CHAPTER 1 — PRACTICE WORKSHEET

Classify each item.

1. a
   Cash

   a) Asset b) Liability c) Owner's Equity
2. b
   Notes payable

   a) Asset b) Liability c) Owner's Equity
3. c
   Accounts receivable

   a) Asset b) Liability c) Owner's Equity
4. d
   Owner's Capital

   a) Asset b) Liability c) Owner's Equity
5. e
   Supplies

   a) Asset b) Liability c) Owner's Equity
6. f
   Salaries and wages payable

   a) Asset b) Liability c) Owner's Equity
7. g
   Equipment

   a) Asset b) Liability c) Owner's Equity
8. h
   Accounts payable

   a) Asset b) Liability c) Owner's Equity
9. i
   Owner's Drawings

   a) Asset b) Liability c) Owner's Equity
10. j
    Prepaid rent

    a) Asset b) Liability c) Owner's Equity

1. a
   (a) Liabilities are $45,000 and owner's equity is $70,000. Compute total assets.
2. b
   (b) Assets are $210,000 and owner's equity is $145,000. Compute total liabilities.
3. c
   (c) Assets are $98,500 and liabilities are $32,700. Compute owner's equity.

For each transaction of Kestrel Design Studio, choose the effect on the accounting equation.

1. a
   1. The owner invests $25,000 cash to start the business.

   a) Assets ↑ and Liabilities ↑ b) Assets ↑ and Owner's Equity ↑ c) One asset ↑, another asset ↓ (totals unchanged) d) Assets ↓ and Owner's Equity ↓ e) Assets ↓ and Liabilities ↓
2. b
   2. Buys a computer for cash.

   a) Assets ↑ and Liabilities ↑ b) Assets ↑ and Owner's Equity ↑ c) One asset ↑, another asset ↓ (totals unchanged) d) Assets ↓ and Owner's Equity ↓ e) Assets ↓ and Liabilities ↓
3. c
   3. Buys supplies on account.

   a) Assets ↑ and Liabilities ↑ b) Assets ↑ and Owner's Equity ↑ c) One asset ↑, another asset ↓ (totals unchanged) d) Assets ↓ and Owner's Equity ↓ e) Assets ↓ and Liabilities ↓
4. d
   4. Bills a client for services performed.

   a) Assets ↑ and Liabilities ↑ b) Assets ↑ and Owner's Equity ↑ c) One asset ↑, another asset ↓ (totals unchanged) d) Assets ↓ and Owner's Equity ↓ e) Assets ↓ and Liabilities ↓
5. e
   5. Pays the month's rent in cash.

   a) Assets ↑ and Liabilities ↑ b) Assets ↑ and Owner's Equity ↑ c) One asset ↑, another asset ↓ (totals unchanged) d) Assets ↓ and Owner's Equity ↓ e) Assets ↓ and Liabilities ↓
6. f
   6. Pays a creditor the amount owed on account.

   a) Assets ↑ and Liabilities ↑ b) Assets ↑ and Owner's Equity ↑ c) One asset ↑, another asset ↓ (totals unchanged) d) Assets ↓ and Owner's Equity ↓ e) Assets ↓ and Liabilities ↓

Torres Design Co. for October: Service revenue $88,400; Salaries expense $41,200; Rent expense $12,000; Utilities expense $3,600; Advertising expense $2,300.

1. a
   Total expenses
2. b
   Net income

Maple Tutoring, month of March: Fees earned $54,000; Salaries expense $21,500; Rent expense $9,600; Supplies expense $1,800; Utilities expense $2,100.

1. a
   Revenues — Fees earned
2. b
   Expenses — Salaries expense
3. c
   Expenses — Rent expense
4. d
   Expenses — Utilities expense
5. e
   Expenses — Supplies expense
6. f
   Total expenses
7. g
   Net income

Maple Tutoring: Capital, March 1 $62,000; owner invested an additional $8,000 during March; net income $19,000 (from the previous exercise); drawings $12,000.

1. a
   Capital, March 1
2. b
   Add: Investments + Net income (total additions)
3. c
   Subtotal after additions
4. d
   Less: Drawings
5. e
   Capital, March 31

Maple Tutoring at March 31: Cash $28,500; Accounts receivable $14,200; Supplies $3,300; Equipment $46,000; Accounts payable $9,500; Notes payable $5,500; Owner's Capital $77,000.

