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FOR INSTRUCTOR USE ONLY
CHAPTER 4
ACCRUAL ACCOUNTING CONCEPTS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY
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Multiple Choice Questions
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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
4-2
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Brief Exercises
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*This topic is dealt with in an Appendix to the chapter.
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-3
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
L.O. 1 L.O. 2 L.O. 3 L.O. 4 L.O. 4 (cont.)
Item Type Item Type Item Type Item Type Item Type
1. TF 9. TF 11. TF 24. TF 155. MC
2. TF 10. TF 12. TF 25. TF 156. MC
3. TF 73. MC 13. TF 26. TF 157. MC
4. TF 74. MC 14. TF 27. TF 158. MC
5. TF 75. MC 15. TF 28. TF 159. MC
6. TF 76. MC 16. TF 29. TF 160. MC
7. TF 77. MC 17. TF 30. TF 161. MC
8. TF 78. MC 18. TF 31. TF 162. MC
54. MC 79. MC 19. TF 32. TF 163. MC
55. MC 80. MC 22. TF 120. MC 164. MC
56. MC 81. MC 23. TF 121. MC 165. MC
57. MC 82. MC 91. MC 122. MC 166. MC
58. MC 83. MC 92. MC 123. MC 167. MC
59. MC 84. MC 93. MC 124. MC 168. MC
60. MC 85. MC 94. MC 125. MC 169. MC
61. MC 86. MC 95. MC 126. MC 170. MC
62. MC 87. MC 96. MC 127. MC 171. MC
63. MC 88. MC 97. MC 128. MC 172. MC
64. MC 89. MC 98. MC 129. MC 238. Be
65. MC 90. MC 99. MC 130. MC 239. Be
65. MC 235. Be 100. MC 131. MC 240. Be
66. MC 251. Ex 101. MC 132. MC 241. Be
67. MC 252. Ex 102. MC 133. MC 242. Be
68. MC 253. Ex 103. MC 134. MC 243. Be
69. MC 254. Ex 104. MC 135. MC 245. Be
70. MC 255. Ex 105. MC 136. MC 246. Be
71. MC 106. MC 137. MC 256. Ex
72. MC 107. MC 138. MC 257. Ex
279. C 108. MC 139. MC 258. Ex
280. C 109. MC 140. MC 259. Ex
281. C 110. MC 141. MC 260. Ex
282. C 111. MC 142. MC 261. Ex
283. C 112. MC 143. MC 262. Ex
113. MC 144. MC 263. Ex
114. MC 145. MC 264. Ex
115. MC 146. MC 265. Ex
116. MC 147. MC 266. Ex
117. MC 148 MC 267. Ex
118. MC 149. MC 268. Ex
119. MC 150. MC 269. Ex
236. Be 151. MC 270. Ex
237. Be 152. MC 271. Ex
239. Be 152. MC 272. Ex
153. MC 275. Ex
154. MC 276. Ex
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-4
L.O. 4 (cont.) L.O. 5 (cont.) L.O. 6 L.O. 7 L.O. 8
Item Type Item Type Item Type Item Type Item Type
284. C 259. Ex 37. TF 39. TF 48. TF
285. C 260. Ex 38. TF 40. TF 49. TF
261. Ex 195. MC 41. TF 50. TF
264. Ex 196. MC 42. TF 51. TF
265. Ex 197. MC 43. TF 52. TF
266. Ex 198. MC 44. TF 224. MC
267. Ex 199. MC 45. TF 225. MC
268. Ex 200. MC 46. TF 226. MC
L.O. 5 269. Ex 201. MC 47. TF 227. MC
33. TF 270. Ex 202. MC 205. MC 228. MC
34. TF 271. Ex 203. MC 207. MC
35. TF 272. Ex 204. MC 209. MC
36. TF 273. Ex 206. MC 210. MC
173. MC 274. Ex 208. MC 211. MC
174. MC 275. Ex 248. Be 212. MC
175. MC 286. C 249. Be 213. MC
176. MC 277. Ex 214. MC
177. MC 287. Ex 215. MC
178. MC 288. C 216. MC
179. MC 217. MC L.O. 9
180. MC 218. MC Item Type
181. MC 219. MC 229. MC
182. MC 220. MC
183. MC 221. MC
184. MC 222. MC L.O.*10
185. MC 223. MC Item Type
186. MC 250. Be 53. TF
187. MC 278. Ex 230. MC
188. MC 288. C 231. MC
189. MC 289. C 232. MC
190. MC 233. MC
191. MC 234. MC
192. MC
193. MC
194. MC
238. Be
240. Be
244. Be
245. Be
247. Be
256. Ex
257. Ex
258. Ex
Note: TF = True-False C = Completion
MC = Multiple Choice Ex = Exercise
The chapter also contains one set of ten Matching questions and ten Short-Answer Essay questions.
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-5
CHAPTER LEARNING OBJECTIVES
1. Explain the revenue recognition principle and the expense recognition principle. The
revenue recognition principle dictates that companies recognize revenue when a performance
obligation has been satisfied. The expense recognition principle dictates that companies rec-
ognize expenses in the period when the company makes efforts to generate those revenues.
2. Differentiate between the cash basis and the accrual basis of accounting. Under the cash
basis, companies record events only in the periods in which the company receives or pays
cash. Accrual-based accounting means that companies record in the periods in which the
events occur, events that change a company's financial statements even if cash has not been
exchanged.
3. Explain why adjusting entries are needed, and identify the major types of adjusting en-
tries. Companies make adjusting entries at the end of an accounting period. These entries
ensure that companies record revenues in the period in which the performance obligation is
satisfied and that companies recognize expenses in the period in which they are incurred. The
major types of adjusting entries are prepaid expenses, unearned revenues, accrued revenues,
and accrued expenses.
4. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned
revenues. Companies make adjusting entries for deferrals at the statement date to record the
portion of the deferred item that represents the expense incurred or the revenue for services
performed in the current accounting period.
5. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued
expenses. Adjusting entries for accruals record revenues earned and expenses incurred in the
current accounting period that have not been recognized through daily entries.
6. Describe the nature and purpose of the adjusted trial balance. An adjusted trial balance is
a trial balance that shows the balances of all accounts, including those that have been adjust-
ed, at the end of an accounting period. The purpose of an adjusted trial balance is to show the
effects of all financial events that have occurred during the accounting period.
7. Explain the purpose of closing entries. One purpose of closing entries is to transfer net in-
come or net loss for the period to Retained Earnings. A second purpose is to “zero-out” all
temporary accounts (revenue accounts, expense accounts, and Dividends) so that they start
each new period with a zero balance. To accomplish this, companies “close” all temporary ac-
counts at the end of an accounting period. They make separate entries to close revenues and
expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Re-
tained Earnings. Only temporary accounts are closed.
8. Describe the required steps in the accounting cycle. The required steps in the accounting
cycle are (a) analyze business transactions, (b) journalize the transactions, (c) post to ledger
accounts, (d) prepare a trial balance, (e) journalize and post adjusting entries, (f) prepare an
adjusted trial balance, (g) prepare financial statements, (h) journalize and post closing entries,
and (i) prepare a post-closing trial balance.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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4-6
9. Understand the causes of differences between net income and cash provided by operat-
ing activities. Net income is based on accrual accounting, which relies on the adjustment
process. Net cash provided by operating activities is determined by adding cash received from
operating the business and subtracting cash expended during operations.
*10. Describe the purpose and the basic form of the worksheet. The worksheet is a device to
make it easier to prepare adjusting entries and the financial statements. Companies often pre-
pare a worksheet using on a computer spreadsheet. The sets of columns of the worksheet are,
from left to right, the unadjusted trial balance, adjustments, adjusted trial balance, income
statement, and balance sheet.
Accrual Accounting Concepts
4-7
TRUE-FALSE STATEMENTS
1. The periodicity assumption states that the economic life of a business entity can be divided
into artificial time periods.
2. The periodicity assumption is often referred to as the expense recognition principle.
3. The revenue recognition principle dictates that revenue be recognized in the accounting pe-
riod in which the performance obligation is satisfied.
4. Expense recognition is tied to revenue recognition.
5. The revenue recognition principle and the expense recognition principle are helpful guides
used in determining net income or net loss for a period.
6. The expense recognition principle requires that efforts be related to accomplishments.
7. Recognizing when an expense contributes to the production of revenue is critical.
8. The expense recognition principle is frequently referred to as the matching principle.
9. Income will always be greater under the cash basis of accounting than under the accrual ba-
sis of accounting.
10. The cash basis of accounting is not in accordance with generally accepted accounting princi-
ples.
11. Adjusting entries are often made because some business events are not recorded as they
occur.
12. Adjusting entries are recorded in the general journal but are not posted to the accounts in the
general ledger.
13. Adjusting entries are not necessary if the trial balance debit and credit columns balances are
equal.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-8
14. An adjusting entry would be made to the revenue account only when cash is received.
15. An adjusting entry to a prepaid expense is required to recognize expired expenses.
16. An adjusting entry always involves two balance sheet accounts.
17. An adjusting entry always involves a balance sheet account and an income statement ac-
count.
18. Revenue received before it is recognized and expenses paid before being used or consumed
are both initially recorded as liabilities.
19. Revenue received before it is recognized and expenses used or consumed before being paid
are both initially recorded as liabilities.
20. Accrued revenues are revenues that have been received but not yet recognized.
21. Accrued revenues are revenues that have been recognized but not yet recorded.
22. The difference between unearned revenue and accrued revenue is that accrued revenue has
been recorded and needs adjusting and unearned revenue has never been recorded.
23. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the
future.
24. The cost of a depreciable asset less accumulated depreciation reflects the book value of the
asset.
25. The book value of a depreciable asset is always equal to its market value because deprecia-
tion is a valuation technique.
26. Accumulated Depreciation is a liability account and has a credit normal account balance.
27. A liability—revenue account relationship exists with an unearned rent revenue adjusting en-
Accrual Accounting Concepts
4-9
try.
28. The balances of the Depreciation Expense and the Accumulated Depreciation accounts
should always be the same.
29. Unearned revenue is a prepayment that requires an adjusting entry when services are per-
formed.
30. The adjusting entry for unearned revenue results in an increase (a debit) to an asset account
and an increase (a credit) to a revenue account.
31. Asset prepayments become expenses when they expire.
32. A contra asset account is subtracted from a related account in the balance sheet.
33. Accrued revenues are revenues that have been recognized but cash has not been received
before financial statements have been prepared.
34. The adjusting entry for accrued salaries requires a debit to Salaries and Wages Payable.
35. The accrued interest for a three month note payable of $10,000 dated December 1, 2013 at
an interest rate of 6% is $150 on December 31, 2013.
36. Without an adjusting entry for accrued interest expense, liabilities and interest expense are
understated, and net income and stockholders’ equity are overstated.
37. Financial statements can be prepared from the information provided by an adjusted trial bal-
ance.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-10
38. An adjusted trial balance must be prepared before the adjusting entries can be recorded.
39. Closing entries deal primarily with the balances of permanent accounts.
40. The only accounts that are closed are temporary accounts.
41. When closing entries are prepared, each income statement account is closed directly to re-
tained earnings.
42. Cash is a temporary account.
43. The post-closing trial balance will contain only permanent—balance sheet—accounts.
44. Accounts receivable is a permanent account.
45. The Dividends account is closed to the Income Summary account at the end of each year.
46. A revenue account is closed with a credit to the revenue account and a debit to Income
Summary.
47. An expense account is closed with a credit to the expense account and a debit to the Income
Summary account.
48. Financial statements must be prepared before the closing entries are made.
49. In the accounting cycle, closing entries are prepared before adjusting entries.
50. Closing entries result in the transfer of net income or net loss into the Retained Earnings ac-
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-11
count.
