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Testbank

to accompany

Financial accounting

10^th edition

by

Hoggett et al.

© John Wiley & Sons Australia, Ltd 2018

Chapter 3: Recording transactions

Multiple-choice questions

1. The transactions below are from the records of Cornerstone Framing. The internal transaction is:

a. cash sale.

b. recorded depreciation on shop fixtures and fittings.

c. credit sale.

d. paid monthly rent on premises.

Correct answer: b

Learning objective 3.1 ~ identify the nature, purpose and evidence for transactions.

2. Which of the following events would not be recorded by an accountant?

a. The owner paid his son’s car registration from the business bank account.

b. Credit purchase.

c. Placed an order with a supplier.

d. Depreciation on equipment calculated at the end of the firm’s financial year.

Correct answer: c

Learning objective 3.1 ~ identify the nature, purpose and evidence for transactions.

3. Which of these events would be recorded by an accountant?

a. An employee resigns.

b. An employee receives a promotion.

c. An employee injures themselves at work in the course of their duties.

d. An employee is paid by being given a computer instead of their normal wages.

Correct answer: d

Learning objective 3.1 ~ identify the nature, purpose and evidence for transactions.

4. Which of the following statements is correct?

a. Income and expenses are recorded net of GST.

b. Journal entries to record GST are regarded as internal transactions.

c. The account, GST Payable, represents the amount of GST payable to the entity’s suppliers.

d. If the GST inclusive price of inventory is $120 the GST component is $12.

Correct answer: a

Learning objective 3.1 ~ identify the nature, purpose and evidence for transactions.

5. The source document for a cash sale could be a:

a. credit note.

b. cheque butt.

c. credit card slip.

d. purchase order.

Correct answer: c

Learning objective 3.1 ~ identify the nature, purpose and evidence for transactions.

6. Which of the following transactions relating to the West Cricket Club is regarded as an internal transaction?

a. Sale of food and drinks from the canteen.

b. Depreciation charged on the club’s mower.

c. Collection of players’ fees.

d. Payment of wages for admin staff.

Correct answer: b

Feedback: Depreciation charged on the club’s trailer is an internal transaction as there is no exchange between the entity and an outside party.

Learning objective 3.1 ~ identify the nature, purpose and evidence for transactions.

7. Why is the placing of an order with a supplier not regarded as a transaction?

a. Because the computer software cannot record it.

b. Because the entity may cancel the order.

c. Because an exchange between the entity and the supplier has not yet occurred.

d. The placing of an order is regarded as a transaction.

Correct answer: c

Feedback: The receipt of an order from a customer is not regarded as a transaction because an exchange between the entity and the customer has not yet occurred.

Learning objective 3.1 ~ identify the nature, purpose and evidence for transactions.

8. In Accounting, GST stands for:

a. General Service Tax.

b. Government Systems Tax.

c. Goods and Services Tax.

d. General and Sales Transactions.

Correct answer: c

Learning objective 3.1 ~ identify the nature, purpose and evidence for transactions.

9. The source document for a credit sale is a:

a. credit note

b. receipt

c. cheque

d. tax invoice

Correct answer: d

Learning objective 3.1 ~ identify the nature, purpose and evidence for transactions.

10. In accounting, ABN stands for:

a. Annual Business Number.

b. Australian Business Number.

c. Automated Business Number.

d. Australian Bank Number.

Correct answer: b

Learning objective 3.1 ~ identify the nature, purpose and evidence for transactions.

11. Financial reports prepared during the financial reporting period are called:

a. automated reports.

b. interim reports.

c. consolidated reports.

d. trial balances.

Correct answer: b

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

12. A regular withdrawal of cash by the owner from the business is treated as a reduction in equity and is recorded in an account called:

a. petty cash.

b. drawings.

c. debtors.

d. borrowings.

Correct answer: b

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

13. A separate ledger account is maintained for each:

a. item that appears in the financial reports.

b. journal entry.

c. business transaction.

d. day of business.

Correct answer: a

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

14. A two-year insurance policy paid for on l July would initially be recorded in an asset account called:

a. debtors.

b. prepaid insurance.

c. insurance payable.

d. unearned insurance.

Correct answer: b

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

15. In the expanded version of the accounting equation, income and expenses are sub-groupings of:

a. assets.

b. liabilities.

c. drawings.

d. equity.

