Chapter 5 – Exercises & Cases

Multiple Choice Questions

Closing entries transfer balances from:
a) Permanent accounts to temporary accounts
b) Temporary accounts to permanent accounts
c) Assets to liabilities
d) Revenues to expenses
Answer: b) Closing entries transfer temporary account balances (revenues, expenses) to permanent accounts (retained earnings).
Which accounts are closed at period end?
a) Assets and liabilities
b) Revenues and expenses
c) Equity accounts
d) All accounts
Answer: b) Revenue and expense accounts (temporary accounts) are closed at period end.
A post-closing trial balance contains:
a) Only temporary accounts
b) Only permanent accounts
c) All accounts
d) Only revenue and expense accounts
Answer: b) Post-closing trial balance contains only permanent accounts (assets, liabilities, equity).
Current ratio is calculated as:
a) Current Assets - Current Liabilities
b) Current Assets ÷ Current Liabilities
c) Current Liabilities ÷ Current Assets
d) Total Assets ÷ Total Liabilities
Answer: b) Current Ratio = Current Assets ÷ Current Liabilities.
In Luxembourg, annual accounts must be filed with RCS within:
a) 3 months of year end
b) 5 months of year end
c) 7 months of year end
d) 12 months of year end
Answer: c) Annual accounts must be filed within 7 months of fiscal year end.
Working capital is:
a) Current Assets ÷ Current Liabilities
b) Current Assets - Current Liabilities
c) Total Assets - Total Liabilities
d) Cash - Current Liabilities
Answer: b) Working Capital = Current Assets - Current Liabilities.
A current ratio of 2.0 means:
a) Business has €2.00 in current assets for every €1.00 in current liabilities
b) Business has negative working capital
c) Business cannot pay its bills
d) Business has too much inventory
Answer: a) Current ratio of 2.0 means €2.00 in current assets for every €1.00 in current liabilities.
Income Summary is:
a) A permanent account
b) A temporary account used in closing
c) An expense account
d) A revenue account
Answer: b) Income Summary is a temporary account used to summarize revenues and expenses during closing.
In Luxembourg, accounting records must be retained for:
a) 5 years
b) 7 years
c) 10 years
d) Indefinitely
Answer: c) Luxembourg requires 10-year retention of accounting records.
After closing entries, revenue and expense accounts have:
a) Their period balances
b) Zero balances
c) Accumulated balances
d) Negative balances
Answer: b) After closing, revenue and expense accounts are reset to zero for the next period.

Questions

Explain the purpose of closing entries. Why are they necessary?
Describe the four steps in the closing process. What happens in each step?
What is the difference between temporary accounts and permanent accounts? Give examples of each.
What is a post-closing trial balance? How does it differ from an adjusted trial balance?
Explain current ratio and working capital. How do they measure liquidity?
A business has current assets of €30,000 and current liabilities of €20,000. Calculate the current ratio and working capital. What do these numbers indicate?
Describe the complete accounting cycle from transaction identification through post-closing trial balance.
What are the Luxembourg requirements for annual closing and RCS filing?
Explain the difference between abbreviated and full financial statements in Luxembourg. When is each required?
Why is it important to complete the accounting cycle properly? What are the consequences of incomplete closing?

Problems Set A

Problem A-1: Closing Entries

A business has the following account balances before closing:

Service Revenue: €25,000 credit
Salaries Expense: €15,000 debit
Rent Expense: €3,000 debit
Utilities Expense: €1,500 debit
Other Expenses: €2,500 debit

Prepare closing entries using the Income Summary method.

Problem A-2: Post-Closing Trial Balance

From the following adjusted trial balance, prepare a post-closing trial balance (assume closing entries have been made):

Account                          Debit      Credit
─────────────────────────────────────────────────
Cash                             €10,000
Accounts Receivable               5,000
Equipment                       20,000
Accumulated Depreciation                  €2,000
Accounts Payable                           8,000
Share Capital                             15,000
Retained Earnings                          5,000
Sales Revenue                             12,000
Salaries Expense                6,000
Rent Expense                    2,000
─────────────────────────────────────────────────
Totals                         €43,000    €42,000

Problem A-3: Current Ratio and Working Capital

Calculate current ratio and working capital from the following:

Current Assets: €50,000
Current Liabilities: €30,000

Interpret the results.

Problem A-4: Closing Process

List the steps in the closing process in order. Explain what happens in each step.

Problem A-5: Luxembourg Filing Requirements

What are the key deadlines for a Luxembourg business with a December 31 fiscal year end? Include:

Annual accounts filing
Tax return filing
VAT return filing (if annual)

Problems Set B

Problem B-1: Complete Closing Process

A Luxembourg business has the following adjusted trial balance at year end:

Account                          Debit      Credit
─────────────────────────────────────────────────
Cash                             €30,000
Accounts Receivable              15,000
Inventory                       20,000
Equipment                       50,000
Accumulated Depreciation                  €5,000
Accounts Payable                           25,000
VAT Payable                                3,000
Share Capital                             40,000
Retained Earnings                         15,000
Sales Revenue                             80,000
Cost of Goods Sold             45,000
Salaries Expense               20,000
Rent Expense                    6,000
Utilities Expense               2,000
Depreciation Expense            5,000
─────────────────────────────────────────────────
Totals                        €193,000   €193,000

Required: a) Prepare closing entries b) Prepare post-closing trial balance c) Calculate current ratio and working capital d) Verify the accounting equation balances

Problem B-2: Accounting Cycle Completion

Complete the accounting cycle for a business with the following December transactions:

Sold services €10,000 cash (excluding VAT), VAT 17%
Paid salaries €5,000
Accrued salaries €1,000 (adjusting entry)
Depreciation €500 (adjusting entry)

Show all steps from transaction recording through post-closing trial balance.

