Chapter 3 Smartbook and quiz

Choose the statement(s) below which is (are) true regarding adjusting journal entries.

- A balance sheet account is always affected. - An income statement account is always affected. - Cash is never affected.

Explain what a contra account is by choosing the statement(s) below that correctly describe(s) a contra account.

- A contra account would be subtracted from another account. - Accumulated Depreciation is an example of a contra account. - A contra account has an opposite normal balance than its linked account. - A contra account is linked with another account.

What is the effect of an accrued expense (such as salaries expense) adjustment on the income statement and the balance sheet?

- A liability (such as salaries payable) will be increased. - Expenses are increased. - Net income is reduced.

Which of the statements below describe(s) a permanent account?

- A permanent account is reported on the balance sheet. - A permanent account's balance is carried forward to the next accounting period.

Which of the statements below describe(s) a temporary account?

- A temporary account is closed at the end of an accounting period. - A temporary account has a balance for only one period.

Which of the following adjustments would be required at the end of the period?

- Accrued revenues. - Deferred expenses - Deferred revenues - Accrued expenses

Which statements below are true regarding permanent and temporary accounts?

- Permanent accounts will appear on a post-closing trial balance. - Permanent accounts are reported on the balance sheet. - Temporary accounts are reported on the income statement. - Temporary accounts have a balance for one period only. - Retained Earning is a permanent account, but dividends is a temporary account.

Which of the following accounts would be considered a prepaid expense or prepaid asset account?

- Prepaid rent - Supplies - Prepaid insurance

What is needed in order to figure interest expense?

- Principal amount owed. - Annual interest rate. - Fraction of year since last payment.

Determine which of the following transactions may require adjustments.

- Six months of rent were paid in advance. - a 24-month insurance policy was prepaid - Equipment was purchased in the middle of the year. - An advance payment was received from a customer earlier in the month, but only partially earned by the end of the month. - Supplies were purchased at the beginning of the year, but not all were used.

$1,000 of supplies were purchased at the beginning of the month. $300 were used during the month. (The Supplies account was increased at the time of the initial purchase.) Demonstrate the required adjusting journal entry by selecting from the choices below.

- Supplies would be credited for $300. - Supplies expense would be debited for $300.

Which of the statements below is (are) correct regarding the accounting cycle?

- The accounting cycle refers to steps followed by a company to prepare its financial statements. - The accounting cycle is a series of steps repeated each reporting period. - The accounting cycle contains 10 steps. - The cycle contains steps for adjusting and closing accounts.

What is the difference between an adjusted trial balance and an unadjusted trial balance?

- The adjusted trial balance is a list of accounts and their balances after adjusting entries have been posted. - The adjusted trial balance generally has more accounts listed than the unadjusted trial balance. - The adjusted trial balance is used to prepare financial statements.

Which of the following describes accrued revenue?

- The adjustment causes an increase in an asset account and an increase in a revenue account. - They refer to earnings which have been earned but not yet billed. - Accounts receivable is usually increased when accruing revenues. - They refer to revenues that are earned in a period, but have not been received and are unrecorded.

Explain your understanding of the closing process by choosing the correct statements below.

- The closing process resets the balances in temporary accounts to zero. - The closing process helps to summarize a period's revenues and expenses.

Demonstrate your knowledge of preparing an adjusted trial balance by selecting the correct statement below.

An adjusted trial balance is prepared after adjustments are posted, so new accounts may need to be added.

Describe an unclassified balance sheet.

An unclassified balance sheet is one whose items are broadly grouped into assets, liabilities, and equity.

Choose the statement below which is true regarding adjusting journal entries.

At least one income statement account and one balance sheet account are always involved.

When does the closing process take place?

At the end of an accounting period.

What is the book value of an asset?

Book value is the original cost of an asset minus its accumulated depreciation.

Which of the following lists of assets would be classified as plant assets?

Buildings and machines.

Choose the statement below that explains what "closing" means.

