ACCT Chapter 5 MC Practice

The difference between an asset's cost and its accumulated depreciation is called:

Book Value Book value is cost less accumulated depreciation

Which statement is incorrect concerning the adjusted trial balance?

The adjusted trial balance lists the account balances segregated by assets and liabilities.

Is this correct: The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.

Yes. The use of the cash-basis of accounting violates both the revenue recognition and expense recognition principles.

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:

$1,500 The adjusting entry would recognize insurance expense of $1,500.

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

$1,520 This is the correct amount because it represents salaries and wages for December 30th and 31.

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?

$100 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.

Financial statements can be prepared directly from the

Adjusted trial balance. The adjusted trial balance can be used to prepare the financial statements.

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:

An unearned revenue. Cash received before the performance obligation is satisfied is an unearned revenue.

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

Cash-basis Under the cash-basis of accounting, revenues are recognized when cash is received, not when.performance obligation is satisfied

Which principle dictates that efforts (expenses) be matched with results (revenues)?

Expense recognition principle. "Let the expenses follow the revenues."

Which one of these statements about the accrual-basis of accounting is false?

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

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:

Debit Depreciation Expense $700 Credit Accumulated Depreciation $700 This entry correctly adjusts the accounts and amount to be charged for the 5 months between August 1 and December 31.

On July 1, Mesa Verde, Inc. purchased a 3-year insurance policy for $12,600. Prepaid Insurance was debited for the entire amount. On December 31, when the annual financial statements are prepared, the appropriate adjusting journal entry would be:

Debit Insurance Expense $2,100 Credit Prepaid Insurance $2,100 This entry correctly adjusts the accounts to recognize that six months of the 36 month policy have expired and are recorded as expense.

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:

Debit Interest Expense $1,750 Credit Interest Payable $1,750 This entry correctly adjusts the accounts and interest incurred for a five month period.

On September 1 the Petite-Sizes Store paid $12,000 to the Mega-Mall Co. for 3 months 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:

Debit Rent Expense $4,000 Credit Prepaid Rent $4,000 This entry will correctly reduce the Prepaid Rent account by one month's rent and correctly record one month of Rent Expense

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:

Debit Supplies Expense $3,700 Credit Supplies $3,700 This entry correctly adjusts supplies to a balance of $1,300 and records the expense for the period of $3,700.

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 Rental 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 would be:

Debit Unearned Rent Revenue $7,500 Credit Rent Revenue $7,500 This entry correctly reduces the liability and recognizes the revenue earned in the period

Adjustments for prepaid expenses

Decrease assets and increase expenses. Adjustments for prepaid expenses decrease assets and increase expenses.

Adjustments for unearned revenues:

Decrease liabilities and increase revenues An adjusting entry for deferrals will decrease a balance sheet account and increase an income statement account.

Which of the following is not a typical example of an accrued expense?

Depreciation While depreciation is an adjusting entry, it is not an accrued expense.

Each of the following is a major type (or category) of adjusting entry except

Earned expenses.

Which of the following is not a type of adjusting entry?

Earned revenues

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?

Expenses are understated; income is overstated. The failure to accrue salaries and wages expense and a liability for salaries and wages payable results in understating expenses and liabilities and overstating net income and retained earnings; there is no impact on assets.

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

False Balance sheet account are permanent accounts which carry a balance from one period to the next. Only temporary accounts (revenues, expenses, dividends) are closed out at the end of the accounting period.

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

False The Adjusted Trial Balance is used to prepare the company's financial statements. The final step in the accounting cycle is the closing process.

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

False. The expense recognition principle requires expenses to be included in the accounting period in which they are incurred to earn revenues.

Adjustments for accrued revenues:

Increase assets and increase revenues.

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:

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

Cash received before services are performed are:

Liabilities Cash received before a service is performed should be recorded as a liability because it represents a future obligation for the organization.

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

Service Revenue.

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?

Liabilities at the end of the year are understated. The adjusting entry would debit (increase) Salaries and Wages Expense and credit (increase) Salaries and Wages Payable, a liability. Not recording this entry will understate expenses and liabilities.

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

Net income is understated by $175 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.

Which of the following correctly describes the closing process?

Net income or net loss is transferred to Retained Earnings.

If the adjusting entry is not made for unearned revenues the result will be to:

Overstate liabilities and understate revenues. The missing entry would reduce a liability through a debit entry and increase revenues through a credit entry.

Which types of accounts will appear in the post-closing trial balance?

Permanent accounts.

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:

Retained earnings will increase by $3,700 through the closing process. The difference of nominal or temporary account debits and credits of a debit of $3,700 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.

In 2013, 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 2014. If Costello uses the accrual-basis of accounting, then Costello will report

Revenue of $10,000 in 2013. The accrual-basis of accounting records revenues when the performance obligation is satisfied and expenses when incurred. Cash movement is not necessary.

Adjusting entries are made to ensure that:

Revenues are recorded in the period in which the performance obligation is satisfied. Expenses are recognized in the period in which they are incurred. Balance sheet and income statement accounts have correct balances at the end of an accounting period.

What is the periodicity assumption?

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

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

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

Wages. Wages are seldom prepaid since employees may not fulfill their obligations if they receive their wages before doing their work.