Test Bank for Accounting Principles, Eleventh Edition. ACC100. All Answers.

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CHAPTER 3 ADJUSTING THE ACCOUNTS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY SUMMARY OF LEARNING OBJ... ECTIVES BY QUESTION TYPE SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE CHAPTER LEARNING OBJECTIVES 1. Explain the time period assumption. The time period assumption assumes that the economic life of a business is divided into artificial time periods. 2. Explain the accrual basis of accounting. Accrual-basis accounting means that companies record events that change a company's financial statements in the periods in which those events occur, rather than in the periods in which the company receives or pays cash. 3. Explain the reasons for adjusting entries and identify the major types of adjusting entries. Companies make adjusting entries at the end of an accounting period. Such entries ensure that companies recognize revenues in the period in which the performance obligation is satisfied and recognize expenses in the period in which they are incurred. The major types of adjusting entries are deferrals (prepaid expenses and unearned revenues) and accruals (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 to record the portion of the prepayment 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. Companies make adjusting entries for accruals to record revenues for services performed and expenses incurred in the current accounting period that have not been recognized through daily entries. 6. Describe the nature and purpose of an adjusted trial balance. An adjusted trial balance shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. Its purpose is to prove the equality of the total debit balances and total credit balances in the ledger after all adjustments. a7. Prepare adjusting entries for the alternative treatment of deferrals. Companies may initially debit prepayments to an expense account. Likewise, they may credit unearned revenues to a revenue account. At the end of the period, these accounts may be overstated. The adjusting entries for prepaid expenses are a debit to an asset account and a credit to an expense account. Adjusting entries for unearned revenues are a debit to a revenue account and a credit to a liability account. a8. Discuss financial reporting concepts. To be judged useful, information should have the primary characteristics of relevance and faithful representation. In addition, it should be comparable, consistent, verifiable, timely, and understandable. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption states that economic events can be identified with a particular unit of accountability. The time period assumption states that the economic life of a business can be divided into artificial time periods and that meaningful accounting reports can be prepared for each period. The going concern assumption states that the company will continue in operation long enough to carry out its existing objectives and commitments. The historical cost principle states that companies should record assets at their cost. The fair value principle indicates that assets and liabilities should be reported at fair value. The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. The expense recognition principle dictates that efforts (expenses) be matched with results (revenues) The full disclosure principle requires that companies disclose circumstances and events that matter to financial statement users. The cost constraint weighs the cost that companies incur to provide a type of information against its benefits to financial statement users. TRUE-FALSE STATEMENTS 1. Many business transactions affect more than one time period. , LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 2. The time period assumption states that the economic life of a business entity can be divided into artificial time periods. , LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 3. The time period assumption is often referred to as the expense recognition principle. , LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 4. A company's calendar year and fiscal year are always the same. , LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Communications, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 5. Accounting time periods that are one year in length are referred to as interim periods. , LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving 6. Income will always be greater under the cash basis of accounting than under the accrual basis of accounting. , LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving 7. The cash basis of accounting is not in accordance with generally accepted accounting principles. , LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 8. The expense recognition principle requires that efforts be matched with accomplishments. , LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 9. Expense recognition is tied to revenue recognition. , LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving 10. The revenue recognition principle dictates that revenue be recognized in the accounting period in which cash is received. , LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 11. Adjusting entries are not necessary if the trial balance debit and credit column balances are equal. , LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 12. An adjusting entry always involves two balance sheet accounts. , LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 13. Adjusting entries are often made because some business events are not recorded as they occur. , LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 14. Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger. , LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 15. Revenue received before services are performed and expenses paid before being used or consumed are both initially recorded as liabilities. , LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 16. Accrued revenues are revenues which have been received but not yet recognized. , LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 17. The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique. , LO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 18. Accumulated Depreciation is a liability account and has a normal credit account balance. , LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 19. A liability—revenue account relationship exists with an unearned rent revenue adjusting entry. , LO 4, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 20. The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same. , LO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 21. Unearned revenue is a prepayment that requires an adjusting entry when services are performed. , LO 4, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 22. Asset prepayments become expenses when they expire. , LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving 23. A contra asset account is subtracted from a related account in the balance sheet. , LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Communications, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 24. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future. , LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 25. The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset. , LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 26. Accrued revenues are revenues that have been recognized and received before financial statements have been prepared. , LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 27. Financial statements can be prepared from the information provided by an adjusted trial balance. , LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a28. The adjusting entry at the end of the period to record an expired cost may be different depending on whether the cost was initially recorded as an asset or an expense. , LO 7, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving a29. Rent received in advance and credited to a rent revenue account which is still unearned at the end of the period, will require an adjusting entry crediting a liability account for the amount still unearned. , LO 7, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a30. An adjusting entry requiring a credit to Insurance Expense indicates that the initial transaction was charged to an asset account. , LO 7, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a31. To be faithfully representative, accounting information should predict future events, confirm prior expectations, and be reported on a timely basis. , LO 8, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a32. Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company. , LO 8, Bloom: C, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a33. Consistency in accounting means that a company uses the same accounting principles from one accounting period to the next accounting period. , LO 8, Bloom: C, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a34. The quality of consistency pertains to the use of the same accounting principles by firms in the same industry. , LO 8, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a35. The periodicity assumption states that the business will remain in operation for the foreseeable future. , LO 8, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a36. For accounting purposes, business transactions should be kept separate from the personal transactions of the owners of the business. , LO 8, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: FSA a37. The economic entity assumption states that economic events can be identified with a particular unit of accountability. , LO 8, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Reporting a38. The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records. , LO 8, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: FSA a39. The going concern assumption is that the business will continue in operation long enough to carry out its existing objectives and commitments. , LO 8, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a40. A common application of materiality is weighing the factual nature of cost figures versus the relevance of fair value. , LO 8, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: FSA Additional True-False Questions 41. The expense recognition principle requires that expenses be matched with revenues. , LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 42. In general, adjusting entries are required each time financial statements are prepared. , LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 43. Every adjusting entry affects one balance sheet account and one income statement account. , LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 44. The Accumulated Depreciation account is a contra asset account that is reported on the balance sheet. , LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Communication, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 45. Accrued revenues are amounts recorded and received but not yet recognized. , LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 46. An adjusted trial balance should be prepared before the adjusting entries are made. , LO 6, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a47. When a prepaid expense is initially debited to an expense account, expenses and assets are both overstated prior to adjustment. , LO 7, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving Answers to True-False Statements MULTIPLE CHOICE QUESTIONS 48. Monthly and quarterly time periods are called a. calendar periods. b. fiscal periods. c. interim periods. d. quarterly periods. , LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving 49. The time period 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 company'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. , LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 50. An accounting time period that is one year in length, but does not begin on January 1, is referred to as a. a fiscal year. b. an interim period. c. the time period assumption. d. a reporting period. , LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 51. Adjustments would not be necessary if financial statements were prepared to reflect net income from a. monthly operations. b. fiscal year operations. c. interim operations. d. lifetime operations. , LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 52. Management usually desires ________ financial statements and the IRS requires all businesses to file _________ tax returns. a. annual, annual b. monthly, annual c. quarterly, monthly d. monthly, monthly LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 53. The time period assumption is also referred to as the a. calendar assumption. b. cyclicity assumption. c. periodicity assumption. d. fiscal assumption. , LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 54. In general, the shorter the time period, the difficulty of making the proper adjustments to accounts a. is increased. b. is decreased. c. is unaffected. d. depends on if there is a profit or loss. , LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 55. Which of the following is not a common time period chosen by businesses as their accounting period? a. Daily b. Monthly c. Quarterly d. Annually , LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 56. Which of the following time periods would not be referred to as an interim period? a. Monthly b. Quarterly c. Semi-annually d. Annually , LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 57. The fiscal year of a business is usually determined by a. the IRS. b. a lottery. c. the business. d. the SEC. , LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 58. Which of the following is in accordance with generally accepted accounting principles? a. Accrual-basis accounting b. Cash-basis accounting c. Both accrual-basis and cash-basis accounting d. Neither accrual-basis nor cash-basis accounting , LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 59. The revenue recognition principle dictates that revenue should be recognized in the accounting 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. LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 60. In a service-type business, revenue is considered 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. , LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 61. The expense recognition principle matches a. customers with businesses. b. expenses with revenues. c. assets with liabilities. d. creditors with businesses. LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 62. Live Wire Hot Rod Shop follows the revenue recognition principle. Live Wire services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Live Wire on August 5. Live Wire receives the check in the mail on August 6. When should Live Wire show that the revenue was recognized? a. July 31 b. August 1 c. August 5 d. August 6 , LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 63. A company spends $15 million dollars for an office building. Over what period should the cost be written off? a. When the $15 million is expended in cash. b. All in the first year. c. Over the useful life of the building. d. After $15 million in revenue is recognized. , LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 64. 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. owner withdrawals should be matched with owner contributions. d. cash payments should be matched with cash receipts. LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 65. A flower shop makes a large sale for $1,200 on November 30. The customer is sent a statement 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 $1,200 considered to be recognized? a. December 5. b. December 10. c. November 30. d. December 1. , LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 66. A candy factory's employees work overtime to finish an order that is sold on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. The overtime wages should be expensed in a. February. b. March. c. the period when the workers receive their checks. d. either in February or March depending on when the pay period ends. , LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 67. Expenses sometimes make their contribution to revenue in a different period than when they are paid. When salaries and wages are incurred in one period and paid in the next period, this often leads to which account appearing on the balance sheet at the end of the time period? a. Due from Employees. b. Due to Employer. c. Salaries and Wages Payable. d. Salaries and Wages Expense. , LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 68. Under accrual-basis 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 financial statements are prepared under generally accepted accounting principles. , LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 69. Adjusting entries are required a. yearly. b. quarterly. c. monthly. d. every time financial statements are prepared. , LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving 70. Which one of the following is not an application of revenue recognition? 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. LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 71. 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 expense 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. LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 72. The following is selected information from Motley Corporation for the fiscal year ending October 31, 2014. Cash received from customers $300,000 Revenue recognized 375,000 Cash paid for expenses 180,000 Cash paid for computers on November 1, 2013 that will be used for 3 years (annual depreciation is $16,000) 48,000 Expenses incurred, including interest, but excluding any depreciation 220,000 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 Motley Corporation’s net income for the year ending October 31, 2014? a. $72,000. b. $104,000. c. $139,000. d. $155,000. , LO 2, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving Solution: $375,000  $220,000  $16,000 = $139,000 73. Crue Company had the following transactions during 2014: • Sales of $4,800 on account • Collected $2,000 for services to be performed in 2015 • Paid $1,625 cash in salaries • Purchased airline tickets for $250 in December for a trip to take place in 2015 What is Crue’s 2014 net income using accrual accounting? a. $2,925. b. $3,175. c. $4,925. d. $5,175. LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving Solution: $4,800  $1,625 = $3,175 74. Crue Company had the following transactions during 2014: • Sales of $4,500 on account • Collected $2,500 for services to be performed in 2015 • Paid $1,625 cash in salaries • Purchased airline tickets for $250 in December for a trip to take place in 2015 What is Crue’s 2014 net income using cash basis accounting? a. $625. b. $875. c. $5,125. d. $5,375. , LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving Solution: $2,500  $1,625  $250 = $625 75. 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. , LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 76. 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 incurred. d. when revenues are recorded in the period in which services are performed. , LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving 77. 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 followed. b. Adjusting entries are necessary to ensure that the expense recognition principle is followed. 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. , LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 78. 