The Accounting Cycle

Medium Practice Test

Introduction to Accounting

The Accounting Cycle

Medium Practice Test

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

1. Which of the following is accomplished by closing journal entries?

a. make revenues and assets equal to 0
b. make expenses and liabilities equal to 0
c. make revenues, expenses, gains, losses equal to 0
d. make dividends paid equal to retained earnings

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C. Closing journal entries are made for the purpose of transferring income statement accounts to retained earnings so the balance goes to 0 and starts over the next period. Assets, liabilities, and owner’s equity accounts are not closed (a. & b.). Dividends paid is also transferred to retained earnings (goes to 0 and starts over).

2. Which of the following accounts will always have a larger balance on the adjusted trial balance than on the unadjusted trial balance?

a. accumulated depreciation
b. common stock
c. cash
d. building

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A. A larger balance means that amounts are added to the account with an adjusting entry. Accumulated depreciation is increased when depreciation expense is recorded with an adjusting entry. Cash is never part of an adjusting entry. (b. & d.) are not affected by adjusting entries.

3. Which of the following is not a closing entry?

a. debit expenses and credit retained earnings
b. debit revenues and credit retained earnings
c. credit expenses and debit retained earnings
d. credit dividends paid and debit retained earnings

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A. Closing entries zero out revenue and expenses. To zero out revenues/gains (credit balance) you must debit the account. To zero out expenses/losses and dividends paid (debit balance) you must credit the account. The other account that is always used in a closing entry is retained earnings (or income summary in some text books).

4. An adjusted trial balance that is “in balance” means

a. assets = liabilities
b. debits = credits
c. all adjusting entries are properly recorded
d. all transactions are properly recorded

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B. A trial balance that balances means only that debits = credits. It does not mean that all transactions are properly recorded. The wrong account could have been used and some transactions/adjusting entries may not have been recorded (c. & d.). Assets must equal liabilities plus owner’s equity, which will be true when the trial balance balances.

5. How is the post closing trial balance different from an adjusted trial balance?

a. the post closing trial balance does not include adjusting entries
b. the post closing trial balance only includes balance sheet accounts
c. the post closing trial balance only includes income statement accounts
d. the post closing trial balance includes retained earnings as of the beginning of the year

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B. The post closing trial balance is done after closing entries are made. Closing entries make all income statement accounts go to 0, so there are no income statement account balances to report on the post closing trial balance. It is the last thing prepared and adjusting entries are included (a.) Closing entries are included in the final balance of retained earnings (d.)

6. A general rule to follow when preparing a trial balance is

a. assets and expenses are always debit balances
b. liabilities and owner’s equity and revenues are always debit balances
c. dividends paid is an owner’s equity account with a credit balance
d. contra assets have debit balances

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A. Assets and expenses always have a debit balance. Liabilities, owner’s equity, revenues always have a credit balance. Dividends paid has a debit balance and retained earnings may have a debit balance if the company has net losses.) Contra assets are opposite of assets and have credit balances.

7. Retained earnings reported on the balance sheet will be determined by

a. beginning retained earnings plus income
b. beginning retained earnings plus income plus dividends paid
c. beginning retained earnings plus income less dividends paid
d. income less dividends paid

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C. The retained earnings balance reported on the balance sheet must be the ending balance. The ending balance is determined by (c.)

8. Which of the following is a temporary account that is not closed out to retained
earnings?

a. accrued expenses
b. prepaid expenses
c. unearned revenue
d. all of the above

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D. Temporary accounts are all accounts reported on the income statement and dividends paid. All temporary accounts are closed to retained earnings. Balance sheet account are not closed to retained earnings.

9. The balance for accumulated depreciation is reported in which column on an adjusted trial balance

a. the debit column
b. the credit column
c. it can be reported on either, if it is in the debit column use a negative amount
d. it is not reported separately, it is netted with equipment or buildings

Check Your Answer

B. Accumulated depreciation is a contra asset and is reported as a credit balance. It is a credit when you make the journal entry to record it. You do not ever use negative amounts on the trial balance. It is a separate account and all accounts must be shown on the trial balance, you can not summarize or net accounts.

10. When a trial balance is in balance it is an indication that

a. revenues are greater than expenses
b. all revenues earned and all expenses incurred have been recorded
c. debits recorded equal credits recorded
d. decreases are equal to increases for all accounts

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C. Being in balance only means one thing: Debits = Credits for all journal entries made. It does not mean all transactions been recorded or that all is recorded correctly. Decreases do not equal increases – for example: assets increase when liabilities increase and there is no equal decrease. (d),

11. The company’s unadjusted trial balance is presented below.

Unadjusted Trial Balance

Accounts	Debit	Credit
Cash	42,000
Accounts Receivable	91,000
Supplies	5,000
Prepaid Insurance	4,000
Prepaid Rent	2,000
Equipment	70,000
Accumulated Deprec.		10,000
L/T Notes Receivable		10,000
L/T Debt		20,000
Unearned Revenues		4,000
Capital Stock		1,000
Retained Earnings 1/1		141,000
Sales		92,000
Salary Expense	16,000
Rent Expense	9,000
Supplies Expense	13,000
Loss on Sale of Equipment	2,000
Interest Income		3,000
Rent Income		8,000
Total	279,000	279,000

Identify the accounts that may require an adjusting journal entry and describe what the adjustment would accomplish.

Check Your Answer

Cash is never adjusted with an adjusting entry.

Accounts Receivable – requires an adjustment to bad debt expense and allowance for uncollectible accounts for the amount that is not expected to be collected.

