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Principles of Accounting, Volume 1: Financial Accounting

Exercise Set A

Principles of Accounting, Volume 1: Financial AccountingExercise Set A
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Table of contents
  1. Preface
  2. 1 Role of Accounting in Society
    1. Why It Matters
    2. 1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting
    3. 1.2 Identify Users of Accounting Information and How They Apply Information
    4. 1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities
    5. 1.4 Explain Why Accounting Is Important to Business Stakeholders
    6. 1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
  3. 2 Introduction to Financial Statements
    1. Why It Matters
    2. 2.1 Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate
    3. 2.2 Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses
    4. 2.3 Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet
    5. Key Terms
    6. Summary
    7. Multiple Choice
    8. Questions
    9. Exercise Set A
    10. Exercise Set B
    11. Problem Set A
    12. Problem Set B
    13. Thought Provokers
  4. 3 Analyzing and Recording Transactions
    1. Why It Matters
    2. 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements
    3. 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions
    4. 3.3 Define and Describe the Initial Steps in the Accounting Cycle
    5. 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements
    6. 3.5 Use Journal Entries to Record Transactions and Post to T-Accounts
    7. 3.6 Prepare a Trial Balance
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  5. 4 The Adjustment Process
    1. Why It Matters
    2. 4.1 Explain the Concepts and Guidelines Affecting Adjusting Entries
    3. 4.2 Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries
    4. 4.3 Record and Post the Common Types of Adjusting Entries
    5. 4.4 Use the Ledger Balances to Prepare an Adjusted Trial Balance
    6. 4.5 Prepare Financial Statements Using the Adjusted Trial Balance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  6. 5 Completing the Accounting Cycle
    1. Why It Matters
    2. 5.1 Describe and Prepare Closing Entries for a Business
    3. 5.2 Prepare a Post-Closing Trial Balance
    4. 5.3 Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity
    5. 5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  7. 6 Merchandising Transactions
    1. Why It Matters
    2. 6.1 Compare and Contrast Merchandising versus Service Activities and Transactions
    3. 6.2 Compare and Contrast Perpetual versus Periodic Inventory Systems
    4. 6.3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System
    5. 6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System
    6. 6.5 Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods
    7. 6.6 Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies
    8. 6.7 Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  8. 7 Accounting Information Systems
    1. Why It Matters
    2. 7.1 Define and Describe the Components of an Accounting Information System
    3. 7.2 Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders
    4. 7.3 Analyze and Journalize Transactions Using Special Journals
    5. 7.4 Prepare a Subsidiary Ledger
    6. 7.5 Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  9. 8 Fraud, Internal Controls, and Cash
    1. Why It Matters
    2. 8.1 Analyze Fraud in the Accounting Workplace
    3. 8.2 Define and Explain Internal Controls and Their Purpose within an Organization
    4. 8.3 Describe Internal Controls within an Organization
    5. 8.4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries
    6. 8.5 Discuss Management Responsibilities for Maintaining Internal Controls within an Organization
    7. 8.6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries
    8. 8.7 Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  10. 9 Accounting for Receivables
    1. Why It Matters
    2. 9.1 Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions
    3. 9.2 Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches
    4. 9.3 Determine the Efficiency of Receivables Management Using Financial Ratios
    5. 9.4 Discuss the Role of Accounting for Receivables in Earnings Management
    6. 9.5 Apply Revenue Recognition Principles to Long-Term Projects
    7. 9.6 Explain How Notes Receivable and Accounts Receivable Differ
    8. 9.7 Appendix: Comprehensive Example of Bad Debt Estimation
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  11. 10 Inventory
    1. Why It Matters
    2. 10.1 Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions
    3. 10.2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method
    4. 10.3 Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method
    5. 10.4 Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet
    6. 10.5 Examine the Efficiency of Inventory Management Using Financial Ratios
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  12. 11 Long-Term Assets
    1. Why It Matters
    2. 11.1 Distinguish between Tangible and Intangible Assets
    3. 11.2 Analyze and Classify Capitalized Costs versus Expenses
    4. 11.3 Explain and Apply Depreciation Methods to Allocate Capitalized Costs
    5. 11.4 Describe Accounting for Intangible Assets and Record Related Transactions
    6. 11.5 Describe Some Special Issues in Accounting for Long-Term Assets
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  13. 12 Current Liabilities
    1. Why It Matters
    2. 12.1 Identify and Describe Current Liabilities
    3. 12.2 Analyze, Journalize, and Report Current Liabilities
    4. 12.3 Define and Apply Accounting Treatment for Contingent Liabilities
    5. 12.4 Prepare Journal Entries to Record Short-Term Notes Payable
    6. 12.5 Record Transactions Incurred in Preparing Payroll
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  14. 13 Long-Term Liabilities
    1. Why It Matters
    2. 13.1 Explain the Pricing of Long-Term Liabilities
    3. 13.2 Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method
    4. 13.3 Prepare Journal Entries to Reflect the Life Cycle of Bonds
    5. 13.4 Appendix: Special Topics Related to Long-Term Liabilities
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  15. 14 Corporation Accounting
    1. Why It Matters
    2. 14.1 Explain the Process of Securing Equity Financing through the Issuance of Stock
    3. 14.2 Analyze and Record Transactions for the Issuance and Repurchase of Stock
    4. 14.3 Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits
    5. 14.4 Compare and Contrast Owners’ Equity versus Retained Earnings
    6. 14.5 Discuss the Applicability of Earnings per Share as a Method to Measure Performance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  16. 15 Partnership Accounting
    1. Why It Matters
    2. 15.1 Describe the Advantages and Disadvantages of Organizing as a Partnership
    3. 15.2 Describe How a Partnership Is Created, Including the Associated Journal Entries
    4. 15.3 Compute and Allocate Partners’ Share of Income and Loss
    5. 15.4 Prepare Journal Entries to Record the Admission and Withdrawal of a Partner
    6. 15.5 Discuss and Record Entries for the Dissolution of a Partnership
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  17. 16 Statement of Cash Flows
    1. Why It Matters
    2. 16.1 Explain the Purpose of the Statement of Cash Flows
    3. 16.2 Differentiate between Operating, Investing, and Financing Activities
    4. 16.3 Prepare the Statement of Cash Flows Using the Indirect Method
    5. 16.4 Prepare the Completed Statement of Cash Flows Using the Indirect Method
    6. 16.5 Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency
    7. 16.6 Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  18. A | Financial Statement Analysis
  19. B | Time Value of Money
  20. C | Suggested Resources
  21. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
    14. Chapter 14
    15. Chapter 15
    16. Chapter 16
  22. Index
EA 1.

