Question

1. An increase in revenue always:
   1. increases stockholders' equity.
   2. increases assets.
   3. decreases stockholders' equity.
   4. decreases assets.

2. Which of the following journal entries would decrease stockholders' equity?
   1. Debit Prepaid Insurance and credit Cash.
   2. Debit Deferred Revenue and credit Service Revenue.
   3. Debit Supplies and credit Accounts Payable.
   4. Debit Insurance Expense and credit Cash.

3. In April, the Surf and Sand Hotel books and accepts a cash payment for $25,600 for vacation services to be provided during in July. The journal entry recorded in April will include a debit to:
   1. Cash and a credit to Deferred Revenue.
   2. Accounts Payable and a credit to Service Revenue.
   3. Accounts Receivable and a credit to Service Revenue.
   4. Prepaid Expenses and a credit to Service Revenue.

Answer 1

Question 1

Correct answer---------(A) increases stockholders' equity.

Increase in revenue may or may not increase asset but it always increase stockholder;s equity. Increase in revenue increase net income which increase retained earnings.

Question 2

Correct answer---------(D) Debit Insurance Expense and credit Cash.

Payment or recording of an expense decrease stockholder's equity because it decrease net income and hence retained earnings.

Option A and C do not affect stockholder's equity accounts.

Statement B increase equity not decrease.

Question 3

Correct answer---------Cash and a credit to Deferred Revenue.

Revenue will be deferred since service is yet to be provided.Service revenue will be recorded in july only.