exam 1 quiz 4 review

Based on the following adjusted trial balance: Garnet & Gold Corporation Adjusted Trial Balance As of December 31 Debit Credit Cash $ 800 Accounts Receivable 200 Inventory 3,000 Building 30,000 Accumulated Depreciation $ 2,000 Notes Payable 1,000 Common Stock 21,000 Retained Earnings 6,000 Dividends 2,000 Revenues 8,000 Selling and Administrative Expense 1,000 Insurance Expense 1,000 $ 38,000 $ 38,000 Determine the amount that will be reported as retained earnings on the post-closing trial balance.

$10,000 Solution:Permanent accounts (i.e., assets, liabilities, and equities) are not closed. Temporary accounts (i.e., revenues, expenses, and dividends) are closed to retained earnings (i.e., an Income Summary account can be used as an intermediate step). Closing revenues increases retained earnings. Closing dividends and expenses decreases retained earnings. Post-closing: Ending retained earnings = beginning retained earnings + revenues - expenses - dividends = $6,000 + 8,000 - 1,000 - 1,000 - 2,000 = $10,000

The following is information from a certain corporation's financial records for the current fiscal year .i. Cash received from customers, $310,000 ii. Revenue earned, $330,000 iii. Cash paid for wages, $140,000 iv. Wages incurred, $125,000 v. Cash received from shareholders for additional shares of stock, $10,000 What is the company's net income for the current year using the accrual basis of accounting?

$205,000 Solution:Net income using the accrual basis = Revenue earned - expenses incurred including depreciationNet income using the accrual basis = $330,000 - 125,000 = $205,000

On August 1, a company purchased equipment for $16,000. The equipment's estimated salvage value is $1,000. The machine will be depreciated using straight-line depreciation and a five year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

$1,250 debit to Depreciation Expense and a $1,250 credit to Accumulated Depreciation. Solution:Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (16,000 - 1,000)/5 = $3,000 per yearThe correct adjusting entry to record depreciation for 5 months (i.e., August 1 through December 31) is $3,000 per year x 5/12 = $1,250.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.

On September 1, a company purchased equipment for $25,000. The equipment's estimated salvage value is $2,500. The machine will be depreciated using straight-line depreciation and a five year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

$1,500 debit to Depreciation Expense and a $1,500 credit to Accumulated Depreciation. Solution:Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (25,000 - 2,500)/5 = $4,500 per yearThe correct adjusting entry to record depreciation for 4 months (i.e., September 1 through December 31) is $4,500 per year x 4/12 = $1,500.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.

Employees at ta certain are paid on Friday, December 27 for the five days ending on December 27. The next payday is Friday, January 3. Employees work 5 days a week. The weekly payroll amounts to $3,800. The appropriate adjusting journal entry on December 31 would be to credit Salaries and Wages Payable for

$1,520 Solution:Employees work on December 30 and December 31, but they will not be paid until January 3. At the end of December 31, the company owes employees for two days of the five day work week (i.e., $3,800 x 2/5 = $1,520).

On August 1, a corporation signed a $30,000, 14%, 2-year note to help finance renovations being made to the corporation headquarters. Assuming interest is accrued only when the year ends on December 31, the appropriate journal entry for the first year would be a

$1,750 debit to Interest Expense and a $1,750 credit to Interest Payable.

On September 1, a company purchased equipment for $25,000. The equipment's estimated salvage value is $3,400. The machine will be depreciated using straight-line depreciation and a four year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

$1,800 debit to Depreciation Expense and a $1,800 credit to Accumulated Depreciation. Solution:Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (25,000 - 3,400)/4 = $5,400 per yearThe correct adjusting entry to record depreciation for 4 months (i.e., September 1 through December 31) is $5,400 per year x 4/12 = $1,800.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.

A company has the following adjusted trial balance: Debit Credit Cash 700 Accounts receivable300 Prepaid rent100 Equipment4,000 Accumulated depreciation-Equipment 2,200 Accounts payable 300 Unearned service revenue 200 Common stock 500 Retained earnings 1,000 Service revenue 2,500 Interest revenue 100 Salaries and wages expense800 Depreciation expense500 Rent expense 400 Total6,8006,800 After closing entries have been journalized and posted, the balance in the company's retained earnings account will be

$1,900. Solution:Ending retained earnings = Beginning retained earnings + revenues - expenses - dividendsEnding retained earnings = 1,000 + 2,500 + 100 - 800 - 500 - 400 = 1,900

Based on the following adjusted trial balance: Garnet & Gold Corporation Adjusted Trial Balance As of December 31 Debit Credit Cash $ 800 Accounts Receivable 200 Inventory 3,000 Building 30,000 Accumulated Depreciation $ 2,000 Notes Payable 1,000 Common Stock 21,000 Retained Earnings 6,000 Dividends 2,000 Revenues 8,000 Selling and Administrative Expense 1,000 Insurance Expense 1,000 $ 38,000 $ 38,000 Determine the amount that will be reported as retained earnings on the post-closing trial balance.

$10,000 Solution:Permanent accounts (i.e., assets, liabilities, and equities) are not closed. Temporary accounts (i.e., revenues, expenses, and dividends) are closed to retained earnings (i.e., an Income Summary account can be used as an intermediate step). Closing revenues increases retained earnings. Closing dividends and expenses decreases retained earnings. Post-closing: Ending retained earnings = beginning retained earnings + revenues - expenses - dividends = $6,000 + 8,000 - 1,000 - 1,000 - 2,000 = $10,000

The following is information is from a certain corporation's financial records for the current fiscal year .i. Cash received from customers, $255,000 ii. Revenue earned, $230,000 iii. Cash paid for wages, $115,000 iv. Wage expense incurred, $110,000 v. Cash paid during the current year for computers that will be used for 3 years, $30,000 vi. Depreciation expense, $5,000 vii. Proceeds from issuing debt, $24,000 viii. Interest incurred on debt, $3,000 ix. Cash paid for supplies, $4,000 x. Supplies expense incurred, $2,000 What is the company's net income for the current year using the accrual basis of accounting?

$110,000 Solution:The accrual-basis of accounting recognizes revenues when the performance obligation is satisfied regardless of when the customer pays and it records expenses when they are incurred regardless of when they are paid.Net income using the accrual basis = Revenue earned - expenses incurred Net income using the accrual basis = $230,000 - 110,000 - 5,000 - 3,000 - 2,000 - $130,000

Based on the following adjusted trial balance: Garnet & Gold Corporation Adjusted Trial Balance As of December 31 Debit Credit Cash $ 800 Accounts Receivable 200 Inventory 2,000 Building 30,000 Accumulated Depreciation $ 1,000 Notes Payable 3,000 Common Stock 17,000 Retained Earnings 10,000 Dividends 3,000 Revenues 7,000 Selling and Administrative Expense 1,000 Insurance Expense 1,000 $ 38,000 $ 38,000 Determine the amount that will be reported as retained earnings on the post-closing trial balance.

