Chapter 3 Accounting

71. A prepaid expense can best be described as an amount a. paid and currently matched with revenues. b. paid and not currently matched with revenues. c. not paid and currently matched with revenues. d. not paid and not currently matched with revenues.

B

31. Stockholders' equity is not affected by all a. cash receipts. b. dividends. c. revenues. d. expenses.

A

*108. Lopez Company received $14,400 on April 1, 2014 for one year's rent in advance and recorded the transaction with a credit to a nominal account. The December 31, 2014 adjusting entry is a. debit Rent Revenue and credit Unearned Rent Revenue, $3,600. b. debit Rent Revenue and credit Unearned Rent Revenue, $10,800. c. debit Unearned Rent Revenue and credit Rent Revenue, $3,600. d. debit Unearned Rent Revenue and credit Rent Revenue, $10,800.

A

28. Nominal accounts are also called a. temporary accounts. b. permanent accounts. c. real accounts. d. None of these answer choices are correct.

A

32. The debit and credit analysis of a transaction normally takes place a. before an entry is recorded in a journal. b. when the entry is posted to the ledger. c. when the trial balance is prepared. d. at the end of the accounting cycle.

A

33. The accounting equation must remain in balance a. throughout each step in the accounting cycle. b. only when journal entries are recorded. c. only at the time the trial balance is prepared. d. only when formal financial statements are prepared.

A

41. A general journal a. chronologically lists transactions and other events, expressed in terms of debits and credits. b. contains one record for each of the asset, liability, stockholders' equity, revenue, and expense accounts. c. lists all the increases and decreases in each account in one place. d. contains only adjusting entries.

A

55. Adjustments are often prepared a. after the balance sheet date, but dated as of the balance sheet date. b. after the balance sheet date, and dated after the balance sheet date. c. before the balance sheet date, and dated before the balance sheet date. d. before the balance sheet date, and dated after the balance sheet date.

A

56. At the time a company prepays a cost a. it debits an asset account to show the service or benefit it will receive in the future. b. it debits an expense account to match the expense against revenues recognized. c. its credits a liability account to show the obligation to pay for the service in the future. d. it credits an asset account and debits an expense account.

A

57. How do these prepaid expenses expire? Rent Supplies a. With the passage of time Through use and consumption b. With the passage of time With the passage of time c. Through use and consumption Through use and consumption d. Through use and consumption With the passage of time

A

59. Unearned revenue on the books of one company is likely to be a. a prepaid expense on the books of the company that made the advance payment. b. an unearned revenue on the books of the company that made the advance payment. c. an accrued expense on the books of the company that made the advance payment. d. an accrued revenue on the books of the company that made the advance payment.

A

60. To compute interest expense on a note for an adjusting entry, the formula is (principal × annual rate × a fraction). The numerator and denominator of the fraction are: Numerator Denominator a. Length of time note has been outstanding 12 months b. Total length of note 12 months c. Length of time until note matures Total length of note d. Length of time note has been outstanding Total length of note

A

63. When an expense is paid in cash before it is used, it is called a(n) a. prepaid expense. b. accrued expense. c. estimated expense. d. cash expense.

A

P51. The failure to properly record an adjusting entry to accrue an expense will result in an a. understatement of expenses and an understatement of liabilities. b. understatement of expenses and an overstatement of liabilities. c. understatement of expenses and an overstatement of assets. d. overstatement of expenses and an understatement of assets.

A

P54. The omission of the adjusting entry to record depreciation expense will result in an a. overstatement of assets and an overstatement of owners' equity. b. understatement of assets and an understatement of owner's equity. c. overstatement of assets and an overstatement of liabilities. d. overstatement of liabilities and an understatement of owners' equity.

A

*100. The income statement of Dolan Corporation for 2014 included the following items: Interest revenue $121,000 Salaries and wages expense 180,000 Insurance expense 18,200 The following balances have been excerpted from Dolan Corporation's balance sheets: December 31, 2014 December 31, 2013 Interest receivable $18,200 $15,000 Salaries and wages payable 17,800 8,400 Prepaid insurance 2,200 3,000 The cash paid for salaries and wages during 2014 was a. $189,400. b. $170,600. c. $171,600. d. $197,800.

