You are on page 1of 31

CHAPTER 4

COMPLETING THE ACCOUNTING CYCLE

Chapter 4Completing the Accounting Cycle


TRUE/FALSE
1. After analyzing transactions, the next step would be to post the transactions in the ledger.
ANS: F

DIF:

OBJ: 01

2. The most important output of the accounting cycle is the financial statements.
ANS: T

DIF:

OBJ: 01

3. The work sheet is not considered a part of the formal accounting records.
ANS: T

DIF:

OBJ: 02

4. The work sheet is a working paper that accountants can use to summarize adjusting entries
and the account balances for the financial statements.
ANS: T

DIF:

OBJ: 02

5. In a computerized accounting system, a work sheet may not be necessary because the
software program automatically posts entries to the accounts and prepares financial
statements.
ANS: T

DIF:

OBJ: 02

6. The trial balance may be listed on the work sheet instead of being prepared separately.
ANS: T

DIF:

OBJ: 02

7. 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.
ANS: F

DIF:

OBJ: 02

8. A work sheet heading is dated for a period of time.


ANS: T

DIF:

OBJ: 02

9. On the work sheet, the capital and drawing account balances are extended to the Balance
Sheet columns.
ANS: T

DIF:

OBJ: 02

10.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.
ANS: T

DIF:

OBJ: 02

11. 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.
ANS: T

DIF:

OBJ: 02

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.
ANS: F

DIF:

OBJ: 02

13. Net income is shown on the work sheet in the Income Statement debit column and the
Balance Sheet credit column.
ANS: T

DIF:

OBJ: 02

14. If the totals of the Income Statement debit and credit columns of a work sheet are $22,750
and $25,000, respectively, after all account balances have been extended, the amount of the
net loss is $2,250.
ANS: F

DIF:

OBJ: 02

15. The worksheet and the financial statements both require dollar signs.
ANS: F

DIF:

OBJ: 02

16. Round tripping is a fraudulent scheme where business A artificially inflates revenue by
lending money to customer B who uses that money to buy products from A.
ANS: T

DIF:

OBJ: 03

17. There is really no benefit in preparing financial statements in any particular order.
ANS: F

DIF:

OBJ: 03

18. On the income statement, miscellaneous expenses are usually presented as the last item
without regard to the dollar amount.
ANS: T

DIF:

OBJ: 03

Chapter 4Completing the Accounting Cycle

19. The usual presentation of the statement of owner's equity is (1) Beginning capital, (2) Net
income or loss, (3) Drawing, (4) Owner's contributions, (5) Ending capital.
ANS: F

DIF:

OBJ: 03

20. The difference between a classified balance sheet and one that is not classified is that the
classified one has subheadings.
ANS: T

DIF:

OBJ: 03

21. 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 longer than one year, are
called current assets.
ANS: F

DIF:

OBJ: 03

22. Prepaid Insurance is an example of a current asset.


ANS: T

DIF:

OBJ: 03

23. Land is an example of a plant asset.


ANS: T

DIF:

OBJ: 03

24. Liabilities that will be due within one year or less and that are to be paid out of current
assets are called current liabilities.
ANS: T

DIF:

OBJ: 03

25. The amount of the net income for a period appears on both the income statement and the
balance sheet for that period.
ANS: F

DIF:

OBJ: 03

26. Accrued taxes payable are generally reported on the balance sheet as a current liability.
ANS: T

DIF:

OBJ: 03

27. At the end of the fiscal period, prepaid expenses are reported on the Income Statement as
expenses.
ANS: F

DIF:

OBJ: 03

28. Office Equipment is an example of a current asset account.


ANS: F

DIF:

OBJ: 03

89

Chapter 4Completing the Accounting Cycle

29. Capital and Drawing are reported in the owner's equity section of the balance sheet.
ANS: F

DIF:

OBJ: 03

30. Deferred expenses that benefit a relatively short period of time are listed on the balance
sheet as current assets.
ANS: T

DIF:

OBJ: 03

31. Unearned revenues that will be earned in a relatively short period of time are listed on the
balance sheet as current assets.
ANS: F

DIF:

OBJ: 03

32. Accrued expenses are ordinarily listed on the balance sheet as current assets.
ANS: F

DIF:

OBJ: 03

33. Accrued revenues are ordinarily listed on the balance sheet as current liabilities.
ANS: F

DIF:

