Chapter 4
A company has the following adjusted trial balance: Debit Credit Cash 550 Accounts receivable 300 Prepaid rent 100 Equipment 6,000 Accumulated depreciation-Equipment 2,200 Accounts payable 300 Unearned service revenue 350 Common stock 1,400 Retained earnings 1,100 Service revenue 3,250 Interest revenue 50 Salaries and wages expense 1,200 Depreciation expense 300 Rent expense 200 Total 8,650 8,650 After closing entries have been journalized and posted, the balance in the company's retained earnings account will be $1,100. $2,700. $8,650. $3,050. $2,200.
$2,700. Solution: Ending retained earnings = Beginning retained earnings + revenues - expenses - dividendsEnding retained earnings = 1,100 + 3,250 + 50 - 1,200 - 300 - 200 = 2,700
A corporation received a check for $36,000 on December 1, which represents a one year advance payment of rent on an office it rents to a client. The corporation increases unearned rent revenue when it collected the rent and it prepares financial statements dated December 31. The appropriate year-end adjusting journal entry that the realty company must record for the first year would be a $24,000 debit to Unearned Rent Revenue and a $24,000 credit to Rent Revenue. No adjusting entry is necessary. $3,000 debit to Rent Revenue and a $3,000 credit to Unearned Rent Revenue. $3,000 debit to Unearned Rent Revenue and a $3,000 credit to Rent Revenue. $12,000 debit to Unearned Rent Revenue and a $12,000 credit to Rent Revenue.
$3,000 debit to Unearned Rent Revenue and a $3,000 credit to Rent Revenue. Solution: The year-end adjusting entry reduces the liability (i.e., Unearned Revenue) and increases Revenue for the amount of revenue earned during this accounting period. Debit unearned revenue to decrease it, and credit rent revenue to increase it.Revenue earned Dec. 1 through Dec. 31 = 36,000 x 1/12 = 3,000
A company has the following adjusted trial balance: Debit Credit Cash 1,500 Accounts receivable 2,100 Prepaid rent 100 Equipment 3,500 Accumulated depreciation-Equipment 1,500 Accounts payable 150 Unearned service revenue 200 Common stock 1,000 Retained earnings 4,700 Service revenue 800 Interest revenue 100 Salaries and wages expense 150 Depreciation expense 600 Rent expense 500 Total 8,450 8,450 After closing entries have been journalized and posted, the balance in the company's retained earnings account will be $4,350. $4,700. $4,550. $5,050. $8,450.
$4,350. Solution: Ending retained earnings = Beginning retained earnings + revenues - expenses - dividendsEnding retained earnings = 4,700 + 800 + 100 - 150 - 600 - 500 = 4,350
Given the following adjusted trial balance, determine the company's net income for the year: Debit Credit Cash $781 Accounts Recieveable 1049 inventory 1562 Prepaid Rent 43 Equipment 150 Accumuilated Depreciation-Equipment 26 Accounts Payable 41 Unearned Service Revenue 61 Common Stock 103 Retained Earnings 3,305 Service Revenue 134 Internet Revenue 28 Salaries and Wages Expense 80 Travel expense 33 Total $3,698 $3,698 $135. $110. $248. $162. $49.
$49. Solution: Net income = revenues minus expenses = $134 + 28 - 80 - 33 = $49
A company borrowed money from a bank by signing a three-year note payable in the amount of $18,000 on September 1. The note requires the company to pay interest at an annual rate of 9%. The company records adjusting entries on December 31. The adjusting entry that the company should record for accrued interest on December 31 of the same year would include a debit to interest expense for $1,500. $540. $4,860. $640. $1,620.
