ACCT: Smartbook Chapter 3

A $300,000 building was purchased on December 1. It is estimated that it will have a life of 20 years and zero salvage value. Calculate depreciation expense for the month of December using straight-line depreciation.

$1,250 $300,000/20 years = $15,000 per year. $15,000/12 months= 1250.

A business has a $10,000 loan from a bank at 8% annual interest. Calculate the amount of interest to accrue if the loan has been outstanding for 45 days. Use a 360 day year.

$100 Reason: $10,000 x.08 x 45/360. The problem stated that you were to use a 360 day year.

$21,000 of equipment is purchased on December 1. It is estimated that it will have a life of 5 years and zero salvage value. Calculate depreciation expense for one month, as of December 31, of the first year using the straight-line method.

$350 Reason: $21,000/60mos=$350 per month. December 1 - December 31 = 1 month.

Given the following information for Mouse Inc., calculate its profit margin for the year. $ in thousands: End Year Net income: $500 Net sales: 3500 Accounts receivable: 2150

14.29% Reason: Net income/net sales. $500/3,500=14.29%

Choose the statement(s) below which is (are) true regarding adjusting journal entries. (Check all that apply.)

A balance sheet account is always affected. Cash is never affected. An income statement account is always affected.

Explain what a contra account is by choosing the statement(s) below that correctly describe(s) a contra account. (Check all that apply.)

A contra account has an opposite normal balance than its linked account. A contra account is linked with another account. A contra account is subtracted from another account. Accumulated Depreciation is an example of a contra account.

What is a plant asset?

A plant asset refers to a long-term tangible asset used to produce and sell products or services.

Describe the effect of the adjusting entry to show the earned amount of a previously recorded unearned revenue on the income statement and on the balance sheet by choosing the correct statements below. (Check all that apply.)

A revenue account is increased. A liability (unearned revenue) will be reduced. Total liabilities are reduced. Net income is increased.

Which of the following describes accrued revenue? (Check all that apply)

Accounts receivable is usually increased when accruing revenues. The adjustment causes an increase in an asset account and an increase in a revenue account. They refer to earnings which have been earned but not yet billed. They refer to revenues that are earned in a period, but have not been received and are unrecorded.

Which of the following adjustments would be required at the end of the period? (Check all that apply.)

Accrued revenues Accrued expenses Deferred revenues Deferred expenses

Which of the following lists of assets would be classified as plant assets?

Buildings, Equipment

At the end of the previous year, a customer owed Chocolates R US $500. On January 31 of the current year, the customer paid $900 total, which included the $500 owed plus $400 owed for the current month of January. What would be the journal entry on January 31 that reflects this? (Check all that apply.)

Cash will be debited for $900. Accounts receivable will be credited for $500. Service revenue would be credited for $400.

Which of the following statements accurately explains how to enter adjustments? (Check all that apply.)

Each adjustment is identified by a letter in parentheses that serves as a cross-reference to the debit and credit side of the adjustment. Adjustments are entered in a middle column titled Adjustments. The adjusted balance is computed by taking that account's amount from the Unadjusted Trial Balance column and adding or subtracting adjustments.

At the end of the previous year, a customer owed Days Company $400. On February 1 of the current year, the customer paid $600 total, which included the $400 owed plus $200 owed through February 1st. The journal entry on February 1 is? (Check all that apply.)

Service revenue would be credited for $200. Cash will be debited for $600. Accounts receivable will be credited for $400.

All of the following are types of adjustments except: deferral of expense accrued expense deferral of revenue accrued revenue accrued cash

accrued cash

The formula for figuring interest expense is:

amount owed x interest rate x fraction of the year since last payment

Accrual basis accounting is defined as: (Check all that apply.)

an accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred. an accounting system that uses the matching principle to determine when to recognize revenues and expenses.

Cash basis accounting is defined as:

an accounting system which recognizes revenues when cash is received and records expenses when cash is paid

StoryBook Company provided services to several customers during the month of December. These services have not yet been paid by the customers. StoryBook should record the following adjusting entry at the end of December: (Check all that apply).

debit accounts receivable credit services revenue

The Fish Aquarium obtained funds from a bank and owes interest on a note at the end of the month. The required adjusting journal entry will

debit interest expense and credit interest payable

Demonstrate your knowledge of preparing an adjusted trial balance by selecting the correct statement below.

