Accounting Exam 3 Review

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  • 1/31 Questions

    When an account recievable that was previously written off is collected, it is first necessary to reverse the entry to reinstate the customers

    • True
    • False
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About This Quiz

The 'Accounting Exam 3 Review' assesses understanding of financial transactions, including stock issuance, note repayment, and account handling. It evaluates key accounting principles and their application in real-world scenarios, crucial for anyone studying or working in the field of accounting.

Accounting Quizzes & Trivia

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  • 2. 

    When a business sells an item and collects a state sales tax on it, a current liability arises

    • True

    • False

    Correct Answer
    A. True
    Explanation
    When a business sells an item and collects a state sales tax on it, a current liability arises because the business is obligated to remit the collected sales tax to the state government. This means that the business owes the state government the amount of sales tax collected, and this obligation is considered a current liability because it is expected to be settled within a year. Therefore, the statement "when a business sells an item and collects a state sales tax on it, a current liability arises" is true.

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  • 3. 

    Recording depreciation on plant assets affects the balance sheet and the income statement

    • True

    • False

    Correct Answer
    A. True
    Explanation
    Recording depreciation on plant assets affects the balance sheet and the income statement because it involves recognizing the decrease in the value of these assets over time. Depreciation is an expense that is recorded on the income statement, which reduces the net income. This reduction in net income also impacts the retained earnings on the balance sheet. Additionally, the accumulated depreciation is recorded as a contra-asset on the balance sheet, which reduces the carrying value of the plant assets and affects the overall asset value. Therefore, both the balance sheet and the income statement are impacted by recording depreciation on plant assets.

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  • 4. 

    Which sales accounts normal have a debit balance?

    • Sales Revenue

    • Sales Returns and Allowances

    Correct Answer
    A. Sales Returns and Allowances
    Explanation
    Sales Returns and Allowances typically have a debit balance because they represent a reduction in sales revenue. When a customer returns a product or receives an allowance for a damaged or defective item, the amount is deducted from the sales revenue. This reduces the overall sales amount and results in a debit balance for the Sales Returns and Allowances account. On the other hand, Sales Revenue represents the total amount of sales made, so it usually has a credit balance as it increases the overall revenue.

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  • 5. 

    The normal balance of cost of good sold is a credit

    • True

    • False

    Correct Answer
    A. False
    Explanation
    The normal balance of cost of goods sold is a debit. This is because cost of goods sold is an expense account, and expenses have a normal debit balance. Expenses are amounts that a company incurs in order to generate revenue, and they are recorded on the debit side of the accounting equation to reflect a decrease in the company's assets or an increase in its liabilities. Therefore, the statement that the normal balance of cost of goods sold is a credit is incorrect.

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  • 6. 

    Erin Corporation purchases $500 of merchandise on credit. Using the periodic inventory approach, Erin would record this transaction as:

    • DR. Inventory......500------------------CR. Accounts Payable......500

    • DR. Accounts Payable.......500-----------------CR. Purchases.......500

    • DR. Purchases.......500--------------------CR. Accounts Payable.......500

    • DR. Accounts Payable.......500---------------------CR. Inventory.........500

    Correct Answer
    A. DR. Inventory......500------------------CR. Accounts Payable......500
  • 7. 

    The normal balance of accounts payable is a credit

    • True

    • False

    Correct Answer
    A. True
    Explanation
    The normal balance of accounts payable is a credit because it represents the amount of money that a company owes to its creditors. In accounting, credits are used to record liabilities, such as accounts payable, while debits are used to record assets and expenses. Since accounts payable is a liability, it is increased with a credit entry. Therefore, the statement "the normal balance of accounts payable is a credit" is true.

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  • 8. 

    The acquisition of treasury stock by a corporation increases total assets and total stockholders' equity

    • True

    • False

    Correct Answer
    A. False
    Explanation
    The acquisition of treasury stock by a corporation does not increase total assets and total stockholders' equity. Treasury stock is a company's own stock that has been bought back from shareholders, and it is recorded as a reduction in stockholders' equity. This means that it decreases both total assets and total stockholders' equity. Therefore, the statement is false.

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  • 9. 

    The Allowance for Doubtful Accounts is a liability account

    • True

    • False

    Correct Answer
    A. False
    Explanation
    The Allowance for Doubtful Accounts is not a liability account. It is a contra-asset account that is used to estimate and record the amount of accounts receivable that is expected to be uncollectible. It is deducted from the accounts receivable on the balance sheet to show a more accurate representation of the company's expected cash inflows. Therefore, the correct answer is false.

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  • 10. 