$12,000 Solution:Permanent accounts (i.e., assets, liabilities, and equities) are not closed. Temporary accounts (i.e., revenues, expenses, and dividends) are closed to retained earnings (i.e., an Income Summary account can be used as an intermediate step). Closing revenues increases retained earnings. Closing dividends and expenses decreases retained earnings. Post-closing: Ending retained earnings = beginning retained earnings + revenues - expenses - dividends = $10,000 + 7,000 - 1,000 - 1,000 - 3,000 = $12,000

The following is information from a certain corporation's financial records for the current fiscal year. i. Cash received from customers, $375,000 ii. Revenue earned, $380,000 iii. Cash paid for wages, $180,000 iv. Wages incurred, $165,000 v. Cash received from shareholders for additional shares of stock, $30,000 What is the company's net income for the current year using the cash-basis of accounting?

$195,000 Solution:Net income using the cash-basis = Cash collected from customers - cash paid for expenses incurred including prepaid expenses Net income using the cash- basis = $375,000 - 180,000 = $195,000

A company has the following adjusted trial balance: DebitCredit Cash 550 Accounts receivable700 Prepaid rent300 Equipment3,400 Accumulated depreciation-Equipment 900 Accounts payable 350 Unearned service revenue 400 Common stock 1,200 Retained earnings 1,400 Service revenue 2,650 Interest revenue 100 Salaries and wages expense950 Depreciation expense500 Rent expense 600 Total7,000 7,000 After closing entries have been journalized and posted, the balance in the company's retained earnings account will be

$2,100. Solution:Ending retained earnings = Beginning retained earnings + revenues - expenses - dividendsEnding retained earnings = 1,400 + 2,650 + 100 - 950 - 500 - 600 = 2,100

Employees at a certain company are paid on Friday, December 26 for the five days ending on December 27. The next payday is Friday, January 2. Employees work 5 days a week. The weekly payroll amounts to $3,600. The appropriate adjusting journal entry on December 31 would be to credit Salaries and Wages Payable for

$2,160. Solution:Employees work on December 29-31, but they will not be paid until January 2. At the end of December 31, the company owes employees for three days of the five day work week (i.e., $3,600 x 3/5 = $2,160).

A company has the following adjusted trial balance: Debit Credit Cash 400 Accounts receivable600 Prepaid rent100 Equipment4,000 Accumulated depreciation-Equipment 1,000 Accounts payable 300 Unearned service revenue 100 Common stock 1,200 Retained earnings 1,700 Service revenue 3,000 Interest revenue 100 Salaries and wages expense1,200 Depreciation expense500 Rent expense 600 Total7,4007,400 After closing entries have been journalized and posted, the balance in the company's retained earnings account will be

$2,500. Solution:Ending retained earnings = Beginning retained earnings + revenues - expenses - dividendsEnding retained earnings = 1,700 + 3,000 + 100 - 1,200 - 500 - 600 = 2,500

A corporation received a check for $30,000 on May 1, which represents a one year advance payment of rent on an office it rents to a client. The corporation increases unearned rent revenue when it collected the rent and it prepares financial statements dated December 31. The appropriate year-end adjusting journal entry that the realty company must record for the first year would be a

$20,000 debit to Unearned Rent Revenue and a $20,000 credit to Rent Revenue. Solution:The revenue earned from May 1 through December 31 = 30,000 x 8/12 = 20,000. The year-end adjusting entry reduces the liability (i.e., Unearned Revenue) and increases the amount of revenue earned. Debit the Unearned Revenue account to decrease it and credit the Revenue account to increase it.

The following is information from a certain corporation's financial records for the current fiscal year. i. Cash received from customers, $350,000 ii. Revenue earned, $390,000 iii. Cash paid for wages, $150,000 iv. Wages incurred, $160,000 v. Cash received from shareholders for additional shares of stock, $40,000 What is the company's net income for the current year using the cash-basis of accounting?

$200,000 Solution:Net income using the cash-basis = Cash collected from customers - cash paid for expenses incurred including prepaid expensesNet income using the cash-basis = $350,000 - 150,000 = $200,000

On September 1, a company purchased equipment for $40,000. The equipment's estimated salvage value is $4,000. The machine will be depreciated using straight-line depreciation and a four year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

$3,000 debit to Depreciation Expense and a $3,000 credit to Accumulated Depreciation. Solution:Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (40,000 - 4,000)/4 = $9,000 per yearThe correct adjusting entry to record depreciation for 4 months (i.e., August 1 through December 31) is $9,000 per year x 4/12 = $3,000.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.

On April 1, a corporation purchased a 3-year insurance policy for $12,600. Prepaid Insurance was debited for the entire amount. On December 31, when the annual financial statements are prepared, the appropriate adjusting journal entry would be a

$3,150 debit to Insurance Expense and a $3,150 credit to Prepaid Insurance. Solution:This entry correctly adjusts the accounts to recognize that six months of the 36 month policy have expired and are recorded as expense.Monthly rate = $12,600/36 = $350 per month.Expense the amount for Apr. 1 through Dec. 31: $350 x 9 = $3,150.

On June 1,a corporation signed a $36,000, 16%, 2-year note to help finance renovations being made to the corporation headquarters. Assuming interest is accrued only when the year ends on December 31, the appropriate journal entry for the first year would be a

$3,360 debit to Interest Expense and a $3,360 credit to Interest Payable. Solution: This entry correctly adjusts the accounts and interest incurred for a seven month period.($36,000 x 0.16 x 7/12 = $3,360)

A corporation reports the following for the current year: i. Sales on account totaled $150,000 ii. Cash collected from customers totaled $120,000 iii. Wages paid to employees totaled $100,000 iv. Wage expense incurred totaled $110,000 v. Prepaid $5,000 for rent that will be incurred next yearWhat is the corporation's net income for the current year using accrual-basis accounting?

$40,000 Solution: Net income using the accrual basis = Revenue earned - expenses incurredNet income using the accrual basis = $150,000 - 110,000 = $40,000

Given the following adjusted trial balance, determine the company's net income for the year: Debit Credit Cash$781 Accounts Recieveable1049 inventory1562 Prepaid Rent43 Equipment150 Accumuilated Depreciation-Equipment 26 Accounts Payable 41 Unearned Service Revenue 61 Common Stock 103 Retained Earnings 3,305 Service Revenue 134 Internet Revenue 28 Salaries and Wages Expense80 Travel expense 33 Total$3,698$3,698

$49. Solution:Net income = revenues minus expenses = $134 + 28 - 80 - 33 = $49

On September 1, a corporation paid $15,000 to its landlord for 3 months' rent beginning September 1. It debited prepaid rent when it recorded the payment. If the corporation prepares financial statements on September 30, the appropriate adjusting journal entry to make on September 30 would be a

$5,000 debit to Rent Expense and a $5,000 credit to Prepaid Rent. Solution:The company should record rent expense for the month of September. Since the cost of three months' of rent totals $15,000, the company's monthly rent expense is $5,000 (i.e., one-third of the three month cost). The month-end adjusting journal entry to record rent expense (and to decrease prepaid rent to its correct ending balance) would be a debit to Rent Expense for $5,000 and a credit to Prepaid Rent for $5,000.

On May 1, a corporation purchased a 2-year insurance policy for $15,600. Prepaid Insurance was debited for the entire amount. On December 31, when the annual financial statements are prepared, the appropriate adjusting journal entry would be a

$5,200 debit to Insurance Expense and a $5,200 credit to Prepaid Insurance. Solution:This entry correctly adjusts the accounts to recognize that six months of the 36 month policy have expired and are recorded as expense.Monthly rate = $15,600/24 = $650 per month.Expense the amount for May. 1 through Dec. 31: $650 x 8 = $5,200

A company borrowed money from a bank by signing a three-year note payable in the amount of $18,000 on September 1. The note requires the company to pay interest at an annual rate of 9%. The company records adjusting entries on December 31. The adjusting entry that the company should record for accrued interest on December 31 of the same year would include a debit to interest expense for

$540. Solution:Interest = Principal x Rate x Time = $18,000 x 9% x 4/12 = $540After one month, the accrued interest is $540.Interest rates are always annual interest rates unless specifically stated otherwise. This loan charges 8% annual interest per year.The debtor records an adjusting entry to record accrued interest.Debit: Interest Expense, $540Credit: Interest Payable, $540

On August 1, a company purchased equipment for $8,000. The equipment's estimated salvage value is $500. The machine will be depreciated using straight-line depreciation and a five year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

$625 debit to Depreciation Expense and a $625 credit to Accumulated Depreciation. Solution:Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (8,000 - 500)/5 = $1,500 per yearThe correct adjusting entry to record depreciation for 5 months (i.e., August 1 through December 31) is $1,500 per year x 5/12 = $625.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.

A company pays its employees their wages each Friday. The most recent payment occurred on Friday, December 28. The next payroll will be paid on January 4. There is one more work day in December after December 28th. Employees work 5 days a week and the company pays $2,000 per day in wages. What will the adjusting entry to accrue wages expense at the end of December include?

A debit to Salaries and Wages Expense for $2,000 Solution:Wages for one needs to be recorded for the current year even though the employer will not pay its employees for that day until Jan. 4 of next year.Wages for one day = $2,000 per day x 1 day = $2,000. Expenses are increased with debits.

Which of the following is correct concerning the adjusted trial balance?

All of these statements are correct. Solution: An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. The adjusted trial balance provides the primary basis for the preparation of financial statements. The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries.

A company has the following adjusted trial balance: DebitCredit Cash 1,500 Accounts receivable2,100 Prepaid rent100 Equipment3,500 Accumulated depreciation-Equipment 1,500 Accounts payable 150 Unearned service revenue 200 Common stock 1,000 Retained earnings 4,700 Service revenue 800 Interest revenue 100 Salaries and wages expense150 Depreciation expense600 Rent expense 500 Total8,4508,450 After closing entries have been journalized and posted, the post-closing trial balance total for the credit column will be

$7,200. Solution: The difference between (i) the adjusted trial balance and (ii) the post-closing trial balance is the effect of the closing entries. Closing entries transfer end-of-period balances from the revenue accounts, expense accounts, and dividend account to the retained earnings account. The closing process reduces revenue accounts to zero and increases retained earnings, and this merely reduces the credit balance in revenue accounts and increases the credit balance in retained earnings (i.e., the total debits balance and total credit balance do not change when revenue is closed). In contrast, the closing process reduces expense and dividend accounts to zero (i.e., which reduces the total debits) and decreases retained earnings lowing the credit balance in retained earnings. So, closing expenses and dividends lowers both the total debit balance and the total credit balance. Total credits in the post-closing trial balance = the total credits of the adjusted trial balance - expenses and dividends (if any).Total credits in the post-closing trial balance = 8,450 - 150 - 600 - 500 = 7,200

A company's adjusted trial balance reports the following accounts and balances: Accounts Receivable, $2,000 Accounts Payable, $200 Accumulated Depreciation-Equipment, $50 Cash, $1,500 Common Stock, $300 Equipment, $3,750 Inventory, $500 Rent Expense, $150 Retained Earnings, $6,600 Salaries and Wages Expense, $200 Service Revenue, 800 Unearned Service Revenue, $150 Each account has its normal balance as either a debit or credit balance. What is the total of the debit and credit columns of the adjusted trial balance?

$8,100 Solution:Accounts with debit balances include assets, expenses, and dividends (e.g., $2,000 + 1,500 + 3,750 + 500 + 150 + 200 = $8,100)Accounts with credit balances include liabilities, equities, and revenues (e.g., $200 + 50 + 300 + 6,600 + 800 + 150 = $8,100)

A company's adjusted trial balance reports the following accounts and balances: Accounts Receivable, $2,000 Accounts Payable, $200 Accumulated Depreciation-Equipment, $50 Cash, $1,800 Common Stock, $800 Equipment, $3,750 Inventory, $500 Rent Expense, $150 Retained Earnings, $6,600 Salaries and Wages Expense, $600 Service Revenue, $1,000 Unearned Service Revenue, $150 Each account has its normal balance as either a debit or credit balance. What is the total of the debit and credit columns of the adjusted trial balance?

$8,800 Solution:Accounts with debit balances include assets, expenses, and dividends (e.g., $2,000 + 1,800 + 3,750 + 500 + 150 + 600 = $8,800)Accounts with credit balances include liabilities, equities, and revenues (e.g., $200 + 50 + 800 + 6,600 + 1,000 + 150 = $8,800)

The following is information is from a certain corporation's financial records for the current fiscal year. i. Cash received from customers, $230,000 ii. Revenue earned, $255,000 iii. Cash paid for wages, $110,000 iv. Wage expense incurred, $115,000 v. Cash paid during the current year for computers that will be used for 3 years, $30,000 vi. Depreciation expense, $10,000 vii. Proceeds from issuing debt (e.g., borrowed money from a bank), $30,000 viii. Interest incurred on debt, $3,000 ix. Cash paid for supplies, $4,000 x. Supplies expense incurred, $2,000 What is the company's net income for the current year using the cash-basis of accounting?

$86,000 Solution:The cash-basis of accounting recognizes revenues in the year cash is collected from customers regardless of when the performance obligation is satisfied and it recognizes expenses in the year they are paid regardless of when they are incurred.Net income using the cash-basis = Cash collected from customers - cash paid for expenses incurredNet income using the cash-basis = $230,000 - 110,000 - 30,000 - 4,000 = $86,000

Based on the following adjusted trial balance: Garnet & Gold Corporation Adjusted Trial Balance As of December 31 Debit Credit Cash $ 800 Accounts Receivable 200 Inventory 2,500 Building 30,000 Accumulated Depreciation $ 3,000 Notes Payable 500 Common Stock 21,000 Retained Earnings 5,000 Dividends 1,000 Revenues 7,000 Selling and Administrative Expense 1,000 Insurance Expense 1,000 $ 36,500 $ 36,500 Determine the amount that will be reported as retained earnings on the post-closing trial balance.