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. , LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 79. The preparation of adjusting entries is a. straight forward because the accounts that need adjustment will be out of balance. b. often an involved process requiring the skills of a professional. c. only required for accounts that do not have a normal balance. d. optional when financial statements are prepared. LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 80. If a resource has been consumed but a bill has not been received at the end of the accounting 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. , LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 81. 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. LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 82. 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. LO 3, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 83. Expenses incurred but not yet paid or recorded are called a. prepaid expenses. b. accrued expenses. c. interim expenses. d. unearned expenses. LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 84. A law firm received $3,000 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. , LO 3, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 85. Adjusting entries can be classified as a. postponements and advances. b. accruals and deferrals. c. deferrals and postponements. d. accruals and advances. LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 86. Accrued revenues are a. cash received and a liability recorded before services are performed. b. revenue for services performed and recorded as liabilities before they are received. c. revenue for services performed but not yet received in cash or recorded. d. revenue for services performed and already received in cash and recorded. , LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 87. Prepaid 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. , LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 88. 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. , LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 89. Unearned revenues are a. cash received and a liability recorded before services are performed. b. revenue for services performed and recorded as liabilities before they are received. c. revenue for services performed but not yet received in cash or recorded. d. revenue for services performed and already received in cash and recorded. , LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 90. A liability—revenue relationship exists with a. prepaid expense adjusting entries. b. accrued expense adjusting entries. c. unearned revenue adjusting entries. d. accrued revenue adjusting entries. , LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 91. Which of the following reflects the balances of prepayment accounts prior to adjustment? a. Balance sheet accounts are understated and income statement accounts are understated. b. Balance sheet accounts are overstated and income statement accounts are overstated. c. Balance sheet accounts are overstated and income statement accounts are understated. d. Balance sheet accounts are understated and income statement accounts are overstated. , LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 92. An asset—expense relationship exists with a. liability accounts. b. revenue accounts. c. prepaid expense adjusting entries. d. accrued expense adjusting entries. , LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 93. Lake of Fire Company purchased supplies costing $7,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of supplies revealed $1,900 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be a. Debit Supplies Expense, $1,900; Credit Supplies, $1,900. b. Debit Supplies, $5,100; Credit Supplies Expense, $5,100. c. Debit Supplies Expense, $5,100; Credit Supplies, $5,100. d. Debit Supplies, $1,900; Credit Supplies Expense, $1,900. , LO 3, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 94. If an adjustment is needed for unearned revenues, the a. liability and related revenue are overstated before adjustment. b. liability and related revenue are understated before adjustment. c. liability is overstated and the related revenue is understated before adjustment. d. liability is understated and the related revenue is overstated before adjustment. , LO 4, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 95. The balance in the supplies account on June 1 was $5,200, supplies purchased during June were $3,500, and the supplies on hand at June 30 were $3,000. The amount to be used for the appropriate adjusting entry is a. $3,500. b. $5,700. c. $6,500. d. $11,700. LO 4, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 96. Depreciation expense for a period is the a. original cost of an asset – accumulated depreciation. b. book value of the asset ÷ useful life. c. portion of an asset’s cost that expired during the period. d. market value of the asset ÷ useful life. 97. Accumulated Depreciation is a. an expense account. b. an owner's equity account. c. a liability account. d. a contra asset account. 98. Meat Puppets Company purchased equipment for $7,200 on December 1. It is estimated that annual depreciation on the equipment will be $1,800. If financial statements are to be prepared 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, $5,400; Credit Accumulated Depreciation, $5,400. d. Debit Equipment, $7,200; Credit Accumulated Depreciation, $7,200. 99. REM Real Estate received a check for $27,000 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 $27,000. Financial statements will be prepared on July 31. REM Real Estate should make the following adjusting entry on July 31: a. Debit Unearned Rent Revenue, $4,500; Credit Rent Revenue, $4,500. b. Debit Rent Revenue, $4,500; Credit Unearned Rent Revenue, $4,500. c. Debit Unearned Rent Revenue, $27,000; Credit Rent Revenue, $24,000. d. Debit Cash, $27,000; Credit Rent Revenue, $27,000. 100. 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. 101. 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 supplies on hand. 102. If a company fails to make an adjusting entry to record supplies expense, then a. owner's equity will be understated. b. expense will be understated. c. assets will be understated. d. net income will be understated. 103. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, $18,500, and unexpired amounts per analysis of policies of $6,000? a. Debit Insurance Expense, $6,000; Credit Prepaid Insurance, $6,000. b. Debit Insurance Expense, $18,500; Credit Prepaid Insurance, $18,500. c. Debit Prepaid Insurance, $12,500; Credit Insurance Expense, $12,500. d. Debit Insurance Expense, $12,500; Credit Prepaid Insurance, $12,500. 104. At December 31, 2014, before any year-end adjustments, Murmur Company's Insurance Expense account had a balance of $2,450 and its Prepaid Insurance account had a balance of $3,800. It was determined that $2,800 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be a. $2,450. b. $3,450. c. $2,800. d. $5,250. 105. 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. 106. A new accountant working for Spirit Walker Company records $900 Depreciation Expense on store equipment as follows: Dr. Depreciation Expense 900 Cr. Cash 900 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. 107. From an accounting standpoint, the acquisition of productive facilities can be thought of as a long-term a. accrual of expense. b. accrual of revenue. c. accrual of unearned revenue. d. prepayment for services. 108. The balance in the Prepaid Rent account before adjustment at the end of the year is $21,000, which represents three months’ rent paid on December 1. The adjusting entry required on December 31 is to a. debit Rent Expense, $7,000; credit Prepaid Rent, $7,000. b. debit Rent Expense, $14,000; credit Prepaid Rent $14,000. c. debit Prepaid Rent, $7,000; credit Rent Expense, $7,000. d. debit Prepaid Rent, $14,000; credit Rent Expense, $14,000. 109. 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. 110. The difference between the cost of a depreciable asset and its related accumulated depreciation 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. 111. Book value is also referred to as a. accumulated depreciation. b. carrying value. c. fair value. d. original cost. 112. Which of the following would not result in unearned revenue? 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 113. If business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit a. cash. b. prepaid rent. c. unearned rent revenue. d. rent revenue. 114. Unearned revenue is classified as a. an asset account. b. a revenue account. c. a contra-revenue account. d. a liability account. 115. If a business has received cash in advance of services performed and credits a liability account, 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. LO 4, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving 116. Dreamtime Laundry purchased $7,000 worth of supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the 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, $1,000; Credit Supplies Expense, $1,000. c. Debit Supplies, $6,000; Credit Supplies Expense, $6,000. d. Debit Supplies Expense, $6,000; Credit Supplies, $6,000. 117. On July 1, Runner's Sports Store paid $14,000 to Corona Realty for 4 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 Runner’s Sports Store is a. Debit Rent Expense, $14,000; Credit Prepaid Rent, $3,500. b. Debit Prepaid Rent, $3,500; Credit Rent Expense, $3,500. c. Debit Rent Expense, $3,500; Credit Prepaid Rent, $3,500. d. Debit Rent Expense, $14,000; Credit Prepaid Rent, $14,000. 118. Fugazi City College sold season tickets for the 2014 football season for $240,000. A total of 8 games will be played during September, October and November. In September, three games were played. The adjusting journal entry at September 30 a. is not required. No adjusting entries will be made until the end of the season in November. b. will include a debit to Cash and a credit to Ticket Revenue for $60,000. c. will include a debit to Unearned Ticket Revenue and a credit to Ticket Revenue for $90,000. d. will include a debit to Ticket Revenue and a credit to Unearned Ticket Revenue for $80,000. 