Learning Questions and Answers for Financial Accounting, Lesson 4.3B – Mastery Level

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1

Read each question carefully. Make sure you know what the question wants you to answer. Think back on all the material you have covered. Keep good notes on any questions that you miss. The goal is, “To not make the same mistake twice.” If you miss a question, make sure to analyze your mistake so you will not make it a second time.

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(1) – After graduating from a local college, Sharon Wiezkeski decides to open a bookstore near campus (named The Frugal Student, or TFS, as it is commonly known) to buy and sell used textbooks. She follows the legal rules of her state and incorporates the business. She puts in $10,000 of her own cash to buy capital stock issued by the corporation. Her cousin invests another $5,000. What is the company’s journal entry for these ownership investments?

(2) – TFS rents a small retail space near campus. The company pays cash of $1,000 per month for the next four months. What is the journal entry for this payment?

(3) - TFS buys several pieces of equipment including a cash register and some shelves and tables for $3,000 on credit. The company will pay for these purchases in a few weeks. What is the journal entry for this acquisition?

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(4) – TFS hires two college students to work in the store. They earn a total of $1,000 per week. That amount is recorded at the end of each week by the accounting system and then payment is made a few days later. What is the company’s journal entry at the end of their first week of work?

(5) – TFS buys 500 textbooks from students for an average cash amount of $10 each. What is the journal entry to record the purchase of this inventory?

(6) – TFS is responsible for the utilities (heating, water, and the like) for the space being rented. The cost of these utilities is $200 per week. TFS chooses not to record these amounts until they are paid (or until financial statements are prepared). It makes the recording process simpler. What is the journal entry at the end of the first week?

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(7) – TFS borrows $10,000 in cash from the local bank by signing a long-term note. The company is planning to buy a computer system to help monitor the textbooks as they are acquired and sold. TFS borrows the money in anticipation of making the purchase. What journal entry is prepared by TFS to record this loan?

(8) – TFS pays the employees $1,000 shortly after their first week of work for the company. What is the company’s journal entry for this payment? Assume that company officials chose to record the appropriate expense and liability as they were incurred.

(9) – TFS bought 500 textbooks for $10 each. Now, the company sells 400 of these textbooks to students at an average sales price of $22 (or $8,800) in cash. What is the company’s journal entry to record these sales? In addition, what is the journal entry to record the conveyance of the inventory to the customers?

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(10) – TFS bought 500 textbooks for $10 each. Now, the company sells 400 of these textbooks to students at an average sales price of $22 (or $8,800) on account. They will pay TFS in a few weeks. What are the journal entries under this different situation?

(11) – TFS bought 500 textbooks for $10 each. Now, the company sells 400 of these textbooks to students at an average sales price of $22 (or $8,800) on account. Why is the revenue recorded at the time of sale if no cash was collected on that date?

(12) – TFS now pays $200 for utilities that were incurred previously. TFS officials had decided not to record this expense and liability as they were incurred. Apparently, the effort was not considered to be worth any benefit that might be gained for internal decision-making purposes. What journal entry is recorded now at the time of payment?

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(13) – TFS incurs utility expenses of $200, but does not record them because of the accounting system in use. The company is now ready to prepare financial statements before payment is made. What entry should be made so that the financial statements can be presented fairly?

(14) – The above entries show the following income statement accounts: sales revenue - $8,800, cost of goods sold - $4,000, salary expense - $1,000, and utilities expense -- $200. For this simple example, that leads to the reporting of net income of $3,600. TFS decides to issue a $1,000 cash distribution to its two stockholders (Sharon Wiezkeski and her cousin). How does a journal entry record the results of this cash distribution? How does this decision affect the reported net come for TFS?

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As you look at these 14 questions, remember that you should start with basic transaction analysis—what balances increase and what balances decrease? Think about the transaction and the recording of that event. Then, using the debit and credit rules, how are each of those changes translated into debits and credits? The categories are few and the methodology remains consistent. Assets always increase with entries on the debit side. Liabilities always increase with credits. That never changes. Practice should help you become quite adept at taking transactions and turning them into journal entries

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(1) – After graduating from a local college, Sharon Wiezkeski decides to open a bookstore near campus (named The Frugal Student, or TFS, as it is commonly known) to buy and sell used textbooks. She follows the legal rules of her state and incorporates the business. She puts in $10,000 of her own cash to buy capital stock issued by the corporation. Her cousin invests another $5,000. What is the company’s journal entry for these ownership investments?

