Chapter 4: Income Measurement and Accrual Accounting
82. Refer to the trial balance for Tracy, Inc.
According to contracts, $4,810 of Unearned Service Revenue has been earned in July. Which of the following is the
correct amount of Service Revenue to be reported in the July income statement?
a. $20,410
b. $11,700
c. $21,320
d. $16,510
83. Autumn Resorts purchased guest room furniture on January 1, 2014 for $120,000. The furniture has an estimated
useful life of ten years. What amount will appear on Autumn’s income statement for depreciation expense for the
year ending June 30, 2015?
a. $1,000
b. $6,000
c. $10,000
d. $12,000
84. Deacon Company purchased equipment last year for $30,000. The equipment has an estimated useful life of five
years. What amount will appear on the income statement for depreciation expense for the month of March, 2014?
a. $0
b. $500
c. $6,000
d. $30,000
85. Hsu Company purchased a truck on May 31, 2012 for $70,000. The equipment has an estimated useful life of five
years. What amount will appear on Hsu Company‘s balance sheet for total accumulated depreciation at May 31,
2015?
a. $14,000
b. $35,000
c. $42,000
d. $28,000
Chapter 4: Income Measurement and Accrual Accounting
86. Accumulated Depreciation
a. increases when the monthly adjustment for depreciation is recognized.
b. decreases when the monthly adjustment for depreciation is recognized.
c. is reported on the income statement with the expense accounts.
d. is allocated as an expense during future periods.
87. Accumulated Depreciation
a. increases assets.
b. decreases assets.
c. increases liabilities.
d. decreases liabilities.
88. Which of the following transactions involves an accrued asset?
a. Wages earned by employees but not yet paid
b. Rent collected in advance from a tenant
c. Rent owed by a tenant but not yet collected
d. One year’s premium on life insurance policy paid in advance
89. Which one of the following is the last step in the accounting cycle?
a. Journalizing business transactions
b. Recording and posting adjustments
c. Closing the accounts
d. Preparing financial statements
90. Which one of the following steps in the accounting cycle is optional rather than required?
a. Business transactions are recorded
b. Adjustments are recorded
c. The accounts are closed
d. Work sheets are prepared
Chapter 4: Income Measurement and Accrual Accounting
91. Which one of the following steps in the accounting cycle is completed only at the end of an accounting period?
a. Business transactions are recorded
b. Adjustments are recorded
c. Transactions are journalized
d. Journal entries are posted to the ledger
92. Some of the steps in the accounting cycle are listed below. Select the choice that places these steps in the correct
order.
1. Close the accounts.
2. Post transactions to accounts in the ledger.
3. Journalize daily transactions.
4. Record and post adjustments.
5. Prepare financial statements.
a. 2, 3, 4, 5, 1
b. 3, 2, 4, 5, 1
c. 3, 2, 4, 1, 5
d. 3, 2, 5, 4, 1
93. Balance sheet accounts are also known as which of the following?
a. Nominal accounts
b. Real accounts
c. Temporary accounts
d. Closing accounts
94. Income statement accounts are also known as which of the following?
a. Nominal accounts
b. Real accounts
c. Closing accounts
d. Both a and c
Chapter 4: Income Measurement and Accrual Accounting
95. The Dividend account is known as which of the following?
a. Nominal account
b. Closing account
c. Real account
d. both b and c
96.
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
97. Recognition is the process of formally recording or incorporating an item into the financial statements
a. True
b. False
98. When initially recording the cost of land purchased, most companies use the current value.
a. True
b. False
Chapter 4: Income Measurement and Accrual Accounting
99. The process of recording an item in the financial statements is called measurement.
a. True
b. False
100. The amount of cash that could be received by selling an asset currently is called historical cost.
a. True
b. False
101. Using matching under the accrual method, expenses are recognized when revenue is earned.
a. True
b. False
102. When a company recognizes the portion of supplies used during a year, the effect is to decrease net income.
a. True
b. False
103. All financial statements are prepared using the accrual basis of accounting.
a. True
b. False
104. Most companies use the cash basis of accounting.
a. True
b. False
105. Revenue is always earned continuously over time.
a. True
b. False
106. An asset is always involved when revenue is recognized.
a. True
b. False
Chapter 4: Income Measurement and Accrual Accounting
107. The recognition of revenue may result from the settlement of a liability rather than from the acquisition of an asset.