Closing means to bring an account balance to zero.

Define "current" as it applies to assets and liabilities on a classified balance sheet.

Current items are those expected to come due within one year or the company's operating cycle, whichever is longer.

On December 28, I. Greasy Catering Company completed $600 of catering services. As of December 31, the customer had not been billed nor had the transaction been recorded. Demonstrate the required adjusting entry by choosing the correct statement below.

Debit Accounts receivable for $600.

Choose the statement below that demonstrates the correct adjusting entry to recognize depreciation expense on a building.

Debit Depreciation expense; credit Accumulated depreciation.

A company borrowed $4,000 from the bank at an interest rate of 9%. By the end of the accounting period, the loan had been outstanding for 30 days. Demonstrate the required adjusting entry by choosing the correct statement below.

Debit Interest expense for $30.

For the current year, Bubbles Office Supply had earned $600 of interest on investments. As of December 31, none of this interest had been received or recorded. Demonstrate the required half of the adjusting entry by choosing the correct statement below.

Debit Interest receivable for $600.

By the end of the accounting period, employees have earned salaries of $500, but they will not be paid until the following pay period. Which of the following is the proper adjusting entry?

Debit Salaries expense for $500.

An advance payment of $1,000 for services was received on December 1 and was recorded as a liability. By the end of the year, $400 had been earned. Demonstrate what the correct adjusting entry should include by choosing the correct statement below.

Debit Unearned revenues for $400.

Chimney Sweeps provided chimney cleaning services to several clients during the month of February. Chimney's customers have not yet been billed. Chimney's customers owe $2,000 to Chimney. How will Chimney Sweeps record this transaction?

Debit accounts receivable and credit services revenue.

Sheldon Company had $500 for one day of accrued salaries on December 31 of the prior year. On January 4 of the current year, total salaries for the five-day week are paid. The journal entry to record the payment of salaries on January 4 includes:

Debit to Salaries Payable for $500; Debit to Salaries Expense for $2,000

Able Company owes interest on a note for a loan. The note is dated December 1 and is due on February 1. On December 31, interest expense should be accrued for the following period:

December 1 to December 31.

A company using a calendar year-end will record an adjusting entry for a bill received on January 15 for services received during the month of December on:

December 31.

What is depreciation?

Depreciation is the process of allocating the costs of long-term assets over their expected useful life.

By the end of the accounting period, employees have earned salaries of $650, but they will not be paid until the following pay period. Demonstrate the required adjusting entry by completing the following sentence. The required adjusting entry would be to debit the Salaries ______ account and ______ the Salaries ______ account.

Expense; credit; payable

Which of the lists below contains only permanent accounts?

Retained Earnings; Accounts Payable; Accumulated Depreciation.

$800 of supplies were purchased at the beginning of the month and the Supplies account was increased. As of the end of the period, $200 of supplies still remain. Which of the following is the correct adjusting entry?

Supplies expense would be debited for $600.

Which of the following accounts is considered a prepaid expense?

Supplies.

Select the statement below that explains how to use the Income Summary account.

The Income Summary account is used during the closing process to facilitate the closing of revenue and expense accounts.

What is the purpose of the Accumulated Depreciation account?

The account allows both the original cost of plant assets and the total depreciation taken to be shown simultaneously.

Which of the statements below explains the accounting cycle?

The accounting cycle is repeated each reporting period and refers to the steps taken in preparing financial statements.

Explain the difference between the unadjusted and the adjusted trial balance.

The adjusted trial balance is prepared after adjusting entries have been recorded and posted.

Describe the final step in the adjusting process.

The final step is to create an adjusting journal entry to get from step 1 to step 2.

What is the date primarily used in adjusting entries?

The last day of the period.