1. a
   Assets — Cash
2. b
   Assets — Accounts receivable
3. c
   Assets — Supplies
4. d
   Assets — Equipment
5. e
   TOTAL ASSETS
6. f
   Liabilities — Accounts payable
7. g
   Liabilities — Notes payable
8. h
   Total liabilities
9. i
   Owner's Capital
10. j
    TOTAL LIABILITIES AND OWNER'S EQUITY

Match each user of accounting information to the question they would most likely ask.

1. a
   A bank loan officer

   a) Can the company pay its short-term debts? b) What does it cost to produce each unit? c) Should I buy, hold, or sell? d) Is taxable income reported correctly? e) Can we afford to cut prices?
2. b
   A production supervisor (internal)

   a) Can the company pay its short-term debts? b) What does it cost to produce each unit? c) Should I buy, hold, or sell? d) Is taxable income reported correctly? e) Can we afford to cut prices?
3. c
   An investor

   a) Can the company pay its short-term debts? b) What does it cost to produce each unit? c) Should I buy, hold, or sell? d) Is taxable income reported correctly? e) Can we afford to cut prices?
4. d
   A taxing authority

   a) Can the company pay its short-term debts? b) What does it cost to produce each unit? c) Should I buy, hold, or sell? d) Is taxable income reported correctly? e) Can we afford to cut prices?
5. e
   A marketing manager (internal)

   a) Can the company pay its short-term debts? b) What does it cost to produce each unit? c) Should I buy, hold, or sell? d) Is taxable income reported correctly? e) Can we afford to cut prices?

1. a
   1. The owner records her family's grocery bills as a business expense.

   a) Historical cost principle b) Economic entity assumption c) Monetary unit assumption d) Going concern assumption
2. b
   2. Land purchased for $80,000 is reported at its appraised value of $120,000.

   a) Historical cost principle b) Economic entity assumption c) Monetary unit assumption d) Going concern assumption
3. c
   3. The company records 'excellent employee morale' as an asset.

   a) Historical cost principle b) Economic entity assumption c) Monetary unit assumption d) Going concern assumption
4. d
   4. The owner plans to close the business next month but still spreads equipment cost over ten future years.

   a) Historical cost principle b) Economic entity assumption c) Monetary unit assumption d) Going concern assumption
5. e
   5. Records of two different businesses owned by the same person are combined into one set of books.

   a) Historical cost principle b) Economic entity assumption c) Monetary unit assumption d) Going concern assumption

Nova Auto Detailing, June transactions: (1) the owner invests $20,000 cash; (2) buys equipment for $6,000 cash; (3) buys supplies of $1,200 on account; (4) performs detailing services for $3,500 cash; (5) pays June rent of $900.

1. a
   Cash balance at June 30
2. b
   Total assets at June 30
3. c
   Owner's equity at June 30
4. d
   Net income for June

Cypress Repair Shop, month of July: Service revenue $21,400; Salaries expense $14,800; Rent expense $6,200; Utilities expense $1,900; Advertising expense $1,300. Capital on July 1 was $40,000; the owner made no investments and withdrew $1,500 during July.

1. a
   Total expenses
2. b
   Net LOSS for July (enter as a positive number)
3. c
   A net loss:

   a) Increases liabilities b) Is reported as an asset until recovered c) Decreases owner's equity d) Only matters when cash is paid out
4. d
   Capital, July 31

Halcyon Media's new bookkeeper recorded five transactions. For each, decide whether it was recorded correctly.

1. a
   1. Bought supplies of $800 on account — recorded: Supplies +800 and Cash −800.

   a) Recorded correctly b) Incorrect
2. b
   2. Performed services of $2,000 on account — recorded: Accounts receivable +2,000 and Revenue +2,000.

   a) Recorded correctly b) Incorrect
3. c
   3. Owner withdrew $600 for personal use — recorded as Salaries expense +600.

   a) Recorded correctly b) Incorrect
4. d
   4. Collected $1,200 from a customer previously billed — recorded: Cash +1,200 and Revenue +1,200.

   a) Recorded correctly b) Incorrect
5. e
   5. Paid July rent of $950 — recorded: Rent expense +950 and Cash −950.

   a) Recorded correctly b) Incorrect
6. f
   Because of error #4, by how much is revenue (and owner's equity) OVERSTATED?
7. g
   Because of error #1, by how much are total liabilities UNDERSTATED?