ACCT SmartBook #4

On November 1, Lawn & Order, Inc. paid $24,000 for two years of rent in advance for rent beginning on November 1. How much should be expensed for the month of November?

$1,000 Reason: The amount expensed is the amount that has expired (been consumed) during the month which is $1,000 (=$24,000/24 months). On November 1, it recorded a debit to Prepaid Rent (+A) and credit to Cash (-A) for $24,000. The adjusting entry to record the amount used in November includes a debit to Rent Expense (+E,-SE) and a credit to Prepaid Rent (-A) for $1,000. Prepaid Rent will have a remaining balance of $23,000 (=$24,000 - 1,000) on the balance sheet.

An ________trial __________is prepared immediately _____________ the adjusting entries have been recorded and ___________ the financial statements are prepared.

Unadjusted ; Balance ; after ; before

The step in the accounting cycle where entries are recorded to update retained earnings and zero out temporary accounts is referred to as the ___________ process.

closing

Closing journal entries are recorded ______.

AFTER the financial statements have been prepared.

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

Cost of rent for the accounting period.

The adjusting entry to record the amount of prepaid rent used during the period requires a _____ to Rent Expense and a __________ to Prepaid Rent.

Credit - Prepaid Rent Debit - Rent 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

Interest incurred, but not yet paid during an accounting period, should be recorded as an expense and a(n) ______.

Liability

Adjusting entries are required to ______.

adjust the unadjusted balances to the desired balances.

Without ________ entries, financial statements would present an incomplete and misleading picture of the company's financial position.

adjusting

The adjusting entry to record interest owed on obligations at the end of the accounting period includes a debit to ______.

debit Interest Expense and credit to Interest Payable

The closing entry for dividends involves a debit to Retained Earnings and a credit to Dividends. The debit to Retained Earnings causes a(n) _______ in the balance of the account.

reduction

What is the effect of the December 31 adjusting entry to record $400 of revenue for which the seller has performed for its customers but not yet collected?

Accounts Receivable should be increased by $400 and Sales Revenue should be increased by $400. Reason: The correct entry is a $400 debit to Accounts Receivable (+A) and $400 credit to Sales Revenue (+SE). The seller has fulfilled its obligation to the buyer before the cash was collected, not after, thus Deferred Revenue is not affected.

The adjusting entry to record depreciation, includes _________

Debit to Depreciation Expense Credit to Accumulated Depreciation

What is a good starting point for determining which accounts require payment?

Unadjusted Trial Balance

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

total income tax that has been paid and accrued (accumulated) during the period.

Which of the following account balances will typically be increased as a result of adjusting entries?

- Supplies Expense - Interest Payable

Noodlecake previously purchased $800 of supplies and now only has $200 left. What is Supplies Expense equal on its income statement?

$600 Reason: The Supplies Expense equals $600 used (=$800 purchased - 200 left).

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.

Beauty and the Bistro, Inc. had $500 of Supplies on its balance at the end of its 1st year of business. It purchased $5,000 of supplies during the 2nd year. At the end of the 2nd year, it had $800 of supplies on hand. What is the amount of Supplies Expense on the income statement?

$4,700 Reason: It started with $500 and purchased $5,000 but only has $800 of supplies left, thus it used $4,700. The amount used is Supplies Expense and is recorded as an adjusting entry with a debit to Supplies Expense (+E,-SE) and credit to Supplies (-A) for $4,700. The Supplies balance on the balance sheet equals $800 (the supplies left).

In its 1st month of business, Brewed Awakenings, Inc. purchased $1,000 of supplies of which it had paid $700 and owes the rest. At the end of the month, it had $400 of supplies available for use. What is the amount of Supplies Expense on the income statement?

$600 Reason: It purchased $1,000 of supplies but only has $400 left, thus it used $600. The amount used is Supplies Expense and is recorded as an adjusting entry with a debit to Supplies Expense (+E,-SE) and credit to Supplies (-A) for $600.

In its 1st year of business, Daily Grind, Inc. purchased $1,000 of supplies of which it only has $300 left at the end of the period. Which of the following will be found in the year-end financial statements?

- Supplies Expense on the Income Statement of $700 - Supplies on the balance sheet of $300

Adjusting entries to adjust Supplies or Prepaid Rent have which of the following effects?

- Total assets is decreased on the balance sheet. - The carrying value of the assets are decreased. - Total expenses on the income statement are increased.

Steps to the Adjustment process in order

1. Analyze the accounts to determine the amount of the adjustment. 2. Record the adjusting entry in the journal. 3. Summarize the adjusting entries in the accounts.

