CHAPTER 3
ADJUSTING THE ACCOUNTS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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Multiple Choice Questions
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Test Bank for Financial Accounting, Ninth Edition
3 – 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Brief Exercises
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Exercises
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Completion Statements
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Short-Answer Essay
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This question covers a topic in an appendix to the chapter.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 3
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
1.
TF
4.
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49.
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C
258.
SA
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TF
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C
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Learning Objective 2
6.
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MC
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C
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Learning Objective 3
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S-A
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BE
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 4
17.
TF
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MC
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MC
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MC
132.
MC
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BE
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Ex
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TF
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Ex
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TF
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Ex
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Ex
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Ex
Learning Objective 5
26.
TF
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MC
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222.
Ex
232.
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238.
Ex
45.
TF
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MC
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207.
BE
223.
Ex
233.
Ex
240.
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134.
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228.
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Ex
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Learning Objective 6
27.
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BE
242.
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C
46.
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MC
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Ex
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Ex
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S-A
139.
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BE
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Ex
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Ex
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Learning Objective a7
a28.
TF
a30.
TF
a153.
MC
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MC
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BE
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S-A
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 4
a29.
TF
a47.
TF
a154.
MC
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MC
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MC
a245.
Ex
Learning Objective a8
a31.
TF
a36.
TF
a159.
MC
a164.
MC
a169.
MC
a174.
MC
a32.
TF
a37.
TF
a160.
MC
a165.
MC
a170.
MC
a175.
MC
a33.
TF
a38.
TF
a161.
MC
a166.
MC
a171.
MC
a176.
MC
a34.
TF
a39.
TF
a162.
MC
a167.
MC
a172.
MC
a215.
BE
a35.
TF
a40.
TF
a163.
MC
a168.
MC
a173.
MC
a216.
BE
Learning Objective a9
a188.
MC
a190.
MC
a192.
MC
a194.
MC
a196.
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a189.
MC
a191.
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a193.
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a195.
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a197.
MC
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise SA = Short-Answer Essay
This chapter also contains one set Matching questions and Short-Answer Essay questions. A
summary table of all learning outcomes, including AACSB, AICPA, and IMA professional
standards, is available on the Weygandt Financial Accounting 9e instructor web site.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 5
CHAPTER LEARNING OBJECTIVES
1. Explain the time period assumption. The time period assumption assumes that the
economic life of a business is divided into artificial time periods.
2. Explain the accrual basis of accounting. Accrual-basis accounting means that companies
record events that change a company‘s financial statements in the periods in which those
events occur, rather than in the periods in which the company receives or pays cash.
3. Explain the reasons for adjusting entries and identify the major types of adjusting
entries. Companies make adjusting entries at the end of an accounting period. Such entries
ensure that companies recognize revenues in the period in which the performance
obligation is satisfied and recognize expenses in the period in which they are incurred. The
major types of adjusting entries are deferrals (prepaid expenses and unearned revenues)
and accruals (accrued revenues and accrued expenses).
4. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or
unearned revenues. Companies make adjusting entries for deferrals to record the portion of
the prepayment that represents the expense incurred or the revenue for services performed
in the current accounting period.
5. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued
expenses. Companies make adjusting entries for accruals to record revenues for services
performed and expenses incurred in the current accounting period that have not been
recognized through daily entries.
6. Describe the nature and purpose of an adjusted trial balance. An adjusted trial balance
shows the balances of all accounts, including those that have been adjusted, at the end of
an accounting period. Its purpose is to prove the equality of the total debit balances and total
credit balances in the ledger after all adjustments.
a7. Prepare adjusting entries for the alternative treatment of deferrals. Companies may
initially debit prepayments to an expense account. Likewise, they may credit unearned
revenues to a revenue account. At the end of the period, these accounts may be overstated.
The adjusting entries for prepaid expenses are a debit to an asset account and a credit to an
expense account. Adjusting entries for unearned revenues are a debit to a revenue account
and a credit to a liability account.
a8. Discuss financial reporting concepts. To be judged useful, information should have the
primary characteristics of relevance and faithful representation. In addition, it should be
comparable, consistent, verifiable, timely, and understandable.
The monetary unit assumption requires that companies include in the accounting records
only transaction data that can be expressed in terms of money. The economic entity
assumption states that economic events can be identified with a particular unit of
accountability. The time period assumption states that the economic life of a business can
be divided into artificial time periods and that meaningful accounting reports can be
prepared for each period. The going concern assumption states that the company will
continue in operation long enough to carry out its existing objectives and commitments.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 6
The historical cost principle states that companies should record assets at their cost. The
fair value principle indicates that assets and liabilities should be reported at fair value. The
revenue recognition principle requires that companies recognize revenue in the
accounting period in which the performance obligation is satisfied. The expense
recognition principle dictates that efforts (expenses) be matched with results (revenues)
The full disclosure principle requires that companies disclose circumstances and events
that matter to financial statement users.
The cost constraint weighs the cost that companies incur to provide a type of information
against its benefits to financial statement users.
Adjusting the Accounts
3 – 7
TRUE-FALSE STATEMENTS
1. Many business transactions affect more than one time period.
2. The time period assumption states that the economic life of a business entity can be
divided into artificial time periods.
3. The time period assumption is often referred to as the expense recognition principle.
4. A company’s calendar year and fiscal year are always the same.
5. Accounting time periods that are one year in length are referred to as interim periods.
6. Income will always be greater under the cash basis of accounting than under the accrual
basis of accounting.
7. The cash basis of accounting is not in accordance with generally accepted accounting
principles.
8. The expense recognition principle requires that efforts be matched with accomplishments.
9. Expense recognition is tied to revenue recognition.
10. The revenue recognition principle dictates that revenue be recognized in the accounting
period in which cash is received.
11. Adjusting entries are not necessary if the trial balance debit and credit column balances
are equal.
12. An adjusting entry always involves two balance sheet accounts.
13. Adjusting entries are often made because some business events are not recorded as they
occur.
14. Adjusting entries are recorded in the general journal but are not posted to the accounts in
the general ledger.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 8
15. Revenue received before services are performed and expenses paid before being used or
consumed are both initially recorded as liabilities.
16. Accrued revenues are revenues which have been received but not yet recognized.
17. The book value of a depreciable asset is always equal to its market value because
depreciation is a valuation technique.
18. Accumulated Depreciation is a liability account and has a normal credit account balance.
19. A liability—revenue account relationship exists with an unearned rent revenue adjusting
entry.
20. The balances of the Depreciation Expense and the Accumulated Depreciation accounts
should always be the same.
21. Unearned revenue is a prepayment that requires an adjusting entry when services are
performed.
22. Asset prepayments become expenses when they expire.
23. A contra asset account is subtracted from a related account in the balance sheet.
24. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in
the future.
25. The cost of a depreciable asset less accumulated depreciation reflects the book value of
the asset.
26. Accrued revenues are revenues that have been recognized and received before financial
statements have been prepared.
27. Financial statements can be prepared from the information provided by an adjusted trial
balance.
a28. The adjusting entry at the end of the period to record an expired cost may be different
depending on whether the cost was initially recorded as an asset or an expense.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 9
a29. Rent received in advance and credited to a rent revenue account which is still unearned at
the end of the period, will require an adjusting entry crediting a liability account for the
amount still unearned.
a30. An adjusting entry requiring a credit to Insurance Expense indicates that the initial
transaction was charged to an asset account.
a31. To be faithfully representative, accounting information should predict future events,
confirm prior expectations, and be reported on a timely basis.
a32. Consistent use of the same accounting principles and methods is necessary for
meaningful analysis of trends within a company.
a33. Consistency in accounting means that a company uses the same accounting principles
from one accounting period to the next accounting period.
a34. The quality of consistency pertains to the use of the same accounting principles by firms
in the same industry.
a35. The periodicity assumption states that the business will remain in operation for the
foreseeable future.
a36. For accounting purposes, business transactions should be kept separate from the
personal transactions of the owners of the business.
a37. The economic entity assumption states that economic events can be identified with a
particular unit of accountability.
a38. The monetary unit assumption states that transactions that can be measured in terms of
money should be recorded in the accounting records.
a39. The going concern assumption is that the business will continue in operation long enough
to carry out its existing objectives and commitments.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 10
a40. A common application of materiality is weighing the factual nature of cost figures versus
the relevance of fair value.
Additional True-False Questions
41. The expense recognition principle requires that expenses be matched with revenues.
42. In general, adjusting entries are required each time financial statements are prepared.
43. Every adjusting entry affects one balance sheet account and one income statement
account.
44. The Accumulated Depreciation account is a contra asset account that is reported on the
balance sheet.
45. Accrued revenues are amounts recorded and received but not yet recognized.
46. An adjusted trial balance should be prepared before the adjusting entries are made.
a47. When a prepaid expense is initially debited to an expense account, expenses and assets
are both overstated prior to adjustment.
Answers to True-False Statements
Adjusting the Accounts
3 – 11
MULTIPLE CHOICE QUESTIONS
48. Monthly and quarterly time periods are called
a. calendar periods.
b. fiscal periods.
c. interim periods.
d. quarterly periods.
49. The time period assumption states that
a. a transaction can only affect one period of time.
b. estimates should not be made if a transaction affects more than one time period.
c. adjustments to the company’s accounts can only be made in the time period when the
business terminates its operations.
d. the economic life of a business can be divided into artificial time periods.
50. An accounting time period that is one year in length, but does not begin on January 1, is
referred to as
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.
51. Adjustments would not be necessary if financial statements were prepared to reflect net
income from
a. monthly operations.
b. fiscal year operations.
c. interim operations.
d. lifetime operations.
52. Management usually desires ________ financial statements and the IRS requires all
businesses to file _________ tax returns.
a. annual, annual
b. monthly, annual
c. quarterly, monthly
d. monthly, monthly
53. The time period assumption is also referred to as the
a. calendar assumption.
b. cyclicity assumption.
c. periodicity assumption.
d. fiscal assumption.
Test Bank for Financial Accounting, Ninth Edition
3 – 12
54. In general, the shorter the time period, the difficulty of making the proper adjustments to
accounts
a. is increased.
b. is decreased.
c. is unaffected.
d. depends on if there is a profit or loss.
55. Which of the following is not a common time period chosen by businesses as their
accounting period?
a. Daily
b. Monthly
c. Quarterly
d. Annually
56. Which of the following time periods would not be referred to as an interim period?
a. Monthly
b. Quarterly
c. Semi-annually
d. Annually
57. The fiscal year of a business is usually determined by
a. the IRS.
b. a lottery.
c. the business.
d. the SEC.
58. Which of the following is in accordance with generally accepted accounting principles?
a. Accrual-basis accounting
b. Cash-basis accounting
c. Both accrual-basis and cash-basis accounting
d. Neither accrual-basis nor cash-basis accounting
59. The revenue recognition principle dictates that revenue should be recognized in the
accounting records
a. when cash is received.
b. when the performance obligation is satisfied.
c. at the end of the month.
d. in the period that income taxes are paid.
Adjusting the Accounts
3 – 13
60. In a service-type business, revenue is considered recognized
a. at the end of the month.
b. at the end of the year.
c. when the service is performed.
d. when cash is received.
61. The expense recognition principle matches
a. customers with businesses.
b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.
