Multiple Choice: Chapter Two
1. Of the following account types, which would be increased by a debit?
a. Liabilities and expenses.
b. Assets and equity.
c. Assets and expenses.
d. Equity and revenues.
2. The following comments all relate to the recording process. Which of these statements is correct?
a. The general ledger is a chronological record of transactions.
b. The general ledger is posted from transactions recorded in the general journal.
c. The trial balance provides the primary source document for recording transactions into the general journal.
d. Transposition is the transfer of information from the general journal to the general ledger.
Answerb. The general ledger is posted from transactions recorded in the general journal. The general journal is a chronological record of transactions. Invoices, checks, receipts, shipping reports, and numerous other items provide the source documents for recording transactions into the general journal; the trial balance is a listing of account balances. Transposition is the accidental reversing of two digits in a number.
3. The following comments each relate to the recording of journal entries. Which statement is true?
a. For any given journal entry, debits must exceed credits.
b. It is customary to record credits on the left and debits on the right.
c. The chart of accounts reveals the amount to debit and credit to the affected accounts.
d. Journalization is the process of converting transactions and events into debit/credit format.
Answerd. Journalization is the process of converting transactions to their debit/credit form and recording them in the general journal. Of course, debits equal credits, debits are customarily recorded on the left, and the chart of accounts is a listing of accounts in use (and their corresponding reference number).
4. Failure to record the receipt of a utility bill for services already received will result in:
a. An overstatement of assets.
b. An overstatement of liabilities.
c. An overstatement of equity.
d. An understatement of assets.
Answerc. The journal entry would involve a debit to expense and a credit to a liability. Failure to record this entry causes expenses and liabilities to be understated. As a result of understating expenses, income and owner's equity are overstated. Notice that assets are correct.
5. The proper journal entry to record Ransom Company's billing of clients for $500 of services rendered is:
a. Cash 500 Accounts Receivable 500 b. Accounts Receivable 500 Capital Stock 500 c. Accounts Receivable 500 Service Revenue 500 d. Cash 500 Service Revenue 500
Answerc. Both Accounts Receivable (an asset which is increased with a debit) and Service Revenue (increased with a credit) increase by the rendering of services on account. Cash is not impacted and should not be debited or credited. The increase in revenue will ultimately cause an increase in owner's equity -- but this occurs through financial statement preparation, not a direct credit to Capital Stock.
6. The proper journal entry to record $1,000 of Dividends paid by Myer's Corporation is:
a. Dividends 1,000 Cash 1,000 b. Accounts Payable 1,000 Cash 1,000 c. Dividends Expense 1,000 Cash 1,000 d. Dividends Expense 1,000 Service Revenue 1,000
Answera. The Dividends account is increased with a debit and Cash is decreased with a credit. Accounts Payable and Service Revenue are not involved at all. Also, never record dividends as an expense -- they are distributions of income.
7. Lynn Lipincott invested land valued at $5,000 in her business. This transaction would be recorded by:
a. Cash 5,000 Capital Stock 5,000 b. Land 5,000 Capital Stock 5,000 c. Land 5,000 Service Revenue 5,000 d. Capital Stock 5,000 Land 5,000
8. The trial balance:
a. Is a formal financial statement.
b. Is used to prove that there are no errors in the journal or ledger.
c. Provides a listing of every account in the chart of accounts.
d. Provides a listing of the balance of each account in active use.
Answerd. The trial balance provides a listing of the balance of each active account. The trial balance is not a formal financial statement, there are errors (such as transpositions and posting to the wrong account) that will not result in an out-of-balance condition in the trial balance, and there may be accounts in the chart of accounts that are not in actual use and will not appear in the trial balance.
9. Which of the following errors will be disclosed in the preparation of a trial balance?
a. Recording transactions in the wrong account.
b. Duplication of a transaction in the accounting records.
c. Posting only the debit portion of a particular journal entry.
d. Recording the wrong amount for a transaction to both the account debited and the account credited.
Answerc. Posting only the debit portion of a particular entry will cause debits to exceed credits -- an error that will be revealed by a trial balance. The other errors do not cause out-of-balance conditions.
10. The basic sequence in the accounting process can best be described as:
a. Transaction, journal entry, source document, ledger account, trial balance.
b. Source document, transaction, ledger account, journal entry, trial balance.
c. Transaction, source document, journal entry, trial balance, ledger account.
d. Transaction, source document, journal entry, ledger account, trial balance.