1 .

Indicate which of the following transactions would NOT be recorded in

the accounting records. (Select as many as are appropriate.)
a . Purchased equipment on account.
b . Obtained permission to purchase land from the board of directors.
c . Issued common shares.
d . Terminated an employee.
e . Hired an employee.
f . Performed services for customers on account.
g . Entered into a contract to purchase inventory, with the supplier
agreeing to deliver the goods in 15 days.
Solution: b., d., e., and g. would not be recorded.
a . Would be recorded because assets (equipment) and liabilities (ac-
counts payable) are affected.
b . Would not be recorded because permission to purchase land does
not result in a change in the accounting equation.

Assets would have to decrease (for example, cash) or a liability in-

crease (such as a mortgage payable) in order for the asset Land to
be recorded.
c . Would be recorded because assets (cash) and shareholders’ equity
(common shares) are affected.
d . Would not be recorded because the act of terminating an employee
does not result in change in the accounting equation.

Once the employee is no longer with the company, no salary would

be earned or paid.
e . Would not be recorded because the act of hiring an employee by
itself does not result in a change in the accounting equation.

Once an employee is hired and starts work and earns their salary,
the transaction would be recorded.

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 f . Would be recorded because assets ( accounts receivable) and share-
holders’ equity (service revenue) are affected.
g . Would not be recorded because the goods have not yet been re-
ceived.
2 . Indicate which of the following is (are) correct. (Select as many as are
appropriate.)
a . CKBW LTD. started the year on January 1 with total assets of
$70, 000 and total liabilities of $40, 000.
During the year, the company recorded $100, 000 in revenues, $65, 000
in expenses, and dividends declared of $5, 000, and issued $15, 000 in
additional common shares.
The company’s total shareholders’ equity was $30, 000 on January 1
and $75, 000 on December 31.
b . Carswell LTD. started the year on January 1 with the total assets
of $105, 000 and total liabilities of $50, 000.
During the year, the company recorded $150, 000 in revenues, $75, 000
in expenses, and dividends declared of $10, 000, and issued $20, 000
in additional common shares.
The company’s total shareholders’ equity was $45, 000 on January 1
and $135, 000 on December 31.
c . Willco LTD. started the year on January 1 with total assets of
$90, 000 and total liabilities of $40, 000.
During the year, the company recorded $75, 000 in revenues and
$30, 000 in expenses, did not declare any dividends, and issued $10, 000
in additional common shares.
The company’s total shareholders’ equity was $70, 000 on January 1
and $125, 000 on December 31.
d . Farenholtz LTD. started the year on January 1 with total assets of
$115, 000 and total liabilities of $67, 000.
During the year, the company recorded $95, 000 in revenues, $75, 000
in expenses and dividends declared of $10, 000, and did not issue any
additional common shares.
The company’s total shareholders’ equity was $48, 000 on January 1
and $58, 000 on December 31.
Solution: a. and d. are correct.

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a .

Assets = Liabilities + Shareholders’ Equity (SE)

January 1 :
$70, 000 assets = $40, 000 liabilities + SE
⇒SE = $30, 000
December 31 :
$30, 000SE (Jan. 1 balance) + $100, 000 revenues − $65, 000 expenses
−$5, 000 dividends declared
+ $15, 000 Common Shares
= $75, 000
SE (Dec. 31 balance)

b .

Assets = Liabilities + Shareholders’ Equity (SE)

January 1 :
$105, 000 assets = $50, 000 liabilities + SE
⇒SE = $55, 000
December 31 :
$55, 000SE (Jan. 1 balance) + $150, 000 revenues − $75, 000 expenses
−$10, 000 dividends declared
+ $20, 000 Common Shares
= $140, 000
SE (Dec. 31 balance)

c .

Assets = Liabilities + Shareholders’ Equity (SE)

January 1 :
$90, 000 assets = $40, 000 liabilities + SE
⇒SE = $50, 000
December 31 :

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 $50, 000SE (Jan. 1 balance) + $75, 000 revenues − $30, 000 expenses
−$0 dividends declared
+ $10, 000 Common Shares
= $105, 000
SE (Dec. 31 balance)

d .
Assets = Liabilities + Shareholders’ Equity (SE)
January 1 :
$115, 000 assets = $67, 000 liabilities + SE
⇒SE = $48, 000
December 31 :
$48, 000SE (Jan. 1 balance) + $95, 000 revenues − $75, 000 expenses
−$10, 000 dividends declared
+ $0 Common Shares
= $58, 000
SE (Dec. 31 balance)

3 . Indicate which of the following transactions would result in an increase

in assets and an increase in shareholders’ equity. (Select as many as are
appropriate.)
a . Received cash from a customer in advance of performing a service.
b . Declared and paid dividends to shareholders.
c . Performed services for a customer on account.
d . Paid employee salaries.
e . Purchased supplies on account.
f . Prepaid an insurance policy for the year.
g . Received cash from the issue of common shares.
Solution: c. and g. would both result in an increase in assets
and shareholders’ equity.

