Accounting Test #1

Revenue Recognition Principle

1. Recognize revenue when it is earned. 2. Proceeds need not be in cash. 3. Measure revenue by cash received plus cash value of items received.

In its first year of operations, Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers); Incurred expenses of $35,000 ($31,000 cash paid toward them); Prepaid $8,000 cash for costs that will not be expensed until next year. Net income under the cash basis of accounting is:

13,000

On August 31 of the current year, the assets and liabilities of Gladstone, Inc. are as follows: Cash $30,750; Supplies, $660; Equipment, $10,500; Accounts Payable, $9,200. What is the amount of equity as of August 31 of the current year?

32,710

Larry Bar opened a frame shop and completed these transactions: 1. Larry started the shop by investing $40,000 cash and equipment valued at $18,000 in exchange for common stock. 2. Purchased $70 of office supplies on credit. 3. Paid $1,200 cash for the receptionist's salary. 4. Sold a custom frame service and collected $1,500 cash on the sale. 5. Completed framing services and billed the client $200. What was the balance of the cash account after these transactions were posted?

40,300

A company pays its employees $500 each Friday, which amounts to $100 per day for the five-day workweek that begins on Monday. If the monthly accounting period ends on Thursday and the employees worked through Thursday, the amount of salaries earned but unpaid at the end of the accounting period is:

400

Business Entity Assumption

A business is accounted for separately from other business entities, including its owner.

Full Disclosure Principle

A company is required to report the details behind financial statements that would impact users' decisions.

Expense Recognition Principle (or Matching Principle)

A company must record its expenses incurred to generate the revenue reported.

On May 1, Sellers Marketing Company received $1,500 from Franco Marcelli for a marketing campaign effective from May 1 this year to April 30 of the following year. The Cash receipt was recorded as unearned fees and at year-end on December 31, $1,000 of the fees had been earned. Assuming adjustments are only made at year-end, the adjusting entry on December 31 would be:

A debit to Unearned Fees and a credit to Fees Earned for $1,000

Fragmental Co. leased a portion of its store to another company for eight months beginning on October 1, at a monthly rate of $950. Fragmental collected the entire $7,600 cash on October 1 and recorded it as unearned revenue. Assuming adjusting entries are only made at year-end, the adjusting entry made by Fragmental Co. on December 31 would be:

A debit to Unearned Rent and a credit to Rent Revenue for $2,850

On January 1 of the current year, Jimmy's Sandwich Company reported stockholders' equity totaling $123,500. During the current year, total revenues were $97,000 while total expenses were $86,500. Also, during the current year paid $21,000 in cash dividends. No other changes in equity occurred during the year. If, on December 31 of the current year, total assets are $197,000, the change in total stockholders' equity during the year was:

A decrease of $10,500

Measurement Principle (or Cost Principle)

Accounting information is based on actual cost. Actual cost is considered objective.

If a company paid $38,000 of its accounts payable in cash, what was the effect on the accounting equation?

Assets would decrease $38,000, liabilities would decrease $38,000, and equity remains unchanged

Marsha Bogswell is the sole stockholder of Bogswell Legal Services. Which accounting principle requires Marsha to keep her personal financial information separate from the financial information of Bogswell Legal Services?

Business entity assumption

The Income Summary account is used to:

Close the revenue and expense accounts

Golddigger Services, Inc. provides services to clients. On May 1, a client prepaid Golddigger Services $82,000 for 6-months services in advance. Golddigger Services' general journal entry to record this transaction will include a:

Credit to Unearned Management Fees for $82,000

On October 1, Goodwell Company rented warehouse space to a tenant for $3,400 per month. The tenant paid five months' rent in advance on that date, with the lease beginning immediately. The cash receipt was credited to the Unearned Rent account. The company's annual accounting period ends on December 31. The adjusting entry needed on December 31 is:

Debit Unearned Rent, $10,200; credit Rent Earned, $10,200

Holman Company owns equipment with an original cost of $95,000 and an estimated salvage value of $5,000 that is being depreciated at $15,000 per year using the straight-line depreciation method, and only prepares adjustments at year-end. The adjusting entry needed to record annual depreciation is:

Debit depreciation Expense, $15,000; credit Accumulated Depreciation, $15,000

A credit entry:

Decreases assets and expense accounts, and increases liability, common stock, and revenue accounts

Monetary Unit Assumption

Express transactions and events in monetary, or money, units.

Closing the temporary accounts at the end of each accounting period does all of the following except:

Has no effect on the retained earnings account

If the liabilities of a business increased $81,000 during a period of time and the equity in the business decreased $33,000 during the same period, the assets of the business must have:

Increased 48,000

The record of all accounts and their balances used by a business is called a:

Ledger (or General Ledger)

The Superior Company acquired a building for $500,000. The building was appraised at a value of $575,000. The seller had paid $300,000 for the building 6 years ago. Which accounting principle would require Superior to record the building on its records at $500,000?

Measurement (Cost) Principle

Another name for equity is:

Net assets

Time Period Assumption

Presumes that the life of a company can be divided into time periods, such as months and years.

Going-Concern Assumption

Reflects assumption that the business will continue operating instead of being closed or sold.

On December 15 of the current year, Conrad Accounting Services signed a $40,000 contract with a client to provide bookkeeping services to the client in the following year. Which accounting principle would require Conrad Accounting Services to record the bookkeeping revenue in the following year and not the year the cash was received?

Revenue Recognition Principle

Identify the accounts that would normally have balances in the credit column of a business's trial balance.

Revenue and liabilities

A $150 credit to Supplies was credited to Fees Earned by mistake. By what amounts are the accounts under- or overstated as a result of this error?

Supplies, overstated $150; Fees Earned, overstated $150

A credit is used to record an increase in all of the following accounts except:

Wages Expense

Which of the following does not require an adjusting entry at year-end?

cash invested by stockholder

Identify the account below that is classified as an asset account:

supplies

Which of the following purposes would financial statements serve for external users?

to fulfill regulatory requirements for companies whose stock is sold to the public