Module I

Practice Questions
Students, please note that this assignment is not graded and is for practice only. The problems
are taken from AHM textbook and Wild and Prakash Singh should not copy, paste or share at
any platform. This is for practice purpose only.

Problem: -1.

An analysis of the transaction made by Acme consulting for the month of July is shown below.

Cash + Accounts + Supplies + Equipment = Accounts + Owners' Equity Description

of
Receivable inventory Payable Transaction

1. +$ 20,000 +$ 20,000 Investment

2. -$ 5,000 +$ 7,000 +$ 2,000
3. -$ 1000 +$ 1,000
4. -$ 4,500 -$ 4,500 Salaries
5. +$ 5,000 +$ 5,000 +$ 10,000 Revenues
6. -$ 1,500 -$ 1,500
7. +$ 1,000 -$ 1,000
8. -$ 750 -$ 750 Rent
9. -$ 500 -$ 500 Utilities
10. +$ 200 -$ 200 Travel
11. -$ 200 -$ 200

Required:-

A. Explain each transaction.

B. List the changes in the company’s balance sheet during the month of July.
C. Prepare an income statement for the month (ignore taxes).
D. Explain the changes in the cash Account.
E. Explain why the change in the cash account and the month’s income are not the same.

Problem: - 2.
During the month of June, Bon Voyage Travel recorded the following transactions.

A. Owners invested $25,000 in cash the start the business. They received common stock.
B. The month’s rent of $500 was prepaid in cash.
C. Equipment costing $8,000 was bought on credit.
D. $500 was paid for office supplies.
E. Advertisement costing $750 was paid for with cash.
F. Paid $3000 employee salaries in cash.
G. Earned travel commissions of $10,000 of which $2,000 was received in cash.
H. Paid $5,000 of the $8,000 owed to the equipment supplier.
I. Used $100 of the office supplies.
J. Charges $1,000 of miscellaneous expenses on the corporate credit card.

Required:-

1. Prepare an analysis of the month’s transactions using the same tabular format as shown in problem 1
(ignore taxes).
2. Explain how the transactions during the month changed the basic accounting equation (Assets =
Liabilities + Owner’s equity) for the company.
3. Prepare an income statement for the month.
4. Explain the changes in cash account.
5. Explain why the change in cash Account & the month’s income are not the same.

Problem:-3.

a. If assets equal $95,000 and Liabilities equal $40,000, then owner’s equity equals----------.
b. If assets equal $65,000 & owner’s equity equals $40,000 then Liabilities equals------------.
c. If current assets equal $25,000, liabilities equal $40,000, and owner’s equity equals $55,000 then non-
current assets equal-------------.
d. If the current ratio is 2.2:1, current assets are $33,000, and non-current assets equal $55,000, then
owner’s equity is---------.( Assume that all liabilities are current).
e. What is the current ratio if non-current asset equal $60,000, total assets $95,000 and owner’s equity
equals $70,000? (Assume that all liabilities are current).

Problem:-4.

Indicate the net effect on assets, liabilities and owner’s equity resulting from each of the following
transactions:

1. Capital stock was issued for $1, 00,000 cash.

2. Bonds payable of $25,000 were refunded with capital stock.
3. Deprecation on plant and equipment equaled $8,500 for the year.
4. Inventory was purchased for $15,900 cash.
5. $9,400 worth of inventory was purchased on credit.
6. Inventory costing $4,500 was sold for $7,200 on credit.
7. $3,500 in cash was received for merchandise sold on credit.
8. Dividends of $3,000 were declared.
9. The declared dividends of $3,000 were paid.
10. The company declared a stock split, and replaced each outstanding share with two new shares.

Problem:-5.

N. Klein & Company had the following transactions in June. Using the matching concept, decide which of
these transactions represented expenses for June.

A. Received orders for goods with prices totaling $25,000; goods to be delivered in July.

B. Paid office staff $9,750 for work performed in June.

C. Products in inventory costing $1,725 were found to be obsolete.

D. Sold goods with a cost of $25,000 in June.

E. Paid $750 for radio advertising in June.

F. Purchased additional inventory for $27,000.

Problem:-6

The Hosmer Company Had June sales of $275,000. The cost of goods sold was $164,000 and other cash
expenses were:-

Rent $3,300 Taxes $1,375

Salaries $27,400 Other 50,240

Required:-

What were the company’s (a) Revenues (b) Expenses and (c) net income in June?

