# Accounting 201 - Chapter 3 Review Test Quiz

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Accounting 201 - Chapter 3 Review Test Quiz
We have just covered business statements and how to prepare them. The quiz below is designed to test your understanding of all we covered in the chapter. Can you identify how these changes in assets and liabilities are treated in different statements? All the best as you tackle it.

• 1.

### Under accrual accounting, revenue is recorded

• A.

When the cash is collected, regardless of when the services are performed

• B.

When the services are performed, regardless of when the cash is received

• C.

B. When the services are performed, regardless of when the cash is received
Explanation
Under accrual accounting, revenue is recorded when the services are performed, regardless of when the cash is received. This means that revenue is recognized when the company has fulfilled its obligations to provide goods or services to the customer, even if the customer has not yet paid for them. This allows for a more accurate reflection of the company's financial performance, as it matches revenue with the period in which it was earned, rather than when the cash is received.

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• 2.

### A company using the accrual basis of accounting pays \$15,000 for a television advertising campaign. Commercials will run evenly in December, January, and February. How much expense will be reported on an income statement prepared for the month of December?

• A.

\$0

• B.

\$5,000

• C.

\$10,000

• D.

\$15,000

B. \$5,000
Explanation
Calculations: 15,000/3=5,000

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• 3.

### To obtain a new customer, a business sells merchandise to the customer for \$65. Normally, the merchandise sells for \$85. For this sale, the business should record revenue of

• A.

\$85

• B.

\$65

• C.

Neither amount

B. \$65
Explanation
In this scenario, the business is selling merchandise to a new customer at a discounted price of \$65, while the normal selling price is \$85. Since the business is making the sale at \$65, it should record revenue of \$65, as that is the actual amount of money received from the customer. The normal selling price of \$85 is not relevant in this case as the business is offering a special discount to attract new customers.

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• 4.

• A.

Not needed under the accrual basis of accounting

• B.

Prepared at the option of the accountant

• C.

Prepared at the beginning of the accounting period to update all accounts.

• D.

Prepared at the end of the accounting period to update certain accounts.

D. Prepared at the end of the accounting period to update certain accounts.
Explanation
Adjusting entries are prepared at the end of the accounting period to update certain accounts. These entries are necessary to ensure that the financial statements accurately reflect the company's financial position and performance. They are used to record transactions or events that have occurred but have not yet been recorded, such as accrued expenses or revenue, prepaid expenses, depreciation, and unearned revenue. By making these adjustments, the accountant can ensure that the financial statements provide a true and fair view of the company's financial position and comply with the accrual basis of accounting.

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• 5.

### Prepaid insurance is reported on the balance sheet as a(n):

• A.

Expense

• B.

Liability

• C.

Asset

• D.

Contra asset

C. Asset
Explanation
Prepaid insurance is reported on the balance sheet as an asset because it represents the amount paid in advance for insurance coverage that has not yet been utilized. As the coverage period progresses, the prepaid insurance is gradually expensed and recorded as an expense on the income statement. Until then, it is considered an asset because it represents a future economic benefit to the company.

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• 6.

### The book value of a plant asset is the

• A.

Accumulated depreciation less the cost of the asset

• B.

Cost of the asset

• C.

Balance in the accumulated depreciation account

• D.

Cost of the asset less the accumulated depreciation

D. Cost of the asset less the accumulated depreciation
Explanation
The book value of a plant asset is the cost of the asset less the accumulated depreciation. This is because the book value represents the net value of the asset after accounting for the depreciation that has been allocated over its useful life. By subtracting the accumulated depreciation from the cost of the asset, we can determine the remaining value of the asset on the company's books.

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• 7.

### A liability that arises from an expense that has not yet been paid is a(n):

• A.

Unearned expense

• B.

Prepaid expense

• C.

Accrued expense

• D.

Accrued revenue

C. Accrued expense
Explanation
An accrued expense is a liability that arises from an expense that has been incurred but has not yet been paid. This means that the expense has been recorded in the accounting records, but the payment for it has not been made. Accrued expenses are typically recorded at the end of an accounting period to ensure that all expenses are properly accounted for, even if they have not been paid yet. This helps to provide a more accurate picture of the company's financial position and performance.

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• 8.

### Unearned revenue is a(n):

• A.

Asset account

• B.

Liability account

• C.

Revenue account

• D.