B

*107. Garcia Corporation received cash of $36,000 on August 1, 2014 for one year's rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 2014 adjusting entry is a. debit Rent Revenue and credit Unearned Rent Revenue, $15,000. b. debit Rent Revenue and credit Unearned Rent Revenue, $21,000. c. debit Unearned Rent Revenue and credit Rent Revenue, $15,000. d. debit Cash and credit Unearned Rent Revenue, $21,000.

B

*99. The income statement of Dolan Corporation for 2014 included the following items: Interest revenue $121,000 Salaries and wages expense 180,000 Insurance expense 18,200 The following balances have been excerpted from Dolan Corporation's balance sheets: December 31, 2014 December 31, 2013 Interest receivable $18,200 $15,000 Salaries and wages payable 17,800 8,400 Prepaid insurance 2,200 3,000 The cash received for interest during 2014 was a. $102,800. b. $117,800. c. $121,000. d. $124,200.

B

27. Which of the following is a nominal (temporary) account? a. Unearned Service Revenue b. Salaries and Wages Expense c. Inventory d. Retained Earnings

B

34. The difference between the accounting process and the accounting cycle is a. the accounting process results in the preparation of financial statements, whereas the accounting cycle is concerned with recording business transactions. b. the accounting cycle represents the steps taken to accomplish the accounting process. c. the accounting process represents the steps taken to accomplish the accounting cycle. d. merely semantic, because both concepts refer to the same thing.

B

42. A journal entry to record the sale of inventory on account will include a a. debit to Inventory. b. debit to Accounts Receivable. c. debit to Sales Revenue. d. credit to Cost of Goods Sold.

B

48. Which of the following is an example of an accrued expense? a. Office supplies purchased at the beginning of the year and debited to an expense account. b. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year. c. Depreciation expense d. Rent recognized during the period, to be received at the end of the year

B

58. Recording the adjusting entry for depreciation has the same effect as recording the adjusting entry for a. an unearned revenue. b. a prepaid expense. c. an accrued revenue. d. an accrued expense.

B

73. An unearned revenue can best be described as an amount a. collected and currently matched with expenses. b. collected and not currently matched with expenses. c. not collected and currently matched with expenses. d. not collected and not currently matched with expenses.

B

74. An adjusted trial balance a. is prepared after the financial statements are completed. b. proves the equality of the debit balances and credit balances of ledger accounts after all adjustments have been made. c. is a required financial statement under generally accepted accounting principles. d. cannot be used to prepare financial statements.

B

92. Chen Company's account balances at December 31, 2014 for Accounts Receivable and the Allowance for Doubtful Accounts are $480,000 debit and $900 credit. Sales during 2014 were $1,650,000. It is estimated that 1% of sales will be uncollectible. The adjusting entry would include a credit to the allowance account for a. $17,400. b. $16,500. c. $15,600. d. $4,800.

B

97. During the first year of Wilkinson Co.'s operations, all purchases were recorded as assets. Supplies in the amount of $25,800 were purchased. Actual year-end supplies amounted to $5,600. The adjusting entry for store supplies will a. increase net income by $20,200. b. increase expenses by $20,200. c. decrease supplies by $5,600. d. debit Accounts Payable for $5,600.

B

P52. Which of the following properly describes a deferral? a. Cash is received after revenue is recognized. b. Cash is received before revenue is recognized. c. Cash is paid after expense is incurred. d. Cash is paid in the same time period that an expense is incurred.

B

S*84. A reversing entry should never be made for an adjusting entry that a. accrues unrecorded revenue. b. adjusts expired costs from an asset account to an expense account. c. accrues unrecorded expenses. d. adjusts unexpired costs from an expense account to an asset account.

B

S47. An adjusting entry should never include a. a debit to an expense account and a credit to a liability account. b. a debit to an expense account and a credit to a revenue account. c. a debit to a liability account and a credit to revenue account. d. a debit to a revenue account and a credit to a liability account.

B

*102. Olsen Company paid or collected during 2014 the following items: Insurance premiums paid $ 25,800 Interest collected 62,800 Salaries paid 260,400 The following balances have been excerpted from Olsen's balance sheets: December 31, 2014 December 31, 2013 Prepaid insurance $ 2,400 $ 3,000 Interest receivable 7,400 5,800 Salaries and wages payable 24,600 21,200 The insurance expense on the income statement for 2014 was a. $20,400. b. $25,200. c. $26,400. d. $31,200.

