Question 1: D. You can structure the business using any one of three options. A simple partnership would not give you liability protection. If the type of business you are starting puts you at risk of lawsuits, you may want to seek liability protection using a Limited Liability Corporation (LLC) or a corporation. Check with your accountant and attorney to sort out the best structure for your business.

Question 2: C. Inventory is an asset and would be found on the balance sheet, which includes Assets, Liabilities, and Equity. The other three accounts are Income Statement accounts.

Question 3: B. Sales is an income account and would be found on the Income Statement. The other three accounts are balance sheet accounts.

Question 4A: If you are using cash accounting, the transaction is not entered until cash actually changes hands, so you would not enter the transaction until you paid the credit card. Here is the way you would enter the transaction in the books:

Question 4B: If you are using accrual accounting, you would enter the books on the date of transaction like this:

Then on the day you pay the credit card, you would enter:

Question 5: First you need to determine the life of the chair. Based on IRS depreciation recovery periods (see Chapter 5) the life of the chair is seven years. You would divide $700 by 7 to get $100, which would be the depreciation expense for the usage of the chair for the first year.

Question 6: Here are four key things that can go wrong if you don’t have good control of your accounting paperwork:

Question 7:

Calculate Sales Tax: $50 × 7% = $3.50

Total cash received: $53.50

You would record the transaction in your books this way:

Question 8: You would record the transaction in your books this way:

Question 9: You would calculate number sold like this:

Question 10: You would record this sale like this:

Question 11: You would record this purchase like this:

Question 12: Here are the six reasons:

Question 13: The employee would earn $10 per hour for the first 40 hours. The additional five hours would have to be paid at an overtime rate of 1.5 times $10, or $15 per hour. Here’s the calculation:

Question 14: Both the employee and employer’s share of Social Security is 6.2% and 1.45% for Medicare.

To calculate the taxes:

You would deduct $124 and $29 from the employee’s check and you would pay an additional $124 and $29 as an employer’s tax expense. The employee’s share would be held in an Accrued Taxes Payable account and paid to the IRS on the employee’s behalf.

Question 15: C. Personal Use of a Company Car. You would calculate the mileage for personal use and multiply it by the standard mileage rate, which in 2010 was 50¢. You would then add this to the amount paid to the employee and calculate taxes on it.

Question 16: You would first multiply 3 × $8,500 for a taxable wage base of $25,500. Then you would multiply $25,500 × .0262 = $668.10. So your state unemployment tax for the year would be $668.10.

Question 17: You start this process from the bottom up. In other words, you check your balances in sub-ledgers or journals to be sure they are correct. Then you match these numbers to the control accounts in the general ledger, such as Accounts Receivable and Accounts Payable, and finally you prove out the general ledger. After all that is done, you are ready to develop your financial statements for the month.

Question 18: You would post the expenses like this:

Question 19: First you would need to calculate the monthly expense. You do that by dividing $2,400 by 12, which equals $200 per month for depreciation.

You would then post the depreciation expense like this:

Question 20: B. Bank account balance. While it’s important to prove out the bank account as part of closing the books, the actual balance will not be shown in the trial balance. The balance in the general ledger Cash in Checking balance is the only cash balance shown on the trial balance. The amount in the bank may differ because some checks or deposits might not yet have cleared or been posted.

Question 21: The formula for the Current Ratio is:

Question 22: You can calculate your inventory turnover by using this formula:

Question 23: You calculate your cost of goods sold by totaling the purchases minus purchase discounts and credit card fees. You also may have to subtract any shipping costs or any other costs that are specifically related to the acquisition of goods to be sold.

Question 24: Your penalties for not providing your employees with a W-2 on time include:

Question 25: When customers don’t pay their bills, a company must write off the loss. This is done using a Bad Debts Expense account. At the time you close the books for a month, quarter, or year (it’s your choice how frequently you want to make this adjustment), here is the entry you should make to write off unpaid customer charges: