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4 ACCRUAL CHAPTER ACCOUNTING CONCEPTS CHAPTER STUDY OBJECTIVES 1. Explain the revenue recognition principle and the expense recognition principle. The revenue recognition principle dictates that companies recognize revenue in the accounting period in which it is earned. The expense recognition principle dictates that companies recog nize expenses when expenses make their contribution to revenues. 2. Differentiate between the cash basis and the accrual basis of accounting. Under the cash basis, companies record events only in the periods in which the company receives or pays cash. Accrual-based accounting means that companies record in the periods in which the events occur, events that change a company's financial statements. 3. Explain why adjusting entries are needed, and identify the major types of adjusting entries. Companies make adjusting entries at the end of an accounting period. These entries ensure that companies record revenues in the period in which they are earned and that com panies recognize expenses in the period in which they are incurred. The major types of adjust ing entries are prepaid expenses, unearned revenues, accrued revenues, and accrued ex penses. 4. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals at the statement date to record the portion of the deferred item that represents the expense incurred or the revenue earned in the current accounting period. 5. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries. 6. Describe the nature and purpose of the adjusted trial balance. An adjusted trial balance is a trial balance that shows the balances of all accounts, including those that have been ad justed, at the end of an accounting period. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period. 7. Explain the purpose of closing entries. One purpose of closing entries is to transfer net in come or net loss for the period to Retained Earnings. A second purpose is to zero-out all temporary accounts (revenue accounts, expense accounts, and dividends) so that they start each new period with a zero balance. To accomplish this, companies close all temporary ac counts at the end of an accounting period. They make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Re tained Earnings. Only temporary accounts are closed. 8. Describe the required steps in the accounting cycle. The required steps in the accounting cycle are: (a) analyze business transactions, (b) journalize the transactions, (c) post to ledger accounts, (d) prepare a trial balance, (e) journalize and post adjusting entries, (f) prepare an adjusted trial balance, (g) prepare financial statements, (h) journalize and post closing entries, and (i) prepare a post-closing trial balance. 9. Understand the causes of differences between net income and cash provided by oper FOR INSTRUCTOR USE ONLY 4- 2 Test Bank for Accounting, Fourth Edition ating activities. Net income is based on accrual accounting, which relies on the adjustment process. Net cash provided by operating activities is determined by adding cash received from operating the business and subtracting cash expended during operations. *10. Describe the purpose and the basic form of the work sheet. The work sheet is a device to make it easier to prepare adjusting entries and the financial statements. Companies often pre pare a work sheet on a computer spreadsheet. The sets of columns of the work sheet are, from left to right, the unadjusted trial balance, adjustments, adjusted trial balance, income statement, and balance sheet. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 3 TRUE-FALSE STATEMENTS 1. The periodicity assumption states that the economic life of a business entity can be divided into artificial time periods. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 2. The periodicity assumption is often referred to as the expense recognition principle. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 3. The revenue recognition principle dictates that revenue be recognized in the accounting period in which it is earned. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 4. Expense recognition is tied to revenue recognition. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 5. The revenue recognition principle and the expense recognition principle are helpful guides used in determining net income or net loss for a period. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 6. The expense recognition principle requires that efforts be related to accomplishments. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 7. Recognizing when an expense contributes to the production of revenue is critical. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 8. The expense recognition principle is frequently referred to as the matching principle. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 9. Income will always be greater under the cash basis of accounting than under the accrual basis of accounting. Register to View AnswerSO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 10. The cash basis of accounting is not in accordance with generally accepted accounting prin ciples. Register to View AnswerSO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 11. Adjusting entries are often made because some business events are not recorded as they occur. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 12. Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 13. Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 14. An adjusting entry would be made to the revenue account only when cash is received. 15. An adjusting entry to a prepaid expense is required to recognize expired expenses. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 4 Test Bank for Accounting, Fourth Edition Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 16. An adjusting entry always involves two balance sheet accounts. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 17. An adjusting entry always involves a balance sheet account and an income statement ac count. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 18. Revenue received before it is earned and expenses paid before being used or consumed are both initially recorded as liabilities. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 19. Revenue received before it is earned and expenses used or consumed before being paid are both initially recorded as liabilities. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 20. Accrued revenues are revenues that have been received but not yet earned. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 21. Accrued revenues are revenues that have been earned but not yet recorded. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 22. The difference between unearned revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and unearned revenue has never been recorded. Register to View AnswerSO 3, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 23. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 24. The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 25. The book value of a depreciable asset is always equal to its market value because depreci ation is a valuation technique. Register to View AnswerSO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Risk Analysis, AICPA PC: Problem Solving 26. Accumulated Depreciation is a liability account and has a credit normal account balance. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 27. A liabilityrevenue account relationship exists with an unearned rent revenue adjusting entry. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 28. The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 29. Unearned revenue is a prepayment that requires an adjusting entry when services are per formed. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 5 Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 30. The adjusting entry for unearned revenue results in an increase (a debit) to an asset account and an increase (a credit) to a revenue account. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 31. Asset prepayments become expenses when they expire. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 32. A contra asset account is subtracted from a related account in the balance sheet. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 33. Accrued revenues are revenues that have been earned but cash has not been received be fore financial statements have been prepared. Register to View AnswerSO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 34. The adjusting entry for accrued salaries requires a debit to Salaries Payable. Register to View AnswerSO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 35. The accrued interest for a three month note payable of $10,000 dated December 1, 2011 at an interest rate of 6% is $150 on December 31, 2011. Register to View AnswerSO 5, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 36. Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders equity are overstated. Register to View AnswerSO 5, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 37. Financial statements can be prepared from the information provided by an adjusted trial bal ance. Register to View AnswerSO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 38. An adjusted trial balance must be prepared before the adjusting entries can be recorded. Register to View AnswerSO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 39. Closing entries deal primarily with the balances of permanent accounts. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 40. The only accounts that are closed are temporary accounts. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 41. When closing entries are prepared, each income statement account is closed directly to re tained earnings. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 42. Cash is a temporary account. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 43. The post-closing trial balance will contain only permanentbalance sheetaccounts. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 44. Accounts receivable is a permanent account. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 6 45. The Dividends account is closed to the Income Summary account at the end of each year. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 46. A revenue account is closed with a credit to the revenue account and a debit to Income Summary. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 47. An expense account is closed with a credit to the expense account and a debit to the In come Summary account. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 48. Financial statements must be prepared before the closing entries are made. Register to View AnswerSO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 49. In the accounting cycle, closing entries are prepared before adjusting entries. Register to View AnswerSO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 50. Closing entries result in the transfer of net income or net loss into the Retained Earnings ac count. Register to View AnswerSO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 51. The post closing trial balance will have fewer accounts than the adjusted trial balance. Register to View AnswerSO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 52. The accounting cycle begins with the journalizing of the transactions. Register to View AnswerSO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving *53. A 10-column work sheet is a permanent accounting record. Register to View AnswerSO 10, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9. T F T T T T T T F 10. 11. 12. 13. 14. 15. 16. 17. 18. T T F F F T F T F 19. 20. 21. 22. 23. 24. 25. 26. 27. T F T F F T F F T 28. 29. 30. 31. 32. 33. 34. 35. 36. F T F T T F F F T 37. 38. 39. 40. 41. 42. 43. 44. 45. T F F T F F T T F FOR INSTRUCTOR USE ONLY 46. 47. 48. 49. 50. 51. 52. 53. F T T F T T F F Accrual Accounting Concepts 4- 7 MULTIPLE CHOICE QUESTIONS 54. The periodicity assumption states that: a. a transaction can only affect one period of time. b. estimates should not be made if a transaction affects more than one time period. c. adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations. d. the economic life of a business can be divided into artificial time periods. Register to View AnswerSO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 55. One of the accounting concepts upon which adjustments for prepayments and accruals are based is: a. expense recognition. b. cost. c. monetary unit. d. economic entity. Register to View AnswerSO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 56. An accounting time period that is one year in length is called: a. a fiscal year. b. an interim period. c. the time period assumption. d. a reporting period. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 57. Adjustments would not be necessary if financial statements were prepared to reflect net in come from: a. monthly operations. b. fiscal year operations. c. interim operations. d. lifetime operations. Register to View AnswerSO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 58. Management usually wants ________ financial statements and the IRS requires all busi nesses to file _________ tax returns. a. annual, annual b. monthly, annual c. quarterly, monthly d. monthly, monthly Register to View AnswerSO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication FOR INSTRUCTOR USE ONLY 4- 8 59. Test Bank for Accounting, Fourth Edition Expenses are recognized when: a. they contribute to the production of revenue. b. they are paid. c. they are billed by the supplier. d. the invoice is received. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 60. Which of the following is not generally an accounting time period? a. A week. b. A month. c. A quarter. d. A year. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 61. The revenue recognition principle dictates that revenue should be recognized in the account ing records: a. when cash is received. b. when it is earned. c. at the end of the month. d. in the period that income taxes are paid. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 62. In a service-type business, revenue is considered earned: 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. Register to View AnswerSO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 63. The expense recognition principle matches: a. customers with businesses. b. expenses with revenues. c. assets with liabilities. d. creditors with businesses. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 64. Ottos Tune-Up Shop follows the revenue recognition principle. Otto services a car on Au gust 31. The customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto receives the check in the mail on September 6. When should Otto show that the revenue was earned? a. August 31 b. August 1 c. September 5 d. September 6 Register to View AnswerSO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 65. 4- 9 A company spends $20 million dollars for an office building. Over what period should the cost be written off? a. When the $20 million is expended in cash. b. All in the first year. c. After $20 million in revenue is earned. d. None of the above. Register to View AnswerSO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Decision Modeling, AICPA PC: Communication 66. The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that: a. assets should be matched with liabilities. b. efforts should be matched with accomplishments. c. dividends should be matched with stockholder investments. d. cash payments should be matched with cash receipts. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 67. Which principle dictates that efforts (expenses) be recorded with accomplishments (reven ues)? a. Cost principle. b. Periodicity principle. c. Revenue recognition principle. d. Expense recognition principle. Register to View AnswerSO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 68. A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop fol lows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be earned? a. December 5 b. December 10 c. November 30 d. December 1 Register to View AnswerSO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 69. A furniture factory's employees work overtime to finish an order that is sold on January 31. The office sends a statement to the customer in early February and payment is received by mid-February. The overtime wages should be expensed in: a. January. b. February. c. the period when the workers receive their checks. d. either January or February depending on when the pay period ends. Register to View AnswerSO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 10 70. Test Bank for Accounting, Fourth Edition Which 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. Register to View AnswerSO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 71. Why do generally accepted accounting principles require the application of the revenue re cognition principle? a. Failure to apply the revenue recognition principle could lead to a misstatement of reven ue. b. It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve. c. Recording revenue when cash is received is an objective application of the revenue re cognition principle. d. Accounting software has made the revenue recognition easy to apply. Register to View AnswerSO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Risk Analysis, AICPA PC: Communication 72. On April 1, 2011, nPropel Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years. nPropel records depreci ation expense of $48,000 for the calendar year ending December 31, 2011. Which account ing principle has been violated? a. Depreciation principle. b. No principle has been violated. c. Cash principle. d. Expense recognition principle. Register to View AnswerSO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Ethics, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 73. Under the cash basis of accounting: a. Revenue is recognized when services are performed. b. Expenses are matched with the revenue that is produced. c. cash must be received before revenue is recognized. d. a promise to pay is sufficient to recognize revenue. Register to View AnswerSO 2, BT: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 74. Under the accrual basis of accounting: a. cash must be received before revenue is recognized. b. net income is calculated by matching cash outflows against cash inflows. c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. d. the ledger accounts must be adjusted to reflect a cash basis of accounting before finan cial statements are prepared under generally accepted accounting principles. Register to View AnswerSO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 75. 