MGMT200 Ch.3

Long-term assets-adjusting entries

$60000 cash paid to purchase equipment Dec. 1 (assume it will last 5 yrs/60 months). Dec. 31 $59000 remaining equipment cost to be allocated. Dec. 31 Depreciation expense Dr. 1000 Accumulated depreciation Cr. 1000 (Record expense, but don't reduce asset directly, accumulate reductions of asset as accumulated depreciation-allocation of a long term asset)

During the month of Jan., Expert Law Services, Inc. provided legal services of $10000 to a client that were not billed. What is the required adjusting entry by the law firm at Jan. 31? A. Dr. Accounts receivable 10000 Cr. Legal service revenue 10000 B. Dr. Legal service revenue 10000 Cr. Accounts receivable 10000 C. Dr. Unearned revenue 10000 Cr. Legal service revenue 10000 D. Dr. Legal service revenue 10000 Cr. Cash 10000

A. Dr. Accounts receivable 10000 Cr. Legal service revenue 10000

Paddington Corporation determined that services were provided to a customer but not billed. What is Paddington's adjusting entry? A. Dr.- Accounts receivable, Cr.-service revenue B. Dr.-Cash, Cr.-Service revenue C. Dr.-Accounts receivable, Cr.-unearned revenue D. Dr.-service revenue, Cr.-accounts receivable

A. Dr.- Accounts receivable, Cr.-service revenue

The following events pertain to Big Sky Ski Resort Corporation. Feb. 1 Big Sky ordered snack bar food of $20000 on account Feb. 5 $10000 of the food was shipped to Big Sky. Feb. 7 Food shipped on Feb. 5 was received at Big Sky Feb. 8 Big Sky used the food received on Feb. 7 for a 1-time party event Feb. 25 Big Sky paid $10000 cash for the food received Feb. 28 The remaining food was delivered to Big Sky Using cash-basis accounting, on which date should Big Sky Ski Resort record food expense? A. Feb. 25 B. Feb. 8 C. Feb. 7 D. Feb. 5 E. Feb. 1

A. Feb. 25

Assume a business bills a client $15000 on June 30, 2017 for services rendered during June. The business collects $8500 of the billing s during July and the remainder in Aug. Under the accrual basis of accounting, when would the business record the revenue of the fees? A. June $15000, July 0, Aug. 0 B. June 0, July $6500, Aug. 8500 C. June $8500, July $6500, Aug. 0 D. June 0, July $8500, Aug. $6500

A. June $15000, July 0, Aug. 0 (Revenues recorded when the services are provided)

Which account is least likely to be debited when revenue is recorded? A. accounts payable B. accounts receivable C. cash D. deferred revenue

A. accounts payable

Which of the following appears on a post-closing trial balance? A. accounts receivable, accrued wages and retained earnings B. cash, salaries, payable and service revenue C. equipment, taxes payable, rental expense D. cash, prepaid deposits and sales revenue

A. accounts receivable, accrued wages and retained earnings

If Bridgetown Corp. records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect total liabilities for the current period? A. total liabilities will be too low B. total liabilities will be too high C. total liabilities will be correct D. not possible to determine

A. total liabilities will be too low

Determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting. Incur utilities cost in the current month but don't pay, $600

Accrual-basis expense $600

Determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting. Pay workers' salaries for the current month $700

Accrual-basis expense and cash-basis expense $700

Accumulated depreciation

Allocated to expense for future periods

Classified balance sheet

Assets: current, investments, ppe, intangible assets=liabilities (current and long-term) + stockholders' equity (contributed capital and retained earnings). Check to see if have enough assets to cover their liabilities for the year

An advantage of a classified balance sheet is that it is easy to see: A. If the company is likely to be profitable in future periods. B. If current assets are large enough to pay current liabilities. C. If the company is profitable in the current period. D. If dividends have been paid to stockholders.

B. If current assets are large enough to pay current liabilities. (determine liquidity of a business)

Racquet Sports, Inc. orders tennis balls in Feb. Those tennis balls are received and used in Mar. for a beginner tennis camp. The tennis balls are paid for in Apr. In which month should Racquet Sports record expense for the tennis balls? A. Feb. B. Mar. C. Apr.

