Testbank

to accompany

Accounting
8th Edition

by
John Hoggett, Lew Edwards,
John Medlin, Matthew Tilling
and Evelyn Hogg

Prepared by
Barbara Burns

John Wiley & Sons Australia, Ltd 2012

Testbank to accompany Accounting 8e

Chapter 3: Recording transactions

Multiple Choice

1. The transactions below are from the records of Templestowe Picture Framers, the
internal transaction is:
a. Cash sale
b. Paid monthly rent on premises
c. Credit sale
d. Recorded depreciation on shop fixtures and fittings

ANSWER D
Section 3.1
2. Which of these events would not be recorded by accountants?
a. Received an order from a customer
b. The owner paid his daughters school fees from the business bank account
c. Credit sale
d. Depreciation on motor vehicles calculated at the end of the firms financial year.

ANSWER A
Section 3.1
3. The event that may be recorded in a firms sustainability report but not in their
financial report is:
a. Loan repayments
b. Payments made to employees under the Superannuation Guarantee Legislation
c. Planned expenditure on waste disposal
d. Depreciation charged on Environmental Officers motor vehicle

ANSWER C
Section 3.1
4. The source document for a cash sale could be a:
a. Purchase order
b. Credit card slip
c. Cheque butt
d. Credit note

ANSWER B
Section 3.2
5. The true statement concerning the accounting period is:
a. The length of the accounting period varies with the needs of users.
b. The accounting period originates from the accounting equation
c. Accounting periods are hardly ever shorter than 6 months

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d. The accounting period is the sequence of events from transactions through to financial
statements

ANSWER A
Section 3.3
6. In order to provide timely information for decision-making the life of the business is
divided into arbitrary time periods of equal length called:
a. Life cycles
b. Operating cycles
c. Months
d. Accounting periods

ANSWER D
Section 3.3

7. A deposit received in advance by Maharaj Co for services not yet supplied can be
initially recorded by Maharaj in a liability account called:
a. Sales
b. Mortgage
c. Unearned income
d. Expenses payable

ANSWER C
Section 3.4
8. The accounting entry to record the payment of a liability is
a. Debit an asset account and credit a liability account
b. Debit a liability account and credit an equity account
c. Debit an equity account and credit a liability account
d. Debit a liability account and credit an asset account

ANSWER D
Section 3.7
9. The true statement is:
a. GST collections is an asset account
b. In the income statement income and expenses are recorded net of GST
c. If the GST inclusive price of a package of books is $1200 the GST component is $120.
d. The entries to account for GST are regarded as internal transactions

ANSWER B
Section 3.Appendix

10. List the steps in the accounting cycle in their correct sequence:
1. Entries are made in the journal
2. A business transaction occurs
3. A trial balance is prepared
4. Entries are made in the ledger
a. 2, 4, 1, 3
b. 2, 1, 4, 3
c. 3, 2, 1, 4

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Testbank to accompany Accounting 8e

d. 4, 2, 3, 1

ANSWER B
Section 3.7

11. A chart of accounts is:

a. A planning device used by management to anticipate information flows through the
accounting system
b. A list of accounts receivable
c. A chart showing the organisational structure of the firm
d. A plan of the ledger listing account titles and their related numbers

ANSWER D
Section 3.6

12. The term used in the Framework for the Preparation and Presentation of Financial
Statements for income which arises in the course of the ordinary activities of an entity is:
a. Revenue
b. Gain
c. Fees
d. Profit

ANSWER A
Section 3.4

13. A party to whom the entity owes money for goods or services provided to the entity is
called a:
a. Creditor
b. Debtor
c. Debit
d. Credit

ANSWER A
Section 3.4

14. Select the account types for these items:

Repairs and maintenance
Repairs and maintenance payable
Accounts receivable
Drawings
a. Expense, liability, asset, equity
b. Asset, liability, asset, equity
c. Expense, asset, asset, expense
d. Expense, liability, asset, liability

ANSWER A
Section 3.4.

