Chapter 2: Review of the Accounting Process

Flounder Corp. sold $12,000 of goods on account. The entry to record this transaction would include a debit to

accounts receivable

The balance sheet account that depreciation is recorded to is:

accumulated depreciation

Prepayments occur when:

cash flow precedes expense or revenue recognition

The adjusting journal entry required when deferred revenue is recognized includes a _______ entry to a liability.

debit

Depreciation expense is _____ and accumulated depreciation is ______ to record the cost of equipment used up generating revenue in the current period.

debited, credited

Supplies expense is ______ and supplies is ______ for the amount of supplies used during the period that were originally recorded as an asset when purchased.

debited, credited

In a double-entry accounting system, the ________ represents the left side of the account.

debits

An adjusting entry to record depreciation expense for the period will ______ total assets.

decrease

Indirectly, expenses will _____ retained earnings and revenues will _____ retained earnings.

decrease; increase

Paying employees for services rendered during the current month ________ assets and ______ shareholders' equity.

decreases; decreases

Which accounts should be closed at the end of the period?

dividends salary expense sales

Which account is a temporary account?

utility expense

The purpose of a post-closing trial balance is to

verify that closing entries were prepared and posted correctly.

Adjusting entries are recorded:

when the financial statements are prepared

On September 1, Year 1, Great Lakes Equipment receives $24,000 from a customer for work to be performed evenly over the next 2 years. What is the amount of revenue that Great Lakes immanent Equipment should recognize on the income statement for the year ending December Year 1?

$4,000, Reason: $24,000/2b I4 months = $1,000 per month x 4 months = $4,000 revenue r1ecognized.

On June 1, Year 1 Oxian Corp. receives $24,000 from a customer for work to be performed evenly over the next 2 years. What is the amount of revenue that Oxian should recognize on the December 31 income statement for Year 1?

$7,000 Reason: $24,000/24 months = $1,000 per month x 7 months = $7,000 revenue.

Conner Corp. accrues interest on a note payable at year-end. The adjusting journal entry to record the accrual will include which of the following?

- Debit to interest expense. - Credit to interest payable.

Longine Co. accrues 1 week of salaries at the end of November. The adjusting journal entry to record this accrual will include which of the following?

- Debit to salary expense. - Credit to salary payable.

Majerek Company accrues salaries at year-end. What is the financial statement effect of this adjusting entry?

- Net income is decreased. - Retained earnings is decreased. - Expense is increased.

Which of the following are external events?

- Paying employee salaries. - Collecting on a customer account. - Borrowing from the bank.

Which of the following are economic events?

- The payment of employee salaries for the week. - Borrowing $10,000 from the bank.

Focus Corp. pays $12,000 for 2 years of rent. What is the journal entry to record this transaction?

Debit prepaid rent $12,000; credit cash $12,000.

On October 1, Year 1, Swift Corporation received $1,200 from customers for services to be performed evenly over the next 12 months. Swift recorded the original transaction in a balance sheet account. The adjusting journal entry on December 31, Year 1, will include which of the following entries?

Debit to deferred revenue $300. Reason: $1,200/12 months = $100 per month x 3 months Oct-Dec.

Which of the following is an internal economic event?

Depreciating equipment

Accountants often have to make _________ , of future amounts to comply with the accrual accounting model.

Estimates

On August 1, 2017, Clerk Company receives $15,000 from a customer on account for work to be performed evenly over the next 18 months. Clerk records this transaction in the deferred revenue account. If Clerk fails to record the adjusting entry on December 31, 2017, what is the effect on the financial statements?

Liabilities are overstated.

An external event involves an exchange between the company and

a separate economic entity.

Expenses incurred in one accounting period and paid for in a future accounting period are _______ liabilities.

Accrued

Failure to record the adjusting entry for deferred revenue now earned causes liabilities on the balance sheet to be what?

Overstated

A perpetual system requires that merchandise purchases be recorded in the ________ account.

inventory

In a perpetual system, each time goods are sold, cost of goods sold is debited and __________ is credited.

inventory

Which of the following is an internal event?

use of supplies

The balance sheet impact of accruing salaries expense is to:

increase liabilities

Conner Corporation purchases supplies on account. This transaction will ______ assets and ______ liabilities.

increase; increase

Purchasing supplies on account _________ the supplies account and ________ accounts payable.

increases; increases

To calculate interest the following information is needed:

interest rate period of time principal

Which account is used to record the accrual of interest on a note receivable?

interest receivable

Deferred revenue should be classified as a(n) _______ on the balance sheet.

liability

Deferred revenue is a(n):

liability on the balance sheet

The general formula used to calculate interest accrued on a note payable is principal times rate times

number of months outstanding in the current year/12.

Accumulated depreciation is:

- a balance sheet account - a contra asset account

On July 1, Perry Company signed a note with principal of $80,000 and a stated interest rate of 4%. The principal and interest are due on April 1 of the following year. Perry will accrue interest on December 31st of

$1,600 Reason: $80,000 x 4% x 6/12 - Interest is always stated as an annual rate regardless of loan term. The 4% interest is annual and must by multiplied by 6/12 to account for the six months July-December when recording the accrued interest on 12/31.