62. Live Wire Hot Rod Shop follows the revenue recognition principle. Live Wire services a
car on July 31. The customer picks up the vehicle on August 1 and mails the payment to
Live Wire on August 5. Live Wire receives the check in the mail on August 6. When should
Live Wire show that the revenue was recognized?
a. July 31
b. August 1
c. August 5
d. August 6
63. A company spends $15 million dollars for an office building. Over what period should the
cost be written off?
a. When the $15 million is expended in cash.
b. All in the first year.
c. Over the useful life of the building.
d. After $15 million in revenue is recognized.
64. The expense recognition principle states that expenses should be matched with revenues.
Another way of stating the principle is to say that
a. assets should be matched with liabilities.
b. efforts should be matched with accomplishments.
c. owner withdrawals should be matched with owner contributions.
d. cash payments should be matched with cash receipts.
65. A flower shop makes a large sale for $1,200 on November 30. The customer is sent a
statement on December 5 and a check is received on December 10. The flower shop
follows GAAP and applies the revenue recognition principle. When is the $1,200
considered to be recognized?
a. December 5.
b. December 10.
c. November 30.
d. December 1.
Test Bank for Financial Accounting, Ninth Edition
3 – 14
66. A candy factory’s employees work overtime to finish an order that is sold on February 28.
The office sends a statement to the customer in early March and payment is received by
mid-March. The overtime wages should be expensed in
a. February.
b. March.
c. the period when the workers receive their checks.
d. either in February or March depending on when the pay period ends.
67. Expenses sometimes make their contribution to revenue in a different period than when
they are paid. When salaries and wages are incurred in one period and paid in the next
period, this often leads to which account appearing on the balance sheet at the end of the
time period?
a. Due from Employees.
b. Due to Employer.
c. Salaries and Wages Payable.
d. Salaries and Wages Expense.
68. Under accrual-basis accounting
a. cash must be received before revenue is recognized.
b. net income is calculated by matching cash outflows against cash inflows.
c. events that change a company’s financial statements are recognized in the period they
occur rather than in the period in which cash is paid or received.
d. the ledger accounts must be adjusted to reflect a cash basis of accounting before
financial statements are prepared under generally accepted accounting principles.
69. Adjusting entries are required
a. yearly.
b. quarterly.
c. monthly.
d. every time financial statements are prepared.
70. Which one of the following is not an application of revenue recognition?
a. Recording revenue as an adjusting entry on the last day of the accounting period.
b. Accepting cash from an established customer for services to be performed over the
next three months.
c. Billing customers on June 30 for services completed during June.
d. Receiving cash for services performed.
Adjusting the Accounts
3 – 15
71. Which statement is correct?
a. As long as a company consistently uses the cash basis of accounting, generally
accepted accounting principles allow its use.
b. The use of the cash basis of accounting violates both the revenue recognition and
expense recognition principles.
c. The cash basis of accounting is objective because no one can be certain of the
amount of revenue until the cash is received.
d. As long as management is ethical, there are no problems with using the cash basis of
accounting.
72. The following is selected information from Motley Corporation for the fiscal year ending
October 31, 2015.
Cash received from customers $300,000
Revenue recognized 375,000
Cash paid for expenses 180,000
Cash paid for computers on November 1, 2014 that will be used
for 3 years (annual depreciation is $16,000) 48,000
Expenses incurred, including interest, but excluding any depreciation 220,000
Proceeds from a bank loan, part of which was used to pay for
the computers 100,000
Based on the accrual basis of accounting, what is Motley Corporation’s net income for the
year ending October 31, 2015?
a. $72,000.
b. $104,000.
c. $139,000.
d. $155,000.
73. Crue Company had the following transactions during 2015:
• Sales of $4,800 on account
• Collected $2,000 for services to be performed in 2016
• Paid $1,625 cash in salaries
• Purchased airline tickets for $250 in December for a trip to take place in 2016
What is Crue’s 2015 net income using accrual accounting?
a. $2,925.
b. $3,175.
c. $4,925.
d. $5,175.
Test Bank for Financial Accounting, Ninth Edition
3 – 16
74. Crue Company had the following transactions during 2015:
• Sales of $4,500 on account
• Collected $2,500 for services to be performed in 2016
• Paid $1,625 cash in salaries
• Purchased airline tickets for $250 in December for a trip to take place in 2016
What is Crue’s 2015 net income using cash basis accounting?
a. $625.
b. $875.
c. $5,125.
d. $5,375.
75. A small company may be able to justify using a cash basis of accounting if they have
a. sales under $1,000,000.
b. no accountants on staff.
c. few receivables and payables.
d. all sales and purchases on account.
76. Adjusting entries are required
a. because some costs expire with the passage of time and have not yet been
journalized.
b. when the company’s profits are below the budget.
c. when expenses are recorded in the period in which they are incurred.
d. when revenues are recorded in the period in which services are performed.
77. Which one of the following is not a justification for adjusting entries?
a. Adjusting entries are necessary to ensure that the revenue recognition principle is
followed.
b. Adjusting entries are necessary to ensure that the expense recognition principle is
followed.
c. Adjusting entries are necessary to enable financial statements to be in conformity with
GAAP.
d. Adjusting entries are necessary to bring the general ledger accounts in line with the
budget.
78. An adjusting entry
a. affects two balance sheet accounts.
b. affects two income statement accounts.
c. affects a balance sheet account and an income statement account.
d. is always a compound entry.
Adjusting the Accounts
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79. The preparation of adjusting entries is
a. straight forward because the accounts that need adjustment will be out of balance.
b. often an involved process requiring the skills of a professional.
c. only required for accounts that do not have a normal balance.
d. optional when financial statements are prepared.
80. If a resource has been consumed but a bill has not been received at the end of the
accounting period, then
a. an expense should be recorded when the bill is received.
b. an expense should be recorded when the cash is paid out.
c. an adjusting entry should be made recognizing the expense.
d. it is optional whether to record the expense before the bill is received.
81. Accounts often need to be adjusted because
a. there are never enough accounts to record all the transactions.
b. many transactions affect more than one time period.
c. there are always errors made in recording transactions.
d. management can’t decide what they want to report.
82. Adjusting entries are
a. not necessary if the accounting system is operating properly.
b. usually required before financial statements are prepared.
c. made whenever management desires to change an account balance.
d. made to balance sheet accounts only.
83. Expenses incurred but not yet paid or recorded are called
a. prepaid expenses.
b. accrued expenses.
c. interim expenses.
d. unearned expenses.
84. A law firm received $3,000 cash for legal services to be rendered in the future. The full
amount was credited to the liability account Unearned Service Revenue. If the legal
services have been rendered at the end of the accounting period and no adjusting entry is
made, this would cause
a. expenses to be overstated.
b. net income to be overstated.
c. liabilities to be understated.
d. revenues to be understated.
Test Bank for Financial Accounting, Ninth Edition
3 – 18
85. Adjusting entries can be classified as
a. postponements and advances.
b. accruals and deferrals.
c. deferrals and postponements.
d. accruals and advances.
86. Accrued revenues are
a. cash received and a liability recorded before services are performed.
b. revenue for services performed and recorded as liabilities before they are received.
c. revenue for services performed but not yet received in cash or recorded.
d. revenue for services performed and already received in cash and recorded.
87. Prepaid expenses are
a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.
88. Accrued expenses are
a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.
89. Unearned revenues are
a. cash received and a liability recorded before services are performed.
b. revenue for services performed and recorded as liabilities before they are received.
c. revenue for services performed but not yet received in cash or recorded.
d. revenue for services performed and already received in cash and recorded.
90. A liability—revenue relationship exists with
a. prepaid expense adjusting entries.
b. accrued expense adjusting entries.
c. unearned revenue adjusting entries.
d. accrued revenue adjusting entries.
91. Which of the following reflects the balances of prepayment accounts prior to adjustment?
a. Balance sheet accounts are understated and income statement accounts are understated.
b. Balance sheet accounts are overstated and income statement accounts are overstated.
c. Balance sheet accounts are overstated and income statement accounts are understated.
d. Balance sheet accounts are understated and income statement accounts are overstated.
Adjusting the Accounts
3 – 19
92. An asset—expense relationship exists with
a. liability accounts.
b. revenue accounts.
c. prepaid expense adjusting entries.
d. accrued expense adjusting entries.
93. Lake of Fire Company purchased supplies costing $7,000 and debited Supplies for the full
amount. At the end of the accounting period, a physical count of supplies revealed $1,900
still on hand. The appropriate adjusting journal entry to be made at the end of the period
would be
a. Debit Supplies Expense, $1,900; Credit Supplies, $1,900.
b. Debit Supplies, $5,100; Credit Supplies Expense, $5,100.
c. Debit Supplies Expense, $5,100; Credit Supplies, $5,100.
d. Debit Supplies, $1,900; Credit Supplies Expense, $1,900.
94. If an adjustment is needed for unearned revenues, the
a. liability and related revenue are overstated before adjustment.
b. liability and related revenue are understated before adjustment.
c. liability is overstated and the related revenue is understated before adjustment.
d. liability is understated and the related revenue is overstated before adjustment.
95. The balance in the supplies account on June 1 was $5,200, supplies purchased during
June were $3,500, and the supplies on hand at June 30 were $3,000. The amount to be
used for the appropriate adjusting entry is
a. $3,500.
b. $5,700.
c. $6,500.
d. $11,700.
96. Depreciation expense for a period is the
a. original cost of an asset – accumulated depreciation.
b. book value of the asset ÷ useful life.
c. portion of an asset’s cost that expired during the period.
d. market value of the asset ÷ useful life.
97. Accumulated Depreciation is
a. an expense account.
b. a stockholders’ equity account.
c. a liability account.
d. a contra asset account.
Test Bank for Financial Accounting, Ninth Edition
3 – 20
98. Meat Puppets Company purchased equipment for $7,200 on December 1. It is estimated
that annual depreciation on the equipment will be $1,800. If financial statements are to be
prepared on December 31, the company should make the following adjusting entry:
a. Debit Depreciation Expense, $1,800; Credit Accumulated Depreciation, $1,800.
b. Debit Depreciation Expense, $150; Credit Accumulated Depreciation, $150.
c. Debit Depreciation Expense, $5,400; Credit Accumulated Depreciation, $5,400.
d. Debit Equipment, $7,200; Credit Accumulated Depreciation, $7,200.
99. REM Real Estate received a check for $27,000 on July 1 which represents a 6 month
advance payment of rent on a building it rents to a client. Unearned Rent Revenue was
credited for the full $27,000. Financial statements will be prepared on July 31. REM Real
Estate should make the following adjusting entry on July 31:
a. Debit Unearned Rent Revenue, $4,500; Credit Rent Revenue, $4,500.
b. Debit Rent Revenue, $4,500; Credit Unearned Rent Revenue, $4,500.
c. Debit Unearned Rent Revenue, $27,000; Credit Rent Revenue, $24,000.
d. Debit Cash, $27,000; Credit Rent Revenue, $27,000.
100. As prepaid expenses expire with the passage of time, the correct adjusting entry will be a
a. debit to an asset account and a credit to an expense account.
b. debit to an expense account and a credit to an asset account.
c. debit to an asset account and a credit to an asset account.
d. debit to an expense account and a credit to an expense account.
101. A company usually determines the amount of supplies used during a period by
a. adding the supplies on hand to the balance of the Supplies account.
b. summing the amount of supplies purchased during the period.
c. taking the difference between the supplies purchased and the supplies paid for during
the period.
d. taking the difference between the balance of the Supplies account and the cost of
supplies on hand.