$9,000 Solution:Permanent accounts (i.e., assets, liabilities, and equities) are not closed. Temporary accounts (i.e., revenues, expenses, and dividends) are closed to retained earnings (i.e., an Income Summary account can be used as an intermediate step). Closing revenues increases retained earnings. Closing dividends and expenses decreases retained earnings. Post-closing: Ending retained earnings = beginning retained earnings + revenues - expenses - dividends = $5,000 + 7,000 - 1,000 - 1,000 - 1,000 = $9,000

The following is information is from a certain corporation's financial records for the current fiscal year. i. Cash received from customers, $150,000 ii. Revenue earned, $195,000 iii. Cash paid for wages, $85,000 iv. Wage expense incurred, $90,000 v. Cash paid during the current year for computers that will be used for 3 years, $24,000 vi. Depreciation expense, $8,000 vii. Proceeds from issuing debt, $50,000 viii. Interest incurred on debt, $5,000 ix. Cash paid for supplies, $3,000 x. Supplies expense incurred, $2,000 What is the company's net income for the current year using the accrual basis of accounting?

$90,000 Solution:The accrual-basis of accounting recognizes revenues when the performance obligation is satisfied regardless of when the customer pays and it records expenses when they are incurred regardless of when they are paid.Net income using the accrual basis = Revenue earned - expenses incurredNet income using the accrual basis = $195,000 - 90,000 - 8,000 - 5,000 - 2,000 = $90,000

Which trial balance will likely list the largest number of accounts?

Adjusted trial balance Solution:Companies prepare three trial balances in the following sequence: (1st) the trial balance, (2nd) the adjusted trial balance, and (3rd) the post-closing trial balance. The adjusted trial balance includes all of the accounts listed on the trial balance, and it might have a few additional accounts as the result of recording adjusting entries. The post-closing trial balance does not list revenues, expenses, or dividends because those accounts have been closed by the closing entries.

On July 1 of the current year, a company purchased equipment. The company neglects to record the adjusting-entry for depreciation before preparing the current year's financial statements. Which of the following is correct regarding the company's financial statements for the current year?

Assets are overstated. Solution:The company should have recorded an adjusting-entry for depreciation:Debit: Depreciation expenseCredit: Accumulated depreciationNeglecting to record an expense understates expenses and overstates net income, retained earnings, and stockholders' equity.Neglecting to record accumulated depreciation overstates the asset's book value and total assets.

A corportion pays its rent of $48,000 annually on January 1 and makes monthly adjusting entries. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true?

Assets will be overstated by $4,000 and net income and stockholders' equity will be overstated by $4,000. Solution:Paying $48,000 for one-year of rent in advance results in an increase in prepaid rent and a decrease in cash. By the end of one month, one-twelfth of the prepaid rent has expired and the company should record an adjusting entry that decreases the balance of the prepaid rent account and in-crease rent expense by $4,000 (i.e., $48,000 x 1/12 = $4,000). If the company forgot to record a prepaid rent adjusting entry, prepaid rent (and total assets) would be overstated and rent expense would be understated. Understating expenses overstates net income, retained earnings, and total stockholders' equity.

Which of the following is true regarding closing entries?

Closing entries cause the revenue and expense accounts to have zero balances. Solution: Closing entries transfer the balances from temporary accounts, such as revenues, expenses, and dividends, to the retained earnings account. Revenues are closed by debiting each revenue account. Expenses are closed by crediting each expense account. Some companies close revenues and expenses to an income summary account and then close the income summary account to retained earnings. Dividends are closed directly to the retained earnings account. Closing revenues increases retained earnings. Closing expenses and dividends decreases retained earnings. After closing them, revenues, expenses, and dividends have zero balances. Temporary accounts are not included on the post-closing trial balance.

Which one of these statements about the accrual-basis of accounting is false?

Companies record revenue only when they receive cash, and record expense only when they pay out cash. Solution: Accrual-basis accounting involves recognizing revenue and recording it when it is earned regardless of when cash is received.

which principle dictates that efforts be matched or recorded with accomplishments?

Expense recognition principle Solution:Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called accrual basis accounting. Expenses are incurred when they contribute to the production of revenue. For example, wage expense is incurred when a company's employees perform services for the company. The timing of expense recognition is called the expense recognition principle; it is also called the matching principle (i.e., expenses are matched to revenues).

Which of the following is not based on accrual accounting?

Net cash provided by operating activities Solution:Net cash provided by operating activities is not based on accrual accounting.

A company accepts a customer's order on November 30 and immediately delivers the goods to the customer. On December 1, the company sends the customer an invoice stating payment is due no later than January 1. The company receives a check from the customer for the full amount due on December 22. The company follows the revenue recognition principle and accrual-basis accounting. On what day should the company recognize revenue for this order?

November 30 Solution: The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. In other words, recognize revenue when it is earned and it is earned when the company performs services earning it.

Which of the following would not result in unearned revenue?

Performing services on account. Solution:Unearned revenue results from customers paying a company in advance of the company performing services or providing merchandise to the customer. Unearned revenue is a liability account. Performing services on account indicates that the company earned the revenue before being paid by the customer rather than after earning the revenue.

The accounting cycle is a series of certain steps that businesses, such as corporations, perform in sequence and repeat in each accounting period. Although steps may be missing among the options listed below, which of the following lists steps of the accounting cycle in their correct order?

Post the transactions, journalize the adjusting entries, and prepare the financial statements. Solution:The correct order is (i) use source documents to analyze transactions, (ii) journalize transactions, (iii) post transactions to the ledger, (iv) prepare the trial balance, (v) journalize and post the adjusting entries, (vi) prepare the adjusted trial balance, (vii) prepare the financial statements, (viii) journalize and post the closing entries, (ix) and prepare the post-closing trial balance.

Which trial balance will likely list the smallest number of accounts?

Post-closing trial balance Solution:Companies prepare three trial balances in the following sequence: (1st) the trial balance, (2nd) the adjusted trial balance, and (3rd) the post-closing trial balance. The adjusted trial balance includes all of the accounts listed on the trial balance, and it might have a few additional accounts as the result of recording adjusting entries. The post-closing trial balance does not list revenues, expenses, or dividends because those accounts have been closed by the closing entries.

A company's closing entries can be described as follows: The first closing entry closes revenues and credits the Income Summary account for $11,125. The second closing entry closes expenses and debits the Income Summary account for $5,775. The third closing entry closes the Income Summary account. Prior to the fourth closing entry, the Dividends account has a $1,125 balance. The fourth closing entry closes the Dividends account. What was the company's net change in Retained Earnings for the current period?

Retained Earnings increased by $4,225 during this period. Solution: Retained Earnings is increased by revenues, $11,125, and decreased by expenses and dividends, $5,775 and $1,125, so the increase in Retained Earnings is $4,225.

A company's closing entries can be describes as follows: The first closing entry closes revenues and credits the Income Summary account for $12,125. The second closing entry closes expenses and debits the Income Summary account for $5,775. The third closing entry closes the Income Summary account. Prior to the fourth closing entry, the Dividends account has a $1,325 balance. The fourth closing entry closes the Dividends account. What was the company's net change in Retained Earnings for the current period? What was the company's net change in Retained Earnings for the current period?

Retained Earnings increased by $5,025 during this period. Solution: Retained Earnings is increased by revenues, $12,125, and decreased by expenses and dividends, $5,775 and $1,325, so the increase in Retained Earnings is $5,025.

At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. Which of the following statements is true as a result of this omission?

