Introduction to Financial Accounting, 10e (Horngren)
Chapter 4 Using Financial Statements
Learning Objective 4.1 Questions
4.1-1) An adjusting entry cannot include a debit to a(n)
A) asset and a credit to a revenue.
B) asset and a credit to a liability.
C) liability and a credit to a revenue.
D) expense and a credit to an asset.
E) All of the above are examples of adjusting entries.
4.1-2) Which of the following is an example of an accrual?
A) Wages incurred but not yet paid
B) Payment of advertising 6 months in advance
C) Purchase of supplies
D) Revenue collected in advance
E) All of the above
4.1-3) Which of the following statements regarding adjusting entries is true?
A) Accountants use adjusting entries to record explicit transactions at the end of each reporting period.
B) Adjusting entries are made on a daily basis as cash is exchanged between parties.
C) Adjusting entries have nothing to do with accrual accounting.
D) Adjusting entries are made at periodic intervals, usually when the financial statements are about to be
prepared.
E) The recording of cash receipts from customers is an example of an adjusting entry.
4.1-4) An example of an explicit transaction is
A) signing a contract to perform services in two months, at which time payment will be received.
B) recognizing depreciation expense.
C) cash disbursement for the payment of 3 months’ rent in advance.
D) accruing wages payable at month end.
E) recognizing rent expense by reducing prepaid rent.
4.1-5) An example of an explicit transaction is
A) depreciation expense.
B) expiration of prepaid rent.
C) recognition of interest expense.
D) accrual of wages payable.
E) purchasing inventory on account.
4.1-6) An example of an implicit transaction is
A) a cash sale.
B) a credit purchase of inventory.
C) the signing of an agreement to provide certain services in the future at which time a cash down
payment is received.
D) the expiration of prepaid rent.
E) a credit sale.
4.1-7) An example of an entry that is not an adjusting entry is
A) reducing Prepaid Rent to record rent expense for the current month.
B) reducing Unearned Revenue to record revenue for services provided during the month.
C) accruing wage expense for labor costs which have been incurred but not yet paid.
D) purchase of land for cash and a note payable.
E) accruing revenue for services that have been provided but not yet billed.
4.1-8) Which of the following situations does NOT involve an accrual?
A) Recording the consumption of an asset
B) Recording depreciation on equipment
C) Recording wages owed to employees
D) Recording revenue earned when cash was received in advance
E) Recognizing sales when they occur
4.1-9) The accountant uses adjusting entries to record implicit transactions at the end of each reporting
period.
4.1-10) Implicit transactions are events such as cash receipts and disbursements that trigger nearly all
day–to–day routine entries.
4.1-11) Some explicit transactions (e.g., the loss of assets due to fire) do not involve actual exchanges of
goods and services between parties.
4.1-12) Every adjusting entry affects one income statement account and one balance sheet account.
4.1-13) All creditor transactions will result in an adjusting entry.
4.1-14) Although it does not occur often, the Cash account can be used to record adjusting entries.
4.1-15) Define the term “implicit transaction” and explain how these transactions are recorded in the
financial records. In addition, list two of the four principal types of adjustments and give an example of
each.
Learning Objective 4.2 Questions
4.2-1) Which of the following situations involves a deferral?
A) Recording accrued interest
B) Recording accrued wages
C) Recording revenue earned but not yet received
D) Recording revenue earned that was collected in advance
E) None of the above are deferrals.
4.2-2) The adjusting entry to recognize periodic depreciation has what effect on the basic accounting
equation?
A) Decrease in assets, decrease in liabilities
B) Decrease in assets, increase in liabilities
C) Decrease in assets, increase in stockholders’ equity
D) Decrease in assets, decrease in stockholders’ equity
E) None of these
4.2-3) Which of the following is an example of an accrual of unrecorded revenues?
A) A 2–year loan was signed with interest accruing monthly.
B) Office supplies are purchased each month, but the account is not adjusted until the end of the month.
C) Wages have been earned, but have not been paid at the end of the month.
D) An attorney has performed work for a client, but has not billed the client yet.
E) Equipment purchased will be beneficial for several years.
4.2-4) Which one of the following adjustments will increase revenues?
A) Fees were not billed for services already performed.
B) Depreciation is recorded.
C) Supplies were used, but not recorded.
