Accounting Quiz 4

On August 1, a company purchased equipment for $16,000. The equipment's estimated salvage value is $1,000. The machine will be depreciated using straight-line depreciation and a five year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

$1,250 debit to Depreciation Expense and a $1,250 credit to Accumulated Depreciation. Solution:Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (16,000 - 1,000)/5 = $3,000 per yearThe correct adjusting entry to record depreciation for 5 months (i.e., August 1 through December 31) is $3,000 per year x 5/12 = $1,250.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.

On September 1, a company purchased equipment for $25,000. The equipment's estimated salvage value is $2,500. The machine will be depreciated using straight-line depreciation and a five year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

$1,500 debit to Depreciation Expense and a $1,500 credit to Accumulated Depreciation. Solution:Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (25,000 - 2,500)/5 = $4,500 per yearThe correct adjusting entry to record depreciation for 4 months (i.e., September 1 through December 31) is $4,500 per year x 4/12 = $1,500.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.

On September 1, a company purchased equipment for $25,000. The equipment's estimated salvage value is $3,400. The machine will be depreciated using straight-line depreciation and a four year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

$1,800 debit to Depreciation Expense and a $1,800 credit to Accumulated Depreciation. Solution:Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (25,000 - 3,400)/4 = $5,400 per yearThe correct adjusting entry to record depreciation for 4 months (i.e., September 1 through December 31) is $5,400 per year x 4/12 = $1,800.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.

Based on the following adjusted trial balance: Garnet & Gold Corporation Adjusted Trial Balance As of December 31 Debit Credit Cash $ 800 Accounts Receivable 200 Inventory 3,000 Building 30,000 Accumulated Depreciation $ 2,000 Notes Payable 1,000 Common Stock 21,000 Retained Earnings 6,000 Dividends 2,000 Revenues 8,000 Selling and Administrative Expense 1,000 Insurance Expense 1,000 $ 38,000 $ 38,000 Determine the amount that will be reported as retained earnings on the post-closing trial balance.

$10,000 Solution:Permanent accounts (i.e., assets, liabilities, and equities) are not closed. Temporary accounts (i.e., revenues, expenses, and dividends) are closed to retained earnings (i.e., an Income Summary account can be used as an intermediate step). Closing revenues increases retained earnings. Closing dividends and expenses decreases retained earnings. Post-closing: Ending retained earnings = beginning retained earnings + revenues - expenses - dividends = $6,000 + 8,000 - 1,000 - 1,000 - 2,000 = $10,000

The following is information is from a certain corporation's financial records for the current fiscal year.i. Cash received from customers, $230,000ii. Revenue earned, $255,000iii. Cash paid for wages, $110,000iv. Wage expense incurred, $115,000v. Cash paid during the current year for computers that will be used for 3 years, $30,000vi. Depreciation expense, $10,000vii. Proceeds from issuing debt, $30,000viii. Interest incurred on debt, $3,000ix. Cash paid for supplies, $4,000x. Supplies expense incurred, $2,000What is the company's net income for the current year using the accrual basis of accounting?

$125,000 Solution:The accrual-basis of accounting recognizes revenues when the performance obligation is satisfied regardless of when the customer pays and it records expenses when they are incurred regardless of when they are paid.Net income using the accrual basis = Revenue earned - expenses incurredNet income using the accrual basis = $255,000 - 115,000 - 10,000 - 3,000 - 2,000 = $125,000

The following is information from a certain corporation's financial records for the current fiscal year.i. Cash received from customers, $310,000ii. Revenue earned, $330,000iii. Cash paid for wages, $140,000iv. Wages incurred, $125,000v. Cash received from shareholders for additional shares of stock, $10,000What is the company's net income for the current year using the cash basis of accounting?

$170,000 Solution:Net income using the cash-basis = Cash collected from customers - cash paid for expenses incurred including prepaid expensesNet income using the cash- basis = $310,000 - 140,000 = $170,000

Employees at a certain company are paid on Friday, December 26 for the five days ending on December 27. The next payday is Friday, January 2. Employees work 5 days a week. The weekly payroll amounts to $3,600. The appropriate adjusting journal entry on December 31 would be to credit Salaries and Wages Payable for

$2,160. Solution:Employees work on December 29-31, but they will not be paid until January 2. At the end of December 31, the company owes employees for three days of the five day work week (i.e., $3,600 x 3/5 = $2,160).