    Interest is usually associated with

    • Accounts receivable

    • Notes receivable

    • Doubtful accounts

    • Bad debts

    Correct Answer
    A. Notes receivable
    Explanation
    Notes receivable is a type of financial asset that represents a written promise to receive a specific amount of money on a future date. Interest is usually associated with notes receivable because it is common for borrowers to pay interest on the amount borrowed. This interest serves as compensation to the lender for providing the funds and is a way to generate additional income. Therefore, notes receivable is the correct answer as it is directly linked to the concept of interest.

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  • 11. 

    The normal balance of inventory is a credit

    • True

    • False

    Correct Answer
    A. False
    Explanation
    The normal balance of inventory is a debit, not a credit. This means that an increase in inventory will be recorded as a debit entry, while a decrease in inventory will be recorded as a credit entry. This is because inventory is an asset, and assets have a debit balance. A credit balance would indicate a decrease in inventory, which is not correct. Therefore, the correct answer is False.

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  • 12. 

    A company using a perpetual inventory system that returns goods previously purchased on credit would

    • Debit accounts payable and credit inventory

    • Debit sales and credit accounts payable

    • Debit cash and credit accounts payable

    • Debit accounts payable and credit purchases

    Correct Answer
    A. Debit accounts payable and credit inventory
    Explanation
    When a company returns goods previously purchased on credit, it needs to reduce the amount owed to the supplier (accounts payable) and also decrease the inventory on hand. Therefore, the correct entry would be to debit (decrease) accounts payable and credit (decrease) inventory. This reflects the reduction in the company's liability and the decrease in the value of the inventory.

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  • 13. 

    Plant assets are ordinarily presented in the balance sheet 

    • At current market values

    • At replacement cost

    • At cost less accumulated depreciation

    • In separate section along with intangible assets

    Correct Answer
    A. At cost less accumulated depreciation
    Explanation
    Plant assets are typically presented in the balance sheet at cost less accumulated depreciation because this method reflects the historical cost of acquiring the assets and deducts the accumulated depreciation over time. This presentation allows users of the financial statements to understand the original cost of the assets and the amount that has been depreciated since their acquisition. It provides a more accurate representation of the value of the assets and their impact on the company's financial position.

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  • 14. 

    The issuance of common stock affects both paid-in capital and retained earnings

    • True

    • False

    Correct Answer
    A. False
    Explanation
    The issuance of common stock affects paid-in capital but does not affect retained earnings. Paid-in capital represents the amount of capital contributed by shareholders in exchange for shares of stock, while retained earnings represent the accumulated profits of the company that have not been distributed to shareholders as dividends. The issuance of common stock increases paid-in capital as the company receives cash or other assets in exchange for the newly issued shares, but it does not impact retained earnings as it does not involve the company's profits or losses. Therefore, the statement is false.

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  • 15. 

    The journal entry to record a credit sale ignoring cost of good sold is

    • Cash .........Sales Revenue

    • Cash .........Service Revenue

    • Accounts Receivable ...........Sales Returns and Allowances

    • Accounts Receivable ............Sales Revenue

    Correct Answer
    A. Accounts Receivable ............Sales Revenue
    Explanation
    The journal entry is recording a credit sale, which means that the company is selling goods or services on credit to customers. When a credit sale is made, the company increases its Accounts Receivable (an asset account) to reflect the amount owed by the customer. At the same time, the company also recognizes the revenue from the sale by increasing its Sales Revenue account. Therefore, the correct answer is Accounts Receivable and Sales Revenue.

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  • 16. 

    As interest is recorded on an interest-bearing note, the Interest Expense account is

    • Increase; the Notes Payable account is increased

    • Increased; the Note Payable account is decreased

    • Increased; the Interest Payable account is increased

    • Decreased; the Interest Payable account is increased

    Correct Answer
    A. Increased; the Interest Payable account is increased
    Explanation
    When interest is recorded on an interest-bearing note, it means that the company has incurred an expense for the interest owed on the note. Therefore, the Interest Expense account is increased to reflect this expense. Additionally, since the company has not yet paid the interest, the amount owed is recorded as a liability in the Interest Payable account, which is also increased. The Notes Payable account is not affected by the recording of interest, so it remains unchanged.

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  • 17. 

    Hoover Company had beginning of $15,000 at March 1, 2014. During the month, the company made purchases of $55,000. The inventory at the end of the month is $17,300. What is the cost of goods sold for the month of March?

    • $52,700

    • $55,000

    • $70,000

    • $72,300

    Correct Answer
    A. $52,700
    Explanation
    The cost of goods sold can be calculated by subtracting the ending inventory from the sum of the beginning inventory and purchases. In this case, the beginning inventory is $15,000 and the purchases are $55,000, resulting in a total of $70,000. Subtracting the ending inventory of $17,300 from this total gives us the cost of goods sold for the month of March, which is $52,700.

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  • 18. 