D) Interest is incurred on borrowed money, but not yet paid to the bank.
E) Wages have accrued, but will not be paid until next month.
Table 4–1
Matelske Company completed the following transactions during August.
1. The company owes $8,900 for wages to be paid on September 6.
2. The company performed a month–end inventory and counted office supplies valued at $2,100. The
beginning balance in the Supplies account was $1,200.
3. The company performed services valued at $7,550. The company did not bill for the services until
September 1.
4. The company received $7,000 cash for services to be delivered in August and September. The company
recorded unearned revenue upon receipt of cash.
4.2-5) Referring to Table 4–1, part (2), assuming that $2,900 of purchases for the month were posted to the
Supplies account, what adjusting entry would the Matelske Company make on August 31?
A) Supplies expense 2,000
Supplies 2,000
B) Supplies 2,000
Supplies expense 2,000
C) Supplies 900
Supplies expense 900
D) Supplies expense 900
Supplies 900
E) Supplies expense 2,900
Supplies 2,900
4.2-6) Referring to Table 4–1, part (3), what adjusting entry would the Matelske Company make on
August 31?
A) Prepaid revenue 7,550
Revenue 7,550
B) Revenue 7,550
Unearned revenue 7,550
C) Unearned revenue 7,550
Revenue 7,550
D) Revenue 7,550
Prepaid revenue 7,550
E) Accounts receivable 7,550
Revenue 7,550
4.2-7) Referring to Table 4–1, part (1), what adjusting entry is necessary on August 31?
A) Wage expense 8,900
Unearned Wages 8,900
B) Wage expense 8,900
Wages payable 8,900
C) Prepaid Wages 8,900
Wage expense 8,900
D) Unearned Wages 8,900
Wage expense 8,900
E) Wage expense 8,900
Prepaid Wages 8,900
4.2-8) Referring to Table 4–1, part (4), what adjusting entry would the Matelske Company make on
August 31, assuming that $2,000 of services were performed in August?
A) Unearned revenue 5,000
Revenue 5,000
B) Accounts receivable 5,000
Revenue 5,000
C) Unearned revenue 2,000
Revenue 2,000
D) Revenue 2,000
Accounts receivable 2,000
E) Accounts receivable 2,000
Unearned revenue 2,000
Table 4–2
Urban Corporation had the following transactions during April:
1. The company paid $1,800 for 3 months’ rent in advance on April 1.
2. The company received $800 in advance on April 1 from Wente Company for services to be performed
over the next 3 months.
3. The company borrowed $20,000 from Benson Bank on April 1. The note is for 9 months with all interest
due at the end of the note. The bank is charging the company 9% interest.
4. Okoye Company, a valued customer, placed an order for $1,500 on April 1. Because Okoye is
experiencing financial difficulties, it has been allowed to pay with a 3–month note receivable. The interest
rate on the note is 8%.
5. Urban Corporation performed services for a client during April valued at $6,000. The client was billed
on May 7.
4.2-9) Referring to Table 4–2, part (1), and assuming only asset accounts were used in the April 1 journal
entry, what adjusting entry is necessary on April 30?
A) Prepaid rent 600
Rent expense 600
B) Rent expense 600
Prepaid rent 600
C) Rent expense 600
Rent payable 600
D) Unearned rent 600
Rent expense 600
E) Prepaid rent 600
Rent payable 600
4.2-10) Referring to Table 4–2, part (2), if the $800 received from Wente Company was placed into the
Unearned Revenue account, and Urban had completed 30% of the work as of the end of the month, what
adjusting entry would Urban Company make on April 30?
A) Prepaid revenue 240
Revenue 240
B) Revenue 240
Unearned revenue 240
C) Unearned revenue 240
Revenue 240
D) Revenue 560
Unearned revenue 560
E) Unearned revenue 560
Revenue 560
4.2-11) Referring to Table 4–2, part (3), what adjusting entry is necessary for Urban Company on April 30?
A) Interest expense 150
Interest payable 150
B) Interest expense 150
Notes payable 150
C) Interest expense 200
Interest payable 200
D) Interest expense 200
Notes payable 200
E) Interest expense 1,800
Notes payable 1,800
4.2-12) Referring to Table 4–2, part (4), what adjusting entry is necessary for Urban Company on April 30?
