accounting exam ch 4

Depreciation is an _______ concept, not a __________ concept.

allocation, valuation

contra asset account

an account that is offset against an asset account on the balance sheet

prepaid expenses

are expenses paid in cash before they are used or consumed. When expenses are prepaid, an asset account is increased (debited) to show the service or benefit that the company will receive in the future.

Adjusting entries are either classified as

deferrals or accruals

an adjusting entry for prepaid expenses results in an

increase (a debit) to an expense account and a decrease (a credit) to an asset account.

Adjustments for accrued revenues: increase assets and increase liabilities. increase assets and increase revenues. decrease assets and decrease revenues. decrease liabilities and increase revenues.

increase assets and increase revenues.

Every adjusting entry will include

one income statement account and one balance sheet account.

one way companies manage earnings

one time items to prop up earning numbers inflate revenue improper adjusting entries

equation analysis

summarize the effects of transactions on the three elements of the accounting equation, as well as the effect on cash flows.

book value (carrying value)

the difference between the cost of a depreciable asset and its related accumulated depreciation

Accrual-basis accounting

means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash was not exchanged

Accruals include

1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded. 2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

Deferrals include

1. Prepaid expenses: Expenses paid in cash before they are used or consumed. 2. Unearned revenues: Cash received before services are performed.

post-closing trial balance

A list of permanent accounts and their balances after a company has journalized and posted closing entries. -prove the equality of the total debit balances and total credit balances of the permanent account balances that the company carries forward into the next accounting period

Adjusting entries are made to ensure that: expenses are recognized in the period in which they are incurred. revenues are recorded in the period in which the performance obligation is satisfied. balance sheet and income statement accounts have correct balances at the end of an accounting period. All of the above.

All of the above.

When Richards Corporation in the question above pays the loan back plus the interest, what journal entry would be made on May 1, 2021? (numbers omitted) a.Interest expense Interest payable Note payable Cash b. Interest expense Interest payable Note Payable Cash c.Note payable Interest expense Interest payable Cash d. Note payable Interest expense Interest payable

C

Which of the following accounts is NOT closed at the end of the year? a.Service revenue. b. Dividends. c.Accounts payable. d. Insurance expense.

C

Closing entries

Entries at the end of an accounting period to transfer the balances of temporary accounts (net income/loss and dividends) to a permanent stockholders' equity account, Retained Earnings. -produce zero balance

quality of earnings

Indicates the level of full and transparent information that a company provides to users of its financial statements.

expense recognition principle (also called matching principle)

It dictates that efforts (expenses) be recognized with results (revenues) in the period when the company makes efforts to generate those revenues.

Which types of accounts will appear in the post-closing trial balance? Permanent accounts. Temporary accounts. Expense accounts. None of the above.

Permanent accounts.

permanent accounts include

assets, liabilities, stockholders equity

adjusting entry for accruals will increase

both a balance sheet and an income statement account.

Queenan Company computes depreciation on delivery equipment at $1,000 for the month of June. The adjusting entry to record this depreciation is as follows: a. Depreciation Expense 1,000 Accumulated Depreciation—Queenan Company 1,000 b. Depreciation Expense 1,000 Equipment1,000 c. Depreciation Expense 1,000 Accumulated Depreciation—Equipment 1,000 d. Equipment Expense 1,000 Accumulated Depreciation—Equipment 1,000

c. Depreciation Expense 1,000 Accumulated Depreciation—Equipment 1,000

Accumulated depreciation is: a.A liability account. b. A temporary account. c.A contra-asset account. d. An expense account.

c.A contra-asset account.

