- During the current period, a company's owner withdrew $2,000 cash for personal use and also contributed a personal computer worth $3,000 to the business. Considering both transactions together, what is the net effect on the accounting equation?
Answer: Assets increased by $1,000, liabilities unchanged, and equity increased by $1,000
The withdrawal decreases Cash by $2,000 and decreases Owner's Equity by $2,000. The contribution increases Equipment by $3,000 and increases Owner's Equity by $3,000. Net effect: Assets increase by $1,000 ($3,000 - $2,000) and Equity increases by $1,000 ($3,000 - $2,000). Choice B considers only the contribution. Choice C considers only the withdrawal. Choice D ignores the withdrawal entirely.
- An account has a normal credit balance of $8,000. During the period, it was debited for $3,000 and credited for $1,500. If this account appears on the income statement, which classification is most likely correct?
Answer: Revenue account with an ending balance of $6,500 credit
Since the account has a normal credit balance and appears on the income statement, it must be a revenue account (revenues have normal credit balances). Starting with $8,000 credit, less $3,000 debit, plus $1,500 credit equals $6,500 credit balance. Choice B incorrectly identifies it as an expense. Choice C miscalculates by adding the debit instead of subtracting. Choice D both misclassifies and miscalculates the ending balance.
- A company's accounting records show the following year-end balances: Accounts Receivable $12,000, Allowance for Doubtful Accounts $800, and Bad Debt Expense $1,200. What is the net effect of these three accounts on the company's financial statements?
Answer: Total assets of $11,200 and total expenses of $1,200 reducing net income
Accounts Receivable ($12,000) minus Allowance for Doubtful Accounts ($800) equals net receivables of $11,200 on the balance sheet. Bad Debt Expense ($1,200) appears on the income statement, reducing net income. Choice B incorrectly adds the allowance to expenses. Choice C adds the allowance to assets instead of subtracting. Choice D subtracts both the allowance and bad debt expense from assets.
- A company records a transaction where it receives $5,000 cash from a customer for services that will be performed next month. Immediately after recording this transaction, which of the following statements about the company's financial position is correct?
Answer: Total assets increased by $5,000 and total liabilities increased by $5,000
When cash is received for services to be performed in the future, Cash (asset) increases by $5,000 and Unearned Revenue (liability) increases by $5,000. This increases both total assets and total liabilities by the same amount. Choice A incorrectly treats this as revenue recognition, which won't occur until services are performed. Choice C ignores the cash receipt. Choice D incorrectly suggests equity decreases.
- A company's unadjusted trial balance shows Supplies with a $4,000 debit balance. A physical count reveals $900 of supplies remaining. After the adjusting entry is made, how will this affect the financial statements?
Answer: Assets will decrease by $3,100 and expenses will increase by $3,100 for the period
When you encounter supplies adjustments, you're dealing with the concept of matching principle—ensuring expenses are recorded in the period they're incurred. The key is determining how much supplies were actually consumed during the period.
Let's work through the calculation: The unadjusted trial balance shows $4,000 in supplies (what you started with or purchased), but only $900 remains on hand. This means $3,100 worth of supplies were used during the period ($4,000 - $900 = $3,100).
The adjusting entry will be: Debit Supplies Expense $3,100 and Credit Supplies $3,100. This reduces the Supplies asset account to its correct balance of $900 and records the consumed supplies as an expense.
Answer choice D correctly identifies that assets decrease by $3,100 (the reduction in Supplies) and expenses increase by $3,100 (Supplies Expense recognized).
Choice A incorrectly suggests assets decrease by the full $4,000 and expenses increase by only $900—this reverses the logic completely. Choice B has the numbers backwards, showing assets decreasing by $900 (the amount remaining) and expenses increasing by $4,000 (the original balance). Choice C defies accounting logic by showing increases in assets and decreases in expenses, which would be the reverse of what happens when supplies are consumed.
Remember this pattern: For supplies adjustments, always calculate the difference between beginning balance and ending physical count. That difference becomes your expense, and it also reduces your asset by the same amount.
- A company records a $6,000 payment for a two-year insurance policy. Six months later, it makes the appropriate adjusting entry. What is the combined effect of both the initial payment and the adjusting entry on the company's assets and expenses?
Answer: Assets decreased by $6,000 and expenses increased by $1,500 over the six-month period
This question tests your understanding of prepaid expenses and how they're recorded and adjusted over time. When you see questions about payments made in advance for services covering multiple periods, think about how the expense recognition principle requires matching expenses to the periods they benefit.
Let's trace through both transactions. Initially, the company pays $6,000 for a two-year insurance policy. This creates a prepaid asset of $6,000 (not an immediate expense) since the insurance coverage extends into future periods. So assets increase by $6,000, but expenses remain unchanged at this point.
