Smartbook: Chapter 3 Adjusting Accounts for Financial Statements

The entries to close the revenue and expense accounts for Jefferson Company are shown below. The next closing entry in the closing process would include: (Check all that apply.) Account Debit Credit Service Fees 10,000 Income Summary 10,000 (Close revenue accounts) Income Summary 2,900 Wages Expense 2,900 (Close expense accounts) A debit to the Retained Earnings account for $7,100.

A credit to the Retained Earnings account for $7,100. A debit to Income Summary for $7,100.

Which of the statements below describe(s) a permanent account? (Check all that apply.)

A permanent account is reported on the balance sheet. A permanent account's balance is carried forward to the next accounting period.

What is a plant asset?

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

Identify the accounts below that would be classified as current liabilities on a classified balance sheet. (Check all that apply.)

Accounts payable Notes payable (due in three months) Unearned rent Taxes payable

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

Debit Unearned revenues for $400.

At year-end, ABC Company is beginning its closing process. Use the following account balances to demonstrate the closing of its revenue accounts. (Check all that apply.) Account Debit Credit Service Fees $15,000 Consulting Revenue $12,000 Supplies Expense $900 Rent Expense $600 Dividends $80

Debit to Consulting Revenue for $12,000. Debit Service Fees for $15,000. A credit to Income Summary for $27,000.

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

Debit to Salaries Payable for $500; Debit to Salaries Expense for $2,000

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

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

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

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

Current assets are:

cash and other resources that are expected to be sold, collected or used within one year

Which of the following could be a logical or realistic accounting period for a business that is creating financial statements? (Check all that apply.)

One-month period One-year period Six-month period

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

Revenues

Identify which of the following steps in the accounting cycle is optional.

Reversing journal entries

Which of the following accounts is considered a prepaid expense?

Supplies

Select the statement below that explains how to use the Income Summary account.

The Income Summary account is used during the closing process to facilitate the closing of revenue and expense accounts.

Show your understanding of the steps involved in adjusting entries by placing the following steps in the correct order of preparation.

1. Prepare and unadjusted trial balance 2. Journalize and post adjusting entries 3. Prepare and adjusted trial balance 4. Prepare financial statements

Describe an unclassified balance sheet.

An unclassified balance sheet is one whose items are broadly grouped into assets, liabilities, and equity.

At the end of the previous year, a customer owed Days Company $400. On February 1 of the current year, the customer paid $600 total, which included the $400 owed plus $200 owed through February 1st. The journal entry on January 31 is? (Check all that apply.)

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

Which of the lists below contains only permanent accounts?

Retained Earnings; Accounts Payable; Accumulated Depreciation

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

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

Which of the accounts below are considered accrued expenses?

Wages expense, Interest expense

A business has a $5,000 loan from a bank at 16% annual interest. Calculate the amount of interest to accrue if the loan has been outstanding for 90 days. Use a 360 day year.

$200

Some of the steps in the accounting cycle are listed below. Place them in the correct order of use.

..,. 1 Journalize transactions Into the journal. I ..,. 2 Journalize and post the adjusting entries . ..,. 3 Prepare the adjusted trial balance . ..,. 4 Prepare the f inancial statements . ..,. 5 Journalize and post closing entries . ..,. 6 Prepare post-closing trial balance.

The following categories are on a classified balance sheet. List them in the order that they would appear.

1 Current assets v 2 Long-term investments v 3 Plant assets v 4 Intangible assets v 5 Current liabilities v 6 Long-term liabilities

Place the steps in the adjusting process in the correct order in which they would be performed.

1. Determine what the current account balance is. 2. Determine what the correct account balance should be. 3. Record an adjusting entry.

A company had the following selected balances: Account Debit Credit Service Revenue $4,000 Rental Revenue $2,000 Wages Expense $500 Utilities Expense $100 Dividends $80 The first closing journal entry would include which of the following?

A credit to Income Summary for $6,000.

Define "current" as it applies to assets and liabilities on a classified balance sheet.

Current items are those expected to come due within one year or the company's operating cycle, whichever is longer.

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

Debit Salaries expense for $500.

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

It is reported on the balance sheet. Its original cost (minus any salvage value) is expensed over its useful life. It is a tangible long-term asset. It has a life within the business greater than one period.

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

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

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

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

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

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

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

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

Explain your understanding of the closing process by choosing the correct statements below. (Check all that apply.)

the closing process helps to summarize a period's revenues and expenses. the closing process resets the balances in temporary accounts to zero.

At year-end, ABC Company is completing its closing process. Use the following account balances to demonstrate the closing of the Dividends account. (Check all that apply.) Account Debit Credit Consulting Fees $5,000 Rental Revenue $2,000 Wages Expense $700 Rent Expense $1,900 Dividends $500

Credit Dividends for $500. Debit Retained Earnings $500.

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

Debit accounts receivable and credit services revenue

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

Insurance expense would be debited for $300.

What is an intangible asset? (Check all that apply.)

Intangible assets are long-term resources that benefit business operations, but lack physical form. The value of intangible assets comes from the privileges or rights granted to or held by the owner.

Which of the following defines long-term liabilities?

Long-term liabilities are debts of a business that are not due to be settled within one year.

Identify which of the accounts below would be classified as a plant asset account. (Check all that apply.)

Machinery Equipment Land currently being used Building

Which of the following statements describes the expense recognition (matching) principle? (Check all that apply.)

Matching of expenses with revenues is a major part of the adjusting process. Expenses should be matched in the same accounting period as the revenues that are earned as a result of those expenses.

Identify the accounts below that would be classified as long-term liabilities on a classified balance sheet. (Check all that apply.)

Mortgage payable Bonds payable (due in five years)

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

Revenues; expenses; debit

A company had the following selected balances: Account Debit Credit Service Revenue $8,000 Rental Revenue $2,000 Wages Expense $500 Utilities Expense $100 The third closing journal entry, after closing revenues and expenses, would include which of the following?

Debit Income Summary $9,400; and credit Retained Earnings $9,400.

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

Expense; credit; payable

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

Interests receivable; credit; interest revenue

Select the statement below that describes a post-closing trial balance.

It is a listing of all permanent accounts and their balances after closing.

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

It reports amounts owed to employees and is a liability.

Select the statements below that describe the purpose of a post-closing trial balance. (Check all that apply.)

One purpose is to verify that total debits equal total credit for permanent accounts. One purpose is to verify that all temporary accounts have zero balances.

Show your understanding of the steps involved in adjusting entries by placing the following steps in the correct order of preparation.

Prepare an unadjusted trial balance journalize and post adjusting entries prepare and adjusted trial balance prepare financial statements

Which of the following statements correctly define(s) a profit margin? (Check all that apply.)

Profit margin is also called return on sales. Profit margin is the ratio of a business's net income to its net sales. Profit margin is a useful measure of a business's operating results.

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

Revenues; expenses; incurred

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

Supplies expense would be debited for $600.

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

credit services revenue debit accounts receivable

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

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

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

Accounts receivable; credit; service revenue

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

Adjustments involve increasing both an expense and a liability account. They refer to costs that are incurred in a period, but are both unpaid and unrecorded. Examples of accrued expenses are wages expense and interest expense. They are reported on an income statement.

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

Debit Interest expense for $30.

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

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

Define plant assets by selecting the correct statements below. (Check all that apply.)

Plant assets are equipment and other assets that have a life greater than one year. Plant assets are difficult to convert to cash quickly. Plant assets are property, plant and equipment that are tangible.

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

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

Describe the general ledger after adjusting and closing entries have been posted. (Check all that apply.)

The Income Summary account will show three closing entries. The Dividends account will have a $0 balance after closing. The abbreviations "adj." and "clos." have been entered in the explanation columns of the ledger. All expense accounts will show a $0 balance after closing.

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

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

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

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

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

Adjustments are entered in a middle column titled Adjustments. As new accounts are added, they are added to the bottom of the worksheet below the other accounts. The adjustments column totals must balance before moving on to the Adjusted Trial Balance columns. Each adjustment is identified by a letter in parentheses that serves as a cross-reference to the debit and credit side of the adjustment.

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

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

What is needed in order to figure interest expense? (Check all that apply.)

Annual interest rate Principal amount owed Fraction of year since last payment

At year-end, Zagnut Company is beginning its closing process. Use the following account balances to demonstrate the closing of its expense accounts. (Check all that apply.) Account Debit Credit Service Fees $10,000 Consulting Revenue $2,000 Supplies Expense $700 Insurance Expense $900 Dividends $120

Credit Insurance Expense for $900. A debit to Income Summary for $1,600. Credit to Supplies Expense for $700.

A classified balance sheet has several categories for assets and liabilities including: (Check all that apply.)

Current assets. Noncurrent (long-term) liabilities. Long-term investments. Plant assets.

What are current liabilities? (Check all that apply.)

Current liabilities are reported in the order of those to be settled first. Current liabilities are obligations due to be paid within one year. Current liabilities are usually settled by paying out current assets such as cash.

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

Debit Accounts receivable for $600.

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

Debit Interest receivable for $600.

A company had the following selected balances: Account Debit Credit Service Revenue $4,000 Rental Revenue $2,000 Wages Expense $500 Utilities Expense $100 Dividends $80 Demonstrate the last closing journal entry to close the Dividends account by selecting the correct answer below.

Debit Retained Earnings $80; Credit Dividends $80

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

Expense; credit; payable

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

Expenses; revenues; adjusting

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

Financial statements are prepared more easily using the adjusted trial balance than with the general ledger. The ending Retained Earnings account balance on the balance sheet is transferred from the statement of retained earnings. The adjusted trial balance includes all accounts and balances appearing in financial statements. The income statement is the first financial statement prepared after preparing the adjusted trial balance.

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

Net income; net sales

What defines a long-term investment? (Check all that apply.)

Notes receivable and stock and bond investments are assets that are expected to be held for more than one year. Long-term investments are sometimes referred to as noncurrent investments.

Identify the accounts below that would be classified as a long-term investment. (Check all that apply.)

Notes receivable due in 2 years Investments in bonds Land held for future expansion

Identify which of the accounts below would be classified as a current asset. (Check all that apply.)

Office supplies Cash Accounts receivable Prepaid rent

Identify the accounts below that would be classified as intangible assets on a classified balance sheet. (Check all that apply.)

Patent Goodwill Franchise Copyrights Trademark

Define plant assets by selecting the correct statements below. (Check all that apply.)

Plant assets are difficult to convert to cash quickly. Plant assets are equipment and other assets that have a life greater than one year. Plant assets are property, plant and equipment that are tangible.

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

Prepaid Insurance Supplies Prepaid Rent

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

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

Describe the final step in the adjusting process.

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

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

Unearned revenue; Supplies; Prepaid rent

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

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

Which of the following lists contains only temporary accounts?

Wages expenses income summary dividends

The revenue recognition principle states that revenue:

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