1. _________Accrual-basis accounting. 2. ________ Calendar year. 3. ________ Periodicity assumption. 4. ________ Expense recognition principle. a. Monthly and quarterly time periods. b. Efforts (expenses) should be matched with results (revenues). c. Accountants divide the economic life of a business into artificial time periods. d. Companies record revenues when they receive cash and record expenses when they pay out cash. e. An accounting time period that starts on January 1 and ends on December 31. f. Companies record transactions in the period in which the events occur.

f e c b

Because the accounts contain all data needed for financial statements, the adjusted trial balance is the ______

primary basis for the preparation of financial statements. -companies prepare financial statements directly from adjusted trial balance

accrued revenues

revenues for services performed but not yet recorded at the statement date

Income Summary

a temporary account used in closing revenue and expense accounts

Adjusting entries are necessary because

the trial balance may not contain up-to-date and complete data

the purchase of prepaid insurance results in

The cost of insurance (premiums) paid in advance is recorded as an increase (debit) in the asset account Prepaid Insurance. At the financial statement date, companies increase (debit) Insurance Expense and decrease (credit) Prepaid Insurance for the cost of insurance that has expired during the period.

useful life

The length of service of a productive asset

how to calculate ADJUSTED TRIAL BALANCE

add up everything but revenue expense dividend

Unearned revenue is a ___________ account used to recognize the obligation that exists

liability

Five Step Revenue Recognition Process

1. identify the contract with customers 2. identify the separate performance obligations in the contract 3. determine the transaction price 4. allocate the transaction price to the separate performance obligations 5. recognize revenue when each performance obligation is satisfied

Richards Corporation borrowed $105,000 on November 1, 2020 at 4% annual interest rate, due date May 1, 2021. The principal balance of the note plus interest for all six months is due on May 1, 2021. Richards makes its adjusting entries on December 31, 2020, none have been made earlier in the year. What adjusting entry would Richards Corporation make at December 31, 2020? a. Interest expense 700 Interest payable 700 b. Interest expense 4,200 Interest payable 4,200 c.Interest payable 700 Interest expense 700 d. Interest expense 1,400 Interest payable 1,400

A 105,000 (2/12)(.04) = 700

Gold Corporation purchases equipment on July 1, 2020 for $24,000. The equipment has an estimated useful life of 5 years and is depreciated using the straight-line method. What is the correct adjusting entry for depreciation for the year ended December 31, 2020? a.Depreciation expense 4,800 Equipment 4,800 b. Accumulated depreciation 4,800 Depreciation expense 4,800 c.Depreciation expense 2,400 Accumulated depreciation 2,400 d. Depreciation expense 4,800 Accumulated depreciation 4,800.

A per year - paying the full year ammt

worksheet

A multiple-column form that companies may use in the adjustment process and in preparing financial statements.

Which statement below regarding closing entries is NOT correct?a.Closing entries transfer net income to retained earnings at the end of the year. b. Asset and liability accounts are closed at the end of the year. c.Closing an account is simply making the balance to zero in the account. d. Revenue, expense, and dividend accounts are called temporary accounts and are the only accounts closed at the end of the year.

B

Copper Inc has a daily payroll of $1,000, or $5,000 per week. Employees are paid every Friday for the week (Monday through Friday). December 31, 2020 falls on Thursday. What adjusting journal entry should Copper make on December 31, 2020 with regard to the salaries earned by the employees in 2020 that have not been paid?a.Salaries payable 1,000 Salaries expense 1,000 b. Salaries expense 1,000 Salaries payable 1,000 c.Salaries expense 4,000 Salaries payable 4,000 d. Salaries payable 4,000 Salaries expense

C

Buffet Corporation purchased an insurance policy on its office building on August 1, 2020. The policy is for a term of two years and the total premium paid on August 1 for the two-year policy was $12,000. The entry on August 1 was to debit the asset account Prepaid Insurance and credit cash for $12,000. What adjusting entry should be made on December 31, 2020 assuming no adjusting entry has been made prior to December 31, 2020? a. Insurance expense 2,500 Prepaid insurance 2,500 b. Insurance expense 500 Prepaid insurance 500 c. Prepaid insurance 2,500 Insurance expense 2,500 e. Insurance expense 2,000 Prepaid insurance 2,000

C 12,000/24 X 5

For Buffet Corporation above, after the proper adjusting entry on December 31, 2020, what is the balance in the Prepaid Insurance account? a.$10,000. b. $2,500. c.$9,500. d. $7,000.