Six months later, the adjusting entry recognizes the insurance expense for the period that has passed. Since $6,000 covers 24 months, the monthly expense is $250 ($6,000 ÷ 24). After six months, $1,500 in insurance has been "consumed" ($250 × 6). The adjusting entry reduces the prepaid insurance asset by $1,500 and increases insurance expense by $1,500.
Combining both effects: assets had a net decrease of $6,000 (the cash paid out) and expenses increased by $1,500 (the portion consumed).
Answer A incorrectly shows assets decreasing by only $4,500, missing the full cash payment. Answer B correctly shows the $1,500 asset decrease from the adjustment but wrongly states expenses increased by $6,000, which would happen only if the entire prepayment was immediately expensed. Answer D incorrectly shows no net change in assets.
Remember: prepaid expenses create assets first, then become expenses through adjusting entries as time passes. Always track both the cash flow impact and the period-by-period expense recognition separately.
- A company has the following accounts: Sales Revenue $45,000, Cost of Goods Sold $28,000, Operating Expenses $12,000, Interest Expense $2,000, and Income Tax Expense $1,500. If these are the only accounts affecting net income, which statement correctly describes their normal balances and net income?
Answer: One account has a credit balance, four have debit balances, and net income is $1,500
Sales Revenue has a normal credit balance ($45,000). All expense accounts (Cost of Goods Sold, Operating Expenses, Interest Expense, Income Tax Expense) have normal debit balances. Net income = $45,000 - $28,000 - $12,000 - $2,000 - $1,500 = $1,500. Choice A incorrectly states four credit balances. Choice C miscalculates net income by omitting income tax expense. Choice D has the correct balance classification but wrong net income calculation.
- A company issues $20,000 of common stock and uses the proceeds to pay off a $12,000 bank loan, with the remainder kept as cash. Immediately after these transactions, which statement best describes the impact on the company's financial position?
Answer: Total assets increased by $8,000, total liabilities decreased by $12,000, and total equity increased by $20,000
Cash increases by $20,000 from stock issuance, then decreases by $12,000 for loan payment (net cash increase: $8,000). Liabilities decrease by $12,000 (loan payoff). Equity increases by $20,000 (stock issuance). The accounting equation balances: +$8,000 assets = -$12,000 liabilities + $20,000 equity. Choice A miscalculates the equity change. Choice C miscalculates the asset change. Choice D ignores the cash retained from the stock issuance.
- A company's trial balance shows Accumulated Depreciation with a $15,000 balance. On the balance sheet, this account should be classified as:
Answer: A contra-asset with a credit balance that reduces total assets by $15,000
Accumulated Depreciation is a contra-asset account with a normal credit balance that reduces the book value of related assets on the balance sheet. It decreases total assets by its balance amount. Choice A incorrectly classifies it as a liability. Choice B misidentifies both the balance type and effect. Choice D confuses it with an equity account, though depreciation expense (not accumulated depreciation) affects retained earnings through the income statement.
- A company's post-closing trial balance includes: Cash $8,000, Equipment $25,000, Accumulated Depreciation-Equipment $5,000, Accounts Payable $3,000, Notes Payable $15,000, and Owner's Equity $10,000. Which statement about this trial balance is correct?
Answer: The trial balance is correct because total debits equal total credits at $33,000 each
When you encounter a post-closing trial balance question, you need to verify that debits equal credits and confirm only permanent accounts remain. Post-closing trial balances should contain only balance sheet accounts (assets, liabilities, and equity) since all temporary accounts have been closed.
Let's calculate the totals by identifying each account type. Debits include: Cash $8,000 + Equipment $25,000 = $33,000. Credits include: Accumulated Depreciation-Equipment $5,000 + Accounts Payable $3,000 + Notes Payable $15,000 + Owner's Equity $10,000 = $33,000. Since debits equal credits at $33,000 each, the trial balance is mathematically correct.
Looking at the wrong answers: A incorrectly calculates the totals, likely by treating Accumulated Depreciation as a debit instead of a credit, which would create a $10,000 difference ($5,000 × 2). B is wrong because this trial balance contains only permanent accounts—no revenue, expense, or drawing accounts that should have been closed. C uses the wrong total amount of $28,000, probably by subtracting Accumulated Depreciation from Equipment instead of listing it separately as a contra-asset credit.
Study tip: Remember that Accumulated Depreciation is always a credit balance (contra-asset) on trial balances, even though it relates to an asset. When checking post-closing trial balances, verify two things: mathematical accuracy (debits = credits) and that only permanent accounts remain. Temporary accounts should never appear after closing entries.