102. If a company fails to make an adjusting entry to record supplies expense, then
a. stockholders’ equity will be understated.
b. expense will be understated.
c. assets will be understated.
d. net income will be understated.
Adjusting the Accounts
3 – 21
103. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a
prepaid insurance account balance before adjustment, $18,500, and unexpired amounts
per analysis of policies of $6,000?
a. Debit Insurance Expense, $6,000; Credit Prepaid Insurance, $6,000.
b. Debit Insurance Expense, $18,500; Credit Prepaid Insurance, $18,500.
c. Debit Prepaid Insurance, $12,500; Credit Insurance Expense, $12,500.
d. Debit Insurance Expense, $12,500; Credit Prepaid Insurance, $12,500.
104. At December 31, 2015, before any year-end adjustments, Murmur Company’s Insurance
Expense account had a balance of $2,450 and its Prepaid Insurance account had a
balance of $3,800. It was determined that $2,800 of the Prepaid Insurance had expired.
The adjusted balance for Insurance Expense for the year would be
a. $2,450.
b. $3,450.
c. $2,800.
d. $5,250.
105. Depreciation is the process of
a. valuing an asset at its fair value.
b. increasing the value of an asset over its useful life in a rational and systematic
manner.
c. allocating the cost of an asset to expense over its useful life in a rational and
systematic manner.
d. writing down an asset to its real value each accounting period.
106. A new accountant working for Spirit Walker Company records $900 Depreciation Expense
on store equipment as follows:
Dr. Depreciation Expense …………………………………….. 900
Cr. Cash …………………………………………………….. 900
The effect of this entry is to
a. adjust the accounts to their proper amounts on December 31.
b. understate total assets on the balance sheet as of December 31.
c. overstate the book value of the depreciable assets at December 31.
d. understate the book value of the depreciable assets as of December 31.
107. From an accounting standpoint, the acquisition of productive facilities can be thought of as
a long-term
a. accrual of expense.
b. accrual of revenue.
c. accrual of unearned revenue.
d. prepayment for services.
Test Bank for Financial Accounting, Ninth Edition
3 – 22
108. The balance in the Prepaid Rent account before adjustment at the end of the year is
$21,000, which represents three months’ rent paid on December 1. The adjusting entry
required on December 31 is to
a. debit Rent Expense, $7,000; credit Prepaid Rent, $7,000.
b. debit Rent Expense, $14,000; credit Prepaid Rent $14,000.
c. debit Prepaid Rent, $7,000; credit Rent Expense, $7,000.
d. debit Prepaid Rent, $14,000; credit Rent Expense, $14,000.
109. An accumulated depreciation account
a. is a contra-liability account.
b. increases on the debit side.
c. is offset against total assets on the balance sheet.
d. has a normal credit balance.
110. The difference between the cost of a depreciable asset and its related accumulated
depreciation is referred to as the
a. market value of the asset.
b. blue book value of the asset.
c. book value of the asset.
d. depreciated difference of the asset.
111. Book value is also referred to as
a. accumulated depreciation.
b. carrying value.
c. fair value.
d. original cost.
112. Which of the following would not result in unearned revenue?
a. Rent collected in advance from tenants
b. Services performed on account
c. Sale of season tickets to football games
d. Sale of two-year magazine subscriptions
113. If a business pays rent in advance and debits a Prepaid Rent account, the company
receiving the rent payment will credit
a. Cash.
b. Prepaid Rent.
c. Unearned Rent Revenue.
d. Rent Revenue.
Adjusting the Accounts
3 – 23
114. Unearned revenue is classified as
a. an asset account.
b. a revenue account.
c. a contra-revenue account.
d. a liability account.
115. If a business has received cash in advance of services performed and credits a liability
account, the adjusting entry needed after the services are performed will be
a. debit Unearned Service Revenue and credit Cash.
b. debit Unearned Service Revenue and credit Service Revenue.
c. debit Unearned Service Revenue and credit Prepaid Expense.
d. debit Unearned Service Revenue and credit Accounts Receivable.
116. Dreamtime Laundry purchased $7,000 worth of supplies on June 2 and recorded the
purchase as an asset. On June 30, an inventory of the supplies indicated only $1,000 on
hand. The adjusting entry that should be made by the company on June 30 is
a. Debit Supplies Expense, $1,000; Credit Supplies, $1,000.
b. Debit Supplies, $1,000; Credit Supplies Expense, $1,000.
c. Debit Supplies, $6,000; Credit Supplies Expense, $6,000.
d. Debit Supplies Expense, $6,000; Credit Supplies, $6,000.
117. On July 1, Runner’s Sports Store paid $14,000 to Corona Realty for 4 months rent
beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are
prepared on July 31, the adjusting entry to be made by Runner’s Sports Store is
a. Debit Rent Expense, $14,000; Credit Prepaid Rent, $3,500.
b. Debit Prepaid Rent, $3,500; Credit Rent Expense, $3,500.
c. Debit Rent Expense, $3,500; Credit Prepaid Rent, $3,500.
d. Debit Rent Expense, $14,000; Credit Prepaid Rent, $14,000.
118. Fugazi City College sold season tickets for the 2015 football season for $240,000. A total
of 8 games will be played during September, October and November. In September, three
games were played. The adjusting journal entry at September 30
a. is not required. No adjusting entries will be made until the end of the season in
November.
b. will include a debit to Cash and a credit to Ticket Revenue for $60,000.
c. will include a debit to Unearned Ticket Revenue and a credit to Ticket Revenue for
$90,000.
d. will include a debit to Ticket Revenue and a credit to Unearned Ticket Revenue for
$80,000.
Test Bank for Financial Accounting, Ninth Edition
3 – 24
119. Fugazi City College sold season tickets for the 2015 football season for $240,000. A total
of 8 games will be played during September, October and November. In September, two
games were played. In October, three games were played. The balance in Unearned
Ticket Revenue at October 31 is
a. $0.
b. $60,000.
c. $90,000.
d. $150,000.
120. Fugazi City College sold season tickets for the 2015 football season for $240,000. A total
of 8 games will be played during September, October and November. Assuming all the
games are played, the Unearned Ticket Revenue balance that will be reported on the
December 31 balance sheet will be
a. $0.
b. $90,000.
c. $150,000.
d. $240,000.
121. At March 1, 2015, Minutemen Corp. had supplies on hand of $500. During the month,
Minutemen purchased supplies of $1,200 and used supplies of $1,500. The March 31
adjusting journal entry should include a
a. debit to the supplies account for $1,500.
b. credit to the supplies account for $500.
c. debit to the supplies account for $1,200.
d. credit to the supplies account for $1,500.
122. Double Nickels Company purchased equipment for $9,000 on January 1, 2015. The
company expects to use the equipment for 3 years. It has no salvage value. Monthly
depreciation expense on the asset is
a. $0.
b. $250.
c. $3,000.
d. $9,000.
123. Husker Du Supplies Inc. purchased a 12-month insurance policy on March 1, 2015 for
$1,800. At March 31, 2015, the adjusting journal entry to record expiration of this asset will
include a
a. debit to Prepaid Insurance and a credit to Cash for $1,800.
b. debit to Prepaid Insurance and a credit to Insurance Expense for $200.
c. debit to Insurance Expense and a credit to Prepaid Insurance for $150.
d. debit to Insurance Expense and a credit to Cash for $150.
Adjusting the Accounts
3 – 25
124. Mary Chain Investments purchased an 18-month insurance policy on May 31, 2015 for
$3,600. The December 31, 2015 balance sheet would report Prepaid Insurance of
a. $0 because Prepaid Insurance is reported on the Income Statement.
b. $1,400.
c. $2,200.
d. $3,600.
125. At March 1, Psychocandy Inc. reported a balance in Supplies of $200. During March, the
company purchased supplies for $750 and consumed supplies of $800. If no adjusting
entry is made for supplies
a. stockholders’ equity will be overstated by $800.
b. expenses will be understated by $750.
c. assets will be understated by $250.
d. net income will be understated by $800.
126. Pixies Inc. pays its rent of $54,000 annually on January 1. If the February 28 monthly
adjusting entry for prepaid rent is omitted, which of the following will be true?
a. Failure to make the adjustment does not affect the February financial statements.
b. Expenses will be overstated by $4,500 and net income and stockholders’ equity will be
understated by $4,500.
c. Assets will be overstated by $9,000 and net income and stockholders’ equity will be
understated by $9,000.
d. Assets will be overstated by $4,500 and net income and stockholders’ equity will be
overstated by $4,500.
127. On January 1, 2014, Doolittle Company purchased furniture for $7,560. The company
expects to use the furniture for 3 years. The asset has no salvage value. The book value
of the furniture at December 31, 2015 is
a. $0.
b. $2,520.
c. $5,040.
d. $7,560.
128. On January 1, 2014, Mudhoney Inc. purchased equipment for $45,000. The company is
depreciating the equipment at the rate of $750 per month. At January 31, 2015, the
balance in Accumulated Depreciation is
a. $750.
b. $9,000.
c. $9,750.
d. $35,250.
Test Bank for Financial Accounting, Ninth Edition
3 – 26
129. On January 1, 2015, Superfuzz Company purchased equipment for $40,000. The
company is depreciating the equipment at the rate of $800 per month. The book value of
the equipment at December 31, 2015 is
a. $0.
b. $9,600.
c. $30,400.
d. $40,000.
130. Ultramega Company collected $19,600 in May of 2015 for 4 months of service which
would take place from October of 2015 through January of 2016. The revenue reported
from this transaction during 2015 would be
a. 0.
b. $4,900.
c. $14,700.
d. $19,600.
131. Soundgarden Company collected $18,200 in May of 2015 for 5 months of service which
would take place from October of 2015 through February of 2016. The revenue reported
from this transaction during 2015 would be
a. $0.
b. $7,280.
c. $10,920.
d. $18,200.
132. Sonic Youth Corporation purchased a one-year insurance policy in January 2015 for
$49,500. The insurance policy is in effect from March 2015 through February 2016. If the
company neglects to make the proper year-end adjustment for the expired insurance
a. net income and assets will be understated by $41,250.
b. net income and assets will be overstated by $41,250.
c. net income and assets will be understated by $8,250.
d. net income and assets will be overstated by $8,250.
133. Dinosaur Junior Corporation purchased a one-year insurance policy in January 2015 for
$75,000. The insurance policy is in effect from May 2015 through April 2016. If the
company neglects to make the proper year-end adjustment for the expired insurance
a. net income and assets will be understated by $50,000.
b. net income and assets will be overstated by $50,000.
c. net income and assets will be understated by $25,000.
d. net income and assets will be overstated by $25,000.
Adjusting the Accounts
3 – 27
134. If an adjusting entry is not made for an accrued revenue,
a. assets will be overstated.
b. expenses will be understated.
c. stockholders’ equity will be understated.
d. revenues will be overstated.
135. If an adjusting entry is not made for an accrued expense,
a. expenses will be overstated.
b. liabilities will be understated.
c. net income will be understated.
d. stockholders’ equity will be understated.
136. Failure to prepare an adjusting entry at the end of the period to record an accrued
expense would cause
a. net income to be understated.
b. an overstatement of assets and an overstatement of liabilities.
c. an understatement of expenses and an understatement of liabilities.
d. an overstatement of expenses and an overstatement of liabilities.