    Crowder Corporation recorded the return of $200 of goods originally sold on credit to Discount Industries. Using the periodic inventory approach, Crowder would record this transaction as:

    • Inventory.....200------------------Accounts Receivable....200

    • Sales Returns and Allowances....200------------Accounts Receivable.....200

    • Accounts Payable....200-------------Sales Returns and Allowances......200

    • Accounts Receivable....200-----------Sales Returns and Allowances....200

    Correct Answer
    A. Sales Returns and Allowances....200------------Accounts Receivable.....200
  • 19. 

    Crawford Company started the year with $30,000 in its Common Stock account and a credit balance in Retained Reining of $22,000. During the year, the company earned net income of $24,000 and declared and paid $10,000 of dividends. In addition, the company sold additional common stock amounting to $14,000. As a result, the amount of its retained earnings at the end of the year would be

    • $80,000

    • $36,000

    • $66,000

    • $50,000

    Correct Answer
    A. $36,000
    Explanation
    The amount of retained earnings at the end of the year can be calculated by adding the net income to the beginning balance of retained earnings and subtracting any dividends paid. In this case, the beginning balance of retained earnings is $22,000, the net income is $24,000, and the dividends paid is $10,000. Therefore, the calculation would be: $22,000 + $24,000 - $10,000 = $36,000.

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  • 20. 

    The normal balance of sales returns and allowances is a credit

    • True

    • False

    Correct Answer
    A. False
    Explanation
    The normal balance of sales returns and allowances is a debit. This means that when a customer returns a product or receives an allowance, it is recorded as a decrease in sales revenue, resulting in a debit entry. This is because sales returns and allowances represent a reduction in the amount of revenue earned by the company.

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  • 21. 

    If a company issues common stock for $40,000 and uses $30,000 of the cash to purchase a truck, 

    • Assets will be increased by $10,000

    • Equity will be reduced by $40,000

    • Assets will be increased by $40,000

    • Assets will be unchanged

    Correct Answer
    A. Assets will be increased by $40,000
    Explanation
    When a company issues common stock for $40,000 and uses $30,000 of the cash to purchase a truck, the company's assets will be increased by $40,000. This is because the company is receiving $40,000 in cash from the issuance of common stock, which is an increase in its assets. Additionally, the purchase of the truck using $30,000 of the cash does not affect the overall increase in assets. Therefore, the total increase in assets is $40,000.

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  • 22. 

    West county bank agrees to lend drake builders company $200,000 on january 1. drake builders company signs a $200,000, 6% 6 month note. What entry will Drake Builders Company make to pay off the note and interest at maturity assuming that interest has been accrued to june 30?

    • Notes payable........................................206,000 -----cash...................................................................206,000

    • Notes payable................................................200,000 interest payable.............................................6,000 -----cash..........................................................................206,000

    • Interest expense............................................6,000 notes payable................................................200,000 -----cash................................................................................206,000

    • Interest payable......................................3,000 notes payable.........................................200,000 interest expense.....................................3,000 -----cash.................................................................206,000

    Correct Answer
    A. Notes payable................................................200,000 interest payable.............................................6,000 -----cash..........................................................................206,000
    Explanation
    The correct answer is the first option: notes payable................................................200,000
    interest payable.............................................6,000
    -----cash..........................................................................206,000.

    This entry reflects the payment of the note and the accrued interest at maturity. The notes payable account is debited for the principal amount of $200,000, the interest payable account is debited for the accrued interest of $6,000, and the cash account is credited for the total payment of $206,000.

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  • 23. 

    The entry to record the return of goods from a customer would include a 

    • Debit to Sales Revenue

    • Credit to Sales Revenue

    • Debit to Sales Returns and Allowances

    • Credit to Sales Returns and Allowances

    Correct Answer
    A. Debit to Sales Returns and Allowances
    Explanation
    The entry to record the return of goods from a customer would include a debit to Sales Returns and Allowances. This is because when goods are returned by a customer, it results in a reduction in sales revenue. The debit to Sales Returns and Allowances account helps to track and record these returns separately from regular sales revenue.

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  • 24. 

    Unearned Rent Revenue is

    • A contra account to Rent Revenue

    • A revenue account

    • reported as a current liability

    • Debited when rent is received in advance

    Correct Answer
    A. reported as a current liability
    Explanation
    Unearned Rent Revenue is reported as a current liability because it represents rent that has been received in advance but has not yet been earned. This means that the company has received payment for rent that will be earned in the future, and until it is earned, it is considered a liability. Once the rent is earned, it will be transferred to Rent Revenue, which is a revenue account.

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  • 25. 

    Which of the following errors, each considered individually, would cause the trial balance to be out of balance?

    • A payment of $148 to creditor was posted as a debit to Accounts Payable an a debit of $148 to Cash.

    • Cash of $539 received from a customer on account was posted as a debit of $350 to Cash and as a credit of $350 to Accounts Payable.

