Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 3
Adjusting Accounts for Financial Statements
True/False Questions
1. A company’s fiscal year must correspond with the calendar year.
2. Interim financial statements report a company’s business activities for a one-year period.
3. Adjusting entries are made after the preparation of financial statements.
4. Adjusting entries result in a better matching of revenues and expenses for the period.
5. Two main accounting principles used in accrual accounting are matching and full closure.
6. Adjusting entries are necessary so that asset, liability, revenue, and expense account
balances are correctly recorded.
7. The cash basis of accounting commonly increases the comparability of financial statements
from period to period.
8. Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and
accrued items.
9. The matching principle requires that expenses get recorded in the same accounting period
as the revenues that are earned as a result of the expenses, not when cash is paid.
10. Recording revenues early overstates current-period income; recording revenues late
understates current period income.
11. Recording expenses early overstates current-period income; recording expenses late
understates current period income.
12. Prior to recording adjusting entries at the end of an accounting period, some accounts
may not show correct balances even though all transactions were properly recorded.
13. On October 15, a company received $15,000 cash as a down payment on a consulting
contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of
the services required by the contract were completed. The company will record consulting
revenue of $1,500 from this contract for October.
14. Adjusting entries are designed primarily to correct accounting errors.
15. Adjustments are necessary to bring an asset or liability account to its proper amount and
also update a related expense or revenue account.
16. Each adjusting entry will affect a balance sheet account.
17. Accrued expenses at the end of one accounting period are expected to result in cash
payments in a future period.
18. Accrued revenues at the end of one accounting period are expected to result in cash
collections in a future period.
19. Each adjusting entry affects one or more income statements account, one or more balance
sheet account, and never cash.
20. Accrued expenses reflect transactions where cash is paid before a related expense is
recognized.
21. An adjusting entry often includes an entry to Cash.
22. Before an adjusting entry is made to recognize the cost of expired insurance for the
period, Prepaid Insurance and Insurance Expense are both overstated.
23. Before an adjusting entry is made to accrue employee salaries, Salaries Expense and
Salaries Payable are both understated.
24. Failure to record depreciation expense will overstate assets and understate expenses.
25. Profit margin can also be called return on sales.
26. Profit margin reflects the percent of profit in each dollar of revenue.
27. Torsten had total assets of $149,501,000, net income of $6,242,000, and net sales of
$209,203,000. Its profit margin was 2.98%.
28. A contra account is an account linked with another account; it is added to that account to
show the proper amount for the item recorded in the associated account.
29. If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one
year of rent in advance and adjusting entries are made at the end of each month, the balance
remaining in Prepaid Rent on December 1 should be $1,500.
30. Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of
its related asset.
31. A salary owed to employees is an example of an accrued expense.
32. Depreciation expense for a period is the portion of a plant asset’s cost that is allocated to
that period.
33. Depreciation measures the decline in market value of an asset.
34. The adjusted trial balance must be prepared before the adjusting entries are made.
35. An unadjusted trial balance is a list of accounts and balances prepared before adjustments
are recorded.
36. Financial statements can be prepared directly from the information in the adjusted trial
balance.
37. Revenue and expense balances are transferred from the adjusted trial balance to the
income statement.
38. In preparing statements from the adjusted trial balance, the balance sheet must be prepared
first.
39. Income Summary is a temporary account only used for the closing process.
40. Revenue accounts are temporary accounts that should begin each accounting period with
zero balances.
41. The closing process is a step in the accounting cycle that prepares accounts for the next
accounting period.
42. Closing entries are required at the end of each accounting period to close all ledger
accounts.
43. Closing entries are necessary so that retained earnings will begin each period with a zero
balance.
44. Permanent accounts carry their balances into the next accounting period..
45. If a company plans to continue business into the future, closing entries are not required.
46. The first five steps in the accounting cycle include analyzing transactions, journalizing,
posting, preparing an unadjusted trial balance, and recording adjusting entries.
47. The last four steps in the accounting cycle include preparing the adjusted trial balance,
preparing financial statements, and recording closing and adjusting entries.
48. A classified balance sheet organizes assets and liabilities into important subgroups that
provide more information to decision makers.
49. Current assets and current liabilities are expected to be used up or come due within one
year or the company's operating cycle whichever is longer.
50. Intangible assets are long-term resources that benefit business operations that usually lack
physical form and have uncertain benefits.
51. Assets are often classified into current assets, long-term investments, plant assets, and
intangible assets.
52. Intangible assets are assets that are long-term, have physical form, and are used to produce
or sell products and services.
53. Current liabilities include accounts receivable, unearned revenues, and salaries payable.
54. Cash and office supplies are both classified as current assets.
55. Plant assets are usually listed in order from most liquid to least liquid.
56. The current ratio is used to help assess a company's ability to pay its debts in the near
future.
57. If a company has current assets of $15,000 and current liabilities of $9,500, its current
ratio is 1.6
58. Flo’s Flowers’ current ratio is 1.3. The industry average for the current ratio is 1.2. This
indicates that Flo’s can cover its short term liabilities with its short term assets.
59. A benefit of using a work sheet is that it aids in the preparation of the financial
statements.
60. The work sheet is a required report made available to external decision makers.
61. On a work sheet, if the Debit total exceeds the Credit total of the Income Statement
columns, a net loss is indicated.
62. If all columns of a completed work sheet balance, you can be sure that no errors were
made in its preparation.
63. Normally closing entries are first entered in the general journal and then posted to the
work sheet.
64. Adjusting entries are usually entered in the work sheet before they are entered in the
general journal.
65. On the work sheet, net income is entered in the Income Statement Credit column as well
as the Balance Sheet Credit column.
66. An expense account is normally closed by debiting Income Summary and crediting the
expense account.
67. After posting the entries to close all revenue and expense accounts, the Income Summary
account of Cleaver Auto Services has a $4,000 debit balance. This result implies that Cleaver
earned a net income of $4,000.
68. When there is a net loss the Income Summary account would have a credit balance.
69. The steps in the closing process are (1) close credit balances in revenue accounts to
Income Summary; (2) close debit balances in expense accounts to Income Summary; (3) close
Income Summary to Retained Earnings; (4) close Dividends to Retained Earnings.
70. A post-closing trial balance is a list of permanent accounts and their balances from the
ledger after all closing entries are journalized and posted.
71. The aim of a post-closing trial balance is to verify that (1) total debits equal total credits
for temporary accounts, and (2) all temporary accounts have zero balances.
72. Reversing entries are optional.
73. Another name for a temporary account is a(n):
A. Real account.
B. Contra account.
C. Accrued account.
D. Balance column account.
E. Nominal account.
74. Which of the following accounts are permanent (real) accounts?
A. Fees earned.
B. Office supplies expense.
C. Interest revenue.
D. Accounts payable.
E. Salaries expense.
75. When closing entries are made:
A. All ledger accounts are closed to start the new accounting period.
B. All temporary accounts are closed but permanent accounts are not closed.
C. All real accounts are closed but nominal accounts are not closed.
D. All permanent accounts are closed but nominal accounts are not closed.
E. All balance sheet accounts are closed.
76. Revenues, expenses, and dividend accounts, which are closed at the end of each
accounting period are:
A. Real accounts.
B. Temporary accounts.
C. Closing accounts.
D. Permanent accounts.
E. Balance sheet accounts.
77. Assets, liabilities, and equity accounts are not closed; these accounts are called:
A. Nominal accounts.
B. Temporary accounts.
C. Permanent accounts.
D. Contra accounts.
E. Accrued accounts.
78. Closing the temporary accounts at the end of each accounting period does all of the
following except:
A. Serves to transfer the effects of these accounts to the retained earnings account on the
balance sheet.
B. Prepares the dividends account for use in the next period.
C. Brings the revenue and expense accounts to zero balances.
D. Has no effect on the retained earnings account.
E. Causes retained earnings to reflect increases from revenues and decreases from expenses
and dividends.
79. Journal entries recorded at the end of each accounting period to prepare the revenue,
expense, and dividend accounts for the upcoming period and to update the retained earnings
account for the events of the period just finished are referred to as:
A. Adjusting entries.
B. Closing entries.
C. Final entries.
D. Work sheet entries.
E. Updating entries.
80. The closing process is necessary in order to:
A. Calculate net income or net loss for an accounting period.
B. Ensure that all permanent accounts are closed to zero at the end of each accounting period.
C. Ensure that the company complies with state laws.
D. Ensure that net income or net loss and dividends for the period are closed into the
retained earnings account.
E. Ensure that management is aware of how well the company is operating.
81. The recurring steps performed each reporting period in preparing financial statements,
starting with analyzing and recording transactions in the journal and continuing through the
post-closing trial balance, is referred to as the:
A. Accounting period.
B. Operating cycle.
C. Accounting cycle.
D. Closing cycle.
E. Natural business year.
82. Which of the following is the usual final step in the accounting cycle?
A. Journalizing transactions.
B. Preparing an adjusted trial balance.
C. Preparing a post-closing trial balance.
D. Preparing the financial statements.
E. Preparing a work sheet.
83. A classified balance sheet:
A. Measures a company's ability to pay its bills on time.
B. Organizes assets and liabilities into important subgroups that provide more information.
C. Broadly groups items into assets, liabilities and equity.
D. Reports operating, investing, and financing activities.
E. Reports the effect of profit and dividends on retained earnings.
84. Two common subgroups for liabilities on a classified balance sheet are:
A. Current liabilities and intangible liabilities.
B. Present liabilities and operating liabilities.
C. General liabilities and specific liabilities.
D. Intangible liabilities and long-term liabilities.
E. Current liabilities and long-term liabilities.
85. Which of the following are classified as current assets?
A. Office equipment.
B. Patent.
C. Unearned revenue.
D. Office supplies.
E. Land.
86. The current ratio:
A. Is used to measure a company's profitability.
B. Is used to measure the relation between assets and long-term debt.
C. Measures the effect of operating income on profit.
D. Is used to help assess a company's ability to pay its debts in the near future.
E. Is calculated by dividing current assets by equity.
87. The Unadjusted Trial Balance columns of a company's work sheet shows the Store
Supplies account with a balance of $750. The Adjustments columns shows a credit of $425
for supplies used during the period. The amount shown as Store Supplies in the Balance Sheet
columns of the work sheet is:
A. $325 debit.
B. $325 credit.
C. $425 debit.
D. $750 debit.
E. $425 credit.
88. Accumulated Depreciation and Service Fees Earned would be sorted to which respective
columns in completing a work sheet?
A. Balance Sheet -Credit and Income Statement-Credit.
B. Balance Sheet Retained Earnings-Debit and Income Statement-Debit.
C. Income Statement-Debit and Income Statement-Credit.
D. Balance Sheet -Debit and Balance Sheet -Credit.
E. Balance Sheet -Debit; and Income Statement-Credit.
89. Which of the following statements is incorrect?
A. Working papers are useful aids in the accounting process.
B. On the work sheet, the effects of the accounting adjustments are shown on the account
balances.
C. After the work sheet is completed, it can be used to help prepare the financial statements.
D. On the work sheet, the adjusted amounts are sorted into columns according to whether the
accounts are used in preparing the unadjusted trial balance or the adjusted trial balance.