A company has the following adjusted trial balance: DebitCredit Cash 400 Accounts receivable600 Prepaid rent100 Equipment4,000 Accumulated depreciation-Equipment 1,000 Accounts payable 300 Unearned service revenue 100 Common stock 1,200 Retained earnings 1,700 Service revenue 3,000 Interest revenue 100 Salaries and wages expense1,200 Depreciation expense500 Rent expense 600 Total7,4007,400 After closing entries have been journalized and posted, the balance in the company's retained earnings account will be

$2,500 Solution:Ending retained earnings = Beginning retained earnings + revenues - expenses - dividendsEnding retained earnings = 1,700 + 3,000 + 100 - 1,200 - 500 - 600 = 2,500

A company has the following adjusted trial balance: DebitCredit Cash 550 Accounts receivable300 Prepaid rent100 Equipment6,000 Accumulated depreciation-Equipment 2,200 Accounts payable 300 Unearned service revenue 350 Common stock 1,400 Retained earnings 1,100 Service revenue 3,250 Interest revenue 50 Salaries and wages expense1,200 Depreciation expense300 Rent expense 200 Total8,6508,650 After closing entries have been journalized and posted, the balance in the company's retained earnings account will be

$2,700. Solution:Ending retained earnings = Beginning retained earnings + revenues - expenses - dividendsEnding retained earnings = 1,100 + 3,250 + 50 - 1,200 - 300 - 200 = 2,700

The company borrowed money from a bank by signing a three-month note payable in the amount of $18,000 on November 1. The note requires the company to pay interest at an annual rate of 9%. The company records adjusting entries on December 31. The adjusting entry that the company should record for accrued interest on December 31 would include a debit to interest expense for

$270 Solution:Interest = Principal x Rate x Time = $18,000 x 9% x 2/12 = $270After one month, the accrued interest is $270.Interest rates are always annual interest rates unless specifically stated otherwise. This loan charges 9% annual interest per year.The debtor records an adjusting entry to record accrued interest.Debit: Interest Expense, $270Credit: Interest Payable, $270

On June 1,a corporation signed a $36,000, 16%, 2-year note to help finance renovations being made to the corporation headquarters. Assuming interest is accrued only when the year ends on December 31, the appropriate journal entry for the first year would be a

$3,360 debit to Interest Expense and a $3,360 credit to Interest Payable. This entry correctly adjusts the accounts and interest incurred for a seven month period.($36,000 x 0.16 x 7/12 = $3,360)

A company has the following adjusted trial balance: DebitCredit Cash 1,500 Accounts receivable2,100 Prepaid rent100 Equipment3,500 Accumulated depreciation-Equipment 1,500 Accounts payable 150 Unearned service revenue 200 Common stock 1,000 Retained earnings 4,700 Service revenue 800 Interest revenue 100 Salaries and wages expense150 Depreciation expense600 Rent expense 500 Total8,4508,450 After closing entries have been journalized and posted, the balance in the company's retained earnings account will be

$4,350 Solution:Ending retained earnings = Beginning retained earnings + revenues - expenses - dividendsEnding retained earnings = 4,700 + 800 + 100 - 150 - 600 - 500 = 4,350

Given the following adjusted trial balance, determine the company's net income for the year: Debit Credit Cash$781 Accounts Receivable1049 inventory1562 Prepaid Rent43 Equipment150 Accumulated Depreciation-Equipment 26Accounts Payable 41Unearned Service Revenue 61Common Stock 103Retained Earnings 3,305Service Revenue 134Internet Revenue 28Salaries and Wages Expense80 Travel expense 33 Total$3,698$3,698

$49 Solution:Net income = revenues minus expenses = $134 + 28 - 80 - 33 = $49

On September 1, a corporation paid $15,000 to its landlord for 3 months' rent beginning September 1. It debited prepaid rent when it recorded the payment. If the corporation prepares financial statements on September 30, the appropriate adjusting journal entry to make on September 30 would be a

$5,000 debit to Rent Expense and a $5,000 credit to Prepaid Rent. Solution:The company should record rent expense for the month of September. Since the cost of three months' of rent totals $15,000, the company's monthly rent expense is $5,000 (i.e., one-third of the three month cost). The month-end adjusting journal entry to record rent expense (and to decrease prepaid rent to its correct ending balance) would be a debit to Rent Expense for $5,000 and a credit to Prepaid Rent for $5,000.