51. The post closing trial balance will have fewer accounts than the adjusted trial balance.
52. The accounting cycle begins with the journalizing of the transactions.
*53. A 10-column worksheet is a permanent accounting record.
Answers to True-False Statements
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-12
MULTIPLE CHOICE QUESTIONS
54. The periodicity assumption states that:
a. a transaction can only affect one period of time.
b. estimates should not be made if a transaction affects more than one time period.
c. adjustments to the enterprise's accounts can only be made in the time period when the
business terminates its operations.
d. the economic life of a business can be divided into artificial time periods.
55. One of the accounting concepts upon which adjustments for prepayments and accruals are
based is:
a. expense recognition.
b. cost.
c. monetary unit.
d. economic entity.
56. An accounting time period that is one year in length is called:
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.
57. Adjustments would not be necessary if financial statements were prepared to reflect net in-
come from:
a. monthly operations.
b. fiscal year operations.
c. interim operations.
d. lifetime operations.
58. Management usually wants ________ financial statements and the IRS requires all busi-
nesses to file _________ tax returns.
a. annual, annual
b. monthly, annual
c. quarterly, monthly
d. monthly, monthly
59. Expenses are recognized when:
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-13
a. they contribute to the production of revenue.
b. they are paid.
c. they are billed by the supplier.
d. the invoice is received.
60. Which of the following is not generally an accounting time period?
a. A week.
b. A month.
c. A quarter.
d. A year.
61. The revenue recognition principle dictates that revenue should be recognized in the account-
ing records:
a. when cash is received.
b. when the performance obligation is satisfied.
c. at the end of the month.
d. in the period that income taxes are paid.
62. In a service-type business, revenue is recognized:
a. at the end of the month.
b. at the end of the year.
c. when the service is performed.
d. when cash is received.
63. The expense recognition principle matches:
a. customers with businesses.
b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.
64. Otto’s Tune-Up Shop follows the revenue recognition principle. Otto services a car on August
31. The customer picks up the vehicle on September 1 and mails the payment to Otto on
September 5. Otto receives the check in the mail on September 6. When should Otto show
that the revenue was recognized?
a. August 31
b. August 1
c. September 5
d. September 6
65. A company spends $20 million dollars for an office building. Over what period should the cost
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-14
be written off?
a. When the $20 million is expended in cash.
b. All in the first year.
c. After $20 million in revenue is earned.
d. None of these answer choices are correct.
66. The expense recognition principle states that expenses should be matched with revenues.
Another way of stating the principle is to say that:
a. assets should be matched with liabilities.
b. efforts should be matched with accomplishments.
c. dividends should be matched with stockholder investments.
d. cash payments should be matched with cash receipts.
67. Which principle dictates that efforts (expenses) be recorded with accomplishments (reve-
nues)?
a. Cost principle.
b. Periodicity principle.
c. Revenue recognition principle.
d. Expense recognition principle.
68. A flower shop makes a large sale for $1,000 on November 30. The customer is sent a state-
ment on December 5 and a check is received on December 10. The flower shop follows
GAAP and applies the revenue recognition principle. When is the $1,000 considered to be
recognized?
a. December 5
b. December 10
c. November 30
d. December 1
69. A furniture factory's employees work overtime to finish an order that is sold on January 31.
The office sends a statement to the customer in early February and payment is received by
mid-February. The overtime wages should be expensed in:
a. January.
b. February.
c. the period when the workers receive their checks.
d. either January or February depending on when the pay period ends.
70. Which is not an application of revenue recognition?
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-15
a. Recording revenue as an adjusting entry on the last day of the accounting period.
b. Accepting cash from an established customer for services to be performed over the next
three months.
c. Billing customers on June 30 for services completed during June.
d. Receiving cash for services performed.
71. Why do generally accepted accounting principles require the application of the revenue
recognition principle?
a. Failure to apply the revenue recognition principle could lead to a misstatement of reve-
nue.
b. It is easy to apply the revenue recognition principle because revenue issues are always
easy to identify and resolve.
c. Recording revenue when cash is received is an objective application of the revenue
recognition principle.
d. Accounting software has made the revenue recognition easy to apply.
72. On April 1, 2013, nPropel Corporation paid $48,000 cash for equipment that will be used in
business operations. The equipment will be used for four years. nPropel records depreciation
expense of $48,000 for the calendar year ending December 31, 2013. Which accounting
principle has been violated?
a. Depreciation principle.
b. No principle has been violated.
c. Cash principle.
d. Expense recognition principle.
73. Under the cash basis of accounting:
a. revenue is recognized when services are performed.
b. expenses are matched with the revenue that is produced.
c. cash must be received before revenue is recognized.
d. a promise to pay is sufficient to recognize revenue.
74. Under the accrual basis of accounting:
a. cash must be received before revenue is recognized.
b. net income is calculated by matching cash outflows against cash inflows.
c. events that change a company's financial statements are recognized in the period they
occur rather than in the period in which cash is paid or received.
d. the ledger accounts must be adjusted to reflect a cash basis of accounting before finan-
cial statements are prepared under generally accepted accounting principles.
75. Using accrual accounting, expenses are recorded and reported only:
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a. when they are incurred whether or not cash is paid.
b. when they are incurred and paid at the same time.
c. if they are paid before they are incurred.
d. if they are paid after they are incurred.
76. A small company may be able to justify using a cash basis of accounting if they have:
a. sales under $1,000,000.
b. no accountants on staff.
c. few receivables and payables.
d. all sales and purchases on account.
77. Which statement is correct?
a. As long as a company consistently uses the cash basis of accounting, generally accepted
accounting principles allow its use.
b. The use of the cash basis of accounting violates both the revenue recognition and ex-
pense recognition principles.
c. The cash basis of accounting is objective because no one can be certain of the amount
of revenue until the cash is received.
d. As long as management is ethical, there are no problems with using the cash basis of
accounting.
78. The following is selected information from L Corporation for the fiscal year ending October
31, 2014.
Cash received from customers
$300,000
Revenue earned
390,000
Cash paid for expenses
170,000
Cash paid for computers on November 1, 2013 that will
be used for 3 years
48,000
Expenses incurred including any depreciation
216,000
Proceeds from a bank loan, part of which was used to
pay for the computers
100,000
Based on the accrual basis of accounting, what is L Corporation’s net income for the year
ending October 31, 2014?
a. $204,000
b. $174,000
c. $158,000
d. $220,000
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79. The following is selected information from C Corporation for the fiscal year ending October
31, 2014.
Cash received from customers
$150,000
Revenue earned
195,000
Cash paid for expenses
85,000
Cash paid for computers on November 1, 2013 that
will be used for 3 years
24,000
Expenses incurred including any depreciation
119,000
Proceeds from a bank loan, part of which was used to
pay for the computers
50,000
Based on the accrual basis of accounting, what is C Corporation’s net income for the year
ending October 31, 2014?
a. $102,000
b. $86,000
c. $76,000
d. $110,000
80. La More Company had the following transactions during 2013:
• Sales of $4,500 on account
• Collected $2,000 for services to be performed in 2014
• Paid $1,875 cash in salaries for 2013
• Purchased airline tickets for $250 in December for a trip to take place in 2014
What is La More’s 2013 net income using accrual accounting?
a. $2,875
b. $4,875
c. $4,625
d. $2,625
81. La More Company had the following transactions during 2013.
• Sales of $4,500 on account
• Collected $2,000 for services to be performed in 2014
• Paid $1,325 cash in salaries
• Purchased airline tickets for $250 in December for a trip to take place in 2014
What is La More’s 2013 net income using cash basis accounting?
a. $5,175
b. $675
c. $4,925
d. $425
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82. Wang Company had the following transactions during 2013:
• Sales of $10,800 on account
• Collected $4,800 for services to be performed in 2014
• Paid $3,100 cash in salaries for 2013
• Purchased airline tickets for $600 in December for a trip to take place in 2014
What is Wang’s 2013 net income using accrual accounting?
a. $8,300
b. $13,100
c. $12,500
d. $7,700
83. Wang Company had the following transactions during 2013:
• Sales of $10,800 on account
• Collected $4,800 for services to be performed in 2014
• Paid $3,100 cash in salaries
• Purchased airline tickets for $600 in December for a trip to take place in 2014
What is Wang’s 2013 net income using cash basis accounting?
a. $1,100
b. $2,300
c. $12,500
d. $1,700
84. Given the data below for a firm in its first year of operation, determine net income under the
cash basis of accounting.
Revenue earned $16,000
Accounts receivable 3,000
Expenses incurred 7,250
Accounts payable (related to expenses) 750
Supplies purchased with cash 1,800
a. $6,500
b. $11,000
c. $4,700
d. $6,950
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85. Given the data below for a firm in its first year of operation, determine net income under the
accrual basis of accounting.
Revenue earned $16,000
Accounts receivable 3,000
Expenses incurred 7,250
Accounts payable (related to expenses) 750
Supplies purchased with cash 1,800
a. $8,750
b. $11,000
c. $6,500
d. $9,200
86. Given the data below for a firm in its first year of operation, determine net income under the
cash basis of accounting.
Cash received from customers $48,000
Accounts receivable 12,000
Cash paid for expenses 26,000
Accounts payable (related to expenses) 3,000
Prepaid rent for next period 7,000
a. $22,000
b. $31,000
c. $24,000
d. $15,000
87. Given the data below for a firm in its first year of operation, determine net income under the
accrual basis of accounting.
Cash received from customers $48,000
Accounts receivable 12,000
Cash paid for expenses 26,000
Accounts payable (related to expenses) 3,000
Prepaid rent for next period 7,000
a. $22,000
b. $31,000
c. $24,000
d. $15,000
88. Under the cash basis of accounting, an amount received from a customer in advance of
providing the services would be reported as a(n):
a. revenue.
b. liability.
c. expense.
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d. prepaid expense.
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89. Which of the following would be unethical?
a. Recording accrued salaries and wages expense.
b. Recording accrued interest revenue.
c. Recording backdated revenue.
d. Recording prepaid expense adjustments.
90. Why was Apple required to spread their iPhone revenues over a two year period?
a. Because of its newness, their returns might exceed the normal level of returns.
b. Because they were required to provide software updates over that two year period.
c. Because that was the estimated life of the iPhone.
d. Because they needed to defer revenue recognition since they had a swap program avail-
able for future models.
91. According to some U.S. companies what gives foreign firms a competitive advantage in the
capital market?
a. The foreign companies don’t have standards similar to GAAP.
b. The foreign companies don’t have strict ethical codes.
c. The Sarbanes-Oxley Act which requires more stringent internal controls on U.S. firms.
d. The foreign companies don’t have to be audited.
92. The primary difference between prepaid and accrued expenses is that prepaid expenses
have:
a. been incurred and accrued expenses have not.
b. not been paid and accrued expenses have.
c. been recorded and accrued expenses have not.
d. not been recorded and accrued expenses have.
93. The primary difference between accrued revenues and unearned revenues is that accrued
revenues have:
a. not been recognized and accrued revenues have been.
b. been paid and unearned revenues have not.
c. been recorded and unearned revenues have not.
d. not been recorded and unearned revenues have.
94. The general term employed to indicate an expense that has not been paid or revenue that
has not been received and has not yet been recognized in the accounts is:
a. contra asset.
b. prepayment.
c. asset.
d. accrued.
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95. Accounts often need to be adjusted because:
a. there are never enough accounts to record all the transactions.
b. many transactions affect more than one time period.
c. there are always errors made in recording transactions.
d. management can't decide what they want to report.
96. Adjusting entries are made to ensure that:
a. expense are recognized in the period in which they are incurred.
b. revenues are recorded in the period in which the performance obligation is satisfied.
c. balance sheet and income statement accounts have correct balances at the end of an
accounting period.
d. All of these answer choices are correct.
