BA 203– Financial Accounting

Fall 2019-2020

Review Questions & Answers for Midterm1

1) Each of the following independent events requires a year-end adjusting entry.

 

a. Paid $48,000 cash in advance on July 1 for a one-year lease on office space.
b. Purchased $5,000 of supplies on account on April 15. At year-end, $500 of supplies remained on
hand.
c. Received a $9,600 cash advance on July 1 for a contract to provide services for one year beginning
immediately.
d. Paid $5,400 cash in advance on February 1 for a one-year insurance policy.

 
Required
Record each event and the related adjusting entry in general journal format. The first event is recorded as an
example. Assume a December 31 closing date. 
 
Date Account Titles Debit Credit
July 1 Prepaid rent 48,000  
  Cash  48,000
      
Dec.
Rent Expense (48,000 × 6/12)24,000  
31
  Prepaid rent  24,000

Date Accounts Debit Credit

Dec 1

Dec 5

Dec 9

Dec 10

Dec 19

Dec 22
  

2) The following transactions pertain to Smith Training Company for Year 1:

 Jan.30 Established the business when it acquired $45,000 cash from the issue of common
stock.
Feb.1 Paid rent for office space for two years, $24,000 cash.
Apr.10 Purchased $3,200 of supplies on account.
July1 Received $24,000 cash in advance for services to be provided over the next year.
July20 Paid $1,500 of the accounts payable from April 10.
Aug.15 Billed a customer $18,000 for services provided during August.
Sept.15 Completed a job and received $8,400 cash for services rendered.
Oct.1 Paid employee salaries of $12,000 cash.
Oct.15 Received $15,000 cash from accounts receivable.
Nov.16 Billed customers $42,000 for services rendered on account.
Dec.1 Paid a dividend of $15,000 cash to the stockholders.
31 Adjusted records to recognize the services provided on the contract of July 1.
31 Recorded $3,600 of accrued salaries as of December 31.
31 Recorded the rent expense for the year. (See February 1.)
31 Physically counted supplies; $280 was on hand at the end of the period.

Record the preceding transactions in the general journal, in the given order.

Date Accounts Debit Credit

Dec 1

Dec 5

Dec 9

Date Accounts Debit Credit

Dec 10

Dec 19

1 Jan 30 Cash 45,000

Common stock 45,000

2 Feb 01 Prepaid rent 24,000

Cash 24,000

3 Apr 10 Supplies 3,200

Accounts payable 3,200

4 Jul 01 Cash 24,000

Unearned revenue 24,000

5 Jul 20 Accounts payable 1,500

Cash 1,500

6 Aug 15 Accounts receivable 18,000

Service revenue 18,000

7 Sep 15 Cash 8,400

Service revenue 8,400

8 Oct 01 Salaries expense 12,000

 Cash 12,000

9 Oct 15 Cash 15,000

Accounts receivable 15,000

10 Nov 16 Accounts receivable 42,000

Service revenue 42,000

11 Dec 01 Dividends 15,000

Cash 15,000

12 Dec 31 Unearned revenue 12,000

Service revenue 12,000

13 Dec 31 Salaries expense 3,600

Salaries payable 3,600

14 Dec 31 Rent expense 11,000

Prepaid rent 11,000

15 Dec 31 Supplies expense 2,920

Supplies 2,920

Explanation:
Dec. 31
Unearned revenue ($24,000 × 6/12) = $12,000
Rent expense ($24,000 ÷ 24) × 11 = $11,000
Supplies expense ($3,200 – $280) = $2,920

3) Indicate whether each of the following accounts normally has a debit or credit balance:

Account Balance Account Balance

a. Interest Receivable l. Accounts Payable
b. Interest Revenue m. Operating Expense
c. Prepaid Insurance n. Unearned Revenue
d. Land o. Dividends
e. Salaries Payable p. Cash
f. Salaries Expense q. Insurance Expense
g. Supplies Expense r. Accounts Receivable
h. Consulting Revenue s. Utilities Expense
i. Utilities Payable t. Retained Earnings
j. Supplies u. Common Stock
k. Service Revenue

Account Balance Account Balance

a. Interest Receivable Debit l. Accounts Payable Credit
b. Interest Revenue Credit m. Operating Expense Debit
c. Prepaid Insurance Debit n. Unearned Revenue Credit
d. Land Debit o. Dividends Debit
e. Salaries Payable Credit p. Cash Debit
f. Salaries Expense Debit q. Insurance Expense Debit
g. Supplies Expense Debit r. Accounts Receivable Debit
h. Consulting Revenue Credit s. Utilities Expense Debit
i. Utilities Payable Credit t. Retained Earnings Credit
j. Supplies Debit u. Common Stock Credit
k. Service Revenue Credit

4) The following information is from the records of attorney Glenn Price. Select appropriate descriptions
provided in dropdowns for the accounting event represented in each of the following general journal
entries. Enter answers for transactions in the given order.
 
