PAGE 26

Joan Robinson opens her own law office on July 1, 2012. During the first
month of
operations, the following transactions occurred.
1. Joan invested $11,000 in cash in the law practice.
2. Paid $800 for July rent on office space.
3. Purchased office equipment on account $3,000.
4. Provided legal services to clients for cash $1,500.
5. Borrowed $700 cash from a bank on a note payable.
6. Performed legal services for client on account $2,000.
7. Paid monthly expenses: salaries and wages $500, utilities $300, and supplies
$100.
8. Joan withdraws $1,000 cash for personal use.
Instructions

(a) Prepare a tabular summary of the transactions

.
(b) Prepare the income statement, owners equity statement, and balance sheet
at
July 31 for Joan Robinson, Attorney.

PAGE 31,32 MCQ Self-Test Questions

1. Which of the following is not a step in the accounting process?
a. Identification.
c. Recording.
b. Verification.
d. Communication.
2. Which of the following statements about users of accounting information is
incorrect?
a. Management is an internal user.
b. Taxing authorities are external users.
c. Present creditors are external users
d. Regulatory authorities are
internal users.
3. The cost principle states that:
a. assets should be initially recorded at cost and adjusted when the fair value
changes.
b. activities of an entity are to be kept separate and distinct from its owner.
c. assets should be recorded at their cost.
d. only transaction data capable of being expressed in terms of money be included in
the accounting records.
4. Which of the following statements about basic assumptions is correct?
a. Basic assumptions are the same as accounting principles.
b. The economic entity assumption states that there should be a particular
unit of accountability.
c. The monetary unit assumption enables accounting to measure employee morale.
d. Partnerships are not economic entities.
5. The three types of business entities are:
a. proprietorships, small businesses, and partnerships.
b. proprietorships, partnerships, and corporations.
c. proprietorships, partnerships, and large businesses.
d. fi nancial, manufacturing, and service companies.
6. Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
7. Performing services on account will have the following effects
on the components of the basic accounting equation:
a. increase assets and decrease owners equity.
b. increase assets and increase owners equity.
c. increase assets and increase liabilities.
d. increase liabilities and increase owners equity.
8. As of December 31, 2012, Stoneland Company has assets of $3,500 and owners
equity of $2,000. What are the liabilities
for Stoneland Company as of December 31, 2012?
a. $1,500. b. $1,000. c. $2,500. d. $2,000.
9. Which of the following events is not recorded in the accounting records?

10. During 2012, Gibson Companys assets decreased $50,000 and its liabilities
decreased $90,000. Its owners equity therefore:
a. increased $40,000.
c. decreased $40,000.
b. decreased $140,000.
d. increased $140,000.
11. Payment of an account payable affects the components ofthe accounting equation in
the following way.
a. Decreases owners equity and decreases liabilities.
b. Increases assets and decreases liabilities.
c. Decreases assets and increases owners equity.
d. Decreases assets and decreases liabilities.
12. Which of the following statements is false?
a. A statement of cash flows summarizes information about the cash inflows (receipts)
and outflows (payments) for a specific period of time.
b. A balance sheet reports the assets, liabilities, and owners equity at a specific date.
c. An income statement presents the revenues, expenses changes in owners
equity, and resulting net income or net loss for a specifi c period of time.
d. An owners equity statement summarizes the changes in owners equity for
a specific period of time.
13. On the last day of the period, Jim Otto Company buys a
$900 machine on credit. This transaction will affect the:
a. income statement only.
b. balance sheet only.
c. income statement and owners equity statement only.
d. income statement, owners equity statement, and balance sheet.
14. The fi nancial statement that reports assets, liabilities, and owners equity is the:
a. income statement.
b. owners equity statement.
c. balance sheet.
d. statement of cash fl ows.
* 15. Services provided by a public accountant include:
a. auditing, taxation, and management consulting.
b. auditing, budgeting, and management consulting.
c. auditing, budgeting, and cost accounting.
d. internal auditing, budgeting, and management consulting.