Expense account

B. Liability account
Explanation
Unearned revenue is a liability account because it represents the money received by a company in advance for goods or services that have not yet been delivered or performed. It is considered a liability because the company has an obligation to provide the goods or services in the future. As the company fulfills its obligation, the unearned revenue is gradually recognized as revenue on the income statement.

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• 9.

### Which account is debited in the adjusting entry to record salaries owed to employees, but not paid until next accounting period?

• A.

Salary Expense

• B.

Unearned Salaries

• C.

Salary Payable

• D.

Deferred Salary

A. Salary Expense
Explanation
The correct answer is Salary Expense. In the adjusting entry to record salaries owed to employees but not paid until the next accounting period, the Salary Expense account is debited. This is because the company has incurred the expense of salaries owed to employees during the current accounting period, even though the payment will be made in the next period. By debiting the Salary Expense account, the company recognizes and records the expense in the current period's financial statements, reflecting the true financial position of the company.

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• 10.

### The book value of an asset that cost \$20,000 and has accumulated depreciation of \$6,000 is

• A.

\$20,000

• B.

\$ 6,000

• C.

\$26,000

• D.

\$14,000

D. \$14,000
Explanation
Calculations: 20,000-6,000=14,000

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• 11.

### A company has \$800 in beginning supplies and \$150 of supplies on hand at the end of the month.  The adjusting entry for this company is:

• A.

Debit supplies of \$150 and a credit of \$150 to Supplies Expense

• B.

Debit supplies Expense of \$150 and a credit of \$150 to Supplies

• C.

Debit supplies Expense of \$650 and a credit of \$650 to Supplies

• D.

There is not enough information given to prepare the entry

C. Debit supplies Expense of \$650 and a credit of \$650 to Supplies
Explanation
Calculations: 800-150=650

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• 12.

### An accrual refers to an event where the

• A.

Expense or revenue is not recorded after the cash settlement

• B.

Liability is recorded after the cash settlement

• C.

Expense or revenue is recorded before the cash settlement

• D.

Asset is recorded only after the cash settlement

C. Expense or revenue is recorded before the cash settlement
Explanation
In accrual accounting, expenses and revenues are recorded when they are incurred, regardless of when the cash settlement occurs. This means that the correct answer is "expense or revenue is recorded before the cash settlement". This method allows for a more accurate representation of a company's financial position and performance, as it recognizes transactions as they happen, rather than waiting for the cash to be received or paid.

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• 13.

### The financial statements are prepared from the

• A.

• B.

• C.

Ledger

• D.

Explanation
The financial statements are prepared from the adjusted trial balance because it provides an accurate and up-to-date record of all the accounts after adjusting entries have been made. Adjusting entries are necessary to ensure that revenues and expenses are properly recognized in the correct accounting period. Therefore, the adjusted trial balance reflects the true financial position of the company and is used as a basis for preparing the financial statements such as the income statement, balance sheet, and cash flow statement.

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• 14.

### How does an accrued expense adjustment affect the financial statements?  The adjustment

• A.

Increases expenses and decreases assets

• B.

Increases expenses and increases liabilities

• C.

Decreases expenses and increases liabilities

• D.

Decreases expenses and increases assets

B. Increases expenses and increases liabilities
Explanation
An accrued expense adjustment increases expenses and increases liabilities. This means that an expense is recognized on the financial statements even though it has not yet been paid. This adjustment increases the amount of expenses reported on the income statement, which in turn increases the total liabilities reported on the balance sheet. This reflects the obligation of the company to pay the expense in the future.

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• 15.

### What effect does an accrued revenue adjustment have on a company’s net income?

• A.

The adjustment has no effect on net income

• B.

The adjustment increases net income for the period

• C.

The adjustment decreases net income for the period

• D.

The effect of the adjustment cannot be determined with the information given

B. The adjustment increases net income for the period
Explanation
An accrued revenue adjustment increases net income for the period because it recognizes revenue that has been earned but not yet received in cash. This adjustment increases both revenue and net income, as it reflects the company's ability to generate revenue even if the cash has not been received.

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• 16.

### Which of the following is NOT true regarding the adjusting process?

• A.

• B.

Every adjusting entry affects the balance sheet and the income statement.

• C.

• D.

The main adjusting entries are deferrals, depreciation and accruals.

Explanation
The given statement "Adjustments are made during the month" is NOT true regarding the adjusting process. The adjusting process involves making necessary adjustments to ensure that the financial statements accurately reflect the company's financial position and performance at the end of the accounting period. These adjustments are typically made at the end of the accounting period, such as monthly, quarterly, or annually, and not during the month.