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 a . Assets (cash) increase and liabilities (deferred revenue) increase.
Shareholders’ equity is not affected.
b . Assets (cash) decrease and shareholders’ equity decreases.
(Dividends declared increases, so retained earnings decrease.)
d . Assets (cash) decrease and shareholders’ equity decreases.
(Salaries expense increases, so retained earnings decrease.)
e . Assets (supplies) increase and liabilities (accounts payable) in-
crease.
Shareholders’ equity is not affected.
f . Assets (prepaid insurance) increase and assets (cash) decrease.
Shareholders’ equity is not affected.
4 . Indicate which of the following accounts would normally have a debit
balance and are asset accounts. (Select as many as are appropriate.)
a . Accounts Receivable
b . Accumulated Depreciation - Vehicles
c . Common Shares
d . Inventory
e . Deferred Revenue
f . Prepaid Insurance
g . Vehicles
h . Retained Earnings
Solution: a., d., f., and g. are asset accounts and have normal
debit balances.
b . It is a contra asset account and has a normal credit balance.
c . Shareholders’ equity accounts and have a normal credit balance.
e . It is a liability account and has a normal credit balance.
h . Shareholders’ equity accounts and have a normal credit balance.
5 . Indicate which of the following accounts normally has (have) a credit
balance. (Select as many as are appropriate.)

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 a . Deferred Revenue
b . Dividends Declared
c . Prepaid Insurance
d . Retained Earnings
e . Depreciation Expense
f . Accounts Payable
g . Accounts Receivable
h . Common Shares
Solution: a., d., f., and h. have normal credit balances.
a . Decrease shareholders’ equity (retained earnings) and have normal
debit balances.
c . They are asset accounts and have normal debit balances.
e . Decrease shareholders’ equity (retained earnings) and have normal
debit balances.
g . They are asset accounts and have normal debit balances.
6 . Indicate which of the following is (are) correct. (Select as many as are
appropriate.)
a . Shareholders’ equity includes common shares and retained earnings.
b . Expenses decrease shareholders’ equity and are recorded as credits.
c . Liabilities normally have a credit balance and are increased by
credits.
d . Revenues increase shareholders’ equity and are recorded as credits
e . Shareholders’ equity is reduced by the declaration of dividends.
f . Dividends declared and paid are an expense and are recorded as
debits.
g . Deferred revenue is a liability and increases net income.
Solution: a., c., d., and e. are correct.

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 a . Shareholders’ equity consists of common shares (share capital) +
retained earnings.
b . Expenses do decrease shareholders’ equity (retained earnings) but
are recorded as debits, not credits.
The normal balance shareholders’ equity (retained earnings) is a
credit and increases in shareholders’ equity (retained earnings) is
a credit and increases in shareholders’ equity are recorded as credits.
c . Liabilities are increased by credits and have a normal credit balance.
d . Shareholders’ equity is increased by credits and has a normal credit
balance.
Retained earnings are part of shareholders’ equity (common shares
+ retained earnings) and also have a normal credit balance.
Revenues increase retained earnings and are recorded as credits, and
report a normal credit balance.
e . Retained earnings are part of shareholders’ equity (common shares
+ retained earnings).
Recall that retained earnings are increased by revenues and decreased
by expenses and any dividends declared.
When retained earnings are decreased by the declaration of divi-
dends, shareholders’ equity automatically decreases as well.
f . Dividends declared are recorded as debits but they are not an
expense.
They are a reduction of retained earnings and shareholders’ equity.
g . Deferred revenue is a liability, but it is a statement of financial
position account and does not affect net income.
7 : A list of cash transactions is in the upper column.
Match the transaction with the account title in lower column that should
be used to record the non - cash side of each transaction.
(Note that there are more account titles than required in the lower col-
umn.)
a . Collected account due from a customer.
b . Purchased inventory for future resale.
c . Received an advance from a customer for future services.

