The Accounting Information System
3 – 21
Multiple Choice Answers—Conceptual
Test Bank for Intermediate Accounting, Seventeenth Edition
3 – 22
MULTIPLE CHOICE—Computational
86. Maso Company recorded journal entries for the issuance of common stock for $200,000,
the payment of $65,000 on accounts payable, and the payment of salaries expense of
$105,000. What net effect do these entries have on stockholders’ equity?
a. Increase of $200,000.
b. Increase of $135,000.
c. Increase of $95,000.
d. Increase of $30,000.
87. Mune Company recorded journal entries for the declaration of $250,000 of dividends, the
$160,000 increase in accounts receivable for services rendered, and the purchase of
equipment for $105,000. What net effect do these entries have on stockholders’ equity?
a. Decrease of $355,000.
b. Decrease of $195,000.
c. Decrease of $90,000.
d. Increase of $55,000.
88. Pappy Corporation received cash of $36,000 on September 1, 2020 for one year’s rent in
advance and recorded the transaction with a credit to Unearned Rent Revenue. The
December 31, 2020 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent Revenue, $12,000.
b. debit Rent Revenue and credit Unearned Rent Revenue, $24,000.
c. debit Unearned Rent Revenue and credit Rent Revenue, $12,000.
d. debit Cash and credit Unearned Rent Revenue, $24,000.
89. Panda Corporation paid cash of $120,000 on June 1, 2020 for one year’s rent in advance
and recorded the transaction with a debit to Prepaid Rent. The December 31, 2020
adjusting entry is
a. debit Prepaid Rent and credit Rent Expense, $50,000.
b. debit Prepaid Rent and credit Rent Expense, $70,000.
c. debit Rent Expense and credit Prepaid Rent, $70,000.
d. debit Prepaid Rent and credit Cash, $50,000.
90. Tate Company purchased equipment on November 1, 2020 and gave a 3-month, 9% note
with a face value of $80,000. The December 31, 2020 adjusting entry is
a. debit Interest Expense and credit Interest Payable, $7,200.
b. debit Interest Expense and credit Interest Payable, $1,800.
c. debit Interest Expense and credit Cash, $1,200.
d. debit Interest Expense and credit Interest Payable, $1,200.
The Accounting Information System
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91. Brown Company’s account balances at December 31, 2020 for Accounts Receivable and
the related Allowance for Doubtful Accounts are $920,000 debit and $2,100 credit,
respectively. From an aging of accounts receivable, it is estimated that $39,000 of the
December 31 receivables will be uncollectible. The necessary adjusting entry would
include a credit to the allowance account for
a. $39,000.
b. $41,100.
c. $36,900.
d. $2,100.
92. Chen Company’s account balances at December 31, 2020 for Accounts Receivable and
the Allowance for Doubtful Accounts are $800,000 debit and $1,500 credit. Sales during
2020 were $2,750,000. It is estimated that 1% of sales will be uncollectible. The adjusting
entry would include a credit to the allowance account for
a. $29,000.
b. $27,500.
c. $26,000.
d. $8,000.
93. Starr Corporation loaned $600,000 to another corporation on December 1, 2020 and
received a 3-month, 8% interest-bearing note with a face value of $600,000. What
adjusting entry should Starr make on December 31, 2020?
a. Debit Interest Receivable and credit Interest Revenue, $12,000.
b. Debit Cash and credit Interest Revenue, $4,000.
c. Debit Interest Receivable and credit Interest Revenue, $4,000.
d. Debit Cash and credit Interest Receivable, $12,000.