Problem:-7
What is the cost of goods sold for the period, given the following information?
 Purchases for the period $78,000

Beginning inventory 27,000

Ending inventory 31,000

Problem:-8
QED Electronics company had the following transactions during April While conducting its television and
stereo repairs business.

1. A new repair truck was purchased for $19,000.

2. Parts with a cost of $1600 were received and used during April.
3. Service revenue for the month was $33,400 but only $20,500 was cash sales. Typically, only 95% of the
sales on account are realized.
4. Interest expense on loan outstanding was $880.
5. Wage costs for the month totaled $10,000; however, $1,400 of this had not yet been paid to the
employees.
6. Parts inventory from the beginning of the month was depleted by $2,100.
7. Utility bills totaling $1,500 were paid. $700 of this amount was associated with March’s operations.
8. Depreciation expense was $2,700
9. Selling expenses were $1,900.
10. A provision for income taxes was established at $2,800, of which $2,600 had been paid to the federal
government.
11. Administrative and miscellaneous expenses were recorded at $4,700.

Required:-

Prepare a detailed April income statement.

Problem:-9
Write journal entries for the following transactions that occurred at Woodside Company during May and
explain how each would be disclosed in Woodside’s financial statement.
1. The company prepaid $14,340 rent for the period May 1-October 31.
2. Sales discounts and Allowances were $34,150.
3. A loan for $3,500 at 12% interest continued to be owed to the company by one of its employee, who
made no payments related to this loan during May.
4. Depreciation expense was $13,660.
5. Customers paid $2730 for services they will not receive until sometime in June.
6. The company purchased $172 worth of stamps and used $100 worth of them.
7. The Allowance for doubtful Accounts was increased by $1,350, reflecting a new estimate of uncollectible
accounts.

Problem:-10
Luft Corporation’s accounts had the following beginning balance:-

Account Dr. Cr.

Account Payable $3,070

Accounts receivable $2,160

Accumulated depreciation $2,800

Allowance for Doubtful accounts 70

Cash 1,440

Fixed assets (at cost) 6,200

Inventories 1,730

Note payable (current) 600

Owner’s equity 4,990

$11,530 $11,530

During the period, the following transactions occurred: -

1. Purchased inventory on account $1,300.

2. Paid employees $730.

3. Sold goods for cash $1,940.

4. Sold goods on credit $1,810.

5. Overhead and other expenses paid in cash $900.

6. Collection of accounts receivable $1,510.

7. Paid certain accounts payable $1,720.

8. Received cash for revenue applicable to the next period $650.

9. Increased the current note payable by $200.

10. Physical inventory showed ending balance of $1,750.

11. Depreciation expense, $300.

Required:-

a. Journalize the transactions.

b. Setup T accounts and post beginning balances and transactions.

c. Determine the cost of goods sold.

d. Prepare an ending balance sheet.

e. Prepare an income statement for the period (ignore taxes).

Problem:-11
Explain what effect the following transactions would have on cash and how they would be shown in a cash
flow statement.

a. A $2,000,000 piece of equipment is purchased with the proceeds of a new 12-month note.

b. Mortgage bonds are retired with $790,000 cash and the proceeds of an issue of 150,000 shares of common
stock.

c. $2,000,000 of inventory is purchased on account.

d. A Dividend of $0.25 per share is declared on the 750,000 outstanding shares.

e. A piece of machinery is sold for $1,500,000 cash. When originally purchased, it cost Anwat $5,000,000 and
currently has $2,500,000 of accumulated depreciation.

Problem:-12
Kids ‘n Caboodle, children’s clothing store, had the following cash receipts & disbursement for its first year of
operations:-

Receipts:

1. Cash sales $155,000

2. Loan proceeds 21,000

Total receipts 176,000

Disbursement:-

1. Merchandise purchases (all sold this year) 84,000

2. Wages 33,000

3. Rent & lease payments 22,000

4. Other operating outlays 7,900

5. Purchase equipment 10,500

Total Disbursements 157,400

Increase in Cash balance $18,600

The store has no accounts receivable (it accepts only cash or bank cards for payment). At year-end, an
employee had earned $200, which the store had not yet paid. Also, at year-end, the store had not paid its
most recent utilities bills, which totaled $150.

Required:-

Prepare a cash flow statement for the year.