$540. Solution:Interest = Principal x Rate x Time = $18,000 x 9% x 4/12 = $540After one month, the accrued interest is $540.Interest rates are always annual interest rates unless specifically stated otherwise. This loan charges 8% annual interest per year. The debtor records an adjusting entry to record accrued interest.Debit: Interest Expense, $540Credit: Interest Payable, $540
On August 1, a company purchased equipment for $8,000. The equipment's estimated salvage value is $500. The machine will be depreciated using straight-line depreciation and a five year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a $625 debit to Depreciation Expense and a $625 credit to Cash. $1,500 debit to Depreciation Expense and a $1,500 credit to Accumulated Depreciation. $1,500 debit to Accumulated Depreciation and a $1,500 credit to Depreciation Expense. $625 debit to Depreciation Expense and a $625 credit to Accumulated Depreciation. $625 debit to Accumulated Depreciation and a $625 credit to Depreciation Expense.
$625 debit to Depreciation Expense and a $625 credit to Accumulated Depreciation. Solution:Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (8,000 - 500)/5 = $1,500 per yearThe correct adjusting entry to record depreciation for 5 months (i.e., August 1 through December 31) is $1,500 per year x 5/12 = $625.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.
On August 1, a company purchased equipment for $8,000. The equipment's estimated salvage value is $800. The machine will be depreciated using straight-line depreciation and a four year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a $1,800 debit to Depreciation Expense and a $1,800 credit to Cash. $1,800 debit to Depreciation Expense and a $1,800 credit to Accumulated Depreciation. $750 debit to Depreciation Expense and a $750 credit to Accumulated Depreciation. $1,800 debit to Depreciation Expense and a $1,800 credit to Equipment. $750 debit to Depreciation Expense and a $750 credit to Equipment.
$750 debit to Depreciation Expense and a $750 credit to Accumulated Depreciation. Solution:Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (8,000 - 800)/4 = $1,800 per yearThe correct adjusting entry to record depreciation for 5 months (i.e., August 1 through December 31) is $1,800 per year x 5/12 = $750.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.
A company's adjusted trial balance reports the following accounts and balances: Accounts Receivable, $2,000 Accounts Payable, $200 Accumulated Depreciation-Equipment, $50 Cash, $1,500 Common Stock, $300 Equipment, $3,750 Inventory, $500 Rent Expense, $150 Retained Earnings, $6,600 Salaries and Wages Expense, $200 Service Revenue, 800 Unearned Service Revenue, $150 Each account has its normal balance as either a debit or credit balance. What is the total of the debit and credit columns of the adjusted trial balance? $8,050 $8,400 $8,100 $8,800 $7,650
$8,100 Solution: Accounts with debit balances include assets, expenses, and dividends (e.g., $2,000 + 1,500 + 3,750 + 500 + 150 + 200 = $8,100)Accounts with credit balances include liabilities, equities, and revenues (e.g., $200 + 50 + 300 + 6,600 + 800 + 150 = $8,100)
The following is information is from a certain corporation's financial records for the current fiscal year. i. Cash received from customers, $230,000 ii. Revenue earned, $255,000 iii. Cash paid for wages, $110,000 iv. Wage expense incurred, $115,000 v. Cash paid during the current year for computers that will be used for 3 years, $30,000 vi. Depreciation expense, $10,000 vii. Proceeds from issuing debt (e.g., borrowed money from a bank), $30,000 viii. Interest incurred on debt, $3,000 ix. Cash paid for supplies, $4,000 x. Supplies expense incurred, $2,000 What is the company's net income for the current year using the cash-basis of accounting? $130,000 $125,000 $86,000 $135,000 $92,000
$86,000 Solution:The cash-basis of accounting recognizes revenues in the year cash is collected from customers regardless of when the performance obligation is satisfied and it recognizes expenses in the year they are paid regardless of when they are incurred. Net income using the cash-basis = Cash collected from customers - cash paid for expenses incurredNet income using the cash-basis = $230,000 - 110,000 - 30,000 - 4,000 = $86,000