C

*103. Olsen Company paid or collected during 2014 the following items: Insurance premiums paid $ 25,800 Interest collected 62,800 Salaries paid 260,400 The following balances have been excerpted from Olsen's balance sheets: December 31, 2014 December 31, 2013 Prepaid insurance $ 2,400 $ 3,000 Interest receivable 7,400 5,800 Salaries and wages payable 24,600 21,200 The interest revenue on the income statement for 2014 was a. $49,600. b. $61,200. c. $64,400. d. $76,000.

C

*104. Olsen Company paid or collected during 2014 the following items: Insurance premiums paid $ 25,800 Interest collected 62,800 Salaries and wages paid 260,400 The following balances have been excerpted from Olsen's balance sheets: December 31, 2014 December 31, 2013 Prepaid insurance $ 2,400 $ 3,000 Interest receivable 7,400 5,800 Salaries and wages payable 24,600 21,200 Salaries and wages expense on the income statement for 2014 was a. $214,600. b. $257,000. c. $263,800. d. $306,200.

C

*106. At the end of 2014, Drew Company made four adjusting entries for the following items: 1. Depreciation expense, $25,000. 2. Expired insurance, $2,200 (originally recorded as prepaid insurance.) 3. Interest payable, $6,000. 4. Rent receivable, $10,000. In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that may be reversed is (are) a. Entry No. 3 only. b. Entry No. 4 only. c. Entry No. 3 and No. 4. d. Entry No. 2, No. 3 and No. 4.

C

*79. When converting from cash-basis to accrual-basis accounting, which of the following adjustments should be made to cash receipts from customers to determine accrual-basis service revenue? a. Subtract ending accounts receivable. b. Subtract beginning unearned service revenue. c. Add ending accounts receivable. d. Add cash sales.

C

*80. When converting from cash-basis to accrual-basis accounting, which of the following adjustments should be made to cash paid for operating expenses to determine accrual-basis operating expenses? a. Add beginning accrued liabilities. b. Subtract beginning prepaid expense. c. Subtract ending prepaid expense. d. Subtract interest expense.

C

*81. Reversing entries are 1. normally prepared for prepaid, accrued, and estimated items. 2. necessary to achieve a proper matching of revenue and expense. 3. useful in simplifying the recording of transactions in the next accounting period. a. 1 b. 2 c. 3 d. 1 and 2

C

29. The double-entry accounting system means a. Each transaction is recorded with two journal entries. b. Each item is recorded in a journal entry, then in a general ledger account. c. The dual effect of each transaction is recorded with a debit and a credit. d. None of these answer choices are correct.

C

30. When a corporation pays a note payable and interest, a. the account notes payable will be increased. b. the account interest expense will be decreased. c. they will debit notes payable and interest expense. d. they will debit cash.

C

38. Which of the following is not an internal event? a. Depreciation b. Using raw materials in the production process c. Dividend declaration and subsequent payment d. All of these are internal transactions.

C

43. A journal entry to record a payment on account will include a a. debit to Accounts Receivable. b. credit to Accounts Receivable. c. debit to Accounts Payable. d. credit to Accounts Payable.

C

62. Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles? a. To reduce the federal income tax liability b. To aid management in cash-flow analysis c. To match the costs of production with revenues as recognized d. To adhere to the accounting constraint of conservatism

C

65. When a revenue is collected and recorded in advance, it is normally accounted for as a(n) ___________ revenue. a. accrued b. prepaid c. unearned d. cash

C

67. During an accounting period, if an expense has been incurred and consumed but not yet paid for or recorded, then the end-of-period adjusting entry would involve a. a liability account and an asset account. b. an asset or contra asset account and an expense account. c. a liability account and an expense account. d. a receivable account and a revenue account.

C

72. An accrued revenue can best be described as an amount a. collected and currently matched with expenses. b. collected and not currently matched with expenses. c. not collected and currently matched with expenses. d. not collected and not currently matched with expenses.