94. A company receives interest on a $90,000, 8%, 5-year note receivable each April 1. At
December 31, 2020, the following adjusting entry was made to accrue interest receivable:
Interest Receivable …………………………………………………….. 5,400
Interest Revenue …………………………………………….. 5,400
Assuming that the company does not use reversing entries, what entry should be made
on April 1, 2021 when the annual interest payment is received?
a. Cash ………………………………………………………………………… 1,800
Interest Revenue …………………………………………….. 1,800
b. Cash ………………………………………………………………………… 5,400
Interest Receivable ………………………………………….. 5,400
c. Cash ………………………………………………………………………… 7,200
Interest Receivable ………………………………………….. 5,400
Interest Revenue …………………………………………….. 1,800
d. Cash ………………………………………………………………………… 7,200
Interest Revenue …………………………………………….. 7,200
Test Bank for Intermediate Accounting, Seventeenth Edition
3 – 24
*95. A company receives interest on a $90,000, 8%, 5-year note receivable each April 1. At
December 31, 2020, the following adjusting entry was made to accrue interest receivable:
Interest Receivable ……………………………………………………. 5,400
Interest Revenue …………………………………………….. 5,400
Assuming that the company does use reversing entries, what entry should be made on
April 1, 2021 when the annual interest payment is received?
a. Cash ……………………………………………………………………….. 1,800
Interest Revenue …………………………………………….. 1,800
b. Cash ……………………………………………………………………….. 5,400
Interest Receivable …………………………………………. 5,400
c. Cash ………………………………………………………………………. 7,200
Interest Receivable …………………………………………. 5,400
Interest Revenue …………………………………………….. 1,800
d. Cash ……………………………………………………………………….. 7,200
Interest Revenue …………………………………………….. 7,200
96. Murphy Company sublet a portion of its warehouse for five years at an annual rental of
$75,000, beginning on May 1, 2020. The tenant, Sheri Charter, paid one year’s rent in
advance, which Murphy recorded as a credit to Unearned Rent Revenue. Murphy reports
on a calendar-year basis. The adjustment on December 31, 2020 for Murphy should be
a. No entry
b. Unearned Rent Revenue ……………………………………………. 25,000
Rent Revenue ………………………………………………… 25,000
c. Rent Revenue …………………………………………………………… 25,000
Unearned Rent Revenue …………………………………. 25,000
d. Unearned Rent Revenue ……………………………………………. 50,000
Revenue Revenue …………………………………………… 50,000
97. During the first year of Wilkinson Co.’s operations, all purchases were recorded as assets.
Supplies in the amount of $28,800 were purchased. Actual year-end supplies amounted to
$6,600. The adjusting entry for store supplies will
a. increase net income by $22,200.
b. increase expenses by $22,200.
c. decrease supplies by $6,600.
d. debit Accounts Payable for $6,600.
The Accounting Information System
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98. Big-Mouth Frog Corporation had revenues of $330,000, expenses of $200,000, and
dividends of $45,000. When Income Summary is closed to Retained Earnings, the amount
of the debit or credit to Retained Earnings is a
a. debit of $85,000.
b. debit of $130,000.
c. credit of $85,000.
d. credit of $130,000.
*99. The income statement of Dolan Corporation for 2020 included the following items:
Interest revenue $141,000
Salaries and wages expense 210,000
Insurance expense 21,200
The following balances have been excerpted from Dolan Corporation’s balance sheets:
December 31, 2020 December 31, 2019
Interest receivable $18,200 $15,000
Salaries and wages payable 17,800 8,400
Prepaid insurance 2,200 3,000
The cash received for interest during 2020 was
a. $122,800.
b. $137,800.
c. $141,000.
d. $144,200.
*100. The income statement of Dolan Corporation for 2020 included the following items:
Interest revenue $141,000
Salaries and wages expense 210,000
Insurance expense 21,200
The following balances have been excerpted from Dolan Corporation’s balance sheets:
December 31, 2020 December 31, 2019
Interest receivable $18,200 $15,000
Salaries and wages payable 17,800 8,400
Prepaid insurance 2,200 3,000
The cash paid for salaries and wages during 2020 was
a. $219,400.
b. $200,600.
c. $201,600.
d. $227,800.