The following is information is from a certain corporation's financial records for the current fiscal year.i. Cash received from customers, $230,000ii. Revenue earned, $255,000iii. Cash paid for wages, $110,000iv. Wage expense incurred, $115,000v. Cash paid during the current year for computers that will be used for 3 years, $30,000vi. Depreciation expense, $10,000vii. Proceeds from issuing debt (e.g., borrowed money from a bank), $30,000viii. Interest incurred on debt, $3,000ix. Cash paid for supplies, $4,000x. Supplies expense incurred, $2,000What is the company's net income for the current year using the cash-basis of accounting? $92,000 $130,000 $86,000 $125,000 $135,000
$86,000 Solution:The cash-basis of accounting recognizes revenues in the year cash is collected from customers regardless of when the performance obligation is satisfied and it recognizes expenses in the year they are paid regardless of when they are incurred. Net income using the cash-basis = Cash collected from customers - cash paid for expenses incurredNet income using the cash-basis = $230,000 - 110,000 - 30,000 - 4,000 = $86,000
Based on the following adjusted trial balance: Garnet & Gold Corporation Adjusted Trial Balance As of December 31 DebitCredit Cash $ 800 Accounts Receivable 200 Inventory 2,500 Building 30,000 Accumulated Depreciation $ 3,000 Notes Payable 500 Common Stock 21,000 Retained Earnings 5,000 Dividends 1,000 Revenues 7,000 Selling and Administrative Expense 1,000 Insurance Expense 1,000 $ 36,500 $ 36,500 Determine the amount that will be reported as retained earnings on the post-closing trial balance. $6,000 $2,000 $14,000 $10,000 $9,000
$9,000 Solution:Permanent accounts (i.e., assets, liabilities, and equities) are not closed. Temporary accounts (i.e., revenues, expenses, and dividends) are closed to retained earnings (i.e., an Income Summary account can be used as an intermediate step). Closing revenues increases retained earnings. Closing dividends and expenses decreases retained earnings. Post-closing: Ending retained earnings = beginning retained earnings + revenues - expenses - dividends = $5,000 + 7,000 - 1,000 - 1,000 - 1,000 = $9,000
Straight-Line Depreciation per year =
(cost - salvage value)/ life *The year-end adjusting entry to record depreciation incudes a debit to Depreciation Expense and a credit to Accumulated Depreciation *straight-line annual depreciation x months remaining/12
A company pays its employee his wage each Friday. The most recent payment occurred on Friday, December 27. The next payroll will be paid on January 3. There are two more working days in December after December 27. The employee works 5 days a week and the company pays $2,500 per week in wages. What will be the adjusting entry to accrue wages expense at the end of December? A debit to Salaries and Wages Expense for $1,000 A credit to Salaries and Wages Expense for $1,000 No adjusting entry would be required. A debit to Salaries and Wages Expense for $2,500 A credit to Salaries and Wages Expense for $2,500
A debit to Salaries and Wages Expense for $1,000 Solution: Wages for two days need to be recorded for the current year even though the employer will not pay its employees for those days until Jan. 3 of next year.Wages for two days = $2,500 x 2/5 = $1,000. Expenses increase with debits.
A corportion pays its rent of $48,000 annually on January 1 and makes monthly adjusting entries. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true? Expenses will be overstated by $4,000 and net income and stockholders' equity will be understated by $4,000. Failure to make the adjustment does not affect the February financial statements. Expenses, net income, and stockholders' equity will be understated by $4,000. Assets will be overstated by $8,000 and net income and stockholders' equity will be understated by $8,000. Assets will be overstated by $4,000 and net income and stockholders' equity will be overstated by $4,000.
Assets will be overstated by $4,000 and net income and stockholders' equity will be overstated by $4,000. Solution:Paying $48,000 for one-year of rent in advance results in an increase in prepaid rent and a decrease in cash. By the end of one month, one-twelfth of the prepaid rent has expired and the company should record an adjusting entry that decreases the balance of the prepaid rent account and in-crease rent expense by $4,000 (i.e., $48,000 x 1/12 = $4,000). If the company forgot to record a prepaid rent adjusting entry, prepaid rent (and total assets) would be overstated and rent expense would be understated. Understating expenses overstates net income, retained earnings, and total stockholders' equity.