97. Adjusting entries are:
a. not necessary if the accounting system is operating properly.
b. usually required before financial statements are prepared.
c. made whenever management desires to change an account balance.
d. made to balance sheet accounts only.
98. Each of the following is a major type (or category) of adjusting entry except:
a. earned expenses.
b. prepaid expenses.
c. accrued expenses.
d. accrued revenues.
99. Adjusting entries are required:
a. because some costs expire with the passage of time and have not yet been journalized.
b. when the company's profits are below the budget.
c. when expenses are recorded in the period in which they are earned.
d. None of these answer choices are correct.
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100. Which one of the following is not a justification for adjusting entries?
a. Adjusting entries are necessary to ensure that the revenue recognition principle is fol-
lowed.
b. Adjusting entries are necessary to ensure that the expense recognition principle is fol-
lowed.
c. Adjusting entries are necessary to enable financial statements to be in conformity with
GAAP.
d. Adjusting entries are necessary to bring the general ledger accounts in line with the
budget.
101. An adjusting entry:
a. affects two balance sheet accounts.
b. affects two income statement accounts.
c. affects a balance sheet account and an income statement account.
d. is always a compound entry.
102. Adjusting entries are:
a. the same as correcting entries.
b. needed to ensure that the expense recognition principle is followed.
c. optional.
d. rarely needed.
103. The preparation of adjusting entries is:
a. straightforward because the accounts that need adjustment will be out of balance.
b. needed to ensure that the expense recognition principle is followed.
c. only required for accounts that do not have a normal balance.
d. optional when financial statements are prepared.
104. If a resource has been consumed but a bill has not been received at the end of the account-
ing period, then:
a. an expense should be recorded when the bill is received.
b. an expense should be recorded when the cash is paid out.
c. an adjusting entry should be made recognizing the expense.
d. it is optional whether to record the expense before the bill is received.
105. An asset–expense relationship exists with:
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a. liability accounts.
b. revenue accounts.
c. prepaid expense adjusting entries.
d. accrued expense adjusting entries.
106. A liability–revenue relationship exists with:
a. asset accounts.
b. revenue accounts.
c. unearned revenue adjusting entries.
d. accrued expense adjusting entries.
107. Adjusting entries can be classified as:
a. postponements and advances.
b. accruals and deferrals.
c. deferrals and postponements.
d. accruals and advances.
108. Adjusting entries can be classified as:
a. postponements and advances.
b. accruals and advances.
c. deferrals and postponements.
d. accruals and deferrals.
109. Accrued expenses are:
a. incurred but not yet paid or recorded.
b. paid and recorded in an asset account after they are used or consumed.
c. paid and recorded in an asset account before they are used or consumed.
d. incurred and already paid or recorded.
110. Accrued revenues are:
a. received and recorded as liabilities before they are recognized.
b. recognized and recorded as liabilities before they are received.
c. recognized but not yet received or recorded.
d. recognized and already received and recorded.
111. Prepaid expenses are:
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a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.
112. Goods purchased for future use in the business, such as supplies, are called:
a. prepaid expenses.
b. revenues.
c. stockholders’ equity.
d. liabilities.
113. Accrued expenses are:
a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.
114. Unearned revenues are:
a. received and recorded as liabilities before they are recognized.
b. recognized and recorded as liabilities before they are received.
c. recognized but not yet received or recorded.
d. recognized and already received and recorded.
115. Adjusting entries affect at least:
a. one revenue and one expense account.
b. one asset and one liability account.
c. one revenue and one balance sheet account.
d. one income statement account and one balance sheet account.
116. An architecture firm earned $2,000 for architecture services provided with the fee to be paid
in the future. No entry was made at the time the service was provided. If the fee has not been
paid by the end of the accounting period and no adjusting entry is made, this would cause:
a. revenues to be overstated.
b. net income to be overstated.
c. liabilities to be understated.
d. revenues to be understated.
117. An adjusting entry can include a:
a. debit to an asset and a credit to a liability.
b. debit to a revenue and a credit to an asset.
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c. debit to a liability and a credit to a revenue.
d. debit to an expense and a credit to a revenue.
118. A law firm received $2,000 cash for legal services to be rendered in the future. The full
amount was credited to the liability account Unearned Service Revenue. If the legal services
have been rendered at the end of the accounting period and no adjusting entry is made, this
would cause:
a. expenses to be overstated.
b. net income to be overstated.
c. liabilities to be understated.
d. revenues to be understated.
119. On January 1, 2013, M. Johanson Company purchased equipment for $36,000. The compa-
ny is depreciating the equipment at the rate of $500 per month. The book value of the
equipment at December 31, 2013 is:
a. $0.
b. $6,000.
c. $30,000.
d. $36,000.
120. The Vintage Laundry Company purchased $6,500 worth of laundry supplies on June 2 and
recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only
$1,000 on hand. The adjusting entry that should be made by the company on June 30 is:
a. debit Supplies Expense, $1,000; credit Supplies, $1,000.
b. debit Supplies, $5,500; credit Supplies Expense, $5,500.
c. debit Supplies, $1,000; credit Supplies Expense, $1,000.
d. debit Supplies Expense, $5,500; credit Supplies, $5,500.
121. Greese Company purchased office supplies costing $4,000 and debited Supplies for the full
amount. At the end of the accounting period, a physical count of office supplies revealed
$1,500 still on hand. The appropriate adjusting journal entry to be made at the end of the pe-
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riod would be:
a. debit Supplies Expense, $1,500; credit Supplies, $1,500.
b. debit Supplies, $2,500; credit Supplies Expense, $2,500.
c. debit Supplies Expense, $2,500; credit Supplies, $2,500.
d. debit Supplies, $1,500; credit Supplies Expense, $1,500.
122. A company purchased office supplies costing $3,000 and debited Supplies for the full
amount. At the end of the accounting period, a physical count of office supplies revealed
$900 still on hand. The appropriate adjusting journal entry to be made at the end of the peri-
od would be:
a. debit Supplies Expense, $3,900; credit Supplies, $3,900.
b. debit Supplies, $900; credit Supplies Expense, $900.
c. debit Supplies Expense, $2,100; credit Supplies, $2,100.
d. debit Supplies, $2,100; credit Supplies Expense, $2,100.
123. Unearned revenue is classified as a(n):
a. asset account.
b. revenue account.
c. contra revenue account.
d. liability.
124. Boyce Company purchased office supplies costing $5,000 and debited Supplies for the full
amount. At the end of the accounting period, a physical count of office supplies revealed
$1,800 still on hand. The appropriate adjusting journal entry to be made at the end of the pe-
riod would be:
a. debit Supplies Expense, $3,200; credit Supplies, $3,200.
b. debit Supplies, $1,800; credit Supplies Expense, $1,800.
c. debit Supplies Expense, $1,800; credit Supplies, $1,800.
d. debit Supplies, $3,200; credit Supplies Expense, $3,200.
125. On July 1 the Fisher Shoe Store paid $18,000 to Acme Realty for 6 months rent beginning
July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on
July 31, the adjusting entry to be made by the Fisher Shoe Store is:
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a. debit Rent Expense, $18,000; credit Prepaid Rent, $3,000.
b. debit Prepaid Rent, $3,000; credit Rent Expense, $3,000.
c. debit Rent Expense, $3,000; credit Prepaid Rent, $3,000.
d. debit Rent Expense, $18,000; credit Prepaid Rent, $15,000.
126. The balance in the prepaid rent account before adjustment at the end of the year is $15,000
and represents three months rent paid on December 1. The adjusting entry required on De-
cember 31 is:
a. debit Prepaid Rent, $5,000; credit Rent Expense $5,000.
b. debit Prepaid Rent, $10,000; credit Rent Expense, $10,000.
c. debit Rent Expense, $15,000; credit Prepaid Rent, $15,000.
d. debit Rent Expense, $5,000; credit Prepaid Rent, $5,000.
127. If a business has received cash in advance of services performed and credits a liability ac-
count, the adjusting entry needed after the services are performed will be:
a. debit Unearned Service Revenue and credit Cash.
b. debit Unearned Service Revenue and credit Service Revenue.
c. debit Unearned Service Revenue and credit Prepaid Expense.
d. debit Unearned Service Revenue and credit Accounts Receivable.
128. Accumulated Depreciation is a(n):
a. expense account.
b. stockholders’ equity account.
c. liability account.
d. contra asset account.
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129. The Harris Company purchased equipment for $9,000 on December 1. It is estimated that
annual depreciation on the computer will be $1,800. If financial statements are to be pre-
pared on December 31, the company should make the following adjusting entry:
a. debit Depreciation Expense, $1,800; credit Accumulated Depreciation, $1,800.
b. debit Depreciation Expense, $150; credit Accumulated Depreciation, $150.
c. debit Depreciation Expense, $7,200; credit Accumulated Depreciation, $7,200.
d. debit Equipment, $9,000; credit Accumulated Depreciation, $9,000.
130. Adjustments for unearned revenue:
a. decrease liabilities and increase revenues.
b. increase liabilities and increase revenues.
c. increase assets and increase revenues.
d. decrease revenues and decrease assets.
131. Leyland Realty Company received a check for $15,000 on July 1, which represents a 6-
month advance payment of rent on a building it rents to a client. Unearned Rent Revenue
was credited for the full $15,000. Financial statements will be prepared on July 31. Leyland
Realty should make the following adjusting entry on July 31:
a. debit Unearned Rent Revenue, $2,500; credit Rent Revenue, $2,500.
b. debit Rent Revenue, $2,500; credit Unearned Rent Revenue, $2,500.
c. debit Unearned Rent Revenue, $15,000; credit Rent Revenue, $15,000.
d. debit Cash, $15,000; credit Rent Revenue, $15,000.
132. As prepaid expenses expire with the passage of time, the correct adjusting entry will be a:
a. debit to an asset account and a credit to an expense account.
b. debit to an expense account and a credit to an asset account.
c. debit to an asset account and a credit to an asset account.
d. debit to an expense account and a credit to an expense account.
133. Adjustments for unearned revenue:
a. decrease liabilities and increase revenues.
b. increase liabilities and increase revenues.
c. increase assets and increase revenues.
d. decrease revenues and decrease assets.
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134. Payments of expenses that will benefit more than one accounting period are identified as:
a. expenses.
b. revenues.
c. prepaid expenses.
d. liabilities.
135. A company usually determines the amount of supplies used during a period by:
a. adding the supplies on hand to the balance of the Supplies account.
b. summing the amount of supplies purchased during the period.
c. taking the difference between the supplies purchased and the supplies paid for during the
period.
d. taking the difference between the balance of the Supplies account and the cost of sup-
plies on hand.
136. If a company fails to make an adjusting entry to record supplies expense, then:
a. stockholders’ equity will be understated.
b. expense will be understated.
c. assets will be understated.
d. net income will be understated.
137. Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the ad-
justing entry is for the amount of supplies:
a. remaining.
b. purchased.
c. used.
d. either used or remaining.
138. If a company fails to adjust for accrued revenues:
a. liabilities will be understated and revenues will be understated.
b. liabilities will be overstated and revenues will be understated.
c. assets will be overstated and revenues will be understated.
d. assets will be understated and revenues will be understated.
139. If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will
this have on that month's financial statements?
a. Failure to make an adjustment does not affect the financial statements.
b. Expenses will be overstated and net income and stockholders’ equity will be under- stat-
ed.
c. Assets will be overstated and net income and stockholders’ equity will be understated.
d. Assets will be overstated and net income and stockholders’ equity will be overstated.