Test Bank for Intermediate Accounting, Seventeenth Edition
3 – 26
*101. The income statement of Dolan Corporation for 2020 included the following items:
Interest revenue $141,000
Salaries and wages expense 210,000
Insurance expense 21,200
The following balances have been excerpted from Dolan Corporation’s balance sheets:
December 31, 2020 December 31, 2019
Interest receivable $18,200 $15,000
Salaries and wages payable 17,800 8,400
Prepaid insurance 2,200 3,000
The cash paid for insurance premiums during 2020 was
a. $19,000.
b. $18,200.
c. $22,000.
d. $20,400.
*102. Olsen Company paid or collected during 2020 the following items:
Insurance premiums paid $ 30,800
Interest collected 69,800
Salaries paid 280,400
The following balances have been excerpted from Olsen’s balance sheets:
December 31, 2020 December 31, 2019
Prepaid insurance $ 2,400 $ 3,000
Interest receivable 7,400 5,800
Salaries and wages payable 24,600 21,200
The insurance expense on the income statement for 2020 was
a. $25,400.
b. $30,200.
c. $31,400.
d. $36,200.
The Accounting Information System
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*103. Olsen Company paid or collected during 2020 the following items:
Insurance premiums paid $ 30,800
Interest collected 69,800
Salaries paid 280,400
The following balances have been excerpted from Olsen’s balance sheets:
December 31, 2020 December 31, 2019
Prepaid insurance $ 2,400 $ 3,000
Interest receivable 7,400 5,800
Salaries and wages payable 24,600 21,200
The interest revenue on the income statement for 2020 was
a. $56,600.
b. $68,200.
c. $71,400.
d. $83,000.
*104. Olsen Company paid or collected during 2020 the following items:
Insurance premiums paid $ 30,800
Interest collected 69,800
Salaries and wages paid 280,400
The following balances have been excerpted from Olsen’s balance sheets:
December 31, 2020 December 31, 2019
Prepaid insurance $ 2,400 $ 3,000
Interest receivable 7,400 5,800
Salaries and wages payable 24,600 21,200
Salaries and wages expense on the income statement for 2020 was
a. $234,600.
b. $277,000.
c. $283,800.
d. $326,200.
*105. The Supplies account had a balance at the beginning of year 3 of $8,000 (before the
reversing entry). Payments for purchases of supplies during year 3 amounted to $50,000
and were recorded as expense. A physical count at the end of year 3 revealed supplies
costing $14,500 were on hand. Reversing entries are used by this company. The required
adjusting entry at the end of year 3 will include a debit to:
a. Supplies Expense for $6,500.
b. Supplies for $6,500.
c. Supplies Expense for $43,500.
d. Supplies for $14,500.
Test Bank for Intermediate Accounting, Seventeenth Edition
3 – 28
*106. At the end of 2020, Drew Company made four adjusting entries for the following items:
1. Depreciation expense, $25,000.
2. Expired insurance, $2,200 (originally recorded as prepaid insurance.)
3. Interest payable, $6,000.
4. Rent receivable, $10,000.
In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that
may be reversed is (are)
a. Entry No. 3 only.
b. Entry No. 4 only.
c. Entry No. 3 and No. 4.
d. Entry No. 2, No. 3 and No. 4.
*107. Garcia Corporation received cash of $60,000 on August 1, 2020 for one year’s rent in
advance and recorded the transaction with a credit to Rent Revenue. The December 31,
2020 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent Revenue, $25,000.
b. debit Rent Revenue and credit Unearned Rent Revenue, $35,000.
c. debit Unearned Rent Revenue and credit Rent Revenue, $25,000.
d. debit Cash and credit Unearned Rent Revenue, $35,000.
*108. Lopez Company received $18,000 on April 1, 2020 for one year’s rent in advance and
recorded the transaction with a credit to a nominal account. The December 31, 2020
adjusting entry is
a. debit Rent Revenue and credit Unearned Rent Revenue, $4,500.
b. debit Rent Revenue and credit Unearned Rent Revenue, $13,500.
c. debit Unearned Rent Revenue and credit Rent Revenue, $4,500.
d. debit Unearned Rent Revenue and credit Rent Revenue, $13,500.