If revenues are recognized only when a customer pays, what method of accounting is being used? Accrual-basis Recognition basis Matching basis Periodicity Cash-basis
Cash-basis Solution: Under the cash-basis of accounting, revenues are recognized when cash is received rather than when the performance obligation is satisfied. It is the accrual-basis of accounting that recognizes revenue when a performance obligation is satisfied. If an organization recognizes the revenue when the customer pays, the organization is using the cash-basis of accounting.
Which of the following is true regarding closing entries? Closing entries cause the revenue and expense accounts to have zero balances. Closing entries summarize the company's financing activities. Closing entries reduce the number of permanent accounts. Closing entries are prepared before preparing the financial statements. reduce the retained earnings account to zero.
Closing entries cause the revenue and expense accounts to have zero balances. Solution: Closing entries transfer the balances from temporary accounts, such as revenues, expenses, and dividends, to the retained earnings account. Revenues are closed by debiting each revenue account. Expenses are closed by crediting each expense account. Some companies close revenues and expenses to an income summary account and then close the income summary account to retained earnings. Dividends are closed directly to the retained earnings account. Closing revenues increases retained earnings. Closing expenses and dividends decreases retained earnings. After closing them, revenues, expenses, and dividends have zero balances. Temporary accounts are not included on the post-closing trial balance.
The accounting cycle is a series of certain steps that businesses, such as corporations, perform in sequence and repeat in each accounting period. Although steps may be missing among the options listed below, which of the following lists steps of the accounting cycle in their correct order? Post the transactions, journalize the transactions, and prepare a trial balance. Prepare the financial statements, journalize the adjusting entries, and post the closing entries. Journalize the transactions, post the adjusting entries, journalize the closing entries. Journalize the closing entries, prepare the adjusted trial balance, and prepare the financial statements, Post the transactions, post the closing entries, and post the adjusting entries.
Journalize the transactions, post the adjusting entries, journalize the closing entries. Solution:The correct order is (i) use source documents to analyze transactions, (ii) journalize transactions, (iii) post transactions to the ledger, (iv) prepare the trial balance, (v) journalize and post the adjusting entries, (vi) prepare the adjusted trial balance, (vii) prepare the financial statements, (viii) journalize and post the closing entries, (ix) and prepare the post-closing trial balance.
At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. Which of the following statements is true as a result of this omission? Liabilities at the end of the year are understated. Stockholders' equity at the end of the year is understated. Assets at the end of the year are understated. Salaries and Wages Expense for the year is overstated. Net income for the year is understated.
Liabilities at the end of the year are understated. Solution: Omitting an expense overstates net income retained earnings, and stockholders' equity. Omitting a payable understates liabilities.
Which types of accounts will appear in the post-closing trial balance? Temporary accounts. Accounts shown on the income statement. None of these answer choices are correct. Permanent accounts. Accounts shown on either income statement or balance sheet.
Permanent accounts. Solution: Closing entries transfer the balances from temporary accounts, such as revenues, expenses, and dividends, to the retained earnings account. Revenues are closed by debiting each revenue account. Expenses are closed by crediting each expense account. Some companies close revenues and expenses to an income summary account and then close the income summary account to retained earnings. Dividends are closed directly to the retained earnings account. Closing revenues increases retained earnings. Closing expenses and dividends decreases retained earnings. After closing them, revenues, expenses, and dividends have zero balances. Temporary accounts are not included in the post-closing trial balance.
Which of the following is not included in the computation of net cash provided by operating activities? Cash received from customers Supplies used Payment of rent Purchase of insurance
Supplies used Solution: Supplies used is not a cash flow, therefore it is not included in net cash provided by operating activities.