Correct answer: d

Feedback: Income has the effect of increasing equity whereas expenses decrease equity.

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

16. There are three basic types of balance sheet accounts. They are:

a. income, expense and drawings.

b. asset, expense and equity

c. asset, liability and equity.

d. bank, debtors and creditors.

Correct answer: c

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

17. What are the two basic types of income statement accounts?

a. Asset and profit

b. Equity and expense

c. Income and equity

d. Income and expense

Correct answer: d

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

18. A party to whom the entity owes money for the provision of goods or services is called a:

a. creditor.

b. client.

c. debtor.

d. customer.

Correct answer: a

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

19. A machine purchased by a business for use in generating income can be recorded in an asset account called:

a. prepayments.

b. plant and equipment.

c. debtors.

d. production.

Correct answer: b

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

20. GST collected by a business on the sale of its goods and services is stored in a liability account called:

a. GST outlays.

b. GST payable.

c. GST purchases.

d. GST receivable.

Correct answer: b

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

21. A collection of all the individual accounts for a particular business is referred to as:

a. the master ledger.

b. the computerised accounts.

c. the chart of accounts.

d. the general ledger.

Correct answer: d

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

22. A listing of the complete ledger account titles and their related account numbers is known as the:

a. general ledger.

b. computerised accounts.

c. chart of accounts.

d. index.

Correct answer: c

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

23. Which of the following statements concerning the accounting period is correct?

a. The accounting period originates from the accounting equation.

b. The accounting period must be at least 3 months long.

c. The length of the accounting period varies with the needs of users.

d. The length of the accounting period depends on which country the business is located in.

Correct answer: c

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

24. In order to provide timely information for decision-making the life of the business is divided into arbitrary time periods of equal length called:

a. accounting cycles.

b. operating periods.

c. business cycles.

d. accounting periods.

Correct answer: d

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

25. A deposit received in advance by Broncos Ltd for services not yet supplied can be initially recorded by Broncos Ltd in a liability account called:

a. sales provision.

b. unearned revenue.

c. accounts payable.

d. accrued expenses.

Correct answer: b

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

26. The term used in the Framework for the Preparation and Presentation of Financial Statements for income which arises in the course of the ordinary activities of an entity is:

a. gains.

b. fees.

c. revenue.

d. profit.

Correct answer: c

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

27. A party to whom the entity owes money for goods or services provided to the entity is called a:

a. borrower.

b. lender.

c. debtor.

d. creditor.

Correct answer: d

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

28. Select the account types for these items:

Fixtures and fittings

Accounts payable

Drawings

Sales

a. Asset, liability, equity, income

b. Asset, liability, equity, expenses

c. Expense, asset, equity, income

d. Expense, liability, asset, expense

Correct answer: a

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

29. Select the account types for these items:

Rent received in advance

Mortgage

Prepaid expenses

Rates

a. Expense, liability, liability, equity

b. Asset, equity, asset, expense

c. Liability, liability, asset, expense

d. Expense, liability, asset, liability

Correct answer: c

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

30. GST paid by a business on the purchase of its goods and services, and for which a reduction of GST collected will be claimed from the tax department, is stored in an account called:

a. GST holdings.

b. GST collected.

c. GST expense.

d. GST receivable.

Correct answer: d

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

31. A chronological record of all the transactions of an entity is provided in the:

a. general ledger.

b. chart of accounts.

c. journal.

d. trial balance.

Correct answer: c

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

32. A chart of accounts is a:

a. formal plan developed by management to estimate information flows through the computerised system.

b. listing of the ledger account titles and their account numbers.

c. list of accounts receivable and payable.

d. chart showing the organisational structure of the entity.

Correct answer: b

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

33. Which of the following statements relating to a chart of accounts is correct?

a. The accounts are listed in alphabetical order.

b. It is a list of accounts and their current balances.

c. It is created at the commencement of a business.

d. It is the same for most businesses.

Correct answer: c

Learning objective 3.2 ~ describe the accounting cycle used to record, classify and summarise transactions, including the use of ledger accounts and the general ledger.

34. The correct accounting entry to record the payment of a liability is:

a. DR asset account; CR liability account

b. DR equity account; CR liability account

c. DR liability account; CR equity account

d. DR liability account; CR asset account

Correct answer: d

Learning objective 3.3 ~ outline the rules of debit and credit used in double-entry accounting and how to apply these rules in analysing transactions.

