Accounting Chapters 4

How do accrual adjustments affect liabilities and expenses?

Accrual adjustments can increase liabilities and increase expenses.

In practice, almost every account, except, ______, could require an adjusting entry.

Cash

Which of the following entries records the adjustment for income taxes accrued, but not yet paid?

Debit Income Tax Expense and credit Income Taxes Payable

Why is the balance in the Depreciation Expense account generally different from the balance in the Accumulated Depreciation account?

Depreciation expense only reflects the current period depreciation. Accumulated Depreciation contains depreciation since the asset was purchased.

Miss Step, the bookkeeper, forgot to record the adjusting entry for some accrued expenses during the period. This will cause which of the following items on the statement of stockholders' equity to be in error?

Ending retained earnings will be overstated. Net income will be overstated.

True or false: adjustments ensure that assets on the balance sheet are reported at amounts that have been used up or expired during the period

False

The effect of journal entries on each account is summarized in the _____.

General ledger

Miss Step, the bookkeeper, forgot to record the adjusting entry for supplies used during the period. This will cause which of the following items on the statement of stockholders' equity to be overstated?

Net income Ending retained earnings Total stockholders' equity

On July 1, Squid Roe, Inc., collected cash in advance from a customer in July for services to be performed in July, August and September and recorded a debit to Cash and credit to Unearned Revenue for $3,000. Which of the following is the proper treatment of this event assuming monthly financial statements are prepared?

On July 31, an adjusting entry should be recorded that debits Unearned Revenue and credits Service Revenue $1,000

How do temporary accounts differ from permanent accounts?

Only temporary accounts are closed at the end of the accounting period.

If no adjusting entries were recorded for the use of supplies, prepaid expenses and equipment, then assets would be________.

Overstated

If there is an error in recording an adjusting entry on the income statement causing Net Income to overstated, then ______.

Retained Earnings on the statement of stockholders' equity will be overstated Total stockholders' equity on the balance sheet will be overstated

Which of the following line items appear on a statement of stockholders' equity?

Retained earnings from the prior period Common stock Net income Dividends declared

The adjustment for supplies used during the period will result in a debit to the _____ account and a credit to the ________ account

Supplies expense; supplies

Miss Step, the bookkeeper, forgot to record the adjusting entry for supplies used during the period. This will cause which of the following on the balance sheet?

Supplies will be overstated. Retained earnings will be overstated. Current assets will be overstated.

Which of the following statements is true regarding the post-closing trial balance?

The post-closing trial balance is an internal report prepared as the last step in the accounting cycle

When recording an adjustment for the use of equipment during the current accounting period, which two accounts are affected?

accumulated depreciation and depreciation expense

Income tax expense is recorded ______.

after all other adjusting entries are recorded for the period

The adjusting entry for income taxes owed at the end of the accounting period must be recorded ______.

after all the other adjusting entries have been recorded by increasing the income taxes payable account using the adjusted pretax income

Prepaid rent is______

an asset and represents rent paid for in advance

Adjustments ensure that _____ balances are reported at amounts representing the economic benefits that remain at the end of the period and will be used up in future periods

asset

Adjustments ensure that ______ balances are reported at amounts representing the economic benefits that remain at the end of the period and will be used-up in future periods.

asset

If the adjusting entry to accrue interest of $1,000 on a note receivable is omitted, then_______.

asset, net income, and stockholders' equity are understated by $1,000.

Which financial statement reports the amount of prepaid expenses remaining at the end of the accounting period?

balance sheet

Which financial statement reports the amount of supplies on hand at the end of the accounting period?

balance sheet

Prepaid expenses appear on the ____.

balance sheet as an asset

Noncurrent assets, such as equipment, are reported at their _____ value on the balance sheet.

carrying

An asset's book value or carrying value is its ______.

cost minus accumulated depreciation

After the adjustments have been completed, the balance in the Rent Expense account represents the ______.

cost of rent for the accounting period

During the closing process, the closing entries to individual expense accounts will be recorded with a ______ to reduce the account balance to zero.

credit

Accumulated Depreciation has a normal _____ balance which indicates that it _____ total assets.

credit decreases

The adjusting entry to record interest owed on notes payable includes ______.

credit interest payable debit interest expense

The entry to record income tax accrued, but unpaid, at the end of the accounting period includes both a ______ and a ______.

credit to Income Taxes Payable debit to Income Tax Expense

The adjusting entry to record depreciation on equipment includes a ______.