OBJ: 03

34. The balance in the capital account on the worksheet will equal the amount presented in the
balance sheet.
ANS: F

DIF:

OBJ: 03

35. Examples of temporary accounts are supplies and prepaid expenses which are in the ledger
for just a short time before they expire.
ANS: F

DIF:

OBJ: 04

36. Accumulated Depreciation is a permanent account.


ANS: T

DIF:

OBJ: 04

37. The drawing account is a temporary account.


ANS: T

DIF:

OBJ: 04

38. The balance sheet accounts are referred to as real or permanent accounts.
ANS: T

90

DIF:

OBJ: 04

Chapter 4Completing the Accounting Cycle

39. Since the adjustments are entered on the work sheet, it is not necessary to record them in the
journal or post them to the ledger.
ANS: F

DIF:

OBJ: 04

40. Journalizing and posting the adjustments and closing entries updates the ledger for the new
accounting period.
ANS: T

DIF:

OBJ: 04

41. The income summary account is closed to the owner's capital account.
ANS: T

DIF:

OBJ: 04

42. The accumulated depreciation account is closed to the income summary account.
ANS: F

DIF:

OBJ: 04

43. The drawing account is closed to the income summary account.


ANS: F

DIF:

OBJ: 04

44. The trial balance prepared after all the closing entries have been posted is called a preclosing trial balance.
ANS: F

DIF:

OBJ: 04

45. Entries required to close the balances of the temporary accounts at the end of the period are
called final entries.
ANS: F

DIF:

OBJ: 04

46. In a sole proprietorship, a closing entry for the drawing account may not be necessary.
ANS: F

DIF:

OBJ: 04

47. Journalizing and posting closing entries must be completed before financial statements can
be prepared.
ANS: F

DIF:

OBJ: 04

48. During the closing process, some balance sheet accounts are closed to zero.
ANS: F

DIF:

OBJ: 04

49. Closing entries are entered directly on to the work sheet.


ANS: F

DIF:

OBJ: 04

91

Chapter 4Completing the Accounting Cycle

50. The post-closing trial balance will generally have fewer accounts than the trial balance.
ANS: T

DIF:

OBJ: 04

51. A post-closing trial balance contains only asset and liability accounts.
ANS: F

DIF:

OBJ: 04

52. A post-closing trial balance should be prepared before the financial statements are prepared.
ANS: F

DIF:

OBJ: 04

53. Any twelve-month accounting period adopted by a company is known as its fiscal year.
ANS: T

DIF:

OBJ: 05

54. A fiscal year that ends when business activities have reached their lowest point is called the
natural business year.
ANS: T

DIF:

OBJ: 05

55. Solvency is essentially the ability of an organization to pay its bills.


ANS: T

DIF:

OBJ: 06

56. Working capital is current assets plus current liabilities.


ANS: F

DIF:

OBJ: 06

57. Current ratio is current assets divided by current liabilities.


ANS: T

DIF:

OBJ: 06

58. Reversing entries are required of all adjusting entries.


ANS: F

DIF:

OBJ: App

59. Immediately after the reversing entry for accrued salary has been posted, the salary expense
account will have a credit balance.
ANS: T

DIF:

OBJ: App

60. The use of reversing entries is optional.


ANS: T

92

DIF:

OBJ: app

Chapter 4Completing the Accounting Cycle

61. When reversing entries are made, all accrual adjustments will be reversed.
ANS: T

DIF:

OBJ: app

MULTIPLE CHOICE
1. In the accounting cycle, the last step is
a. preparing the financial statements
b. journalizing and posting the adjusting entries
c. preparing a post-closing trial balance
d. journalizing and posting the closing entries
ANS: C

DIF:

OBJ: 01

2. The worksheet
a. is an integral part of the accounting cycle
b. eliminates the need to rewrite the financial statements
c. is a working paper that is required
d. is used to summarize account balances and adjustments for the financial statements
ANS: D

DIF:

OBJ: 02

3. Which one of the steps below is not aided by the preparation of the work sheet?
a. preparing the adjusted trial balance
b. posting to the general ledger
c. preparing the financial statements
d. preparing the closing entries
ANS: B

DIF:

OBJ: 02

4. A work sheet includes columns for


a. adjusting entries
b. closing entries
c. reversing entries
d. both a and b
ANS: A

DIF:

OBJ: 02

5. When a work sheet is complete, the adjustment columns should have


a. total credits greater than total debits if a net income was earned
b. total debits grater than total credits if a net loss was incurred
c. total debits greater than total credits if a net income was earned
d. total debits equal total credits
ANS: D

DIF:

OBJ: 02

93

Chapter 4Completing the Accounting Cycle

6. 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
ANS: B

DIF:

OBJ: 02

7. 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:

OBJ: 02

8. A net loss appears on the work sheet in the


a. debit column of the Balance Sheet columns
b. credit column of the Balance Sheet columns
c. debit column of the Income Statement columns
d. credit column of the Adjustments columns
ANS: A

DIF:

OBJ: 02

9. 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
ANS: B

DIF:

OBJ: 02

10. Which of the statements below indicates that a company earned a net income for the period?
a. The sum of the debits exceeds the sum of the credits in the Balance Sheet columns
on the work sheet.
b. The sum of the credits exceeds the sum of the debits in the Income Statement
columns on the work sheet.
c. The sum of the debits exceeds the sum of the credits in the Income Statement
columns on the work sheet.
d. Cash inflows exceeded cash outflows.
ANS: B

94

DIF:

OBJ: 02

Chapter 4Completing the Accounting Cycle

11. Which of the items below would appear in the Income Statement columns of the work
sheet?
a. Equipment
b. Unearned Fees
c. Prepaid Expense
d. Net Loss
ANS: D

DIF:

OBJ: 02

12. Which of the accounts below would appear in the balance sheet columns of the worksheet?
a. Rent Earned
b. Bill Jones, Drawing
c. Unearned Revenue
d. Both b and c
ANS: D

DIF:

OBJ: 02

13. Which of the accounts below would appear in the Balance Sheet columns of the work sheet?
a. Service Revenue
b. Prepaid Rent
c. Supplies Expense
d. None of the Above
ANS: B

DIF:

OBJ: 02

14. The work sheet at the end of September has $4,000 in the Balance Sheet credit column for
Accumulated Depreciation. The work sheet at the end of October has $4,750 in the Balance
Sheet credit column for Accumulated Depreciation. What was the amount of the
depreciation expense adjustment for the month of October?
a. amount can not be determined
b. $4,750
c. $4,000
d. $750
ANS: D

DIF:

OBJ: 02

15. Which of the items below does not appear on the work sheet?
a. adjusting entries
b. the unadjusted trial balance
c. closing entries
d. the drawing account
ANS: C

DIF:

OBJ: 02

95

Chapter 4Completing the Accounting Cycle

16. 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
ANS: B

DIF:

OBJ: 02

17. 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 $25,250 and $21,825, respectively.
What is the amount of net income or net loss for the period?
a. $3,425 net income
b. $25,250 net loss
c. $3,425 net loss
d. $21,825 net income
ANS: A

DIF:

OBJ: 02

18. 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 $87,500 and $98,300,
respectively. What is the amount of the net income or net loss for the period?
a. $10,800 net income
b. $10,800 net loss
c. $98,300 net income
d. $87,500 net loss
ANS: A

DIF:

OBJ: 02

19. On October 1, the company pays rent for twelve months in advance and debits an asset
account. At year end, the adjusting entry on the work sheet would
a. increase an expense account
b. decrease a liability account
c. increase an asset account
d. decrease an expense account
ANS: A

DIF:

OBJ: 02

20. On August 1, a company collects revenue in advance for the next twelve months and credits
a liability account. The adjusting entry at year end on the work sheet would
a. increase a liability account
b. decrease an asset account
c. decrease a revenue account
d. decrease a liability account
ANS: D

96

DIF:

OBJ: 02

Chapter 4Completing the Accounting Cycle

21. 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 Balance Sheet columns of the work sheet
ANS: C

DIF:

OBJ: 03

22. 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
ANS: B

DIF:

OBJ: 03

23. Notes Receivable due in 345 days appear on the


a. balance sheet in the current assets section
b. balance sheet in the fixed assets section
c. balance sheet in the current liabilities section
d. income statement as an expense
ANS: A

DIF:

OBJ: 03

24. Unearned Fees appear on the


a. balance sheet in the current assets section
b. balance sheet as a current liability
c. balance sheet in the owner's equity section
d. income statement as revenue
ANS: B

DIF:

OBJ: 03

25. 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
ANS: B

DIF:

OBJ: 03

26. Balance sheet accounts


a. represent amounts accumulated during a specific period of time
b. are called real accounts
c. have zero balances after the closing entries have been posted
d. are equal to assets and liabilities
ANS: B

