Fall 2010_Section Problem Set 3 (Chap 3) me

Fall 2010_Section Problem Set 3 (Chap 3) me - AEM 2210...

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AEM 2210 Section Problem Set 3 Covering Material from Chapter 3 Name: Section: Material Review. Cash-basis Accounting – Revenue and expenses recorded when cash is transferred Accrual Accounting – assets, liabilities, revenues and expenses recognized when transaction occurs, NOT when cash moves o Required by GAAP, so standard for the class o Revenue is recognized when delivery has occurred, services are performed, price is fixed, collection of receivable is assured T-accounts for Revenues and Expenses o Revenue increase à Credit the T-account o Expense increase à Debit the T-account REMEMBER: Asset Increase à Debit the T-account; Liability increase à Credit the T-account Revenue Principle o Unearned revenue – liability account that is credited when cash is received before the company delivers goods or services Journal entry example: publisher receives money for a magazine subscription before the magazine is sent out Cash $500 Unearned Revenue (L) $500 o Cash received when revenue is earned Journal entry example: Retail store receives cash for inventory purchased that day Cash $25 Revenue (R) $25 NOTE: If cash is not yet received but revenue is earned, accounts receivable is debited instead of cash
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Matching Principle – resources consumed to earn revenues in a period should be recorded in that period o Cash is paid after company receives goods or services, a liability account gets credited Journal entry example: Company A pays workers’ wages at the end of a month Wage Expense $1,000 Wages Payable $1,000 Journal entry when wages are paid: Wages Payable $1,000 Cash $1,000
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Multiple Choice 1. During 2009, Sigma Company earned service revenues amounting to $700,000, of which $630,000 was collected in cash; the balance will be collected in January 2010. The 2009 income statement of the company should report the following amount for service revenues: A) $ 630,000 **B) $ 700,000……. . C) $ 70,000 D) $1,330,000 E) None of the above is correct. 2. When a company buys equipment for $60,000 and pays for one third in cash and the other two thirds is financed by a note payable, which of the following is the effect on the equation? A) Cash decreases by $20,000 B) Equipment increases by $60,000 C) Liabilities increase by $40,000 D) Total assets increase by $40,000 E) All of the above effects occur on the equation…………… 3. Abrahams Corporation reported the following amounts at the end of the first year of operations, December 31, 20A: contributed capital $50,000; sales revenue $200,000; total assets $150,000; $10,000 dividends; and total liabilities $80,000. Retained earnings and total expenses would be A) retained earnings $20,000 and expenses $170,000…… B) retained earnings $30,000 and expenses $160,000
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Fall 2010_Section Problem Set 3 (Chap 3) me - AEM 2210...

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