Ch.3 Outline Review Questions (Multiple Choice)

The accounting equation (A = L + SE) must remain in balance:A.throughout each step in the accounting cycle.B.only when journal entries are recorded.C.only at the time the trial balance is prepared.D.only when formal financial statements are prepared.

(A) If the accounting equation is out of balance at any time during the accounting cycle, then an error has been made.

A prepaid expense can best be described as an amount:A.Paid and currently matched with earnings.B.Paid and not currently matched with earnings.C.Not paid and not currently matched with earnings.D.Not paid and currently matched with earnings.

(B) A prepaid expense can best be described as an amount paid and not currently matched with earnings. The journal entry to record a prepaid expense involves an asset account and crediting cash. The asset is deferred to and expensed in future years. Answer (A) is incorrect because it is not matched with earnings until it is expensed in future years. Answers (C) and (D) are incorrect because a prepaid expense is one that has been paid.

An adjusting entry should never include:A.a debit to expense and a credit to a liability.B.a debit to expense and a credit to revenue.C.a debit to a liability and a credit to revenue.D.a debit to revenue and a credit to a liability.

(B) All adjusting entries include one balance sheet account (asset or liability) and one income statement account (revenue or expense). Thus, all alternatives other than alternative B represent possible adjusting entry descriptions.

An accrued expense can best be described as an amount:A.Paid and not currently matched with earnings.B.Not paid and currently matched with earnings.C.Not paid and not currently matched with earnings.D.Paid and currently matched with earnings.

(B) An accrued expense can best be described as an amount not paid and currently matched with earnings. The journal entry to record an accrued expense involves debiting an expense account which is deducted from revenues in determining income and crediting a liability account. Accrued expenses are generally incurred as a result of passage of time (e.g., interest, rent, salaries, etc.). Answers (A) and (D) are incorrect because by definition an accrued expense is one that has been incurred but not yet paid. Answer (C) is incorrect because the purpose of accruing an expense is to match it currently with earnings.

Which of the following is an example of an accrued liability?A.Supplies purchased at the beginning of the year and debited to an expense account.B.Property taxes incurred during the year, to be paid in the first quarter of the subsequent year.C.Depreciation expense.D.Rent, provided as a service during the period, cash to be received next year.

(B) An accrued liability is an item of expense that has been incurred during the period, but has not been recorded or paid. The property taxes fits this definition, as they are an expense of the period in which they were incurred and represent a liability until they are paid in the subsequent period. The office supplies are a prepaid expense, depreciation is an estimated item, and the rent is an accrued revenue item.

During the first year of Wisnewski Co.'s operations, all purchases were recorded as assets. Store supplies in the amount of $6,540 were purchased. Actual year-end store supplies inventory amounted to $2,150. The adjusting entry for store supplies will:A.increase net income $4,390.B.increase expenses by $4,390.C.decrease store supplies by $6,540.D.debit accounts payable for $2,150.

(B)Purchased .................................................... $6,540Year-end inventory ....................................... 2,150Used during year .......................................... $4,390Adjusting entry: Supplies Expense 4,390Supplies 4,390

Which of the following journal entries is appropriate when a company receives payment in advance for goods or services?A.Debit cash and credit an expense account.B.Credit cash and debit a revenue account.C.Debit cash and credit a liability account.D.Credit cash and debit a liability or revenue account.

(C) An advance payment for goods or services requires a debit to cash and a credit to a liability account. When the goods or services are delivered to the customer, the revenue is recognized by debiting the liability and crediting a revenue account.

Which of the following statements best describes the purpose of closing entries?A.To facilitate posting and preparing a trial balance.B.To determine the amount of gain or loss for the period.C.To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period.D.To complete the record of various transactions that were started in a prior period.

(C) Closing entries represent the formal process by which all nominal accounts (revenue and expense) are reduced to zero and the net income or net loss is determined and transferred to owners equity.

Which of the following is correct regarding double-entry accounting?A.Each transaction is recorded twice, once in the general journal and once in a specialized journal.B.Each transaction must involve two entries, either two debits, two credits, or one debit and one credit.C.Each transaction must result in equal amounts of debits and credits.D.Each transaction appears in at least two of the financial statements.

(C) The double-entry system records the dual effect of each transaction and every transaction must be recorded with equal debits and credits.

A trial balance prepared at year end showed Puccineli Co.'s debit total exceeding the credit total by $6,300. This discrepancy could have been caused by:A.the balance of $47,000 in accounts receivable being entered in the trial balance as $40,700.B.an error in adding the Sales Journal.C.the balance of $700 in the Equipment account being entered as a debit of$7,000.D.a net loss of $6,300.

(C)Recorded debit amount ................................... $7,000Actual debit balance ........................................ 700Excess debit total ............................................ $6,300

With regard to the accounting cycle, which of the following pairings of activities provides a correct chronology?A.The financial statements are prepared and later an adjusted trial balance is prepared.B.Reversing entries are prepared and later a post-closing trial balance is prepared.C.Closing entries are prepared and later financial statements are prepared.D.Transactions are journalized and later posted to the ledger.

(D) Alternatives A, B, and C provide an incorrect chronology in the accounting cycle. Alternative D provides a correct chronology.

If expenses are greater than revenues, the Income Summary account will be closed by a debit to:A.Income Summary and a credit to Cash.B.Income Summary and a credit to Retained Earnings.C.Cash and a credit to Income Summary.D.Retained Earnings and a credit to Income Summary.

(D) If expenses are greater than revenues, then the Income Summary account will have a debit balance after closing entries have been made. Thus, to close the Income Summary account the journal entry would include a debit to Retained Earnings and

The Murphy Company sublet a portion of its warehouse for five years at an annual rental of $24,000, beginning on May 1, 2020. The tenant, Sheri Charter, paid one year's rent in advance, which Murphy recorded as a credit to unearned rental income. Murphy reports on a calendar-year basis. The adjustment on December 31, 2020 for Murphy should be:Dr.Cr.A.No entryB.Unearned rental income8,000Rental income8,000C.Rental income8,000Unearned rental income8,000D.Unearned rental income16,000Rental income16,000

(D) Murphy Company should make an adjusting entry to recognize that two-thirds of the performance obligation has been satisfied (8 months of an annual rental of $24,000) should be recognized as rental income in 2020. The journal entry that should be made is: Unearned rental income 16,000 Rental income ($24,000 × 2/3) 16,000

Rent collected in advance by a landlord is a (an):A.Accrued liability.B.Deferred asset.C.Accrued revenue.D.Unearned revenue.

(D) Rent collected in advance by a landlord is an unearned revenue. Cash received in advance should not be recognized as revenue until the performance obligation has been satisfied. Answer (A) is incorrect because an accrued liability is the result of an expense which has been incurred but not yet paid. Answer (B) is incorrect because a deferred asset is a cost which has been incurred but the benefits will be received in the future. Answer (C) is incorrect because an accrued revenue is revenue for which the performance obligation has been satisfied but the cash has not yet been received.

Which of the following is not a principal purpose of an unadjusted trial balance?A.It proves that debits and credits of equal amounts are in the ledger.B.It is the basis for any adjustments to the account balances.C.It supplies a listing of open accounts and their balances.D.It proves that debits and credits were properly entered in the ledger accounts.

(D) The trial balance accomplishes the things listed in the first three alternatives. However, the purpose of the trail balance is not to prove that the debits and credits were properly entered in the ledger accounts. The fact that the trial balance is in balance proves that an equal amount of debits and credits were made, but there is no assurance that the postings were made to the correct accounts.