119. Fugazi City College sold season tickets for the 2014 football season for $240,000. A total of 8 games will be played during September, October and November. In September, two games were played. In October, three games were played. The balance in Unearned Ticket Revenue at October 31 is a. $0. b. $60,000. c. $90,000. d. $150,000. 120. Fugazi City College sold season tickets for the 2014 football season for $240,000. A total of 8 games will be played during September, October and November. Assuming all the games are played, the Unearned Ticket Revenue balance that will be reported on the December 31 balance sheet will be a. $0. b. $90,000. c. $150,000. d. $240,000. 121. At March 1, 2014, Minutemen Corp. had supplies on hand of $500. During the month, Minutemen purchased supplies of $1,200 and used supplies of $1,500. The March 31 adjusting journal entry should include a a. debit to the supplies account for $1,500. b. credit to the supplies account for $500. c. debit to the supplies account for $1,200. d. credit to the supplies account for $1,500. 122. Double Nickels Company purchased equipment for $9,000 on January 1, 2014. The company expects to use the equipment for 3 years. It has no salvage value. Monthly depreciation expense on the asset is a. $0. b. $250. c. $3,000. d. $9,000. 123. Husker Du Supplies 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. debit to Prepaid Insurance and a credit to Insurance Expense for $200. c. debit to Insurance Expense and a credit to Prepaid Insurance for $150. d. debit to Insurance Expense and a credit to Cash for $150. 124. Mary Chain Investments purchased an 18-month insurance policy on May 31, 2014 for $3,600. The December 31, 2014 balance sheet would report Prepaid Insurance of a. $0 because Prepaid Insurance is reported on the Income Statement. b. $1,400. c. $2,200. d. $3,600. 125. At March 1, Psychocandy Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $750 and consumed supplies of $800. If no adjusting entry is made for supplies a. owner’s equity will be overstated by $800. b. expenses will be understated by $750. c. assets will be understated by $250. d. net income will be understated by $800. 126. Pixies Inc. pays its rent of $54,000 annually on January 1. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following will be true? a. Failure to make the adjustment does not affect the February financial statements. b. Expenses will be overstated by $4,500 and net income and owner’s equity will be understated by $4,500. c. Assets will be overstated by $9,000 and net income and owner’s equity will be understated by $9,000. d. Assets will be overstated by $4,500 and net income and owner’s equity will be overstated by $4,500. 127. On January 1, 2013, Doolittle Company purchased furniture for $7,560. The company expects to use the furniture for 3 years. The asset has no salvage value. The book value of the furniture at December 31, 2014 is a. $0. b. $2,520. c. $5,040. d. $7,560. 128. On January 1, 2013, Mudhoney Inc. purchased equipment for $45,000. The company is depreciating the equipment at the rate of $750 per month. At January 31, 2014, the balance in Accumulated Depreciation is a. $750. b. $9,000. c. $9,750. d. $35,250. 129. On January 1, 2014, Superfuzz Company purchased equipment for $40,000. The company is depreciating the equipment at the rate of $800 per month. The book value of the equipment at December 31, 2014 is a. $0. b. $9,600. c. $30,400. d. $40,000. 130. Ultramega Company collected $19,600 in May of 2014 for 4 months of service which would take place from October of 2014 through January of 2015. The revenue reported from this transaction during 2014 would be a. 0. b. $4,900. c. $14,700. d. $19,600. 131. Soundgarden Company collected $18,200 in May of 2014 for 5 months of service which would take place from October of 2014 through February of 2015. The revenue reported from this transaction during 2014 would be a. $0. b. $7,280. c. $10,920. d. $18,200. 132. Sonic Youth Corporation purchased a one-year insurance policy in January 2014 for $49,500. The insurance policy is in effect from March 2014 through February 2015. If the company neglects to make the proper year-end adjustment for the expired insurance a. net income and assets will be understated by $41,250. b. net income and assets will be overstated by $41,250. c. net income and assets will be understated by $8,250. d. net income and assets will be overstated by $8,250. 133. Dinosaur Junior Corporation purchased a one-year insurance policy in January 2014 for $75,000. The insurance policy is in effect from May 2014 through April 2015. If the company neglects to make the proper year-end adjustment for the expired insurance a. net income and assets will be understated by $50,000. b. net income and assets will be overstated by $50,000. c. net income and assets will be understated by $25,000. d. net income and assets will be overstated by $25,000. 134. If an adjusting entry is not made for an accrued revenue, a. assets will be overstated. b. expenses will be understated. c. owner's equity will be understated. d. revenues will be overstated. 135. If an adjusting entry is not made for an accrued expense, a. expenses will be overstated. b. liabilities will be understated. c. net income will be understated. d. owner's equity will be understated. 136. 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. 137. 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. 138. Sebastian Belle has performed $2,000 of CPA services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Sebastian 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 139. Sebastian Belle, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will Sebastian 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 140. NWA Air Charter signed a four-month note payable in the amount of $20,000 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. $150. b. $200. c. $600. d. $1,800. 141. Uncle Tupelo's Gifts 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 $75,000 with annual interest of 12%. 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 1,500 Interest Payable 1,500 b. Interest Expense 2,250 Interest Payable 2,250 c. Interest Expense 1,500 Cash 1,500 d. Interest Expense 1,500 Notes Payable 1,500 142. Stone Roses Candies paid employee wages on and through Friday, January 26, and the next payroll 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 $1,500 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January? a. Salaries and Wages Expense 1,500 Salaries and Wages Payable 1,500 b. Salaries and Wages Expense 7,500 Salaries and Wages Payable 7,500 c. Salaries and Wages Expense 4,500 Salaries and Wages Payable 4,500 d. No adjusting entry is required. 143. A company shows a balance in Salaries and Wages Payable of $38,000 at the end of the month. The next payroll amounting to $48,000 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 48,000 Salaries and Wages Payable 48,000 b. Salaries and Wages Expense 48,000 Cash 48,000 c. Salaries and Wages Expense 10,000 Cash 10,000 d. Salaries and Wages Expense 10,000 Salaries and Wages Payable 38,000 Cash 48,000 144. A business pays weekly salaries of $30,000 on Friday for a five-day week ending on that day. The adjusting entry necessary at the end of the fiscal period ending on a Thursday is a. debit Salaries and Wages Payable, $24,000; credit Cash, $24,000. b. debit Salaries and Wages Expense, $24,000; credit Cash, $24,000. c. debit Salaries and Wages Expense, $24,000; credit Salaries and Wages Payable, $24,000. d. debit Salaries and Wages Expense, $6,000; credit Salaries and Wages Payable, $6,000. 145. SurferRosa Music Store borrowed $30,000 from the bank signing a 9%, 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, $2,700; Credit Interest Payable, $2,700. b. Debit Interest Expense, $225; Credit Interest Payable, $225. c. Debit Notes Payable, $2,700; Credit Cash, $2,700. d. Debit Cash, $675; Credit Interest Payable, $675. 146. Nirvana Corporation issued a one-year, 9%, $400,000 note on April 30, 2014. Interest expense for the year ended December 31, 2014 was a. $21,000. b. $24,000. c. $27,000. d. $36,000. 147. Yo La Corporation issued a one-year, 6%, $100,000 note on August 31, 2014. Interest expense for the year ended December 31, 2014 was a. $6,000. b. $2,500. c. $2,000. d. $1,500. 148. Employees at Tengo Corporation are paid $15,000 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. $15,000 b. $9,000 c. $6,000 d. None, matching requires the weekly salary to be accrued on December 31. 149. 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. 150. The adjusted trial balance is prepared a. after financial statements are prepared. b. before the trial balance. c. to prove the equality of total assets and total liabilities. d. after adjusting entries have been journalized and posted. 151. 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 accounts 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. 152. 