CH 4

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.

What are the effects on the financial condition of the business from the adjustment for revenues earned, but not yet collected, during the accounting period?

Total assets will increase and total stockholders' equity will increase.

What are the effects on the accounting equation from the adjustment for revenue earned during the accounting period that had previously been recorded as a liability?

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

Which of the following statements is correct regarding a noncurrent asset such as equipment?

The original cost in the Equipment account will not change during the adjustment process.

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

decreased

True or false: Accumulated Depreciation is a contra-account to a noncurrent asset account, such as Equipment. This means that it increases the balance of the noncurrent asset on the balance sheet.

FALSE

In May, Sea the World Cruises, Inc. collected $1,000 cash from a customer for services to be performed in June. Which of the following is true assuming accrual accounting?

$1,000 of revenue should be recorded in June.

On December 1, Lotsa Space Company received $12,000 from a tenant for 4 months' rent in advance. The entry on December 1, includes a Blank______. (Check all that apply.)

-$12,000 credit to Unearned Rent Revenue -$12,000 debit to Cash

Why are the adjustments important to the preparation of the financial statements? (Check all that apply.)

-Adjustments ensure that the revenues earned and expenses incurred during the period are reflected in the income statement. -Unadjusted financial statements could present a misleading and incomplete picture of the company's financial results. -Adjustments ensure that the balance sheet reports all of the economic resources the company owns and all of the obligations the company owes.

Which of the following types of transactions represent deferral adjustments that are recorded to adjust for amounts expired or used during the period? (Select all that apply.)

-Decrease to Prepaid Insurance and increase to Insurance Expense -Decrease to Supplies and increase to Supplies Expense

Match each type of adjustment with the appropriate description of the adjusting entry required.

-Deferred revenues= adjusted for amounts earned that were collected in advance. - Accrued revenues= adjusted for amounts earned, but not yet collected. - Deferred expenses= Adjusted for amounts used that were paid for in advance. - Accrued expenses= adjusted for amounts incurred, but not yet paid.

Miss Take, the bookkeeper, forgot to record the adjusting entry for revenues earned during the period, but not yet collected. What is the effect of this error on the accounting equation? (Check all that apply.)

-Stockholders' equity is understated. -Assets are understated.

After adjusting entries have been recorded, select which statements are true regarding supplies. (Select all that apply.)

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

Identify which companies would report deferred revenues that would need to be adjusted at the end of the accounting period.

-a gym that requires a three-month prepayment of membership fees -an insurance company collects one year's premium from customers in advance -an airline that sells tickets online

Adjusting entries are required to ensure Blank______. (Check all that apply.)

-all liabilities are reported at their proper balances on the balance sheet -all expenses incurred are reported on the income statement -all revenues earned are reported on the income statement -all assets are reported at their proper balances on the balance sheet

The adjusting entry for income taxes owed at the end of the accounting period must be recorded Blank______. (Select all that apply.)

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

When a company provides services previously recorded as unearned revenue, it records a Blank______, (Check all that apply.)

-credit to Revenue -debit to Unearned Revenue

The journal entry a law firm records when it provides legal services for a client who will pay in a later period includes a ______. (Check all that apply.)

-debit to Accounts Receivable -credit to Service Revenue

The adjusting entry for interest earned on a note receivable includes a Blank______. (Check all that apply.)

-debit to Interest Receivable -credit to Interest Revenue

Which of the following events require adjusting entries? (Check all that apply.)

-incurring wages expense that will be paid in the -following period -the use of supplies during the period -the use of equipment during the period -owing interest on notes payable

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

10

On December 1, ABC Apartment Company received $4,800 in advance from a tenant for 3 months' rent, December through February. It credited Unearned Rent Revenue for the full amount. After the adjusting entry is recorded, the Unearned revenue balance at December 31 equals $

3200

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

Which of the following adjusting entries will decrease assets and stockholders' equity? (Check all that apply.)

Adjusting for depreciation on equipment Adjusting for amounts used that were paid in advance

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

Adjustments are made at the end of the accounting period to update accounts for reporting purposes.

When Pizza Company sells three $100 gift cards at the beginning of the month, it should record a $300 debit to Blank______ and a $300 credit to Blank______.

Cash; Unearned Revenue

______ revenues and expenses result because the cash changed hands prior to the revenue being earned or the expense being incurred.

Deferred

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.

Chip & Dale, Inc. makes an adjusting entry at the end of the accounting period on investments it owns. As a result, it will show which account on its balance sheet?

Interest receivable

On October 31, Pizza Company sold pumpkin spice pizzas for Halloween parties on account. The customers have 30 days to pay for the pizzas. In which month should Pizza Company record the revenue under accrual accounting?

October

If a company debits Interest Receivable and credits Interest Revenue, it must be recording Blank______.

amounts earned from its investments but not yet collected

Interest Receivable is a(n) ______.

asset that represents the right to collect interest

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

assets and stockholders' equity will be understated

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

carrying

The adjusting entry to record interest owed on notes payable includes Blank______. (Select all that apply.)

credit Interest Payable debit Interest Expense

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: (select all that apply)

debit Supplies Expense for $400 credit Supplies for $400

Balance sheet accounts, such as Supplies or Prepaid rent,________ (incr/decr) as a result of deferral adjustments.

decrease

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

decrease assets and stockholders' equity

The adjusting entry to record the amount earned that previously had been collected in advance will Blank______.

decrease liabilities and increase revenues

Adjusting entries for ______ revenues and expenses are necessary when the cash was collected or paid in the past. Adjusting entries for ______ revenues and expenses are necessary when the earning of revenues and incurring of expenses occurred prior to the cash changing hands.

deferred; accrued

Adjusting entries are made at the ________ of the accounting period, while daily transactions are made throughout the accounting period. (Enter one word per blank.)

end

Interest Expense is a(n) Blank______.

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

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

expenses

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

income statement

When making deferral adjustments to record the amount used during the period for items such as Prepaid Insurance or Supplies, the debit will _____ a(n) _______ account.

increase; expense

Adjustments made to expense accounts at the end of the accounting period adhere to the expense _______ principle.

recognition

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 as assets. (Enter one word per blank.)

referral; accrued

Accrual adjustments to record amounts earned but not yet collected include a credit to a(n) _________ account

revenue

Adjustments to revenue accounts at the end of the accounting period are made to adhere to accrual accounting principles, specifically the Blank______ principle.

revenue recognition

Supplies Expense can be calculated by

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

In a deferral adjustment for revenues collected in advance that are now earned, Blank______.

the liability recorded when cash was received is decreased by the adjustment for the revenue being earned

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 Blank

the same amount for both notes

True or false: The adjusting entry to record depreciation does not directly reduce the noncurrent asset accounts, such as Equipment, so that the original cost of the asset remains unchanged.

true

In accrual accounting, to defer means to _____ recording the other side of the cash transaction as a revenue or expense. Instead the other side of the cash entry is recorded as liability or prepaid. (Enter one word per blank.)

wait

Deferring a revenue or expense account in accounting means that the amount Blank______

will be reported as a revenue or an expense