Chapter 7 - Othe transactions

Question 1

What is a memo?

Answer 1

an internal source document used to verify a transaction that does not involve cash and is not a sale, purchase or return of inventory

Question 2

What is fair value?

Answer 2

the price of an asset contributed by the owner that would be received if that asset was sold at the time it was acquired by the business

Question 3

Referring to one Accounting Assumption, explain why transactions with the owner must be recorded in the accounts of the business?

Answer 3

Accounting Entity Assumption- Because the business is assumed to be a separate Accounting entity, transactions between the business and its owner must be recorded in the firm’s records as changes to the owner’s capital.

Question 4

Entries for a contribution of a Non-Current Asset

Answer 4

NCA DR
Capital-Owner CR
‘Contribution of NCA (valued at fair value) by owner (Memo 31)’

Question 5

Entries for drawing of non-cash asset

Answer 5

Drawings DR
Office Furniture CR
‘Drawings of an office chair by the owner (Memo 46)’

Question 6

What is a commencing entry?

Answer 6

a General Journal entry to establish double-entry records by entering existing assets, liability and owner’s equity balances in the General Ledger accounts.

Question 7

What is a correcting entry?

Answer 7

a General Journal entry to correct an error in the way a transaction is recorded in the General Journal or General Ledger.

Question 8

What are the two likely steps for a correcting entry?

Answer 8

1. Undo the incorrect entry be reversing it; that is, record a debit entry to undo an incorrect credit and vice versa.
2. Record the entry as it should have been recorded

Question 9

Example Correcting Entry: Drawings of inventory worth 250 had been recorded as inventory used for advertising, what are the correcting entries for this

Answer 9

Drawings Dr
Advertising Cr
Correcting Entry- drawings of inventory incorrectly recorded as advertising