Chapter 4: Income Measurement and Accrual Accounting
96. Which of the following accounts is not closed to Income Summary at the end of the accounting period?
a. Rent Expense
b. Service Revenue
c. Unearned Revenue
d. Supplies Expense
97. Which of the following journal entries is required to close the Income Summary account of a company with a net
loss ?
a. Debit Income Summary, credit Capital Stock.
b. Debit Income Summary, credit Retained earnings.
c. Credit Income Summary, debit Retained earnings.
d. Credit Income Summary, debit Dividends.
98. When using a work sheet:
a. an equal number of account titles are applicable to the Income Statement columns and the Balance Sheet
columns.
b. adjusting entries are not made since they appear on the work sheet.
c. net income appears in both the Income Statement debit column and the Balance Sheet credit column.
d. the Income Statement column and Balance Sheet column of the work sheet eliminate the need to prepare
formal financial statements.
Chapter 4: Income Measurement and Accrual Accounting
99.
Oregon Company
Adjusted Trial Balance
For the Year ended December 31, 2014
Cash
$ 6,030
Accounts Receivable
2,100
Prepaid Expenses
700
Equipment
13,700
Accumulated Depreciation
$ 1,100
Accounts Payable
1,900
Notes Payable
4,200
Capital Stock
12,940
Dividends
790
Fees Earned
8,750
Wages Expense
2,500
Rent Expense
1,960
Utilities Expense
775
Depreciation Expense
250
Miscellaneous Expense
85
______
Totals
$28,890
$28,890
Determine the net income (loss) for the period.
a.
Net Loss $5,570
b.
Net Income $3,180
c.
Net Loss $790
d.
Net Income $2,390
100. After all of the account balances have been extended to the Balance Sheet columns of the work sheet, the totals of
the debit and credit columns are $37,875 and $32,735, respectively. What is the amount of net income or net loss
for the period?
a. $5,140 net income
b. $37,875 net loss
c. $5,140 net loss
d. $32,735 net income
101. All of the following statements are true regarding the use of a work sheet at the end of an accounting period except:
a. all companies use a ten–column work sheet.
b. the net income of the period is extended from the income statement debit column to the balance sheet credit
column.
c. the beginning balance in the Retained Earnings account is entered initially on the work sheet on the
unadjusted trial balance.
d. cash is always carried over from the unadjusted trial balance columns of the work sheet to the balance sheet
columns without any adjustment.
Chapter 4: Income Measurement and Accrual Accounting
102. Which account is always carried over from the unadjusted trial balance columns of a work sheet to the balance
sheet columns of the work sheet without any adjustment?
a. Accumulated depreciation
b. Depreciation expense
c. Cash
d. All of these are adjusted.
103. The amount in the Subscriptions Sold in Advance account should be carried over from the adjusted trial balance of
the 10-column work sheet to which of the following columns?
a. Income statement as a debit
b. Income statement as a credit
c. Balance sheet as a debit
d. Balance sheet as a credit
104. The amount in the Dividends account should be carried over from the adjusted trial balance of the 10–column work
sheet to which of the following columns?
a. Income statement as a debit
b. Income statement as a credit
c. Balance sheet as a debit
d. Balance sheet as a credit
105. Recognition is the process of formally recording or incorporating an item into the financial statements.
a. True
b. False
106. When initially recording the cost of land purchased, most companies use the current value.
a. True
b. False
107. The process of recording an item in the financial statements is called measurement.
a. True
b. False
Chapter 4: Income Measurement and Accrual Accounting
108. The amount of cash that could be received by selling an asset currently is called historical cost.
a. True
b. False
109. Under the accrual method, expenses are recognized when revenue is earned.
a. True
b. False
110. When a company recognizes the portion of supplies used during a year, the effect is to decrease net income.
a. True
b. False
111. All financial statements are prepared using the accrual basis of accounting.
a. True
b. False
112. Most companies use the cash basis of accounting.
a. True
b. False
113. Revenue is always earned continuously over time.
a. True
b. False
114. An asset is always involved when revenue is recognized.
a. True
b. False
115. The recognition of revenue may result from the settlement of a liability rather than from the acquisition of an asset.
a. True
b. False
Chapter 4: Income Measurement and Accrual Accounting
116. Expired costs are called assets.
a. True
b. False
117. Three months before year–end, Billings Company signed a $100,000, 12%, 6-month note. Principal and interest will
be paid at maturity. No interest should be accrued at year-end because the company has no obligation to pay the
interest until the note matures.
a. True
b. False
118. Matching can occur directly (like cost of goods sold), indirectly (like plant assets), or immediately when no future
benefits from the cost are expected.
