161)
All of the following are true regarding prepaid expenses except:
A)
They are paid for in advance of receiving their benefits.
B)
When they are used, their costs become expenses.
C)
They are assets.
D)
The adjusting entry for prepaid expenses increases expenses and decreases liabilities.
E)
The adjusting entry for prepaid expenses increases expenses and decreases assets.
162)
An annual reporting period consisting of any twelve consecutive months is known as:
A)
Calendar year.
B)
Interim financial period.
C)
Seasonal year.
D)
Fiscal year.
E)
Natural business year.
163)
Two accounting principles central to accrual accounting basis that are relied on in the adjusting
process are:
A)
Revenue recognition and going-concern.
B)
Revenue recognition and monetary unit.
C)
Expense recognition (matching) and cost.
D)
Revenue recognition and Expense recognition (matching).
E)
Expense recognition (matching) and business entity.
164)
All of the following are true regarding unearned revenues except:
A)
The adjusting entry for unearned revenues increases assets and increases revenues.
B)
The adjusting entry for unearned revenues increases revenues and decreases liabilities.
C)
They are payments received in advance of services performed.
D)
They are liabilities.
E)
As they are earned, they become revenues.
165)
Assuming prepaid expenses are originally recorded in balance sheet accounts, the adjusting entry to
record use of a prepaid expense is:
A)
Increase an expense; decrease a liability.
B)
Increase an expense; decrease an asset.
C)
Increase an asset; increase revenue.
D)
Increase an expense; increase a liability.
E)
Decrease a liability; increase revenue.
166)
Assuming unearned revenues are originally recorded in balance sheet accounts, the adjusting entry
to record earning of unearned revenue is:
A)
Decrease a liability; increase revenue.
B)
Increase an expense; increase a liability.
C)
Increase an expense; decrease a liability.
D)
Increase an asset; increase revenue.
E)
Increase an expense; decrease an asset.
167)
The adjusting entry to record an accrued expense is:
A)
Decrease a liability; increase revenue.
B)
Increase an expense; increase a liability.
C)
Increase an expense; decrease a liability.
D)
Increase an asset; increase revenue.
E)
Increase an expense; decrease an asset.
168)
The adjusting entry to record an accrued revenue is:
A)
Increase an expense; decrease an asset.
B)
Decrease a liability; increase revenue.
C)
Increase an expense; increase a liability.
D)
Increase an expense; decrease a liability.
E)
Increase an asset; increase revenue.
169)
On October 1, Goodwell Company rented warehouse space to a tenant for $2,500 per month. The
tenant paid five months’ rent in advance on that date, with the lease beginning immediately. The
cash receipt was credited to the Unearned Rent account. The company’s annual accounting period
ends on December 31. The adjusting entry needed on December 31 is:
A)
Debit Rent Receivable, $12,500; credit Rent Earned, $12,500.
B)
Debit Unearned Rent, $5,000; credit Rent Earned, $5,000.
C)
Debit Rent Receivable, $7,500; credit Rent Earned, $7,500.
D)
Debit Unearned Rent, $12,500; credit Rent Earned, $12,500.
E)
Debit Unearned Rent, $7,500; credit Rent Earned, $7,500.
170)
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, with the lease beginning
immediately. The cash receipt 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) $10,000. C) $7,500. D) $12,500. E) $2,500.
171)
Sanborn Company rents space to a tenant for $2,200 per month. The tenant currently owes rent for
November and December. The tenant has agreed to pay the November, December, and January
rents in full on January 15 and has agreed not to fall behind again. The adjusting entry needed on
December 31 is:
A)
Debit Unearned Rent, $4,400; credit Rent Earned, $4,400.
B)
Debit Rent Receivable, $4,400; credit Rent Earned, $4,400.
C)
Debit Rent Receivable, $6,600; credit Rent Earned, $6,600.
D)
Debit Rent Receivable, $2,200; credit Rent Earned, $2,200.
E)
Debit Unearned Rent, $2,200; credit Rent Earned, $2,200.
172)
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 Cash, $5,400.
