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Chapter 3 – Exercises & Cases

Multiple Choice Questions​

  1. Which accounting principle requires expenses to be recorded in the same period as related revenues?
    a) Cost Principle
    b) Revenue Recognition Principle
    c) Matching Principle
    d) Full Disclosure Principle
    Answer: c) The Matching Principle requires expenses to match with related revenues.

  2. In the expanded accounting equation, revenue:
    a) Increases assets
    b) Decreases liabilities
    c) Increases equity
    d) Decreases expenses
    Answer: c) Revenue increases equity, which increases the right side of the equation.

  3. Which step comes first in the accounting cycle?
    a) Post to ledger
    b) Prepare trial balance
    c) Identify transactions
    d) Make adjusting entries
    Answer: c) Identifying transactions is the first step in the accounting cycle.

  4. A debit to an asset account:
    a) Increases the asset
    b) Decreases the asset
    c) Has no effect
    d) Depends on the transaction
    Answer: a) Debits increase assets (normal balance is debit).

  5. In Luxembourg, accounting records must be retained for:
    a) 3 years
    b) 5 years
    c) 7 years
    d) 10 years
    Answer: d) Luxembourg requires 10-year retention of accounting records.

  6. Which PCN class contains cash and bank accounts?
    a) Class 3
    b) Class 4
    c) Class 5
    d) Class 6
    Answer: c) Class 5 contains financial accounts (cash and banks).

  7. A trial balance that balances proves:
    a) All transactions were recorded correctly
    b) No errors exist in the accounting records
    c) Debits equal credits mathematically
    d) Financial statements are accurate
    Answer: c) A balanced trial balance only proves mathematical accuracy, not correctness.

  8. The normal balance for expense accounts is:
    a) Debit
    b) Credit
    c) Either, depending on the expense
    d) Zero
    Answer: a) Expenses have a debit normal balance (increases are debits).

  9. In Luxembourg, double-entry bookkeeping is:
    a) Optional for small businesses
    b) Recommended but not required
    c) Required by law for all businesses
    d) Only required for large businesses
    Answer: c) Double-entry bookkeeping is a legal requirement in Luxembourg.

  10. When a business purchases inventory on credit, which accounts are affected?
    a) Assets and Expenses
    b) Assets and Liabilities
    c) Liabilities and Equity
    d) Assets and Revenue
    Answer: b) Inventory (asset) increases and Accounts Payable (liability) increases.

Questions​

  1. Explain the difference between the cost principle and the revenue recognition principle. Give an example of each.

  2. Describe the expanded accounting equation. How does it differ from the basic equation, and why is it useful?

  3. List and explain the first four steps of the accounting cycle. Why is each step important?

  4. Explain the rules for debits and credits. Use the DEAD CLIC memory aid to help your explanation.

  5. What is a journal entry? What information must it include? Why are journal entries important?

  6. Describe how to post a journal entry to T-accounts. What is the purpose of posting?

  7. What is a trial balance? What does it prove, and what does it not prove?

  8. Explain the Luxembourg PCN account numbering system. How are accounts organized, and why is this system important?

  9. Why is double-entry bookkeeping required by law in Luxembourg? What are the consequences of not following this requirement?

  10. A business purchases €5,000 equipment, paying €2,000 cash and signing a note for €3,000. Analyze this transaction showing:
    a) Accounts affected
    b) Debit/credit entries
    c) Impact on accounting equation
    d) PCN account numbers

Problems Set A​

Problem A-1: Identifying Accounting Principles

For each scenario, identify which accounting principle, assumption, or concept applies:

a) A business records equipment at its purchase price of €10,000, not its current market value of €12,000 b) A business records revenue when services are provided, even though payment is received later c) A business keeps its records separate from the owner's personal records d) A business records expenses in the same period as the revenues they helped generate e) A business prepares financial statements for the year ended December 31, 2024

Problem A-2: Expanded Accounting Equation

For each transaction, show the impact on the expanded accounting equation:

a) Owner invests €25,000 cash b) Purchase €8,000 equipment for cash c) Earn €3,000 revenue, receiving cash d) Pay €1,500 rent expense e) Purchase €2,000 inventory on credit

Problem A-3: Journal Entries

Prepare journal entries for the following transactions (include PCN account numbers):

a) Purchase €5,000 equipment, paying cash b) Sell services for €2,000 cash (excluding VAT), VAT 17% c) Purchase €1,500 inventory on credit (excluding VAT), VAT 17%, recoverable d) Pay €800 salaries expense e) Pay €1,200 to supplier for previous purchase

Problem A-4: T-Accounts

Post the following journal entries to T-accounts and calculate balances:

Journal Entry 1:
510000 Cash                €10,000
101000 Share Capital                €10,000

Journal Entry 2:
223000 Equipment           €6,000
510000 Cash                         €6,000

Journal Entry 3:
321000 Inventory           €2,000
400000 Accounts Payable             €2,000

Journal Entry 4:
510000 Cash                €1,170
701000 Service Revenue              €1,000
430000 VAT Payable                    €170

Problem A-5: Trial Balance

From the T-accounts in Problem A-4, prepare a trial balance.