Problem:-13

Lori Crump owns a small trucking operation. The book-keeper presented Crump with the following income
statements & balance sheets for 2010 and 2009.
 Income statement
2010 2009

Revenues $191,400 $182,600

Operating expenses:-
Depreciation $ 26,400 $ 26,400
Fuel 77,000 46,200
Driver’s salaries 44,000 35,200
Tax & licenses 22,000 17,600
Repairs 30,800 19,800
Miscellaneous 2,200 202,400 1,100 146,300
Income (Loss) $(11,000) $(36,300)

Balance Sheets
12/31/10 12/31/09
cash $ 22,000 $ 4,400
Accounts receivable 8,800 26,400
Net fixed assets 198,000 224,400
Total Assets $228,800 $ 255,200

Accounts payable $30,800 22,000

Accrued salaries 8,800 5,500
Other accruals 3,300 1,100
Long-term debt 100,100 129,800
Crump, capital 85,800 96,800
Total Liabilities and Capital $228,800 $ 255,200

Crump does not understand how the company can be $ 17,600 ahead of last year in terms of cash on hand
and yet show an $ 11,000 loss for the year.
Required: Prepare a cash flow statement (indirect method) to use in explaining this to Lori Crump.

Problem 14: -

Prepare a balance sheet as of June 30, for the J. L. Gregory Company, using the following data:

Accounts payable. $ 241,000 Cash $ 89,000

Accounts receivable 505,000 Equipment (at cost ) 761,000

Accrued expenses 107,000 Estimated tax liability 125,000

Accumulated depreciation 538,000 Inventories 513,000

on buildings
Investment in the peerless 320,000
company
Accumulated depreciation 386,000
on equipment Land (at cost ) 230,000

Bonds payable 700,000 Marketable securities 379,000

Buildings (at cost) 1,120,000 Notes payable 200,000

Capital stock 1,000,000 Retained earnings ?

Problem 15:

What expense items are associated with the following transactions? when and how is the
income statement affected by each one?

a. Purchased equipment for $40,000 that has a useful life of five years. b. Purchased land for $135,000.

c. Purchased $7,000 worth of inventory on December 19. On December 27 sold one-half of the inventory for
$6,000. On January 8, sold the remainder for $6,200. The company uses the calendar year for its fiscal year.

d. On January 1, subscribed to a magazine for two years. The cost was $72.

Problem 16:

Prepare a detailed April income statement.

Determine the amount of total assets, current assets, and non-current assets at the end of the
period, given the following data:-

Current liabilities, ending $ 50,000 Purchases during the period $ 40,000

Balance
Inventory, ending balance 30,000
Current ratio, ending 1.6:1
Gross margin percentage 45%
Owners’ equity, beginning 120,000 Profit margin 10%

Balance Long-term debt, ending balance 40,000

Inventory, beginning balance 35,000

Problem 17:

Shep’s company records show the following information for the current year:

Beginning of Year End of Year

Total Assets $ 50,000 $ 80,000
Total Liabilities $ 22,000 $ 35,000

Determine net income (loss) for each of the following separate situations:
• Additional common stock of $ 3,000 was issued and dividends of $ 7,000 were paid during the
current year.
• Additional common stock of $ 15,000 was issued and no dividends were paid during the current
year.
• No additional common stock was issued and dividends of $ 12,000 were paid during the current
year.

Problem 18: Neva Nadal started a new business, Nadal Computing, and completed the following
transactions during its first year of operations.

• Neva Nadal invested $ 90,000 cash and equipment valued at $ 10,000 in the company in
exchange for its common stock.
• The company purchased a building for $ 50,000 cash.
• The company purchased equipment for $ 25,000 cash.
• The company purchased $ 1,200 of supplies and $ 1,700 of equipment on credit.
• The company paid $ 750 cash for advertising expenses.
• The company completed a financial plan for a client and billed that client $ 2,800 for the service.
 • The company designed a financial plan for another client and immediately collected a $ 4,000
cash fee.
• The company paid $ 11,500 cash in dividends to the owner (sole shareholder).
• The company received $ 1,800 cash from the client described in the transaction f.
• The company made a payment of $700 cash on the equipment purchased in transaction d.
• The company paid $2,500 cash for the secretary’s wages.

Required:

1. Create the following table similar to exhibit 1.9. Use additions and subtractions within the
table to show the dollar effects of each transaction on individual items of the accounting
equation. Show new balances after the transaction.

Assets = Liabilities + Equity

Cash + A/C Receivable+ Supplies+ Equipment = A/C Payable + Common Stock- Dividend
+Building + Revenue - Expenses

2. Determine the company’s net income.