ch 3 financial accounting test

On January 1, a company purchased new furniture at a cost of $22,000. The furniture is estimated to have a useful life of 4 years and a salvage value of $2,800. The company uses the straight-line method of depreciation. How much depreciation expense will be recorded for the furniture for the first year ended December 31?

$4,800 Explanation ($22,000-$2,800)/4 years = $4,800 per year

On May 1, a two-year insurance policy was purchased for $26,400 with coverage to begin immediately. What is the amount of insurance expense that would appear on the company's income statement for the first year ended December 31?

$8,800 Explanation $26,400 × 8/24 = $8,800

High Step Shoes had annual revenues of $194,000, expenses of $108,200, and paid dividends of $21,600 during the current year. The retained earnings account before closing had a balance of $306,000. The ending retained earnings balance after closing is:

$85,800

The primary difference between the accrual basis and the cash basis of accounting is:

- Accrual basis records revenues when services or products are delivered and records expenses when incurred - The cash basis records revenues when cash is received and records expenses when cash is paid (Cash basis is not permitted by generally accepted accounting principles)

Accounting Cycle (refers to steps in preparing financial statements)

1. analyze transactions 2. journalize 3. post 4. prepare unadjusted trial balance 5. adjust 6. prepare adjusted trial balance 7. prepare statements 8. close 9. prepare post-closing trial balance 10. reverse and post (optional)

On April 1, Garcia Publishing Company received $3,258 from Otisco, Incorporated for 36-month subscriptions to several different magazines. The subscriptions started immediately. What is the amount of revenue that should be recorded by Garcia Publishing Company for the first year of the subscription assuming the company uses a calendar-year reporting period?

814.50 Explanation (3,258/36=90.50x9)

Fragment Company leased a portion of its store to another company for eight months beginning on October 1, at a monthly rate of $1,300. Fragment collected the entire $10,400 cash on October 1 and recorded it as unearned revenue. Assuming adjusting entries are only made at year-end, the adjusting entry made on December 31 would be:

A debit to Unearned Revenue and a credit to Rent Revenue for $3,900. Explanation $10,400 × 3/8 = $3,900 earned by December 31

Income Summary

A temporary account only used for the closing process that has a credit for total revenues and a debit for total expenses

Classify the following list of accounts into the correct account type. Accounts Receivable Unearned Revenue Accounts Payable

Accounts Receivable: Asset Unearned Revenue: Liability Accounts Payable: Liability

On Saturday, December 31, the company's owner provided ten hours of service to a customer. The company bills $100 per hour for services provided on weekends. Payment has not yet been received. The owner did not stop in the office on Saturday; as such, on December 31, the services were unbilled and unrecorded.

Accounts receivable (DR) 1,000 Services revenue (CR) 1,000

If a company failed to make the end-of-period adjustment to move the amount of management fees that were earned from the Unearned Revenue account to the Management Fees Revenue account, this omission would cause:

An overstatement of liabilites

Long-term investments

Assets to be held for more than one year. Examples are notes receivable and long-term investments in stock and bonds

current assets

Assets to be sold, collected, or used within one year. Examples are cash, short term investments, accounts receivable, merchandise inventory, and prepaid expenses

If a company mistakenly forgot to record depreciation on office equipment at the end of an accounting period, the financial statements prepared at that time would show:

Assets, net income, and equity overstated.

Prepaid expenses reflect transactions when cash is paid:

Before the related expense is recognized.

Ending Retained Earnings Equation

Beginning Retained Earnings + Revenues - Expenses - Dividends

An unclassified balance sheet:

Broadly groups assets, liabilities and equity

Which does not require an adjusting entry at year-end?

Cash invested by stockholders

Unearned Revenue

Cash received in advance of providing products and services. When cash is accepted, the company has a liability to provide products or services.

temporary accounts

Closed at period-end. They consist of revenue, expense, dividends, and Income Summary.

Classify the following accounts into the correct financial statement. Consulting Revenue Rent Expense Dividends

Consulting Revenue: Income statement Rent Expense: Income statement Dividends: Statement of Retained Earnings

An account linked with another account that has an opposite normal balance and is subtracted from the balance of the related account is a

Contra account

accrued expenses

Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities.