A) Notes receivable 10
Interest revenue 10
B) Interest receivable 120
Interest revenue 120
C) Interest receivable 10
Interest revenue 10
D) Notes receivable 120
Interest revenue 120
E) Notes receivable 60
Interest revenue 60
4.2-13) Referring to Table 4–2, part (5), what adjusting entry would Urban Company make on April 30?
A) Accounts receivable 6,000
Revenue 6,000
B) Revenue 6,000
Accounts receivable 6,000
C) Unearned revenue 6,000
Revenue 6,000
D) Revenue 6,000
Unearned revenue 6,000
E) No adjusting entry is necessary on June 30.
Table 4–3
Fabian Company had the following transactions on April 30:
1. The company owes $14,100 for wages to be paid on May 6.
2. The company performed a month–end inventory and counted office supplies valued at $1,425. The
beginning balance in the Supplies account was $750.
3. The company performed services valued at $3,325. The company did not bill for the services until May
1.
4.2-14) Referring to Table 4–3, part (2), assuming that $2,900 of purchases for the month were posted to the
Supplies account, what adjusting entry would Fabian Company make on April 30?
A) Supplies expense 2,225
Supplies 2,225
B) Supplies 2,225
Supplies expense 2,225
C) Supplies 675
Supplies expense 675
D) Supplies expense 675
Supplies 675
E) None of the above
4.2-15) Referring to Table 4–3, part (3), what adjusting entry would Fabian Company make on April 30?
A) Prepaid revenue 3,325
Revenue 3,325
B) Revenue 3,325
Unearned revenue 3,325
C) Unearned revenue 3,325
Revenue 3,325
D) Revenue 3,325
Prepaid revenue 3,325
E) Accounts Receivable 3,325
Revenue 3,325
4.2-16) Referring to Table 4–3, part (1), what adjusting entry is necessary on April 30?
A) Wage expense 14,100
Unearned wages 14,100
B) Wage expense 14,100
Wages payable 14,100
C) Prepaid wages 14,100
Wage expense 14,100
D) Unearned wages 14,100
Wage expense 14,100
E) Wage expense 14,100
Prepaid wages 14,100
4.2-17) Failure to adjust for depreciation results in the overstatement of assets and the understatement of
net income.
4.2-18) If the adjusting entry to record the current period’s prepaid rent that is expired is omitted, current
assets will be overstated.
4.2-19) The adjusting entry to record $650 of expired insurance would include a debit to Unearned
Insurance.
4.2-20) Examples of adjusting for asset expirations include the write–offs to expense of such assets as
Office Supplies and Prepaid Insurance.
4.2-21) Prepare any necessary adjusting or correcting entries called for by the following situations.
Assume that no entries have been made regarding the situation other than those specifically described.
Consider each situation separately.
a. Equipment is repaired and maintained by an outside maintenance company on an annual fee basis,
payable in advance. The $2,400 fee was paid in advance on September 1 (for 12 months beginning
September 1) and was charged to Rent Expense. What adjustment is necessary on December 31?
b. On January 1, $10,500 of machinery was purchased. $500 cash was paid down and a 3–month, 12% note
payable was signed for the balance. The January 1 transaction was properly recorded. Prepare the
adjustment for the interest as of January 31.
c. On February 1, $1,200 was paid in advance to the landlord for three month’s rent. The tenant debited
Prepaid Rent for $1,200 on February 1. What adjustment is necessary as of February 28?
Learning Objective 4.3 Questions
4.3-1) The adjustment for revenue received in advance, which has been earned in the current period,
involves a
A) debit to unearned revenue.
B) debit to accrued revenue.
C) credit to accrued revenue.
D) debit to cash.
E) credit to cash.
4.3-2) The adjustment for revenue received in advance that has now been earned involves a debit to
A) Cash and a credit to Prepaid Revenue.
B) Unearned Revenue and a credit to Revenue.
C) Prepaid Revenue and a credit to Unearned Revenue.
D) Revenue and a credit to Unearned Revenue.
E) Prepaid Revenue and a credit to Cash.
4.3-3) An example of an adjusting entry is
A) cash collections from credit customers.
B) payment of the principal and interest on a note.
C) recognizing rent expense by reducing Prepaid Rent.
D) declaring a cash dividend.
E) buying inventory on open account.