Supplies – requires an adjustment to make sure the balance is what is actually on hand at 12/31. This adjustment will also use the accounts supplies expense

Prepaid Insurance – requires an adjustment to make sure the balance is the amount that is still prepaid on the balance sheet date. This adjustment will also use the account insurance expense

Prepaid Rent – requires an adjustment to make sure the balance is the amount that is still prepaid on the balance sheet date. This adjustment will also use the account rent expense

Equipment/Accumulated Depreciation – depreciation expense must be recorded when the equipment is used to produce revenues. Debit depreciation expense and credit accumulated depreciation

Long-Term Notes Receivable – the note will carry interest and will require an adjustment to record the interest revenue earned. This adjustment will also use the account interest receivable

Long Term Debt – the debt will carry interest and will require an adjustment to record interest expense incurred. The adjustment will also use the account interest payable

Unearned Revenue – the account balance must represent what is owed the customer on the balance sheet date. The account is adjusted to the owed amount and the other account that is used is a revenue account (sales, rent revenue, etc.)

Salary Expense – this account must be adjusted to add any amounts earned by employees this period that have not been paid. The other account that is used is salaries payable

All revenue and expense accounts must be adjusted to be equal to what is earned this period and what is incurred this period. Adjusting the asset and liability accounts listed above will also adjust the revenue and expense to what is earned and incurred.

Gains and losses are never adjusted.
Capital stock and retained earnings are never adjusted.

12. Following is a company’s adjusted trial balance. Prepare an income statement and
a balance sheet. Prepare closing journal entries before preparing the balance sheet.

Unadjusted Trial Balance

Accounts	Debit	Credit
Cash	42,000
Accounts Receivable	91,000
Allowance for U.A.		9,000
Supplies	3,000
Prepaid Insurance	6,000
Interest Receivable	2,500
Equipment	70,000
Accumulated Deprec.		10,000
L/T Notes Receivable	25,000
L/T Debt		20,000
Unearned Revenues		4,000
Interest Payable		600
Tax Payable		21,000
Capital Stock		1,000
Dividends Paid	5,000
Retained Earnings 1/1		139,200
Sales		92,000
Salary Expense	16,000
Rent Expense	9,000
Supplies Expense	13,000
Depreciation Expense	1,800
Interest Expense	600
Tax Expense	21,000
Loss on Sale of Equipment	2,000
Interest Income		4,500
Rent Income		8,000
Bad Debt Expense	1,400
Total	309,300	309,300

Check Your Answer

Income Statement:

Sales	92,000
Less Operating Expense:
Salary Expense	16,000
Rent Expense	9,000
Supples Expense	13,000
Depreciation Expense	1,800
Bad Debt Expense	1,400
Operating Income:	50,800
Other Revenues/Expenses:
Interest Expense	(600)
Loss on Sale of Equipment	(2,000)
Interest Income	4,500
Rent Income	8,000
Income Before Tax	60,700
Tax Expense	(21,000)
Net Income	39,700

Closing Entries:

Sales	92,000
Interest Income	4,500
Rent Income	8,000
Retained Earnings	104,500

Retained Earnings	64,800
Salary Expense	16,000
Rent Expense	9,000
Supplies Expense	13,000
Depreciation Expense	1,800
Bad Debt Expense	1,400
Interest Expense	600
Loss on Sale of Equipment	2,000
Tax Expense	21,000

Retained Earnings	5,000
Dividends Paid	5,000

Balance Sheet:

Ending retained earnings = 139,000 + 104,500 – 64,800 – 5,000 = 173,900

13. Following is a list of accounts for the company as of December 31 st after recording adjusting entries.

Accounts Payable	47,000	Admin Expenses	35,000
Accounts Receivable	22,000	Patent	6,000
Building	215,000	Accrued Expenses	9,000
Cash	15,000	Short Term Notes Payable	135,000
Equipment	76,000	Common Stock	1,000
Retained Earnings	(59,000)	Bonds Payable	75,000
Prepaid Expenses	12,000	Accumulated Depreciation	92,000
Sales	123,000	Dividends Paid	5,000
Deprec. Expense	18,000	Unearned Revenue	8,000
Loss on Sale of Auto	3,000	Selling Expenses	24,000

A. Prepare an adjusted trial balance.
B. Prepare an income statement
C. Prepare closing journal entries.
D. Determine the balance in retained earnings to be presented on the balance sheet as of December 31 st

Check Your Answer

Account	Debit	Credit
Cash	15,000
Accounts Receivable	22,000
Prepaid Expenses	12,000
Building	215,000
Equipment	76,000
Accumulated Depreciation		92,000
Patent	6,000
Accounts Payable		47,000
Accrued Expenses		9,000
Unearned Revenues		8,000
S/T Notes Payable		135,000
Bonds Payable		75,000
Common Stock		1,000
Retained Earnings	59,000
Dividends Paid	5,000
Sales		123,000
Administration Expense	35,000
Selling Expense	24,000
Depreciation Expense	18,000
Loss on Sale of Auto	3,000
Total	490,000	490,000

B. Income Statement

Sales	123,000
Less Operating Expenses:
Administrative Expense	(35,000)
Selling Expense	(24,000)
Depreciation Expense	(18,000)
Income from Operations	46,000
Loss on Sale of Auto	(3,000)
Net Income	43,000

C. Closing Entries

Sales 123,000
Retained Earnings 123,000

Retained Earnings 80,000
Administrative Expense 35,000
Selling Expense 24,000
Depreciation Expense 18,000
Loss on sale of auto 3,000

Retained Earnings 5,000
Dividends Paid 5,000

D. Ending Retained Earnings:

Beginning Retained Earnings (59,000)
+ Income 43,000
– Dividends Paid (5,000)
Ending Retained Earnings (21,000)

Reported on balance sheet

The Accounting Cycle

Medium Practice Test

Introduction to Accounting