*109. Gibson Company paid $24,000 on June 1, 2020 for a two-year insurance policy and
recorded the entire amount as Insurance Expense. The December 31, 2020 adjusting
entry is
a. debit Insurance Expense and credit Prepaid Insurance, $7,000.
b. debit Insurance Expense and credit Prepaid Insurance, $17,000.
c. debit Prepaid Insurance and credit Insurance Expense, $7,000
d. debit Prepaid Insurance and credit Insurance Expense, $17,000.
Multiple Choice Answers—Computational
The Accounting Information System
3 – 29
MULTIPLE CHOICE—CPA Adapted
110. On September 1, 2020, Lowe Co. issued a note payable to National Bank in the amount
of $1,500,000, bearing interest at 9%, and payable in three equal annual principal
payments of $500,000. On this date, the bank’s prime rate was 8%. The first payment for
interest and principal was made on September 1, 2021. At December 31, 2021, Lowe
should record accrued interest payable of
a. $45,000.
b. $40,000.
c. $30,000.
d. $25,000.
111. Eaton Co. sells major household appliance service contracts for cash. The service
contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts
are credited to Unearned Service Revenue. This account had a balance of $5,700,000 at
December 31, 2020 before year-end adjustment. Service contract costs are charged as
incurred to the Service Contract Expense account, which had a balance of $1,350,000 at
December 31, 2020.
Service contracts still outstanding at December 31, 2020 expire as follows:
During 2021 $1,440,000
During 2022 1,710,000
During 2023 1,050,000
What amount should be reported as Unearned Service Revenue in Eaton’s December 31,
2020 balance sheet?
a. $4,350,000.
b. $4,200,000.
c. $2,850,000.
d. $1,500,000.
112. In November and December 2020, Lane Co., a newly organized magazine publisher,
received $75,000 for 1,000 three-year subscriptions at $25 per year, starting with the
January 2021 issue. Lane included the entire $75,000 in its 2020 income tax return. What
amount should Lane report in its 2020 income statement for subscriptions revenue?
a. $0.
b. $4,166.
c. $25,000.
d. $75,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
3 – 30
113. On June 1, 2020, Nott Corp. loaned Horn $1,600,000 on a 12% note, payable in five
annual installments of $320,000 beginning January 2, 2021. In connection with this loan,
Horn was required to deposit $5,000 in a noninterest-bearing escrow account. The
amount held in escrow is to be returned to Horn after all principal and interest payments
have been made. Interest on the note is payable on the first day of each month beginning
July 1, 2020. Horn made timely payments through November 1, 2020. On January 2,
2021, Nott received payment of the first principal installment plus all interest due. At
December 31, 2020, Nott’s interest receivable on the loan to Horn should be
a. $0.
b. $16,000.
c. $32,000.
d. $48,000.
114. Included in Allen Corp.’s balance sheet at June 30, 2021 is a 10%, $4,000,000 note
payable. The note is dated October 1, 2019 and is payable in three equal annual
payments of $2,000,000 plus interest. The first interest and principal payment was made
on October 1, 2020. In Allen’s June 30, 2021 balance sheet, what amount should be
reported as accrued interest payable for this note?
a. $450,000.
b. $300,000.
c. $150,500.
d. $100,000.
115. Colaw Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is
paid in the next biweekly period. Colaw accrues salaries expense only at its December 31
year end. Data relating to salaries earned in December 2020 are as follows:
Last payroll was paid on 12/26/20, for the 2-week period ended 12/26/20.
Overtime pay earned in the 2-week period ended 12/26/20 was $25,000.
Remaining work days in 2020 were December 29, 30, 31, on which days there was no
overtime.
