Accounting - Ch 3: Adjusting Accounts for Financial Statements

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; 3600

Which of the following describes accrued revenue?

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. They refer to earnings which have been earned but not yet billed. The adjustment causes an increase in an asset account and an increase in a revenue account

On December 27, a business completed a $400 service that had not yet been billed or recorded as of December 31. 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

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

Cash Office supplies Prepaid rent Accounts receivable (land & equipment = long-term)

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. (unearned revenues aren't involved)

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. (not a revenue, technically)

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. ($400 has been earned. $600 is the balance in the Unearned revenues account, so $400 must be debited to reduce this account. Not credit as unearned revenues are debited.)

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 (not cash since this is a revenue)

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.

For the current year, a business has earned (but not recorded or received) $200 of interest from investments. 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

Select the statement below that describes a post-closing trial balance.

It is a listing of all permanent accounts and their balances after closing.

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 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 (liabilities; so no revenues, equity, or assets)

Which of the following accounts would be considered a prepaid expense or prepaid asset account? Accounts payable Common Stock Prepaid rent Prepaid insurance Supplies

Prepaid rent Prepaid insurance Supplies (common stock = equity; acc. payable = liability)

Which statements below are true regarding permanent and temporary accounts?

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

Which of the following accounts is considered a prepaid expense?

Supplies (not utilities, those are paid after usage)

$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.

Determine which of the following transactions may require adjustments.

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

$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.

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.

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. (duh)

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 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.

permanent; ledger; after; closing

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.

retained earnings; dividends

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

revenue

The revenue recognition principle states that revenue:

should be recorded when goods or services are provided to customers at an amount expected to be received

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

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 an adjusting entry.

1, 2, 3

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

12; December

Explain your understanding of what an accrued expense is by selecting the statements below which are correct: 1. They are also called accounts receivable. 2. They refer to earnings which have been earned, but not yet billed. 3. Adjustments involve increasing both an expense and a liability account. 4. They refer to costs that are incurred in a period, but are both unpaid and unrecorded. 5. Examples of accrued expenses are wages expense and interest expense. 6. They are reported on an income statement.

3,4,5,6 1 is an asset 2 expense does not equal earnings

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.

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

Closing means to bring an account balance to zero.

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. (3,600/12)

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 reported on the balance sheet. 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.

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.

Which of the statements below is (are) correct regarding the accounting cycle?

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.

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 reported on a balance sheet. They are also called deferred revenues. They are a liability. (they're not an account receivable as that is an asset)

All of the following are on an unclassified balance sheet:

Total assets Total liabilities (classifieds have current / noncurrents)

$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.

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

Unearned revenue; Supplies; Prepaid rent (never cash?)

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:

credit to Prepaid insurance for $400. debit to Insurance expense for $400. (4800 / 12 = $400... debiting the expense as an increase, crediting the insurance as a decrease)

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

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

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