Chapter 7: What is GAAP?
Question 1: Who is required to follow GAAP?
Question 2: Who creates the rules for GAAP?
Question 3: What is the purpose of Generally Accepted Accounting Principles (GAAP)?
Answer to Question 1: Publicly-traded companies. (Governmental entities are required
to follow GAAP as well, but the rules that make up GAAP for governmental entities are
significantly different from the rules for publicly-traded companies.)
Answer to Question 2: The Financial Accounting Standards Board (FASB)
Answer to Question 3: To purpose of GAAP is to ensure that companies’ financial
statements are prepared using a similar set of rules and assumptions. This helps to enable
meaningful comparisons between the financial statements of multiple companies.
Chapter 8: Debits and Credits
Questions 1-3: Show how the following transactions would affect the Accounting Equation
Question 1: James purchases a $5,000 piece of equipment.
Question 2: James writes his monthly check for rent: $3,000.
Question 3: James takes out a $25,000 loan with his bank.
Questions 4-6: Create journal entries to record the following transactions
Question 4: James purchases a $5,000 piece of equipment.
Question 5: James writes his monthly check for rent: $3,000.
Question 6: James takes out a $25,000 loan with his bank.
Answer to Question 1:
Assets = Liabilities + Owners’ Equity
-5,000 no change no change
+5,000
Answer to Question 2:
Assets = Liabilities + Owners’ Equity
-3,000 -3,000
Answer to Question 3:
Assets = Liabilities + Owners’ Equity
+25,000 +25,000
Answer to Question 4:
Dr. Equipment 5,000
Cr. Cash 5,000
Answer to Question 5:
Dr. Rent Expense 3,000
Cr. Cash 3,000
Answer to Question 6:
Dr. Cash 25,000
Cr. Note Payable 25,000
Chapter 9: Cash vs. Accrual
Questions 1-5: Prepare journal entries to record each of the following events.
Question 1: Tom’s Tax Prep’s monthly rent is $3,500. At the end of February, they had not
yet received their monthly rent invoice.
Question 2: In early March, Tom’s Tax Prep receives and pays their rent bill for February.
Question 3: Marla, a marketing consultant, performs services for a client. The agree-upon
price was $10,000, due 30 days from the date the services were completed.
Question 4: ABC Hardware makes a sale (on credit) for $2,500 worth of lumber. The
lumber originally cost them $1,300.
Question 5: Julie takes out a $10,000 loan for her business. Repayment is due in one year
along with $1,200 interest.
Answer to Question 1:
Dr. Rent Expense 3,500
Cr. Rent Payable 3,500
Answer to Question 2:
Dr. Rent Payable 3,500
Cr. Cash 3,500
Answer to Question 3:
Accounts Receivable 10,000
Sales 10,000
Answer to Question 4:
Accounts Receivable 2,500
Sales 2,500
Cost of Goods Sold 1,300
Inventory 1,300
Answer to Question 5:
When the loan is taken out:
Cash 10,000
Note Payable 10,000
At the end of each month during the year:
Interest Expense 100
Interest Payable 100
When the loan is repaid:
Note Payable 10,000
Interest Payable 1,200
Cash 11,200
Chapter 10: The Accounting Close Process
Prepare closing journal entries for Mario’s Mobile Products, which has the following end-of-
year trial balance:
Cash 40,000
Accounts Receivable 8,000
Property, Plant, and Equipment 150,000
Inventory 30,000
Accounts Payable 15,000
Wages Payable 22,000
Common Stock 50,000
Retained Earnings 60,000
Sales 380,000
Cost of Goods Sold 120,000
Rent Expense 60,000
Wages and Salary Expense 110,000
Advertising Expense 9,000
Answer:
Sales 380,000
Income Summary 380,000
Income Summary 120,000
Cost of Goods Sold 120,000
Income Summary 60,000
Rent Expense 60,000
Income Summary 110,000
Wages and Salary Expense 110,000
Income Summary 9,000
Advertising Expense 9,000
Alternatively, the above can be combined into one journal entry:
Sales 380,000
Cost of Goods Sold 120,000
Rent Expense 60,000
Wages and Salary Expense 110,000
Advertising Expense 9,000
Income Summary 81,000
In either case, the following closing journal entry is also required in order to close out the
Income Summary account and transfer the balance — representing the business’s net
income for the period — into Retained Earnings:
Income Summary 81,000
Retained Earnings 81,000