The Accounting Cycle

Medium Test

Key Things To Know

j

Practice As You Learn

Self Test

b

Easy Test

h

Medium Test

Medium Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. Which of the following is accomplished by closing journal entries?

a. make revenues and assets equal to 0
b. make expenses and liabilities equal to 0
c. make revenues, expenses, gains, losses equal to 0
d. make dividends paid equal to retained earnings

Check Your Answer
C. Closing journal entries are made for the purpose of transferring income statement accounts to retained earnings so the balance goes to 0 and starts over the next period. Assets, liabilities, and owner’s equity accounts are not closed (a. & b.). Dividends paid is also transferred to retained earnings (goes to 0 and starts over).
2. Which of the following accounts will always have a larger balance on the adjusted trial balance than on the unadjusted trial balance?

a. accumulated depreciation
b. common stock
c. cash
d. building

Check Your Answer
A. A larger balance means that amounts are added to the account with an adjusting entry. Accumulated depreciation is increased when depreciation expense is recorded with an adjusting entry. Cash is never part of an adjusting entry. (b. & d.) are not affected by adjusting entries.
3. Which of the following is not a closing entry?

a. debit expenses and credit retained earnings
b. debit revenues and credit retained earnings
c. credit expenses and debit retained earnings
d. credit dividends paid and debit retained earnings

Check Your Answer
A. Closing entries zero out revenue and expenses. To zero out revenues/gains (credit balance) you must debit the account. To zero out expenses/losses and dividends paid (debit balance) you must credit the account. The other account that is always used in a closing entry is retained earnings (or income summary in some text books).
4. An adjusted trial balance that is “in balance” means

a. assets = liabilities
b. debits = credits
c. all adjusting entries are properly recorded
d. all transactions are properly recorded

Check Your Answer
B. A trial balance that balances means only that debits = credits. It does not mean that all transactions are properly recorded. The wrong account could have been used and some transactions/adjusting entries may not have been recorded (c. & d.). Assets must equal liabilities plus owner’s equity, which will be true when the trial balance balances.
5. How is the post closing trial balance different from an adjusted trial balance?

a. the post closing trial balance does not include adjusting entries
b. the post closing trial balance only includes balance sheet accounts
c. the post closing trial balance only includes income statement accounts
d. the post closing trial balance includes retained earnings as of the beginning of the year

Check Your Answer
B. The post closing trial balance is done after closing entries are made. Closing entries make all income statement accounts go to 0, so there are no income statement account balances to report on the post closing trial balance. It is the last thing prepared and adjusting entries are included (a.) Closing entries are included in the final balance of retained earnings (d.)
6. A general rule to follow when preparing a trial balance is

a. assets and expenses are always debit balances
b. liabilities and owner’s equity and revenues are always debit balances
c. dividends paid is an owner’s equity account with a credit balance
d. contra assets have debit balances

Check Your Answer
A. Assets and expenses always have a debit balance. Liabilities, owner’s equity, revenues always have a credit balance. Dividends paid has a debit balance and retained earnings may have a debit balance if the company has net losses.) Contra assets are opposite of assets and have credit balances.
7. Retained earnings reported on the balance sheet will be determined by

a. beginning retained earnings plus income
b. beginning retained earnings plus income plus dividends paid
c. beginning retained earnings plus income less dividends paid
d. income less dividends paid

Check Your Answer
C. The retained earnings balance reported on the balance sheet must be the ending balance. The ending balance is determined by (c.)
8. Which of the following is a temporary account that is not closed out to retained
earnings?

a. accrued expenses
b. prepaid expenses
c. unearned revenue
d. all of the above

Check Your Answer
D. Temporary accounts are all accounts reported on the income statement and dividends paid. All temporary accounts are closed to retained earnings. Balance sheet account are not closed to retained earnings.
9. The balance for accumulated depreciation is reported in which column on an adjusted trial balance

a. the debit column
b. the credit column
c. it can be reported on either, if it is in the debit column use a negative amount
d. it is not reported separately, it is netted with equipment or buildings