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• 17.

### After the adjustments are journalized and posted, a(n) _____________ can be prepared to aid in the preparation of the financial statements:

• A.

Balance sheet

• B.

• C.

Post-close trial balance

• D.

Income statement

Explanation
After the adjustments are journalized and posted, a(n) adjusted trial balance can be prepared to aid in the preparation of the financial statements. This is because the adjusted trial balance includes all the accounts with their updated balances after the adjustments have been made. It serves as a summary of all the accounts and their balances, making it easier to transfer the information to the financial statements such as the balance sheet and income statement. The adjusted trial balance ensures that all the accounts have been properly adjusted and provides a reliable basis for preparing accurate financial statements.

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• 18.

### Accounts that relate to a limited period are called:

• A.

Asset and liability accounts

• B.

Permanent accounts

• C.

Real accounts

• D.

Temporary accounts

D. Temporary accounts
Explanation
Temporary accounts are accounts that relate to a limited period, typically a fiscal year. These accounts include revenue, expense, and dividend accounts. They are temporary because their balances are closed at the end of the accounting period and transferred to the retained earnings or owner's equity account. In contrast, permanent accounts, also known as real accounts, are accounts that are not closed at the end of the period and their balances are carried forward to the next accounting period. Asset and liability accounts are types of permanent accounts.

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• 19.

### Which of the following accounts is considered a "temporary" account?

• A.

Inventory

• B.

Rent Expense

• C.

Accounts Payable

• D.

Common Stock

B. Rent Expense
Explanation
Rent Expense is considered a "temporary" account because it is an expense account that records the cost of renting a property for a specific period of time. Temporary accounts are used to track revenues, expenses, and withdrawals for a specific accounting period and are closed at the end of the period, transferring their balances to the retained earnings account. Rent Expense is closed at the end of each accounting period to accurately reflect the current period's expenses and to start the next period with a zero balance.

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• 20.

### Closing entries transfer the revenue, expense, and dividends balances to:

• A.

Retained earnings

• B.

Permanent accounts

• C.

Temporary accounts

• D.

None of the above

A. Retained earnings
Explanation
Closing entries transfer the revenue, expense, and dividends balances to retained earnings. This is done at the end of an accounting period to update the financial records and prepare for the next period. By transferring these balances to retained earnings, the company is effectively closing out the temporary accounts and carrying over the net income or loss to the retained earnings account. This ensures that the income statement accounts start fresh in the new period, while the retained earnings account reflects the cumulative profits or losses of the company over time.

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• 21.

### On September 1, Boz sold to Skaggs prepaid maintenance for \$6,000 for six months.  As of December 31, what is the amount that has been earned?

• A.

\$0

• B.

\$2000

• C.

\$4000

• D.

\$6000

C. \$4000
Explanation
Calculations: 6,000/6=1,000 revenue per month*4months =4,000 earned

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• 22.

### Which of the following financial statements is prepared using the adjusted trial balance?

• A.

Both the balance sheet and the income statement

• B.

Neither the balance sheet nor the income statement

• C.

The balance sheet only

• D.

The income statement only

A. Both the balance sheet and the income statement
Explanation
The adjusted trial balance is used to prepare both the balance sheet and the income statement. The adjusted trial balance includes all the accounts and their balances after adjusting entries have been made at the end of the accounting period. These adjusted balances are then used to prepare the financial statements. The balance sheet presents the financial position of a company at a specific point in time, while the income statement shows the company's revenues, expenses, and net income over a period of time. Therefore, both the balance sheet and the income statement are prepared using the adjusted trial balance.

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• 23.

### Which account is debited in the adjusting entry to record insurance expired during the current period?

• A.

Prepaid Insurance

• B.

Insurance Expense

• C.

Accrued Insurance

• D.

Insurance Payable

B. Insurance Expense
Explanation
In the adjusting entry to record insurance expired during the current period, the account that is debited is Insurance Expense. This is because insurance expense represents the cost of the insurance that has been used up or expired during the period. By debiting Insurance Expense, we are recognizing and recording the expense in the appropriate period, in accordance with the matching principle of accounting.

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• 24.

### An expense incurred in 2010 is not paid until 2011. Using the accrual basis of accounting, the expense should appear on:

• A.

) the 2010 income statement

• B.

