Question

1

Palmer Hand Clinic has the following accounts and balances:

Cash, $2,350
Accounts Receivable, $280
Professional Equipment, $1,200
Office Equipment, $6,700
Accounts Payable, $4,380
P. Palmer, Capital, $2,000
Income from Services, $6,000
Rent Expense, $1,850

What is the amount of owner's equity?

a.$6,150

b.$4,150

c.$8,000

d.$2,000

2

Which of the following is an example of an asset?

a.Accounts Payable

b.Outstanding Rent

c.Prepaid Insurance

d.Capital

3

When an owner withdraws cash from the business, it results in a decrease in:

a.Cash and Long-term Liabilities.

b.Cash and Contingent Liabilities.

c.Cash and Accounts Payable.

d.Cash and Accounts Receivable.

e.Cash and Capital.

4

If an owner invests his or her computer, printer, and cash in the business, there is an increase in:

a.Computer Equipment, Cash, and Capital.

b.Cash and Accounts Payable.

c.Cash and Drawing.

d.Computer Equipment, Accounts Payable, and Drawing.

e.Computer Equipment and Expenses.

5

Magna Company paid $2,400 for a 6-month liability insurance policy. At the time of payment, this transaction should be recorded as

a.Insurance Expense, $400.

b.Insurance Expense, $2,400.

c.Prepaid Insurance, $2,400.

d.Prepaid Insurance, $400.

6

The purchase of an asset (like Equipment) on account will

a.increase total liabilities and decrease total assets.

b.increase total assets and increase total liabilities.

c.increase total assets and increase owner's equity.

d.have no effect on total assets or total liabilities.

e.increase total assets and decrease owner's equity.

7

Petkus Company paid Perkins Products, a creditor, on account, $7,500. What are the effects on the fundamental account equation?

a.Assets increase $7,500; liabilities decrease $7,500; owner's equity, no effect.

b.Assets decrease $7,500; liabilities, no effect; owner's equity decreases $7,500.

c.Assets increase $7,500; liabilities, no effect; owner's equity increases $7,500.

d.Assets decrease $7,500; liabilities decrease $7,500; owner's equity, no effect.

8

Jamie's Lighting Company paid rent for the month, $2,500. What are the effects on the fundamental accounting equation?

a.Assets increase $2,500; liabilities, no effect; owner's equity increases $2,500.

b.Assets decrease $2,500; liabilities, decrease $2,500; owner's equity, no effect.

c.Assets decrease $2,500; liabilities, no effect; owner's equity increases $2,500.

d.Assets decrease $2,500; liabilities, no effect; owner's equity decreases $2,500.

Answer 1

Requirement 1:

Amount of Owner’s Equity

= Capital + Profit (Income – Expense)

= $2000 + (6000-1850)

= $2000 + $4150

= $6150

Correct Option is a) $6150

Requirement 2:

Accounts Payable and Outstanding rent are liabilities and Capital is Equity.

Prepaid Insurance is an asset as insurance has been paid in advance before its accrual.

Correct Option is c) Prepaid Insurance

Requirement 3:

When the Owner withdraws cash from business, Drawings i.e., Capital should be debited and Cash should be credited as cash goes out from the business. This results in the decrease in balance of capital and cash both.

Correct Option is e) Cash and Capital

Requirement 4:

When an owner invests Computer, Printer and cash into business, the assets like Computer and cash gets added to business in the form of capital. This means there will be increase in Cash, Computer and capital.

Correct Option is a) Computer Equipment, Cash and Capital

Requirement 5:

When insurance policy has been taken and paid, the payment should be considered as prepaid as it is not accrued yet.

Hence when 6-month liability insurance policy is taken and paid $2400, it should be treated as prepaid insurance.

Correct Option is c) Prepaid Insurance $2400

Requirement 6:

When asset has been purchased on account, cash doesn’t go out, instead liability gets increased and asset will be increased.

Correct Answer is b) increase total assets and increase total liabilities

Requirement 7:

When a Creditor is paid, the liability (Accounts payable) would be decreased and asset (Cash) would be decreased

Correct Option is d) Assets decrease $7500, liabilities decrease $7500, Owner’s Equity, No effect

Requirement 8:

When rent has been paid, expense (Rent) would be increased and asset (cash) would be decreased.

As the expense increases, the net income decreases which results in decrease in owner’s equity.

Correct Option is d) Assets decrease $2500, Liabilities, no effect, Owner’s Equity decrease $2500