Chapter 5F45FReview 5FHandout 5F28solutions 29 PDF

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UNIT 2: CHAPTER 4 REVIEW

MRS. KATZ

Part One: True and False 1. Closing entries are necessary if the business plans to continue operating in the future and issue financial statements each year. T 2. The owner's drawings account is closed to the Income Summary account in order to properly determine Profit (or loss) for the period. F 3. After closing entries have been journalized and posted, all temporary accounts in the ledger should have zero balances. T 4. Cash is a temporary account and it should be zero after all closing entries have been posted. F 5. Closing entries are an optional part of the accounting cycle. F 6. Closing revenue and expense accounts to the Income Summary account is an optional bookkeeping procedure. F 7. Closing the drawings account to Capital is not necessary if profit is greater than owner's drawings during the period. F 8. Reversing Entries are an optional part of the accounting cycle. T 9. The final step in the accounting cycle is the pre-closing trial balance. F 10. A company has only one accounting cycle over its economic existence. F 11. The accounting cycle begins at the start of a new accounting period. T 12. Both correcting entries and adjusting entries always affect at least one balance sheet account and one income statement account. F 13. Correcting entries are made any time an error is discovered even though it may not be at the end of an accounting period. T 14. Correcting entries will only be done at the same time as the adjusting entries are being prepared. F 15. An incorrect debit to Accounts Receivable instead of the correct account Notes Receivable does not require a correcting entry because total assets will not be misstated. F 16. Current assets are normally listed in the balance sheet in order of permanency. F 17. Under International Financial Reporting Standards, current assets may be shown after noncurrent assets on the Balance Sheet. T 18. Another name for Balance Sheet is the Statement of Financial Position. T

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UNIT 2: CHAPTER 4 REVIEW

MRS. KATZ

19. All Canadian public companies must follow International Financial Reporting Standards. T 20. Cash and office supplies are both classified as current assets. T 21. Long-term investments would appear in the property, plant, and equipment section of the balance sheet. F 22. A liability is classified as a current liability if it is to be settled within one year from the balance sheet date or in the company’s normal operating cycle. T 23. Common Canadian practice shows current assets as the first items listed on a classified T 24. The current ratio is the ratio of current liabilities divided by current assets. F 25. Abbott Manufacturing Company’s current ratio is 2:1. The company has $50,000 in current liabilities; current assets must be $25,000. F 26. The difference between current assets and current liabilities is called working capital. T 27. The acid-test ratio is a measure of a company’s long-term liquidity. F

Part Two: Multiple Choice 28. A post-closing trial balance will show a. only permanent account balances. b. only temporary account balances. c. zero balances for all accounts. d. the amount of profit (or loss) for the period. 29. A post-closing trial balance should be prepared a. before closing entries are posted to the ledger accounts. b. after closing entries are posted to the ledger accounts. c. before adjusting entries are posted to the ledger accounts. d. after adjusting entries are posted to the ledger accounts. 30. A post-closing trial balance will show a. zero balances for all accounts. b. zero balances for balance sheet accounts. c. only balance sheet accounts. d. only income statement accounts.

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UNIT 2: CHAPTER 4 REVIEW

MRS. KATZ

31. The purpose of the post-closing trial balance is to a. ensure that all adjusting entries were made. b. prove the equality of the balance sheet account balances that are carried forward into the next accounting period. c. prove the equality of the income statement account balances that are carried forward into the next accounting period. d. list all the balance sheet accounts in alphabetical order for easy reference. 32. The balances that appear on the post-closing trial balance will match the a. income statement account balances after adjustments. b. balance sheet account balances after closing entries. c. income statement account balances after closing entries. d. balance sheet account balances after adjustments. 33. The heading for a post-closing trial balance has a date line that is similar to the one found on a. a balance sheet. b. an income statement. c. a statement of owner's equity. d. the work sheet. 34. Which one of the following is an optional step in the accounting cycle of a business enterprise? a. Analyze business transactions. b. Prepare a work sheet. c. Prepare a trial balance. d. Post to the ledger accounts. 35. Which of the following steps in the accounting cycle would NOT generally be performed daily? a. Journalize transactions. b. Post to ledger accounts. c. Prepare adjusting entries. d. Analyze business transactions. 36. Which of the following steps in the accounting cycle may be performed more frequently than annually? a. Prepare a post-closing trial balance. b. Journalize closing entries. c. Post closing entries. d. Prepare a trial balance. 37. The two optional steps in the accounting cycle are preparing a. a post-closing trial balance and reversing entries. b. a work sheet and post-closing trial balances. c. reversing entries and a work sheet. d. an adjusted trial balance and a post-closing trial balance.

