ACG 2021 chapter 4

FastAct Company pays its employees their wages each Friday. The most recent payment occurred on Friday, December 26. The next payroll will be paid on January 2. There are three more work days in December after December 26th. Employees work 5 days a week and the company pays $30,000 per week in wages. What will be the adjusting entry to accrue wages expense at the end of December?

A debit to Salaries and Wages Expense for $18,000

On June 1 the Darius Co. purchased a photocopy machine for $9,000. The estimated annual depreciation on the machine is $1,800. 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 A. $150 debit to Depreciation Expense and a $150 credit to Accumulated Depreciation. B. $750 debit to Depreciation Expense and a $750 credit to Equipment. C. $1,050 debit to Depreciation Expense and a $1,050 credit to Accumulated Depreciation. D. No adjusting entry is necessary. E. $1,800 debit to Depreciation Expense and a $1,800 credit to Accumulated Depreciation.

$1,050 debit to Depreciation Expense and a $1,050 credit to Accumulated Depreciation. Solution: The correct adjusting records depreciation expense and accumulated depreciation for the 7 months between June 1 and December 31 (i.e., $1,800 per year x 7/12 = $1,050).

Based on the following adjusted trial balance: Peak Corporation Adjusted Trial Balance As of December 31, 2018 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. A. $6,000 B. $9,000 C. $14,000 D. $2,000 E. $10,000

$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

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

$1500 Solution: When a company pays in advance for prepaid insurance, the company increases prepaid insurance and decreases cash. This transaction is an asset exchange. At the end of the accounting period, the company record an adjusting entry to reduce prepaid insurance by the portion used, consumed, or expired during the year and to write-of or expense that portion as insurance expense. The adjusting entry would reduce prepaid insurance and recognize insurance expense of $1,500.

On June 1, Long 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: A. $3,360 debit to Interest Expense and a $3,360 credit to Notes Payable. B. $5,760 debit to Interest Expense and a $5,760 credit to Notes Payable. C. $5,760 debit to Interest Expense and a $5,760 credit to Interest Payable. D. No adjusting entry would be required. E. $3,360 debit to Interest Expense and a $3,360 credit to Interest Payable.

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

Kepler Company borrowed money from a bank by signing a three-year note payable in the amount of $18,000 on September 1, 2018. The note requires Kepler Company to pay interest at an annual rate of 9%. Kepler Company records adjusting entries on December 31. The adjusting entry that Kepler Company should record for accrued interest on December 31, 2018 would include a debit to Interest Expense fore?

$540

Crowley Company has the following adjusted trial balance: Debit Credit Cash 1,500 Accounts receivable 2,100 Prepaid rent 100 Equipment 3,500 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 expense 150 Depreciation expense 600 Rent expense 500 Total 8,450 8,450 After closing entries have been journalized and posted, the post-closing trial balance total for the credit column will be A. $9,700. B. $8,450. C. $7,200. D. $4,350. E. $8,100.

$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

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 A.$22,500 debit to Unearned Rent Revenue and a $22,500 credit to Rent Revenue. B. $7,500 debit to Unearned Rent Revenue and a $7,500 credit to Rent Revenue. C. No adjusting entry is necessary. D. $2,500 debit to Rent Revenue and a $2,500 credit to Unearned Rent Revenue.

$7,500 debit to Unearned Rent Revenue and a $7,500 credit to Rent Revenue. Solution: Learning objective 4 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. Revenue earned Oct. through Dec. = 30,000 x 3/12 = 7,500

On September 1 the Petite-Sizes Store paid $16,000 to the Mega-Mall Co. for 2 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 a A. $8,000 debit to Rent Expense and a $8,000 credit to Prepaid Rent. B. $16,000 debit to Prepaid Rent and a $16,000 credit to Rent Expense. C. $16,000 debit to Rent Expense and a $16,000 credit to Prepaid Rent. D. $8,000 debit to Prepaid Rent and a $8,000 credit to Rent Expense. E. No adjusting entry is necessary.

$8,000 debit to Rent Expense and a $8,000 credit to Prepaid Rent Solution: Learning objective 4 The company should record rent expense for the month of September. Since the cost of two months' of rent totals $16,000, the company's monthly rent expense is $5,000 (i.e., one-half of the two 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 $8,000 and a credit to Prepaid Rent for $8,000.

The following is information is from Clark Corporation's financial records for the current fiscal year. i. Cash received from customers, $150,000 ii. Revenue earned, $195,000 iii. Cash paid for wages, $85,000 iv. Wage expense incurred, $90,000 v. Cash paid during the current year for computers that will be used for 3 years, $24,000 vi. Depreciation expense, $8,000 vii. Proceeds from issuing debt, $50,000 viii. Interest incurred on debt, $5,000 ix. Cash paid for supplies, $3,000 x. Supplies expense incurred, $2,000 What is the company's net income for the current year using the accrual basis of accounting? A. $98,000 B. $138,000 C. $125,000 D. $97,000 E. $90,000

$90,000 Solution: Net income using the accrual basis = Revenue earned - expenses incurred including prepaids Net income using the accrual basis = $195,000 - 90,000 - 8,000 - 5,000 - 2,000 = $90,000 Chapter 4, Learning objective 2, Pool 3

Which of the following is correct concerning the adjusted trial balance? A. The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries. B. All of these statements are correct. C. The adjusted trial balance provides the primary basis for the preparation of financial statements. D. None of these statements are correct. E. 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.

