Ch 3: The Accounting Cycle: End of the Period

In May, Just In Thyme, Inc. billed a customer $1,000 for services performed in May. In June, Just In Thyme collected the $1,000. Which of the following is true assuming accrual accounting?

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

Burrow, Inc. borrowed $20,000 with an annual rate of 6%, the note and interest are due at the end of two years. By the end of the first month, the interest incurred equals $

$100

On November 1, 2019, Movers, Inc., paid $24,000 for 2 years' rent beginning on November 1. The Prepaid rent balance at December 31, 2019 equals ______.

$22,000 Prepaid rent started with $24,000 on November 1. After 2 months of use (November 1 through December 31), Prepaid rent only has 22 months left with a balance of $22,000 (or $24,000/24 months times 22 months).

Burrow, Inc. borrowed $20,000 with an annual rate of 6%, the note and interest are due at the end of two years. Calculate the interest for a three-month period.

$300

_____-basis accounting helps measure and report revenues and expenses in a way that clearly represents the net income of the company.

Accrual

The accounting basis that records revenues in the period that goods and services are provided to customers is referred to as _____

Accrual-basis accounting

_____ occur when the cash flow occurs after either the expense is incurred or the revenue is earned.

Accruals

How do adjusting entries for accrued expenses affect liabilities and expenses?

Adjusting entries for accrued expenses can increase liabilities and increase expenses.

Reporting revenues only when cash is received and expenses only when cash is paid is called the _____ basis of accounting.

Cash

_____ revenue arises when a business receives cash in one period, but does not provide all of the related goods or services until a later period.

Deferred

_____ is an allocation of the cost of buildings, vehicles, and equipment to expense over time as they are used.

Depreciation

True or false: A contra-asset account, such as Accumulated Depreciation, will have a normal debit balance.

False

True or false: Accumulated Depreciation is a contra-account to a long-lived asset account, such as Equipment. This means that it is added to the balance of the long-lived asset in the balance sheet.

False

Which of the following statements is correct regarding the adjusting entry to record interest accrued on a note payable?

Interest on the note payable is classified as an expense since it is a cost of borrowing.

In January, Pizza Company bought pizza ingredients on account for $100, with payment due to the supplier in April. The pizza ingredients were used for pizzas made in January. In which month should Pizza Company record the cost of the pizza ingredients as an expense?

January

Which of the following pre-payments requires an adjusting entry at the end of the year?

On November 1, the company pays rent for the next six months.

Which of the following transactions would normally be recorded as an asset when cash is paid?

Rent paid in advance

The _____ trial balance shows a list of all accounts and their balances after we have updated account balances for adjusting entries.

adjusted

To complete the measurement process, companies need to update balances of assets, liabilities, revenues and expenses for _____ entries.

adjusting

A prepayment that is originally recorded as an asset will be ______.

allocated to future accounting periods based on the cost of the asset used during the period

After the adjusting entries have been completed, the adjusted balance in the Prepaid Rent account represents the ______.

amount of the prepayment that remains towards future rental periods

In recording an accrual adjusting entry to account for revenues earned but not yet collected, ______.

an asset is increased since cash will be collected at a later date

The adjusting entry for supplies used during the period will result in ______ to the Supplies Expense account.

an increase

A prepayment such as "Prepaid Insurance" is originally recorded as a(n) ___ when an insurance policy is purchased and will later be expensed in the period used.

asset

Neumann Corporation purchases supplies that will be used during the following quarter. At the time of purchase, the supplies should be recorded as a(n)

asset

Supplies that are not used immediately are recorded as a(n) ______ when purchased.

asset

Prepaid insurance is a(n) ______.

asset in the balance sheet

Norbert Company debits Accounts Receivable and credits Service Revenue. As a result of this adjusting entry, Norbert Company's:

assets increase; equity increases

Deferred revenue appears on the ______.

balance sheet as a liability

Prepaid rent appears in the ______.

balance sheet because it is an asset

Long-lived assets, such as equipment, are reported at their ______ value in the balance sheet.

book

Long-lived assets are reported in the balance sheet at _____ value, which is equal to its original cost less _____.