4.3-4) On May 1, Parker Company paid 3 months’ rent in advance, at a total cost of $2,100. At the time of
the payment, prepaid rent was increased by $2,100. What adjusting entry is necessary as of May 31?
A) Prepaid rent 700
Rent expense 700
B) Rent expense 700
Prepaid rent 700
C) Prepaid rent 1,400
Rent expense 1,400
D) Rent expense 1,400
Prepaid rent 1,400
E) No adjusting entry is necessary.
4.3-5) The earning of income previously collected has what effect on the basic accounting equation?
(Unearned Revenue had been increased when the cash was collected in advance.)
A) Increase in assets, decrease in liabilities
B) Decrease in assets, decrease in liabilities
C) Decrease in liabilities, increase in stockholders’ equity
D) Decrease in assets, decrease in stockholders’ equity
E) Increase in assets, increase in stockholders‘ equity
4.3-6) The adjusting entry to record $425 of earned revenue received in advance would include a debit to
Unearned Revenue.
4.3-7) Jarvis Bookstore recorded $2,500 of unearned revenue being earned and the collection of $3,000
cash for services previously accrued. The impact of these two entries on total revenue is an increase of
$5,500.
4.3-8) Wagner Corporation records $8,000 of revenue being received in advance and $4,000 of revenue
being accrued. Unearned revenue has a year–end balance of $4,500. The effect of this information on total
revenue is an increase of $7,500.
4.3-9) Gray Law Services had the following transactions on August 1:
a. The company received a $2,000 payment from a customer for services to be performed during August
and September. On August 1, the entire $2,000 was placed in the Unearned Revenue account. As of
August 31, 40% of the work had been completed.
b. The company sold inventory costing $1,100 for $1,900. The customer will not be billed until September.
As of August 31, no entries have been made with respect to the inventory that has been sold.
c. The company paid $10,000 for 4 months’ rent in advance. The entire amount was placed into Prepaid
Rent.
d. The company sold equipment costing $2,400 for $5,400 to a customer in return for a 3–month note. The
sale was properly recorded on August 1. Gray Law Services is charging 12% interest on the note. The
customer will pay the note and all interest after 3 months.
Prepare the appropriate journal entry for Gray Law Services as of August 31, for each of the above
transactions.
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4.3-10) Shipe Publishing circulates a monthly magazine, charging $36 to subscribers for a 12–month
subscription. Subscribers are required to forward the entire $36 yearly subscription fee before Shipe
Publishing will furnish the subscriber with the magazine. Shipe Publishing sold 300 magazine
subscriptions in the month of March, while the balance in the Unearned Subscription Revenue account
was $20,000 on March 1, 2009. After the necessary adjusting entry for March, the balance in the Unearned
Subscription Revenue account was $25,200.
Required:
1. Prepare the appropriate journal entry for Shipe Publishing as of March 31.
2. How would net income be affected for the month ending March 31 if Shipe Publishing did not record
the above entry?
4.3-11) Fletcher Products records adjusting entries monthly. The accountant at Fletcher Products is having
difficulty figuring out what amount to include as the adjustment. Below are the accounts and amounts
from Fletcher Products’ month–end balances on February and March of 2009.
February 28, 2009 March 31, 2009
Current assets
Cash 45,100 42,540
Accounts Receivable 98,500 88,300
Office Supplies 2,700 1,900
Prepaid Rent 3,000 2,000
Long–term assets
Equipment 10,000 10,000
Accumulated Depreciation 900 1,100
Current liabilities
Accounts Payable 55,700 49,200
Wages Payable 17,000 16,100
Interest Payable 400 400
Long–term liabilities
Notes Payable 10,000 10,000
Additional Information:
∙ Office supplies of $250 were purchased in the month of March.
∙ Fletcher Products committed to a one–year rental agreement on February 1, 2009. This is the only
rental agreement for Fletcher Products.
∙ A stamping machine is the only piece of equipment owned by Fletcher Products. It was
purchased on April 1, 2008 for $10,000 and the company estimates a zero salvage value on it. Fletcher
Products uses the straight line method of depreciation.
∙ Wages are paid on the fifteenth of each month for work performed during the first and fifteenth
and also paid on the last day of each month for work performed from the sixteenth to the last day of each
month.
∙ Fletcher Products signed a 1–year, 24% note on January 1, 2009. The company recognizes interest
on a monthly basis and is required to pay the entire amount of interest and principal upon the maturity
date of December 31, 2009.
