Mastering Adjusting Entries

An expense is booked when it is ______.

Incurred

An expense should be recorded when it has been ______.

Incurred

You prepay $24,000 for 1 year of insurance premiums and debit Unexpired Insurance (prepaid insurance expense). Your company's year ends 9 months later. Record the adjusting entry.

Insurance Expense 18,000 Unexpired Insurance 18,000 To record insurance expense (2,000 x 9)

An accrued expense is paid when incurred. a. True b. False

b Accrued means that the expense was incurred before it was paid.

Interest receivable appears on which financial statement? a. income statement b. balance sheet c. statement of capital d. statement of retained earnings

b Because interest receivable is an asset.

Accrued revenue is revenue... a. neither earned nor received b. received but not earned c. earned but not received d. earned and received

c It is recognized (booked) as revenue because it has been earned even though it has not been received.

Accrued revenue is revenue ____________________ but not ___________________.

earned, received (collected)

An expense recorded as incurred but not paid is presented as a(n) ___________ on the balance sheet.

liability

Write the number of the adjusting entry in Column B that belongs to the transaction entry in Column A: A 1. Rent Expense/Cash 2. Prepaid Rent/Cash B 1. Prepaid Rent/Rent Expense 2. Rent Expense/Prepaid Rent

1 and 1 2 and 2

Prepare the adjusting journal entry for each situation: You collect $25,000 in advance for a $100,000 advertising order and credit Advertising Revenue. You complete 15% of the job before your company's year ends.

Advertising Revenue 10,000 Unearned Advertising Revenue 10,000 To record unearned revenue (25,000 - 15,000)

Prepaid Insurance is a(n) _____ account.

Asset

Unused supplies is a(n) _____ account.

Asset

When you prepay insurance, you debit a(n) _____ account or a(n) ______ account and credit _____.

Asset or expense; Cash

In an unadjusted trial balance, the accounts are listed in the same order as in the chart of accounts, which is ____ followed by _____, ______, _____, and _____.

Assets, liabilities, owner's equity, revenues, expenses

A prepaid expense involves payment of cash ________ the expense is incurred.

Before

A prepaid expense is cash paid (before/after) ______ the expense is incurred.

Before

Unearned revenue is the result of revenue collected __________ (before/after) it is earned.

Before

Make the following adjusting journal entries: Receipt in December of $2,000 in commissions earned and accrued in November.

Cash 2,000 Commission Receivable 2,000 To record receipt of November commission

Payment received in advance is debited to ______ and credited to either _______ or _______.

Cash/Revenue; Deferred Revenue or Unearned Revenue

For cash collected in advance, debit _________ and credit _________.

Cash; Revenue or Unearned Revenue or Deferred Revenue

Deferrals record _____ of revenue not yet ______, and _______ of expenses not yet ______.

Collection, earned; payment, incurred

Record the adjusting entries and any transaction entries on December 31 for each of the following: Of the $1,000 in commissions payable on December 31, only $400 was paid.

Commissions Expense 400 Cash 400 Commissions Expense 600 Commissions Payable 600 To accrue commissions expense

Adjusting entries make expense and revenue accounts current as of the _____ date.

Cut-off

Revenue is recorded when __________.

Earned

Accruals record revenue _____, but not _____, or expenses _____, but not _____.

Earned, collected; incurred, paid

On November 1, your company signs up with a law firm for an agreed-upon retainer of $15,000 a year, paying the first 3 months' fee in advance and debiting Prepaid Legal Fees. Record the adjusting entry on December 31.

Legal Expense 2,500 Prepaid Legal Fees 2,500 To record advance on law firm retainer

Your company signs a 2-year contract to sell MiCo's products for a 20% commission on sales. During the year, MiCo remits $7,000 to your firm for commissions that you credit to Commissions Revenue. At year end your company has achieved sales of $35,000 from MiCo's products this year. What adjusting entry do you record on December 31?

No adjusting entry is required. The ending balance in Commissions Revenue is correct.

You give PaintCo a $12,000 advance on a $100,000 paint job and record it in Painting Advance (prepaid painting expense). By year end, PaintCo has completed 10% of the job. Record the adjusting entry.

Painting Expense 10,000 Painting Advance 10,000 To record painting expense (100,000x10%)

Record the adjusting entry: Your company prepays $18,000 of rent for 1 year and debits Rent Expense. Your company's year ends 4 months later.