C

75. Which type of account is always debited during the closing process? a. Dividends b. Expense c. Revenue d. Retained earnings

C

86. Maso Company recorded journal entries for the issuance of common stock for $160,000, the payment of $52,000 on accounts payable, and the payment of salaries expense of $84,000. What net effect do these entries have on owners' equity? a. Increase of $160,000. b. Increase of $108,000. c. Increase of $76,000. d. Increase of $24,000.

C

87. Mune Company recorded journal entries for the declaration of $150,000 of dividends, the $96,000 increase in accounts receivable for services rendered, and the purchase of equipment for $63,000. What net effect do these entries have on owners' equity? a. Decrease of $213,000. b. Decrease of $117,000. c. Decrease of $54,000. d. Increase of $33,000.

C

88. Pappy Corporation received cash of $24,000 on September 1, 2014 for one year's rent in advance and recorded the transaction with a credit to Unearned Rent Revenue. The December 31, 2014 adjusting entry is a. debit Rent Revenue and credit Unearned Rent Revenue, $8,000. b. debit Rent Revenue and credit Unearned Rent Revenue, $16,000. c. debit Unearned Rent Revenue and credit Rent Revenue, $8,000. d. debit Cash and credit Unearned Rent Revenue, $16,000.

C

89. Panda Corporation paid cash of $60,000 on June 1, 2014 for one year's rent in advance and recorded the transaction with a debit to Prepaid Rent. The December 31, 2014 adjusting entry is a. debit Prepaid Rent and credit Rent Expense, $25,000. b. debit Prepaid Rent and credit Rent Expense, $35,000. c. debit Rent Expense and credit Prepaid Rent, $35,000. d. debit Prepaid Rent and credit Cash, $25,000.

C

91. Brown Company's account balances at December 31, 2014 for Accounts Receivable and the related Allowance for Doubtful Accounts are $920,000 debit and $1,400 credit, respectively. From an aging of accounts receivable, it is estimated that $23,000 of the December 31 receivables will be uncollectible. The necessary adjusting entry would include a credit to the allowance account for a. $23,000. b. $24,400. c. $21,600. d. $1,400.

C

93. Starr Corporation loaned $450,000 to another corporation on December 1, 2014 and received a 3-month, 8% interest-bearing note with a face value of $450,000. What adjusting entry should Starr make on December 31, 2014? a. Debit Interest Receivable and credit Interest Revenue, $9,000. b. Debit Cash and credit Interest Revenue, $3,000. c. Debit Interest Receivable and credit Interest Revenue, $3,000. d. Debit Cash and credit Interest Receivable, $9,000.

C

94. A company receives interest on a $70,000, 8%, 5-year note receivable each April 1. At December 31, 2014, the following adjusting entry was made to accrue interest receivable: Interest Receivable 4,200 Interest Revenue 4,200 Assuming that the company does not use reversing entries, what entry should be made on April 1, 2015 when the annual interest payment is received? a. Cash 1,400 Interest Revenue 1,400 b. Cash 4,200 Interest Receivable 4,200 c. Cash 5,600 Interest Receivable 4,200 Interest Revenue 1,400 d. Cash 5,600 Interest Revenue 5,600

C

P50. An adjusting entry to record an accrued expense involves a debit to a(an) a. expense account and a credit to a prepaid account. b. expense account and a credit to Cash. c. expense account and a credit to a liability account. d. liability account and a credit to an expense account.

C

S76. Which of the following statements best describes the purpose of closing entries? a. To faciliate posting and taking a trial balance. b. To determine the amount of net income or net loss for the following period. c. To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period. d. To complete the record of various transactions that were started in a prior period.

C

*101. The income statement of Dolan Corporation for 2014 included the following items: Interest revenue $121,000 Salaries and wages expense 180,000 Insurance expense 18,200 The following balances have been excerpted from Dolan Corporation's balance sheets: December 31, 2014 December 31, 2013 Interest receivable $18,200 $15,000 Salaries and wages payable 17,800 8,400 Prepaid insurance 2,200 3,000 The cash paid for insurance premiums during 2014 was a. $16,000. b. $15,200. c. $19,000. d. $17,400.