Current vs. long term classification

Current items are to be collected or owed within one year. long term items are expected after one year

Two common subgroups for liabilities on a classified balance sheet are

Current liabilites and long-term liabilites

On January 1, the company purchased equipment that cost $10,000. The equipment is expected to be worth about (or has a salvage value of) $1,000 at the end of its useful life in five years. The company uses straight-line depreciation. It has not recorded any adjustments relating to this equipment during the current year.

Depreciation expense (DR) $1,800 Accumlated depreciation (CR) $1,800

Financial statements are typically prepared in the following order:

Income statement, statement of retained earnings, balance sheet

long-term liabilities

Liabilities that extend beyond one year. examples are notes payable, mortgages payable, bonds payable and lease obligations

Current Liabilities

Liabilities to be paid or settled within one year. Examples are accounts payable, wages payable, taxes payable, interest payable, unearned revenues, and current portions of notes or long-term debt

Intangible assets

Long-term assets that lack physical form. Examples are patents, trademarks, copyrights, franchises and goodwill

permanent accounts

Not closed at period-end. They consist of asset, liability, common stock, and retained earnings (all balance sheet accounts).

Closing Process

Occurs at period-end after financial statements have been prepared. Resets revenue, expense, and dividends balances to zero.

Adjusting entries affect:

One of more balance sheet accounts and one or more income statement accounts.

The company employs a single employee who works all five weekdays and is paid on the following Monday. The employee works the entire week ending on Friday, December 30. The employee earns $800 per day.

Salaries expense (DR) 4,000 Salaries payable (CR) 4,000

Four-step closing process

Step 1: Close the revenue accounts. Step 2: Close the expense accounts. Step 3: Close the income summary account. Step 4: Close the dividends account.

Three step adjusting process

Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record an adjusting entry to get from step 1 to step 2.

plant assets

Tangible assets used to produce or sell products and services. Examples are equipment, machinery, buildings, and land used in operations

Equity

The owner's claim on assets. For a corporation, this is common stock and retained earnings

Before the adjusting entry for a deferral of an expense, the expenses will be _____ and the assets will be _____.

Understated; overstated.

The revenue recognition requires that revenue be recorded:

When the goods or services are provided to customers

Annual reporting periods can cover

a calendar year. A 52-week period. 12 consecutive months.

adjusted trial balance

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

unadjusted trial balance

a list of ledger accounts and balances before adjustments are recorded

For each of the following separate situations, determine how much revenue is recognized in December (using accrual basis accounting). a. On December 7, Oklahoma City Thunder sold a $96 ticket to a basketball game to be played in March. b. Tesla sold and delivered a $64,000 car on December 25. The customer will not pay until February. c. . Deloitte signs a contract on December 1 to provide 40 days of advisory services with receipt of $16,000 due at the end of the contract. On December 31, 75% of the services have been completed.

a. Sale of a ticket to a basketball game $0 b. Sale of a car on credit $64,000 c. Contract to provide advisory services $12,000

For each of the following separate situations, determine the amount of expense each company should recognize in December (using accrual basis accounting). a. Chipotle has monthly wages expense of $6,000 that has been incurred but not paid as of December 31. b. United Airlines purchases a 24-month insurance policy for $90,000 on December 1 for immediate coverage. c. On December 15, Pfizer prepays $48,000 for hotel rooms for its January sales meeting.

a. Wages expense incurred but not paid $6,000 b. Purchases a 24-month insurance policy $3,750 c. Prepays for hotel rooms for its annual sales meeting $0

An adjusted trial balance includes:

all accounts and their balances

prepaid expenses

assets paid for in advance of receiving their benefits. when these assets are used, the advance payments become expenses.

Which of the following is not a current asset?

automobiles

interim financial statements

covering one, three, or six months of activity

Assume that the Accumulated Depreciation account has an unadjusted normal balance of $120,000. The company's list of adjusting entries includes one that debits Depreciation Expense and credits the Accumulated Depreciation account for $20,000. The adjusted balance in the Accumulated Depreciation account is a:

credit balance of 140,000

Dividends

payments from a corporation to its stockholders

Accrued Revenues

revenues earned in a period that are both unrecorded and not yet received yet in cash