4- 11 Using accrual accounting, expenses are recorded and reported only: a. when they are incurred whether or not cash is paid. b. when they are incurred and paid at the same time. c. if they are paid before they are incurred. d. if they are paid after they are incurred. Register to View AnswerSO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 76. A small company may be able to justify using a cash basis of accounting if they have: a. sales under $1,000,000. b. no accountants on staff. c. few receivables and payables. d. all sales and purchases on account. Register to View AnswerSO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 77. Which statement is correct? a. As long as a company consistently uses the cash basis of accounting, generally accep ted accounting principles allow its use. b. The use of the cash basis of accounting violates both the revenue recognition and ex pense recognition principles. c. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received. d. As long as management is ethical, there are no problems with using the cash basis of accounting. Register to View AnswerSO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 78. The following is selected information from L Corporation for the fiscal year ending October 31, 2011. Cash received from customers Revenue earned Cash paid for expenses Cash paid for computers on November 1, 2010 that will be used for 3 years Expenses incurred including any depreciation Proceeds from a bank loan, part of which was used to pay for the computers $300,000 370,000 170,000 48,000 216,000 100,000 Based on the accrual basis of accounting, what is L Corporations net income for the year ending October 31, 2011? a. $184,000 b. $154,000 c. $152,000 d. $170,000 Register to View AnswerSO 2, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 12 79. Test Bank for Accounting, Fourth Edition The following is selected information from C Corporation for the fiscal year ending Oct ober 31, 2011. Cash received from customers Revenue earned Cash paid for expenses Cash paid for computers on November 1, 2010 that will be used for 3 years Expenses incurred including any depreciation Proceeds from a bank loan, part of which was used to pay for the computers $150,000 195,000 85,000 24,000 109,000 50,000 Based on the accrual basis of accounting, what is C Corporations net income for the year ending October 31, 2011? a. $102,000 b. $87,000 c. $86,000 d. $95,000 Register to View AnswerSO 2, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting , AICPA PC: Problem Solving 80. La More Company had the following transactions during 2011: Sales of $4,500 on account Collected $2,000 for services to be performed in 2012 Paid $1,375 cash in salaries for 2011 Purchased airline tickets for $250 in December for a trip to take place in 2012 What is La Mores 2011 net income using accrual accounting? a. $3,375 b. $5,375 c. $5,125 d. $3,125 Register to View AnswerSO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 81. La More Company had the following transactions during 2011. Sales of $4,500 on account Collected $2,000 for services to be performed in 2012 Paid $1,125 cash in salaries Purchased airline tickets for $250 in December for a trip to take place in 2012 What is La Mores 2011 net income using cash basis accounting? a. $5,375 b. $875 c. $5,125 d. $625 Register to View AnswerSO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 82. 4- 13 Wang Company had the following transactions during 2011: Sales of $5,400 on account Collected $2,400 for services to be performed in 2012 Paid $1,550 cash in salaries for 2011 Purchased airline tickets for $300 in December for a trip to take place in 2012 What is Wangs 2011 net income using accrual accounting? a. $4,150 b. $6,550 c. $6,250 d. $3,850 Register to View AnswerSO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 83. Wang Company had the following transactions during 2011: Sales of $5,400 on account Collected $2,400 for services to be performed in 2012 Paid $1,550 cash in salaries Purchased airline tickets for $300 in December for a trip to take place in 2012 What is Wangs 2011 net income using cash basis accounting? a. $550 b. $1,150 c. $6,250 d. $850 Register to View AnswerSO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 84. Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting. Revenue earned $14,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1,800 a. $4,500 b. $9,000 c. $2,700 d. $4,950 Register to View AnswerSO 2, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 85. Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Revenue earned $14,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 a. $6,750 b. $9,000 c. $4,500 d. $7,200 Register to View AnswerSO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 14 86. Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting. Cash received from customers $44,000 Accounts receivable 12,000 Cash paid for expenses 26,000 Accounts payable (related to expenses) 3,000 Prepaid rent for next period 7,000 a. $18,000 b. $27,000 c. $20,000 d. $11,000 Register to View AnswerSO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 87. Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Cash received from customers $44,000 Accounts receivable 12,000 Cash paid for expenses 26,000 Accounts payable (related to expenses) 3,000 Prepaid rent for next period 7,000 a. $18,000 b. $27,000 c. $20,000 d. $11,000 Register to View AnswerSO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 88. Under the cash basis of accounting, an amount received from a customer in advance of providing the services would be reported as a(n): a. revenue b. liability c. expense d. prepaid expense Register to View AnswerSO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 89.Which of the following would be unethical? a. Recording accrued salaries and wages expense. b. Recording accrued interest revenue. c. Recording backdated revenue. d. Recording prepaid expense adjustments. Register to View AnswerSO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA BB: None, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor 90. Why was Apple required to spread their iPhone revenues over a two year period? a. Because of its newness, their returns might exceed the normal level of returns. b. c. d. Because they were required to provide software updates over that two year period. Because that was the estimated life of the iPhone. Because they needed to defer revenue recognition since they had a swap program available for future models. Register to View AnswerSO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving.. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 91. 4- 15 According to some U.S. companies what gives foreign firms a competitive advantage in the capital market? a. The foreign companies dont have standards similar to GAAP. b. The foreign companies dont have strict ethical codes. c. The Sarbanes-Oxley Act which requires more stringent internal controls on U.S. firms. d. The foreign companies dont have to be audited. Register to View AnswerSO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 92. The primary difference between prepaid and accrued expenses is that prepaid expenses have: a. been incurred and accrued expenses have not. b. not been paid and accrued expenses have. c. been recorded and accrued expenses have not. d. not been recorded and accrued expenses have. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 93. The primary difference between accrued revenues and unearned revenues is that accrued revenues have: a. not been earned and accrued revenues have been. b. been paid and unearned revenues have not. c. been recorded and unearned revenues have not. d. not been recorded and unearned revenues have. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 94. The general term employed to indicate an expense that has not been paid or revenue that has not been received and has not yet been recognized in the accounts is: a. contra asset. b. prepayment. c. asset. d. accrued. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 95.Accounts often need to be adjusted because: a. there are never enough accounts to record all the transactions. b. many transactions affect more than one time period. c. there are always errors made in recording transactions. d. management can't decide what they want to report. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 96. Adjusting entries are made to ensure that: a. expense are recognized in the period in which they are incurred. b. revenues are recorded in the period in which they are earned. c. balance sheet and income statement accounts have correct balances at the end of an accounting period. d. All of the above. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 16 97. Test Bank for Accounting, Fourth Edition 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. Register to View AnswerSO 3, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 98. Each of the following is a major type (or category) of adjusting entry except: a. earned expenses. b. prepaid expenses. c. accrued expenses. d. accrued revenues. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 99. Adjusting entries are required: a. because some costs expire with the passage of time and have not yet been journalized. b. when the company's profits are below the budget. c. when expenses are recorded in the period in which they are earned. d. None of the above. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 100. Which one of the following is not a justification for adjusting entries? a. Adjusting entries are necessary to ensure that the revenue recognition principle is fol lowed. b. Adjusting entries are necessary to ensure that the expense recognition principle is fol lowed. c. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP. d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget. Register to View AnswerSO 3, BT: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 101. An adjusting entry: a. affects two balance sheet accounts. b. affects two income statement accounts. c. affects a balance sheet account and an income statement account. d. is always a compound entry. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 102. Adjusting entries are: a. the same as correcting entries. b. needed to ensure that the expense recognition principle is followed. c. optional. d. rarely needed. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 103. 4- 17 The preparation of adjusting entries is: a. straightforward because the accounts that need adjustment will be out of balance. b. needed to ensure that the expense recognition principle is followed. c. only required for accounts that do not have a normal balance. d. optional when financial statements are prepared. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 104. If a resource has been consumed but a bill has not been received at the end of the account ing period, then: a. an expense should be recorded when the bill is received. b. an expense should be recorded when the cash is paid out. c. an adjusting entry should be made recognizing the expense. d. it is optional whether to record the expense before the bill is received. Register to View AnswerSO 3, BT: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 105. An assetexpense relationship exists with: a. liability accounts. b. revenue accounts. c. prepaid expense adjusting entries. d. accrued expense adjusting entries. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 106. A liabilityrevenue relationship exists with: a. asset accounts. b. revenue accounts. c. unearned revenue adjusting entries. d. accrued expense adjusting entries. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 107. Adjusting entries can be classified as: a. postponements and advances. b. accruals and deferrals. c. deferrals and postponements. d. accruals and advances. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 108. Adjusting entries can be classified as: a. postponements and advances. b. accruals and advances. c. deferrals and postponements. d. accruals and deferrals. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 109. Accrued expenses are: a. incurred but not yet paid or recorded. b. paid and recorded in an asset account after they are used or consumed. c. paid and recorded in an asset account before they are used or consumed. d. incurred and already paid or recorded. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 110. Accrued revenues are: FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 18 a. b. c. d. received and recorded as liabilities before they are earned. earned and recorded as liabilities before they are received. earned but not yet received or recorded. earned and already received and recorded. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 111. 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. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 112. Goods purchased for future use in the business, such as supplies, are called: a. prepaid expenses. b. revenues. c. stockholders equity. d. liabilities. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 113. Accrued expenses are: a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded. d. incurred and already paid or recorded. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 114. Unearned revenues are: a. received and recorded as liabilities before they are earned. b. earned and recorded as liabilities before they are received. c. earned but not yet received or recorded. d. earned and already received and recorded. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 115. Adjusting entries affect at least: a. one revenue and one expense account. b. one asset and one liability account. c. one revenue and one balance sheet account. d. one income statement account and one balance sheet account. Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 116. An architecture firm earned $2,000 for architecture services provided with the fee to be paid in the future. No entry was made at the time the service was provided. If the fee has not been paid by the end of the accounting period and no adjusting entry is made, this would cause: a. b. c. d. revenues to be overstated. net income to be overstated. liabilities to be understated. revenues to be understated. Register to View AnswerSO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 117. An adjusting entry can include a: a. debit to an asset and a credit to a liability. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 19 b. debit to a revenue and a credit to an asset. c. debit to a liability and a credit to a revenue. d. debit to an expense and a credit to a revenue. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 118. A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause: a. expenses to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated. Register to View AnswerSO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 119. On January 1, 2011, M. Johanson Company purchased equipment for $30,000. The com pany is depreciating the equipment at the rate of $500 per month. The book value of the equipment at December 31, 2011 is: a. $0 b. $6,000 c. $24,000 d. $30,000 Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 120. The Vintage Laundry Company purchased $6,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indic ated only $2,000 on hand. The adjusting entry that should be made by the company on June 30 is: a. debit Laundry Supplies Expense, $2,000; credit Laundry Supplies, $2,000. b. debit Laundry Supplies, $4,500; credit Laundry Supplies Expense, $4,500. c. debit Laundry Supplies, $2,000; credit Laundry Supplies Expense, $2,000. d. debit Laundry Supplies Expense, $4,500; credit Laundry Supplies, $4,500. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 121. Greese Company purchased office supplies costing $4,000 and debited Office Supplies for the full amount. At the end of the accounting period, a physical count of office supplies re vealed $1,100 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debit Office Supplies Expense, $1,100; credit Office Supplies, $1,100. b. debit Office Supplies, $2,900; credit Office Supplies Expense, $2,900. c. debit Office Supplies Expense, $2,900; credit Office Supplies, $2,900. d. debit Office Supplies, $1,100; credit Office Supplies Expense, $1,100. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 20 122. Test Bank for Accounting, Fourth Edition A company purchased office supplies costing $3,000 and debited Office Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $600 still on hand. The appropriate adjusting journal entry to be made at the end of the p eriod would be: a. debit Office Supplies Expense, $3,600; credit Office Supplies, $3,600. b. debit Office Supplies, $600; credit Office Supplies Expense, $600. c. debit Office Supplies Expense, $2,400; credit Office Supplies, $2,400. d. debit Office Supplies, $2,400; credit Office Supplies Expense, $2,400. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 123. Unearned revenue is classified as a(n): a. asset account. b. revenue account. c. contra revenue account. d. liability. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 124. Boyce Company purchased office supplies costing $5,000 and debited Office Supplies for the full amount. At the end of the accounting period, a physical count of office supplies re vealed $1,400 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debit Office Supplies Expense, $3,600; credit Office Supplies, $3,600. b. debit Office Supplies, $1,400; credit Office Supplies Expense, $1,400. c. debit Office Supplies Expense, $1,400; credit Office Supplies, $1,400. d. debit Office Supplies, $3,600; credit Office Supplies Expense, $3,600. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 125. On July 1 the Fisher Shoe Store paid $15,000 to Acme Realty for 6 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the Fisher Shoe Store is: a. debit Rent Expense, $15,000; credit Prepaid Rent, $2,500. b. debit Prepaid Rent, $2,500; credit Rent Expense, $2,500. c. debit Rent Expense, $2,500; credit Prepaid Rent, $2,500. d. debit Rent Expense, $15,000; credit Prepaid Rent, $12,500. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 126. The balance in the prepaid rent account before adjustment at the end of the year is $12,000 and represents three months rent paid on December 1. The adjusting entry required on December 31 is: a. debit Prepaid Rent, $4,000; credit Rent Expense $4,000. b. debit Prepaid Rent, $8,000; credit Rent Expense, $8,000. c. debit Rent Expense, $12,000; credit Prepaid Rent, $12,000. d. debit Rent Expense, $4,000; credit Prepaid Rent, $4,000. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 127. 4- 21 If a business has received cash in advance of services performed and credits a liability a ccount, the adjusting entry needed after the services are performed will be: a. debit Unearned Revenue and credit Cash. b. debit Unearned Revenue and credit Revenue Earned. c. debit Unearned Revenue and credit Prepaid Expense. d. debit Unearned Revenue and credit Accounts Receivable. Register to View AnswerSO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 128. Accumulated Depreciation is a(n): a. expense account. b. stockholders equity account. c. liability account. d. contra asset account. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 129. The Harris Company purchased a computer for $3,000 on December 1. It is estimated that annual depreciation on the computer will be $600. If financial statements are to be prepared on December 31, the company should make the following adjusting entry: a. debit Depreciation Expense, $600; credit Accumulated Depreciation, $600. b. debit Depreciation Expense, $50; credit Accumulated Depreciation, $50. c. debit Depreciation Expense, $2,400; credit Accumulated Depreciation, $2,400. d. debit Office Equipment, $3,000; credit Accumulated Depreciation, $3,000. Register to View AnswerSO 4, BT: K, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 130. Adjustments for unearned revenue: a. decrease liabilities and increase revenues. b. increase liabilities and increase revenues. c. increase assets and increase revenues. d. decrease revenues and decrease assets. Register to View AnswerSO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 131. Leyland Realty Company received a check for $12,000 on July 1, which represents a 6month advance payment of rent on a building it rents to a client. Unearned Rental Revenue was credited for the full $12,000. Financial statements will be prepared on July 31. Leyland Realty should make the following adjusting entry on July 31: a. debit Unearned Rental Revenue, $2,000; credit Rental Revenue, $2,000. b. debit Rental Revenue, $2,000; credit Unearned Rental Revenue, $2,000. c. debit Unearned Rental Revenue, $12,000; credit Rental Revenue, $12,000. d. debit Cash, $12,000; credit Rental Revenue, $12,000. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 132. As prepaid expenses expire with the passage of time, the correct adjusting entry will be a: a. debit to an asset account and a credit to an expense account. b. debit to an expense account and a credit to an asset account. c. debit to an asset account and a credit to an asset account. d. debit to an expense account and a credit to an expense account. Register to View AnswerSO 4, BT: C, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 22 133. Test Bank for Accounting, Fourth Edition Adjustments for unearned revenue: a. decrease liabilities and increase revenues. b. increase liabilities and increase revenues. c. increase assets and increase revenues. d. decrease revenues and decrease assets. Register to View AnswerSO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 134. Payments of expenses that will benefit more than one accounting period are identified as a. expenses. b. revenues. c. prepaid expenses. d. liabilities. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 135. A company usually determines the amount of supplies used during a period by: a. adding the supplies on hand to the balance of the Supplies account. b. summing the amount of supplies purchased during the period. c. taking the difference between the supplies purchased and the supplies paid for during the period. d. taking the difference between the balance of the Supplies account and the cost of sup plies on hand. Register to View AnswerSO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 136. If a company fails to make an adjusting entry to record supplies expense, then: a. stockholders equity will be understated. b. expense will be understated. c. assets will be understated. d. net income will be understated. Register to View AnswerSO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 137. Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the adjusting entry is for the amount of supplies: a. remaining. b. purchased. c. used. d. either used or remaining. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 138. If a company fails to adjust for accrued revenues: a. liabilities will be understated and revenues will be understated. b. liabilities will be overstated and revenues will be understated. c. assets will be overstated and revenues will be understated. d. assets will be understated and revenues will be understated. Register to View AnswerSO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 139. 4- 23 If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month's financial statements? a. Failure to make an adjustment does not affect the financial statements. b. Expenses will be overstated and net income and stockholders equity will be understated. c. Assets will be overstated and net income and stockholders equity will be understated. d. Assets will be overstated and net income and stockholders equity will be overstated. Register to View AnswerSO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 140. If a company fails to adjust an Unearned Rent account for rent that has been earned, what effect will this have on that months financial statements? a. Assets will be understated and revenues will be understated. b. Liabilities will be understated and revenues will be understated. c. Liabilities will be overstated and revenues will be understated. d. Assets will be overstated and revenues will be understated. Register to View AnswerSO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 141. If a company fails to adjust for accrued expenses, what effect will this have on that month's financial statements? a. Failure to make an adjustment does not affect the financial statements. b. Expenses will be understated and net income and stockholders equity will be overstated. c. Assets will be overstated and net income and stockholders equity will be under-stated. d. Assets will be overstated and net income and stockholders equity will be overstated. Register to View AnswerSO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 142. On January 1, 2010, Leardon Inc. purchased equipment for $45,000. The company is depre ciating the equipment at the rate of $600 per month. At January 31, 2011, the balance in Ac cumulated Depreciation is: a. $600 debit b. $7,200 credit c. $7,800 credit d. $39,900 debit Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 143. At December 31, 2011, before any year-end adjustments, Dallis Company's Prepaid Insur ance account had a balance of $2,700. It was determined that $1,000 of the Prepaid Insur ance had expired. The adjusted balance for Insurance Expense for the year would be: a. $1,000. b. $1,700. c. $2,700. d. $1,400. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 24 144. Test Bank for Accounting, Fourth Edition At December 31, 2011, before any year-end adjustments, Janus Company's Prepaid Insurance account had a balance of $2,400. It was determined that $1,000 of the Prepaid Insur ance had expired. The adjusted balance for Prepaid Insurance for the year would be: a. $1,000. b. $1,400. c. $3,800. d. $2,400. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 145. At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted. Which of the following statements is true? a. Net income will be overstated for the current year. b. Total assets will be understated at the end of the current year. c. The balance sheet and income statement will be misstated but the Retained Earnings statement will be correct for the current year. d. Total expenses will be overstated at the end of the current year. Register to View AnswerSO 4, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 146. 4- 25 The trial balance for Greenway Corporation appears as follows: Greenway Corporation Trial Balance December 31, 2011 Cash Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation, Office Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries Expense Rent Expense $ 300 500 60 140 4,000 $ 800 300 1,000 1,400 3,000 1,000 500 $6,500 0 $6,500 If, on December 31, 2011, supplies on hand were $30, the adjusting entry would contain a: a. debit to Supplies for $30. b. credit to Supplies for $30. c. debit to Supplies Expense for $110. d. credit to Supplies Expense for $110. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 26 147. Test Bank for Accounting, Fourth Edition The trial balance for Greenway Corporation appears as follows: Greenway Corporation Trial Balance December 31, 2011 Cash Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation, Office Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries Expense Rent Expense $ 300 500 60 140 4,000 $ 800 300 1,000 1,400 3,000 1,000 500 $6,500 0 $6,500 If, on December 31, 2011, the insurance still unexpired amounted to $15, the adjusting entry would contain a: a. debit to Prepaid Insurance for $45. b. credit to Prepaid Insurance for $15. c. debit to Insurance Expense for $45. d. debit to Prepaid Insurance for $15. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 148. 4- 27 The trial balance for Greenway Corporation appears as follows: Greenway Corporation Trial Balance December 31, 2011 Cash Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation, Office Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries Expense Rent Expense $ 300 500 60 140 4,000 $ 800 300 1,000 1,400 3,000 1,000 500 $6,500 0 $6,500 If the estimated depreciation for office equipment were $800, the adjusting entry would con tain a: a. credit to Accumulated Depreciation, Office Equipment for $800. b. credit to Depreciation Expense, Office Equipment for $800. c. debit to Accumulated Depreciation, Office Equipment for $800. d. credit to Office Equipment for $800. Register to View AnswerSO 4, BT: K, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 28 149. Test Bank for Accounting, Fourth Edition The trial balance for Greenway Corporation appears as follows: Greenway Corporation Trial Balance December 31, 2011 Cash Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation, Office Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries Expense Rent Expense $ 300 500 60 140 4,000 $ 800 300 1,000 1,400 3,000 1,000 500 $6,500 0 $6,500 If as of December 31, 2011, rent of $120 for December had not been recorded or paid, the adjusting entry would include a: a. credit to Accumulated Rent for $120. b. credit to Cash for $120. c. debit to Rent Payable for $120 d. debit to Rent Expense for $120 Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 150. 4- 29 The trial balance for Greenway Corporation appears as follows: Greenway Corporation Trial Balance December 31, 2011 Cash Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation, Office Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries Expense Rent Expense $ 300 500 60 140 4,000 $ 800 300 1,000 1,400 3,000 1,000 500 $6,500 0 $6,500 If service for $125 had been performed but not billed, the adjusting entry to record this would include a: a. debit to Service Revenue for $125. b. credit to Unearned Service Revenue for $125. c. credit for Service Revenue for $125. d. debit to Unearned Revenue for $125. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 151. Depreciation is the process of: a. valuing an asset at its fair market 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. Register to View AnswerSO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 152. The difference between the balance of a plant asset account and the related accumulated depreciation account is termed: a. market value. b. contra asset. c. book value. d. liability. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 30 Test Bank for Accounting, Fourth Edition 153. A new accountant working for Metcalf Company records $800 Depreciation Expense on store equipment as follows: Dr. Cr. Depreciation Expense .................800 Cash ................................................................. 800 The effect of this entry is to: a. adjust the accounts to their proper amounts on December 31. b. understate total assets on the balance sheet as of December 31. c. overstate the book value of the depreciable assets at December 31. d. understate the book value of the depreciable assets as of December 31. Register to View AnswerSO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 154. From an accounting standpoint, the acquisition of long-lived assets is essentially a(n): a. accrual of expense. b. accrual of revenue. c. accrual of unearned revenue. d. prepaid expense. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 155. If a business pays rent in advance and debits a Prepaid Rent account, the company receiv ing the rent payment will credit: a. cash. b. prepaid rent. c. unearned rent revenue. d. accrued rent revenue. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 156. An accumulated depreciation account: a. is a contra liability account. b. increases on the debit side. c. is offset against total assets on the balance sheet. d. has a normal credit balance. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 157. The difference between the cost of a depreciable asset and its related accumulated depreci ation 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. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: , AICPA PC: 158. 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. Register to View AnswerSO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 159. 4- 31 The policy at Adler Corporation is to expense all office supplies at the time of purchase. On the last day of the accounting period, there are $1,400 of unused office supplies on hand and the balance of supplies expense is $3,500. What should the accountant do? a. Debit Supplies and credit Supplies Expense for $1,400. b. Nothing, company policy says to expense supplies when purchased. c. Convince management to change its policy to avoid problems in the future. d. Debit Supplies Expense for $2,100 and credit Supplies for $2,100. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 160. Which statement is correct? a. Accumulated Depreciation should always have a debit balance in the Adjusted Trial Bal ance. b. Accumulated Depreciation is added to the long-term liabilities on the Balance Sheet. c. Accumulated Depreciation, Office Equipment represents the total cost of office equip ment that has expired up to the date of the Balance Sheet. d. Accumulated Depreciation is used to reveal the value of the related asset on the date of the Balance Sheet. Register to View AnswerSO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 161. Walton Company collected $7,200 in May of 2010 for 4 months of service which would take place from October of 2010 through January of 2011. The revenue reported from this trans action during 2010 would be: a. $0 b. $5,400 c. $7,200 d. $1,800 Register to View AnswerSO 4, BT: C, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 162. Skypress Company collected $5,600 in May of 2010 for 4 months of service which would take place from October of 2010 through January of 2011. The revenue reported from this transaction during 2010 would be: a. $0 b. $4,200 c. $5,600 d. $1,400 Register to View AnswerSO 4, BT: C, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 163. Masterfalls Corporation purchased a one-year insurance policy in January 2010 for $60,000. The insurance policy is in effect from March 2010 through February 2011. 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 $10,000 d. net income and assets will be overstated by $10,000 Register to View AnswerSO 4, BT: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 32 164. Test Bank for Accounting, Fourth Edition James & Younger Corporation purchased a one-year insurance policy in January 2010 for $36,000. The insurance policy is in effect from March 2010 through February 2010. If the company neglects to make the proper year-end adjustment for the expired insurance: a. net income and assets will be understated by $30,000. b. net income and assets will be overstated by $30,000. c. net income and assets will be understated by $6,000. d. net income and assets will be overstated by $6,000. Register to View AnswerSO 4, BT: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 165. At March 1, 2011, Candy Inc. had supplies on hand of $1,500. During the month, Candy pur chased supplies of $2,900 and used supplies of $1,800. The March 31 balance sheet should report what balance in the supplies account? a. $1,500 b. $2,600 c. $1,800 d. $2,900 Register to View AnswerSO 4, BT: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 166. Darting Company purchased a computer system for $5,400 on January 1, 2011. The com pany expects to use the computer system for 3 years. It has no salvage value. Monthly de preciation expense on the asset is: a. $0 b. $150 c. $1,800 d. $5,400 Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 167. Fleet Services Company purchased equipment for $8,000 on January 1, 2011. The company expects to use the equipment for 5 years. It has no salvage value. What balance would be reported on the December 31, 2011 balance sheet for Accumulated Depreciation? a. $0 because Accumulated Depreciation is reported on the Income Statement b. $1,600 c. $6,400 d. $8,000 Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 168. Green Realty Company received a check for $24,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent was credited for the full $24,000. Financial statements will be prepared on July 31. Green Realty should make the following adjusting entry on July 31: a. debit Unearned Rent, $4,000; credit Rental Revenue, $4,000. b. debit Rental Revenue, $4,000; credit Unearned Rent, $4,000. c. debit Unearned Rent, $24,000; credit Rental Revenue, $24,000. d. debit Cash, $24,000; credit Rental Revenue, $24,000. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 169. 4- 33 Oakville Inc. purchased a 12-month insurance policy on March 1, 2011 for $1,200. At March 31, 2011, the adjusting journal entry to record expiration of this asset will include: a. a debit to Prepaid Insurance and a credit to Cash for $1,200. b. a debit to Prepaid Insurance and a credit to Insurance Expense for $120. c. a debit to Insurance Expense and a credit to Prepaid Insurance for $100 d. a debit to Insurance Expense and a credit to Cash for $100. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 170. Hoosher Enterprises purchased an 18-month insurance policy on May 31, 2011 for $5,400. The December 31, 2011 balance sheet would report Prepaid Insurance of: a. $0 because Prepaid Insurance is reported on the Income Statement. b. $2,100 c. $3,300 d. $5,400 Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 171. At March 1, I. Repo Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $950 and consumed supplies of $800. If no adjusting entry is made for supplies: a. stockholders' equity will be overstated by $800. b. expenses will be understated by $950. c. assets will be understated by $350. d. net income will be understated by $800. Register to View AnswerSO 4, BT: AN, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 172. Regions Inc. pays its rent of $60,000 annually on January 1 and makes monthly adjusting entries. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true? a. Failure to make the adjustment does not affect the February financial statements. b. Expenses will be overstated by $5,000 and net income and stockholders' equity will be understated by $5,000. c. Assets will be overstated by $10,000 and net income and stockholders' equity will be un derstated by $10,000. d. Assets will be overstated by $5,000 and net income and stockholders' equity will be overstated by $5,000. Register to View AnswerSO 4, BT: AN, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 173. An adjusting entry can include a: a. debit to an asset and a credit to a revenue. b. debit to a revenue and a credit to an asset. c. credit to an expense and a debit to a revenue. d. debit to an expense and a credit to a revenue. Register to View AnswerSO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 174. A revenueasset relationship exists with: a. prepaid expense adjusting entries. b. accrued expense adjusting entries. c. unearned revenue adjusting entries. d. accrued revenue adjusting entries. Register to View AnswerSO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 34 175. Test Bank for Accounting, Fourth Edition The accounts of a business before an adjusting entry is made to record accrued revenue re flect an: a. understated liability and an overstated revenue. b. overstated asset and an understated revenue. c. understated expense and an overstated revenue. d. understated asset and an understated revenue. Register to View AnswerSO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 176. Adjustments for accrued revenues: a. increase assets and increase revenues. b. increase assets and increase liabilities. c. decrease assets and increase revenues. d. decrease liabilities and increase revenues. Register to View AnswerSO 5, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 177. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause: a. net income to be understated. b. an overstatement of assets and an overstatement of liabilities. c. an understatement of expenses and an understatement of liabilities. d. an overstatement of expenses and an overstatement of liabilities. Register to View AnswerSO 5, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 178. Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause: a. net income to be overstated. b. an understatement of assets and an understatement of revenues. c. an understatement of revenues and an understatement of liabilities. d. an understatement of revenues and an overstatement of liabilities. Register to View AnswerSO 5, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 179. An adjusting entry made to record accrued interest on a note receivable due next year con sists of a: a. debit to Interest Expense and a credit to Interest Payable. b. debit to Interest Receivable and a credit to Interest Earned. c. debit to Interest Expense and a credit to Notes Payable. d. debit to Interest Expense and a credit to Cash. Register to View AnswerSO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 180. Raxon Company borrowed $30,000 from the bank signing a 6%, 3-month note on Septem ber 1. Principal and interest are payable to the bank on December 1. If the company pre pares monthly financial statements, the adjusting entry that the company should make for in terest on September 30, would be: a. debit Interest Expense, $1,800; credit Interest Payable, $1,800. b. debit Interest Expense, $150; credit Interest Payable, $150. c. debit Note Payable, $1,800; credit Cash, $1,800. d. debit Cash, $450; credit Interest Payable, $450. Register to View AnswerSO 5, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 181. Nacron Company borrowed $8,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 35 monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be: a. debit Interest Expense, $40; credit Interest Payable, $40. b. debit Interest Expense, $480; credit Interest Payable, $480. c. debit Note Payable, $480; credit Cash, $480. d. debit Cash, $40; credit Interest Payable, $40. Register to View AnswerSO 5, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 182. Mary Richardo has performed $500 of CPA services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Mary make? a. Debit Cash and credit Unearned Revenue b. Debit Accounts Receivable and credit Unearned Revenue c. Debit Accounts Receivable and credit Service Revenue d. Debit Unearned Revenue and credit Service Revenue Register to View AnswerSO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 183. Mary Richardo, CPA, has billed her clients for services performed. She subsequently re ceives payments from her clients. What entry will she make upon receipt of the payments? a. Debit Unearned 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 Register to View AnswerSO 5, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 184. Amos Real Estate signed a four-month note payable in the amount of $12,000 on Septem ber 1. The note requires interest at an annual rate of 9%. The amount of interest to be ac crued at the end of September is: a. $360. b. $90. c. $1,080. d. $120. Register to View AnswerSO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 185. DeNova Real Estate signed a four-month note payable in the amount of $6,000 on Septem ber 1. The note requires interest at an annual rate of 6%. The amount of interest to be ac crued at the end of September is: a. $360. b. $90. c. $30. d. $60. Register to View AnswerSO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 186. A gift shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $40,000 with annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the in terest? a. Interest Expense 400 Interest Payable 400 b. Interest Expense 600 Interest Payable 600 FOR INSTRUCTOR USE ONLY 4- 36 Test Bank for Accounting, Fourth Edition c. Interest Expense Cash d. Interest Expense Note Payable 400 400 600 600 Register to View AnswerSO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 187. Ye Olde Christmas shop signs a three-month note payable to help finance increases in in ventory for the Christmas shopping season. The note is signed on October 1 in the amount of $20,000 with annual interest of 9%. 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 150 Interest Payable 150 b. Interest Expense 300 Interest Payable 300 c. Interest Expense 450 Interest Payable 450 d. Interest Expense 1,800 Note Payable 1,800 Register to View AnswerSO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 188. Snelling Tables 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 (2931). Em ployees work 5 days a week and the company pays $800 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January? a. Wages Expense 800 Wages Payable 800 b. Wages Expense 4,000 Wages Payable 4,000 c. Wages Expense 2,400 Wages Payable 2,400 d. No adjusting entry is required. Register to View AnswerSO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 189. Jill Clown earned a salary of $500 for the last week of October. She will be paid on Novem ber 1. The adjusting entry for Jills employer October 31 is: a. No entry is required. b. Salaries Expense 500 Salary payable 500 c. Salaries Expense 500 Cash 500 d. Salaries Payable 500 Cash 500 Register to View AnswerSO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 190. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employ ees was omitted. Which of the following statements is true? a. Salary Expense for the year is overstated. b. Liabilities at the end of the year are understated. c. Assets at the end of the year are understated. d. Stockholders equity at the end of the year is understated. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 37 Register to View AnswerSO 5, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 191. A company shows a balance in Salaries Payable next payroll amounting to $45,000 is to be paid journal entry to record the payment of salaries? a. Salaries Expense 45,000 Salaries Payable b. Salaries Expense 45,000 Cash c. Salaries Expense 15,000 Cash d. Salaries Payable 30,000 Salaries Expense 15,000 Cash of $30,000 at the end of the month. The in the following month. What will be the 45,000 45,000 15,000 45,000 Register to View AnswerSO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 192. De Meaning Corporation issued a one-year 6% $200,000 note on April 30, 2011. Interest expense for the year ended December 31, 2011 was: a. $12,000 b. $9,000 c. $8,000 d. $7,000 Register to View AnswerSO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 193. Bluing Corporation issued a one-year 9% $200,000 note on April 30, 2011. Interest expense for the year ended December 31, 2011 was: a. $18,000 b. $13,500 c. $12,000 d. $10,500 Register to View AnswerSO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 194. Employees at Biquell Corporation are paid $8,000 cash every Friday for working Monday through Friday. The calendar year accounting period ends on Wednesday, December 31. How much salary expense should be recorded two days later on January 2? a. $8,000 b. $4,800 c. None, expense recognition requires the weekly salary to be accrued on December 31. d. $3,200 Register to View AnswerSO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 195. An adjusted trial balance: a. is prepared after the financial statements are completed. b. proves the equality of the total debit balances and total credit balances of ledger ac counts after all adjustments have been made. c. is a required financial statement under generally accepted accounting principles. d. cannot be used to prepare financial statements. Register to View AnswerSO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 196. Which of the statements below is not true? a. An adjusted trial balance should show ledger account balances. FOR INSTRUCTOR USE ONLY 4- 38 Test Bank for Accounting, Fourth Edition 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. Register to View AnswerSO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 197. Which statement is incorrect concerning the adjusted trial balance? a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. b. The adjusted trial balance provides the primary basis for the preparation of financial statements. c. The adjusted trial balance lists the account balances in order of their magnitude. d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted. Register to View AnswerSO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 198. Can financial statements be prepared directly from the adjusted trial balance? a. They cannot. The general ledger must be used. b. Yes, adjusting entries have been recorded in the general journal and posted to the ledger accounts. c. No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose. d. They can because that is the only reason that an adjusted trial balance is prepared. Register to View AnswerSO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 199. The primary source used in the preparation of the financial statements is the: a. trial balance. b. post-closing trial balance. c. general trial balance. d. adjusted trial balance. Register to View AnswerSO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 200. Which of the following accounts will reflect the accounts beginning balance on the adjusted trial balance? a. Prepaid rent b. Retained earnings c. Prepaid insurance d. Unearned revenue Register to View AnswerSO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 201. The following accounts show balances on the adjusted trial balance. Which of these account balances will not appear the same on the balance sheet? a. Retained earnings b. Accounts receivable c. Common stock d. Notes payable Register to View AnswerSO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 202. Which trial balance will consist of the greatest number of accounts? a. Post-closing trial balance b. Trial balance FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 39 c. Adjusted trial balance d. All of the above will contain the same number of accounts. Register to View AnswerSO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 203. Based on the account balances below, what is the total of the debit the adjusted trial balance? Service revenue $3,300 Equipment Cash 1,525 Prepaid insurance Unearned revenue 5,320 Depreciation expense Salary expense 1,050 Accum. depreciation Common stock 390 Retained earnings a. $9,150 b. $10,840 c. $9,560 d. $10,430 and credit columns of $6,400 1,225 640 1,280 550 Register to View AnswerSO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 204. Given the following adjusted trial balance: Cash Accounts receivable Inventory Prepaid rent Property, plant & equipment Accumulated depreciation Accounts payable Unearned revenue Common stock Retained earnings Service revenue Interest revenue Salary expense Travel expense Total Net income for the year is: a. $98 b. $270 c. $324 d. $496 Debit $1,562 2,098 3,124 86 300 Credit 52 82 122 206 6,610 268 56 160 66 $7,396 $7,396 Register to View AnswerSO 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 205. Given the following adjusted trial balance: Cash Accounts receivable Inventory Prepaid rent Property, plant & equipment Accumulated depreciation Accounts payable Debit $1,562 2,098 3,124 86 300 FOR INSTRUCTOR USE ONLY Credit 52 82 4- 40 Test Bank for Accounting, Fourth Edition Unearned revenue 122 Common stock 206 Retained earnings 6,610 Service revenue 268 Interest revenue 56 Salary expense 160 Travel expense 66 Total $7,396 $7,396 After closing entries have been posted, the balance in retained earnings will be: a. $6,340 b. $6,512 c. $6,880 d. $6,708 Register to View AnswerSO 7, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 206. Given the following adjusted trial balance: Cash Accounts receivable Inventory Prepaid rent Property, plant & equipment Accumulated depreciation Accounts payable Unearned revenue Common stock Retained earnings Service revenue Interest revenue Salary expense Travel expense Total Net income for the year is: a. $49 b. $135 c. $162 d. $248 Debit $781 1,049 1,562 43 150 Credit 26 41 61 103 3,305 134 28 80 33 $3,698 $3,698 Register to View AnswerSO 6, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 207. Given the following adjusted trial balance: Cash Accounts receivable Inventory Prepaid rent Property, plant & equipment Accumulated depreciation Accounts payable Unearned revenue Debit $781 1,049 1,562 43 150 FOR INSTRUCTOR USE ONLY Credit 26 41 61 Accrual Accounting Concepts 4- 41 Common stock 103 Retained earnings 3,305 Service revenue 134 Interest revenue 28 Salary expense 80 Travel expense 33 Total $3,698 $3,698 After closing entries have been posted, the balance in retained earnings will be: a. $3,256 b. $3,170 c. $3,440 d. $3,354 Register to View AnswerSO 7, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 208. Closing entries: a. are prepared before the financial statements. b. reduce the number of permanent accounts. c. cause the revenue and expense accounts to have zero balances. d. summarize the activity in every account. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 209. Which of the following is a true statement about closing the books of a corporation? a. Expenses are closed to the Expense Summary account. b. Only revenues are closed to the Income Summary account. c. Revenues and expenses are closed to the Income Summary account. d. Revenues, expenses, and the Dividends account are closed to the Income Summary ac count. Register to View AnswerSO 7, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 210. The closing entry process consists of closing: a. all asset and liability accounts. b. out the Retained Earnings account. c. all permanent accounts. d. all temporary accounts. Register to View AnswerSO 7, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 211. Which account will have a zero balance after closing entries have been journalized and pos ted? a. Service revenue. b. Advertising Supplies. c. Prepaid Insurance. d. Accumulated Depreciation. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 212. A post-closing trial balance will show: a. zero balances for all accounts. b. zero balances for balance sheet accounts. FOR INSTRUCTOR USE ONLY 4- 42 Test Bank for Accounting, Fourth Edition c. only balance sheet accounts. d. only income statement accounts. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 213. Which types of accounts will appear in the post-closing trial balance? a. Permanent accounts. b. Temporary accounts. c. Accounts shown in the income statement columns of a work sheet. d. None of the above. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 214. The purpose of the post-closing trial balance is to: a. prove that no mistakes were made. b. prove the equality of the permanent account balances that are carried forward into the next accounting period. c. prove the equality of the temporary account balances that are carried forward into the next accounting period. d. list all the balance sheet accounts in alphabetical order for easy reference. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 215. Which statement is correct concerning the adjusted trial balance? a. An adjusted trail balance eliminates the need for the preparation of financial statements. b. The purpose of an adjusted trial balance is to prove the equality of the total debit bal ances and the total credit balances in the ledger. c. An adjusted trial balance will contain only permanentbalance sheetaccounts. d. The adjusted trial balance is prepared after the adjusting entries have been journalized but before they have been posted. Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 216. Which of the following accounts balance will change between the adjusted trial balance and the post-closing trial balance? a. Common stock b. Prepaid rent c. Unearned service revenue d. Retained earnings Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 217. Which type of accounts will not appear in the post-closing trial balance? a. Asset accounts b. Permanent accounts c. Liability accounts d. Temporary accounts Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 218. There are usually how many closing journal entries? a. 5 b. 4 c. 3 d. 2 FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 43 Register to View AnswerSO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 219. Given the following adjusted trial balance, what will be the totals for the debit and credit columns of the post-closing trial balance? Cash Accounts receivable Inventory Prepaid rent Property, plant & equipment Accumulated depreciation Accounts payable Unearned revenue Common stock Retained earnings Service revenue Interest revenue Salary expense Travel expense Totals a. b. c. d. Debit $1,562 2,098 3,124 86 300 Credit $ 160 66 $7,396 52 82 172 206 6,610 218 56 $7,396 $7,396 $7,118 $7,344 $7,170 Register to View AnswerSO 7, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 44 220. Test Bank for Accounting, Fourth Edition Given the following adjusted trial balance, what will be the totals for the debit and credit columns of the post-closing trial balance? Cash Accounts receivable Inventory Prepaid rent Property, plant & equipment Accumulated depreciation Accounts payable Unearned revenue Common stock Retained earnings Service revenue Interest revenue Salary expense Travel expense Totals a. b. c. d. Debit $ 781 1,049 1,562 43 150 Credit $ 80 33 $3,698 26 41 86 103 3,305 109 28 $3,698 $3,585 $3,559 $3,698 $3,672 Register to View AnswerSO 7, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 221. The final step in the accounting cycle is to prepare: a. closing entries. b. financial statements. c. a post-closing trial balance. d. adjusting entries. Register to View AnswerSO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 222. All of the following are required steps in the accounting cycle except : a. journalizing and posting closing entries. b. preparing an adjusted trial balance. c. preparing a post-closing trial balance. d. preparing a work sheet. Register to View AnswerSO 8, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 45 223. The following information is from the Income Statement of the Dirt Poor Laundry Service : ____________________________________________________________________________ Revenues Laundry Service Revenues $5,500 Expenses Wages expense $ 1,450 Advertising expense 500 Rent expense 300 Supplies expense 200 Insurance expense 100 Total expenses 2,550 Net Income $2,950 The entry to close the Laundry Service Revenue account includes a: a. debit to Laundry Service Revenue for $5,500. b. credit to Laundry Service Revenue for $5,500. c. debit to Income Summary for $5,500. d. debit to Retained Earnings for $5,500. Register to View AnswerSO 8, BT: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 224. The following information is from the Income Statement of the Dirt Poor Laundry Service : ____________________________________________________________________________ Revenues Laundry Service Revenues $5,500 Expenses Wages expense $ 1,450 Advertising expense 500 Rent expense 300 Supplies expense 200 Insurance expense 100 Total expenses 2,550 Net Income $2,950 The entry to close the expense accounts includes a: a. credit to Income Summary for $2,550. b. debit to Income Summary for $2,550. c. debit to Wages Expense for $1,450. d. credit to Retained Earnings for $2,550. Register to View AnswerSO 8, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 225. The following information is from the Income Statement of the Dirt Poor Laundry Service : FOR INSTRUCTOR USE ONLY 4- 46 Test for Bank Accounting, Fourth Edition ____________________________________________________________________________ Revenues Laundry Service Revenues $5,500 Expenses Wages expense $ 1,450 Advertising expense 500 Rent expense 300 Supplies expense 200 Insurance expense 100 Total expenses 2,550 Net Income $2,950 The entry to close the Income Summary includes a: a. credit to Income Summary for $2,950. b. debit to Income Summary for $2,950. c. debit to Retained Earnings for $2,950. d. credit to Common Stock for $2,950. Register to View AnswerSO 8, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 226. The first required step in the accounting cycle is: a. adjusting entries. b. journalizing transactions. c. analyzing transactions. d. posting transactions. Register to View AnswerSO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 227. The Accounts Receivable account has a beginning balance of $52,000 and an ending bal ance of $74,000. If $42,000 was sold on account during the year, what were the total collec tions on account? a. $20,000 b. $64,000 c. $84,000 d. $94,000 Register to View AnswerSO 8, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 228. How many required steps are there in the accounting cycle? a. 11 b. 9 c. 7 d. 5 Register to View AnswerSO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 229. Which of the following steps in the accounting cycle usually occurs only at the end of a com panys annual accounting period? a. Step 3: Post to the ledger accounts. b. Step 7: Prepare financial statements. c. Step 6: Prepare adjusting trial balance. d. Step 9: Prepare a post-closing trial balance. Register to View AnswerSO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving *230. The work sheet is: a. part of the journal. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 47 b. a financial statement. c. part of the ledger. d. none of the above. Register to View AnswerSO 10, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving *231. The work sheet starts with two columns for the: a. adjustments. b. financial statements. c. trial balance. d. adjusted trial balance. Register to View AnswerSO 10, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving *232. The work sheet does not contain columns for the: a. income statement. b. statement of retained earnings. c. balance sheet. d. adjusted trial balance. Register to View AnswerSO 10, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving *233. The work sheet contains columns for the: a. statement of retained earnings. b. statement of cash flows. c. post-closing trial balance. d. balance sheet. Register to View AnswerSO 10, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving *234. Net income is recorded on the work sheet under the: a. debit column of the adjusted trial balance and the credit column of retained earnings. b. debit column of the income statement and the credit column of the balance sheet. c. credit column of the adjusted trial balance and the debit column of retained earnings. d. credit column of the income statement and the debit column of the balance sheet. Register to View AnswerSO 10, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 48 Test Bank for Accounting, Fourth Edition Answers to Multiple Choice Questions 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. d a a d b a a b c b a d b d c a b a d c c a c b b c d d 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. d a c a d b a c b c c d d b d b a a d c b b c c c b d a 110. 111. 112. 113. 114. 115. 116. 117 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. c a a c a d d c d c d c c d a c d b d b a a b a c d b c 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. d d c b c a b a c c a d c c c c d c d c b a c b b b b b 166. 167 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. b b a c c a d a d d a c b b b a c b b c a c c b b d c c FOR INSTRUCTOR USE ONLY 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218. 219. 220. 221. d b d c b d b a c b a d a d c c d a c a b b d d b d a c 222. 223. 224. 225. 226. 227. 228. 229. 230. 231. 232. 233. 234. d a b b c a b d d c b d b Accrual Accounting Concepts 4- 49 BRIEF EXERCISES Be. 235 Identify the effect, if any, that each of the following transactions would have upon cash and retained earnings. Show the dollar amount and the effect (+, , N). Retained _Cash__ Earnings 1. 2. 3. 5. Solution 235 1. 2. 3. 4. 5. _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _Cash__ 4. Purchases capital asset for $3,000 Purchased $200 of supplies for cash Recorded an adjusting entry to record use of $110 of the above supplies. Received $600 from customers in payment of their accounts Recorded depreciation of equipment for period used, $900. Retained Earnings $-3,000_ $ -_200 __ N__ __ N _ ___N__ $ -110_ $ + 600 __N__ (5 min.) Purchases capital asset for $3,000 Purchased $200 of supplies for cash Recorded an adjusting entry to record use of $110 of the above supplies. Received $600 from customers in payment of their accounts Recorded depreciation of equipment for period used, $900. _N _ $ - 900_ Ans: N/A, SO 2, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Be. 236 FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 50 Before month-end adjustments are made, the February 28 trial balance of Coles Enterprise con tains revenue of $11,000 and expenses of $8,600. Adjustments are necessary for the following items: Depreciation for February is $1,200. Revenue earned but not yet billed is $2,800. Accrued interest expense is $900. Revenue collected in advance that is now earned is $2,500. Portion of prepaid insurance expired during February is $500. Instructions: Calculate the correct net income for Cole's Enterprise for February 3. Solution 236 (5 min.) Net Income before Adjustments ($11,000 8,600) Add: Unearned Revenues Accrued Revenues Subtract: Depreciation Expense Interest Expense Insurance Expense $ 2,400 $2,500 2,800 1,200 900 500 Net Income after Adjustments 5,300 7,700 2,600 $ 5,100 Ans: N/A, SO 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Be. 237 Before month-end adjustments are made, the September 30 trial balance of Horton Enterprise con tains revenue of $9,200 and expenses of $6,300. Adjustments are necessary for the following items: Depreciation for September is $300. Revenue earned but not yet billed is $2,100. Accrued interest expense is $800. Revenue collected in advance that is now earned is $3,400. Portion of prepaid insurance expired during September is $300. Instructions: Calculate the correct net income for Hortons Enterprise for September. Solution 237 (5 min.) FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts Net Income before Adjustments ($9,200 6,300) Add: Unearned Revenues Accrued Revenues 4- 51 $ 2,900 $3,400 2,100 Subtract: Depreciation Expense Interest Expense Insurance Expense Net Income after Adjustments 5,500 8,400 300 800 300 1,400 $ 7,000 Ans: N/A, SO 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Be. 238 For each of the following oversights, state whether total assets will be understated (U), overstated (O), or no affect (NA). _____ 1. Failure to record revenue earned 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 recognize the earned portion of unearned revenues. Solution 238 1. 2. 3. 4. 5. 6. (5 min.) U O U O NA NA Ans: N/A, SO 4 & 5, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Be. 239 FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 52 State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued revenue (AR) or an accrued expense (AE). 1. 2. 3. 4. 5. Unrecorded interest on savings bonds is $245. Property taxes that have been incurred but that have not yet been paid or recorded amount to $300. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40 percent was still unexpired. Unpaid salaries earned by year end but not yet paid or recorded amounted to $1,200. Solution 239 1. 2. 3. 4. 5. (5 min.) AR AE UR PE AE Ans: N/A, SO 3, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Be. 240 Identify the impact on the balance sheet for that month if the following information is not used to adjust the accounts. 1. 2. 3. 4. Supplies consumed during the month totalled $3,000. Interest accrues on notes payable at the rate of $200 per month. Insurance of $450 expired during the month. Plant and equipment are depreciated at the rate of $1,200 per month. Solution 240 1. 2. 3. 4. Assets overstated and Stockholders' Equity overstated by $3,000. Liabilities understated and Stockholders' Equity overstated by $200. Assets overstated and Stockholders' Equity overstated by $450. Assets overstated and Stockholders' Equity overstated by $1,200. Ans: N/A, SO 4 & 5, BT: AN, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Be. 241 On January 1, the Biddle & Biddle, CPAs received a $6,000 cash retainer for legal services to be provided rateably over the next 3 months. The full amount was credited to the liability account Unearned Revenue. Assuming that the revenue is earned rateably over the 3 month period, what adjusting journal entry should be made at January 31? Solution 241 FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts Unearned Revenue Fees Earned 4- 53 2,000 2,000 Ans: N/A, SO 4, BT: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Be. 242 On February 1, the Acts Tax Service received a $2,800 cash retainer for tax preparation services to be provided rateably over the next 4 months. The full amount was credited to the liability account Unearned Revenue. Assuming that the revenue is earned rateably over the 4 month period, what balance would be reported on the February 28 balance sheet for Unearned Revenue? Solution 242 Revenue earned monthly = $2,800/ 4 months = $700 per month Feb 28 balance in Unearned Revenue = $2,800 $700 revenue earned in February = $2,100 Ans: N/A, SO 4, BT: AP, Difficulty: Easy, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Be. 243 Better Publications, sold annual subscriptions to their magazine for $36,000 in December, 2010. The magazine is published monthly. The new subscribers received their first magazine in January, 2011. 1. 2. What adjusting entry should be made in January if the subscriptions were originally recorded as a liability? What amount will be reported on the January 2011 balance sheet for Unearned Revenue? Solution 243 1. 2. Unearned Subscription Revenue Subscription Revenue 3,000 3,000 Unearned Subscription Revenue at January 31: 36,000 - 3,000 = $33,000 Ans: N/A, SO 4, BT: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Be. 244 River Ridge Music School borrowed $30,000 from the bank signing a 10%, 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)? Solution 244 FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 54 Interest Expense (30,000 10% 1/12) Interest Payable 250 250 Ans: N/A, SO 5, BT: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Be. 245 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: _____ 1. A revenue not yet earned; collected in advance. _____ 2. An expense incurred; not yet paid or recorded. _____ 3. A revenue earned; not yet collected or recorded. _____ 4. An expense not yet incurred; paid in advance. Solution 245 1. 2. 3. 4. (5 min.) B D C A Ans: N/A, SO 4, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Be. 246 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3. Depreciation on equipment is $800 for the accounting period. There was no beginning balance of supplies and purchased $600 of office supplies during the period. At the end of the period $80 of supplies were on hand. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $400 was unex pired. Solution 246 (5 min.) 1. Depreciation Expense ...................................................................... FOR INSTRUCTOR USE ONLY 800 Accrual Accounting Concepts Accumulated DepreciationEquipment ................................. 4- 55 800 2. Supplies Expense ............................................................................. Supplies ................................................................................... ($600 $80) 520 3. Rent Expense ................................................................................... Prepaid Rent ............................................................................ ($1,000 $400) 600 520 600 Ans: N/A, SO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Be. 247 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3. Unrecorded interest accrued on savings bonds is $200. Property taxes incurred but not paid or recorded amount to $900. Salaries incurred by year end but not yet paid or recorded amounted to $600. Solution 247 (5 min.) 1. Interest Receivable .......................................................................... Interest Revenue...................................................................... 200 2. Property Taxes Expense .................................................................. Property Taxes Payable .......................................................... 900 5. Salaries Expense .............................................................................. Salaries Payable ...................................................................... 600 200 900 600 Ans: N/A, SO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Be. 248 The adjusted trial balance of Warbocks Corporation at December 31, 2011 includes the following accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries Ex pense $15,000; Insurance Expense $2,000; Rent Expense $3,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare an income statement for the year ended December 31, 2011. FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 56 Solution 248 (5 min.) WARBOCKS CORPORATION Income Statement For the Year Ended December 31, 2011 ____________________________________________________________________________ Revenues Service Revenue Expenses Salaries Expense Rent Expense Insurance Expense Depreciation Expense Supplies Expense Total Expenses Net Income $ 30,000 $15,000 3,500 2,000 1,000 500 22,000 $ 8,000 Ans: N/A, SO 6, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Be. 249 The adjusted trial balance of Warbocks Corporation at December 31, 2011 includes the following accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries Ex pense $15,000; Insurance Expense $2,000; Rent Expense $3,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare a retained earnings statement for the year. Solution 249 (5 min.) WARBOCKS CORPORATION Retained Earnings Statement For the Year Ended December 31, 2011 ____________________________________________________________________________ Retained Earnings, January 1 Plus: Net Income Less: Dividends Retained Earnings, December 31 $12,600 8,000 20,600 5,000 $15,600 Ans: N/A, SO 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 57 Be. 250 The following selected accounts appear in the adjusted trial balance for Blender Company. Identify the accounts that would be included in the post-closing trial balance. 1. 2. 3. 4. Accumulated Depreciation Depreciation Expense Retained Earnings Dividends Solution 250 5. 6. 7. Supplies Accounts Payable Service Revenue (5 min.) The following are accounts that would be included in the post-closing trial balance. 1. 3. 5. 6. Accumulated Depreciation Retained Earnings Supplies Accounts Payable Ans: N/A, SO 7, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving EXERCISES Ex. 251 The balance sheets of Palle Company include the following: 12/31/11 $4,300 5,000 3,700 -0- Interest Receivable Supplies Wages Payable Unearned Service Revenue The income statement for 2011 shows the following: Interest Revenue Service Revenue Supplies Expense Wages Expense $15,500 78,700 10,700 44,000 Instructions: Calculate the following for 2011: 1. Cash received for interest. 2. Cash paid for supplies. 3. Cash paid for wages. 