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140. If a company fails to adjust an Unearned Rent Revenue account for rent that has been
earned, what effect will this have on that month’s financial statements?
a. Assets will be understated and revenues will be understated.
b. Liabilities will be understated and revenues will be understated.
c. Liabilities will be overstated and revenues will be understated.
d. Assets will be overstated and revenues will be understated.
141. If a company fails to adjust for accrued expenses, what effect will this have on that month's
financial statements?
a. Failure to make an adjustment does not affect the financial statements.
b. Expenses will be understated and net income and stockholders’ equity will be over- stat-
ed.
c. Assets will be overstated and net income and stockholders’ equity will be under-stated.
d. Assets will be overstated and net income and stockholders’ equity will be overstated.
142. On January 1, 2013, Leardon Inc. purchased equipment for $60,000. The company is depre-
ciating the equipment at the rate of $800 per month. At January 31, 2014, the balance in
Accumulated Depreciation is:
a. $800 debit.
b. $9,600 credit.
c. $10,400 credit.
d. $53,200 debit.
143. At December 31, 2014, before any year-end adjustments, Dallis Company's Prepaid Insur-
ance account had a balance of $2,900. It was determined that $1,300 of the Prepaid
Insurance had expired. The adjusted balance for Insurance Expense for the year would be:
a. $1,300.
b. $1,600.
c. $2,900.
d. $1,400.
144. At December 31, 2014, before any year-end adjustments, Janus Company's Prepaid Insur-
ance account had a balance of $2,800. It was determined that $1,200 of the Prepaid
Insurance had expired. The adjusted balance for Prepaid Insurance for the year would be:
a. $1,200.
b. $1,600.
c. $3,800.
d. $2,800.
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145. At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was
omitted. Which of the following statements is true?
a. Net income will be overstated for the current year.
b. Total assets will be understated at the end of the current year.
c. The balance sheet and income statement will be misstated but the Retained Earnings
statement will be correct for the current year.
d. Total expenses will be overstated at the end of the current year.
ing
146. The trial balance for Greenway Corporation appears as follows:
Greenway Corporation
Trial Balance
December 31, 2014
Cash $ 300
Accounts Receivable 500
Prepaid Insurance 60
Supplies 140
Equipment 4,000
Accumulated Depreciation, Equipment $ 800
Accounts Payable 300
Common Stock 1,000
Retained Earnings 1,400
Service Revenue 3,000
Salaries and Wages Expense 1,000
Rent Expense 500 0
$6,500 $6,500
If, on December 31, 2014, supplies on hand were $20, the adjusting entry would contain a:
a. debit to Supplies for $20.
b. credit to Supplies for $20.
c. debit to Supplies Expense for $120.
d. credit to Supplies Expense for $120.
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147. The trial balance for Greenway Corporation appears as follows:
Greenway Corporation
Trial Balance
December 31, 2014
Cash $ 300
Accounts Receivable 500
Prepaid Insurance 60
Supplies 140
Equipment 4,000
Accumulated Depreciation, Equipment $ 800
Accounts Payable 300
Common Stock 1,000
Retained Earnings 1,400
Service Revenue 3,000
Salaries and Wages Expense 1,000
Rent Expense 500 0
$6,500 $6,500
If, on December 31, 2014, the insurance still unexpired amounted to $10, the adjusting entry
would contain a:
a. debit to Prepaid Insurance for $50.
b. credit to Prepaid Insurance for $10.
c. debit to Insurance Expense for $50.
d. debit to Prepaid Insurance for $10.
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148. The trial balance for Greenway Corporation appears as follows:
Greenway Corporation
Trial Balance
December 31, 2014
Cash $ 300
Accounts Receivable 500
Prepaid Insurance 60
Supplies 140
Equipment 4,000
Accumulated Depreciation, Equipment $ 800
Accounts Payable 300
Common Stock 1,000
Retained Earnings 1,400
Service Revenue 3,000
Salaries and Wages Expense 1,000
Rent Expense 500 0
$6,500 $6,500
If the estimated depreciation for equipment were $800, the adjusting entry would contain a:
a. credit to Accumulated Depreciation, Equipment for $800.
b. credit to Depreciation Expense, Equipment for $800.
c. debit to Accumulated Depreciation, Equipment for $800.
d. credit to Equipment for $800.
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149. The trial balance for Greenway Corporation appears as follows:
Greenway Corporation
Trial Balance
December 31, 2014
Cash $ 300
Accounts Receivable 500
Prepaid Insurance 60
Supplies 140
Equipment 4,000
Accumulated Depreciation, Equipment $ 800
Accounts Payable 300
Common Stock 1,000
Retained Earnings 1,400
Service Revenue 3,000
Salaries and Wages Expense 1,000
Rent Expense 500 0
$6,500 $6,500
If as of December 31, 2014, rent of $120 for December had not been recorded or paid, the
adjusting entry would include a:
a. credit to Accumulated Rent for $120.
b. credit to Cash for $120.
c. debit to Rent Payable for $120
d. debit to Rent Expense for $120
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150. The trial balance for Greenway Corporation appears as follows:
Greenway Corporation
Trial Balance
December 31, 2014
Cash $ 300
Accounts Receivable 500
Prepaid Insurance 60
Supplies 140
Equipment 4,000
Accumulated Depreciation, Equipment $ 800
Accounts Payable 300
Common Stock 1,000
Retained Earnings 1,400
Service Revenue 3,000
Salaries and Wages Expense 1,000
Rent Expense 500 0
$6,500 $6,500
If service for $125 had been performed but not billed, the adjusting entry to record this would
include a:
a. debit to Service Revenue for $125.
b. credit to Unearned Service Revenue for $125.
c. credit for Service Revenue for $125.
d. debit to Unearned Revenue for $125.
151. Depreciation is the process of:
a. valuing an asset at its fair value.
b. increasing the value of an asset over its useful life in a rational and systematic manner.
c. allocating the cost of an asset to expense over its useful life in a rational and systematic
manner.
d. writing down an asset to its real value each accounting period.
152. The difference between the balance of a plant asset account and the related accumulated
depreciation account is termed:
a. market value.
b. contra asset.
c. book value.
d. liability.
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153. A new accountant working for Metcalf Company records $800 Depreciation Expense on
store equipment as follows:
Dr. Cr.
Depreciation Expense …………………….. .............. 800
Cash .............................................................. 800
The effect of this entry is to:
a. adjust the accounts to their proper amounts on December 31.
b. understate total assets on the balance sheet as of December 31.
c. overstate the book value of the depreciable assets at December 31.
d. understate the book value of the depreciable assets as of December 31.
154. From an accounting standpoint, the acquisition of long-lived assets is essentially a(n):
a. accrual of expense.
b. accrual of revenue.
c. accrual of unearned revenue.
d. prepaid expense.
155. If a business pays rent in advance and debits a Prepaid Rent account, the company receiv-
ing the rent payment will credit:
a. cash.
b. prepaid rent.
c. unearned rent revenue.
d. accrued rent revenue.
156. An accumulated depreciation account:
a. is a contra liability account.
b. increases on the debit side.
c. is offset against total assets on the balance sheet.
d. has a normal credit balance.
157. The difference between the cost of a depreciable asset and its related accumulated depre-
ciation is referred to as the:
a. market value of the asset.
b. blue book value of the asset.
c. book value of the asset.
d. depreciated difference of the asset.
158. Which of the following would not result in unearned revenue?
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a. Rent collected in advance from tenants.
b. Services performed on account.
c. Sale of season tickets to football games.
d. Sale of two-year magazine subscriptions.
159. The policy at Adler Corporation is to expense all office supplies at the time of purchase. On
the last day of the accounting period, there are $1,100 of unused office supplies on hand and
the balance of supplies expense is $3,500. What should the accountant do?
a. Debit Supplies and credit Supplies Expense for $1,100.
b. Nothing, company policy says to expense supplies when purchased.
c. Convince management to change its policy to avoid problems in the future.
d. Debit Supplies Expense for $2,400 and credit Supplies for $2,400.
160. Which statement is correct?
a. Accumulated Depreciation should always have a debit balance in the adjusted trial
balance.
b. Accumulated Depreciation is added to the long-term liabilities on the balance sheet.
c. Accumulated Depreciation, Equipment represents the total cost of equipment that has
expired up to the date of the balance sheet.
d. Accumulated Depreciation is used to reveal the value of the related asset on the date of
the balance sheet.
161. Walton Company collected $9,600 in May of 2013 for 4 months of service which would take
place from October of 2013 through January of 2014. The revenue reported from this trans-
action during 2013 would be:
a. $0.
b. $7,200.
c. $9,600.
d. $2,400.
162. Skypress Company collected $8,400 in May of 2013 for 4 months of service which would
take place from October of 2013 through January of 2014. The revenue reported from this
transaction during 2013 would be:
a. $0.
b. $6,300.
c. $8,400.
d. $2,100.
163. Masterfalls Corporation purchased a one-year insurance policy in January 2013 for $30,000.
The insurance policy is in effect from March 2013 through February 2014. If the company
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neglects to make the proper year-end adjustment for the expired insurance:
a. net income and assets will be understated by $25,000.
b. net income and assets will be overstated by $25,000.
c. net income and assets will be understated by $5,000.
d. net income and assets will be overstated by $5,000.
164. James & Younger Corporation purchased a one-year insurance policy in January 2013 for
$48,000. The insurance policy is in effect from March 2013 through February 2014. If the
company neglects to make the proper year-end adjustment for the expired insurance:
a. net income and assets will be understated by $40,000.
b. net income and assets will be overstated by $40,000.
c. net income and assets will be understated by $8,000.
d. net income and assets will be overstated by $8,000.
165. At March 1, 2014, Candy Inc. had supplies on hand of $1,500. During the month, Candy pur-
chased supplies of $2,900 and used supplies of $2,800. The March 31 balance sheet should
report what balance in the supplies account?
a. $1,500
b. $1,600
c. $2,800
d. $2,900
166. Darting Company purchased a computer system for $7,200 on January 1, 2014. The compa-
ny expects to use the computer system for 3 years. It has no salvage value. Monthly
depreciation expense on the asset is:
a. $0.
b. $200.
c. $2,400.
d. $7,200.
167. Fleet Services Company purchased equipment for $9,000 on January 1, 2014. The company
expects to use the equipment for 5 years. It has no salvage value. What balance would be
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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reported on the December 31, 2014 balance sheet for Accumulated Depreciation?
a. $0 because Accumulated Depreciation is reported on the Income Statement.
b. $1,800
c. $7,200
d. $9,000
168. Green Realty Company received a check for $30,000 on July 1 which represents a 6 month
advance payment of rent on a building it rents to a client. Unearned Rent Revenue was cred-
ited for the full $30,000. Financial statements will be prepared on July 31. Green Realty
should make the following adjusting entry on July 31:
a. debit Unearned Rent Revenue, $5,000; credit Rent Revenue, $5,000.
b. debit Rent Revenue, $5,000; credit Unearned Rent Revenue, $5,000.
c. debit Unearned Rent Revenue, $30,000; credit Rent Revenue, $30,000.
d. debit Cash, $30,000; credit Rent Revenue, $30,000.
169. Oakville Inc. purchased a 12-month insurance policy on March 1, 2014 for $1,800. At March
31, 2014, the adjusting journal entry to record expiration of this asset will include:
a. a debit to Prepaid Insurance and a credit to Cash for $1,800.
b. a debit to Prepaid Insurance and a credit to Insurance Expense for $180.
c. a debit to Insurance Expense and a credit to Prepaid Insurance for $150.
d. a debit to Insurance Expense and a credit to Cash for $150.
170. Hoosher Enterprises purchased an 18-month insurance policy on May 31, 2014 for $7,200.
The December 31, 2014 balance sheet would report Prepaid Insurance of:
a. $0 because Prepaid Insurance is reported on the Income Statement.
b. $2,800.
c. $4,400.
d. $7,200.