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UNIT 2: CHAPTER 4 REVIEW

MRS. KATZ

38. On August 1, Rothesay Boat Club provided services on account for $800. Rothesay received the entire balance on August 31 and recorded the payment by debiting Cash for $800 and crediting Service Revenue for $800. On the August 31 financial statements a. assets and revenues will be understated. b. assets and liabilities will be overstated. c. assets and revenue will be overstated. d. assets and liabilities will be understated. 39. The Singh Company paid $630 on account to a creditor. The transaction was erroneously recorded as a debit to Cash of $360 and a credit to Accounts Receivable, $360. The correcting entry is a. Accounts Payable................................................................................. 630 Cash............................................................................................. 630 b. Accounts Receivable........................................................................... 360 Cash............................................................................................. 360 c. Accounts Receivable........................................................................... 360 Accounts Payable........................................................................ 360 d. Accounts Receivable.......................................................................... 360 Accounts Payable............................................................................... 630 Cash ........................................................................................... 990 40. The Saint John River Company received $630 on account from a customer. The transaction was erroneously recorded as a debit to Cash of $360 and a credit to Accounts Payable, $360. The correcting entry is a. Accounts Receivable........................................................................... 630 Cash............................................................................................. 630 b. Accounts Payable................................................................................ 360 Cash............................................................................................. 360 c. Accounts Payable................................................................................. 360 Accounts Receivable................................................................... 360 d. Accounts Payable............................................................................... 360 Cash…................................................................................................ 270 Accounts Receivable.................................................................. 630 41. A lawyer collected $860 of legal fees in advance. He erroneously debited Cash for $680 and credited Accounts Receivable for $680. The correcting entry is a. Cash......................................................................................................680 Accounts Receivable............................................................................ 180 Unearned Legal Fees.................................................................... 860 b. Cash...................................................................................................... 860 Legal Fees Earned........................................................................ 860 c. Cash..................................................................................................... 180 Accounts Receivable........................................................................... 680 Unearned Legal Fees.................................................................. 860 d. Cash...................................................................................................... 180 Accounts Receivable.................................................................... 180

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UNIT 2: CHAPTER 4 REVIEW

MRS. KATZ

42. Queenstown Marina noticed an error in their financial statements after the financial statements had been submitted to their bank. The company is applying for a new loan to install a new wharf. The controller of Queenstown should a. wait until the bank has approved the loan to notify them of the mistake. b. inform Queenstown’s management and assume that they will tell the bank. c. inform Queenstown’s management and inform the bank and provide corrected financial statements. d. do nothing or resign. 43. An intangible asset a. derives its value from the rights and privileges it provides the owner. b. is a liability because it has no physical substance. c. is never amortized because it has an indefinite life. d. cannot be classified on the balance sheet because it lacks physical substance. 44. Liabilities are generally classified on a balance sheet as a. small liabilities and large liabilities. b. present liabilities and future liabilities. c. tangible liabilities and intangible liabilities. d. current liabilities and non-current liabilities. 45. The current portion of a long-term liability is reported on the balance sheet as a a. deferred interest expense. b. current asset. c. current liability. d. non-current liability. 46. On a classified balance sheet of a Canadian company, current assets are customarily listed a. in alphabetical order. b. with the largest dollar amounts first. c. in the order of liquidity. d. in the order of acquisition. 47. Intangible assets are a. listed under current assets on the balance sheet. b. not listed on the balance sheet because they do not have physical substance. c. listed as a separate category on the balance sheet. d. listed as a long-term investment on the balance sheet.

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UNIT 2: CHAPTER 4 REVIEW

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48. The relationship between current assets and current liabilities is important in evaluating a company's a. profitability. b. liquidity. c. market value. d. turnover. 49. The most important information needed to determine if companies can pay their current obligations is the a. profit for this year. b. projected profit for next year. c. relationship between current assets and current liabilities. d. relationship between current and non-current liabilities. 50. The current ratio is expressed as a. current assets divided by current liabilities. b. current assets minus current liabilities. c. current liabilities divided by non-current liabilities. d. current assets minus owner’s equity. 51. The current ratio should be interpreted by considering all but a. general economic and industry conditions. b. other special financial information. c. other firms in the same or related industry. d. other firms in unrelated industries.