C 12000 - 2500

Which one of these statements about the accrual basis of accounting is false? Companies record events that change their financial statements in the period in which events occur, even if cash was not exchanged. Companies recognize revenue in the period in which the performance obligation is satisfied. This basis is in accordance with generally accepted accounting principles. Companies record revenue only when they receive cash and record expense only when they pay out cash.

Companies record revenue only when they receive cash and record expense only when they pay out cash.

Aggie Inc. provides consulting services. Aggie signed a contract on November 1, 2020 to provide services for a client for $10,000 per month for 18 months. The consulting services will begin on November 1, 2020 and Aggie will send monthly invoices at the end of each month. Aggie sent an invoice for $10,000 to the client on December 3, 2020 for the month of November and the amount was paid by the client on December 9. Services were provided in December, 2020 but the invoice was not prepared for the month of December until January 3, 2021. What adjusting entry, if any, should Aggie make on December 31, 2020? a.No entry necessary. b. Service Revenue 10,000 Accounts receivable 10,000 c.Cash 10,000 Service revenue 10,000 d. Accounts receivable 10,000 Service Revenue 10,000

D

Slider Corporation had office supplies (asset account) on hand at January 1, 2020 of $3,000 and during the 2020 year, the corporation purchased $17,000 of additional office supplies. Bullet had $2,000 of office supplies on hand at December 31, 2020. No adjusting journal entry has been made prior to December 31, 2020. What should be the adjusting entry on December 31, 2020? a. Office supplies 2,000 Office supplies expense 2,000 b. Office supplies expense 17,000 Office supplies 17,000 c. Office supplies expense 20,000 Office supplies 20,000 d. Office supplies expense 18,000 Office supplies 18,000

D

Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? Expense recognition principle. Historical cost principle. Periodicity principle. Revenue recognition principle.

Expense recognition principle.

accrued analysis

Expenses incurred but not yet paid or recorded at the statement date -Interest, taxes, utilities, and salaries are common examples

temporary accounts

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period. (nominal accounts)

Which account will have a zero balance after a company has journalized and posted closing entries? Service Revenue. Supplies. Prepaid Insurance. Accumulated Depreciation.

Service Revenue.

Which statement is incorrect concerning the adjusted trial balance? An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. The adjusted trial balance provides the primary basis for the preparation of financial statements. The adjusted trial balance does not list temporary accounts. The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries.

The adjusted trial balance does not list temporary accounts.

What is the periodicity assumption? Companies should recognize revenue in the accounting period in which services are performed. Companies should match expenses with revenues. The economic life of a business can be divided into artificial time periods. The fiscal year should correspond with the calendar year.

The economic life of a business can be divided into artificial time periods.

What are the first step and the final step in the revenue recognition process? The first step is identify the contract with customers, and the final step is allocate the transaction price to the separate performance obligations. The first step is identify the separate performance obligations in the contract, and the final step is determine the transaction price. The first step is identify the contract with customers, and the final step is recognize revenue when each performance obligation is satisfied. The first step is determine the transaction price, and the final step is identify the separate performance obligations in the contract.

The first step is identify the contract with customers, and the final step is recognize revenue when each performance obligation is satisfied.

When Copper pays its employees $5,000 on January 1, 2021, how much would be recorded as salaries expense? a.$1,000 .b. $4,000. c.$5,000. d. $2,000.

a

adjusted trial balance

a list of accounts and their balances after all adjustments have been made

the adjusting entry for unearned revenues results in

a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.

an adjusting entry for accrued revenues results in

an increase (a debit) to an asset account and an increase (a credit) to a revenue account

the purchase of supplies results in

an increase (a debit) to an asset account.

an adjusting entry for accrued expenses results in

an increase (a debit) to an expense account and an increase (a credit) to a liability account.