Prepaid Rent 12,000 Rent Expense 12,000 To recognize rent expense (18,000 - 6,000)

If the original transaction entry records revenue collected in advance in the revenue account and the company earns only part of the revenue by year end, the adjusting entry at year end will (increase/reduce) the balance in Revenue.

Reduce

Record the adjusting entries and any transaction entries on December 31 for each of the following: Rent for December of $2,300 will be paid on January 2.

Rent Expense 2,300 Rent Payable 2,300 To accrue rent expense

Prepare the adjusting journal entry for each situation: You collect $24,000 in advance for 1 year's rent and credit Rent Revenue Collected In Advance. Your company's year ends 3 months later.

Rent Revenue Collected In Advance 6,000 Rent Revenue 6,000 To record revenue earned (24,000 - 18,000)

Prepare the adjusting journal entry for each situation: Your company collects a $20,000 advance for a $100,000 order to produce widgets and credits Revenue. At year end, your company has completed 12% of the job.

Revenue 8,000 Unearned Revenue 8,000 To record unearned revenue 20,000 - (100,000x12%) = 8,000

Record the adjusting entry: Your company buys $30,000 of office supplies and debits Supplies On Hand. At year end there are $9,000 of supplies on hand (unused).

Supplies Expense 21,000 Supplies On Hand 21,000 To record supplies expense (30,000 - 9,000)

Prepare the adjusting journal entry for each situation: You collect $25,000 in advance for a $100,000 advertising order and credit Unearned Advertising Revenue. You complete 15% of the job before your company's year ends.

Unearned Advertising Revenue 15,000 Advertising Revenue 15,000 To record revenue earned (100,000x15%)

Prepare the adjusting journal entry for each situation: You collect a $12,000 advance for 1 year's rent and credit Unearned Rent Revenue. At year end, 3 months have elapsed.

Unearned Rent Revenue 3,000 Rent Revenue 3,000 To record revenue earned (1,000/month x 3 months)

Prepare the adjusting journal entry for each situation: Your company collects a $20,000 advance for a $100,000 job and credits Unearned Revenue. At year end, your company has completed 12% of the job.

Unearned Revenue 12,000 Earned Revenue 12,000 To record revenue earned (100,000x12%)

Adjusting entries... a. never involve cash b. always involve cash c. may involve cash d. none of the above

a

A piece of equipment costs $20,000. The estimated residual value is $2,000, and it is estimated to have a 4-year life. If the company uses straight-line depreciation, then depreciation expense for Years 1 and 2, respectively, will be... a. $4,500 and $4,500 b. $5,000 and $5,000 c. $4,500 and $5,000 d. $5,000 and $4,500

a $20,000 cost - $2,000 residual value = $18,000 depreciable base / 4 years = $4,500 per year depreciation expense over each of the 4 years of its life.

A company estimates bad debt at 2% of ending receivable, which has an ending balance of $250,000. If Allowance For Doubtful Accounts has a debit balance of $3,000, the adjusting entry for bad debt is a debit to Bad Debt Expense for... a. $8,000 b. $5,000 c. $2,000 d. zero

a $250,000 x 2% = $5,000 final credit balance needed in Allowance For Doubtful Accounts + $3,000 current debit balance = $8,000 increase (credit) required in the adjusting entry.

A company has credit sales of $300,000 for the year and bad debt is estimated at 2% of credit sales. Allowances For Doubtful Accounts has a credit balance of $2,000. The adjusting entry for bad debt will debit Bad Debt Expense for... a. $6,000 b. $4,000 c. $2,000 d. zero

a $300,000 x 2% = $6,000. When bad debt expense is computed as a percentage of credit sales, the amount used in the adjusting entry is found simply by multiplying the total credit sales by the percentage of estimated bad debt. The balance in Allowance For Doubtful Accounts before the adjusting entry is recorded is irrelevant.

You collect $10,000 during the year and credit Revenue. If you earn all $10,000, you need no adjusting entry at year end. a. True b. False

a All revenue received has been earned, so the accounts do not need to be adjusted.

You prepay rent and debit Rent Expense. If part of the period paid for has elapsed and you do not record the adjusting entry, net income will be... a. understated b. overstated c. unaffected

a Unless the balance in Rent Expense is reduced to the amount of rent used, this balance will be too high, making overall expenses on the income statement too high and understating net income.

The entry to record bad debt expense for book purpose debits Bad Debt Expense. a. True b. False

a . True The credit is to Allowance For Doubtful Accounts.

