978-0134125053 Chapter 3 Part 1

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Financial Accounting, 4e (Kemp)

Chapter 3 Adjusting and Closing Entries

3.1 Understand the revenue recognition and matching principles

1) Under accrual accounting, the most important GAAP concepts to remember are the

recognition principle for expenses and the matching principle for revenues.

Question Type: Concept

2) Accounts Receivable and Accounts Payable are examples of accruals.

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3) Because inventories are high, Target should end its fiscal year in either November or

December.

Question Type: Application

4) It does not matter when a fiscal year starts as long as it is twelve consecutive months long.

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5) Accounting for revenue on an accrual basis means that no entry of revenue is made until the

cash is actually received.

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6) When cash is paid prior to incurring an expense, it is a deferral.

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7) GAAP requires the use of accrual accounting.

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8) If revenues are recognized and recorded when earned, the company is using the:

A) cash basis of accounting.

B) accrual basis of accounting.

C) adjustment basis of accounting.

D) the expense basis of accounting.

Question Type: Concept

9) If Crane company records revenue when cash is received, they are using the:

A) cash basis of accounting.

B) accrual basis of accounting.

C) adjustment basis of accounting.

D) expense basis of accounting.

Question Type: Concept

10) If C&S, Inc. records expenses in the time period when incurred, they are using the:

A) cash basis of accounting.

B) accrual basis of accounting.

C) adjustment basis of accounting.

D) expense basis of accounting.

Question Type: Concept

11) If a business records expenses when paid, the company is using the:

A) cash basis of accounting.

B) accrual basis of accounting.

C) adjustment basis of accounting.

D) the expense basis of accounting.

Question Type: Concept

12) The matching principle in accounting requires the matching of:

A) revenue earned with the assets used to produce the revenue.

B) revenue earned with the assets used less the liabilities incurred.

C) revenue earned with the liabilities used to produce the revenue.

D) revenue earned with the expenses incurred to produce the revenue.

Question Type: Concept

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13) The revenue recognition principle states that revenues should be recognized

A) when cash is received.

B) when they are earned, if cash will be received within the year.

C) when they are earned.

D) within six months of receiving cash.

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14) Part of accrual accounting depends upon recording ________ entries at the end of the

accounting period.

A) expense

B) revenue

C) adjusting

D) debit

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15) Item costs that have been incurred, but not yet paid, are called:

A) referrals.

B) deferrals.

C) accruals.

D) non-cash items.

Question Type: Concept

16) Items for which we have received payment, but have not yet delivered the service, are called:

A) referrals.

B) deferrals.

C) accruals.

D) non-cash items.

Question Type: Concept

17) The type of accounting required by GAAP is:

A) modified cash.

B) hybrid cash.

C) cash.

D) accrual.

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18) The majority of businesses normally end their fiscal year on:

A) June 30.

B) September 30.

C) December 31.

D) some other date.

Question Type: Concept

19) A period of time, such as a month or quarter, could be considered a(n):

A) fiscal year.

B) accounting period.

C) revenue period.

D) income period.

Question Type: Concept

20) Holly‘s Holiday Shoppe would most likely end their fiscal year in which month?

A) June

B) November

C) December

D) Any of the above.

Question Type: Application

3.2 Understand the four types of adjustments, and prepare adjusting entries

1) Adjusting entries are used to update accounts at the end of an accounting period.

Question Type: Concept

2) An example of a contra-account would be Accumulated Depreciation.

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3) Adjusting entries are made only for accrued revenues and accrued expenses.

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4) Unearned Ticket Revenue must be adjusted to show how much of the deferred revenue has

been earned during the period.

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5) The Supplies account must be adjusted to reflect the supplies that were used during the period.

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6) Land must be adjusted for depreciation at the end of the period.

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7) Wages that have been accrued need to be recorded so that the matching principle is reflected

in Wages Expense.

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8) Accumulated Depreciation is recorded in the Liabilities section of the Balance Sheet.

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9) Adjusting entries always include a debit or credit to Cash.

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10) All fixed assets are subject to depreciation.

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11) The asset cost less accumulated depreciation equals salvage value.

