Practice Problems

Question 1

On January 1, 2015, Spencer Ltd. Paid $2,000 cash for equipment to be used in its operations. The equipment was delivered and placed in service on January 1, 2015 and has an expected life of five years. Choose the correct entry (if any) to be made on January 1, 2015.

Answer 1

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Debit: Equipment (+A) $2,000
Credit: Cash (-A) $2,000

Question 2

Spencer Ltd. Has excess space in its warehouse that it rents out to another company, BTW Inc. On December 31, 2015, Spencer Ltd. Received a full year’s rent payment for $24,000 from BTW Inc. for the use of the warehouse space for the calendar year 2016. Choose the correct entry (if any) to be made by Spencer Ltd. On December 31, 2015.

Answer 2

Debit: Cash (+A) $24,000
Credit: Unearned Revenue (+L) $24,000

Question 3

On January 1, 2015, Spencer Ltd. Borrowed $100,000 from a local financial institution. The note payable has an annual interest rate of 4%. Interest payments are made at the end of each quarter (that is, March 31st, June 30th, etc.). The note’s principal of $100,000 is to be repaid on January 1, 2016. Choose the correct entry (if any) to be made on January 1, 2015.

Answer 3

Debit: Cash (+A) $100,000
Credit: Note Payable (+L) $100,000

Question 4

On April 1, 2015, Spencer Ltd. Purchased $43,000 of merchandise inventory from a wholesale distributor. Spencer Ltd. Intends to offer these items for sale to its customers. The merchandise was received on that date and would be paid for at the end of April 2015. Choose the correct entry (if any) to be made on April 1, 2015.

Answer 4

Debit: Merchandise Inventory (+A) $43,000
Credit: Accounts Payable (+L) $43,000

Question 5

On June 23, 2015, Spencer Ltd. received cash payment of $17,000 from a customer for products that had been delivered to the customer in May 2015. It is common practice in Spencer Ltd.’s industry to allow customers to pay a month after delivery, so the delay in payment was not a reflection of the customer’s ability or willingness to pay for the products received. Choose the correct entry (if any) to be made on June 23, 2015.

Answer 5

Debit: Cash (+A) $17,000
Credit: Accounts Receivable (-A) $17,000

Question 6

On April 17, 2015, Spencer Ltd. Received an order from a customer for a delivery to be made in May 2015. Spencer Ltd. The customer has agreed to pay Spencer Ltd. for the delivery in May 2015. The items will cost Spencer Ltd. $7,500 and the customer will pay $11,000 once the items are delivered. Choose the correct entry (if any) to be made on April 17, 2015.

Answer 6

No entry should be made at this time.

Question 7

The company failed to record a dividend of $250,000 that was declared in 2014, but not been paid to shareholders as of December 31, 2014.

Answer 7

Debit: Retained earnings (-SE) $250,000
Credit: Dividends payable (+L) $250,000

Assets: No Effect
Liabilities: Understated
SE: Overstated
Revenues: No Effect
Expenses: No Effect
Net Income: No Effect

Question 8

On November 1, 2014, Bryant Company signed a 6-month, 6% (annual rate, or 0.5% per month) note payable to a bank and received $540,000 cash from the bank. Bryant Company neglected to record ANY entries relating to this note.

Answer 8

Debit: Cash (+A) $540,000
Credit: Note payable (+L) $540,000

Debit: Interest Expense (+E, -SE) $5,400
Credit: Interest payable (+L) $5,400

Assets: Understated
Liabilities: Understated
SE: Overstated
Revenues: No Effect
Expenses: Understated
Net Income: Overstated

Question 9

Rizzo, Inc. neglected to record the receipt of $12 million in cash on December 15, 2014 from the CEO’s brother in return for 15,000 shares of the company’s $2 par value stock.

Answer 9

Debit: Cash (+A) $12,000,000
Credit: Common Stock (+SE) $30,000
Credit: Additional paid-in capital (+SE) $11,970,000

Assets: Understated
Liabilities: No Effect
SE: Understated
Revenues: No Effect
Expenses: No Effect
Net Income: No Effect

Question 10

Schwarber Corporation neglected to record ANY journal entries relating to the purchase of one-year property insurance policy effective October 1, 2014 for $72,000. Schwarber paid the full amount of the annual premium at the inception of the policy.

