Chapter 4—Accrual Accounting and Adjusting Entries Key
1. Under accrual accounting, revenue is recognized:
2. Glass Corporation sold merchandise to a customer for $30,000 on credit on July 15. The customer paid Glass
the amount due on July 31. Under the accrual basis of accounting, how should Glass record the transaction?
3. GMC sells cars and pays each salesperson a commission of $800 for each car sold. During the month of
December, a salesperson, Tom, sold 3 new cars. GMC pays commissions on the 5th day of the month following
the sale. Tom operates on the cash basis; the car dealer operates on the accrual basis. Which of the following
statements is true?
A. Tom will recognize commission revenue earned in the amount of $2,400 in December.
4. Under which accounting method are revenues and expenses recognized in the same accounting period that
cash receipts and payments occur?
5. Which of the following concepts is important to accrual accounting?
6. Which of the following statements present financial information based on the cash basis of accounting?
7. FedZ is a local package delivery service. If FedZ uses accrual basis of accounting, when should it recognize
revenue from its package delivery service?
8. Using the accrual basis of accounting, when is revenue from the sale of merchandise normally recognized?
9. Brooks Company sells merchandise to customers. Under the accrual basis of accounting, Brooks should
normally recognize:
10. Under accrual basis of accounting, expenses are be matched against revenue:
11. Joe’s Auto Company uses the accrual basis of accounting. Which situation violates the matching principle
during 2012?
12. What does the phrase, “Revenue is recognized when earned” mean?
A. Revenue is recorded in the accounting records when the goods are received from a supplier, and reported on
13. Accrued expenses originate from:
14. Assets become expenses when:
15. Which one of the following is an example of a deferred revenue?
16. What effect does “recognizing accrued interest revenue at the end of the accounting period” have on the
accounting equation?
17. What effect does “recognizing revenue at the end of the accounting period for rent previously received in
advance” have on the accounting equation for the insurance company?
18. Which one of the following is an example of an accrued liability?
19. Adjusting journal entries are made at the end of the period when:
20. What happens to the accounting equation when the adjustment for depreciation expense for the accounting
period is recorded?
21. What happens to the accounting equation when the adjustment is recorded to recognize earned revenue
previously recorded as unearned revenue?
22. Adjustments for which of the following involves the cash account?
23. Which one of the following adjustments will increase assets?
24. Accumulated Depreciation:
25. Suppose that a business sells 6-month subscriptions to its monthly magazine. On January 1, the company
receives a total of $600 for 10 subscriptions. To record this transaction, the company debits “Cash” for $600
and credits “Unearned Subscription Revenue” for $600. As of January 31, the company has provided one month
of magazines and has earned one month of revenue. What adjusting entry is necessary at January 31?
26. Suppose a company received a $2,500 utility bill for the month of March but has not yet recorded the
transaction or paid the bill. What adjusting entry is necessary at March 31?
27. Pine Corporation makes adjusting entries monthly. Property, Plant, and Equipment depreciates at a rate of
$9,000 per month. No entry for depreciation has been recorded in the month of March. What adjusting entry is
necessary at March 31?
A. Accumulated Depreciation 750
Property, Plant, & Equipment 750
28. Pine Corporation makes adjusting entries monthly. As of March 31, the general ledger shows Prepaid Rent
to have a debit balance of $6,000. Rent expires at a rate of $1,200 per month. No entry for rent has been
recorded in the month of March. What adjusting entry is necessary at March 31?
A. Prepaid Rent 500
Cash 500
29. Suppose that a business purchases a 6-month general liability insurance policy for $24,000 on January 1. To
record this transaction, the company debits “Prepaid Insurance” for $24,000 and credits “Cash” for
$24,000. As of January 31, the company has consumed one month of insurance. What adjusting entry is
necessary at January 31?
30. Income statement accounts are also known as which of the following?
31. The Dividend account is a(n):
32. Which of the following does not occur during the closing process?
33. Which of the following entries properly closes a temporary account?
34. Which of the following entries properly closes a temporary account?
35. Which of the following accounts will appear in a post-closing trial balance?
36. There are three closing entries. The first one is to close ____, the second one is to close ____, and the last
one is to close ____.
37. The entry to close the Insurance Expense account at the end of the accounting period is to:
38. The post-closing trial balance differs from the adjusted trial balance in that it:
39. The accounting cycle requires three trial balances be prepared. In what order are they prepared?
40. Which one of the following is the last step in the accounting cycle?
41. The financial statements are prepared immediately after:
42. Which one of the following steps in the accounting cycle is completed only at the end of an accounting
period?
43. Some of the steps in the accounting cycle are listed below. Select the choice that places these steps in the
correct order.
1.
Prepare a post-closing trial balance.
2.
Prepare a trial balance.
3.
Journalize and post accounting transactions.
4.
Journalize and post adjusting entries.
5.
Prepare financial statements.
44. Andre’s Tennis Club sells season memberships for $1,500 each. During January of 2012, 50 season
memberships were sold. As of March 31, 2012, only $45,000 of season membership fees had been collected
from customers. The tennis season runs for 6 months starting April 01, 2012. Which one of the following is an
amount reported on the Balance Sheet dated March 31, 2012?
45. On December 31, 2012, Bosco Corporation signed a one-year contract to provide services to Cosco
Company for $120,000. Cosco will pay for the services on January 1, 2013. Using the accrual basis of
accounting, when should Bosco Corporation recognize revenue?
46. Sharp Inc. purchased equipment at a cost of $700,000 in January, 2003. As of January 1, 2012, depreciation
of $315,000 had been recorded on this asset. Depreciation expense for 2012 is $35,000. After the adjustments
are recorded and posted at December 31, 2013, what are the balances of Equipment and Accumulated
Depreciation?