Companies prepare various types of trial balances. Which trial balance lists all of a company's permanent and temporary accounts? The post-closing trial balance The adjusted trial balance The trial balance prepared before recording adjusting entries All of these list the same number of accounts. The pre-disclosure trial balance
The adjusted trial balance Solution:Companies prepare three trial balances: (i) trial balance (i.e., before recording adjusting entries), (ii) the adjusted trial balance (i.e., which is prepared after recording adjusting entries), and (iii) the post-closing trial balance (i.e., which is prepared after recording closing entries). The adjusted trial balance shows the balances of all accounts, including those adjusted at the end of the accounting period. The post-closing trial balance lists only permanent accounts (i.e., balance sheet accounts) because the temporary accounts (e.g., income statement accounts) will have been closed to zero in preparation for the next year.There is no "pre-disclosure trial balance."
On December 31, before any year-end adjustments, a corporation's prepaid insurance account had a balance of $2,900. It was determined that $1,300 of the prepaid insurance had expired. The year-end adjusting entry would include a $1,300 debit to Insurance Expense. a $2,900 debit to Insurance Expense. a $1,400 debit to Insurance Expense. No year-end adjusting entry would be necessary a $1,600 debit to Insurance Expense.
a $1,300 debit to Insurance Expense. Solution: Increase insurance expense by $1,300 and decrease prepaid insurance by $1,300. Debit the Insurance Expense account to increase it, and credit the Prepaid Insurance account to decrease it.
A company borrowed money from a bank by signing a one-year note payable in the amount of $300,000 on April 30. The note requires the company to pay interest at an annual rate of 6%. The company records adjusting entries on December 31. The adjusting entry that the company should record for accrued interest on December 31 would include a debit to Interest Expense for $6,000. a debit to Interest Expense for $1,200. a debit to Interest Expense for $15,000. a debit to Interest Expense for $12,000. none of these because no adjusting entry would be necessary.
a debit to Interest Expense for $12,000. Solution:Interest = Principal x Rate x Time = $300,000 x 6% x 8/12 = $12,000After one month, the accrued interest is $12,000.Interest rates are always annual interest rates unless specifically stated otherwise. This loan charges 6% annual interest per year. The debtor records an adjusting entry to record accrued interest.Debit: Interest Expense, $12,000Credit: Interest Payable, $12,000
An adjusting entry is always a compound entry affecting three or more accounts. usually affects two balance sheet accounts and no income statement accounts. usually affects two income statement accounts and no balance sheet accounts. must be noted in the books of a company but is never journalized or posted. always affects at least one balance sheet account and one income statement account.
always affects at least one balance sheet account and one income statement account. Solution:Accrual-basis accounting means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash is not exchanged in the same period. Accrual-basis accounting ensures that the revenue recognition principle and expense recognition principles are both followed. Adjusting entries ensure that the revenue recognition and expense recognition principles are followed. Adjusting entries are required before a company prepares financial statements. Every adjusting entry will affect the balance of at least one balance sheet ac-count and one income statement account. Accrual-basis accounting (and adjusting entries) are required by generally accepted accounting principles.
Adjusting entries are also called closing entries. affect only balance sheet accounts. are never posted to the ledger. affect only income statement accounts. are needed to ensure that the expense recognition principle is followed.
are needed to ensure that the expense recognition principle is followed. Solution:Accrual-basis accounting means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash is not exchanged in the same period. Accrual-basis accounting ensures that the revenue recognition principle and expense recognition principles are both followed. Adjusting entries ensure that the revenue recognition and expense recognition principles are followed. Adjusting entries are required before a company prepares financial statements. Every adjusting entry will affect the balance of at least one balance sheet ac-count and one income statement account. Accrual-basis accounting (and adjusting entries) are required by generally accepted accounting principles.