The time span from when cash is used to purchase goods until cash is received from the sale of goods is called the ______ cycle.

operating

Cash basis accounting recognizes revenues when cash is ______ and records expenses when cash is ______.

received; paid

Illustrate your understanding of how to use the adjusted trial balance to prepare a statement of retained earnings by completing the following sentence. In order to prepare the statement of retained earnings, the balance of the ______ account balance as well as any debit balance in the ______ account is transferred from the adjusted trial balance and is used along with the reported net income (loss) from the Income statement.

retained earnings; dividends

Accured ______ are earned in a period that are both unrecorded and not yet received in cash.

revenues

The journal entry to close all of a company's expense accounts would include a ______ to each of the expense accounts and a corresponding ______ to the Income ______ account.

credit; debit; summary

Review and complete the following statement regarding the Income Summary account. The Income Summary account is ______ for the sum of all revenue accounts and is ______ for the sum of all expense accounts and its balance will be transferred to the ______ account.

credited; debited; retained earnings

The Fish Aquarium obtained funds from a bank and owes interest on a note at the end of the month. The required adjusting journal entry will:

debit interest expense and credit interest payable.

The closing process takes place at the ______ of an accounting period, after the ______ trial balance is prepared and ______ the financial statements are prepared.

end; adjusted; after

A company borrowed $10,000 from the bank at 5% interest. The loan has been outstanding for 45 days. Demonstrate the required adjusting entry for this company by completing the following sentence. The required adjusting entry would be to debit the Interest ______ account and ______ the Interest ______ account.

expense; credit; payable

The expense recognition (matching) principle aims to record ______ in the same accounting period as the ______ that are earned as a result of those costs. This principle is a major part of the ______ process.

expenses; revenues; adjusting

For the current year, a business has earned (but not recorded or received) $200 of interest from investments. Demonstrate the required adjusting entry by completing the following sentence. The required adjusting entry would be to debit the ______ account and ______ the ______ account.

interest receivable; credit; interest revenue

Illustrate your understanding of how to use the adjusted trial balance to prepare an income statement by completing the following sentence. In order to prepare an income statement using the account balances on an adjusted trial balance, all of the ______ and their credit balances are transferred to the income statement as well as all of the ______ and their ______ balances.

revenues; expenses; debit

Accrual basis accounting recognizes ______ when earned and records ______ when ______ in order to adhere to the matching principle.

revenues; expenses; incurred

The revenue recognition principle states that revenue:

should be recorded when goods or services are provided to customers at an amount expected to be received.

Complete the following statement. The purpose of the closing process is to reset ______ account balances to zero and to transfer the changes in all of these accounts to the Retained ______ account.

temporary; earnings

Closing means to transfer account balances from ______ accounts so that they will start with a ______ balance at the beginning of the next period.

temporary; zero

Current items can be described as those expected to come due within one ______ and are listed in the order of how ______ they could be converted to or paid in cash.

year; quickly

A $300,000 building was purchased on December 1. It is estimated that it will have a life of 20 years and zero salvage value. Calculate depreciation expense for the month of December using straight-line depreciation.

$1,250.

A business has a $10,000 loan from a bank at 8% annual interest. Calculate the amount of interest to accrue if the loan has been outstanding for 45 days. Use a 360 day year.

$100.

$21,000 of equipment is purchased on December 1. It is estimated that it will have a life of 5 years and zero salvage value. Calculate the first month's depreciation expense as of December 31 using the straight-line method.

$350.

Which of the following statements about the Accumulated depreciation account is (are) correct?

- Accumulated depreciation accumulates the total depreciation taken on an asset since its purchase. - The Accumulated depreciation account allows the original cost of the asset to remain in the plant asset account. - Accumulated depreciation is a contra account. - Accumulated depreciation is subtracted from its plant asset on the balance sheet.

Which of the following statements accurately explains how to use a worksheet to enter adjustments?

- Adjustments are entered in a middle column titled adjustments - Each adjustment is identified by a letter in parentheses that serves as a cross - The adjustments column totals must balance before moving on to the adjusted trial balance columns

Explain your understanding of what an accrued expense is by selecting the statements below which are correct.

