Accounting: Chapter 3

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

Accumulated Depreciation and Depreciation Expense

What are current assets?

Assets that provide benefits within the next year.

A company receives $450 in February for services that will be performed in March. In March, the adjusting entry is recorded as:

Debit Deferred Revenue $450, Credit Service Revenue $450

Depreciation on a company's equipment for the year is $6,000. The adjusting entry for depreciation is recorded as:

Debit Depreciation Expense $6,000, Credit Accumulated Depreciation $6,000

Adjusting entries help to ensure that all ______ are recorded in the period in which they are incurred.

Expenses

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

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

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

Reporting revenues only when cash is received and expenses only when cash is paid is called the

cash basis accounting

As the balance in the Accumulated Depreciation increases, total assets _____ because Depreciation is a(n) _______ account

decrease, contra

A prepayment is originally recorded as an asset. An adjusting entry at the end of the accounting period results in a(n) ______ in the asset account and a(n) ______ in the expense account.

decrease, increase

Cash-basis accounting is not allowed

for financial reporting purposes for most major companies.

Deferred revenue is considered a

liability

The income statement provides a measure of

net income (profitability), calculated as revenues minus expenses.

The _____ is the average time between purchasing inventory and receiving cash proceeds from its sale.

operating cycle

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

owed

After the adjusting entries have been completed, the ending balance in the Supplies account represents the cost of supplies ______.

remaining at the end of the accounting period

We post adjusting entries to the general ledger to

update account balances

Under cash-basis accounting, we record expenses when

we pay cash

The post-closing trial balance helps to verify that

we prepared and posted closing entries correctly the accounts are ready for next period's transactions

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?

$1,000 of revenue should be 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?

$1,000 of revenue should be recorded in May.

Wald Corporation's adjusted trial balance shows the following temporary accounts: service revenue: $20,000; salaries expense $8,000; insurance expense: $2,000; utilities expense: $3,000; interest expense $200; and depreciation expense: $1,400. As part of the the closing process, Wald should credit retained earnings for:

$20,000 because retained earnings is credited for the balance of revenue

On August 1, 2019, a firm prepaid $53,520 for 2 years' rent of an office building. On March 1, 2020, the firm prepaid $34,800 for 2 years' rent of a warehouse. The rent agreements on both buildings went into effect on the dates the rents were prepaid. What amount will be shown for prepaid rent on the December 31, 2020 balance sheet?

$35,910

Adjusting entries are unnecessary in two cases:

(1) for transactions that do not involve revenue or expense activities and (2) for transactions that result in revenues or expenses being recorded at the same time as the cash flow.

The closing entry for Service Revenue includes:

A debit to Service Revenue and a credit to Retained Earnings.

Which relationship between revenue and expense recognition is implied in the matching principle?

Cause and effect

On June 30, a company provides $900 of services to customers on account. It usually takes the company one week to mail bills to customers and another week for customers to pay. In June, the adjusting entry is recorded as:

Debit Accounts Receivable $900, Credit Service Revenue $900

On January 1, a company pays one year of rent in advance for $12,000 ($1,000 per month). On January 31, the adjusting entry is recorded as:

Debit Rent Expense $1,000, Credit Prepaid Rent $1,000

At the end of May, a company receives a utility bill for $500 associated with operations in May. The company plans to pay the bill on June 10. In May, the adjusting entry is recorded as:

Debit Utilities Expense $500, Credit Utilities Payable $500

A company receives cash in March for services that it will provide in April. This scenario is an example of a(n):

Deferred revenue

Taggert Company paid $1,800 for a 6-month insurance premium on December 1. Which of the following statements are correct regarding the accounting for this insurance over the six-month period?

Taggert will debit Insurance Expense for $300 on Dec. 31. Taggert will debit Prepaid Insurance for $1,800 on Dec. 1. Taggert will credit Prepaid Insurance for $300 on Dec. 31.

The adjusting entry for an accrued revenue always includes

a debit to an asset account a credit to a revenue account

An adjusted trial balance is a list of

all accounts and their balances at a particular date, after we have updated account balances for adjusting entries.