The adjusting entry for supplies used during the period requires a _______ (debit or credit) to Supplies and a ___________ (debit or credit) to Supplies expense.

1. Credit (supplies) 2. Debit (supplies Expense)

_____ ensure that the revenues recognized and expenses incurred during the period are reflected in the income statement.

Adjusting entries

How does the timing of adjusting entries differ from the accounting for daily transactions?

Adjustments are made at the end of the accounting period because making them on a daily basis would be inefficient.

Supplies Expense Supplies Accounts Payable

Amount used and reported on the Income Statement Amount remaining and reported in the balance sheet Amount owed for supplies purchased on account.

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

_________- is the process of allocating the cost of buildings, vehicles, and equipment to expense over time as they are used.

Depreciation

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 amounts will need an adjusting entry to adjust for the amounts used during the period that were paid for in advance.

Prepaid Rent

Which of the following statements is correct regarding the adjustment for salaries and wages accrued but not paid at the end of the accounting period?

Salaries and Wages Expense will increase by the amount of the unpaid salaries and wages.

How does the adjustment for depreciation differ from other deferral adjustments?

The depreciation adjustment uses a contra-account rather than reducing the asset accounts directly.

What is the purpose of preparing an adjusted trial balance?

To ensure that total debits equal total credits after the adjustments have been recorded

The adjusting entry to record revenue for services the seller has performed but not yet collected requires ______.

a debit to Accounts Receivable a credit to Service Revenue

In its 1st year of business, Eel Electric purchased $1,000 of supplies on account. During the year, it paid $700 of the amount it owed for supplies. At the end of the year, it had $200 of supplies remaining. What is Supplies Expense on the income statement equal?

$800 Reason: It had $1,000 of supplies and only $200 left at the end of the year, it must have used $800 of its supplies during the year. At the end of the year, it recorded an adjusting entry that debited Supplies Expense (+E,-SE) and credited Supplies (-A) for $800.

A prepayment that is originally recorded as an asset will be ______.

Allocated to future accounting periods based on the value of the benefit used during the period.

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

Debit --- Depreciation Expense Credit --- Accumulated Depreciation

The Accounts Receivable account should be ____________ when adjusting at the end of the period for any revenues from fulfilling obligations to buyers which has not yet been collected or recorded.

Debited

A prepayment is originally recorded as an asset. Later at the end of the accounting period, an adjustment is recorded causing in a(n) ______ in the asset account and a(n) ______ in the expense account.

Decrease ; Increase

As the balance in the Accumulated Depreciation increases, total assets _____ because Accumulated Depreciation is a(n) _____ account.

Decreases ; Contra

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

Depreciation

What are the effects on the accounting equation from the adjustment for which the seller has satisfied the performance obligation to its buyers during the accounting period that had previously been recorded as a liability?

Total Liabilities will decrease and total stockholder's equity will increase. Reason: When a company receives cash in advance for which the seller has satisfied the performance obligation, it debits Cash (+A) and credits Deferred Revenue (+L). It defers recording the revenue until it fulfills its obligation. Later, when the revenue is recognized by satisfying the sales obligation, it will debit Deferred Revenue (-L) and credit Revenue (+SE).

True or false: Supplies is an asset account because it contains the value of supplies that have not been used, but still remain an economic resource for the company.

True Reason: Supplies Expense reports the amount of supplies that have been used during the period.

If a company recorded an adjusting entry by debiting Interest Expense for $500 and Interest Payable for $50 in error, then the ______.

adjusted trial balance's debits will not equal its credits.

Which of the following adjusting entries will cause assets and stockholders' equity to increase? Adjusting for services provided ______.

but not yet collected Reason: The adjusting entry for amounts collected in advance that have now been fulfilled is recorded with a debit to Deferred Revenue (-L) and a credit to Service Revenue (+SE).

Select the following statements that are correct regarding Dividends?

- Dividends have a normal debit balance. - Dividends are closed into retained earnings by crediting Dividends. - Dividends are closed into retained earnings by debiting Retained Earnings.

On June 30, Daily Kneads paid $12,000 in advance for one year of insurance coverage beginning July 1. Match each line item with the correct amount that would be reported in the following month, July, and on which July financial statement the line item would be reported.

- Insurance Expense ---- $1,000 on the Income Statement - Prepaid Insurance ---- $11,000 on the balance sheet

To determine the adjusting entries required, a(n) ___________ is prepared.

Unadjusted Trial Balance Reason: The unadjusted trial balance is the starting point to determine which balances need adjusting.

On June 30, Planet of the Crepes paid $12,000 in advance for insurance coverage beginning July 1 through December 31. Which of the following are correct regarding the July financial statements?

