Chapter 3—The Adjusting Process Key
1. The system of accounting where revenues are recorded when they are earned and expenses are recorded when
they are incurred is called the cash basis of accounting.
2. Generally accepted accounting principles require the accrual basis of accounting.
3. The revenue recognition concept states that revenue should be recorded in the same period as the cash is
received.
4. The matching concept requires expenses be recorded in the same period that the related revenue is recorded.
5. The financial statements measure precisely the financial condition and results of operations of a business.
6. An example of deferred revenue is Unearned Rent.
7. Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has been
earned.
8. If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a liability
account.
9. Proper reporting of revenues and expenses in a period is due to the accounting period concept.
10. Revenue recognition concept requires that the reporting of revenue be included in the period when cash for
the service is received.
11. Under accrual accounting, revenues and expenses should be recorded in the same period to which they
relate.
12. The matching concept supports matching expenses with the related revenues.
13. Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis of
accounting.
14. The updating of accounts is called the adjusting process.
15. Adjusting entries are made at the end of an accounting period to adjust accounts on the balance sheet.
16. Adjusting entries affect only expense and asset accounts.
17. An adjusting entry would adjust revenue so it is reported when earned and not when cash is received.
18. An adjusting entry would adjust an expense account so the expense is reported when incurred.
19. An adjusting entry to accrue an incurred expense will affect total liabilities.
20. The difference between deferred revenue and accrued revenue is that accrued revenue has been recorded
and needs adjusting and deferred revenue has never been recorded.
21. Deferrals are recorded transactions that delay the recognition of an expense or revenue.
22. Adjustments for accruals are needed to record a revenue that has been earned or an expense that has been
incurred but not recorded.
23. Unearned revenue is a liability.
24. The systematic allocation of land’s cost to expense is called depreciation.
25. The difference between the balance of a fixed asset account and the balance of its related accumulated
depreciation account is termed the book value of the asset.
26. The Accumulated Depreciation’s account balance is the sum of the depreciation expense recorded in past
periods.
27. Accumulated Depreciation accounts are liability accounts.
28. Accumulated Depreciation is reported on the income statement.
29. A contra asset account for Land will normally appear in the balance sheet.
30. Depreciation Expense is reported on the balance sheet as an addition to the related asset.
31. A company pays $36,000 for twelve month’s rent on October 1. The adjusting entry on December 31 is
debit Rent Expense, $9,000 and credit Prepaid Rent, $9,000.
32. A company pays $360 for a yearly trade magazine on August 1. The adjusting entry on December 31 is
debit Unearned Subscription Revenue, $150 and credit Subscription Revenue, $150.
33. A company depreciates its equipment $500 a year. The adjusting entry for December 31 is credit
Depreciation Expense, $500 and debit Equipment, $500.
34. A company pays an employee $3,000 for a five day work week, Monday – Friday. The adjusting entry on
December 31, which is a Wednesday, is debit Wages Expense, $1,800 and credit Wages Payable, $1,800.
35. A company pays $6,500 for two season tickets on September 1. If $2,500 is earned by December 31, the
adjusting entry made at that time is debit Cash, $2,500 and credit Ticket Revenue, $2,500.
36. A company realizes that the last two day’s revenue for the month was billed but not recorded. The adjusting
entry on December 31 is debit Accounts Receivable and credit Fees Earned.
37. At year-end, the balance in the prepaid insurance account, prior to any adjustments, is $6,000. The amount
of the journal entry required to record insurance expense will be $4,000 if the amount of unexpired insurance
applicable to future periods is $2,000.
38. A fixed asset’s market value is reflected in the Balance Sheet.
39. If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both liabilities and
stockholders’ equity will be understated for the period.
40. If the adjustment to recognize expired insurance at the end of the period is inadvertently omitted, the assets
at the end of the period will be understated.
41. If the adjustment of the unearned rent account at the end of the period to recognize the amount of rent
earned is inadvertently omitted, the net income for the period will be understated.
42. If the adjustment for depreciation for the year is inadvertently omitted, the assets on the balance sheet at the
end of the period will be understated.
43. Adjusting journal entries are dated on the last day of the period.
44. By ignoring and not posting the adjusting journal entries to the appropriate accounts, net income will always
be overstated.
45. The financial statements are prepared from the unadjusted trial balance.
46. The adjustment for accrued fees was debited to Accounts Payable instead of Accounts Receivable. This
error will be detected when the Adjusted Trial Balance is prepared.
47. The adjusted trial balance verifies that total debits equals total credits before the adjusting entries are
prepared.
48. Vertical analysis compares each item in a financial statement with a total amount from the same statement.
49. When preparing an income statement vertical analysis, each revenue and expense is expressed as a percent
of net income.
50. Vertical analysis is useful for analyzing financial statement changes over time.
51. The revenue recognition concept
52. The matching concept
53. Using accrual accounting, revenue is recorded and reported only
54. Using accrual accounting, expenses are recorded and reported only
55. One of the accounting concepts upon which deferrals and accruals are based is
56. If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account, which
of the following describes the effect of the credit portion of the entry?
57. If the effect of the credit portion of an adjusting entry is to increase the balance of a liability account, which
of the following describes the effect of the debit portion of the entry?