E. A worksheet is not a substitute for financial statements.
90. A company shows a $600 balance in Prepaid Rent in the Unadjusted Trial Balance
columns of the work sheet. The Adjustments columns show expired rent of $200. This
adjusting entry results in:
A. $200 decrease in net income.
B. $200 increase in net income.
C. $200 difference between the debit and credit columns of the Unadjusted Trial Balance.
D. $200 of prepaid insurance.
E. An error in the financial statements.
91. A company's December 31 work sheet for the current period appears below. Based on the
information provided, what is net income for the current period?
Cash..........................................................
Unadjusted
Trial Balance Adjustments
Debit Credit Debit Credit
975
Prepaid insurance..................................... 3,600 150
Supplies.................................................... 180 70
Equipment................................................ 10,320
Accounts payable..................................... 1,140
Unearned fees........................................... 4,500 375
Common stock......................................... 9,180
Dividends................................................. 1,650
Fees earned............................................... 5,850 375
300
Rent expense............................................ 1,500
Salaries expense....................................... 2,100 315
Utilities expense.......................................
345
Insurance expense.................................... 150
Supplies expense...................................... 70
Depreciation expense—equipment.......... 190
Accumulated depreciation—equipment.... 190
Salaries payable........................................ 315
Accounts receivable.................................
300
Totals........................................................ 20,670 20,670 1,400 1,400
A. $1,400.
B. $1,855.
C. $1,905.
D. $2,060.
E. $4,670.
92. A company's December 31 work sheet for the current period appears below. Based on the
information provided, what is net income for the current period?
Cash..........................................................
Unadjusted
Trial Balance Adjustments
Debit Credit Debit Credit
1,975
Accounts Receivable…………………… 1,000 875
Prepaid insurance..................................... 1,600 650
Supplies.................................................... 330 115
Equipment................................................ 8,320
Accumulated depreciation—equipment... 720 190
Accounts payable..................................... 1,140
Common stock......................................... 9,110
Dividends................................................. 1,050
Fees earned............................................... 7,250 875
Rent expense............................................ 1,300
Salaries expense....................................... 2,300
Utilities expense.......................................
345
Insurance expense.................................... 650
Supplies expense...................................... 115
Depreciation expense—equipment.......... 190
Totals........................................................ 18,220 18,220 1,830 1,830
A. $3,305.
B. $4,180.
C. $2,350.
D. $2,540.
E. $3,225.
93. Which of the following errors would cause the Balance Sheet columns of a work sheet to
be out of balance?
A. Entering an asset amount in the Income Statement Debit column.
B. Entering a liability amount in the Income Statement Credit column.
C. Entering an expense amount in the Balance Sheet Debit column.
D. Entering a revenue amount in the Balance Sheet Debit column.
E. Entering a liability amount in the Balance Sheet Credit column.
94. The Unadjusted Trial Balance columns of a work sheet total $84,000. The Adjustments
columns contain entries for the following:
1. Office supplies used during the period, $1,200.
2. Expiration of prepaid rent, $700.
3. Accrued salaries expense, $500.
4. Depreciation expense, $800.
5. Accrued service fees receivable, $400.
The Adjusted Trial Balance columns total is:
A. $80,400.
B. $84,000.
C. $85,700.
D. $85,900.
E. $87,600.
1. Supplies Expense $1,200
Supplies (1,200)
2. Rent Expense 700
Prepaid rent (700)
3. Salaries Expense 500
Salaries payable 500
4. Depr. Expense 800
Accum. Depr 800
5. Accts. Receivable 400
Fees earned 400
Adjusted total $85,700 $85,700
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-33
95. The balances in the unadjusted columns of a work sheet will agree with:
A. the balances reflected in the company's financial statements.
B. the balances reflected in the company's unadjusted trial balance.
C. whatever balances management has decided to report.
D. the balances in the company's post-closing trial balance.
E. the balances management budgeted for the accounting period.
96. The special account used only in the closing process to temporarily hold the amounts of
revenues and expenses before the net difference is added to (or subtracted from) the retained
earnings account is the:
A. Income Summary account.
B. Closing account.
C. Balance column account.
D. Contra account.
E. Nominal account.
97. K. Canopy, the stockholder of Canopy Services, Inc., The company paid $5,700 cash in
dividends to the owner (sole stockholder).. The entry to close the dividends account at the
end of the year is:
A. Debit Dividends $5,700; credit Cash, $5,700
B. Debit Retained Earnings $5,700; credit Dividends $5,700
C. Debit Dividends $5,700; credit Retained Earnings $5,700
D. Debit Retained Earnings $5,700, credit Salary Expense $5,700
E. Debit Income Summary $5,700; credit Retained Earnings $5,700
98. Tara Westmont, the stockholder of Tiptoe Shoes, Inc., had annual revenues of $185,000,
expenses of $103,700, The company paid $18,000 cash in dividends to the owner (sole
stockholder).. The retained earnings account before closing had a balance of $297,000. The
entry to close the Income Summary account at the end of the year, after revenue and expense
accounts have been closed, is:
A. Debit Retained Earnings $297,000; credit Income Summary $297,000
B. Debit Retained Earnings $63,300; credit Income Summary $63,300
C. Debit Income Summary $63,300; credit Retained Earnings $63,300
D. Debit Income Summary $81,300, credit Retained Earnings $81,300
E. Debit Retained Earnings $81,300; credit Income Summary $81,300
99. Tara Westmont, the stockholder of Tiptoe Shoes, Inc., had annual revenues of $185,000,
expenses of $103,700, and the company paid $18,000 cash in dividends to the owner (sole
shareholder).. The retained earnings account before closing had a balance of $297,000. The
Net Income for the year is:
A. $185,000
B. $63,300
C. $81,300
D. $360,300
E. $378,300
100. Tara Westmont, the stockholder of Tiptoe Shoes, Inc., had annual revenues of $185,000,
expenses of $103,700, and the company paid $18,000 cash in dividends to the owner (sole
stockholder).. The retained earnings account before closing had a balance of $297,000. The
ending retained earnings balance after closing is:
A. $185,000
B. $63,300
C. $81,300
D. $360,300
E. $378,300
101. A company had revenues of $75,000 and expenses of $62,000 for the accounting period.
The company paid $8,000 cash in dividends to the owner (sole shareholder).. Which of the
following entries could not be a closing entry?
A. Debit Income Summary $13,000; credit Retained Earnings $13,000
B. Debit Income Summary $75,000; credit Revenues $75,000.
C. Debit Revenues $75,000; credit Income Summary $75,000.
D. Debit Income Summary $62,000, credit Expenses $62,000.
E. Debit Retained Earnings $8,000, credit Dividends $8,000.
102. The following information is available for the Higgins Travel Agency, Inc.. After these
closing entries what will be the balance in the Retained Earnings account?
Net Income…………………… $42,500
Retained earnings…… 130,000
Dividends……... 12,000
A. $ 75,500.
B. $184,500.
C. $99,500.
D. $160,500.
E. $130,000.
103. The following information is available for the Noir Detective Agency, Inc.. After these
closing entries what will be the balance in the Retained Earnings account?
Net Loss…………………… $17,600
Retained earnings……… 289,000
Dividends……... 32,000
A. $239,400.
B. $274,600.
C. $303,400.
D. $289,000.
E. $257,000.
104. The Retained Earnings account has a credit balance of $37,000 before closing entries are
made. If total revenues for the period are $55,200, total expenses are $39,800, and dividends
are $9,000, what is the ending balance in the Retained Earnings account after all closing
entries are made?
A. $37,000.
B. $35,400.
C. $43,400.
D. $28,000.
E. $52,400.
105. The Retained Earnings account has a credit balance of $37,000 before closing entries are
made. Total revenues for the period are $55,200, total expenses are $39,800, and dividends
are $9,000. What is the correct closing entry for the expense accounts?
A. Debit Income Summary $39,800; credit Expense accounts $39,800.
B. Debit Expense accounts $37,000; credit Retained Earnings $37,000.
C. Credit Expense accounts $39,800; debit Retained Earnings $39,800.
D. Debit Expense accounts $39,800; credit Income Summary $39,800.
E. Debit Income Summary $39,800; credit Retained Earnings $39,800.
106. The Income Summary account is used to:
A. Adjust and update asset and liability accounts.
B. Close the revenue and expense accounts.
C. Determine the appropriate dividend amount.
D. Replace the income statement under certain circumstances.
E. Replace the retained earnings account in some businesses.
107. The company paid $35,000 cash in dividends to the owner, Jen Rogers. The entry needed
to close the dividends account is:
A. Debit Income Summary and credit Cash for $35,000.
B. Debit Dividends and credit Cash for $35,000.
C. Debit Income Summary and credit Dividends for $35,000.
D. Debit Retained Earnings and credit Dividends for $35,000.
E. Debit Dividends and credit Retained Earnings for $35,000.
108. A company's ledger accounts and their end-of-period balances before closing entries are
posted are shown below. What amount will be posted to Retained Earnings in the process of
closing the Income Summary account? (Assume all accounts have normal balances.)
Retained Earnings……….. $ 7,000
Dividends.................................. 9,600
Revenue................................. ……………….. 29,000
Rent expense........................... 3,600
Salaries expense.......……..... 7,200
Insurance expense................... 920
Depr. Expense-equipment ....... 500
Accum depr.-equipment......... 1,500
A. $16,780 debit.
B. $ 7,180 credit.
C. $16,780 credit.
D. $18,280 credit.
E. $23,780 credit.
109. It is obvious that an error occurred in the preparation and/or posting of closing entries if:
A. all revenue and expense accounts have zero balances.
B. the retained earnings account is debited for the amount of the net loss for the period.
C. the income summary account is debited for the amount of net income for the period.
D. all balance sheet accounts have zero balances.
E. only permanent accounts appear on the post-closing trial balance.
110. At the beginning of the year, a company's balance sheet reported the following balances:
Total Assets = $225,000; Total Liabilities = $125,000; and Retained Earnings = $100,000.
During the year, the company reported revenues of $46,000 and expenses of $30,000. In
addition, dividends for the year totaled $20,000. Assuming no other changes to retained
earnings, the balance in the retained earnings account at the end of the year would be:
A. $116,000.
B. $136,000.
C. $24,000
D. $96,000.
E. $104,000.
111. After preparing and posting the closing entries for revenues and expenses, the income
summary account has a debit balance of $33,000. The entry to close the income summary
account will be:
A. Debit Dividends $33,000; credit Income Summary$33,000.
B. Debit Income Summary $33,000; credit Dividends $33,000.
C. Debit Income Summary$33,000; credit Retained Earnings $33,000.
D. Debit Retained Earnings $33,000; credit Income Summary $33,000.
E. Credit Retained Earnings $33,000; debit Dividends $33,000.
112. The trial balance prepared after all closing entries have been journalized and posted is
called the:
A. Unadjusted trial balance.
B. Post-closing trial balance.
C. General ledger.
D. Adjusted trial balance.
E. Work sheet.
113. Which of the following accounts showing a balance on the post-closing trial balance
indicate an error?
A. Office Equipment.
B. Accumulated Depreciation-Office Equipment.
C. Depreciation Expense-Office Equipment.
D. Retained Earnings.
E. Salaries Payable.
114. Which of the following accounts showing a balance on the post-closing trial balance
indicate an error?
