Ch 3: Adjusting Accounts for Financial Statements

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

1. Determine what the current account balance is 2. Determine what the correct account balance should be 3. Record and adjusting entry

On December 1, a company pays $3,600 for a 36-month insurance policy. After one month, accrual accounting requires $_______________________ (100/3,600) of insurance expense be reported on the income statement ending December 31. However, if cash basis accounting is used, $_____________________ (100/3,600) of insurance expense would be reported at the time of purchase.

100 3.600

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

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.

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.

Accounts receivable credit Service revenue

Describe an unclassified balance sheet.

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

When does the closing process take place?

At the end of an accounting period

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.

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.

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

December

Determine which of the following transactions may qqwa.

Equipment was purchased in the middle of the year. Six months of rent were paid in advance. Supplies were purchased at the beginning of the year, but not all were used. 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.

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

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

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.

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.

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

Office supplies Cash Prepaid rent Accounts receivable

Select the statements below that describe the purpose of a post-closing trial balance.

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

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

Prepaid rent Prepaid insurance Supplies

Which statements below are true regarding permanent and temporary accounts?

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

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 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.

Retained earnings Dividends

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

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

Which of the following accounts is considered a prepaid expense?

Supplies

Which of the following describes accrued revenue?

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.

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

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

All of the following subtotals and totals are shown on an unclassified balance sheet:

Total liabilities Total assets

Which of the following lists steps of the accounting cycle in the correct order (note that not all steps are listed)?

Trial balance, Adjusting journal entries, Post-closing trial balance.

Identify which group of accounts may require adjustments at the end of the accounting period.

Unearned revenue; Supplies; Prepaid rent

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:

credit services revenue debit accounts receivable

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.

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.

end adjusted after

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.

expenses revenues adjusting

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

permanent after closing

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

revenue

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.

temporary zero

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.

Interest receivable credit Interest revenue

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

It is a tangible long-term asset. It is reported on the balance sheet. It has a life within the business more than one year. Its original cost is expensed over its useful life.

Some of the steps in the accounting cycle are listed below. Place them in the correct order of use. Instructions

Journalize transactions into the journal Journalize and post the adjusting entries prepare the adjusted trial balance prepare the financial statements journalize and post closing entries prepare post-closing trial balance

Identify which of the following steps in the accounting cycle is optional.

Reversing journal entries

$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.

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

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.

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.

$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.

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

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 ________________________ (expense/payable/receivable) account and _______________________ (debit/credit) the Interest _________________________ (expense/payable/receivable) 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 ______________________ (expense/payable) account and _______________________ (debit/credit) the Salaries ______________________ (expense/payable/unearned) account.

expense credit payable


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