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 d . Received cash for services performed.
e . Purchased supplies.
f . Paid an account due to a supplier.
g . Declared and paid dividends to shareholders.
1 . Accounts Payable
2 . Account receivable
3 . Dividends Declared
4 . Dividends Payable
5 . Equipment
6 . Inventory
7 . Service revenue
8 . Supplies
9 . Deferred Revenue

a . 2. Accounts Receivable
b . 6. Inventory
c . 9. Deferred Revenue
d . 7. Service Revenue
e . 8. Supplies
f . 1. Accounts Payable
g . 3. Dividends Declared
8 . Indicate which of the following statements is (are) correct. (Select as
many as are appropriate.)
a . The general journal is also known as the book of original entry.
b . Journal entries should be recorded in chronological order.
c . A compound journal entry affects two accounts, one debt and one
credit.

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 d . It doesn’t matter if debit and credit amounts equal in each journal
entry as long as total debits equal to total credits in the trial balance.
e . The general ledger is often arranged in the order in which accounts
are listed in the financial statements, starting with the statement of
financial position accounts.
f . Posting involves transferring information from the general ledger
to the general journal.
g . The first four steps in the accounting cycle can be completed in
any order.
Solution: a., b., and e., are correct.
a . The general journal is known as the book of original entry because
it is the first place a transaction is recorded.
b . Journal entries should be recorded and posted in chronological
(date) order.
c . A simple journal entry affects only two accounts; a compound
journal entry affects three or more accounts.
d . Debits and credits must equal in each separate journal entry as
well as in the trial balance.
e . Although other orders are possible, the most common order of a
general ledger (T - accounts) is in financial statement order.
f . Posting involves transferring information from general journal to
the general ledger, rather than the reverse.
g . The first four steps of the accounting cycle must be complete in
this order:
(1) . Analyse transactions
(2) . Journalize transactions
(3) . Post transactions from the general journal to the general ledger
accounts
(4) . Prepare a trial balance
9 . Indicate which of the following statements is (are) correct regarding the
retained earnings account shown on a trial balance prepared at the end of

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a company’s first year of operations. (Select as many as are appropriate.)
a . It represents the retained earnings at the end of the first year.
b . It would be zero.
c . It is equal to total assets less total liabilities.
d . It is the same as total shareholders’ equity at the end of the first
year.
e . It represents the income generated by the company during the first
year (if no dividends were declared).
f . It would not be included in the trial balance.
g . It would represent the amount received from the issue of common
shares.
Solution: b. and f. are correct.
a . Not correct, because the amount reported on the trial balance
represents retained earnings at the beginning of the year, not the
end of the year.
Net income (revenues less expenses) and dividends declared are not
yet included in retained earnings to determine the ending retained
earnings balance.
b . Correct, because opening retained earnings are zero the first year
of a company’s operations.
After that, opening retained earnings of the current year equals end-
ing retained earnings of the prior year.
c . Not correct, because shareholders’ equity includes common shares
in addition to retained earnings.
d . Not correct, because shareholders’ equity includes common shares
in addition to retained earnings.
e . Not correct, because the amount reported on the trial balance
represents retained earnings at the beginning of the year, not the
end of the year.
Net income (revenues less expenses) and dividends declared are not
yet included in retained earnings to determine the ending retained
earnings balance.

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 f . Correct, because amounts with zero balances are not normally
included in a trial balance.
g . Not correct, because retained earnings do not include common
shares.
10 . Indicate which of the following situations would result in the trial balance
not being in balance. (Select as many as are appropriate.)
a . A journal entry to record a cash sale is posted twice.
b . The purchase of $400 of supplies on account is debited to supplies
and credited to cash.
c . The purchase of $275 of inventory on account was recorded as a
debit to Inventory and a debit to Accounts Payable.
d . A $100 cash dividend is debited to Dividends Declared for $1, 000
and credited to cash for $100.
e . A $450 payment on account to a creditor is debited to Accounts
Payable for $45 and credited to cash for $45.
f . A $125 collection on account was recorded and posted as a debit
to cash and a credit to Service Revenue.
g . A $300 payment to a supplier to settle an outstanding account was
posted as a debit to cash and a credit to Accounts Payable.
Solution: c. and d. would result in unequal debit and credit
columns in the trial balance.
All of the remaining choices, while incorrect, will not result in
unequal debit and credit columns in the trial balance because
the individual journal entries were balanced. (That is, debits
equalled credits.)

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