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Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
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238. All of the following are required steps in the accounting cycle except:
a. journalizing and posting closing entries.
b. preparing an adjusted trial balance.
c. preparing a post-closing trial balance.
d. preparing a work sheet.
239. The first required step in the accounting cycle is:
a. adjusting entries.
b. journalizing transactions.
c. analyzing transactions.
d. posting transactions.
240. How many required steps are there in the accounting cycle?
a. 11
b. 9
c. 7
d. 5
241. Which of the following steps in the accounting cycle usually occurs only at the end of a com-
pany’s annual accounting period?
a. Step 3: Post to the ledger accounts.
b. Step 7: Prepare financial statements.
c. Step 6: Prepare adjusting trial balance.
d. Step 9: Prepare a post-closing trial balance.
242. The Accounts Receivable account has a beginning balance of $52,000 and an ending bal-
ance of $74,000. If $42,000 was sold on account during the year, what were the total
collections on account?
a. $20,000
b. $64,000
c. $74,000
d. $84,000
*243. The worksheet is:
a. part of the journal.
b. a financial statement.
c. part of the ledger.
d. none of these answer choices are correct.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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*244. The worksheet starts with two columns for the:
a. adjustments.
b. financial statements.
c. trial balance.
d. adjusted trial balance.
*245. The worksheet does not contain columns for the:
a. income statement.
b. statement of retained earnings.
c. balance sheet.
d. adjusted trial balance.
*246. The worksheet contains columns for the:
a. statement of retained earnings.
b. statement of cash flows.
c. post-closing trial balance.
d. balance sheet.
*247. Net income is recorded on the worksheet under the:
a. debit column of the adjusted trial balance and the credit column of retained earnings.
b. debit column of the income statement and the credit column of the balance sheet.
c. credit column of the adjusted trial balance and the debit column of retained earnings.
d. credit column of the income statement and the debit column of the balance sheet.
Accrual Accounting Concepts
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Answers to Multiple Choice Questions
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
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BRIEF EXERCISES
Be. 248
Identify the effect, if any, that each of the following transactions would have upon cash and retained
earnings. Show the dollar amount and the effect (+, –, N).
Retained
_Cash__ Earnings
1. Purchases equipment for $3,000 _______ _______
2. Purchased $200 of supplies for cash _______ _______
3. Recorded an adjusting entry to record use of
$110 of the above supplies. _______ _______
4. Received $600 from customers in payment of
their accounts _______ _______
5. Recorded depreciation of equipment for period
used, $900. _______ _______
Solution 248 (5 min.)
Accrual Accounting Concepts
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Be. 249
Before month-end adjustments are made, the February 28 trial balance of Cole’s Enterprise contains
revenue of $11,000 and expenses of $8,900. Adjustments are necessary for the following items:
• Depreciation for February is $1,200.
• Revenue recognized but not yet billed is $2,800.
• Accrued interest expense is $900.
• Revenue collected in advance that is now recognized is $2,500.
• Portion of prepaid insurance expired during February is $500.
Instructions:
Calculate the correct net income for Cole's Enterprise for February 3.
Be. 250
Before month-end adjustments are made, the September 30 trial balance of Horton Enterprise con-
tains revenue of $9,200 and expenses of $6,500. Adjustments are necessary for the following items:
• Depreciation for September is $300.
• Revenue recognized but not yet billed is $2,100.
• Accrued interest expense is $800.
• Revenue collected in advance that is now recognized is $3,400.
• Portion of prepaid insurance expired during September is $300.
Instructions:
Calculate the correct net income for Horton’s Enterprise for September.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
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Be. 251
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.
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Be. 252
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.
5. Unpaid salaries earned by year end but not yet paid or recorded amounted to $1,200.
Be. 253
Identify the impact on the balance sheet for that month if the following information is not used to ad-
just the accounts.
1. Supplies consumed during the month totalled $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. 254
On January 1, the Biddle & Biddle, CPAs received a $7,500 cash retainer for accounting services to
be provided rateably over the next 3 months. The full amount was credited to the liability account
Unearned Service Revenue. Assuming that the revenue is recognized rateably over the 3 month pe-
riod, what adjusting journal entry should be made at January 31?
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Be. 255
On February 1, the Acts Tax Service received a $3,600 cash retainer for tax preparation services to
be provided rateably over the next 4 months. The full amount was credited to the liability account
Unearned Service Revenue. Assuming that the revenue is recognized rateably over the 4 month pe-
riod, what balance would be reported on the February 28 balance sheet for Unearned Service
Revenue?
Be. 256
Better Publications, sold annual subscriptions to their magazine for $42,000 in December, 2016. The
magazine is published monthly. The new subscribers received their first magazine in January, 2017.
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 2017 balance sheet for Unearned Subscription
Revenue?
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Be. 257
River Ridge Music School borrowed $30,000 from the bank signing a 6%, 6-month note on Novem-
ber 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. 258
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. An expense incurred; not yet paid or recorded.
____ 3. A revenue recognized; not yet collected or recorded.
____ 4. An expense not yet incurred; paid in advance.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
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Be. 259
Prepare adjusting entries for the following transactions. Omit explanations.
1. Depreciation on equipment is $800 for the accounting period.
2. There was no beginning balance of supplies and $600 of supplies were purchased during the
period. At the end of the period $120 of supplies were on hand.
3. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $300 was unex-
pired.
Be. 260
Prepare adjusting entries for the following transactions. Omit explanations.
1. Unrecorded interest accrued on savings bonds is $200.
2. Property taxes incurred but not paid or recorded amount to $900.
3. Salaries incurred by year end but not yet paid or recorded amounted to $600.
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Be. 261
The adjusted trial balance of Warbocks Corporation at December 31, 2017 includes the following
accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and
Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense
$500; and Depreciation Expense $1,000. Prepare an income statement for the year ended Decem-
ber 31, 2017.
Be. 262
The adjusted trial balance of Warbocks Corporation at December 31, 2017 includes the following
accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and
Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense
$500; and Depreciation Expense $1,000. Prepare a retained earnings statement for the year.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Be. 263
The following selected accounts appear in the adjusted trial balance for Blender Company. Identify
the accounts that would be included in the post-closing trial balance.
1. Accumulated Depreciation 5. Supplies
2. Depreciation Expense 6. Accounts Payable
3. Retained Earnings 7. Service Revenue
4. Dividends
EXERCISES
Ex. 264
The balance sheets of Palle’ Company include the following:
12/31/17 12/31/16
Interest Receivable $4,300 $ -0-
Supplies 5,000 3,900
Salaries and Wages Payable 3,700 3,800
Unearned Service Revenue -0- 4,000
The income statement for 2017 shows the following:
Interest Revenue $17,500
Service Revenue 78,700
Supplies Expense 10,700
Salaries and Wages Expense 48,000
Instructions:
Calculate the following for 2017:
1. Cash received for interest.
2. Cash paid for supplies.
3. Cash paid for salaries and wages.
4. Cash received for service revenue.
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Ex. 265
The 2017 income statement for Moring Company showed rent expense of $9,500 and wages ex-
pense of $8,600. The related balance sheet account balance at year-end last year and this year
were as follows:
2017 2016
Prepaid Rent $900 $300
Salaries and Wages Payable 500 400
Calculate the following for 2017:
1. Cash paid for rent.
2. Cash paid for wages.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Business Economics
Ex. 266
A company using the cash basis of accounting reports net income for 2017 of $45,460. If the com-
pany had used the accrual basis of accounting it would have reported the following year-end
balances:
2017 2016
Accounts receivable $3,850 $5,100
Supplies 1,740 1,950
Salaries and wages payable 3,600 2,250
Other unpaid amounts 2,400 2,100
Instructions:
Determine the company’s net income under the accrual basis of accounting. Show your calcu-
lations. Use the column headings shown below.
Explanation Amount
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Ex. 267
Double-entry Accounting Services begin operations on July 1. It allows its clients 90 days to pay for
services received. On the other hand, the company’s suppliers require payment for their goods and
services within 30 days. Double-entry prepaid its office rent for 12 months on July 1. At the end of
the year, December 31, the company had yet to pay its last month’s utility bill.
Instructions:
Explain how cash and accrual basis accounting would handle each of the events described
above. Use the column headings shown below.
Event Cash Basis Accrual Basis
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Ex. 268
Hooper Company prepared the following income statement using the cash basis of accounting:
HOOPER COMPANY
Income Statement, Cash Basis
For the Year Ended December 31, 2016
Service revenue (does not include $40,000 of services rendered on account
because the collection will not be until 2017) .................................................... $380,000
Expenses (does not include $20,000 of expenses on account because
payment will not be made until 2017) .............................................................. 220,000
Net income ............................................................................................................ $160,000
Additional data:
1. Depreciation on a company automobile for the year amounted to $7,000. This amount is not in-
cluded in the expenses above.
2. On January 1, 2016, paid for a two-year insurance policy on the automobile amounting to
$1,600. 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.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Ex. 269
On December 31, 2017, Çolski Company prepared an income statement and balance sheet and
failed to take into account three adjusting entries. The incorrect income statement showed net in-
come of $40,000. The balance sheet showed total assets, $130,000; total liabilities, $60,000; and
stockholders’ equity, $70,000.
The data for the three adjusting entries were:
(1) Depreciation of $9,000 was not recorded on equipment.
(2) Salaries and Wages amounting to $10,000 for the last two days in December were not paid
and not recorded. The next payroll will be in January.
(3) Rent of $8,000 was paid for two months in advance on December 1. The entire amount was
debited to Prepaid Rent when paid.
Instructions:
Complete the following tabulation to correct the financial statement amounts shown (indicate deduc-
tions with parentheses):
Item Net Income Total Assets Total Liabilities Stockholders’ Equity
Incorrect balances $ 40,000 $130,000 $ 60,000 $ 70,000
Effects of:
Depreciation
Salaries and Wages
Rent
Correct Balances
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Ex. 270
The Downtown Company accumulates the following adjustment data at December 31.
1. Revenue of $1,100 collected in advance has been recognized.
2. Salaries of $600 are unpaid.
3. Prepaid rent totaling $400 has expired.
4. Supplies of $550 have been used.
5. Revenue recognized but unbilled totals $750.
6. Utility expenses of $300 are unpaid.
7. Interest of $250 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 $22,500. What is the adjusted net
income?
Prepare your answer in the tabular form presented below.
Account Balances
Before Adjustment Income Effect
Type of Account (Understatement Increase
Adjustment Relationship or Overstatement) Adjusting Entry (Decrease)
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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