Net realizable value is Accounts Receivable less Allowance For Doubtful Accounts. a. True b. False

a. True

Recording bad debt expense under the direct write-off method is acceptable for tax purposes but cannot be used for book purposes under generally accepted accounting principles. a. True b. False

a. True

A debit balance in Allowance For Doubtful Accounts means that in prior years, bad debt expense was underestimated. a. True b. False

a. True At the end of each year Allowance For Doubtful Accounts is credited, leaving a credit balance in the account. During the year, whenever management determines that an account is uncollectible (has moved from the "doubtful" to "uncollectible"), Allowance For Doubtful Accounts is debited and Accounts Receivable is credited. Thus, when more accounts are written off than management estimated, the debits to Allowance For Doubtful Accounts will result in a debit balance.

The journal entry to record depreciation expense credits Accumulated Depreciation a. True b. False

a. True Every year when Depreciation Expense is debited for that year's expenses, Accumulated Depreciation is credited, increasing the balance in this account. This continues until the asset has been fully depreciated.

The entry to record interest revenue for a money market account debits an asset account. a. True b. False

a. True The credit is to Interest Revenue.

Under the accrual basis accounting, expenses presented on the income statement are... a. expenses incurred during the year b. expenses paid during the year c. expenses incurred during the year that have been paid d. payments to vendors for expenses incurred through December 31

a. expenses incurred during the year The income statement simply presents the expenses recorded in the general ledger. Under accrual basis accounting, expenses in the general ledger are those incurred, regardless of whether cash has been paid.

The adjusting entry to accrue revenue debits a(n) ____________________ account and credits a(n) __________________ account.

asset (receivable), revenue

Adjusting journal entries are usually recorded in the general journal... a. before they are entered on the worksheet b. after they are entered on the worksheet c. at the same time that they are entered on the worksheet d. either before or after they are entered on the worksheet as the preparer determines

b

A company has ending accounts receivables of $100,000. Its desired allowance for doubtful accounts is estimated at 4% of accounts receivable. Allowance For Doubtful Accounts currently has a credit balance of $1,000. The adjusting entry at year end will include... a. a debit to Allowance For Doubtful Accounts of $1,000 b. a credit to Allowance For Doubtful Accounts of $3,000 c. a debit to Allowance For Doubtful Accounts of $5,000 d. a credit to Allowance For Doubtful Accounts of $5,000

b 4% x $100,000 = $4,000 allowance for doubtful accounts at year end. Under the accounts receivable method for estimating bad debt, the ending balance in the Allowance For Doubtful Accounts must be $4,000. To compute: $1,000 credit balance in the Allowance For Doubtful Accounts + $3,000 credit = $4,000 desired balance.

You prepay rent and debit Prepaid Rent. If part of the time covered has elapsed and you do not record the adjusting entry, net income will be... a. understated b. overstated c. unaffected

b Unless the amount of rent used is transferred to Rent Expense at year end, the balance in Rent Expense will be too low, making overall expenses too low and overstating net income.

To write off an accounts receivable under the allowance method, credit Allowance For Doubtful Accounts. a. True b. False

b. False Debit Allowance For Doubtful Accounts and credit Accounts Receivable.

Allowance For Doubtful Accounts always has a credit balance. a. True b. False

b. False Every time a company writes off an accounts receivable that becomes uncollectible, it debts Allowance For Doubtful Accounts (and credits Accounts Receivable). If more accounts are written off than the company anticipated, constantly debiting Allowances For Doubtful Accounts will eventually result in a debit balance.

Net realizable value is an income statement account. a. True b. False

b. False Net realizable value is not an account. It is a line on the balance sheet that shows the accounts receivable that the company expects to collect.

To record bad debts for book purposes under either the percentage of credit sales or the percentage of accounts receivable method, debit Bad Debt Expenses and credit Allowance For Doubtful Accounts for the amount of the estimated bad debt expense for the year. a. True b. False

b. False Only under the percentage of credit sales method do you credit Allowance For Doubtful Accounts by the amount of bad debt expense. Under the percentage of accounts receivable method, the ending credit balance in Allowance For Doubtful Accounts must equal management's estimate of uncollectible accounts, so the adjusting entry must result in the correct ending balance.

The adjusting entry to record depreciation expense debits Accumulated Depreciation. a. True b. False

b. False The adjusting entry to record depreciation expense debits the expense account, Depreciation Expense, and credits the balance sheet account, Accumulated Depreciation.