171. At March 1, I. Repo Inc. reported a balance in Supplies of $200. During March, the company
Accrual Accounting Concepts
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purchased supplies for $950 and consumed supplies of $700. If no adjusting entry is made
for supplies:
a. stockholders' equity will be overstated by $700.
b. expenses will be understated by $950.
c. assets will be understated by $450.
d. net income will be understated by $700.
ing
172. Regions Inc. pays its rent of $48,000 annually on January 1 and makes monthly adjusting
entries. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the fol-
lowing are true?
a. Failure to make the adjustment does not affect the February financial statements.
b. Expenses will be overstated by $4,000 and net income and stockholders' equity will be
understated by $4,000.
c. Assets will be overstated by $8,000 and net income and stockholders' equity will be un-
derstated by $8,000.
d. Assets will be overstated by $4,000 and net income and stockholders' equity will be over-
stated by $4,000.
173. An adjusting entry can include a:
a. debit to an asset and a credit to a revenue.
b. debit to a revenue and a credit to an asset.
c. credit to an expense and a debit to a revenue.
d. debit to an expense and a credit to a revenue.
174. A revenue–asset relationship exists with:
a. prepaid expense adjusting entries.
b. accrued expense adjusting entries.
c. unearned revenue adjusting entries.
d. accrued revenue adjusting entries.
175. The accounts of a business before an adjusting entry is made to record accrued revenue re-
flect an:
a. understated liability and an overstated revenue.
b. overstated asset and an understated revenue.
c. understated expense and an overstated revenue.
d. understated asset and an understated revenue.
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176. Adjustments for accrued revenues:
a. increase assets and increase revenues.
b. increase assets and increase liabilities.
c. decrease assets and increase revenues.
d. decrease liabilities and increase revenues.
177. Failure to prepare an adjusting entry at the end of the period to record an accrued expense
would cause:
a. net income to be understated.
b. an overstatement of assets and an overstatement of liabilities.
c. an understatement of expenses and an understatement of liabilities.
d. an overstatement of expenses and an overstatement of liabilities.
178. Failure to prepare an adjusting entry at the end of a period to record an accrued revenue
would cause:
a. net income to be overstated.
b. an understatement of assets and an understatement of revenues.
c. an understatement of revenues and an understatement of liabilities.
d. an understatement of revenues and an overstatement of liabilities.
179. An adjusting entry made to record accrued interest on a note receivable due next year con-
sists of a:
a. debit to Interest Expense and a credit to Interest Payable.
b. debit to Interest Receivable and a credit to Interest Revenue.
c. debit to Interest Expense and a credit to Notes Payable.
d. debit to Interest Expense and a credit to Cash.
180. Raxon Company borrowed $40,000 from the bank signing a 6%, 3-month note on September
1. Principal and interest are payable to the bank on December 1. If the company prepares
monthly financial statements, the adjusting entry that the company should make for interest
on September 30, would be:
a. debit Interest Expense, $2,400; credit Interest Payable, $2,400.
b. debit Interest Expense, $200; credit Interest Payable, $200.
c. debit Note Payable, $2,400; credit Cash, $2,400.
d. debit Cash, $600; credit Interest Payable, $600.
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181. Nacron Company borrowed $10,000 from the bank signing a 6%, 3-month note on Septem-
ber 1. Principal and interest are payable to the bank on December 1. If the company
prepares monthly financial statements, the adjusting entry that the company should make for
interest on September 30, would be:
a. debit Interest Expense, $50; credit Interest Payable, $50.
b. debit Interest Expense, $600; credit Interest Payable, $600.
c. debit Note Payable, $600; credit Cash, $600.
d. debit Cash, $50; credit Interest Payable, $50.
182. Mary Richardo has performed $500 of CPA services for a client but has not billed the client
as of the end of the accounting period. What adjusting entry must Mary make?
a. Debit Cash and credit Unearned Service Revenue
b. Debit Accounts Receivable and credit Unearned Service Revenue
c. Debit Accounts Receivable and credit Service Revenue
d. Debit Unearned Service Revenue and credit Service Revenue
ing
183. Mary Richardo, CPA, has billed her clients for services performed. She subsequently re-
ceives payments from her clients. What entry will she make upon receipt of the payments?
a. Debit Unearned Service Revenue and credit Service Revenue
b. Debit Cash and credit Accounts Receivable
c. Debit Accounts Receivable and credit Service Revenue
d. Debit Cash and credit Service Revenue
ing
184. Amos Real Estate signed a four-month note payable in the amount of $16,000 on September
1. The note requires interest at an annual rate of 9%. The amount of interest to be accrued at
the end of September is:
a. $480.
b. $120.
c. $1,440.
d. $160.
185. DeNova Real Estate signed a four-month note payable in the amount of $8,000 on Septem-
ber 1. The note requires interest at an annual rate of 6%. The amount of interest to be
accrued at the end of September is:
a. $480.
b. $120.
c. $40.
d. $90.
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186. A gift shop signs a three-month note payable to help finance increases in inventory for the
Christmas shopping season. The note is signed on November 1 in the amount of $30,000 with
annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest
expense accrued to that date, if no entries have been made previously for the interest?
a. Interest Expense 300
Interest Payable 300
b. Interest Expense 450
Interest Payable 450
c. Interest Expense 300
Cash 300
d. Interest Expense 450
Note Payable 450
187. Ye Olde Christmas shop signs a three-month note payable to help finance increases in in-
ventory for the Christmas shopping season. The note is signed on October 1 in the amount
of $20,000 with annual interest of 6%. What is the adjusting entry to be made on December
31 for the interest expense accrued to that date, if no entries have been made previously for
the interest?
a. Interest Expense 100
Interest Payable 100
b. Interest Expense 200
Interest Payable 200
c. Interest Expense 300
Interest Payable 300
d. Interest Expense 1,200
Note Payable 1,200
188. Snelling Tables paid employee wages on and through Friday, January 26, and the next pay-
roll will be paid in February. There are three more working days in January (29–31).
Employees work 5 days a week and the company pays $900 a day in wages. What will be
the adjusting entry to accrue wages expense at the end of January?
a. Salaries and Wages Expense 900
Salaries and Wages Payable 900
b. Salaries and Wages Expense 4,500
Salaries and Wages Payable 4,500
c. Salaries and Wages Expense 2,700
Salaries and Wages Payable 2,700
d. No adjusting entry is required.
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189. Jill Clown earned a salary of $500 for the last week of October. She will be paid on Novem-
ber 1. The adjusting entry for Jill’s employer October 31 is:
a. No entry is required.
b. Salaries and Wages Expense 500
Salaries and Wages payable 500
c. Salaries and Wages Expense 500
Cash 500
d. Salaries and Wages Payable 500
Cash 500
190. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employ-
ees was omitted. Which of the following statements is true?
a. Salaries and Wages Expense for the year is overstated.
b. Liabilities at the end of the year are understated.
c. Assets at the end of the year are understated.
d. Stockholders’ equity at the end of the year is understated.
191. A company shows a balance in Salaries and Wages Payable of $40,000 at the end of the
month. The next payroll amounting to $60,000 is to be paid in the following month. What will
be the journal entry to record the payment of salaries?
a. Salaries and Wages Expense 60,000
Salaries and Wages Payable 60,000
b. Salaries and Wages Expense 60,000
Cash 60,000
c. Salaries and Wages Expense 20,000
Cash 20,000
d. Salaries and Wages Payable 40,000
Salaries and Wages Expense 20,000
Cash 60,000
192. De Meaning Corporation issued a one-year 6% $300,000 note on April 30, 2014. Interest ex-
pense for the year ended December 31, 2014 was:
a. $18,000.
b. $13,500.
c. $12,000.
d. $10,500.
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193. Bluing Corporation issued a one-year 9% $300,000 note on April 30, 2014. Interest expense
for the year ended December 31, 2014 was:
a. $27,000.
b. $20,250.
c. $18,000.
d. $15,750.
194. Employees at Biquell Corporation are paid $9,000 cash every Friday for working Monday
through Friday. The calendar year accounting period ends on Wednesday, December 31.
How much salaries and wages expense should be recorded two days later on January 2?
a. $9,000
b. $5,400
c. None, expense recognition requires the weekly salary to be accrued on December 31.
d. $3,600
195. An adjusted trial balance:
a. is prepared after the financial statements are completed.
b. proves the equality of the total debit balances and total credit balances of ledger ac-
counts after all adjustments have been made.
c. is a required financial statement under generally accepted accounting principles.
d. cannot be used to prepare financial statements.
196. Which of the statements below is not true?
a. An adjusted trial balance should show ledger account balances.
b. An adjusted trial balance can be used to prepare financial statements.
c. An adjusted trial balance proves the mathematical equality of debits and credits in the
ledger.
d. An adjusted trial balance is prepared before all transactions have been journalized.
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197. Which statement is incorrect concerning the adjusted trial balance?
a. An adjusted trial balance proves the equality of the total debit balances and the total
credit balances in the ledger after all adjustments are made.
b. The adjusted trial balance provides the primary basis for the preparation of financial
statements.
c. The adjusted trial balance lists the account balances in order of their magnitude.
d. The adjusted trial balance is prepared after the adjusting entries have been journalized
and posted.
198. Can financial statements be prepared directly from the adjusted trial balance?
a. They cannot. The general ledger must be used.
b. Yes, adjusting entries have been recorded in the general journal and posted to the ledger
accounts.
c. No, the adjusted trial balance merely proves the equality of the total debit and total credit
balances in the ledger after adjustments are posted. It has no other purpose.
d. They can because that is the only reason that an adjusted trial balance is prepared.
199. The primary source used in the preparation of the financial statements is the:
a. trial balance.
b. post-closing trial balance.
c. general trial balance.
d. adjusted trial balance.
200. Which of the following accounts will reflect the account’s beginning balance on the adjusted
trial balance?
a. Prepaid rent
b. Retained earnings
c. Prepaid insurance
d. Unearned revenue
201. The following accounts show balances on the adjusted trial balance. Which of these account
balances will not appear the same on the balance sheet?
a. Retained earnings
b. Accounts receivable
c. Common stock
d. Notes payable
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202. Which trial balance will consist of the greatest number of accounts?
a. Post-closing trial balance
b. Trial balance
c. Adjusted trial balance
d. All of the above will contain the same number of accounts.
203. Based on the account balances below, what is the total of the debit and credit columns of the
adjusted trial balance?
Service revenue $4,300 Equipment $7,400
Cash 1,525 Prepaid insurance 1,225
Unearned service rev. 5,320 Depreciation expense 640
Salaries and wages expense 1,050 Accum. depreciation 1,280
Common stock 390 Retained earnings 550
a. $10,150
b. $11,840
c. $10,560
d. $11,430
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204. Given the following adjusted trial balance:
Debit Credit
Cash $1,562
Accounts receivable 2,098
Inventory 3,124
Prepaid rent 86
Equipment 300
Accumulated depreciation-equipment 52
Accounts payable 82
Unearned service revenue 122
Common stock 206
Retained earnings 6,610
Service revenue 268
Interest revenue 56
Salaries and wages expense 160
Travel expense 66
Total $7,396 $7,396
Net income for the year is:
a. $98.
b. $270.
c. $324.
d. $496.
205. Given the following adjusted trial balance:
Debit Credit
Cash $1,562
Accounts receivable 2,098
Inventory 3,124
Prepaid rent 86
Equipment 300
Accumulated depreciation-equipment 52
Accounts payable 82
Unearned service revenue 122
Common stock 206
Retained earnings 6,610
Service revenue 268
Interest revenue 56
Salaries and wages expense 160
Travel expense 66
Total $7,396 $7,396
After closing entries have been posted, the balance in retained earnings will be:
a. $6,340.
b. $6,512.
c. $6,880.
d. $6,708.