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. a 153. Sebadoah is a barber who does his own accounting for his shop. When he buys supplies he routinely debits Supplies Expense. Sebadoah purchased $1,500 of supplies in January and his inventory at the end of January shows $300 of supplies remaining. What adjusting entry should Sebadoah make on January 31? a. Supplies Expense 300 Supplies 300 b. Supplies Expense 1,500 Cash 1,500 c. Supplies 300 Supplies Expense 300 d. Supplies Expense 1,200 Supplies 1,200 a 154. Alternative adjusting entries do not apply to a. accrued revenues and accrued expenses. b. prepaid expenses. c. unearned revenues. d. prepaid expenses and unearned revenues. a 155. Elliott Smith is a lawyer who requires that his clients pay him in advance of legal services rendered. Elliott routinely credits Service Revenue when his clients pay him in advance. In June Elliott collected $15,000 in advance fees and completed 70% of the work related to these fees. What adjusting entry is required by Elliott's firm at the end of June? a. Unearned Service Revenue 10,500 Service Revenue 10,500 b. Unearned Service Revenue 4,500 Service Revenue 4,500 c. Cash 15,000 Service Revenue 15,000 d. Service Revenue 4,500 Unearned Service Revenue 4,500 a 156. If prepaid expenses are initially recorded in expense accounts and have not all been used at the end of the accounting period, then failure to make an adjusting entry will cause a. assets to be understated. b. assets to be overstated. c. expenses to be understated. d. contra-expenses to be overstated. a 157. If unearned revenues are initially recorded in revenue accounts and not all the related services been performed at the end of the accounting period, then failure to make an adjusting entry will cause a. liabilities to be overstated. b. revenues to be understated. c. revenues to be overstated. d. accounts receivable to be overstated. a158. On January 2, 2014, Superchunk purchased a general liability insurance policy for $2,700 for coverage for the calendar year. The entire $2,700 was charged to Insurance Expense on January 2, 2014. If the firm prepares monthly financial statements, the proper adjusting entry on January 31, 2014, will be: a. Insurance Expense 2,475 Prepaid Insurance 2,475 b. Prepaid Insurance 2,475 Insurance Expense 2,475 c. Insurance Expense 225 Prepaid Insurance 225 d. Prepaid Insurance 225 Insurance Expense 225 a 159. If accounting information has relevance, it is useful in making predictions about a. future tax audits. b. new accounting principles. c. foreign currency exchange rates. d. the future events of a company. a 160. Which one of the following is not an enhancing quality of useful information? a. Timeliness b. Understandability c. Materiality d. Comparability a 161. All of the following are characteristics of accounting information except a. faithful representation. b. comparability. c. relevance. d. flexibility. a 162. The two fundamental qualities of useful information are a. verifiability and timeliness. b. relevance and faithful representation. c. comparability and flexibility. d. understandability and consistency. a 163. Relevant accounting information a. is information that has been audited. b. must be reported within the operating cycle or one year, whichever is longer. c. has been objectively determined. d. is information that is capable of making a difference in a business decision. a 164. Characteristics associated with relevant accounting information are a. comparability and timeliness. b. predictive value and confirmatory value. c. neutral and verifiable. d. consistency and understandability. a 165. Characteristics associated with faithfully representative accounting information are a. verifiable and timely. b. neutral and verifiable. c. complete and neutral. d. relevance and verifiable. a 166. Which of the following statements is not true? a. Comparability means using the same accounting principles from year to year within a company. b. Faithful representation is the quality of information that gives assurance that it is free from error. c. Relevant accounting information must be capable of making a difference in the decision. d. The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decision. a167. An item is considered material if a. it doesn't cost a lot of money. b. it is of a tangible good. c. it is likely to influence the decision of an investor or creditor. d. the cost of reporting the item is greater than its benefits. a168. A company using the same accounting principles from year to year is an application of a. timeliness. b. consistency. c. full disclosure. d. meteriality. a 169. Which of the following is a constraint in accounting? a. Comparability. b. Cost. c. Consistency. d. Relevance. a 170. The periodicity assumption states that the economic life of a business can be divided into a. equal time periods. b. cyclical time periods. c. artificial time periods. d. perpetual time periods. a 171. Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments? a. Monetary unit assumption. b. Economic entity assumption. c. Periodicity assumption. d. Going concern assumption. a 172. The economic entity assumption states that economic events a. of different entities can be combined if all the entities are corporations. b. must be reported to the IASB. c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners. d. of every entity can be separately identified and accounted for. a 173. Which of the following is not an accounting assumption? a. Integrity. b. Going concern. c. Periodicity. d. Economic entity. a 174. The periodicity assumption states a. the business will remain in operation for the foreseeable future. b. the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared. c. every economic entity can be separately identified and accounted for. d. only those things that can be expressed in money are included in the accounting records. a175. Valuing assets at their fair value rather than at their cost is inconsistent with the: a. economic entity assumption. b. historical cost principle. c. periodicity assumption. d. full disclosure principles. a 176. Jackson Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which of the following qualities of useful information has Jackson most likely violated? a. Comparability b. Relevance c. Faithful representation d. Consistency Additional Multiple Choice Questions 177. Which of the following statements concerning accrual-basis accounting is incorrect? a. Accrual-basis accounting follows the revenue recognition principle. b. Accrual-basis accounting is the method required by generally accepted accounting principles. c. Accrual-basis accounting recognizes expenses when they are paid. d. Accrual-basis accounting follows the expense recognition principle. 178. The revenue recognition principle dictates that revenue be recognized in the accounting period a. before it is earned. b. after it is earned. c. in which the performance obligation is satisfied. d. in which it is collected. 179. An expense is recorded under the cash basis only when a. services are performed. b. it is earned. c. cash is paid. d. it is incurred. 180. For prepaid expense adjusting entries a. an expense—liability account relationship exists. b. prior to adjustment, expenses are overstated and assets are understated. c. the adjusting entry results in a debit to an expense account and a credit to an asset account. d. none of these answer choices are correct. 181. Expenses paid and recorded as assets before they are used are called a. accrued expenses. b. interim expenses. c. prepaid expenses. d. unearned expenses. 182. Buffalo Tom Cruises purchased a five-year insurance policy for its ships on April 1, 2014 for $60,000. Assuming that April 1 is the effective date of the policy, the adjusting entry on December 31, 2014 is a. Prepaid Insurance 9,000 Insurance Expense 9,000 b. Insurance Expense 9,000 Prepaid Insurance 9,000 c. Insurance Expense 12,000 Prepaid Insurance 12,000 d. Insurance Expense 3,000 Prepaid Insurance 3,000 183. Pavement Company purchased a truck from Bee Thousand Corp. by issuing a 6-month, 8% note payable for $90,000 on November 1. On December 31, the accrued expense adjusting entry is a. No entry is required. b. Interest Expense 7,200 Interest Payable 7,200 c. Interest Expense 3,600 Interest Payable 3,600 d. Interest Expense 1,200 Interest Payable 1,200 184. If the adjusting entry for depreciation is not made, a. assets will be understated. b. owner's equity will be understated. c. net income will be understated. d. expenses will be understated. 185. Ryan Adams, an employee of Heartbreaker Corp., will not receive her paycheck until April 2. Based on services performed from March 15 to March 31, his salary was $1,000. The adjusting entry for Heartbreaker Corp. on March 31 is a. Salaries and Wages Expense 1,000 Salaries and Wages Payable 1,000 b. No entry is required. c. Salaries and Wages Expense 1,000 Cash 1,000 d. Salaries and Wages Payable 1,000 Cash 1,000 186. Which of the following statements related to the adjusted trial balance is incorrect? a. It shows the balances of all accounts at the end of the accounting period. b. It is prepared before adjusting entries have been made. c. It proves the equality of the total debit balances and the total credit balances in the ledger. d. Financial statements can be prepared directly from the adjusted trial balance. 187. Financial statements are prepared directly from the a. general journal. b. ledger. c. trial balance. d. adjusted trial balance. 188. Accrual-basis accounting is allowed under a. GAAP but not IFRS. b. IFRS but not GAAP. c. both IFRS and GAAP. d. neither IFRS nor GAAP. 189. Cash-basis accounting is allowed under a. GAAP but not IFRS. b. IFRS but not GAAP. c. both IFRS and GAAP. d. neither IFRS nor GAAP. 190. The time period assumption is used under a. GAAP but not IFRS. b. IFRS but not GAAP. c. both IFRS and GAAP. d. neither IFRS nor GAAP. 191. IFRS requires that companies present a. a complete set of financial statement, including comparative information, annually. b. only a statement of financial position, including comparative information, annually. c. only an income statement, including comparative information, annually. d. only a statement of changes in cash flows, including comparative information, annually. 192. Revenue recognition under IFRS is a. substantially different from revenue recognition under GAAP. b. generally the same as revenue recognition under GAAP, but with more detailed guidance. c. generally the same as revenue recognition under GAAP, but with less detailed guidance. d. exactly the same as revenue recognition under GAAP. 193. Revenue recognition fraud is a. a major issue in the U.S. but not worldwide. b. a major issue internationally, but not in the U.S. c. a major issue in the U.S. and worldwide. d. not a major issue anywhere. 