D

*105. The Supplies account had a balance at the beginning of year 3 of $8,000 (before the reversing entry). Payments for purchases of supplies during year 3 amounted to $50,000 and were recorded as expense. A physical count at the end of year 3 revealed supplies costing $11,500 were on hand. Reversing entries are used by this company. The required adjusting entry at the end of year 3 will include a debit to: a. Supplies Expense for $3,500. b. Supplies for $3,500. c. Supplies Expense for $46,500. d. Supplies for $11,500.

D

*109. Gibson Company paid $12,000 on June 1, 2014 for a two-year insurance policy and recorded the entire amount as Insurance Expense. The December 31, 2014 adjusting entry is a. debit Insurance Expense and credit Prepaid Insurance, $3,500. b. debit Insurance Expense and credit Prepaid Insurance, $8,500. c. debit Prepaid Insurance and credit Insurance Expense, $3,500 d. debit Prepaid Insurance and credit Insurance Expense, $8,500.

D

*78. Under the cash-basis of accounting, revenues are recorded a. when they are recognized and realized. b. when they are recognized and realizable. c. when they are recognized. d. when they are realized.

D

*82. Adjusting entries that should be reversed include those for prepaid or unearned items that a. create an asset or a liability account. b. were originally entered in a revenue or expense account. c. were originally entered in an asset or liability account. d. create an asset or a liability account and were originally entered in a revenue or expense account.

D

*83. Adjusting entries that should be reversed include a. all accrued revenues. b. all accrued expenses. c. those that debit an asset or credit a liability. d. All of these answer choices are correct.

D

*95. A company receives interest on a $70,000, 8%, 5-year note receivable each April 1. At December 31, 2014, the following adjusting entry was made to accrue interest receivable: Interest Receivable 4,200 Interest Revenue 4,200 Assuming that the company does use reversing entries, what entry should be made on April 1, 2015 when the annual interest payment is received? a. Cash 1,400 Interest Revenue 1,400 b. Cash 4,200 Interest Receivable 4,200 c. Cash 5,600 Interest Receivable 4,200 Interest Revenue 1,400 d. Cash 5,600 Interest Revenue 5,600

D

21. Factors that shape an accounting information system include the a. nature of the business. b. size of the firm. c. volume of data to be handled. d. All of these answer choices are correct.

D

22. The process of transferring figures from the book of original entry to the ledger accounts is called a. adjusting. b. balancing. c. ledgering. d. posting.

D

23. Debit always means a. the right side of an account. b. an increase. c. a decrease. d. None of these answer choices are correct.

D

24. An accounting record into which the essential facts and figures in connection with all transactions are first recorded is called the a. ledger. b. account. c. trial balance. d. None of these answer choices are correct.

D

25. A trial balance a. proves that debits and credits are equal in the ledger. b. supplies a listing of open accounts and their balances that are used in preparing financial statements. c. is normally prepared three times in the accounting cycle. d. All of these answer choices are correct.

D

26. Which of the following is a real (permanent) account? a. Goodwill b. Service Revenue c. Accounts Receivable d. Both Goodwill and Accounts Receivable

D

35. An optional step in the accounting cycle is the preparation of a. adjusting entries. b. closing entries. c. a statement of cash flows. d. a post-closing trial balance.

D

36. Which of the following criteria must be met before an event or item should be recorded for accounting purposes? a. The event or item can be measured objectively in financial terms. b. The event or item is relevant and reliable. c. The event or item is an element. d. All of these must be met.

D

37. Which of the following is a recordable event or item? a. Changes in managerial policy b. The value of human resources c. Changes in personnel d. None of these answer choices are correct.

D

39. External events do not include a. interaction between an entity and its environment. b. a change in the price of a good or service that an entity buys or sells. c. improvement in technology by a competitor. d. using buildings and machinery in operations.

D

40. A trial balance may prove that debits and credits are equal, but a. an amount could be entered in the wrong account. b. a transaction could have been entered twice. c. a transaction could have been omitted. d. All of these answer choices are correct

D

44. A journal entry to record a receipt of rent in advance will include a a. debit to Rent Revenue. b. credit to Rent Revenue. c. credit to Cash. d. credit to Unearned Revenue.

