D102 Financial Accounting - Set 1 - Part 3

Correct Answer: Debit common stock, Credit cash

When common stock is issued above par value, the cash account is debited, and the common stock account is credited for the par value. The excess is credited to the additional paid-in capital account.

Correct Answer: Paying employees

Financing activities include transactions related to borrowing, repaying loans, issuing shares, and paying dividends to shareholders.

Correct Answer: Liability account

The allowance for bad debts is a contra-asset account used to offset accounts receivable by reflecting estimated uncollectible amounts.

Correct Answer: New units sold, old units in ending inventory

Under LIFO (Last In, First Out), the most recently purchased (new) units are assumed to be sold first, leaving the older units in inventory.

Correct Answer: $160,000

The accounting equation states that Assets = Liabilities + Equity, so Equity = Assets minus Liabilities. Substituting the values gives $250,000 minus $90,000 = $160,000. Equity represents the residual claim of the owners on the company's assets after all liabilities are settled, so subtracting liabilities from total assets yields the correct equity figure of $160,000.

Correct Answer: When the cash is actually received from the customer

The cash basis of accounting recognizes revenue only when cash is physically received and recognizes expenses only when cash is paid, regardless of when the underlying goods or services are delivered. This contrasts with the accrual basis, which recognizes revenue when it is earned and expenses when they are incurred. Therefore, under the cash basis, revenue is recorded at the moment the customer's payment is collected.

Correct Answer: 2.5 to 1

The current ratio is calculated by dividing current assets by current liabilities, which measures a company's ability to pay its short-term obligations. Here, $80,000 divided by $32,000 = 2.5, meaning the company has $2.50 of current assets for every $1.00 of current liabilities. A ratio above 1.0 generally indicates that a company can cover its current liabilities with its current assets.

Correct Answer: $68,000

Ending retained earnings is calculated as beginning retained earnings plus net income minus dividends declared. Applying the values gives $50,000 + $30,000 minus $12,000 = $68,000. Net income increases retained earnings because it reflects profit retained in the business, while dividends decrease retained earnings because they represent distributions of earnings to shareholders.

Correct Answer: Debit Insurance Expense $1,500; credit Prepaid Insurance $1,500

The $6,000 policy covers 12 months, so the monthly cost is $500. From October 1 to December 31, three months have elapsed, meaning $1,500 (3 times $500) of the prepaid asset has expired and become an expense. The adjusting entry debits Insurance Expense for $1,500 to recognize the cost used and credits Prepaid Insurance for $1,500 to reduce the asset to its remaining unexpired balance of $4,500.