ACC Chapter 3 SB

On December 30, Superior Strategies, Inc., collected $10,000 in advance from clients relating to consulting engagements to be performed during January of the following year. Under cash-basis accounting, revenues recorded in December will equal:

$10,000

Burrow, Inc. borrowed $20,000 with an annual rate of 6%, the note and interest are due at the end of two years. By the end of the first month, the interest incurred equals

$100

In May, Sea the World Cruises, Inc. collected $1,000 cash in advance from a customer for services to be performed in June. Which of the following is true assuming accrual accounting?

$1000 revenue recorded in June

In May, Just in Thyme, Inc. billed a customer $1,000 for services performed in May. In June, Just in Thyme collected the $1,000. Which of the following is true assuming accrual accounting?

$1000 revenue should be recorded in May

Selected items reported on Gunter Company's balance sheet are as follows: accounts payable: $10,000; notes payable: $15,000; common stock: $50,000; retained earnings: $25,000; equipment: $30,000; accumulated depreciation: (5,000). Total stockholders' equity reported on Gunter Company's balance sheet should be:

$75,000 (common stock + retained earnings)

Norbert Company debits Accounts Receivable and credits Service Revenue. As a result of this adjusting entry, Norbert Company's:

- Assets increase - Equity increases

The adjusting entry for an accrued revenue always includes:

- Credit to a revenue account - Debit to an asset account

Expense recognition

- Expenses are reported in the same period as the revenues they help to generate - Commonly referred to as the matching principle

Which of the following would be referred to as "accruals?"

- Expenses incurred, not yet paid - Goods and services provided, not yet collected

On December 31, Mueller Inc., makes an adjusting entry to accrue salaries expense. As a result of this entry, Mueller's:

- Liabilities will increase - Equity will decrease

On a classified balance sheet, long-term assets may be reported in these sub-categories:

- Property, plant and equipment - Intangible assets - Long-term investments

As of December 31, the end of the accounting period, $700 of salaries to employees have been incurred but not paid. The employees will be paid on January 5. On December 31, which two of the following will occur?

- Salaries payable will increase by $700 - Salaries expense will increase by $700

Under accrual-basis accounting, which of the following result in an expense being recorded in May?

- The company pays cash in April for supplies used in May. - The company pays cash in June for salaries earned in May

___ occur when the cash flow occurs after either the expense is incurred, or the revenue is earned.

Accurals

How do adjusting entries for accrued expenses affect liabilities and expenses?

Adjusting entries for accrued expenses can increase liabilities and increase expenses.

T/F: A contra-asset account, such as Accumulated Depreciation, will have a normal debit balance.

False

True or false: Salaries Receivable is the account used to record salaries owed to employees for work performed during the current period.

False

A classified balance sheet ___.

Groups asset and liabilities into current and long-term categories.

Expense Recognition under Accrual-Basis

In the period costs are used to help produce revenues

Long-term productive assets used in the normal course of business are classified as

Property, plant, and equipment

Revenue Recognition under Accrual-Basis:

When goods and services are provided to customers

When recording an adjustment for the cost of using equipment during the current accounting period, which two accounts are affected?

accumulated depreciation depreciation expense

GAAP =

accural basis

Adjusting entries never affect the asset account called

cash

Interest payable, salaries payable, and accounts payable are common examples of items classified as

current liabilities

Assets that will be used up or converted to cash within the next year are ___ assets.

current or short-term

Peter Inc. earned interest on its bank deposit. The interest will be received at the beginning of next year. On December 31, Peter should

debit interest receivable and credit interest revenue

Prepaid expenses should be ___ by the cost of the asset used during the accounting period.

decreased

A long-term liability

is not due within the next year

A company may properly classify an asset that provides benefits for 15 months as a current asset if

the company's operating cycle is longer than one year

Cash typically is the first current asset reported on the balance sheet because it is

the most liquid asset

Quartz Instruments had retained earnings of $145,000 at December 31, 2018. Net income for 2019 was $90,000, and dividends for 2019 were $30,000. What amount of retained earnings should be reported at December 31, 2019?

$205,000

On May 1, Cut Above, Inc., collected $3,000 from customers to mow their lawns in June. Under cash-basis accounting, revenues in May will equal:

$3,000

Burrow, Inc. borrowed $20,000 with an annual rate of 6%, the note and interest are due at the end of two years. Calculate the interest for a three-month period.

$300

Activities are part of the operating cycle

- paying cash to suppliers - selling goods and services - collecting cash from customers

What are current assets?

Assets that provide benefits within the next year.

Equivalent to the book value of an asset

Cost of the asset less the accumulated depreciation

Used: Owed:

Debit Credit

The Accounts Receivable account should be ___ by an adjusting entry at the end of the period for any revenues that have been earned but not yet collected or recorded.

Debited/Increased

During December, Mainzel Interior Design Corporation redecorated the reception areas of a local hotel. The project was completed on December 31 with payment due in 30 days. Payment was received on January 21 of the following year. When should Mainzel recognize the related revenue using accrual accounting?

December 31

When should supplies be recorded as an expense?

In the period the supplies are used, regardless of when they were purchased

In January, Pizza Company bought pizza ingredients on account for $100, with payment due to the supplier in April. The pizza ingredients were used for pizzas made in January. In which month should Pizza Company record the cost of the pizza ingredients as an expense?

January

Prepaid Expense

Pay cash (or have an obligation to pay cash) tp purchase an asset in the current period that will be recorded as an expense in a future period.

