Smartbook: Chapter 3 Adjusting Accounts for Financial Statements

What is a plant asset?

A plant asset refers to a long-term tangible asset used to produce and sell products or services.

Sheldon Company had $500 for one day of accrued salaries on December 31 of the prior year. On January 4 of the current year, total salaries for the five-day week are paid. The journal entry to record the payment of salaries on January 4 includes:

Debit to Salaries Payable for $500; Debit to Salaries Expense for $2,000

Which of the following describes accrued revenue? (Check all that apply)

They refer to earnings which have been earned but not yet billed. Accounts receivable is usually increased when accruing revenues. They refer to revenues that are earned in a period, but have not been received and are unrecorded. The adjustment causes an increase in an asset account and an increase in a revenue account.

Determine which of the following transactions may require adjustments. (Check all that apply.)

a 24-month insurance policy was prepaid Equipment was purchased in the middle of the year. Six months of rent were paid in advance. Supplies were purchased at the beginning of the year, but not all were used. An advance payment was received from a customer earlier in the month, but only partially earned by the end of the month.

Accrual basis accounting is defined as: (Check all that apply.)

an accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred. an accounting system that uses the matching principle to determine when to recognize revenues and expenses.

A 12-month insurance policy was purchased on Dec. 1 for $4,800 and the Prepaid insurance account was initially increased for the payment. The required adjusting journal entry on December 31 includes a: (Check all that apply.)

debit to Insurance expense for $400. credit to Prepaid insurance for $400.

Place the steps in the adjusting process in the correct order in which they would be performed.

1. Determine what the current account balance is. 2. Determine what the correct account balance should be. 3. Record an adjusting entry.

At the end of the previous year, a customer owed Chocolates R US $500. On January 31 of the current year, the customer paid $900 total, which included the $500 owed plus $400 owed for the current month of January. What would be the journal entry on January 31 that reflects this? (Check all that apply.)

Accounts receivable will be credited for $500. Cash will be debited for $900. Service revenue would be credited for $400.

On December 27, a business completed a $400 service that had not yet been billed or recorded as of December 31. Demonstrate the required adjusting entry of the business by completing the following sentence. The required adjusting entry would be to debit the ___ (Unearned revenue/Accounts receivable/Cash/Service revenue) account and ___ (debit/credit) the ___ (Unearned revenue/Accounts receivable/Cash/Service revenue) account.

Accounts receivable; credit; service revenue

Explain your understanding of what an accrued expense is by selecting the statements below which are correct. (Check all that apply.)

Adjustments involve increasing both an expense and a liability account. They refer to costs that are incurred in a period, but are both unpaid and unrecorded. Examples of accrued expenses are wages expense and interest expense. They are reported on an income statement.

At the end of the previous year, a customer owed Days Company $400. On February 1 of the current year, the customer paid $600 total, which included the $400 owed plus $200 owed through February 1st. The journal entry on January 31 is? (Check all that apply.)

Cash will be debited for $600. Accounts receivable will be credited for $400. Service revenue would be credited for $200.

On December 28, I. M. Greasy, Catering completed $600 of catering services. As of December 31, the customer had not been billed nor had the transaction been recorded. Demonstrate the required adjusting entry by choosing the correct statement below.

Debit Accounts receivable for $600.

A company borrowed $4,000 from the bank at an interest rate of 9%. By the end of the accounting period, the loan had been outstanding for 30 days. Demonstrate the required adjusting entry by choosing the correct statement below.

Debit Interest expense for $30.

For the current year, Bubbles Office Supply had earned $600 of interest on investments. As of December 31, none of this interest had been received or recorded. Demonstrate the required half of the adjusting entry by choosing the correct statement below.

Debit Interest receivable for $600.

By the end of the accounting period, employees have earned salaries of $500, but they will not be paid until the following pay period. Which of the following is the proper adjusting entry?

Debit Salaries expense for $500.

A company borrowed $10,000 from the bank at 5% interest. The loan has been outstanding for 45 days. Demonstrate the required adjusting entry for this company by completing the following sentence. The required adjusting entry would be to debit the Interest (expense/payable/receivable) ___ account and (debit/credit) ___ the Interest ___ (expense/payable/receivable) account.

Expense; credit; payable

By the end of the accounting period, employees have earned salaries of $650, but they will not be paid until the following pay period. Demonstrate the required adjusting entry by completing the following sentence. The required adjusting entry would be to debit the Salaries ___ (expense/payable) account and ___ (debit/credit) the Salaries ___ (expense/payable/unearned) account.

Expense; credit; payable

The expense recognition ___ (matching) principle requires that be recorded in the same accounting period as the ___ (expenses/revenues/assets) that are recognized as a result of those costs. This principle is a major part of the ___ (timing/adjusting/estimating) process.