The 2011 income statement

• C.

Neither the 2010 nor the 2011 income statement

• D.

Both the 2010 and 2011 income statements

A. ) the 2010 income statement
Explanation
According to the accrual basis of accounting, expenses should be recorded when they are incurred, regardless of when they are paid. Since the expense was incurred in 2010, it should appear on the 2010 income statement, even if it is not paid until 2011.

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• 25.

### According to the revenue principle, revenue should be recorded

• A.

Before it has been earned

• B.

• C.

When it has been earned

• D.

Whenever the company needs to record the revenue

C. When it has been earned
Explanation
According to the revenue principle, revenue should be recorded when it has been earned. This means that revenue should only be recognized and recorded in the financial statements when the company has completed the earnings process, which typically occurs when goods or services have been delivered to the customer. This principle ensures that revenue is reported accurately and reflects the actual economic value generated by the company's operations. Recognizing revenue before it has been earned or when cash is received would not adhere to the revenue recognition principle.

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• 26.

### In most cases, revenue is earned

• A.

• B.

When the order is placed

• C.

When the customer mails the check

• D.

When the goods or services have been delivered to the customer

D. When the goods or services have been delivered to the customer
Explanation
Revenue is earned when the goods or services have been delivered to the customer because this is when the transaction is considered complete and the customer has received the value they paid for. At this point, the company can recognize the revenue and record it in their financial statements. Receiving cash, placing an order, or receiving a check from the customer are all steps that may occur before or after the delivery of goods or services, but they do not necessarily indicate that revenue has been earned.

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• 27.

### Thompson Company executives are planning a \$5 million advertising campaign. The expense of this advertising campaign should be recognized when

• A.

Planning for the campaign is complete

• B.

Cash is paid to the television stations which will run the commercials

• C.

Commercials are filmed

• D.

Explanation
The expense of the advertising campaign should be recognized when the commercials are broadcast. This is because the cost of the campaign is incurred and the company starts to receive the benefits of the advertising when the commercials are actually aired on television. Until then, the planning, filming, and payment to the television stations are all part of the preparation process and do not represent the actual expense of the campaign.

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• 28.

### An expense that is paid in advance is a(n):

• A.

Unearned expense

• B.

Prepaid expense

• C.

Liability

• D.

Unearned asset

B. Prepaid expense
Explanation
A prepaid expense refers to an expense that has been paid in advance but has not yet been used or consumed. It is considered an asset because it represents a future benefit for the company. The company will recognize the expense gradually over time as it is used or consumed. Therefore, prepaid expense is the correct answer.

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• 29.

### Prepaid expenses will:

• A.

Become expenses when their future benefits expire

• B.

Become revenues when their future benefits expire

• C.

Become liabilities when their future benefits expire

• D.

Become none of the above

A. Become expenses when their future benefits expire
Explanation
Prepaid expenses are initially recorded as assets because they represent future benefits that have been paid for in advance. However, as time passes and the benefits are consumed or expire, they are no longer considered assets and are instead recognized as expenses. This is because the benefits have been used up and no longer provide any value to the company. Therefore, the correct answer is that prepaid expenses become expenses when their future benefits expire.

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• 30.

### Current assets include

• A.

Cash and receivables

• B.

Cash and payables

• C.

Land and Building

• D.

Retained earnings

A. Cash and receivables
Explanation
Current assets are assets that can be easily converted into cash or used up within a year. Cash and receivables are both examples of current assets. Cash refers to the physical currency and cash equivalents that a company holds, while receivables represent the amounts owed to the company by its customers or clients. Both of these assets are considered current because they are expected to be converted into cash within a relatively short period of time.

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• 31.

### A company has \$900 in beginning supplies and \$700 of supplies used during the month.  The adjusting entry for this company is:

• A.

Debit supplies \$700 and a credit supplies expense \$700

• B.

Debit supplies expense \$200 and a credit supplies \$200

• C.

Debit supplies expense \$700 and a credit supplies \$700

• D.

There is not enough information given to prepare the entry

C. Debit supplies expense \$700 and a credit supplies \$700
Explanation
Calculations: 900-200=700

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• 32.

### Which account is debited in the adjusting entry to record depreciation expense during the current period?

• A.

Accumulated Depreciation

• B.

Equipment

• C.

Depreciation Expense

• D.

