Chapter 4SB

increase liability

Gift cards are an example of a transaction in which a company receives payment in advance of fulfilling a sale or performing a service. This type of transaction will result in an increase to an asset account and a(n) ________ to a(n) ________ account. (Enter only one word per blank.)

Only temporary accounts are closed at the end of the accounting period.

How do temporary accounts differ from permanent accounts?

Adjustments are made at the end of the accounting period because making them on a daily basis would be inefficient.

How does the timing of adjusting entries differ from the accounting for daily transactions?

a gym requiring a three-month prepayment of membership fees insurance company collecting one year's premium in advance an airline that sells tickets online

Identify which companies would report deferred revenues that would need to be adjusted at the end of the accounting period.

has $1,400 in supplies remaining at the end of the period

If a company determines that it has $1,400 of supplies on hand at the end of the period, which of the following statements is correct? The company ______.

assets, net income, and stockholders' equity are understated by $1,000

If the adjusting entry to accrue interest of $1,000 on a note receivable is omitted, then ______.

assets and stockholders' equity will be overstated

If the adjusting entry to record supplies used during the period is not recorded, then ______.

Total stockholders' equity on the balance sheet will be overstated Retained Earnings on the statement of stockholders' equity will be overstated

If there is an error in recording an adjusting entry on the income statement causing Net Income to overstated, then ______. (Check all that apply.)

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

In May, Sea the World Cruises, Inc. collected $1,000 cash from a customer for services to be performed in June. Which of the following is true assuming accrual accounting?

the liability recorded when cash was received is decreased by the adjustment for the revenue being earned

In a deferral adjustment for revenues collected in advance that are now earned, ______.

asset that represents the right to collect interest

Interest Receivable is a(n) ______.

increase

The adjustment for supplies used during the period will result in a(n) ______ to the Supplies Expense account.

general ledger

The effect of journal entries on each account is summarized in the ______.

increase expense

When making deferral adjustments to record the amount used during the period for items such as Prepaid Insurance or Supplies, the debit will ________ a(n) _________ account.

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

When should supplies be recorded as an expense?

Balance sheet

Which financial statement reports the amount of supplies on hand at the end of the accounting period?

Income statement

Which financial statement reports the amount of supplies used during the accounting period?

cash accounts receivable

Which of the following accounts would be listed above Property and equipment (net of accumulated depreciation) on a classified balance sheet? (Check all that apply.)

Supplies, accrued expenses payable, unearned revenue

Which of the following are found on the balance sheet? (Select all that apply.)

Debit Interest Receivable and credit Investment Income

Which of the following entries records the adjustment for interest earned on an investment, but not yet collected?

Debit Accounts Receivable and credit Sales Revenue

Which of the following entries records the adjustment for revenue earned, but not yet collected?

dividends declared net income retained earnings from prior period common stock

Which of the following line items appear on a statement of stockholders' equity? (Check all that apply.)

Financial statements are prepared after adjustments to ensure that all accounts have been brought to their correct balance.

Which of the following statements is correct?

The Cash account should be adjusted for the effects of accrued revenues and expenses during the accounting period.

Which of the following statements is incorrect regarding the need to make accrual adjustments at the end of the accounting period?

The post-closing trial balance is an internal report prepared as the last step in the accounting cycle.

Which of the following statements is true regarding the post-closing trial balance?

To establish zero balances in the income statement accounts and to transfer net income into retained earnings

Which of the following statements most accurately describes the purposes of the closing entries?

Adjustments ensure that the balance sheet reports all of the economic resources the company owns and all of the obligations the company owes. Adjustments ensure that the revenues earned and expenses incurred during the period are reflected in the income statement. Unadjusted financial statements could present a misleading and incomplete picture of the company's financial results.

Why are the adjustments important to the preparation of the financial statements? (Check all that apply.)

At the end of the accounting period prior to preparing the financial statements

When are adjusting entries recorded?

to ensure revenues and expenses are recorded in the period in which they occur, even though the cash will be collected or paid in a future period; at the end of the accounting period

Adjusting entries are typically recorded ______. (Check all that apply.)

deferred; accrued

Adjusting entries for ______ revenues and expenses are necessary when the cash was collected or paid in advance. Adjusting entries for ______ revenues and expenses are necessary when the earning of revenues and incurring of expenses occurred prior to the cash changing hands.

asset

Adjustments ensure that ______ balances are reported at amounts representing the economic benefits that remain at the end of the period and will be used-up in future periods.

