Question

10) Contessa Company collected $42,000 cash on its accounts receivable. The effects of this 10 transaction as reflected in the accounting equation are: A) Total assets, total liabilities, and total equity are unchanged B) Total assets increase and equity decreases C) Both total assets and total liabilities decrease D) Both total assets and equity are unchanged and liabilities increase. E) Total assets decrease and equity increases. 11) If the liabilities of a business increased $75,000 during a period of time and the equity in 1) the business decreased $30,000 during the same period, the assets of the business must have A) Increased $45,000. B) Increased $105,000. c) Decreased $45,000. D) Increased S30,000. E) Decreased $105,000 12) At the beginning of January of the current year, Little Mikey's Catering ledger reflected a 12) normal balance of $52,000 for accounts receivable. During January, the company collected $14,800 from customers on account and provided additional services to customers on account totaling $12,500. Additionally, during January one customer paid Mikey $5,000 for services to be provided in the future. At the end of January, the balance in the accounts receivable account should be: А)$49,700. B) S54700. C)$49,300. D) S2,300. E) S54,300 13) During the month of March, Harley's Computer Services made purchases on account 13) totaling $43,500. Also during the month of March, Harley was paid $8,000 by a customer for services to be provided in the future and paid S36,900 of cash on its accounts payable balance. If the balance in the accounts payable account at the beginning of March was $77,300, what is the balance in accounts payable at the end of March? A) $91,900. B) $83,900. c) $6,600 D) $75,900 E) S4,900 140 What is the proper adjusting entry at December 31, the end of the accounting period, if 14) the balance in the prepaid insurance account is $8050 before adjustment, and the unexpired amount per analysis of policies is, $3400? A) Debit Insurance Expense, $3400, credit Prepaid Insurance, $3400. B) Debit Insurance Expense, $8050; credit Prepaid Insurance, $8050 c) Debit Prepaid Insurance, $4650; credit Insurance Expense, $4650. D) Debit Insurance Expense, $4650; credit Prepaid Insurance, $4650. E) Debit Cash, $8050: Credit Prepaid Insurance, $8050.

Answer 1

10) Solution:

A) Total Assets, total liabilities and total equity are unchanged

When a Company collects Cash on its Accounts Receivable (also called as ‘Debtors’), the accounting entry passed in the books is as follows:

Cash A/c . . . . . . . . . . . . . . . . . . Dr.

Accounts Receivable . . . . . . . . . . Cr.

Cash and Accounts receivable are both part of the Asset side of the Balance Sheet. As Cash A/c is debited, the Cash balance increases and because the Accounts receivable A/c is credited, the balance in Accounts receivable A/c decreases.

The Total assets remain unchanged because both accounts are part of the total assets and the increase in cash balance is nullified by the decrease in accounts receivable.

There is no effect on the total liabilities and total equity too.

11) Solution:

A) Increased $ 45,000

In the Balance Sheet, the closing balance of the total assets is always equal to the closing balance of the total liabilities. In this question, assume opening balance of total assets and total liabilities before the mentioned changes is $ 1,00,000. The effect of the transaction shall be as follows:

LIABILITIES		ASSETS
Particulars	Amount	Particulars	Amount
Opening Balance	$ 1,00,000	Opening Balance	$ 1,00,000
Increase in Liabilities	$ 75,000	Increase in Assets	?
Decrease in Equity	- $ 30,000
Closing Balance	$ 1,45,000	Closing Balance	$ 1,45,000

As seen in the table, to tally the closing balance of total assets with the closing balance of total liabilities, the assets of the business must have increased by ($ 1,45,000 - $ 1,00,000) i.e. $ 45,000

12) Solution:

A) $ 49,700

Opening balance for accounts receivable	$ 52,000
Less: Collections from Customer	- $ 14,800
Add: Services provided	$ 12,500
Closing balance of accounts receivable	$ 49,700

Accounts receivable is a debit balance shown on the asset side of the balance sheet.

Accounting entry for collections from customer is as follows:

Cash/Bank A/c . . . . . . . . . . . . . . . . . Dr.

Accounts receivable A/c . . . . . . . . . . Cr.

As the accounts receivable account is credited, the amount of $ 14,800 is deducted from the accounts receivable A/c.

Accounting entry for services provided on account is as follows:

Accounts receivable A/c . . . . . . . . . . . Dr.