LO 3.1Match the correct term with its definition.

A. cost principle i. if uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount
B. full disclosure principle ii. also known as the historical cost principle, states that everything the company owns or controls (assets) must be recorded at their value at the date of acquisition
C. separate entity concept iii. (also referred to as the matching principle) matches expenses with associated revenues in the period in which the revenues were generated
D. monetary measurement concept iv. business must report any business activities that could affect what is reported on the financial statements
E. conservatism v. system of using a monetary unit by which to value the transaction, such as the US dollar
F. revenue recognition principle vi. period of time in which you performed the service or gave the customer the product is the period in which revenue is recognized
G. expense recognition principle vii. business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally
EA 2.

LO 3.2Consider the following accounts, and determine if the account is an asset (A), a liability (L), or equity (E).

  1. Accounts Payable
  2. Cash
  3. Dividends
  4. Notes Payable
EA 3.

LO 3.2Provide the missing amounts of the accounting equation for each of the following companies.

A table with three columns. The second column is labeled Gianni. The third column is labeled Forest. The next row is, left to right: Assets, $222,000, $387,000. The next row is, left to right: Liabilities, ?, 7,000. The last row is, left to right: Equity, 147,000, ?.
EA 4.

LO 3.2Identify the financial statement on which each of the following accounts would appear: the income statement (IS), the retained earnings statement (RE), or the Balance Sheet (BS).

  1. Insurance Expense
  2. Accounts Receivable
  3. Office Supplies
  4. Sales Revenue
  5. Common Stock
  6. Notes Payable
EA 5.

LO 3.2Cromwell Corporation has the following trial balance account balances, given in no certain order, as of December 31, 2018. Retained Earnings at January 1, 2018, was $3,600. Using the information provided, prepare Cromwell’s annual financial statements (omit the Statement of Cash Flows).

Supplies $865; Fees earned 22,850; Accounts Receivable 2,580; Accounts payable 1,945; Office furniture 12,685; Rent expense 12,240; Cash 4,695; Electricity expense 1,380; Common stock 10,000; Miscellaneous expenses 1,450; Dividend 2,500.
EA 6.

LO 3.3From the following list, identify which items are considered original sources:

  1. prepaid insurance
  2. bank statement
  3. sales ticket
  4. general journal
  5. trial balance
  6. balance sheet
  7. telephone bill
  8. invoice from supplier
  9. company sales account
  10. income statement
EA 7.

LO 3.4Indicate what impact the following transactions would have on the accounting equation, Assets = Liabilities + Equity.

 
  Impact 1 Impact 2
Received cash from issuance of common stock    
Sold goods to customers on account    
Collected cash from customer sales made in previous month    
Paid cash to vendors for supplies delivered last month    
Purchased inventory on account    
Table 3.3
EA 8.

LO 3.1For the following accounts please indicate whether the normal balance is a debit or a credit.

  1. Sales
  2. Dividends
  3. Office Supplies
  4. Retained Earnings
  5. Accounts Receivable
  6. Prepaid Rent
  7. Prepaid Insurance
  8. Wages Payable
  9. Building
  10. Wages Expense
EA 9.

LO 3.4Indicate what impact the following transactions would have on the accounting equation, Assets = Liabilities + Equity.

 
  Impact 1 Impact 2
Paid monthly note payment to bank    
Sold inventory on account    
Bought supplies, to be paid for next month    
Received cash from sales this month    
Paid for inventory purchased on account last month    
Table 3.4
EA 10.

LO 3.1Identify the normal balance for each of the following accounts. Choose Dr for Debit; Cr for Credit.

 
  Normal balance
Utilities Expense  
Cash  
Equipment  
Rent Revenue  
Preferred Stock  
Interest Payable  
Table 3.5
EA 11.

LO 3.4Identify whether each of the following transactions would be recorded with a debit (Dr) or credit (Cr) entry.

 
  Debit or credit?
Cash increase  
Supplies decrease  
Accounts Payable increase  
Common Stock decrease  
Interest Payable decrease  
Notes Payable decrease  
Table 3.6
EA 12.

LO 3.4Identify whether each of the following transactions would be recorded with a debit (Dr) or credit (Cr) entry.

 
  Debit or credit?
Equipment decrease  
Common Stock Sold increase  
Gas and Oil Expense increase  
Service revenue decrease  
Miscellaneous Expense decrease  
Bonds Payable decrease  
Table 3.7
EA 13.

LO 3.4Identify whether ongoing transactions posted to the following accounts would normally have only debit entries (Dr), only credit entries (Cr), or both debit and credit entries (both).

 
  Type of entry
Accounts Payable  
Cash  
Gas and Oil Expense  
Rent Revenue  
Supplies Expense  
Common Stock  
Table 3.8
EA 14.

LO 3.5Determine whether the balance in each of the following accounts increases with a debit or a credit.

  1. Cash
  2. Common Stock
  3. Equipment
  4. Accounts Payable
  5. Fees Earned
  6. Electricity Expense
EA 15.

LO 3.5Journalize for Harper and Co. each of the following transactions or state no entry required and explain why. Be sure to follow proper journal writing rules.