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15. Select the account types for these items:

Prepaid insurance
Mortgage
GST Collected
Light and power
a. Expense, liability, liability, equity
b. Asset, equity, asset, expense
c. Asset, liability, liability expense
d. Expense, liability, asset, liability

ANSWER C
Section 3.4.

16. GST paid by a business on the purchase of its goods and services, and for which a
reduction of GST collected will be claimed from the tax department, is stored in an
account called:
a. GST outlays
b. GST collections
c. Creditable acquisitions
d. Input credits

ANSWER A
Feedback Section 3.4

17. A chronological record of all the transactions of an entity is provided in the:

a. Ledger
b. Journal
c. Balance sheet
d. Trial balance

ANSWER B
Section 3.5

18. Which is the correct statement concerning a chart of accounts?

a. The accounts are listed in alphabetical order
b. Is drawn up at the commencement of a business
c. Is similar for most businesses
d. It is a list of accounts with their current balances

ANSWER B
Section 3.6

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19. The double-entry system requires how many of the following to be true?
i. At least one account should be debited and one account credited
ii. Total debits should equal total credits
iii. The accounting equation should stay in balance
a. 0
b. 1
c. 2
d. 3

ANSWER D
Section 3.7

20. A credit entry is made to:

a. Decrease an expense, increase income, and increase equity
b. Decrease an asset, increase a liability, and decrease equity
c. Increase an asset, decrease a liability, and decrease equity
d. Decrease an asset, decrease a liability, and increase equity

ANSWER A
Section 3.7

21. If a transaction causes an equity account to decrease, which of these related effects may
also occur?
a. A decrease of an equal amount in a liability account
b. An increase of an equal amount in an asset account
c. A decrease of an equal amount in an asset account
d. A decrease of an equal amount in another equity account

ANSWER C
Section 3.7

22. The accounting entry when income is earned on credit is:

a. Debit cash, credit income
b. Debit accounts receivable, credit income
c. Debit income, credit accounts payable
d. Debit income, credit accounts receivable

ANSWER B
Section 3.8

23. If a sole proprietor who owns an electrical store takes home a DVD player for his own
personal use it would be considered to be:
a. An expense because an asset has been given away
b. An increase in equity and a decrease in assets because the proprietor now owns the DVD
player

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c. A decrease in assets and a decrease in equity because by taking the DVD player the
owner has made a drawing from the business
d. An increase in assets and an increase in equity

ANSWER C
Section 3.8
24. Which statement relating to the general journal is incorrect?
a. The debit and credit effects of each transaction are shown together
b. It is referred to as a book of original entry
c. It provides a record of transactions in date order
d. It can use the running balance format or the T format

ANSWER D
Section 3.8

25. A firm borrows $4000 cash from the bank. The transaction is recorded as:
a. Debit Bank Loan $4000; credit Owners capital $4000
b. Debit Cash at bank $4000; credit Accounts Receivable $4000
c. Debit Cash at bank $4000; credit Bank Loan $4000
d. Debit Bank Loan $4000; credit Cash at bank $4000

ANSWER C
Section 3.8

26. Creol Soaps requires its customers to pay for their orders six weeks before shipping the
goods. How should the payments be initially recorded by Creol?
a. Debit bank, credit a liability account
b. Debit bank, credit an expense account
c. Debit bank, credit an asset account
d. Debit bank, credit an income account

ANSWER A
Section 3.8

27. Machinery is purchased on credit for $16 000 plus GST. The general journal entry to
record this transaction is:
$ $
DR CR
a. Equipment 16 000
Accounts Payable 16 000
b. Equipment 14 545
GST Outlays 1 455
Accounts Payable 16 000
c. Equity 16 000
GST Outlays 1 600
Accounts Payable 17 600
d. Equipment 16 000
GST Outlays 1 600
Accounts Payable 17 600