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Solution: $6,610 + $268 + $56 − $160 − $66 = $6,708
206. Given the following adjusted trial balance:
Debit Credit
Cash $781
Accounts receivable 1,049
Inventory 1,562
Prepaid rent 43
Equipment 150
Accumulated depreciation-equipment 26
Accounts payable 41
Unearned service revenue 61
Common stock 103
Retained earnings 3,305
Service revenue 134
Interest revenue 28
Salaries and wages expense 80
Travel expense 33
Total $3,698 $3,698
Net income for the year is:
a. $49.
b. $135.
c. $162.
d. $248.
207. Given the following adjusted trial balance:
Debit Credit
Cash $781
Accounts receivable 1,049
Inventory 1,562
Prepaid rent 43
Equipment 150
Accumulated depreciation-equipment 26
Accounts payable 41
Unearned service revenue 61
Common stock 103
Retained earnings 3,305
Service revenue 134
Interest revenue 28
Salaries and wages expense 80
Travel expense 33
Total $3,698 $3,698
After closing entries have been posted, the balance in retained earnings will be:
a. $3,256.
b. $3,170.
c. $3,440.
d. $3,354.
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Solution: $3,305 + $134 + $28 − $80 − $33 = $3,354
208. Which statement is correct concerning the adjusted trial balance?
a. An adjusted trail balance eliminates the need for the preparation of financial statements.
b. The purpose of an adjusted trial balance is to prove the equality of the total debit balanc-
es and the total credit balances in the ledger.
c. An adjusted trial balance will contain only permanent—balance sheet—accounts.
d. The adjusted trial balance is prepared after the adjusting entries have been journalized
but before they have been posted.
209. Which of the following is a true statement about closing the books of a corporation?
a. Expenses are closed to the Expense Summary account.
b. Only revenues are closed to the Income Summary account.
c. Revenues and expenses are closed to the Income Summary account.
d. Revenues, expenses, and the Dividends account are closed to the Income Summary ac-
count.
210. The closing entry process consists of closing:
a. all asset and liability accounts.
b. out the Retained Earnings account.
c. all permanent accounts.
d. all temporary accounts.
211. Which account will have a zero balance after closing entries have been journalized and post-
ed?
a. Service revenue.
b. Supplies.
c. Prepaid Insurance.
d. Accumulated Depreciation.
212. A post-closing trial balance will show:
a. zero balances for all accounts.
b. zero balances for balance sheet accounts.
c. only balance sheet accounts.
d. only income statement accounts.
213. Which types of accounts will appear in the post-closing trial balance?
a. Permanent accounts.
b. Temporary accounts.
c. Accounts shown in the income statement columns of a work sheet.
d. None of these answer choices are correct.
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214. The purpose of the post-closing trial balance is to:
a. prove that no mistakes were made.
b. prove the equality of the permanent account balances that are carried forward into the
next accounting period.
c. prove the equality of the temporary account balances that are carried forward into the
next accounting period.
d. list all the balance sheet accounts in alphabetical order for easy reference.
215. Closing entries:
a. are prepared before the financial statements.
b. reduce the number of permanent accounts.
c. cause the revenue and expense accounts to have zero balances.
d. summarize the activity in every account.
216. Which of the following account’s balance will change between the adjusted trial balance and
the post-closing trial balance?
a. Common stock
b. Prepaid rent
c. Unearned service revenue
d. Retained earnings
217. Which type of accounts will not appear in the post-closing trial balance?
a. Asset accounts
b. Permanent accounts
c. Liability accounts
d. Temporary accounts
218. There are usually how many closing journal entries?
a. 5
b. 4
c. 3
d. 2
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219. Given the following adjusted trial balance, what will be the totals for the debit and credit col-
umns of the post-closing trial balance?
Debit Credit
Cash $1,562
Accounts receivable 2,098
Inventory 3,124
Prepaid rent 86
Equipment 300
Accumulated depreciation-equipment $ 52
Accounts payable 82
Unearned service revenue 172
Common stock 206
Retained earnings 6,610
Service revenue 218
Interest revenue 56
Salaries and wages expense 160
Travel expense 66
Totals $7,396 $7,396
a. $7,396
b. $7,118
c. $7,344
d. $7,170
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220. Given the following adjusted trial balance, what will be the totals for the debit and credit col-
umns of the post-closing trial balance?
Debit Credit
Cash $ 781
Accounts receivable 1,049
Inventory 1,562
Prepaid rent 43
Equipment 150
Accumulated depreciation-equipment $ 26
Accounts payable 41
Unearned service revenue 86
Common stock 103
Retained earnings 3,305
Service revenue 109
Interest revenue 28
Salaries and wages expense 80
Travel expense 33
Totals $3,698 $3,698
a. $3,585
b. $3,559
c. $3,698
d. $3,672
221. The following information is from the Income Statement of the Dirt Poor Laundry Service:
__________________________________________________________________________
Revenues
Service Revenue $5,500
Expenses
Salaries and wages expense $ 1,950
Advertising expense 500
Rent expense 300
Supplies expense 200
Insurance expense 100
Total expenses 3,050
Net Income $2,450
The entry to close the Service Revenue account includes a:
a. debit to Service Revenue for $5,500.
b. credit to Service Revenue for $5,500.
c. debit to Income Summary for $5,500.
d. debit to Retained Earnings for $5,500.
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222. The following information is from the Income Statement of the Dirt Poor Laundry Service:
___________________________________________________________________________
Revenues
Service Revenue $5,500
Expenses
Salaries and Wages expense $ 1,950
Advertising expense 500
Rent expense 300
Supplies expense 200
Insurance expense 100
Total expenses 3,050
Net Income $2,450
The entry to close the expense accounts includes a:
a. credit to Income Summary for $3,050.
b. debit to Income Summary for $3,050.
c. debit to Salaries and Wages Expense for $1,950.
d. credit to Retained Earnings for $3,050.
223. The following information is from the Income Statement of the Dirt Poor Laundry Service:
___________________________________________________________________________
Revenues
Service Revenue $5,500
Expenses
Salaries and Wages expense $ 1,950
Advertising expense 500
Rent expense 300
Supplies expense 200
Insurance expense 100
Total expenses 3,050
Net Income $2,450
The entry to close the Income Summary includes a:
a. credit to Income Summary for $2,450.
b. debit to Income Summary for $2,450.
c. debit to Retained Earnings for $2,450.
d. credit to Common Stock for $2,450.
224. The final step in the accounting cycle is to prepare:
a. closing entries.
b. financial statements.
c. a post-closing trial balance.
d. adjusting entries.
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225. 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.
226. The first required step in the accounting cycle is:
a. adjusting entries.
b. journalizing transactions.
c. analyzing transactions.
d. posting transactions.
227. How many required steps are there in the accounting cycle?
a. 11
b. 9
c. 7
d. 5
228. 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.
229. The Accounts Receivable account has a beginning balance of $52,000 and an ending bal-
ance of $69,000. If $42,000 was sold on account during the year, what were the total
collections on account?
a. $25,000
b. $59,000
c. $69,000
d. $79,000
*230. The worksheet is:
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a. part of the journal.
b. a financial statement.
c. part of the ledger.
d. none of these answer choices are correct.
*231. The worksheet starts with two columns for the:
a. adjustments.
b. financial statements.
c. trial balance.
d. adjusted trial balance.
*232. The worksheet does not contain columns for the:
a. income statement.
b. statement of retained earnings.
c. balance sheet.
d. adjusted trial balance.
*233. The worksheet contains columns for the:
a. statement of retained earnings.
b. statement of cash flows.
c. post-closing trial balance.
d. balance sheet.
*234. 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.
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Answers to Multiple Choice Questions
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BRIEF EXERCISES
Be. 235
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 capital asset 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. _______ _______
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Be. 236
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 earned but not yet billed is $2,800.
• Accrued interest expense is $900.
• Revenue collected in advance that is now earned 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. 237
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 earned but not yet billed is $2,100.
• Accrued interest expense is $800.
• Revenue collected in advance that is now earned is $3,400.
• Portion of prepaid insurance expired during September is $300.
Instructions:
Calculate the correct net income for Horton’s Enterprise for September.
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Be. 238
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. 239
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. 240
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. 241
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
Service Unearned Revenue. Assuming that the revenue is recognized rateably over the 3 month pe-
riod, what adjusting journal entry should be made at January 31?
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Be. 242
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. 243
Better Publications, sold annual subscriptions to their magazine for $42,000 in December, 2013. The
magazine is published monthly. The new subscribers received their first magazine in January, 2014.
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 2014 balance sheet for Unearned Subscription
Revenue?
Be. 244
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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. 245
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.
Be. 246
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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 purchased $600 of office supplies 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.
Business Economics
Be. 247
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.
Solution 247 (5 min.)
Be. 248
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The adjusted trial balance of Warbocks Corporation at December 31, 2014 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, 2014.
Be. 249
The adjusted trial balance of Warbocks Corporation at December 31, 2014 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.
Be. 250
Accrual Accounting Concepts
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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. 251
The balance sheets of Palle’ Company include the following:
12/31/14 12/31/13
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 2014 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 2014:
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. 252
The 2014 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:
2014 2013
Prepaid Rent $900 $300
Salaries and Wages Payable 500 400
Calculate the following for 2014:
1. Cash paid for rent.
2. Cash paid for wages.
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Ex. 253
A company using the cash basis of accounting reports net income for 2014 of $45,460. If the com-
pany had used the accrual basis of accounting it would have reported the following year-end
balances:
2014 2013
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. 254
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 heading s shown below.
Event Cash Basis Accrual Basis
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Ex. 255
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, 2013
Service revenue (does not include $40,000 of services rendered on account
because the collection will not be until 2014) .................................................... $380,000
Expenses (does not include $20,000 of expenses on account because
payment will not be made until 2014) .............................................................. 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, 2013, 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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Solution 255 (15 min.)
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Ex. 256
On December 31, 2014, 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. 257
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)
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Solution 257 (20 min.)
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Ex. 258
The adjusted trial balance of Masters Company includes the following balance sheet accounts that
frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid ex-
penses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in
the adjusting entry.
(a) (b)
Balance Sheet Account Type of Adjusting Entry Related Account
1. Supplies
2. Accounts Receivable
3. Prepaid Insurance
4. Accumulated Depreciation—
Equipment
5. Interest Payable
6. Salaries and Wages Payable
7. Unearned Service Revenue
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Ex. 259
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. Office supplies on hand that will be used in the next period.
____ 3. Subscription revenue collected; not yet recognized.
____ 4. Rent not yet collected; already recognized.
____ 5. An expense incurred; not yet paid or recorded.
____ 6. A revenue recognized; not yet collected or recorded.
____ 7. An expense not yet incurred; paid in advance.
____ 8. Interest expense incurred; not yet paid.
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Ex. 260
A review of the ledger of Wilde Co. at December 31, 2014, produces the following data pertaining to
the preparation of annual adjusting entries:
(a) Salaries and Wages Payable $0: Salaries are paid every Friday for the current week. Five em-
ployees receive a weekly salary of $800, and three employees earn a weekly salary of $700.
December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2
days of December.
(b) Unearned Rent Revenue $58,000: The company had several lease contracts during the year as
shown below:
Rent
Term per Number of
Date (in months) lease leases
Oct. 1 12 $ 8,000 3
Dec. 1 12 18,000 2
(c) Notes Receivable $90,000: This is a 6-month note, dated November 1, 2014, with a 6% interest
rate.
Instructions:
Prepare the adjusting entries at December 31, 2014. Show all computations.