Accrued revenues are revenues for services performed that have not yet been recorded. If a company fails to record a year-end adjusting entry for accrued revenues, the company's liabilities will be understated and its revenue will be understated. equity will be overstated and its revenue will be understated. assets will be overstated and its revenue will be understated. liabilities will be overstated and its revenue will be understated. assets will be understated asset and its revenue will be understated.
assets will be understated asset and its revenue will be understated. Solution: If a company fails to record a year-end adjusting entry for accrued revenues, the company's revenue will be understated. Understating revenue understates retained earnings and stockholders' equity. Failing to accrue revenues also understates accounts receivable understating assets.
A certain company debited prepaid insurance when it paid for a one-year insurance policy. If the company does not record any year-end adjusting entries then retained earnings would be understated. stockholders' equity would be understated. assets would be overstated. expenses would be overstated. liabilities would be understated.
assets would be overstated. Solution: The adjusting entry for prepaid insurance would include a debit to the Insurance Expense account and a credit to the Prepaid Insurance account. This adjusting entry would increase expense which would decrease net income, and decreasing net income decreases retained earnings (and stockholders' equity). This adjusting entry also decreases assets (i.e., decrease Prepaid insurance). This questions asks for the effect of omitting (or forgetting) this adjusting entry. Omitting the adjusting entry to record prepaid expense causes several errors, including overstating assets, understating expenses, overstating net income, overstating retained earnings, and overstating stockholders' equity. Liabilities are not affected.
Post-Closing(ending retained earnings) =
beginning retained earnings + revenues(not unearned revenue) - expenses - dividends
The difference between an asset's cost and its accumulated depreciation is called fair value. book value. real value. nominal value. market value.
book value. Solution: Book value is cost less accumulated depreciation. Market value is the value at which the item could be sold under normal selling conditions. Fair value is the value at which the item could be sold under normal selling conditions. "Real value" does not have a specific meaning in the context of accounting.
Accrued expenses are expenses incurred that are not yet paid or recorded. An adjusting entry made to record an accrued expense debits an equity account and credits an expense account. debits an expense account and credit cash. debit an expense account and credits a liability account. debits an expense account and credits an equity account. debits a liability account and credits an expense account.
debit an expense account and credits a liability account. Solution: Accruing an expense increases the expense, and expenses increase with debits. Accruing an expense also increases a liability, and liabilities increase with credits.
As prepaid expenses expire with the passage of time, the correct adjusting entry will be a: debit to an expense account and a credit to an asset account. debit to an asset account and a credit to a liability account. debit to an asset account and a credit to an expense account. debit to an asset account and a credit to an asset account. debit to an expense account and a credit to an expense account.
debit to an expense account and a credit to an asset account. Solution:Prepaid expenses, such as prepaid insurance and supplies, are costs that expire either with the pas-sage of time or through use. By the end of the period, a portion of the prepaid asset (e.g., supplies) had been used. An adjusting entry is necessary to reduce the prepaid expense account so that it will report the actual amount of unused or unexpired prepaid expense at the end of the period. The adjusting entry debits an expense (e.g., supplies expense) and credits an asset account (e.g., supplies).
The year-end trial balance for Garnet & Gold Corporation appears as follows: Garnet & Gold CorporationTrial BalanceDecember 31 Debit Credit Cash $ 300 Accounts Receivable 500 Prepaid Insurance 60 Supplies 140 Equipment 4,000 Accumulated Depreciation, Equipment $ 800 Unearned Revenues 300 Common Stock 1,000 Retained Earnings 1,400 Service Revenue 3,000 Salaries and Wages Expense 1,000 Rent Expense 500 $ 6,500 $ 6,500 If the current year depreciation on the equipment were $400, the company should record an adjusting entry that debits Depreciation Expense for $400 and credits Equipment for $400. debits Accumulated Depreciation for $400 and credits Equipment for $400. debits Depreciation Expense for $400 and credits Cash for $400. debits Depreciation Expense for $400 and credits Accumulated Depreciation for $400. debits Equipment for $400 and credits Accumulated Depreciation for $400.
debits Depreciation Expense for $400 and credits Accumulated Depreciation for $400. Solution: The trial balance lists the company's accounts and their balances on a particular date before adjustng entries have been recorded. This company's trial balance shows that the Accumulated Equipment has an $800 balance. However, this balance does not include the effects of the current year's depreciation expense. The adjusting entry increases Accumulated Depreciation and increases Depreciation Expense by $400. The ending balance of Accumulated Depreciation will become $1,200. Debit the Depreciation Expense account by $400 and credit the Accumulated Depreciation account by $400.
