ACCT 2001, Denstel, Chapter 4

At December 31, 2013, before any year-end adjustments, Macarty Company's Prepaid Insurance account had a balance of $2,700. It was determined that $1,500 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be A. $1,500. B. $1,200. C. $1,900. D. $2,700.

A

At the end of the accounting period, all balance sheet accounts are closed out. False or True

False

The accounting cycle requires that closing entries be prepared on a monthly basis. False or True

False

The cash-basis of accounting is in accordance with generally accepted accounting principles. True or False

False

The expense recognition principle requires that expenses be recognized in the same period that they are paid. True or False

False

The revenue recognition principle dictates that revenue is recognized in the period in which the cash is received. True or False

False

Adjusting entries are made to ensure that A. expenses are recognized in the period in which they are incurred. B. revenues are recorded in the period in which the performance obligation is satisfied. C. balance sheet and income statement accounts have correct balances at the end of an accounting period. D. all of these answer choices are correct.

D

Book value is equal to cost minus accumulated depreciation. True or False

True

In 2017, Costello Company performs work for a customer and bills the customer $10,000; it also pays expenses of $3,000. The customer pays Costello in 2018. If Costello uses the accrual-basis of accounting, then Costello will report A. revenue of $10,000 in 2017. B. revenue of $10,000 in 2018. C. expenses of $3,000 in 2018. D. net income of $7,000 in 2018

A

The final step in the accounting cycle is to prepare A. a post-closing trial balance. B. adjusting entries. C. closing entries. D. financial statements.

A

Which of the following is NOT a type of adjusting entry? A. Earned revenues B. Accrued revenues C. Accrued expenses D. Prepaid expenses

A

Which one of the following is NOT a justification for adjusting entries? A. Adjusting entries are necessary to bring the general ledger accounts in line with the budget. B. Adjusting entries are necessary to ensure that the revenue recognition principle is followed. C. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP. D. Adjusting entries are necessary to ensure that the expense recognition principle is followed.

A

Which statement is correct? A. The use of the cash-basis of accounting violates both the revenue recognition and expense recognition principles. B. As long as management is ethical, there are no problems with using the cash-basis of accounting. C. As long as a company consistently uses the cash-basis of accounting, generally accepted accounting principles allow its use. D. The cash-basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.

A

Which types of accounts will appear in the post-closing trial balance? A. Permanent accounts. B. Temporary accounts. C. Accounts shown in the income statement columns of a work sheet. D. None of these answer choices are corrrect.

A

Ignatenko Company purchased office supplies costing $5,000 and debited Supplies for the full amount. Supplies on hand at the end of the accounting period were $1,300. The appropriate adjusting journal entry to be made would be: A. Supplies Expense- $3,700, Supplies- $3,700 B. Supplies- $1,300, Supplies Expense-$4,000 C. Supplies- $3,700, Supplies Expense- $3,700 D. Supplies Expense- $1,300, Supplies- $1,300

A; This entry correctly adjusts supplies to a balance of $1,300 and records the expense for the period of $3,700 ($5,000-$1,300).

With the adjusted trial balance in hand, you see that the debit totals of the real accounts is $18,250 and the credit totals of the real accounts is $14,550. The debit total of the nominal or temporary accounts is $3,475 while the credit total of the nominal or temporary accounts is $7,175. From this you know that A. retained earnings will increase by $3,700 through the closing process. B. there is an error in the adjusted trial balance. C. net loss is $3,700 for the fiscal period. D. net income is $3,700 for the fiscal period.

A; The difference of nominal or temporary account debits and credits of a debit of $3,700 or ($18,250 - $14,550) indicates growth in the company for the fiscal period - an increase in retained earnings, not net income or loss since you do not know revenue and expense or dividend issues.

On August 1, Luang Corporation signed a $30,000, 14%, 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. Interest Expense- $1,750, Interest Payable- $1,750 B. Interest Expense- $4,200, Interest Payable- $4,200 C. Interest Expense- $4,200, Notes Payable- $4,200 D. Interest Expense- $1,750, Notes Payable- $1,750

A; This entry correctly adjusts the accounts and interest incurred for a five-month period of $1,750 or ((($30,000 X .14)/12) X 5).

All of the following are required steps in the accounting cycle except: A. preparing an adjusted trial balance. B. preparing a worksheet. C. preparing a post-closing trial balance. D. journalizing and posting closing entries.

B

Cash received before services are performed which is recorded as a debit to a Cash account and a credit to a liability account is called A. an accrued revenue. B. an unearned revenue. C. an unrecorded revenue. D. none of these answer choices are correct.

B

Financial statements can be prepared directly from the A. reversing trial balance. B. adjusted trial balance. C. post-closing trial balance. D. trial balance.

B

If the adjusting entry is NOT made for unearned revenues the result will be to A. understate retained earnings and overstate revenues. B. overstate liabilities and understate revenues. C. overstate assets and understate liabilities. D. understate net income and overstate retained earnings.