4. Cash received for service revenue. FOR INSTRUCTOR USE ONLY 12/31/10 $ -03,900 3,800 4,000 Test Bank for Accounting, Fourth Edition 4- 58 Solution 251 (15 min.) 1. Cash received for interest = Interest Revenue Less: Interest Receivable Cash Received $ 11,200 $15,500 4,300 $ 11,200 2. Cash paid for supplies = Supplies Expense Less: Supplies (2010) $11,800 $10,700 3,900 6,800 5,000 $11,800 Add: Supplies (2011) Cash Paid 3. Cash paid for wages = Wages Expense Add: Wages Payable (2010) Less: Wages Payable (2011) Cash Paid 4. Cash received for service revenue = Service Revenue Less: Unearned Service Revenue (2010) Cash Received $44,100 $44,000 3,800 47,800 3,700 $44,100 $74,700 $78,700 4,000 $74,700 Ans: N/A, SO 2, BT: AN, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 252 The 2011 income statement for Moring Company showed rent expense of $8,500 and wages ex pense of $9,600. The related balance sheet account balance at year-end last year and this year were as follows: 2011 2010 Prepaid Rent $900 $300 Wages Payable 500 400 Calculate the following for 2011: 1. Cash paid for rent. 2. Cash paid for wages. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts Solution 252 4- 59 (10 min.) 1. Cash paid for rent = Rent Expense Less: Prepaid rent (2010) $9,100 $8,500 300 8,200 900 $9,100 Add: Prepaid rent (2011) Cash Paid 2. Cash paid for wages = Wages Expense Add: Wages Payable (2010) $9,500 $9,600 400 10,000 500 $9,500 Less: Wages Payable (2011) Cash Paid Ans: N/A, SO 2, BT: AN, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 253 A company using the cash basis of accounting reports net income for 2011 of $50,460. If the com pany had used the accrual basis of accounting it would have reported the following year-end bal ances: Accounts receivable Supplies on hand Wages payable Other unpaid amounts 2011 $3,450 1,740 3,600 2,400 2010 $5,100 1,950 2,250 2,100 Instructions: Determine the companys net income under the accrual basis of accounting. Show your calculations. Use the column headings shown below. Explanation Amount FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 60 Solution 253 (10 min.) Explanation Cash basis net income The decrease in accounts receivable would be included in cash basis net income, but not accrual basis net income The decrease in supplies would not be included in cash basis net income The increase in wages payable would be deducted in accrual basis net income The increase in other unpaid amounts would be deducted in accrual basis net income Accrual basis net income Amount $50,460 (1,650) ( 210) (1,350) ( 300) $46,950 Ans: N/A, SO 2, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 254 Double-entry Accounting Services begin operations on July 1. It allows its clients 90 days to pay for services received. On the other hand, the companys suppliers require payment for their goods and services within 30 days. Double-entry prepaid its office rent for 12 months on July 1. At the end of the year, December 31, the company had yet to pay its last months utility bill. Instructions: Explain how cash and accrual basis accounting would handle each of the events described above. Use the column heading s shown below. Event Cash Basis Accrual Basis Solution 254 (10 min.) FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts Event Cash Basis 90 days for customers Revenue would be to pay recorded when the cash was received. Accrual Basis Revenue would be recorded when the service was performed. 30 days to pay suppliers Expenses would be recorded when the cash was paid. Until the item purchased was used it would be recorded as an asset. When used, it would then be expensed. Prepaid rent of 12 months It would expensed when paid. It would be recorded as an asset when paid and then expensed as time passes. Unpaid utilities It would not be expensed until paid. 4- 61 It would be expensed in the month incurred. Ans: N/A, SO 2, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Ex. 255 Hooper Company prepared the following income statement using the cash basis of accounting: HOOPER COMPANY Income Statement, Cash Basis For the Year Ended December 31, 2011 Service revenue (does not include $30,000 of services rendered on account because the collection will not be until 2012)...................................................... Expenses (does not include $25,000 of expenses on account because payment will not be made until 2012) ................................................................. Net income ................................................................................................................ $380,000 220,000 $160,000 Additional data: 1. Depreciation on a company automobile for the year amounted to $7,000. This amount is not in cluded in the expenses above. 2. On January 1, 2011, paid for a two-year insurance policy on the automobile amounting to $1,600. This amount is included in the expenses above. Instructions: (a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change. (b) Explain which basis (cash or accrual) provides a better measure of income. Solution 255 (15 min.) FOR INSTRUCTOR USE ONLY 4- 62 (a) Test Bank for Accounting, Fourth Edition HOOPER COMPANY Income Statement For the Year Ended December 31, 2011 Service revenue ................................................................................................ Expenses ........................................................................................................... Net income ........................................................................................................ $410,000 251,200 $158,800 Service revenue should include the $30,000 for services performed on account. The accrual basis states that revenue is reflected in the period when the service is performed. ($380,000 + $30,000 = $410,000). Expenses should include the $25,000 for expenses incurred but not yet paid. The accrual basis states that expenses should be reflected in the period when incurred. Expenses also should only include half of the $1,600 insurance premium since $800 applies to 2011. The other $800 is an asset and should be reflected on the balance sheet as prepaid in surance. The $7,000 of depreciation for the automobile is included as an expense in 2011. ($220,000 + $25,000 $800 + $7,000 = $251,200). (b) The accrual basis of accounting provides a better measure of income than the cash basis. The accrual basis is required under generally accepted accounting principles and recognizes reven ues when earned and expenses when incurred. Revenues and expenses recognized under the accrual basis are related to the economic environment in which they occur and thus allow trends to be more meaningfully interpreted. The cash basis often fails to recognize revenue in the period when earned and expenses when incurred. Additionally, expenses are not matched with revenues when earned; therefore, the ex pense recognition principle is violated. Ans: N/A, SO 2, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Ex. 256 FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 63 On December 31, 2011, olski Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed net in come of $40,000. The balance sheet showed total assets, $130,000; total liabilities, $60,000; and stockholders equity, $70,000. The data for the three adjusting entries were: (1) Depreciation of $7,000 was not recorded on equipment. (2) Wages amounting to $10,000 for the last two days in December were not paid and not recor ded. The next payroll will be in January. (3) Rent of $9,000 was paid for two months in advance on December 1. The entire amount was debited to Prepaid Rent when paid. Instructions: Complete the following tabulation to correct the financial statement amounts shown (indicate deduc tions with parentheses): Item Incorrect balances Effects of: Depreciation Net Income $ 40,000 Total Assets $130,000 Total Liabilities Stockholders Equity $ 60,000 $ 70,000 Net Income $40,000 Total Assets $130,000 Total Liabilities Stockholders Equity $60,000 $70,000 (7,000) (10,000) (4,500) $18,500 (7,000) Wages Rent Correct Balances Solution 256 (10 min.) Item Incorrect balances Effects of: Depreciation Wages Rent Correct Balances 10,000 (4,500) $118,500 $70,000 (7,000) (10,000) (4,500) $48,500 Ans: N/A, SO 4 & 5, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 64 Test Bank for Accounting, Fourth Edition Ex. 257 The Downtown Company accumulates the following adjustment data at December 31. 1. Revenue of $1,100 collected in advance has been earned. 2. Salaries of $600 are unpaid. 3. Prepaid rent totaling $450 has expired. 4. Supplies of $550 have been used. 5. Revenue earned but unbilled totals $750. 6. Utility expenses of $300 are unpaid. 7. Interest of $250 has accrued on a note payable. Instructions: (a) For each of the above items indicate: 1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense). 2. The account relationship (asset/liability, liability/revenue, etc.). 3. The status of account balances before adjustment (understatement or overstatement). 4. The adjusting entry. (b) Assume net income before the adjustments listed above was $24,500. What is the adjusted net income? Prepare your answer in the tabular form presented below. Type of Adjustment Solution 257 Account Relationship Account Balances Before Adjustment (Understatement or Overstatement) Adjusting Entry (20 min.) FOR INSTRUCTOR USE ONLY Income Effect Increase (Decrease) Accrual Accounting Concepts (a) Type of Account Adjustment Relationship 1. Unearned revenue L/R 2. Accrued expense 3. Prepaid expense 4. Prepaid expense 5. Accrued revenue 6. Accrued expense Account Balances Before Adjustment (Understatement or Overstatement) Liab. O Rev. U Adjusting Entry Unearned Revenue Service Revenue Exp. U Liab. U Salary Expense Salaries Payable (600) Exp. U Asset O Rent Expense Prepaid Rent (450) Exp. U Asset O Supplies Expense Supplies (550) Asset U Rev. U Accounts Receivable Service Revenue Exp. U Utilities Expense E/L E/A E/A A/R E/L Income Effect Increase (Decrease) Liab. U 7. Accrued expense Codes: A = L= E= (b) Asset Liability Expense 4- 65 E/L Exp. U Liab. U R= O= U= Accounts Payable Interest Expense Interest Payable 1,100 750 (300) (250) Revenue Overstatement Understatement Net income before adjustments .................................................... Add: Unearned revenue (1) ....................................................... Accrued revenue (5).......................................................... Less: Accrued salaries (2) ........................................................... Prepaid rent expired (3) ..................................................... Supplies used (4) ............................................................... Accrued utilities (6) ............................................................ Accrued interest (7) ........................................................... Adjusted net income ...................................................................... $24,500 $1,100 750 600 450 550 300 250 1,850 26,350 2,150 $24,200 Ans: N/A, SO 3, BT: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Ex. 258 The adjusted trial balance of Masters Company includes the following balance sheet accounts that FOR INSTRUCTOR USE ONLY 4- 66 Test Bank for Accounting, Fourth Edition frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid ex penses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry. (a) (b) Balance Sheet Account Type of Adjusting Entry Related Account 1. Supplies 2. Accounts Receivable 3. Prepaid Insurance 4. Accumulated Depreciation Equipment 5. Interest Payable 6. Salaries Payable 7. Unearned Service Revenue Solution 258 (10 min)(cont.) Balance Sheet Account (a) Type of Adjusting Entry (b) Related Account 1. Supplies Prepaid Expense Supplies Expense 2. Accounts Receivable Accrued Revenue Service Revenue 3. Prepaid Insurance Prepaid Expense Insurance Expense 4. Accumulated Depreciation Equipment Prepaid Expense Depreciation Expense 5. Interest Payable Accrued Expense Interest Expense 6. Salaries Payable Accrued Expense Salaries Expense 7. Unearned Service Revenue Unearned Revenue Service Revenue Ans: N/A, SO 3, BT: K, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Ex. 259 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts A. B. C. D. 4- 67 TERMS: Prepaid Expenses Unearned Revenues Accrued Revenues Accrued Expenses STATEMENTS: _____ 1. A revenue not yet earned; collected in advance. _____ 2. Office supplies on hand that will be used in the next period. _____ 3. Subscription revenue collected; not yet earned. _____ 4. Rent not yet collected; already earned. _____ 5. An expense incurred; not yet paid or recorded. _____ 6. A revenue earned; not yet collected or recorded. _____ 7. An expense not yet incurred; paid in advance. _____ 8. Interest expense incurred; not yet paid. Solution 259 1. 2. 3. 4. 5. 6. 7. 8. (5 min.) B A B C D C A D Ans: N/A, SO 3, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 260 A review of the ledger of Wilde Insurance Co. at December 31, 2011, produces the following data pertaining to the preparation of annual adjusting entries: FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 68 (a) Salaries Payable $0: Salaries are paid every Friday for the current week. Five employees re ceive a weekly salary of $800, and three employees earn a weekly salary of $600. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December. (b) Unearned Insurance Revenue $58,000: The company sold several insurance policies during the year as shown below: Premium Term Per Number of Date (in months) Policy Policies Oct. 1 12 $ 8,000 3 Dec. 1 12 18,000 2 (c) Notes Receivable $90,000: This is a 6-month note, dated November 1, 2011, with an 8% interest rate. Instructions: Prepare the adjusting entries at December 31, 2011. Show all computations. Solution 260 (a) Dec. 31 Salaries Expense Salaries Payable (5 X $800 X 2/5 = $$1,600) (3 X $600 X 2/5 = $ 720) (b) (c) 31 Unearned Insurance Revenue Insurance Revenue (3/12 X $8,000 X 3 = $6,000) (1/12 X $18,000 X 2 = $3,000) 2,320 2,320 9,000 31 Interest Revenue 1,200 Interest Receivable ($90,000 X .08 X 2/12 = $1,200) 9,000 1,200 Ans: N/A, SO 4 & 5, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 261 A review of the ledger of Weakly Service Co. at December 31, 2011, produces the following data pertaining to the preparation of annual adjusting entries: FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 69 (a) Notes Payable $70,000: This is a 9-month note, dated September 1, 2011, with an 9% interest rate. (b) Prepaid Rent $648,000. The company rents offices throughout the Midwest. During 2011 it signed 10 leases as shown below: Date Sept. 1 Nov. 1 Term (in months) 8 12 Monthly Rent $ 4,500 7,000 Number of Leases 4 6 (c) Unearned Service Revenue $183,000. During 2011 the company entered into 13 monthly service contracts with clients. The clients prepaid for the services to be provided over the contract period in an even manner. Date Aug. 1 Oct. 1 Service Period (in months) 9 6 Amount Per Contract $13,500 15,000 Number of Contracts 8 5 Instructions: Prepare the adjusting entries at December 31, 2011. Show all computations. Solution 261 (a) Dec. 31 Interest Expense 2,100 Interest Payable ($70,000 X .09 X 4/12 = $2,100) (b) (c) 31 Rent Expense Prepaid Rent (4 X $4,500 X 4 = $72,000) (2 X $7,000 X 6 = $84,000) 156,000 31 Unearned Service Revenue Service Revenue (5/9 X $13,500 X 8 = $60,000) (3/6 X $15,000 X 5 = $37,500) 2,100 97,500 156,000 97,500 Ans: N/A, SO 4 & 5, BT: C, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 262 The Scarlet Pages, a semi-professional hockey team, prepare financial statements on a monthly basis. Their season begins in October, but in September the team engaged in the following transac tions: FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 70 (a) Paid $180,000 to Oklahoma City as advance rent for use of Oklahoma City Arena for the sixmonth period October 1 through March 31. (b) Collected $600,000 cash from sales of season tickets for the team's 30 home games. This amount was credited to Unearned Ticket Revenue. (c) During the month of October, the Scarlet Pages played five home games. Instructions: Prepare the adjusting entries required at October 31 for the transactions above. Solution 262 (5 min.) (a) Rent Expense .................................................................................. Prepaid Rent ......................................................................... ($180,000 6 = $30,000) (b) & (c) Unearned Ticket Revenue .............................................................. Ticket Revenue ..................................................................... ($600,000 30 = $20,000; $20,000 5 = $100,000) 30,000 30,000 100,000 100,000 Ans: N/A, SO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 263 The Jacquers, a semi-professional baseball team, prepare financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions: (a) (b) (c) Paid $90,000 to Lawrence City as advance rent for use of Lawrence City Stadium for the sixmonth period April 1 through September 30. Collected $500,000 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 Jacquers played four home games and five road games. Instructions: Prepare the adjusting entries required at April 30 for the transactions above. Solution 263 (5 min.) (a) Rent Expense .................................................................................. Prepaid Rent ......................................................................... ($90,000 6 = $15,000) FOR INSTRUCTOR USE ONLY 15,000 15,000 Accrual Accounting Concepts (b) & (c) Unearned Ticket Revenue .............................................................. Ticket Revenue ..................................................................... ($500,000 20 = $25,000; $25,000 4 = $100,000) 4- 71 100,000 100,000 Ans: N/A, SO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 264 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3. 4. 5. Depreciation on equipment is $1,340 for the accounting period. Interest owed on a loan but not paid or recorded is $275. There was no beginning balance of supplies and $550 of office supplies were purchased during the period. At the end of the period $150 of supplies were on hand. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $700 had ex pired. Accrued salaries at the end of the period amounted to $900. Solution 264 (10 min.) 1. Depreciation Expense ...................................................................... Accumulated DepreciationEquipment ................................. 1,340 2. Interest Expense ............................................................................... Interest Payable ....................................................................... 275 3. Supplies Expense ............................................................................. Supplies ................................................................................... ($550 $150) 400 4. Rent Expense ................................................................................... Prepaid Rent ............................................................................ 