The year-end trial balance for Garnet & Gold Corporation appears as follows: Garnet & Gold CorporationTrial BalanceDecember 31 Debit Credit Cash $ 300 Accounts Receivable 500 Prepaid Insurance 60 Supplies 140 Equipment 4,000 Accumulated Depreciation, Equipment $ 800 Unearned Revenues 300 Common Stock 1,000 Retained Earnings 1,400 Service Revenue 3,000 Salaries and Wages Expense 1,000 Rent Expense 500 $ 6,500 $ 6,500 If, at year-end, the unexpired insurance were $20, the company should record an adjusting entry that debits Prepaid Insurance for $20 and credits Insurance Expense for $20. debits Insurance Expense for $20 and credits Prepaid Insurance for $20. debits Prepaid Insurance for $40 and credits Insurance Expense for $40. debits Insurance Expense for $40 and credits Prepaid Insurance for $40. debits Insurance Expense for $20 and credits Cash for $20.
debits Insurance Expense for $40 and credits Prepaid Insurance for $40. Solution: The trial balance lists the company's accounts and their balances on a particular date before adjusting entries have been recorded. This company's trial balance shows that the Prepaid Insurance account has a balance of $60. However, unexpired insurance is only $20; the Prepaid Insurance account is overstated and it needs to be adjusted. The adjusting entry reduces Prepaid Insurance and increases Insurance Expense by $40. This results in Prepaid Insurance having an ending balance of $20. Debit the Insurance Expense account by $40 and credit the Prepaid Insurance account by $40.
Year-end adjusting entries for prepaid expenses decrease expenses and increase assets. decrease assets and increase revenues. decrease revenues and increase assets. decrease assets and increase expenses. increase revenues and increase assets
decrease assets and increase expenses. Solution:When a company pays before receiving goods or services, it records the decrease in cash and an increase in a different asset (e.g., supplies, prepaid insurance, prepaid rent). At the end of the accounting period, the company adjusts its prepaid expense accounts to reflect that the company has fully or partially consumed them through use or the passage of time (e.g., decrease prepaid insurance for the months of coverage used before the end of the accounting period). Also, the company adjusts its expenses upward by that same amount (e.g., increase insurance expense) to show it was incurred before the end of the period.
A certain company debited prepaid insurance when it paid for a one-year insurance policy. If the company does not record any year-end adjusting entries then assets would be understated. nothing would be over or understated. stockholders' equity would be understated. liabilities would be understated. expenses would be understated.
expenses would be understated. Solution: The adjusting entry for prepaid insurance would include a debit to the Insurance Expense account and a credit to the Prepaid Insurance account. This adjusting entry would increase expense which would decrease net income, and decreasing net income decreases retained earnings (and stockholders' equity). This adjusting entry also decreases assets (i.e., decrease Prepaid insurance). This questions asks for the effect of omitting (or forgetting) this adjusting entry. Omitting the adjusting entry to record prepaid expense causes several errors, including overstating assets, understating expenses, overstating net income, overstating retained earnings, and overstating stockholders' equity. Liabilities are not affected.
In the closing process total revenues are determined to be $4,350 while total expenses are determined to be $3,575 and total dividends are $650. The retained earnings account will increase by $775. Retained earnings does not change. decrease by $775. increase by $125. decrease by $125.
increase by $125. Solution: Retained earnings will increase by revenues of $4,350, decrease by expenses of $3,575 and decrease by dividends or $650; retained earnings increases by $125.
