Chapter 4 - Financial Accounting Concepts

Which statement is true about an adjusted trial balance?

Balance sheet items are presented before income statement items.

Adjusting entries are prepared:

Before financial statements and after a trial balance has been prepared.

Which of the following would not be a proper application of the concept of materiality by Millridge Corporation?

On a monthly basis, utility bills are expensed in the month paid, rather than in the month in which services are used.

Which of the following is considered an adjusting entry?

The entry to pay outstanding bills

Which of the following is not an example of an adjusting entry?

The entry to pay outstanding bills.

Under accrual accounting, fees received in advance from customers should be shown as being earned:

When cash is collected.

If a depreciable asset's market value increases during the year, no depreciation expense should be recorded.

false

The Cash account is usually affected by adjusting entries.

false

When a company receives cash in advance and is obligated to provide a service or a product in the future, the entry would be a debit to a revenue account and a credit to a liability account.

false

Adjusting entries are needed whenever transactions affect the revenue or expenses of more than one accounting period.

true

Dolphin Company received $1,500 in fees during Year 1, 1/3 of which will be earned in Year 2. The rest was earned when the amount was received. The company should report which of the following amounts as income in Year 1?

$1,000

Gourmet Shop purchased cash registers on April 1 for $11,520. If this asset has an estimated useful life of three years, what is the book value of the cash registers on May 31?

$11,520

Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31, Year 1: (1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1, Year 1. (2) The company pays all employees up-to-date each Friday. Since December 31, Year 1, fell on Tuesday, there was a liability to employees at that date for two day's pay amounting to $6,800. (3) On December 1, Year 1, rent on the office building had been paid for four months. The monthly rent is $6,000. (4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year. (5) Fees of $9,800 were earned during the month for clients who had paid in advance. By what amount will the book value of the office equipment decline after the appropriate December adjustment is recorded?

$130

Before any month-end adjustments are made, the net income of Russell Company is $37,000. However, the following adjustments are necessary: office supplies used, $3,060; services performed for clients but not yet recorded or collected, $2,940; interest accrued on a note payable to bank, $3,540. After adjusting entries are made for the items listed above, Russell Company's net income would be:

$33,340

Gamma Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31: A one-year bank loan of $720,000 at an annual interest rate of 6% had been obtained on December 1. The company's pays all employees up-to-date each Friday for a five-day workweek. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day's pay (Monday and Tuesday). Employees earn a total of $12,800 per week. On December 1, rent on the office building had been paid for three months. The monthly rent is $7,000. Depreciation of office equipment is based on an estimated useful life of five years. The balance in the Office Equipment account is $12,360; no change has occurred in the account during the year. All fees totaling $19,800 were earned during the month for clients who had paid in advance. How much is owed the employees for their wages?

$5,120

Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31, Year 1: (1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1, Year 1. (2) The company pays all employees up-to-date each Friday. Since December 31, Year 1, fell on Tuesday, there was a liability to employees at that date for two day's pay amounting to $6,800. (3) On December 1, Year 1, rent on the office building had been paid for four months. The monthly rent is $6,000. (4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year. (5) Fees of $9,800 were earned during the month for clients who had paid in advance. What amount of interest expense has accrued on the bank loan?

$7,200

Colonial Systems prepares monthly financial statements. Colonial would record a prepaid expense in each of the following situations except:

A tenant paid Colonial Systems three months' rent in advance.

Which of the following statements concerning materiality is true?

Immaterial items should be handled in the most expedient manner, even if resulting financial statements are not completely precise.

The concept of materiality:

Is measured as an item significant enough to influence the decisions of users of financial statements.

An adjusting entry involving recognition of accrued revenue is necessary at the end of March in which of the following situations?

Midwood Consultants began working for a client on March 15; bills will be sent monthly beginning April 15.