  1. A corporation is started with an investment of $50,000 in exchange for stock.
  2. Equipment worth $4,800 is ordered.
  3. Office supplies worth $750 are purchased on account.
  4. A part-time worker is hired. The employee will work 15–20 hours per week starting next Monday at a rate of $18 per hour.
  5. The equipment is received along with the invoice. Payment is due in three equal monthly installments, with the first payment due in sixty days.
EA 16.

LO 3.5Discuss how each of the following transactions for Watson, International, will affect assets, liabilities, and stockholders’ equity, and prove the company’s accounts will still be in balance.

  1. An investor invests an additional $25,000 into a company receiving stock in exchange.
  2. Services are performed for customers for a total of $4,500. Sixty percent was paid in cash, and the remaining customers asked to be billed.
  3. An electric bill was received for $35. Payment is due in thirty days.
  4. Part-time workers earned $750 and were paid.
  5. The electric bill in “C” is paid.
EA 17.

LO 3.5For each item that follows, indicate whether a debit or a credit applies.

  1. increase in prepaid insurance
  2. increase in utilities expense
  3. increase in commissions earned
  4. increase in supplies
  5. decrease in retained earnings
  6. decrease in income taxes payable
  7. increase in unearned revenue
  8. increase in salaries expense
  9. decrease in notes receivable
  10. increase in common stock
EA 18.

LO 3.5Indicate whether each account that follows has a normal debit or credit balance.

  1. Unearned Revenue
  2. Office Machines
  3. Prepaid Rent
  4. Cash
  5. Legal Fees Earned
  6. Salaries Payable
  7. Dividends
  8. Accounts Receivable
  9. Advertising Expense
  10. Retained Earnings
EA 19.

LO 3.5A business has the following transactions:

  • The business is started by receiving cash from an investor in exchange for common stock $20,000
  • The business purchases supplies on account $500
  • The business purchases furniture on account $2,000
  • The business renders services to various clients on account totaling $9,000
  • The business pays salaries $2,000
  • The business pays this month’s rent $3,000
  • The business pays for the supplies purchased on account.
  • The business collects from one of its clients for services rendered earlier in the month $1,500.

What is total income for the month?

EA 20.

LO 3.5Prepare journal entries to record the following transactions.

  1. January 22, purchased, an asset, merchandise inventory on account for $2,800.
  2. February 10, paid creditor for part of January 22 purchase, $1,600
EA 21.

LO 3.5Prepare journal entries to record the following transactions.

  1. July 1, issued common stock for cash, $15,000
  2. July 15, purchased supplies, on account, $1,800
  3. July 25, billed customer for accounting services provided, $950
EA 22.

LO 3.5Prepare journal entries to record the following transactions.

  1. March 1, purchased land for cash, $20,000
  2. March 11, purchased merchandise inventory, on account, $18,500
  3. March 15, Sold merchandise to customer for cash, $555
EA 23.

LO 3.5Post the following February transactions to T-accounts for Accounts Receivable and Cash, indicating the ending balance (assume no beginning balances in these accounts).

  1. provided legal services to customers for cash, $5,600
  2. provided legal services to customers on account, $4,700
  3. collected cash from customer accounts, $3,500
EA 24.

LO 3.5Post the following November transactions to T-accounts for Accounts Payable and Inventory, indicating the ending balance (assume no beginning balances in these accounts).

  1. purchased merchandise inventory on account, $22,000
  2. paid vendors for part of inventory purchased earlier in month, $14,000
  3. purchased merchandise inventory for cash, $6,500
EA 25.

LO 3.6Prepare an unadjusted trial balance, in correct format, from the alphabetized account information as follows. Assume all accounts have normal balances.

Accounts payable $11,100; Accounts receivable 16,500; Administrative expense 54,712; Cash 64,888; Common stock 50,000; Service revenue 75,000.
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