Adjusting Entries

Adjusting entries are usually dated the last day of the accounting period and they convert accounts from the cash basis of accounting to the __________ basis of accounting.

Accrual

It is acceptable that some adjusting entries contain estimated amounts.

True

A company borrowed $100,000 on December 1 by signing a six-month note that specifies interest at an annual percentage rate (APR) of 12%. No interest or principal payment is due until the note matures on May 31. The company prepares financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that should be entered in the company's records. What date should be used to record the December adjusting entry?

December 31

A law firm has received $10,000 for services to be performed in the future. In which category would you put the entry to adjust the accounts involved (Service Revenues and Unearned Revenues)?

Deferral

An adjusting entry to adjust the amounts already recorded in the asset account Supplies and in the income statement account Supplies Expense is categorized as a(n).

Deferral

What is the name of the account that will be credited?

Prepaid Insurance

An adjusting entry to record interest expense incurred by a company but not yet included in its accounting records is categorized as a(n).

Accrual

What is the amount of the debit and the credit?

$1,000 12% per year = 1% per month .01 x $100,000 = $1,000

What is the amount of the debit and the credit?

$200 $2,400/ 12

A bank lent $100,000 to a customer on December 1 that required the customer to pay an annual percentage rate (APR) of 12% on the amount of the loan. The loan is due in six months and no payment of interest or principal is to be made until the note is due on May 31. The bank prepares monthly financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that the bank will be making for its accounting records. What date should be used to record the December adjusting entry?

December 31

What would be the effect on the financial statements if the company fails to make the adjusting entry on December 31?

If the bank fails to make the December 31 adjusting entry there will be four consequences: 1) Interest Revenue or Interest Income will be understated by $1,000. 2) Net Income will be understated by $1,000. 3) Owner's equity will be understated by $1,000. 4) Interest Receivable will be understated by $1,000. The accounting equation and balance sheet will show assets (Interest Receivable) understated by $1,000 and owner's equity understated by $1,000.

A common characteristic of an adjusting entry is that it involves a balance sheet account and an __________ account.

Income Statement

On December 1, your company paid its insurance agent $2,400 for the annual insurance premium covering the twelve-month period beginning on December 1. The $2,400 payment was recorded on December 1 with a debit to the current asset Prepaid Insurance and a credit to the current asset Cash. Your company prepares monthly financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that will be written by the company. What is the name of the account that will be debited?

Insurance Expense

What is the name of the account that will be debited?

Interest Expense

What is the name of the account that will be credited?

Interest Payable

How many accounts are involved in the adjusting entry?

Interest Receivable

What is the name of the account that should be credited?

Interest Revenue/ Interest Income

How many accounts are involved in the adjusting entry?

Two

Company S received money in advance of providing services to Company P. The money received before it is earned is an increase to Company S's asset account Cash. The amount unearned should also be reported as:

a Liability

Adjusting entries are often categorized into two groups: __________ and deferrals.

accruals