QUESTIONS
1. Give an example of a transaction that results in:
(a) A decrease in an asset and a decrease in a liability.
(b) A decrease in one asset and an increase in another asset.
(c) A decrease in one liability and an increase in another liability.
2. Do the following events represent business transactions?
Explain your answer in each case.
(a) A computer is purchased on account.
(b) A customer returns merchandise and is given credit on account.
(c) A prospective employee is interviewed.
(d) The owner of the business withdraws cash from the business for personal use.
(e) Merchandise is ordered for delivery next month.
3. Name the accounts debited and credited for each of the following transactions.
(a) Billing a customer for work done.
(b) Receipt of cash from customer on account.
(c) Purchase of office supplies on account.
(d) Purchase of 15 gallons of gasoline for the delivery truck.
4. Why are revenue and expense accounts called temporary or nominal accounts?
5. Andrea Pafko, a fellow student, contends that the double entry system means that each transaction must be recorded twice. Is Andrea correct? Explain.
6. Is it necessary that a trial balance be taken periodically?
What purpose does it serve?
7. Indicate whether each of the following items is a real or nominal account and whether it appears in the balance sheet or the income statement.
(a) Prepaid Rent.
(b) Salaries and Wages Payable.
(c) Inventory.
(d) Accumulated Depreciation—Equipment.
(e) Equipment.
(f) Service Revenue.
(g) Salaries and Wages Expense.
(h) Supplies.
8. Employees are paid every Saturday for the preceding work week. If a balance sheet is prepared on Wednesday,
December 31, what does the amount of wages earned during the first three days of the week (12/29, 12/30,
12/31) represent? Explain.
9. (a) How are the components of revenues and expenses different for a merchandising company? (b) Explain the income measurement process of a merchandising company.
10. What differences are there between the trial balance before closing and the trial balance after closing with respect to the following accounts?
(a) Accounts Payable.
(b) Expense accounts.
(c) Revenue accounts.
(d) Retained Earnings account.
(e) Cash.
11. What are adjusting entries and why are they necessary?
12. What are closing entries and why are they necessary?
13. Jay Hawk, maintenance supervisor for Boston Insurance Co., has purchased a riding lawnmower and accessories to be used in maintaining the grounds around corporate headquarters. He has sent the following information to the accounting department.
Compute the amount of depreciation expense (related to the mower and accessories) that should be reported on Boston’s December 31, 2017, income statement. Assume straight-line depreciation.
14. Midwest Enterprises made the following entry on December 31, 2017.
Interest Expense 10,000
Interest Payable 10,000
(To record interest expense due on loan from Anaheim National Bank)
What entry would Anaheim National Bank make regarding its outstanding loan to Midwest Enterprises? Explain why this must be the case.
15. Distinguish between cash-basis accounting and accrual-basis accounting. Why is accrual-basis accounting acceptable for most businesses and the cash-basis unacceptable in the preparation of an income statement and a balance sheet?
16. When salaries and wages expense for the year is computed, why are beginning accrued salaries and wages subtracted from, and ending accrued salaries and wages added to, salaries and wages paid during the year?
17. List two types of transactions that would receive different accounting treatment using (a) strict cash-basis accounting, and (b) a modified cash basis.
18. What are reversing entries, and why are they used?
19. “A worksheet is a permanent accounting record, and its use is required in the accounting cycle.” Do you agree? Explain.
