[Accounting Principles 2024-2]

Assignment #1 (due on October 3)

1. Determine whether the following statement is true or false.

(1) Accounting communicates financial information about a business enterprise to both internal
and external users. (True)
(2) The process of reducing the differences between Generally Accepted Accounting Principles
and International Financial Reporting Standards is known as convergence. (True)
(3) Share capital is the total amount paid in by shareholders for shares purchased. (True)
(4) Providing services for cash increases assets and equity. (True)
(5) The primary purpose of the statement of cash flows is to provide information about the cash
receipts and cash payments of a company during a period. (True)
(6) The ending retained earnings balance is reported on the statement of financial position. (True)
(7) The purchase of store equipment for cash reduces the equity by an equal amount. (False)
(8) Debit and credit can be interpreted to mean increase and decrease, respectively. (False)
(9) The dividends account is a subdivision of the retained earnings account and appears as an
expense on the income statement. (False)
(10) All accounts reported in the statement of financial position are increased by using debits on the
left-hand side of the T-account. (False)
(11) The general ledger contains all the accounts that are reported on the statement of financial
position, whereas the general journal contains all the accounts that are reported on the income
statement. (False)
(12) The normal balance of all accounts is a debit. (False)
(13) When debits do not equal credits on the trial balance, this indicates that the company has net
income that needs to be transferred to the retained earnings account. (False)
(14) A trial balance does not prove that all transactions have been recorded or that the ledger is
correct. (True)
(15) The trial balance will not balance when incorrect account titles are used in journalizing or
posting. (False)

2. External users of accounting information include all of following except

a. the shareholders of Air Italy.

b. the management of Pirelli.
c. a potential customers of Olivetti.
d. All of these answer choices are correct.

3. The body that has the power to prescribe the accounting practices and standards used by
most US companies is the

a. FASB.
b. IASB.
c. GAAP.
d. IFRS.

4. Equity is often referred to as

a. residual equity.
b. leftovers.
c. spoils.
d. second equity

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5. As of December 31, 2020, Oxford-Welsh Inc. had assets of ₤9,780,000, liabilities of ₤2,970,000, and
share capital of ₤4,230,000. Retained earnings as of that date are

a. ₤2,580,000.
b. ₤5,550,000.
c. ₤6,810,000.
d. ₤7,200,000.

6. The accounting equation for Gudgeyes Enterprises is as follows:

Assets Liabilities Equity
$280,000 = $120,000 + $160,000
If Gudgeyes purchases office equipment on account for $24,000, the accounting equation will change
to

Assets Liabilities Equity

a. $280,000 = $120,000 + $160,000
b. $304,000 = $120,000 + $184,000
c. $304,000 = $152,000 + $152,000
d. $304,000 = $144,000 + $160,000

7. On February 1, Potter Company paid £900 for advertisements to run during the month of February.
This transaction will

a. decrease Cash and increase Advertising Expense by £900.

b. increase Advertising Expense and increase Accounts Payable by £900.
c. decrease Accounts Payable and decrease Cash by £900.
d. decrease Cash and decrease Advertising Expense by £900.

[8–11] Use the following information for questions 8–11:

EI Greco Corporation began operations on January 1, 2020. Presented below is selected information
related to EI Greco at December 31, 2020.

Equipment €435,000 Utilities Expense € 54,000

Cash 126,000 Accounts Receivable 123,000
Service Revenue 972,000 Salaries and Wages Expense 363,000
Rent Expense 117,000 Notes Payable 144,000
Accounts Payable 66,000 Dividends 135,000
Share Capital-Ordinary 252,000 Salaries and Wages Payable 24,000
Supplies 45,000 Advertising Expense 60,000

8. The statement of financial position at December 31, 2020 reports total assets of

a. €480,000.
b. €606,000.
c. €684,000.
d. €729,000.

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9. The statement of financial position at December 31, 2020 reports total liabilities of

a. €90,000.
b. €180,000.
c. €234,000.
d. €357,000.

