Journal Entries
Hard Practice Test
Financial Accounting
Journal Entries
Hard Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. Retained earnings will decrease when
a. common stock is credited
b. cash is debited when collected from a customer
c. the company pays an accounts payable and credits accounts payable
d. the account dividends paid is debited
Check Your Answer
D. Retained earnings decreases when dividends are paid or the company incurs a net loss. Paying dividends is a reduction to shareholder’s equity. Decreases to shareholder’s equity is recorded with a debit.
2. What is recorded when insurance for the next six months is paid for this period?
a. a debit to prepaid insurance
b. a credit to accrued insurance
c. a debit to accounts payable
d. a debit to insurance payable
Check Your Answer
A. This is an increase to prepaid insurance. Prepaid insurance is an asset and assets increase with a debit.
3. Which of the following is never recorded in the same transaction?
a. a debit to cash and a debit to owner’s equity
b. a credit to cash and a debit to a different asset
c. a debit to an asset and a credit to a liability
d. a credit to an asset and a debit to a liability
Check Your Answer
A. A journal entry must always have at least one debit and one credit. All other choices are very common: (b) exchanges one asset for another asset, (c) buy an asset and pay later, (d) repay a liability
4. What is recorded when dividends are paid to shareholders?
a. a debit to cash and a credit to dividends payable
b. a credit to dividend revenue and a credit to cash
c. a debit to dividend expense and a credit to cash
d. a debit to divididends paid or retained earnings and a credit to cash
Check Your Answer
D. Payments are always a decrease to cash which is recorded with a credit. If cash is the credit, the other account must be a debit. Dividends paid is a decrease to the owner’s equity account retained earnings or dividends paid (either can be used). Dividends paid are not a revenue or an expense and are never recorded on the income statement.
5. What is recorded when goods are provided to a customer on account?
a. a debit to 2 asset accounts and a credit to 2 revenue accounts
b. credits to an asset and a revenue, debit to an asset and a debit to an expense
c. a credit liability and revenue accounts, credit an asset and a debit an expense
d. a debit to an asset and credit to a revenue only
Check Your Answer
B. This is recorded with a debit to accounts receivable and a credit to sales for the price to the customer. You also record a debit to cost of goods sold (expense) and a credit to inventory that is used up when provided to the customer for the company’s cost of the inventory. Two separate things occur: 1) the customer is provided goods (credit sales revenue) and owes the company (debit accounts receivable) and 2) inventory is used up (credit inventory) when it is given to the customer creating an expense (debit cost of goods sold).
6. Accumulated depreciation is recorded as a credit in the journal entry that occurs
when
a. supplies depreciate
b. a long-term asset is used during the current period
c. a customer does not pay
d. depreciation expense is paid
Check Your Answer
B. Accumulated depreciation is always recorded as a credit when depreciation expense is incurred (debit). Depreciation expense is recorded when a long term asset is used. Depreciation expense is not paid since the cash was paid when the long-term asset was purchased. Supplies is a current asset and does not depreciate, they are used.
7. When recording advertising expense incurred this period you also record
a. a credit to accrued expenses
b. a debit to accrued liabilities
c. a credit to a revenue
d. a debit to cash
Check Your Answer
A. When recording an expense for this period (increase with a debit) you must also record the expense was paid for (credit to cash) or that you owe for the expense (credit to a liability). Accrued expense is the liability often used for advertising expense (accounts payable is also used).
8. Cost of goods sold is debited when
a. inventory is purchased and paid for
b. inventory is provided to a customer
c. a service is provided to a customer
d. a service is provided to the company
Check Your Answer
B. Cost of goods sold is the account that is used to show that inventory is used to provide goods to the customer. Using inventory is recorded as the credit (decreasing) and cost of goods sold is recorded with a debit (expense increasing).
9. The accounts receivable account is credited when
a. goods are provided to customers
b. the customer pays for goods provided
c. the customer does not pay for goods provided
d. both a. & c.
Check Your Answer
B. Accounts receivable represents what the customer owes the company and is an asset. Assets are credited when they are decreased. Accounts receivable decreases when the customer pays the company. (a.) & (c.) are recorded with a debit to accounts receivable.
10. You will record that an asset is purchased by paying a certain amount of cash down and agreeing to pay the rest by making monthly payments with
a. a debit to an asset and a credit to a liability
b. a debit to two asset accounts and a credit to one liability account
c. a debit to one asset account and a credit to three liability accounts
d. a debit to an asset, a credit to an asset, and a credit to a liability
Check Your Answer
D. Purchasing an asset is an increase in the asset (debit). Paying cash is a decrease to the asset (credit). Paying later is an increase to a liability (credit). Total debits must always equal total debits.
