978-1337276337 Test Bank Chapter 4 Part 2

Chapter 4

Page 21

58. Hensley Painting Company painted four houses in June at $500 each. At the end of June, three homeowners had paid

Hensley cash for the jobs. Under the accrual basis, what amounts will be reported on the income statement and the

statement of cash flows for June?

Income Statement Statement of Cash Flows

a.

$2,000 $2,000

b.

$2,000 $1,500

c.

$1,500 $1,500

d.

$500 $500

59. Holten Farm sells new tractors and pays each salesperson a commission of $1,000 for each tractor sold. During the

month of August, a salesperson, Fred, sold three new tractors. Holten Farm pays Fred on the 10th day of the month

following the sale. Fred operates on the cash basis; Holten Farm operates on the accrual basis. Which of the following

statements is true?

a. Fred will recognize commission revenue earned in the amount of $3,000 in August.

b. Holten Farm will recognize commission expense in the amount of $3,000 in August.

c. Fred will recognize commission expense in the amount of $3,000 in September.

d. Fred will recognize revenue in the same month that the tractor dealer recognizes expense.

Chapter 4

Page 22

60. A pool cleaning service signs a contract with a new customer on May 1. The pool is vacuumed and “shocked” for the

customer on June 1, and the bill for the services is paid on July 1. Under the accrual basis, the business should recognize

revenue on

a. December 31.

b. July 1.

c. June 1.

d. May 1.

61. Under which method are revenues and expenses recognized in the same accounting period that cash receipts and

payments occur?

a. Under the cash basis of accounting

b. Under the accrual basis of accounting

c. Under the adjusting method of accounting

d. Under both the cash and accrual basis of accounting

Chapter 4

Page 23

62. On January 1, 2017, ABC, Inc. purchased a copier for $9,000 cash and decided to depreciate it over five years. What

amounts associated with the copier will appear on ABC’s financial statements for the year ending December 31, 2017?

Income Statement Statement of Cash Flows

a.

$1,800 $9,000

b.

$1,800 $ 0

c.

$9,000 $ 0

d.

None of these are correct.

63. Which of the following concepts is important to accrual accounting?

a. Time period, because accrual accounting divides earnings into time periods

b. Monetary unit, because inflation is a big factor in the environment

c. Cash basis, because if cash is not received, revenue is not accrued

d. Entity concept, because personal transactions must be separated from business transactions

Chapter 4

Page 24

64. Which of the following statements does not present financial information based on the accrual basis of accounting?

a. Balance sheet

b. Income statement

c. Statement of retained earnings

d. Statement of cash flows

65. Harvest Catering is a local catering service. Conceptually, when should Harvest recognize revenue from its catering

service?

a. On the date the customer places the order

b. On the date the meals are catered

c. On the date the invoice is mailed to the customer

d. On the date the customer’s payment is received

66. When is revenue from the sale of merchandise normally recognized?

a. On the date the sale is made

b. When the customer pays for the merchandise

c. Either on the date on which the sale occurs, or the date on which the customer pays

d. When the merchandise is sold, if sold for cash, or when payment is received, if sold on credit

Chapter 4

Page 25

67. Sun Corp. sells merchandise to customers. Sun should normally recognize

a. cash revenue only and the related expenses in the same accounting period as earned whether payment is received or

not.

b. revenue when the cash is collected and the expenses when Sun pays its creditor for the merchandise.

c. revenue and expenses after all payments are collected.

d. cash and credit revenue in the same accounting period as earned and the related expenses incurred whether

payment is received or not.

68. All of the following describe a revenue except a revenue

a. can result in the inflow of assets.

b. can result in the settlement of liabilities from the delivery or distribution of goods.

c. can result in the settlement of liabilities from rendering services.

d. must involve an inflow of assets.