    • A payment of $59 for supplies was posted as a debit of $95 to Supplies and a credit of $95 to Cash.

    • A transaction was not posted.

    Correct Answer
    A. A payment of $148 to creditor was posted as a debit to Accounts Payable an a debit of $148 to Cash.
    Explanation
    The payment of $148 to a creditor was incorrectly recorded as a debit to both Accounts Payable and Cash. This error would cause the trial balance to be out of balance because it increases both the debit and credit sides of the trial balance by $148, resulting in an imbalance.

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  • 26. 

    When an account becomes uncollectible and must be written of

    • Allowance for doubtful accounts should be credited

    • Accounts receivable should be credited

    • Bad debt expense should be credited

    • Sales revenue should be debited

    Correct Answer
    A. Accounts receivable should be credited
    Explanation
    When an account becomes uncollectible and must be written off, the correct action to take is to credit the accounts receivable. This means reducing the accounts receivable balance on the company's books, as the amount is no longer expected to be collected. By crediting the accounts receivable, the company recognizes the loss and adjusts its financial statements accordingly. This ensures that the company's records accurately reflect the uncollectible account and prevents any overstatement of assets or revenues.

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  • 27. 

    Under the allowance method, Bad Debt Expense is debited when an account is deemed uncollectible and must be written off

    • True

    • False

    Correct Answer
    A. False
    Explanation
    Under the allowance method, Bad Debt Expense is not debited when an account is deemed uncollectible and must be written off. Instead, the allowance for doubtful accounts is debited to reduce the accounts receivable balance. This reflects the estimated amount of uncollectible accounts that the company anticipates. The Bad Debt Expense is recorded in the same period as the sale, based on an estimate of the percentage of sales that will eventually become uncollectible. When an account is deemed uncollectible, the specific account receivable is written off, reducing the accounts receivable balance and the allowance for doubtful accounts.

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  • 28. 

    Turner Corporation returned $150 of goods originally purchased on credit from Morgan Industries. Using the period Inventory approach, Turner would record this transaction as:

    • Inventory....150 ----------Accounts Payable.....150

    • Accounts Payable.....150 ------------Inventory.....150

    • Purchase Returns and Allowances.....150 ---------Accounts Payable.....150

    • Accounts Payable.....150 ------------Purchase Returns and Allowances....150

    Correct Answer
    A. Accounts Payable.....150 ------------Inventory.....150
    Explanation
    Turner Corporation returned $150 worth of goods to Morgan Industries, which were originally purchased on credit. According to the period Inventory approach, the transaction would be recorded by decreasing the Accounts Payable by $150, as the amount owed to Morgan Industries is reduced. At the same time, the Inventory account would be increased by $150 to reflect the return of the goods. This ensures that the company's financial records accurately reflect the decrease in liabilities and the increase in inventory.

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  • 29. 

    Sales taxes collected by a retailer are recorded by

    • Crediting Sales Tax Revenue

    • Debiting Sales Tax Expense

    • Crediting Sales Taxes Payable

    • Debiting Sales Taxes Payable

    Correct Answer
    A. Crediting Sales Taxes Payable
    Explanation
    When a retailer collects sales taxes, they are essentially collecting the taxes on behalf of the government. These taxes are not considered as revenue for the retailer, but rather as a liability that they owe to the government. Therefore, the retailer should credit Sales Taxes Payable to record the amount of sales taxes collected. This indicates that the retailer owes this amount to the government.

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  • 30. 

    When an asset us sold, a gain occurs when the

    • Sale price exceeds the book value of the asset sold

    • Sale price exceeds the original cost of the asset sold

    • Book value exceeds the sale price of the asset sold

    • Sale price exceeds the depreciable cost of the asset sold

    Correct Answer
    A. Sale price exceeds the book value of the asset sold
    Explanation
    When an asset is sold, a gain occurs when the sale price exceeds the book value of the asset sold. This means that the asset is sold for more than its recorded value on the company's books. The book value represents the original cost of the asset minus any accumulated depreciation. Therefore, if the sale price is higher than the book value, it indicates that the company has made a profit on the sale of the asset.

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  • 31. 

    A company receives $261, of which $21 is for sales tax. The journal entry record to sale would include a

    • Debit to Sales Taxes Expense for $21

    • Debit to Sales Taxes Payable for $21

    • Debit to Sales Revenue for $261

    • Debit to Cash for $261

    Correct Answer
    A. Debit to Cash for $261
    Explanation
    The correct answer is debit to Cash for $261. This is because when the company receives $261, it increases its cash balance by debiting the Cash account.

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Quiz Review Timeline (Updated): Mar 20, 2023 +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Mar 20, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • May 04, 2015
    Quiz Created by
    Maxriemer
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