A. Land.
B. Dividends.
C. Accounts Payable.
D. Unearned Revenue.
E. Prepaid Insurance.
115. A post-closing trial balance reports:
A. All permanent ledger accounts with balances.
B. All nominal ledger accounts with balances.
C. All temporary and permanent ledger accounts with balances.
D. Only revenue and expense accounts.
E. Only asset accounts.
116. Reversing entries:
A. Are optional.
B. Are mandatory.
C. Correct errors in journal entries.
D. Are required by GAAP.
E. Are prepared on the worksheet.
117. Kline Company, Inc. accrued wages of $7,350 that were earned by employees unpaid at
the end of 2014. Assuming Kline uses reversing entries, which of the following entries is
appropriate for reversing the accrued wages at the beginning of 2015?
A. Debit Wages Expense $7,350; credit Cash $7,350.
B. Debit Wages Expense $7,350; credit Wages Payable $7,350.
C. Debit Wages Payable $7,350; credit Cash $7,350.
D. Debit Cash $7,350; credit Wages Expense $7,350.
E. Debit Wages Payable $7,350; credit Wages Expense $7,350.
118. The purpose of reversing entries is to:
A. Simplify a company’s recording of certain journal entries in the future.
B. Correct errors made in previous journal entries.
C. Ensure that closing entries have been properly posted to the ledger accounts.
D. Make certain that only permanent accounts are carried forward into the next accounting
period.
E. Complete a required step in the accounting cycle.
119. Temporary accounts include all of the following except:
A. Consulting revenue.
B. Dividends.
C. Rent expense.
D. Prepaid rent.
E. Income Summary.
120. Permanent accounts include all of the following except:
A. Accumulated Depreciation—Equipment.
B. Prepaid Insurance.
C. Unearned Revenue.
D. Accounts Receivable.
E. Depreciation Expense—Equipment.
121. Which of the following statements about a company’s operating cycle is not true:
A. Non-current items are those expected to come due within one year or the company’s
operating cycle.
B. The operating cycle is the time span from when cash is used to acquire goods and services
until cash is received from the sale of goods and services.
C. The length of a company’s operating cycle depends on its activities.
D. For a merchandiser selling products, the operating cycle is the time span between paying
suppliers for merchandise and receiving cash from customers.
E. Most operating cycles are less than one year.
122. Use the information in the adjusted trial balance presented below to calculate current
assets for Taron Company, Inc.:
Account Title Dr. Cr.
Cash 23,000
Accounts receivable 16,000
Prepaid insurance 6,600
Equipment 100,000
Accumulated Depreciation—Equipment 50,000
Land 95,000
Accounts payable 17,000
Interest payable 2,400
Unearned revenue 5,000
Long-term notes payable 30,000
Common stock
Retained Earnings
1,000
135,200
Totals 240,600 240,600
A. $21,200.
B. $45,600.
C. $24,400.
D. $95,600.
E. $41,200.
123. Use the information in the adjusted trial balance presented below to calculate the current
ratio for Taron Company, Inc.:
Account Title Dr. Cr.
Cash 23,000
Accounts receivable 16,000
Prepaid insurance 6,600
Equipment 100,000
Accumulated Depreciation—Equipment 50,000
Land 95,000
Accounts payable 17,000
Interest payable 2,400
Unearned revenue 5,000
Long-term notes payable 30,000
Common stock
Retained earnings
1,000
135,200
Totals 240,600 240,600
A. 1.87.
B. .54.
C. 3.92.
D. 1.77.
E. 1.60.
124. Which of the following statements regarding reporting under GAAP and IFRS is not
true:
A. Both GAAP and IFRS define the initial asset value as historical cost for nearly all assets.
B. The definition of an asset under GAAP and IFRS involves three basic criteria.
C. Both GAAP and IFRS define the initial asset value as replacement value.
D. The definition of a liability under GAAP and IFRS involves three basic criteria.
E. After acquisition, one of two asset measurement systems is applied.
125. The following information is available for Brendon Company, Inc. before closing the
accounts. What will be the amount in the Income Summary account that should be closed to
Retained Earnings?
J. Retained earnings 112,000
Dividends 32,000
Fees earned 187,000
Depreciation Expense—Equipment 12,000
Wages expense 71,400
Interest expense 3,300
Insurance expense 11,700
Rent expense 24,200
A. $80,000.
B. $64,400.
C. $43,000.
D. $32,400.
E. $42,400.
126. Flagg, Inc. records adjusting entries at its December 31 year end. At December 31,
employees had earned $12,000 of unpaid and unrecorded salaries. The next payday is January
3, at which time $30,000 will be paid. Prepare the January 1 journal entry to reverse the effect
of the December 31 salary expense accrual.
A. Debit Salaries expense $12,000; credit Salaries payable $12,000.
B. Debit Salaries expense $18,000; debit Salaries payable $12,000; credit Cash $30,000.
C. Debit Salaries payable $18,000; credit Cash $18,000.
D. Debit Salaries payable $12,000, credit Salaries expense $12,000.
E. Debit Salaries expense $18,000; credit Salaries payable $18,000.
127. Flagg, Inc. records adjusting entries at its December 31 year end. At December 31,
employees had earned $12,000 of unpaid and unrecorded salaries. The next payday is January
3, at which time $30,000 will be paid. Prepare the journal on January 3 to record payment
assuming the adjusting and reversing entries were made on December 31 and January 1.
A. Debit Salaries expense $12,000; debit Salaries payable $18,000; credit Cash $30,000.
B. Debit Salaries expense $30,000; credit Cash $30,000.
C. Debit Salaries payable $30,000; credit Cash $30,000.
D. Debit Salaries expense $18,000, debit Salaries payable $12,000; credit Cash $30,000.
E. Debit Salaries expense $18,000; credit Cash $18,000.
128. Which of the following accounts would be included in a post-closing trial balance?
A. Accounts Receivable.
B. Dividends.
C. Consulting Fees Earned.
D. Depreciation Expense—Equipment.
E. Salaries Expense.
129. Palmer Company, Inc. is at the end of its annual accounting period. The accountant has
journalized and posted all external transactions and all adjusting entries, had prepared an
adjusted trial balance, and completed the financial statements. The next step in the accounting
cycle is:
A. Prepare a work sheet.
B. Prepare reversing entries.
C. Close temporary accounts.
D. Prepare a post-closing trial balance.
E. Prepare an unadjusted trial balance.
130. A broad principle that requires identifying the activities of a business with specific time
periods such as months, quarters, or years is the:
A. Operating cycle of a business.
B. Time period assumption.
C. Going-concern assumption.
D. Matching principle.
E. Accrual basis of accounting.
131. Interim financial statements refer to financial reports:
A. That cover less than one year, usually spanning one, three, or six-month periods.
B. That are prepared before any adjustments have been recorded.
C. That show the assets above the liabilities and the liabilities above the equity.
D. Where revenues are reported on the income statement when cash is received and expenses
are reported when cash is paid.
E. Where the adjustment process is used to assign revenues to the periods in which they are
earned and to match expenses with revenues.
132. The length of time covered by a set of periodic financial statements, primarily a year for
most companies, is referred to as the:
A. Fiscal cycle.
B. Natural business year.
C. Accounting period.
D. Business cycle.
E. Operating cycle.
133. The accounting principle that requires revenue to be recorded when earned is the:
A. Matching principle.
B. Revenue recognition principle.
C. Time period assumption.
D. Accrual reporting principle.
E. Going-concern assumption.
134. Adjusting entries:
A. Affect only income statement accounts.
B. Affect only balance sheet accounts.
C. Affect both income statement and balance sheet accounts.
D. Affect cash accounts.
E. Affect only equity accounts.
135. The broad principle that requires expenses to be reported in the same period as the
revenues that were earned as a result of the expenses is the:
A. Recognition principle.
B. Cost principle.
C. Cash basis of accounting.
D. Expense recognition (Matching) principle.
E. Time period principle.
136. The system of preparing financial statements based on recognizing revenues when the
cash is received and reporting expenses when the cash is paid is called:
A. Accrual basis accounting.
B. Operating cycle accounting.
C. Cash basis accounting.
D. Revenue recognition accounting.
E. Current basis accounting.
137. The approach to preparing financial statements based on recognizing revenues when they
are earned and matching expenses to those revenues is:
A. Cash basis accounting.
B. The matching principle.
C. The time period assumption.
D. Accrual basis accounting.
E. Revenue basis accounting.
138. Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued
revenues are all examples of:
A. Items that require contra accounts.
B. Items that require adjusting entries.
C. Asset and equity.
D. Asset accounts.
E. Income statement accounts.
139. A company made no adjusting entry for accrued and unpaid employee wages of $28,000
on December 31. This oversight would:
A. Understate net income by $28,000.
B. Overstate net income by $28,000.
C. Have no effect on net income.
D. Overstate assets by $28,000.
E. Understate assets by $28,000.
140. If a company mistakenly forgot to record depreciation on office equipment at the end of
an accounting period, the financial statements prepared at that time would show:
A. Assets overstated and equity understated.
B. Assets and equity both understated.
C. Assets overstated, net income understated, and equity overstated.
D. Assets, net income, and equity understated.
E. Assets, net income, and equity overstated.
141. If a company failed to make the end-of-period adjustment to move the amount of
management fees that were earned from the Unearned Management Fees account to the
Management Fees Revenue account, this omission would cause:
A. An overstatement of net income.
B. An overstatement of assets.
C. An overstatement of liabilities.
D. An overstatement of equity.
E. An understatement of liabilities.
142. Profit margin is defined as:
A. Revenues divided by net sales.
B. Net sales divided by assets.
C. Net income divided by net sales.
D. Net income divided by assets.
E. Net sales divided by net income.
143. A company earned $3,000 in net income for October. Its net sales for October were
$10,000. Its profit margin is:
A. 3%.
B. 30%.
C. 33%.
D. 333%.
E. $7,000.
144. A company had $7,000,000 in net income for the year. Its net sales were $15,200,000 for
the same period. Calculate its profit margin.
A. 85.4%.
B. 117.1%.
C. 53.9%.
D. 217.1%.
E. 46.1%
145. On July 1 Plum Co. paid $7,500 cash for management services to be performed over a
two-year period. Plum follows a policy of recording all prepaid expenses to asset accounts at
the time of cash payment. On July 1 Plum should record:
A. A debit to an expense and credit to a prepaid expense for $7,500.
B. A debit to an expense and credit to Cash for $7,500.
C. A debit to a prepaid expense and a credit to Cash for $7,500.
D. A credit to a prepaid expense and a debit to Cash for $7,500.
E. A debit to Cash for $7,500 and a credit to an expense for $7,500.
146. An account linked with another account that has an opposite normal balance and is
subtracted from the balance of the related account is a(n):
A. Accrued expense.
B. Contra account.
C. Accrued revenue.
D. Intangible asset.
E. Adjunct account.
147. The total amount of depreciation recorded against an asset over the entire time the asset
has been owned:
A. Is referred to as depreciation expense.
B. Is referred to as accumulated depreciation.
C. Is shown on the income statement of the final period.
D. Is only recorded when the asset is disposed of.
E. Is referred to as an accrued asset.
148. Prior to recording adjusting entries, the Office Supplies account had a $359 debit
balance. A physical count of the supplies showed $105 of unused supplies available. The
required adjusting entry is:
A. Debit Office Supplies $105 and credit Office Supplies Expense $105.
B. Debit Office Supplies Expense $105 and credit Office Supplies $105.
C. Debit Office Supplies Expense $254 and credit Office Supplies $254.
D. Debit Office Supplies $254 and credit Office Supplies Expense $254.
E. Debit Office Supplies $105 and credit Supplies Expense $254.
149. If throughout an accounting period the fees for legal services paid in advance by clients
are recorded in an account called Unearned Legal Fees, the end-of-period adjusting entry to
record the portion of those fees that has been earned is:
A. Debit Cash and credit Legal Fees Earned.
B. Debit Cash and credit Unearned Legal Fees.
C. Debit Unearned Legal Fees and credit Legal Fees Earned.
D. Debit Legal Fees Earned and credit Unearned Legal Fees.
E. Debit Unearned Legal Fees and credit Accounts Receivable.
150. On July 1, a company paid the $2,400 premium on a one-year insurance policy with
benefits beginning on that date. What will be the insurance expense on the annual income
statement for the current year ended December 31?
