Chapter 2 Review of the Accounting Process
True/False Questions
1. Owners’ equity can be expressed as assets minus liabilities.
2. Debits increase asset accounts and decrease liability accounts.
3. Balance sheet accounts are referred to as temporary accounts because their balances are
always changing.
4. After an unadjusted trial balance is prepared, the next step in the accounting processing cycle
is the preparation of financial statements.
5. Adjusting journal entries are recorded at the end of any period when financial statements are
prepared.
6. Accruals occur when the cash flow precedes either revenue or expense recognition.
7. The adjusted trial balance contains only permanent accounts.
8. The income statement summarizes the operating activity of a firm at a particular point in time.
9. The balance sheet can be considered a change or flow statement.
Chapter 2 Review of the Accounting Process
10. The statement of cash flows summarizes transactions that caused cash to change during a
reporting period.
11. The statement of shareholders’ equity discloses the changes in the temporary shareholders’
equity accounts.
12. The post-closing trial balance contains only permanent accounts.
13. The closing process brings all temporary accounts to a zero balance and updates the balance in
the retained earnings account.
14. A reversing entry at the beginning of a period for salaries would include a debit to salaries
expense.
15. The sale of merchandise on account would be recorded in a sales journal.
16. The payment of cash to a supplier would be recorded in a purchases journal.
Multiple Choice Questions
17. The accounting equation can be stated as:
a. A + L – OE = 0.
b. A – L + OE = 0.
c. -A + L – OE = 0.
d. A – L – OE = 0.
18. Examples of external transactions include all of the following except:
a. Paying employee salaries.
b. Purchasing equipment.
c. Depreciating equipment.
d. Collecting a receivable.
19. Examples of internal transactions include all of the following except:
a. Writing off an uncollectible account.
b. Recording the expiration of prepaid insurance.
c. Recording unpaid salaries.
d. Paying salaries to company employees.
20. XYZ Corporation receives $100,000 from investors for issuing them shares of its stock.
XYZ’s journal entry to record this transaction would include a:
a. Debit to investments.
b. Credit to retained earnings.
c. Credit to capital stock.
d. Credit to revenue.
21. Incurring an expense for advertising on account would be recorded by:
a. Debiting liabilities.
b. Crediting assets.
c. Debiting an expense.
d. Debiting assets.
Chapter 2 Review of the Accounting Process
22. A sale on account would be recorded by:
a. Debiting revenue.
b. Crediting assets.
c. Crediting liabilities.
d. Debiting assets.
23. Mary Parker Co. invested $15,000 in ABC Corporation and received capital stock in
exchange. Mary Parker Co.’s journal entry to record this transaction would include a:
a. Debit to investments.
b. Credit to retained earnings.
c. Credit to capital stock.
d. Debit to expense.
24. Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down
payment and a 12% note for the balance. The journal entry to record this sale would include a:
a. Credit to cash.
b. Debit to cash discount.
c. Debit to note receivable.
d. Credit to note receivable.
Chapter 2 Review of the Accounting Process
25. Somerset Leasing received $12,000 for 24 months’ rent in advance. How should Somerset
record this transaction?
a.
Prepaid rent
12,000
Rent expense
12,000
b.
Cash
12,000
Deferred revenue
12,000
c.
Interest expense
12,000
Interest payable
12,000
d.
Salaries expense
12,000
Salaries payable
12,000
26. Davis Hardware Company uses a perpetual inventory system. How should Davis record the
sale of merchandise, costing $620, and sold on account for $960?
a.
Inventory
620
Accounts receivable
620
Sales
960
Revenue from sales
960
b.
Accounts receivable
960
Sales revenue
960
Cost of goods sold
620
Inventory
620
c.
Inventory
620
Gain on sale
340
Sales revenue
960
d.
Accounts receivable
960
Sales revenues
620
Gain on sale
340
Chapter 2 Review of the Accounting Process
27. Ace Bonding Company purchased merchandise inventory on account. The inventory costs
$2,000 and is expected to sell for $3,000. How should Ace record the purchase?
a.
Inventory
2,000
Accounts payable
b.
Cost of goods sold
2,000
Deferred revenue
1,000
Sales in advance
c.
Cost of goods sold
2,000
Inventory payable
d.
Cost of goods sold
2,000
Profit
1,000
Sales payable
28. Which of the following accounts has a normal debit balance?
a. Accounts payable.
b. Accrued taxes.
c. Accumulated depreciation.
d. Advertising expense.
29. An example of a contra account is:
a. Depreciation expense.
b. Accounts receivable.
c. Sales revenue.
d. Accumulated depreciation.
