Chapter 4

Question 1

Which is true regarding reversing entries? Which is not true?

Answer 1

True:
Reversing entries are used for adjusting entries involving accrued revenues and accrued expenses.

Reversing entries are optional.

Reversing entries are dated the first day of the new accounting period.

Reversing entries are used to simplify a company’s recordkeeping.

Not true:
Reversing entries should not be the exact opposite of previous period adjusting entries.

Question 2

Flagg records adjusting entries at its December 31year-end. At December 31, employees had earned $12,000 of unpaid and unrecorded salaries. The next payday is January 3, at which time $30,000 will be paid. Prepare the journal on January 3 to record payment assuming the adjusting and reversing entries were made on December 31 and January 1.

Answer 2

Debit Salaries expense $30,000; credit Cash $30,000.

Question 3

The F. Mercury, Capital account has a credit balance of $46,000 before closing entries are made. Services revenue for the period is $64,200, wages expense is $44,300, and withdrawals are $12,600. What is the correct closing entry for the expense accounts?

Answer 3

Debit Income Summary $44,300; credit Wages expense $44,300.

Question 4

The Unadjusted Trial Balance columns of a company’s work sheet shows the Store Supplies account with a balance of $595. The Adjustments columns show a credit of $335 for supplies used during the period. The amount shown as Store Supplies in the Balance Sheet columns of the work sheet is:

Answer 4

$260 Debit

Unadjusted Store Supplies − Supplies used = Supplies unused

$595 − $335 = $260 debit

Question 5

Tara Westmont, the proprietor of Tiptoe Shoes, had annual revenues of $186,000, expenses of $104,200, and withdrew $18,400 from the business during the current year. The owner’s capital account before closing had a balance of $298,000. The ending owner’s capital balance after closing is:

Answer 5

$361,400

Beginning Owner’s Capital + Revenues − Expenses − Owner Withdrawals = Ending Owner’s Capital

$298,000 + 186,000 − 104,200 − 18,400 = $361,400

Question 6

It is obvious that an error occurred in the preparation and/or posting of closing entries if:

Answer 6

All balance sheet accounts have zero balances.

Question 7

T of F: Reversing entries are optional.

Answer 7

True.

Question 8

For the year ended December 31, a company had services revenue of $190,000 and wages expense of $114,000. The owner withdrew $38,000 during the year. Which of the following entries could not be a closing entry?

Answer 8

Debit Income Summary $190,000; credit Services Revenue $190,000.

Question 9

T or F: A post-closing trial balance should include only permanent accounts.

Answer 9

True.

Question 10

The following information is available for the Higgins Travel Agency. After closing entries are posted, what will be the balance in the C. Higgins, Capital account?

Net Income $ 42,500
C. Higgins, Capital 130,000
C. Higgins, Withdrawals 12,000

Answer 10

$160,500

Ending Capital Balance = Beginning Capital Balance + Net Income − Withdrawals

Ending Capital Balance = $130,000 + $42,500 − $12,000 = $160,500

Question 11

After preparing and posting the closing entries for revenues and expenses, the income summary account has a debit balance of $33,000. The entry to close the income summary account will be:

Answer 11

Debit Owner Capital $33,000; credit Income Summary $33,000.

Question 12

The following information is available for Brendon Company before closing the accounts. What will be the amount in the Income Summary account that should be closed to Brendon, Capital?

J. Brendon, Capital $ 112,000
J. Brendon, Withdrawals 32,000
Services revenue 187,000
Depreciation Expense—Equipment 12,000
Wages expense 71,400
Interest expense 3,300
Insurance expense 11,700
Rent expense 24,200

Answer 12

$64,400

Income Summary = Revenues − Expenses

Income Summary = $187,000 − $12,000 − $71,400 − $3,300 − $11,700 − $24,200 = $64,400

Question 13

The following information is available for Zephyr Company before closing the accounts. After all of the closing entries are made, what will be the balance in the Zephyr, Capital account?

Net Income $ 124,200
Zephyr, Capital 118,000
Zephyr, Withdrawals 45,000

Answer 13

$197,200

Ending Capital Balance = Beginning Capital Balance + Net Income − Withdrawals

Ending Capital Balance = $118,000 + $124,200 − $45,000 = $197,200

Question 14

T or F: The last four steps in the accounting cycle include preparing the adjusted balance sheet, preparing financial statements, recording closing entries, and recording adjusting entries.

Answer 14

False.

Question 15

T or F: The closing process is a step in the accounting cycle that prepares certain accounts for the next accounting period.

Answer 15

True.

Question 16

T or F: After posting the entries to close all revenue and expense accounts, Marker Company’s Income Summary account has a credit balance of $6,000, and its Marker, Withdrawals account has a debit balance of $2,500. These balances indicate that net income for the current accounting period amounted to $3,500.

Answer 16

False.

Question 17

T or F: A work sheet contains all of the balances for each account and therefore may be used as a substitute for the set of financial statements.

Answer 17

False.

Question 18

T or F: Long-term investments include notes receivable and investments in stocks and bonds when they are expected to be held for more than the longer of one year or the operating cycle.

Answer 18

True.

Question 19

T or F: An expense account is normally closed by debiting Income Summary and crediting the expense account.

Answer 19

True.