Question 1

Which of the following account(s) would be part of working capital?

Correct
Response Answer Choices
a. accounts payable
b. land
c. retained earnings
d. cost of goods sold
e. both (a) and (b) are part of working capital

Explanation:
Working capital is defined as current assets minus current liabilities (chapter 3
module 3 slide 4). Accounts payable is a current liability. Thus, accounts payable
is part of working capital. Land is a long-term asset; retained earnings is part of
equity; cost of goods sold is an expense account. Therefore, none of those accounts
are part of working capital.

Question 2
For each item below, indicate whether a debit or credit is appropriate.

1. an increase to cost of goods sold

2. a decrease to patent
3. an increase to mortgage payable
4. a decrease to retained earnings
5. an increase to interest revenue

Explanation:
1. Cost of goods sold is an expense account and is increased with a debit.

2. Patent is an asset account and is decreased with a credit.

3. Mortgage payable is a liability account and is increased with a credit.

4. Retained earnings is an equity account and is decreased with a debit.

5. Interest revenue is a revenue account and is increased with a credit.

Review the chart on chapter 4 module 2 slide 4 for the debit/credit rules.
Question 3
On May 17, Buckeye Corporation performed $800 of services for Betty DeRose, a customer.
Betty paid for one-half of the bill on May 17 and agreed to pay the remainder within 30
days. On June 9, Betty paid the remaining amount owed. Which of the following journal
entries would Buckeye Corporation make on June 9?

Correct
Response Answer Choices
a. debit accounts receivable $400 and credit cash $400
b. debit cash $400 and credit service revenue $400
c. debit accounts payable $400 and credit service revenue $400
d. debit cash $400 and credit accounts payable $400
e. debit accounts payable $400 and credit accounts receivable $400
f. debit cash $400 and credit accounts receivable $400
g. debit accounts payable $400 and credit cash $400

Explanation:
Buckeye Corporation would make the following entry on June 9 to record receiving
payment from a customer for work previously performed:

Cash ...................... 400

Accounts receivable ................. 400

Question 4
Angelique's Antiques had $475 worth of supplies on hand at the beginning of April.
During April, the store paid $600 for supplies. At the end of the month, a hand count
showed that there were $350 left of supplies on hand.

Calculate the amount of supplies expense for Angelique's Antiques during April.

Correct answer
$725

Explanation:
Beginning supplies + Supplies purchased - Supplies used up = Ending supplies

475 + 600 - Supplies used up = 350

Supplies used up = Supplies expense = $725

Question 5
On June 30, 2004, ABC Company borrowed $40,000 from a bank on a 9%, 9-month note
payable.

Calculate the amount of interest expense reported by ABC Company in its 2005 income
statement related to this loan.

Correct answer
$900

Explanation:
Interest = Principle x Rate x Time

In 2005, the loan will be outstanding for 3 months. Thus, the interest expense for 2005
would be calculated as:

40,000 x .09 x 3/12 = $900

NOTE: The loan will be outstanding for 6 months during 2004. Thus, the interest
expense for 2004 would be $1,800 (40,000 x .09 x 6/12).
Question 6
The transactions below relate to XYZ Delivery Company. Indicate the effect of each
transaction on the accounting equation (i.e., assets, liabilities, and equity).

1. XYZ purchased $7,000 of newspaper advertising and agreed to pay the newspaper
in thirty days.

2. XYZ Company purchased office supplies for $1,900 cash.

3. The firm performed $3,000 of delivery services for a customer who agreed to
pay XYZ Company next month.

4. XYZ purchased $40,000 worth of store equipment from Libby Company by paying
$8,000 cash and agreeing to pay the remainder within six months.

5. XYZ received $5,000 cash for services to be performed for a customer next
month.

6. XYZ used supplies costing $800 in the performance of services.

Explanation:

1. This transaction increases liabilities (accounts payable) and decreases equity

(due to the recording of advertising expense which decreases net income and
thus decreases retained earnings).