Adjusting entries... a. record the receipt of cash b. always involve a liability account c. are necessary when the accrual basis of accounting is used d. always involve an asset account

c

Net realizable value of accounts receivable is... a. the total of all accounts receivable b. the total of all accounts receivable plus the allowance for doubtful accounts c. the total of all accounts receivable less the allowance for doubtful accounts d. the total of all accounts receivable plus bad debt expense

c

Which of the following accounts is not depreciated? a. Equipment b. Furniture c. Land d. Building

c

A company estimates bad debt at 2% of ending accounts receivable, which has an ending balance of $250,000. If Allowance For Doubtful Accounts has a credit balance of $3,000, the adjusting entry to record bad debt will debit Bad Debt Expense for... a. $5,000 b. $3,000 c. $2,000 d. zero

c $250,000 x 2% = $5,000 - $3,000 current balance = $2,000 increase required in the Allowance For Doubtful Accounts credit balance.

Your company buys office supplies, debiting Supplies Inventory for $28,000. At year end, you estimate that $5,000 in unused supplies remain. The adjusting entry will leave an ending balance in Supplies Inventory of _____ and ending balance in Supplies Expense of ______. a. $28,000 and zero b. zero and $28,000 c. $5,000 and $23,000 d. $23,000 and $5,000

c To compute: $28,000 advance - $5,000 in supplies remaining at year end = $23,000 in supplies expense for the year. Thus, at the ending balance in Supplies Expense will be $23,000.

A building is acquired at a cost of $400,000. It is estimated to have a 40-year life and a residual value of $40,000. If the building is depreciated under the straight-line method, annual depreciation expense will be... a. $400,000 b. $40,000 c. $10,000 d. $9,000

d $400,000 cost - $40,000 residual value = $360,000 depreciable base / 40 years = $9,000 depreciation expense per year

A company has credit sales for the year of $100,000. Bad debt is estimated at 3% of credit sales. The allowance for doubtful accounts has a credit balance of $1,000. The adjusting entry at year end will include a debit to bad debt expense of... a. zero b. $1,000 c. $2,000 d. $3,000

d 3% x $100,000 = $3,000 bad debt expense for the year. When bad debt is based on a percentage of credit sales, the adjusting entry is for the estimated amount regardless of the balance in Allowance For Doubtful Accounts.

A company has ending accounts receivable of $100,000, of which it estimates that 4% will not be collectible. Allowance For Doubtful Accounts currently has a debit balance of $1,000. The adjusting entry at year end will include... a. a debit to Allowance For Doubtful Accounts of $1,000 b. a credit to Allowance For Doubtful Accounts of $3,000 c. a debit to Allowance For Doubtful Accounts of $5,000 d. a credit to Allowance For Doubtful Accounts of $5,000

d 4% x $100,000 = $4,000 desired balance in Allowance For Doubtful Accounts. Under the accounts receivable method for estimating bad debts, the ending balance in the Allowance For Doubtful Accounts must be $4,000. Currently, the account has a debit balance of $1,000, so a $5,000 credit must be added to yield the correct credit balance of $4,000. To compute: $4,000 estimate of bad debt expense (required ending balance) + $1,000 debit balance = $5,000 increase required. Thus, the Allowance For Doubtful Accounts must be credited for $5,000.

The adjusting entry to accrue revenue... a. increases the balance in the ledger Cash account b. decreases the balance in the ledger Cash account c. may increase or decrease the balance in the ledger Cash account d. does not affect the ledger Cash account

d No cash is involved because accrued revenue has been earned but not received.

An accrued expense is one that has been __________________ but not _________________.

incurred; paid

Three possible names for a revenue liability account are ___________, ____________, and ___________. (Answers may be more than one word).

Unearned Revenue, Revenue Collected in Advance, Revenue Received in Advance, Deferred Revenue.

Record the adjusting entries and any transaction entries on December 31 for each of the following: On December 31, 20X1, FaCo incurs wage expense of $8,000 for December 29-31 that has not been either recorded or paid.

Wages Expense 8,000 Wages Payable 8,000 To accrue wages expense

An accrued expense is one that is incurred but not yet paid. a. True b. False

a

If the entry to record a prepaid insurance premium is a debit to Prepaid Insurance, then the adjusting entry to reflect insurance expense at year end is a debit to... a. Insurance Expense b. Unexpired Insurance c. Cash

a

With an accrued expense, payment follows recognition of the expense. a. True b. False

a

What kind of account is Taxes Payable a. asset b. liability c. revenue d. expense

b A payable account is liability

If a company collects cash in advance for a job and credits Revenue, then completes part of the work but fails to record an adjusting entry at year end, net income is... a. understated b. overstated c. unaffected

b Because not all of the credit to Revenue in the original entry has been earned, the balance in Revenue should be reduced year end by an adjusting entry. If an adjusting entry is not reduced, then revenue is overstated and net income is overstated.