- Prepaid Insurance of $10,000 is on the Balance Sheet - Insurance Expense of $2,000 is on the Income Statement Reason: On June 30, the entry recorded included a debit to Prepaid Insurance (+A) and a credit to Cash (-A) for $12,000. The adjusting entry to record the amount expired in July included a debit to Insurance Expense (+E,-SE) and credit to Prepaid Insurance (-A) for $2,000 (=$12,000/6 months).

In its 1st year of business, Daily Grind, Inc. purchased $1,000 of supplies of which it only has $300 left at the end of the period. Which of the following will be found in the year-end financial statements? (Select all that apply.)

- Supplies Expense on the Income Statement of $700 - Supplies on the Balance Sheet of $300

In its 1st year of business, Daily Grind, Inc. purchased $1,000 of supplies of which it only has $300 left at the end of the period. Which of the following will be found in the year-end financial statements?

- Supplies Expense on the income statement of $700 - Supplies on the balance sheet of $300 Reason: The adjusting entry to record the number of supplies used includes a debit to Supplies Expense (+E,-SE) and a credit to Supplies (-A) of $700 (=$1,000 available - $300 remaining).

How does the adjusting entry to record the supplies used during the period affect the financial statements?

- Supplies on the balance sheet will decrease - Net Income on the Income Statement will decrease - Supplies Expense on the Income Statement will Increase

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

Debit ---- Income Tax Expense Credit ---- Income Tax Payable

The seller's adjusting entry to record the revenue earned by fulfilling its obligation to its buyers which had been collected in advance requires a ___________ (debit/credit) to Deferred Revenue and a __________ (debit/credit) to Sales Revenue.

Debit ; Credit

Which action will be taken in the adjusting entry to record rent expense that has expired during the month? (Assume that the rent was paid in advance and previously recorded as an asset.)

Debit Rent Expense Reason: The original entry to record the prepayment would have resulted in a debit to Prepaid Rent (+A) and a credit to Cash (-A). The adjusting entry will show a debit to Rent Expense (+E,-SE) and a credit to Prepaid Rent (-A).

What is the purpose of the Depreciation Adjustment for long-lived assets?

Depreciation allows the company to allocate the cost of an asset over the years the asset benefits the company. Reason: Depreciation is the process of expensing noncurrent assets over their useful lives as the assets are used to help generate revenues.

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

Dr. Supplies Expense ; CR. Supplies Reason: The adjusting entry requires a debit to Supplies Expense (-SE) and a credit to Supplies (-A) to record the amount of supplies used during the period.

Adjusting entries are made at the ________of the accounting period, while daily transactions are made throughout the accounting period.

End

Adjustments help to ensure that all ______ are recorded in the period in which they are incurred.

Expenses

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 Reason: Adjustments ensure that assets report their economic benefit remaining, not the amount that has been used up or expired during the period. The related expense on the income statement is the amount used or expired during the accounting period.

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 stockholder's equity will decrease. Reason: The amount of income tax accrued, but not paid, during the current period should be recorded as an increase to the liability, Income Tax Payable, and an increase to Income Tax Expense. An increase in an expense account results in a decrease to stockholders' equity.

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

Total assets will decrease and total stockholders' equity will decrease. Reason: Accumulated Depreciation increases, but it represents a conta-account or negative asset. So, total assets will decrease when this account is increasing. Depreciation Expense is debited, so expenses are increasing causing a decrease to stockholders' equity.

What are the effects on the financial condition of the business from the adjustment for revenues from the seller fulfilling its obligations that have not yet been collected?

Total assets will increase and total stockholders' equity will increase. Reason: This should be recorded as an adjusting entry with a debit to Accounts Receivable (+A) and a credit to Revenues (+SE).

After the adjustments have been completed, the adjusted balance in the Supplies Expense account represents the cost of supplies ______.

Used during the accounting period.

The balance in the Prepaid Insurance account after the adjusting entries have been recorded represents the _________.

Value of the insurance payment that remains to benefit future periods.

The adjusting entry to record wages incurred but not yet recorded includes a credit to ______.

Wages Payable Reason: The adjusting entry includes a debit to Wages Expense (+E,-SE) and a credit to Wages Payable (+L).

Which of the following entries records the adjustment to revenue for which the seller has performed its obligations but has not yet been collected or billed?

debit Accounts Receivable credit Sales Revenue Reason: Since the seller has fulfilled its obligation to the buyer, it will not be recorded in the Deferred Revenue account. Accounts Receivable will be the debited account because it is an asset and the cash will be received in the future.

After the adjustments have been completed, the Supplies account on the balance sheet represents the cost of supplies ______.

on hand at the end of the accounting period.