2. This transaction increases one asset (supplies) and at the same time decreases
another asset (cash). Thus, there is no effect on total assets.

3. This transaction increases assets (accounts receivable) and increases equity

(due to the recording of service revenue which increases net income and thus
increases retained earnings).

4. This transaction increases assets (equipment by $40,000); decreases assets

(cash by $8,000); and increases liabilities (accounts payable by $32,000).
Thus, the overall effect of the transaction is to increase assets by $32,000
and increase liabilities by $32,000.

5. This transaction increases assets (cash) and increases liabilities (unearned

revenue).

6. This transaction decreases assets (supplies) and decreases equity (due to the
recording of supplies expense which decreases net income and thus decreases
retained earnings).
Question 7
ABC Company reported the following information for 2005:

1. Assets at January 1, 2005 were equal to $400,000

2. Assets at December 31, 2005 were equal to $500,000
3. Liabilities at December 31, 2005 were equal to $300,000
4. The return on investment (ROI) for 2005 was 6%
5. The return on equity (ROE) for 2005 was 15%

Using the above information, calculate ABC Company's total stockholders’ equity at
January 1, 2005.

Correct answer
$160,000

Explanation:
Use the ROI equation to calculate net income as follows:

ROI = Net income ÷ Average total assets

Average total assets = (400,000 + 500,000) ÷ 2 = $450,000

.06 = Net income ÷ 450,000

Net income = 450,000 x .06 = $27,000

Now, use the ROE equation to calculate average total equity as follows:

ROE = Net income ÷ Average total equity

.15 = 27,000 ÷ Average total equity

Average total equity = 27,000 ÷ 0.15 = $180,000

Next, calculate equity at December 31 using the balance sheet equation as follows:

Assets at December 31 = $500,000 (given)

Liabilities at December 31 = $300,000 (given)

Thus, equity at December 31 = 500,000 - 300,000 = $200,000

Finally, calculate equity at January 1 as follows:

Average total equity = (Beginning equity + Ending equity) ÷ 2

180,000 = (Beginning equity + 200,000) ÷ 2

Beginning equity = $160,000

Question 8
Before making its year-end adjustments, the net income for Gannet Company was $80,000.
Year-end adjusting entries are necessary for the following items:

1. Office supplies used up during the year totaled $3,200

2. Interest accrued to December 31 on note payable to the bank totaled $900
3. Services performed for clients but not yet collected totaled $2,600

Calculate Gannet Company's net income for the year after the necessary adjustments are
made.

Correct answer
$78,500

Explanation:
The necessary adjusting entries related to each transaction would be:

1. Supplies expense ................. 3,200

Supplies ............................... 3,200

2. Interest expense ................. 900

Interest payable ....................... 900

3. Accounts receivable .............. 2,600

Service revenue ........................ 2,600

● Adjustment #1 decreases net income (the expense reduces net income) $3,200

● Adjustment #2 decreases net income (the expense reduces net income) $900

● Adjustment #3 increases net income (the revenue increases net income) $2,600

Net income after the three adjusting entries have been recorded would be:

80,000 - 3,200 - 900 + 2,600 = $78,500

Question 9
The University of Miami sold $250,000 worth of season tickets for five home football
games. The university collected $80,000 cash for payment for the tickets during
September; $60,000 cash for payment for the tickets in October; and $110,000 cash for
payment for the tickets in November. Two home games were played in September, one home
game was played in October, and two home games were played in November. All home games
at the University of Miami are sell-outs.

Using the realization principle, calculate the amount of revenue the university should
record in September related to the ticket sales.

Correct answer
$100,000

Explanation:
According to the realization principle, revenue is to be recorded in the period the
service is performed regardless as to when cash is received (chapter 4 module 1 slide
2). In this case, the service being performed is allowing ticket holders to attend
games. There were a total of five home games, two of which were played in September.
Therefore the revenue earned during September can be calculated as follows:

$250,000 total sales ÷ 5 games = $50,000 earned per game

$50,000 earned per game x 2 games in September = $100,000 revenue for September
Question 10
ABC Company began operations on August 1, 2009 and entered into the following
transactions during 2009:

1. On August 1, ABC Company sold common stock to owners in the amount of $200,000
and borrowed 100,000 from the local bank on a 10-month, 12% note payable.