194. The IFRS standard dealing specifically with revenue recognition is based on a. whether the revenue is realized or realizable. b. whether the revenue is earned. c. whether the revenue is realized or realizable, and earned. d. the probability that economic benefits will flow to the company, and reliability of measurement. 195. Depreciation based on revaluation of land and buildings is permitted under a. GAAP but not IFRS. b. IFRS but not GAAP. c. both IFRS and GAAP. d. neither IFRS nor GAAP. 196. Under IFRS, income is defined as a. revenue less expenses. b. revenues and gains, less expenses and losses. c. revenues and gains. d. revenues, gains, and contributions by owners. 197. The procedures of the closing process are applicable to all companies when they are using a. GAAP but not IFRS. b. IFRS but not GAAP. c. both IFRS and GAAP. d. neither IFRS nor GAAP. BRIEF EXERCISES BE 198 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. BE 199 Prepare adjusting entries for the following transactions. Omit explanations. 1. Depreciation on equipment is $900 for the accounting period. 2. There was no beginning balance of supplies and purchased $500 of supplies during the period. At the end of the period $150 of supplies were on hand. 3. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $400 was unexpired. BE 200 On June 1, during its first month of operations, Crooked Rain purchased supplies for $4,500 and debited the supplies account for that amount. At June 30, an inventory of supplies showed $1,000 of supplies on hand. What adjusting journal entry should be made for June? BE 201 On January 1, Chan & Chan, CPAs received a $15,000 cash retainer for accounting services to be rendered ratably over the next 3 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is recognized equally over the 3-month period, what adjusting journal entry should be made at January 31? BE 202 On February 1, Results Income Tax Service received a $3,000 cash retainer for tax preparation services to be rendered equally over the next 4 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is recognized equally over the 4-month period, what balance would be reported on the February 28 balance sheet for Unearned Service Revenue? BE 203 Bakesale Enterprises purchased equipment on May 1, 2014 for $6,300. The company expects to use the equipment for 5 years. It has no salvage value. 1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared (annual depreciation is $1,260)? 2. What is the book value of the equipment at May 31, 2014? BE 204 Rhodes National purchased software on October 1, 2014 for $14,400. The company expects to use the software for 3 years. It has no salvage value. 1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared? (annual depreciation is $4,800) 2. What balance will be reported on the December 31, 2014 balance sheet for Accumulated Depreciation? BE 205 Teenage Fanclub Printings sold annual subscriptions to their magazine for $30,000 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 206 On January 1, 2014, Bottle Rockets Corp. purchased a general liability insurance policy for $9,000 to provide coverage for the calendar year. 1. If the company recorded the policy as an asset when purchased, what is the monthly adjusting journal entry that should be recorded at January 31, 2014? *2. If the company expensed the cost of the policy on January 1, 2014, what is the monthly adjusting entry that should be recorded at January 31, 2014? BE 207 Identify the impact on the balance sheet if the following information is not used to adjust the accounts. 1. Supplies consumed totaled $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 208 Determine the impact on the balance sheet accounts if the following information is not used to adjust the accounts of Mood Food Company for the month of January, 2014. Round answers to the nearest dollar. 1. The company rents extra office space to Beulah, CPAs. Beulah pays the $6,000 rent annually on January 1. 2. The company has an outstanding loan to its President in the amount of $150,000. The loan accrues interest at the annual rate of 6%. Principal and interest are due January 1, 2016. 3. The company completed work on a project during January that was not yet billed to the client. The client will be charged $3,100. BE 209 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. BE 210 Blue Guitar Music School borrowed $30,000 from the bank signing an 8%, 6-month note on November 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 211 The adjusted trial balance of Rocky Acre Spread Inc. on December 31, 2014 includes the following accounts: Accumulated Depreciation, $6,000; Depreciation Expense, $2,000; Notes Payable $7,500; Interest Expense $150; Utilities Expense, $300; Rent Expense, $500; Service Revenue, $19,600; Salaries and Wages Expense, $6,000; Supplies, $200; Supplies Expense, $1,200; Salaries and Wages Payable, $600. Prepare an income statement for the month of December. BE 212 The adjusted trial balance of Old 97 Automotive Service Company on June 30, 2014 includes the following accounts: Supplies, $300; Accumulated Depreciation, $9,500; Salaries Payable, $1,550, Notes Payable $6,750; Service Revenue, $22,100; Salaries and Wages Expense, $8,750; Depreciation Expense, $3,250; Supplies Expense, $1,000; Rent Expense, $400; Utilities Expense, $350; and Interest Expense $250. Prepare an income statement for the month of June. BE 213 The adjusted trial balance of Sodajerk Company at December 31, 2014 includes the following accounts: Owner's Capital $12,600; Owner's Drawings $7,000; Service Revenue $38,000; Salaries and Wages Expense $13,000; Insurance Expense $2,000; Rent Expense $3,500; Supplies Expense $2,500; and Depreciation Expense $2,000. Prepare an owner’s equity statement for the year. BE 214 The adjusted trial balance of Hanson Hawk Company at September 30, 2014 includes the following accounts: Owner's Capital $27,700; Owner's Drawings $9,750; Service Revenue $46,800; Insurance Expense $1,950; Salaries Expense $18,000; Rent Expense $3,000; Supplies Expense $650; and Depreciation Expense $1,100. Prepare an owner’s equity statement for the year. aBE 215 The following terms relate to the fundamental qualities of useful information. Match the key letter of the correct term with the descriptive statement below. a. Confirmatory value e. Faithful representation b. Neutral f. Timely c. Predictive value g. Verifiable d. Relevant _____ 1. Accounting information that is not biased toward one position or another. _____ 2. Providing information before it loses its capacity to influence decision. _____ 3. Independent measures, using the same methods, obtain similar results. _____ 4. Providing information that would make a difference in a business decision. _____ 5. Provide information that accurately depicts what really happened. _____ 6. Confirms or corrects prior decisions. LO 8, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting aBE 216 Presented below are the basic assumptions and principles underlying financial statements. a. Historical cost principle d. Going concern assumption b. Economic entity assumption e. Monetary unit assumption c. Full disclosure principle f. Periodicity assumption Identify the basic assumption or principle that is described below. _____ 1. The economic life of a business can be divided into artificial time periods. _____ 2. The business will continue in operation long enough to carry out its existing objectives. _____ 3. Assets should be recorded at their cost. _____ 4. Economic events can be identified with a particular unit of accountability. _____ 5. Circumstances and events that make a difference to financial statement users should be disclosed. _____ 6. Only transaction data that can be expressed in terms of money should be included in the accounting records. LO 8, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting EXERCISES Ex. 217 The balance sheets of Red House Painters include the following: 12/31/14 12/31/13 Interest Receivable $0 $4,300 Supplies 3,000 5,000 Salaries and Wages Payable 3,800 5,600 Unearned Service Revenue 4,000 -0- The income statement for 2014 shows the following: Interest Revenue $18,400 Service Revenue 72,700 Supplies Expense 8,700 Salaries and Wages Expense 39,000 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 revenue. Ex. 218 Hal Corp. prepared the following income statement using the cash basis of accounting: HAL CORP. Income Statement, Cash Basis For the Year Ended December 31, 2014 Service revenue (does not include $25,000 of services rendered on account because the collection will not be until 2015) $370,000 Expenses (does not include $15,000 of expenses on account because payment will not be made until 2015) 220,000 Net income $150,000 Additional data: 1. Depreciation on a company automobile for the year amounted to $6,000. This amount is not included in the expenses above. 2. On January 1, 2014, paid for a two-year insurance policy on the automobile amounting to $1,800. 