A company has the following adjusted trial balance: DebitCredit Cash 1,500 Accounts receivable2,100 Prepaid rent100 Equipment3,500 Accumulated depreciation-Equipment 1,500 Accounts payable 150 Unearned service revenue 200 Common stock 1,000 Retained earnings 4,700 Service revenue 800 Interest revenue 100 Salaries and wages expense150 Depreciation expense600 Rent expense 500 Total8,4508,450 After closing entries have been journalized and posted, the post-closing trial balance total for the credit column will be

$7,200 Solution: The difference between (i) the adjusted trial balance and (ii) the post-closing trial balance is the effect of the closing entries. Closing entries transfer end-of-period balances from the revenue accounts, expense accounts, and dividend account to the retained earnings account. The closing process reduces revenue accounts to zero and increases retained earnings, and this merely reduces the credit balance in revenue accounts and increases the credit balance in retained earnings (i.e., the total debits balance and total credit balance do not change when revenue is closed). In contrast, the closing process reduces expense and dividend accounts to zero (i.e., which reduces the total debits) and decreases retained earnings lowing the credit balance in retained earnings. So, closing expenses and dividends lowers both the total debit balance and the total credit balance. Total credits in the post-closing trial balance = the total credits of the adjusted trial balance - expenses and dividends (if any).Total credits in the post-closing trial balance = 8,450 - 150 - 600 - 500 = 7,200

A corporation received a check for $30,000 on October 1, which represents a one year advance payment of rent on an office it rents to a client. The corporation increases unearned rent revenue when it collected the rent and it prepares financial statements dated December 31. The appropriate year-end adjusting journal entry that the realty company must record for the first year would be a

$7,500 debit to Unearned Rent Revenue and a $7,500 credit to Rent Revenue. Solution:The year-end adjusting entry reduces the liability (i.e., Unearned Revenue) and increases Revenue for the amount of revenue earned during this accounting period. Debit unearned revenue to decrease it, and credit rent revenue to increase it.Revenue earned Oct. 1 through Dec. 31 = 30,000 x 3/12 = 7,500.

The following is information is from a certain corporation's financial records for the current fiscal year.i. Cash received from customers, $230,000ii. Revenue earned, $255,000iii. Cash paid for wages, $110,000iv. Wage expense incurred, $115,000v. Cash paid during the current year for computers that will be used for 3 years, $30,000vi. Depreciation expense, $10,000vii. Proceeds from issuing debt (e.g., borrowed money from a bank), $30,000viii. Interest incurred on debt, $3,000ix. Cash paid for supplies, $4,000x. Supplies expense incurred, $2,000What is the company's net income for the current year using the cash-basis of accounting?

$86,000 Solution:The cash-basis of accounting recognizes revenues in the year cash is collected from customers regardless of when the performance obligation is satisfied and it recognizes expenses in the year they are paid regardless of when they are incurred.Net income using the cash-basis = Cash collected from customers - cash paid for expenses incurredNet income using the cash-basis = $230,000 - 110,000 - 30,000 - 4,000 = $86,000

Closing entries must be journalized and posted. Which of the following accounts will not be closed each year-end?

Accounts Receivable olution: Closing entries transfer the balances from temporary accounts, such as revenues, expenses, and dividends, to the retained earnings account. Revenues are closed by debiting each revenue account. Expenses are closed by crediting each expense account. Some companies close revenues and expenses to an income summary account and then close the income summary account to retained earnings. Dividends are closed directly to the retained earnings account. Closing revenues increases retained earnings. Closing expenses and dividends decreases retained earnings. After closing them, revenues, expenses, and dividends have zero balances. Temporary accounts are not included on the post-closing trial balance.

A company increases its prepaid rent account's balance when it pays its landlord, but the company fails to record its adjusting entries at the end of the current year. What is the effect of this omission?

