Recording Income Statement Transactions - Spreadsheet

Medium Practice Test

Introduction to Accounting

Recording Income Statement Transactions – Spreadsheet

Medium Practice Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. What is recorded when dividends are paid?

a. an increase in an asset and an increase in a liability
b. an increase in a revenue and an increase in an asset
c. an increase in an expense and a decrease in an asset
d. a decrease in owner’s equity and a decrease in cash

Check Your Answer

D. Dividends paid is a direct reduction to retained earnings and a decrease to cash. Dividends paid is not an expense, it is a return of capital to shareholders.

2. What is recorded when goods are provided to a customer on account?

a. an increase in two asset accounts and 2 revenue accounts
b. an increase in an asset and revenue and a decrease in an asset and an increase in an expense
c. an increase in a liability and revenue and a decrease in an asset and an increase in an expense
d. an increase in an asset and an increase in a revenue

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B. Goods provided to a customer on account is recorded using 4 accounts. Sales, a revenue account, is increased and accounts receivable, an asset account is increased. For the goods provided the asset inventory is decreased and using this asset is an expense called cost of goods sold. Increases in expenses are recorded with a negative amount since expenses must have a negative balance. A liability account is not used because the company does not owe anything.

3. Accumulated depreciation is recorded on the spreadsheet when

a. supplies are used up
b. a long-term asset is used during the current period
c. a customer does not pay
d. accrued expenses are paid

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B. Accumulated depreciation is a contra asset account that records the cumulative amount of depreciation expense recorded in all periods. It is recorded with depreciation expense because it keeps a cumulative balance for depreciation expense.

4. Supplies expense is always recorded when

a. supplies are used up
b. cash is paid for supplies
c. a liability is incurred
d. a revenue is increased

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A. An expense is using an asset or a service provided to the company that must be paid for. Supplies is not a service. If it has an associated expense it is because the asset was used up. The company does not owe when it uses supplies (c).

5. Interest earned is recorded as

a. an increase to a revenue
b. an increase to an expense
c. an increase to a liability
d. a decrease to a revenue

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A. The word earned is always an increase to revenue. The company has provided the service of letting someone use their money. Providing service is revenue.

6. When recording advertising expense incurred this period you also record

a. an increase to accrued expenses
b. a decrease to accrued liabilities
c. an increased to a revenue
d. that a service is provided to the customer

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A. Advertising expense means the advertising service has been provided to the company and they must pay for it. If they did not pay for it in this period a liability is recorded because they owe. Adding a liability is an increase to a liability. The account advertising payable, accounts payable, or accrued liabilities/expense may be used to show the liability. (d) is a revenue. An expense and a revenue are not recorded in the same transaction unless goods are provided to the customer (4 part transaction).

7. Revenues and expenses are included with what category of accounts?

a. assets
b. liabilities
c. owner’s equity
d. they have their own and are not included with assets, liabilities or owner’s equity

Check Your Answer

C. Revenues less expenses equal profits/losses and profits and losses are the owners. They are included in the owner’s equity account retained earnings. You have to show them separately also so that you have accounts and amounts to prepare the income statement.

8. Cost of goods sold is increased 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

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B. Cost of goods sold represents the cost of the inventory that is provided to the customer. Using the asset inventory to earn sales revenue is an expense called cost of goods sold. Purchasing and paying for inventory is exchanging one asset (cash) for another (inventory). (c) is a revenue and (d) is an expense called whatever service was provided to the company.

9. Expenses that are increasing are recorded with

a. a negative amount
b. a positive amount
c. it depends on what period the expense occurred
d. the same as the associated revenue

Check Your Answer

A. Expenses always have a negative balance because they reduce profits. They are always increased with a negative amount. Revenues increase with a positive amount. Revenues less expenses = profit/loss.

10. The bad debt expense account is used when

a. goods are provided to customers
b. the customer pays for goods provided
c. the customer does not pay for goods provided
d. you estimate how much will not be collected from the customer

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D. Bad debt expense occurs when a customer does not pay the amount owed the company. This must be estimated because of the matching principle that states all expenses must be recorded in the same period as the revenue. You don’t know who won’t pay when you sell the goods, so you must estimate an amount based on history of how customers normally pay.

11. A company had the following transactions the first month of business. Record the transactions on a spreadsheet and total the accounts. Make sure the
accounting equation balances.

