CHAPTER 3 SMARTBOOK (McGraw Hill)

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 depreciation expense for one month, as of December 31, of the first year using the straight-line method.

$350 Reason: $21,000/60mos=$350 per month. December 1 - December 31 = 1 month.

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? (Check all that apply.)

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

Determine which of the following transactions may require adjustments. (Check all that apply.)

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

A plant asset can be defined by which of the following statements? (Check all that apply.)

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

What is the difference between an adjusted trial balance and an unadjusted trial balance? (Check all that apply.)

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

Accrual basis accounting is defined as: (Check all that apply.)

An accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred An accounting system that uses the matching principle to determine when to recognize revenues and expenses An accounting system which is consistent with generally accepted accounting principles

Define an adjusting journal entry.

An adjusting journal entry is made at the end of an accounting period to reflect a transaction or event that is not yet recorded.

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.

On December 27, a business completed a $400 service taht had not yet been billed or recoreded 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 __________ (unearned revenue/accounts recieveable/cash/service revenue) account and __________ (debit/credit) the ____________ (unearned revenue/accounts receivable/cash/service revenue) account.

Blank 1: Accounts receivable Blank 2: credit Blank 3: Service revenue

Illustrate your understanding of how to use the adjusted trial balance to prepare a statement of owner's equity by completing the following sentence:In order to prepare the statement of owner's equity, the Owner ___ account balance as well as any debit balance in the withdrawals ___ account is transferred from the adjusted trial balance and is used along with the reported net income (loss) from the income statement.

Blank 1: capital Blank 2: withdrawals

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 (expense/payable/receivable) _____________ account and (debit/credit) _____________ the interest (expense/payable/receivable) account.

Blank 1: expense Blank 2: credit Blank 3: payable

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 (expense/payable) account and (debit/credit) the Salaries (expense/payable/unearned) account.

Blank 1: expense Blank 2: credit Blank 3: payable

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 _________ (unearned revenue/accounts receivable/cash/interest receivable) account and _______ (debit/credit) the ________ (cash/accounts receivable/interest revenue/interest receivable) account.

Blank 1: interest receivable Blank 2: credit Blank 3: interest revenue

The formula to figure out the profit margin of a company is __________ (Net income/ Accountsreceivable/ Net sales) divided by ________ (Net income/ Cash/ Net sales).

Blank 1: net income Blank 2: net sales

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.

Blank 1: revenues Blank 2: expenses Blank 3: debit

Which of the accounts below would be classified as long-term or fixed assets? (Check all that apply.)

Building Land Equipment Vehicles

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

Buildings Equipment

On December 28, I. M. Greasy, Catering 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. Reason: $400 has been earned. $600 is the balance in the Unearned revenues account, so $400 must be debited to reduce this account.

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 adjusting entry?

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

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: (Check all that apply.)

Debit to insurance expense for $400 Credit to prepaid insurance for $400

Demonstrate your knowledge of a depreciation adjusting entry by completing the following sentence. A depreciation adjustment would include a debit to (depreciation expense/accumulated depreciation/building) and (debit/credit) to (depreciation expense/accumulated depreciation/building).

Depreciation expense Credit Accumulated depreciation

Place the steps in the adjusting process in the correct order in which they would be performed.

Determine what the current account balance is Determine what the correct account balance should be Record an adjusting entry

The expense recognition (matching) principle aims to record _________ (expenses/assets/liabilities) in the same accounting period as the _________ (expenses/revenues/assets) that are earned as a result of those costs. This principle is a major part of the ____________ (timing/adjusting/esetimating) process

Expenses Revenues Adjusting

Which of the following statements describes the expense recognition (matching) principle? (Check all that apply.)

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

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

Which of the following describe the Salaries payable account? (Check all that apply.)

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

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

It reports amounts owed to employees and is a liability.

Which of the following accounts would be considered a prepaid expense or prepaid asset account? (Check all that apply.)

Prepaid rent Supplies Prepaid insurance

Which of the following statements correctly define(s) profit margin? (Check all that apply.)

Profit margin is a useful measure of a business's operating results. Profit margin is also called return on sales. Profit margin is the ratio of a business's net income to its net sales.

Accrual basis accounting recognizes __________ (equity/revenues/expenses) when earned and records __________ (revenues/expenses/liabilities) when ____________ (incurred/paid) in order to adhere to the matching principle.

Revenues Expenses Incurred

$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. (Check all that apply.)

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

Which of the following could be a logical or realistic accounting period for a business that is creating financial statements? (Check all that apply.)

Six-month One-month One-year

Which of the following accounts is considered a prepaid expense?

Supplies Prepaid Rent Prepaid Insurance

$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

$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. (Check all that apply.)

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

Which of the following statements about the Accumulated depreciation account is (are) correct? (Check all that apply.)

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

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.

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

Which of the following is (are) true regarding timeliness and the importance of periodic reporting? (Check all that apply.)

The value of information is often linked to its timeliness Useful information must reach decision makers frequently and promptly Businesses report financial information at regular intervals to ensure timeliness of data

Explain what unearned revenues are by selecting the statements below which are correct. (Check all that apply.)

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

Explain your understanding of what an accrued expense is by selecting the statements below which are correct. (Check all that apply.)

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. Adjustments involve increasing both an expense and a liability account. They are reported on an income statement.

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 accounts below are considered accrued expenses?

Wages expense, Interest expense

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 (report/account/statement). It has a(n) (similar/opposite) balance and is (added/subtracted) to/from the other account's balance.

account opposite subtracted

The formula for figuring interest expense is:

amount owed x interest rate x fraction of the year since last payment

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: (Check all that apply).

credit services revenue debit accounts receivable

Accrued __________ are earned in a period that are both unrecorded and not yet received in cash

revenue

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

-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 ending Owner, Capital account balance on the balance sheet is transferred from the statement of owner's equity. -The income statement is the first financial statement prepared after preparing the adjusted trial balance.

Which of the following describes accrued revenue? (Check all that apply)

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

Show your understanding of the steps involved in adjusting entries by placing the following steps in the correct order of preparation.

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

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

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

What is a plant asset?

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

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. (Check all that apply.)

Salaries expense would be debited for $3,500. Salaries payable will be debited for $500. Cash would be credited for $4,000. - Reason: On January 3, cash will be credited for entire weekly pay period of 5 days.

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 1 is? (Check all that apply.)

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