Revenue A/c . . . . . . . . . . . . . . . . . . . Cr.

As the accounts receivable account is debited, the amount of $ 12,500 is added to the accounts receivable A/c.

Kindly note that Advance received of $ 5,000 against services to be provided in the future is shown as a current liability in the balance sheet and has no effect on the balance of accounts receivable A/c.

13) Solution:

B) $ 83,900

Opening balance for accounts payable	$ 77,300
Add: Purchases on account	$ 43,500
Less: Cash paid on accounts payable	- $ 36,900
Closing balance of accounts payable	$ 83,900

Accounts payable is a credit balance shown on the liabilities side of the balance sheet.

Accounting entry for purchases on account is as follows:

Purchases A/c . . . . . . . . . . . . . . . . . Dr.

Accounts payable A/c . . . . . . . . . . . Cr.

As the accounts payable account is credited, the amount of $ 14,800 is added to the accounts payable A/c.

Accounting entry for cash paid on accounts payable is as follows:

Accounts payable A/c . . . . . . . . . Dr.

Cash A/c . . . . . . . . . . . . . . . . . . . Cr.

As the accounts payable account is debited, the amount of $ 12,500 is deducted from the accounts payable A/c.

Kindly note that Advance received of $ 8,000 against services to be provided in the future is shown as a current liability in the balance sheet and has no effect on the balance of accounts payable A/c.

14) Solution:

D) Debit Insurance expense $ 4,650, Credit prepaid insurance $ 4,650

Prepaid expenses are expenses which are incurred in the current accounting year but the benefit from these expenses are received in the future accounting years. Prepaid expenses are a debit balance and are shown as an asset in the balance sheet.

Prepaid insurance is the amount of premium paid for an insurance policy in the current year for the policy extending some of the succeeding accounting years. As per accounting principles, at the end of the accounting year, the expired portion of the total prepaid insurance amount is shown as an expense and removed from the balance of prepaid insurance A/c.

Total prepaid insurance	$ 8,050
Less: Unexpired amount	- $ 3,400
Expired Amount	$ 4,650

     

Hence, the accounting entry for expensing the expired amount shall be as under:

Insurance Expense A/c . . . . . . . . . Dr.

Prepaid Insurance A/c . . . . . . . . . . Cr.

15) Solution:

B) $ 1,455

The formula for calculating depreciation of an asset by straight line method is as follows:

(Total value of the asset – Salvage Value) / No. of years of useful life

In this example, the furniture is purchased on September 30 and the accounting year ends on December 31. Hence, the furniture is only used for 3 months in the current accounting year.

Total life of the furniture = 5 years i.e. 60 months

Depreciation under straight line method for 1 year = ($ 33,000 - $ 3,900)/5 = $ 5,820

Therefore, depreciation for 3 months = $ 5,820 x 3/12 = $ 1,455.

16) Solution:

C) Debit Interest receivable $ 3,360, credit Interest revenue $ 3,360

In the given question, the total interest for 1 year on $ 1,12,000 @ 9% is $ 10,080. ($ 1,12,000 x 9/100)

The loan is given on September 1 and the accounting period ends on December 31. Hence, accrued interest for period September to December i.e. 4 months is $ 10,080 x 4/12 = $ 3,360.

As the interest is due to be received after one year and is not received on December 31, the accrued interest is shown as Interest receivable on the asset side of the balance sheet which has a debit balance. Hence the accounting entry shall be:

Insurance receivable A/c . . . . . . . . . Dr.

Interest income A/c . . . . . . . . . . . . . Cr.

17) Solution:

C) Debit Salaries expense $ 7,500, credit Salaries payable $ 7,500

Total Salaries per day of the week = $ 2,500

As December 31 is a Wednesday and the salaries for the previous week are paid on the Monday of the next week, the salaries payable as on December 31 shall be for 3 days from Monday to Wednesday i.e. $ 2,500 x 3 = $ 7,500.

Any amount payable at the end of the accounting period is debited to the expense and is shown as liabilities in the balance sheet. Hence the accounting entry for adjustment regarding accrued salaries would be as under:

Salaries A/c . . . . . . . . . . . . . . . . . . . . Dr.

Salaries Payable A/c . . . . . . . . . . . . . Cr.