Retained earnings at the end of the year is overstated. Liabilities at the end of the year are understated. Solution: Omitting an expense overstates net income retained earnings, and stockholders' equity. Omitting a payable understates liabilities.

A corporation paid employee wages on Friday, December 26. It will pay the next payroll on week later. There are three working days in the month after December 26 (i.e., Dec. 29 - Dec. 31). Employees work 5 days a week and the company pays $900 a day in wages. What will be the adjusting entry to accrue wages expense at the end of December?

Salaries and Wages Expense....................... 2,700 Salaries and Wages Payable............... 2,700 Solution: The corporation incurs three days of wage expense that it must record as a year-end adjusting entry using a rate of $900 per day. Debit salaries and wages expense for $2,700 and credit salaries and wages payable for $2,700.

Which account will have a zero balance after closing entries have been journalized and posted?

Service Revenue. Solution: Closing entries transfer the balances from temporary accounts, such as revenues, expenses, and dividends, to the retained earnings account. Revenues are closed by debiting each revenue account. Expenses are closed by crediting each expense account. Some companies close revenues and expenses to an income summary account and then close the income summary account to retained earnings. Dividends are closed directly to the retained earnings account. Closing revenues increases retained earnings. Closing expenses and dividends decreases retained earnings. After closing them, revenues, expenses, and dividends have zero balances.

Which of the following is not included in the computation of net cash provided by operating activities?

Supplies used Solution: Supplies used is not a cash flow, therefore it is not included in net cash provided by operating activities.

Which type of accounts will not appear in the post-closing trial balance?

Temporary accounts Solution: Closing entries transfer the balances from temporary accounts, such as revenues, expenses, and dividends, to the retained earnings account. Revenues are closed by debiting each revenue account. Expenses are closed by crediting each expense account. Some companies close revenues and expenses to an income summary account and then close the income summary account to retained earnings. Dividends are closed directly to the retained earnings account. Closing revenues increases retained earnings. Closing expenses and dividends decreases retained earnings. After closing them, revenues, expenses, and dividends have zero balances. Temporary accounts are not included on the post-closing trial balance.

Companies prepare various types of trial balances. Which trial balance likely lists the largest number of accounts for a given company?

The adjusted trial balance Solution:Companies prepare three trial balances: (i) trial balance (i.e., before recording adjusting entries), (ii) the adjusted trial balance (i.e., which is prepared after recording adjusting entries), and (iii) the post-closing trial balance (i.e., which is prepared after recording closing entries). The adjusted trial balance shows the balances of all accounts, including those adjusted at the end of the accounting period. The post-closing trial balance lists only permanent accounts (i.e., balance sheet accounts) because the temporary accounts (e.g., income statement accounts) will have been closed to zero in preparation for the next year. The trial balance prepared before recording adjusting entries likely lists most of a company's accounts but a few do not yet have balances (e.g., depreciation expense) and will not be listed.There is no "pre-disclosure trial balance."

Companies prepare various types of trial balances. Which trial balance lists all of a company's permanent and temporary accounts?

The adjusted trial balance Solution:Companies prepare three trial balances: (i) trial balance (i.e., before recording adjusting entries), (ii) the adjusted trial balance (i.e., which is prepared after recording adjusting entries), and (iii) the post-closing trial balance (i.e., which is prepared after recording closing entries). The adjusted trial balance shows the balances of all accounts, including those adjusted at the end of the accounting period. The post-closing trial balance lists only permanent accounts (i.e., balance sheet accounts) because the temporary accounts (e.g., income statement accounts) will have been closed to zero in preparation for the next year.There is no "pre-disclosure trial balance."

Companies prepare various types of trial balances. Which trial balance lists all of a company's permanent accounts but not its temporary accounts?

The post-closing trial balance

Companies prepare various types of trial balances. Which trial balance likely lists the smallest number of accounts for a given company?

The post-closing trial balance Solution:Companies prepare three trial balances: (i) trial balance (i.e., before recording adjusting entries), (ii) the adjusted trial balance (i.e., which is prepared after recording adjusting entries), and (iii) the post-closing trial balance (i.e., which is prepared after recording closing entries). The adjusted trial balance shows the balances of all accounts, including those adjusted at the end of the accounting period. The post-closing trial balance lists only permanent accounts (i.e., balance sheet accounts) because the temporary accounts (e.g., income statement accounts) will have been closed to zero in preparation for the next year. The trial balance prepared before recording adjusting entries likely lists most of a company's accounts but a few do not yet have balances (e.g., depreciation expense) and will not be listed.There is no "pre-disclosure trial balance."

Companies prepare various types of trial balances. Which trial balance lists all of a company's permanent accounts but not its temporary accounts?

The post-closing trial balance Solution:Companies prepare three trial balances: (i) trial balance (i.e., before recording adjusting entries), (ii) the adjusted trial balance (i.e., which is prepared after recording adjusting entries), and (iii) the post-closing trial balance (i.e., which is prepared after recording closing entries). The adjusted trial balance shows the balances of all accounts, including those adjusted at the end of the accounting period. The post-closing trial balance lists only permanent accounts (i.e., balance sheet accounts) because the temporary accounts (e.g., income statement accounts) will have been closed to zero in preparation for the next year.There is no "pre-disclosure trial balance."

Which of the following is not a typical example of a prepaid expense?

Wages Solution:Wages are not paid to employees until after employees perform work for the employer. In other words, wages are not prepaid. In contrast, companies pay for supplies, rent, and insurance before using or consuming them. Supplies are purchased before acquiring them and using them. Insurance is paid for before insurance coverage is received. Rent is paid at the beginning of the period.

On December 31, before any year-end adjustments, a corporation's prepaid insurance account had a balance of $2,900. It was determined that $1,300 of the prepaid insurance had expired. The year-end adjusting entry would include

a $1,300 debit to Insurance Expense. Solution:Increase insurance expense by $1,300 and decrease prepaid insurance by $1,300. Debit the Insurance Expense account to increase it, and credit the Prepaid Insurance account to decrease it.

A company borrowed money from a bank by signing a one-year note payable in the amount of $300,000 on April 30. The note requires the company to pay interest at an annual rate of 6%. The company records adjusting entries on December 31. The adjusting entry that the company should record for accrued interest on December 31 would include

a debit to Interest Expense for $12,000. Solution:Interest = Principal x Rate x Time = $300,000 x 6% x 8/12 = $12,000After one month, the accrued interest is $12,000.Interest rates are always annual interest rates unless specifically stated otherwise. This loan charges 6% annual interest per year.The debtor records an adjusting entry to record accrued interest.Debit: Interest Expense, $12,000Credit: Interest Payable, $12,000

A company borrowed money from a bank by signing a three-month note payable in the amount of $40,000 on December 1. The note requires the company to pay interest at an annual rate of 6%. The company records adjusting entries on December 31. The adjusting entry that the company should record for accrued interest on December 31 would include

a debit to Interest Expense for $200. Solution:Interest = Principal x Rate x Time = $40,000 x 6% x 1/12 = $200After one month, the accrued interest is $200.Interest rates are always annual interest rates unless specifically stated otherwise. This loan charges 6% annual interest per year.The debtor records an adjusting entry to record accrued interest.Debit: Interest Expense, $200Credit: Interest Payable, $200