Required:
Prepare any necessary adjusting entries based on the above information. Assume that no adjusting entries
have been made on the month–end balances above.
Learning Objective 4.4 Questions
4.4-1) An example of an adjusting entry is
A) the payment of wages that have been accrued.
B) the accruing of interest expense.
C) the return of defective inventory.
D) the payment of rent in advance.
E) collection of an accounts receivable.
4.4-2) An adjusting entry made to record accrued interest on a note payable involves a credit to
A) interest expense.
B) interest payable.
C) interest revenue.
D) interest receivable.
E) cash.
4.4-3) The adjusting entry to record accrued salaries has what effect on the basic accounting equation?
A) Increases liabilities, decreases stockholders’ equity
B) Increases liabilities, increases stockholders’ equity
C) Decrease assets, decreases stockholders’ equity
D) Decrease assets, increases stockholders’ equity
E) Decrease liabilities, decrease assets
4.4-4) The entry to record the cash payment of salaries that had previously been accrued has what effect
on the basic accounting equation?
A) Decrease liabilities, decrease assets
B) Decrease liabilities, decrease stockholders’ equity
C) Decrease assets, decrease stockholders‘ equity
D) Decrease assets, increase stockholders‘ equity
E) Decrease assets, increase liabilities
4.4-5) Derosha Corporation has a daily payroll of $1,500, 5 days a week. The employees are paid every
Friday for that week‘s wages. May 31 was on a Wednesday and the employees were paid $7,500 on June
2. What is the journal entry on June 2, assuming the appropriate month ending adjusting entry was made
on May 31?
A) Cash 7,500
Prepaid wages 4,500
Unearned wages 3,000
B) Cash 7,500
Prepaid wages 4,500
Wage expense 3,000
C) Wage expense 7,500
Cash 7,500
D) Prepaid wages 4,500
Wage expense 3,000
Cash 7,500
E) Wage expense 3,000
Wages payable 4,500
Cash 7,500
4.4-6) Gasper, Inc., borrowed $4,000 from Skyler Bank on November 1, 20X9. At that time, the company
made the appropriate journal entry; however, no other journal entry pertaining to the note has been
made. Given that the bank is charging interest at a rate of 12%, what adjusting entry, if any, is necessary
as of Gasper, Inc.’s year–end date of December 31, 20X9?
A) Interest expense 80
Interest payable 80
B) Interest expense 80
Notes payable 80
C) Interest expense 480
Interest payable 480
D) Interest expense 480
Notes payable 480
E) Notes payable 480
Interest expense 480
4.4-7) The adjusting entry to record the accrual of interest expense has what effect on the basic accounting
equation?
A) Increase assets, increase liabilities
B) Decrease assets, decrease liabilities
C) Increase assets, decrease liabilities
D) Increase liabilities, decrease stockholders‘ equity
E) Decrease liabilities, increase stockholders‘ equity
4.4-8) What is the effect on the basic accounting equation of the cash payment of interest payable
previously accrued?
A) Increase assets, increase liabilities
B) Decrease assets, decrease liabilities
C) Decrease assets, increase liabilities
D) Increase liabilities, decrease stockholders‘ equity
E) Decrease liabilities, increase stockholders‘ equity
4.4-9) The adjusting entry to record accrued salaries includes a debit to salaries payable.
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4.4-10) Failure to adjust for an accrued expense will overstate net income and stockholders’ equity for the
period.
4.4-11) Failure to adjust for an accrued expense will understate liabilities.
4.4-12) Recording an accrued expense will increase expenses and decrease revenues.
4.4-13) Gabbler Company records the payment of $200 cash for a previously accrued expense and the
accrual of $625 for another expense. The impact of these two entries is to decrease net income by $825.
4.4-14) Calvey Paper Products accrues its income taxes quarterly for the sole manufacturing facility
located in Streetsboro, NC. Although Calvey Paper Products is not subject to local tax, it is required to
pay both state and federal income taxes, which are 12% and 28% of net income, respectively. Second
quarter income for Calvey Paper Products amounted to $550,000.
Required:
1. Prepare the appropriate journal entry for Calvey Paper Products as of June 30.
2. Explain how income taxes are shown on a multi–step income statement.