1) Borrowed $150,000 cash from the bank. $30,000 is to be repaid at the end of
each year for the next 5 years.
2) Purchased inventory; $30,000 to be repaid in 30 days.
3) Rented warehouse space, $2,000 was paid for this month.
4) Paid $300 for advertising to be run spread out over the next 3 months.
5) Purchased computer equipment; paid $3,000 and put $2,000 on account
6) Employees worked and earned $3,900; employees were paid $3,300
7) Sold $15,000 of inventory on account for a sales price of $25,000.
8) Purchased $500 of office supplies on account, not yet used
9) Acquired manufacturing equipment costing $55,000; paid ½ down and agreed to pay monthly payments for the balance for 3 years.
10) Paid $25,000 on accounts owed.
11) Collected $10,000 from customers for amounts owed.
12) Received $1,200 from a customer for services to be performed next month.

Check Your Answer

Assets
	Cash	Inventory	Accounts Receivable	Prepaid Expense	Computer Equipment	Office Supplies	Manufacturing Equipment
1)	150,000
2)		30,000
3)	(2,000)
4)	(300)			300
5)	(3,000)				5,000
6)	(3,300)
7)		(15,000)	25,000
8)						500
9)	(27,500)						55,000
10)	(25,000)
11)	10,000		(10,000)
12)	1,200	________	_______	_____	______	______	______
	100,100	15,000	15,000	300	5,000	500	55,000

Liabilities
	Accounts Payable	Current Maturities of L/T Notes Pay	L/ T Notes Payable	Salaries Payable	Unearned Revenues
1)		30,000	120,000
2)	30,000
3)
4)
5)	2,000
6)				600
7)
8)	500
9)		9,167	18,333
10)	(25,000)
11)
12)	________	________	________	________	1,200
	7,500	39,167	138,333	600	1,200

	Owner’s Equity	Revenues – Expenses
	Sales	(Cost of Goods Sold)	(Rent Expense)	(Salaries Expense)
1)
2)
3)			(2,000)
4)
5)
6)				(3,900)
7)	25,000	(15,000)
8)
9)
10)
11)
12)	_______	________	________	________
	25,000	(15,000)	(2,000)	(3,900)

12. A company had the following transactions the first month of business. Record the transactions on a spreadsheet and total the accounts. Prepare a balance sheet and an income statement.

1) Received $200,000 from stock issued to investors
2) Purchased a building for $139,000, agreeing to pay monthly payments for 10 years on a mortgage note.
3) Provided $25,000 in services to customers collecting $12,500 and agreeing to receive the rest in 30 days.
4) Loaned a supplier $20,000, to be repaid in 6 months.
5) Received dividends on investments owned; $400
6) Earned interest of $2,200, not yet collected
7) Purchased inventory on account; $12,000
8) Provided goods to customers for $28,000 on account that cost the company $10,500
9) Collected $5,000 from the supplier who borrowed from the company
10) Paid $240 to rent equipment this month.
11) Tax expense that has not yet been paid is $15,200

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Assets
	Cash	Inventory	Accounts Receivable	Interest Receivable	S/T Notes Receivable	Building
1)	200,000
2)						139,000
3)	12,500		12,500
4)	(20,000)				20,000
5)	400
6)				2,200
7)		12,000
8)		(10,500)	28,000
9)	5,000				(5,000)
10)	(240)
11)	_____	_____	_____	_____	_____	_____
	197,660	1,500	40,500	2,200	15,000	139,000

		Liabilities			Owner’s Equity
	Accounts Payable	Current Portion of Mortgage Pay	Mortgage Payable	Tax Payable	Common Stock
1)					200,000
2)		13,900	125,100
3)
4)
5)
6)
7)	12,000
8)
9)
10)
11)				15,200
	12,000	13,900	125,100	15,200	200,000

		Revenues			Expenses
	Service Revenues	Sales	Dividend Income	Interest Income	(Cost of Goods Sold)	(Rent Expense)	(Tax Expense)
1)
2)
3)	25,000
4)
5)			400
6)				2,200
7)
8)		28,000			10,500)
9)
10)						(240)
11)	_______	_______	_______	_______	_______	_______	(15,200)
	25,000	28,000	400	2,200	(10,500)	(240)	(15,200)

Do the income statement first.