You prepay rent and debit Prepaid Rent. If you do not record the adjusting entry at end year period, total assets on the balance sheet will be... a. understated b. overstated c. unaffected

b Failure to reduce Prepaid Rent by the amount of the rent expense used up for the period will result in the balance in Prepaid Rent, an asset, being overstated and therefore overstating assets on the balance sheet.

A company failed to accrue employee salary expense. What effect does this have on net income and liabilities, respectively? a. overstates net income but does not affect liabilities b. overstates net income and understates liabilities c. understates net income and overstates liabilities d. understates net income but does not affect liabilities

b Net income is overstated because total expenses are understated (lower than they should be). Liabilities are also understated because the appropriate liability account was not increased.

A company collects cash in advance for a job, credits Deferred Revenue, then completes part of the work. If it fails to record an adjusting entry at year end, liabilities will be... a. understated b. overstated c. unaffected

b Revenue earned is not recorded.

If a company collects cash in advance and credits Deferred Revenue, the adjusting entry at year end is a debit to... a. Revenue b. Deferred Revenue c. Cash

b The balance in Deferred Revenue must be decreased by the amount earned, and Revenue must be increased by the same amount to recognize the income. The Cash amount is not used in adjusting entries.

Make the following adjusting journal entries: Accrue property tax expense of $1,200

Property Tax Expense 1,200 Property Tax Payable 1,200 To accrue property tax expense

Record the adjusting entry: Your company prepays $12,000 of rent for 1 year and debits Prepaid Rent. Your company's year ends 4 months later.

Rent Expense 4,000 Prepaid Rent 4,000 To recognize rent expense (1,000x4)

Record the adjusting entry: Your company prepays $18,000 of rent for 1 year and debits Prepaid Rent. Your company's year ends 4 months later.

Rent Expense 6,000 Prepaid Rent 6,000 To recognize rent expense (1,500 x 4)

Make the following adjusting journal entries: Accrued rent revenue of $3,600

Rent Receivable 3,600 Rent Revenue 3,600 To accrue rent receivable

Prepare the adjusting journal entry for each situation: You collected a $12,000 advance for 1 year's rent and credit Rent Revenue. At year end, 3 months have elapsed.

Rent Receivable 9,000 Unearned Rent Revenue 9,000 To record unearned rent revenue (12,000-3,000 earned)

Prepare the adjusting journal entry for each situation: You collect a $24,000 advance for 1 year's rent and credit Rent Revenue. Your company's year ends 3 months later.

Rent Revenue 18,000 Unearned Rent Revenue 18,000 (24,000 - 6,000) To record unearned revenue To record unearned revenue

Make the following adjusting journal entries: Accrue rental revenue of $2,400

Rental Receivable $2,400 Rental Revenue $2,400 To accrue rental revenue

If a company forgets to accrue utilities expense at year end, how does it affect net income? a. Net income will be overstated b. Net income will be understated c. Net income will be unaffected

a When a company does not record an expense, expenses are understated (too low) on the income statement, and net income is overstated (too high).

Accrued taxes appear on the balance sheet as liability. a. True b. False

a When taxes accrue, a liability account (Taxes Payable) is credited, increasing liabilities on the balance sheet.

On December 1, 20X3, WyCo, a calendar year company, borrows $30,000 on a 6-month, 8% note payable. The interest is payable at the maturity date. Of the amount borrowed, $6,000 will be used to pay WyCo's 20X3 income tax when it files a return in 20X4. Another portion of the loan will go to pay part of WyCo's weekly payroll of $12,000 for the last week of the year. WyCo uses a 5-day workweek and payday is Friday. What adjusting entries does WyCo record on Tuesday, December 31, 20X3?

$30,000x8%x1/12 = 200 Interest Expense 200 Interest Payable 200 To accrue interest expense Income Tax Expense 6,000 Income Tax Payable 6,000 To accrue income tax expense $12,000x2/5 = 4,800 Salaries Expense 4,800 Salaries Payable 4,800 To accrue salaries expense

Your payroll for the last week of the year (your company uses a 5-day workweek) is $40,000 and December 31 falls on a Thursday. Record the adjusting journal entry at year end.