Supplies expense on the income statement reports the amount of supplies used during the accounting period. Supplies on the balance sheet reports the amount of supplies on hand at the end of the accounting period.

After adjusting entries have been recorded, select which statements are true regarding supplies. (Select all that apply.)

on hand at the end of the accounting period

After the adjustments have been completed, the Supplies account on the balance sheet represents the cost of supplies ______.

used during the accounting period

After the adjustments have been completed, the adjusted balance in the Supplies Expense account represents the cost of supplies ______.

the sales or services still owed to the customer

After the adjustments have been recorded, Unearned Revenue on the balance sheet reports the amount of ______.

Unearned Revenue A liability Deferred Revenue

Amounts collected in advance of being earned are recorded as _______. (Select all that apply.)

Interest Expense should be increased, because the cost of interest relates to the current period.

As of December 31, $2,500 of interest expense has accrued on a $50,000 note payable. The note payable and the accrued interest will become due and payable next year. How will the interest affect the adjustments at the end of the period?

$200; $200; $600

Bristol, Inc. paid $800 for a 4-month insurance policy on August 1 of the current year. On August 31, Bristol, Inc. made an adjusting entry to account for the insurance that expired during the month of August. The adjusting entry contained a debit to Insurance Expense in the amount of $___ and a credit to Prepaid Insurance in the amount of $___. The remaining balance in the Prepaid Insurance account after the adjustment was $___.

will be reported as a revenue or an expense in a later period

Deferring a revenue or expense account in accounting means that the amount ______.

assets will be overstated stockholders' equity will be overstated

Miss Hap, the company's accountant, forgot to make the adjusting entry to record the amount of prepaid expenses used during the period. As a result ______. (Select all that apply.)

Net income Ending retained earnings Total stockholders' equity

Miss Step, the bookkeeper, forgot to record the adjusting entry for supplies used during the period. This will cause which of the following items on the statement of stockholders' equity to be overstated? (Check all that apply.)

Supplies will be overstated. Current assets will be overstated. Retained earnings will be overstated.

Miss Step, the bookkeeper, forgot to record the adjusting entry for supplies used during the period. This will cause which of the following on the balance sheet? (Check all that apply.)

3200

On December 1, ABC Apartment Company received $4,800 in advance from a tenant for 3 months' rent, December through February. It credited Unearned Rent Revenue for the full amount. After the adjusting entry is recorded, the Unearned revenue balance at December 31 equals $________.

$12,000 credit to Unearned Rent Revenue $12,000 debit to Cash

On December 1, Lotsa Space Company received $12,000 from a tenant for 4 months' rent in advance. The entry on December 1, includes a ______. (Check all that apply.)

On July 31, an adjusting entry should be recorded that debits Unearned Revenue and credits Service Revenue for $1,000.

On July 1, Squid Roe, Inc., collected cash in advance from a customer in July for services to be performed in July, August and September and recorded a debit to Cash and credit to Unearned Revenue for $3,000. Which of the following is the proper treatment of this event assuming monthly financial statements are prepared?

credit Supplies for $400 debit Supplies Expense for $400

On May 1, Buy & Large, Inc. had a supplies balance of $100. During May, it purchased $500 of supplies on credit. At the end of May, there were $200 of supplies on hand. The entry to record the adjusting entry for supplies used during the period includes: (select all that apply)

$22,000

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

October

On October 31, Pizza Company sold pumpkin spice pizzas for Halloween parties on account. The customers have 30 days to pay for the pizzas. In which month should Pizza Company record the revenue under accrual accounting?

balance sheet as an asset

Prepaid expenses appear on the ______.

an asset and represents rent paid for in advance

Prepaid rent is a(n) ________.

post-closing

Preparing a(n) ________-________ trial balance is the last step to the accounting cycle.