A. $1,200.
B. $2,400.
C. $1,000.
D. $400.
E. $1,400.
151. On January 1 a company purchased a five-year insurance policy for $1,800 with
coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account,
and the company records adjustments only at year-end, the adjusting entry at the end of the
first year is:
A. Debit Prepaid Insurance, $1,800; credit Cash, $1,800.
B. Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440.
C. Debit Prepaid Insurance, $360; credit Insurance Expense, $360.
D. Debit Insurance Expense, $360; credit Prepaid Insurance, $360.
E. Debit Insurance Expense, $360; credit Prepaid Insurance, $1,440.
152. Unearned revenue is reported in the financial statements as:
A. A revenue on the balance sheet.
B. A liability on the balance sheet.
C. An unearned revenue on the income statement.
D. An asset on the balance sheet.
E. A financing activity on the statement of cash flows.
153. Which of the following assets is not depreciated?
A. Store fixtures.
B. Computers.
C. Land.
D. Buildings.
E. Equipment.
154. Which of the following does not require an adjusting entry at year-end?
A. Accrued interest on notes payable.
B. Supplies used during the period.
C. Cash invested by stockholder.
D. Accrued wages.
E. Expired portion of prepaid insurance.
155. On May 1, a two-year insurance policy was purchased for $18,000 with coverage to
begin immediately. What is the amount of insurance expense that would appear on the
company’s income statement for the first year ended December 31?
A. $750.
B. $5,270.
C. $6,000.
D. $6,750.
E. $18,000.
156. On May 1, Sellers Marketing Company received $1,500 from Franco Marcelli for a
marketing campaign effective from May 1 this year to April 30 of the following year. The
Cash receipt was recorded as unearned fees and at year-end on December 31, $1,000 of the
fees had been earned. The adjusting entry on December 31 would be:
A. A debit to Unearned Fees and a credit to Cash for $500.
B. A debit to Fees Earned and a credit to Unearned Fees for $500.
C. A debit to Unearned Fees and a credit to Fees Earned for $1,000.
D. A debit to Fees Earned and a credit to Cash for $1,000.
E. A debit to Fees Earned and a credit to Cash for $500.
157. Incurred but unpaid expenses that are recorded during the adjusting process with a debit
to an expense and a credit to a liability are:
A. Intangible expenses.
B. Prepaid expenses.
C. Unearned expenses.
D. Net expenses.
E. Accrued expenses.
158. A company pays each of its two office employees each Friday at the rate of $100 per day
for a five-day week that begins on Monday. If the monthly accounting period ends on Tuesday
and the employees worked on both Monday and Tuesday, the month-end adjusting entry to
record the salaries earned but unpaid is:
A. Debit Unpaid Salaries $600 and credit Salaries Payable $600.
B. Debit Salaries Expense $400 and credit Salaries Payable $400.
C. Debit Salaries Expense $600 and credit Salaries Payable $600.
D. Debit Salaries Payable $400 and credit Salaries Expense $400.
E. Debit Salaries Expense $400 and credit Cash $400.
159. A company pays its employees $4,000 each Friday, which amounts to $800 per day for
the five-day workweek that begins on Monday. If the monthly accounting period ends on
Thursday and the employees worked through Thursday, the amount of salaries earned but
unpaid at the end of the accounting period is:
A. $4,000.
B. $800.
C. $1,600.
D. $2,400.
E. $3,200.
160. The adjusting entry to record the salaries earned due to employees for services provided
but unpaid at the end of the accounting period affects the accounts in which of the following
ways?
A. Debit Salaries Payable and credit Salaries Expense.
B. Debit Salaries Expense and credit Cash.
C. Debit Accrued Salaries and credit Salaries Payable.
D. Debit Cash and credit Salaries Expense.
E. Debit Salaries Expense and credit Salaries Payable.
161. On January 1, Eastern College received $1,200,000 from its students for the spring
semester that it recorded in Unearned Tuition and Fees. The term spans four months
beginning on January 2 and the college spreads the revenue evenly over the months of the
term. What amount of tuition revenue should the college recognize on February 28?
A. $300,000.
B. $600,000.
C. $800,000.
D. $900,000.
E. $1,200,000.
162. An adjusting entry was made on year-end December 31 to accrue salary expense of
$1,200. Which of the following entries would be prepared to record the $3,000 payment of
salaries in January of the following year?
A. Salaries
Expense
..........................................
3,000
Cash.......................................................
3,000
B. Salaries
Payable
..........................................
.
3,000
Cash.......................................................
3,000
C. Salaries
Payable
...........................................
1,200
Cash.......................................................
1,200
D. Salaries Expense...............................................
1,200
Salaries Payable..........................................
1,200
E. Salaries Payable............................................... 1,200
Salaries Expense...............................................
1,800
Cash....................................................... 3,000
163. The difference between the cost of an asset and the accumulated depreciation for that
asset is called
A. Depreciation Expense.
B. Unearned Depreciation.
C. Prepaid Depreciation.
D. Depreciation Value.
E. Book Value.
164. A company recorded 2 days of accrued salaries of $1,400 for its employees on January
31. On February 9, it paid its employees $7,000 for these accrued salaries and for other
salaries earned through February 9. The January 31 and February 9 journal entries are:
A. 1/31 Salaries Expense ………………………… 1,400
Salaries Payable …………................ 1,400
2/9 Salaries Payable …………………………. 7,000
Salaries Expense ………………………… 1,400
Cash..………………………………… 7,000
B. 1/31 Salaries Payable ………………………….. 1,400
Salaries Expense……………………... 1,400
2/9 Salaries Expense………………………….. 5,600
Salaries Payable…………………………... 1,400
Cash…………………………………... 7,000
C. 1/31 Salaries Expense………………………….. 1,400
Cash………………………………….. 1,400
2/9 Salaries Expense…………………………. 7,000
Cash…………………………………. 7,000
D. 1/31 Salaries Expense…………………………. 1,400
Salaries Payable……………………... 1,400
2/9 Salaries Expense………………………….. 7,000
Cash…………………………………... 7,000
E. 1/31 Salaries Expense…………………………. 1,400
Salaries Payable……………………… 1,400
2/9 Salaries Expense………………………….. 5,600
Salaries Payable…………………………... 1,400
Cash…………………………………... 7,000
165. What is the proper adjusting entry at December 31, the end of the accounting period, if
the balance in the prepaid insurance account is $7,750 before adjustment, and the unexpired
amount per analysis of policies is, $3,250?
A. Debit Insurance Expense, $3,250; credit Prepaid Insurance, $3,250.
B. Debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500.
C. Debit Prepaid Insurance, $4,500; credit Insurance Expense, $4,500.
D. Debit Insurance Expense, $7,750; credit Prepaid Insurance, $7,750.
E. Debit Cash, $7,750; Credit Prepaid Insurance, $7,750.
166. On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-
month subscriptions to several different magazines. The company credited Unearned Fees for
the amount received and the subscriptions started immediately. What is the adjusting entry
that should be recorded by Griffith Publishing Company on December 31 of the first year?
A. debit Unearned Fees, $1,548; credit Fees Earned, $1,548.
B. debit Unearned Fees, $516; credit Fees Earned, $516.
C. debit Unearned Fees, $1,161; credit Fees Earned, $1,161.
D. debit Unearned Fees, $129; credit Fees Earned, $129.
E. debit Unearned Fees, $387; credit Fees Earned, $387.
167. On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-
month subscriptions to several different magazines. The company credited Unearned Fees for
the amount received and the subscriptions started immediately. What is the adjusting entry
that should be recorded by Griffith Publishing Company on December 31 of the second year?
A. debit Unearned Fees, $1,548; credit Fees Earned, $1,548.
B. debit Unearned Fees, $516; credit Fees Earned, $516.
C. debit Unearned Fees, $1,161; credit Fees Earned, $1,161.
D. debit Unearned Fees, $129; credit Fees Earned, $129.
E. debit Unearned Fees, $387; credit Fees Earned, $387.
168. On April 1, Santa Fe, Inc. paid Griffith Publishing Company $1,548 for 36-month
subscriptions to several different magazines. Santa Fe debited the prepayment to a Prepaid
Subscriptions account, and the subscriptions started immediately. What adjusting entry should
be made by Santa Fe, Inc. for the adjustment on December 31 of the first year assuming the
company is using a calendar reporting period and no previous adjustments had been made?
A. Debit Subscription Expense $516 and credit Prepaid Subscriptions $516.
B. Debit Prepaid Subscriptions $516 and credit Subscription Expense $516.
C. Debit Subscription Expense $387 and credit Cash $387.
D. Debit Unearned Subscriptions $387 and credit Subscription Expense $387
E. Debit Subscription Expense $387 and credit Prepaid Subscriptions $387.
169. A company made no adjusting entry for accrued and unpaid employee salaries of $9,000
on December 31. Which of the following statements is true?
A. It will have no effect on income.
B. It will overstate assets and liabilities by $9,000
C. It will understate net income by $9,000.
D. It will understate assets by $9,000.
E. It will understate expenses and overstate net income by $9,000.
170. The correct adjusting entry for accrued and unpaid employee salaries of $9,000 on
December 31 is:
A. debit Salary Expense, $9,000; credit Cash, $9,000
B. debit Salary Expense, $9,000; credit Fees Earned, $9,000
C. debit Salary Expense, $9,000; credit Prepaid Salary, $9,000
D. debit Salary Expense, $9,000; credit Salaries Payable, $9,000
E. debit Salaries Payable, $9,000; credit Salary Expense $9,000
171. A company purchased new furniture at a cost of $16,000 on January 1. The furniture is
estimated to have a useful life of 6 years and a $1,000 salvage value. The company uses the
straight-line method of depreciation. What is the book value of the furniture on December 31
of the first year?
A. $16,000
B. $15,000
C. $2,500
D. $13,500
E. $13,333
172. If Regent Tax Services’ office supplies account balance on March 1 was $1,400, the
company purchased $675 of supplies during the month, and a physical count of supplies on
hand at the end of March indicated $1,250 unused, what is the amount of the adjusting entry
for office supplies on March 31?
A. $ 675
B. $ 825
C. $1,250
D. $1,975
E. $ 525
173. The adjusted trial balance contains information pertaining to:
A. Asset accounts only.
B. Balance sheet accounts only.
C. Income statement accounts only.
D. All general ledger accounts.
E. Revenue accounts only.
174. Financial statements are typically prepared in the following order:
A. Balance sheet, statement of retained earnings, income statement.
B. Statement of retained earnings, balance sheet, income statement.
C. Income statement, balance sheet, statement of retained earnings.
D. Income statement, statement of retained earnings, balance sheet.
E. Balance sheet, income statement, statement of retained earnings.
175. Under the alternative method for recording prepaid expenses, which is the correct set of
journal entries?