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Ex. 261
A review of the ledger of Weakly Service Co. at December 31, 2014, produces the following data
pertaining to the preparation of annual adjusting entries:
(a) Notes Payable $80,000: This is a 9-month note, dated September 1, 2014, with a 9% inter-
est rate.
(b) Prepaid Rent $648,000. The company rents offices throughout the Midwest. During 2014 it
signed 10 leases as shown below:
Term Monthly Number of
Date (in months) Rent Leases
Sept. 1 8 $ 4,500 4
Nov. 1 12 7,000 6
(c) Unearned Service Revenue $171,000. During 2014 the company entered into 13 monthly
service contracts with clients. The clients prepaid for the services to be provided over the
contract period in an even manner.
Service Period Amount Number of
Date (in months) Per Contract Contracts
Aug. 1 9 $12,600 8
Oct. 1 6 15,000 5
Instructions:
Prepare the adjusting entries at December 31, 2014. Show all computations.
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Ex. 262
The Scarlet Pages, a semi-professional hockey team, prepare financial statements on a monthly ba-
sis. Their season begins in October, but in September the team engaged in the following
transactions:
(a) Paid $150,000 to Oklahoma City as advance rent for use of Oklahoma City Arena for the six-
month period October 1 through March 31.
(b) Collected $450,000 cash from sales of season tickets for the team's 30 home games. This
amount was credited to Unearned Ticket Revenue.
(c) During the month of October, the Scarlet Pages played five home games.
Instructions:
Prepare the adjusting entries required at October 31 for the transactions above.
Ex. 263
The Jacquers, a semi-professional baseball team, prepare financial statements on a monthly basis.
Their season begins in April, but in March the team engaged in the following transactions:
(a) Paid $120,000 to Lawrence City as advance rent for use of Lawrence City Stadium for the six-
month period April 1 through September 30.
(b) Collected $600,000 cash from sales of season tickets for the team's 20 home games. This
amount was credited to Unearned Ticket Revenue.
(c) During the month of April, the Jacquers played four home games and five road games.
Instructions:
Prepare the adjusting entries required at April 30 for the transactions above.
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Ex. 264
Prepare adjusting entries for the following transactions. Omit explanations.
1. Depreciation on equipment is $1,340 for the accounting period.
2. Interest owed on a loan but not paid or recorded is $275.
3. There was no beginning balance of supplies and $550 of office supplies were purchased dur-
ing the period. At the end of the period $100 of supplies were on hand.
4. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $700 had ex-
pired.
5. Accrued salaries at the end of the period amounted to $900.
Solution 264 (10 min.)
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Ex. 265
Prepare adjusting entries for the following transactions. Omit explanations.
1. Unrecorded interest accrued on savings bonds is $410.
2. Property taxes incurred but not paid or recorded amount to $800.
3. Unearned service revenue of $4,000 was collected in advance. By year end $700 was still
unearned.
4. Prepaid insurance had a $750 debit balance prior to adjustment. By year end, 60 percent
was still unexpired.
5. Salaries incurred by year end but not yet paid or recorded amounted to $650.
Solution 265 (10 min.)
Ex. 266
Prepare year-end adjustments for the following transactions. Omit explanations.
1. Accrued interest on notes receivable is $30.
2. $1,000 of unearned service revenue has been recognized.
3. Three years’ rent, totaling $45,000, was paid in advance at the beginning of the year.
4. Services totaling $2,900 had been performed but not yet billed at the end of the year.
5. Depreciation on equipment totaled $6,500 for the year.
6. Supplies purchased totaled $850. By year end, only $250 of supplies remained.
7. Salaries owed to employees at the end of the year total $960
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Solution 266 (10 min.)
Ex. 267
Janus Coat Company purchased a delivery truck on June 1 for $30,000, paying $10,000 cash and
signing a 6%, 2-month note for the remaining balance. The truck is expected to depreciate $6,000
each year. Janus Coat Company prepares monthly financial statements.
Instructions:
(a) Prepare the general journal entry to record the acquisition of the delivery truck on June 1st.
(b) Prepare any adjusting journal entries that should be made on June 30th.
(c) Show how the delivery truck will be reflected on Janus Coat Company's balance sheet on June
30th.
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Ex. 268
Sunkan Company prepares monthly financial statements. Below are listed some selected accounts
and their balances on the September 30 trial balance before any adjustments have been made for
the month of September.
SUNKAN COMPANY
Trial Balance (Selected Accounts)
September 30, 2014
___________________________________________________________________________
Debit Credit
Supplies .............................................................................................. $ 2,700
Prepaid Insurance ............................................................................... 4,800
Equipment ........................................................................................... 16,200
Accumulated Depreciation—Equipment .............................................. $ 1,000
Unearned Rent Revenue .................................................................... 1,200
(Note: Debit column does not equal credit column because this is a partial listing of selected ac-
count balances.)
An analysis of the account balances by the company's accountant provided the following additional
information:
1. A physical count of office supplies revealed $1,000 on hand on September 30.
2. A two-year life insurance policy was purchased on June 1 for $4,800.
3. Office equipment depreciates $3,000 per year.
4. The amount of rent received in advance that remains unearned at September 30 is $300.
Instructions:
Using the information given, prepare the adjusting entries that should be made by Sunkan Company
on September 30.
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Ex. 269
Prepare the required end-of-period adjusting entries for each independent case listed below.
Case 1
The Thoma Company began the year with a $3,000 balance in the Supplies account. During the
year, $8,500 of additional supplies were purchased. A physical count of supplies on hand at the end
of the year revealed that $8,300 worth of supplies had been used during the year. No adjusting entry
has been made until year end.
Case 2
The Leno Company has a calendar year-end accounting period. On July 1, the company purchased
office equipment for $30,000. It is estimated that the office equipment will depreciate $200 each
month. No adjusting entry has been made until year end.
Case 3
Yeats Realty is in the business of renting several apartment buildings and prepares monthly financial
statements. It has been determined that 2 tenants in $900 per month apartments and one tenant in
the $1,000 per month apartment had not paid their December rent as of December 31st.
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Ex. 270
Greenstream Insurance Agency prepares monthly financial statements. Presented below is an in-
come statement for the month of June that is correct on the basis of information considered.
GREENSTREAM INSURANCE AGENCY
Income Statement
For the Month Ended June 30
__________________________________________________________________________
Revenues
Service Revenue ........................................................................ $40,000
Expenses
Salaries and Wages Expense .................................................... $12,000
Advertising Expense ................................................................... 800
Rent Expense ............................................................................. 4,200
Depreciation Expense ................................................................ 2,800
Total Expenses .......................................................................... 19,800
Net Income ......................................................................................... $20,200
Additional Data: When the income statement was prepared, the company accountant neglected to
take into consideration the following information:
1. A utility bill for $1,200 was received on the last day of the month for electric and gas service for
the month of June.
2. A company insurance salesman sold a life insurance policy to a client for a premium of $10,000.
The agency billed the client for the policy and is entitled to a commission of 20%.
3. Supplies on hand at the beginning of the month were $2,500. The agency purchased additional
supplies during the month for $1,500 in cash and $1,200 of supplies were on hand at June 30.
4. The agency purchased a new car at the beginning of the month for $24,000 cash. The car will
depreciate $6,000 per year.
5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on
July 5.
Instructions:
Prepare a corrected income statement.
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Ex. 271
One part of an adjusting entry is given below.
Instructions:
Indicate the account title for the other part of the entry.
1. Unearned Service Revenue is debited.
2. Prepaid Rent is credited.
3. Accounts Receivable is debited.
4. Depreciation Expense on equipment is debited.
5. Utilities Expense is debited.
6. Interest Payable is credited.
7. Service Revenue is credited (give two possible debit accounts).
8. Interest Receivable is debited.
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Ex. 272
The following ledger accounts are used by the Heartland Race Track:
Accounts Receivable
Prepaid Advertising
Prepaid Rent
Unearned Sales Revenue
Sales Revenue
Advertising Expense
Rent Expense
Instructions:
For each of the following transactions below, prepare the journal entry (if one is required) to record
the initial transaction and then prepare the adjusting entry, if any, required on November 30, the end
of the fiscal year.
(a) On November 1, paid rent on the track facility for three months, $150,000.
(b) On November 1, sold season tickets for admission to the racetrack. The racing season is year-
round with 25 racing days each month. Season ticket sales totaled $960,000.
(c) On November 1, borrowed $250,000 from First National Bank by issuing a 6% note payable
due in three months.
(d) On November 5, programs for 20 racing days in November, 25 racing days in December and
15 racing days in January were printed for $3,000.
(e) The accountant for the concessions company reported that gross receipts for November were
$140,000. Ten percent is due to Heartland and will be remitted by December 10.
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Ex. 273
Dallison Company has an accounting fiscal year, which ends on June 30. The company also has a
policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were
incurred.
Date Amount
Monday June 28 $3,200
Tuesday June 29 2,800
Wednesday June 30 2,900
Thursday July 1 3,000
Friday July 2 2,600
Instructions:
(a) Prepare any necessary adjusting journal entries that should be made at year end on June 30.
(b) Prepare the journal entry to record the payment of the weekly payroll on July 2.
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Ex. 274
On Friday of each week, Prawn Company pays its personnel weekly wages amounting to $45,000
for a five-day work week.
Instructions:
(a) Prepare the necessary adjusting entry at year end, assuming December 31 falls on Wednes-
day.
(b) Prepare the journal entry for payment of the week's wages on the payday which is Friday, Jan-
uary 2 of the next year.
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Ex. 275
Presented below is the Trial Balance and Adjusted Trial Balance for Stabler Company on December
31. STABLER COMPANY
Trial Balance
December 31
___________________________________________________________________________
Before Adjustment After Adjustment
Dr. Cr. Dr. Cr.
Cash $ 3,000 $ 3,000
Accounts Receivable 2,800 3,700
Prepaid Rent 2,100 1,500
Supplies 1,200 700
Equipment 18,000 18,000
Accumulated Depreciation—
Equipment $ 1,300 $ 1,500
Accounts Payable 2,700 3,000
Notes Payable 10,000 10,000
Interest Payable 120
Salaries and Wages Payable 800
Unearned Service Revenue 4,460 4,060
Common Stock 8,200 8,200
Dividends 3,200 3,200
Service Revenue 8,000 9,300
Salaries and Wages Expense 2,060 2,860
Utilities Expense 1,800 2,100
Rent Expense 500 1,100
Supplies Expense 500
Depreciation Expense 200
Interest Expense 120
Totals $34,660 $34,660 $36,980 $36,980
Instructions:
Prepare in journal form, with explanations, the adjusting entries that explain the changes in the
balances from the trial balance to the adjusted trial balance.
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Accrual Accounting Concepts
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Ex. 276
The Golden Petting Zoo operates a drive-through tourist attraction in Colorado. The company ad-
justs its accounts at the end of each month. The selected accounts appearing below reflect balances
after adjusting entries were prepared on April 30. The adjusted trial balance shows the following:
Prepaid Rent $ 18,000
Buildings 42,000
Accumulated Depreciation—Buildings 5,500
Unearned Ticket Revenue 600
Other data:
1. Three months' rent had been prepaid on April 1.
2. The buildings are being depreciated at $6,000 per year.
3. The unearned ticket revenue represents tickets sold for future zoo visits. The tickets were sold at
$4.00 each on April 1. During April, twenty of the tickets were used by customers.
Instructions:
(a) Calculate the following:
1. Monthly rent expense.
2. The age of the fencing in months.
3. The number of tickets sold on April 1.
(b) Prepare the adjusting entries that were made by the Golden Petting Zoo on April 30.
Solution 276 (15 min.)