DIF:

OBJ: 03

97

Chapter 4Completing the Accounting Cycle

27. Prepaid insurance is reported on the balance sheet as a


a. current asset
b. fixed asset
c. current liability
d. long-term liability
ANS: A

DIF:

OBJ: 03

28. On which financial statement will Income Summary be shown?


a. Statement of Owner's Equity
b. Balance Sheet
c. Income Statement
d. No financial statement
ANS: D

DIF:

OBJ: 04

29. 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
ANS: B

DIF:

OBJ: 04

30. 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:

OBJ: 04

31. 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
ANS: D

DIF:

OBJ: 04

32. 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
ANS: B

98

DIF:

OBJ: 04

Chapter 4Completing the Accounting Cycle

33. Which of the accounts below would be closed by making a debit to the account?
a. Unearned Revenue
b. Fees Earned
c. Jeff Ritter, Drawing
d. Rent Expense
ANS: B

DIF:

OBJ: 04

34. 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 Insurance
d. Unearned Rent
ANS: A

DIF:

OBJ: 04

35. 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
ANS: C

DIF:

OBJ: 04

36. Which of the following accounts will be closed to the Capital account at the end of the fiscal
year?
a. Rent Expense
b. Fees Earned
c. Income Summary
d. Depreciation Expense
ANS: C

DIF:

OBJ: 04

37. The entry to close the appropriate insurance account at the end of the accounting period is
a. debit Income Summary; credit Prepaid Insurance
b. debit Prepaid Insurance; credit Income Summary
c. debit Insurance Expense; credit Income Summary
d. debit Income Summary; credit Insurance Expense
ANS: D

DIF:

OBJ: 04

38. Which of the following accounts ordinarily appears in the post-closing trial balance?
a. Bill Smith, Drawing
b. Supplies Expense
c. Fees Earned
d. Unearned Rent
ANS: D

DIF:

OBJ: 04

99

Chapter 4Completing the Accounting Cycle

39. The post-closing trial balance differs from the adjusted trial balance in that it
a. does not take into account closing entries
b. does not take into account adjusting entries
c. does not include balance sheet accounts
d. does not include income statement accounts
ANS: D

DIF:

OBJ: 04

40. The following accounts were taken from the Adjusted Trial Balance columns of the work
sheet:
Accumulated Depreciation
$ 2,000
Fees Earned
15,000
Depreciation Expense
1,000
Insurance Expense
500
Prepaid Insurance
4,500
Supplies
1,200
Supplies Expenses
3,500
Net income for the period is
a. $2,300
b. $10,000
c. $4,300
d. $5,000
ANS: B

DIF:

OBJ: 04

41. A summary of selected ledger accounts appear below for Ted's Auto Services for the 2005
calendar year end.
Ted, Capital
1/1
12/31

5,000
17,000

Ted, Drawing
12/31

7,000

12/31

7,000

6/30
11/30

2,000
5,000

12/31
12/31

Income Summary
15,000
12/31
17,000

32,000

Net income for the period is


a. $17,000
b. $22,000
c. $7,000
d. $15,000
ANS: A

100

DIF:

OBJ: 04

Chapter 4Completing the Accounting Cycle

42. 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
ANS: A

DIF:

OBJ: 05

43. The ability of a company to pay its debts is called


a. working capital
b. current ratio
c. return on investment
d. solvency
ANS: D

DIF:

OBJ: 06

44. A current ratio of 4.3 means that


a. there are $4.30 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 $4.30 in current assets for every $4.30 in current liabilities
d. there are $4 in current assets for every $3 in current liabilities
ANS: A

DIF:

OBJ: 06

45. Reversing entries are


a. required by generally accepted accounting principles
b. made for all deferred adjusting entries
c. made at the end of the accounting period prior to the closing entries
d. made at the beginning of the accounting period
ANS: D

DIF:

OBJ: App

46. A reversing entry reverses a(n)


a. closing entry
b. transaction entry
c. adjusting entry
d. correcting entry
ANS: C

DIF:

OBJ: App

47. If reversing entries are used, which of the adjusting entries below should be reversed?
a. Insurance Expense, debit: Prepaid Insurance, credit
b. Unearned Revenue, debit; Fees Earned, credit
c. Office Supplies Expense, debit; Office Supplies, credit
d. Accounts Receivable, debit; Fees Earned, credit
ANS: D