a. True
b. False
119. A cost can be an asset or expense depending on whether the future economic benefits have expired or not.
a. True
b. False
120. One effect of recognizing depreciation is to decrease net income.
a. True
b. False
121. A company that forgets to recognize depreciation for the year overstates its income and assets.
a. True
b. False
122. An entry that includes the Cash account is probably an adjustment.
a. True
b. False
123. Every company prepares only four adjustments—one for each of the four types of adjustments.
a. True
b. False
Chapter 4: Income Measurement and Accrual Accounting
124. When cash is paid before an expense is incurred, an accrual is necessary.
a. True
b. False
125. The amount of interest accrued is added to the note payable account and reported in the liabilities section of the
balance sheet.
a. True
b. False
126. Accumulated depreciation is increased when depreciation is recognized.
a. True
b. False
127. Adjustments are recorded for all transactions involving outside entities.
a. True
b. False
128. When revenue is earned before the receipt of cash, an adjustment that increases a receivable and decreases a
liability account is recorded.
a. True
b. False
129. Every adjustment involves at least one income statement and one balance sheet account.
a. True
b. False
130. When an expense is incurred prior to the payment of cash for that expense, an adjustment that increases an
expense account and decreases an asset is prepared.
a. True
b. False
131. The balance in the account, Rent Collected in Advance, is reported as an asset on the balance sheet of the landlord.
a. True
b. False
Chapter 4: Income Measurement and Accrual Accounting
132. While most companies make adjustments and prepare statements monthly, many companies complete the
accounting cycle only once per year.
a. True
b. False
133. Accountants often prepare work sheets at the end of an accounting period in place of financial statements.
a. True
b. False
134. Financial statements should be prepared before any adjustments are made.
a. True
b. False
135. Interim financial statements are prepared annually.
a. True
b. False
136. Adjusting entries are recorded at the end of each accounting period so that net income is accurately reflected in the
financial statements for the period.
a. True
b. False
137. Income summary does not appear on the income statement.
a. True
b. False
138. Balance sheet accounts are called real accounts.
a. True
b. False
139. Expense accounts are debited in the closing process.
a. True
b. False
Chapter 4: Income Measurement and Accrual Accounting
140. Closing entries serve two important purposes: (1) to return the balances in all temporary or nominal accounts to
zero to start the next accounting period and (2) to transfer the net income (or net loss) and the dividends of the
period to the Retained Earnings account.
a. True
b. False
141. There is one single format for a work sheet.
a. True
b. False
142. According to the text, the income statement is in fact a subset of the balance sheet, because information from the
income statement columns flows into the balance sheet columns.
a. True
b. False
143. Measurement in accounting requires choosing an attribute and a unit of measure.
is the attribute used for many of the assets included in the financial statements.
144. is a rise in the general level of prices in the economy and results in a decrease in
purchasing power.
For each of the following sentences 145–152, select the word or group of words that best completes the
statement.
Matching
Measurement
Deferred revenue
Deferred expense
Accrual basis
Accrued asset
145. The success of accounting as a form of communication depends on two concepts, and
____________________.
146. The of accounting necessitates a number of adjustments at the end of an
accounting period.
147. The of accounting is a system in which revenues are recognized when payments
are received and expenses are recognized when payments are made.
Chapter 4: Income Measurement and Accrual Accounting
148. is the association of the costs incurred with the associated revenue of a period.
149. A(n) creates an increase in income for the period.
150. A(n) results when cash is paid before the related amount is reported on the
income statement.
151. A(n) results when cash is received before the related amount is reported on the
income statement.
152. The basis of accounting that fails to take into consideration amounts earned that are not collected and expenses
incurred but are not paid is the _________________________.
153. The difference between accrual-based revenue and accrual-based expenses is called
_________________________.
154. Under the basis of accounting, revenues are recognized when earned and expenses
when incurred.
155. According to the revenue recognition principle, revenues are recognized when they are
_________________________.
156. Under the accrual basis of accounting, at what point in time should a fast food restaurant recognize revenue?
_________________________
157. Under the accrual basis of accounting, at what point in time should a publisher of magazines record revenue?
______________________________
158. The principle attempts to associate with the revenue of the period, all costs necessary
to generate that revenue.
159. is the allocation of the cost of a tangible, long-term asset over its useful life.
Chapter 4: Income Measurement and Accrual Accounting
160. The names of the four major types of adjusting entries are ,
_________________________, _________________________, and _________________________.
161. The one asset account that never requires adjustment at the end of the period is .
162. is the name given to revenue, expense, and dividend accounts because they are closed
at the end of the period.
163. is the name given to balance sheet accounts because they are permanent in nature.