Initial Entry Adjusting Entry
A
)
Insurance Expense
Cash
Prepaid Insurance
Insurance Expense
B) Cash
Insurance Expense
Prepaid Insurance
Insurance Expense
C) Prepaid Insurance
Cash
Prepaid Insurance
Insurance Expense
D
)
Prepaid Insurance Insurance Expense
Cash Prepaid Insurance
E) Prepaid Insurance
Insurance Expense
Cash
Prepaid Insurance
176. Which of the following statements related to U.S. GAAP and IFRS is incorrect:
A. Both U.S. GAAP and IFRS include guidance for adjusting entries.
B. Both U.S. GAAP and IFRS prepare the same four financial statements.
C. U.S. GAAP does not require items to be separated by current and noncurrent classifications
on the balance sheet.
D. U.S. GAAP balance sheets report current items first.
E. IFRS balance sheets normally present noncurrent items first.
177. On December 1, Milton Company borrowed $300,000, at 8% annual interest, from the
Tennessee National Bank. Interest is paid when the loan matures one year from the issue date.
What is the adjusting entry for accruing interest that Milton would need to make on December
31, the calendar year-end?
A. debit Interest Payable, $2,000; credit Interest Expense, $2,000
B. debit Interest Expense, $2,000; credit Interest Payable, $2,000
C. debit Interest Expense, $2,000; credit Cash, $2,000
D. debit Interest Expense, $4,000; credit Interest Payable, $4,000.
E. debit Interest Expense, $24,000; credit Interest Payable, $24,000.
178. An annual reporting period consisting of any twelve consecutive months is known as:
A. Fiscal year.
B. Calendar year.
C. Interim financial period.
D. Natural business year.
E. Seasonal year.
179. Assuming unearned revenues are originally recorded in balance sheet accounts, the
adjusting entry to record earning of unearned revenue is:
A. Increase an expense; increase a liability.
B. Increase an asset; increase revenue.
C. Decrease a liability; increase revenue.
D. Increase an expense; decrease an asset.
E. Increase an expense; decrease a liability.
180. The adjusting entry to record an accrued expense is:
A. Increase an expense; increase a liability.
B. Increase an asset; increase revenue.
C. Decrease a liability; increase revenue.
D. Increase an expense; decrease an asset.
E. Increase an expense; decrease a liability.
181. The adjusting entry to record an accrued revenue is:
A. Increase an expense; increase a liability.
B. Increase an asset; increase revenue.
C. Decrease a liability; increase revenue.
D. Increase an expense; decrease an asset.
E. Increase an expense; decrease a liability.
182. On October 1, Goodwell Company rented warehouse space to a tenant for $2,500 per
month and received $12,500 for five months’ rent in advance on that date. The collection was
credited to the Unearned Rent account. The company’s annual accounting period ends on
December 31. The Unearned Rent account balance at the end of December, after adjustment,
should be:
A. $5,000.
B. $7,500.
C. $12,500.
D. $2,500.
E. $10,000.
183. Sanborn Company has 10 employees, who earn a total of $1,800 in salaries each working
day. They are paid on Monday for the five-day workweek ending on the previous Friday.
Assume that year ended December 31, is a Wednesday and all employees will be paid salaries
for five full days on the following Monday. The adjusting entry needed on December 31 is:
A. Debit Salaries Expense, $5,400; credit Salaries Payable, $5,400.
B. Debit Salaries Expense, $3,600; credit Salaries Payable, $3,600.
C. Debit Salaries Expense, $9,000; credit Salaries Payable, $9,000.
D. Debit Salaries Payable, $5,400; credit Salaries Expense, $5,400.
E. Debit Salaries Expense, $5,400; credit Cash, $5,400.
184. On January 1, Imlay Company purchases manufacturing equipment costing $95,000 that
is expected to have a five-year life and an estimated salvage value of $5,000. Imlay uses the
straight-line depreciation method to allocate costs. The adjusting entry needed on December
31 of the first year is:
A. Debit Depreciation Expense, $9,000; credit Accumulated Depreciation, $9,000.
B. Debit Depreciation Expense, $18,000; credit Accumulated Depreciation, $18,000.
C. Debit Depreciation Expense, $90,000; credit Accumulated Depreciation, $90,000.
D. Debit Depreciation Expense, $18,000; credit Equipment, $18,000.
E. Debit Depreciation Expense, $9,000; credit Equipment, $9,000.
185. Holman Company owns equipment with an original cost of $95,000 and an estimated
salvage value of $5,000 that is being depreciated at $15,000 per year using the straight-line
depreciation method. The adjusting entry needed to record annual depreciation is:
A. Debit Depreciation Expense, $15,000; credit Equipment, $15,000.
B. Debit Equipment, $15,000; credit Accumulated Depreciation, $15,000.
C. Debit Depreciation Expense, $10,000; credit Accumulated Depreciation, $10,000.
D. Debit Depreciation Expense, $10,000; credit Equipment, $10,000.
E. Debit Depreciation Expense, $15,000; credit Accumulated Depreciation, $15,000.
186. On December 31, 2015 Carmack Company received a $215 utility bill for December that
it will not pay until January 15. The adjusting entry needed on December 31 to accrue this
expense is:
A. Debit Utilities Expense $215; credit Accounts Payable $215.
B. Debit Accounts Payable $215; credit Utilities Expense $215.
C. Debit Prepaid Utilities $215; credit Cash $215.
D. Debit Utilities Expense $215; credit Prepaid Utilities $215.
E. Debit Prepaid Utilities $215; credit Accounts Payable $215.
187. Match the following terms with the appropriate definition.
A. Permanent accounts F. Work sheet
B. Accounting cycle G. Closing entries
C. Temporary accounts H. Post-closing trial balance
D. Working papers I. Operating cycle of a business
E. Income summary
____ 1. Various analyses and internal documents prepared by accountants when organizing
information for internal and external decision makers.
____ 2. The time span from when cash is used to acquire goods and services until cash is
received from the sale of those goods and services.
____ 3. A temporary account only used for the closing process that contains a credit for the
sum of all revenues and a debit for the sum of all expenses.
____ 4. A widely used working paper that is a useful tool for preparers in working with
accounting information, usually not available to external decision makers..
____ 5. A list of permanent accounts and their balances from the ledger after all closing
entries are journalized and posted.
____ 6. Recurring steps in preparing financial statement performed each accounting period,
beginning with analyzing transactions and ending with a post-closing trial balance or
reversing entries.
____ 7. Entries used to transfer end-of-period balances in revenue, expense, and dividends
accounts to the permanent retained earnings account.
____ 8. Accounts that report on activities related to one or more future accounting periods;
they carry their ending balances into the next period.
____9. Accounts that accumulate data related to one accounting period only; they include
income statement accounts, dividends, and the Income Summary account.
1. D; 2. I; 3. E; 4. F; 5. H; 6. B; 7. G; 8. A; 9. C;
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 03-C2
Learning Objective: 03-P4
Learning Objective: 03-P5
Learning Objective: 03-P7
Topic: Closing Process
Topic: Accounting Cycle
Topic: Work Sheet as a Tool
Topic: Post-closing Trial Balance
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-80
188. Match the following terms with the appropriate definition.
A. Plant assets
B. Stockholders’ equity
C. Classified balance sheet
D. Intangible assets
E. Current ratio
F. Closing entries
G. Current liabilities
H. Long-term investments
I. Current assets
J. Unclassified balance sheet
____ 1. The stockholders’ claim on the assets of a company.
____ 2. Tangible assets that are long-lived and used to produce or sell products or services.
____ 3. Cash and other resources that are expected to be sold, collected, or used within one
year or the company's operating cycle, whichever is longer.
____ 4. Entries recorded at the end of each accounting period to transfer end-of-period
balances in
revenue, expense, and dividends accounts to the permanent retained earnings account.
____ 5. Long-term resources that benefit business operations, usually lack physical form, and
have uncertain benefits.
____ 6. Assets that are held for more than the longer of one year or the operating cycle of the
company and are not used in operations.
____ 7. A balance sheet that organizes the assets and liabilities into important subgroups that
provide more information to decision makers.
____ 8. Obligations due to be paid or settled within one year or the operating cycle of a
business, whichever is longer.
____ 9. A balance sheet that broadly groups items into assets, liabilities and equity.
____10. A ratio that is used to help evaluate a company's ability to pay its short-term
obligations,
calculated by dividing current assets by current liabilities.
1. B; 2. A; 3. I; 4. F; 5. D; 6. H; 7. C; 8. G; 9. J; 10, E
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 03-A2
Learning Objective: 03-C2
Learning Objective: 03-C3
Topic: Current Ratio
Topic: Classified Balance Sheet
Topic: Accounting Cycle
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-81
189. Classified balance sheets commonly include the following categories.
a. Current assets
b. Long-term investments
c. Plant assets
d. Intangible assets
e. Current liabilities
f. Long-term liabilities
g. Equity.
Indicate the typical classification of each item below by placing the letter of the correct
balance sheet category a through g in the blank space next to the item.
1) ____ Equipment used in business operations
2) ____ Store Supplies
3) ____ Investment maturing in two years
4) ____ Long-term Note Payable
5) ____ Prepaid Rent
6) ____ Retained earnings
7) ____ Accounts Payable
8) ____ Current portion of long-term debt
9) ____ Trademarks
10) ____ Wages Payable
11) ____ Accounts Receivable
12) ____ Cash
1. C; 2. A; 3. B; 4. F; 5. A; 6. G; 7. E; 8. E; 9. D; 10. E; 11. A; 12. A
Blooms: Understand
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 2 Medium
Learning Objective: 03-C3
Topic: Classified Balance Sheet
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-82
Short Answer Questions
190. Explain why temporary accounts are closed each period.
191. Explain the difference between temporary and permanent accounts.
192. List the steps in the accounting cycle.
193. How is the current ratio calculated? How is it used to evaluate a company?
194. Describe a work sheet and explain why it is useful.
195. List and explain the steps in preparing a 10-column worksheet.
196. What is the purpose of closing entries? Describe the closing process.
197. What is the purpose of a post-closing trial balance?
198. Explain the purpose of reversing entries.
199. Match the following terms with the appropriate definition.
A. Accrued expenses
B. Adjusting entry
C. Adjusted trial balance
D. Prepaid expenses
E. Report form balance sheet
F. Accounting period
G. Contra account
H. Profit margin
I. Unadjusted trial balance
J. Natural business year
____ 1. A 12-month period, used by companies with seasonal variation that ends when a
company’s sales activities are at their lowest point.
____ 2. A journal entry made at the end of an accounting period to reflect a transaction or
event that is not yet recorded; affects one or more income statement account and one or more
balance sheet account, but never cash..
____ 3. An account linked with another account and having an opposite normal balance.
____ 4. Items paid for in advance of receiving their benefits; recorded as an asset when
purchased and expensed when used.
____ 5. Any length of time that an organization’s activities are divided into and reported by
financial statements.
____ 6. A listing of accounts and balances prepared after adjustments are recorded and posted
to the ledger.
____ 7. A balance sheet that lists items vertically in the order of assets, liabilities and equity.
____ 8. Costs that are incurred in a period but are both unpaid and unrecorded, requiring an
adjustment at the end of the period.
____ 9. A listing of accounts and balances prepared after external transactions are recorded
but before adjustments are recorded.