Date Account Titles Debit Credit
Jan. 1 Cash 40,000  
  Common stock   40,000
Feb. 1 Cash 24,000  
  Service revenue   24,000
Mar. 1 Prepaid rent 1,600  
   Cash   1,600
Apr. 1 Accounts receivable 48,000  
  Service revenue   48,000
May 1 Supplies 2,000  
  Cash   2,000
June 10 Cash 8,000  
  Unearned revenue   8,000
July 10 Cash 8,800  
  Accounts receivable   8,800
Aug. 1 Salaries expense 4,000  
  Cash   4,000
Oct. 1 Dividends 2,000  
  Cash   2,000
Nov. 1 Property tax expense 3,000  
  Cash   3,000
Dec. 31 Rent expense 4,400  
  Prepaid rent   4,400
31 Unearned revenue 2,240  
  Service revenue   2,240
31 Supplies expense 800  
  Supplies   800

Entry Date Description of Transaction

January 1
February1
March 1
April 1
May 1
June 10
July 10
August 1
October 1
November 1
December 31
December 31
December 31

Entry Date Description of Transaction

January 1 Acquired cash from the issue of common stock.
February 1 Performed services and received cash.
March 1 Paid cash to rent space for the future.
April 1 Performed services on account.
May 1 Paid cash for supplies.
June 10 Collected cash for services to be performed in the future.
July 10 Received cash from customers on account.
August 1 Paid cash for salaries.
October 1 Paid a cash dividend to stockholders.
November 1 Paid cash for property taxes.
December 31 Recognized rent expense. Cash had been paid in a prior transaction.
Recognized revenue that had been earned during the period. Cash had been
December 31
received in prior transactions.
December 31 Recognized expense for supplies that had been used during the period.

5) The following trial balance was prepared from the ledger accounts of Ricardo Company:
 
RICARDO COMPANY
Trial Balance
April 30, Year 1
Account Titles Debit Credit
Cash $ 68,900      
Accounts
  30,000      
receivable
Supplies   1,800      
Prepaid insurance   3,600      
Land     $ 12,000 
Accounts payable        9,600 
100,00
Common stock         
0
Retained earnings        27,510 
Dividends   8,000      
Service revenue        60,000 
Rent expense   9,600      
Salaries expense   31,500      
Operating expense   32,400      
209,11
Totals $185,800 $  
0

 
When the trial balance failed to balance, the accountant reviewed the records and discovered the following
errors:
 

1. The company received $560 as payment for services rendered. The credit to Service Revenue was
recorded correctly, but the debit to Cash was recorded as $650.
2. A $900 receipt of cash that was received from a customer on accounts receivable was not recorded.
3. A $600 purchase of supplies on account was properly recorded as a debit to the Supplies account.
However, the credit to Accounts Payable was not recorded.
4. Land valued at $12,000 was contributed to the business in exchange for common stock. The entry to
record the transaction was recorded as a $12,000 credit to both the Land account and the Common
Stock account.
5. A $500 rent payment was properly recorded as a credit to Cash. However, the Salaries Expense account
was incorrectly debited for $500.

 
Required
Prepare a corrected trial balance for Ricardo Company.

RICARDO COMPANY
 Trial Balance
As of April 30, Year 1
Account Titles Debit Credit
Cash $69,710
Accounts receivable 29,100
Supplies 1,800
Prepaid insurance 3,600
Land 12,000
Accounts payable 10,200
Common stock 100,000
Retained earnings 27,510
Dividends 8,000
Service revenue 60,000
Rent expense 10,100
Salaries expense 31,000
Operating expenses 32,400

Total $197,710 $197,710

6) At the beginning of Year 1, Oak Consulting had the following normal balances in its accounts:
 
Account Balance
Cash $ 42,000
Accounts
  25,000
receivable
Accounts payable   8,400
Common stock   24,000
Retained earnings   34,600

The following events apply to Oak Consulting for Year 1:

1. Provided $185,000 of services on account.

2. Incurred $45,800 of operating expenses on account.
3. Collected $140,000 of accounts receivable.
4. Paid $120,000 cash for salaries expense.
5. Paid $31,400 cash as a partial payment on accounts payable.
6. Paid a $10,000 cash dividend to the stockholders.

a) Record these events in a general journal.

Event General Journal Debit Credit

1 Accounts receivable 185,000
Service revenue 185,000
 2 Operating expenses 45,800
Accounts payable 45,800

3 Cash 140,000
Accounts receivable 140,000

4 Salaries expense 120,000

Cash 120,000

5 Accounts payable 31,400

Cash 31,400

6 Dividends 10,000
Cash 10,000

b) Record the closing entries in the general journal.

Event General Journal Debit Credit

1 Service revenue 185,000
Retained earnings 185,000

2 Retained earnings 165,800

Operating expenses 45,800
Salaries expense 120,000

3 Retained earnings 10,000

Dividends 10,000

c) What is the amount of net income for the year?

Net income $19,200

d) What is the amount of change in retained earnings for the year?

Change in retained earnings $9,200

Explanation:
Change in retained earnings = $9,200 (NI $19,200 – Div. $10,000)
The change in retained earnings is different from the amount of net income by $10,000 because retained
earnings is also affected by dividends to shareholders. The dividend reduces retained earnings but does not
decrease net income.
 e) Prepare a post-closing trial balance.

OAK CONSULTING
Post-Closing Trial Balance
As of December 31, Year 1
Account Titles Debit Credit
Cash $20,600
Accounts receivable 70,000
Accounts payable 22,800
Common stock 24,000
Retained earnings 43,800

Totals $90,600 $90,600