2. On September 1, ABC Company purchased a parcel of land costing $80,000 by paying

$20,000 in cash and agreeing to pay the remainder within six months.

3. On October 1, ABC Company received $50,000 cash from a customer for services to
be performed over the next 10 months

4. On December 1, ABC Company paid $10,000 of the amount owed for the land purchased
on September 1.

Calculate the amount of total liabilities that ABC Company would report in its December
31, 2009 balance sheet after all the above transactions are recorded and all necessary
adjusting entries are made.

Correct answer
$190,000

Explanation:
Start by making the journal entries to record the above transactions:

August 1:

Cash ....................... 300,000

Common stock ..................... 200,000
Notes payable .................... 100,000

September 1:

Land ....................... 80,000

Cash ............................. 20,000
Accounts payable ................. 60,000

October 1:

Cash ....................... 50,000

Unearned revenue ................. 50,000

December 1:

Accounts payable ........... 10,000

Cash ............................. 10,000

continued on next page

Question 10 (continued)

December 31 – adjusting entry for interest:

Interest expense ........... 5,000

Interest payable ................. 5,000

(100,000 x .12 x 5/12 = $5,000)

December 31 – adjusting entry for unearned revenue:

Unearned revenue ........... 15,000

Service revenue .................. 15,000

(50,000 ÷ 10 months = $5,000 earned per month x 3 months = $15,000)

Accounts payable ............ 50,000 (60,000 – 10,000)

Notes payable ............... 100,000
Interest payable ............ 5,000
Unearned revenue ............ 35,000 (50,000 – 15,000)
Total liabilities ........... 190,000
Question 11
At January 1, 2010, XYZ Company reported total assets of $400,000, total liabilities of
$150,000, and total equity of $250,000. During 2010, XYZ Company entered into the
following transactions:

1. On April 1, XYZ Company purchased inventory for $60,000 cash

2. On July 1, XYZ Company borrowed $30,000 from the local bank on a 9-month, 10% note
payable

3. On September 1, XYZ Company received $16,000 cash from a customer for services to
be performed over the next 20 months

4. On October 1, XYZ Company sold one-half of the inventory purchased on April 1 to a

customer for $50,000 cash

Calculate the amount of total equity that XYZ Company would report in its December 31,
2010 balance sheet after all the above transactions are recorded and all necessary
adjusting entries are made.

Correct answer
$271,700

Explanation:
Start by making the journal entries to record the above transactions:

April 1 – purchase of inventory:

Inventory .................. 60,000

Cash ............................. 60,000

July 1 – borrowing from the bank:

Cash ....................... 30,000

Notes payable .................... 30,000

September 1 – receipt of cash for services to be performed later:

Cash ....................... 16,000

Unearned revenue ................. 16,000

October 1 – sale of inventory:

Cash ....................... 50,000

Cost of goods sold ......... 30,000
Sales revenue .................... 50,000
Inventory ........................ 30,000

continued on next page

Question 11 (continued)

December 31, 2007 – adjusting entry for interest:

Interest expense ........... 1,500

Interest payable ................. 1,500

(30,000 x 10% x 6/12 = 1,500)

December 31, 2007 – adjusting entry for unearned revenue:

Unearned revenue ........... 3,200

Service revenue .................. 3,200

(16,000 ÷ 20 months = $800 earned per month x 4 months = $2,400)

Sales revenue ....................... 50,000

Cost of goods sold .................. <30,000>
Gross profit ........................ 20,000
Service revenue ..................... 3,200
Interest expense .................... <1,500>
Net income .......................... 21,700

Beginning equity .................... 250,000

Net income .......................... 21,700
Total equity at 12/31/2008 .......... 271,700