Bullet Corporation is a consulting firm and on September 18, 2020 received a payment of $48,000 for services to be performed over the next 4 months beginning October 1, 2020. The services will be performed evenly over the next four months. The entry made by Bullet on September 18 was: Cash 48,000 Unearned service revenue 48,000 No adjusting entries have been made prior to December 31, 2020. What adjusting entry should be made on December 31, 2020? a.Service revenue 36,000 Unearned service revenue 36,000 b. Unearned service revenue 36,000 Service revenue 36,000 c.Cash 36,000 Service revenue 36,000 d. Unearned service revenue 12,000 Service revenue 12,000

b

Colleen Mooney earned a salary of $400 for the last week of September. She will be paid on October 1. The adjusting entry for Colleen's employer at September 30 is: a. No entry is required. b. Salaries and Wages Expense 400 Salaries and Wages Payable 400 c. Salaries and Wages Expense 400 Cash 400 d. Salaries and Wages Payable 400 Cash 400

b. Salaries and Wages Expense 400 Salaries and Wages Payable 400

permanent accounts

balance sheet accounts whose balances are carried forward to the next accounting period (real accounts)

The trial balance shows Supplies $1,350 and Supplies Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting entry is: a. Supplies 600 Supplies Expense 600 b. Supplies 750 Supplies Expense 750 c. Supplies Expense 750 Supplies 750 d. Supplies Expense 600 Supplies 600

c. Supplies Expense 750 Supplies 750

companies often report using the __________ year

calendar -month, quarter or year. typically january 1 to december 31

An alternative to the accrual basis is the ______ ________

cash basis

unearned revenues

cash received and a liability recorded before services are performed

cash-basis accounting

companies record revenue at the time they receive cash. They record an expense at the time they pay out cash. -The cash basis seems appealing due to its simplicity, but it often produces misleading financial statements. For example, it fails to record revenue for a company that has performed services but has not yet received payment. As a result, the cash basis may not reflect revenue in the period that a performance obligation is satisfied. -NOT IN ACCORDANCE W GAAP

Two principles are used as guidelines when reporting:

the revenue recognition principle and the expense recognition principle. -in accordance w GAAP

There are two overall methods of accounting, cash basis and accrual basis. Three of the transactions below describe the accrual basis of accounting. Which transaction below is not connected with the accrual basis of accounting? a.Revenues are recognized when services are performed, not necessarily when cash is received. b. When equipment is purchased, it is expensed over its useful life through depreciation rather than expensing the total cost in the year of purchase. c.Expenses are recognized when the corresponding liability is incurred, not necessarily when the cash is spent. d. Service revenues are recognized when cash payments are received from customers, not necessarily when the services are performed.

d. Service revenues are recognized when cash payments are received from customers, not necessarily when the services are performed.

Adjustments for prepaid expenses: decrease assets and increase revenues. decrease expenses and increase assets. decrease assets and increase expenses. decrease revenues and increase assets.

decrease assets and increase expenses.

Adjustments for unearned revenues: decrease liabilities and increase revenues. increase liabilities and increase revenues. increase assets and increase revenues. decrease revenues and decrease assets.

decrease liabilities and increase revenues.

Adjusting entries

ensure that the revenue recognition and expense recognition principles are followed.

Clark Corporation purchased equipment at a cost of $10,000 on January 1, 2016. The equipment has an estimated useful life of 10 years. Journal entries for depreciation were properly made for the four years 2016-2019. After the depreciation is recorded and posted for the year ended December 31, 2020, what are the balances for Depreciation Expense and Accumulated Depreciation?

exp: 1000 accum: 5000 -10000/10 = 1000 ended 2020 ; 1000 x 5

adjusting entries have ___ effect on cash flows

no

All of the following are required steps in the accounting cycle except: journalizing and posting closing entries. preparing an adjusted trial balance. preparing a post-closing trial balance. prepare financial statements from the unadjusted trial balance.

prepare financial statements from the unadjusted trial balance.

The purpose of an adjusted trial balance is to

prove the equality of the total debit balances and the total credit balances in the ledger after all adjustments.

revenue recognition principle

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied

Temporary accounts include

revenues, expenses, dividends

. Earnings management

the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income

Depreciation

the process of allocating the cost of an asset to expense over its life

Without the adjusting entry, assets and stockholders' equity on the balance sheet and revenues and net income on the income statement are ____________and net income and stockholders' equity are ___________

understated, overstated

Each of the following is a major type (or category) of adjusting entry except: prepaid expenses. accrued revenues. accrued expenses. unearned expenses.

unearned expenses.