All of these statements are correct.

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? A. Journalize the closing entries, prepare the adjusted trial balance, and prepare the financial statements, B. Journalize the transactions, post the adjusting entries, journalize the closing entries. C. Post the transactions, post the closing entries, and post the adjusting entries. D. Post the transactions, journalize the transactions, and prepare a trial balance. E. Prepare the financial statements, journalize the adjusting entries, and post the closing entries.

B. Journalize the transactions, post the adjusting entries, journalize the closing entries

Which of the following correctly describes the closing process? A. All of these are correct. B. Net income is transferred to the Cash account. C. Each revenue account and expense account is closed to a zero balance. D. Permanent accounts are closed to zero balances.

Each revenue account and expense account is closed to a zero balance Solution: Because revenue, expenses, and dividends relate only to a given accounting period, these accounts are considered temporary accounts. At the end of the accounting period, companies close the temporary account balances to zero. Revenue accounts and expense accounts are transferred to the Income Summary account which is closed to the Retained Earnings account. In this manner, net income is transferred to the Retained Earnings account through the closing process. The dividends account is transferred directly to Retained Earnings.

A company's closing entries can be described as follows: The first closing entry closes revenues and credits the Income Summary account for $11,125. The second closing entry closes expenses and debits the Income Summary account for $5,775. 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? A. Retained Earnings decreased by $5,350 during this period. B. Retained Earnings increased by $4,225 during this period. C. Retained earnings does not change during this period. D. Retained Earnings decreased by $4,225 during this period. E. Retained Earnings increased by $5,350 during this period.

Retained Earnings increased by $4,225 during this period. Solution: 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.

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

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

book value

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

cash-basis

The following information is from the Income Statement of the Dirt Poor Laundry Service: Revenues Service Revenue $5,500 Expenses Salaries and wages expense $ 1,950 Advertising expense 500 Rent expense 300 Supplies expense 200 Insurance expense 100 Total expenses 3,050 Net Income $2,450 The closing entries includes a: A. credit to Income Summary for $2,450. B. debit to Retained Earnings for $2,450. C. debit to expenses for $3,050. D. debit to Income Summary for $2,450. E. credit to Common Stock for $2,450.

debit to Income Summary for $2,450. Solution: Closing entries close revenue accounts and expense accounts to an account called "income summary" and then closes the income summary account to the retained earnings account. Also, the dividends account is also closed, but it is closed directly to retained earnings. First, close the revenue accounts: Debit: Service Revenue for $5,500 Credit: Income Summary for $5,500 Second, close the expense accounts: Debit: Income Summary for $3,050 Credit: Salaries and Wages Expense for $1,950 Credit: Advertising Expense for $500 Credit: Rent Expense for $300 Credit: Supplies Expense for $200 Credit: Insurance Expense for $100 Third, close the Income Summary account: Debit: Income Summary for $2,450 Credit: Retained Earnings for $2,450 There is no dividends account balance to be closed.

Adjusting entries are recorded to ensure that

expenses are recognized in the period in which they are incurred.

During the adjusting process two transactions were neglected or omitted. 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. revenue is overstated by $725. B. net income is understated by $175. C. liabilities are overstated by $725. D. These omissions would not affect the financial statements; the financial statements will be correct. E. assets are overstated by $725.

net income is understated by $175 Solution: 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. Chapter 4, Learning objective 5

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

retained earnings would be overstated. 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.

In Year 1, Costello Company performed $14,000 of services for a customer who paid immediately. In Year 1, Costello Company also incurred $6,000 of wage expenses but did not pay its employees until Year 2. If Costello Company uses the accrual-basis of accounting, then it will report A. no revenue and no expense in either year. B. revenue of $14,000 and expense of $6,000 in Year 1. C. revenue of $14,000 in Year 2 and expense of $6,000 in Year 2. D. revenue of $14,000 in Year 2 and expense of $6,000 in Year 1. E. revenue of $14,000 in Year 1 and expense of $6,000 in Year 2.

revenue of $14,000 and expense of $6,000 in Year 1.

The generally accepted accounting principle which dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied is the

revenue recognition principle

Which of the following is not included in the computation of net cash provided by operating activities? A. Supplies used B. Cash received from customers C. Payment of rent D. Purchase of insurance

supplies used

A company has unearned revenues on its books. If the company fails to record a year-end adjusting entry for unearned revenues, then its financial statement: A. understate retained earnings and overstate revenues. B. understate revenues and overstate liabilities. C. understate net income and overstate retained earnings. D. understate revenues and understate liabilities. E. overstate assets and overstate revenues

understate revenues and overstate liabilities.