Unearned Revenue, Accounts Payable, and Common Stock
Land, Notes Receivable, and Prepaid Insurance
Sales Revenue, Cash, and Equipment
Rent Expense, Retained Earnings, and Interest Revenue
Answer
Unearned Revenue, Accounts Payable, and Common Stock
Explanation
Debits increase asset accounts and credits increase liability and equity accounts. Unearned revenue and accounts payable are liability accounts and common stock is an equity account, all of which are increased with credits.
Willard Company purchased $700 of supplies on account. A result of this transaction would be to
Credit (right side of T-account) Cash
Debit (left side of T-account) Accounts Receivable
Credit (right side of T-account) Accounts Payable
Credit (right side of T-account) Supplies
Answer
Credit (right side of T-account) Accounts Payable
Explanation
Willard Company debits (increases) the asset account Supplies and credits (increases) the liability account Accounts Payable.
Hanover Company paid $3,600 cash in advance for a one-year insurance policy starting on October 1, 2016. Which of the following is the correct adjusting journal entry to record the portion of insurance used up through December 31, 2016?
Debit Credit
Insurance Expense 900
Prepaid Insurance 900
Debit Credit
Prepaid Insurance 900
Insurance Expense 900
Debit Credit
Prepaid Insurance 3,600
Insurance Expense 3,600
Debit Credit
Insurance Expense 3,600
Prepaid Insurance 3,600
Answer
Debit Credit
Insurance Expense 900
Prepaid Insurance 900
Explanation
Hanover Company used three months of the prepaid insurance for October, November, and December ($3,600 × 3/12 = $900). The company will recognize insurance expense for those three months by increasing Insurance Expense with a debit and decreasing Prepaid Insurance with a credit.
Rupert Company provided $12,000 of services on account. Which of the following is the correct general journal entry to record this transaction?
Debit Credit
Accounts Receivable 12,000
Service Revenue 12,000
Debit Credit
Service Revenue 12,000
Accounts Receivable 12,000
Debit Credit
Accounts Receivable 12,000
Unearned Service Revenue 12,000
Debit Credit
Unearned Service Revenue 12,000
Service Revenue 12,000
Answer
Debit Credit
Accounts Receivable 12,000
Service Revenue 12,000
Explanation
Accrual accounting requires Rupert Company to recognize the revenue when the services are performed before the cash is collected. The asset account Accounts Receivable is debited (increased) and the revenue account Service Revenue is credited (increased).
On December 1, 2016, King Company collected $26,000 of cash in advance from a customer for services to be provided from January 1, 2017 through June 30, 2017. Which of the following is the correct general journal entry to record this transaction?
Debit Credit
Cash 26,000
Unearned Service Revenue 26,000
Debit Credit
Cash 26,000
Service Revenue 26,000
Debit Credit
Unearned Service Revenue 26,000
Cash 26,000
Debit Credit
Accounts Receivable 26,000
Cash 26,000
Answer
Cash 26,000
Unearned Service Revenue 26,000
Explanation
Collecting cash in advance for services to be performed results in a debit (increase) to the asset account Cash and a credit (increase) to the liability account Unearned Service Revenue. The account Service Revenue is used when the revenue is recognized.
Is the normal balance of the following accounts a debit or a credit?
Explanation
The normal balance for the asset account Cash is a debit. The normal balances for the liability account Accounts Payable and the equity accounts Retained Earnings and Service Revenue are credits.
Jarvis Company is preparing the closing entries at the end of the accounting period. Jarvis Company's trial balance has normal balances in the following revenue accounts:
Service Revenue 50,000
Interest Revenue 2,800
Unearned Service Revenue 10,100
Which of the following represents the closing general journal entry for Jarvis Company's revenue accounts?
Answer
Explanation
The closing entry will bring the revenue accounts to zero balances. Because Service Revenue and Interest Revenue have normal credit balances, they are closed with a debit. The equity account Retained Earnings is increased with the credit. Unearned Service Revenue is a liability account and is not closed at the end of the accounting period.
Which one of the following companies has the lowest return on assets?
| Company A | Company B | Company C | Company D | ||||
| | | | | ||||
| Assets | $1,000,000 | $1,500,000 | $2,000,000 | $3,000,000 | |||
| Liabilities | $600,000 | $800,000 | $1,400,000 | $2,400,000 | |||
| SH equity | $400,000 | $700,000 | $600,000 | $600,000 | |||
| Net income | $50,000 | $60,000 | $90,000 | $130,000 |
|
To
evaluate the relationship between level of income and the size of
investment, you can use the return on assets ratio, computed as net
income divided by total assets.
|
| Company A | Company B | Company C | Company D | ||||
| | | | | | | | |
| Net income |
$50,000
| |
$60,000
| |
$90,000
| |
$130,000
|
| | | | | ||||
| Assets |
$1,000,000
| |
$1,500,000
| |
$2,000,000
| |
$3,000,000
|
| Return on assets |
5.0%
| |
4.0%
| |
4.5%
| |
4.3%
|
Which one of the following companies has the lowest level of debt risk and which one of the following companies has the best use of financial leverage?
| Company A | Company B | ||
| Assets | $1,000,000 | $1,500,000 | |
| Liabilities | $600,000 | $800,000 | |
| SH equity | $400,000 | $700,000 | |
| Net income | $50,000 | $60,000 |
|
Answer
Company
B has the lowest level of debt risk which can be measured in part by
the debt to asset ratio (total debt divided by total assets). Using
borrowed money to increase the return on stockholders' investment is
called financial leverage. Financial leverage explains why companies are
willing to accept the risk of debt. Company A has the best use of
financial leverage, which is measured by the return on equity ratio (net
income divided by stockholders' equity).
|
| Company A | Company B | ||
| | | ||
| Liabilities | $600,000 | $800,000 | |
| | | ||
| Assets | $1,000,000 | $1,500,000 | |
| Debt to assets | 60.0% | 53.3% | |
| | | ||
| Net income | $50,000 | $60,000 | |
| | | ||
| SH equity | $400,000 | $700,000 | |
| Return on equity | 12.5% | 8.6% |
The recording rules of double-entry accounting related to assets, liabilities, and stockholders' equity accounts can be summarized as
Debits increase asset accounts; credits decrease liability and stockholders' equity accountsDebits decrease asset accounts; credits increase liability and stockholders' equity accounts
Debits decrease asset accounts; credits decrease liability and stockholders' equity accounts
Debits increase asset accounts; credits increase liability and stockholders' equity accounts
Answer
Debits increase asset accounts; credits increase liability and stockholders' equity account
Explanation
Debits increase asset accounts and credits decrease asset accounts. Debits decrease liability and stockholders' equity accounts; credits increase liability and stockholders' equity accounts.
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