- Adjustments involve increasing both an expense and a liability account. - They refer to costs that are incurred in a period, but are both unpaid and unrecorded. - Examples of accrued expenses are wages expense and interest expense. - They are reported on an income statement.

Describe the general ledger after adjusting and closing entries have been posted.

- All expense account will show a $0 balance after cloising - The abbreviation "adj." and "clos." have been entered in the explanation columns of the ledger. - The dividends account will have a $0 balance after closing. - The income summary account will show three closing entries.

The Income Summary account can be defined as which of the following?

- An account whose balance equals net income or net loss - An account used during the closing process - A temporary account - An account that contains a credit for the sum of all revenues

Describe the effect of an accrued revenue adjustment on the income statement and the balance sheet by choosing from the statements below.

- An asset will be increased. - Total assets will be increased. - Net income is increased. - A revenue account will be increased.

Demonstrate your knowledge of preparing a post-closing trial balance by selecting the accounts below that would be included on it.

- Asset accounts - Permanent accounts - Liability accounts

At the end of the previous year, a customer owed Days Company $400. On February 1 of the current year, the customer paid $600 total, which included the $400 owed plus $200 owed through February 1st. The journal entry on February 1st is?

- Cash will be debited for $600. - Accounts receivable will be credited for $400. - Service revenue would be credited for $200.

At the end of the previous year, a customer owed Chocolates R US $500. On January 31 of the current year, the customer paid $900 total, which included the $500 owed plus $400 owed for the current month of January. What would be the journal entry on January 31 that reflects this?

- Cash will be debited for $900. - Service revenue would be credited for $400. - Accounts receivable will be credited for $500.

McDarrel's records $500 of accrued salaries on December 31. Three days later, on January 3, total salaries of $4,000 (including the $500 accrued at year end) are paid. Demonstrate the required journal entry on January 3 by selecting from the choices below.

- Cash would be credited for $4,000. - Salaries expense would be debited for $3,500. - Salaries payable will be debited for $500.

Which of the following statements describes why accrual accounting better reflects a business's performance?

- Comparability of financial statement is improved. - Revenue are always recorded in the period in which they are earned. - Expenses are always recognized in the period in which they are incurred.

A 12-month insurance policy was purchased on Dec. 1 for $4,800 and the Prepaid insurance account was initially increased for the payment. The required adjusting journal entry on December 31 includes a:

- Credit to Prepaid insurance for $400. - Debit to Insurance expense for $400.

A classified balance sheet has several categories for assets and liabilities including:

- Current assets - Plant assets - Long-term investments - Non-current (long-term) liabilities

Which of the following statements are true regarding depreciation?

- Depreciation is the original cost of an asset minus any residual value and this amount is expensed over its useful life. - Depreciation is recorded through an adjusting entry. - Depreciation is recognized at the end of an accounting period. - Depreciation is the process of allocating the cost of an asset to the period the asset benefits.

Define what the book value of an asset is by choosing the correct statement(s) below.

- It is sometimes referred to as the net amount of an asset. - The formula is Cost less Accumulated depreciation. - It is the original cost of an asset minus its accumulated depreciation.

Which of the following describe the Salaries payable account?

- It reports amounts owed to employees. - It is reported on the balance sheet. - It is increased with a credit. - It is a liability account.

$500 of supplies were purchased at the beginning of the period. By the end of the period, only $100 remains. The adjustment to show the $400 of supplies used would have the following effect(s).

- It would increase expenses, so net income would be reduced. - It would reduce assets, so total assets would be lower.

A plant asset can be defined by which of the following statements?

- Its original cost (minus any salvage value) is gradually expensed over its useful life. - It is reported on the balance sheet. - It is a tangible long-term asset. - It has a life within the business greater than one year.

Which of the accounts below would be classified as long-term or fixed assets?

- Land - Equipment - Vehicles - Building

Which of the following statements describes the expense recognition (matching) principle?

- Matching of expenses with revenues is a major part of the adjusting process. - Expenses should be matched in the same accounting period as the revenues that are earned as a result of those expenses.