An adjusted trial balance is prepared after adjustments are posted, so new accounts may need to be added.

$200 of supplies were purchased at the beginning of the period and recorded as an asset. During the period, $90 of supplies were used. The adjustment to show the supplies used up would cause ___ (assets/liabilities/expenses) to be reduced and ___ (expenses/liabilities/revenues) to be increased, so net income would decline.

Blank 1: assets Blank 2: expenses

Demonstrate your knowledge of a depreciation adjusting entry by completing the following sentence. A depreciation adjustment would include a debit to ___ (depreciation expense/accumulated depreciation/building) and ___ (debit/credit) to ___ (depreciation expense/accumulated depreciation/building).

Blank 1: depreciation expense Blank 2: credit Blank 3: accumulated depreciation

Illustrate your understanding of how to use the adjusted trial balance to prepare an income statement by completing the following sentence. In order to prepare an income statement using the account balances on an adjusted trial balance, all of the ___ (revenues/liabilities) and their credit balances are transferred to the income statement as well as all of the ___ (expenses/assets) and their ___ (debit/credit) balances.

Blank 1: revenues Blank 2: expenses Blank 3: debit

Accrual basis accounting recognizes ___ (equity/revenues/expenses) when the service or product is delivered and records ___ (revenues/expenses/liabilities) when ___ (incurred/paid) in order to adhere to the matching principle.

Blank 1: revenues Blank 2: expenses Blank 3: incurred

A company borrowed $4,000 from the bank at an interest rate of 9%. By the end of the accounting period, the loan had been outstanding for 30 days. Demonstrate the required adjusting entry by choosing the correct statement below.

Debit Interest expense for $30.

What is the effect of an accrued expense (such as salaries expense) adjustment on the income statement and the balance sheet? (Check all that apply.)

Expenses are increased. Net income is reduced. A liability (such as salaries payable) will be increased.

List the order in which financial statements are prepared. Income statement Statement of owner's equity Balance sheet Statement of cash flows

Income statement statement of owner's equity balance sheet statement of cash flows

Which of the following accounts would be considered a prepaid expense or prepaid asset account? (Check all that apply.)

Prepaid rent Supplies Prepaid insurance

What is the purpose of the Accumulated Depreciation account?

The account allows both the original cost of plant assets and the total depreciation taken to be shown simultaneously.

What is the difference between an adjusted trial balance and an unadjusted trial balance? (Check all that apply.)

The adjusted trial balance generally has more accounts listed than the unadjusted trial balance. The adjusted trial balance is a list of accounts and their balances after adjusting entries have been posted. The adjusted trial balance is used to prepare financial statements.

Explain the difference between the unadjusted and the adjusted trial balance.

The adjusted trial balance is prepared after adjusting entries have been recorded and posted.

Describe the final step in the adjusting process.

The final step is to create an adjusting journal entry to get from step 1 to step 2.

Explain your understanding of what an accrued expense is by selecting the statements below which are correct. (Check all that apply.)

They refer to costs that are incurred in a period that are both unpaid and unrecorded. Adjustments involve increasing both an expense and a liability account. Examples of accrued expenses are salaries expense and interest expense.

Which of the accounts below are considered accrued expenses?

Wages expense, Interest expense

An adjusted trial balance is:

a list of accounts and balances after adjusting entries have been recorded and posted

Not recording an accrued expense will have the following effect on the financial statement: (Check all that apply.)

expenses on the income statement will be understated. liabilities on the balance sheet will be understated.

Define what the book value of an asset is by choosing the correct statements below. (Check all that apply.)

it is sometimes referred to as the net amount of an asset. It is the original cost of an asset minus its accumulated depreciation. The formula is cost less accumulated depreciation.

Which of the following statements about the Accumulated depreciation account is (are) correct? (Check all that apply.)

Accumulated depreciation accumulates the total depreciation taken on an asset since its purchase. The Accumulated depreciation account allows the original cost of the asset to remain in the plant asset account. Accumulated depreciation is a contra account. Accumulated depreciation is subtracted from its plant asset on the balance sheet.

Accrued ___ are earned in a period that are both unrecorded and not yet received in cash.