35. What is the correct order of the steps in the accounting cycle?

1. Entries are made in the journal

2. A business transaction occurs

3. A trial balance is prepared

4. Entries are made in the ledger

5. Financial statements are prepared

a. 2, 4, 1, 5, 3

b. 2, 1, 4, 3, 5

c. 3, 2, 1, 4, 5

d. 5, 2, 4, 3, 1

Correct answer: b

Learning objective 3.3 ~ outline the rules of debit and credit used in double-entry accounting and how to apply these rules in analysing transactions.

36. How many of the following statements about the double-entry system are true?

i. The accounting equation should stay in balance

ii. At least one account should be debited and one account credited

iii. Credits should always be entered into the journal before debits

a. 3

b. 2

c. 1

d. 0

Correct answer: b

Learning objective 3.3 ~ outline the rules of debit and credit used in double-entry accounting and how to apply these rules in analysing transactions.

37. A credit entry will:

a. decrease an asset, increase a liability, and decrease equity.

b. increase an asset, decrease a liability, and decrease equity.

c. decrease an expense, increase income, and increase equity.

d. decrease an asset, decrease a liability, and increase equity.

Correct answer: c

Learning objective 3.3 ~ outline the rules of debit and credit used in double-entry accounting and how to apply these rules in analysing transactions.

38. If a transaction causes a liability account to increase, which of these related effects may also occur?

a. An increase of an equal amount in an equity account.

b. An increase of an equal amount in an asset account.

c. A decrease of an equal amount in an asset account.

d. An increase of an equal amount in another liability account.

Correct answer: b

Learning objective 3.3 ~ outline the rules of debit and credit used in double-entry accounting and how to apply these rules in analysing transactions.

39. Which of the following statements is correct?

a. The normal balance for an asset is a credit.

b. The normal balance for equity is a credit.

c. The normal balance for income is a debit.

d. The normal balance for a liability is a debit.

Correct answer: b

Learning objective 3.3 ~ outline the rules of debit and credit used in double-entry accounting and how to apply these rules in analysing transactions.

40. The system of accounting where each transaction affects two or more accounts and the sum of the debit entries equals the sum of the credit entries is called:

a. single transaction accounting.

b. two-entry accounting.

c. double-entry accounting.

d. debit and credit accounting.

Correct answer: c

Learning objective 3.3 ~ outline the rules of debit and credit used in double-entry accounting and how to apply these rules in analysing transactions.

41. What is the correct order in which the steps for analysing transactions are carried out?

i Determine which accounts are affected.

ii Determine if the account type is increasing or decreasing.

iii Apply the rules of debit and credit.

iv Determine the account type.

a. i, iv, ii, iii

b. i, ii, iii, iv

c. iv, ii, i, iii

d. i, ii, iv, iii

Correct answer: a

Learning objective 3.3 ~ outline the rules of debit and credit used in double-entry accounting and how to apply these rules in analysing transactions.

42. Which of the following represents the accounting entry when expenses are incurred on

credit?

a. DR Cash, CR Income

b. DR Accounts receivable, CR Income

c. DR Expense, CR Accounts payable

d. DR Accounts payable, CR Income

Correct answer: c

Learning objective 3.4 ~ explain the purpose and format of the general journal, record transactions in the general journal and transfer the information to the general ledger.

43. A __________________ provides a complete record, in one place, of each transaction in date order.

a. general journal

b. ledger

c. trial balance

d. chart of accounts

Correct answer: a

Learning objective 3.4 ~ explain the purpose and format of the general journal, record transactions in the general journal and transfer the information to the general ledger.

44. A sole proprietor who owns a newsagency takes home stationery and exercise books for

his children to use at school. This would be considered to be:

a. an expense because an asset has been used for personal use.

b. an increase in equity and a decrease in assets because the sole proprietor purchased the inventory.

c. a decrease in assets and a decrease in equity because by taking the stationery items the owner has made a drawing from the business.

d. an increase in assets and an increase in equity.

Correct answer: c

Learning objective 3.4 ~ explain the purpose and format of the general journal, record transactions in the general journal and transfer the information to the general ledger.

45. Which statement relating to the general journal is incorrect?

a. The debit and credit effects of each transaction are recorded together.

b. It provides a record of transactions in chronological order.

c. It is compiled using the information taken from the entity’s general ledger.

d. It is referred to as a book of original entry.