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UNIT 2: CHAPTER 4 REVIEW

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Part Three: Exercises

Exercise 1 (20 minutes) The trial balances of Grant Company follow with the accounts arranged in alphabetic order: Trial Balances Unadjusted Adjusted Post-Closing Accounts Payable..................................... $10,000 $10,000 $10,000 Accounts Receivable................................ 2,200 3,200 3,200 Accumulated Depreciation—equipment.. 13,000 17,000 17,000 Advertising Expense................................ 0 11,300 0 Cash.......................................................... 60,000 60,000 60,000 Depreciation Expense.............................. 0 4,000 0 Equipment................................................ 75,000 75,000 75,000 F. Grant, Capital....................................... 82,200 82,200 102,400 F. Grant, Drawings................................... 16,000 16,000 0 Prepaid Advertising.................................. 12,800 1,500 1,500 Prepaid Rent............................................. 15,000 11,000 11,000 Rent Expense............................................ 0 4,000 0 Service Revenue....................................... 96,000 105,000 0 Supplies.................................................... 3,200 700 700 Supplies Expense..................................... 2,000 4,500 0 Unearned Service Revenue...................... 23,000 15,000 15,000 Wages Expense......................................... 38,000 45,000 0 Wages Payable......................................... 0 7,000 7,000 Instructions Analyze the data and prepare a. the adjusting entries and b. the closing entries made by Grant Company. Solution Exercise 8 (20 min.) a. Adjusting Entries Depreciation Expense ...................................................................... Accumulated Depreciation—Equipment .................................

4,000 4,000

Advertising Expense ....................................................................... Prepaid Advertising ..................................................................

11,300

Unearned Service Revenue.............................................................. Service Revenue........................................................................

8,000

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

1,000

11,300

8,000 1,000

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b.

UNIT 2: CHAPTER 4 REVIEW

MRS. KATZ

Rent Expense ................................................................................... Prepaid Rent .............................................................................

4,000

Supplies Expense ............................................................................ Supplies ....................................................................................

2,500

Wages Expense ................................................................................ Wages Payable ..........................................................................

7,000

Closing Entries Service Revenue............................................................................... Income Summary......................................................................

4,000

2,500 7,000

105,000 105,000

Income Summary............................................................................. Advertising Expense................................................................. Depreciation Expense................................................................ Rent Expense............................................................................. Supplies Expense...................................................................... Wages Expense..........................................................................

68,800

Income Summary............................................................................. F. Grant, Capital........................................................................

36,200

F. Grant, Capital............................................................................... F. Grant, Drawings....................................................................

16,000

11,300 4,000 4,000 4,500 45,000 36,200

Exercise 2 (5 minutes) Listed below are some of the steps required to complete the accounting cycle. 1. Analyze business transactions. 2. ___________________________ 3. Post to general ledger accounts. 4. Prepare a trial balance. 5. ___________________________ 6. ___________________________ 7. 8. 9.

___________________________ Journalize and post closing entries. ___________________________

Instructions Fill in the blank with the appropriate step in the accounting cycle. Solution Exercise 10 2. Journalize the transaction.

16,000

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UNIT 2: CHAPTER 4 REVIEW

5.

Journalize and post adjusting entries; Prepayments/ Accruals.

6.

Prepare an unadjusted trial balance.

7.

Prepare financial statements.

9.

Prepare a post closing trial balance.

MRS. KATZ

Exercise 3 (10 minutes) The new accountant for Wilson’s Giftware was in a hurry to record the transactions for the month of March, and made the following errors: 1.

2. 3. 4.

February utilities of $560 had been recorded as an Account Payable in February. When the account was paid in March, the accountant recorded the payment as a debit to Utilities Expense and a credit to Cash. March 15th salaries totalling $4,750 were recorded as a debit to Supplies instead of to Salaries Expense. A customer payment in the amount of $1,200 was credited to Accounts Receivable. However the sale had never been invoiced or recorded and was a cash sale. Samra Wilson withdrew $800 for personal use. The accountant recorded the entry as a debit to Cash and a credit to S. Wilson, Drawings.

Instructions: a. For each of the four errors, indicate the effect of the error on the balance sheet and income statement, indicating whether the assets, liabilities, owner’s equity, revenue, expenses, and Profit are overstated (O), understated (U), or not affected (NA). Use the table below for your answer. b.

For each of the four errors, prepare the correcting entries required at March 31.

Table for part a.

Error number Assets Liabilities Owners’ Equity Revenue Expenses

1.

2.

3.

4.

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UNIT 2: CHAPTER 4 REVIEW

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Profit

Solution Exercise 15 (10 min.) a.

Error number

1.

2.

3.

4.

Assets

NA

O

U

O

Liabilities

O

NA

NA

NA

Owners’ Equity

U

O

U

O

Revenue

NA

NA

U

NA

Expenses

O

U

NA

NA

Profit

U

O

U

NA

b. 1.

Accounts Payable.............................................................................

560

Utilities Exp...