A company uses accrual-basis accounting. On December 20, the company received $1,000 from a customer for services expected to be completed within 30 days. On December 20, the company recorded $1,000 of cash and unearned service revenue. The company does provide the services before the end of the current year, but it omits the year-end adjusting entry. This omission would cause the company's current year revenues to be overstated. liabilities to be understated. assets to be overstated. expenses to be overstated. net income to be understated.
net income to be understated. Solution:The firm should record a year-end adjusting entry for services earned:Debit: Unearned revenues for $1,000Credit: Revenue for $1,000Overlooking this adjusting-entry would cause unearned revenue (and liabilities) to be overstated and it would cause revenues (net income, retained earnings and equity would also be overstated) to be understated.
Interest =
principal x rate x time (ie. $10,000 x 6%/(12 x remaining months) *debit-interest expense *credit-interest payable
Net income using accrual basis =
revenue earned -expenses incurred(wage expense incurred, depreciation expense, interest incurred on debt, supplies expense incurred)
In Year 1, Costello Company performed work for a customer and billed the customer $14,000. In Year 2, the customer pays Costello Company for the services it rendered in Year 1. In Year 1, the company incurred and paid $6,000 of wage expense. If Costello Company uses the cash-basis of accounting, then it will report revenue of $14,000 in Year 2 and expense of $6,000 in Year 1. revenue of $14,000 and expense of $6,000 in Year 2. revenue of $14,000 in Year 1 and expense of $6,000 in Year 2. no revenue and no expense in either year. revenue of $14,000 and expense of $6,000 in Year 1.
revenue of $14,000 in Year 2 and expense of $6,000 in Year 1 Solution: The cash-basis of accounting recognizes revenues in the year cash is collected from customers regardless of when the performance obligation is satisfied and it recognizes expenses in the year they are paid regardless of when they are incurred. The company collected cash from the customer in Year 2 so it recognizes the revenue in Year 2. It paid the employees the wage in Year 1 so it recognizes the expense in Year 1.
The generally accepted accounting principle which dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied is the expense recognition principle. accrued revenues principle. going concern assumption. periodicity assumption. revenue recognition principle.
revenue recognition principle. Solution:The revenue recognition principle states that revenue is recognized in the accounting period in which the performance obligation is satisfied. Periodicity assumption states that a business's life can be divided into fiscal periods. The expense recognition principle dictates that companies match efforts (i.e., expenses) with results (i.e., revenues). The revenue recognition principle states that revenue is recognized in the accounting period in which the performance obligation is satisfied. There is no "accrued revenues principle."
On December 1, a corporation reported a $200 balance in its supplies accounts. During December, the company purchased additional supplies for $950 and it also consumed $700 of its supplies. If no adjusting entry is made for supplies net income will be understated by $700. assets will be understated by $450. expenses will be understated by $950. expenses will be understated by $250. stockholders' equity will be overstated by $700.
stockholders' equity will be overstated by $700. Solution:Ending supplies = beginning supplies + additional supplies purchased minus supplies consumedEnding supplies = 200 + 950 - 700 = 450.The year-end adjusting entry records the supplies consumed as a debit to Supplies Expense for $700 and a decrease in Supplies by $700. Forgetting to record that journal entry understates ex-penses by $700 which overstates net income, retained earnings and stockholders' equity by $700, and overstates assets (i.e., supplies) by $700.
Total credit in post-closing trial balance =
the total credits of the adjusted trial balance - expenses and dividends
12-Month insurance question
total insurance paid/number of months, multiply that by remaining months *debit-insurance expense *credit-prepaid insurance
When a business that provides services to customers uses accrual-basis accounting , revenue is recognized when cash is received. at the end of the year. when the customer is billed. at the end of the month. when the service is performed.
when the service is performed. Solution: Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called accrual basis accounting. Revenues are earned when the performance obligation is satisfied. For example, revenue is earned when a company provides services to a customer.