700 5. 900 Salaries Expense ........................................................................... Salaries Payable ....................................................................... 1,340 275 400 700 900 Ans: N/A, SO 4 & 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 265 Prepare adjusting entries for the following transactions. Omit explanations. FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 72 1. 2. 3. 4. 5. Unrecorded interest accrued on savings bonds is $410. Property taxes incurred but not paid or recorded amount to $800. Legal service revenues of $4,000 were collected in advance. By year end $900 was still un earned. Prepaid insurance had a $500 debit balance prior to adjustment. By year end, 60 percent was still unexpired. Salaries incurred by year end but not yet paid or recorded amounted to $650. Solution 265 (10 min.) 1. Interest Receivable .......................................................................... Interest Revenue...................................................................... 410 2. Property Taxes Expense .................................................................. Property Taxes Payable .......................................................... 800 3. Unearned Legal Services Revenues................................................ Legal Services Revenues ........................................................ ($4,000 $900) 3,100 4. Insurance Expense ........................................................................... Prepaid Insurance..................................................................... ($500 x .40) 200 5. Salaries Expense .............................................................................. Salaries Payable ....................................................................... 650 410 800 3,100 200 650 Ans: N/A, SO 4 & 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 266 Prepare year-end adjustments for the following transactions. Omit explanations. 1. 2. 3. 4. 5. 6. 7. Accrued interest on notes receivable is $30. $1,000 of unearned revenues has been earned. Three years rent, totaling $42,000, was paid in advance at the beginning of the year. Services totaling $2,900 had been performed but not yet billed at the end of the year. Depreciation on equipment totaled $6,500 for the year. Supplies purchased totaled $850. By year end, only $150 of supplies remained. Salaries owed to employees at the end of the year total $960 Solution 266 (10 min.) 1. Interest Receivable .......................................................................... Interest Revenue...................................................................... 30 2. Unearned Revenues.......................................................................... Revenues ................................................................................. 1,000 FOR INSTRUCTOR USE ONLY 30 1,000 Accrual Accounting Concepts 3. Rent Expense .................................................................................. Prepaid Rent ........................................................................... ($42,000 3 = $14,000) 14,000 Accounts Receivable...................................................................... Services Revenue.................................................................... 2,900 Depreciation Expense ..................................................................... Accumulated DepreciationEquipment ................................. 6,500 6. Supplies Expense ............................................................................. Supplies ................................................................................... ($850 $150) 700 7. 4- 73 960 4. 5. 14,000 2,900 6,500 700 Salaries Expense ............................................................................. Salaries Payable ................................................................... 960 Ans: N/A, SO 4 & 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 267 Janus Coat Company purchased a delivery truck on June 1 for $24,000, paying $8,000 cash and signing a 6%, 2-month note for the remaining balance. The truck is expected to depreciate $4,800 each year. Janus Coat Company prepares monthly financial statements. Instructions: (a) Prepare the general journal entry to record the acquisition of the delivery truck on June 1 st. (b) Prepare any adjusting journal entries that should be made on June 30th. (c) Show how the delivery truck will be reflected on Janus Coat Company's balance sheet on June 30th. Solution 267 (10 min.) (a) June 1 Delivery Truck ................................................................. Notes Payable ....................................................... Cash ....................................................................... (To record acquisition of delivery truck and signing of a 2-month, 6% note) FOR INSTRUCTOR USE ONLY 24,000 16,000 8,000 4- 74 Test Bank for Accounting, Fourth Edition (b) June 30 Depreciation Expense - Delivery Truck .......................... Accumulated DepreciationDelivery Truck ......... (To record monthly depreciation) $4,800 12 = $400/month 400 30 Interest Expense ............................................................. Interest Payable ..................................................... (To accrue interest on notes payable) $16,000 6% 1/12 = $80 80 (c) Assets Delivery Truck Less: Accumulated DepreciationDelivery Truck 400 80 $24,000 400 $23,600 Ans: N/A, SO 4 & 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Ex. 268 Sunkan Company prepares monthly financial statements. Below are listed some selected accounts and their balances on the September 30 trial balance before any adjustments have been made for the month of September. SUNKAN COMPANY Trial Balance (Selected Accounts) September 30, 2011 FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 75 ____________________________________________________________________________ Office Supplies ........................................................................................ Prepaid Insurance ................................................................................... Office Equipment .................................................................................... Accumulated DepreciationOffice Equipment ...................................... Unearned Rent Revenue ........................................................................ Debit $ 2,700 5,250 16,200 Credit $ 1,000 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 office supplies revealed $1,000 on hand on September 30. 2. A two-year life insurance policy was purchased on June 1 for $4,200. 3. Office equipment depreciates $3,000 per year. 4. The amount of rent received in advance that remains unearned at September 30 is $500. Instructions: Using the information given, prepare the adjusting entries that should be made by Sunkan Com pany on September 30. Solution 268 (10 min.) 1. Office Supplies Expense .................................................................. 1,700 Office Supplies ......................................................................... (To record the amount of office supplies used $2,700 1,000) 2. Insurance Expense ........................................................................... Prepaid Insurance .................................................................... (To record insurance expired $4,200 24) FOR INSTRUCTOR USE ONLY 1,700 175 175 4- 76 Test Bank for Accounting, Fourth Edition 3. Depreciation Expense Office Equipment ...................................... Accumulated DepreciationOffice Equipment ....................... (To record monthly depreciation $3,000 12) 250 4. Unearned Rent Revenue .................................................................. Rent Revenue .......................................................................... (To record rent revenue earned $1,200 $500) 700 250 700 Ans: N/A, SO 4 & 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 269 Prepare the required end-of-period adjusting entries for each independent case listed below. Case 1 The Thoma Company began the year with a $3,000 balance in the Office Supplies account. During the year, $8,500 of additional office supplies were purchased. A physical count of office supplies on hand at the end of the year revealed that $8,300 worth of office supplies had been used during the year. No adjusting entry has been made until year end. Case 2 The Leno Company has a calendar year-end accounting period. On July 1, the company purchased office equipment for $30,000. It is estimated that the office equipment will depreciate $250 each month. No adjusting entry has been made until year end. Case 3 Yeats Realty is in the business of renting several apartment buildings and prepares monthly finan cial statements. It has been determined that 2 tenants in $800 per month apartments and one ten ant in the $1,000 per month apartment had not paid their December rent as of December 31st. Solution 269 (10 min.) Case 1December 31 Office Supplies Expense ..................................................... Office Supplies ........................................................ (To record office supplies used during the year) Case 2December 31 Depreciation Expense-Office Equipment ........................... Accumulated DepreciationOffice Equipment....... FOR INSTRUCTOR USE ONLY 8,300 8,300 1,500 1,500 Accrual Accounting Concepts (To record depreciation expense for six months) $250 6 months = $1,500 Depreciation Case 3December 31 Rent Receivable .................................................................. Rent Revenue ......................................................... (To accrue rent earned but not yet received) [(2 x $800) + $1,000)] 2,600 2,600 Ans: N/A, SO 4 & 5, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 77 4- 78 Test Bank for Accounting, Fourth Edition Ex. 270 Greenstream 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. GREENSTREAM INSURANCE AGENCY Income Statement For the Month Ended June 30 ____________________________________________________________________________ Revenues Premium Commission Revenues .................................................. $40,000 Expenses Salary Expense .............................................................................. $12,000 Advertising Expense ...................................................................... 800 Rent Expense ................................................................................ 4,200 Depreciation Expense ................................................................... 2,800 Total Expenses .............................................................................. 19,800 Net Income .............................................................................................. $20,200 Additional Data: When the income statement was prepared, the company accountant neglected to take into consideration the following information: 1. A utility bill for $1,200 was received on the last day of the month for electric and gas service for the month of June. 2. A company insurance salesman sold a life insurance policy to a client for a premium of $20,000. The agency billed the client for the policy and is entitled to a commission of 20%. 3. Supplies on hand at the beginning of the month were $2,000. The agency purchased additional supplies during the month for $1,500 in cash and $1,200 of supplies were on hand at June 30. 4. The agency purchased a new car at the beginning of the month for $24,000 cash. The car will depreciate $6,000 per year. 5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5. Instructions: Prepare a corrected income statement. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts Solution 270 4- 79 (15 min.) GREENSTREAM INSURANCE AGENCY Income Statement For the Month Ended June 30 ____________________________________________________________________________ Revenues Premium Commission Revenues ($40,000 + $4,000)................... $44,000 Expenses Salary Expense ($12,000 + $5,300) ............................................. $17,300 Advertising Expense ...................................................................... 800 Rent Expense ................................................................................ 4,200 Depreciation Expense ($2,800 + $500) ........................................ 3,300 Utilities Expense ($0 + $1,200) ..................................................... 1,200 Supplies Expense ($0 + $2,300) ................................................... 2,300 Total expenses ..................................................................... 29,100 Net Income .............................................................................................. $14,900 Ans: N/A, SO 4 & 5, BT: AN, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving Ex. 271 One part of an adjusting entry is given below. Instructions: Indicate the account title for the other part of the entry. 1. Unearned Service Revenue is debited. 2. Prepaid Rent is credited. 3. Accounts Receivable is debited. 4. Depreciation Expense is debited. 5. Utilities Expense is debited. 6. Interest Payable is credited. 7. Service Revenue is credited (give two possible debit accounts). 8. Interest Receivable is debited. Solution 271 1. 2. 3. 4. (5 min.) Service Revenue Rent Expense Service Revenue Accumulated Depreciation 5. 6. 7. 8. Utilities Payable Interest Expense Accounts Receivable or Unearned Service Revenue Interest Revenue Ans: N/A, SO 4 & 5, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 80 Ex. 272 The following ledger accounts are used by the Heartland Race Track: Accounts Receivable Prepaid Printing Prepaid Rent Unearned Admissions Revenue Admissions Revenue Concessions Revenue Printing Expense Rent Expense Instructions: For each of the following transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on November 30, the end of the fiscal year. (a) On November 1, paid rent on the track facility for three months, $90,000. (b) On November 1, sold season tickets for admission to the racetrack. The racing season is year-round with 25 racing days each month. Season ticket sales totaled $960,000. (c) On November 1, borrowed $120,000 from First National Bank by issuing a 6% note payable due in three months. (d) On November 5, schedules for 20 racing days in November, 25 racing days in December and 15 racing days in January were printed for $3,600. (e) The accountant for the concessions company reported that gross receipts for November were $140,000. Ten percent is due to Heartland and will be remitted by December 10. Solution 272 (15 min.) (a) Journal Entry Prepaid Rent ............................................................................ Cash ................................................................................ Adjusting Entry Rent Expense .......................................................................... Prepaid Rent ................................................................... ($90,000 3 = $30,000) (b) Journal Entry Cash ......................................................................................... Unearned Admissions Revenue...................................... Adjusting Entry Unearned Admissions Revenue .............................................. Admissions Revenue ...................................................... ($960,000 12 = $80,000) FOR INSTRUCTOR USE ONLY 90,000 90,000 30,000 30,000 960,000 960,000 80,000 80,000 Accrual Accounting Concepts 4- 81 Solution 272 (cont.) (c) Journal Entry Cash ......................................................................................... Note Payable .................................................................. Adjusting Entry Interest Expense ...................................................................... Interest Payable .............................................................. ([$120,000 6%] 12 = $600) (d) Journal Entry Prepaid Printing ....................................................................... Cash ................................................................................ Adjusting Entry Printing Expense ...................................................................... Prepaid Printing .............................................................. ($3,600 20 60 = $1,200) 120,000 120,000 600 600 3,600 3,600 1,200 1,200 (e) Journal Entry None Adjusting Entry Accounts Receivable ............................................................... Concessions Revenue .................................................... 14,000 14,000 Ans: N/A, SO 4 & 5, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 273 Dallison Company has an accounting fiscal year, which ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred. Date Amount Monday June 28 $3,200 Tuesday June 29 2,800 Wednesday June 30 2,400 Thursday July 1 3,000 Friday July 2 2,600 Instructions: (a) Prepare any necessary adjusting journal entries that should be made at year end on June 30. (b) Prepare the journal entry to record the payment of the weekly payroll on July 2. FOR INSTRUCTOR USE ONLY Test Bank for Accounting, Fourth Edition 4- 82 Solution 273 (10 min.) (a) June 30 Salaries Expense ............................................................ Salaries Payable .................................................... (To accrue salaries incurred but not yet paid) 8,400 (b) July 2 8,400 5,600 Salaries Payable ............................................................. Salaries Expense ............................................................ Cash ....................................................................... (To record payment of July 2 payroll) 8,400 14,000 Ans: N/A, SO 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Ex. 274 On Friday of each week, Prawn Company pays its factory personnel weekly wages amounting to $55,000 for a five-day work week. Instructions: (a) Prepare the necessary adjusting entry at year end, assuming December 31 falls on Wednes day. (b) Prepare the journal entry for payment of the week's wages on the payday which is Friday, January 2 of the next year. Solution 274 (a) Dec. 31 (b) Jan. 2 (5 min.) Wages Expense .............................................................. Wages Payable ..................................................... ([$55,000 5] 3 = $33,000) 33,000 Wages Payable .............................................................. Wages Expense .............................................................. Cash ....................................................................... 