137. Failure to prepare an adjusting entry at the end of a period to record an accrued revenue
would cause
a. net income to be overstated.
b. an understatement of assets and an understatement of revenues.
c. an understatement of revenues and an understatement of liabilities.
d. an understatement of revenues and an overstatement of liabilities.
138. Sebastian Belle has performed $2,000 of CPA services for a client but has not billed the
client as of the end of the accounting period. What adjusting entry must Sebastian make?
a. Debit Cash and credit Unearned Service Revenue
b. Debit Accounts Receivable and credit Unearned Service Revenue
c. Debit Accounts Receivable and credit Service Revenue
d. Debit Unearned Service Revenue and credit Service Revenue
139. Sebastian Belle, CPA, has billed her clients for services performed. She subsequently
receives payments from her clients. What entry will Sebastian make upon receipt of the
payments?
a. Debit Unearned Service Revenue and credit Service Revenue
b. Debit Cash and credit Accounts Receivable
c. Debit Accounts Receivable and credit Service Revenue
d. Debit Cash and credit Service Revenue
Test Bank for Financial Accounting, Ninth Edition
3 – 28
140. NWA Air Charter signed a four-month note payable in the amount of $20,000 on
September 1. The note requires interest at an annual rate of 9%. The amount of interest
to be accrued at the end of September is
a. $150.
b. $200.
c. $600.
d. $1,800.
141. Uncle Tupelo’s Gifts signs a three-month note payable to help finance increases in
inventory for the Christmas shopping season. The note is signed on November 1 in the
amount of $75,000 with annual interest of 12%. What is the adjusting entry to be made on
December 31 for the interest expense accrued to that date, if no entries have been made
previously for the interest?
a. Interest Expense ……………………………………………………….. 1,500
Interest Payable ………………………………………………… 1,500
b. Interest Expense ……………………………………………………….. 2,250
Interest Payable ………………………………………………… 2,250
c. Interest Expense ……………………………………………………….. 1,500
Cash ………………………………………………………………… 1,500
d. Interest Expense ……………………………………………………….. 1,500
Notes Payable …………………………………………………… 1,500
142. Stone Roses Candies paid employee wages on and through Friday, January 26, and the
next payroll will be paid in February. There are three more working days in January (29–
31). Employees work 5 days a week and the company pays $1,500 a day in wages. What
will be the adjusting entry to accrue wages expense at the end of January?
a. Salaries and Wages Expense ……………………………………… 1,500
Salaries and Wages Payable……………………………….. 1,500
b. Salaries and Wages Expense ……………………………………… 7,500
Salaries and Wages Payable……………………………….. 7,500
c. Salaries and Wages Expense ……………………………………… 4,500
Salaries and Wages Payable……………………………….. 4,500
d. No adjusting entry is required.
Adjusting the Accounts
3 – 29
143. A company shows a balance in Salaries and Wages Payable of $38,000 at the end of the
month. The next payroll amounting to $48,000 is to be paid in the following month. What
will be the journal entry to record the payment of salaries?
a. Salaries and Wages Expense ……………………………………… 48,000
Salaries and Wages Payable ………………………………. 48,000
b. Salaries and Wages Expense ……………………………………… 48,000
Cash …………………………..…………………………………… 48,000
c. Salaries and Wages Expense ……………………………………… 10,000
Cash …………………………..…………………………………… 10,000
d. Salaries and Wages Expense ……………………………………… 10,000
Salaries and Wages Payable ………………………………………. 38,000
Cash …………………………..…………………………………… 48,000
144. A business pays weekly salaries of $30,000 on Friday for a five-day week ending on that
day. The adjusting entry necessary at the end of the fiscal period ending on a Thursday is
a. debit Salaries and Wages Payable, $24,000; credit Cash, $24,000.
b. debit Salaries and Wages Expense, $24,000; credit Cash, $24,000.
c. debit Salaries and Wages Expense, $24,000; credit Salaries and Wages Payable,
$24,000.
d. debit Salaries and Wages Expense, $6,000; credit Salaries and Wages Payable,
$6,000.
145. SurferRosa Music Store borrowed $30,000 from the bank signing a 9%, 3-month note on
September 1. Principal and interest are payable to the bank on December 1. If the
company prepares monthly financial statements, the adjusting entry that the company
should make for interest on September 30, would be
a. Debit Interest Expense, $2,700; Credit Interest Payable, $2,700.
b. Debit Interest Expense, $225; Credit Interest Payable, $225.
c. Debit Notes Payable, $2,700; Credit Cash, $2,700.
d. Debit Cash, $675; Credit Interest Payable, $675.
146. Nirvana Corporation issued a one-year, 9%, $400,000 note on April 30, 2015. Interest
expense for the year ended December 31, 2015 was
a. $21,000.
b. $24,000.
c. $27,000.
d. $36,000.
Test Bank for Financial Accounting, Ninth Edition
3 – 30
147. Yo La Corporation issued a one-year, 6%, $100,000 note on August 31, 2015. Interest
expense for the year ended December 31, 2015 was
a. $6,000.
b. $2,500.
c. $2,000.
d. $1,500.
148. Employees at Tengo Corporation are paid $15,000 cash every Friday for working Monday
through Friday. The calendar year accounting period ends on Wednesday, December 31.
How much salaries and wages expense should be recorded two days later on January 2?
a. $15,000
b. $9,000
c. $6,000
d. None, matching requires the weekly salary to be accrued on December 31.
149. Can financial statements be prepared directly from the adjusted trial balance?
a. They cannot. The general ledger must be used.
b. Yes, adjusting entries have been recorded in the general journal and posted to the
ledger accounts.
c. No, the adjusted trial balance merely proves the equality of the total debit and total
credit balances in the ledger after adjustments are posted. It has no other purpose.
d. They can because that is the only reason that an adjusted trial balance is prepared.
150. The adjusted trial balance is prepared
a. after financial statements are prepared.
b. before the trial balance.
c. to prove the equality of total assets and total liabilities.
d. after adjusting entries have been journalized and posted.
151. An adjusted trial balance
a. is prepared after the financial statements are completed.
b. proves the equality of the total debit balances and total credit balances of ledger
accounts after all adjustments have been made.
c. is a required financial statement under generally accepted accounting principles.
d. cannot be used to prepare financial statements.
152. Which of the statements below is not true?
a. An adjusted trial balance should show ledger account balances.
b. An adjusted trial balance can be used to prepare financial statements.
c. An adjusted trial balance proves the mathematical equality of debits and credits in the
ledger.
d. An adjusted trial balance is prepared before all transactions have been journalized.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 31
a153. Sebadoah is a barber who does his own accounting for his shop. When he buys supplies
he routinely debits Supplies Expense. Sebadoah purchased $1,500 of supplies in January
and his inventory at the end of January shows $300 of supplies remaining. What adjusting
entry should Sebadoah make on January 31?
a. Supplies Expense ……………………………………………………… 300
Supplies …………………………………………………………… 300
b. Supplies Expense ……………………………………………………… 1,500
Cash …………………………..…………………………………… 1,500
c. Supplies ……………………………………………………….………….. 300
Supplies Expense ……………………………………………… 300
d. Supplies Expense ……………………………………………………… 1,200
Supplies …………………………………………………………… 1,200
a154. Alternative adjusting entries do not apply to
a. accrued revenues and accrued expenses.
b. prepaid expenses.
c. unearned revenues.
d. prepaid expenses and unearned revenues.
a155. Elliott Smith is a lawyer who requires that his clients pay him in advance of legal services
rendered. Elliott routinely credits Service Revenue when his clients pay him in advance. In
June Elliott collected $15,000 in advance fees and completed 70% of the work related to
these fees. What adjusting entry is required by Elliott’s firm at the end of June?
a. Unearned Service Revenue ……………………………………….. 10,500
Service Revenue ………………………………………………. 10,500
b. Unearned Service Revenue ……………………………………….. 4,500
Service Revenue ………………………………………………. 4,500
c. Cash ………………………………………………………………………. 15,000
Service Revenue ………………………………………………. 15,000
d. Service Revenue ……………………………………………………… 4,500
Unearned Service Revenue ……………………………….. 4,500
a156. If prepaid expenses are initially recorded in expense accounts and have not all been used
at the end of the accounting period, the failure to make an adjusting entry will cause
a. assets to be understated.
b. assets to be overstated.
c. expenses to be understated.
d. contra-expenses to be overstated.
a157. If unearned revenues are initially recorded in revenue accounts and not all the related
services been performed at the end of the accounting period, the failure to make an
adjusting entry will cause
a. liabilities to be overstated.
b. revenues to be understated.
c. revenues to be overstated.
d. accounts receivable to be overstated.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 32
a158. On January 2, 2015, Superchunk purchased a general liability insurance policy for $2,700
for coverage for the calendar year. The entire $2,700 was charged to Insurance Expense
on January 2, 2015. If the firm prepares monthly financial statements, the proper adjusting
entry on January 31, 2015, will be:
a. Insurance Expense ……………………………………………………. 2,475
Prepaid Insurance ……………………………………………… 2,475
b. Prepaid Insurance ……………………………………………………… 2,475
Insurance Expense …………………………………………….. 2,475
c. Insurance Expense ……………………………………………………. 225
Prepaid Insurance ……………………………………………… 225
d. Prepaid Insurance ……………………………………………………… 225
Insurance Expense …………………………………………….. 225
a159. If accounting information has relevance, it is useful in making predictions about
a. future tax audits.
b. new accounting principles.
c. foreign currency exchange rates.
d. the future events of a company.
a160. Which one of the following is not an enhancing quality of useful information?
a. Timeliness
b. Understandability
c. Materiality
d. Comparability
a161. All of the following are characteristics of accounting information except
a. faithful representation.
b. comparability.
c. relevance.
d. flexibility.
a162. The two fundamental qualities of useful information are
a. verifiability and timeliness.
b. relevance and faithful representation.
c. comparability and flexibility.
d. understandability and consistency.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 33
a163. Relevant accounting information
a. is information that has been audited.
b. must be reported within the operating cycle or one year, whichever is longer.
c. has been objectively determined.
d. is information that is capable of making a difference in a business decision.
a164. Characteristics associated with relevant accounting information are
a. comparability and timeliness.
b. predictive value and confirmatory value.
c. neutral and verifiable.
d. consistency and understandability.
a165. Characteristics associated with faithfully representative accounting information are
a. verifiable and timely.
b. neutral and verifiable.
c. complete and neutral.
d. relevance and verifiable.
a166. Which of the following statements is not true?
a. Comparability means using the same accounting principles from year to year within a
company.
b. Faithful representation is the quality of information that gives assurance that it is free
from error.
c. Relevant accounting information must be capable of making a difference in the
decision.
d. The primary objective of financial reporting is to provide financial information that is
useful to investors and creditors for making decision.
a167. An item is considered material if
a. it doesn’t cost a lot of money.
b. it is of a tangible good.
c. it is likely to influence the decision of an investor or creditor.
d. the cost of reporting the item is greater than its benefits.
a168. A company using the same accounting principles from year to year is an application of
a. timeliness.
b. consistency.
c. full disclosure.
d. materiality.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 34
a169. Which of the following is a constraint in accounting?
a. Comparability.
b. Cost.
c. Consistency.
d. Relevance.
a170. The periodicity assumption states that the economic life of a business can be divided into
a. equal time periods.
b. cyclical time periods.
c. artificial time periods.
d. perpetual time periods.
a171. Which accounting assumption assumes that an enterprise will continue in operation long
enough to carry out its existing objectives and commitments?
a. Monetary unit assumption.
b. Economic entity assumption.
c. Periodicity assumption.
d. Going concern assumption.
a172. The economic entity assumption states that economic events
a. of different entities can be combined if all the entities are corporations.
b. must be reported to the IASB.
c. of a sole proprietorship cannot be distinguished from the personal economic events of
its owners.
d. of every entity can be separately identified and accounted for.
a173. Which of the following is not an accounting assumption?
a. Integrity.
b. Going concern.
c. Periodicity.
d. Economic entity.
a174. The periodicity assumption states
a. the business will remain in operation for the foreseeable future.
b. the life of a business can be divided into artificial time periods and that useful reports
covering those periods can be prepared.
c. every economic entity can be separately identified and accounted for.
d. only those things that can be expressed in money are included in the accounting
records.
