Chapter 3: SmartBook

A $300,000 building was purchased on December 1. It is estimated that it will have a life of 20 years and zero salvage value. Calculate depreciation expense for the month of December using straight-line depreciation.

$1,250

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 and adjusting entry

Show your understanding of the steps involved in adjusting entries by placing the following steps in the correct order of preparation.

1. prepare an unadjusted trial balance 2. journalize and post adjusting entries 3. prepare an adjusted trial balance 4. prepare financial statements

Given the following information for Mouse Inc., calculate its profit margin for the year 2018. ($ in thousands) -Net Income: 2018: $500 2019: $450 -Net Sales: 2018: $3500 2019: $3650 -Accounts Receivable: 2018: $2150 2019: $1500

14.29%

Choose the statement(s) below which is (are) true regarding adjusting journal entries. (Check all that apply.)

A balance sheet account is always affected. An income statement account is always affected. Cash is never affected.

Explain what a contra account is by choosing the statement(s) below that correctly describe(s) a contra account. (Check all that apply.)

A contra account has an opposite normal balance than its linked account. A contra account would be subtracted from another account. Accumulated Depreciation is an example of a contra account. A contra account is linked with another account.

The entries to close the revenue and expense accounts for Jefferson Company are shown below. The next closing entry in the closing process would include: (Check all that apply.) Service Fees- $10,000 (debit) Income Summary- $10,000 (credit) (Closing revenue accounts) Income Summary- $2,900 (debit) Wages Expense- $2,900 (credit) (Close expense accounts)

A credit to the Retained Earnings account for $7,100. A debit to Income Summary for $7,100.

At year-end, Zagnut Company is beginning its closing process. Use the following account balances to demonstrate the closing of its expense accounts. (Check all that apply.) Service Fees- $10,000 (credit) Consulting Revenue- $2,000 (credit) Supplies Expense- $700 (debit) Insurance Expense- $900 (debit) Dividends- $120 (debit)

A debit to Income Summary for $1,600. Credit Insurance Expense for $900. Credit to Supplies Expense for $700.

What is a plant asset?

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

Which of the statements below describe(s) a temporary account? (Check all that apply.)

A temporary account is closed at the end of an accounting period. A temporary account has a balance for only one period.

Which of the statements below is correct regarding the difference between a temporary account and a permanent account?

A temporary account will not appear on a post-closing trial balance.

Which of the following statements about the Accumulated depreciation account is (are) correct? (Check all that apply.)

Accumulated depreciation is a contra account. Accumulated depreciation accumulates the total depreciation taken on an asset since its purchase. The Accumulated depreciation account allows the original cost of the asset to remain in the plant asset account. Accumulated depreciation is subtracted from its plant asset on the balance sheet.

The Income Summary account can be defined as which of the following? (Check all that apply.)

An account whose balance equals net income or net loss An account used during the closing process An account that contains a credit for the sum of all revenues A temporary account

When does the closing process take place?

At the end of an accounting period

Explain a contra account by filling in the following blanks. A contra account is an account that is linked with another _________________ (report/account/statement). It has a(n) _________________ (similar/opposite) balance and is _________________ (added/subtracted) to/from the other account's balance.

Blank 1: account Blank 2: opposite Blank 3: subtracted

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

Blank 1: assets Blank 2: liabilities Blank 3: credit

The journal entry to close all of a company's expense accounts would include a ________________ (debit/credit) to each of the expense accounts and a corresponding ________________ (debit/credit) to the Income ________________ (statement/summary) account.

Blank 1: credit Blank 2: debit Blank 3: summary

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.

Blank 1: interest receivable Blank 2: credit Blank 3: interest revenue

Cash basis accounting recognizes ______________ (equity/revenues/expenses) when cash is received and records ______________ (revenues/expenses/liabilities) when cash is paid.

Blank 1: revenues Blank 2: expenses

Closing means to transfer account balances from ________________ (asset/liability/permanent/temporary) accounts so that they will start with a ________________ (contra/larger/zero) balance at the beginning of the next period.