11. Beginning balances for the company’s accounts were as follows:
| Cash | $52,000 |
| Accounts Receivable | $31,000 |
| Inventory | $59,000 |
| Notes Receivable – S/T | $10,000 |
| Building | $75,000 |
| Accumulated Deprec. | $15,000 |
| Accounts Payable | $21,000 |
| Salaries Payable | $3,000 |
| Long Term Debt | $90,000 |
| Common Stock | $50,000 |
| Retained Earnings | $48,000 |
A. Record journal entries for the following transactions.
B. Balance all accounts.
C. Prepare an income statement.
D. Prepare a balance sheet.
1) Purchased equipment paying $4,000 cash and financing $10,000 to be repaid in monthly payments for 8 months.
2) Paid $2,500 owed to employees for work performed this period.
3) Recorded $5,000 to show the use of the building this period
4) Earned $1,000 interest on the notes receivable, collected cash
5) Made a payment to the bank on the long term debt; $2,500
6) Customers paid $12,800 for goods provided this period that cost the company $8,400
7) Interest incurred on the long term debt was $1,200, not yet paid
8) Customers paid $23,000 for amounts owed to the company
9) The company paid $11,000 to suppliers owed
10) Employees earned $4,800 this period, not yet paid
11) Paid dividends of $5,000 to shareholders
12) Paid $2,400 for insurance for this month
13) Purchased and used supplies. Paid $200 cash.
14) Purchased equipment for $2,500; paid $1,000 down and will pay the different in monthly payments during the next year.
15) Paid $400 for advertising run this month
Check Your Answer
1)
Equipment 14,000
Cash 4,000
S/T Notes Payable 10,000
2)
Salaries Expense 2,500
Cash 2,500
(Incur this period means it is an expense)
3)
Depreciation Expense 5,000
Accumulated Depreciation 5,000
(Using long term assets is always depreciation expense)
4)
Cash 1,000
Interest Revenue 1,000
(Earned means a revenue)
5)
Long Term Debt 2,500
Cash 2,500
6)
Cash 12,800
Sales 12,800
Cost of Goods Sold 4,800
Inventory 4,800
(The value to the customer is the sales amount and the cost of inventory is the cost of goods sold amount)
7)
Interest Expense 1,200
Interest Payable 1,200
(incurred always means an expense)
8)
Cash 23,000
Accounts Receivable 23,000
9)
Accounts Payable 11,000
Cash 11,000
10)
Salaries Expense 4,800
Salaries Payable 4,800
11)
Dividends Paid (R.E.) 5,000
Cash 5,000
12)
Insurance Expense 2,400
Cash 2,400
13)
Supplies Expense 200
Cash 200
(Used an asset is always an expense)
14)
Equipment 2,500
Cash 1,000
S/T Notes Payable 1,500
15)
Advertising Expense 400
Cash 400
(“run” means provided which is an expense)
T Accounts are not provided here. You should have written a T account for each account name use and post the amounts on the proper debit or credit side and balance the account.
Asset and expense accounts have a debit balance. Liability, owner’s equity, and revenue accounts have a credit balance. Accumulated depreciation has a credit balance (contra-asset)
Account balances will be the amounts on the income statement and balance sheet below.
Income Statement:
| Sales | 12,800 |
| – Cost of Goods Sold | (8,400) |
| = Gross Profit | 4,400 |
| – Operating Expenses: | |
| Depreciation Expense | (5,000) |
| Salary Expense | (7,300) |
| Insurance Expense | (2,400) |
| Supplies Expense | (200) |
| Advertising Expense | (400) |
| Operating Income | (10,900) |
| +-Other Revenues/Expenses | |
| Interest Income | 1,000 |
| Interest Expense | (1,200) |
| Income before tax | (11,100) |
| Tax Expense | 0 |
| Net Income | (11,100) |
Balance Sheet:
| Assets | Liabilities | |||
| Cash | 59,800 | Accounts Payable | 10,000 | |
| Accounts Receivable | 8,000 | Salaries Payable | 7,800 | |
| Inventory | 50,600 | Interest Payable | 1,200 | |
| S/T Notes Receivable | 10,000 | S/T Notes Payable | 11,500 | |
| Total Current Assets | 128,400 | Total Current Liabilities | 30,500 | |
| L/T Debt | 87,500 | |||
| Building | 75,000 | |||
| Equipment | 16,500 | Total Liabilities | 118,000 | |
| Accumulated Deprec. | (20,000) | |||
| Net P/P/E | 128,400 | Owner’s Equity | ||
| Common Stock | 50,000 | |||
| Retained Earnings | 31,900 | |||
| Total Owners Equity | 81,900 | |||
| Total Assets | 199,900 | Total Liabilites & O. Eq. | 199,900 | |
| ====== | ===== | |||
Beginning Retained Earnings 48,000
+ Income – Loss (11,100)
– Dividends Paid (5,000)
= Ending Retained Earnings 31,900
** Dividends paid are not reported on either statement. It is included in retained earnings.
12. Record journal entries for each of the following transactions. The beginning balance of cash and common stock is $50,000 each. Determine the balance in the cash account at the end of the period.