____ 10. A useful measure of a company’s operating results determined by dividing net
income by net sales.
1. J; 2. B; 3. G; 4. D; 5. F; 6. C; 7. E; 8. A; 9. I; 10. H
Blooms: Understand
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 2 Medium
Learning Objective: 03-C1
Learning Objective: 03-P1
Learning Objective: 03-P2
Learning Objective: 03-P3
Learning Objective: 03-A1
Topic: Timing and Reporting
Topic: Adjusting Accounts
Topic: Adjusted Trial Balance
Topic: Preparing Financial Statements
Topic: Profit Margin
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-87
Short Answer Questions
200. Discuss how accrual accounting enhances the usefulness of financial statements.
201. Identify the primary differences between accrual accounting and cash basis accounting.
202. Explain the purpose of adjusting entries at the end of a period and provide an example of
an adjusting entry.
203. List the three-steps of the adjusting process.
204. Identify the types of adjusting entries and explain the purpose of each type.
205. Explain how accounting adjustments affect financial statements and provide an example
of an adjustment that would impact the statements if not recorded.
206. What is an adjusted trial balance? Why is it prepared?
207. Why are financial statements prepared in a specific order? What is the usual order in
which financial statements are prepared from the adjusted trial balance?
208. On December 31, the year end, a company forgot to record $6,000 of depreciation on
machinery. In the current year financial statements, what is the effect of this error on assets,
net income, and equity?
209. Using the table below, indicate the impact of the following errors made during the
adjusting entry process. Use a “+” for overstatements, a “-” for understatements, and a “0” for
no effect. The first one is provided as an example.
Error Revenues Expenses Assets Liabilities Equity
Ex. Did not record depreciation for this
period………………………………. 0 - + 0 +
1. Did not record unpaid telephone
bill……..
2. Did not adjust unearned revenue account
for revenue earned this period.
3. Did not adjust shop supplies for
supplies used this period…………..
4. Did not accrue employee salaries for this
period…………………………
5. Recorded rent expense owed with a debit
to insurance expense and a credit to rent
payable…………………………
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-92
1. Did not record unpaid telephone
bill…….. 0 - 0 - +
2. Did not adjust unearned revenue account
for revenue earned this period.
- 0 0 + -
3. Did not adjust shop supplies for
supplies used this period………….. 0 - + 0 +
4. Did not accrue employee salaries for this
period………………………… 0 - 0 - +
5. Recorded rent expense owed with a debit
to insurance expense and a credit to rent
payable………………………… 0 0 0 0 0
Blooms: Analyze
AACSB: Analytical Thinking
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 03-P1
Topic: Adjusting Accounts
210. Andrew Inc.’s net income was $280,000; its total assets were $1,050,000; and its net
sales were $3,500,000. Calculate the company’s profit margin ratio.
211. A company’s employees earn a total of $10,000 per week for a 5-day week that begins on
Monday. December 31 of Year 1 is a Monday, and all 20 employees worked that day.
a) Prepare the required adjusting journal entry to record accrued salaries on December 31,
Year 1.
b) Prepare the journal entry to record the payment of salaries on January 4, Year 2.
212. Prior to recording adjusting entries on December 31, a company’s Office Supplies
account had a $780 debit balance. A physical count of the supplies showed $425 of unused
supplies available as of December 31. Prepare the required adjusting entry.
213. Prepare general journal entries on December 31 to record the following unrelated year-
end adjustments.
a. Estimated depreciation on equipment for the year, $4,500.
b. The Prepaid Insurance account has a $3,680 debit balance before adjustment. An
examination of insurance policies shows $600 of insurance expired.
c. The Prepaid Insurance account has a $2,400 debit balance before adjustment. An
examination of insurance policies shows $950 of unexpired insurance.
d. The company has three office employees who each earn $100 per day for a five-day
workweek that ends on Friday. The employees were paid on Friday, December 26, and have
worked full days on Monday, Tuesday, and Wednesday, December 29, 30, and 31.
e. On November 1, the company received 6 months’ rent in advance from a tenant whose rent
is $700 per month. The $4,200 was credited to the Unearned Rent account.
f. The company collects rent monthly from its tenants. One tenant whose rent is $1,000 per
month has not paid his rent for December.
214. Rogers Company’s employees are paid a total of $1,600 per day for a 5-day workweek.
The employees are paid each Friday. This year the accounting period ends on Tuesday.
Prepare the December 31 year-end adjusting journal entry Rogers Company should make to
accrue wages.
215. Show the December 31 adjusting entry to record $750 of earned but unpaid salaries of
employees at the end of the current accounting period.
216. During the current year ended December 31, clients paid fees in advance for accounting
services amounting to $15,000. These fees were recorded in an account called Unearned
Accounting Fees. If $3,500 of these fees remains unearned on December 31 of this year,
present the December 31 adjusting entry to bring the accounts up to date.
217. The following unadjusted and adjusted trial balances are from the current year’s
accounting system for Excelsior Inc..
Excelsior, Inc.
Trial Balances
For Year Ended December 31
Unadjusted
Trial Balance
Adjusted
Trial Balance
Debit Credit Debit Credit
Cash 11,300 11,300
Accounts receivable 16,340 17,140
Office supplies 1,145 645
Prepaid advertising 1,000 450
Building 26,700 26,700
Accumulated depreciation—Building … 1,300 6,300
Accounts payable ……………………... 3,320 3,500
Unearned services revenue …………… 4,410 3,010
Common stock
Retained earnings ………………………. 1,000
16,905
1,000
16,905
Services revenue......……………………. 72,400 74,600
Salaries expense ………………………. 34,500 34,500
Utilities expense..........………………….. 5,450 5,630
Advertising expense …………………….. 2,900 3,450
Supplies expense ……………………….. 500
Depreciation expense— building…………. 5,000
Totals............................…………………. 99,335
99,335
105,315
105,315
Present the six adjusting entries in general journal form that explain the changes in the
account balances from the unadjusted to the adjusted trial balance.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-98
Analytical Thinking
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 03-P1
Learning Objective: 03-P2
Topic: Adjusting Accounts
Topic: Adjusted Trial Balance
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-99
218. Trapper Company Inc.’s unadjusted and adjusted trial balances on December 31 of the
current year are as follows:
Unadjusted
Trial Balance
Adjusted
Trial Balance
Cash..................................................... 4,000 4,000
Prepaid insurance................................. 1,500 1,200
Equipment........................................... 9,000 9,000
Accumulated depreciation—
Equipment...................................... 800 1,800
Salaries payable................................... 1,000
Unearned repair fees............................ 2,500 600
Repair fees earned................................ 10,000 11,900
Salaries expense................................... 3,500 4,500
Depreciation expense—Equip.............. 1,000
Insurance expense
Common stock
600
100
900
100
Retained earnings
............................................................
______
18,700
5,400
18,700
______
20,700
5,400
20,700
Present the four adjusting journal entries that were recorded by Trapper Company.
219. Record the December 31 adjusting entries for the following transactions and events in
general journal form. Assume that December 31 is the end of the annual accounting period.
a. The Prepaid Insurance account shows a debit balance of $2,340, representing the cost of a
two-year fire insurance policy that was purchased on October 1 of the current year and has not
been adjusted to-date.
b. The Store Supplies account has a debit balance of $400; a year-end inventory count reveals
$80 of supplies still on hand.
c. On November 1 of the current year, Rent Earned was credited for $1,500. This amount
represented the rent earned for a three-month period beginning November 1.
d. Estimated depreciation on store equipment is $600.
e. Accrued salaries amount to $1,400.
220. Based on the unadjusted trial balance for Highlight Styling, Inc. and the adjusting
information given below, prepare the adjusting journal entries for Highlight Styling Inc..
Highlight Styling Inc.’s unadjusted trial balance for the current year follows:
Highlight Styling, Inc.
Trial Balance
December 31
Cash…………………………………………………. $ 2,200
Prepaid insurance …………………………………... 1,680
Shop supplies ............................................................. 790
Shop equipment ……………………………………. 3,860
Accumulated depreciation—shop equipment ……….. $ 770
Building……………………………………………... 59,500
Accumulated depreciation—building……………….. 3,840
Land …………………. 55,000
Unearned rent……………………………………….. 2,600
Long-term notes payable……………………………. 50,000
Common stock
Retained earnings
1,000
47,860
Rent earned …………………………………………. 2,400
Fees earned …………………………………………. 23,400
Wages expense ……………………………………... 3,200
Utilities expense …………………………………… 690
Property taxes expense ……………………………. 600
Interest expense …………………………………… 4,350________
Totals ……………………………………………….. $131,870 $131,870
Additional information:
a. An insurance policy examination showed $1,040 of expired insurance.
b. An inventory count showed $210 of unused shop supplies still available.
c. Depreciation expense on shop equipment, $350.
d. Depreciation expense on the building, $2,020.
e. A beautician is behind on space rental payments, and this $200 of accrued revenues was
unrecorded at the time the trial balance was prepared.
f. $800 of the Unearned Rent account balance was still unearned by year-end.
g. The one employee, a receptionist, works a five-day workweek at $50 per day. The
employee was paid last week but has worked four days this week for which she has not been
paid.
h. Three months’ property taxes, totaling $450, have accrued. This additional amount of
property taxes expense has not been recorded.
i. One month’s interest on the note payable, $600, has accrued but is unrecorded.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-102
221. Using the information presented below, prepare an income statement from the adjusted
trial balance of Dodson Containers Inc..
DODSON CONTAINERS, Inc.
Adjusted Trial Balance
December 31
Cash…………………………………………………. $ 3,050
Accounts receivable………………………………… 400
Prepaid insurance …………………………………... 830
Office supplies ............................................................. 80
Office equipment ……………………………………. 4,200
Accumulated depreciation—office equipment ……….. $ 1,100
Buildings……………………………………………... 98,000
Accumulated depreciation—buildings……………….. 28,000
Land...................................................…………………. 115,000
Wages Payable……………………………………… 880
Property taxes payable……………………………… 1,400
Interest payable……………………………………... 2,200
Unearned rent……………………………………….. 460
Long-term notes payable……………………………. 150,000
Common stock
Retained earnings
1,000
39,340
Dividends 21,000
Rent earned …………………………………………. 67,500
Wages expense ……………………………………... 29,000
Utilities expense ……………………………………. 2,900
Property taxes expense …………………………….. 2,400
Insurance expense…………………………………... 5,800
Office supplies expense……………………………… 250
Depreciation expense—office equipment…………….. 400
Depreciation expense—buildings…………………….. 5,570
Interest expense ……………………………………. 3,000
$291,880
________
$291,880
Totals ………………………………………………..
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-104
222. Using the information presented below, prepare a statement of retained earnings and
balance sheet from the adjusted trial balance of Dodson Containers, Inc. Dodson’s
stockholders’ equity balance of $40,340 consists of retained earnings of $29,340, a $1,000
beginning-year balance in common stock, plus a $10,000 investment during the current year
by the stockholders.
DODSON CONTAINERS, Inc.