DIF:

OBJ: App

101

Chapter 4Completing the Accounting Cycle

48. Reversing entries should be made for


a. adjusting entries recording depreciation
b. adjusting entries for all deferrals
c. adjusting entries recording salaries
d. all of the above
ANS: C

DIF:

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)
Kim Lee, Drawing
____
(2)
Fees Earned
____
(8)
Equipment
____
(3)
Accounts Payable ____
(9)
Accounts Receivable ____
(4)
Kim Lee, Capital ____
(10)
Accumulated Depreciation____
(5)
Supplies Expense ____
(11)
Salary Expense
____
(6)
Unearned Rent ____
(12)
Depreciation Expense ____
ANS:
(a)
(b)

Income statement: 2, 5, 11, 12


Balance sheet: 1, 3, 4, 6, 7, 8, 9, 10

DIF:

OBJ: 02

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)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
DIF:

102

current asset
current liability
current asset
expense
expense
current asset
current liability
revenue
2

OBJ: 03

Chapter 4Completing the Accounting Cycle

3. The following accounts were taken from the Adjusted Trial Balance columns of the work
sheet for June 30, 2005 for Brodie Co.:
Accumulated Depreciation
Fees Earned
Depreciation Expense
Rent Expense
Prepaid Insurance
Supplies
Supplies Expense

$ 25,000
85,000
9,500
44,000
7,000
500
2,500

Prepare an income statement.


ANS:
Brodie Co.
Income Statement
For the Year Ended June 30, 2005
Fees earned
Expenses:
Rent expense
Depreciation expense
Supplies expense
Total expenses
Net income
DIF:

$85,000
$44,000
9,500
2,500
56,000
$29,000
=======

OBJ: 03

4. The following revenue and expense account balances were taken from the Income Statement
columns of the work sheet for Marion Services Co. for December 31, 2005:
Depreciation Expense
Insurance Expense
Miscellaneous Expense
Rent Expense
Service Revenue
Supplies Expense
Utilities Expense
Wages Expense

$ 5,950
3,900
2,200
34,000
102,500
4,150
6,000
53,750

Prepare an income statement.

103

Chapter 4Completing the Accounting Cycle

ANS:
Marion Services Co.
Income Statement
For the Year Ended December 31, 2005
Service revenue
Operating expenses:
Wages expense
Rent expense
Utilities expense
Depreciation expense
Insurance expense
Supplies expense
Miscellaneous expense
Total operating expenses
Net loss
DIF:

$ 102,500
$53,750
34,000
6,000
5,950
3,900
4,150
2,200
109,950
$(7,450)
========

OBJ: 03

5. Selected ledger accounts appear below for Construction Services for 2005.
Flynn, Capital
Flynn, Drawing
12/31
15,000
1/1
20,000
3/31 12,000
12/31
12/31
45,000
12/22 3,000

12/31
12/31

Income Summary
19,000
12/31
45,000

15,000

64,000

Prepare a statement of owner's equity.


ANS:
Construction Services
Statement of Owner's Equity
For the Year Ended December 31, 2005
Flynn, capital, 1/1/2005
Net income
Less withdrawals
Increase in owners equity
Flynn, capital, 12/31/2005
DIF:

104

OBJ: 03

$20,000
$ 45,000
15,000
30,000
$50,000
=======

Chapter 4Completing the Accounting Cycle

6. The following data were taken from the Balance Sheet columns of the work sheet for
September 30, 2005 for Clayton Company:
Accumulated Depreciation-Trucks
Prepaid Rent
Supplies
Unearned Fees
Trucks
Cash
Clayton, Capital

$25,000
4,000
500
4,300
29,000
2,000
?

Prepare a classified balance sheet.


ANS:
Clayton Company
Balance Sheet
September 30, 2005
Assets
Current assets:
Cash
Supplies
Prepaid rent
Total current
assets
Property, plant, and
equipment:
Trucks
Less accum.
depreciation
Total property, plant
and equipment
Total assets

DIF:

Liabilities
$ 2,000
500
4,000

Current liabilities:
Unearned fees
$ 6,500

$29,000

Owner's Equity
Clayton, capital
Total liabilities and
owner's equity

$ 4,300

6,200
$10,500
=======

25,000

4,000
$10,500
=======
OBJ: 03

105

Chapter 4Completing the Accounting Cycle

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)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)

Automobile ___
Accumulated depreciation ____
Rent expense ____
Fees earned ____
Salaries payable ____
Prepaid rent ____
Store supplies ____
Advertising expense ____
Unearned rent ____

ANS:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
DIF:

property, plant, and equipment


property, plant, and equipment
expense
revenue
current liability
current asset
current asset
expense
current liability
2

OBJ: 03

8. The balances in the ledger of Landscape Services as of December 31, 2005 before
adjustments, are as follows:
Cash
$ 4,500 Tim Welch, Capital
$33,050
Supplies
4,150 Tim Welch, 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 Landscape Services for December,
2005.
(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, 2005.