A company borrowed money from a bank by signing a three-month note payable in the amount of $10,000 on December 1. The note requires the company to pay interest at an annual rate of 6%. The company records adjusting entries on December 31. The adjusting entry that the company should record for accrued interest on December 31 would include

a debit to Interest Expense for $50. Solution:Interest = Principal x Rate x Time = $10,000 x 6% x 1/12 = $50After one month, the accrued interest is $50.Interest rates are always annual interest rates unless specifically stated otherwise. This loan charges 6% annual interest per year.The debtor records an adjusting entry to record accrued interest.Debit: Interest Expense, $50Credit: Interest Payable, $50

An adjusting entry

always affects at least one balance sheet account and one income statement account. Solution:Accrual-basis accounting means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash is not exchanged in the same period. Accrual-basis accounting ensures that the revenue recognition principle and expense recognition principles are both followed. Adjusting entries ensure that the revenue recognition and expense recognition principles are followed. Adjusting entries are required before a company prepares financial statements. Every adjusting entry will affect the balance of at least one balance sheet ac-count and one income statement account. Accrual-basis accounting (and adjusting entries) are required by generally accepted accounting principles.

Under the cash basis of accounting, an amount received from a customer in advance of providing the services would be reported as a(n):

an increase to assets and an increase to revenue. Solution: Under the cash basis of accounting revenue is recognized when cash is received from customers and expenses are recognized when cash is paid to others who perform services or products to the company that incurs the expense. If a customer pays the company in advance of the company performing services for the customer the company recognizes revenue when cash is received even though it has not yet performed the services.

Cash received before services are performed may be recorded as a debit to a Cash account and a credit to a liability account is called

an unearned revenue. Solution:A company receiving cash from customers records the increase in cash as an increase in assets. The reason why customers paid the company cash before the company performs services is because the company promises to perform services for the customer in the future. This is an obligation and the company records the obligation as a liability called unearned revenue. Later, revenue will be recorded when the performance obligation is satisfied which occurs after cash was received whenever customers paid in advance

A company uses accrual-basis accounting. Shortly before the end of the current year, the company earned $1,000 by providing services to a customer but the customer does not pay the company until the following year. Nothing is recorded regarding these events, including year-end adjusting entries. This omission would cause the company's current year

assets to be understated. Solution:The firm should record a year-end adjusting entry for services earned:Debit: Accounts receivable for $1,000Credit: Revenue for $1,000Overlooking this adjusting-entry would cause accounts receivable (and assets) to be understated, and it would cause revenues, net income, retained earnings, and equity to be understated.

If a company fails to adjust for accrued revenues:

assets will be understated and revenues will be understated.

The balance in the prepaid rent account before recording year-end adjusting entries is $15,000. This amount represents three months of rent paid on December 1. The appropriate year-end adjusting entry required on December 31 is

debit Rent Expense for $5,000 and credit Prepaid Rent for $5,000. Solution:One month of 6 months of prepaid rent has expired by the end of December. The monthly rent expense is the total rent paid divided by the number of months = $15,000/3 months = $5,000 per month.The adjusting entry to record the expiration of one month's rent is as follows:Debit: Rent Expense for $5,000Credit: Prepaid Rent for $5,000

A company received $15,000 on December 1 from a tenant. The amount received represents a 6-month advance payment of rent paid by a tenant. The company records the transaction as an increase to its unearned rent revenue account. Prior to preparing financial statements at the end of December, the company should make the following adjusting entry:

debit Unearned Rent Revenue for $2,500 and credit Rent Revenue and $2,500. Solution:One month of 6 months of rent has been earned by the end of December. The monthly rent earned is the total rent divided by the number of months = $15,000/6 months = $2,500 per month.The adjusting entry to record one month's rent being earned:Debit: Unearned Rent for $4,000Credit: Rent Revenue for $4,000

The year-end trial balance for Garnet & Gold Corporation appears as follows: Garnet & Gold Corporation Trial Balance December 31 Debit Credit Cash$ 300 Accounts Receivable500 Prepaid Insurance60 Supplies140 Equipment4,000 Accumulated Depreciation, Equipment$ 800 Unearned Revenues300 Common Stock1,000 Retained Earnings1,400 Service Revenue3,000 Salaries and Wages Expense1,000 Rent Expense500 Totals: Debit $ 6,500 Credit $ 6,500 If the current year depreciation on the equipment were $200, the company should record an adjusting entry that

debits Depreciation Expense for $200 and credits Accumulated Depreciation for $200. Solution:The trial balance lists the company's accounts and their balances on a particular date before adjustng entries have been recorded. This company's trial balance shows that the Accumulated Equipment has an $800 balance. However, this balance does not include the effects of the current year's depreciation expense. The adjusting entry increases Accumulated Depreciation and increases Depreciation Expense by $200. The ending balance of Accumulated Depreciation will become $1,000. Debit the Depreciation Expense account by $200 and credit the Accumulated Depreciation account by $200.

The year-end trial balance for Garnet & Gold Corporation appears as follows: Garnet & Gold Corporation Trial Balance December 31 DebitCredit Cash$ 300 Accounts Receivable500 Prepaid Insurance60 Supplies140 Equipment4,000 Accumulated Depreciation, Equipment$ 800 Unearned Revenues300 Common Stock1,000 Retained Earnings1,400 Service Revenue3,000 Salaries and Wages Expense1,000 Rent Expense500 $ 6,500$ 6,500 If, at year-end, the unexpired insurance were $10, the company should record an adjusting entry that

debits Insurance Expense for $50 and credits Prepaid Insurance for $50. Solution:The trial balance lists the company's accounts and their balances on a particular date before adjusting entries have been recorded. This company's trial balance shows that the Prepaid Insurance account has a balance of $60. However, unexpired insurance is only $10; the Prepaid Insurance account is overstated and it needs to be adjusted. The adjusting entry reduces Prepaid Insurance and increases Insurance Expense by $50. This results in Prepaid Insurance having an ending balance of $10. Debit the Insurance Expense account by $50 and credit the Prepaid Insurance account by $50.

The year-end trial balance for Garnet & Gold Corporation appears as follows: Garnet & Gold Corporation Trial Balance December 31 DebitCredit Cash$ 300 Accounts Receivable500 Prepaid Insurance60 Supplies140 Equipment4,000 Accumulated Depreciation, Equipment$ 800 Unearned Revenues300 Common Stock1,000 Retained Earnings1,400 Service Revenue3,000 Salaries and Wages Expense1,000 Rent Expense500 $ 6,500$ 6,500 If, at year-end, supplies on hand were $40, the company should record an adjusting entry that

debits Supplies Expense for $100 and credits Supplies for $100. Solution:The trial balance lists the company's accounts and their balances on a particular date before adjusting entries have been recorded. This company's trial balance shows that the Supplies account has a balance of $140. However, supplies on hand are only $40; the Supplies account is overstated and it needs to be adjusted. The adjusting entry reduces Supplies and increases Supplies Expense by $100. This results in Supplies having an ending balance of $100. Debit the Supplies Expense account by $100 and credit the Supplies account by $100.