164. Statements prepared monthly, quarterly, or at other intervals less than a year in duration are called
_____________________.
165. Temporary accounts are also known as accounts.
Chapter 4: Income Measurement and Accrual Accounting
166. On January 1, 2015, Blankenship Solutions began business. The company offers scalable cloud computing to small
businesses for a monthly fee of $0.25 per gigabyte, $.05 per hour for public IP addresses, and $.01 per hour for
Internet services. During January, 150 companies signed up for the service, and each will have until the fifth of the
following month to pay the monthly fee. By the end of January, 120 companies had paid the monthly fee for an
average company usage of 100 gigabytes. In addition, IP addresses were accessed for an average of 680 hours per
company and Internet services averaged 600 hours per company during January. Assume that Blankenship
Solutions uses the accrual basis of accounting.
REQUIRED
1. Prepare the Revenues section of Blankenship Solutions’ income statement for the month of January.
2. Prepare the Cash Receipts section of Blankenship Solutions’ statement of cash flows for the month of January.
3. In addition to the Cash account, what other account will appear on Blankenship Solutions’ balance sheet at the end
of January? What amount will be in this account?
167. A hospital corporation contracted with a private company to collect fees and maintain health facilities that adjoin
their property. Users of the health facility can pay cash of $10 for a daily visit or they can purchase a pass. The
pass has a magnetic strip that is swiped through the entrance device each time an individual enters the facility. This
subtracts daily fee from the pass balance for each day used. The passes are issued for a fee of $365, which are
good for 365 days. Refunds are not issued on the pass. Last year $18,650 was collected for daily visits, $438,000 of
annual passes were issued, and $206,225 of pass usage was registered on the scanning equipment. How much
should the company recognize as revenue for the year? Explain how the revenue recognition rule should be applied
in this case.
Chapter 4: Income Measurement and Accrual Accounting
168. On July 1, 2015, Crouch Corporation takes out a 12%, two-month, $50,000 loan at Cocoa National Bank. Principal
and interest are to be repaid on August 31.
Required
1. Prepare the journal entries for July 1 to record the borrowing, for July 31 to record the accrual of interest, and
for August 31 to record repayment of the principal and interest.
2. Evaluate the following statement: It would be much easier not to bother with an adjusting entry on July 31 and
simply record interest expense on August 31 when the loan is repaid.
Chapter 4: Income Measurement and Accrual Accounting
169. Carpenter Transport Company purchased a truck at a cost of $60,000 on January 1, 2011. The truck has an
estimated useful life of 9 years and a $15,000 residual value.
A. How much depreciation expense should be reported for the year 2015?
B. What is the total amount of accumulated depreciation at December 31, 2015?
C. Show how the truck and the related accumulated depreciation would appear on Carpenter’s
December 31, 2015, balance sheet immediately after the adjustments are recorded and
posted.
D. Is the amount on the balance sheet what the truck could probably be sold for on
December 31, 2015? What principle governs?
E. How much depreciation expense should be reported for the year 2016?
Chapter 4: Income Measurement and Accrual Accounting
170. Carter, Inc. paid salaries expense of $292,000 during 2015. However, additional salaries of $14,000 had been
earned by employees, but not paid or recorded at December 31, 2015 by Carter.
A) What is the effect on the accounting equation of the adjusting entry necessary at December 31,
2015?
B) Under which basis, cash, accrual, or both, would the adjustment in part A be prepared?
Explain.
C) Under the accrual basis of accounting, what is the total amount of salaries expense for the year
ended December 31, 2015?
D) Under the accrual basis of accounting, what is the total amount of salaries payable to be
reported at December 31, 2015?
E) Under the cash basis of accounting, what is the total amount of salaries expense for the year ending
December 31, 2015?
F) Under the cash basis of accounting, what is the total amount of salaries payable at December 31,
2015?
Chapter 4: Income Measurement and Accrual Accounting
171. Becca Corp. purchased supplies at a cost of $5,200 during 2014. At January 1, 2015, supplies on hand were $1,600.
During the year, the company used $4,000 of supplies. Becca’s accounting year ends on December 31.
A) What is the effect on the accounting equation of the adjusting entry that is prepared at
December 31, 2015?
B) Under the accrual basis of accounting, how much is Supplies Expense for 2015?
C) How much should be reported on the December 31, 2015, balance sheet for Supplies?
D) What type of adjustment was made in part A?
172. Dino’s Pizza employs 10 workers in its plant. Each employee is paid $8 per hour and works 8 hours per day,
Monday through Friday. Employees are paid every Wednesday for the previous Monday through Friday workweek.
The last payday was Wednesday, May 28.