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For the business, cash increases by $15,000. As an asset, that increase is recorded as a debit. The source of these assets was the issuance of capital stock. Thus, contributed capital (or capital stock) also increases by $15,000. As a resource, that increase is recorded as a credit.

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Notice that the journal entry is clear (visually). the Cash account and its $15,000 increase are on the left (the debit side) and contributed capital and its $15,000 increase are to the right (the credit side). Accountants do not want to risk any confusion as to whether an account is being debited or credited. Both the debit and credit (the account title and the monetary figure) should be obvious by their placement. Notice, also, that the entry does balances, the debit does equal the credit. Cash went up because of the owners’ investment into the company.

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(2) – TFS rents a small retail space near campus. The company pays cash of $1,000 per month for the next four months. What is the journal entry for this payment?

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This rent payment is for a future economic benefit (an asset) so prepaid rent increases by $4,000. That current asset increases with a debit. Cash decreases by $4,000. As an asset, this decrease is recorded as a credit.

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(3) - TFS buys several pieces of equipment including a cash register and some shelves and tables for $3,000 on credit. The company will pay for these purchases in a few weeks. What is the journal entry for this acquisition?

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Equipment increases by the cost of $3,000. Equipment is an asset. Asset increases are shown as debits. Accounts payable increases by the same $3,000. The Accounts Payable account monitors liabilities (usually created through an acquisition). Liability increases are shown as credits.

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(4) – TFS hires two college students to work in the store. They earn a total of $1,000 per week. That amount is recorded at the end of each week by the accounting system and then payment is made a few days later. What is the company’s journal entry at the end of their first week of work?

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A cost of $1,000 has been incurred as a result of the work the employees did in the past week. That is reported as salary expense because the benefit was in the past and not the future. Expenses increase with debits. Because the amount has not yet been paid, a salary payable is also recorded (a liability). That account also increases. As a liability, that increase is reported here as a credit.

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Salary is an accrued expense that normally increases as time passes. TFS has opted to record this accrual at the end of each week. Different companies approach this reporting in different ways. In recording such events, it is important to know how company officials have decided to record these accruals.

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(5) – TFS buys 500 textbooks from students for an average cash amount of $10 each. What is the journal entry to record the purchase of this inventory?

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Inventory increases by its cost of $5,000. Inventory is an asset and assets increase using a debit. At the same time, cash decreases $5,000. Cash is also an asset. It decreases with a credit entry.

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(6) – TFS is responsible for the utilities (heating, water, and the like) for the space being rented. The cost of these utilities is $200 per week. TFS chooses not to record these amounts until they are paid (or until financial statements are prepared). It makes the recording process simpler. What is the journal entry at the end of the first week?

This is probably obvious from the information provided, but the company does not make a journal entry at that time. It is easier to wait until the amount is paid (or financial statements are prepared) to make the necessary recording. If the information is not to be used for internal decision-making, recording accruals as they happen is not worth the effort.

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(7) – TFS borrows $10,000 in cash from the local bank by signing a long-term note. The company is planning to buy a computer system to help monitor the textbooks as they are acquired and sold. TFS borrows the money in anticipation of making the purchase. What journal entry is prepared by TFS to record this loan?

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Cash is received. Cash is an asset and it is increased. That increase is shown in the journal entry as a debit. The note payable is a liability. The note payable balance goes up because of the transaction. Liabilities are increased in accounting by a credit.

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(8) – TFS pays the employees $1,000 shortly after their first week of work for the company. What is the company’s journal entry for this payment? Assume that company officials chose to record the appropriate expense and liability as they were incurred.

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TFS should not record the expense a second time because it was already recorded while the work was done. Instead, the company is now paying off the liability that was established at that time. Salary payable, as the recorded liability, is decreased by $1,000. Liabilities increase with credits so a debit is used to reflect a decrease. Cash is also decreased. It is an asset. Assets are reduced using a credit. .

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(9) – TFS bought 500 textbooks for $10 each. Now, the company sells 400 of these textbooks to students at an average sales price of $22 (or $8,800) in cash. What is the company’s journal entry to record these sales? In addition, what is the journal entry to record the conveyance of the inventory to the customers?