$40,000*(4/5) = 32,000 Salaries Expense 32,000 Salaries Payable 32,000 To accrue salaries expense

Your company borrows $50,000 on a 6-month, 12% note on October 1. Year end is November 30. Record the accrued interest at November 30.

$50,000x12%x(2/12) = 1,000 Interest Expense 1,000 Interest Payable 1,000 To accrue 2 months' interest expense

If you prepay insurance and debit Insurance Expense, then use up only part of the insurance before year end, the year-end adjusting entry will (reduce/increase) _______ the balance in Insurance Expense.

Reduce

Make the following adjusting journal entries: Accrue salaries expense of $10,000

Salaries Expense 10,000 Salaries Payable 10,000 To accrue salaries expense

Make the following adjusting journal entries: Accrue salaries expense of $42,000

Salaries Expense 42,000 Salaries Payable 42,000 To accrue salaries expense

Make the following adjusting journal entries: Accrue sales commissions of $18,000

Sales Commission Expense 18,000 Sales Commission Payable 18,000 To accrue sales commission expense

Record the adjusting entry: Your company buys $40,000 of office supplies and debits Supplies On Hand, at year end, there are $6,000 of unused supplies left.

Supplies Expense 34,000 Supplies On Hand 34,000 To record supplies expense ($40,000 - 6,000)

Record the adjusting entry: Your company buys $40,000 of office supplies and debits Supplies Expense. At year end, there are $6,000 of supplies unused (on hand).

Supplies On Hand 6,000 Supplies Expense 6,000 To recognize supplies expense

Record the adjusting entry: Your company buys $30,000 of office supplies and debits Supplies Expense. At year end, there are $9,000 of supplies on hand (unused).

Supplies On Hand 9,000 Supplies Expense 9,000 To recognize supplies expense

To accrue revenue at a year end is to record... a. receipt of payment from a customer b. the amount of an invoice sent to a customer c. an amount earned for which payment has not been received d. an amount earned and deposited in your bank

c. an amount earned for which payment has not been received

To accrue an expense is to record... a. payment of the expense b. the portion of the expense used and paid for c. an expense incurred but not yet paid for d. the amount of a check sent to pay an expense

c. an expense incurred but not yet paid for Under GAAP, when you incur an expense (use it up) before you have paid it, the expense is still recognized and recorded in the appropriate Expense account.

When revenue is accrued... a. cash is received when the revenue is recognized b. cash is received before the revenue is recognized c. cash is received after the revenue is recognized d. cash may be received before or after the revenue is recognized

c. cash is received after the revenue is recognized

A company omitted its adjusting entry to accrue rental revenue. What effect does this have on liabilities at year end? a. overstate b. understate c. no effect d. it is not possible to know without more information

c. no effect A liability is money that the company owes, not money that it collects. Thus, an adjusting entry related to revenue does not affect liabilities.

1. Your company has a 6-day workweek and payday is Saturday. Weekly salaries are $12,000, and your company contributes to each employee's pension by contributing 3% of salaries to Pension Fund account. Make the adjusting journal entries when the accounting period ends on a Tuesday. 2. What adjusting entry (if any) do you record if the accounting period ends on a Saturday?

1. $12,000x(2/6) = 4,000 Salaries Expense 4,000 Salaries Payable 4,000 To accrue salaries expense 4,000*3% = 120 Pension Expense 120 Pension Payable 120 To accrue pension expense 2. If the workweek ends on a Saturday, the company will pay salaries for the entire week, so no salaries accrue (accrued expenses are expenses incurred before they are paid). Thus, no adjusting entry is recorded; only an ordinary transaction entry is needed. However, pension contributions might accrue depending on the rules of the particular plan.

1. Your company holds a $50,000, 8% note receivable, interest payable annually on each June 30. When your company's fiscal year ends on August 31, 20X5, you have received no interest payment since June 30, 20X5. What adjusting journal entry do you make? 2. If your company's fiscal year ended on December 31, 20X5, what entry would you make?

1. Accrued interest ~667 Interest receivable ~667 Interest revenue 667 To accrue 2 months' interest on note (50,000x0.08x(2/12)) 2. Accrued interest 2,000 Interest receivable 2,000 To accrue 6 months' interest on note (50,000x0.08x(6/12))

Your company has a 5-day workweek and pays employees on Friday. The weekly gross payroll is $100,000, and the year ends on Thursday. Record the adjusting journal entry at year end.

100,000x(4/5) = 80,000 Salaries Expense 80,000 Salaries Payable 80,000 To accrue salaries expense (Mon-Thurs.)

