equity account retained earnings decreases.
References
Multiple Choice Difficulty: 1 Easy Learning Objective: 01-04 Show how business events affect the
accounting equation.
32.
Award: 1.00 point
33.
Award: 1.00 point
34.
Award: 1.00 point
Wing Company paid $5,000 cash to purchase land. Which of the following shows the impact of this transaction on Wing’s accounting equation?
Assets = Liabilities + Stockholders’ Equity
A. +/− n/a n/a
B. + n/a +
C. − n/a −
D. + + n/a
Option A
Option B
Option C
Option D
Purchasing land for cash is an asset exchange transaction. The asset account Cash decreases and the asset account land increases. There is no impact on
liabilities or stockholders’ equity.
References
Multiple Choice Difficulty: 1 Easy Learning Objective: 01-04 Show how business events affect the
accounting equation.
Turner Company reported assets of $20,000 (including cash of $9,000), liabilities of $8,000, common stock of $7,000, and retained earnings of $5,000. Based
on this information, what can be concluded?
25% of Turner's assets are the result of prior earnings.
$5,000 is the maximum dividend that can be paid to shareholders.
40% of Turner's assets are the result of borrowing from creditors.
25% of Turner's assets are from prior earnings, $5,000 is the maximum possible dividend, and 40% of assets are the result of borrowed resources.
Retained earnings of $5,000 is equal to 25% of the company's assets, indicating that 25% of Turner's assets are from prior earnings. $8,000, or 40%, of Turner's
assets are liabilities, indicating that those assets are the result of borrowed resources. A company can pay out no more in dividends than it has in its retained
earnings account.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 01-05 Interpret information shown in an
accounting equation.
At the time of liquidation, Fairchild Company reported assets of $200,000, liabilities of $120,000, common stock of $90,000 and retained earnings of
($10,000). What amount of Fairchild's assets are the shareholders entitled to receive?
$200,000
$80,000
$90,000
$100,000
Creditors receive first priority in asset distribution during a business liquidation. Therefore, creditors would collect the $120,000 owed to them, leaving the
shareholders with the remaining $80,000.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 01-05 Interpret information shown in an
accounting equation.
35.
Award: 1.00 point
36.
Award: 1.00 point
As of December 31, Year 2, Bristol Company had $100,000 of assets, $40,000 of liabilities and $25,000 of retained earnings. What percentage of Bristol's
assets were obtained from investors?
60%
25%
40%
35%
If assets total $100,000, claims must also total $100,000. Claims include liabilities, common stock and retained earnings. Because liabilities and retained
earnings equal $65,000, common stock must be $35,000. The common stock account represents the assets that were obtained through investors. $35,000 is
35% of $100,000.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 01-05 Interpret information shown in an
accounting equation.
On January 1, Year 2, Chavez Company had beginning balances as follows:
Assets = $12,500
Liabilities = $ 4,500
Common Stock = $ 3,000
During Year 2, Chavez paid dividends to its stockholders of $2,000. Given that ending retained earnings was $6,000, what was Chavez's net income for the
Year 2?
$3,000
$5,000
$7,000
$2,000
On January 1, Year 2:
Assets = Liabilities + Common Stock + Retained Earnings
$12,500 = $4,500 + $3,000 + Retained Earnings
Retained Earnings = $5,000
During Year 2:
Beginning retained earnings + Net income − Dividends = Ending retained earnings
$5,000 + Net Income − $2,000 = $6,000
Net Income = $3,000
References
Multiple Choice Learning Objective: 01-04 Show
how business events affect the
accounting equation.
Difficulty: 3 Hard Learning Objective: 01-07
Prepare an income statement, a
statement of changes in
stockholders equity, and a
balance sheet.
37.
Award: 1.00 point