The recurring biweekly salaries total $450,000.
Assuming a five-day workweek, Colaw should record a liability at December 31, 2020 for
accrued salaries of
a. $135,000.
b. $160,000.
c. $270,000.
d. $295,000.
The Accounting Information System
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116. Tolan Corp.’s trademark was licensed to Eddy Co. for royalties of 15% of sales of the
trademarked items. Royalties are payable semiannually on March 15 for sales in July
through December of the prior year, and on September 15 for sales in January through
June of the same year. Tolan received the following royalties from Eddy:
March 15 September 15
2019 $10,000 $15,000
2020 12,000 19,000
Eddy estimated that sales of the trademarked items would total $60,000 for July through
December 2020. In Tolan’s 2020 income statement, the royalty revenue should be
a. $28,000.
b. $31,000.
c. $40,000.
d. $41,000.
117. At December 31, 2020, Sue’s Boutique had 1,500 gift certificates outstanding, which had
been sold to customers during 2020 for $60 each. Sue’s operates on a gross profit of 60%
of its sales. What amount of revenue pertaining to the 1,500 outstanding gift certificates
should be deferred at December 31, 2020?
a. $0.
b. $36,000.
c. $54,000.
d. $90,000.
*118. Compared to the accrual basis of accounting, the cash basis of accounting overstates
income by the net increase during the accounting period of the
Accounts Receivable Accrued Expenses Payable
a. No No
b. No Yes
c. Yes No
d. Yes Yes
*119. Gregg Corp. reported revenue of $1,650,000 in its accrual basis income statement for the
year ended June 30, 2021. Additional information was as follows:
Accounts receivable June 30, 2020 $400,000
Accounts receivable June 30, 2021 530,000
Uncollectible accounts written off during the fiscal year 15,000
Under the cash basis, Gregg should report revenue of
a. $1,235,000.
b. $1,250,000.
c. $1,505,000.
d. $1,535,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
3 – 32
*120. Jim Yount, M.D., keeps his accounting records on the cash basis. During 2021, Dr. Yount
collected $390,000 from his patients. At December 31, 2020, Dr. Yount had accounts
receivable of $40,000. At December 31, 2021, Dr. Yount had accounts receivable of
$70,000 and unearned revenue of $10,000. On the accrual basis, how much was Dr.
Yount’s patient service revenue for 2021?
a. $350,000.
b. $410,000.
c. $420,000.
d. $430,000.
*121. The following information is available for Ace Company for 2020:
Disbursements for purchases $1,560,000
Increase in trade accounts payable 100,000
Decrease in merchandise inventory 40,000
Cost of goods sold for 2020 was
a. $1,700,000.
b. $1,620,000.
c. $1,500,000.
d. $1,420,000.
Multiple Choice Answers—CPA Adapted
The Accounting Information System
3 – 33
DERIVATIONS — Computational
No. Answer Derivation
Test Bank for Intermediate Accounting, Seventeenth Edition
3 – 34
DERIVATIONS — CPA Adapted
No. Answer Derivation
The Accounting Information System
3 – 35
BRIEF EXERCISES
BE. 3–122—Definitions.
Provide clear, concise answers for the following.
1. What is the accrual-basis of accounting?
2. What is an accrued expense?
3. What is accrued revenue?
4. What is a prepaid expense?
5. What is unearned revenue?
*6. State the rule that indicates which adjusting entries for prepaid and unearned items should be
reversed.
BE. 3–123—Terminology.
In the space provided at the right, write the word or phrase that is defined or indicated.
1. Revenue and expense accounts. 1. _______________________________________
2. An optional step in the accounting 2. _______________________________________
cycle.
3. A revenue collected, but not recognized.3. _______________________________________
4. A revenue recognized, but not collected.4. _______________________________________
5. Asset, liability, and equity accounts. 5. _______________________________________
6. An expense paid, but not incurred. 6. _______________________________________
7. An expense incurred, but not paid. 7. _______________________________________
Test Bank for Intermediate Accounting, Seventeenth Edition
3 – 36
Solution 3-123
BE. 3–124—Accrued and deferred items.
