Financial Accounting

Practice Questions # 2
1. According to the rules of debit and credit for balance sheet accounts:
a. Increases in asset, liability, and owners’ equity accounts are recorded by debits.
b. Decreases in asset and liability accounts are recorded by credits.
c. Increases in asset and owners’ equity accounts are recorded by debits.
d. Decreases in liability and owners’ equity accounts are recorded by debits.

2. Indicate all of the following statements that correctly describe net income. Net income:
a. Is equal to revenue minus expenses.
b. Is equal to revenue minus the sum of expenses and dividends.
c. Increases owners’ equity.
d. Is reported by a company for a specific period of time.

3. Brown Consulting Services organized as a corporation on January 18 and engaged in the following
transactions during its first two weeks of operation:
a. Jan. 18: Issued capital stock in exchange for $30,000 cash.
b. Jan. 22: Borrowed $20,000 from its bank by issuing a note payable.
c. Jan. 23: Paid $100 for a radio advertisement aired on January 24.
d. Jan. 25: Provided $1,000 of services to clients for cash.
e. Jan. 26: Provided $2,000 of services to clients on account.
f. Jan. 31: Collected $800 cash from clients for the services provided on January 26.
Record each of these transactions. & determine the balance in the Cash account on January 31.

4. A number of transactions of Claypool Construction are described below in terms of accounts debited
and credited:
1. Debit Wages Expense; credit Wages Payable.
2. Debit Accounts Receivable; credit Construction Revenue.
3. Debit Dividends; credit Cash.
4. Debit Office Supplies; credit Accounts Payable.
5. Debit Repairs Expense; credit Cash.
6. Debit Cash; credit Accounts Receivable.
7. Debit Tools and Equipment; credit Cash and Notes Payable.
8. Debit Accounts Payable; credit Cash.
Indicate the effects of each transaction upon the elements of the income statement and the balance
sheet. Use the code letters I for increase, D for decrease, and NE for no effect. Organize your answer in
tabular form using the column headings shown below:
Income Statement Balance Sheet
Transaction Net Owner’s
Revenue - Expenses = Assets = Liabilities +
Income Equity
1 NE I D NE I D

5. Transactions are first journalized and then posted to ledger accounts. In this exercise, however, your
understanding of the relationship between the journal and the ledger is tested by asking you to study
some ledger accounts and determine the journal entries that probably were made to produce these
ledger entries.

From the desk of Daem Farooqui

 The following accounts show the first six transactions of Avenson Insurance Company. Prepare a
journal entry (including a written explanation) for each transaction:

6. Herrold Consulting incorporated on February 1, 2021. The company engaged in the following
transactions during its first month of operations:
a. Feb. 1: Issued capital stock in exchange for $750,000 cash.
b. Feb. 5: Borrowed $50,000 from the bank by issuing a note payable.
c. Feb. 8: Purchased land, building, and office equipment for $600,000. The value of the land was
$100,000, the value of the building was $450,000, and the value of the office equipment was
$50,000. The company paid $300,000 cash and issued a note payable for the balance.
d. Feb. 11: Purchased office supplies for $600 on account. The supplies will last for several months.
e. Feb. 14: Paid the local newspaper $400 for a full-page advertisement. The ad will appear in print
on February 18.
f. Feb. 20: Several of the inkjet printer cartridges that Herrold purchased on February 11 were
defective. The cartridges were returned and the office supply store reduced Herrold’s outstanding
balance by $100.
g. Feb. 22: Performed consulting services for $6,000 cash.
h. Feb. 24: Billed clients $9,000.
i. Feb. 25: Paid salaries of $5,000.
j. Feb. 28: Paid the entire outstanding balance owed for office supplies purchased on February 11.
A partial list of the account titles used by the company includes:
Cash Notes Payable Accounts Receivable Accounts Payable
Capital Stock Office Supplies Client Service Revenue Land
Building Advertising Expense Office Equipment Salaries Expense
⍟ Prepare journal entries, including explanations, for the above transactions.
⍟ Post each entry to the appropriate ledger accounts (T-Accounts).
⍟ Prepare a trial balance dated February 28, 2021. Assume accounts with zero balances are not
included in the trial balance.

From the desk of Daem Farooqui