Check Your Answer
B. Accumulated depreciation is a contra asset and is reported as a credit balance. It is a credit when you make the journal entry to record it. You do not ever use negative amounts on the trial balance. It is a separate account and all accounts must be shown on the trial balance, you can not summarize or net accounts.
10. When a trial balance is in balance it is an indication that

a. revenues are greater than expenses
b. all revenues earned and all expenses incurred have been recorded
c. debits recorded equal credits recorded
d. decreases are equal to increases for all accounts

Check Your Answer
C. Being in balance only means one thing: Debits = Credits for all journal entries made. It does not mean all transactions been recorded or that all is recorded correctly. Decreases do not equal increases – for example: assets increase when liabilities increase and there is no equal decrease. (d),
11. The company’s unadjusted trial balance is presented below.

Unadjusted Trial Balance

Accounts Debit Credit
Cash 42,000
Accounts Receivable 91,000
Supplies 5,000
Prepaid Insurance 4,000
Prepaid Rent 2,000
Equipment 70,000
Accumulated Deprec. 10,000
L/T Notes Receivable 10,000
L/T Debt 20,000
Unearned Revenues 4,000
Capital Stock 1,000
Retained Earnings 1/1 141,000
Sales 92,000
Salary Expense 16,000
Rent Expense 9,000
Supplies Expense 13,000
Loss on Sale of Equipment 2,000
Interest Income 3,000
Rent Income               8,000
Total 279,000 279,000

Identify the accounts that may require an adjusting journal entry and describe what the adjustment would accomplish.

Check Your Answer
Cash is never adjusted with an adjusting entry.

Accounts Receivable – requires an adjustment to bad debt expense and allowance for uncollectible accounts for the amount that is not expected to be collected.

Supplies – requires an adjustment to make sure the balance is what is actually on hand at 12/31.  This adjustment will also use the accounts supplies expense

Prepaid Insurance – requires an adjustment to make sure the balance is the amount that is still prepaid on the balance sheet date.  This adjustment will also use the account insurance expense

Prepaid Rent – requires an adjustment to make sure the balance is the amount that is still prepaid on the balance sheet date. This adjustment will also use the account rent expense

Equipment/Accumulated Depreciation – depreciation expense must be recorded when the equipment is used to produce revenues. Debit depreciation expense and credit accumulated depreciation          

Long-Term Notes Receivable – the note will carry interest and will require an adjustment to record the interest revenue earned.  This adjustment will also use the account interest receivable

Long Term Debt – the debt will carry interest and will require an adjustment to record interest expense incurred.  The adjustment will also use the account interest payable

Unearned Revenue – the account balance must represent what is owed the customer on the balance sheet date.  The account is adjusted to the owed amount and the other account that is used is a revenue account (sales, rent revenue, etc.)

Salary Expense – this account must be adjusted to add any amounts earned by employees this period that have not been paid. The other account that is used is salaries payable

All revenue and expense accounts must be adjusted to be equal to what is earned this period and what is incurred this period. Adjusting the asset and liability accounts listed above will also adjust the revenue and expense to what is earned and incurred.

Gains and losses are never adjusted.
Capital stock and retained earnings are never adjusted.

12. Following is a company’s adjusted trial balance. Prepare an income statement and
a balance sheet. Prepare closing journal entries before preparing the balance sheet.

