Accounting Exam 3 Review

When an account receivable that was previously written off is collected, it is necessary to reverse the entry to reinstate the customer. This means that the amount written off as a bad debt is now being recognized as a valid payment. By reversing the entry, the company can accurately reflect the collection of the receivable and update its financial records accordingly. This ensures that the company's financial statements are accurate and reflect the true state of its accounts receivable.

When a business sells an item and collects a state sales tax on it, a current liability arises because the business is obligated to remit the collected sales tax to the state government. This means that the business owes the state government the amount of sales tax collected, and this obligation is considered a current liability because it is expected to be settled within a year. Therefore, the statement "when a business sells an item and collects a state sales tax on it, a current liability arises" is true.

Recording depreciation on plant assets affects the balance sheet and the income statement because it involves recognizing the decrease in the value of these assets over time. Depreciation is an expense that is recorded on the income statement, which reduces the net income. This reduction in net income also impacts the retained earnings on the balance sheet. Additionally, the accumulated depreciation is recorded as a contra-asset on the balance sheet, which reduces the carrying value of the plant assets and affects the overall asset value. Therefore, both the balance sheet and the income statement are impacted by recording depreciation on plant assets.

Sales Returns and Allowances typically have a debit balance because they represent a reduction in sales revenue. When a customer returns a product or receives an allowance for a damaged or defective item, the amount is deducted from the sales revenue. This reduces the overall sales amount and results in a debit balance for the Sales Returns and Allowances account. On the other hand, Sales Revenue represents the total amount of sales made, so it usually has a credit balance as it increases the overall revenue.

The normal balance of cost of goods sold is a debit. This is because cost of goods sold is an expense account, and expenses have a normal debit balance. Expenses are amounts that a company incurs in order to generate revenue, and they are recorded on the debit side of the accounting equation to reflect a decrease in the company's assets or an increase in its liabilities. Therefore, the statement that the normal balance of cost of goods sold is a credit is incorrect.

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The normal balance of accounts payable is a credit because it represents the amount of money that a company owes to its creditors. In accounting, credits are used to record liabilities, such as accounts payable, while debits are used to record assets and expenses. Since accounts payable is a liability, it is increased with a credit entry. Therefore, the statement "the normal balance of accounts payable is a credit" is true.

The acquisition of treasury stock by a corporation does not increase total assets and total stockholders' equity. Treasury stock is a company's own stock that has been bought back from shareholders, and it is recorded as a reduction in stockholders' equity. This means that it decreases both total assets and total stockholders' equity. Therefore, the statement is false.

The Allowance for Doubtful Accounts is not a liability account. It is a contra-asset account that is used to estimate and record the amount of accounts receivable that is expected to be uncollectible. It is deducted from the accounts receivable on the balance sheet to show a more accurate representation of the company's expected cash inflows. Therefore, the correct answer is false.

Notes receivable is a type of financial asset that represents a written promise to receive a specific amount of money on a future date. Interest is usually associated with notes receivable because it is common for borrowers to pay interest on the amount borrowed. This interest serves as compensation to the lender for providing the funds and is a way to generate additional income. Therefore, notes receivable is the correct answer as it is directly linked to the concept of interest.

The normal balance of inventory is a debit, not a credit. This means that an increase in inventory will be recorded as a debit entry, while a decrease in inventory will be recorded as a credit entry. This is because inventory is an asset, and assets have a debit balance. A credit balance would indicate a decrease in inventory, which is not correct. Therefore, the correct answer is False.

When a company returns goods previously purchased on credit, it needs to reduce the amount owed to the supplier (accounts payable) and also decrease the inventory on hand. Therefore, the correct entry would be to debit (decrease) accounts payable and credit (decrease) inventory. This reflects the reduction in the company's liability and the decrease in the value of the inventory.

Plant assets are typically presented in the balance sheet at cost less accumulated depreciation because this method reflects the historical cost of acquiring the assets and deducts the accumulated depreciation over time. This presentation allows users of the financial statements to understand the original cost of the assets and the amount that has been depreciated since their acquisition. It provides a more accurate representation of the value of the assets and their impact on the company's financial position.

The issuance of common stock affects paid-in capital but does not affect retained earnings. Paid-in capital represents the amount of capital contributed by shareholders in exchange for shares of stock, while retained earnings represent the accumulated profits of the company that have not been distributed to shareholders as dividends. The issuance of common stock increases paid-in capital as the company receives cash or other assets in exchange for the newly issued shares, but it does not impact retained earnings as it does not involve the company's profits or losses. Therefore, the statement is false.

When interest is recorded on an interest-bearing note, it means that the company has incurred an expense for the interest owed on the note. Therefore, the Interest Expense account is increased to reflect this expense. Additionally, since the company has not yet paid the interest, the amount owed is recorded as a liability in the Interest Payable account, which is also increased. The Notes Payable account is not affected by the recording of interest, so it remains unchanged.