book; accumulated depreciation

Adjusting entries never affect the asset account called _____

cash

At the end of December, Berber Company receives a utility bill for $920 associated with its December operations. Berber will pay the bill on January 5. On December 31, Berber should

debit Utilities Expense and credit Utilities Payable

Andy records an adjusting entry for deferred revenue. Andy should:

debit a liability account credit a revenue account

Beverly Company incurred interest on its bank loan; interest is due and will be paid at the beginning of next year. On December 31, Beverly Company should

debit interest expense and credit interest payable

Unpaid interest should be credited to _____ payable

interest

On December 1, Emilia Company borrowed $100,000 and signed a promissory note. The principal and interest are due on May 1 of the following year. On December 31, the company accrues interest for the month of December. The company's bookkeeper should debit interest expense and credit

interest payable

Besides sales or service revenue, which of the following is another common example of a transaction that is recorded as an accrued revenue.

interest revenue

After the adjusting entries have been completed, the adjusted balance in the Interest Payable account represents:

interest that has accrued, but has not been paid, at the end of the period

On December 31, Mueller Inc., makes an adjusting entry to accrue salaries expense. As a result of this entry, Mueller's:

liabilities will increase, equity will decrease

Deferred revenue is reported on the balance sheet as a current _____.

liability

Which of the following transactions do not require an adjusting journal entry for Mueller Corporation on December 31?

shipping expense for december is paid in cash service is provided during december for cash.

The adjusting entry for supplies used during the period will result in a debit to the ______ account and a credit to the ______ account.

supplies expense; supplies

After the adjusting entries have been completed, the adjusted balance in the Deferred Revenue account represents:

the amount of the sales or services still owed to the customer.

After the adjusting entries have been completed, the adjusted balance in the Supplies account represents:

the cost of supplies remaining at the end of the accounting period

After the adjusting entries have been completed, the adjusted balance in the Interest Expense account represents:

total interest that has been paid or accrued during the period

After the adjusting entries have been completed, the balance in the "Salaries Expense" account represents:

total salaries, paid and unpaid, that have been incurred during the accounting period

On August 1, 2019, a firm prepaid $53,520 for 2 years' rent of an office building. On March 1, 2020, the firm prepaid $34,800 for 2 years' rent of a warehouse. The rent agreements on both buildings went into effect on the dates the rents were prepaid. What amount will be shown for prepaid rent on the December 31, 2020 balance sheet?

$35,910 ($53,520/24 months*7 months remaining)+($34,800/24 months*14 months remaining) Note that the question is asking for the Prepaid rent on the balance sheet on December 31, 2020 and not the expense on the income statement.

When recording an adjustment for the cost of using equipment during the current accounting period, which two accounts are affected?

Accumulated Depreciation and Depreciation Expense

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

Cash; Deferred Revenue

On July 1, Book Palace prepaid 12 months' fire insurance with coverage starting the following month. The adjusting entry on December 31 includes:

Credit to prepaid insurance debit to insurance expense

During December, Mainzel Interior Design Corporation redecorated the reception areas of a local hotel. The project was completed on December 31 with payment due in 30 days. Payment was received on January 21 of the following year. When should Mainzel recognize the related revenue using accrual accounting?

December 31

True or false: The adjusting entry to record interest owed for the period will cause the balance in the Note Payable account to increase.

False

Which of the following would be referred to as "accruals?"

Goods and services provided, but not yet collected. Expenses Incurred, not yet paid.

Which of the following situations matches a journal entry that debits Deferred Revenue and credits Service Revenue.

Goods or services, for which cash was collected in advance, were provided during the current period.

When should supplies be recorded as an expense?

In the period the supplies are used, regardless of when they were purchased

Which of the following transactions requires an adjusting entry for accrued revenue?

Interest earned, but not yet collected, on a note receivable

On November 1, 2019, Movers, Inc., paid $24,000 for 2 years' rent beginning on November 1 (assume rent is the same amount each month). Movers' year-end financial statements as of December 31, 2019 will show:

Rent expense of $2,000 Prepaid rent of $22,000

_____ are recorded in the period that goods and services are provided to customers and _____ are recorded in the period that costs are incurred while providing those goods and services.

Revenues; expenses

On April 1, Katie Inc. collected $2,400 from a customer for a 12-month membership starting on that date. On December 31, Katie Inc. should credit:

Service revenue for $1,800

Taggert Company paid $1,800 for a 6-month insurance premium on December 1. Which of the following statements are correct regarding the accounting for this insurance over the six-month period?

Taggert will debit Insurance Expense for $300 on Dec. 31. Taggert will debit Prepaid Insurance for $1,800 on Dec. 1. Taggert will credit Prepaid Insurance for $300 on Dec. 31.