Blank 1: temporary Blank 2: zero

Which of the following lists of assets would be classified as plant assets?

Buildings, Machines

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.)

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

Choose the statement below that explains what "closing" means.

Closing means to bring an account balance to zero.

On December 28, I. Greasy Catering Company 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.

Choose the statement below that demonstrates the correct adjusting entry to recognize depreciation expense on a building.

Debit Depreciation expense; credit Accumulated depreciation.

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.

Mouse Inc. uses the alternative method of accounting for prepayments and purchased a $1,200, 6-month insurance policy. The company immediately debited the Insurance expense account. By the end of the period, $400 of the policy had expired. Demonstrate the required adjustment needed at the end of the period.

Debit Prepaid insurance $800.

At year-end, ABC Company is completing its closing process. Use the following account balances to demonstrate the closing of the Dividends account. (Check all that apply.) Consulting Fees- $5,000 (credit) Rental Revenue- $2,000 (credit) Wages Expense- $700 (debit) Rent Expense- $1,900 (debit) Dividends- $500 (debit)

Debit Retained Earnings $500. Credit Dividends for $500.

A company had the following selected balances: Service Fees- $4,000 (credit) Consulting Revenue- $2,000 (credit) Supplies Expense- $500 (debit) Insurance Expense- $100 (debit) Dividends- $80 (debit) Demonstrate the last closing journal entry to close the Dividends account by selecting the correct answer below.

Debit Retained Earnings $80; Credit Dividends $80

An advance payment of $1,000 for services was received on December 1 and was recorded as a liability. By the end of the year, $400 had been earned. Demonstrate what the correct adjusting entry should include by choosing the correct statement below.

Debit Unearned revenues for $400.

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

Able Company owes interest on a note for a loan. The note is dated December 1 and is due on February 1. On December 31, interest expense should be accrued for the following period:

December 1 to December 31

Which of the accounts below would be classified as long-term or fixed assets? (Check all that apply.)

Equipment Land Building Vehicles

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.

Define the Income Summary account.

It is a temporary account used during the closing process to summarize revenues and expenses.

What defines a fiscal year for a business?

It is any period which consists of 12 consecutive months.

Which of the following describe the Salaries payable account? (Check all that apply.)

It is increased with a credit. It reports amounts owed to employees. It is reported on the balance sheet. It is a liability account.

Define the Salaries payable account by selecting the appropriate statement below.

It reports amounts owed to employees and is a liability.

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 recognized as a result of those expenses.

A prepaid expense (such as supplies or prepaid rent) can initially be recorded as either an expense or as an asset. Demonstrate your understanding of adjusting for prepaid expenses by selecting the statement that is correct.

No matter how a prepaid expense was initially recorded, after adjustment, the financial statements will be identical.

Select the statements below that describe the purpose of a post-closing trial balance. (Check all that apply.)

One purpose is to verify that total debits equal total credit for permanent accounts. One purpose is to verify that all temporary accounts have zero balances.

Which statements below are true regarding permanent and temporary accounts? (Check all that apply.)

Permanent accounts are reported on the balance sheet. Retained Earnings is a permanent account, but Dividends is a temporary account. Temporary accounts have a balance for one period only. Permanent accounts will appear on a post-closing trial balance. Temporary accounts are reported on the income statement.

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

Prepaid rent Prepaid insurance Supplies

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

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. Profit margin is also called return on sales.

Which of the following accounts is considered a prepaid expense?

Supplies

$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.

Select the statement below that explains how to use the Income Summary account.

The Income Summary account is used during the closing process to facilitate the closing of revenue and expense accounts.

What is the purpose of the Accumulated Depreciation account?

The account allows both the original cost of plant assets and the total depreciation taken to be shown simultaneously.

Which of the statements below explains the accounting cycle?

The accounting cycle is repeated each reporting period and refers to the steps taken in preparing financial statements.

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

The adjustment causes an increase in an asset account and an increase in a revenue account. 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.