The cost of goods sold can be calculated by subtracting the ending inventory from the sum of the beginning inventory and purchases. In this case, the beginning inventory is $15,000 and the purchases are $55,000, resulting in a total of $70,000. Subtracting the ending inventory of $17,300 from this total gives us the cost of goods sold for the month of March, which is $52,700.

The journal entry is recording a credit sale, which means that the company is selling goods or services on credit to customers. When a credit sale is made, the company increases its Accounts Receivable (an asset account) to reflect the amount owed by the customer. At the same time, the company also recognizes the revenue from the sale by increasing its Sales Revenue account. Therefore, the correct answer is Accounts Receivable and Sales Revenue.

The amount of retained earnings at the end of the year can be calculated by adding the net income to the beginning balance of retained earnings and subtracting any dividends paid. In this case, the beginning balance of retained earnings is $22,000, the net income is $24,000, and the dividends paid is $10,000. Therefore, the calculation would be: $22,000 + $24,000 - $10,000 = $36,000.

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The normal balance of sales returns and allowances is a debit. This means that when a customer returns a product or receives an allowance, it is recorded as a decrease in sales revenue, resulting in a debit entry. This is because sales returns and allowances represent a reduction in the amount of revenue earned by the company.

The correct answer is the first option: notes payable................................................200,000
interest payable.............................................6,000
-----cash..........................................................................206,000.

This entry reflects the payment of the note and the accrued interest at maturity. The notes payable account is debited for the principal amount of $200,000, the interest payable account is debited for the accrued interest of $6,000, and the cash account is credited for the total payment of $206,000.

When a company issues common stock for $40,000 and uses $30,000 of the cash to purchase a truck, the company's assets will be increased by $40,000. This is because the company is receiving $40,000 in cash from the issuance of common stock, which is an increase in its assets. Additionally, the purchase of the truck using $30,000 of the cash does not affect the overall increase in assets. Therefore, the total increase in assets is $40,000.

Unearned Rent Revenue is reported as a current liability because it represents rent that has been received in advance but has not yet been earned. This means that the company has received payment for rent that will be earned in the future, and until it is earned, it is considered a liability. Once the rent is earned, it will be transferred to Rent Revenue, which is a revenue account.

The payment of $148 to a creditor was incorrectly recorded as a debit to both Accounts Payable and Cash. This error would cause the trial balance to be out of balance because it increases both the debit and credit sides of the trial balance by $148, resulting in an imbalance.

The entry to record the return of goods from a customer would include a debit to Sales Returns and Allowances. This is because when goods are returned by a customer, it results in a reduction in sales revenue. The debit to Sales Returns and Allowances account helps to track and record these returns separately from regular sales revenue.

When an account becomes uncollectible and must be written off, the correct action to take is to credit the accounts receivable. This means reducing the accounts receivable balance on the company's books, as the amount is no longer expected to be collected. By crediting the accounts receivable, the company recognizes the loss and adjusts its financial statements accordingly. This ensures that the company's records accurately reflect the uncollectible account and prevents any overstatement of assets or revenues.

Under the allowance method, Bad Debt Expense is not debited when an account is deemed uncollectible and must be written off. Instead, the allowance for doubtful accounts is debited to reduce the accounts receivable balance. This reflects the estimated amount of uncollectible accounts that the company anticipates. The Bad Debt Expense is recorded in the same period as the sale, based on an estimate of the percentage of sales that will eventually become uncollectible. When an account is deemed uncollectible, the specific account receivable is written off, reducing the accounts receivable balance and the allowance for doubtful accounts.

When a retailer collects sales taxes, they are essentially collecting the taxes on behalf of the government. These taxes are not considered as revenue for the retailer, but rather as a liability that they owe to the government. Therefore, the retailer should credit Sales Taxes Payable to record the amount of sales taxes collected. This indicates that the retailer owes this amount to the government.

Turner Corporation returned $150 worth of goods to Morgan Industries, which were originally purchased on credit. According to the period Inventory approach, the transaction would be recorded by decreasing the Accounts Payable by $150, as the amount owed to Morgan Industries is reduced. At the same time, the Inventory account would be increased by $150 to reflect the return of the goods. This ensures that the company's financial records accurately reflect the decrease in liabilities and the increase in inventory.

The correct answer is debit to Cash for $261. This is because when the company receives $261, it increases its cash balance by debiting the Cash account.

When an asset is sold, a gain occurs when the sale price exceeds the book value of the asset sold. This means that the asset is sold for more than its recorded value on the company's books. The book value represents the original cost of the asset minus any accumulated depreciation. Therefore, if the sale price is higher than the book value, it indicates that the company has made a profit on the sale of the asset.