior to adjustment at July 31, the end of the current fiscal year, Salary Expense has a debit
balance of $300,500. Salaries owed but not paid as of the same date total $1,500.
(a) Present the entries to record the following:
(1) Accrued salaries as of July 31.

(2) Closing of Salary Expense as of July 31.
(3) Reversal of adjusting entry as of August 1.
(4) Payment of weekly salaries of $9,900 on August 3.
(b) Answer the following questions:
(1) Is the balance in Salary Expense, after posting the entry of August 1, an asset, a
liability, a revenue, or an expense?
(2) What is the amount of the balance in Salary Expense after posting the entry of
August 3?
(3) If there had been no reversing entry as of August 1, what would the debits have
been when the weekly salary was paid on August 3?
ANS:
(a)
(1) Salary Expense 1,500

Salaries Payable 1,500
(2) Income Summary 302,000

(3) Salaries Payable 1,500

(4) Salary Expense 9,900

Cash 9,900
(b)
(1) A liability
(2) $8,400 ($9,900 - $1,500)
(3) Salaries Payable, $1,500
Salary Expense, $8,400
DIF: 1 OBJ: 03, App
13. List in order the seven steps of the accounting cycle in a manual accounting system.
ANS:
(1) Transactions are analyzed and recorded in the journal.
(2) Transactions are posted to the ledger.
(3) A trial balance is prepared, adjustment data are assembled, and the work sheet is
completed.
(4) Financial statements are prepared.
(5) Adjusting entries are journalized and posted to the ledger.
(6) Closing entries are journalized and posted to the ledger.
(7) A post-closing trial balance is prepared.
DIF: 3 OBJ: 05
14. Compute working capital and the current ratio from the following information.
S. Myers, Consultant
Balance Sheet
For the Year Ended December 31, 2001
Cash $50
Accounts receivable 8
Prepaid insurance 12
Land 25
Building 12
Equipment 14
Total assets $121
===
Accounts payable $ 9
Wages payable 5
Mortgage payable 50
S. Myers, capital 57
Total liabilities and owner's equity $121
===
ANS:
Working Capital: $70 - $14 = $56
Current Ratio: $70 ÷ $14 = 5
DIF: 3 OBJ: 06

Chapter 4

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Chapter 4

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Chapter 4—Completing the Accounting Cycle

ANS: T DIF: 5 OBJ: 01

ANS: F DIF: 1 OBJ: 01

3. The work sheet is a formal report presented to owners.

ANS: F DIF: 1 OBJ: 01

ANS: F DIF: 5 OBJ: 01

5. A work sheet heading is dated like a statement of owner's equity heading.

ANS: T DIF: 1 OBJ: 01

6. A work sheet contains nonfinancial information for a period of time.

ANS: F DIF: 1 OBJ: 01

ANS: T DIF: 1 OBJ: 01

ANS: F DIF: 1 OBJ: 01

ANS: T DIF: 5 OBJ: 01

ANS: T DIF: 5 OBJ: 01

ANS: F DIF: 5 OBJ: 01

ANS: F DIF: 5 OBJ: 01

ANS: T DIF: 5 OBJ: 01

ANS: T DIF: 5 OBJ: 01

ANS: F DIF: 5 OBJ: 01

ANS: T DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

25. Accounts receivable is an example of a current asset.

ANS: T DIF: 1 OBJ: 02

26. Land is an example of a fixed asset.

ANS: T DIF: 1 OBJ: 02

27. Fixed assets are also known as permanent assets.

ANS: F DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

29. Depreciation Expense is a permanent account.

ANS: F DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 02

35. Office Supplies is an example of a current asset account.

ANS: T DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

37. Prepaid insurance is listed on the balance sheet as a current asset.

ANS: T DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 02

44. Office supplies is not an example of a prepaid expense.

ANS: F DIF: 1 OBJ: 02

ANS: T DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 03

ANS: F DIF: 1 OBJ: 03

ANS: T DIF: 1 OBJ: 03

ANS: T DIF: 1 OBJ: 03

ANS: T DIF: 1 OBJ: 03

53. The drawing account is closed to the owner's capital account.

(1) Salaries Payable (7) L. Wang, Drawing

(1) Supplies (5) Supplies Expense