33,000 22,000 33,000 55,000 Ans: N/A, SO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 83 Ex. 275 Presented below is the Trial Balance and Adjusted Trial Balance for Stabler Company on Decem ber 31. STABLER COMPANY Trial Balance December 31 ____________________________________________________________________________ Cash Accounts Receivable Prepaid Rent Supplies Automobile Equipment Accumulated Depreciation Automobile Equipment Accounts Payable Notes Payable Interest Payable Salaries Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries Expense Utilities Expense Rent Expense Supplies Expense Depreciation Expense Automobile Equipment Interest Expense Totals Before Adjustment Dr. Cr. $ 3,000 2,800 2,100 1,200 18,000 After Adjustment Dr. Cr. $ 3,000 3,700 1,500 700 18,000 $ 1,300 2,700 10,000 $ 1,500 3,000 10,000 120 800 4,060 8,200 4,460 8,200 3,200 3,200 8,000 2,060 1,800 500 $34,660 9,300 2,860 2,100 1,100 500 $34,660 200 120 $36,980 $36,980 Instructions: Prepare in journal form, with explanations, the adjusting entries that explain the changes in the bal ances from the trial balance to the adjusted trial balance. FOR INSTRUCTOR USE ONLY 4- 84 Test Bank for Accounting, Fourth Edition Solution 275 (20 min.) Accounts Receivable .............................................................................. Service Revenue ........................................................................... (To record revenue earned but not yet collected) 900 Rent Expense ......................................................................................... Prepaid Rent .................................................................................. (To record expiration of prepaid rent) 600 Supplies Expense ................................................................................... Supplies ......................................................................................... (To record supplies used) 500 Depreciation ExpenseAutomobile Equipment .................................... Accumulated DepreciationAutomobile Equipment .................... (To record depreciation expense) 200 Salaries Expense .................................................................................... Salaries Payable ............................................................................ (To record salaries owed, not yet paid) 800 Interest Expense ..................................................................................... Interest Payable ............................................................................. (To record accrued interest payable) 120 Unearned Service Revenue ................................................................... Service Revenue ........................................................................... (To record revenue earned) 400 Utilities Expense ..................................................................................... Accounts Payable .......................................................................... (To record receipt of utility bill) 300 900 600 500 200 800 120 400 300 Ans: N/A, SO 4 & 5, BT: AP, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 85 Ex. 276 The Golden Petting Zoo operates a drive-through tourist attraction in Colorado. The company ad justs its accounts at the end of each month. The selected accounts appearing below reflect bal ances after adjusting entries were prepared on April 30. The adjusted trial balance shows the fol lowing: Prepaid Rent $ 15,000 Fencing 42,000 Accumulated DepreciationFencing 5,500 Unearned Ticket Revenue 400 Other data: 1. Three months' rent had been prepaid on April 1. 2. The fencing is being depreciated at $6,000 per year. 3. The unearned ticket revenue represents tickets sold for future zoo visits. The tickets were sold at $4.00 each on April 1. During April, twenty of the tickets were used by customers. Instructions: (a) (b) Calculate the following: 1. Monthly rent expense. 2. The age of the fencing in months. 3. The number of tickets sold on April 1. Prepare the adjusting entries that were made by the Golden Petting Zoo on April 30. Solution 276 (a) (15 min.) 1. $7,500. The $15,000 balance on the adjusted trial balance reflects two months remaining on the prepaid rent. This indicates that the monthly rent is $7,500. 2. The fencing is 11 months old. By dividing annual depreciation ($6,000) by 12, the monthly depreciation expense is $500. The accumulated depreciation account shows $5,500 which means that depreciation has been taken for 11 months. 3. 120 tickets were originally sold. Twenty tickets were used in April at $4.00 each. The ad justed trial balance shows a balance of $400 indicating that 100 tickets are still outstand ing. By adding the 20 used in April to the 100 still remaining to be used, 120 tickets must have been sold on April 1. (b) 1. Rent Expense .......................................................................... Prepaid Rent ................................................................... 7,500 2. Depreciation Expense ............................................................. Accumulated DepreciationFencing ............................. 500 3. Unearned Ticket Revenue ....................................................... Ticket Revenue ............................................................... (20 $4 = $80) 80 7,500 500 80 Ans: N/A, SO 4, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 86 Test Bank for Accounting, Fourth Edition Ex. 277 The adjusted trial balance of Nicks Financial Planners appears below and using the information from the adjusted trial balance, you are to prepare for the month ending December 31: 1. an income statement; 2. a retained earnings statement; and 3. a balance sheet. NICKS FINANCIAL PLANNERS Adjusted Trial Balance December 31, 2011 ____________________________________________________________________________ Debit Credit Cash ........................................................................................................ $ 16,400 Accounts Receivable .............................................................................. 2,200 Office Supplies ........................................................................................ 1,800 Office Equipment .................................................................................... 15,500 Accumulated DepreciationOffice Equipment ...................................... $ 4,000 Accounts Payable ................................................................................... 3,000 Unearned Service Revenue ................................................................... 5,000 Common Stock........................................................................................ 17,000 Retained Earnings .................................................................................. 7,400 Dividends ................................................................................................ 2,500 Service Revenue .................................................................................... 7,500 Office Supplies Expense ........................................................................ 1,100 Depreciation Expense ............................................................................ 2,500 Rent Expense ......................................................................................... 1,900 $43,900 $43,900 Solution 277 (20 min.) 1. NICKS FINANCIAL PLANNERS Income Statement For the Month Ended December 31, 2011 ____________________________________________________________________________ Revenues Service Revenue ........................................................................... Expenses Depreciation Expense ................................................................... Rent Expense ................................................................................ Office Supplies Expense ............................................................... Total Expenses ........................................................................ Net Income............................................................................................... FOR INSTRUCTOR USE ONLY $ 7,500 $2,500 1,900 1,100 5,500 $ 2,000 Accrual Accounting Concepts Solution 277 (cont.) 2. NICKS FINANCIAL PLANNERS Retained Earnings Statement For the Month Ended December 31, 2011 ____________________________________________________________________________ Retained Earnings, December 1 ............................................................ Plus: Net Income................................................................................... $7,400 2,000 9,400 2,500 $6,900 Less: Dividends..................................................................................... Retained Earnings, December 31 .......................................................... 3. NICKS FINANCIAL PLANNERS Balance Sheet December 31, 2011 ____________________________________________________________________________ Assets Cash ......................................................................................................... Accounts Receivable .............................................................................. Office Supplies ........................................................................................ Office Equipment .................................................................................... Less: Accumulated DepreciationOffice Equipment .......................... Total Assets ................................................................................... Liabilities and Stockholders Equity Liabilities Accounts Payable .......................................................................... Unearned Service Revenue .......................................................... Total Liabilities ......................................................................... Stockholders Equity Common Stock............................................................................... Retained Earnings ......................................................................... Total Liabilities and Stockholders Equity ............................... $16,400 2,200 1,800 $15,500 4,000 11,500 $31,900 $3,000 5,000 $ 8,000 17,000 6,900 23,900 $31,900 Ans: N/A, SO 6, BT: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 87 4- 88 Test Bank for Accounting, Fourth Edition Ex. 278 The adjusted trial balance shown below is for Rich Company at the end of its fiscal year: RICH COMPANY Trial Balance March 31, 2011 ____________________________________________________________________________ Debit Credit Cash ........................................................................................................ $ 12,900 Accounts Receivable .............................................................................. 9,400 Office Supplies ........................................................................................ 700 Prepaid Insurance ................................................................................... 2,500 Office Equipment .................................................................................... 16,000 Accumulated DepreciationOffice Equipment ...................................... $ 4,800 Accounts Payable ................................................................................... 5,800 Salaries Payable ..................................................................................... 1,100 Unearned Rent Revenue ........................................................................ 600 Common Stock........................................................................................ 10,000 Retained Earnings .................................................................................. 5,600 Dividends ................................................................................................ 3,800 Service Revenue .................................................................................... 39,600 Rent Revenue ......................................................................................... 14,400 Salaries expense .................................................................................... 20,100 Office Supplies Expense ........................................................................ 1,800 Rent Expense ......................................................................................... 12,000 Insurance Expense ................................................................................. 1,500 Depreciation Expense............................................................................. 1,200 $81,900 $81,900 Instructions: Prepare the closing entries for the temporary accounts at March 31. Solution 278 FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts March 31 Service Revenue................................................................ 39,600 Rent Revenue..................................................................... 14,400 Income Summary......................................................... 54,000 Income Summary................................................................ 36,600 Salaries Expense.......................................................... Rent Expense............................................................... Office Supplies Expense.............................................. Insurance Expense....................................................... Depreciation Expense.................................................. 20,100 12,000 1,800 1,500 1,200 Income Summary................................................................ Retained Earnings....................................................... 17,400 17,400 Retained Earnings....................................................................... Dividends............................................................. 3,800 31 31 31 4- 89 3,800 Ans: N/A, SO 7, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving COMPLETION STATEMENTS 279. The ______________ assumption states that the economic life of a business can be divided into artificial time periods. Ans: time period, SO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 280. The ______________ principle gives accountants guidance as to when revenue is to be re corded. Ans: revenue recognition, SO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solv ing 281. In a service company, revenue is earned when the service is _______________ . Ans: performed, SO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 282. The expense recognition principle attempts to match ______________ with ______________ . Ans: expenses, revenues, SO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solv ing 283. Expenses paid and recorded in an asset account before they are used or consumed are called _______________ . Revenue received and recorded as a liability before it is earned is referred to as _________________ . Ans: prepaid expenses, unearned revenue, SO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 284. Failure to adjust a prepaid expense account for the amount expired will cause _______________ to be understated and ________________ to be overstated. FOR INSTRUCTOR USE ONLY 4- 90 Test Bank for Accounting, Fourth Edition Ans: expenses, assets, SO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 285. Depreciation is an __________________ concept, not a ________________ concept. Ans: allocation, valuation, SO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solv ing 286. 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, SO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving 287. An adjusted trial balance proves the ______________ of the total debit and credit balances after all ______________ entries have been made. Ans: equality, adjusting, SO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 288. In addition to updating Retained Earnings, ______________ entries produce a zero balance in each ______________ account. Ans: closing, temporary, SO7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving 289. After all closing entries are journalized and posted, a _________________ trial balance is prepared from the ledger. Ans: post-closing, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving Answers to Completion Statements 279. 280. 281. 282. 283. 284. periodicity revenue recognition performed expenses, revenues prepaid expenses, unearned revenue expenses, assets 285. 286. 287. 288. 289. allocation, valuation incurred, paid equality, adjusting closing, temporary post-closing FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 91 MATCHING 290. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. Periodicity assumption Cash basis Revenue recognition principle Prepaid expenses Expense recognition principle F. G. H. I. J. Accrued revenues Depreciation Post-closing trial balance Accrued expenses Book value _____ 1. Events recorded only in periods the company receives or pays cash _____ 2. Expenses paid before they are incurred _____ 3. Cost less accumulated depreciation _____ 4. The economic life of a business can be divided into artificial time periods _____ 5. Efforts are related to accomplishments _____ 6. Includes only permanentbalance sheetaccounts _____ 7. Revenue is recognized when earned _____ 8. Revenues earned but not yet received _____ 9. Expenses incurred but not yet paid _____ 10. A cost allocation process Answers to Matching 1. 2. 3. 4. 5. B D J A E 6. 7. 8. 9. 10. H C F I G Ans: N/A, SO 1,2,3,4,5,& 7, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 92 Test Bank for Accounting, Fourth Edition SHORT-ANSWER ESSAY QUESTIONS S-A E 291 You are part of a group of individuals (incorporators) who want to form a new corporation. During discussions on forming the business, Mark Adams makes this statement: Our business will have accounts receivable and accounts payable. It will also acquire a substantial amount of computers and equipment. Will it be acceptable to use the cash basis of accounting? Prepare a response for Mark and the other incorporators. Solution 291 Considering the proper basis of accounting to use is an important decision that should be ad dressed before the business is started. Thus, this is an excellent time to look at the differences between the cash and accrual basis of accounting. When the cash basis is used, revenue is recorded when cash is received and expenses are recor ded when cash is paid. This is not an objective approach in determining net income because the receipt and payment of cash does not reflect the efforts and accomplishments of the business. Also, accounts receivable, accounts payable and depreciation are not recognized in the accounting records. The use of the accrual basis of accounting overcomes these problems. Revenue is recorded when it is earned and expenses are recorded when they are incurred. This represents an objective way of matching efforts and accomplishments of the accounting period. In addition, accounts receivable and accounts payable are recorded and their balances are shown on the balance sheet. The busi ness has access to these balances during the accounting period and can make important decisions about them. