PCP - Chapter 3: Adjusting Accounts for Financial Statements

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.

Supplies expense would be debited for $300. Supplies would be credited for $300.

$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.

Explain the difference between the unadjusted and the adjusted trial balance.

The adjusted trial balance is prepared after adjusting entries have been recorded and posted.

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.

Explain your understanding of what an accrued expense is by selecting the statements below which are correct.

They are reported on an income statement. Adjustments involve increasing both an expense and a liability account. They refer to costs that are incurred in a period, but are both unpaid and unrecorded. Examples of accrued expenses are wages expense and interest expense.

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 accounts below are considered accrued expenses?

Wages expense, Interest expense

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 ____ account and ____ the interest ____ account.

expense; credit; 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 ____ account and ____ the salaries ____ account.

expense; credit; 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 ____ account and ____ the salaries ____ account.

expense; credit; payable.

The expense recognition (matching) principle aims to record ____ in the same accounting period as the ____ that are earned as a result of those costs. This principle is a major part of the ____.

expenses; revenues; adjusting

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 ____ account and ____ the ____ account.

interest receivable; credit; interest revenue

A reversing entry can be described as a(n):

optional entry. entry whose purpose is to simplify a company's record keeping. entry that is the exact opposite of an accrual adjusting entry. entry that is used for adjusting entries involving accrued revenues and accrued expenses.

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 ____ account balance as well as any debit balance in the ____ account is transferred from the adjusted trial balance and is used along with the reported net income (loss) from the Income statement.

retained earnings; dividends

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

revenues

Current assets are:

cash and other resources that are expected to be sold, collected or used within one year.

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:

debit accounts receivable. credit services revenue.

On December 1, a company pays $3,600 for a 36-month insurance policy. After one month, accrual accounting requires $____ of insurance expense be reported on the income statement ending December 31. However, if cash basis accounting is used, $____ of insurance expense would be reported at the time of purchase.

100; 3,600

A calendar year-end reporting period is defined as a ____-month period which ends on ____ 31st.

12; December

What is a plant asset?

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

Identify which of the accounts below would be classified as a current asset.

Accounts receivable; prepaid rent; cash; office supplies.

Recall the column headings of a work sheet used to prepare financial statements. Which of the following items are on a worksheet.

Adjusted Trial Balance columns Balance Sheet columns Income Statement columns Adjustment columns Unadjusted Trial Balance columns

Describe an unclassified balance sheet.

An unclassified balance sheet is one whose items are broadly grouped into assets, liabilities, and equity.

The following categories are on a classified balance sheet. List them in the order that they would appear. Current liabilities Long-term investments Intangible assets Long-term liabilities Current assets Plant assets

Current assets Long-term investments Plant assets Intangible assets Current liabilities Long-term liabilities

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.

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. [$4,000 x .09 x 30/360 = $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.

On December 31, AB Consulting recorded two days' wages of $100 in an adjusting entry which included a debit to Salaries Expense and a credit to Salaries Payable. On January 1, the accountant prepared a reversing entry which included which of the following?

Debit Salaries Payable $100; credit Salaries Expense $100.

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.

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 the December 31 adjusting entry by choosing the correct statement below.

Debit Unearned revenues for $400.

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.

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:

Debit to Insurance expense for $400. Credit to Prepaid insurance for $400.

Place the steps in the adjusting process in the correct order in which they would be performed. Record an adjusting entry. Determine what the current account balance is. Determine what the correct account balance should be.

Determine what the current account balance is. Determine what the correct account balance should be. Record an adjusting entry.

Explain the required steps to complete a work sheet by placing the following steps in the correct order. Enter adjustments. Sort adjusted trial balance amounts to financial statements. Total financial statement columns, compute income or loss and balance columns. Enter unadjusted trial balance. Prepare adjusted trial balance.

Enter unadjusted trial balance. Enter adjustments. Prepare adjusted trial balance. Sort adjusted trial balance amounts to financial statements. Total financial statement columns, compute income or loss and balance columns.

Which of the following statements describes why accrual accounting better reflects a business's performance?

Expenses are always recognized in the period in which they are incurred. Revenues are always recorded in the period in which they are earned. Comparability of financial statements is improved.

What is the difference between an adjusted trial balance and an unadjusted trial balance?

The adjusted trial balance is used to prepare financial statements. The adjusted trial balance generally has more accounts listed than the unadjusted trial balance. The adjusted trial balance is a list of accounts and their balances after adjusting entries have been posted.

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.

Insurance expense would be debited for $300.

What is a work sheet?

It can help with adjusting and closing accounts and with preparing financial statements.

A plant asset can be defined by which of the following statements?

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

Which of the following statements describes the expense recognition (matching) principle?

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.

Which of the following accounts would be considered a prepaid expense or prepaid asset account?

Prepaid rent. Prepaid insurance. Supplies.

Match: Income statement Balance sheet Work sheet Trial balance Statement of cash flows

Reports a business's revenues and expenses for a period of time. Reports a business's assets, liabilities and equity on a specific date. An internal accounting aid which helps in preparing financial statements. A list of accounts and their balances at a point in time. Reports the inflows and outflows of cash during a period of time.

Which of the accounts below would appear in the equity section of a classified balance sheet?

Retained 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.)

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

Determine which of the following transactions may require adjustments.

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

Explain what unearned revenues are by selecting the statements below which are correct.

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

Which of the following describes accrued revenue?

They refer to revenues that are earned in a period, but have not been received and are unrecorded. They refer to earnings which have been earned but not yet billed. Accounts receivable is usually increased when accruing revenues. The adjustment causes an increase in an asset account and an increase in a revenue account.

All of the following are on an unclassified balance sheet:

Total assets Total liabilities

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 ____ account and ____ the ____ account.

accounts receivable; credit; service revenue.