Assets will be overstated, net income will be overstated, and stockholders' equity will be overstated Solution:Paying for rent in advance of the lease period results in an increase in prepaid rent and a decrease in cash. By the end of the year, some or all of the prepaid rent has expired and the company should record an adjusting entry that decreases the balance of the prepaid rent account and increase rent expense. If the company forgot to record a prepaid rent adjusting entry, prepaid rent would be overstated and rent expense would be understated.

If revenues are recognized only when a customer pays, what method of accounting is being used?

Cash-basis Solution: Under the cash-basis of accounting, revenues are recognized when cash is received rather than when the performance obligation is satisfied. It is the accrual-basis of accounting that recognizes revenue when a performance obligation is satisfied. If an organization recognizes the revenue when the customer pays, the organization is using the cash-basis of accounting.

Which principle dictates that efforts be matched or recorded with accomplishments?

Expense recognition principle. Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called accrual basis accounting. Expenses are incurred when they contribute to the production of revenue. For example, wage expense is incurred when a company's employees perform services for the company. The timing of expense recognition is called the expense recognition principle; it is also called the matching principle (i.e., expenses are matched to revenues).

The accounting cycle is a series of certain steps that businesses, such as corporations, perform in sequence and repeat in each accounting period. Although steps may be missing among the options listed below, which of the following lists steps of the accounting cycle in their correct order?

Journalize the transactions, journalize the adjusting entries, and prepare a post-closing trial balance. Solution:The correct order is (i) use source documents to analyze transactions, (ii) journalize transactions, (iii) post transactions to the ledger, (iv) prepare the trial balance, (v) journalize and post the adjusting entries, (vi) prepare the adjusted trial balance, (vii) prepare the financial statements, (viii) journalize and post the closing entries, (ix) and prepare the post-closing trial balance.

Which of the following is not based on accrual accounting?

Net cash provided by operating activities Net cash provided by operating activities is not based on accrual accounting.

On January 1, a corporation paid $100,000 cash for equipment that will be used in its business operations for four years. The equipment has no salvage value. The corporation uses straight-line depreciation. It records depreciation expense of $25,000 for the current calendar year ending December 31. Which accounting principle has been violated?

No principle has been violated Solution: Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called accrual basis accounting. Expenses are incurred when they contribute to the production of revenue. For example, depreciation expense is incurred when a company's depreciable property is used in its operations. A $100,000 depreciable asset with a useful life should be depreciated by $25,000 each year for four years. The timing of expense recognition is called the expense recognition principle; it is also called the matching principle (i.e., expenses are matched to revenues).

Closing entries must be journalized and posted. Which of the following accounts will not be closed each year-end?

Prepaid Rent Solution: Closing entries transfer the balances from temporary accounts, such as revenues, expenses, and dividends, to the retained earnings account. Revenues are closed by debiting each revenue account. Expenses are closed by crediting each expense account. Some companies close revenues and expenses to an income summary account and then close the income summary account to retained earnings. Dividends are closed directly to the retained earnings account. Closing revenues increases retained earnings. Closing expenses and dividends decreases retained earnings. After closing them, revenues, expenses, and dividends have zero balances.

A company's closing entries can be describes as follows: The first closing entry closes revenues and credits the Income Summary account for $12,325. The second closing entry closes expenses and debits the Income Summary account for $6,075. The third closing entry closes the Income Summary account. Prior to the fourth closing entry, the Dividends account has a $1,125 balance. The fourth closing entry closes the Dividends account. What was the company's net change in Retained Earnings for the current period? What was the company's net change in Retained Earnings for the current period?

Retained Earnings increased by $5,125 during this period. Retained Earnings is increased by revenues, $12,325, and decreased by expenses and dividends, $6,075 and $1,125, so the increase in Retained Earnings is $5,125.

A company owes wages of $40,000 at the end of the month. The next payroll amounting to $60,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries?

Salaries and Wages Payable ....................... 40,000 Salaries and Wages Expense....................... 20,000 Cash..................................................... 60,000 Solution: At year-end, the corporation will record an adjusting entry debiting salaries and wages expense of $40,000 and salaries and wages payable of $40,000. In the next month, it will pay $60,000 in cash while reducing the salaries and wages payable by $40,000 and increasing salaries and wages expense of $20,000.