Adjusting the Accounts
3 – 35
a175. Valuing assets at their fair value rather than at their cost is inconsistent with the:
a. economic entity assumption.
b. historical cost principle.
c. periodicity assumption.
d. full disclosure principles.
a176. Jackson Cement Corporation reported $35 million for sales when it only had $20 million of
actual sales. Which of the following qualities of useful information has Jackson most likely
violated?
a. Comparability
b. Relevance
c. Faithful representation
d. Consistency
Additional Multiple Choice Questions
177. Which of the following statements concerning accrual-basis accounting is incorrect?
a. Accrual-basis accounting follows the revenue recognition principle.
b. Accrual-basis accounting is the method required by generally accepted accounting
principles.
c. Accrual-basis accounting recognizes expenses when they are paid.
d. Accrual-basis accounting follows the expense recognition principle.
178. The revenue recognition principle dictates that revenue be recognized in the accounting
period
a. before it is earned.
b. after it is earned.
c. in which the performance obligation is satisfied.
d. in which it is collected.
179. An expense is recorded under the cash basis only when
a. services are performed.
b. it is earned.
c. cash is paid.
d. it is incurred.
180. For prepaid expense adjusting entries
a. an expense—liability account relationship exists.
b. prior to adjustment, expenses are overstated and assets are understated.
c. the adjusting entry results in a debit to an expense account and a credit to an asset
account.
d. none of these answer choices are correct.
Test Bank for Financial Accounting, Ninth Edition
3 – 36
181. Expenses paid and recorded as assets before they are used are called
a. accrued expenses.
b. interim expenses.
c. prepaid expenses.
d. unearned expenses.
182. Buffalo Tom Cruises purchased a five-year insurance policy for its ships on April 1, 2015
for $60,000. Assuming that April 1 is the effective date of the policy, the adjusting entry on
December 31, 2015 is
a. Prepaid Insurance ……………………………………………………… 9,000
Insurance Expense ……………………………………………… 9,000
b. Insurance Expense ……………………………………………………. 9,000
Prepaid Insurance ……………………………………………….. 9,000
c. Insurance Expense ……………………………………………………. 12,000
Prepaid Insurance ……………………………………………….. 12,000
d. Insurance Expense ……………………………………………………. 3,000
Prepaid Insurance ……………………………………………….. 3,000
183. Pavement Company purchased a truck from Bee Thousand Corp. by issuing a 6-month,
8% note payable for $90,000 on November 1. On December 31, the accrued expense
adjusting entry is
a. No entry is required.
b. Interest Expense ……………………………………………………….. 7,200
Interest Payable ………………………………………………….. 7,200
c. Interest Expense ……………………………………………………….. 3,600
Interest Payable ………………………………………………….. 3,600
d. Interest Expense ……………………………………………………….. 1,200
Interest Payable ………………………………………………….. 1,200
184. If the adjusting entry for depreciation is not made,
a. assets will be understated.
b. stockholders’ equity will be understated.
c. net income will be understated.
d. expenses will be understated.
185. Ryan Adams, an employee of Heartbreaker Corp., will not receive his paycheck until April
2. Based on services performed from March 15 to March 31, his salary was $1,000. The
adjusting entry for Heartbreaker Corp. on March 31 is
a. Salaries and Wages Expense ………………………………………. 1,000
Salaries and Wages Payable …………………………………. 1,000
b. No entry is required.
c. Salaries and Wages Expense ………………………………………. 1,000
Cash ………………………………………………………………….. 1,000
d. Salaries and Wages Payable ……………………………………….. 1,000
Cash ………………………………………………………………….. 1,000
186. Which of the following statements related to the adjusted trial balance is incorrect?
a. It shows the balances of all accounts at the end of the accounting period.
b. It is prepared before adjusting entries have been made.
c. It proves the equality of the total debit balances and the total credit balances in the
ledger.
d. Financial statements can be prepared directly from the adjusted trial balance.
187. Financial statements are prepared directly from the
a. general journal.
b. ledger.
c. trial balance.
d. adjusted trial balance.
188. Accrual-basis accounting is allowed under
a. GAAP but not IFRS.
b. IFRS but not GAAP.
c. both IFRS and GAAP.
d. neither IFRS nor GAAP.
189. Cash-basis accounting is allowed under
a. GAAP but not IFRS.
b. IFRS but not GAAP.
c. both IFRS and GAAP.
d. neither IFRS nor GAAP.
190. The time period assumption is used under
a. GAAP but not IFRS.
b. IFRS but not GAAP.
c. both IFRS and GAAP.
d. neither IFRS nor GAAP.
191. IFRS requires that companies present
a. a complete set of financial statement, including comparative information, annually.
b. only a statement of financial position, including comparative information, annually.
c. only an income statement, including comparative information, annually.
d. only a statement of changes in cash flows, including comparative information,
annually.
192. Revenue recognition under IFRS is
a. substantially different from revenue recognition under GAAP.
b. generally the same as revenue recognition under GAAP, but with more detailed
guidance.
c. generally the same as revenue recognition under GAAP, but with less detailed
guidance.
d. exactly the same as revenue recognition under GAAP.
Test Bank for Financial Accounting, Ninth Edition
3 – 38
193. Revenue recognition fraud is
a. a major issue in the U.S. but not worldwide.
b. a major issue internationally, but not in the U.S.
c. a major issue in the U.S. and worldwide.
d. not a major issue anywhere.
194. The IFRS standard dealing specifically with revenue recognition is based on
a. whether the revenue is realized or realizable.
b. whether the revenue is earned.
c. whether the revenue is realized or realizable, and earned.
d. the probability that economic benefits will flow to the company, and reliability of
measurement.
195. Depreciation based on revaluation of land and buildings is permitted under
a. GAAP but not IFRS.
b. IFRS but not GAAP.
c. both IFRS and GAAP.
d. neither IFRS nor GAAP.
196. Under IFRS, income is defined as
a. revenue less expenses.
b. revenues and gains, less expenses and losses.
c. revenues and gains.
d. revenues, gains, and contributions by owners.
197. The procedures of the closing process are applicable to all companies when they are
using
a. GAAP but not IFRS.
b. IFRS but not GAAP.
c. both IFRS and GAAP.
d. neither IFRS nor GAAP.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 39
Answers to Multiple Choice Questions
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans
.
48.
c
70.
b
92.
c
114.
d
136.
c
a158.
b
180.
c
49.
d
71.
b
93.
c
115.
b
137.
b
a159.
d
181.
c
50.
a
72.
c
94.
c
116.
d
138.
c
a160.
c
182.
b
51.
d
73.
b
95.
b
117.
c
139.
b
a161.
d
183.
d
52.
b
74.
a
96.
c
118.
c
140.
a
a162.
b
184.
d
53.
c
75.
c
97.
d
119.
c
141.
a
a163.
d
185.
a
54.
a
76.
a
98.
b
120.
a
142.
c
a164.
b
186.
b
55.
a
77.
d
99.
a
121.
d
143.
d
a165.
c
187.
d
56.
d
78.
c
100.
b
122.
b
144.
c
a166.
a
188.
c
57.
c
79.
b
101.
d
123.
c
145.
b
a167.
c
189.
d
58.
a
80.
c
102.
b
124.
c
146.
b
a168.
b
190.
c
59.
b
81.
b
103.
d
125.
a
147.
c
a169.
b
191.
a
60.
c
82.
b
104.
d
126.
d
148.
c
a170.
c
192.
c
61.
b
83.
b
105.
c
127.
b
149.
b
a171.
d
193.
c
62.
a
84.
d
106.
c
128.
c
150.
d
a172.
d
194.
d
63.
c
85.
b
107.
d
129.
c
151.
b
a173.
a
195.
b
64.
b
86.
c
108.
a
130.
c
152.
d
a174.
b
196.
c
65.
c
87.
a
109.
d
131.
c
a153.
c
a175.
b
197.
c
66.
a
88.
c
100.
c
132.
b
a154.
a
a176.
c
67.
c
89.
a
111.
b
133.
b
a155.
d
177.
c
68.
c
90.
c
112.
b
134.
c
a156.
a
178.
c
69.
d
91.
c
113.
c
135.
b
a157.
c
179.
c
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 40
BRIEF EXERCISES
BE 198
State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued
revenue (AR) or an accrued expense (AE).
1. Unrecorded interest on savings bonds is $245.
2. Property taxes that have been incurred but that have not yet been paid or recorded amount to
$300.
3. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned.
4. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40 percent was still
unexpired.
BE 199
Prepare adjusting entries for the following transactions. Omit explanations.
1. Depreciation on equipment is $900 for the accounting period.
2. There was no beginning balance of supplies and purchased $500 of supplies during the
period. At the end of the period $150 of supplies were on hand.
3. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $400 was
unexpired.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 41
BE 200
On June 1, during its first month of operations, Crooked Rain purchased supplies for $4,500 and
debited the supplies account for that amount. At June 30, an inventory of supplies showed $1,000
of supplies on hand. What adjusting journal entry should be made for June?
BE 201
On January 1, Chan & Chan, CPAs received a $15,000 cash retainer for accounting services to
be rendered ratably over the next 3 months. The full amount was credited to the liability account
Unearned Service Revenue. Assuming that the revenue is recognized equally over the 3-month
period, what adjusting journal entry should be made at January 31?
BE 202
On February 1, Results Income Tax Service received a $3,000 cash retainer for tax preparation
services to be rendered equally over the next 4 months. The full amount was credited to the
liability account Unearned Service Revenue. Assuming that the revenue is recognized equally
over the 4-month period, what balance would be reported on the February 28 balance sheet for
Unearned Service Revenue?
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 42
BE 203
Bakesale Enterprises purchased equipment on May 1, 2015 for $6,300. The company expects to
use the equipment for 5 years. It has no salvage value.
1. What adjusting journal entry should the company make at the end of each month if monthly
financials are prepared (annual depreciation is $1,260)?
2. What is the book value of the equipment at May 31, 2015?
BE 204
Rhodes National purchased software on October 1, 2015 for $14,400. The company expects to
use the software for 3 years. It has no salvage value.
1. What adjusting journal entry should the company make at the end of each month if
monthly financials are prepared? (annual depreciation is $4,800)
2. What balance will be reported on the December 31, 2015 balance sheet for Accumulated
Depreciation?
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 43
BE 205
Teenage Fanclub Printings sold annual subscriptions to their magazine for $30,000 in December,
2014. The magazine is published monthly. The new subscribers received their first magazine in
January, 2015.
