Accounting Chapter 3 3 The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is.

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144) Adjusting entries made at the end of an accounting period accomplish all of the following

except:

A) Updating liability and asset accounts to their proper balances.

B) Assigning revenues to the periods in which they are earned.

C) Assigning expenses to the periods in which they are incurred.

D) Assuring that financial statements reflect the revenues earned and the expenses incurred.

E) Assuring that external transaction amounts remain unchanged.

145) 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 expense recognition (matching) principle.

C) The time period assumption.

D) Accrual basis accounting.

E) Revenue basis accounting.

146) 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 accounts.

D) Asset accounts.

E) Income statement accounts.

147) The accrual basis of accounting:

A) Is generally accepted for external reporting because it is more useful than cash basis for most

business decisions.

B) Is flawed because it gives complete information about cash flows.

C) Recognizes revenues when received in cash.

D) Recognizes expenses when paid in cash.

E) Eliminates the need for adjusting entries at the end of each period.

148) In its first year of operations, Grace Company reports the following: Earned revenues of

$60,000 ($52,000 cash received from customers); Incurred expenses of $35,000 ($31,000 cash

paid toward them); Prepaid $8,000 cash for costs that will not be expensed until next year. Net

income under the accrual basis of accounting is:

A) $17,000.

B) $21,000.

C) $13,000.

D) $25,000.

E) None of the answer choices is correct.

149) In its first year of operations, Grace Company reports the following: Earned revenues of

$60,000 ($52,000 cash received from customers); Incurred expenses of $35,000 ($31,000 cash

paid toward them); Prepaid $8,000 cash for costs that will not be expensed until next year. Net

income under the cash basis of accounting is:

A) $17,000.

B) $21,000.

C) $13,000.

D) $25,000.

E) None of the answer choices is correct.

150) Which of the following statements is incorrect?

A) Adjustments to prepaid expenses and unearned revenues involve previously recorded assets

and liabilities.

B) Accrued expenses and accrued revenues involve assets and liabilities that had not previously

been recorded.

C) Adjusting entries can be used to record both accrued expenses and accrued revenues.

D) Prepaid expenses, depreciation, and unearned revenues often require adjusting entries to

record the effects of the passage of time.

E) Adjusting entries affect only balance sheet accounts.

151) An adjusting entry could be made for each of the following except:

A) Prepaid expenses.

B) Depreciation.

C) Stockholder investments.

D) Unearned revenues.

E) Accrued expenses.

152) 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.

153) 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.

154) 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.

155) A company records the fees for legal services paid in advance by its clients in an account

called Unearned Legal Fees. If the company fails to make the end-of-period adjusting entry to

move the portion of these fees that has been earned to a revenue account, one effect will be:

A) An overstatement of equity.

B) An understatement of equity.

C) An understatement of assets.

D) An understatement of liabilities.

E) An overstatement of assets.

156) 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.

157) 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) 33.3%

158) All of the following statements regarding profit margin are true except:

A) Profit margin reflects the percent of profit in each dollar of revenue.

B) Profit margin is also called return on sales.

C) Profit margin can be used to compare a firm’s performance to its competitors.

D) Profit margin is calculated by dividing net income by net sales.

E) Profit margin is not a useful measure of a company’s operating results.

159) A company had $6,992,000 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) 46.0%.

160) On July 1 Olive Co. paid $7,500 cash for management services to be performed over a two-

year period. Olive follows a policy of recording all prepaid expenses to asset accounts at the time

of cash payment. On July 1 Olive 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.

161) 161. On July 1 of the current calendar year, Olive Co. paid $7,500 cash for management

services to be performed over a two-year period beginning July 1. Olive follows a policy of

recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry

on December 31 of the current year for Olive would include:

A) A debit to an expense and a credit to a prepaid expense for $5,625.

B) A debit to a prepaid expense and a credit to Cash for $5,625.

C) A debit to an expense and a credit to a prepaid expense for $1,875.

D) A debit to a prepaid expense and a credit to an expense for $1,875.

E) A credit to a liability and a debit to a prepaid expense for $1,875.

162) Accrued revenues:

A) At the end of one accounting period result in cash receipts in a future period.

B) At the end of one accounting period often result in cash payments in the next period.

C) Are also called unearned revenues.

D) Are listed on the balance sheet as liabilities.

E) Are recorded at the end of an accounting period because cash has already been received for

revenues earned.

163) 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.

164) 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.

165) The periodic expense created by allocating the cost of plant and equipment to the periods in

which they are used, representing the expense of using the assets, is called:

A) Accumulated depreciation.

B) A contra account.

C) The expense recognition (matching) principle.

D) Depreciation expense.

E) An accrued account.

166) 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.

167) 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.

168) On April 1, a company paid the $1,350 premium on a three-year insurance policy with

benefits beginning on that date. What amount of the insurance expense will be reported on the

annual income statement for the first year ended December 31?

A) $1,350.00.

B) $450.00.

C) $1,012.50.

D) $337.50.

E) $37.50.

169) 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 first year ended December 31?

A) $1,200.

B) $2,400.

C) $1,000.

D) $400.

E) $1,400.

170) A company had no office supplies available at the beginning of the year. During the year,

the company purchased $250 worth of office supplies. On December 31, $75 worth of office

supplies remained. How much should the company report as office supplies expense for the

year?

A) $75.

B) $125.

C) $175.

D) $250.

E) $325.

171) 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.

172) 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.

173) Which of the following assets is not depreciated?

A) Store fixtures.

B) Computers.

C) Land.

D) Buildings.

E) Equipment.

174) 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 stockholders.

D) Accrued wages.

E) Expired portion of prepaid insurance.

175) 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.

176) Fragmental Co. leased a portion of its store to another company for eight months beginning

on October 1, at a monthly rate of $800. Fragmental collected the entire $6,400 cash on October

1 and recorded it as unearned revenue. Assuming adjusting entries are only made at year-end, the

adjusting entry made by Fragmental Co. on December 31 would be:

A) A debit to Rent Revenue and a credit to Cash for $2,400.

B) A debit to Rent Revenue and a credit to Unearned Rent for $2,400.

C) A debit to Cash and a credit to Rent Revenue for $6,400.

D) A debit to Unearned Rent and a credit to Rent Revenue for $2,400.

E) A debit to Unearned Rent and a credit to Rent Revenue for $4,000.

177) On May 1, Sellers Marketing Company received $1,500 from Franco Marcelli for a

marketing campaign effective from May 1 of the current 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. Assuming adjustments are only made at year-end, 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.

178) 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.

179) The adjusting entry at the end of an accounting period to record the unpaid salaries of

employees for work provided is:

A) Debit Unpaid Salaries and credit Salaries Payable.

B) Debit Salaries Payable and credit Salaries Expense.

C) Debit Salaries Expense and credit Cash.

D) Debit Salaries Expense and credit Salaries Payable.

E) Debit Cash and credit Salaries Expense.

180) 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.

181) 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.

182) 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.

183) 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. Assuming the college

prepares adjustments monthly, 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.

184) On January 1, Fashion Forward Magazine received $15,000 from subscribers for the annual

subscriptions that it recorded in Unearned Subscription Revenue. The issues of the magazine are

mailed to subscribers quarterly. What amount of subscription revenue should the magazine

recognize on March 31 when the first issue is sent in March?

A) $15,000.

B) $1,250.

C) $7,500.

D) $3,750.

E) $0.