Equipment Accumulated Depreciation
47. Axis Corporation purchased equipment at a cost of $100,000 in January, 2003. As of January 1, 2012,
depreciation of $45,000 had been recorded on this asset. Depreciation expense for 2012 is $5,000. After the
adjustments are recorded and posted at December 31, 2012, what are the balances for the Depreciation Expense
and Accumulated Depreciation?
Depreciation Expense Accumulated Depreciation
48. Timberland Company received advance payments from customers during 2012 of $240,000. At December
31, 2012, $20,000 of the advance payments still had not been earned. After the adjustments are recorded and
posted at December 31, 2012, what will the balances be in the Unearned Service Revenue and Service Revenue
accounts?
Unearned Service Revenue Service Revenue
49. Duck Insurance Company received advance payments from customers during 2012 of $100,000. At
December 31, 2012, $15,000 of the advance payments still had not been earned. After the adjustments are
recorded and posted at December 31, 2012, what will the balances be in the Unearned Insurance Revenue and
Insurance Revenue accounts?
Unearned Insurance Revenue Insurance Revenue
50. Blackrock Company received a 6-month, 15% note for $100,000 from its president on November 1, 2012.
The note is due on April 30, 2013. If Blackrock’s accounting period ends on December 31, how much interest
revenue should Blackrock recognize during 2012 and 2013?
2012 2013
51. Peckham Corporation received a 9-month, 9% note for $100,000 from its agent on July 1, 2012. The note is
due on March 31, 2013. If Peckham’s accounting period ends on December 31, 2012, how much interest
revenue should Peckham recognize during 2012 and 2013?
2012 2013
52. Federer Corporation had $12,400 of supplies on hand at January 1. During the year, supplies with a cost of
$24,000 were purchased. At December 31, the actual supplies on hand amount to $8,000. After the adjustments
are recorded and posted at December 31, determine the balances in the Supplies and Supplies Expense accounts.
Supplies Supplies Expense
53. Match Incorporated recorded salary expense of $120,000 in 2012. However, additional salaries of $9,000
had been earned, but not paid or recorded at December 31, 2012. After the adjustments are recorded and posted
at December 31, 2012, the balances in the Salaries Expense and Salaries Payable accounts will be
Salaries Expense Salaries Payable
54. On October 1, 2012, Zane Corporation paid $18,000 rent in advance. The rent per month is $1,500. If Zane’s
accounting period ends on December 31, 2012, what will be reported on the financial statements?
55. Court Corporation purchased supplies at a cost of $24,000 during 2012. At January 1, 2012, supplies on
hand were $2,000. At December 31, 2012, supplies on hand are $2,100. Calculate supplies expense for 2012.
56. Point Corporation purchased supplies at a cost of $14,500 during the year. At January 1, supplies on hand
were $1,000. At December 31, supplies on hand are $3,500. Determine the amount of supplies expense for the
year.
57. Staple Corp. purchased supplies at a cost of $2,581 during the year. At December 31, supplies on hand are
$1,492. Supplies expense for the year was $6,213. How much were supplies on hand at January 1?
58. Buster Corporation purchased supplies at a cost of $20,000 during 2012. At January 1, 2012, the beginning
balance in the supplies account was $1,300. For 2012, supplies expense was $11,200. How much “Supplies” are
on hand as of December 31, 2012?
59. A company forgot to record four adjustments during 2012. Which one of the following omissions of
adjustments will understate income?
60. A company forgot to record four adjustments during 2012. Which one of the following omissions of
adjustments will understate assets?
61. Game Systems Corporation has grown significantly over the past year. The end-of-year supplies on hand
totaled $200, and purchases totaled $3,000, and supplies on hand at the beginning of the year amounted to $180.
How much will Game Systems report as supplies expense for the current year?
62. On October 1, 2012, Glover Company borrowed $200,000 on a two-year, 12% note, with interest and
principal to be paid at maturity. How much interest expense will Glover report on its income statement for the
year ending December 31, 2012?
63. Youngblood Company borrowed $100,000 on a one-year, 10% note on October 1, 2012, with interest and
principal to be paid at maturity. How much interest should Stone Company report on its income statement for
the year ending December 31, 2013?
64. Thompson Company borrowed $100,000 on a one-year, 10% note on September 1, 2012, with interest and
principal to be paid at maturity. How much interest payable will be reported on Thompson’s balance sheet as of
November 30, 2012?
65. Pro Incorporated operates five days per week with a daily payroll of $5,000. Employees are paid every
Saturday for the workweek just completed (Monday through Friday). The last day of the month is Wednesday,
October 31. What is the effect of the correct adjustment at October 31?
66. Based on its income for the month, Bates Company estimates that it will owe $23,000 of federal income
taxes for the month of May. What is the effect of the adjustment on the financial statements?
67. Which one of the following adjustments increases net income for the period?
68. Graystone Company’s plant operates five days per week with a daily payroll of $100,000. Employees are
paid every Tuesday for the prior week’s work (Monday through Friday). The last day of the month is Tuesday,
April 30. What effect does the accrual at April 30 have on Graystone’s net income?
69. Wolf Industries plant operates five days per week with a daily payroll of $50,000. Employees are paid every
Saturday for the work week just completed (Monday through Friday). The last day of the month is Wednesday,
May 31. The correct adjusting entry at May 31 is
70. Saturn Co. rented out office space to a tenant on January 1 and received a total of $90,000 for the first nine
months of rent. The amount was recorded as Rent Collected in Advance when received. Adjustments are
recorded only at the end of every quarter. What effect does the adjustment at March 31 have on Saturn’s net
income for the quarter ending March 31?