Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

ANALYSIS OF MULTIPLE-CHOICE QUESTIONS

1. Question

   (L.O. 2) Which of the following accounts is a nominal (temporary) account?

   1. Cash.
   2. Prepaid Rent.
   3. Accumulated Depreciation.
   4. Advertising Expense.

   Approach and Explanation: Write down the definition of a nominal (or temporary) account. A nominal account is an account which is closed at the end of an accounting period. Think of what types of accounts get closed—revenues, expenses, and dividends. Think of what types of accounts never get closed—asset, liability, common stock, and retained earnings. Identify the classification of each of the accounts mentioned:

   Cash	Asset
   Prepaid Rent	Asset
   Accumulated Depreciation	Contra Asset
   Advertising Expense	Expense

   When judging if an account is temporary or permanent (real), a contra account is classified in the same manner (temporary or permanent) as the account to which it relates. Hence, a contra asset account is a real account. (Solution = d.)

2. Question

   (L.O. 2) Certain accounts are closed at the end of an accounting period in order to:

   1. reduce the number of items that get reported in the general purpose financial statements.
   2. prepare those accounts for recording of transactions of the subsequent accounting period.
   3. reduce the number of accounts that appear in the ledger.
   4. transfer the effect of transactions recorded in real accounts to owners' equity.

   Approach and Explanation: Review the two reasons for preparing closing entries: (1) closing entries prepare the temporary accounts for ...