Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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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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Solution 278
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.
Accrual Accounting Concepts
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Answers to Completion Statements
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
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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.
Solution 291
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
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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.
Solution 292
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.
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Solution 293
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.
Solution 294
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S-A E 295
What is the purpose of the preparation of adjusting entries?
Solution S-A E 295
S-A E 296
Briefly distinguish between a deferral and an accrual.
Solution 296
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.
Solution 297
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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.
Solution 298
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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Solution 299
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.)
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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).
Multiple Choice Questions
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.
Solution 11 (15 min.)
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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