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The company receives $8,800 in cash. Cash is an asset and it increases. An increase in an asset is shown as a debit. The source of that cash was sales revenue. Sales revenue increases by the use of a credit. Continued on following card

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When selling inventory, two things happen. There is a sales transaction and the inventory is then given to the buyer. Thus a second entry is needed to show this decrease in inventory. Inventory is an asset. A decrease in an asset is recorded in a journal entry as a credit. The removal of the inventory is an expense, one that is typically referred to as cost of goods sold. As an expense, it is increased with a debit. The inventory was recorded at its cost of $10 each. For the 400 textbooks sold at this time, the total reduction is $4,000. If the inventory is recorded initially at $10 each, it must be removed at $10 each.

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Gross profit (or mark-up) would be calculated as the sales revenue of $8,800 less the cost of goods sold of $4,000 or $4,800.

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(10) – TFS bought 500 textbooks for $10 each. Now, the company sells 400 of these textbooks to students at an average sales price of $22 (or $8,800) on account. They will pay TFS in a few weeks. What are the journal entries under this different situation?

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TFS collects nothing now but will (hopefully) collect the amount due at a later date. The only element of the transaction that is different is the asset being received at this time by TFS.

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(11) – TFS bought 500 textbooks for $10 each. Now, the company sells 400 of these textbooks to students at an average sales price of $22 (or $8,800) on account. Why is the revenue recorded at the time of sale if no cash was collected on that date?

U.S GAAP does not necessarily recognize revenue at the point that cash is received. According to the rules, revenue is recognized by the seller when that party has satisfied the performance obligation created by the agreement between buyer and seller. Here, TFS is assumed to satisfy its performance obligation when the textbooks are handed over to the customers. Whether cash is received now or later, the revenue is recognized at the point the performance obligation is satisfied.

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(12) – TFS now pays $200 for utilities that were incurred previously. TFS officials had decided not to record this expense and liability as they were incurred. Apparently, the effort was not considered to be worth any benefit that might be gained for internal decision-making purposes. What journal entry is recorded now at the time of payment?

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Because of the company’s decision, neither expense nor liability was recorded as the expense was incurred. Now, when payment is made, no expense has been recorded. No liability balance exists to be removed. Instead, the expense is recorded now. A debit is used in double-entry bookkeeping to show an increase in an expense. Cash is decreased by $200. Cash is an asset. A decrease in an asset is shown as a credit. The liability was never put into the records so it cannot be removed.

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(13) – TFS incurs utility expenses of $200, but does not record them because of the accounting system in use. The company is now ready to prepare financial statements before payment is made. What entry should be made so that the financial statements can be presented fairly?

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If financial statements are produced prior to the recording of this expense, it should be entered into the accounting records at that time. As will be shown, this is known as an adjusting entry. The expense is increased. A debit is used to show an increase in an expense. The related liability is also increased. A credit is used to show an increase in a liability. This allows the financial statements to be presented fairly according to U.S. GAAP even though the expense and liability were not recorded as the amount accrued.

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(14) – The above entries show the following income statement accounts: sales revenue - $8,800, cost of goods sold - $4,000, salary expense - $1,000, and utilities expense -- $200. For this simple example, that leads to the reporting of net income of $3,600. TFS decides to issue a $1,000 cash distribution to its two stockholders (Sharon Wiezkeski and her cousin). How does a journal entry record the results of this cash distribution? How does this decision affect the reported net come for TFS?

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The dividend distribution reduces the net assets of the company. As a cost of this type, it is recorded by a debit. The cash is decreased. Cash is an asset and a decrease in an asset is recorded as a credit.

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A dividend distribution creates no change in reported net income. It is not viewed as an expense because it is not incurred in hopes of generating additional future revenues. It is a sharing of the profits generated by business operations with the stockholders. The dividend will be reported as a reduction on the statement of retained earnings.

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It is easy to read the answers here and automatically reassure yourself, “Oh, I know that.” Until you have read the 14 questions at the beginning of this series and provide each answer without any help, you have not proven you know the answers. You might have to do these questions a couple of times to achieve that degree of mastery but you can do it. Keep practicing until your knowledge of debits and credits enables you to take these basic transactions and record them as journal entries

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