On January 1, Noonan Company purchases equipment for $100,000. The equipment is expected to have a useful life of 5 years and will have no value at the end of that period. Noonan allocates the cost equally over the period of use so the depreciation expense that must be recognized for the year is:

$20,000.

On January 1, Poodle Company purchases equipment for $120,000. The equipment is expected to have a useful life of 4 years and will have no value a the end of that period. Poodle allocates the cost equally over the period of use so the depreciation expense that must be recognized for the year is:

$30,000

Brunson Company pays employees $4,000 for work performed in the current month. The journal entry to record the transaction will include?

- a debit to salary expense - a credit to cash

To record depreciation expense

- accumulated depreciation is credited - depreciation expense is debited

An internal event (Select all that apply)

- affects the company's financial position. - does not involve an exchange transaction with another entity.

Accruals occur when cash flow comes:

- after revenue recognition - after expense recognition

Which of the following make up shareholders' equity?

- amounts earned by the corporation - amounts invested by shareholders

The following accounts are closed to income summary with a credit entry

- cost of goods sold - salaries expense - depreciation expense

The expense accounts are closed to income summary with:

- credit entry to expenses - debit to income summary

On April 1, Larken Corp. pays $36,000 for 3 years of rent. The transaction is appropriately recorded as prepaid rent. The adjusting entry on December 31, of the same year, will require a:

- credit to prepaid rent - debit to rent expense

On October 1, Arcelia Corp. pays $24,000 for two years of rent. The transaction is appropriately recorded in a prepaid rent account. On December 31, of the same year Arcelia should make an adjusting entry for the rent expired, which includes

- credit to prepaid rent $3,000 - debit to rent expense for $3,000.

Ragland Corp. purchases supplies on account for $1,000 and appropriately records the transaction in an asset account. A count of inventory at year-end indicates that $300 of supplies are remaining. The adjusting journal entry required at year-end includes:

- credit to supplies on hand $700 - debit to supplies expense $700.

Juergen is preparing the closing journal entries for the year. To close the revenue accounts, Juergen should:

- debit revenue - credit income summary

On October 1, Callison accepts a 5-year interest bearing note receivable for $1,000. The note bears interest of 12%. Both principal and interest are received at maturity. The journal entry required on December 31, Year 1, to accrue interest will include

- debit to interest receivable $30. - credit to interest revenue $30 Reason: $1,000 x 12% = $120/12 = $10 per month x 3 months = $30 interest expense

On May 1, Year 1, Garcia Company paid $1,200 for 12 months of rent and recorded the transaction in an income statement account. The adjusting journal entry required on December 31, Year 1, will require a:

- debit to prepaid rent $400. - credit rent expense $400 Reason: Because Garcia recorded the amount in an income statement account, you know they are using the alternative approach and record the full $1,200 expense when paying on May 1st. The appropriate rent expense amount at the end of the year is $800 for the months May-Dec so they do an adjusting entry to reduce the rent expense. Debit prepaid rent and credit rent expense for the $400 that will be recorded in the following year.

To accrue utilities expense at year-end that has not been paid,

- debit utilities expense - credit utilities payable

To record an adjusting entry when deferred revenue is recognized:

- deferred revenue is debited - revenue is credited

Which accounts are temporary accounts?

- depreciation expense - gain on sale of equipment

An internal event (Select all that apply)

- does not involve an exchange transaction with another entity. - affects the company's financial position.

Borrowing $50,000 from the bank and signing a note payable causes: (Select all that apply.)

- notes payable to increase - cash to increase

Which of the following make up shareholders' equity of a corporation?

- retained earnings - paid-in capital

Which of the following are temporary accounts?

- revenue - salary expense

Adjusting entries help a company accurately measure:

- revenues and expenses for the period. - the company's financial performance.

Mann Corporation signed a note with principal and interest due in 6 months. The stated rate of interest on the note was 8%. If Mann accrues three months of interest at year-end, the formula Mann will use will be: Principal x ________ x 3/12.

.08

Prepaid expenses are the cost of ______ acquired in one accounting period and ______ in a future period.

Assets, expensed

What account is debited when cash is collected from customers for a previous sale on account?

Cash

Which of the following steps occurs only at the end of the year?

Close the temporary accounts to retained earnings

Which transaction will require the following journal entry: debit Cash for $1,500 and credit Accounts receivable for $1,500?

Collect from customer on account.

Closing the sales revenue account requires a _______ to sales revenue.

Debit

Carradine Company prepares an adjusting journal entry to accrue salaries at year-end. What effect will this entry have on the financial statements?

Expenses will increase.

True or false: An internal event involves an exchange between the company and a separate economic entity.

False

True or false: Retained earnings equals net income plus distributions to shareholders.

False

An individual invests $10,000 to open a new business. What is the effect on assets?

Increase in total assets

Norton Corp. has revenues of $5,000 and expenses of $2,000. What is the total effect on retained earnings?

Increases $3,000.

Galaxy Corporation issues 500 shares of $1 par value common stock for $5,000. What is the total effect on owners' equity?