a. Purchased a building for $150,000 by signing a note for $125,000 to be repaid in 10 years and paying the rest in cash.
b. Purchased equipment, signed a note to repay in 6 months, $8,000
c. Borrowed $80,000 from investors, agreeing to repay in 5 years.
d. Purchased 2 company autos for $30,000; paid $2,400 down and financed the rest to be repaid in 5 years
e. Paid $1,000 for insurance for the next 6 months
f. Purchased inventory on account for $20,000
g. Purchased office supplies for cash of $1,100, used this month
h. Received $5,000 from a customer who will be provided the service in 2 months
i. Paid for half the inventory purchased on account in f.
j. Signed a contract to purchase an acre of land for $25,000
Check Your Answer
a.
Building 150,000
Cash 25,000
L/T Notes Payable 125,000
b.
Equipment 8,000
S/T Notes Payable 8,000
c.
Cash 80,000
Bonds Payable 80,000
d.
Automobiles 30,000
L/T Notes Payable 27,600
Cash 2,400
e.
Prepaid Insurance 1,000
Cash 1,000
f.
Inventory 20,000
Accounts Payable 20,000
g.
Office supplies expense 1,100
Cash 1,100
h.
Cash 5,000
Unearned Revenue 5,000
i.
Accounts Payable 10,000
Cash 10,000
j. No transaction recorded, an exchange has not occurred
13. The company began the year with the following balances:
| Sales | $25,000 |
| Accounts Receivable | $12,000 |
| Inventory | $15,000 |
| Accounts Payable | $3,000 |
| S/T Notes Payable | $20,000 |
| Interest Payable | $1,000 |
| Taxes Payable | $2,000 |
| Common Stock | $26,000 |
A. Record journal entries for the following transactions.
B. Determine the balance for each account.
C. Prepare a balance sheet.
a. Collected $6,000 owed from customers
b. Purchased $13,000 of inventory on account
c. Repaid $5,000 to the bank
d. Paid the total amount owed for interest
e. Paid one half of the total amount owed to suppliers
f. Purchased office supplies on account for $200 (not used this period)
g. Received $2,500 from a customer who will be shipped inventory next month
h. Paid the entire amount owed to the government for income taxes
i. Sold part of the company to investors for $30,000
j. Invested $25,000 of excess cash in a short term investment
Check Your Answer
a.
Cash 6,000
Accounts Receivable 6,000
b.
Inventory 13,000
Accounts Payable 13,000
c.
S/T Notes Payable 5,000
Cash 5,000
d.
Interest Payable 1,000
Cash 1,000
e.
Accounts Payable 8,000
Cash 8,000
(Beginning 3,000 + 13,000 = 16,000 x ½ = 8,000)
f.
Office Supplies 200
Accounts Payable 200
g.
Cash 2,500
Unearned Revenue 2,500
h.
Taxes Payable 2,000
Cash 2,000
i.
Cash 30,000
Common Stock 30,000
j.
S/T Investment 25,000
Cash 25,000
T Accounts are not provided here. You should have written a T account for each account name used, posted the amounts on the proper debit or credit side and balanced each account.
Asset and expense accounts will have a debit balance.
Liability, owner’s equity, and revenue accounts will have a credit balance.
Account balances are the amounts on the income statement and balance sheet below.
Balance Sheet:
| Assets | Liabilities | |||
| Cash | 22,500 | Accounts Payable | 8,200 | |
| Inventory | 28,000 | S/T Notes Payable | 15,000 | |
| Accounts Receivable | 6,000 | Unearned Revenue | 2,500 | |
| Office Supplies | 200 | |||
| Short Term Investments | 25,000 | Total Current Liabilities | 25,700 | |
| Total Current Assets | 81,700 | |||
| Owner’s Equity | ||||
| Common Stock | 56,000 | |||
| Total Owner’s Equity | 56,000 | |||
| Total Assets | 81,700 | Total Liabilities & Owner’s Equity | 81,700 | |