Problems Set B​

Problem B-1: Complete Transaction Analysis

Analyze the following transactions for a Luxembourg restaurant. For each transaction: a) Identify accounts affected b) Determine debit/credit c) Show impact on accounting equation d) Prepare journal entry with PCN accounts e) Post to T-accounts

Transactions:

  1. Owner invests €30,000 cash
  2. Purchase €20,000 kitchen equipment, paying €5,000 cash and €15,000 note
  3. Purchase €3,000 food inventory on credit (excluding VAT), VAT 3%, recoverable
  4. Provide catering services for €2,000 cash (excluding VAT), VAT 17%
  5. Pay €2,500 salaries expense
  6. Pay €1,000 rent expense
  7. Pay €900 to supplier for previous purchase
  8. Receive €500 from customer for previous credit sale

Problem B-2: Error Detection

A trial balance shows the following errors. Identify what's wrong and how to correct it:

a) Cash account shows credit balance of €5,000 b) Sales Revenue shows debit balance of €10,000 c) Equipment purchased for €8,000 recorded as €800 d) Payment of €1,200 rent recorded as debit to Cash and credit to Rent Expense (both €1,200) e) Sale of €2,000 recorded as debit to Cash €2,000, credit to Sales Revenue €200

Problem B-3: PCN Account Mapping

For each transaction, identify the correct PCN accounts (account number and class):

a) Cash sale of goods b) Credit purchase of inventory with recoverable VAT c) Payment of utilities expense d) Purchase of delivery vehicle e) Receipt of bank loan f) Payment of VAT to tax authorities g) Owner investment h) Payment of social security charges

Problem B-4: Luxembourg Compliance Analysis

Explain what a Luxembourg SARL must do to comply with double-entry bookkeeping requirements: a) What records must be maintained? b) What format must be used? c) What PCN requirements must be followed? d) How long must records be retained? e) What are the consequences of non-compliance?

Comprehensive Problem​

Comprehensive Problem 3: Complete Accounting Cycle - Initial Steps

Mode Luxembourg SARL is a retail clothing store in Luxembourg City. The following transactions occurred during November 2024:

November 1: Owner invested €50,000 cash to start the business.

November 3: Purchased store fixtures for €12,000, paying €4,000 cash and signing a note for €8,000.

November 5: Purchased inventory for €15,000 on credit from supplier (excluding VAT), VAT 17%, recoverable.

November 8: Sold merchandise for €8,000 cash (excluding VAT), VAT 17%. Cost of goods sold was €5,000.

November 12: Paid €2,000 rent expense for the month.

November 15: Sold merchandise for €6,000 on credit (excluding VAT), VAT 17%. Cost of goods sold was €3,500.

November 18: Paid €1,500 salaries expense.

November 20: Paid €10,000 to supplier for previous inventory purchase.

November 22: Received €4,000 from customer for previous credit sale.

November 25: Paid €500 utilities expense.

November 28: Purchased additional inventory for €8,000 cash (excluding VAT), VAT 17%, recoverable.

Required:

  1. Analyze each transaction showing:
    a) Accounts affected
    b) Account types
    c) Increases/decreases
    d) Debit/credit determination
    e) Impact on accounting equation

  2. Prepare journal entries for all transactions. Include PCN account numbers and proper descriptions.

  3. Post all journal entries to T-accounts. Calculate ending balances.

  4. Prepare a trial balance as of November 30, 2024.

  5. Verify that:
    a) Total debits equal total credits
    b) Accounting equation balances
    c) All PCN accounts are properly classified

  6. Identify which transactions affect:
    a) Only the Balance Sheet
    b) Only the Income Statement
    c) Both statements

  7. Explain how this business is complying with Luxembourg double-entry bookkeeping requirements.

Cases​

Case 3-1: Setting Up the Accounting System

Marie has decided to handle her restaurant's accounting herself instead of using a fiduciaire. She's purchased accounting software (Sage BOB) but is unsure how to set it up properly.

Questions for Analysis:

  1. What accounting principles and assumptions should Marie understand before setting up her system?

  2. How should Marie organize her chart of accounts using PCN? What accounts will she need for a restaurant?

  3. What source documents should Marie collect and organize? How should she store them?

  4. What are the legal requirements Marie must meet for maintaining accounting records in Luxembourg?

  5. What are the risks of Marie doing her own accounting? When should she consider professional help?

  6. How can Marie ensure she's using double-entry bookkeeping correctly?

Case 3-2: Detecting and Correcting Errors

A Luxembourg SME's trial balance doesn't balance. The difference is €500 (debits exceed credits). The accountant has identified several potential issues:

  • A €1,000 sale was recorded as debit to Cash €1,000, credit to Sales Revenue €100
  • A €500 expense payment was recorded twice
  • Equipment purchase of €8,000 was recorded as €800
  • A €200 receipt was not recorded at all

Questions for Analysis:

  1. Which of these errors would cause the trial balance to not balance? Why?

  2. Which errors would NOT be detected by a trial balance? Why?

  3. How would you systematically find the €500 difference?

  4. How would you correct each error once found?

  5. What procedures could prevent these types of errors in the future?

  6. What are the implications if these errors are not corrected before filing financial statements with RCS?

Solutions are published in supplementary/instructor/solutions/chapter_03_solutions.md.