Accounting 201 Chapter 4 Terms

When a customer pays for magazine subscriptions in advance, the journal entry involves a debit to which account for the publishing company?

Cash

When a prepaid expense expires with the passage of time, an asset account is debited and an expense account is credited to make the adjustment in the books.

False

Without an adjusting entry for accrued interest expense, net income and stockholders' equity are understated

False

Mahogany Inc. is a consulting firm. It reports its results on a cash-basis with a fiscal year ending June 30th. Mahogany performed services for customers from June 23rd to June 30th, 2016, amounting to $6,000. The customers paid Mahogany in full on July 12th. The cash-basis is not in accordance with ________, and Mahogany is in violation of the _______.

GAAP, revenue recognition principle

Failure to accrue revenues will result in an ________ of assets and an ________ of revenues.

Understatement, Understatement

Juanita has performed $750 of consultancy for a client but has not billed the client as of the end of the accounting period. The adjusting entry in Juanita's books will be

debit Accounts Receivable and credit Service Revenue.

A company purchased office supplies costing $3,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $900 still on hand. Which of the following is an adjusting entry that should be made by the company?

debit Supplies Expense $2,100; credit Supplies $2,100

Henna Hair Salon purchased supplies for $6,000 and debited Supplies for the full amount. At the end of the accounting period, $1,800 worth of supplies were still on hand. Identify the adjusting entry needed at the end of the period.

debit Supplies Expense $4,200; credit Supplies $4,200

If a customer has not yet paid for services performed before the statement date, the income statement and balance sheet should be adjusted by posting a ______ to Accounts Receivable and a _______ to Service Revenue.

debit, credit

An adjusting entry for unearned revenue will

decrease liabilities and increase revenues.

To determine the book value of an asset the cost of the asset is

reduced by accumulated depreciation.

Revenues that are recorded at the end of the period that have not already been received in cash involve a debit to ________ and a credit to _________.

Accounts Receivable; Service Revenue

An adjusting entry involving depreciation of equipment involves a credit to ________, a contra-asset account.

Accumulated Depreciation-Equipmen

Mozer Villa & Spa employs a seven-day workweek which begins on a Sunday and a December 31 year-end. Normal weekly wages amount to $76,000. If December 31 ends on a Tuesday, what is the appropriate journal entry on January 4, the next payday for Mozer Villa & Spa?

Debit Wages Expense $43,429 Debit Wages Payable $32,571 Credit Cash $76,000

In the current fiscal year, the company has obtained a new loan, and interest started accumulating immediately but has not yet been paid. Which of the following entries is correct when recording the loan, and when recording interest accrual?

Debit to Cash, credit to Notes Payable; debit to Interest Expense, credit to Interest Payable.

Happy Maids has an opening balance in its supplies account of $1,600 and purchases $1,800 of supplies during the year. A year-end physical count shows $1,200 in supplies inventory. Which is the appropriate journal entry at year end?

Dr Supplies Expense $2,200 Cr Supplies $2,200

Accrual Basis Accounting Accrued revenue

Expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period. Accrued revenue is an asset class for goods or services that have been sold or completed but the associated revenue that has not yet been billed to the customer. Accrued revenue - which may include income that is due in arrears - is treated as an asset on the balance sheet rather than a liability.

An adjustment for accrued revenues will lead to a decrease in assets and a decrease in revenues

False

Before an adjusting entry is made to record accrued revenue, the accounts of a business reflect an overstated asset and an overstated revenue.

False

Mary Richardo has performed $500 of CPA services for a client but has not billed the client as of the end of the accounting period. While making the adjusting entry, Mary will debit Service Revenue and credit Accounts Receivable.

False

Salaries and wages payments may be paid in the accounting period after the work is performed. The accrual of these amounts will increase ___________ and _________.

Salaries and Wages Expense; Salaries and Wages Payable

Which account title will accompany Supplies Expense in an adjusting entry?

Supplies (Asset)

An adjusting entry recording accrued salaries for a period indicates that Salaries and Wages Expense has been incurred but has not yet been paid or recorded.

True

Failure to make an adjusting entry at the end of a period to record an accrued revenue would cause an understatement of assets and an understatement of revenues.

True

On January 2nd, 2016, Hectic Adventures receives $45,000 from a customer to perform entertainment services for each of the next three years. Which is the appropriate journal entry at December 31st, 2016, (Hectic's fiscal year-end)? In the choices below, as per convention, debits are listed first followed by credits

Unearned Revenue $15,000 Service Revenue $15,000 One-third of the revenue is earned each year. Unearned revenue represents payment for services yet to be rendered

At the end of March, Paul's Painting hired five temporary employees to work on a project that began on April 5 and ended on April 28. Paul's received 100% of the total payment for the project on May 3. In this situation, both ________ accounting and GAAP require that Paul's recognize the employees' total salary expense in

accrual-basis; April. According to the matching principle, expenses should be recognized in the same period in which the related revenues are recognized. Here, Paul's finished the project in April, so the employees' salary expenses should be recognized in April as well. By recognizing these expenses in April rather than May, Paul's would not only be engaging in accrual-basis accounting, but also acting in accordance with GAAP

Lloyd's Landscaping Service purchased $3,500 worth of landscaping supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the supplies indicated only $1,000 on hand. What adjusting entry should be made on June 30?

debit Supplies Expense $2,500; credit Supplies $2,500

At December 31, 2017, before any year-end adjustments, Janus Company's Prepaid Insurance account had a balance of $2,800. It was determined that $1,200 of the Prepaid Insurance had expired. Which of the following is the correct adjusted balance for Prepaid Insurance at December 31, 2017?

$1,600

Which of the following statements is true regarding an adjusting entry for unearned revenue?

A liability and a revenue account are modified.

If a company fails to adjust a prepaid rent account for rent that has expired, what effect will this have on that month's financial statements?

Assets will be overstated and net income and stockholders' equity will be overstated.

Azure Industries borrows $12,000 at 7% annual interest for six months on October 1st, 2016. Which is the appropriate entry to accrue interest if Azure employs a December 31st, 2016, fiscal year? In the choices below, as per convention, debits are listed first followed by credits.

Interest Expense $210 Interest Payable $210

Some revenues are not recorded until the end of the period because they accrue with the passage of time. _________ is an example of this type of revenue.

Interest Revenue

At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. What will result from this error?

Liabilities at the end of the year will be understated.

Supplies used during a period is computed by taking the difference between the balance of the Supplies account and the cost of supplies on hand.

True

Mozer Villa & Spa employs a seven-day workweek (Sunday through Saturday) and a December 31 year-end. Normal weekly wages amount to $76,000. If December 31 is on a Thursday, what is the appropriate journal entry at fiscal year-end? In the choices below, as per convention, debits are listed first followed by credits.

Wages Expense $54,286 Wages Payable $54,286

Companies must pay insurance ________.

in advance, often for more than one year.

An adjustment for accrued revenues will lead to a(n)

increase in assets and an increase in revenues.

Interest Revenue is an example of

revenue that is not recorded until the end of the period because it accrues with the passage of time.

Supplies used during a period are computed by

taking the difference between the balance of the Supplies account and the cost of supplies on hand.

An understatement of assets and revenues would result if ________.

the income statement and balance sheet fail to account for accrued revenues.

On December 31, 2017, before any year-end adjustments, Canterbury Shoe Repair's Prepaid Insurance account had a balance of $3,500. It was determined that $2,200 of the Prepaid Insurance had expired. The adjusted balance for Prepaid Insurance at December 31, 2017, will be

$1300

BJ Corporation is a cash-basis business. BJ signed a six-month, 12% note payable of $5,000 on October 1st, 2016. By recording the interest expense related to the note only when it is paid on April 1st, 2017, BJ will understate expenses by ________ on its year-end financial statements on December 31st, 2016.

$150 The interest accrued from the note for the last three months of the fiscal year is $150 ($5,000 x .12 x 3/12).

A company that uses accrual-basis accounting purchased equipment on July 1 of the current year for $20,000. The company expects to use the equipment consistently for four years, and will record ________ depreciation in its December 31 financial statements.

$2,500 Under the accrual basis of accounting, depreciation expense is recorded at the end of each period. By dividing the purchase price of $20,000 by the four-year useful life, yearly depreciation of $5,000 results. Because the company purchased the asset on July 1, it should record half a year's depreciation.

Owen Clark, CPA, has billed his clients for services performed. He subsequently receives payments from his clients. While making the entry he will debit Accounts Receivable and credit Cash.

False

The adjusting entry for accrued salaries requires a debit to Salaries and Wages Payable and credit to Salaries and Wages Expense.

False

The payment of expenses that will benefit more than one accounting period is a type of liability.

False

Which of the following accounts are affected if the company fails to make an adjusting entry to record accrued revenues?

assets and revenues

The Vintage Laundry Company purchased $6,500 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 $1,000 on hand. Which of the following is an adjusting entry on June 30?

debit Supplies Expense $5,500; credit Supplies $5,500

GoCarts Systems pays $3,500 cash for next year's publication subscription which is known as a(n) _________. During the same week it delivers carts to a theme park and sends the customer a $15,000 invoice which is known as a(n) ___________.

deferral, accrual Although a deferred expense will not be recognized until a subsequent accounting period it is recognized as a deferral when paid. An accrual results when revenue is earned and billed but payment is received late

A dance studio received $3,500 cash for services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause

revenues to be understated.

If a business does not make an adjusting entry to record accrued revenue, it will result in an ________ asset and an ________ revenue.

understated; understated