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. Ex. 219 Before month-end adjustments are made, the February 28 trial balance of Neutral Milk Hotel contains revenue of $7,000 and expenses of $4,400. Adjustments are necessary for the following items: • Depreciation for February is $1,800. • Revenue recognized but not yet billed is $2,700. • Accrued interest expense is $700. • Revenue collected in advance that is now recognized is $2,500. • Portion of prepaid insurance expired during February is $400. Instructions Calculate the correct net income for Neutral Milk Hotel’s Income Statement for February. Ex. 220 On December 31, 2014, Fashion Nugget Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed net income of $35,000. The balance sheet showed total assets, $115,000; total liabilities, $45,000; and owner's equity, $70,000. The data for the three adjusting entries were: (1) Depreciation of $10,000 was not recorded on equipment. (2) Wages amounting to $7,000 for the last two days in December were not paid and not recorded. The next payroll will be in January. (3) Rent of $12,000 was paid for two months in advance on December 1. The entire amount was debited to Rent Expense when paid. Ex. 220 (cont.) Instructions Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses): Item Net Income Total Assets Total Liabilities Owner’s Equity Incorrect balances $ 35,000 $115,000 $ 45,000 $ 70,000 Effects of: Depreciation Wages Rent Correct Balances Ex. 221 Indicate (a) the type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense), and (b) the accounts before adjustment (overstated or understated) for each of the following: 1. Supplies of $200 have been used. 2. Salaries of $600 are unpaid. 3. Rent received in advance totaling $300 has been earned. 4. Services provided but not recorded total $500. Ex. 222 Buena Vista Social Club accumulates the following adjustment data at December 31. 1. Revenue of $1,600 collected in advance has been recognized. 2. Salaries of $600 are unpaid. 3. Prepaid rent totaling $500 has expired. 4. Supplies of $450 have been used. 5. Revenue recognized but unbilled total $750. 6. Utility expenses of $250 are unpaid. 7. Interest of $300 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 $15,500. What is the adjusted net income? Prepare your answer in the tabular form presented below. Account Balances Before Adjustment Type of Account (Understatement Adjustment Relationship or Overstatement) Adjusting Entry Ex. 223 The adjusted trial balance of the Victoria Lane Paving Company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, 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 Revenue Ex. 224 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. Interest 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. Ex. 225 The Shins, a minor league 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 $210,000 to Kansas City as advance rent for use of Kansas City Stadium for the six month period April 1 through September 30. (b) Collected $450,000 cash from sales of season tickets for the team's 20 home games. This amount was credited to Unearned Ticket Revenue. During the month of April, the Shins played four home games and five road games. Instructions Prepare the adjusting entries required at April 30 for the transactions above. Ex. 226 On July 1, 2014, Damlen Jurado Company pays $12,000 to its insurance company for a 2-year insurance policy. Instructions Prepare the necessary journal entries for Damlen Jurado on July 1 and December 31. Ex. 227 On July 1, 2014, Jeffrey Underwriters Associates received $8,000 from a client for a 2-year insurance policy. Instructions Prepare the necessary journal entries for Jeffrey Underwriters Associates on July 1 and December 31. Ex. 228 Mother Hips Garment Company purchased equipment on June 1 for $90,000, paying $20,000 cash and signing a 9%, 2-month note for the remaining balance. The equipment is expected to depreciate $18,000 each year. Mother Hips Garment Company prepares monthly financial statements. Instructions (a) Prepare the general journal entry to record the acquisition of the equipment on June 1st. (b) Prepare any adjusting journal entries that should be made on June 30th. (c) Show how the equipment will be reflected on Mother Hips Garment Company’s balance sheet on June 30th. Ex. 229 Scotsman Company prepares monthly financial statements. Below are listed some selected accounts and their balances in the September 30 trial balance before any adjustments have been made for the month of September. SCOTSMAN COMPANY Trial Balance (Selected Accounts) September 30, 2014 ——————————————————————————————————————————— Debit Credit Supplies $ 3,200 Prepaid Insurance 4,200 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 account balances) An analysis of the account balances by the company's accountant provided the following additional information: 1. A physical count of 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. Equipment depreciated $3,000 per year. 4. The amount of rent received in advance that remains unearned at September 30 is $500. Instructions Using the above additional information, prepare the adjusting entries that should be made by Scotsman Company on September 30. Ex. 230 Prepare the required end-of-period adjusting entries for each independent case listed below. Case 1 Sleater-Kinney Company began the year with a $3,000 balance in the Supplies account. During the year, $8,500 worth of additional supplies were purchased. A physical count of supplies on hand at the end of the year revealed that $7,400 worth of supplies had been used during the year. No adjusting entry has been made until year end. Case 2 Western Company has a calendar year-end accounting period. On July 1, the company purchased equipment for $30,000. It is estimated that the equipment will depreciate $300 each month. No adjusting entry has been made until year end. Case 3 Ranch Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 3 tenants in $900 per month apartments and one tenant in the $1,200 per month apartment had not paid their August rent as of August 31st. Solution 230 (10 min.) Case 1—December 31 Supplies Expense 7,400 Supplies 7,400 (To record office supplies used during the year) Case 2—December 31 Depreciation Expense 1,800 Accumulated Depreciation—Equipment 1,800 (To record depreciation expense for six months) $300 × 6 months = $1,800 Depreciation Case 3—August 31 Accounts Receivable 3,900 Rent Revenue 3,900 (To accrue rent revenue recognized but not yet received) LO 4 and 5, BT: AN, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving Ex. 231 Aeroplane Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered. AEROPLANE INSURANCE AGENCY Income Statement For the Month Ended June 30 ——————————————————————————————————————————— Revenues Sales revenue $35,000 Expenses Salaries and wages expense $6,000 Rent expense 4,200 Depreciation expense 2,800 Advertising expense 800 Total expenses 13,800 Net income $21,200 Additional Data: When the income statement was prepared, the company accountant neglected to take into consideration the following information: 1. A utility bill for $2,500 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 $25,000. 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 $3,000. The agency purchased additional supplies during the month for $4,000 in cash and $2,200 of supplies were on hand at June 30. 4. The agency purchased a new car at the beginning of the month for $22,000 cash. The car will depreciate $5,400 per year. 5. Salaries owed to employees at the end of the month total $6,100. The salaries will be paid on July 5. Instructions Prepare a correct income statement. Ex. 232 One part of eight adjusting entries is given below. Instructions Indicate the account title for the other part of each entry. 1. Unearned Service Revenue is debited. 2. Prepaid Rent is credited. 3. Accounts Receivable is debited. 4. Depreciation Expense is debited. 5. Salaries and Wages Expense is debited. 6. Interest Payable is credited. 7. Service Revenue is credited (give two possible debit accounts). 8. Supplies Expense is debited. Ex. 233 For each of the following accounts, indicate (a) the type of adjusting entry (prepaid expense, accrued revenue, etc.) and (b) the related account in the adjusting entry. 1. Depreciation Expense 2. Salaries and Wages Payable 3. Service Revenue 4. Supplies 5. Unearned Service Revenue Ex. 234 Prepare the necessary adjusting entry for each of the following: 1. Services provided but unrecorded totaled $700. 2. Accrued salaries at year-end are $1,000. 3. Depreciation on equipment for the year is $600. : 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving Ex. 235 The following ledger accounts are used by the Sebastopol Dog Track: Accounts Receivable Prepaid Advertising Prepaid Rent Unearned Ticket Revenue Advertising Expense Rent Expense Ticket Revenue Sales Revenue 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 September 30, the end of the fiscal year. (a) On September 1, paid rent on the track facility for three months, $210,000. (b) On September 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 $900,000. (c) On September 1, borrowed $350,000 from First National Bank by issuing a 9% note payable due in three months. (d) On September 5, programs for 20 racing days in September, 25 racing days in October, and 15 racing days in November were printed for $3,600. (e) The accountant for the concessions company reported that gross receipts for September were $150,000. Ten percent is due to the track and will be remitted by October 10. Ex. 236 Gwynn 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 $3,000 Tuesday June 29 3,800 Wednesday June 30 3,300 Thursday July 1 3,500 Friday July 2 2,400 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. Ex. 237 On Friday of each week, Spoon Company pays its factory 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 Wednesday. (b) Prepare the journal entry for payment of the week's wages on the payday which is Friday, January 2 of the next year. Ex. 238 Presented below is the Trial Balance and Adjusted Trial Balance for Morning Jacket Company on December 31. MORNING JACKET Trial Balance December 31 ——————————————————————————————————————————— Before Adjustment After Adjustment Dr. Cr. Dr. Cr. Cash $ 2,000 $ 2,000 Accounts Receivable 2,800 3,800 Prepaid Rent 2,100 1,400 Supplies 1,200 650 Equipment 18,000 18,000 Accumulated depreciation— Equipment $ 1,300 $ 1,550 Accounts Payable 2,700 2,700 Notes Payable 10,000 10,000 Interest Payable 140 Salaries and Wages Payable 1,270 Unearned Service Revenue 4,460 3,960 Owner's Capital 7,200 7,200 Owner's Drawings 3,200 3,200 Service Revenue 8,000 9,500 Salaries and Wages Expense 3,860 5,130 Rent Expense 500 1,200 Supplies Expense 550 Depreciation Expense— Equipment 250 Interest Expense 140 Totals $33,660 $33,660 $36,320 $36,320 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. Ex. 239 Compute the net income for 2014 based on the following amounts presented on the adjusted trial balance of D-Lay Company. Accumulated Depreciation – Equip. $20,000 Depreciation Expense 18,000 Salaries and Wages Expense 15,000 Service Revenue 40,000 Unearned Service Revenue 8,000 Ex. 240 New Slang Pest Control has the following balances in selected accounts on December 31, 2014. Accounts Receivable $ 0 Accumulated Depreciation – Equipment 0 Equipment 6,650 Interest Payable 0 Notes Payable 20,000 Prepaid Insurance 2,220 Salaries and Wages Payable 0 Supplies 2,940 Unearned Service Revenue 30,000 All of the accounts have normal balances. The information below has been gathered at December 31, 2014. 