Using the financial information of ABC Co. below, evaluate the company's current ratio. Select all answers which apply. Current assets- $620 Current liabilities- $430 Current ratio- 1.44 Industry current ratio- 1.28

The company's ability to pay short-term obligations is not in doubt since its current ratio is greater than 1.0 The company's ratio is above the industry's ratio, so this company is able to cover its debt better than others in this industry.

Determine which of the statements below are correct regarding the current ratio. (Check all that apply.)

The current ratio can affect interest rates charged by creditors when lending money to a business. A current ratio of less than 1.0 would indicate that a company would have a problem paying off short term debt. The current ratio helps a supplier determine whether it wants to extend credit to a customer. The current ratio is one measure of a company's ability to pay its short-term debts.

Which of the statements below is (are) correct regarding the accounting cycle? (Check all that apply.)

The cycle contains steps for adjusting and closing accounts. The accounting cycle is a series of steps repeated each reporting period. The accounting cycle refers to steps followed by a company to prepare its financial statements. The accounting cycle contains 10 steps.

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.

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

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

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

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

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 lists contains only temporary accounts?

Wages Expense; Income Summary; Dividends

An adjusted trial balance is:

a list of accounts and balances after adjusting entries have been recorded and posted

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. an accounting system which is consistent with generally accepted accounting principles.

Cash basis accounting is defined as:

an accounting system which recognizes revenues when cash is received and records expenses when cash is paid

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.)

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

StoryBook Company provided services to several customers during the month of December. These services have not yet been paid by the customers. StoryBook should record the following adjusting entry at the end of December: (Select all that apply).

debit accounts receivable credit services revenue

The Fish Aquarium obtained funds from a bank and owes interest on a note at the end of the month. The required adjusting journal entry will

debit interest expense and credit interest payable

An adjusting journal entry is made at the _________________ (beginning/middle/end) of an accounting period.

end

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 six-month one-year

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

revenue

Explain your understanding of the closing process by choosing the correct statements below. (Check all that apply.)

the closing process helps to summarize a period's revenues and expenses. the closing process resets the balances in temporary accounts to zero.

A calendar year-end reporting period is defined as a _________ (1 / 3 / 12) -month period which ends on ________________________ (December/January/March) 31st.

Blank 1: 12 Blank 2: December

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

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

$21,000 of equipment is purchased on December 1. It is estimated that it will have a life of 5 years and zero salvage value. Calculate depreciation expense as of December 31 of the first year using the straight-line method.

$350

At year-end, ABC Company is beginning its closing process. Use the following account balances to demonstrate the closing of its revenue accounts. (Check all that apply.) Service Fees- $15,000 (credit) Consulting Revenue- $12,000 (credit) Supplies Expense- $900 (debit) Rent Expense- $600 (debit) Dividends- $80 (debit)

A credit to Income Summary for $27,000. Debit Service Fees for $15,000. Debit to Consulting Revenue for $12,000.

A company had the following selected balances: Service Revenue- $4,000 (credit) Rental Revenue- $2,000 (credit) Wages Expense- $500 (debit) Utilities Expense- $100 (debit) Dividends- $80 (debit) The first closing journal entry would include which of the following?

A credit to Income Summary for $6,000.

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.

Blank 1: Accounts receivable Blank 2: credit Blank 3: Service revenue

Accrual basis accounting recognizes ________________ (equity/revenues/expenses) when earned and records ________________ (revenues/expenses/liabilities) when ________________ (incurred/paid) in order to adhere to the matching principle.

Blank 1: revenues Blank 2: expenses Blank 3: incurred

A company had the following selected balances: Service Revenue- $8,000 (credit) Rental Revenue- $2,000 (credit) Wages Expense- $500 (debit) Utilities Expense- $100 (debit) The third closing journal entry, after closing revenues and expenses, would include which of the following?

Debit Income Summary $9,400; and credit Retained Earnings $9,400.

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.

Chimney Sweeps provided chimney cleaning services to several clients during the month of February. Chimney's customers have not yet been billed. Chimney's customers owe $2,000 to Chimney. How will Chimney Sweeps record this transaction?