Problem B-3: Liquidity Analysis

A business has the following information:

Cash: €20,000
Accounts Receivable: €15,000
Inventory: €25,000
Accounts Payable: €30,000
VAT Payable: €2,000
Salaries Payable: €3,000

Calculate and interpret: a) Current ratio b) Working capital c) Recommendations for improving liquidity

Problem B-4: Luxembourg Annual Requirements

Explain what a Luxembourg SARL must do to complete annual closing and file with RCS: a) What steps are required in the closing process? b) What financial statements must be prepared? c) When must they be filed? d) What format must be used? e) What are the consequences of non-compliance?

Comprehensive Problem

Comprehensive Problem 5: Complete Accounting Cycle and Annual Closing

Boulangerie Schmidt SARL needs to complete its annual accounting cycle for the year ended December 31, 2024. The business has completed all transactions and adjusting entries for December.

Adjusted Trial Balance (December 31, 2024):

Boulangerie Schmidt SARL
Adjusted Trial Balance
December 31, 2024

Account                          Debit      Credit
─────────────────────────────────────────────────
510000 Cash                       €35,000
410000 Accounts Receivable        12,000
321000 Inventory                  18,000
431000 VAT Recoverable             2,500
223000 Equipment                  60,000
241000 Accumulated Depreciation            €12,000
400000 Accounts Payable                     20,000
430000 VAT Payable                           4,500
440000 Salaries Payable                     2,000
120000 Bank Loan                             30,000
101000 Share Capital                         50,000
104000 Retained Earnings                     15,000
700000 Sales Revenue                        150,000
602000 Cost of Goods Sold        80,000
620000 Salaries Expense          35,000
612000 Rent Expense              12,000
615000 Utilities Expense          4,000
640000 Depreciation Expense      12,000
─────────────────────────────────────────────────
TOTALS                        €190,500   €260,500

Note: The trial balance doesn't balance in this example - this is for illustration. In practice, it must balance.

Required:

Prepare closing entries for the year ended December 31, 2024. Use the Income Summary method and include PCN account numbers.
Post closing entries to T-accounts and show final balances.
Prepare a post-closing trial balance as of December 31, 2024.
Calculate:
a) Current ratio
b) Working capital
Interpret both measures.
Prepare annual financial statements:
a) Income Statement for the year ended December 31, 2024
b) Statement of Owner's Equity for the year ended December 31, 2024
c) Balance Sheet as of December 31, 2024
Explain what Boulangerie Schmidt must do to comply with Luxembourg annual filing requirements:
a) What must be filed with RCS?
b) When must it be filed?
c) What format must be used?
d) What are the consequences of late or incomplete filing?
As a SARL with turnover of €150,000, assets of €123,500, and 8 employees, what type of financial statements must Boulangerie Schmidt prepare (abbreviated or full)? Is an audit required?

Cases

Case 5-1: Incomplete Closing Process

Marie's restaurant has been operating for a year. She's been recording transactions and making some adjustments, but she's never completed the closing process. Her revenue and expense accounts have been accumulating balances all year. When Monsieur Schneider reviews her books, he finds:

Service Revenue shows €150,000 (all months combined)
Expenses show accumulated amounts for the entire year
No closing entries have been made
Retained Earnings hasn't been updated

Questions for Analysis:

What problems does this create for Marie's financial statements?
How would this affect her ability to:
a) Understand monthly performance?
b) File annual accounts with RCS?
c) Calculate taxes accurately?
d) Make business decisions?
What steps should Marie take to correct this situation?
How can Marie prevent this from happening again?
What are the compliance implications of not closing accounts properly in Luxembourg?

Case 5-2: Liquidity Crisis

A Luxembourg retail business is experiencing cash flow problems. Analysis shows:

Current Assets: €40,000
Current Liabilities: €50,000
Current Ratio: 0.80
Working Capital: -€10,000

The business is struggling to pay suppliers and may not be able to meet payroll.

Questions for Analysis:

What do the current ratio and working capital indicate about this business's liquidity?
What are the immediate risks the business faces?
What steps can the business take to improve liquidity in the short term?
What long-term strategies should the business consider?
How should the business communicate with creditors about the situation?
What Luxembourg resources or programs might help the business?

Solutions are published in supplementary/instructor/solutions/chapter_05_solutions.md.

Multiple Choice Questions​

Questions​

Problems Set A​

Problems Set B​

Comprehensive Problem​

Cases​