Generally accepted accounting principles require the use of accruals and deferrals in the
determination of income. How is income determined under the accrual-basis of accounting?
Include in your answer what constitutes an accrued item and a deferred (prepaid) item, and give
appropriate examples of each.
The Accounting Information System
3 – 37
EXERCISES
Ex. 3-125—Adjusting entries.
Present, in journal form, the adjustments that would be made on July 31, 2021, the end of the
fiscal year, for each of the following.
1. The supplies inventory on August 1, 2020 was $9,350. Supplies costing $24,150 were
acquired during the year and charged to the supplies inventory. A count on July 31, 2021
indicated supplies on hand of $8,810.
2. On April 30, a ten-month, 6% note for $30,000 was received from a customer.
*3. On May 1, $20,000 was collected as rent for one year and a nominal account was credited.
Ex. 3-126—Adjusting entries.
Reed Co. wishes to enter receipts and payments in such a manner that adjustments at the end of
the period will not require reversing entries at the beginning of the next period. Record the
following transactions in the indicated manner and give the adjusting entry on December 31,
2020. (Two entries for each part.)
1. An insurance policy for two years was acquired on April 1, 2020 for $24,000.
2. Rent of $15,000 for six months for a portion of the building was received on November 1,
2020.
Test Bank for Intermediate Accounting, Seventeenth Edition
3 – 38
Ex. 3-127—Accrual adjusting entries.
The following information relates to the Wallstrom Company at the end of 2020. The accounting
period is the calendar year.
1. Employees are paid every Friday for the five-day week ending on that day. Salaries
amount to $4,000 per week. The accounting period ends on a Tuesday.
2. A note for $5,000 was received from a customer in a sales transaction on April 1, 2020.
The note matures in one year and bears 8% interest.
3. On September 1, 2020, Wallstrom borrowed $10,000 cash by signing a note payable due
in one year at 6% interest.
Instructions
Using the information given above, prepare the necessary adjusting entries at December 31,
2020.
Ex. 3-128—Deferral adjusting entries.
The following information relates to the Morganstern Magazine Company at the end of 2020. The
accounting period is the calendar year.
1. An insurance premium of $6,000 was paid on March 1, 2020, and was charged to Prepaid
Insurance. The premium covers a 24-month period beginning March 1, 2020.
2. On June 1, 2020, cash of $54,000 was received from subscribers (customers) for a 36-
month subscription period beginning on that date. The receipt was recorded by a debit to
Cash and a credit to Unearned Subscription Revenue.
3. The Supplies account showed a balance of $5,000 at the beginning of 2020. Supplies
costing $16,000 were purchased during 2020 and debited to the asset account. Supplies
of $3,000 were on hand at December 31, 2020.
Instructions
Using the information given above, prepare the necessary adjusting entries at December 31,
2020.
The Accounting Information System
3 – 39
Solution 3-128
Ex. 3-129—Adjusting entries.
The following data relate to the accounts of Edmiston Company.
a. Unpaid salaries and wages at year end amount to $750.
b. Edmiston Company owns bonds of another corporation that pay annual interest of $800.
These bonds were purchased on April 1, 2020, and the next interest payment will be
received on April 1, 2021.
c. A two-year insurance policy was purchased on June 1, 2020. The $1,200 insurance
premium was paid on that date and was debited to Prepaid Insurance.
d. Service Revenue was credited for $900 on June 1, 2020. The amount represents a one-
year advance payment for services to be performed by Edminston Company through May
31, 2021.
e. The Supplies account shows a balance of $2,500 on December 31, 2020. A physical
count of the supplies on hand at this date reveals a total of $1,000 available.
Instructions
Prepare the necessary adjusting journal entries indicated by each item for the year ended
December 31, 2020.