Blank 1: revenue or revenues

McDarrel's records $500 of accrued salaries on December 31. Three days later, on January 3, total salaries of $4,000 (including the $500 accrued at year end) are paid. Demonstrate the required journal entry on January 3 by selecting from the choices below. (Check all that apply.)

Cash would be credited for $4,000. Salaries payable will be debited for $500. Salaries expense would be debited for $3,500.

Which of the following statements describes why accrual accounting better reflects a business's performance as compared to the cash basis? (Check all that apply.)

Comparability of financial statements is improved. Expenses are always recognized in the period in which they are incurred. Revenues are always recorded in the period in which they are earned when services and products are delivered.

A 12-month insurance policy was purchased on Dec. 1 for $3,600 and the Prepaid insurance account was increased for the payment. Demonstrate the required adjusting journal entry on Dec. 31 by selecting from the choices below.

Insurance expense would be debited for $300.

Describe the effect of the adjusting entry to show the earned amount of a previously recorded unearned revenue on the income statement and on the balance sheet by choosing the correct statements below. (Check all that apply.)

Net income is increased. Total liabilities are reduced. A revenue account is increased. A liability (unearned revenue) will be reduced.

Which of the following accounts is considered a prepaid expense?

Supplies

$1,000 of supplies were purchased at the beginning of the month. $300 were used during the month. (The Supplies account was increased at the time of the initial purchase.) Demonstrate the required adjusting journal entry by selecting from the choices below. (Check all that apply.)

Supplies expense would be debited for $300. Supplies would be credited for $300.

Explain what unearned revenues are by selecting the statements below which are correct. (Check all that apply.)

They are reported on a balance sheet. They are also called deferred revenues. They refer to cash received in advance of performing a service or product. They are a liability.

Identify which group of accounts may require adjustments at the end of the accounting period.

Unearned revenue; Supplies; Prepaid rent

Explain what unearned revenues are by choosing the correct statement below.

Unearned revenues refer to cash received in advance of providing a service or product.

Which of the following is (are) true regarding timeliness and the importance of periodic reporting? (Check all that apply.)

Useful information must reach decision makers frequently. Businesses report financial information at regular intervals to ensure timeliness of data. The value of information is often linked to its timeliness.

A 12-month insurance policy was purchased on Dec. 1 for $4,800 and the Prepaid insurance account was initially increased for the payment. The required adjusting journal entry on December 31 includes a: (Check all that apply.)

debit to Insurance expense for $400. credit to Prepaid insurance for $400.

All of the following are types of adjustments

deferral of expense accrued expense deferral of revenue accrued revenue

The revenue recognition principle states that revenue:

should be recorded when goods or services are provided to customers at an amount expected to be received from them

If an adjusting entry for unearned revenue is not recorded, what is the effect on the financial statements?

the revenues on the income statement will be understated.

Which of the following refers to the preparation of an adjusted trial balance? (Check all that apply.)

An adjusted trial balance is prepared after adjustments have been posted. Accounts are generally listed in the same order as listed in the chart of accounts. The debit and credit column totals must balance. An adjusted trial balance has one debit column and one credit column. New accounts may need to be added because of the adjusting process.

Define an adjusting journal entry.

An adjusting journal entry is made at the end of an accounting period to reflect a transaction or event that is not yet recorded.

A company borrowed $10,000 from the bank at 5% interest. The loan has been outstanding for 45 days. Demonstrate the required adjusting entry for this company by completing the following sentence. The required adjusting entry would be to debit the Interest (expense/payable/receivable) ___ account and (debit/credit) ___ the Interest ___ (expense/payable/receivable) account.

Blank 1: expense Blank 2: credit Blank 3: payable

Recall the order in which financial statements are prepared.

Income statement, statement of owner's equity, balance sheet, statement of cash flows

Review the following statements and determine which is (are) correct regarding an adjusted trial balance and how it is used In preparing financial statements. (Check all that apply.)

Financial statements are prepared more easily using the adjusted trial balance than with the general ledger. The adjusted trial balance includes all accounts and balances appearing in financial statements. The income statement is the first financial statement prepared after preparing the adjusted trial balance. The ending Owner, Capital account balance on the balance sheet is transferred from the statement of owner's equity.