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ANSWER D
Section 3.8

28. On 20 June Yin repaired Yans computer and charged her $660 cash including GST. The
general journal entry to record the transaction is:
$ $
DR CR
a. Cash at bank 660
GST Collections 60
Income from repairs 600
b. Cash at bank 600
GST Collections 60
Income from repairs 660
c. Cash at bank 660
GST Outlays 60
Income from repairs 600
d. None of the above

ANSWER A
Section 3.8

29. On 15 May Osaka paid $715 cash for an 18-month insurance policy including 10% GST.
The general journal entry to record the payment is:
$ $
a. Insurance Expense 650
GST Outlays 65
Equity 715
b. Insurance Expense 585
GST Collected 65
Prepaid Insurance 650
c. Prepaid Insurance 650
GST Outlays 65
Cash 715
d. Cash 650
Prepaid Insurance 650

ANSWER C
Section 3.8

30. J. Wood performed carpentry services for $7500. He received cash of $2000 and gave
credit for $5500. Ignoring GST the transaction is recorded as:
a. Debit Cash $2000, debit Accounts Receivable $7500; credit Accounts receivable $2000,
credit Income Earned $7500
b. Debit Income Earned $7500; credit Cash $2000, credit Accounts Payable $5500
c. Debit Cash $7500; credit Equity $7500
d. Debit Cash $2000, debit Equity $5500; credit Income Earned $7500

ANSWER A

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Section 3.8

31. Quinn paid $440, including GST, for advertising. The entry to record this transaction is:
a. Debit Advertising $440; credit Cash $440
b. Debit Advertising $400, debit GST Outlays $40; credit Cash $440
c. Debit Advertising $440; credit GST Outlays $40, credit Cash $400
d. Debit Advertising $440, debit GST Outlays $44; credit Cash $484

ANSWER B
Section 3.8

32. The statement relating to a trial balance that is incorrect is:

a. A trial balance may be prepared at any time to test the equality of debits and credits in
the ledger
b. A trial balance reports the financial performance of a business
c. The fact that the sum of the debit column equals the sum of the credit column does not
guarantee that no errors have been made in the ledger
d. A trial balance is a list of all the accounts in the ledger with their current balances

ANSWER B
Section 3.9

33. A trial balance will disclose which of these errors?

a. Recording a transaction twice
b. Recording an amount on the right side of the wrong account
c. Recording a debit as a credit
d. Omitting a transaction

ANSWER C
Section 3.10

34. Which of these errors would be detected by a trial balance?

a. A cash sale was recorded in the sales account as $237 instead of $273 but was correctly
recorded in the bank account
b. Office salaries were recorded as office expenses
c. The sales assistant pocketed the cash from a cash sale and did not ring it up on the
register
d. Purchase of inventory on credit was recorded as a debit to the plant and equipment
account and a credit to creditors

ANSWER A
Section 3.10

35. The bookkeeper recorded wages for the month as a debit to the Sales account rather than
as a debit to Wages Expense. This error will result in:
a. Overstated profit for the period
b. Understated equity at the end of the period

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c. Understated assets at the end of the period

d. No effect on profit of the period

ANSWER D
Section 3.10

36. The correct classification for these ledger accounts is:

1. Land
2. Accounts Receivable
3. Interest Received
4. Mortgage Payable
a. 1 Asset 2 Liability 3 Income 4 Asset
b. 1 Asset 2 Asset 3 Liability 4 Liability
c. 1 Asset 2 Liability 3 Liability 4 Liability
d. 1 Asset 2 Asset 3 Income 4 Liability

ANSWER D
Section 3.4

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 Chapter 3: Recording transactions

Fill in the blanks

1. T____________________ are events that are given accounting recognition and are the
first stage in the accounting cycle.

ANSWER transactions
Section 3.3

2. The ______________ ___________ assumption involves the division of the operating

life of a firm into equal time intervals.

ANSWER accounting period

Section 3.3

3. The liability account recording GST collected by an entity from its customers is titled
GST ______________.

ANSWER Collections
Section 3.4

4. The source document associated with the provision of goods on credit is an

i______________.