69. As a general rule, revenue is recognized at the point of sale. Which one of the following situations illustrates this rule?

a. Products are sold to customers on credit with payment due in 30 days.

b. Employees are paid wages the week after the wages are earned.

c. Products are purchased for resale purposes.

d. Interest is collected from amounts loaned to employees.

70. What does the phrase “Revenue is recognized at the point of sale” mean?

a. Revenue is recorded in the accounting records when the goods are received from a supplier and reported on the

income statement when sold to the customer.

b. Revenue is recorded in the accounting records and reported on the income statement when the cash is received

from the customer.

Chapter 4

Page 26

c. Revenue is recorded in the accounting records when the goods are sold to a customer and reported on the income

statement when the cash payment is received from the customer.

d. Revenue is recorded in the accounting records and reported on the income statement when goods are sold and

delivered to a customer.

71. On October 31, Michael Corporation signed a one-year contract to provide services to Love Company for $80,000

throughout the next year. Love will pay for the services on November 1. Using the accrual basis of accounting, when

should Michael Corporation recognize revenue?

a. November 1 of the current year when the cash is received from Love

b. On October 31 of the next year when all services have been provided

c. Throughout the year as the revenue is earned

d. At December 31 of the current year and October 31 of the next year

Chapter 4

Page 27

72. Expenses originate from

a. using an asset or recognizing liabilities.

b. incurring liabilities or providing services to customers.

c. collecting cash from customers.

d. paying off liabilities.

73. Which one of the following is not a recognized method of recognizing assets as expenses in a particular accounting

period?

a. Customers’ account balances in accounts receivable are assigned to expense in the period in which each customer

pays.

b. Prepaid insurance is assigned to expense as the insurance expires.

c. A building is depreciated and its cost is assigned to the current and future accounting periods in which the building

is expected to be used.

d. Merchandise inventory is assigned to cost of goods sold in the period the goods are sold.

74. Expenses can be matched against revenue

a. if the earnings process is not complete.

b. when cash is collected from the sale of products.

c. through allocation to the accounting periods in which the benefits are recognized.

d. when payment is made for costs related to revenue.

75. Remaz Corp. purchased equipment at a cost of $220,000 in January, 2016. As of January 1, 2017, depreciation of

$160,000 had been recorded on this asset. Depreciation expense for 2017 is $50,000. After the adjustments are recorded

and posted at December 31, 2017, what are the balances for Equipment and Accumulated Depreciation?

Equipment Accumulated Depreciation

Chapter 4

Page 28

a.

$220,000 $210,000

b.

$220,000 $0

c.

$160,000 $ 50,000

d.

$120,000 $210,000

Chapter 4

Page 29

76. Grove Corp. purchased equipment at a cost of $260,000 in January 2016. As of January 1, 2017, depreciation of

$88,000 had been recorded on this asset. Depreciation expense for 2017 is $22,000. After the adjustments are recorded

and posted at December 31, 2017, what are the balances for Depreciation Expense and Accumulated Depreciation?

Depreciation Expense Accumulated Depreciation

a.

$22,000 $110,000

b.

$22,000 $88,000

c.

$110,000 $110,000

d.

$110,000 $88,000

77. Which of the following statements is true concerning assets?

a. Assets represent future economic sacrifices.

b. Assets are expired costs.

c. Assets become expenses at the time they are paid in cash.

d. Assets become expenses when their economic benefits expire.

Chapter 4

Page 30

78. Which one of the following is an example of a deferred revenue?

a. Sales are made to customers on credit.

b. Interest has been earned by a bank deposit, but it has not been recorded.

c. Cash is received prior to providing the services to customers.

d. Cash sales are made to customers.

79. What effect does recognizing an accrued liability for utilities at the end of the accounting period have on the

accounting equation?

a. Assets decrease and stockholders’ equity decreases.

b. Liabilities increase and stockholders’ equity increases.

c. Assets decrease and liabilities decrease.

d. Liabilities increase and stockholders’ equity decreases.

