Accounting: Chapter 3
When recording an adjustment for the cost of using equipment during the current accounting period, which two accounts are
Accumulated Depreciation and Depreciation Expense
What are current assets?
Assets that provide benefits within the next year.
A company receives $450 in February for services that will be performed in March. In March, the adjusting entry is recorded as:
Debit Deferred Revenue $450, Credit Service Revenue $450
Depreciation on a company's equipment for the year is $6,000. The adjusting entry for depreciation is recorded as:
Debit Depreciation Expense $6,000, Credit Accumulated Depreciation $6,000
Adjusting entries help to ensure that all ______ are recorded in the period in which they are incurred.
Expenses
When should supplies be recorded as an expense?
In the period the supplies are used, regardless of when they were purchased
In January, Pizza Company bought pizza ingredients on account for $100, with payment due to the supplier in April. The pizza ingredients were used for pizzas made in January. In which month should Pizza Company record the cost of the pizza ingredients as an expense?
January
On a classified balance sheet, long-term assets may be reported in these sub-categories
Property, plant, and equipment Intangible assets Long-term investments
Reporting revenues only when cash is received and expenses only when cash is paid is called the
cash basis accounting
As the balance in the Accumulated Depreciation increases, total assets _____ because Depreciation is a(n) _______ account
decrease, contra
A prepayment is originally recorded as an asset. An adjusting entry at the end of the accounting period results in a(n) ______ in the asset account and a(n) ______ in the expense account.
decrease, increase
Cash-basis accounting is not allowed
for financial reporting purposes for most major companies.
Deferred revenue is considered a
liability
The income statement provides a measure of
net income (profitability), calculated as revenues minus expenses.
The _____ is the average time between purchasing inventory and receiving cash proceeds from its sale.
operating cycle
Adjusting entries for accrued expenses ensure that liabilities are reported for all amounts ______ at the end of the accounting period.
owed
After the adjusting entries have been completed, the ending balance in the Supplies account represents the cost of supplies ______.
remaining at the end of the accounting period
We post adjusting entries to the general ledger to
update account balances
Under cash-basis accounting, we record expenses when
we pay cash
The post-closing trial balance helps to verify that
we prepared and posted closing entries correctly the accounts are ready for next period's transactions
In May, Sea the World Cruises, Inc. collected $1,000 cash in advance from a customer for services to be performed in June. Which of the following is true assuming accrual accounting?
$1,000 of revenue should be recorded in June.
In May, Just In Thyme, Inc. billed a customer $1,000 for services performed in May. In June, Just In Thyme collected the $1,000. Which of the following is true assuming accrual accounting?
$1,000 of revenue should be recorded in May.
Wald Corporation's adjusted trial balance shows the following temporary accounts: service revenue: $20,000; salaries expense $8,000; insurance expense: $2,000; utilities expense: $3,000; interest expense $200; and depreciation expense: $1,400. As part of the the closing process, Wald should credit retained earnings for:
$20,000 because retained earnings is credited for the balance of revenue
On August 1, 2019, a firm prepaid $53,520 for 2 years' rent of an office building. On March 1, 2020, the firm prepaid $34,800 for 2 years' rent of a warehouse. The rent agreements on both buildings went into effect on the dates the rents were prepaid. What amount will be shown for prepaid rent on the December 31, 2020 balance sheet?
$35,910
Adjusting entries are unnecessary in two cases:
(1) for transactions that do not involve revenue or expense activities and (2) for transactions that result in revenues or expenses being recorded at the same time as the cash flow.
The closing entry for Service Revenue includes:
A debit to Service Revenue and a credit to Retained Earnings.
Which relationship between revenue and expense recognition is implied in the matching principle?
Cause and effect
On June 30, a company provides $900 of services to customers on account. It usually takes the company one week to mail bills to customers and another week for customers to pay. In June, the adjusting entry is recorded as:
Debit Accounts Receivable $900, Credit Service Revenue $900
On January 1, a company pays one year of rent in advance for $12,000 ($1,000 per month). On January 31, the adjusting entry is recorded as:
Debit Rent Expense $1,000, Credit Prepaid Rent $1,000
At the end of May, a company receives a utility bill for $500 associated with operations in May. The company plans to pay the bill on June 10. In May, the adjusting entry is recorded as:
Debit Utilities Expense $500, Credit Utilities Payable $500
A company receives cash in March for services that it will provide in April. This scenario is an example of a(n):
Deferred revenue
Taggert Company paid $1,800 for a 6-month insurance premium on December 1. Which of the following statements are correct regarding the accounting for this insurance over the six-month period?
Taggert will debit Insurance Expense for $300 on Dec. 31. Taggert will debit Prepaid Insurance for $1,800 on Dec. 1. Taggert will credit Prepaid Insurance for $300 on Dec. 31.