Deferred Revenue

Receive cash in the current period that will be recorded as a revenue in the future period.

Accrued Revenue

Record a revenue in the current period that will be collected in cash in a future period.

Accrued Expense

Record expense in the current period that will be paid in cash in the future period.

Revenues recognition

Revenues are recorded in the period in which the goods or services are provided to customer - Revenue recognition principle

Show the order in which these asset accounts would appear on a balance sheet. accounts receivable, cash, equipment

a. Cash b. Accounts Receivable c. Equipment

Reporting revenues when goods or services are provided and expenses in the period, they are incurred to generate related revenues is referred to as

accural-basis accounting

The ___ trial balance shows a list of all accounts and their balances after we have updated account balances for adjusting entries.

adjusted

An adjusted trial balance shows all accounts and their balances _____ the accounts have been updated for adjusting entries.

after

A classified balance sheet shows subtotals for current ___ and current ___.

assets liabilities

A classified _____ indicates whether or not a company can meet its obligations in the near future.

balance sheet

Long-lived assets, such as equipment, are reported at their ______ value in the balance sheet.

book

Long-lived assets are reported in the balance sheet at _____ value, which is equal to its original cost less _____.

book accumulated depreciation

Which of the following accounts will never be affected by an adjusting entry?

cash

Which of these asset accounts would typically appear first on a company's balance sheet?

cash

If an asset account such as Equipment has a normal debit balance, the associated contra account should have a normal ___ ___.

credit balance

Prepaid expenses should be ______ by the cost of the asset used during the accounting period.

decreased

Supplies should be ______ and Supplies Expense should be ______ for the cost of supplies used up during the period.

decreased increased

___ ___ should be recorded to recognize the cost of using long-lived assets, such as equipment, during the accounting period.

depreciation expense

The adjusting entry for equipment depreciation includes a debit to _____ and a credit to _____.

depreciation expense accumulated depreciation

Current liabilities are ______.

due within the next year

Initially a prepayment for items such as rent, or insurance are recorded as assets and later are recorded as a(n) ___ in the period the benefit expires.

expense

The adjusting entry to record salaries owed to employees at the end of the accounting period includes a debit to "Salaries __" and credit to "salaries __".

expense payable

A primary purpose of adjusting entries is to record events that

have occurred but have not yet been recorded

An advantage of a classified balance sheet is that it is easy to see ______.

if current assets are large enough to pay current liabilities

Sam earned interest on his bank account, for which he has not yet received cash by December 31. Sam should debit interest receivable and credit

interest revenue

Property, plant, and equipment and intangible assets are typically classified as _____ assets.

long-term

Assets that provide benefits for more than one year are classified as

long-term assets

Which of the following would typically be the first long-term asset category reported on a classified balance sheet?

long-term investments

Adjusting Entires

made by companies at the end of the accounting period to being the accounts up to date - to prepare accurate financial statements 1. End of the accounting period = up to date accounts and adjusted 2. Prepare the adjusted trail balance (debits = credits) 3. Prepare the financial statements

Long-term assets are expected to provide benefits for

more than one year

Creative Advertising Company had retained earnings of $100,000 at December 31, 2018. Net income for 2019 was $150,000, and dividends for 2019 were $80,000. What amount of retained earnings should be reported at December 31, 2019?

$170,000

Adjusting Entries... - -

- before financial statement preparation - update the accounts to their proper balances

As of December 31, $400 of revenues related to goods or services provided during the period were not collected nor recorded. What adjusting entry is necessary at the end of the period?

The Accounts Receivable account should be increased by $400 and the Service Revenue account should be increased by $400.

What are the effects on the accounting equation from the adjusting entry for interest expense accrued, but not paid, at the end of the accounting period?

Total liabilities will increase, and total Stockholders' Equity will decrease

Place the asset categories in the order in which they would appear on a classified balance sheet. ~

a. Current assets b. Long-term investments c. Property, plant and equipment d. Intangible assets

Which of the following are commonly classified as current liabilities?

a. Deferred revenue b. Salaries payable c. Accounts payable

Which of the following would be reported as "property, plant, and equipment" on a classified balance sheet?

a. Land on which office building is located b. Currently used manufacturing facility

List these liability accounts in the order in which they would appear on a company's balance sheet.

a. Note payable (due in 5 months) b. Note payable (5 years) c. Mortgage payable (25 years)

Consistent with the ___-basis of accounting, we record ___ when we provide goods and services to customers, and we record ___ in the period that costs are used to provide those goods and services.

accrual revenue expenses

Which of these is a long-term liability?

mortgage payable due in 20 years

Adjusting entries for accrued expenses ensure that liabilities are reported for all amounts ______ at the end of the accounting period.

owed

Four types of adjusting entires

prepaid expenses deferred revenue accrued expenses accrued revenues

Revenues are recorded in the period that goods and services are provided to customers and expensesare recorded in the period that costs are incurred while providing those goods and services.

revenues expenses

Which of the following statements is correct regarding an adjusting entry for salaries accrued but not paid at the end of the accounting period?

salaries expense will increase by the amount of the unpaid salaries

What are the effects on the accounting equation from an adjusting entry for revenues earned, but not yet collected, during the accounting period?

total assets will increase and total stockholders' equity will increase

After the adjusting entries have been completed, the adjusted balance in the Supplies Expense account represents the cost of supplies:

used during the accounting period