Which of the following accounts will not appear in the post-closing trial balance because it has been closed?

Service Revenue Solution: Closing entries transfer the balances from temporary accounts, such as revenues, expenses, and dividends, to the retained earnings account. Revenues are closed by debiting each revenue account. Expenses are closed by crediting each expense account. Some companies close revenues and expenses to an income summary account and then close the income summary account to retained earnings. Dividends are closed directly to the retained earnings account. Closing revenues increases retained earnings. Closing expenses and dividends decreases retained earnings. After closing them, revenues, expenses, and dividends have zero balances. Temporary accounts are not included on the post-closing trial balance.

Which account will have a zero balance after a company has journalized and posted closing entries?

Service Revenue Solution:Supplies and Prepaid Insurance are assets; they are permanent accounts and will not be closed at the end of the year. Accumulated Depreciation is a contra-asset account. Contra-asset accounts are permanent accounts and are not closed at the end of the year.

Which of the following is not included in the computation of net cash provided by operating activities?

Supplies used Solution: Supplies used is not a cash flow, therefore it is not included in net cash provided by operating activities.

On January 1, a corporation paid $100,000 cash for equipment that will be used in its business operations for four years. The equipment has no salvage value. The corporation uses straight-line depreciation. It records depreciation expense of $100,000 for the current calendar year ending December 31. Which accounting principle has been violated?

The expense recognition principle Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called accrual basis accounting. Expenses are incurred when they contribute to the production of revenue. For example, depreciation expense is incurred when a company's depreciable property is used in its operations. A $100,000 depreciable asset with a useful life should be depreciated by $25,000 each year for four years. The timing of expense recognition is called the expense recognition principle; it is also called the matching principle (i.e., expenses are matched to revenues).

Which statement is correct concerning the adjusted 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 adjusting entries have been recorded. Solution:Companies prepare an adjusted trial balance after journalizing and posting the adjusting entries and before preparing the financial statements. In fact, the financial statement are prepared using in-formation reported on the adjusted trial balance. All trial balances, including the adjusted trial balance, is prepared to prove the equality of total debit balances and total credit balances. The adjust-ed trial balance includes all of a company's accounts.

Which of the following is not a typical example of a prepaid expense?

Wages Solution:Wages are not paid to employees until after employees perform work for the employer. In other words, wages are not prepaid. In contrast, companies pay for supplies, rent, and insurance before using or consuming them. Supplies are purchased before acquiring them and using them. Insurance is paid for before insurance coverage is received. Rent is paid at the beginning of the period.

A company borrowed money from a bank by signing a three-month note payable in the amount of $30,000 on November 1. The note requires the Company to pay interest at an annual rate of 6%. The company records adjusting entries on December 31. The adjusting entry that the company should record for accrued interest on December 31 would include

a debit to Interest Expense for $300. Solution:Interest = Principal x Rate x Time = $30,000 x 6% x 2/12 = $300After one month, the accrued interest is $300.Interest rates are always annual interest rates unless specifically stated otherwise. This loan charges 6% annual interest per year.The debtor records an adjusting entry to record accrued interest.Debit: Interest Expense, $300Credit: Interest Payable, $300

Financial statements can be prepared directly from the

adjusted trial balance Solution:The adjusted trial balance can be used to prepare the financial statements. The post-closing trial balance does not contain temporary or nominal accounts, i.e. income statement and some of the stockholders' equity accounts. The adjusted trial balance can be used to prepare the financial statements. While there are reversing entries, there is not a reversing trial balance. The adjusted trial balance can be used to prepare the financial statements.

Accrued expenses are expenses incurred but not yet paid or recorded. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause

an understatement of expenses and an understatement of liabilities. Solution: If a company fails to record a year-end adjusting entry for accrued expenses, the company's expenses will be understated. Understating expenses overstates retained earnings and stockholders' equity. Failing to accrue expenses also understates amounts owed understating liabilities

Cash received before services are performed may be recorded as a debit to a cash account and a credit to a liability account is called

an unearned revenue Solution:A company receiving cash from customers records the increase in cash as an increase in assets. The reason why customers paid the company cash before the company performs services is because the company promises to perform services for the customer in the future. This is an obligation and the company records the obligation as a liability called unearned revenue. Later, revenue will be recorded when the performance obligation is satisfied which occurs after cash was received whenever customers paid in advance.