Sales	28,000
– Cost of Goods Sold	(10,500)
= Gross Profit	17,500
+ Service Revenue	25,000
– Operating Expenses:
Rent Expense	(240)
Operating Income	42,260
+- Other Revenues/Expenses
Interest Income	2,200
Dividend	400
Income before tax	44,860
Tax Expense	(15,200)
Net Income	29,660

Then do the balance sheet:

Assets		Liabilities
Cash	197,660	Accounts Payable	12,000
Accounts Receivable	40,500	Current Portion of
Inventory	1,500	Mortgage Payable	13,900
Interest Receivable	2,200	Tax Payable	15,200
S/T Notes Receivable	15,000	Total Current Liabilities	41,100
Total Current Assets	256,860
		Mortgage Payable	125,100
		Total Liabilities	166,200

P/P/E:
Building	139,000	Owner’s Equity

		Common Stock	200,000
		Retained Earnings	29,660
		Total Owners Equity	229,660
	______		______
Total Assets	395,860	Total Liabilities & O.Eq.	395,860
	======		======

Note: This is the first year of operations so retained earnings is equal to net income.

13. 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 depreciation $15,000
Accounts Payable $21,000
Salaries Payable $ 3,000
Long-Term Debt $90,000
Common Stock $50,000
Retained Earnings $48,000

Record the beginning balances on the spreadsheet and record the following
transactions on the spreadsheet. Total all accounts. Prepare a balance sheet and an
income statement.

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
4) Earned $1,000 interest on the note receivable, collected cash
5) Made a payment to the bank on the long-term debt; $2,500
6) Customers paid $12,800 for goods 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 over the next year.
15) Paid $400 for advertising run this month

Check Your Answer

Assets
			Accounts	S/T Notes
Accumulated
	Cash	Inventory	Receivable	Receivable	Building	Equipment	Depreciation
Beg	52,000	59,000	31,000	10,000	75,000		(15,000)
1)	(4,000)					14,000
2)	(2,500)
3)							(5,000)
4)	1,000
5)	(2,500)
6)	12,800	(8,400)
7)
8)	23,000		(23,000)
9)	(11,000)
10)
11)	(5,000)
12	(2,400)
13)	(200)
14)	(1,000)					2,500
15)	(400)
	_____	_____	_____	_____	_____	_____	_____
	59,800	50,600	8,000	10,000	75,000	16,500	(20,000)

	Liabilities					Owner’s Equity
	Accounts Payable	Salaries Payable	Interest Payable	LongTerm Debt	S/T Notes Payable	Common Stock	Retained Earnings	Dividend Paid
Beg	21,000	3,000		90,000		50,000	48,000
1)					10,000
2)		(2,500)
3)
4)
5)				(2,500)
6)
7)			1,200
8)
9)	(11,000)
10)		4,800
11)								(5,000)
12)
13)
14)					1,500
15)
	______	______	______	______	______	______	______	______
	10,000	5,300	1,200	87,500	11,500	50,000	48,000	(5,000)

	Revenues		Expenses
	Sales	Interest Income	(Cost of Goods Sold)	(Salaries Expense)	(Depreciation Expense)	(Interest Exp)
1)
2)
3)					(5,000)
4)		1,000
5)
6)	12,800		(8,400)
7)						(1,200)
8)
9)
10)				(4,800)
11)
12)
13)
14)
15)	____	____	____	____	____	____
	12,800	1,000	(8,400)	(4,800)	(5,000)	(1,200)

	(Insurance Expense)	(Supplies Expense)	(Advertising Expense)
11)
12)	(2,400)
13)		(200)
14)			(400)
15)	____	____	____
	(2,400)	(200)	(400)

Income Statement:

Sales 12,800
– Cost of Goods Sold (8,400)
= Gross Profit 4,400
– Operating Expenses:
    Depreciation Expense (5,000)
    Salary Expense   (4,800)
    Insurance Expense (2,400)
    Supplies Expense (200)
    Advertising Expense (400)
Operating Income (8,400)
+- Other Revenues/Expenses
         Interest Income 1,000
         Interest Expense   (1,200)
Income before tax (8,600)
   Tax Expense    0
Net Income (8,600)

Balance Sheet:

Assets		Liabilities
Cash	59,800	Accounts Payable	10,000
Accounts Receivable	8,000	Salaries Payable	5,300
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	28,000

		L/T Debt	87,500
Building	75,000		_______
Equipment	16,500	Total Liabilities	115,500
Accumulated Deprec	(20,000)
Net P/P/E	71,500	Owner’s Equity
		Common Stock	50,000
		Retained Earnings	34,400
		Total Owners Equity	84,400
	_____		_____
Total Assets	199,900	Total Liabilities & O.Eq.	199,900
	======		======

Beginning Retained Earnings 48,000
+ Income – Loss (8,600)
– Dividends Paid (5,000)
= Ending Retained Earnings 34,400

Recording Income Statement Transactions - Spreadsheet

Medium Practice Test

Introduction to Accounting