chapter 4: adjustments financial statements and financial results

bristol inc. paid $800 for a 4 month insurance policy on august 1 of the current year. on august 31, Bristol inc. made an adjusting entry to account for the insurance that expired during the month of august. the adjusting entry contained a debit to insurance expense in the amount of _____ and a credit to prepaid insurance in the amount of _____. the remaining balance in the prepaid insurance account after the adjustment was _____.

$200; $200; $600

place the steps in the adjustment process in order. first step on top

1. analyze the accounts to determine the amounts of the adjustment 2. record the adjusting entry in the journal 3. summarize the adjusting entries in the account

at the end of the accounting period, adjusting entries are required. place the steps in the adjustment process in the correct order.

1. use the unadjusted trial balance to determine the accounts requiring adjustment 2. record and post adjusting entries 3. prepare an adjusted trial balance to check the equality of the debit and credits 4. prepare financial statements 5. record closing journal entries and post to the accounts 6. prepare a post-closing trial balance

_____ adjustments are used when cash has not been exchanged in a prior transaction, and _____ adjustments are used when cash has been exchanged in a prior transaction.

accrual; deferral

which two accounts are used to record the adjusting entry for the amortization of long-term assets that lack physical substance?

accumulated amortization amortization expense

a(n) ______ trial _____ is prepared immediately _____ the adjusting entries have been recorded and _____ the financial statement are prepared

adjusted; balance; after; before

which of the following statements describes the effect that adjustments may have on liabilities?

adjustments increase liabilities for the amount of any accrued and unpaid expenses at the end of the period

the adjusting entry to record the amortization of a long-term asset that lacks physical substance includes a debit to _____ and a credit to _____

amortization expense; accumulated amortization

a prepayment is originally recorded as an asset. later at the end of the accounting period, an adjustment is recorded causing in a(n) _____ in the asset account and a(n) _____ in the expense account

decrease; increase

_____ expense accumulates or accrues throughout the accounting period on notes payable

interest

the adjusting entry to record depreciation on equipment includes a _____

credit to accumulated depreciation debit to depreciation expense

accumulated depreciation has a normal _____ balance which indicates that it _____ total assets

credit; decreases

the closing entry to close rent expense requires rent expense to be _____ and retained earnings to be _____

credited; debited

the deferral adjustment to record the amount of service revenue collected in advance for which the company has now satisfied the performance obligation includes a _____

debit to deferred revenue credit to service revenue

the seller's adjusting entry to record the revenue earned by fulfilling its obligations to its buyers which had been collected in advance requires a _____ to deferred revenue and a _____ to sales revenue

debit; credit

which of the following types of transactions represent deferral adjustments that are recorded to adjust for amounts expired or used during the period?

decrease to supplies and increase to supplies expense decrease to prepaid insurance and increase to insurance expense

why is it necessary to make adjustments to revenue accounts at the end of the accounting period?

deferred revenue should be reduced for any portion the seller has fulfilled of its obligations during the current period revenues the seller has performed of its obligations but not yet billed to accounts receivable, should be recorded as a revenue

_____ expense should be recorded to recognize the use of and benefit received from long-lived assets, such as equipment, during the accounting period

depreciation

why is the balance in the depreciation expense account generally different from the balance in the accumulated depreciation account?

depreciation expense only reflects the current period depreciation. accumulated depreciation contains depreciation since the asset was purchased

the adjusting entry to record depreciation, includes a debit to _____ and a credit to _____

depreciation expense; accumulated depreciation

which of the following line items are found on a statement of retained earnings?

dividends net income

the _____ recognition principle requires that a portion of long-lived assets be transferred to an expense account during the accounting period the asset is being used to generate revenues

expense

which of the following are temporary accounts that will be closed at the end of the accounting period during the closing process?

expenses revenues dividends

as of December 31 (the end of the accounting period), ABC company has a profit before tax of $12,000. the company's tax rate is 25%. the adjustment will include a(n) _____ of _____ to income tax expense

increase; $3,000

gift cards are an example of a transaction in which a company receives payment in advance of fulfilling a sale or performing a service. this type of transaction will result in: 1) an increase to the account called cash, an asset, and 2) a(n) _____ to the account called _____ , a _____

increase; deferred revenue; liability

in an accrual adjustment for expenses incurred but not yet paid, a liability is _____

increased because cash will be paid in the future due to the expense incurred

on June 30, daily kneads paid $12,000 in advance for one year of insurance coverage beginning July 1. match each line with the correct amount that would be reported in the following month, July, and on which July financial statement the line item would be reported

insurance expense- $1,000 on the income statement prepaid insurance- $11,000 on the balance sheet

which of the following statements is correct regarding the adjustment to record interest accrued on a note payable?

interest on the note payable is classified as an expense since it is a cost of borrowing

which of the following may require an accrual adjusting entry that is recorded with a debit to an expense and a credit to a liability?

interest owed on notes payable utilities to be paid in later accounting period

which of the following accounts are found on a balance sheet?

interest payable prepaid rent

which of the following accounts found on an unadjusted balance typically require adjusting entries

interest payable supplies prepaid rent

_____ is defined as the "cost of borrowing money." since the account represents a cost incurred on borrowed money, it is classified as a(n) _____ account under stockholders' equity

interest; expense

salaries and wages payable is recorded for salaries and wages incurred, but not yet _____ to employees, at the end of the accounting period

paid

net income (or loss) is recorded in the retained earnings account when _____ and _____ accounts are closed and transferred into retained earnings

revenue; expense

the adjusting entry to record amortization causes _____

stockholders' equity to decrease assets to decrease

which of the following account balances will typically be increased as a result of adjusting entries?

supplies expense interest payable

match each financial statement line item with the appropriate description

supplies expense- amount used and reported on the income statement supplies- amount remaining and reported on the balance sheet accounts payable- amount owed for supplies purchased on account

which of the following transactions constitute an accrual adjustment involving an expense account?

taxes incurred but not yet paid to the government as of the end of the accounting period wages incurred but not yet paid to employees as the end of the accounting period

how does the adjustment for depreciation differ from other deferral adjustments?

the depreciation adjustment uses a contra-account rather than reducing the asset accounts directly

what is the purpose of preparing an adjusted trial balance?

to ensure that total debits equal total credits after the adjustments have been recorded

what are the effects on the accounting equation from the adjustment for which the seller has satisfied the performance obligations to its buyers during the accounting period that had previously been recorded as a liability?

total liabilities will decrease and total stockholders' equity will increase