Debit accounts receivable and credit services revenue

Rather than debiting an asset account, which of the following statements explains an alternate recording procedure to journalize prepaid expenses, such as prepaid rent or supplies. (Check all that apply.)

Record all prepaid expenses with debits to expense accounts. Any unused prepaids existing at end of period are transferred to asset accounts.

Rather than crediting the Unearned rent account for $400 of prepaid rent received from a customer, which of the following statements explains an alternate recording procedure to journalize this receipt? (Check all that apply.)

Record receipt with a credit to the Rent revenue account. Any unused portion of the prepayment still existing at the end of the period will be transferred to the Unearned rent account.

$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.

Review the following statements and determine which is (are) correct regarding an adjusted trial balance and how it is used In preparing financial statements. (Check all that apply.)

The ending Retained Earnings account balance on the balance sheet is transferred from the statement of retained earnings. The adjusted trial balance includes all accounts and balances appearing in financial statements. Financial statements are prepared more easily using the adjusted trial balance than with the general ledger. The income statement is the first financial statement prepared after preparing the adjusted trial balance.

Review and complete the following statement regarding the Income Summary account. The Income Summary account is ________________ (debited/credited) for the sum of all revenue accounts and is ________________ (debited/credited) for the sum of all expense accounts and its balance will be transferred to the ________________ (Retained Earnings/Cash) account.

Blank 1: credited Blank 2: debited Blank 3: retained earnings

Demonstrate your knowledge of a depreciation adjusting entry by completing the following sentence. A depreciation adjustment would include a debit to _________________ (depreciation expense/accumulated depreciation/building) and _________________ (debit/credit) to _________________ (depreciation expense/accumulated depreciation/building).

Blank 1: depreciation expense Blank 2: credit Blank 3: accumulated depreciation

The closing process takes place at the ________________ (end/beginning) of an accounting period, after the ________________ (adjusted/unadjusted) trial balance is prepared and ________________ (after/before) the financial statements are prepared.

Blank 1: end Blank 2: adjusted Blank 3: after

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.

Blank 1: expense Blank 2: credit Blank 3: 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.

Blank 1: expense Blank 2: credit Blank 3: payable

The expense recognition (matching) principle aims to record ________________ (expenses/assets/liabilities) in the same accounting period as the ________________ (expenses/revenues/assets) that are earned as a result of those costs. This principle is a major part of the ________________ (timing/adjusting/estimating) process.

Blank 1: expenses Blank 2: revenues Blank 3: adjusting

A post-closing trial balance is a list of ________________ (permanent/temporary) accounts and their balances from the ________________ (journal/ledger) ________________ (after/before) all ________________ (adjusting/closing) entries have been journalized and posted.

Blank 1: permanent Blank 2: ledger Blank 3: after Blank 4: closing

Illustrate your understanding of how to use the adjusted trial balance to prepare a statement of retained earnings by completing the following sentence. In order to prepare the statement of retained earnings, the balance of the ________________ (Retained earnings / Cash) account balance as well as any debit balance in the ________________ (Dividends / Supplies) account is transferred from the adjusted trial balance and is used along with the reported net income (loss) from the Income statement.

Blank 1: retained earnings Blank 2: dividends

Cash received from a customer for unearned subscription revenue can initially be recorded as either a(n) ________________ (revenue/expense) or a(n) ________________ (liability/expense). No matter how an unearned revenue was initially recorded, after the adjusting entry, net income will be identical.

Blank 1: revenue Blank 2: liability

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.

Blank 1: revenues Blank 2: expenses Blank 3: debit

Complete the following statement. The purpose of the closing process is to reset ________________ (temporary/permanent) account balances to zero and to transfer the changes in all of these accounts to the Retained, ________________ (Earnings/Summary/Withdrawal) account.

Blank 1: temporary Blank 2: earnings

$1,000 of cash was received in advance of performing services. By the end of the period, $300 had not yet been earned. (The Unearned revenue account was increased at the time of the initial cash receipt.) Demonstrate the required adjusting journal entry by selecting from the choices below. (Check all that apply.)

Service revenue would be credited for $700. Unearned revenue would be debited for $700.

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

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