Select the statements below that describe the purpose of a post-closing trial balance.

- One purpose is to verify that total debits equal total credit for permanent accounts. - One purpose is to verify that all temporary accounts have zero balances.

Review the following statements and determine which is (are) correct regarding an adjusted trial balance and how it is used In preparing financial statements.

- The ending Retained Earnings account balance on the balance sheet is transferred from the statement of retained earnings. - The adjusted trial balance includes all accounts and balances appearing in financial statements. - Financial statements are prepared more easily using the adjusted trial balance than with the general ledger. - The income statement is the first financial statement prepared after preparing the adjusted trial balance.

Review the statements below and select the items that are correct regarding the operating cycle for a business.

- The length of a company's operating cycle depends on its activities - Most operating cycles are less than one year - The operating cycle is the time span from when cash is used to acquire goods and services until cash is received from sale of goods services - Most companies use one-year period or operating cycle in deciding which assets

In preparing a post-closing trial balance, which of the following statements are correct?

- The total of all debit balances will equal the total of all credit balances. - All permanent accounts with a balance in the general ledger will be included. - The capital account on the post-closing trial balance will include the net income or net loss for the period.

Explain what unearned revenues are by selecting the statements below which are correct.

- They are also called deferred revenues. - They are reported on a balance sheet. - They refer to cash received in advance of performing a service or product. - They are a liability.

Describe the effect of the adjusting entry to show the earned amount of a previously recorded unearned revenue on the income statement and on the balance sheet by choosing the correct statements below.

- Total liabilities are reduced. - A revenue account is increased. - Net income is increased. - A liability (unearned revenue) will be reduced.

$1,000 of cash was received in advance of performing services. By the end of the period, $300 had not yet been earned. (The Unearned revenue account was increased at the time of the initial cash receipt.) Demonstrate the required adjusting journal entry by selecting from the choices below.

- Unearned revenue would be debited for $700. - Service revenue would be credited for $700.

Accrual basis accounting is:

- an accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred. - an accounting system that best reflects business performance and increases the comparability of financial statements from period to period. - an accounting system which is consistent with generally accepted accounting principles.

StoryBook Company provided services to several customers during the month of December. These services have not yet been paid by the customers. StoryBook should record the following adjusting entry at the end of December:

- debit accounts receivable - credit services revenue

Demonstrate your knowledge of a depreciation adjusting entry by completing the following sentence. A depreciation adjustment would include a debit to ______ and ______ to ______.

- depreciation expense - credit - accumulated depreciation

Not recording an accrued expense will have the following effect on the financial statements:

- expenses on the income statement will be understated. - liabilities on the balance sheet will be understated.

Not recording an adjusting entry for accrued revenue will result in:

- revenue being understated - accounts receivable being understated

The following categories are on a classified balance sheet. List them in the order that they would appear. - Long-term investments - Current liabilities - Intangible assets - Plant assets - Long-term liabilities - Current assets

1. Current Asset 2. Long-term investment 3. Plant asset 4. Intangible asset 5. Current Liabilities 6. Long term liabilities

Place the steps in the adjusting process in the correct order in which they would be performed. - Record an adjusting entry. - Determine what the current account balance is. - Determine what the correct account balance should be.

1. Determine what the current account balance is. 2. Determine what the current account balance should be. 3. Recored an adjusting entry.

List the order in which financial statements are prepared. - Statement of cash flows - Balance sheet - Income statement - Statement of retained earnings

1. Income statement 2. Statement of retained earnings 3. Balance sheet 4. Statement of cash flows

Some of the steps in the accounting cycle are listed below. Place them in the correct order of use. - Journalize and post the adjusting entries. - Prepare the adjusted trial balance. - Prepare the financial statements. - Prepare post-closing trial balance. - Journalize transactions into the journal. - Journalize and post closing entries.