B

The difference between an asset's cost and its accumulated depreciation is called A. fair value. B. book value. C. real value. D. market value.

B

What is the periodicity assumption? A. Companies should match expenses with revenues. B. The economic life of a business can be divided into artificial time periods. C. The fiscal year should correspond with the calendar year. D. Companies should recognize revenue in the accounting period in which the performance obligation is satisfied.

B

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

B

Which is the correct order of steps in the accounting cycle? A. Prepare financial statements, prepare adjusting entries, prepare closing entries, prepare a post-closing trial balance. B. Journalize and post transactions, journalize and post adjusting entries, journalize and post closing entries. C. Post transactions, journalize transactions, prepare a trial balance, prepare financial statements. D. Journalize and post transactions, journalize and post closing entries, journalize and post adjusting entries.

B

Which of the following is NOT a typical example of a prepaid expense? A. Supplies B. Wages C. Insurance D. Rent

B

Which of the following is not a typical example of an accrued expense? A. Interest B. Depreciation C. Wages D. Taxes

B

On September 1 the Petite-Sizes Store paid $12,000 to the Mega-Mall Co. for 3-month rent beginning September 1. Prepaid Rent was debited for the payment. If Petite-Sizes Store prepares financial statements on September 30, the appropriate adjusting journal entry to make on September 30 would be A. Prepaid Rent- $4,000, Rent Expense- $4,000 B. Rent Expense- $4,000, Prepaid Rent- $4,000 C. Prepaid Rent- $8,000, Rent Expense-$8,000 D. Rent Expense- $8,000, Prepaid Rent- $8,000

B; This entry will correctly reduce the Prepaid Rent account by one month's rent and correctly record one month of Rent Expense of $4000 or ($12,000 / 3).

The following journal entries have been made during the closing process: Sales Revenues- 8,750, Service Revenues- 2,375, Income Summary- 11,125, Income Summary- 5,775, Sales Expenses- 3,550, Service Expenses- 975, Administrative Expenses- 1,250, Retained Earnings- 1,125, Dividends- 1,125, What was the net change in Retained Earnings? A. Retained Earnings decreased by $4,225 during this period. B. Retained Earnings increased by $4,225 during this period. C. Retained Earnings decreased by $5,350 during this period. D. Retained Earnings increased by $5,350 during this period.

B; Retained Earnings is increased by revenues, $11,125, and decreased by expenses and dividends, $5,775 and $1,125, so the increase in Retained Earnings is $4,225.

In the closing process total revenues are determined to be $4,750 while total expenses are determined to be $3,875 and total dividends are $1,150. The retained earnings account will: A. decrease by $275 due to net income. B. increase by $875 due to net income. C. increase by $275 due to net income. D. decrease by $875 due to net income.

B; Retained earnings will increase by revenues of $4,750 less expenses of $3,875, or $875. Dividends do not affect net income.

During the adjusting process two transactions were missed. The first is for unearned rent revenue of which $450 was earned during the period, the second was for accrued interest payable of which $275 is owed for the period. As a result of these omissions A. assets are overstated by $725. B. net income is understated by $175. C. liabilities are overstated by $725. D. revenue is overstated by $725.

B; The omission associated with unearned rent revenues increases net income by $450 while the omission of accrued expenses, interest expense and interest payable, increases expenses and liabilities by $275. As a result, revenues are understated by $450 while expenses are understated by $275 so net income is understated by $175. Assets are not affected by these errors but liabilities are overstated by $175.

On August 1 the Darius Co. purchased a photocopy machine for $8,000. The estimated annual depreciation on the machine is $1,680. 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. Depreciation Expense- $700, Equipment- $700 B. Depreciation Expense- $700, Accumulated Depreciation- $700 C. Depreciation Expense- $140, Accumulated Depreciation- $140 D. Depreciation Expense- $1,680, Accumulated Depreciation- $1,680

B; This entry correctly adjusts the accounts and amount to be charged for the 5 months between August 1 and December 31 for $700 or ($1,680/12 x 5)

Bonita Realty Management Co. 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. Unearned Rent Revenue was credited for the full $30,000. Financial statements are prepared on December 31. The appropriate adjusting journal entry to make on December 31 of the first year would be: A. Rent Revenue- $2,500, Unearned Rent Revenue- $2,500 B. Unearned Rent Revenue- $7,500, Rent Revenue- $7,500 C. Unearned Rent Revenue- $22,500, Rent Revenue- $22,500 D. Rent Revenue- $22,500, Unearned Rent Revenue- $22,500

B; This entry correctly reduces the liability and recognizes the revenue earned in the period by $7,500 or (($30,000 /12) x 3).

Cash received before services are performed are recorded as A. equity. B. expenses. C. liabilities. D. revenues.