Answer 10

Debit: Prepaid insurance (+A) $72,000
Credit: Cash (-A) $72,000

Debit: Insurance expense (+E, -SE) $18,000
Credit: Prepaid insurance (-A) $18,000

Assets: Overstated
Liabilities: No Effect
SE: Overstated
Revenues: No Effect
Expenses: Understated
Net Income: Overstated

Question 11

Arrieta Auto Sales neglected to record ANY entries relating to transactions involving six sport utility vehicles (SUVs) purchased for its inventory in November, 2014. The purchase price for each SUV was $22,000 and Arrieta Auto paid its supplier in cash. Four of the SUVs were sold to customers in December, 2014 at a price of $37,000. The remaining vehicles were still available for sale in the Arrieta Auto customer showroom at the end of December, 2014.

Answer 11

Record the purchase of inventory
Debit: Inventory (+A) $132,000
Credit: Cash (-A) $132,000

Record Revenue and Cost of Goods Sold from the sale of four SUVs
Debit: Cash (+A) $148,000
Credit: Sales (+R, +SE) $148,000
Debit: Cost of goods sold (+E, -SE) $88,000
Credit: Inventory (-A) $88,000

Assets: Understated
Liabilities: No Effect
SE: Understated
Revenues: Understated
Expenses: Understated
Net Income:Understated

Question 12

When multiple products or services are bundled and sold for one price, the revenue should be

Answer 12

Allocated among the different elements and recognized as each element is delivered to the customer.

Question 13

If bad debts expense is determined by estimating uncollectible accounts receivable, the entry to record the write-off of a specific uncollectible account would decrease

Answer 13

allowance for uncollectible accounts

Question 14

1. If management intentionally underestimates bad debts expense, then net income is

Answer 14

overstated and assets are overstated.

Question 15

You are given the following information from Spencer Ltd.'s Balance Sheet:
(in millions)
2014
2013
Accounts Receivable
10,926
11,429
Less: Allowance for doubtful accounts
715.5
508.5
Accounts Receivable, Net of Allowance
10,210.5
10,920

During 2014, Spencer Ltd. reported revenues of $56,119.5 million. Assume Spencer Ltd. collected $56,236.5 million in cash from its customers during 2014.
Determine the bad debts expense recognized by Spencer Ltd. in 2014.

Answer 15

BOY A/R, net of Allowance + Revenue – Cash Collections – EOY A/R, net of Allowance = Bad Debt Expense
$10,920 + $56,119.50 - $56,236.5 - $10,210.5 = $592.50

Question 16

Analyzing changes in Retained Earnings
On December 31, 2015, the credit balances of the Common Stock and Retained Earnings accounts were $30,000 and $18,000, respectively, for Architect Services Company. Its stock issuances for 2016 totaled $6,000, and it declared and paid $9,700 toward dividends in 2016. For the year ended December 31, 2016, the company had net income of $29,900.
What was the balance of Retained Earnings on the December 31, 2016 Balance Sheet?

Answer 16

$38,200

Question 17

Assume you are in the process of closing procedures for Echo Corporation. You have already closed all revenue and expense accounts to the Retained Earnings account. The total debits to Retained Earnings equal $308,800 and total credit to Retained Earnings equal $347,400. The Retained Earnings accounts had a credit balance of $99,000 at the start of this current year. Assume no dividends were declared during the period. What is the post-closing ending balance of Retained Earnings at the end of this current year?

Answer 17

a. $137,600

Question 18

The Income Statement for the period December 31, 2016, for Smith Company is as follows:

Commissions Revenue					$84,900
Expenses:
Wages expense			$36,000
Insurance expense		$1,900
Utilities expense		$8,200
Depreciation expense		$9,800
Net Income						$29,000
Prepare the closing entry:

Answer 18

Debit: Commissions Revenue		$84,900
Credit: Wages expense		$36,000
Credit: Insurance expense	$1,900
Credit: Utilities expense		$8,200
Credit: Depreciation expense	$9,900
Credit: Retained Earnings	$29,000

Question 19

The Income Statement for the period December 31, 2016, for Smith Company is as follows:

Commissions Revenue					$84,900
Expenses:
Wages expense			$36,000
Insurance expense		$1,900
Utilities expense		$8,200
Depreciation expense		$9,800
Net Income						$29,000

What is the ending balance of Retained Earnings as of December 31, 2016? The Balance in Retained Earnings as of December 31, 2014 was $72,100. Assume no dividends were declared during the period.

Answer 19

a. $101,100

Question 20

Norton Company closes its accounts on December 31 each year. The company works a five-day work week and pays its employees every two weeks. On December 31, 2016, Norton accrued $4,700 of salaries payable. On January 7, 2017, the company paid salaries of $12,000 cash to employees.
Prepare a journal entry related to salaries for December 31, 2016.

Answer 20

a. Debit: Salaries expense $4,700

Credit: Salaries payable $4,700