80. What effect does recognizing revenue at the end of the accounting period for rent previously received in advance have

on the accounting equation for an insurance company?

a. Stockholders’ equity increases and liabilities increase.

b. Assets increase and stockholders’ equity increases.

c. Assets decrease and liabilities decrease.

d. Liabilities decrease and stockholders’ equity increases.

Chapter 4

Page 31

81. Lincoln Corp. received advance payments from customers during 2017 of $10,000. At December 31, 2017, $1,000 of

the advance payments still had not been earned. After the adjustments are recorded and posted at December 31, 2017,

what are the balances in Unearned Service Revenue and Service Revenue?

Unearned Service Revenue Service Revenue

a.

$1,000 $9,000

b.

$1,000 $10,000

c.

$11,000 $1,000

d.

$9,000 $10,000

82. Stockton Co. received advance payments from customers during 2017 of $6,000. At December 31, 2016, $1,300 of the

advance payments still had not been earned. After the adjustments are recorded and posted at December 31, 2016, what

will the balances be in the Unearned Book Revenue and Book Revenue accounts?

Unearned Book Revenue Book Revenue

a.

$1,300 $6,000

b.

$1,300 $4,700

c.

$6,000 $1,300

d.

None of these choices

Chapter 4

Page 32

83. Cuisine Company received a 6-month, 6% note for $10,000 from its president on October 1, 2016. The note is due on

March 31, 2017. If Cuisine’s accounting period ends on December 31, how much interest revenue should Cuisine

recognize during 2016 and 2017?

2016 2017

a.

$450 $150

b.

$600 $ 0

c.

$300 $300

d.

$150 $150

Chapter 4

Page 33

84. Vivo Co. received an 8-month, 9% note for $100,000 from its agent on October 1, 2016. The note is due on May 30,

2017. If Vivo accounting period ends on December 31, 2016, how much interest revenue should Vivo recognize during

2016 and 2017?

2016 2017

a.

$3,750 $2,250

b.

$2,250 $3,750

c.

$9,000 $ 0

d.

$3,375 $5,625

85. Which one of the following is an example of an accrued liability?

a. Wages have been earned by employees, but have not been paid at the end of the period.

b. Equipment that will benefit several periods has been purchased.

c. An insurance policy that expires in a future period has been acquired.

d. Supplies are purchased and used over several months.

Chapter 4

Page 34

86. Adjustments are necessary only if

a. the cash basis of accounting is used for all accounting periods.

b. cash receipts and payments occur before or after the point in time when revenues and expenses should be

recognized under the accrual basis of accounting.

c. management reports its adjustments on the statement of cash flows.

d. the company reports revenue in the same period cash is collected.

87. What happens to the accounting equation when the adjustment for depreciation expense for the accounting period is

recorded?

a. Assets decrease and stockholders’ equity decreases.

b. Assets increase and stockholders’ equity increases.

c. Assets decrease and liabilities decrease.

d. Liabilities increase and stockholders’ equity decreases.

88. What happens to the accounting equation when the adjustment that recognizes accrued interest revenue is recorded?

a. Assets increase and liabilities increase.

b. Assets increase and stockholders’ equity increases.

c. Assets decrease and liabilities decrease.

d. Stockholders’ equity increases and decreases by the same amount.

Chapter 4

Page 35

89. Charlie Company had $1,800 of supplies on hand at January 1. During the year, supplies with a cost of $4,000 were

purchased. At December 31, the actual supplies on hand amount to $1,300. After the adjustments are recorded and posted

at December 31, determine the balances in the Supplies and Supplies Expense accounts.

Supplies Supplies Expense

a.

$1,800 $4,000

b.

$1,300 $4,500

c.

$5,300 $5,800

d.