B)
Debit Salaries Expense, $5,400; credit Salaries Payable, $5,400.
C)
Debit Salaries Payable, $5,400; credit Salaries Expense, $5,400.
D)
Debit Salaries Expense, $9,000; credit Salaries Payable, $9,000.
E)
Debit Salaries Expense, $3,600; credit Salaries Payable, $3,600.
173)
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, and only prepares adjustments at year-end. The
adjusting entry needed on December 31 of the first year is:
A)
Debit Depreciation Expense, $18,000; credit Equipment, $18,000.
B)
Debit Depreciation Expense, $9,000; credit Accumulated Depreciation, $9,000.
C)
Debit Depreciation Expense, $18,000; credit Accumulated Depreciation, $18,000.
D)
Debit Depreciation Expense, $9,000; credit Equipment, $9,000.
E)
Debit Depreciation Expense, $90,000; credit Accumulated Depreciation, $90,000.
174)
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,
and only prepares adjustments at year-end. The adjusting entry needed to record annual
depreciation is:
A)
Debit Depreciation Expense, $15,000; credit Equipment, $15,000.
B)
Debit Depreciation Expense, $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 Equipment, $15,000; credit Accumulated Depreciation, $15,000.
175)
On November 1, Jovel Company loaned another company $100,000 at a 6.0% interest rate. The
note receivable plus interest will not be collected until March 1 of the following year. The
company’s annual accounting period ends on December 31. The amount of interest revenue that
should be reported in the first year is:
A) $5,000. B) $1,000. C) $6,000. D) $16,667. E) $0.
176)
On November 1, Jovel Company loaned another company $100,000 at a 6.0% interest rate. The
note receivable plus interest will not be collected until March 1 of the following year. The
company’s annual accounting period ends on December 31, and adjustments are only made at
year-end. The adjusting entry needed on December 31 is:
A)
Debit Interest Receivable, $500; credit Interest Revenue, $500.
B)
Debit Interest Receivable, $1,000; credit Interest Revenue, $1,000.
C)
No entry required.
D)
Debit Interest Expense, $1,000; credit Note Payable, $1,000.
E)
Debit Interest Expense, $5,000; credit Interest Payable, $5,000.
177)
On December 1, Casualty Insurance Company borrowed $50,000 at a 6.0% interest rate from One
Mutual Bank. The note payable plus interest will not be paid until April 1 of the following year.
The company’s annual accounting period ends on December 31 and adjustments are only made at
year-end. The adjusting entry needed on December 31 is:
A)
Debit Interest Expense, $250; credit Interest Payable, $250.
B)
Debit Interest Expense, $250; credit Note Payable, $250.
C)
Debit Interest Payable, $1,000; credit Interest Expense, $1,000.
D)
Debit Interest Expense, $1,000; credit Interest Payable, $1,000.
E)
No entry required.
178)
Which of the following statements is incorrect?
A)
An adjusted trial balance is a list of accounts and balances prepared after adjusting entries
have been recorded and posted to the ledger.
B)
Financial statements should be prepared directly from information in the unadjusted trial
balance.
C)
An unadjusted trial balance is a list of accounts and balances prepared before adjustments are
recorded.
D)
Financial statements can be prepared directly from information in the adjusted trial balance.
E)
Each trial balance amount is used in preparing the financial statements.
179)
On December 31, 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 Accounts Payable $215; credit Utilities Expense $215.
B)
Debit Prepaid Utilities $215; credit Accounts Payable $215.
C)
Debit Prepaid Utilities $215; credit Cash $215.
D)
Debit Utilities Expense $215; credit Accounts Payable $215.
E)
Debit Utilities Expense $215; credit Prepaid Utilities $215.
180)
On December 31, Winters Company received a $385 bill for the purchase of supplies in December
that it will not pay for until January 15. Winters follows a policy of recording all prepaid expenses
to asset accounts at the time of cash payment. The adjusting entry needed on December 31 to
accrue this cost is:
A)
Debit Supplies $385; credit Accounts Payable $385.
B)
Debit Supplies Expense $385; credit Supplies $385.