If the year-end adjusting entry to record salaries owed to employees were omitted then

assets would be correctly stated Solution:The adjusting entry to record salaries owed at year-end would include a debit to the Salaries and Wages Expense account and a credit to the Salaries and Wages Payable account. This adjusting entry would increase salaries expense. This adjusting entry (if recorded) increases the company's expenses which decreases its net income, and decreasing net income decreases retained earnings (and stockholders' equity). This adjusting entry also increases a payable account which is a liability so it increases liabilities. This questions asks for the effect of omitting (or forgetting) this adjusting entry. Omitting the adjusting entry to record salaries causes several errors, including understating expenses, overstating net income, overstating retained earnings, overstating stockholders' equity, and understating liabilities.

A company purchased office supplies costing $4,000 and debited supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,500 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be:

debit Supplies Expense for $2,500 and credit Supplies for $2,500. Solution:When the company bought supplies it recorded them as an asset so it debited the supplies account. Supplies is a prepaid expense; prepaid expenses are costs that expire either with the passage of time or through use. By the end of the period, a portion of the supplies had been used. An adjusting entry is necessary to reduce the supplies account so that it will report the actual amount of sup-plies on hand at the end of the period. The adjusting entry debits supplies expense and credits supplies by $2,500 (i.e., $4,000 - 1,500 = $2,500).

A corporation started business this year and it purchased $5,000 of office supplies and debited supplies for the full cost. Supplies on hand at the end of the accounting period were $1,300. The company's appropriate adjusting journal entry to be made would be a

debit to Supplies Expense for $3,700 and a credit to Supplies for $3,700. Solution:Supplies expense can be computed as beginning supplies plus the cost of supplies purchased in the current period minus the cost of supplies on hand at the end of the period. Since this company started business this year (and no beginning supplies were mentioned), beginning supplies should be determined to be zero. Thus, supplies expense = $0 + $5,000 - $1,300 = $3,700. The year-end adjusting journal entry to record Supplies Expense (and to decrease Supplies to the correct ending balance) would be a debit to Supplies Expense for $3,700 and a credit to Supplies for $3,700.

The year-end trial balance for Garnet & Gold Corporation appears as follows: Garnet & Gold CorporationTrial BalanceDecember 31 DebitCreditCash$ 300Accounts Receivable500Prepaid Insurance60Supplies140Equipment4,000Accumulated Depreciation, Equipment$ 800Unearned Revenues300Common Stock1,000Retained Earnings1,400Service Revenue3,000Salaries and Wages Expense1,000Rent Expense500 $ 6,500$ 6,500 If, at year-end, the unexpired insurance were $40, the company should record an adjusting entry that

debits Insurance Expense for $20 and credits Prepaid Insurance for $20 Solution:The trial balance lists the company's accounts and their balances on a particular date before adjusting entries have been recorded. This company's trial balance shows that the Prepaid Insurance account has a balance of $60. However, unexpired insurance is only $20; the Prepaid Insurance account is overstated and it needs to be adjusted. The adjusting entry reduces Prepaid Insurance and increases Insurance Expense by $20. This results in Prepaid Insurance having an ending balance of $40. Debit the Insurance Expense account by $20 and credit the Prepaid Insurance account by $20.

The year-end trial balance for Garnet & Gold Corporation appears as follows: Garnet & Gold CorporationTrial BalanceDecember 31 DebitCreditCash$ 300Accounts Receivable500Prepaid Insurance60Supplies140Equipment4,000Accumulated Depreciation, Equipment$ 800Unearned Revenues300Common Stock1,000Retained Earnings1,400Service Revenue3,000Salaries and Wages Expense1,000Rent Expense500 $ 6,500$ 6,500 If, at year-end, the unexpired insurance were $20, the company should record an adjusting entry that

debits Insurance Expense for $40 and credits Prepaid Insurance for $40. Solution:The trial balance lists the company's accounts and their balances on a particular date before adjusting entries have been recorded. This company's trial balance shows that the Prepaid Insurance account has a balance of $60. However, unexpired insurance is only $20; the Prepaid Insurance account is overstated and it needs to be adjusted. The adjusting entry reduces Prepaid Insurance and increases Insurance Expense by $40. This results in Prepaid Insurance having an ending balance of $20. Debit the Insurance Expense account by $40 and credit the Prepaid Insurance account by $40.