B. Mar. (record expense when used)

A customer purchased a bed and dresser on Aug. 25 on account from a furniture store. The furniture was delivered on Sep. 6. The customer paid for the furniture on Oct. 10. When should the furniture store record the revenue for this transaction according to the revenue recognition principle? A. Aug. B. Sep. C. Oct. D. Evenly in each of the 3 months E. 1/3 in Aug. and 2/3 in Sep

B. Sep. (Record on delivery date 9/6)

Receiving a repair bill for costs in the current period but delaying payment until the following period is an example of a(n): A. prepaid expense B. accrued expense C. accrued revenue D. deferred revenue

B. accrued expense

Which of the following is recorded with an adjusting entry associated with a prepaid expense? A. Debit a liability B. credit an asset C. credit an expense D. debit an asset

B. credit an asset (adjusting entry always reduces an asset (credit) and increases expense (debit))

Which of the following is a possible adjusting journal entry? A. Debit cash, credit wages payable B. debit rent expense, credit rent payable C. debit service revenue, credit cash D. debit utilities expense, credit retained earnings

B. debit rent expense, credit rent payable

When cash has been paid or received but expense or revenue has not been recognized this represents a (an) A. accrual B. deferral

B. deferral

Accrued Expenses/Salaries

By end of the year, $300 in salaries have been earned by employees but not paid. Owe $300 salaries on Dec. 31. Jan. 4 $700 cash paid for salaries Jan.4 (employees earned another $400 Dec. 31 salaries expense Dr. 300 salaries payable Cr. 300

Accrued expenses/interest

By the end of the year, 1 month of interest has been charged for borrowing $10000 at 12% interest (10000x12%x1/12=$100). When borrow money, pay interest at end of loan when loan is due. Accrued $100 in an entire period, therefore, next period expense will only be $1100. Interest expense Dr. 100 Interest payable Cr. 100

Accrued Revenues/Services

By the end of the year, services of $700 have been provided to customers but have not yet been billed Dec. 31 Accounts receivable debit $700 Service revenue Cr. $700

On July 1, 2018, a 2yr insurance policy was purchased for $30000 with coverage to begin immediately. What was the amount of insurance expense for the year ended Dec. 31, 2018? A. $2500 B. $5000 C. $7500 D. $15000 E. $30000

C. $7500

Kensal Green, Inc. pays its sales employees $300 per day for a 5-day work week that runs from Mon. to Fri. If Dec. 31 is a Wed. what is the amount of the salaries adjustment at Dec. 31, assuming that Friday is payday? A. $300 B. $600 C. $900 D. $1200

C. $900 (recorded as salary expense for the 3 days ended Dec. 31)

In Apr. Wilderness Camp, Inc. hires 10 counselors for a summer camp to be held in June. Those employees work during June and are paid all of their wages in July. In which month should the camp record counselor wage expense? A. Apr. B. May C. June D. July

C. June

Providing goods or services to customers on account is an example of a(n): A. accrued expense B. deferred revenue C. accrued revenue D. prepaid expense

C. accrued revenue

Adjusting entries: A. often include the cash account B. usually are recorded at the beginning of the accounting period C. always involve at least one income statement account and 1 balance sheet account D. adjust the balance of revenue and expense accounts to 0

C. always involve at least one income statement account and 1 balance sheet account

In 2018, San Bruno Corp. reported sales of $100,000 and expenses of $75000. The company also paid a dividend of $10000 in 2018. At Dec. 31, 2018, San Bruno prepared closing entries. The net effect of the closing entries on retained earnings was a(n) A. an increase of $25000 B. an increase of $85000 C. an increase of $15000 D. a decrease of $10000

C. an increase of $15000

Which of the following would be recorded as an expense under cash-basis accounting? A. company purchases equipment by borrowing from the bank B. company uses utilities in the current period but does not pay cash C. company purchases office supplies with cash and doesn't use the supplies D. company provides services to customers for cash

C. company purchases office supplies with cash and doesn't use the supplies

A concert promoter received $50,000 in cash deposits from students in Feb. for a concert to be held in Mar. Which of the following statements is true? A. promoter records revenue in Feb. B. promoter records the cash collections n Mar. C. promoter records deferred revenue in Feb. D. promoter records nothing in Feb.

C. promoter records deferred revenue in Feb. (increase cash and deferred revenue)

A fitness club receives $540 from a customer for 6 physical training classes. The training classes will be performed later. After providing 4 training classes to the customer, what should the fitness club record on the income statement using the accrual method of accounting? A. service revenue of $540 B. unearned revenue of $360 C. service revenue of $360 D. cash of $180

C. service revenue of $360 (fees for each session $90, 4 sessions completed=$360 service revenue earned)

Adjusting Entries-Accruals

Cash paid or received after adjustment. Recognizing unrecorded expenses. End of Jan. increase liability and increase expense. Recognizing unrecorded earned revenues. Ex: consultant provides services. Feb. 1 report, adjusting entry, need to provide revenue, increase assets accounts receivable and increase revenue

Adjusting Entries- Deferrals

Cash paid or received before adjustment. Allocating recorded costs between 2 or more periods. Reduce asset and convert debit to expense, use supplies=have expense. Ex: prepaid rent-paid for something in advance and used cash, when make payment, record asset for prepaid rent because it will benefit future period convert it to an expense after a few periods. Allocating recorded unearned revenues between 2 or more periods. Reduce liability because delivered camp/performed service and record revenue.

Determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting. Pay for for rent 1 year in advance, $3600

Cash-basis expense $3600

Determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting. Purchase office supplies for cash $540

Cash-basis expense $540

Determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting. Pay workers' salaries for the previous month $850

Cash-basis expense $850

Determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting. Receive cash from customers who were previously billed, $1700

Cash-basis revenue $1700

Deferred revenue

Company receives cash in advance from customers before provide service=increase in cash and record liability because obligation to customer. When obligation met, revenue can be recorded. Adjusting entry Dr. Liability account (normal balance liability credit, but decreasing liability) Cr. Revenue account

Deferrals/Prepaid Expenses

Costs of assets acquired in 1 period that will be recorded as an expense in a future period. Costs are initially recorded as assets because they provide future benefits. These costs are expense in future periods as assets are used. Convert assets normal balance as debit to credit Ex: Dr. Expense account Cr. Asset account

Of the following 5 accounts, which ones are permanent accounts: 1. cash 2. deferred revenue 3. prepaid expense 4. common stock 5. retained earnings A. 1, 4, 5 B. 1, 3, 4 C. 1, 3, 5 D. all of the accounts

D. all of the accounts

Deferred revenues refer to: A. revenue being recorded at the same time the cash is collected from the customer B. revenue being recorded prior to cash collection from the customer C. cash being collected from the customer after the revenue is recorded D. customers paying cash in advance of the good or service to be provided

D. customers paying cash in advance of the good or service to be provided

If the supplies account indicated a balance of $2,250 before adjustment on May 31 and supplies on hand at May 31 totaled $950, the adjustment would be: A. increase supplies $950; decrease supplies expense, $950 B. increase supplies, $1300; decrease supplies expense, $1300 C. increase supplies expense $950; decrease supplies, $950 D. increase supplies expense $1300; decrease supplies, $1300

D. increase supplies expense $1300; decrease supplies, $1300 (supplies available during the period $2250 less supplies on hand $950=supplies used $1300)

Assets are listed on the balance sheet in the order of their A. purchase date B. adjustments C. balance D. liquidity

D. liquidity

Which of the following is an example of a prepaid/deferral adjusting entry? A. recording interest expense incurred on a bank borrowings that are payable next year. B. recording wages for employees not paid. C. recording revenue that has been earned but not yet received D. recording the usage of supplies inventory during the period

D. recording the usage of supplies inventory during the period

On Apr. 1, 2018, Cotswolds, Inc. paid $90000 to its landlord for rent covering 18 months from July 1, 2018 through Dec. 31, 2019. What adjusting entry should Cotswolds record at Dec. 31, 2018? A. Prepaid rent 90000, credit rent expense 90000 B. Rent expense 30000, credit cash 30000 C. rent expense 45000, credit prepaid rent 45000 D. rent expense 30000, credit prepaid rent 30000

D. rent expense 30000, credit prepaid rent 30000

Which of the following transactions results in an increase in revenues? A. receipt of cash from bank loan B. sale of land at cost for cash C. collection of cash on account D. sale of a product on credit

D. sale of a product on credit

A classified balance sheet A. provides more detail of current assets and liabilities B. shows only current assets and current liabilities C. shows changes in assets, liabilities, revenues and expenses D. shows subtotals for current assets and current liabilities

D. shows subtotals for current assets and current liabilities

Adjusting accounts is the process of A. zeroing out account balances to prepare for the next period B. reducing revenues by deducting expenses to measure income C. posting transactions as they occur during the period D. updating accounts at the end of an accounting period

D. updating accounts at the end of an accounting period

Trans American Airlines, Inc. flies throughout North America employing a strategy of short flights using smaller aircraft to increase efficiencies and utilization. The Company's policy is to provide a cash refund to customers for unused aircraft tickets. When should Trans American recognize revenue for ticket sales? A. when the passenger pays for the ticket B. when the airline sells the ticket C. when boarding passes are taken at the plane door D. when the plane arrives at its destination

D. when the plane arrives at its destination (at completion of service)

The Accounting Cycle: End of the Period

End of the year/accounting period do adjusting entries, prepare financial statements, record and post closing entries

Matching principle

Expenses are reported in the same period as the revenues they help to generate

Revenue should be recorded when the related cash has been collected, not when it has been earned. T/F

F

When payment is received for services not yet rendered, no entry is recorded until that service has been rendered. T/F

F (record cash received and a liability (deferred revenue))

Expense Recognition Accrual-Basis

In the period costs are used to help produce revenues. Record expense when record revenue

Determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting. Receive cash from customers at the time of service, $3700

Increase accrual-basis revenue $3700 and cash-basis $3700

Post-closing trial balance

Lists all account balances after updating for closing entries. Helps verify that closing entries were prepared and posted correctly and that the accounts are now ready for the next period's transactions

Adjusted trial balance

Lists all account balances after updating them for adjusting entries. Prepared after posting the adjusting entries to the general ledger. Makes sure that all adjusted entries were done correctly

Accrual

Make payment cash after recorded expense

Determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting. Pay dividends to stockholders $500

No effect

Determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting. Repay a long-term note to the bank $3000

No effect

Determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting. Issue common stock for cash, $6000

No effect on Accrual-Basis and Cash-Basis

Prepaid expenses

Pay cash to purchase an asset in the current period that will be recorded as an expense in a future period(s). Type of deferral

Deferred Revenues

Receive cash in the current period that will be recorded as a revenue in a future period (s). Ex: airlines, Netflix. Type of deferral

Deferral

Received cash/payed cash before record revenue

Accrued Revenues

Record a revenue in the current period that will be collected in cash in a future period(s). Mainly for service companies. When a company provides products or services to customers but hasn't yet received cash, it records the revenue and an asset for the amount expected to be received Adjusting entry Dr. accounts receivable Cr. revenue account

Accrued Expenses

Record an expense in the current period that will be paid in cash in a future period (s) Recorded when a company has a cost that is used to help produce revenue but hasn't yet paid cash for that cost. Cost is recorded as an expense, and the amount owed is recorded as a liability Adjusting entry Dr. Expense account Cr. Liability account

Adjusting entries

Record at the end of an accounting period, need to update general ledger accounts. For transactions that have occurred but have not been recorded in the accounting system. Do not involve an exchange transaction with another entity. Periodicity, revenue measurement, expense measurement. Made after accounting period ends

Revenue Recognition Principle

Revenues are recorded in the period in which the goods or services are provided to customers, not necessarily only when you receive the cash

Caribbean Airlines collected cash on Feb. 4 from the sale of a ticket to a customer on Jan. 30. The flight took place on Apr. 5. According to the revenue recognition principle, in which month should the airline recognize revenue?

Sale of ticket has no entry, in Jan. In Feb., collect cash=increase assets and increase deferred revenue. Liability exists till service performed. Apr. decrease deferred revenue and increase revenue (record revenue)

Adjusting entries are useful in apportioning costs among 2 or more accounting periods. T/F

T

An accrual represents cash that has not been paid or received but expense has been incurred or revenue recognized. T/F

T

Closing entries

To transfer the balances of all temp. accounts to the balance of retained earnings. To reduce the balances of these temp. accounts to 0 to prep. them for the next period (all other accounts are permanent) take accumulated revenues and expenses and move them to retained earnings. Need to debit revenue and credit retained earnings. Credit expenses and dividends and debit retained earnings.

Expense Recognition Cash-Basis

When cash is paid, not accepted by GAAP, looked at by internal revenue service

Revenue Recognition Cash-Basis

When cash is received, not accepted by GAAP

Revenue Recognition Accrual-Basis

When goods and services are provided to customers

When are revenues and expenses recorded?

When you ship or deliver a product or when you perform a service