The adjusting entry for an accrued revenue always includes
a debit to an asset account a credit to a revenue account
An adjusted trial balance is a list of
all accounts and their balances at a particular date, after we have updated account balances for adjusting entries.
Interest on the note payable is classified as
an expense since it is a cost of borrowing.
Adjusting entries
are a necessary part of accrual-basis accounting. They are used to record changes in assets and liabilities (and their related revenues and expenses) that have occurred during the period but that we have not yet recorded by the end of the period.
At the beginning of the accounting period, the balances of temporary accounts
are zero
A prepayment such as "Prepaid Insurance" is originally recorded as a(n) __ when an insurance policy is purchased and will later be expensed in the period used.
asset
Norbert Inc. delivered goods and services during December. Payment is expected during the first week of January. The related adjusting entry should consist of a debit to a(n) ____ account and a credit to a(n) _____ account.
asset, revenue
The balance sheet demonstrates that
assets equal liabilities plus stockholders' equity (the basic accounting equation).
During a discount sale, Larry buys a CD from Best Buy. Rather than paying cash, Larry uses his Best Buy card to buy the CD on account. Under the accrual basis of accounting, when will Best Buy record revenue from this sale?
at the time of the sale
Prepaid rent appears in the ______.
balance sheet because it is an asset
Adjusting entries are needed when
cash flows or obligations occur before the revenue- or expense-related activity (prepayment) or when cash flows occur after the revenue- or expense-related activity (accrual).
Beverly Company incurred interest on its bank loan; interest is due and will be paid at the beginning of next year. On December 31, Beverly Company should
debit interest expense and credit interest payable
On July 1, Book Palace prepaid 12 months' fire insurance with coverage starting the following month. The adjusting entry on December 31 includes:
debit to insurance expense, credit to prepaid insurance
The adjusting entry for prepaid rent requires a ____ to Rent Expense and a _____ to prepaid rent
debit, credit
Supplies should be ______ and Supplies Expense should be ______ for the cost of supplies used up during the period.
decreased, increased
The process of allocating the cost of an asset to expense over the useful life of the asset is called
depreciation
___ Expense should be recorded to recognize the the cost of using long-lived assets, such as equipment, during the accounting period.
depreciation
The adjusting entry for equipment depreciation includes a debit to _____ and a credit to _____.
depreciation expense; accumulated depreciation
The adjusting entry for a prepaid expense includes a debit to a(n) ______ account and a credit to a(n) ____ account.
expense, asset
A primary purpose of adjusting entries is to record events that
have occurred but that have not yet been recorded.
Costs of assets acquired in one period that will be recorded as expense in a future period are referred to as ______ and are initially recorded as _____.
prepaid expenses; assets
Revenue recognition principle
states that we record revenue in the period in which we provide goods and services to customers, not necessarily in the period in which we receive cash.
The adjusting entry for supplies used during the period will result in a debit to the ______ account and a credit to the ______ account.
supplies expense; supplies
Closing entries move the balances from the ______ accounts into the Retained Earnings account.
temporary
Revenues, expenses, and dividends are referred to as
temporary
We prepare the income statement, statement of stockholders' equity, and balance sheet from
the adjusted trial balance
Closing entries increase retained earnings by
the amount of revenues for the period and decrease retained earnings by the amount of expenses and dividends for the period.
After the adjusting entries have been completed, the adjusted balance in the Deferred Revenue account represents:
the amount of revenues for which goods or services were provided during the current period.
After we post the closing entries to the general ledger, the balance of Retained Earnings equals
the amount shown in the balance sheet. The balances of all revenue, expense, and dividend accounts are zero at that point.
After the adjusting entries have been completed, the adjusted balance in the Supplies account represents:
the cost of supplies remaining at the end of the accounting period
Liquidity
the ease with which an asset can be converted into cash
Other expenses indirectly related to producing revenues are recorded in
the period they occur.
Most expenses are recorded in
the same period as the revenues they help to generate.
The difference between accrual-basis accounting and cash-basis accounting is
timing
Under accrual-basis accounting, we record revenues when
we provide goods and services to customers
Closing entries serve two purposes:
(1) to transfer the balances of temporary accounts (revenues, expenses, and dividends) to the Retained Earnings account (2) to reduce the balances of these temporary accounts to zero to prepare them for measuring activity in the next period.
A classified balance sheet shows subtotals for current
assets and liabilities
When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records a:
credit to Revenue debit to Deferred Revenue
Under cash-basis accounting, we record revenues when
we receive cash
Under accrual-basis accounting, we record expenses when
costs are used in company operations.
If an asset account such as Equipment has a normal debit balance, the associated contra account should have a normal
credit balance