The year-end trial balance for Garnet & Gold Corporation appears as follows: Garnet & Gold CorporationTrial BalanceDecember 31 DebitCreditCash$ 300Accounts Receivable500Prepaid Insurance60Supplies140Equipment4,000Accumulated Depreciation, Equipment$ 800Unearned Revenues300Common Stock1,000Retained Earnings1,400Service Revenue3,000Salaries and Wages Expense1,000Rent Expense500 $ 6,500$ 6,500 If the company has not yet recorded its performance of $200 of services to a customer who had paid in advance, the company should record an adjusting entry that

debits Unearned Revenue for $200 and credits Service Revenue for $200 The trial balance lists the company's accounts and their balances on a particular date before adjusting entries have been recorded. This company's trial balance shows that Unearned Revenue has a $300 balance. However, this balance does not include the effects of services performed to customers who prepaid for services. Unearned Revenues is overstated. The adjusting entry decreases Unearned Revenues and increases Service Revenue by $200. The ending balance of Unearned Revenue will become $100. Debit the Unearned Revenue account by $200 and credit the Service Revenue account by $200.

A certain company debited prepaid insurance when it paid for a one-year insurance policy. If the company does not record any year-end adjusting entries then

expenses would be understated. Solution: The adjusting entry for prepaid insurance would include a debit to the Insurance Expense account and a credit to the Prepaid Insurance account. This adjusting entry would increase expense which would decrease net income, and decreasing net income decreases retained earnings (and stockholders' equity). This adjusting entry also decreases assets (i.e., decrease Prepaid insurance). This questions asks for the effect of omitting (or forgetting) this adjusting entry. Omitting the adjusting entry to record prepaid expense causes several errors, including overstating assets, understating expenses, overstating net income, overstating retained earnings, and overstating stockholders' equity. Liabilities are not affected.

If the year-end adjusting entry to record salaries owed to employees were omitted then

expenses would be understated. Solution:The adjusting entry to record salaries owed at year-end would include a debit to the Salaries and Wages Expense account and a credit to the Salaries and Wages Payable account. This adjusting entry would increase salaries expense. This adjusting entry (if recorded) increases the company's expenses which decreases its net income, and decreasing net income decreases retained earnings (and stockholders' equity). This adjusting entry also increases a payable account which is a liability so it increases liabilities. This questions asks for the effect of omitting (or forgetting) this adjusting entry. Omitting the adjusting entry to record salaries causes several errors, including understating expenses, overstating net income, overstating retained earnings, overstating stockholders' equity, and understating liabilities.

Accrued expenses are expenses incurred that are not yet paid or recorded. An adjusting entry made to record an accrued expense

increases liabilities and decreases income for the period. Solution: Accruing an expense increases the expense, and expenses increase with debits. Accruing an expense also increases a liability, and liabilities increase with credits

An adjusted trial balance

is prepared to prove the equality of the total debit balances and total credit balances of ledger accounts after all of the adjusting entries have been recorded. Solution:Companies prepare an adjusted trial balance after journalizing and posting the adjusting entries and before preparing the financial statements. In fact, the financial statement are prepared using in-formation reported on the adjusted trial balance. All trial balances, including the adjusted trial balance, is prepared to prove the equality of total debit balances and total credit balances. The adjust-ed trial balance includes all of a company's accounts.

A corporation purchased a one-year insurance policy on March 1 of the current year for $48,000. The insurance policy will be in effect from March 1 through February 28 of the next year. The company recorded the payment as prepaid Insurance. The company neglects to record the year-end adjusting entry at the end of the current year. As a result, the company's current year

net income and assets will be overstated by $40,000. Solution: Without crediting the prepaid insurance, the assets will be overstated.48000/12 = 4000, 4000x10= 40,000

A corporation's depreciation in the current year is $800. The company's accountant recorded the year-end adjusting entry for depreciation as a debit to depreciation expense for $800 and a credit to cash for $800. The company's

net income and total assets will be correctly stated. Solution:The correct year-end adjusting entry for $800 of depreciation is:Debit: Depreciation expense for $800Credit Accumulated Depreciation for $800This company failed to credit accumulated depreciation. Crediting accumulated depreciation lowers total assets (i.e., recall accumulated depreciation is a contra asset). Rather, this company reduced cash which reduces total assets by the same amount that crediting accumulated depreciation would have reduced total assets.