$800 of supplies were purchased at the beginning of the month and the Supplies account was increased. As of the end of the period, $200 of supplies still remain. Which of the following is the correct adjusting entry?

Supplies expense would be debited for $600.

What is the book value of an asset?

Book value is the original cost of an asset minus its accumulated depreciation.

Cash basis accounting recognizes ___ (equity/revenues/expenses) when cash is received and records ___ (revenues/expenses/liabilities) when cash is paid.

Blank 1: revenues Blank 2: expenses

Which of the accounts below would be classified as a plant asset? (Check all that apply.)

Building Vehicles Equipment

A plant asset can be defined by which of the following statements? (Check all that apply.)

It is a tangible long-term asset. Provide benefits for greater than one period. Its cost (minus any salvage value) is gradually reported as expenses over its useful life. It is reported on the balance sheet.

Which of the following describe the Salaries payable account? (Check all that apply.)

It is increased with a credit. It is reported on the balance sheet. It reports amounts owed to employees. It is a liability account.

Define the Salaries payable account by selecting the appropriate statement below.

It reports amounts owed to employees and is a liability.

$500 of supplies were purchased at the beginning of the period. By the end of the period, only $100 remains. The adjustment to show the $400 of supplies used would have the following effect(s). (Check all that apply.)

It would reduce assets, so total assets would be lower. It would increase expenses, so net income would be reduced.

Determine which of the following transactions may require adjustments. (Check all that apply.)

Supplies were purchased at the beginning of the year, but not all were used. An advance payment was received from a customer earlier in the month, but only partially earned by the end of the month. Six months of rent were paid in advance. Equipment was purchased in the middle of the year. a 24-month insurance policy was prepaid

Describe the effect of an accrued revenue adjustment on the income statement and the balance sheet by choosing from the statements below. (Check all that apply.)

An asset will be increased. Total assets will be increased. A revenue account will be increased. Net income is increased.

Choose the statement below which is true regarding adjusting journal entries.

At least one income statement account and one balance sheet account are always involved.

On December 1, a company pays $3,600 for a 36-month insurance policy. After one month, accrual accounting requires $ ___ (100/3,600) of insurance expense be reported on the income statement ending December 31. However, if cash basis accounting is used, $ ___ (100/3,600) of insurance expense would be reported at the time of purchase.

Blank 1: 100 Blank 2: 3,600 or 3600

A calendar year-end reporting period is defined as a ___ (1 / 3 / 12) -month period which ends on ___ (December/January/March) 31st.

Blank 1: 12 Blank 2: December

On December 27, a business completed a $400 service that had not yet been billed or recorded as of December 31. Demonstrate the required adjusting entry of the business by completing the following sentence. The required adjusting entry would be to debit the ___ (Unearned revenue/Accounts receivable/Cash/Service revenue) account and ___ (debit/credit) the ___ (Unearned revenue/Accounts receivable/Cash/Service revenue) account.

Blank 1: Accounts receivable Blank 2: credit Blank 3: Service revenue

Explain a contra account by filling in the following blanks. A contra account is an account that is linked with another ___ (report/account/statement). It has a(n) ___ (similar/opposite) balance and is ___ (added/subtracted) to/from the other account's balance.

Blank 1: account Blank 2: opposite Blank 3: subtracted

Illustrate your understanding of how to use the adjusted trial balance to prepare the balance sheet by completing the following sentence. In order to prepare a balance sheet using the account balances on an adjusted trial balance, all of the ___ (expenses/assets) and their debit balances are transferred to the balance sheet as well as all of the ___ (liabilities/revenues) and their ___ (debit/credit) balances.

Blank 1: assets Blank 2: liabilities Blank 3: credit

Illustrate your understanding of how to use the adjusted trial balance to prepare a statement of owner's equity by completing the following sentence. In order to prepare the statement of owner's equity, the Owner ___ (Capital, Cash) account balance as well as any debit balance in the ___ (Withdrawals, Supplies) account is transferred from the adjusted trial balance and is used along with the reported net income (loss) from the Income statement.