1. What adjusting entry should be made in January if the subscriptions were originally recorded
as a liability?
2. What amount will be reported on the January 2015 balance sheet for Unearned Subscription
Revenue?
BE 206
On January 1, 2015, Bottle Rockets Corp. purchased a general liability insurance policy for
$9,000 to provide coverage for the calendar year.
1. If the company recorded the policy as an asset when purchased, what is the monthly
adjusting journal entry that should be recorded at January 31, 2015?
*2. If the company expensed the cost of the policy on January 1, 2015, what is the monthly
adjusting entry that should be recorded at January 31, 2015?
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 44
BE 207
Identify the impact on the balance sheet if the following information is not used to adjust the
accounts.
1. Supplies consumed totaled $3,000.
2. Interest accrues on notes payable at the rate of $200 per month.
3. Insurance of $450 expired during the month.
4. Plant and equipment are depreciated at the rate of $1,200 per month.
BE 208
Determine the impact on the balance sheet accounts if the following information is not used to
adjust the accounts of Mood Food Company for the month of January, 2015. Round answers to
the nearest dollar.
1. The company rents extra office space to Beulah, CPAs. Beulah pays the $6,000 rent annually
on January 1.
2. The company has an outstanding loan to its President in the amount of $150,000. The loan
accrues interest at the annual rate of 6%. Principal and interest are due January 1, 2017.
3. The company completed work on a project during January that was not yet billed to the client.
The client will be charged $3,100.
BE 209
For each of the following oversights, state whether total assets will be understated (U), overstated
(O), or no affect (NA).
_____ 1. Failure to record revenue recognized but not yet received.
_____ 2. Failure to record expired prepaid rent.
_____ 3. Failure to record accrued interest on the bank savings account.
_____ 4. Failure to record depreciation.
_____ 5. Failure to record accrued wages.
_____ 6. Failure to record the recognized portion of unearned revenues.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 45
BE 210
Blue Guitar Music School borrowed $30,000 from the bank signing an 8%, 6-month note on
November 1. Principal and interest are payable to the bank on May 1. If the company prepares
monthly financial statements, what adjusting entry should the company make at November 30
with regard to the note (round answer to the nearest dollar)?
BE 211
The adjusted trial balance of Rocky Acre Spread Inc. on December 31, 2015 includes the
following accounts: Accumulated Depreciation, $6,000; Depreciation Expense, $2,000; Notes
Payable $7,500; Interest Expense $150; Utilities Expense, $300; Rent Expense, $500; Service
Revenue, $19,600; Salaries and Wages Expense, $6,000; Supplies, $200; Supplies Expense,
$1,200; Salaries and Wages Payable, $600. Prepare an income statement for the month of
December.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 46
BE 212
The adjusted trial balance of Old 97 Automotive Service Company on June 30, 2015 includes the
following accounts: Supplies, $300; Accumulated Depreciation, $9,500; Salaries Payable, $1,550,
Notes Payable $6,750; Service Revenue, $22,100; Salaries and Wages Expense, $8,750;
Depreciation Expense, $3,250; Supplies Expense, $1,000; Rent Expense, $400; Utilities
Expense, $350; and Interest Expense $250. Prepare an income statement for the month of June.
BE 213
The adjusted trial balance of Sodajerk Company at December 31, 2015 includes the following
accounts: Retained Earnings $12,600; Dividends $7,000; Service Revenue $38,000; Salaries and
Wages Expense $13,000; Insurance Expense $2,000; Rent Expense $3,500; Supplies Expense
$2,500; and Depreciation Expense $2,000. Prepare a retained earnings statement for the year.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 47
BE 214
The adjusted trial balance of Hanson Hawk Company at September 30, 2015 includes the
following accounts: Retained Earnings $27,700; Dividends $9,750; Service Revenue $46,800;
Insurance Expense $1,950; Salaries Expense $18,000; Rent Expense $3,000; Supplies Expense
$650; and Depreciation Expense $1,100. Prepare a retained earnings statement for the year.
aBE 215
The following terms relate to the fundamental qualities of useful information. Match the key letter
of the correct term with the descriptive statement below.
a. Confirmatory value e. Faithful representation
b. Neutral f. Timely
c. Predictive value g. Verifiable
d. Relevant
_____ 1. Accounting information that is not biased toward one position or another.
_____ 2. Providing information before it loses its capacity to influence decision.
_____ 3. Independent measures, using the same methods, obtain similar results.
_____ 4. Providing information that would make a difference in a business decision.
_____ 5. Provide information that accurately depicts what really happened.
_____ 6. Confirms or corrects prior decisions.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 48
aBE 216
Presented below are the basic assumptions and principles underlying financial statements.
a. Historical cost principle d. Going concern assumption
b. Economic entity assumption e. Monetary unit assumption
c. Full disclosure principle f. Periodicity assumption
Identify the basic assumption or principle that is described below.
_____ 1. The economic life of a business can be divided into artificial time periods.
_____ 2. The business will continue in operation long enough to carry out its existing objectives.
_____ 3. Assets should be recorded at their cost.
_____ 4. Economic events can be identified with a particular unit of accountability.
_____ 5. Circumstances and events that make a difference to financial statement users should
be disclosed.
_____ 6. Only transaction data that can be expressed in terms of money should be included in
the accounting records.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 49
EXERCISES
Ex. 217
The balance sheets of Red House Painters include the following:
12/31/15 12/31/14
Interest Receivable $0 $4,300
Supplies 3,000 5,000
Salaries and Wages Payable 3,800 5,600
Unearned Service Revenue 4,000 -0-
The income statement for 2015 shows the following:
Interest Revenue $18,400
Service Revenue 72,700
Supplies Expense 8,700
Salaries and Wages Expense 39,000
Instructions
Calculate the following for 2015:
1. Cash received for interest.
2. Cash paid for supplies.
3. Cash paid for salaries and wages.
4. Cash received for revenue.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 50
Ex. 218
Hal Corp. prepared the following income statement using the cash basis of accounting:
HAL CORP.
Income Statement, Cash Basis
For the Year Ended December 31, 2015
Service revenue (does not include $25,000 of services rendered on account
because the collection will not be until 2016) …………………………………………… $370,000
Expenses (does not include $15,000 of expenses on account because
payment will not be made until 2016)……………………………………………………… 220,000
Net income ……………………………………………………………………………………………… $150,000
Additional data:
1. Depreciation on a company automobile for the year amounted to $6,000. This amount is not
included in the expenses above.
2. On January 1, 2015, paid for a two-year insurance policy on the automobile amounting to
$1,800. This amount is included in the expenses above.
Instructions
(a) Recast the above income statement on the accrual basis in conformity with generally
accepted accounting principles. Show computations and explain each change.
(b) Explain which basis (cash or accrual) provides a better measure of income.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 51
Ex. 219
Before month-end adjustments are made, the February 28 trial balance of Neutral Milk Hotel
contains revenue of $7,000 and expenses of $4,400. Adjustments are necessary for the following
items:
• Depreciation for February is $1,800.
• Revenue recognized but not yet billed is $2,700.
• Accrued interest expense is $700.
• Revenue collected in advance that is now recognized is $2,500.
• Portion of prepaid insurance expired during February is $400.
Instructions
Calculate the correct net income for Neutral Milk Hotel’s Income Statement for February.
Ex. 220
On December 31, 2015, Fashion Nugget Company prepared an income statement and balance
sheet and failed to take into account three adjusting entries. The incorrect income statement
showed net income of $35,000. The balance sheet showed total assets, $115,000; total liabilities,
$45,000; and stockholders’ equity, $70,000.
The data for the three adjusting entries were:
(1) Depreciation of $10,000 was not recorded on equipment.
(2) Wages amounting to $7,000 for the last two days in December were not paid and not
recorded. The next payroll will be in January.
(3) Rent of $12,000 was paid for two months in advance on December 1. The entire amount
was debited to Rent Expense when paid.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 52
Ex. 220 (cont.)
Instructions
Complete the following tabulation to correct the financial statement amounts shown (indicate
deductions with parentheses):
Item Net Income Total Assets Total Liabilities Stockholders’ Equity
Incorrect balances $ 35,000 $115,000 $ 45,000 $ 70,000
Effects of:
Depreciation
Wages
Rent
Correct Balances
Ex. 221
Indicate (a) the type of adjustment (prepaid expense, unearned revenue, accrued revenue, or
accrued expense), and (b) the accounts before adjustment (overstated or understated) for each
of the following:
1. Supplies of $200 have been used.
2. Salaries of $600 are unpaid.
3. Rent received in advance totaling $300 has been earned.
4. Services provided but not recorded total $500.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 53
Ex. 222
Buena Vista Social Club accumulates the following adjustment data at December 31.
1. Revenue of $1,600 collected in advance has been recognized.
2. Salaries of $600 are unpaid.
3. Prepaid rent totaling $500 has expired.
4. Supplies of $450 have been used.
5. Revenue recognized but unbilled total $750.
6. Utility expenses of $250 are unpaid.
7. Interest of $300 has accrued on a note payable.
Instructions
(a) For each of the above items indicate:
1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or
accrued expense).
2. The account relationship (asset/liability, liability/revenue, etc.).
3. The status of account balances before adjustment (understatement or overstatement).
4. The adjusting entry.
(b) Assume net income before the adjustments listed above was $15,500. What is the adjusted
net income?
Prepare your answer in the tabular form presented below.
Account Balances
Before Adjustment
Type of Account (Understatement
Adjustment Relationship or Overstatement) Adjusting Entry
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 54
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 55
Ex. 223
The adjusted trial balance of the Victoria Lane Paving Company includes the following balance
sheet accounts that frequently require adjustment. For each account, indicate (a) the type of
adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses)
and (b) the related account in the adjusting entry.
(a) (b)
Balance Sheet Account Type of Adjusting Entry Related Account
1. Supplies
2. Accounts Receivable
3. Prepaid Insurance
4. Accumulated Depreciation—
Equipment
5. Interest Payable
6. Salaries and Wages Payable
7. Unearned Revenue
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 56
Ex. 224
Match the statements below with the appropriate terms by entering the appropriate letter code in
the spaces provided.
TERMS:
A. Prepaid Expenses
B. Unearned Revenues
C. Accrued Revenues
D. Accrued Expenses
STATEMENTS:
____ 1. A revenue not yet recognized; collected in advance.
____ 2. Office supplies on hand that will be used in the next period.
____ 3. Interest revenue collected; not yet recognized.
____ 4. Rent not yet collected; already recognized.
____ 5. An expense incurred; not yet paid or recorded.
____ 6. A revenue recognized; not yet collected or recorded.
____ 7. An expense not yet incurred; paid in advance.
____ 8. Interest expense incurred; not yet paid.
Ex. 225
The Shins, a minor league baseball team, prepare financial statements on a monthly basis. Their
season begins in April, but in March the team engaged in the following transactions:
(a) Paid $210,000 to Kansas City as advance rent for use of Kansas City Stadium for the six
month period April 1 through September 30.
(b) Collected $450,000 cash from sales of season tickets for the team’s 20 home games. This
amount was credited to Unearned Ticket Revenue.
During the month of April, the Shins played four home games and five road games.
Instructions
Prepare the adjusting entries required at April 30 for the transactions above.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
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Ex. 226
On July 1, 2015, Damlen Jurado Company pays $12,000 to its insurance company for a 2-year
insurance policy.