Prepaid expenses are:

paid and recorded in an asset account before they are used or consumed. Solution:Accrued expenses (e.g., interest expense, salaries expense, etc.) incurred and recorded before they are paid.

If a company uses accrual basis accounting, accrued revenues differ from deferred revenues in that accrued revenues are

recognized as revenue earned before cash is collected from customers. Solution:Accrual accounting is a broad term suggesting that a cash basis is not used. In accrual accounting, adjusting entries are recorded for (i) accruals and (ii) deferrals. Accrued revenues are recorded as revenue earned before cash is collected (e.g., sales to customers on account). Deferred revenues are recorded as revenue earned after cash is collected (e.g., unearned revenues recorded before performing for customers).

In its first year, a company performed services for a customer and billed the customer $12,000. In the second year, the customer pays the company for the services rendered in the first year. In the first year, the company incurred $4,000 of wage expense, but it did not pay the employees until the second year. If the company uses the cash-basis of accounting, then it will report

revenue of $12,000 and expense of $4,000 in the second year. The cash-basis of accounting recognizes revenues in the year cash is collected from customers regardless of when the performance obligation is satisfied and it recognizes expenses in the year they are paid regardless of when they are incurred. The company collected cash from the customer in Year 2 so it recognizes the revenue in Year 2. It paid the employees the wage in Year 2 so it recognizes the expense in Year 2.

In its first year, a company performed services for a customer and billed the customer $14,000. In the second year, the customer pays the company for the services rendered in the first year. In the first year, the company incurred $6,000 of wage expense, but it did not pay the employees until the second year. If the company uses the cash-basis of accounting, then it will report

revenue of $14,000 and expense of $6,000 in the second year. The cash-basis of accounting recognizes revenues in the year cash is collected from customers regardless of when the performance obligation is satisfied and it recognizes expenses in the year they are paid regardless of when they are incurred. The company collected cash from the customer in Year 2 so it recognizes the revenue in Year 2. It paid the employees the wage in Year 2 so it recognizes the expense in Year 2.

A company uses accrual-basis accounting. Shortly before the end of the current year, the company earned $1,000 by providing services to a customer but the customer does not pay the company until the following year. Nothing is recorded regarding these events, including year-end adjusting entries. This omission would cause the company's current year

revenues to be understated. The firm should record a year-end adjusting entry for services earned:Debit: Accounts receivable for $1,000Credit: Revenue for $1,000Overlooking this adjusting-entry would cause accounts receivable (and assets) to be understated, and it would cause revenues, net income, retained earnings, and equity to be understated.

Adjusting entries

should be recorded before financial statements are prepared. Solution: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 is not exchanged in the same period. Adjusting entries ensure that the revenue recognition and expense recognition principles are fol-lowed. Adjusting entries are required before a company prepares financial statements. Every adjusting entry will affect the balance of at least one balance sheet account and one income statement account.

A company uses accrual-basis accounting. Shortly before the end of the current year, the company earned $1,000 by providing services to a customer but the customer does not pay the company until the following year. Nothing is recorded regarding these events, including year-end adjusting entries. This omission would cause the company's current year

stockholders' equity to be understated Solution:The firm should record a year-end adjusting entry for services earned:Debit: Accounts receivable for $1,000Credit: Revenue for $1,000Overlooking this adjusting-entry would cause accounts receivable (and assets) to be understated, and it would cause revenues, net income, retained earnings, and equity to be understated.

Revenues for services performed but not yet recorded or collected in cash are accrued revenues. Failure to prepare a year-end adjusting entry to record accrued revenues would result in financial statements that

understate assets and understate revenues Solution: If a company fails to record a year-end adjusting entry for accrued revenues, the company's revenue will be understated. Understating revenue understates retained earnings and stockholders' equity. Failing to accrue revenues also understates accounts receivable understating assets.