1. Depreciation on the equipment for 2014 is $1,300. 2. New Slang Pest Control borrowed $20,000 by signing a 10%, one-year note on July 1, 2014. 3. New Slang Pest Control paid $2,220 for 12 months of insurance coverage on October 1, 2014. 4. New Slang Pest Control pays its employees total salaries of $11,000 every Monday for the preceding 5-day week (Monday-Friday). On Monday, December 27, 2014, employees were paid for the week ending December 24, 2014. All employees worked the five days ending December 31, 2014. 5. New Slang Pest Control performed disinfecting services for a client in December 2014. The client will be billed $3,200. 6. On December 1, 2014, New Slang Pest Control collected $30,000 for disinfecting processes to be performed from December 1, 2014, through May 31, 2014. 7. A count of supplies on December 31, 2014, indicates that supplies of $850 are on hand. Instructions Prepare in journal form with explanations, the adjusting entries for the seven items listed for New Slang Pest Control. Ex. 241 The trial balances before and after adjustments for Old Julian Calendars at the end of its fiscal year are presented below. Old Julian Calendars Trial Balance September 31, 2014 ——————————————————————————————————————————— Before Adjustment After Adjustment Dr. Cr. Dr. Cr. Cash $ 15,080 $ 15,080 Accounts Receivable 14,960 16,110 Supplies 2,760 885 Prepaid Insurance 5,800 1,450 Equipment 13,300 13,300 Accumulated Depreciation – Equip $ 5,220 $ 6,960 Accounts Payable 9,860 9,860 Salaries and Wages Payable 4,500 Unearned Sales Revenue 2,175 1,150 Unearned Rent Revenue 2,100 525 Owner's Capital 18,395 18,395 Sales Revenue 48,800 50,975 Rent Revenue 1,575 3,150 Salaries and Wages Expense 36,225 40,725 Supplies Expense 1,875 Insurance Expense 0 4,350 Depreciation Expense 0 0 1,740 0 $ 88,125 $ 88,125 $ 95,515 $ 95,515 Ex. 241 Cont’d Ex. 242 The White Stripes Animal Encounters operates a drive through tourist attraction. The company adjusts 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 $16,000 Buildings 30,000 Accumulated Depreciation—Buildings 6,600 Unearned Ticket Revenue 600 Other data: 1. Three months' rent had been prepaid on April 1. 2. The buildings are being depreciated at $7,200 per year. 3. The unearned ticket revenue represents tickets sold for future visits. The tickets were sold at $5.00 each on April 1. During April, thirty of the tickets were used by customers. Instructions (a) Calculate the following: 1. Monthly rent expense. 2. The age of the buildings in months. 3. The number of tickets sold on April 1. (b) Prepare the adjusting entries that were made by the White Stripes Animal Encounters on April 30. Ex. 243 The adjusted trial balance of C.S. Financial Planners appears below. Using the information from the adjusted trial balance, you are to prepare for the month ending December 31, 2014: 1. an income statement. 2. an owner's equity statement. 3. a balance sheet. C.S. Financial Planners Adjusted Trial Balance December 31, 2014 ——————————————————————————————————————————— Debit Credit Cash $ 4,900 Accounts Receivable 2,200 Supplies 1,800 Equipment 15,000 Accumulated Depreciation—Equipment $ 4,000 Accounts Payable 3,300 Unearned Service Revenue 6,000 Owner's Capital 14,400 Owner's Drawings 2,500 Service Revenue 4,200 Supplies Expense 600 Depreciation Expense 2,500 Rent Expense 2,400 $31,900 $31,900 Ex. 244 Yankee Hotel Foxtrot initiated operations on July 1, 2014. To manage the company officers and managers have requested monthly financial statements starting July 31, 2014. The adjusted trial balance amounts at July 31 are shown below. Debits Credits Cash $ 7,680 Accumulated Depreciation – Equipment $ 840 Accounts Receivable 810 Notes Payable 6,000 Prepaid Rent 1,965 Accounts Payable 2,140 Supplies 1,160 Salaries and Wages Payable 360 Equipment 11,400 Interest Payable 40 Owner's Drawings 800 Unearned Service Revenue 580 Salaries and Wages Expense 7,145 Owner's Capital 10,640 Rent Expense 2,740 Service Revenue 14,390 Depreciation Expense 665 Total credits $34,990 Supplies Expense 580 Interest Expense 45 Total debits $ 34,990 (a) Determine the net income for the month of July. (b) Determine the total assets and total liabilities at July 31, 2014 for Yankee Hotel Foxtrot. (c) Determine the amount that appears for Owner’s, Capital at July 31, 2014. aEx. 245 1. Drive-by Truckers prepares monthly financial statements. On July 1, the Supplies account had a balance of $3,000. During July, additional supplies were purchased for $4,800 and that amount was debited to Supplies Expense. On July 31, a physical count of supplies revealed that there was $2,000 on hand. Prepare the adjusting journal entry that Drive-by Truckers should make on July 31. 2. Alesandro Rental Agency prepares monthly financial statements. On September 1, a check for $9,000 was received from a tenant for six months’ rent. The full amount was credited to Rent Revenue. Prepare the adjusting entry the company should make on September 30. COMPLETION STATEMENTS 246. The ______________ assumption divides the economic life of a business into artificial time periods. 247. An accounting period that is one year in length is referred to as a ______________ year. 248. The ______________ principle gives accountants guidance as to when revenue is to be recorded. 249. In a service company, revenue is recognized when the service is ______________. 250. The expense recognition principle attempts to match ______________ with ______________. 251. 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 recognized is referred to as ______________. 252. Failure to adjust a prepaid expense account for the amount expired will cause ______________ to be understated and ________________ to be overstated. Ans: expenses, assets, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 253. Depreciation is a ______________ allocation process rather than a process of ______________. ost, valuation, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 254. Depreciation expense for a period is an ______________ rather than a factual measurement of cost that has expired. Ans: estimate, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 255. An adjusting entry recording accrued salaries for a period indicates that Salaries Expense has been ________________ but has not yet been ________________ or recorded. Ans: incurred, paid, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 256. An adjusted trial balance proves the ______________ of the total debit and credit balances after all ______________ entries have been made. MATCHING 257. Match the items below by entering the appropriate code letter in the space provided. A. Time period assumption F. Accrued revenues B. Fiscal year G. Depreciation C. Revenue recognition principle H. Accumulated depreciation D. Prepaid expenses I. Accrued expenses E. Expense recognition principle J. Book value 1. A twelve month accounting period 2. Expenses paid before they are incurred 3. Cost less accumulated depreciation 4. Divides the economic life of a business into artificial time periods 5. Efforts are related to accomplishments 6. A contra asset account 7. Recognition of revenue when the performance obligation is satisfied 8. Revenues recognized but not yet received 9. Expenses incurred but not yet paid 10. A cost allocation process SHORT-ANSWER ESSAY QUESTIONS S-A E 258 The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the time period assumption and the revenue recognition and expense recognition principles provide guidance to accountants in preparing an income statement. S-A E 259 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 often 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. S-A E 260 You are visiting with a friend, Jim Borke, who wants to start a new business. During discussions on forming the business, Jim 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 Jim. S-A E 261 The long-term liability section of Escovedo Company’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 Escovedo Company 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. S-A E 262 (Ethics) Jay Farrar Company 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. Jay Farrar introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying 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 Josh Ritter, the manager of the New Products division, worried, however. He 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. He did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. He preferred to complete testing of the pen first, so that more confidence could be placed in the results. Top management, however, declined the tests. Mr. Ritter 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 expenses 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. S-A E 263 (Communication) A new sales representative, Jiggs Lucero, has just received his copy of the month-end financial reports. 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 j.lucero@sbd Required: Write a response to send to Jiggs. [Show More]

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