D

45. Which of the following errors will cause an imbalance in the trial balance? a. Omission of a transaction in the journal. b. Posting an entire journal entry twice to the ledger. c. Posting a credit of $720 to Accounts Payable as a credit of $720 to Accounts Receivable. d. Listing the balance of an account with a debit balance in the credit column of the trial balance

D

61. Adjusting entries are necessary to 1. obtain a proper matching of revenue and expense. 2. achieve an accurate statement of assets and equities. 3. adjust assets and liabilities to their fair market value. a. 1 b. 2 c. 3 d. 1 and 2

D

64. When revenue or expense has been recognized or incurred but not yet collected or paid, it is normally called a(n) ____________ revenue or expense. a. deferred b. adjusted c. estimated d. None of these answer choices are correct.

D

66. An accrued expense can best be described as an amount a. paid and currently matched with earnings. b. paid and not currently matched with earnings. c. not paid and not currently matched with earnings. d. not paid and currently matched with earnings.

D

68. Which of the following must be considered in estimating depreciation on an asset for an accounting period? a. The original cost of the asset b. Its useful life c. The decline of its fair value d. Both the original cost of the asset and its useful life.

D

69. Which of the following would not be a correct form for an adjusting entry? a. A debit to a revenue and a credit to a liability b. A debit to an expense and a credit to a liability c. A debit to a liability and a credit to a revenue d. A debit to an asset and a credit to a liability

D

70. Year-end net assets would be overstated and current expenses would be understated as a result of failure to record which of the following adjusting entries? a. Expiration of prepaid insurance b. Depreciation of fixed assets c. Use of supplies d. All of these answer choices are correct.

D

90. Tate Company purchased equipment on November 1, 2014 and gave a 3-month, 9% note with a face value of $60,000. The December 31, 2014 adjusting entry is a. debit Interest Expense and credit Interest Payable, $5,400. b. debit Interest Expense and credit Interest Payable, $1,350. c. debit Interest Expense and credit Cash, $900. d. debit Interest Expense and credit Interest Payable, $900.

D

96. Murphy Company sublet a portion of its warehouse for five years at an annual rental of $60,000, beginning on May 1, 2014. The tenant, Sheri Charter, paid one year's rent in advance, which Murphy recorded as a credit to Unearned Rent Revenue. Murphy reports on a calendar-year basis. The adjustment on December 31, 2014 for Murphy should be a. No entry b. Unearned Rent Revenue 20,000 Rent Revenue 20,000 c. Rent Revenue 20,000 Unearned Rent Revenue 20,000 d. Unearned Rent Revenue 40,000 Revenue Revenue 40,000

D

98. Big-Mouth Frog Corporation had revenues of $300,000, expenses of $200,000, and dividends of $45,000. When Income Summary is closed to Retained Earnings, the amount of the debit or credit to Retained Earnings is a a. debit of $55,000. b. debit of $100,000. c. credit of $55,000. d. credit of $100,000.

D

P49. Which of the following statements is true about the accrual basis of accounting? a. The timing of cash receipts and disbursements is emphasized. b. A minimal amount of record keeping is required in accrual basis accounting compared to cash basis. c. This method is used less frequently by businesses than the cash method of accounting. d. Revenues are recognized in the period the performance obligation is satisfied, regardless of the time period the cash is received.

D

P53. The failure to properly record an adjusting entry to accrue a revenue item will result in an a. understatement of revenues and an understatement of liabilities. b. overstatement of revenues and an overstatement of liabilities. c. overstatement of revenues and an overstatement of assets. d. understatement of revenues and an understatement of assets.

D

P77. If ending accounts receivable exceeds the beginning accounts receivable a. cash collections during the period exceed the amount of revenue recognized. b. net income for the period is less than the amount of cash-basis income. c. no cash was collected during the period. d. cash collections during the year are less than the amount of revenue recognized.

D

S*85. The worksheet for Sharko Co. consisted of five pairs of debit and credit columns. The dollar amount of one item appeared in both the credit column of the income statement section and the debit column of the balance sheet section. That item is a. net income for the period. b. beginning inventory. c. cost of goods sold. d. net loss for the period.

D

S46. Which of the following is not a principal purpose of an unadjusted trial balance? a. It proves that debits and credits of equal amounts are in the ledger. b. It is the basis for any adjustments to the account balances. c. It supplies a listing of open accounts and their balances. d. It proves that debits and credits were properly entered in the ledger accounts.

D