1. Journalize transactions into the journal. 2. Journalize and post the adjusting entries. 3. Prepare the adjusted trial balance. 4. Prepare the financial statements. 5. Journalize and post closing entries. 6. Prepare post-closing trial balance.

Show your understanding of the steps involved in adjusting entries by placing the following steps in the correct order of preparation. - Journalize and post adjusting entries. - Prepare financial statements. - Prepare an unadjusted trial balance. - Prepare an adjusted trial balance.

1. Prepare an unadjusted trial balance. 2. Journalize and post adjusting entries. 3. Prepare an adjusted trial balance. 4. Prepare financial statements.

On December 1, a company pays $3,600 for a 36-month insurance policy. After one month, accrual accounting requires $______ of insurance expense be reported on the income statement ending December 31. However, if cash basis accounting is used, $______ of insurance expense would be reported at the time of purchase.

100; 3,600

What is a plant asset?

A plant asset refers to a long-term tangible asset used to produce and sell products or services.

Which of the statements below is correct regarding the difference between a temporary account and a permanent account?

A temporary account will not appear on a post-closing trial balance.

On December 27, a business completed a $400 service that had not yet been billed or recorded as of December 31. Demonstrate the required adjusting entry of the business by completing the following sentence. The required adjusting entry would be to debit the ______ account and ______ the ______ account.

Accounts receivable; credit; Service revenue

Recall the order in which financial statements are prepared.

Income statement, statement of retained earnings, balance sheet, statement of cash flows.

A 12-month insurance policy was purchased on Dec. 1 for $3,600 and the Prepaid insurance account was increased for the payment. Demonstrate the required adjusting journal entry on Dec. 31 by selecting from the choices below.

Insurance expense would be debited for $300.

Select the statement below that describes a post-closing trial balance.

It is a listing of all permanent accounts and their balances after closing.

Define the Income Summary account.

It is a temporary account used during the closing process to summarize revenues and expenses.

Define the Salaries payable account by selecting the appropriate statement below.

It reports amounts owed to employees and is a liability.

If an adjusting entry for unearned revenue is not recorded, what is the effect on the financial statements?

The revenues on the income statement will be understated.

Which of the following lists steps of the accounting cycle in the correct order (note that not all steps are listed)?

Trial balance, Adjusting journal entries, Post-closing trial balance.

Identify which group of accounts may require adjustments at the end of the accounting period.

Unearned revenue; Supplies; Prepaid rent

Explain what unearned revenues are by choosing the correct statement below.

Unearned revenues refer to cash received in advance of providing a service or product.

Which of the following lists contains only temporary accounts?

Wages Expense; income summary; dividends.

Which of the accounts below are considered accrued expenses?

Wages expense, Interest expense

Illustrate your understanding of how to use the adjusted trial balance to prepare the balance sheet by completing the following sentence. In order to prepare a balance sheet using the account balances on an adjusted trial balance, all of the ______ and their debit balances are transferred to the balance sheet as well as all of the ______ and their ______ balances.

assets; liabilities; credit

An adjusted trial balance is:

a list of accounts and balances after adjusting entries have been recorded and posted.

Explain a contra account by filling in the following blanks. A contra account is an account that is linked with another ______. It has a(n) ______ balance and is ______ to/from the other account's balance.

account; opposite; subtracted

All of the following are types of adjustments except:

accrued cash.

Cash basis accounting is defined as:

an accounting system which recognizes revenues when cash is received and records expenses when cash is paid.

$200 of supplies were purchased at the beginning of the period and recorded as an asset. During the period, $90 of supplies were used. The adjustment to show the supplies used up would cause ______ to be reduced and ______ to be increased, so net income would decline.

assets; expenses

Illustrate your understanding of how to use the adjusted trial balance to prepare the balance sheet by completing the following sentence. In order to prepare a balance sheet using the account balances on an adjusted trial balance, all of the ______ and their debit balances are transferred to the balance sheet as well as all of the ______ and their ______ balances

assets; liabilities; credit