106

Chapter 4Completing the Accounting Cycle

ANS:
(a)
Landscape Services
)
Work Sheet
)
For the Month Ended December 31, 2005
)
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 Depreciation
.....
10,200
.....
(c) 1,500 )
Tim Welch, Capital
.....
33,050
.....
..... )
Tim Welch, 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
(
====== ======
======
======

107

Chapter 4Completing the Accounting Cycle

(b) (1)
Landscape Services
Income Statement
For the Month Ended December 31, 2005
Service revenue
Operating expenses:
Salary expense
Rent expense
Supplies expense
Depreciation expense
Insurance expense
Miscellaneous expense
Total operating expenses
Net income

$52,500
$27,600
5,000
3,150
1,500
900
1,900
40,050
$12,450
=======

(2)
Landscape Services
Statement of Owner's Equity
For the Month Ended December 31, 2005
Tim Welch, capital, December 1, 2005
Net income for the month
Less withdrawals
Increase in owner's equity
Tim Welch, capital, December 31, 2005

108

$33,050
$12,450
2,900
9,550
$42,600
=======

Chapter 4Completing the Accounting Cycle

(3)
Landscape Services
Balance Sheet
December 31, 2005
Assets
Current assets:
Cash
Supplies
Prepaid insurance
Total current
assets

Liabilities
$ 4,500
1,000
7,800

Current liabilities:
Salaries payable
$13,300

Property, plant, and


equipment:
Equipment...

Owner's Equity
Tim Welch, capital
Total liabilities
and owner's equity

$42,000

Less accumulated
depreciation
Total property,
plant, and
equipment
Total assets

$ 1,000

42,600
$43,600
======
=

11,700
30,300
$43,600
======
=

(c)
Closing Entries
Jan. 31 Service Revenue
Income Summary

52,500
52,500

31 Income Summary
Salary Expense
Rent Expense
Miscellaneous Expense
Supplies Expense
Insurance Expense
Depreciation Expense

40,050

31 Income Summary
Tim Welch, Capital

12,450

31 Tim Welch, Capital


Tim Welch, Drawing
DIF:

27,600
5,000
1,900
3,150
900
1,500
12,450
2,900
2,900

OBJ: 03, 04

109

Chapter 4Completing the Accounting Cycle

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 Shore Co., journalize the four closing entries.
Cash
Accounts Receivable
Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Stan Shore, Capital
Stan Shore, Drawing
Fees Earned
Salary Expense
Rent Expense
Depreciation Expense
Supplies Expense
Miscellaneous Expense

$ 21,500
45,200
5,000
169,900
$ 69,000
42,500
152,600
30,000
404,500
300,500
60,000
25,000
9,500
2,000
$668,600
========

$668,600
========

ANS:
Oct. 31 Fees Earned
Income Summary
31 Income Summary
Salary Expense
Rent Expense
Depreciation Expense
Supplies Expense
Miscellaneous Expense
31 Income Summary
Stan Shore, Capital
31 Stan Shore, Capital
Stan Shore, Drawing
DIF:

110

OBJ: 04

404,500
404,500
397,000
300,500
60,000
25,000
9,500
2,000
7,500
7,500
30,000
30,000

Chapter 4Completing the Accounting Cycle

10. After all adjustments have been made, but before the accounts have been closed, the
following balances were taken from the ledger:
Accounts Payable
Accounts Receivable
Accumulated Depreciation
Cash
Depreciation Expense
Equipment
Insurance Expense
Prepaid Insurance

$ 40,000
54,500
83,325
7,150
23,500
155,000
8,600
5,275

Rent Expense
Salary Expense
Salaries Payable
Service Revenue
Supplies
Supplies Expense
Ray Felon, Capital
Ray Felon, Drawing

$ 21,400
66,000
150
151,000
2,500
3,500
100,950
28,000

Journalize the entries to close the appropriate accounts.