Interest on the note payable is classified as

an expense since it is a cost of borrowing.

Adjusting entries

are a necessary part of accrual-basis accounting. They are used to record changes in assets and liabilities (and their related revenues and expenses) that have occurred during the period but that we have not yet recorded by the end of the period.

At the beginning of the accounting period, the balances of temporary accounts

are zero

A prepayment such as "Prepaid Insurance" is originally recorded as a(n) __ when an insurance policy is purchased and will later be expensed in the period used.

asset

Norbert Inc. delivered goods and services during December. Payment is expected during the first week of January. The related adjusting entry should consist of a debit to a(n) ____ account and a credit to a(n) _____ account.

asset, revenue

The balance sheet demonstrates that

assets equal liabilities plus stockholders' equity (the basic accounting equation).

During a discount sale, Larry buys a CD from Best Buy. Rather than paying cash, Larry uses his Best Buy card to buy the CD on account. Under the accrual basis of accounting, when will Best Buy record revenue from this sale?

at the time of the sale

Prepaid rent appears in the ______.

balance sheet because it is an asset

Adjusting entries are needed when

cash flows or obligations occur before the revenue- or expense-related activity (prepayment) or when cash flows occur after the revenue- or expense-related activity (accrual).

Beverly Company incurred interest on its bank loan; interest is due and will be paid at the beginning of next year. On December 31, Beverly Company should

debit interest expense and credit interest payable

On July 1, Book Palace prepaid 12 months' fire insurance with coverage starting the following month. The adjusting entry on December 31 includes:

debit to insurance expense, credit to prepaid insurance

The adjusting entry for prepaid rent requires a ____ to Rent Expense and a _____ to prepaid rent

debit, credit

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

decreased, increased

The process of allocating the cost of an asset to expense over the useful life of the asset is called

depreciation

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

depreciation

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

depreciation expense; accumulated depreciation

The adjusting entry for a prepaid expense includes a debit to a(n) ______ account and a credit to a(n) ____ account.

expense, asset

A primary purpose of adjusting entries is to record events that

have occurred but that have not yet been recorded.

Costs of assets acquired in one period that will be recorded as expense in a future period are referred to as ______ and are initially recorded as _____.

prepaid expenses; assets

Revenue recognition principle

states that we record revenue in the period in which we provide goods and services to customers, not necessarily in the period in which we receive cash.

The adjusting entry for supplies used during the period will result in a debit to the ______ account and a credit to the ______ account.

supplies expense; supplies

Closing entries move the balances from the ______ accounts into the Retained Earnings account.

temporary

Revenues, expenses, and dividends are referred to as

temporary

We prepare the income statement, statement of stockholders' equity, and balance sheet from

the adjusted trial balance

Closing entries increase retained earnings by

the amount of revenues for the period and decrease retained earnings by the amount of expenses and dividends for the period.

After the adjusting entries have been completed, the adjusted balance in the Deferred Revenue account represents:

the amount of revenues for which goods or services were provided during the current period.

After we post the closing entries to the general ledger, the balance of Retained Earnings equals

the amount shown in the balance sheet. The balances of all revenue, expense, and dividend accounts are zero at that point.

After the adjusting entries have been completed, the adjusted balance in the Supplies account represents:

the cost of supplies remaining at the end of the accounting period

Liquidity

the ease with which an asset can be converted into cash

Other expenses indirectly related to producing revenues are recorded in

the period they occur.

Most expenses are recorded in

the same period as the revenues they help to generate.

The difference between accrual-basis accounting and cash-basis accounting is

timing

Under accrual-basis accounting, we record revenues when

we provide goods and services to customers

Closing entries serve two purposes:

(1) to transfer the balances of temporary accounts (revenues, expenses, and dividends) to the Retained Earnings account (2) to reduce the balances of these temporary accounts to zero to prepare them for measuring activity in the next period.

A classified balance sheet shows subtotals for current

assets and liabilities

When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records a:

credit to Revenue debit to Deferred Revenue

Under cash-basis accounting, we record revenues when

we receive cash

Under accrual-basis accounting, we record expenses when

costs are used in company operations.

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

credit balance