Unadjusted Trial Balance

Accounts Debit Credit
Cash 42,000
Accounts Receivable 91,000
Allowance for U.A. 9,000
Supplies 3,000
Prepaid Insurance 6,000
Interest Receivable 2,500
Equipment 70,000
Accumulated Deprec. 10,000
L/T Notes Receivable 25,000
L/T Debt 20,000
Unearned Revenues 4,000
Interest Payable 600
Tax Payable 21,000
Capital Stock 1,000
Dividends Paid 5,000
Retained Earnings 1/1 139,200
Sales 92,000
Salary Expense 16,000
Rent Expense 9,000
Supplies Expense 13,000
Depreciation Expense 1,800
Interest Expense 600
Tax Expense 21,000
Loss on Sale of Equipment 2,000
Interest Income 4,500
Rent Income 8,000
Bad Debt Expense 1,400               
Total 309,300 309,300
Check Your Answer
Income Statement:

Sales 92,000
  Less Operating Expense:
Salary Expense 16,000
Rent Expense 9,000
Supples Expense 13,000
Depreciation Expense 1,800
Bad Debt Expense   1,400
Operating Income: 50,800
  Other Revenues/Expenses:
Interest Expense (600)
Loss on Sale of Equipment (2,000)
Interest Income 4,500
Rent Income   8,000
Income Before Tax 60,700
Tax Expense (21,000)
Net Income 39,700

Closing Entries:

Sales 92,000         
Interest Income 4,500         
Rent Income 8,000         
            Retained Earnings 104,500
Retained Earnings 64,800         
        Salary Expense 16,000
        Rent Expense 9,000
        Supplies Expense 13,000
        Depreciation Expense 1,800
        Bad Debt Expense 1,400
        Interest Expense 600
        Loss on Sale of Equipment 2,000
        Tax Expense 21,000
Retained Earnings 5,000         
        Dividends Paid 5,000

Balance Sheet:

Ending retained earnings = 139,000 + 104,500 – 64,800 – 5,000 = 173,900

13. Following is a list of accounts for the company as of December 31 st after recording adjusting entries.

Accounts Payable 47,000 Admin Expenses 35,000
Accounts Receivable 22,000 Patent 6,000
Building 215,000 Accrued Expenses 9,000
Cash 15,000 Short Term Notes Payable 135,000
Equipment 76,000 Common Stock 1,000
Retained Earnings (59,000) Bonds Payable 75,000
Prepaid Expenses 12,000 Accumulated Depreciation 92,000
Sales 123,000 Dividends Paid 5,000
Deprec. Expense 18,000 Unearned Revenue 8,000
Loss on Sale of Auto 3,000 Selling Expenses 24,000

A. Prepare an adjusted trial balance.
B. Prepare an income statement
C. Prepare closing journal entries.
D. Determine the balance in retained earnings to be presented on the balance sheet as of December 31 st

Check Your Answer

A. 

Account        Debit Credit
Cash 15,000
Accounts Receivable 22,000
Prepaid Expenses 12,000
Building 215,000
Equipment 76,000
Accumulated Depreciation 92,000
Patent 6,000
Accounts Payable 47,000
Accrued Expenses 9,000
Unearned Revenues 8,000
S/T Notes Payable 135,000
Bonds Payable 75,000
Common Stock 1,000
Retained Earnings 59,000
Dividends Paid 5,000
Sales 123,000
Administration Expense 35,000
Selling Expense 24,000
Depreciation Expense 18,000
Loss on Sale of Auto    3,000                
Total 490,000 490,000

B. Income Statement

Sales 123,000
   Less Operating Expenses:
   Administrative Expense (35,000)
   Selling Expense (24,000)
   Depreciation Expense   (18,000)
Income from Operations 46,000
   Loss on Sale of Auto     (3,000)
Net Income 43,000

C. Closing Entries

Sales                                              123,000
       Retained Earnings                        123,000

Retained Earnings                       80,000
       Administrative Expense                35,000
       Selling Expense                               24,000
       Depreciation Expense                    18,000
       Loss on sale of auto                          3,000

Retained Earnings                        5,000
       Dividends Paid                                  5,000

D. Ending Retained Earnings:

Beginning Retained Earnings          (59,000)
+ Income                                                43,000
– Dividends Paid                                   (5,000)
Ending Retained Earnings                (21,000)

Reported on balance sheet