C)
Debit Accounts Payable $385; credit Supplies $385.
D)
Debit Accounts Payable $385; credit Cash $385.
E)
Debit Supplies Expense $385; credit Cash $385.
92
181)
On December 31, Carmack Company’s Prepaid Insurance account had a balance before adjustment
of $6,000. The insurance was purchased on July 1 of the same year for one year of insurance
coverage, with coverage beginning on that date. The adjusting entry needed on December 31 is:
A)
Debit Prepaid Insurance $6,000; credit Cash $6,000.
B)
Debit Insurance Expense $3,000; credit Prepaid Insurance $3,000.
C)
Debit Insurance Expense $3,000; credit Accounts Payable $3,000.
D)
Debit Insurance Expense $6,000; credit Accounts Payable $6,000.
E)
Debit Cash $6,000; credit Prepaid Insurance $6,000.
182)
On December 31, Winters Company’s Prepaid Rent account had a balance before adjustment of
$6,000. Three months’ rent was paid in advance on December 1, the first day of the lease term. The
adjusting entry needed on December 31 is:
A)
Debit Cash $2,000; credit Prepaid Rent $2,000.
B)
Debit Rent Expense $2,000; credit Accounts Payable $2,000.
C)
Debit Rent Expense $6,000; credit Accounts Payable $6,000.
D)
Debit Rent Expense $2,000; credit Prepaid Rent $2,000.
E)
Debit Prepaid Rent $6,000; credit Cash $6,000.
SHORT ANSWER QUESTIONS
183)
Match the following terms with the appropriate definition.
A. Accrual basis accounting
B. Cash basis accounting
C. Fiscal year
D. Interim financial statements
E. Depreciation
F. Straight-line depreciation
G. Time period assumption
H. Expense recognition (matching) principle
I. Accrued revenues
_____ 1. Any 12 consecutive months or 52-week period that a company adopts for its annual
reporting period.
2. A method that allocates equal amounts of an asset’s cost (less any salvage value) to
depreciation expense during its useful life.
_____ 3. Assumes that an organization’s activities can be divided into specific time periods
such as months, quarters, or years.
_____ 4. Aims to record expenses in the same accounting period as the revenues that are
earned as a result of those expenses.
_____ 5. The accounting system that uses the adjusting process to recognize revenues when
earned and expenses when incurred.
_____ 6. The process of allocating the costs of long-term assets to the income statement over
their expected useful lives.
_____ 7. Revenues earned in a period that are both unrecorded and not yet received in cash or
other assets.
_____ 8. The accounting system that recognizes revenue when cash is received and records
expenses when cash is paid.
_____ 9. A set of financial statements that covers less than one year, typically one, three, or six
months of activity.
184)
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. Prepaid expense
2. Unearned revenue
3. Accrued expense
4. Accrued revenue
185)
Match the following types of adjustments (a though d) with the transactions (1 through 4).
186)
Discuss the importance of periodic reporting and the time period assumption.
187)
Discuss how accrual accounting enhances the usefulness of financial statements.
188)
Identify the primary differences between accrual accounting and cash basis accounting.
189)
Explain the purpose of adjusting entries at the end of a period and provide an example of an
adjusting entry.
190)
List the three-steps of the adjusting process.
191)
Identify the types of adjusting entries and explain the purpose of each type.
192)
Explain how accounting adjustments affect financial statements and provide an example of an
adjustment that would impact the statements if not recorded.
193)
How is profit margin calculated? Discuss its use in analyzing a company’s performance.
194)
Describe the types of entries required in later periods that result from accruals.
195)
Describe the adjusting entries, including the accounts used, for 1) prepaid expenses, 2) depreciation
and 3) unearned revenues.
196)
Describe the adjusting entries, including the accounts used, for 1) accrued expenses and 2) accrued
revenues.
197)
Describe the two alternate methods used to account for prepaid expenses.
198)
What is an adjusted trial balance? Why is it prepared?
199)
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?
200)
Explain how the owner of a company uses the accrual basis of accounting.
ESSAY QUESTIONS
201)
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?