a. True
b. False
108. Expired costs are called assets.
a. True
b. False
109. 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
110. 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
111. A cost can be an asset or expense depending on whether the future economic benefits have expired or not.
a. True
b. False
112. One effect of recognizing depreciation is to decrease net income.
a. True
b. False
113. A company that forgets to recognize depreciation for the year overstates its income and assets.
a. True
b. False
Chapter 4: Income Measurement and Accrual Accounting
114. An entry that includes the Cash account is probably an adjustment.
a. True
b. False
115. Every company prepares only four adjustments—one for each of the four types of adjustments.
a. True
b. False
116. When cash is paid before an expense is incurred, an accrual is necessary.
a. True
b. False
117. 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
118. Accumulated depreciation is increased when depreciation is recognized.
a. True
b. False
119. Adjustments are recorded for all transactions involving outside entities.
a. True
b. False
120. 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
121. Every adjustment involves at least one income statement and one balance sheet account.
a. True
b. False
Chapter 4: Income Measurement and Accrual Accounting
122. 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
123. 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
124. While most companies make adjustments and prepare statements monthly, many companies complete the accounting
cycle only once per year.
a. True
b. False
125. Accountants often prepare work sheets at the end of an accounting period in place of financial statements.
a. True
b. False
126. Financial statements should be prepared before any adjustments are made.
a. True
b. False
127. Interim financial statements are prepared annually.
a. True
b. False
128. 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
Chapter 4: Income Measurement and Accrual Accounting
129. Balance sheet accounts are called real accounts.
a. True
b. False
130. 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
131. 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.
132. 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 133–140, select the word or group of words that best completes the
statement.
Matching
Cash basis
Measurement
Deferred revenue
Adjustments
Deferred expense
Accrual basis
Recognition
Accrued asset
133. The success of accounting as a form of communication depends on two concepts, and
____________________.
134. The of accounting necessitates a number of adjustments at the end of an
accounting period.
135. The of accounting is a system in which revenues are recognized when payments are
received and expenses are recognized when payments are made.
136. is the association of the costs incurred with the associated revenue of a period.
Chapter 4: Income Measurement and Accrual Accounting
137. A(n) creates an increase in income for the period.
138. A(n) results when cash is paid before the related amount is reported on the income
statement.
139. A(n) results when cash is received before the related amount is reported on the
income statement.
140. 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 _________________________.
141. The difference between accrual-based revenue and accrual-based expenses is called
_________________________.
142. Under the basis of accounting, revenues are recognized when earned and expenses when
incurred.
143. According to the revenue recognition principle, revenues are recognized when they are
_________________________.
144. Under the accrual basis of accounting, at what point in time should a fast food restaurant recognize revenue?
_________________________
145. Under the accrual basis of accounting, at what point in time should a publisher of magazines record revenue?
______________________________
146. The principle attempts to associate with the revenue of the period, all costs necessary to
generate that revenue.
147. is the allocation of the cost of a tangible, long-term asset over its useful life.
Chapter 4: Income Measurement and Accrual Accounting
148. The names of the four major types of adjusting entries are ,
_________________________, _________________________, and _________________________.
149. The one asset account that never requires adjustment at the end of the period is .
150. is the name given to revenue, expense, and dividend accounts because they are closed at
the end of the period.
151. is the name given to balance sheet accounts because they are permanent in nature.
152. Statements prepared monthly, quarterly, or at other intervals less than a year in duration are called
_____________________.
153. Temporary accounts are also known as accounts.
Chapter 4: Income Measurement and Accrual Accounting
154. 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?
Chapter 4: Income Measurement and Accrual Accounting
155. 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
156. 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. Identify and analyze the transaction 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
157. 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
158. 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
159. 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?
160. 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
161. 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
162. 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
163. 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.
Chapter 4: Income Measurement and Accrual Accounting
164. 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, Lowen 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?