Adjusted Trial Balance
December 31
Cash…………………………………………………. $ 3,050
Accounts receivable………………………………… 400
Prepaid insurance …………………………………... 830
Office supplies ............................................................. 80
Office equipment ……………………………………. 4,200
Accumulated depreciation—office equipment ……….. $ 1,100
Buildings……………………………………………... 98,000
Accumulated depreciation—buildings……………….. 28,000
Land...................................................…………………. 115,000
Wages Payable……………………………………… 880
Property taxes payable……………………………… 1,400
Interest payable……………………………………... 2,200
Unearned rent……………………………………….. 460
Long-term notes payable……………………………. 150,000
Common stock
Retained earnings
11,000
29,340
Dividends 21,000
Rent earned …………………………………………. 67,500
Wages expense ……………………………………... 29,000
Utilities expense ……………………………………. 2,900
Property taxes expense …………………………….. 2,400
Insurance expense…………………………………... 5,800
Office supplies expense……………………………… 250
Depreciation expense—office equipment…………….. 400
Depreciation expense—buildings…………………….. 5,570
Interest expense ……………………………………. 3,000
$291,880
________
$291,880
Totals ………………………………………………..
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-106
Blooms: Apply
AACSB: Analytical Thinking
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 03-P3
Topic: Preparing Financial Statements
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-107
223. Using the information given below, prepare an income statement and statement of
retained earnings for Rapid Car Services, Inc. from the adjusted trial balance. The
stockholders did not make any additional investments in the company during the year.
Rapid Car Services, Inc.
Adjusted Trial Balance
For the year ended December 31
Cash ……………………………………………. $ 33,000
Accounts receivable ……………………………. 14,200
Office supplies …………………………………. 1,700
Vehicles ……………………………………….. 100,000
Accumulated depreciation – Vehicles ………… 45,000
Accounts payable ……………………………… 11,500
Common stock
Retained earnings
1,000
70,900
Dividends …………………... 40,000
Fees earned …………………………………….. 155,000
Rent expense …………………………………... 13,000
Office supplies expense ………………………... 2,000
Utilities expense ……………………………….. 2,500
Depreciation Expense – Vehicles.......…………….. 15,000
Salary expense …………………………………. 50,000
Fuel expense …………………………………… 12,000
$283,400
________
$283,400
Totals ……………………………………………
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-108
224. Using the information given below, prepare a balance sheet for Rapid Car Services, Inc.
from the adjusted trial balance. The stockholders did not make any additional investments in
the company during the year.
Rapid Car Services, Inc.
Adjusted Trial Balance
For the year ended December 31
Cash ……………………………………………. $ 33,000
Accounts receivable ……………………………. 14,200
Office supplies …………………………………. 1,700
Vehicles ……………………………………….. 100,000
Accumulated depreciation – Vehicles ………… 45,000
Accounts payable ……………………………… 11,500
Common stock
Retained earnings
1,000
70,900
Dividends …………………... 40,000
Fees earned …………………………………….. 155,000
Rent expense …………………………………... 13,000
Office supplies expense ………………………... 2,000
Utilities expense ……………………………….. 2,500
Depreciation Expense – Vehicles.......…………….. 15,000
Salary expense …………………………………. 50,000
Fuel expense …………………………………… 12,000
$283,400
________
$283,400
Totals ……………………………………………
225. Abdulla, Co. collected 6-months’ rent in advance from a tenant on October 1 of the
current year. When it collected the cash, it recorded the following entry:
Oct. 01 Cash ……………………………………….. 15,000
Rent Revenue Earned ……………... 15,000
Prepare the required adjusting entry at December 31 of the current year.
226. On November 1 of the current year, Salinger Company paid $9,600 cash for a one-year
insurance policy that took effect on that day. On the date of the payment, Salinger recorded
the following entry:
Nov. 01 Insurance Expense..……………………….. 9,600
Cash………………….……………... 9,600
Prepare the required adjusting entry at December 31 of the current year.
227. The unadjusted trial balance and the adjustment data for Porter Business Institute, Inc.
are given below along with adjusting entry information. What is the impact on net income if
these adjustments are not recorded? Show the calculation for net income without the
adjustments and net income with the adjustments. Which one gives the most accurate net
income? Which accounting principles are being violated if the adjustments are not made?
Porter Business Institute, Inc.
Unadjusted Trial Balance
December 31
(in millions)
Cash…………………………………………………. $ 58,000
Accounts receivable…………..……………… 59,000
Prepaid insurance …………………………... 12,000
Equipment ……………………………………. 8,000
Accumulated depreciation—equipment ……….. $ 2,000
Buildings……………………………………………... 57,500
Accumulated depreciation—buildings………….. 17,500
Land…………………………………. 55,000
Unearned rent………………………………….. 16,000
Long-term notes payable………………………. 50,000
Common stock
Retained earnings
1,000
114,600
Tuition fees earned ………………………. 74,000
Training fees earned …………………………. 23,400
Wages expense ……………………………………... 32,000
Utilities expense ……………………………. 8,000
Property taxes expense ………………………… 5,000
Interest expense ……………………………………. 4,000 ________
Totals ……………………………………….. $ 298,500 $298,500
Additional information items:
a. The Prepaid Insurance account consists of a payment for a 1 year policy. An analysis of the
insurance invoice indicates that one half of the policy has expired by the end of the December
31 year-end.
b. A cash payment for space sublet for 8 months was received on July 1 and was credited to
Unearned Rent.
c. Accrued interest expense on the note payable of $1,000 has been incurred but not paid.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-112
228. The unadjusted trial balance and the adjustment data for Porter Business Institute, Inc.
are shown below along with adjusting entry information. What is the impact of the adjusting
entries on the balance sheet? Show the calculation for total assets, total liabilities, and
stockholders’ equity without the adjustments; show the calculation for total assets, total
liabilities, and stockholders’ equity with the adjustments. Which one provides the most
accurate presentation of the balance sheet?
Porter Business Institute, Inc.
Unadjusted Trial Balance
December 31
(in millions)
Cash…………………………………………. $ 58,000
Accounts receivable…………..……………… 59,000
Prepaid insurance …………………………... 12,000
Equipment ……………………………………. 8,000
Accumulated depreciation—equipment ……….. $ 2,000
Buildings………………………………………. 57,500
Accumulated depreciation—buildings………….. 17,500
Land…………………………………. 55,000
Unearned rent………………………………….. 16,000
Long-term notes payable………………………. 50,000
Common stock
Retained earnings
1,000
114,600
Tuition fees earned ………………………. 74,000
Training fees earned ……………………. 23,400
Wages expense …………………………… 32,000
Utilities expense …………………………. 8,000
Property taxes expense …………………… 5,000
Interest expense …………………………… 4,000 ________
Totals ……………………………………….. $ 298,500 $298,500
Additional information items:
a. The Prepaid Insurance account consists of a payment for a 1 year policy. An analysis of the
insurance invoice indicates that one half of the policy has expired by the end of the December
31 year-end.
b. A cash payment for space sublet for 8 months was received on July 1 and was credited to
Unearned Rent.
c. Accrued interest expense on the note payable of $1,000 has been incurred but not paid.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-114
229. Prepare adjusting entries for the year ended December 31, for each of these separate
situations. Assume that prepaid expenses are initially recorded in asset accounts and that fees
collected in advance are initially recorded as liabilities.
a. The Prepaid Rent account has a debit balance of $8,000 before adjustment, representing a
prepayment for four months’ rent made on December 1 of the current year.
b. One-third of the work related to $18,000 of cash received in advance was performed during
this period.
c. Unpaid accrued salaries at December 31 amounts to $15,000
d. Work was completed for a client on December 31 in the amount of $21,000, but was not
previously billed or recorded.
e. Estimated depreciation on office equipment is $27,000.
230. Gracio Co., Inc. had the following transactions in the last two months of its year ended
December 31. Prepare entries for these transactions under the method that records prepaid
expenses as expenses and records unearned revenues as revenues. Also prepare adjusting
entries at the end of the year.
Nov. 1 Paid $11,400 for 12 months of insurance coverage through October 31 of next year.
5 Received $8,000 cash for future services to be provided to a customer.
7 Paid $10,000 for future advertising.
Dec. 31 A portion of the insurance paid for on November 1 has expired. No adjustment was
made in November to the insurance account.
31 Services of $2,500 are not yet provided to the customer who paid on November 5.
31 Of the advertising paid for on November 7, $1,500 is not yet used.
231. For each of the following two separate situations, present both the April 30 adjusting
entry and the subsequent entry during May to record the payment of the accrued expenses or
receipt of the accrued revenue.
a. Nicolas Company has 5 employees, who earn a total of $2,900 in salaries each working
day. They are paid on Monday for the five-day workweek ending on the previous Friday.
Assume that fiscal year ended April 30, is a Thursday and all employees worked each day and
will be paid salaries for five full days on the following Monday.
b. Services of $3,000 have been performed for Clevenger Company through April 30. The
client will pay the entire amount of the contract when services are completed on May 23.
c. Paid the employees’ salaries on May 4.
d. Received payment from Clevenger Company for services that are now completed on May
23.
232. In the table below, indicate with an "X" in the proper column whether the account is a
temporary (nominal) account or a permanent (real) account.
Account
Temporary
(Nominal)
Permanent
(Real)
a. Cash............................................................
b. Prepaid rent................................................
c. Unearned revenue......................................
d. Accounts receivable...................................
e. Insurance expense......................................
f. Retained earnings
g. Dividends...................................................
h. Rent expense..............................................
i. Fees earned.................................................
j. Supplies......................................................
k. Supplies expense........................................
l. Depreciation expense—Equipment............
m. Accumulated depreciation—Equipment…..
1. Depreciation expense—Equipment............ X
m. Accumulated depreciation—Equipment...... X
Blooms: Understand
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 2 Medium
Learning Objective: 03-P4
Topic: Closing Process
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-119
233. A number of accounts are listed below. Use the table to classify each account by
indicating whether it is a temporary or permanent account, whether it is included in the
Income Statement or Balance sheet, and if it is closed at the end of the accounting period, and,
if so, whether it is closed with a debit or credit. The first one is done as an example.
Account
Permanent (P)
or
Temporary (T)
Income
Statement (IS)
or Balance
Sheet (BS)
Closed (C)
or
Not
Closed (NC)
Closed
with
Debit (Dr)
or
Credit (CR)
a. Accounts payable............. P BS NC
b. Accounts receivable...........
c. Accumulated depreciation,
Building.................
d. Marketing expense..........
e. Cash...............................
f. Unearned revenues...........
g. Depreciation expense—
Building......................
h. Dividends........
i. Building......................
j. Insurance expense..........
k. Interest expense.............
l. Miscellaneous expense....
m Notes payable.................
n. Store supplies................
o. Store supplies expense...
p. Prepaid rent...........
q. Rent expense................
r. Common stock................
s. Salaries expense............
t. Salaries payable..............
u.
Service
revenue.........................
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-120
234. The steps in the accounting cycle are shown below. List them in the correct order in
which they are completed:
Prepare adjusted trial balance
Post transactions
Prepare an unadjusted trial balance
Journalize transactions
Prepare the financial statements
Close the temporary accounts
Adjust the ledger accounts
Prepare a post-closing trial balance
Analyze transactions
235. The calendar year-end adjusted trial balance for Blessinger Co., Inc. follows:
BLESSINGER CO., Inc.
Adjusted Trial Balance
December 31
Cash...............................................................................
$ 112,000
Accounts receivable....................................................... 27,000
Prepaid rent.................................................................... 15,000
Prepaid Insurance.......................................................... 9,000
Office supplies............................................................... 3,300
Office equipment........................................................... 38,000
Accumulated depreciation—Equipment........................ $ 3,200
Building......................................................................... 288,000
Accumulated depreciation—Building............................ 42,000
Land.............................................................................. 700,000
Accounts payable........................................................... 25,800
Salaries payable............................................................. 14,500
Interest payable.............................................................. 2,500
Long-term note payable................................................. 72,000
Common stock
Retained earnings...........................................................