ANS:
Service Revenue
Income Summary

151,000

Income Summary
Depreciation Expense
Insurance Expense
Rent Expense
Salary Expense
Supplies Expense

123,000

151,000
23,500
8,600
21,400
66,000
3,500

Income Summary
Ray Felon, Capital

28,000

Ray Felon, Capital


Ray Felon, Drawing

28,000

DIF:

28,000
28,000
OBJ: 04

111

Chapter 4Completing the Accounting Cycle

11. The following balance sheet contains errors.


Billy Brown Services Co.
Balance Sheet
For the Year Ended December 31, 2005
Assets
Current assets:
Cash
Accounts payable
Supplies
Prepaid insurance
Land
Total current assets
Property, plant, and
equipment:
Building
Equipment
Total property,
plant,
and equipment
Total assets

(a)

Liabilities
Current liabilities:
Accounts receivable
Accum. depr-building
Accum. depr-equipment
Net income

$ 6,170
8,500
1,590
345
25,000

$41,605 Total liabilities

$ 9,000
13,525
6,340
12,500
$ 41,365

Owner's Equity
Wages payable
$45,500
28,250

Billy Brown, capital


Total owner's equity

74,490
$ 74,990

73,750
Total liabilities and
$116,355
owner's equity
=======
=

$116,355
=======
=

List the errors in the balance sheet above and (b) prepare a corrected balance
sheet.

ANS:
(a)

112

500

(1) Date of statement should be "December 31, 2005" and not "For the Year
Ended "December 31, 2005."
(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.

Chapter 4Completing the Accounting Cycle

A corrected balance sheet would be as follows:


Billy Brown Services Co.
Balance Sheet
December 13, 2005
Assets
Current assets:
Cash
Accounts receivable
Supplies
Prepaid insurance
Total current assets
Property, plant, and equipment:
Land
Building
Less accum. depreciation
Equipment
Less accum. depreciation
Total property, plant, and
equipment
Total assets

(
Liabilities
(Current liabilities:
( Accounts payable
( Wages payable
(Total liabilities
(
( Owner's Equity
(Billy Brown, capital
(
(Total liabilities and
( owner's equity
DIF:

$ 6,170
9,000
1,590
345
$17,105
$25,000
$45,500
13,525
28,250
6,340

31,975
21,910
78,885
$95,990
=======

)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)

$ 8,500
500
$ 9,000
86,990
$95,990
=======
OBJ: 03

113

Chapter 4Completing the Accounting Cycle

12. Prior to adjustment at July 31, 2005, 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)
(2)
(3)

Is the balance in Salary Expense, after posting the entry of August 1, an


asset, a liability, a revenue, or an expense?
What is the amount of the balance in Salary Expense after posting the entry
of August 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
Salaries Payable

1,500

(2) Income Summary


Salary Expense

302,000

1,500
302,000

(3) Salaries Payable


Salary Expense

1,500

(4) Salary Expense


Cash

9,900

1,500
9,900

(b)
(1) A liability
(2) $8,400 ($9,900 - $1,500)
(3) Salaries Payable, $1,500
Salary Expense, $8,400
DIF:

114

OBJ: 04, App

Chapter 4Completing the Accounting Cycle

13. List in order the seven steps of the accounting cycle in a manual accounting system.
ANS:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
DIF:

Transactions are analyzed and recorded in the journal.


Transactions are posted to the ledger.
A trial balance is prepared, adjustment data are assembled, and the work
sheet is completed.
Financial statements are prepared.
Adjusting entries are journalized and posted to the ledger.
Closing entries are journalized and posted to the ledger.
A post-closing trial balance is prepared.
2

OBJ: 01

14. Compute working capital and the current ratio from the following information.
Roy Reed, Consultant
Balance Sheet
December 31, 2005
Cash
Accounts receivable
Prepaid insurance
Land
Building
Equipment
Total assets

$50
8
12
25
12
14
$121
===

Accounts payable
Wages payable
Mortgage payable (long term)
Roy Reed, capital
Total liabilities and owner's equity

$ 9
5
50
57
$121
===

ANS:
Working Capital:
Current Ratio:

$70 - $14 = $56


$70 $14 = 5

DIF:

OBJ: 06

115

Chapter 4Completing the Accounting Cycle

(Left blank intentionally)

116