Your company rents a machine to another company at an annual rental of $15,000. At year end, you have received $13,500 in rent. Record the adjusting journal entry.

15,000 - 13,500 = 1,500 Rent receivable 1,500 Rent revenue 1,500 To accrue rental revenue

A 1. Cash/Revenue 2. Cash/Unearned Revenue B 1. Revenue/Unearned Revenue 2. Unearned Revenue/Revenue

A 1 and 1 B 2 and 2

Unexpired insurance is a(n) _________ account.

Asset (same as Prepaid Insurance).

Supplies On Hand is a(n) ________ account.

Asset (same as Prepaid Supplies).

Make the following adjusting journal entries: Accrue commission revenue earned of $1,400

Commission Receivable $1,400 Commission Revenue $1,400 To accrue commission revenue

Make the following adjusting journal entries: Accrued commission revenue of $2,800

Commission Receivable 2,800 Commission Revenue 2,800 To accrue commission revenue

Revenue is booked when ______, not when _______.

Earned; collected (received).

You prepay $24,000 for 2 years of insurance premiums and debit Unexpired Insurance (prepaid insurance expense). Your company's year end ends 4 months later. Make the adjusting entry.

Insurance Expense 4,000 Unexpired Insurance 4,000 To record insurance expense (1,000x4)

Make the following adjusting journal entries: Accrue interest expense of $3,000

Interest Expense 3,000 Interest Payable 3,000 To accrue interest expense

Make the following adjusting journal entries: Accrue interest expense of $8,000

Interest Expense 8,000 Interest Payable 8,000 To accrue interest expense

Make the following adjusting journal entries: Accrue interest revenue of $400

Interest Receivable $400 Interest Revenue $400 To accrue interest revenue

Your company holds DuCo's $60,000, 12% mortgage on which it has collected $7,000 in interest for the year. What adjusting entry do you record at year end?

Interest Receivable 200 Interest Revenue 200 To accrue interest revenue

Your company has a 60-day, $3,000, 12% note receivable dated December 1. What adjusting journal entry do you record on December 31 if you have received no interest payment?

Interest Receivable 30 Interest Revenue 30 To accrue 1 month's interest earned on note ($3,000x12%x1/12)

Make the following adjusting journal entries: Accrued interest revenue of $4,200

Interest Receivable 4,200 Interest Revenue 4,200 To accrue interest revenue

Unearned revenue appears as a(n) _______ on the balance sheet.

Liability

Unearned revenue appears on a balance sheet as a(n) _______________.

Liability

On May 15, your company accepts a $28,000 advance on a 2-year, $70,000 painting job. On December 31, management tells you that it has completed 30% of the work. What original transaction entry do you record on May 15 if the amount received is recorded as revenue? What adjusting entry do you record at year end?

Original entry on May 15: Cash 28,000 Painting Revenue 28,000 To record revenue Adjusting entry at year end: Painting Revenue 7,000 Unearned Painting Revenue 7,000 To reduce Revenue to amount earned (70,000x30% = 21,000; 28,000-21,000 = 7,000)

Your company undertakes a $ 27,000 painting job and receives an advance of $10,000, which you credit to Painting Revenue. At year end your firm has completed 1/3 of the work. What adjusting entry do you record?

Painting Revenue 1,000 Unearned Painting Revenue 1,000 To reduce Revenue to the required balance (10,000 - 9,000).

Record the adjusting entry: Your company prepays $12,000 rent for 1 year and debits Rent Expense. Your company's year ends 4 months later.

Prepaid Rent 8,000 Rent Expense 8,000 To recognize rent expense (12,000 - 8,000)

Your firm signs a contract to sell Widget, Inc. products for a 20% commission on sales. During the year, Widget pays your firm $7,000 in commissions, which you credit to Unearned Commission Revenue. By year end, your firm achieves $25,000 in sales. What adjusting entry do you record on December 31?

Unearned Commission Revenue 5,000 Revenue $5,000 To record revenue earned (25,000x20%) Only the $5,000 earned can be recognized as revenue at year end.

Make the following adjusting journal entries: Accrue utility expense of $2,500

Utility Expense 2,500 Utility Payable 2,500 To accrue utility expense

Regardless of which transaction entry is made, an adjusting entry affects both the income statement and the balance sheet. a. True b. False

a An adjusting entry affects the income statement because it always involves an expense account, and it also affects the balance sheet because it always involves a prepaid (asset) account.