Self-Test Questions

1. Which of the following statements about an account is true?

a. In its simplest form, an account consists of two parts.
b. An account is an individual accounting record of increases and
decreases in specific asset, liability, and owners equity items.
c. There are separate accounts for specific assets and liabilities but only
one account for owners equity
items.
d. The left side of an account is the credit or decrease side.
2. Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.
3. A revenue account:
a. is increased by debits.
b. is decreased by credits.
c. has a normal balance of a debit.
d. is increased by credits.
4. Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and owners capital.
c. assets, liabilities, and owners drawings.
d. assets, owners drawings, and expenses.
5. The expanded accounting equation is:
a. Assets 1 Liabilities 5 Owners Capital 1 Owners Drawings 1 Revenues 1
Expenses
b. Assets 5 Liabilities 1 Owners Capital 1 Owners Drawings 1 Revenues 2
Expenses
c. Assets 5 Liabilities 2 Owners Capital 2 Owners Drawings 2 Revenues 2
Expenses
d. Assets 5 Liabilities 1 Owners Capital 2 Owners Drawings 1
Revenues 2 Expenses
6. Which of the following is not part of the recording process?
a. Analyzing transactions.
b. Preparing a trial balance.
c. Entering transactions in a journal.
d. Posting transactions.
7. Which of the following statements about a journal is false?
a. It is not a book of original entry.
b. It provides a chronological record of transactions.
c. It helps to locate errors because the debit and credit amounts for each
entry can be readily compared.
d. It discloses in one place the complete effect of a transaction.
8. The purchase of supplies on account should result in:
a. a debit to Supplies Expense and a credit to Cash.
b. a debit to Supplies Expense and a credit to Accounts Payable.
c. a debit to Supplies and a credit to Accounts Payable.
d. a debit to Supplies and a credit to Accounts Receivable.
9. The order of the accounts in the ledger is:

a. assets, revenues, expenses, liabilities, owners capital, owners

drawings.
b. assets, liabilities, owners capital, owners drawings, revenues,
expenses.
c. owners capital, assets, revenues, expenses, liabilities, owners
drawings.
d. revenues, assets, expenses, liabilities, owners capital, owners
drawings
10. A ledger:
a. contains only asset and liability accounts.
b. should show accounts in alphabetical order.
c. is a collection of the entire group of accounts maintained by a
company.
d. is a book of original entry.
11. Posting:
a. normally occurs before journalizing.
b. transfers ledger transaction data to the journal.
c. is an optional step in the recording process.
d. transfers journal entries to ledger accounts.
12. Before posting a payment of $5,000, the Accounts Payable of Senator
Company had a normal balance of $16,000. The balance after posting this
transaction was:
a. $21,000. c. $11,000.
b. $5,000 . d. Cannot be determined.
13. A trial balance:
a. is a list of accounts with their balances at a given time.
b. proves the mathematical accuracy of journalized transactions.
c. will not balance if a correct journal entry is posted twice.
d. proves that all transactions have been recorded.
14. A trial balance will not balance if:
a. a correct journal entry is posted twice.
b. the purchase of supplies on account is debited to Supplies and credited
to Cash.
c. a $100 cash drawing by the owner is debited to Owners
Drawings for $1,000 and credited to Cash for $100.
d. a $450 payment on account is debited to Accounts
Payable for $45 and credited to Cash for $45.
15. The trial balance of Clooney Company had accounts with the following
normal balances: Cash $5,000, Service Revenue $85,000, Salaries and
Wages Payable $4,000, Salaries and Wages Expense $40,000, Rent
Expense $10,000, Owners Capital $42,000; Owners Drawings $15,000;
Equipment $61,000. In preparing a trial balance, the total in the debit
column is:
a. $131,000.
c. $91,000.
b. $216,000
. d. $116,000.

BE1-2 Given the accounting equation, answer each of the

following questions.
(a) The liabilities of Buerhle Company are $120,000 and the
owners equity is $232,000. What is
the amount of Buerhle Companys total assets?
(b) The total assets of Buerhle Company are $190,000 and
its owners equity is $91,000. What is
the amount of its total liabilities?
(c) The total assets of Buerhle Company are $800,000 and its
liabilities are equal to one half of
its total assets. What is the amount of Buerhle Companys
owners equity?

(a) $120,000 + $232,000 = $352,000 (Total assets).

(b) $190,000 $80,000 = $110,000 (Total liabilities).
(c) $800,000 0.5($800,000) = $400,000 (Owners equity).
BE1-5 Indicate whether each of the following items is an asset
(A), liability (L), or part of owners equity (OE).
A (a) Accounts receivable
A (d) Office
supplies
L (b) Salaries payable
OE (e) Owners
investment
A (c) Equipment
L (f) Notes
payable
Do it! 1-4 Presented below is selected information related to
Lance Company at December
31, 2012. Lance reports fi nancial information monthly.
Accounts Payable $ 3,000 Salaries and Wages Expense $16,500
Cash 4,500 Notes Payable 25,000
Advertising Expense 6,000 Rent Expense 10,500
Service Revenue 51,500 Accounts Receivable 13,500
Equipment 29,000 Owners Drawings 7,500

(a) Determine the total assets of Lance Company at December

31, 2012.
(b) Determine the net income that Lance Company reported for
December 2012.
(c) Determine the owners equity of Lance Company at
December 31, 2012.
A)47000