Instructions
Prepare the necessary journal entries for Damlen Jurado on July 1 and December 31.
Ex. 227
On July 1, 2015, Jeffrey Underwriters Associates received $8,000 from a client for a 2-year
insurance policy.
Instructions
Prepare the necessary journal entries for Jeffrey Underwriters Associates on July 1 and
December 31.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 58
Ex. 228
Mother Hips Garment Company purchased equipment on June 1 for $90,000, paying $20,000
cash and signing a 9%, 2-month note for the remaining balance. The equipment is expected to
depreciate $18,000 each year. Mother Hips Garment Company prepares monthly financial
statements.
Instructions
(a) Prepare the general journal entry to record the acquisition of the equipment on June 1st.
(b) Prepare any adjusting journal entries that should be made on June 30th.
(c) Show how the equipment will be reflected on Mother Hips Garment Company’s balance
sheet on June 30th.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 59
Ex. 229
Scotsman Company prepares monthly financial statements. Below are listed some selected
accounts and their balances in the September 30 trial balance before any adjustments have been
made for the month of September.
SCOTSMAN COMPANY
Trial Balance (Selected Accounts)
September 30, 2015
———————————————————————————————————————————
Debit Credit
Supplies ………………………………………………………………………………….. $ 3,200
Prepaid Insurance …………………………………………………………………….. 4,800
Equipment ……………………………………………………………………………….. 16,200
Accumulated Depreciation—Equipment ……………………………………….. $1,000
Unearned Rent Revenue …………………………………………………………… 1,200
(Note: Debit column does not equal credit column because this is a partial listing of selected
account balances)
An analysis of the account balances by the company’s accountant provided the following
additional information:
1. A physical count of supplies revealed $1,000 on hand on September 30.
2. A two-year life insurance policy was purchased on June 1 for $4,800.
3. Equipment depreciated $3,000 per year.
4. The amount of rent received in advance that remains unearned at September 30 is $500.
Instructions
Using the above additional information, prepare the adjusting entries that should be made by
Scotsman Company on September 30.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 60
Ex. 230
Prepare the required end-of-period adjusting entries for each independent case listed below.
Case 1
Sleater-Kinney Company began the year with a $3,000 balance in the Supplies account. During
the year, $8,500 worth of additional supplies were purchased. A physical count of supplies on
hand at the end of the year revealed that $7,400 worth of supplies had been used during the
year. No adjusting entry has been made until year end.
Case 2
Western Company has a calendar year-end accounting period. On July 1, the company
purchased equipment for $30,000. It is estimated that the equipment will depreciate $300 each
month. No adjusting entry has been made until year end.
Case 3
Ranch Realty is in the business of renting several apartment buildings and prepares monthly
financial statements. It has been determined that 3 tenants in $900 per month apartments and
one tenant in the $1,200 per month apartment had not paid their August rent as of August 31st.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 61
Ex. 231
Aeroplane Insurance Agency prepares monthly financial statements. Presented below is an
income statement for the month of June that is correct on the basis of information considered.
AEROPLANE INSURANCE AGENCY
Income Statement
For the Month Ended June 30
———————————————————————————————————————————
Revenues
Sales revenue ………………………………………………………………….. $35,000
Expenses
Salaries and wages expense ………………………………………………. $6,000
Rent expense …………………………………………………………………… 4,200
Depreciation expense ………………………………………………………... 2,800
Advertising expense ………………………………………………………….. 800
Total expenses …………………………………………………………………. 13,800
Net income ………………………………………………………………………………. $21,200
Additional Data: When the income statement was prepared, the company accountant neglected
to take into consideration the following information:
1. A utility bill for $2,500 was received on the last day of the month for electric and gas service
for the month of June.
2. A company insurance salesman sold a life insurance policy to a client for a premium of
$25,000. The agency billed the client for the policy and is entitled to a commission of 20%.
3. Supplies on hand at the beginning of the month were $3,000. The agency purchased
additional supplies during the month for $4,000 in cash and $2,200 of supplies were on hand
at June 30.
4. The agency purchased a new car at the beginning of the month for $22,000 cash. The car will
depreciate $5,400 per year.
5. Salaries owed to employees at the end of the month total $6,100. The salaries will be paid on
July 5.
Instructions
Prepare a correct income statement.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 62
Ex. 232
One part of eight adjusting entries is given below.
Instructions
Indicate the account title for the other part of each entry.
1. Unearned Service Revenue is debited.
2. Prepaid Rent is credited.
3. Accounts Receivable is debited.
4. Depreciation Expense is debited.
5. Salaries and Wages Expense is debited.
6. Interest Payable is credited.
7. Service Revenue is credited (give two possible debit accounts).
8. Supplies Expense is debited.
Ex. 233
For each of the following accounts, indicate (a) the type of adjusting entry (prepaid expense,
accrued revenue, etc.) and (b) the related account in the adjusting entry.
1. Depreciation Expense
2. Salaries and Wages Payable
3. Service Revenue
4. Supplies
5. Unearned Service Revenue
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
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Ex. 234
Prepare the necessary adjusting entry for each of the following:
1. Services provided but unrecorded totaled $700.
2. Accrued salaries at year-end are $1,000.
3. Depreciation on equipment for the year is $600.
Ex. 235
The following ledger accounts are used by the Sebastopol Dog Track:
Accounts Receivable
Prepaid Advertising
Prepaid Rent
Unearned Ticket Revenue
Advertising Expense
Rent Expense
Ticket Revenue
Sales Revenue
Instructions
For each of the following transactions below, prepare the journal entry (if one is required) to
record the initial transaction and then prepare the adjusting entry, if any, required on September
30, the end of the fiscal year.
(a) On September 1, paid rent on the track facility for three months, $210,000.
(b) On September 1, sold season tickets for admission to the racetrack. The racing season is
year-round with 25 racing days each month. Season ticket sales totaled $900,000.
(c) On September 1, borrowed $350,000 from First National Bank by issuing a 9% note payable
due in three months.
(d) On September 5, programs for 20 racing days in September, 25 racing days in October, and
15 racing days in November were printed for $3,600.
(e) The accountant for the concessions company reported that gross receipts for September
were $150,000. Ten percent is due to the track and will be remitted by October 10.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 64
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 65
Ex. 236
Gwynn Company has an accounting fiscal year which ends on June 30. The company also has a
policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs
were incurred.
Date Amount
Monday June 28 $3,000
Tuesday June 29 3,800
Wednesday June 30 3,300
Thursday July 1 3,500
Friday July 2 2,400
Instructions
(a) Prepare any necessary adjusting journal entries that should be made at year end on June
30.
(b) Prepare the journal entry to record the payment of the weekly payroll on July 2.
Ex. 237
On Friday of each week, Spoon Company pays its factory personnel weekly wages amounting to
$45,000 for a five-day work week.
Instructions
(a) Prepare the necessary adjusting entry at year end, assuming December 31 falls on
Wednesday.
(b) Prepare the journal entry for payment of the week’s wages on the payday which is Friday,
January 2 of the next year.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 66
Ex. 238
Presented below is the Trial Balance and Adjusted Trial Balance for Morning Jacket Company on
December 31. MORNING JACKET
Trial Balance
December 31
———————————————————————————————————————————
Before Adjustment After Adjustment
Dr. Cr. Dr. Cr.
Cash $ 2,000 $ 2,000
Accounts Receivable 2,800 3,800
Prepaid Rent 2,100 1,400
Supplies 1,200 650
Equipment 18,000 18,000
Accumulated depreciation—
Equipment $ 1,300 $ 1,550
Accounts Payable 2,700 2,700
Notes Payable 10,000 10,000
Interest Payable 140
Salaries and Wages Payable 1,270
Unearned Service Revenue 4,460 3,960
Common Stock 7,200 7,200
Dividends 3,200 3,200
Service Revenue 8,000 9,500
Salaries and Wages Expense 3,860 5,130
Rent Expense 500 1,200
Supplies Expense 550
Depreciation Expense—
Equipment 250
Interest Expense 140
Totals $33,660 $33,660 $36,320 $36,320
Instructions
Prepare in journal form, with explanations, the adjusting entries that explain the changes in the
balances from the trial balance to the adjusted trial balance.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 67
Ex. 239
Compute the net income for 2015 based on the following amounts presented on the adjusted trial
balance of D-Lay Company.
Accumulated Depreciation – Equip. $20,000
Depreciation Expense 18,000
Salaries and Wages Expense 15,000
Service Revenue 40,000
Unearned Service Revenue 8,000
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 68
Ex. 240
New Slang Pest Control has the following balances in selected accounts on December 31, 2014.
Accounts Receivable $ 0
Accumulated Depreciation – Equipment 0
Equipment 6,650
Interest Payable 0
Notes Payable 20,000
Prepaid Insurance 2,220
Salaries and Wages Payable 0
Supplies 2,940
Unearned Service Revenue 30,000
All of the accounts have normal balances. The information below has been gathered at
December 31, 2015.
1. Depreciation on the equipment for 2015 is $1,300.
2. New Slang Pest Control borrowed $20,000 by signing a 10%, one-year note on July 1,
2015.
3. New Slang Pest Control paid $2,220 for 12 months of insurance coverage on October 1,
2015.
4. New Slang Pest Control pays its employees total salaries of $11,000 every Monday for
the preceding 5-day week (Monday-Friday). On Monday, December 27, 2015, employees
were paid for the week ending December 24, 2015. All employees worked the five days
ending December 31, 2015.
5. New Slang Pest Control performed disinfecting services for a client in December 2015.
The client will be billed $3,200.
6. On December 1, 2015, New Slang Pest Control collected $30,000 for disinfecting
processes to be performed from December 1, 2015, through May 31, 2015.
7. A count of supplies on December 31, 2015, indicates that supplies of $850 are on hand.
Instructions
Prepare in journal form with explanations, the adjusting entries for the seven items listed for New
Slang Pest Control.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 69
Ex. 241
The trial balances before and after adjustments for Old Julian Calendars at the end of its fiscal
year are presented below. Old Julian Calendars
Trial Balance
September 31, 2014
———————————————————————————————————————————
Before Adjustment After Adjustment
Dr. Cr. Dr. Cr.
Cash $ 15,080 $ 15,080
Accounts Receivable 14,960 16,110
Supplies 2,760 885
Prepaid Insurance 5,800 1,450
Equipment 13,300 13,300
Accumulated Depreciation – Equip $ 5,220 $ 6,960
Accounts Payable 9,860 9,860
Salaries and Wages Payable 4,500
Unearned Sales Revenue 2,175 1,150
Unearned Rent Revenue 2,100 525
Common Stock 18,395 18,395
Sales Revenue 48,800 50,975
Rent Revenue 1,575 3,150
Salaries and Wages Expense 36,225 40,725
Supplies Expense 1,875
Insurance Expense 0 4,350
Depreciation Expense 0 0 1,740 0
$ 88,125 $ 88,125 $ 95,515 $ 95,515
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 70
Ex. 241 Cont’d
Instructions
Prepare the adjusting entries that were made.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 71
Ex. 242
The White Stripes Animal Encounters operates a drive through tourist attraction. The company
adjusts its accounts at the end of each month. The selected accounts appearing below reflect
balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the
following:
Prepaid Rent $16,000
Buildings 30,000
Accumulated Depreciation—Buildings 6,600
Unearned Ticket Revenue 600
Other data:
1. Three months’ rent had been prepaid on April 1.
2. The buildings are being depreciated at $7,200 per year.
3. The unearned ticket revenue represents tickets sold for future visits. The tickets were sold at
$5.00 each on April 1. During April, thirty of the tickets were used by customers.