$1,300 $5,800

90. Lucky Company purchased a truck at a cost of $12,000 in 2012. As of January 1, 2017, depreciation of $10,000 had

been recorded on this asset. Depreciation expense for 2017 is $2,000. After the adjustments are recorded and posted at

December 31, 2017, what is the carrying value of the truck?

a. $2,000

b. $5,500

c. $12,000

d. $0

Chapter 4

Page 36

91. Starlight Associates, Inc. recorded salary expense of $100,000 in 2017. However, additional salaries of $5,000 had

been earned, but not paid or recorded at December 31, 2017. After the adjustments are recorded and posted at December

31, 2017, what are the balances in the Salaries Expense and Salaries Payable accounts?

Salaries Expense Salaries Payable

a.

$105,000 $5,000

b.

$100,000 $0

c.

$100,000 $5,000

d.

$105,000 $0

92. On December 1, 2017, Vonn Corporation paid $8,000 rent in advance. The rent per month is $1,000. If Vonn’s

accounting period ends on December 31, 2017, what will be reported on the financial statements?

a. Prepaid Rent of $7,000 on its balance sheet at December 31, 2017

b. Prepaid Rent of $8,000 on its balance sheet at December 31, 2017

c. Rent Expense of $8,000 on its 2017 income statement

d. Rent Revenue of $7,000 on its 2017 income statement

Chapter 4

Page 37

93. Frank Corporation purchased supplies at a cost of $15,000 during 2017. At January 1, 2017, supplies on hand were

$2,000. At December 31, 2017, supplies on hand are $2,500. Calculate supplies expense for 2017.

a. $15,500

b. $14,500

c. $15,000

d. $17,000

94. Place Corp. purchased supplies at a cost of $12,000 during the year. At January 1, supplies on hand were $2,000. At

December 31, supplies on hand are $1,000. Determine the amount of supplies expense for the year.

a. $10,000

b. $12,000

c. $13,000

d. $14,000

Chapter 4

Page 38

95. Windstar Corp. purchased supplies at a cost of $6,000 during the year. At December 31, supplies on hand are $1,400.

Supplies expense for the year was $5,200. How much were supplies on hand at January 1?

a. $2,200

b. $11,200

c. $1,400

d. $600

96. Gear Shop purchased supplies at a cost of $1,000 during the year. At January 1, the beginning balance in the Supplies

account was $300. At December 31, supplies on hand are $100. Determine supplies expense for the year.

a. $1,300

b. $1,200

c. $1,100

d. $1,400

Chapter 4

Page 39

97. Vake purchased supplies at a cost of $18,000 during 2017. At January 1, 2017, the beginning balance in the Supplies

account was $1,000. For 2017, supplies expense was $16,000. How much “Supplies” are on hand as of December 31,

2017?

a. $1,000

b. $3,000

c. $16,000

d. $17,000

98. Which one of the following adjustments will increase assets?

a. Interest incurred on money borrowed during the period but not yet paid to the bank is accrued.

b. Rent revenue is recorded for amounts owed by a tenant but not yet paid.

c. The use of supplies is recorded.

d. Depreciation for the period is recorded.

99. A company forgot to record four adjustments during 2017. Which one of the following omissions of adjustments will

understate net income?

a. Sales made during the last week of the period are not recorded.

b. Interest on monies borrowed has not yet been recorded.

c. Prepaid insurance is not reduced for the portion of the policy that has expired during the period.

d. Income taxes owed but not yet paid are ignored.

100. A company forgot to record four adjustments during 2017. Which one of the following omissions of adjustments will

overstate assets?

a. Sales made during the last week of the period are not recorded.

b. Interest on monies borrowed has not yet been recorded.

c. Prepaid insurance is not reduced for the portion of the policy that has expired during the period.

d. Income taxes owed but not yet paid are ignored.

Chapter 4

Page 40

101. CBA Corp. has grown significantly over the past year. One area that has plagued the controller of CBA is the

reconciliation of supplies expense. The end-of-year supplies on hand totaled $20, purchases totaled $500, and supplies on

hand at the beginning of the year amounted to $300. How much will CBA report as supplies expense for the current year?

a. $20

b. $780

c. $300

d. $500