10. Net income (loss) reported on the income statement for the month of December is

a. €378,000.
b. €270,000.
c. €243,000.
d. €144,000.

11. Retained earnings reported on the statement of financial position at December 31, 2020 is

a. €495,000.
b. €378,000.
c. €252,000.
d. €243,000.

12. Identify whether the following items would be reported on the income statement (IS) or statement
of financial position (FP).
1. Cash: FP
2. Service Revenue: IS
3. Notes Payable: FP
4. Interest Expense: IS
5. Accounts Receivable: FP

13. Use the following information to calculate for the year ended December 31, 2020 (a) net income
(net loss), (b) ending retained earnings, and (c) total assets.

Supplies ¥ 1,000 Revenues ¥21,000

Operating expenses 12,000 Cash 13,000
Accounts payable 9,000 Dividends 1,000
Accounts receivable 3,000 Notes payable 1,000
Beginning retained earnings 5,000 Equipment 6,000

(a) ¥9,000 (b) ¥13,000 (c) ¥23,000

14. Journalize the following business transactions in general journal form. Identify each transaction by
number. You may omit explanations of the transaction.

1. Kevin Diaz invested $40,000 cash in exchange for ordinary shares.

2. Hired an employee to be paid $400 per week, starting tomorrow.
3. Paid two years’ rent in advance, $7,200.
4. Paid the worker’s weekly salary.
5. Recorded revenue earned and received for the week, $1,500.

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1. Cash 40,000 / Share Capital-Ordinary 40,000
2. No entry, not a transaction.
3. Prepaid Rent 7,200 / Cash 7,200
4. Salaries and Wages Expense 400 / Cash 400
5. Cash 1,500 / Service Revenue 1,500

15. Identify the impact on the accounting equation of the following transactions.

1. Purchased 36-month insurance policy for cash.

2. Purchased supplies on account.
3. Received utility bill to be paid at later date.
4. Paid utility bill previously accrued.

1. Net effect is no change: Increases assets and decreases assets.

2. Increases assets and increases liabilities.
3. Increases liabilities and decreases equity.
4. Decreases assets and decreases liabilities

16. Journalize the following transactions for Mercado Company for June 2020, the company’s first
month of operations. You may omit explanations for the transactions.

1. Purchased equipment on account for $6,000.

2. Billed customers $5,000 for services performed.
3. Made payment of $1,500 on account for equipment purchased earlier in the month.
4. Collected $2,400 on customer accounts.

1. Equipment 6,000 / Accounts Payable 6,000

2. Accounts Receivable 5,000 / Service Revenue 5,000
3. Accounts Payable 1,500 / Cash 1,500
4. Cash 2,400 / Accounts Receivable 2,400

17. Under a double-entry system, show how each item is entered in the ledger by using debit or credit
to indicate the increase or decrease in the affected account.

Debit or Credit

1. An increase in Salaries and Wages Expense. ____________________

2. A decrease in Accounts Payable. ____________________

3. An increase in Prepaid Insurance. ____________________

4. An increase in Share Capital-Ordinary. ____________________

5. A decrease in Supplies. ____________________

6. An increase in Dividends. ____________________

7. An increase in Service Revenue. ____________________

8. A decrease in Accounts Receivable. ____________________

9. An increase in Rent Expense. ____________________

10. A decrease in Equipment. ____________________

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Debit:1, 2, 3, 6, 9
Credit: 4, 5, 7, 8, 10

18. For each of the following accounts, indicate the effects of (a) a debit and (b) the normal account
balance.

1. Notes Payable
2. Prepaid Insurance
3. Salaries and Wages Expense
4. Service Revenue
5. Equipment
6. Share Capital-Ordinary

Debit Effect Normal Balance

Notes Payable Decrease Credit

Prepaid Insurance Increase Debit
Salaries and Wages Expense Increase Debit
Service Revenue Decrease Credit
Equipment Increase Debit
Share Capital-Ordinary Decrease Credit