A) Compute the dollar amount of the weekly payroll.
B) What is the effect on the accounting equation of the adjusting entry required on Friday, May 30, the last day of
Dino’s Pizza fiscal period?
C) What special precautions are necessary upon recording the payment of wages to employees
on the next payday, June 4?
Chapter 4: Income Measurement and Accrual Accounting
173. Barker Corp. began operations on November 30, 2015, and immediately paid $48,000 for 6 months rent in advance
for rental of a parking lot for the period beginning December 1, 2015. Barker’s accounting period ends on
December 31, 2015. Indicate how much will be reported for each of the following accounts on Barker’s financial
statements for the period ending December 31, 2015. If the amount reported is zero, indicate so by writing $0, and
explain why zero is the appropriate amount.
A) Rent Expense
B) Rent Payable
C) Rent revenue
D) Prepaid Rent
174. Ramos Corporation employs 14 workers in its retail service center. Each employee is paid $10 per hour and works
6 hours per day, Monday through Friday. Employees are paid every Friday for the workweek just ending. The last
payday was Friday, December 26, on which day the employees were paid through that date.
A) Compute the dollar amount of the weekly payroll.
B) Determine the effect on the accounting equation of the adjusting entry needed on
Wednesday, December 31, the last day of Ramos Corporation’s fiscal period.
Chapter 4: Income Measurement and Accrual Accounting
175. Calzone, Inc. signs a 9% 4-month $50,000 loan with Reliable Bank on October 1, 2015. Determine the effects on
the accounting equation for the following items:
A. The signing of the loan on October 1, 2015 by Calzone, Inc.
B. The recording of the interest on December 31, 2015 by Calzone, Inc.
176. Lowen Homes, Inc. pays its sales personnel 6% commission of the selling price of each home. During November of
2015, sales people sold $18,400,000 of homes. During December, 2015, sales people sold $20,050,000 of homes.
Because its policy is to pay commissions only in the month after the sales, Lowen paid commissions during
December for November, 2015. During January of 2016, Stitt paid its sales people commissions for December,
2015.
A) If the cash basis of accounting is used, how much is reported commission expense on Lowen
Homes‘ income statement for December of 2015?
B) If the accrual basis of accounting is used, how much is reported as commission expense on
Lowen Homes‘ December income statement for 2015?
Chapter 4: Income Measurement and Accrual Accounting
177. Martinez Produce sells fresh vegetables and fruits in Sutton County. The following unadjusted amounts were taken
from the company‘s accounting records at December 31, 2015:
Note Payable, 12%, 4-month, dated December 1, 2015, for $20,000
Note Receivable, 10%, 6-month, dated October 1, 2015, for $12,000
A) Determine the effects on the accounting equation of any adjusting entries that would be
necessary at December 31, 2015, for the notes.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net Income
B) Fill in the partial balance sheet below by showing the notes and the effects of any
adjustments related to the notes.
Current Assets Current Liabilities
Balance Sheet
Income Statement
Chapter 4: Income Measurement and Accrual Accounting
178. The following unadjusted amounts were taken from Ruben Gifts’ accounting records at December 31, 2015:
Rent Collected in Advance $ 1,000
Office Supplies 740
A) Determine the effects on the accounting equation of any adjusting entries necessary for Ruben
Gifts at December 31, 2015, for both of the following transactions:
1) During December of 2015, Ruben Gifts had received payments from tenants that were
renting storage space in its warehouse. The payments received by Ruben Gifts were for
the period December, 2015, and January, 2016.
2) At the end of the year, Ruben Gifts determined that $240 of office supplies
remained on hand.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net Income
B) What is the effect of omitting these adjustments on the current year’s net income?
Assets
=
Liabilities
+
Revenues
–
Expenses
=
Assets
=
Liabilities
+
Equity
Revenues
–
Expenses
=
Chapter 4: Income Measurement and Accrual Accounting
179. The following unadjusted amount was reported on Rental Entertainment Corporation‘s accounting records at
December 31, 2015:
Unearned Subscription Revenue $ 36,000
A) Determine the effect on the accounting equation of any adjusting entries necessary at
December 31, 2015, for each of the following transactions:
1) During the year, Rental Entertainment sold 12-month subscriptions for its newly
developed Internet service. Half of the subscriptions began October 1, 2014, while the
other half began December 1, 2015.
2) Rental estimates its income taxes to be 30 percent of its estimated income of
$60,000
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net Income
B) Prepare the current liabilities section of Rental’s balance sheet by listing any current liabilities and the related
amounts as a result of the adjustments in Part A
Stockholders’
Assets
=
Liabilities
+
–
=
Net Income