The year-end trial balance for Garnet & Gold Corporation appears as follows: Garnet & Gold CorporationTrial BalanceDecember 31 DebitCreditCash$ 300Accounts Receivable500Prepaid Insurance60Supplies140Equipment4,000Accumulated Depreciation, Equipment$ 800Unearned Revenues300Common Stock1,000Retained Earnings1,400Service Revenue3,000Salaries and Wages Expense1,000Rent Expense500 $ 6,500$ 6,500 If, at year-end, supplies on hand were $30, the company should record an adjusting entry that

debits Supplies Expense for $110 and credits Supplies for $110. Solution:The trial balance lists the company's accounts and their balances on a particular date before adjusting entries have been recorded. This company's trial balance shows that the Supplies account has a balance of $140. However, supplies on hand are only $30; the Supplies account is overstated and it needs to be adjusted. The adjusting entry reduces Supplies and increases Supplies Expense by $110 resulting in an ending balance of $30. Debit the Supplies Expense account by $110 and credit the Supplies account by $110.

Year-end adjusting entries for prepaid expenses

decrease assets and increase expenses. Solution:When a company pays before receiving goods or services, it records the decrease in cash and an increase in a different asset (e.g., supplies, prepaid insurance, prepaid rent). At the end of the accounting period, the company adjusts its prepaid expense accounts to reflect that the company has fully or partially consumed them through use or the passage of time (e.g., decrease prepaid insurance for the months of coverage used before the end of the accounting period). Also, the company adjusts its expenses upward by that same amount (e.g., increase insurance expense) to show it was incurred before the end of the period.

A corporation purchased a one-year insurance policy on March 1 of the current year for $48,000. The insurance policy will be in effect from March 1 through February 28 of the next year. The company recorded the payment as prepaid Insurance. The company neglects to record the year-end adjusting entry at the end of the current year. As a result, the company's current year

net income and assets will be overstated by $40,000.

Adjusting entries are recorded to ensure that

expenses are recognized in the period in which they are incurred. Solution:Adjusting entries are journalized and posted in order for revenues to be recorded in the period in which the performance obligations are satisfied and for expenses to be recognized in the period in which they are incurred. So, adjusting entries ensure that the revenue recognition and expense recognition principles are followed. Note that if firms reported only their lifetime operations when they cease to exist (rather than reporting results for fiscal periods (e.g., months, quarters, years) adjusting entries would not be required. Adjusting entries are not recorded to comply with budgets.

During the adjusting process two transactions were neglected or omitted. The first is for unearned rent revenue of which $540 was earned during the period, the second was for accrued interest payable of which $225 is owed for the period. As a result of these omissions

expenses are understated by $225. Solution:Omitting the year-end adjusting entry for unearned revenue and revenue fails to reduce unearned revenue and it fails to increase revenue. Liabilities are overstated by $540 and revenue is understated by $540.Omitting the year-end adjusting entry for accrued interest payable fails to increase interest payable and it fails to increase interest expense. Liabilities are understated by $225 and interest expense is understated by $225.The net effect of these two omissions include the following:Liabilities are overstated by $315 (i.e., 540 - 225 = 315).Revenue is understated by $540Expenses are understated by $225Net income is understated by $315Assets are not affected by these omissions.

During the adjusting process two transactions were neglected or omitted. The first is for unearned rent revenue of which $415 was earned during the period, the second was for accrued interest payable of which $275 is owed for the period. As a result of these omissions

expenses are understated by $275. Solution:Omitting the year-end adjusting entry for unearned revenue and revenue fails to reduce unearned revenue and it fails to increase revenue. Liabilities are overstated by $415 and revenue is understated by $415.Omitting the year-end adjusting entry for accrued interest payable fails to increase interest payable and it fails to increase interest expense. Liabilities are understated by $275 and interest expense is understated by $275.The net effect of these two omissions include the following:Liabilities are overstated by $140 (i.e., 415 - 275 = 140).Revenue is understated by $415Expenses are understated by $275Net income is understated by $140Assets are not affected by these omissions.

A certain company debited prepaid insurance when it paid for a one-year insurance policy. If the company does not record any year-end adjusting entries then

expenses would be understated. Solution: The adjusting entry for prepaid insurance would include a debit to the Insurance Expense account and a credit to the Prepaid Insurance account. This adjusting entry would increase expense which would decrease net income, and decreasing net income decreases retained earnings (and stockholders' equity). This adjusting entry also decreases assets (i.e., decrease Prepaid insurance). This questions asks for the effect of omitting (or forgetting) this adjusting entry. Omitting the adjusting entry to record prepaid expense causes several errors, including overstating assets, understating expenses, overstating net income, overstating retained earnings, and overstating stockholders' equity. Liabilities are not affected.

Revenues for services performed but not yet collected in cash or recorded are accrued revenues. Adjusting entries for accrued revenues

increase assets and increase revenues Solution: A year-end adjusting entry for accrued revenues increases revenues and it increases assets (i.e., it increases accounts receivable).

An adjusted trial balance

is prepared to prove the equality of the total debit balances and total credit balances of ledger accounts after all of the adjusting entries have been recorded.

During the adjusting process two transactions were neglected or omitted. The first is for unearned rent revenue of which $475 was earned during the period, the second was for accrued interest payable of which $315 is owed for the period. As a result of these omissions

liabilities are overstated by $160. Solution:Omitting the year-end adjusting entry for unearned revenue and revenue fails to reduce unearned revenue and it fails to increase revenue. Liabilities are overstated by $475 and revenue is understated by $475.Omitting the year-end adjusting entry for accrued interest payable fails to increase interest payable and it fails to increase interest expense. Liabilities are understated by $315 and interest expense is understated by $315.The net effect of these two omissions include the following:Liabilities are overstated by $160 (i.e., 475 - 315 = 160).Revenue is understated by $475Expenses are understated by $315Net income is understated by $160Assets are not affected by these omissions.

A company uses accrual-basis accounting. On December 20, the company received $1,000 from a customer for services expected to be completed within 30 days. On December 20, the company recorded $1,000 of cash and unearned service revenue. The company does provide the services before the end of the current year, but it omits the year-end adjusting entry. This omission would cause the company's current year

liabilities to be overstated. Solution:The firm should record a year-end adjusting entry for services earned:Debit: Unearned revenues for $1,000Credit: Revenue for $1,000Overlooking this adjusting-entry would cause unearned revenue (and liabilities) to be overstated and it would cause revenues (net income, retained earnings and equity would also be overstated) to be understated.

If a company uses accrual basis accounting, unearned revenues are

liabilities until the earnings process is complete. Solution:If a company uses accrual accounting, it records unearned revenues as liabilities until the earnings process is complete, and it record revenue later when the company earns the revenue.

Payments from customers received before performing services for the customers are recorded as

liabilities. Solution:A company receiving cash from customers records the increase in cash as an increase in assets. The reason why customers paid the company cash before the company performs services is because the company promises to perform services for the customer in the future. This is an obligation and the company records the obligation as a liability. Revenues will be recorded when the performance obligation is satisfied which occurs after cash was received whenever customers paid in advance.