Correct answer: c

Learning objective 3.4 ~ explain the purpose and format of the general journal, record transactions in the general journal and transfer the information to the general ledger.

46. An entity repays $2000 of an existing bank loan. The transaction is recorded as:

a. DR Bank loan $2000; CR Owner’s capital $2000

b. DR Cash $2000; CR Accounts payable $2000

c. DR Cash $2000; CR Bank loan $2000

d. DR Bank loan $2000; CR Cash $2000

Correct answer: d

Learning objective 3.4 ~ explain the purpose and format of the general journal, record transactions in the general journal and transfer the information to the general ledger.

47. Charming Pete requires his customers to pay for their orders two weeks before shipping the goods. Pete will record the cash receipts as:

a. DR Bank, CR asset account

b. DR Bank, CR expense account

c. DR Bank, CR liability account

d. DR Bank, CR income account

Correct answer: c

Learning objective 3.4 ~ explain the purpose and format of the general journal, record transactions in the general journal and transfer the information to the general ledger.

48. Equipment is purchased on credit for $12 000 plus GST. The general journal entry to record this transaction is which of the following?

$ $

DR CR

a. Equipment 12 000

Accounts payable 12 000

b. Equipment 10 909

GST receivable 1 091

Accounts payable 12 000

c. Equity 12 000

GST receivable 1 200

Accounts payable 13 200

d. Equipment 12 000

GST receivable 1 200

Accounts payable 13 200

Correct answer: d

Learning objective 3.4 ~ explain the purpose and format of the general journal, record transactions in the general journal and transfer the information to the general ledger.

49. On 23 May Harry Ltd repaired Ron Ltd’s computer and charged him $330 cash

including GST. The general journal entry to record the transaction is:

$ $

DR CR

a. Cash at bank 330

GST payable 30

Income from repairs 300

b. Cash at bank 300

GST receivable 30

Income from repairs 330

c. Cash at bank 330

GST receivable 30

Income from repairs 300

d. None of the above

Correct answer: a

Learning objective 3.4 ~ explain the purpose and format of the general journal, record transactions in the general journal and transfer the information to the general ledger.

50. On 23 August Ostrich Ltd paid $825 cash for an 18-month insurance policy including

10% GST. Which of the following is the general journal entry to record the payment?

$ $

a. Prepaid insurance 750

GST payable 75

Cash 825

b. Insurance expense 675

GST payable 75

Prepaid insurance 750

c. Prepaid insurance 750

GST receivable 75

Cash 825

d. Cash 750

Prepaid insurance 750

Correct answer: c

Learning objective 3.4 ~ explain the purpose and format of the general journal, record transactions in the general journal and transfer the information to the general ledger.

51. James Wright performed handyman services for $2500. He received cash of $1500 with

the balance to be received within 28 days. Ignoring GST, the transaction is recorded as:

a. DR Cash $1500; DR Accounts receivable $1000; CR Services revenue $2500

b. DR Services revenue $2500; CR Cash $1500; CR Accounts payable $1000

c. DR Cash $2500; CR Equity $2500

d. DR Cash $1500; DR Equity $1000; CR Services revenue $2500

Correct answer: a

Learning objective 3.4 ~ explain the purpose and format of the general journal, record transactions in the general journal and transfer the information to the general ledger.

52. O’Brien paid $880, including GST, for advertising. The entry to record this transaction is:

a. DR Advertising $880; CR Cash $880

b. DR Advertising $880, DR GST receivable $88; CR Cash $792

c. DR Advertising $880; CR GST receivable $80, CR Cash $800

d. DR Advertising $800, DR GST receivable $80; CR Cash $880

Correct answer: d

Learning objective 3.4 ~ explain the purpose and format of the general journal, record transactions in the general journal and transfer the information to the general ledger.

53. Which statement relating to a trial balance is incorrect?

a. A trial balance may be prepared at any time to test the equality of debits and credits in the ledger.

b. The fact that the total of the debit column equals the total of the credit column does not guarantee that the ledger if free from errors.

c. A trial balance reports the financial performance of an entity.

d. A trial balance is a list of all the accounts in the ledger with their current balances.

Correct answer: c

Learning objective 3.5 ~ discuss the purpose of a trial balance and how to prepare one.

54. A trial balance will disclose which of the following errors?

a. Failing to record a transaction.

b. Recording an amount on the correct side of the wrong account.

c. Recording the same transaction twice.

d. Recording a credit as a debit.