ANSWER invoice
Section 3.2

5. A __________ of _______________ is a plan of the ledger listing the names of all

ledger accounts together with an appropriate numbering system.

ANSWER chart of accounts

Section 3.6

6. In the accounting equation income and expenses can be thought of as sub-classifications

of e__________.
ANSWER equity
Section 3.7

7. P___________________ is the process of transferring entries in the journal to the

appropriate ledger accounts.

ANSWER Posting
Section 3.8

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8. The accounting system where recording is a dual process and every transaction has two
or more effects on the accounting equation is known as the _______________-
_____________ accounting system.

ANSWER double-entry
Section 3.7

9. A ____________ __________________ is a list of ledger accounts and their balances

prepared to verify the equality of debits and credits in the ledger.

ANSWER trial balance

Section 3.9

10. Accounts in the general _____________ are organised in the order that they appear in
the accounting reports.

ANSWER ledger
Section 3.6

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Short answer questions

Question 3.1.

If assets and liabilities at the start of the period are, respectively, $120,000 and $65,000,
income for the period equals $20,000 and expenses equal $11,000 what is equity at the end of
the period? Assume these are the only changes in equity for the period.
Section: 3.7

Question 3.2

Belinda decided to open a hairdressing salon Luscious Hair.

During her first week in business the following transactions occurred:

July 1 Belinda deposited $16,000 in a business bank account.
3 Paid $12,000 for equipment to fit out the shop.
3 Bought a years supply of hairdressing supplies on credit for $1,400.
6 Paid creditors for hairdressing supplies $1,400.
6 Banked takings from clients of $650
7 Paid expenses - Salary (part-time) $200
- Rent $150
7 Belinda withdrew $300 from the business at the end of the first week.

REQUIRED:

Using the template below complete a chart of accounts for Luscious Hair including a suitable
number for each account.

Luscious Hair
CHART OF ACCOUNTS

CURRENT ASSETS (100-150)

NON-CURRENT ASSETS (151-199)

CURRENT LIABILITIES (200-250)

NON-CURRENT LIABILITIES (251-299)

EQUITY (300-399)

INCOME (400-499)

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Testbank to accompany Accounting 8e

EXPENSES (500-599)

DETERMINATION OF PROFIT (600-650)

Section: 3.6

Question 3.3

Explain how the rules for debits and credits are derived from the accounting equation. Your
answer should include the rules for income and expenses.
Section: 3.7

Solutions Exam type questions

Solution Question 3.1

Equity at the end of the period = opening equity + income expenses

= ($120,000 - $65,000) + $20,000 - $11,000
= $64.000
Section: 3.7

Solution Question 3.2

Luscious Hair
CHART OF ACCOUNTS

CURRENT ASSETS (100-150)

105 - Bank
110 - Hairdressing supplies

NON-CURRENT ASSETS (151-199)

153 - Salon Equipment

CURRENT LIABILITIES (200-250)

205 - Creditors

NON-CURRENT LIABILITIES (251-299)

EQUITY (300-399)
302 - Capital, Belinda
303 - Drawings

INCOME (400-499)
403 - Receipts from customers

EXPENSES (500-599)
503 - Hairdressing supplies used
506 - Rent
509 - Salaries

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DETERMINATION OF PROFIT (600-650)

601 - Income account
Section: 3.6

Solution Question 3.3

Assets = Liabilities + Equity + (Income Expenses)

Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
+ - - + - + - + + -

If the left hand side of the equation is assumed to be of a debit nature and the right hand side
is assumed to be of a credit nature the rules of debit and credit follow. Increases in assets are
debits, reductions in assets (the opposite) are credits. Increases in liabilities and equity (right
hand side) are credits, reductions in liabilities are debits. Income adds to equity so its rules
are the same as for equity. Expenses reducing equity therefore its rules are the opposite of
equity, i.e. increases in expenses are debits and reductions are credits.
Section: 3.7

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