1) The revenue recognition principle requires that revenue be recognized in the accounting
records ________.
A) when cash is received
B) when it is earned
C) at the end of the accounting period
D) in the period the income taxes are paid
2) The term accounts receivable is used to describe ________.
A) amounts owed to creditors
B) amounts due from customers as a result of credit sales
C) amounts that have already been collected from customers
D) amounts owed to suppliers
3) Details, Inc. paints a truck on May 31. The customer picks up the truck on June 6 and mails
the payment to Details on August 5. Details receives the check in the mail on August 8. When
should Details record that the revenue was earned?
A) May 31
B) June 6
C) August 5
D) August 8
4) Sales revenue is usually considered earned when ________.
A) cash is received from credit sales
B) the customer places an order for goods to be shipped
C) goods have been shipped from the seller to the buyer
D) the adjustments are made at the end of the accounting period
5) Net income means the same thing as net ________.
A) expenses
B) revenues
C) cash
D) profit
6) If a company’s expenses for the period are greater than its revenues, then the company will
report ________.
A) net income
B) a decrease in cash
C) a net loss
D) both a decrease in cash and a net loss
7) Net income equals ________.
A) revenues minus liabilities
B) assets minus liabilities
C) the change in shareholders’ equity from the beginning of the year to the end of the year
D) revenues minus expenses
8) An accrual is ________.
A) a transaction in which the action comes before the exchange of cash
B) a transaction in which the exchange of dollars comes before the action takes place
C) another term for a deferral
D) recorded when cash is paid in advance of receiving the service
9) Which of the following is a TRUE statement about the matching principle?
A) The matching principle states that expenses should be recognized when cash is paid for an
item.
B) The matching principle states that assets must match, or equal, liabilities plus shareholders’
equity.
C) The matching principle states that expenses incurred should be recognized in the same period
as revenues earned.
D) The matching principle states that, after adjustments, expenses must equal revenues in each
accounting period.
10) Revenue earned on the income statement will always equal Cash collected from customers
on the statement of cash flows.
11) The income statement is sometimes called the statement of earnings.
12) Supplies on the balance sheet equals the amount of supplies used up during a period.
13) An accrual is a transaction in which the action comes after the exchange of cash.
14) A deferral is a transaction in which the exchange of dollars comes before the action.
15) Making an adjustment for a transaction in which the action has occurred but the cash has not
yet changed hands is called “accruing” the revenue or expense.
16) Accrual accounting requires that revenue be recorded when it is earned even if the cash from
a sale to a customer has not been collected yet.
17) Describe the accrual basis of accounting.
18) Explain why adjustments are needed at the end of each accounting period.
19) Explain the difference between accruals and deferrals.
20) How is net income calculated and on what financial statement(s) is it reported?
21) Match the following terms with the appropriate definitions. Definitions have not been
provided for all of these terms.
a. Accrual
b. Deferral
c. Net income
d. The matching principle
e. The revenue recognition principle
f. The cost principle
g. The valuation principle
h. Adjustments
_____ 1. Updates made to account balances at the end of each accounting period
_____ 2. The rule that requires that revenues be recognized in the period when earned
_____ 3. A transaction in which the exchange of dollars comes before the action
_____ 4. The rule that requires that both earnings and the costs of earnings be reported on the
same statement each accounting period
_____ 5. A transaction in which the action comes before the exchange of cash
22) Match the following terms with the appropriate definitions below. Some terms are used more
than once.
a. Accrued revenue
b. Accrued expense
c. Deferred revenue
d. Deferred expense
_____ 1. An end of period adjustment to recognize office supplies used during a period
_____ 2. An end of period adjustment to recognize employee salaries earned but unpaid
_____ 3. An end of period adjustment to recognize depreciation on certain long-term assets
_____ 4. An end of period adjustment to recognize prepaid insurance used up during a period
_____ 5. An end of period adjustment to recognize prepaid rent used up during a period
_____ 6. An end of period adjustment to recognize interest costs incurred but unpaid
_____ 7. An end of period adjustment to recognize earnings related to work done but not yet
billed
_____ 8. An end of period adjustment to recognize the amount of unearned revenue earned as of
the end of the period
Learning Objective 3-2
1) Adjusting entries for accruals will never affect ________.