A company uses accrual-basis accounting. Shortly before the end of the current year, the company earned $1,000 by providing services to a customer but the customer does not pay the company until the following year. Nothing is recorded regarding these events, including year-end adjusting entries. This omission would cause the company's current year

net income to be understated. Solution:The firm should record a year-end adjusting entry for services earned:Debit: Accounts receivable for $1,000Credit: Revenue for $1,000Overlooking this adjusting-entry would cause accounts receivable (and assets) to be understated, and it would cause revenues, net income, retained earnings and equity to be understated.

A company uses accrual-basis accounting. On December 20, the company received $1,000 from a customer for services expected to be completed within 30 days. On December 20, the company recorded $1,000 of cash and unearned service revenue. The company does provide the services before the end of the current year, but it omits the year-end adjusting entry. This omission would cause the company's current year

net income to be understated. Solution:The firm should record a year-end adjusting entry for services earned:Debit: Unearned revenues for $1,000Credit: Revenue for $1,000Overlooking this adjusting-entry would cause unearned revenue (and liabilities) to be overstated and it would cause revenues (net income, retained earnings and equity would also be overstated) to be understated.

If the year-end adjusting entry to record salaries owed to employees were omitted then

retained earnings would be overstated. liabilities would be understated. Solution:The adjusting entry to record salaries owed at year-end would include a debit to the Salaries and Wages Expense account and a credit to the Salaries and Wages Payable account. This adjusting entry would increase salaries expense. This adjusting entry (if recorded) increases the company's expenses which decreases its net income, and decreasing net income decreases retained earnings (and stockholders' equity). This adjusting entry also increases a payable account which is a liability so it increases liabilities. This questions asks for the effect of omitting (or forgetting) this adjusting entry. Omitting the adjusting entry to record salaries causes several errors, including understating expenses, overstating net income, overstating retained earnings, overstating stockholders' equity, and understating liabilities.

In Year 1, Costello Company performed work for a customer and billed the customer $10,000. In Year 2, the customer pays Costello Company for the services it rendered in Year 1. In Year 1, the company incurred and paid $3,000 of wage expense. If Costello Company uses the accrual-basis of accounting, then it will report

revenue of $10,000 and expense of $3,000 in Year 1. Solution:The accrual-basis of accounting recognizes revenues when the performance obligation is satisfied regardless of when the customer pays and it records expenses when incurred regardless of when they are paid. The company performed the services in Year 1 so the company should recognize the revenue in Year 1 even though the customer did not pay the company until Year 2. The company incurred the expenses in Year 1 so the company should recognize the expenses in Year 1 regardless of when the company paid the expenses.

In Year 1, Costello Company performed work for a customer and billed the customer $10,000. In Year 2, the customer pays Costello Company for the services it rendered in Year 1. In Year 1, the company incurred $3,000 of wage expense, but it did not pay the employees until Year 2. If Costello Company uses the cash-basis of accounting, then it will report

revenue of $10,000 and expense of $3,000 in Year 2. Solution:The cash-basis of accounting recognizes revenues in the year cash is collected from customers regardless of when the performance obligation is satisfied and it recognizes expenses in the year they are paid regardless of when they are incurred. The company collected cash from the customer in Year 2 so it recognizes the revenue in Year 2. It paid the employees the wage in Year 2 so it recognizes the expense in Year 2.

In Year 1, Costello Company performed work for a customer and billed the customer $10,000. In Year 2, the customer pays Costello Company for the services it rendered in Year 1. In Year 1, the company incurred and paid $3,000 of wage expense. If Costello Company uses the cash-basis of accounting, then it will report

revenue of $10,000 in in Year 2 and expense of $3,000 in Year 1. Solution:The cash-basis of accounting recognizes revenues in the year cash is collected from customers regardless of when the performance obligation is satisfied and it recognizes expenses in the year they are paid regardless of when they are incurred. The company collected cash from the customer in Year 2 so it recognizes the revenue in Year 2. It paid the employees the wage in Year 1 so it recognizes the expense in Year 1.

In Year 1, Costello Company performed work for a customer and billed the customer $12,000. In Year 2, the customer pays Costello Company for the services it rendered in Year 1. In Year 1, the company incurred and paid $4,000 of wage expense. If Costello Company uses the cash-basis of accounting, then it will report

revenue of $12,000 in Year 2 and expense of $4,000 in Year 1. Solution:The cash-basis of accounting recognizes revenues in the year cash is collected from customers regardless of when the performance obligation is satisfied and it recognizes expenses in the year they are paid regardless of when they are incurred. The company collected cash from the customer in Year 2 so it recognizes the revenue in Year 2. It paid the employees the wage in Year 1 so it recognizes the expense in Year 1.

In Year 1, Costello Company performed work for a customer and billed the customer $14,000. In Year 2, the customer pays Costello Company for the services it rendered in Year 1. In Year 1, the company incurred $6,000 of wage expense, but it did not pay the employees until Year 2. If Costello Company uses the cash-basis of accounting, then it will report

revenue of $14,000 and expense of $6,000 in Year 2. Solution:The cash-basis of accounting recognizes revenues in the year cash is collected from customers regardless of when the performance obligation is satisfied and it recognizes expenses in the year they are paid regardless of when they are incurred. The company collected cash from the customer in Year 2 so it recognizes the revenue in Year 2. It paid the employees the wage in Year 2 so it recognizes the expense in Year 2.

A company uses accrual-basis accounting. Shortly before the end of the current year, the company earned $1,000 by providing services to a customer but the customer does not pay the company until the following year. Nothing is recorded regarding these events, including year-end adjusting entries. This omission would cause the company's current year

stockholders' equity to be understated. Solution:The firm should record a year-end adjusting entry for services earned:Debit: Accounts receivable for $1,000Credit: Revenue for $1,000Overlooking this adjusting-entry would cause accounts receivable (and assets) to be understated, and it would cause revenues, net income, retained earnings, and equity to be understated.

On December 1, a corporation reported a $200 balance in its supplies accounts. During December, the company purchased additional supplies for $950 and it also consumed $700 of its supplies. If no adjusting entry is made for supplies

stockholders' equity will be overstated by $700. Solution:Ending supplies = beginning supplies + additional supplies purchased minus supplies consumedEnding supplies = 200 + 950 - 700 = 450.The year-end adjusting entry records the supplies consumed as a debit to Supplies Expense for $700 and a decrease in Supplies by $700. Forgetting to record that journal entry understates ex-penses by $700 which overstates net income, retained earnings and stockholders' equity by $700, and overstates assets (i.e., supplies) by $700.

The book value of equipment owned by a business and used in its operations is equal to

the asset's cost minus its accumulated depreciation. Solution: The book value of an asset, such as equipment, equals the asset's cost minus accumulated

When accrual-basis accounting is used, expenses are recognized when

they contribute to the production of revenue. Solution:Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called accrual basis accounting. Expenses are incurred when they contribute to the production of revenue. For example, wage expense is incurred when a company's employees perform services for the company.

When a business that provides services to customers uses accrual-basis accounting , revenue is recognized

when the service is performed. Solution: Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called accrual basis accounting. Revenues are earned when the performance obligation is satisfied. For example, revenue is earned when a company provides services to a customer.