Chapter 2 Review of the Accounting Process
30. Making insurance payments in advance is an example of:
a. An accrued receivable transaction.
b. An accrued liability transaction.
c. A deferred revenue transaction.
d. A prepaid expense transaction.
31. Recording revenue that is earned, but not yet collected, is an example of:
a. A prepaid expense transaction.
b. A deferred revenue transaction.
c. An accrued liability transaction.
d. An accrued receivable transaction.
32. When a magazine company collects cash for selling a subscription, it is an example of:
a. An accrued liability transaction.
b. An accrued receivable transaction.
c. A prepaid expense transaction.
d. A deferred revenue transaction.
33. On December 31, 2015, Coolwear, Inc. had a balance in its prepaid insurance account of
$48,400. During 2016, $86,000 was paid for insurance. At the end of 2016, after adjusting
entries were recorded, the balance in the prepaid insurance account was 42,000. Insurance
expense for 2016 would be:
a. $ 6,400.
b. $134,400.
Chapter 2 Review of the Accounting Process
c. $ 86,000.
d. $ 92,400.
34. Adjusting entries are primarily needed for:
a. Cash basis accounting.
b. Accrual accounting.
c. Current value accounting.
d. Manual accounting systems.
35. Prepayments occur when:
a. Cash flow precedes expense recognition.
b. Sales are delayed pending credit approval.
c. Customers are unable to pay the full amount due when goods are delivered.
d. Manufactured goods await quality control inspections.
36. Accruals occur when cash flows:
a. Occur before expense recognition.
b. Occur after revenue or expense recognition.
c. Are uncertain.
d. May be substituted for goods or services.
37. On December 31, 2016, the end of Larry’s Used Cars’ first year of operations, the accounts
receivable was $53,600. The company estimates that $1,200 of the year-end receivables will
not be collected. Accounts receivable in the 2016 balance sheet will be valued at:
a. $53,600.
b. $54,800.
c. $52,400.
d. $ 1,200.
38. Cal Farms reported supplies expense of $2,000,000 this year. The supplies account decreased
by $200,000 during the year to an ending balance of $400,000. What was the cost of supplies
the Cal Farms purchased during the year?
a. $1,600,000.
b. $1,800,000.
c. $2,200,000.
d. $2,400,000.
Chapter 2 Review of the Accounting Process
39. Which of the following is not an adjusting entry?
a.
Prepaid rent
Rent expense
b.
Cash
Deferred revenue
c.
Interest expense
Interest payable
d.
Salaries expense
Salaries payable
40. The adjusting entry required when amounts previously recorded as deferred revenues are
recognized includes:
a. A debit to a liability.
b. A debit to an asset.
c. A credit to a liability.
d. A credit to an asset.
41. Which of the following accounts has a normal credit balance?
a. Salary expense.
b. Accrued income taxes payable.
c. Land.
d. Prepaid rent.
Chapter 2 Review of the Accounting Process
42. When a tenant makes an end–of–period adjusting entry credit to the “Prepaid rent” account:
a. (S)he usually debits cash.
b. (S)he usually debits an expense account.
c. (S)he debits a liability account.
d. (S)he) credits an owners’ equity account.
43. When a business makes an end–of-period adjusting entry with a debit to supplies expense, the
usual credit entry is made to:
a. Accounts payable.
b. Supplies.
c. Cash.
d. Retained earnings.
44. The adjusting entry required to record accrued expenses includes:
a. A credit to cash.
b. A debit to an asset.
c. A credit to an asset.
d. A credit to liability.
Chapter 2 Review of the Accounting Process
45. Carolina Mills purchased $270,000 in supplies this year. The supplies account increased by
$10,000 during the year to an ending balance of $66,000. What was supplies expense for
Carolina Mills during the year?
a. $300,000.
b. $280,000.
c. $260,000.
d. $240,000.
Chapter 2 Review of the Accounting Process
46. Yummy Foods purchased a two-year fire and extended coverage insurance policy on August
1, 2016, and charged the $4,200 premium to Insurance expense. At its December 31, 2016,
year-end, Yummy Foods would record which of the following adjusting entries?
a.
Insurance expense
875
Prepaid insurance
b.
Prepaid insurance
875
Insurance expense
c.
Insurance expense
875
Prepaid insurance
3,325
Insurance payable
d.
