Question

Suppose a company provides services to customers in the current period but does not collect cash from those customers. How will the basic accounting equation be affected in the current year?

	a.	Stockholders’ equity decreases
	b.	Assets increase
	c.	Liabilities increase
	d.	Expenses increase
	e.	No effect in the current year

On May 1, 2016, a company paid $9,000 for insurance to cover the next 12 months. On December 31, 2016, what adjusting entry does the company need to make for its year-end financial statements?

	a.	Debit Insurance Expense $3,000; Credit Prepaid Insurance $3,000
	b.	Debit Prepaid Insurance $3,000; Credit Cash $3,000
	c.	Debit Insurance Expense $6,000; Credit Prepaid Insurance $6,000
	d.	Debit Insurance Expense $6,000; Credit Cash $6,000
	e.	Debit Prepaid Insurance $6,000; Credit Insurance Expense $6,000

On July 16, a company received cash from a customer for services that were provided in June. Which of the following should be recorded on July 16?

	a.	Debit Cash; Credit Service Revenue
	b.	Debit Service Revenue; Credit Cash
	c.	Debit Cash; Credit Accounts Receivable
	d.	Debit Cash; Credit Deferred Revenue
	e.	Debit Accounts Receivable; Credit Service Revenue

The ending balance of retained earnings represents:

	a.	The total resources available to be distributed to owners.
	b.	The value created by the company for its owners and ditributed to the owners.
	c.	The value of the company from contributions by owners.
	d.	The total resources available to pay claims to resources
	e.	The value created by the company for its owners and kept in the company.

Answer 1

Answer to Question 1.

Correct Answer: Option b i.e. Assets increase.

Providing services to customers in the current period on account will increase Accounts Receivable (Assets) and Service Revenue (Stockholders’ Equity) by the amount of Services rendered. The Journal entry to record the entry will be:

Accounts Receivable         Dr.             xx
          Service Revenue                                        xx

Answer to Question 2.

Correct Answer: Option c i.e. Debit Insurance Expenses $6,000; Credit Prepaid Insurance $6,000.

On December 31, 2016, the adjusting entry will be to record accrued Insurance Expense ($9,000*8/12) for 8 months from May 1, 2016 to December 31, 2016.

The Journal entry to record the entry will be:

Insurance Expense         Dr.             6,000
          Prepaid Insurance                                        6,000

Answer to Question 3.

Correct Answer: Debit Cash; Credit Accounts Receivable.

The Collection of cash from Customer for the services rendered in the last month would decrease Accounts Receivable and increase Cash.

The Journal entry to record the entry will be:

Cash                                         Dr.             xx
          Accounts Receivable                                        xx

Answer to Question 4.

Correct Answer: The value created by the Company for its owners and kept in the Company.

The Ending Retained Earnings represents the amount earned for the benefit of Stockholders and retained in the Company to increase the Retained Earnings by reinvesting in the Company.

Whereas, Dividend is the amount earned and distributed to the owners.