Increases $5,000

Which of the following are examples of prepayments?

Purchasing supplies that will be used later

Which transaction or event required the journal entry: debit Interest expense for $250 and credit Interest payable for $250?

Record interest at the end of the period.

Which transaction would require the following journal entry: debit Accounts receivable for $3,500; credit Sales revenue for $3,500; debit Cost of goods sold for $2,000 and credit Inventory for $2,000?

Sale on account

True or false: The stated interest rate on debt instruments is always stated as an annual rate.

True

Which of the following is an example of an estimate?

accounting for bad debts accounting for depreciation

Adjusting journal entries are necessary for three situations: deferrals, _________, and estimates.

accruals

Which of the following items is prepared at the end of the accounting period immediately before the financial statements are prepared?

adjusted trial balance

Entries made at the end of the accounting period before the financial statements are prepared are called ______ entries.

adjusting

A post-closing trial balance is prepared

after

Accruals involve transactions where the cash outflow or inflow takes place in a period ______ expense or revenue recognition.

after

Recognizing revenue before cash flow is an example of:

an accrual adjusting entry

A company paying rent in advance for the month of April records:

an asset

When rent is paid in advance, it is properly recorded on the balance sheet as __________.

an asset.

At the end of the accounting period, before the adjusting entries are recorded:

an unadjusted trial balance is prepared

When rent is paid in advance for 2 years, it is appropriately recorded as a(n) _______ whereas when rent is paid and used during one month, it is appropriately recorded as a(n) ________

asset, expense

Prepaid expenses are costs of assets acquired in an accounting period:

before they will be expensed

Which of the following is an external event?

borrowing from the bank

A deferred revenue liability appears on the balance sheet for:

cash received before revenue is earned

The process in which temporary accounts are reduced to zero balances and transferred to retained earnings is the ______ process.

closing

The purpose of estimating bad debts is to:

comply with the accrual accounting model.

The adjusting journal entry required when deferred revenue is recognized includes a ______ entry to revenue.

credit

Drake Corp. received $5,000 from customers for goods sold on account in the previous month. The journal entry for this transaction will include a

credit to accounts receivable

Green Pro accrues interest at year-end on a note receivable. The adjusting journal entry to record the accrual will include a

credit to interest revenue $40. Reason: Interest is stated at an annual rate regardless of the term of the loan. $1,000 x 12% x 4/12

On September 1, Gina accepts a 6-month interest bearing note receivable for $1,000. The note bears interest of 12%. Both principal and interest are received at maturity. The journal entry required on December 31 to accrue interest will include a

credit to interest revenue $40. Reason: Interest is stated at an annual rate regardless of the term of the loan. $1,000 x 12% x 4/12

On November 1, Year 1, Thomasson paid rent on its building for 2 years in the amount of $12,000. When the transaction was initially recorded, the full $12,000 was recorded as an expense using an alternative approach to record the prepayment. The adjusting journal entry on December 31, Year 1 requires a

credit to rent expense $11,000. Reason: 2 years of rent $12,000/24 months = $600 per month Reverse the unused portion of rent expense in the amount of $11,000 with a credit to rent expense and a debit to prepaid rent.

Glasser Corp. sold goods on account. The journal entry to record this transaction includes:

debit cost of goods sold credit inventory debit accounts receivable credit revenue

On October 1, Calloway signs a 5-year interest-bearing note payable for $4,000. The note bears interest of 10%. The journal entry required on December 31 to accrue interest will include a:

debit to interest expense $100. Reason: $4,000 x 10% x 3/12 = $100

On April 1, Gemini signs a 5-year interest-bearing note payable for $1,000. The note bears interest of 12%. The journal entry required on December 31 to accrue interest will include a

debit to interest expense $90. Reason: $1,000 x 12% x 9/12 = $90

To accrue interest earned on a note receivable that has not yet been collected, _____ interest receivable and ______ interest revenue.

debit, credit

The adjusting journal entry required to record depreciation includes a(n) ______ entry to depreciation expense and a(n) ______ entry to accumulated depreciation.

debit; credit

A situation that requires an adjusting entry that is not a prepayment or an accrual entry is:

estimating bad debts

Accrued liabilities are:

expenses incurred before cash was paid

Economic events cause changes in the:

financial position of a company

On the last day of the period, a journal entry is made to record the amount of interest that has been accrued but not ______.

paid

A ______ account represents the basic financial position elements of the accounting equation and a _____ account keeps track of the changes in the retained earnings component of shareholders' equity.

permanent; temporary

One of the purposes of adjusting entries is to:

recognize all revenues earned during the period.

When an adjusting entry is made to record depreciation expense, the effect on the balance sheet is to:

reduce total assets

The first step in the closing process is to reduce the balances in the temporary accounts to zero. The second step is to transfer the effects of step 1 to which account?

retained earnings

Which account should be closed at the end of the period?

revenues

The left side of the accounting equation represents _____, while the right side represents _____.

the total economic resources of the company; the total claims against the company

At the end of the period, an unadjusted _________ balance, a listing of all accounts with their respective balances, is used to assist in the preparation of adjusting entries, financial statements, and closing entries.

trial