$400; $400; $800

Sterling Company paid $1200 for 3 months of rent on April 1 of the current year. On April 30 Sterling Company made an adjusting entry to account for the rent that expired during the month of April. The adjusting entry included a debit to Rent Expense in the amount of __________ and a credit to Prepaid Rent in the amount of ____________. The remaining balance on Prepaid Rent account after the adjustments is____________.

subtracting the supplies on hand from the beginning supplies plus supplies purchased during the period

Supplies Expense can be calculated by ______.

decreased; increased

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

Taggert will debit Insurance Expense for $300 on Sept. 30. Taggert will credit Prepaid Insurance for $300 on Sept. 30. Taggert will debit Prepaid Insurance for $1,800 on Sept.1.

Taggert Company paid $1,800 for a 6-month insurance premium on September 1. Which of the following statements are correct regarding the accounting for this insurance over the six-month period? (Check all that apply.)

debit to Interest Receivable credit to Investment Income

The adjusting entry for interest earned on a note receivable includes a ______. (Check all that apply.)

income statement balance sheet statement of stockholders' equity

The adjusting entry to record revenues earned, but not yet billed (accrued revenues), affects which of the following financial statements? (Check all that apply.)

decrease in liabilities, increase in revenues

The adjusting entry to record the amount earned that previously had been collected in advance will ______.

true

True or false: After the closing entries have been posted, the new balance in the retained earnings account will equal the retained earnings reported on the balance sheet.

False

True or false: Since Retained Earnings is involved in the closing process, it is considered a temporary account.

True

True or false: Supplies is an asset account because it contains the value of supplies that have not been used, but still remain an economic resource for the company.

False

True or false: The term "defer" means "in advance."

balance sheet as a liability

Unearned revenue appears on the ______.

assets and stockholders liability increase

What are the effects on the financial condition of the business from the adjustment for revenues earned, but not yet collected, during the accounting period?

debit to unearned revenue credit to revenue

When a company provides services previously recorded as unearned revenue, it records a ______, (Check all that apply.)

Even though the interest will not be paid until a future period the expense was incurred during the current accounting period. The adjustment is needed to accurately portray the interest liability of a company, all amounts owed should be recorded on the balance sheet.

Why is an adjustment necessary for interest accrued on a note payable at the end of the period if the interest will not be paid until the note is due? (Check all that apply.)

Payments received in advance and originally recorded as a liability should be reduced for any portion earned during the current period. Revenues earned at the end of the period that have not been billed two accounts receivable should be recorded as a revenue

Why is it necessary to make adjustments to revenue accounts at the end of the accounting period? (Select all that apply.)

As the revenue is earned, it is removed from the Unearned Revenue account and transferred into a revenue account.

Why is the Unearned Revenue account reduced during the adjustment process?

Deferred

______ revenues and expenses result because the cash changed hands prior to the revenue being earned or the expense being incurred

temporary permanent

________ accounts are closed to $0 balances at the end of the accounting period. ________ account balances carry forward to the next accounting period. (Enter only one word per blank.)

depreciation

________ is the process of allocating the cost of buildings, vehicles, and equipment to expense over time as they are used. (Enter one word per blank.)

Accrual deferral

adjustments are used when cash has not been exchanged in a prior transaction, and adjustments are used when cash has been exchanged in a prior transaction. (Enter one word per blank.)

accrual

adjustments involve adjusting entries where the revenue has been earned or the expense has been incurred, and the cash will be collected or paid in the future. (Enter one word per blank.)

net income cash dividends accumulated depreciation depreciation expense

both income statement and statement of stockholders' equity balance sheet statement of stockholders' equity both balance sheet and statement of cash flows income statement

retained earnings net income dividends supplies supplies expense

both statement of stockholders' equity and balance sheet both income statement and stockholders' equity statement of stockholders' equity balance sheet income statement

Adjusted for amounts earned that were collected in advance; Adjusted for amounts earned, but not yet collected; Adjusted for amounts used that were paid for in advance; Adjusted for amounts incurred, but not yet paid

deferred revenues accrued revenues deferred expenses accrued expenses

postpone

in accrual accounting, to defer means to _________ recording the other side of the cash transaction as a revenue or expense. Instead the other side of the cash entry is recorded as liability or prepaid. (Enter one word per blank.)

1. prepare an unadjusted trial balance to determine whether debits equal credits 2. record the adjusting entries in the journal 3. post the adjusting journal entries to the ledger 4. prepare the financial statements 5. record the closing entries to the journal 6. post the closing entries to the ledger

order of the accounting period

only the balance sheet

permanent accounts are found on ________.

the income statement

temporary accounts are found on ________.