Blank 1: capital or Capital Blank 2: withdrawals or Withdrawals

By the end of the accounting period, employees have earned salaries of $650, but they will not be paid until the following pay period. Demonstrate the required adjusting entry by completing the following sentence. The required adjusting entry would be to debit the Salaries ___ (expense/payable) account and ___ (debit/credit) the Salaries ___ (expense/payable/unearned) account.

Blank 1: expense or expenses Blank 2: credit Blank 3: payable

The expense recognition (matching) principle requires that ___ (expenses/assets/liabilities) be recorded in the same accounting period as the ___ (expenses/revenues/assets) that are recognized as a result of those costs. This principle is a major part of the ___ (timing/adjusting/estimating) process.

Blank 1: expenses Blank 2: revenues Blank 3: adjusting

For the current year, a business has earned (but not recorded or received) $200 of interest from investments. Demonstrate the required adjusting entry by completing the following sentence. The required adjusting entry would be to debit the ___ (Unearned revenue/Accounts receivable/Cash/Interest receivable) account and ___ (debit/credit) the ___ (Cash/Accounts receivable/Interest revenue/Interest receivable) account.

Blank 1: interest receivable Blank 2: credit Blank 3: interest revenue

The formula to compute the profit margin of a company is ___ (Net income/Accounts receivable/Net sales) divided by ___ (Net income/Cash/Net sales).

Blank 1: net income Blank 2: net sales

On December 28, I. M. Greasy, Catering completed $600 of catering services. As of December 31, the customer had not been billed nor had the transaction been recorded. Demonstrate the required adjusting entry by choosing the correct statement below.

Debit Accounts receivable for $600.

Choose the statement below that demonstrates the correct adjusting entry to recognize depreciation expense on a building.

Debit Depreciation expense; credit Accumulated depreciation.

For the current year, Bubbles Office Supply had earned $600 of interest on investments. As of December 31, none of this interest had been received or recorded. Demonstrate the required half of the adjusting entry by choosing the correct statement below.

Debit Interest receivable for $600.

By the end of the accounting period, employees have earned salaries of $500, but they will not be paid until the following pay period. Which of the following is the proper adjusting entry?

Debit Salaries expense for $500.

An advance payment of $1,000 for services was received on December 1 and was recorded as a liability. By the end of the year, $400 had been earned. Demonstrate the December 31 adjusting entry by choosing the correct statement below.

Debit Unearned revenues for $400.

An advance payment of $1,000 for services was received on December 1 and was recorded as a liability. By the end of the year, $400 had been earned. Demonstrate what the correct adjusting entry should include by choosing the correct statement below.

Debit Unearned revenues for $400.

Chimney Sweeps provided chimney cleaning services to several clients during the month of February. Chimney's customers have not yet been billed. Chimney's customers owe $2,000 to Chimney. How will Chimney Sweeps record this adjusting entry?

Debit accounts receivable and credit services revenue

Sheldon Company had $500 for one day of accrued salaries on December 31 of the prior year. On January 4 of the current year, total salaries for the five-day week are paid. The journal entry to record the payment of salaries on January 4 includes:

Debit to Salaries Payable for $500; Debit to Salaries Expense for $2,000 Reason: On the payday, the journal entry will include a debit to Salaries Payable for $500, a debit to Salaries Expense for (4 days) $2,000, and a credit to Cash for $2,500.

Able Company owes interest on a note for a loan. The note is dated December 1 and is due on February 1. On December 31, interest expense should be accrued for the following period:

December 1 to December 31

Place the steps in the adjusting process in the correct order in which they would be performed. Instructions Determine what the current account balance equals. Determine what the current account balance should equal. Record an adjusting entry.

Determine what the current account balance equals. Determine what the current account balance should equal. Record an adjusting entry.

$1,000 of cash was received in advance of performing services. By the end of the period, $300 had not yet been earned. (The Unearned revenue account was increased at the time of the initial cash receipt.) Demonstrate the required adjusting journal entry by selecting from the choices below.

Service revenue would be credited for $700. Unearned revenue would be debited for $700.

Revenue recognition principle

requires that revenue be recorded when goods or services are provided to customers and at an amount expect to be received from customers. Adjustments ensure revenue is recognized (reported) in the time period when those services and products are provided.

Not recording an adjusting entry for accrued revenue will result in: (Check all that apply).

revenue being understated accounts receivable being understated