Instructions
(a) Calculate the following:
1. Monthly rent expense.
2. The age of the buildings in months.
3. The number of tickets sold on April 1.
(b) Prepare the adjusting entries that were made by the White Stripes Animal Encounters on
April 30.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 72
Ex. 243
The adjusted trial balance of C.S. Financial Planners appears below. Using the information from
the adjusted trial balance, you are to prepare for the month ending December 31, 2015:
1. an income statement.
2. a retained earnings statement.
3. a balance sheet.
C.S. Financial Planners
Adjusted Trial Balance
December 31, 2015
———————————————————————————————————————————
Debit Credit
Cash……………………………………………………………………………………….. $ 4,900
Accounts Receivable …………………………………………………………………. 2,200
Supplies ………………………………………………………………………………….. 1,800
Equipment ……………………………………………………………………………….. 15,000
Accumulated Depreciation—Equipment ……………………………………….. $ 4,000
Accounts Payable……………………………………………………………………… 3,300
Unearned Service Revenue ……………………………………………………….. 6,000
Common Stock …………………………………………………………………………. 10,000
Retained Earnings …………………………………………………………………….. 4,400
Dividends ………………………………………………………………………………… 2,500
Service Revenue ………………………………………………………………………. 4,200
Supplies Expense……………………………………………………………………… 600
Depreciation Expense ……………………………………………………………….. 2,500
Rent Expense …………………………………………………………………………… 2,400
$31,900 $31,900
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
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Ex. 244
Yankee Hotel Foxtrot initiated operations on July 1, 2015. To manage the company officers and
managers have requested monthly financial statements starting July 31, 2015. The adjusted trial
balance amounts at July 31 are shown below.
Debits Credits
Cash $ 7,680 Accumulated Depreciation – Equipment $ 840
Accounts Receivable 810 Notes Payable 6,000
Prepaid Rent 1,965 Accounts Payable 2,140
Supplies 1,160 Salaries and Wages Payable 360
Equipment 11,400 Interest Payable 40
Dividends 800 Unearned Service Revenue 580
Salaries and Wages Expense 7,145 Common Stock 5,000
Rent Expense 2,740 Retained Earnings 5,640
Depreciation Expense 665 Service Revenue 14,390
Supplies Expense 580 Total credits $34,990
Interest Expense 45
Total debits $ 34,990
(a) Determine the net income for the month of July.
(b) Determine the total assets and total liabilities at July 31, 2015 for Yankee Hotel Foxtrot.
(c) Determine the amount that appears for Retained Earnings at July 31, 2015.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 74
aEx. 245
1. Drive-by Truckers prepares monthly financial statements. On July 1, the Supplies account
had a balance of $3,000. During July, additional supplies were purchased for $4,800 and that
amount was debited to Supplies Expense. On July 31, a physical count of supplies revealed
that there was $2,000 on hand. Prepare the adjusting journal entry that Drive-by Truckers
should make on July 31.
2. Alesandro Rental Agency prepares monthly financial statements. On September 1, a check
for $9,000 was received from a tenant for six months’ rent. The full amount was credited to
Rent Revenue. Prepare the adjusting entry the company should make on September 30.
Adjusting the Accounts
3 – 75
COMPLETION STATEMENTS
246. The ______________ assumption divides the economic life of a business into artificial
time periods.
247. An accounting period that is one year in length is referred to as a ______________ year.
248. The ______________ principle gives accountants guidance as to when revenue is to be
recorded.
249. In a service company, revenue is recognized when the service is ______________.
250. The expense recognition principle attempts to match ______________ with
______________.
251. Expenses paid and recorded in an asset account before they are used or consumed are
called ______________. Revenue received and recorded as a liability before it is
recognized is referred to as ______________.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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252. Failure to adjust a prepaid expense account for the amount expired will cause
______________ to be understated and ________________ to be overstated.
253. Depreciation is a ______________ allocation process rather than a process of
______________.
254. Depreciation expense for a period is an ______________ rather than a factual
measurement of cost that has expired.
255. An adjusting entry recording accrued salaries for a period indicates that Salaries Expense
has been ________________ but has not yet been ________________ or recorded.
256. An adjusted trial balance proves the ______________ of the total debit and credit
balances after all ______________ entries have been made.
Answers to Completion Statements
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
3 – 77
MATCHING
257. Match the items below by entering the appropriate code letter in the space provided.
A. Time period assumption F. Accrued revenues
B. Fiscal year G. Depreciation
C. Revenue recognition principle H. Accumulated depreciation
D. Prepaid expenses I. Accrued expenses
E. Expense recognition principle J. Book value
____ 1. A twelve month accounting period
____ 2. Expenses paid before they are incurred
____ 3. Cost less accumulated depreciation
____ 4. Divides the economic life of a business into artificial time periods
____ 5. Efforts are related to accomplishments
____ 6. A contra asset account
____ 7. Recognition of revenue when the performance obligation is satisfied
____ 8. Revenues recognized but not yet received
____ 9. Expenses incurred but not yet paid
____ 10. A cost allocation process
Answers to Matching
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
3 – 78
SHORT-ANSWER ESSAY QUESTIONS
S-A E 258
The income statement is an important financial statement used by individuals who are interested
in the operations of a business enterprise. Explain how the time period assumption and the
revenue recognition and expense recognition principles provide guidance to accountants in
preparing an income statement.
S-A E 259
In developing an accounting information system, it is important to establish procedures whereby
all transactions that affect the components of the accounting equation are recorded. Why then, is
it often necessary to adjust the accounts before financial statements are prepared even in a
properly designed accounting system? Identify the major types of adjustments that are frequently
made and give a specific example of each.
S-A E 260
You are visiting with a friend, Jim Borke, who wants to start a new business. During discussions
on forming the business, Jim makes this statement:
Our business will have accounts receivable and accounts payable. It will also acquire a
substantial amount of computers and equipment. Will it be acceptable to use the cash basis of
accounting?
Prepare a response for Jim.
Adjusting the Accounts
FOR INSTRUCTOR USE ONLY
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S-A E 261
The long-term liability section of Escovedo Company’s Balance Sheet includes the following
accounts:
Notes Payable $100,000
Mortgage Payable 250,000
Salaries and Wages Payable 75,000
Accumulated Depreciation 125,000
Total Long-Term Liabilities $550,000
Escovedo Company is an established company and does not experience any financial difficulties
or have any cash flow problems. Discuss at least two items that are questionable as long-term
liabilities.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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S-A E 262 (Ethics)
Jay Farrar Company is a manufacturing company that specializes in writing instruments. The past
year was a difficult one for the company, as it sought to retain its share in a market in which the
largest competitors were also rapid innovators. Jay Farrar introduced a new product late in the
year, even though testing was not complete. It was a pen designed with two cartridges: one
supplying ink and the other correction fluid. A person could then switch easily between writing
and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the
Correct-O-Pen, as the product was named, was an overwhelming success.
The success of the product has Josh Ritter, the manager of the New Products division, worried,
however. He was concerned that quality problems would begin occurring, since the longevity of
the pen and stability of the correction fluid formulation had not been tested. He did not want sales
personnel to get the bonuses that appeared to be indicated, since they might aggressively
promote a product that would fail in use. He preferred to complete testing of the pen first, so that
more confidence could be placed in the results.
Top management, however, declined the tests. Mr. Ritter then instructed you, the accountant, not
to prorate payroll taxes or rent expense for the rest of the year, but to show them as current
expenses in total. In this way, the new product would appear to be only slightly profitable.
Required:
1. Describe the alternatives that you as an accountant would have in this situation.
2. Indicate which alternative is best.
Adjusting the Accounts
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S-A E 263 (Communication)
A new sales representative, Jiggs Lucero, has just received his copy of the month-end financial
reports. He is puzzled by the term “unearned revenue.” He left the following e-mail message for
you on the company‘s bulletin board system:
What is this??? Creative Accounting, or what??? Line item 12 on year-to-date
financials shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we
earned it, or we didn’t … Right??! Is this how you guys lower our commissions?
Reply to j.lucero@sbd
Required:
Write a response to send to Jiggs.
Test Bank for Financial Accounting, Ninth Edition
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CHALLENGE EXERCISES
CE 1
O’Brien Industries collected $190,000 from customers in 2015. Of the amount collected, $40,000
was from revenue accrued from services performed in 2014, and $20,000 was received in
advance for 2016 revenue. In addition, O’Brien earned $70,000 of revenue in 2015, which will not
be collected until 2016. O’Brien also earned $25,000 of revenue in 2015 which had been
collected in 2014.
O’Brien Industries paid $150,000 for expenses in 2015. Of the amount paid, $50,000 was for
expenses incurred on account in 2014, $22,000 was paid in advance for 2016 expenses. In
addition, O’Brien incurred $78,000 of expenses in 2015, which will not be paid until 2016. O’Brien
also incurred $29,000 of expenses in 2015 which had been paid in 2014.
Instructions
(a) Compute 2015 cash-basis net income.
(b) Compute 2015 accrual-basis net income.
CE 2
The ledger of Laurie Rental Agency on March 31 of the current year includes the following
selected accounts before adjusting entries have been prepared
Debit Credit
Prepaid Insurance $6,000
Supplies 4,500
Equipment 40,000
Accumulated Depreciation—Equipment $12,600
Notes Payable 20,000
Unearned Rent Revenue 14,100
Rent Revenue 90,000
Interest expense -0-
Salaries and Wages Expense 20,000
An analysis of the accounts shown the following.
1. The equipment depreciates $400 per month.
2. Two-thirds of the unearned rent revenue was recognized during the quarter.
3. The note payable is dated January 1 and bears 12% interest.
Adjusting the Accounts
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CE 2 (Cont.)
4. Suppliers on hand total $800.
5. The insurance policy is a two-year policy dated January 1.
Instructions
A. Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly.
Additional accounts are: Depreciation Expense, Insurance Expense, Interest Payable, and
Supplies Expense.
B. Compute the ending balances for Prepaid Insurance, Supplies, Unearned Rent Revenue, and
Rent Revenue, and indicate in which financial statement those items will be reported.
CE 3
The income statement of Annette Co, for the month of July shows net income of $2,400 based on
Service Revenue $7,200, Salaries and Wages Expense $2,900 Supplies Expense $1,400, and
Utilities Expense $500.In reviewing the statement, you discover the following.
1. Insurance expired during July of $600 was omitted.
2. Supplies expense includes $300 of supplies that are still on hand at July 31.
3. Depreciation on equipment of $250 was omitted.
4. Accrued but unpaid salaries and wages at July 31 of $400 were not included.
5. Services performed but unrecorded totaled $700.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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CE 3 (Cont.)
Instructions
A. Prepare a correct income statement for July 2015.
B. What effect do the corrections have on the amount reported as total assets on the balance
sheet?
C. What effect do the corrections have on the amount reported as total liabilities on the balance
sheet?
Note to instructor: Net income decreased by $250, from $2,400 to $2,150. This would decrease
stockholders’ equity You can verify your computations with the accounting equation:
Assets = Liabilities + Stockholders’ Equity
+ $150 = + $400 + –$250