B)18500

C)19000

Do it 14

Assets
=liabilities
+owner equity
Cash ac.rec supplies equipment= ac.payable +capital drawing +revenue-expenses
10000
10000
-5000
5000
-400
-400
-500
500
250
-250
6100
6100
-1000
-1000
-2000
-2000
-170
-170
750
750
120
-120
........ + ......... + ..........+............ =................... + ...........-.............+.............-................
7150 +630
+500
+5000
= 250
+10000 -1000
+6850 -2820
13280
= 250
+9000
+4030
13280
=13280
Income statement
Revenue
Service revenue
6850
Total revenue
6850
6850
Expenses
Rent
400
Advertising
250
Salaries
2000
Utility
170
Total expenses
2820
2820
Net profit
4030

Assets
=liabilities +owner equity
Cash + A.rec+ supplies+ equip =A.pay + A.not+ capital- drawing+ revenue- expenses
7000
7000
-900
-900rent
600
600
-120
-120adv
4000
4000
-1000
-1000
5400
5400
-2500
-2500sal
-600
-600
4000
-4000
5000
5000
4200
4200
-275
-275utl
..........+............+..............+...........=...........+.........+............-..............+.............-............
14605+1400 +600
+4200 = 4200 +5000 +7000 - 1000
+9400
-3795
20805
=20805
Income statement 1may2012 to 31may2012
Revenue
Service revenue
9400
Total revenue
9400
9400
Expenses
Rent
900
Advertising
120
Salaries
2500
Utility
275
Total expenses
3795
3795
Net profit
5605
Owner equity statement 1may2012 to 31may2012
Owner capital on 1may2012
0
Add investment
7000
Net profit
5605
12605
12605
Less drawing
1000
1000
Owner capital on 31may2012
11605
Balance sheet on 31may2012
Assets
Cash
14605
A.rec
1400
Supply
600
Equipment 4200
Total assets
20805
Liabilities and owner equity
Liabilities
A.pay
4200
A.not
5000
Total liabilities
9200
Owner equity
11605
Total liabilities and OE
20805

Credit$

Debit$
6000
8000
6000
80000

11000
20000
3000
28000
8000
88000
15000
0

38000
4000
15000
0

Account
Cash
Account receivable
Supplies
Equipment
Accounting payable
Accounting notes
Salaries payable
Owner capital
Owner drawing
Revenue
Expense salary
Expense supplies
Total

Cr
12000
1200
0
900
900
1300
1300
1500
1500
400
400
1000
1000

Dr

Credit Debit
$
$
explanation

Cash
Owner capital
1150
Investment to start business 0
Cash
2800
Revenue
Collect service revenue in April
12
1800
Salaries expense
Cash
300
Pay salaries for employee
Account payable
1000
Cash
Pay cash for creditor 1200
Cash
0
Account receivable 4100
Collect cash from billed customer
1300
Cash
Unearned service revenue
1740not1740
Collect cash from service
0
0
provided yet

Account
Date
April1
Cash
April12
Account
receivable
Supplies
April15
Account
payable
April25
Unearned
service
Owner capital
April29
Revenue
Expense
April30
salaries
Total

Journal
Cr

Dr
20000

20000
2000
2000
2500
2500
900
900
3200
3200
3500
3500
1200
1200

Explain
Cash
Owner capital
Investment to start business
Salaries and wage expense
Unearned service revenue
Hiring a receptionist
Supplies
Account payable
Purchasing supplies from Read company
Rent expense
Cash
Pay for month rent
Account receivable
Service revenue
Billing customer for service
Cash
Service revenue
Collecting cash for a service
Cash
Service revenue

Date
May1

May2

May3

May7

May11

May12

May17

2000

Unearned service revenue??salary payable

Cash
Paying month salary of hired receptionist

1500

Account payable
Cash
A cash payment for Read company

2000

1500

Ledger

May31

Trial balance
Balance
20000
19100
23800
21800
20300

Cr

Dr
20000

account
Cash

900
3500
1200
2000
1500

Date
May1
May7
May12
May17
May31
May31

Account receiv.
3200

3200

May11
Supplies

2500

2500

May3
Account payable

2500
1000

2500

2000
0

2000

20000

20000

May3
May31

1500
Unearned service

May2
May31

2000
Owner capital

May1
Revenue

3200
6700
7900

3200
3500
1200

May11
May12
May17
Salaries expense

2000

2000

May2

Rent expense
900

Cr

Dr
20000

20000
12000
2000
1000
15000
700
700
600
600
1050
1050
1100
1100
1500
1500
800
800
250
250
1050
1050
2100
2100

900

Explain
Cash
Owner capital
Investment to start business
Land
Building
Equipment
Cash
Advertising expense
Cash
Prepaid insurance
Cash
Equipment
Account payable
Cash
Service revenue
Cash
Service revenue
Drawing
Cash
Salaries expense
Cash
Account payable
Cash
Cash
Service revenue

May7

Date
Mar1

Mar3

Mar5
Mar6
Mar10
Mar18
Mar19
Mar25
Mar30

Mar31

 25