A) shareholders’ equity
B) expenses
C) liabilities
D) cash
2) Lumbers, Inc. lends $3,000 at 12% to an employee on September 1, 2012. The employee
agrees to pay the interest and principal in two years. Which of the following will be reported on
Lumbers’ year ended December 31, 2012 financial statements?
A) The balance sheet will report Interest receivable of $120.
B) The income statement will report Interest revenue of $0.
C) The statement of cash flows will report Cash received for interest of $120.
D) The income statement will report Interest income of $360.
3) Other receivables represents the amount ________.
A) customers owe for goods or services previously delivered
B) collected in advance of performing the services
C) lent to others
D) borrowed from others
4) If a company has Other receivables on its balance sheet it most likely will show ________ on
its income statement.
A) Interest revenue
B) Interest expense
C) Interest receivable
D) Interest payable
5) How much interest will accrue over three months on a $10,000, 9% loan?
A) $300
B) $225
C) $900
D) $2,700
6) How much interest will accrue over ten months on a $50,000, 6% loan?
A) $3,000
B) $3,600
C) $300
D) $2,500
7) Slumbers, Inc. borrows $3,000 at 12% from a bank on September 1, 2012 and agrees to pay
the interest and principal in two years. Which of the following will be reported on the year ended
December 31, 2012 financial statements?
A) The balance sheet will report Interest payable of $120.
B) The income statement will report Interest expense of $0.
C) The statement of cash flows will report Cash paid for interest of $120.
D) The income statement will report Interest expense of $360.
8) Slumbers, Inc. borrows $3,000 at 12% from a bank on September 1, 2012 and agrees to pay
the interest and principal in two years. What is the effect on the accounting equation of the
adjusting entry to record interest for the year ended December 31, 2012?
A) Assets will increase by $3,000.
B) Liabilities will decrease by $120.
C) Shareholders’ equity will decrease by $120.
D) Cash will decrease by $120.
9) On May 1, 2012, Mink, Inc. borrowed $10,000 by issuing a 12%, 3-month note and another
$10,000 by issuing a 12%, 6-month note. Interest expense for the month ended May 31, 2012
equals ________.
A) $(400) on the income statement
B) $(200) on the income statement
C) $(300) on the income statement
D) $(2,400) on the income statement
10) On May 1, 2012, Mink, Inc. borrowed $10,000 by issuing a 12%, 3-month note and another
$10,000 by issuing a 12%, 6-month note. Interest expense for the month ended May 31, 2012
will be ________.
A) greater on the 3-month note than the 6-month note
B) greater on the 6-month note than the 3-month note
C) $200 for both notes combined
D) $0 for both notes because no interest was paid
11) Mac, Inc. purchased a truck on October 1, 2011 in exchange for a 12-month, 9%, $100,000
note. What effect does the October 31, 2011 adjusting entry for interest have on the company’s
total assets?
A) increase
B) decrease
C) no effect
12) Mac, Inc. purchased a truck on October 1, 2011 in exchange for a 12-month, 9%, $100,000
note. What effect does the October 31, 2011 adjusting entry for interest have on the company’s
total liabilities?
A) increase
B) decrease
C) no effect
13) Mac, Inc. purchased a truck on October 1, 2011 in exchange for a 12-month, 9%, $100,000
note. What effect does the October 31, 2011 adjusting entry for interest have on the company’s
total shareholders’ equity?
A) increase
B) decrease
C) no effect
14) Mariner, Inc. bought a lobster boat on November 1, 2011 in exchange for a 2-month, 6%,
$80,000 note. The note plus interest will be repaid on January 1, 2012, the maturity date. How
much interest expense should the company report on its income statement for the month ended
November 30, 2011?
A) $0
B) $4,800
C) $400
D) $800
15) Mariner, Inc. bought a lobster boat on November 1, 2011 in exchange for a 2-month, 6%,
$80,000 note. The note plus interest will be repaid on January 1, 2012, the maturity date. How
much interest payable should the company report on its balance sheet at November 30, 2011?
A) $0
B) $4,800
C) $400
D) $800
16) Mariner, Inc. bought a lobster boat on November 1, 2011 in exchange for a 2-month, 6%,
$80,000 note. The note plus interest will be repaid on January 1, 2012, the maturity date. How
much interest payable should the company report on its balance sheet at December 31, 2011?
A) $0
B) $4,800
C) $400
D) $800
17) Mariner, Inc. bought a lobster boat on November 1, 2011 in exchange for a 2-month, 6%,
$80,000 note. The note plus interest will be repaid on January 1, 2012, the maturity date. How
much interest expense should the company report on its income statement for the month ended
December 31, 2011?
