Chapter 3 practice

$12,000 revenue less $5,000 expenses is $7,000 net income; $2,000 opening Retained Earnings plus $7,000 income less $2,000 distributions is $7,000.

This forces the same ending equity while understating performance by treating the $2,000 owner distribution as expense.

Revenue is not net income; the $5,000 expenses, $2,000 opening balance, and $2,000 distribution must retain their distinct roles.

Net income is a period result and Retained Earnings is accumulated equity; neither is one asset account.

Answer: A

The income statement reports $12,000 revenue less $5,000 expenses, or $7,000 net income. Contributed Capital remains $22,000. Retained Earnings is $2,000 opening plus $7,000 net income less $2,000 owner distributions, or $7,000. Total ending equity is $29,000. Choice A is correct.

Ending equity is shared across the statements. Correct addition within each report does not explain a difference between reports.

An unexplained balancing amount hides the error instead of tracing it to the records.

The ledger supports $29,000 of net assets, which must agree with the equity statement.

The facts do not support changing the liability. Correct the report from the ledger instead.

Answer: C

The common adjusted ledger supports $7,000 net income and $29,000 ending equity: $24,000 beginning equity plus $7,000 income less $2,000 distributions. The correct ending balance sheet has $34,000 assets, $5,000 liabilities, and $29,000 equity. A version reporting $28,000 equity and $33,000 total assets is stale or incorrectly mapped even if it balances internally. Choice C is correct.

The reports answer different questions but share amounts that must describe the same facts.

The balance sheet reports ending assets, liabilities, and equity. The income statement reports revenue over the period.

Credit sales, unpaid expenses, depreciation, and investing or financing transactions can separate income from cash movement.

Matching labels do not remove a difference in units.

Answer: A

The income statement reports performance over a period, the changes-in-equity statement reconciles components across that period, and the balance sheet reports position at the ending date. Entity, consolidation scope, currency, unit, period, date, and version must match before shared amounts are tied. Choice A is correct.

Net income is $7,000. Beginning Retained Earnings of $3,000 plus income less $2,000 of distributions gives $8,000.

Ending equity can agree even though net income is understated. Distributions must remain separate from expenses.

Permanent balances carry forward. Closing resets temporary accounts, not assets and liabilities.

Closing transfers recorded balances. It does not repeat the earlier cash payments.

Answer: A

Close the $12,000 credit-balance Revenue with a debit and credit Retained Earnings. Close $4,000 Salaries Expense and $1,000 Depreciation Expense with credits and debit Retained Earnings $5,000. Close the $2,000 debit-balance Distribution with a credit and debit Retained Earnings. Net income is $7,000; $3,000 opening Retained Earnings plus $7,000 minus $2,000 distributions equals $8,000 ending. Permanent debits are $18,000 Cash, $6,000 Receivable, and $10,000 Equipment; permanent credits are $1,000 Accumulated Depreciation, $5,000 Payable, $20,000 Contributed Capital, and $8,000 Retained Earnings. Each side totals $34,000. Choice A is correct.

Closing adds entries while preserving the original journal and ledger records.

The next period needs opening asset, liability, and equity balances, but separate measures of its own revenue and expenses.

Retained Earnings is an equity account, not a separate cash balance.

Closing debits transfer the revenue balance. They are not refunds or reductions of the year's earned revenue.

Answer: B

Permanent positions and updated Retained Earnings carry into the next period. Revenue, expense, and distribution accounts begin the next period at zero, but their prior entries and the closing transfers remain traceable. Closing lines must be identified separately from operating transactions. Choice B is correct.