Financial Accounting Tools for Decision Making Chapter 4

Leyland Realty Company received a check for $18,000 on July 1, which represents a 6-month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $18,000. Financial statements will be prepared on July 31. Leyland Realty should make the following adjusting entry on July 31: A) debit Unearned Rent Revenue, $3,000; credit Rent Revenue, $3,000. B) debit Rent Revenue, $3,000; credit Unearned Rent Revenue, $3,000. C) debit Unearned Rent Revenue, $18,000; credit Rent Revenue, $18,000. D) debit Cash, $18,000; credit Rent Revenue, $18,000.

A) debit Unearned Rent Revenue, $3,000; credit Rent Revenue, $3,000.

19. Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Revenue recognized $19,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1800 A) $11,750 B) $14,000 C) $9,500 D) $12,200

A) $11,750

At December 31, 2017, before any year-end adjustments, Dallis Company's Prepaid Insurance account had a balance of $5,800. It was determined that $2,600 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be: A) $2,600. B) $3,200. C) $5,800. D) $2,800.

A) $2,600.

Which of the following describes an accrued expense? A) Incurred but not yet paid or recorded. B) Paid and recorded in an asset account after they are used or consumed. C) Paid and recorded in an asset account before they are used or consumed. D) Incurred and already paid or recorded.

A) Incurred but not yet paid or recorded.

In a service-type business, revenue is recognized: A) at the end of the month. B) at the end of the year. C) when the service is performed. D) when cash is received.

A) at the end of the month.

Unearned revenues are: A) received and recorded as liabilities before they are recognized. B) recognized and recorded as liabilities before they are received. C) recognized but not yet received or recorded. D) recognized and already received and recorded.

A) received and recorded as liabilities before they are recognized.

Expenses are recognized when: A) they contribute to the production of revenue. B) they are paid. C) they are billed by the supplier. D) the invoice is received.

A) they contribute to the production of revenue.

A company spends $20 million dollars for an office building. Over what period should the cost be written off? A) When the $20 million is expended in cash. B) All in the first year. C) After $20 million in revenue is earned. D) None of these answer choices are correct.

B) All in the first year.

21. Why was Apple required to spread their iPhone revenues over a two year period? A) Because of its newness, their returns might exceed the normal level of returns. B) Because they were required to provide software updates over that two year period. C) Because that was the estimated life of the iPhone. D) Because they needed to defer revenue recognition since they had a swap program available for future models.

B) Because they were required to provide software updates over that two year period

If a business has received cash in advance of services performed and credits a liability account, the adjusting entry needed after the services are performed will be: A) debit Unearned Service Revenue and credit Cash. B) debit Unearned Service Revenue and credit Service Revenue. C) debit Unearned Service Revenue and credit Prepaid Expense. D) debit Unearned Service Revenue and credit Accounts Receivable.

B) debit Unearned Service Revenue and credit Service Revenue.

Adjusting entries are: A) not necessary if the accounting system is operating properly. B) usually required before financial statements are prepared. C) made whenever management desires to change an account balance. D) made to balance sheet accounts only.

B) usually required before financial statements are prepared

The following is selected information from L Corporation for the fiscal year ending October 31, 2017. Cash received from customers $300,000 Revenue recognized 440,000 Cash paid for expenses 170,000 Cash paid for computers on November 1, 2016 that will be used for 3 years 48,000 Expenses incurred including any depreciation 216,000 Proceeds from a bank loan, part of which was used to pay for the computers 100,000 Based on the accrual basis of accounting, what is L Corporation's net income for the year ending October 31, 2017? A) $254,000 B) $224,000 C) $208,000 D) $270,000

C) $208,000

Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting. Revenue recognized $19,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1800 A) $9,500 B) $14,000 C) $7,700 D) $9,950

C) $7,700

Otto's Tune-Up Shop follows the revenue recognition principle. Otto services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto receives the check in the mail on September 6. When should Otto show that the revenue was recognized? A) August 31 B) August 1 C) September 5 D) September 6

C) September 5

An adjusting entry: A) affects two balance sheet accounts. B) affects two income statement accounts. C) affects a balance sheet account and an income statement account. D) is always a compound entry.

C) affects a balance sheet account and an income statement account.

Depreciation is the process of: A) valuing an asset at its fair value. B) increasing the value of an asset over the periods in which it is used. C) allocating the cost of an asset to the periods in which it is used. D) writing down an asset to its real value each accounting period.

C) allocating the cost of an asset to the periods in which it is used

Under the cash basis of accounting: A) revenue is recognized when services are performed. B) expenses are matched with the revenue that is produced. C) cash must be received before revenue is recognized. D) a promise to pay is sufficient to recognize revenue.

C) cash must be received before revenue is recognized.

An adjusting entry can include a: A) debit to an asset and a credit to a liability. B) debit to a revenue and a credit to an asset. C) debit to a liability and a credit to a revenue. D) debit to an expense and a credit to a revenue.

C) debit to a liability and a credit to a revenue.

Under the accrual basis of accounting: A) cash must be received before revenue is recognized. B) net income is calculated by matching cash outflows against cash inflows. C) events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. D) the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

C) events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.

. La More Company had the following transactions during 2016: • Sales of $9,000 on account • Collected $4,000 for services to be performed in 2017 • Paid $3,750 cash in salaries for 2016 • Purchased airline tickets for $500 in December for a trip to take place in 2017 What is La More's 2016 net income using accrual accounting? A) $5,750 B) $9,750 C) $9,250 D) $5,250

D) $5,250

La More Company had the following transactions during 2016. • Sales of $9,000 on account • Collected $4,000 for services to be performed in 2017 • Paid $2,650 cash in salaries • Purchased airline tickets for $500 in December for a trip to take place in 2017 What is La More's 2016 net income using cash basis accounting? A) $10,350 B) $1,350 C) $9,850 D) $850

D) $850

Which one of the following is not a justification for adjusting entries? A) Adjusting entries are necessary to ensure that the revenue recognition principle is followed. B) Adjusting entries are necessary to ensure that the expense recognition principle is followed. C) Adjusting entries are necessary to enable financial statements to be in conformity with GAAP. D) Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

D) Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

7. The expense recognition principle matches: A) customers with businesses. B) expenses with revenues. C) assets with liabilities. D) creditors with businesses.

D) creditors with businesses.

The Vintage Laundry Company purchased $8,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $1,500 on hand. The adjusting entry that should be made by the company on June 30 is: A) debit Supplies Expense, $1,500; credit Supplies, $1,500. B) debit Supplies, $7,000; credit Supplies Expense, $7,000. C) debit Supplies, $1,500; credit Supplies Expense, $1,500. D) debit Supplies Expense, $7,000; credit Supplies, $7,000.

D) debit Supplies Expense, $7,000; credit Supplies, $7,000.

The primary difference between accrued revenues and unearned revenues is that accrued revenues have: A) not been recognized and accrued revenues have been. B) been paid and unearned revenues have not. C) been recorded and unearned revenues have not. D) not been recorded and unearned revenues have.

D) not been recorded and unearned revenues have.

An architecture firm earned $2,000 for architecture services provided with the fee to be paid in the future. No entry was made at the time the service was provided. If the fee has not been paid by the end of the accounting period and no adjusting entry is made, this would cause: A) revenues to be overstated. B) net income to be overstated. C) liabilities to be understated. D) revenues to be understated.

D) revenues to be understated.