A) $0
B) $4,800
C) $400
D) $800
18) Salaries payable on the balance sheet most likely means that ________.
A) the company is in serious financial difficulty. It doesn’t even have enough cash to pay its
employees
B) the company’s accountants are seriously confused. Salaries appear on the income statement,
not on the balance sheet
C) employees did not receive payment for the last few days of work because the last day of the
accounting period was not a payday
D) employees were overpaid and now owe the company money
19) The employees of Roll n Dough, Inc. get paid every Friday for a 5-day workweek (Monday
through Friday). The total payroll is $3,000 per day of work. If the accounting period ends on
Thursday of a given week, what adjustment must be made to the company’s accounting records?
A) Increase Salaries payable by $15,000 and decrease shareholders’ equity by recognizing
Salaries expense for the same amount.
B) Increase Salaries payable by $12,000 and decrease shareholders’ equity by recognizing
Salaries expense for the same amount.
C) Decrease Cash by $12,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
D) No adjustment is necessary because there is no expense until the employees are paid on
Friday.
20) The employees of Roll n Dough, Inc. get paid every Friday for a 5-day workweek (Monday
through Friday). The total payroll is $4,000 per day of work. If the accounting period ends on
Wednesday of a given week, what adjustment must be made to the company’s accounting
records?
A) Decrease Cash by $12,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
B) Increase Salaries payable by $20,000 and decrease shareholders’ equity by recognizing
Salaries expense for the same amount.
C) Increase Salaries payable by $12,000 and decrease shareholders’ equity by recognizing
Salaries expense for the same amount.
D) No adjustment is necessary because there is no expense until the employees are paid on
Friday.
21) The employees of Roll n Dough, Inc. get paid every Friday for a 5-day workweek (Monday
through Friday). The total payroll is $4,000 per day of work. If the accounting period ends on
Tuesday of a given week, what adjustment must be made to the company’s accounting records?
A) Increase Salaries payable by $8,000 and decrease shareholders’ equity by recognizing
Salaries expense for the same amount.
B) Decrease Salaries payable by $8,000 and increase shareholders’ equity by recognizing
Salaries expense for the same amount.
C) Decrease Cash by $8,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
D) No adjustment is necessary because the expense is not recorded until the employees are paid.
22) The employees of Roll n Dough, Inc. get paid every Friday for a 5-day workweek (Monday
through Friday). The total payroll is $4,000 per day of work. If the accounting period ends on
Friday of a given week, what entry must be made to the company’s accounting records?
A) Decrease Cash by $20,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
B) Increase Salaries payable by $20,000 and decrease shareholders’ equity by recognizing
Salaries expense for the same amount.
C) Increase Salaries payable by $20,000 and increase shareholders’ equity by recognizing
Salaries expense for the same amount.
D) Decrease Cash by $4,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
23) The employees of Curel, Inc. get paid every Friday for a 5-day workweek (Monday through
Friday). The total payroll is $6,000 per day of work. If the accounting period ends on Tuesday of
a given week, what adjustment must be made to the company’s accounting records?
A) Increase Salaries payable by $12,000 and decrease shareholders’ equity by recognizing
Salaries expense for the same amount.
B) Increase Salaries payable by $12,000 and increase shareholders’ equity by recognizing
Salaries expense for the same amount.
C) Decrease Cash by $12,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
D) No adjustment is necessary because there is no expense until the employees are paid on
Friday.
24) At December 31, 2010, McToil, Inc. owes its employees $20,000 for work performed in
2010. Payday is not until the first week in January 2011. What is the effect of the December 31,
2010 adjusting entry on the company’s total assets?
A) increase
B) decrease
C) no effect
D) changed in a way that cannot be predicted
25) At December 31, 2010, McToil, Inc. owes its employees $20,000 for work performed in
2010. Payday is not until the first week in January 2011. What is the effect of the December 31,
2010 adjusting entry on the company’s total liabilities?
A) increase
B) decrease
C) no effect
D) changed in a way that cannot be predicted
26) At December 31, 2010, McToil, Inc. owes its employees $20,000 for work performed in
2010. Payday is not until the first week in January 2011. What is the effect of the December 31,
2010 adjusting entry on total shareholders’ equity?
A) increase
B) decrease
C) no effect
D) changed in a way that cannot be predicted
27) Which financial statement shows Salaries payable?
A) Income statement
B) Statement of changes in shareholders’ equity
C) Statement of cash flows
D) Balance sheet
28) Which financial statement shows Salaries expense?
A) Income statement
B) Statement of changes in shareholders’ equity
C) Statement of cash flows
D) Balance sheet
29) Which financial statement shows Cash paid to employees?
A) Income statement
B) Statement of changes in shareholders’ equity
C) Statement of cash flows
D) Balance sheet
30) The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday
through Friday). The total payroll is $5,000 per day of work. If the accounting period ends on
Wednesday of a given week, what adjustment must be made to the company’s accounting
records?
A) Increase Salaries payable by $15,000 and increase shareholders’ equity by recognizing
Salaries expense for the same amount.
B) Increase Salaries payable by $15,000 and decrease shareholders’ equity by recognizing
Salaries expense for the same amount.
C) Decrease Cash by $15,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
D) No adjustment is necessary because there is no expense until the employees are paid on
Friday.
31) The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday
through Friday). The total payroll is $5,000 per day of work. If the accounting period ends on
Wednesday of a given week and the proper adjustment is made on Wednesday, what will be the
effect of the adjustment on the company’s financial statements?
A) The balance sheet will report additional salaries expense of $15,000.
B) The balance sheet will report additional salaries expense of $25,000.
C) The income statement will report additional salaries expense of $15,000.
D) The income statement will report additional salaries expense of $25,000.
32) The employees of Dew Drop Inn get paid every Friday for a 5-day work week (Monday
through Friday). The total payroll is $5,000 per day of work. If the accounting period ends on
Wednesday of a given week, and the proper adjustment is made on Wednesday, what will be the
effect of the adjustment on the company’s financial statements?
A) The balance sheet will report Salaries payable of $25,000.
B) The income statement will report additional salaries expense of $25,000.
C) The balance sheet will report Salaries payable of $15,000.
D) The income statement will report Salaries payable of $15,000.
33) The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday
through Friday). The total payroll is $5,000 per day of work. If the accounting period ends on
Thursday of a given week, what adjustment must be made to the company’s accounting records?
A) Decrease Cash by $20,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
B) Increase Salaries payable by $20,000 and increase shareholders’ equity by recognizing
Salaries expense for the same amount.
C) Increase Salaries payable by $20,000 and decrease shareholders’ equity by recognizing
Salaries expense for the same amount.
D) No adjustment is necessary because there is no expense until the employees are paid on
Friday.
34) The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday
through Friday). The total payroll is $5,000 per day of work. If the accounting period ends on
Thursday of a given week, and the proper adjustment is made on Thursday, what will be the
effect on the company’s accounting system on Friday when the employees are paid for the week?
A) Decrease Cash by $25,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
B) Decrease Cash by $25,000, decrease shareholders’ equity by recognizing Salaries expense for
$20,000 and decrease Salaries payable by $5,000.
C) Decrease Cash by $25,000, decrease shareholders’ equity by recognizing Salaries expense for
$5,000 and decrease Salaries payable by $20,000.
D) Decrease Cash by $5,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
35) The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday
through Friday). The total payroll is $5,000 per day of work. If the accounting period ends on
Thursday of a given week, and the proper adjustment is made on Thursday, what will be the
effect of the adjustment on the company’s financial statements?
A) The balance sheet will report additional salaries expense of $20,000.
B) The balance sheet will report additional salaries expense of $25,000.
C) The income statement will report additional salaries expense of $20,000.
D) The income statement will report additional salaries expense of $25,000.
36) The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday
through Friday). The total payroll is $5,000 per day of work. If the accounting period ends on
Thursday of a given week, and the proper adjustment is made on Thursday, what will be the
effect of the adjustment on the company’s financial statements?
A) The balance sheet will report Salaries payable of $20,000.
B) The income statement will report additional salaries expense of $25,000.
C) The balance sheet will report additional salaries expense of $20,000.
D) The income statement will report Salaries payable of $20,000.
37) The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday
through Friday). The total payroll is $5,000 per day of work. If the accounting period ends on
Friday of a given week, what effect will this have on the company’s accounting system?
A) Decrease Cash by $25,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
B) Increase Salaries payable by $25,000 and increase shareholders’ equity by recognizing
Salaries expense for the same amount.