credit to accumulated depreciation debit to depreciation expense

When recording closing entries, temporary accounts with debit balances are ______ and those with credit balances are ______.

credited; debited

Which of the following entries records the adjustment for interest earned on an investment, but not yet collected?

debit interest receivable and credit investment income

The journal entry a law firm records when it provides legal services for a client who will pay in a later period includes a ______.

debit to accounts receivable credit to service revenue

A closing entry includes a ______.

debit to sales revenue

The adjusting entry to record the amounts owed for wages incurred during the period includes a ______.

debit to wages expense credit to wages payable

The closing process requires ______.

debiting retained earnings when there is a net loss debiting the revenue accounts crediting retained earnings when revenues are greater than expenses crediting the expense accounts

Balance sheet accounts, such as supplies or prepaid rent, _______, as a result of deferral adjustments.

decrease

The effect of the adjusting entries for supplies and deferred expenses is to

decrease assets and stockholders equity

The adjusting entry to record the supplies used during the period will result in a(n) ______.

decrease to supplies and an increase to supplies expense

Prepaid expenses, such as Prepaid Rent, should be ______ by the benefits that were used up during the accounting period.

decreased

Supplies should be ______ and Supplies Expense should be ______ for supplies used during the period.

decreased; increased

How do deferral adjustments for prepaid expenses—such as rent—that were initially recorded as assets affect assets and expenses?

deferral adjustments decrease assets and increase expenses

________Expense should be recorded to recognize the use of and benefit received from long-lived assets, such as equipment, during the accounting period.

depreciation

After the adjustments have been completed for the fiscal year, the adjusted balance in the Depreciation Expense account represents the ______.

depreciation for the current fiscal year

The adjusting entry to record interest owed on obligations at the end of the accounting period includes a debit to "Interest______" a credit to "interest___________"

expense payable

Interest Expense is a(n) ______.

expense on the income statement and reports the cost of using borrowed funds during the period

A deferral adjusting entry that adjusts assets (such as Prepaid Insurance) ______.

expenses the amount used during the period

True or false: Since Retained Earnings is involved in the closing process, it is considered a temporary account.

false

In comparison to the balances on an unadjusted trial balance, many revenues and expenses will typically be ______ on an adjusted trial balance.

greater

If a company determines that it has $1,400 of supplies on hand at the end of the period, which of the following statements ic correct? The company_____

has $1,400 in supplies remaining at the end of the period

When should supplies be recorded as an expense?

in the period the supplies are used, regardless of when they were purchased

Which financial statement reports the amount of prepaid expenses used during the accounting period?

income statement

The adjustment for supplies used during the period will result in a(n) ______ to the Supplies Expense account.

increase

______ is defined as the "cost of borrowing money". Since the account represents a cost incurred on borrowed money, it is classified as a(n) ________ account under stockholders' equity

interest expense

As of December 31, $2,500 of interest expense has accrued on a $50,000 note payable. The note payable and the accrued interest will become due and payable next year. How will the interest affect the adjustments at the end of the period?

interest expense should be increased, because the cost of interest relates to the current period

Which of the following statements is correct regarding the adjustment to record interest accrued on a note payable?

interest is classified as an expense since it is a cost of borrowing

Miss Take, the accountant, forgot to record the interest owed at the end of the accounting period. As a result of this error, ______.

liabilities will be understated stockholders' equity will be overstated

Unearned revenue is a

liability

Interest Payable is a(n)

liability on the balance sheet and reports the unpaid cost of using borrowed funds

After the adjustments have been completed, the adjusted balance in the payable account represents the amount________ at the end of the accounting period

owed

The adjusting entry for income taxes records income tax that is incurred and_________ by the company

owed

After the adjustments have been completed, the adjusted balance in the "Accrued Expenses Payable" or "Wages Payable" account represents amounts incurred, but not yet

paid

Supplies can be calculated by_______.

subtracting the supplies on hand from the beginning supplies plus supplies purchased during the period

Chipotle had $10 of supplies at the beginning of the period and purchased $80 of supplies during the period. At the end of the period, it had $5 of supplies on hand. After the adjusting entry has been recorded at the end of this period, the financial statements will reported which of the following?

supplies of $5 on the balance sheet supplies expense of $85 on the income statement

Permanent accounts are found on ______.

the balance sheet

The adjusting entry to record accrued expenses requires debiting ______.

the expense accounts and crediting the related payable accounts

Temporary accounts are found on ______.

the income statement

Burrows, Inc. borrowed $1,000 on a 3-month note payable and $1,000 on a 6-month note payable both at 12% annually. The amount of interest incurred in one month will be ______.

the same amount for both notes

What are the effects on the accounting equation from the adjustment for depreciation?

total assets will decrease and total stockholders' equity will decrease

After the adjustments have been completed, the adjusted balance in the Income Tax Expense account represents ______.

total income tax that has been paid or accrued during the period

After the adjustments have been completed, the adjusted balance in the Interest Expense account represents ______.

total interest that has been paid or accrued during the period

Why is an adjustment necessary for interest accrued on a note payable at the end of the period if the interest will not be paid until the note is due?

-The adjustment is needed to accurately portray the interest liability of the company, all amounts owed should be reported on the balance sheet. -Even though the interest will not be paid until a future period, the expense was actually incurred during the current accounting period.

Which of the following transactions constitute an accrual adjustment involving an expense account?

-Wages incurred but not yet paid to employees as of the end of the accounting period -Taxes incurred but not yet paid to the government as of the end of the accounting period

Adjusting entries include______ adjustments for revenues earned but not yet collected and expenses incurred but not yet paid. They also include _______ adjustments for revenues earned that were collected in advance and expenses incurred that were previously recorded assets.

-accrued -deferred

Which of the following adjusting entries will decrease assets and stockholders' equity?

-adjusting for depreciation on equipment -adjusting for amounts used that were paid in advance

The adjusting entry for income taxes owed at the end of the accounting period must be recorded ______.

-after all other adjusting entries have been recorded -using the adjusted pretax income -by increasing the Income Taxes Payable account

Adjusting entries_________.

-are needed in order to measure the period's net income or loss -update the accounts to their proper balances

ABC Company reports net income of $120,000, net sales of $1,200,000, and average total assets of $960,000. The asset turnover equals ______.

1.25 times

Burrows, Inc. borrowed $1,000 on a 12%, 1-year note payable. The amount of interest incurred in one month equals $

10

Net sales was $10,000,000 for the year. Total assets was $1,100,000 at the end of this year and $900,000 at the beginning of the year. The asset turnover equals

10

If Buy & Large, Inc.'s annual depreciation is $1,200, then the amount of depreciation expense on its income statement for the month ended May 31 equals $

100

On January 1, Eons, Inc. purchased a truck for $60,000 and depreciates $10,000 per year. Depreciation expense on the 1st quarter's income statement equals $_____

2500

When are adjusting entries recorded?

At the end of the accounting period prior to preparing the financial statements

Which of the following statements is correct?

Financial statements are prepared after adjustments to ensure that all accounts have been brought to their correct balance

Which type of adjusting entry may management manipulate and overstate the amount to report a higher net income?

Overstating the amount of accrued revenues Overstating the amount earned of deferred revenues

What are the effects on the accounting equation from the adjustment for income tax expense accrued, but not paid, at the end of the accounting period?

Total liabilities will increase and total stockholders' equity will decrease.

If the adjusting entry to record supplies used during the period is not recorded, then ______.

assets and stockholders equity will be overstated

Miss Hap, the bookkeeper, forgot to record the depreciation for the year. This error will cause ______.

assets to be overstated stockholders' equity to be overstated

The asset turnover ratio measures the ______.

dollars of sales generated for each dollar invested in assets

True or false: To calculate a company's income tax obligation, the income after tax is multiplied by the company's tax rate.

false

Which of the following types of transactions represent deferral adjustments that are recorded to adjust for amounts expired or used during the period?

-decrease to prepaid insurance and increase to insurance expense -decrease to supplies and increase to supplies expense

The general journal, also known as the journal,

-does not provide account balances -is where transactions are first recorded -is where the effects of each transaction is recorded chronologically

When making deferral adjustments to record the amount used during the period for items such as Prepaid Insurance or Supplies, the debit will ________ an ___________ account.

-increase -expense

What are the effects on the accounting equation from the adjusting entry for interest expense accrued, but not paid, at the end of the accounting period?

Total liabilities will increase and total stockholders' equity will decrease.

The effect on the accounting equation of the adjusting entry to record the amount of prepaid expenses used during the period causes ______.

assets to decrease stockholders' equity to decrease

The adjusting entry to record revenues earned, but not yet billed (accrued revenues), affects which of the following financial statements?

balance sheet income statement statement of stockholders equity

the adjusted trial balance should be prepared________ the financial statements are prepared in order to prove the _______ of the debits and credits

before equality

True or false: Wages Receivable is the account used to record wages owed to employees for work performed during the current period.

false

The adjusting entry for income tax expense accrued, but not paid, at the end of the accounting period causes ______.

total liabilities to increase total stockholders' equity to decrease

Sterling Company paid $1,200 for 3 months of rent on April 1 of the current year. On April 30, Sterling Company made an adjusting entry to account for the rent that expired during the month of April. The adjusting entry contained a debit to Rent Expense in the amount of $_____ and a credit to Prepaid Rent in the amount of $____. The remaining balance in the Prepaid Rent account after the adjustment was $____.

400 400 800

Burrows, Inc. borrowed $10,000 on a 6-month note payable at 6% annually. The amount of interest incurred in one month equals $______

50

Which of the following adjusting entries will increase Net Income and hence may tempt management to misstate the estimated amount?

Adjusting accrued revenues Adjusting deferred revenues

On November 1, Movers, Inc. paid $24,000 for 2 years' rent beginning on November 1 (assume rent is the same amount each month). The entry to record this transaction requires a ______.

-credit to cash of $24,000 -debit to prepaid rent of $24,000

True or false: When referring to supplies, the term "on hand" refers to supplies that have been used up during the accounting period.

false

The adjusting entry for interest earned on a note receivable includes a_______

-debit to interest receivable -credit to investment income

Why is it necessary to make adjustments to revenue accounts at the end of the accounting period?

-revenues earned at the end of the period, not yet billed to accounts receivable, should be recorded as a revenue -payments received in advance, and originally recorded as a liability, should be reduced for any portion earned during the current period

Bristol, Inc. paid $800 for a 4-month insurance policy on August 1 of the current year. On August 31, Bristol, Inc. made an adjusting entry to account for the insurance that expired during the month of August. The adjusting entry contained a debit to Insurance Expense in the amount of $____ and a credit to prepaid insurance in the amount of $___. The remaining balance in the Prepaid Insurance account after the adjustment was $____.

200 200 600

On January 1, Squid Roe, Inc. had a supplies balance of $1,500. During the year, it purchased $40,000 of supplies on credit, of which $30,000 was paid. At the end of the year, it had $2,000 of supplies on hand. The amount of Supplies Expense for the year end December 31 equals $

39500

Deferring a revenue or expense account in accounting means that the amount______

will be reported as a revenue or an expense in a later period

After adjusting entries have been recorded, select which statements are true regarding supplies.

-supplies expense on the income statement reports the amount of supplies used during the accounting period -supplies on the balance sheet reports the amount of supplies on hand at the end of the accounting period

Amounts collected in advance of being earned are recorded as______.

-unearned revenue -a liability -deferred revenue

The annual depreciation taken on a vehicle totals $3,000. The vehicle has been in service for 3 full years and the adjusting entries have been completed for the year. At the end of the 3rd year, the annual financial statements will report Depreciation Expense equal to $_____ and Accumulated Depreciation equal to $_____.

3000 9000

For the current year ended, Textable, Inc.'s multi-step income statement reports gross profit of $80,000, operating income of $60,000 and a pretax income of $10,000. Textable's income tax rate is 34%. Income Tax Expense for the year equals $

3400

On May 1, Buy & Large, Inc. had a supplies balance of $100. During May, it purchased $500 of supplies on credit. At the end of May, there were $200 of supplies on hand. The amount of Supplies Expense for the month of May equals $

400

On September 1, Taggert Company paid $1,800 for a 6-month insurance premium beginning September 1. Which of the following statements are correct regarding the accounting for this insurance over the six-month period?

-Taggert will debit Prepaid Insurance for $1,800 on Sept. 1. -Taggert will credit Prepaid Insurance for $300 on Sept. 30. -Taggert will debit Insurance Expense for $300 on Sept. 30.

Adjusting entries are typically recorded_______.

-at the end of the accounting period -to ensure revenues and expenses are recorded in the period in which they occur, even though the cash will be collected or paid in a future period

On May 1, Buy & Large, Inc. had a supplies balance of $100. During May, it purchased $500 of supplies on credit. At the end of May, there were $200 of supplies on hand. The entry to record the adjusting entry for supplies used during the period includes:

-credit supplies for $400 -debit supplies expense for $400