58. Prior to the adjusting process, accrued expenses have
59. Prior to the adjusting process, accrued revenue has
60. Deferred expenses have
61. Deferred revenue is revenue that is
62. Adjusting entries are
63. Adjusting entries affect at least one
64. The general term employed to indicate an expense that has not been paid and has not yet been recognized in
the accounts by a routine entry is
65. Which of the following is not a characteristic of accrual basis of accounting?
66. Generally accepted accounting principles requires that companies use the ____ of accounting.
67. The cash basis of accounting records revenues and expenses when the cash is exchanged while the accrual
basis of accounting
68. By matching revenues and expenses in the same period in which they incur
69. Adjusting entries always include
70. Prepaid expenses are eventually expected to
71. Which of the following is considered to be unearned revenue?
72. Which of the following is an example of accrued revenue?
73. Which of the following is considered to be an accrued expense?
74. Which account would normally not require an adjusting entry?
75. Which one of the accounts below would likely be included in an accrual adjusting entry?
76. Which one of the following accounts below would likely be included in a deferral adjusting entry?
77. The balance in the prepaid rent account before adjustment at the end of the year is $32,000, which
represents four months’ rent paid on December 1. The adjusting entry required on December 31 is
78. The balance in the office supplies account on June 1 was $7,500, supplies purchased during June were
$3,100, and the supplies on hand at June 30 were $2,300. The amount to be used for the appropriate adjusting
entry is
79. Which of the following is the proper adjusting entry, based on a prepaid insurance account balance before
adjustment of $14,000 and unexpired insurance of $3,000, for the fiscal year ending on April 30?
80. The entry to adjust for the cost of supplies used during the accounting period is
81. A business pays weekly salaries of $25,000 on Friday for a five-day week ending on that day. The
adjusting entry necessary at the end of the fiscal period ending on Tuesday is
82. The difference between the balance of a fixed asset account and the related accumulated depreciation
account is termed
83. The adjusting entry to record the depreciation of equipment for the fiscal period is
84. As time passes, fixed assets other than land lose their capacity to provide useful services. To account for
this decrease in usefulness, the cost of fixed assets is systematically allocated to expense through a process
called
85. The entry to adjust the accounts for wages accrued at the end of the accounting period is
86. The supplies account has a balance of $2,100 at the beginning of the year and was debited during the year
for $2,300, representing the total of supplies purchased during the year. If $400 of supplies are on hand at the
end of the year, the supplies expense to be reported on the income statement for the year is
87. A company purchases a one-year insurance policy on June 1 for $2,760. The adjusting entry on December
31 is
88. Austin, Inc. made a Prepaid Rent payment of $3,500 on January 1st. The company’s monthly rent
is $700. The amount of Prepaid Rent that would appear on the January 31 balance sheet after adjustment is:
89. Depreciation Expense and Accumulated Depreciation are classified, respectively, as
90. The type of account and normal balance of Accumulated Depreciation is
91. The type of account and normal balance of Unearned Rent is
92. Data for an adjusting entry described as “accrued wages, $2,020″ would result in
93. Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the adjusting entry is for
94. If there is a balance in the prepaid rent account after adjusting entries are made, it represents a(n)
95. If there is a balance in the unearned subscriptions account after adjusting entries are made, it represents a(n)
96. The cost of office supplies to be used in future periods is ordinarily shown on the balance sheet as a(n)
97. Which of the following is an example of a prepaid expense?
98. The unexpired insurance at the end of the fiscal period represents
99. Accrued revenues would appear on the balance sheet as
100. Prepaid advertising, representing payment for the next quarter, would be reported on the balance sheet as
a(n)
101. Unearned rent, representing rent for the next six months’ occupancy, would be reported on the landlord’s
balance sheet as a(n)
102. Accrued expenses are ordinarily reported on the balance sheet as
103. Fees receivable would appear on the balance sheet as a(n)
104. The general term used to indicate delaying the recognition of an expense already paid or of a revenue
already received is
105. The adjusting entry for rent earned that was previously recorded in the unearned rent account is
106. Which of the following pairs of accounts could not appear in the same adjusting entry?
108.
The following adjusting journal entry does not include an explanation. Select the best explanation for the entry.
Unearned Revenue
7,500
Fees earned
7,500
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109. The following adjusting journal entry does not include an explanation. Select the best explanation for the
entry.
Supplies Expense
730
Supplies
730
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110. The following adjusting journal entry found in the journal is missing an explanation. Select the best
explanation for the entry.
Wages Expense
4,500
Wages Payable
4,500
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111. What effect will this adjustment have on the accounting records?
Unearned Revenue
6,375
Fees Earned
6,375
112. What effect will this adjusting journal entry have on the accounting records?
Supplies Expense
760
Supplies
760
113. What effect will the following adjusting journal entry have on the accounting records?
Depreciation Expense
2,150
Accumulated Depreciation
2,150
114. How will the following adjusting journal entry affect the accounting equation?
Unearned Subscriptions
11,500
Subscriptions Earned
11,500
115. Which of the following is not true regarding depreciation?
116. The account type and normal balance of Prepaid Expense is
117. The account type and normal balance of Unearned Revenue is
118. Which of the following is an example of an accrued expense?
119. The net book value of a fixed asset is determined by
120. The balance in the supplies account, before adjustment at the end of the year is $6,250. The proper
adjusting entry if the amount of supplies on hand at the end of the year is $1,500 would be
121. The net income reported on the income statement is $58,000. However, adjusting entries have not been
made at the end of the period for supplies expense of $2,200 and accrued salaries of $1,300. Net income, as
corrected, is
122. At the end of the fiscal year, the usual adjusting entry to Prepaid Insurance to record expired insurance was
omitted. Which of the following statements is true?
123. At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted. Which
of the following statements is true?
124. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was
omitted. Which of the following statements is true?
125. The adjusting entry to adjust supplies was omitted at the end of the year. This would effect the income
statement by having
126. Which of the accounts below would most likely appear on an adjusted trial balance but probably would not
appear on the unadjusted trial balance?