Expenses; revenues; adjusting

A 12-month insurance policy was purchased on Dec. 1 for $3,600 and the Prepaid insurance account was increased for the payment. Demonstrate the required adjusting journal entry on Dec. 31 by selecting from the choices below.

Insurance expense would be debited for $300.

For the current year, a business has earned (but not recorded or received) $200 of interest from investments. Demonstrate the required adjusting entry by completing the following sentence. The required adjusting entry would be to debit the ___ (Unearned revenue/Accounts receivable/Cash/Interest receivable) account and ___ (debit/credit) the ___ (Cash/Accounts receivable/Interest revenue/Interest receivable) account.

Interests receivable; credit; interest revenue

A plant asset can be defined by which of the following statements? (Check all that apply.)

It is reported on the balance sheet. Its original cost (minus any salvage value) is expensed over its useful life. It is a tangible long-term asset. It has a life within the business greater than one period.

Which of the following statements describes the expense recognition (matching) principle? (Check all that apply.)

Matching of expenses with revenues is a major part of the adjusting process. Expenses should be matched in the same accounting period as the revenues that are earned as a result of those expenses.

The formula to figure out the profit margin of a company is ___ (Net income/Accounts receivable/Net sales) divided by ___ (Net income/Cash/Net sales).

Net income; net sales

Which of the following could be a logical or realistic accounting period for a business that is creating financial statements? (Check all that apply.)

One-month period One-year period Six-month period

Which of the following accounts would be considered a prepaid expense or prepaid asset account? (Check all that apply.)

Prepaid Insurance Supplies Prepaid Rent

Which of the following statements correctly define(s) a profit margin? (Check all that apply.)

Profit margin is also called return on sales. Profit margin is the ratio of a business's net income to its net sales. Profit margin is a useful measure of a business's operating results.

Accrued ___ are earned in a period that are both unrecorded and not yet received in cash.

Revenue or revenues

Illustrate your understanding of how to use the adjusted trial balance to prepare an income statement by completing the following sentence. In order to prepare an income statement using the account balances on an adjusted trial balance, all of the ___ (revenues/liabilities) and their credit balances are transferred to the income statement as well as all of the ___ (expenses/assets) and their ___ (debit/credit) balances.

Revenues; expenses; debit

Accrual basis accounting recognizes ___ (equity/revenues/expenses) when the service or product is delivered and records ___ (revenues/expenses/liabilities) when ___ (incurred/paid) in order to adhere to the matching principle.

Revenues; expenses; incurred

McDarrel's records $500 of accrued salaries on December 31. Three days later, on January 3, total salaries of $4,000 (including the $500 accrued at year end) are paid. Demonstrate the required journal entry on January 3 by selecting from the choices below. (Check all that apply.)

Salaries payable will be debited for $500. Cash would be credited for $4,000. Salaries expense would be debited for $3,500.

Which of the following accounts is considered a prepaid expense?

Supplies

$800 of supplies were purchased at the beginning of the month and the Supplies account was increased. As of the end of the period, $200 of supplies still remain. Which of the following is the correct adjusting entry?

Supplies expense would be debited for $600.

$1,000 of supplies were purchased at the beginning of the month. $300 were used during the month. (The Supplies account was increased at the time of the initial purchase.) Demonstrate the required adjusting journal entry by selecting from the choices below. (Check all that apply.)

Supplies would be credited for $300. Supplies expense would be debited for $300.

Explain the difference between the unadjusted and the adjusted trial balance.

The adjusted trial balance is prepared after adjusting entries have been recorded and posted.

Explain what unearned revenues are by selecting the statements below which are correct. (Check all that apply.)

They are reported on a balance sheet. They are also called deferred revenues. They refer to cash received in advance of performing a service or product. They are a liability.

What is the difference between an adjusted trial balance and an unadjusted trial balance? (Check all that apply.)

The adjusted trial balance is used to prepare financial statements. The adjusted trial balance generally has more accounts listed than the unadjusted trial balance. The adjusted trial balance is a list of accounts and their balances after adjusting entries have been posted.

Describe the final step in the adjusting process.

The final step is to create an adjusting journal entry to get from step 1 to step 2.

Identify which group of accounts may require adjustments at the end of the accounting period.

Unearned revenue; Supplies; Prepaid rent

Explain what unearned revenues are by choosing the correct statement below.

Unearned revenues refer to cash received in advance of providing a service or product.

Which of the following is (are) true regarding timeliness and the importance of periodic reporting? (Check all that apply.)

Useful information must reach decision makers frequently. Businesses report financial information at regular intervals to ensure timeliness of data. The value of information is often linked to its timeliness.

Which of the accounts below are considered accrued expenses?

Wages expense, Interest expense

The revenue recognition principle states that revenue:

should be recorded when goods or services are provided to customers at an amount expected to be received from them