Depreciation Payable

C. Depreciation Expense
Explanation
Depreciation expense represents the allocation of the cost of an asset over its useful life. In the adjusting entry to record depreciation expense, the account that is debited is Depreciation Expense. This is because depreciation expense is an expense account that reflects the decrease in value of the asset over time. By debiting Depreciation Expense, the company recognizes the reduction in the asset's value and records the corresponding expense in the income statement.

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• 33.

### Which of the following accurately describes the account type of the Accumulated Depreciation account?

• A.

Contra-expense account

• B.

Liability account

• C.

Contra-asset account

• D.

Expense account

C. Contra-asset account
Explanation
The correct answer is "Contra-asset account." Accumulated Depreciation is a contra-asset account because it is used to offset the value of an asset on the balance sheet. It represents the total depreciation expense that has been recorded over the life of the asset. As a contra-asset account, it has a credit balance and is subtracted from the related asset account to determine the net book value of the asset.

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• 34.

### Which of the following accurately describes the normal balance of the Accumulated Depreciation account?

• A.

Credit balance

• B.

Debit balance

A. Credit balance
Explanation
The Accumulated Depreciation account is used to record the cumulative depreciation of an asset over its useful life. Depreciation is an expense that reduces the value of an asset, so it is recorded as a credit entry in the account. Therefore, the normal balance of the Accumulated Depreciation account is a credit balance. This means that the total amount of accumulated depreciation is shown as a positive value on the balance sheet, indicating the total amount of depreciation that has been recorded for the asset.

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• 35.

### On November 1, Phillips Tool and Die Company paid six months’ insurance in advance totaling \$9,000.  An adjusted trial balance prepared on December 31 would include a balance in the Prepaid Insurance account of:

• A.

\$9000

• B.

\$6000

• C.

\$3000

• D.

\$0

B. \$6000
Explanation
Calculations: 9,000/6=1,500 insurance expense per month
1,500*2 months = 3,000 insurance expense Beg bal 9,000-3,000=6,000

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• 36.

### To close the expense accounts

• A.

Debit retained earnings

• B.

Debit expenses

• C.

Credit retained earnings

A. Debit retained earnings
Explanation
Debiting retained earnings is the correct answer because closing expense accounts involves transferring their balances to the retained earnings account. Debiting retained earnings will decrease the account balance, reflecting the reduction in earnings due to the expenses incurred. This ensures that the income statement is reset for the next accounting period and the expenses are properly accounted for in the retained earnings account.

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• 37.

### On November 1 of the current year, Prepaid Rent was debited \$5,400 for three months of rent, paid in advance. The amount of the adjusting entry on December 31 is (2 months):

• A.

\$1800

• B.

\$3600

• C.

\$5400

• D.

\$0

B. \$3600
Explanation
Calculations: 5,400/3= 1,800 rent per month. 1,800 *2 months used =3,600

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• 38.

### On August 1 of the current year, Jamie Simmons received \$5,400 for legal services to be performed  evenly throughout the next six months. An adjusted trial balance prepared on December 31 of the current year will show a credit balance in Unearned Revenue in the amount of:

• A.

\$0

• B.

\$900

• C.

\$4500

• D.

\$5400

B. \$900
Explanation
Calculations: 5,400/6= 900 revenue per month. 900 *5 months used =4,500 earned
Beg bal in unearned 5,400 less 4,500 earned = 900 ending balance

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• 39.

### To record wages that have been earned but have not been paid:

• A.

Debit wages payable, credit cash

• B.

Debit wages expense, credit cash

• C.

Debit wages expense, credit wages payable

• D.

Debit cash, credit wages expense

C. Debit wages expense, credit wages payable
Explanation
The correct answer is to debit wages expense and credit wages payable. This is because when wages have been earned but not yet paid, it is necessary to record the expense in the wages expense account to reflect the cost incurred by the company. At the same time, the company also has a liability to pay these wages, which is recorded in the wages payable account.

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• 40.

### To close the revenue account:

• A.

Debit retained earnings

• B.

Credit revenue

• C.

Credit retained earnings

C. Credit retained earnings
Explanation
The correct answer is to credit retained earnings. When closing the revenue account, the revenue is transferred to the retained earnings account. This is done by crediting retained earnings, which increases the balance in the account. Debiting retained earnings would decrease the balance, and crediting revenue would not properly close the revenue account. Therefore, the correct action is to credit retained earnings.

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• Mar 21, 2023
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• Jun 14, 2012
Quiz Created by
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