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Ex. 277
The adjusted trial balance of Nicks Financial Planners appears below and using the information from
the adjusted trial balance, you are to prepare for the month ending December 31:
1. an income statement;
2. a retained earnings statement; and
3. a balance sheet. NICKS FINANCIAL PLANNERS
Adjusted Trial Balance
December 31, 2014
__________________________________________________________________________
Debit Credit
Cash ................................................................................................... $ 15,400
Accounts Receivable .......................................................................... 2,200
Supplies .............................................................................................. 1,800
Equipment ........................................................................................... 15,500
Accumulated Depreciation—Equipment .............................................. $ 4,000
Accounts Payable ............................................................................... 3,000
Unearned Service Revenue ................................................................ 5,000
Common Stock .................................................................................... 15,000
Retained Earnings .............................................................................. 7,400
Dividends ............................................................................................ 3,500
Service Revenue ................................................................................. 9,500
Supplies Expense ............................................................................... 1,100
Depreciation Expense ......................................................................... 2,500
Rent Expense ..................................................................................... 1,900
$43,900 $43,900
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Ex. 278
The adjusted trial balance shown below is for Rich Company at the end of its fiscal year:
RICH COMPANY
Trial Balance
March 31, 2014
__________________________________________________________________________
Debit Credit
Cash ................................................................................................... $ 12,900
Accounts Receivable .......................................................................... 9,400
Supplies .............................................................................................. 700
Prepaid Insurance ............................................................................... 2,500
Equipment ........................................................................................... 16,000
Accumulated Depreciation—Equipment .............................................. $ 4,800
Accounts Payable ............................................................................... 5,800
Salaries and Wages Payable .............................................................. 1,100
Unearned Rent Revenue .................................................................... 600
Common Stock .................................................................................... 15,000
Retained Earnings .............................................................................. 5,600
Dividends ............................................................................................ 5,800
Service Revenue ................................................................................. 34,600
Rent Revenue ..................................................................................... 14,400
Salaries and Wages Expense ............................................................. 18,100
Supplies Expense ............................................................................... 1,800
Rent Expense ..................................................................................... 12,000
Insurance Expense ............................................................................. 1,500
Depreciation Expense .......................................................................... 1,200
$81,900 $81,900
Instructions:
Prepare the closing entries for the temporary accounts at March 31.
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COMPLETION STATEMENTS
279. The ______________ assumption states that the economic life of a business can be divided
into artificial time periods.
280. The ______________ principle gives accountants guidance as to when revenue is to be
recorded.
281. In a service company, revenue is earned when the service is _______________.
282. The expense recognition principle attempts to match ______________ with
______________.
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283. Expenses paid and recorded in an asset account before they are used or consumed are
called _______________. Revenue received and recorded as a liability before it is earned is
referred to as _________________.
284. Failure to adjust a prepaid expense account for the amount expired will cause
_______________ to be understated and ________________ to be overstated.
285. Depreciation is an __________________ concept, not a ________________ concept.
286. An adjusting entry recording accrued salaries for a period indicates that Salaries and Wages
Expense has been ________________ but has not yet been ________________ or record-
ed.
287. An adjusted trial balance proves the ______________ of the total debit and credit balances
after all ______________ entries have been made.
288. In addition to updating Retained Earnings, ______________ entries produce a zero balance
in each ______________ account.
289. After all closing entries are journalized and posted, a _________________ trial balance is
prepared from the ledger.
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Answers to Completion Statements
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MATCHING
290. Match the items below by entering the appropriate code letter in the space provided.
A. Periodicity assumption F. Accrued revenues
B. Cash basis G. Depreciation
C. Revenue recognition principle H. Post-closing trial balance
D. Prepaid expenses I. Accrued expenses
E. Expense recognition principle J. Book value
___ 1. Events recorded only in periods the company receives or pays cash
___ 2. Expenses paid before they are incurred
___ 3. Cost less accumulated depreciation
___ 4. The economic life of a business can be divided into artificial time periods
___ 5. Efforts are related to accomplishments
___ 6. Includes only permanent—balance sheet—accounts
___ 7. Revenue is recognized when the performance obligation is satisfied.
___ 8. Revenues earned but not yet received
___ 9. Expenses incurred but not yet paid
___ 10. A cost allocation process
Answers to Matching
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 291
You are part of a group of individuals (incorporators) who want to form a new corporation. During
discussions on forming the business, Mark Adams makes this statement:
Our business will have accounts receivable and accounts payable. It will also acquire a substantial
amount of computers and equipment. Will it be acceptable to use the cash basis of accounting?
Prepare a response for Mark and the other incorporators.
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S-A E 292
The income statement is an important financial statement used by individuals who are interested in
the operations of a business enterprise. Explain how the periodicity assumption and the revenue
recognition and expense recognition principles provide guidance to accountants in preparing an in-
come statement.
S-A E 293
As a recent graduate in accounting, and the financial director of a political candidate in a current
election, you have been asked to explain many questions concerning how governmental accounting
differs from corporate accounting.
Required:
(a) Discuss the differences between cash basis and accrual−basis accounting.
(b) Prepare a memo to your candidate explaining why governmental entities favor the cash basis of
accounting.
Accrual Accounting Concepts
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S-A E 294
The long-term liability section of Alpha Corporation’s Balance Sheet includes the following accounts
Notes Payable
$100,000
Mortgage Payable
250,000
Salaries and Wages Payable
75,000
Accumulated Depreciation
125,000
Total Long-Term Liabilities
$550,000
Alpha Corporation is an established company and does not experience any financial difficulties or
have any cash flow problems. Discuss at least two items that are questionable as long-term liabilities.
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S-A E 295
What is the purpose of the preparation of adjusting entries?
S-A E 296
Briefly distinguish between a deferral and an accrual.
S-A E 297
In developing an accounting information system, it is important to establish procedures whereby all
transactions that affect the components of the accounting equation are recorded. Why then, is it of-
ten necessary to adjust the accounts before financial statements are prepared even in a properly
designed accounting system? Identify the major types of adjustments that are frequently made and
give a specific example of each.
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S-A E 298
Companies are continually under pressure to “Make the Numbers” – to have earnings that are in line
with expectations. Explain the terms earnings management and quality of earnings.
S-A E 299 (Ethics)
Benson and Jencks is a manufacturing company that specializes in writing instruments. The past
year was a difficult one for the company, as it sought to retain its share in a market in which the
largest competitors were also rapid innovators. Benson and Jencks introduced a new product late in
the year, even though testing was not complete. It was a pen designed with two cartridges: one sup-
plying ink and the other correction fluid. A person could then switch easily between writing and
correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-O-
Pen, as the product was named, was an overwhelming success.
The success of the product has Fern Donald, the manager of the New Products division, worried,
however. She was concerned that quality problems would begin occurring, since the longevity of the
pen and stability of the correction fluid formulation had not been tested. She did not want sales per-
sonnel to get the bonuses that appeared to be indicated, since they might aggressively promote a
product that would fail in use. She preferred to complete testing of the pen first, so that more confi-
dence could be placed in the results.
Top management, however, declined the tests. Ms. Donald then instructed you, the accountant, not
to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expens-
es in total. In this way, the new product would appear to be only slightly profitable.
Required:
1. Describe the alternatives that you as an accountant would have in this situation.
2. Indicate which alternative is best.
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S-A E 300 (Communication)
A new sales representative, Eddy Wherli, has just received his copy of the month-end financial re-
ports. He is puzzled by the term "unearned revenue." He left the following e-mail message for you
on the company's bulletin board system:
What is this??? Creative Accounting, or what??? Line item 12 on year-to-date financials
shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we earned it, or we didn't .
. . Right??! Is this how you guys lower our commissions? Reply to e.wherli@sbd
Required:
Write a response to send to Eddy. (Since the answer is being prepared for a "bulletin board" type
system, it can be in informal language and can respond in kind to the humor. However, proper
grammar and spelling are essential, as is the message about what unearned revenue really is.)
Accrual Accounting Concepts
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Solution 300
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International Financial Reporting Standards
True-False Statements
1. The cash basis of accounting is not in accordance with IFRS.
2. The expense recognition principle requires that efforts be matched with accomplishments.
3. Adjusting entries are needed to enable financial statements to conform to International Fi-
nancial Reporting Standards (IFRS).
4. Which of the following are in accordance with IFRS?
a. Accrual basis accounting
b. Cash basis accounting
c. Both accrual basis and cash basis accounting
d. Neither accrual basis nor cash basis accounting
5. Wong Ho Company had the following transactions during 2013:
• Sales of ¥11,000 on account
• Collected ¥4,000 for services to be performed in 2014
• Paid ¥1,250 cash in salaries
• Purchased airline tickets for ¥500 in December for a trip to take place in 2014
What is Wong Ho’s 2013 net income using accrual accounting?
a. ¥9,750.
b. ¥13,750.
c. ¥13,250.
d. ¥9,250.
6. Under International Financial Reporting Standards (IFRS)
a. The cash-basis method of accounting is accepted.
b. Events are recorded in the period in which the event occurs.
c. Interim period financial statements are either a calendar year or a fiscal year.
d. A fiscal year is an accounting time period encompassing less than 12 months.
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7. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid
insurance account balance before adjustment, € 20,500, and unexpired amounts per analysis
of policies of €4,000?
a. Debit Insurance Expense, € 4,000; Credit Prepaid Insurance, € 4,000.
b. Debit Insurance Expense, € 20,500; Credit Prepaid Insurance, € 20,500.
c. Debit Prepaid Insurance, € 16,500; Credit Insurance Expense, € 16,500.
d. Debit Insurance Expense, € 16,500; Credit Prepaid Insurance, € 16,500.
8. Karcan, Inc. purchased supplies costing ₤2,500 on January 1, 2014 and recorded the trans-
action by increasing assets. At the end of the year ₤1,100 of the supplies are still on hand.
How will the adjusting entry impact Karcan, Inc.’s statement of financial position at December
31, 2014?
a. Decreased assets ₤ 1,100.
b. Increased equity ₤ 1,100.
c. Increased liabilities ₤ 1,400.
d. Decreased assets ₤ 1,400.
9. Karcan, Inc. purchased supplies costing ₤2,500 on January 1, 2014 and recorded the trans-
action by increasing assets. At the end of the year ₤1,100 of the supplies are still on hand. If
Karcan, Inc. does not make the appropriate adjusting entry, what is the impact on its state-
ment of financial position at December 31, 2014?
a. Assets overstated by ₤ 1,400.
b. Equity understated by ₤ 1,400.
c. Equity overstated by ₤ 1,100.
d. Assets overstated by ₤ 1,100.
10. Similarities between International Financial Reporting Standards (IFRS) and U.S. GAAP in-
clude all of the following except
a. Cash-basis accounting is not in accordance with either IFRS or U.S. GAAP.
b. Both IFRS and U.S. GAAP allow revaluation of items such as land and buildings to fair
value.
c. Both IFRS and U.S. GAAP divide the economic life of companies into artificial time peri-
ods.
d. The form and content of financial statements are very similar under IFRS and U.S.
GAAP.
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Brief Exercises
11. The statements of financial position of Rocky Acre Spread Ltd. include the following:
12/31/14 12/31/13
Interest Receivable €4,300 € -0-
Supplies 5,000 3,000
Salaries and Wages Payable 3,600 3,800
Unearned Service Revenue -0- 4,000
The income statement for 2014 shows the following:
Interest Revenue €14,400
Service Revenue 75,700
Supplies Expense 8,700
Salaries and Wages Expense 36,000
Instructions
Calculate the following for 2014:
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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12. Use the following income statement for the year 2013 for Haggrad Ltd. to prepare entries to
close the revenue and expense accounts for the company.
Service revenue €90,300
Expenses:
Salaries and Wages Expense €45,000
Rent Expense 25,000
Insurance Expense 6,500
Total expenses 76,500
Net income (loss) €13,800