Correct answer: d

Learning objective 3.5 ~ discuss the purpose of a trial balance and how to prepare one.

55. Which of the following errors would be detected by a trial balance?

a. Staff wages were recorded as office expenses.

b. The cashier pocketed the cash from a cash sale and did not record it on the register.

c. A cash sale was recorded in the sales account as $548 instead of $584 but was correctly recorded in the bank account.

d. Supplies purchased on credit were recorded as a debit to the plant and equipment account and a credit to the accounts payable account.

Correct answer: c

Learning objective 3.5 ~ discuss the purpose of a trial balance and how to prepare one.

56. The payroll officer recorded wages for the month as a debit to the Sales account rather

than as a debit to wages expense. This error will result in:

a. understated liabilities at the end of the period.

b. overstated expenses at the end of the period.

c. overstated profit for the period.

d. no effect on profit of the period.

Correct answer: d

Learning objective 3.5 ~ discuss the purpose of a trial balance and how to prepare one.

57. Ignoring GST, which of the following entries correctly records the receipt by Swift Garden Maintenance of $500 in cash for gardening services?

a. DR Bank $500; CR Services $500

b. DR Services $500; CR Bank $500

c. DR Bank $500; CR Debtors $500

d. DR Equity $500; CR Services $500

Correct answer: a

Learning objective 3.5 ~ discuss the purpose of a trial balance and how to prepare one.

58. Ignoring GST, which of the following entries correctly records the purchase of land for $300 000 financed by a $100 000 cash deposit with the balance payable via a 20-year, 6% loan?

a. DR Land $100 000; CR Bank $100 000

b. DR Land $300 000; CR Bank $300 000

c. DR Land $300 000; CR Bank $100 000; CR Loan $200 000

d. DR Land $300 000; CR Loan $300 000

Correct answer: c

Learning objective 3.5 ~ discuss the purpose of a trial balance and how to prepare one.

59. Johanna’s Hair Studio paid $300 for advertising during the month using Cheque No. 100558. Ignore GST. Which of the following reflects the effect on the accounting equation?

a. Decrease in equity of $300; increase in assets of $300.

b. Increase in assets of $300; increase in liabilities of $300.

c. Decrease in assets of $300; increase in equity of $300.

d. Decrease in equity of $300; decrease in assets of $300.

Correct answer: d

Learning objective 3.5 ~ discuss the purpose of a trial balance and how to prepare one.

60. Jones Cleaning Services purchased 12 months’ worth of cleaning supplies from Focus on Cleaning. The purchase is for cash and the invoiced amount is $1200. Ignoring GST, the entry that correctly records this transaction is:

a. DR Cleaning Supplies expense $1200; CR Equity $1200

b. DR Bank $1200; CR Cleaning Supplies asset $1200

c. DR Cleaning Supplies asset $1200; CR Bank $1200

d. DR Bank $1200; CR Cleaning Supplies expense $1200

Correct answer: c

Learning objective 3.5 ~ discuss the purpose of a trial balance and how to prepare one.

61. Kleen Windows received $770 (including GST) from its customer John Jones for services previously supplied to him on credit. Which of the following entries correctly records this receipt?

a. DR Debtors $770; CR Bank $770

b. DR Bank $770; CR Debtors $770

c. DR Bank $770; CR Services revenue $700; CR GST payable $70

d. DR Debtors $770; CR Services revenue $700; CR GST payable $70

Correct answer: b

Learning objective 3.5 ~ discuss the purpose of a trial balance and how to prepare one.

62. A trial balance is prepared to:

a. act as a link between the journal and the ledger.

b. determine profit or loss.

c. act as an index to the journal.

d. verify the equality of debit and credit postings in the ledger.

Correct answer: d

Learning objective 3.5 ~ discuss the purpose of a trial balance and how to prepare one.

63. A list of ledger accounts and their balances is called a:

a. chart of accounts.

b. balance sheet.

c. general journal.

d. trial balance.

Correct answer: d

Learning objective 3.5 ~ discuss the purpose of a trial balance and how to prepare one.

64. The GST is a tax that is levied at the rate of ______ on the sale of most goods and services. It was introduced in Australia on July 1 2000.

a. 5%

b. 10%

c. 15%

d. 20%

Correct answer: b

Learning objective ~ Apppendix.