Finance Chapter 4 Which of the following accounts is not closed to Income Summary at the end of the accounting period?

Chapter 4: Income Measurement and Accrual Accounting

143. The Dividend account is known as which of the following?

a.

Nominal account

b.

Closing account

c.

Real account

d.

both b and c

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-06 – LO: 04-06

KEYWORDS:

Bloom’s: Understanding

144. Which of the following accounts is not closed to Income Summary at the end of the accounting period?

a.

Rent Expense

b.

Service Revenue

c.

Unearned Revenue

d.

Supplies Expense

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-07 – LO: 04-07

KEYWORDS:

Bloom’s: Understanding

145. Which of the following journal entries is required to close the Income Summary account of a company with a net

loss?

a.

Debit Income Summary, credit Capital Stock.

b.

Debit Income Summary, credit Retained earnings.

c.

Credit Income Summary, debit Retained earnings.

d.

Credit Income Summary, debit Dividends.

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-07 – LO: 04-07

KEYWORDS:

Bloom’s: Understanding

146. When using a work sheet:

a.

an equal number of account titles are applicable to the Income Statement columns and the Balance Sheet

columns.

b.

adjusting entries are not made since they appear on the work sheet.

c.

net income appears in both the Income Statement debit column and the Balance Sheet credit column.

d.

the Income Statement column and Balance Sheet column of the work sheet eliminate the need to prepare

formal financial statements.

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-06 – LO: 04-06

FACC.PONO.13.04-08 – LO: 04-08

KEYWORDS:

Bloom’s: Understanding

147.

Oregon Company

Adjusted Trial Balance

For the Year ended December 31, 2016

Cash

$ 6,030

Accounts Receivable

2,100

Prepaid Expenses

700

Equipment

13,700

Accumulated Depreciation

$ 1,100

Accounts Payable

1,900

Notes Payable

4,200

Capital Stock

12,940

Dividends

790

Fees Earned

8,750

Wages Expense

2,500

Rent Expense

1,960

Utilities Expense

775

Depreciation Expense

250

Miscellaneous Expense

85

______

Totals

$28,890

Determine the net income (loss) for the period.

a.

Net Loss $5,570

b.

Net Income $3,180

c.

Net Loss $790

d.

Net Income $2,390

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-06 – LO: 04-06

FACC.PONO.13.04-07 – LO: 04-07

FACC.PONO.13.04-08 – LO: 04-08

KEYWORDS:

Bloom’s: Analyzing

148. After all of the account balances have been extended to the Balance Sheet columns of the work sheet, the totals of the

debit and credit columns are $37,875 and $32,735, respectively. What is the amount of net income or net loss for the

period?

a.

$5,140 net income

b.

$37,875 net loss

c.

$5,140 net loss

d.

$32,735 net income

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-06 – LO: 04-06

FACC.PONO.13.04-07 – LO: 04-07

FACC.PONO.13.04-08 – LO: 04-08

KEYWORDS:

Bloom’s: Analyzing

149. All of the following statements are true regarding the use of a work sheet at the end of an accounting period except:

a.

all companies use a ten-column work sheet.

b.

the net income of the period is extended from the income statement debit column to the balance sheet credit

column.

c.

the beginning balance in the Retained Earnings account is entered initially on the work sheet on the unadjusted

trial balance.

d.

cash is always carried over from the unadjusted trial balance columns of the work sheet to the balance sheet

columns without any adjustment.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-08 – LO: 04-08

KEYWORDS:

Bloom’s: Understanding

150. Which account is always carried over from the unadjusted trial balance columns of a work sheet to the balance sheet

columns of the work sheet without any adjustment?

a.

Accumulated depreciation

b.

Depreciation expense

c.

Cash

d.

All of these are adjusted.

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-08 – LO: 04-08

KEYWORDS:

Bloom’s: Understanding

151. The amount in the Subscriptions Sold in Advance account should be carried over from the adjusted trial balance of

the 10-column work sheet to which of the following columns?

a.

Income statement as a debit

b.

Income statement as a credit

c.

Balance sheet as a debit

d.

Balance sheet as a credit

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-08 – LO: 04-08

KEYWORDS:

Bloom’s: Understanding

152. The amount in the Dividends account should be carried over from the adjusted trial balance of the 10-column work

sheet to which of the following columns?

a.

Income statement as a debit

b.

Income statement as a credit

c.

Balance sheet as a debit

d.

Balance sheet as a credit

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-08 – LO: 04-08

KEYWORDS:

Bloom’s: Understanding

153. A decline in purchasing power is evidenced by all of the following except:

a.

inflation.

b.

a continuing rise in the general level of prices in an economy.

c.

buying the same amount of goods or services for a higher price a year later.

d.

current value is equal to historical cost.

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Understanding

154. All of the following describe a revenue except:

a.

A revenue can result in the inflow of assets.

b.

A revenue can result in the settlement of liabilities from the delivery or distribution of goods.

c.

A revenue can result in the settlement of liabilities from rendering services.

d.

A revenue must involve an inflow of assets.

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Understanding

155. Which of the following statements is true concerning the matching principle?

a.

All costs can be directly matched with revenue.

b.

All costs can be indirectly matched with periods in which they provide a benefit.

c.

The association of assets for a period with the liabilities necessary to generate the assets is known as the

matching principle.

d.

Cost of goods sold matched with sales revenue is a classic example of direct matching under the matching

principle.

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Understanding

Completion

156. Measurement in accounting requires choosing an attribute and a unit of measure. _________________________ is

the attribute used for many of the assets included in the financial statements.

ANSWER:

Historical cost

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Remembering

157. ____________________ is a rise in the general level of prices in the economy and results in a decrease in purchasing

power.

ANSWER:

Inflation

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Remembering

For each of the following sentences 145-152, select the word or group of words that best completes the statement.

Matching

Cash basis

Measurement

Deferred revenue

Adjustments

Deferred expense

Accrual basis

Recognition

Accrued asset

158. The success of accounting as a form of communication depends on two concepts, ____________________ and

____________________.

ANSWER:

recognition, measurement

measurement, recognition

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

FACC.PONO.13.04-02 – LO: 04-02

FACC.PONO.13.04-04 – LO: 04-04

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

159. The _________________________ of accounting necessitates a number of adjustments at the end of an accounting

period.

ANSWER:

accrual basis

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

FACC.PONO.13.04-02 – LO: 04-02

FACC.PONO.13.04-04 – LO: 04-04

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

160. The ____________________ of accounting is a system in which revenues are recognized when payments are

received and expenses are recognized when payments are made.

ANSWER:

cash basis

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

FACC.PONO.13.04-02 – LO: 04-02

FACC.PONO.13.04-04 – LO: 04-04

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

161. ____________________ is the association of the costs incurred with the associated revenue of a period.

ANSWER:

Matching

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

FACC.PONO.13.04-02 – LO: 04-02

FACC.PONO.13.04-04 – LO: 04-04

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

162. A(n) ____________________ creates an increase in income for the period.

ANSWER:

accrued asset

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

FACC.PONO.13.04-02 – LO: 04-02

FACC.PONO.13.04-04 – LO: 04-04

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

163. A(n) _________________________ results when cash is paid before the related amount is reported on the income

statement.

ANSWER:

deferred expense

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

FACC.PONO.13.04-02 – LO: 04-02

FACC.PONO.13.04-04 – LO: 04-04

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

164. A(n) _________________________ results when cash is received before the related amount is reported on the

income statement.

ANSWER:

deferred revenue

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

FACC.PONO.13.04-02 – LO: 04-02

FACC.PONO.13.04-04 – LO: 04-04

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

165. The basis of accounting that fails to take into consideration amounts earned that are not collected and expenses

incurred but are not paid is the _________________________.

ANSWER:

cash basis

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Remembering

166. The difference between accrual-based revenue and accrual-based expenses is called _________________________.

ANSWER:

net income

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Remembering

167. Under the ____________________ basis of accounting, revenues are recognized when earned and expenses when

incurred.

ANSWER:

accrual

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Remembering

168. According to the revenue recognition principle, revenues are recognized when they are

_________________________.

ANSWER:

realized and earned

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Remembering

169. Under the accrual basis of accounting, at what point in time should a fast food restaurant recognize revenue?

_________________________

ANSWER:

At the point the food is sold

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Remembering

170. Under the accrual basis of accounting, at what point in time should a publisher of magazines record revenue?

______________________________

ANSWER:

As revenue is earned throughout the time period by delivery of magazines

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Remembering

171. The ____________________ principle attempts to associate with the revenue of the period, all costs necessary to

generate that revenue.

ANSWER:

matching

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Remembering

172. ____________________ is the allocation of the cost of a tangible, long-term asset over its useful life.

ANSWER:

Depreciation

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Remembering

173. The names of the four major types of adjusting entries are _________________________,

_________________________, _________________________, and _________________________.

ANSWER:

accrued liability, accrued assets, deferred revenue, deferred expense

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

174. The one asset account that never requires adjustment at the end of the period is ____________________.

ANSWER:

Cash

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

175. ____________________ is the name given to revenue, expense, and dividend accounts because they are closed at the

end of the period.

ANSWER:

Nominal

Temporary

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-06 – LO: 04-06

KEYWORDS:

Bloom’s: Remembering

176. ____________________ is the name given to balance sheet accounts because they are permanent in nature.

ANSWER:

Real

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-06 – LO: 04-06

KEYWORDS:

Bloom’s: Remembering

177. Statements prepared monthly, quarterly, or at other intervals less than a year in duration are called

_____________________.

ANSWER:

interim statements.

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-07 – LO: 04-07

KEYWORDS:

Bloom’s: Remembering

178. Temporary accounts are also known as _________________ accounts.

ANSWER:

nominal

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-07 – LO: 04-07

KEYWORDS:

Bloom’s: Remembering

Chapter 4: Income Measurement and Accrual Accounting

Matching

Select the correct revenue recognition principle for each of the following.

a.

Recognize revenue over the passage of time.

b.

Recognize revenue when the customer takes possession of the product.

c.

Recognize revenue when cash is collected.

d.

Recognize revenue when service is performed.

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Applying

179. Interest

ANSWER:

a

180. Rent

ANSWER:

a

181. Subscription to a magazine

ANSWER:

a

182. Merchandise

ANSWER:

b

183. Carpet cleaning

ANSWER:

d

Match the most probable matching method to the costs listed below.

a.

Directly match a specific revenue.

b.

Indirectly match with the period during which it will provide revenue.

c.

Immediately recognize because no future benefits are expected.

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Applying

184. Warehouse used for storing inventory goods

ANSWER:

b

185. Commissions earned by sales people

ANSWER:

a

186. Cost of two-year insurance policy

ANSWER:

b

187. Taxes owed on income earned during the current period

ANSWER:

c

Chapter 4: Income Measurement and Accrual Accounting

Match the following choices to the listed situation.

a.

a deferred expense

b.

a deferred revenue

c.

an accrued liability

d.

an accrued asset

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Applying

188. One year’s premium on truck insurance was paid in advance

ANSWER:

a

189. Cash was collected from customers for rental of tents for next year

ANSWER:

b

190. A warehouse building was acquired for cash

ANSWER:

a

191. Income taxes are owed to the federal government at year end

ANSWER:

c

192. Rent is owed by a tenant but not yet collected

ANSWER:

d

For each transaction select the letter of the type of adjustment that would be required

a.

Deferred expense

b.

Deferred revenue

c.

Accrued liability

d.

Accrued asset

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Applying

193. Depreciation on a delivery truck is recorded

ANSWER:

a

194. Revenue is earned during the current period, although customers had paid in a previous period

ANSWER:

b

195. Interest earned on notes receivable, but not yet received is recorded

ANSWER:

d

196. The cost of supplies used during the current year is determined and recorded

ANSWER:

a

197. The cost of salaries earned by employees, but not paid at the end of the accounting period is recorded

ANSWER:

c

For each transaction select the letter of the type of adjustment that would be required.

a.

Deferred expense

b.

Deferred revenue

c.

Accrued liability

d.

Accrued asset

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Applying

198. Amounts earned, not received from customers are recorded

ANSWER:

d

199. Magazine subscriptions are delivered during the current period, although customers had paid in a previous period

ANSWER:

b

200. Interest is incurred on money borrowed from the bank, but not yet paid

ANSWER:

c

201. The depreciation on office equipment used during the current year is recorded

ANSWER:

a

202. The cost of commissions to salesmen that has been earned, but not paid at the end of the accounting period is

recorded

ANSWER:

c

Chapter 4: Income Measurement and Accrual Accounting

From the list of accounts below, determine whether the account would be a nominal account or a real account.

a.

nominal account

b.

real account

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-07 – LO: 04-07

KEYWORDS:

Bloom’s: Applying

203. Cash

ANSWER:

b

204. Sales Revenue

ANSWER:

a

205. Office Equipment

ANSWER:

b

206. Depreciation Expense

ANSWER:

a

207. Prepaid Rent

ANSWER:

b

208. Unearned Revenue

ANSWER:

b

209. Utilities Expense

ANSWER:

a

210. Interest Payable

ANSWER:

b

Chapter 4: Income Measurement and Accrual Accounting

Subjective Short Answer

211. On January 1, 2016, Blankenship Solutions began business. The company offers scalable cloud computing to small

businesses for a monthly fee of $0.25 per gigabyte, $0.05 per hour for public IP addresses, and $0.01 per hour for Internet

services. During January, 150 companies signed up for the service, and each will have until the fifth of the following

month to pay the monthly fee. By the end of January, 120 companies had paid the monthly fee for an average company

usage of 100 gigabytes. In addition, IP addresses were accessed for an average of 680 hours per company and Internet

services averaged 600 hours per company during January. Assume that Blankenship Solutions uses the accrual basis of

accounting.

Required:

1. Prepare the Revenues section of Blankenship Solutions’ income statement for the month of January.

2. Prepare the Cash Receipts section of Blankenship Solutions’ statement of cash flows for the month of January.

3. In addition to the Cash account, what other account will appear on Blankenship Solutions’ balance sheet at the end of

January? What amount will be in this account?

ANSWER:

1. The income statement for Blankenship Solutions would show the following:

Blankenship Solutions

Income Statement

For the Month Ended January 31, 2016

Revenues

Scalable monthly fees (150 × 100 GB × $0.25)

$3,750

IP Address hourly fees (680 × $0.05 × 150)

5,100

Internet services hourly fees (600 × $0.01 × 150)

900

Total revenue

$9,750

2. A partial statement of cash flows for Blankenship Solutions would show the following:

Cash received from:

Scalable monthly fees (120 × 100 GB × $0.25) $3,000

3. On Blankenship Solutions’ balance sheet at the end of January, two accounts will appear:

Cash $3,000 (120 × 100 GB × $.025)

Accounts Receivable 6,750 (Remainder monthly $750 + $6,000 hourly fees)

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Analyzing

212. A hospital corporation contracted with a private company to collect fees and maintain health facilities that adjoin

their property. Users of the health facility can pay cash of $10 for a daily visit or they can purchase a pass. The pass has a

magnetic strip that is swiped through the entrance device each time an individual enters the facility. This subtracts daily

fee from the pass balance for each day used. The passes are issued for a fee of $365, which are good for 365 days.

Refunds are not issued on the pass. Last year $18,650 was collected for daily visits, $438,000 of annual passes were

issued, and $206,225 of pass usage was registered on the scanning equipment. How much should the company recognize

as revenue for the year? Explain how the revenue recognition rule should be applied in this case.

ANSWER:

Cash collected for daily visits

$ 18,650

Passes usage redeemed

206, 225

Revenue recognized

$ 224,875

Only the amount of passes that have been used should be recognized as revenue. The

difference between the $438,000 of passes issued and the $206,225 of passes used is

unearned revenue at this point. That means that $231,775 will appear on the balance sheet as

a current liability until earned, unless there is some type of time limit on the 365 day passes.

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Analyzing

213. On July 1, 2016, Crouch Corporation takes out a 12%, two-month, $50,000 loan at Cocoa National Bank. Principal

and interest are to be repaid on August 31.

Required:

1. Prepare the journal entries for July 1 to record the borrowing, for July 31 to record the accrual of interest, and for

August 31 to record repayment of the principal and interest.

2. Evaluate the following statement: It would be much easier not to bother with an adjusting entry on July 31 and simply

record interest expense on August 31 when the loan is repaid.

Chapter 4: Income Measurement and Accrual Accounting

July 31

Interest Expense

500

Interest Payable

Aug. 31

Interest Payable

500

Notes Payable

50,000

Interest Expense

500

Cash

loan.

ANSWER:

1.

July 1

Cash

50,000

Notes Payable

50,000

To record two-month, 12% bank loan

2. It would save the time and cost in making a journal entry to skip an adjusting entry on

July 31 and simply record interest when the loan is repaid on August 31. However, to do so

would violate the matching principle. One of the necessary costs in July was interest, and it

should be matched with the revenues of that period. If interest were not accrued at the end of

July, the expense for that month would be understated and the expense for August would be

overstated.

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Analyzing

214. Carpenter Transport Company purchased a truck at a cost of $60,000 on January 1, 2012. The truck has an estimated

useful life of 9 years and a $15,000 residual value.

A.

How much depreciation expense should be reported for the year 2016?

B.

What is the total amount of accumulated depreciation at December 31, 2016?

C.

Show how the truck and the related accumulated depreciation would appear on

Carpenter’s December 31, 2016, balance sheet immediately after the adjustments are

recorded and posted.

D.

Is the amount on the balance sheet what the truck could probably be sold for on

December 31, 2016? What principle governs?

E.

How much depreciation expense should be reported for the year 2017?

ANSWER:

A.

($60,000 – $15,000)/9 years = $5,000

B.

5 years × $5,000 = $25,000

C.

Long-term Assets:

Truck

$60,000

Less Accumulated depreciation

(25,000)

$35,000

D.

Probably not. This is due to the cost principle. The balance sheet does not present

the assets at their current market price. Assets such as operational assets are

recorded at historical cost and then adjusted for accumulated depreciation.

E.

$5,000

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Analyzing

$292,000 + $14,000 = $306,000

$14,000

$292,000

$0

Moderate

FACC.PONO.13.04-02 – LO: 04-02

FACC.PONO.13.04-05 – LO: 04-05

Bloom’s: Analyzing

215. Carter, Inc. paid salaries expense of $292,000 during 2016. However, additional salaries of $14,000 had been earned

by employees, but not paid or recorded at December 31, 2016 by Carter.

A)

What is the effect on the accounting equation of the adjusting entry necessary at December

31, 2016?

B)

Under which basis, cash, accrual, or both, would the adjustment in part A be prepared?

Explain.

C)

Under the accrual basis of accounting, what is the total amount of salaries expense for the

year ended December 31, 2016?

D)

Under the accrual basis of accounting, what is the total amount of salaries payable to be

reported at December 31, 2016?

E)

Under the cash basis of accounting, what is the total amount of salaries expense for the year

ending December 31, 2016?

F)

Under the cash basis of accounting, what is the total amount of salaries payable at December

31, 2016?

ANSWER:

A)

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders’

Equity

Revenues

–

Expenses

=

Net

Income

Salaries

Payable

14,000

(14,000)

Salaries

Expense

14,000

(14,000)

B)

Only the accrual basis requires adjustments. Adjustments are necessary

under the accrual basis because income represents amounts earned

during the period, not just collected in cash. Accrual basis also includes

expenses that have been incurred regardless of whether payment has

been made. Net income under the accrual basis represents the net effect

of amounts earned less amounts incurred.

216. Becca Corp. purchased supplies at a cost of $5,200 during 2015. At January 1, 2016, supplies on hand were $1,600.

During the year, the company used $4,000 of supplies. Becca’s accounting year ends on December 31.

A)

What is the effect on the accounting equation of the adjusting entry that is prepared at

December 31, 2016?

B)

Under the accrual basis of accounting, how much is Supplies Expense for 2016?

C)

How much should be reported on the December 31, 2016, balance sheet for Supplies?

D)

What type of adjustment was made in part A?

ANSWER:

A)

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders’

Equity

Revenues

–

Expenses

=

Net Income

Supplies

(4,000)

Supplies

Expense

4,000

(4,000)

B)

$4,000

C)

$1,600 + $5,200 – $4,000 = $2,800

D)

Deferred expense

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Analyzing

217. Dino’s Pizza employs 10 workers in its plant. Each employee is paid $8 per hour and works 8 hours per day, Monday

through Friday. Employees are paid every Wednesday for the previous Monday through Friday workweek. The last

payday was Wednesday, May 28.

A)

Compute the dollar amount of the weekly payroll.

B)

What is the effect on the accounting equation of the adjusting entry required on Friday, May

30, the last day of Dino’s Pizza fiscal period?

C)

What special precautions are necessary upon recording the payment of wages to employees

on the next payday, June 4?

ANSWER:

A) 8 hours × $8.00 per hour × 5 days × 10 workers = $3,200

B)

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders’

Equity

Revenues

–

Expenses

=

Net Income

Wages

Payable

3,200

(3,200)

Wages

Expense

3,200

(3,200)

(8 hours × $8.00 per hour × 5 days × 10 workers)

C)

If an adjusting entry is made on May 30, a liability, Wages Payable, is

created, which is reported on the balance sheet account that does not get

closed, so the $3,200 will remain in this account on June 1. When the entry is

made to record the payment of the wages on June 4, the liability must be

reduced.

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Analyzing

DIFFICULTY:

Moderate

KEYWORDS:

Bloom’s: Analyzing

218. Barker Corp. began operations on November 30, 2016, and immediately paid $48,000 for 6 months rent in advance

for rental of a parking lot for the period beginning December 1, 2016. Barker’s accounting period ends on December 31,

2016. Indicate how much will be reported for each of the following accounts on Barker’s financial statements for the

period ending December 31, 2016. If the amount reported is zero, indicate so by writing $0, and explain why zero is the

appropriate amount.

A) Rent Expense

B) Rent Payable

C) Rent revenue

D) Prepaid Rent

ANSWER:

A)

$8,000 ($48,000 Prepaid Rent/6 Months)

B)

$ -0- Rent was paid in advance which means that no amount is owed at the end of the

year

C)

$ -0- Rent is an expense, or a cost to the company. It does not create revenue since no

amounts are earned for rent.

D)

$40,000 ($48,000 – $8,000 = $40,000)

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Analyzing

219. Ramos Corporation employs 14 workers in its retail service center. Each employee is paid $10 per hour and works 6

hours per day, Monday through Friday. Employees are paid every Friday for the workweek just ending. The last payday

was Friday, December 26, on which day the employees were paid through that date.

A)

Compute the dollar amount of the weekly payroll.

B)

Determine the effect on the accounting equation of the adjusting entry needed on

Wednesday, December 31, the last day of Ramos Corporation’s fiscal period.

ANSWER:

A)

6 hours × $10 per hour × 14 workers × 5 days = $4,200

B)

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders’

Equity

Revenues

–

Expenses

=

Net Income

Wages

Payable

2,520

(2,520)

Wage

Expense

2,520

(2,520)

6 hours × $10 per hour × 14 workers × 3 days = $2,520