C

Each of the following is a major type (or category) of adjusting entry EXCEPT A. accrued revenues. B. accrued expenses. C. earned expenses. D. prepaid expenses.

C

Saira works for a sports franchise, which pays wages and salaries earned on a monthly basis. A new accountant was hired by the sports franchise in late May. Due to inexperience, the new accountant failed to accrue Saira's salary for May. What is the impact on the May 31 financial statements of the sports franchise? A. Liabilities are understated; assets are overstated. B. Revenues are overstated; net income is understated. C. Expenses are understated; net income is overstated. D. Liabilities are overstated; retained earnings is overstated.

C

The closing entry process consists of closing A. out the Retained Earnings account. B. all asset and liability accounts. C. all temporary accounts. D. all permanent accounts.

C

The generally accepted accounting principle which dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied is the A. periodicity assumption. B. expense recognition principle. C. revenue recognition principle. D. accrued revenues principle.

C

Which of the following correctly describes the closing process? A. Each revenue and expense account is closed individually to Retained Earnings. B. Net income or net loss is transferred to the Cash account. C. Net income or net loss is transferred to Retained Earnings. D. Permanent accounts become ready to accumulate data in the next accounting period.

C

Which one of these statements about the accrual-basis of accounting is FALSE? A. Companies recognize revenue in the period in which the performance obligation is satisfied. B. This basis is in accord with generally accepted accounting principles. C. Companies record revenue only when they receive cash, and record expense only when they pay out cash. D. Companies record events that change a company's financial statements in the periods in which the events occur.

C

Which principle dictates that efforts (expenses) be matched with results (revenues)? A. Historical cost principle. B. Revenue recognition principle. C. Expense recognition principle. D. Periodicity principle.

C

Which statement is incorrect concerning the adjusted trial balance? A. The adjusted trial balance provides the primary basis for the preparation of financial statements. B. 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. C. The adjusted trial balance lists the account balances segregated by assets and liabilities. D. The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries.

C

If revenues are recognized only when a customer pays, what method of accounting is being used? A. Cash-basis B. Matching basis C. Recognition basis D. Accrual-basis

Cash-basis

Adjustments for prepaid expenses A. decrease assets and increase revenues. B. decrease revenues and increase assets. C. decrease expenses and increase assets. D. decrease assets and increase expenses.

D

Adjustments for unearned revenues A. increase liabilities and increase revenues. B. Increase assets and increase revenues. C. decrease revenues and decrease assets. D. decrease liabilities and increase revenues.

D

At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. Which of the following statements is true? A. Salaries and Wages Expense for the year is overstated. B. Stockholders' equity at the end of the year is understated. C. Assets at the end of the year are understated. D. Liabilities at the end of the year are understated.

D

A company lends $15,000 at 8% interest for 3 months on June 1. If adjusting entries are recorded on June 30, how much will be credited to Interest Revenue? A. $900 B. $1,200 C. $300 D. $100

D; The formula is Principal x Rate x Time or $15,000 x 8% x (1/12) since interest is stated in an annual rate yielding a value of $100.

On July 1, Mesa Verde, Inc. purchased a 6-month insurance policy for $12,600. Prepaid Insurance was debited for the entire amount. The adjusting entries to recognize the expired cost were made each month. On December 31, when the annual financial statements are prepared, the appropriate adjusting journal entry would be A. Prepaid Insurance- $2,100, Insurance Expense- $2,100 B. Insurance Expense- $10,500, Prepaid Insurance- $10,500 C. Prepaid Insurance- $10,500, Insurance Expense- $10,500 D. Insurance Expense- $2,100, Prepaid Insurance- $2,100

D; This entry correctly adjusts the accounts to recognize for the 6-month policy. Insurance Expense needs to be debited to recognize the expense and Prepaid Insurance needs to be credited to reduce the asset accordingly for $2,100 ($12,600 / 6).

Employees at the Waco Waffle House were paid on Friday, December 27 for the five days ending on December 27. The next payday is Friday, January 3. Employees work 5 days a week. The weekly payroll amounts to $3,800. The appropriate adjusting journal entry on December 31 would be to credit Salaries and Wages Payable for A. $760. B. $2,280. C. $3,800. D. $1,520.

D; This is the correct amount because it represents salaries and wages for December 30th and 31 of $1,520 or (($3,800/5) x 2).

Adjustments for accrued revenues A. decrease assets and decrease revenues. B. decrease liabilities and increase revenues. C. increase assets and increase liabilities. D. increase assets and increase revenues.

D; When the adjustment is made for accrued revenues, an asset account (usually Accounts Receivable) is increased and a revenue account, not a liability account is increased.

Accrued expenses are expenses that have already been paid. True or False

False

An Adjusted Trial Balance is prepared after the books of a company are closed at the end of the accounting period. True or False

False

Prior to an accrual adjustment, the revenue account (and the related asset account) or the expense account (and the related liability account) is understated. True or False

True