Under accrual-basis accounting, which of the following result in an expense being recorded in May?

The company pays cash in April for supplies used in May. The company pays cash in June for salaries earned in May.

Which of the following statements is correct regarding a long-lived asset such as a building?

The original cost in the building account will not change when an adjusting entry is recorded for depreciation.

What are the effects on the accounting equation from an adjusting entry 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 adjusting entry for interest expense accrued, but not paid, at the end of the accounting period?

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

What are the effects on the accounting equation from the adjustment for salaries incurred but not yet paid during the accounting period?

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

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

True

Which of the following statements is correct regarding a long-lived asset such as equipment?

When adjusting entries are recorded, the original cost in the Equipment account will not change.

In an adjusting entry for expenses incurred but not yet paid ______.

a liability is increasing since cash will be paid in the future due to the expense incurred

Depreciation is an allocation of the _____ of buildings, vehicles, and equipment to expense over time as they are used.

cost

After the adjusting entries have been completed, the balance in the Rent Expense account represents the:

cost of rent for the accounting period

If an asset account such as Equipment has a normal debit balance, the associated contra account should have a normal _____ balance.

credit

The adjusting entry for supplies used requires a _____ to Supplies and a _____to Supplies Expense.

credit; debit

Accumulated Depreciation has a normal _____ balance which indicates that it _____ total assets.

credit; decreases

Peter Inc. earned interest on its bank deposit. The interest will be received at the beginning of next year. On December 31, Peter should

debit interest receivable and credit interest revenue

When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records a:

debit to Deferred Revenue credit to Revenue

The adjusting entry for prepaid rent requires a(n) _____ to Rent Expense and a(n) _____ to Prepaid Rent.

debit; credit

As the balance in the Accumulated Depreciation increases, total assets _____ because Accumulated Depreciation is a(n) _____ account.

decrease; contra

Supplies should be ______ and Supplies Expense should be ______ for the cost of supplies used up during the period.

decreased; increased

The adjusting entry for equipment depreciation includes a debit to _____ and a credit to _____.

depreciation expense; accumulated depreciation

Adjusting entries are made at the _____ of the accounting period, while daily transactions are made throughout the accounting period.

end

The adjusting entry for a prepaid expense includes a debit to a(n) ______ account and a credit to a(n) ____ account.

expense; asset

The adjusting entry to record salaries owed to employees at the end of the accounting period includes a debit to "_____" and a credit to "_____".

expense; payable

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

expenses

Accrual basis accounting differs from cash basis accounting in that accrual basis accounting records ______.

expenses in the period incurred, even though cash has not yet been paid revenues in the period when the revenue is earned, even though the cash has not yet been collected

An adjusting entry is necessary to record interest expense at year-end because the interest:

has already been incurred

Consistent with accrual-basis accounting, expenses should be recognized

in the period when the related revenue is generated

Under the accrual basis of accounting, costs used to generate revenue are recorded as expenses

in the same period as related revenue.

Sabrina Company recorded an adjusting entry for salaries owed to employees at the end of the year. As a result of this entry, Sabrina Company's:

liability increase; equity decrease

Transactions that do not involve revenues or expenses and transactions that result in revenues and expenses being recorded at the same time as the cash flows

never require adjusting entries

Adjusting entries for accrued expenses ensure that liabilities are reported for all amounts ______ at the end of the accounting period.

owed

After the adjusting entries have been completed, the adjusted balance in the Salaries Payable account represents wages earned by employees, but not yet _____ by the company.

paid

Costs of assets acquired in one period that will be recorded as expense in a future period are referred to as ______ and are initially recorded as _____.

prepaid expenses; assets

At year-end, companies that utilize accrual-based accounting systems complete the measurement process through

recording of adjusting entries

After the adjusting entries have been completed, the ending balance in the Supplies account represents the cost of supplies ______.

remaining at the end of the accounting period

As of December 31, the end of the accounting period, $700 of salaries to employees have been incurred but not paid. The employees will be paid on January 5. On December 31, which two of the following will occur?

salaries payable will increase by $700 salaries expense will increase by $700

Which of the following account balances are shown in the adjusted trial balance and reported in the income statement?

service revenue; supplies expense

Identify all transactions that do not require adjusting entries.

transactions that result in revenues or expenses being recorded at the same time as the cash flow; transactions that do not involve revenue or expense activities

After the adjusting entries have been completed, the adjusted balance in the Supplies Expense account represents the cost of supplies:

used during the accounting period