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12) Recording Interest Receivable would be an example of a(n):

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

Question Type: Concept

13) Recording Income Taxes Payable would be an example of a(n):

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

Question Type: Concept

14) Recording Prepaid Rent would be an example of a(n):

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

Question Type: Concept

15) Recording Unearned Subscriptions Revenue would be an example of a(n):

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

Question Type: Concept

16) Recording Accounts Receivable would be an example of a(n):

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

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17) Recording Wages Payable would be an example of a(n):

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

Question Type: Concept

18) Recording Social Security Taxes Payable would be an example of a(n):

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

Question Type: Concept

19) Recording the collection of three months of advance rent from a client in an unearned

account would be an example of a(n):

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

Question Type: Concept

20) Recording the purchase of supplies in a prepaid account would be an example of a(n):

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

Question Type: Concept

21) The recording of depreciation is related to a(n):

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

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22) Recording season ticket monies received in advance as unearned revenue would be an

example of a(n):

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

Question Type: Concept

23) The value of an asset after all allowable depreciation has been taken is called:

A) depreciable value.

B) market value.

C) salvage value.

D) trade-in value.

Question Type: Concept

24) At the beginning of the period, the Supplies account has a balance of $700. At the end of the

period, the balance in the account was $475. The adjusting entry would be:

A) debit Supplies Expense, $475; credit Supplies, $475.

B) debit Supplies, $475; credit Supplies Expense, $475.

C) debit Supplies Expense, $225; credit Supplies, $225.

D) debit Supplies, $225; credit Supplies Expense, $225.

Question Type: Application

25) A piece of equipment cost $700 and has a salvage value of $500. If it has an 5–year life, the

annual depreciation expense under straight–line depreciation would be:

A) $140.

B) $40.

C) $500.

D) $200.

Question Type: Application

26) Adjusting entries for Supplies and Prepaid Rent would be adjustments for:

A) deferred expense.

B) deferred revenue.

C) accrued expense.

D) accrued revenue.

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27) During a recent week, incurred wages were $800. However, $480 of the wages had not been

paid. Assume no other adjusting entries have been done this fiscal year. The adjusting entry for

wages would be:

A) debit Wages Payable, $480; credit Wages Expense, $480.

B) debit Wages Expense, $480; credit Wages Payable, $480.

C) debit Wages Payable, $320; credit Wages Expense, $320.

D) debit Wages Expense, $320; credit Wages Payable, $320.

Question Type: Application

28) Allied, Inc. bought a 3-year insurance policy on August 1 for $3,900. Assume no other

adjusting entries have been done this fiscal year. The adjusting entry on December 31 would be:

A) debit Insurance Expense, $108; credit Prepaid Insurance, $108.

B) debit Prepaid Insurance, $108; credit Insurance Expense, $108.

C) debit Insurance Expense, $542; credit Prepaid Insurance, $542.

D) debit Prepaid Insurance, $542; credit Insurance Expense, $542.

Question Type: Application

29) A machine with a salvage value of $2,000 and a cost of $40,000 was purchased on January 1,

2012. What is the depreciation expense for 2012 if the company uses straight–line depreciation

for 10 years?

A) $40,000

B) $38,000

C) $4,000

D) $3,800

Question Type: Application

30) Supplies on hand were $800 at the start of the year. At the end of the year, it was determined

that $450 of supplies had been used. What is the adjusting entry for supplies?

A) debit Supplies, $450; credit Supplies Expense, $450

B) debit Supplies, $350; credit Supplies Expense, $350

C) debit Supplies Expense, $450; credit Supplies, $450

D) debit Supplies Expense, $350; credit Supplies, $350

Question Type: Application

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31) Which of the following accounts would NOT be debited or credited in an adjusting entry?

A) Supplies Expense

B) Office Equipment

C) Wages Expense

D) Wages Payable

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32) Which of the following accounts would NOT be adjusted?

A) Accumulated Depreciation

B) Cash

C) Depreciation Expense

D) Wages

Question Type: Concept

33) Fixed assets that are depreciated are sometimes called:

A) Accounts Payable.

B) current assets.

C) long-term assets.

D) long-term liabilities.

Question Type: Concept

34) Which of the following accounts is NOT affected by an accrued expense?

A) Sales Tax Payable

B) Supplies

C) Interest Expense

D) Wages Payable

Question Type: Concept

35) Which of the following accounts is NOT affected by an accrued revenue?

A) Accounts Receivable

B) Rent Revenue

C) Unearned Rent Revenue

D) Interest Receivable

Question Type: Concept