You prepay rent and debit Rent Expense. If you do not record the adjusting entry at the end of the period, total assets on the balance sheet will be... a. understated b. overstated c. unaffected

a If the unused portion of the rent prepayment is not transferred out of Rent Expense and into Prepaid Rent, an asset account, assets will be understated.

If you collect 3 month's rent on December 1 and your year ends December 31, the revenue earned will be less than the cash collected. a. True b. False

a Revenue earned is one-third of cash collected.

When revenue is received in advance and part of it is earned by the end of the period, the adjusting entry affects both the income statement and balance sheet. a. True b. False

a The adjusting entry affects Revenue, an income statement account, and unearned revenue affects Deferred Revenue (Unearned Revenue), a balance sheet account.

An adjusting entry to accrue interest expense does not involve a cash payment. a. True b. False

a The entry debits an expense account and credits a liability account; no cash is involved.

If a company collects cash in advance for a job and credits Deferred Revenue, then completes part of the work but fails to record an adjusting entry at year end, net income is... a. understated b. overstated c. unaffected

a Unearned Revenue is a liability account. At year end, the balance must be reduced by the amount earned, which is transferred to Revenue. If Revenue is not credited with the amount earned, then revenue will be understated, and so will net income.

A company collects cash in advance for a job and credits Revenue. It earns part of the advance by completing work during the year. If it omits the proper adjusting entry at year end, liabilities will be... a. understated b. overstated c. unaffected

a Unearned revenue, a liability, is not recorded.

Interest Receivable is what type of account? a. Asset b. Liability c. Revenue d. Expense

a. Asset Receivable means that cash will be received in the future, making this an asset account.

To defer revenue is to... a. postpone recording a customer's payment as revenue until it is earned b. postpone depositing a cash payment in the bank c. postpone accepting payment from a customer until you do the work d. postpone depositing a customer's payment to minimize a current-year income taxes

a. postpone recording a customer's payment as revenue until it is earned When you receive an advance payment and do not earn the full amount before year end, the unearned portion is kept in a separate account (that is, not in the Revenue account) until it is earned in the future.

To recognize revenue or an expense is to... a. record the amount in the general ledger Revenue or Expense account b. deposit the revenue in the bank or pay the expense c. know that a particular cash payment received was revenue or that a cash payment made was an expense d. add the amount to the company profit or losses

a. record the amount in the general ledger Revenue or Expense account

If a company fails to record an adjusting entry for property taxes, then net income will be... a. unaffected b. understated c. overstated d. understated or overstated depending on the amount

c Because not all expenses are on the books, net income will be overstated.

Under the accrual basis accounting, revenues presented on the income statement are... a. revenues earned during the year b. revenues earned for the year in cash c. cash received from customers during the year d. revenues earned during the year for which invoices have been sent to customers

a. revenues earned during the year The income statement simply presents the revenues recorded in the general ledger. Under accrual basis accounting, revenues in the general ledger are those earned, regardless of whether cash has been received.

Under accrual basis of accounting, you recognize revenue... a. when you receive payment b. when you have earned the revenue c. when you have earned the revenue and received the payment d. when you have earned the revenue and received at least some of the payment

b. when you have earned the revenue Only in cash basis accounting you recognize revenue when you receive payment

If you fail to record the adjusting entry to accrue revenue, it will affect the income statement as follows: a. net income will be understated b. revenue will be understated c. neither a nor b d. both a and b

d

Your company buys office supplies and debits Supplies On Hand for $50,000. At year end, you estimate that $8,000 of supplies are on hand. The adjusting entry will leave an ending balance in Supplies Expense of _______ and an ending balance in Supplies On Hand of ______. a. $50,000 and zero b. zero and $50,000 c. $8,000 and $42,000 d. $42,000 and $8,000

d $42,000 is the expense ($50,000 prepayment - $8,000 remaining at year end) and $8,000 is the balance remaining in Supplies On Hand until the $8,000 is used up.

Under accrual basis accounting, you recognize an expense when you have... a. paid the expense b. incurred the expense and paid for it c. recorded payment of the expense on your books d. incurred the expense

d. incurred the expense In cash basis accounting, you recognize an expense only when you pay the expense

An adjusting entry to accrue an expense (increases/decreases) net income.

decreases

An expense is accrued by debiting a(n) _________________ account and crediting a(n) _____________ account.

expense; payable (liability)

If you omit the adjusting journal entry to accrue revenue, you _______________ (overstate, understate) your firm's net income.

understate