C) Increase Salaries payable by $25,000 and decrease shareholders’ equity by recognizing
Salaries expense for the same amount.
D) Decrease Cash by $5,000 and decrease shareholders’ equity by recognizing Salaries expense
for the same amount.
38) The cost of borrowing money from a creditor is called the principal of the loan.
39) Bankrupt & Baroque, Inc. borrowed $10,000 on January 1 from E-Z Bank for three months
at a 6% annual interest rate. The amount of interest due as of January 31 equals $200.
40) Needem, Inc. borrowed $100,000 from Lendem Commercial Bank, on April 1, 2009 and
agreed to repay the principal plus interest on April 1, 2012. The note bears interest at 9%
annually (do not compound). Fill in the blanks in the chart below.
Interest
Expense
Cash Paid
For Interest
Interest
Payable
Year ended Dec. 31, 2009
$
$
$
Year ended Dec. 31, 2010
$
$
$
Year ended Dec. 31, 2011
$
$
$
Year ended Dec. 31, 2012
$
$
$
Interest
Expense
Cash Paid
For Interest
Interest
Payable
Year ended Dec. 31, 2009
Year ended Dec. 31, 2010
$15,750
Year ended Dec. 31, 2011
$24,750
Year ended Dec. 31, 2012
41) Record each event in the accounting equation below. Include both amounts and account
titles.
Shareholders’ equity
Assets
Liabilities
CC
Retained
earnings
1.
On November 1, 2011,
Lucky Luke, Inc. borrowed
$20,000 on a 3-month, 9%
notes.
2.
On November 30, 3011, it
adjusted for the interest
owed on the note.
3. Which of the four financial statements are affected by the adjusting entry to accrue interest?
______ Income Statement ______ Statement of Changes in Shareholders’ Equity
______ Statement of Cash Flows ______ Balance Sheet
4. Would your answer in 2. be different if the note was a $20,000, 6-month, 9% note instead of
a 3-month note?
Assets
Liabilities
CC
earnings
1.
On November 1, 2011,
Lucky Luke, Inc. borrowed
$20,000 on a 3-month, 9%
notes.
20,000
Cash
20,000
Notes
Payable
2.
On November 30, 3011, it
adjusted for the interest owed
on the note.
150
Interest
Payable
(150) Interest
expense
42) Match the following terms with the appropriate definitions below. Definitions have not been
provided for all of these terms.
a. Interest
b. Principal
c. Liabilities
d. Debtor
e. Creditor
f. Sales revenue
g. Accounts receivable
h. Accounts payable
_____ 1. A party that lends resources with the understanding that the resources will be returned
later
_____ 2. The amount borrowed or loaned
_____ 3. What you pay for the use of other people’s money or what you earn by lending money
_____ 4. Assets created by selling goods to customers on credit
_____ 5. A party that borrows resources with the understanding that the resources will be repaid
later
Learning Objective 3-3
1) What type of account is Unearned revenue?
A) an asset
B) a liability
C) a revenue
D) part of shareholders’ equity
2) The Unearned revenue account represents the amount of ________.
A) cash paid to customers during the period
B) cash collected from customers during a period
C) goods and services sold to customers during a period
D) goods and services that a company owes its customers
3) Which financial statement shows Unearned revenue?
A) Income statement
B) Statement of changes in shareholders’ equity
C) Statement of cash flows
D) Balance sheet
4) Why would the Unearned revenue account need to be adjusted at the end of the period?
A) Revenue that had been deferred is now earned.
B) Revenue has been recorded, and cash has not yet been received.
C) Liabilities are unrecorded.
D) Assets would otherwise be understated.
5) In February, Ira Roth, Public Accountant, accepted $500 in cash from a customer in exchange
for a tax return he promised to prepare in April. Which of the following statements is true?
A) Ira has earned $500 in February.
B) Ira has a $500 liability in February.
C) Ira does not need to record anything in February. He can wait until April.
D) Ira has to record Cash of $500 in April when the return is prepared.
6) Hen House, Inc. collects all subscription revenue in advance. At December 31, 2011, the
company owed $50,000 to customers for unearned revenue. During 2012, the company received
$150,000 in advance from its customers and delivered $190,000 of magazines to its customers.
How much subscription revenue will Hen House, Inc. report on its income statement for the year
ended December 31, 2012?
A) $200,000
B) $190,000
C) $10,000
D) $210,000