1,000
909,000
Dividends....................................................................... 200,500
Service fees earned........................................................ 430,800
Salaries expense............................................................. 90,000
Insurance expense.......................................................... 5,200
Rent expense.................................................................. 5,000
Depreciation expense—Equipment................................ 800
Depreciation expense—Building................................... 7,000
Totals............................................................................. $1,500,800 $1,500,800
Required:
(a) Prepare a classified year-end balance sheet. (Note: A $9,000 installment on the long-term
note payable is due within one year.)
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-123
236. Calculate the current ratio in each of the following separate cases and identify the
company case with the strongest liquidity position..
Current
Assets
Current
Liabilities
Case
1
$
55,000
$ 30,000
Case
2
$141,500
$ 85,000
Case
3
$
45,000
$ 59,000
237. Use the following partial work sheet from Carmelo Bowl, Inc. to prepare its income
statement, statement of retained earnings and a classified balance sheet (Assume the
stockholders did not make any investments in the business this year.)
CARMELO BOWL, Inc.
Work Sheet
For Year Ended June 30
Balance
Sheet
Account Income Statement
Dr. Cr. Dr.
Cash................................................. 11,275
Accounts Receivable....................... 1,750
Office Supplies................................ 800
Prepaid Insurance............................ 3,400
Scoring Equipment.......................... 130,000
Accumulated depreciation-
Scoring equipment .....................
Salaries payable ..............................
Common stock
Retained earnings......................
Dividends............. 46,425
Bowling revenue ............................. 137,675
Depreciation expense-
Scoring equipment ..................... 10,825
Salaries expense .............................. 1,800
Insurance expense ........................... 200
Rent expense ................................... 1,600
Office supplies expense .................. 400
Repairs expense .............................. 350
Telephone expense.......................... 750
Totals............................................... 15,925 137,675 193,650
Net income ...................................... 121,750
Totals............................................... 137,675 137,675 193,650
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-126
238. A partially completed work sheet is shown below. The unadjusted trial balance columns
are complete. Complete the adjustments, adjusted trial balance, income statement, and balance
sheet and statement of retained earnings columns.
Dustin Company, Inc.
Work Sheet
For the year ended December 3 l
Account Unadjusted Trial
Balance Adjustments
Adjusted Trial
Balance
Income Statement Owner's Equity
Debit Credit Debit Credit Debit
Credi
t
Debit
Credi
t
Debit
Cash..............................
40
Accounts receivable......
Prepaid insurance.......... 25
Supplies........................ 14 8
Office equipment..........
340
340
Accum. Depr., Office
equipment.................. 45
Accounts payable.......... 57
Rent payable.................
Common stock..............
132
Dividends....................... 35 35
Fees earned................... 300 380
Rent expense................. 60 90
Utilities expense............
20
Insurance expense......... 10
Supplies expense...........
Deprec. exp., Office
equipment...................
45
Totals............................ 534 534
Net income...................
Totals............................
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-129
239. A company's December 31 work sheet appears below with summary amounts in the
Income Statement and Balance Sheet columns.. Prepare the four necessary closing entries.
Assets..........................................
Income Statement Balance Sheet
Debit
Credit
Debit
Credit
12,000
Liabilities ................................... 3,000
Common stock
Retained earnings ......................
1,000
6,500
Dividends.................................... 1,500
Revenue...................................... 19,500
Salaries expense......................... 11,250
Other operating expenses...........
5,250
Totals........................................... 16,500 19,500 13,500 10,500
Net income.................................
3,000
3,000
Totals........................................... 19,500 19,500 13,500 13,500
240. The adjusted trial balance of Carson’s Internet Services, Inc. follows:
CARSON’S
INTERNET SERVICES, Inc.
Adjusted Trial Balance
December 31
Cash...............................................................................
$ 1,170
Supplies......................................................................... 1,930
Prepaid insurance........................................................... 600
Computer equipment..................................................... 20,600
Accumulated depreciation—Computer equipment $ 5,400
Accounts payable........................................................... 325
Common stock
Retained earnings...........................................................
1,000
12,925
Dividends....................................................................... 4,800
Services revenue............................................................ 21,720
Salaries expense............................................................. 6,920
Depreciation expense..................................................... 2,000
Rent expense.................................................................. 1,200
Supplies expense............................................................ 800
Utilities expense............................................................. 950
Insurance expense..........................................................
400
Totals.............................................................................. $41,370 $41,370
(a) Prepare the four closing entries necessary.
(b) What is the balance of the Retained Earnings account after the closing entries are posted?
241. Following are selected accounts and their balances for a company after the adjustments
made on May 31, the end of its fiscal year. (All accounts have normal balances.)
Retained earnings.............……… $30,000
Dividends...........................……… 6,000
Fees earned........................………. 20,000
Salaries expense.................……… 7,000
Insurance expense............………. 350
Utilities expense...............……….. 75
Supplies expense...............………. 500
Supplies payable................……… 400
Salaries payable................……….. 300
Depreciation expense........………. 425
Prepare all the necessary closing entries for this company.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-133
242. The Income Statement columns of the work sheet prepared for Jolly Auto Service, Inc.
at current year-end are shown below. In addition, Retained Earnings had a credit balance of
$235,000 and Dividends had a debit balance of $40,000 at year end. Prepare closing journal
entries for this company.
Income Statement
Dr. Cr.
Service revenue.............................................. $130,200
Wages expense……………………………..
Wagalaries expense........................................
$43,100
Rent expense.................................................. 16,200
Insurance expense.......................................... 1,800
Shop supplies expense................................... 3,500
Depreciation expense—Shop equipment........
7,000
Totals.............................................................. $71,600 $130,200
Net income.....................................................
58,600
Totals..............................................................
$130,200
$130,200
Income Summary........................................ 130,200
31 Income Summary...........................................71,600
Wages Expense............................................ 43,100
Rent Expense............................................... 16,200
Insurance Expense...................................... 1,800
Shop Supplies Expense............................... 3,500
Depr. Expense—Shop Equipment............... 7,000
31 Income Summary...........................................58,600
Retained Earnings.................................... 58,600
31 Retained Earnings........................................40,000
Dividends.................................................. 40,000
Blooms: Apply
AACSB: Analytical Thinking
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 2 Hard
Learning Objective: 03-P4
Topic: Closing Process
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-135
243. Presented below are the year-end balances at December 31 of Becca’s Dry Cleaning
Service, Inc.. (All accounts have normal balances.)
Accounts receivable................................................ $ 12,000
Accounts payable.................................................... 25,000
Accumulated depreciation—equipment .................. 30,000
Cash........................................................................ 42,000
Depreciation expense—equipment.......................... 12,000
Insurance expense................................................... 7,000
Equipment............................................................... 125,000
Service revenue....................................................... 200,000
Notes payable.......................................................... 65,000
Common stock
Retained earnings....................................................
1,000
16,000
Dividends................................................................ 18,000
Prepaid insurance.................................................... 1,500
Salaries payable....................................................... 4,000
Salary expense........................................................ 97,000
Supplies................................................................... 1,500
Supplies expense..................................................... 16,000
Unearned service revenues..................................... 500
Utilities expense...................................................... 9,500
(a) Prepare the necessary closing entries at December 31.
(b) Prepare a post-closing trial balance at December 31.
244. Mandalay Company, Inc. frequently has accrued expenses at the end of its fiscal year
that should be recorded for proper financial statement presentation. Mandalay pays on a
weekly basis and has $50,000 of accrued salaries incurred but not paid for June 30, its fiscal
year-end. This consists of one day's accrued salaries for the week. The company will pay its
employees $250,000 on July 4; the one day of accrued salaries and the remaining four days
for July salaries. Record the following entries:
(a) Accrual of the salaries on June 30.
(b) Payment of the salaries on July 4, assuming that Mandalay does not prepare reversing
entries.
(c) Assuming that Mandalay prepares reversing entries, reverse the adjusting entry made on
June 30.
(d) Assuming that Mandalay prepares reversing entries, payment of the salaries on July 4.
245. Compute Darling Company’s current ratio using the following information:
Accounts receivable $20,000 Long-term notes payable $80,000
Salaries payable 5,000 Building 170,000
Prepaid Rent 7,000 Accounts payable 15,000
Cash 12,000 Land 75,000
246. The unadjusted trial balance of Barber Housekeeping Service, Inc. is entered on the
partial work sheet below.
Barber Housekeeping Service, Inc.
Work Sheet
For the year ended December 31
Account
Unadjusted Trial
Balance Adjustments
Adjusted Trial
Balance
Income
Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash................................. 50,000
Accounts Receivable....... 10,000
Supplies........................... 8,000
Automobiles.................... 160,000
Accum. Depr.—Autos..... 55,000
Accounts payable............ 37,000
Salaries payable...............
Common stock
Retained earnings............ 1,000
54,000
Dividends ....................... 45,000
Fees earned...................... 275,400
Salary expense................. 125,000
Rent expense................... 24,400
Advertising expense........
Supplies expense.............
Depreciation expense...... ______ ______
Totals............................... 422 ,400 422,400
Required: Complete the work sheet using the following information:
(a) Salaries earned by employees that are unpaid and unrecorded, $5,000.
(b) An inventory of supplies showed $3,000 of unused supplies still on hand.
(c) Depreciation on automobiles, $30,000.
(d) Advertising for November and December in the amount of $8,000 remains unpaid and
unrecorded.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3-141
247. ______________________ are required at the end of the accounting period because
certain internal transactions and events remain unrecorded.
248. Accrual accounting and the adjusting process rely on two principles: the
___________________ principle and the ________________________ principle.
249. __________ basis accounting means that revenues are recognized when cash is received
and that expenses are recorded when cash is paid. _____________ basis accounting means
that the financial effects of revenues and expenses are recorded when earned or incurred.
250. Accrued revenues at the end of one accounting period often result in cash
_______________________ in the next period.
251. ______________ revenues are liabilities requiring delivery of products and for services.
252. If a prepaid expense account was not adjusted for the amount used, on the balance sheet
assets would be ___________________ and equity would be ___________________.
253. Profit margin = ___________________ divided by net sales.
254. The _______________ depreciation method allocates equal amounts of an asset’s cost to
depreciation during its useful life.
255. ___________________ is the process of allocating the cost of plant assets to the income
statement over their expected useful lives.
256. A _____________ account is an account linked with another account, having an opposite
normal balance, and reported as a subtraction from that other account’s balance.
257. _____________ expenses are those costs that are incurred in a period but are both unpaid
and unrecorded.
258. An _______________________ is a listing of all of the accounts in the ledger with their
account balances before adjustments are made.
259. An _______________________ is a listing of all of the accounts in the ledger with their
account balances after adjustments are made.
260. The closing process resets ________, __________, and ________ account balances to
zero at the end of each accounting period.
261. The ___________________ account is a temporary account used only in the closing
process.
262. Revenues, expenses, dividends, and Income Summary are called _________________
accounts because they are closed at the end of each accounting period.
263. _______________ are long-term resources used to produce or sell products and services;
they generally lack physical form and their benefits are highly uncertain.
264. A current ratio of 2.1 suggests that a company has ____________ current assets to cover
current liabilities.