Prepaid insurance
3,325
Insurance expense
Entry on 8/1:
Insurance expense
Cash
47. The employees of Neat Clothes work Monday through Friday. Every other Friday the
company issues payroll checks totaling $32,000. The current pay period ends on Friday, July
3. Neat Clothes is now preparing quarterly financial statements for the three months ended
June 30. What is the adjusting entry to record accrued salaries at the end of June?
a.
Salaries expense
22,400
Prepaid salaries
9,600
Salaries payable
b.
Salaries expense
6,400
Salaries payable
c.
Prepaid salaries
9,600
Salaries payable
d.
Salaries expense
22,400
Salaries payable
Chapter 2 Review of the Accounting Process
48. On September 1, 2016, Fortune Magazine sold 600 one-year subscriptions for $81 each. The
total amount received was credited to deferred subscriptions revenue. What is the required
adjusting entry at December 31, 2016?
a.
Deferred subscriptions revenue
48,600
Subscriptions revenue
16,200
Prepaid subscriptions
32,400
b.
Deferred subscriptions revenue
16,200
Subscriptions revenue
16,200
c.
Deferred subscriptions revenue
16,200
Subscriptions payable
16,200
d.
Deferred subscriptions revenue
32,400
Subscriptions revenue
32,400
49. Mama’s Pizza Shoppe borrowed $8,000 at 9% interest on May 1, 2016, with principal and
interest due on October 31, 2017. The company’s fiscal year ends June 30, 2016. What
adjusting entry is necessary on June 30, 2016?
a.
No entry.
b.
Interest expense
240
Interest payable
240
c.
Interest expense
120
Interest payable
120
d.
Prepaid interest
120
Interest payable
120
Chapter 2 Review of the Accounting Process
50. On September 15, 2016, Oliver’s Mortuary received a $6,000, nine-month note bearing
interest at an annual rate of 10% from the estate of Jay Hendrix for services rendered. Oliver’s
has a December 31 year-end. What adjusting entry will the company record on December 31,
2016?
a.
Interest receivable
175
Interest revenue
175
b.
Interest receivable
230
Interest revenue
230
c.
Interest receivable
175
Notes receivable
175
d.
Interest receivable
600
Interest revenue
175
Cash
425
51. In its first year of operations Acme Corp. had income before tax of $400,000. Acme made
income tax payments totaling $150,000 during the year and has an income tax rate of 40%.
What is the balance in income tax payable at the end of the year?
a. $160,000 credit.
b. $150,000 credit.
c. $ 10,000 credit.
d. $ 10,000 debit.
Chapter 2 Review of the Accounting Process
52. Eve’s Apples opened business on January 1, 2016, and paid for two insurance policies
effective that date. The liability policy was $36,000 for 18 months, and the crop damage
policy was $12,000 for a two-year term. What is the balance in Eve’s prepaid insurance as of
December 31, 2016?
a. $ 9,000.
b. $18,000.
c. $30,000.
d. $48,000.
53. Fink Insurance collected premiums of $18,000,000 from its customers during the current year.
The adjusted balance in the Deferred premiums account increased from $6 million to $8
million dollars during the year. What is Fink’s revenue from insurance premiums recognized
for the current year?
a. $10,000,000.
b. $16,000,000.
c. $18,000,000.
d. $20,000,000.
54. On November 1, 2016, Tim’s Toys borrows $30,000,000 at 9% to finance the holiday sales
season. The note is for a six-month term and both principal and interest are payable at
maturity. What is the balance of interest payable for the loan as of December 31, 2016?
a. $ 112,500.
b. $ 225,000.
Chapter 2 Review of the Accounting Process
c. $ 450,000.
d. $1,350,000.
55. An economic resource of an entity is:
a. A revenue.
b. An asset.
c. A liability.
d. A contra asset until used.
56. Cost of goods sold is:
a. An asset account.
b. A revenue account.
c. An expense account.
d. A permanent equity account.
57. The balance in retained earnings at the end of the year is determined by retained earnings at
the beginning of the year:
a. Plus revenues, minus liabilities.
b. Plus accruals, minus deferrals.
c. Plus net income, minus dividends.
d. Plus assets, minus liabilities.
58. In its first year of operations Best Corp. had income before tax of $500,000. Best made
income tax payments totaling $210,000 during the year and has an income tax rate of 40%.
What was Best’s net income for the year?
a. $290,000.
b. $294,000.
c. $300,000.
d. $306,000.
59. Dave’s Duds reported cost of goods sold of $2,000,000 this year. The inventory account
increased by $200,000 during the year to an ending balance of $400,000. What was the cost of
merchandise that Dave’s purchased during the year?
a. $1,600,000.
b. $1,800,000.
c. $2,200,000.
d. $2,400,000.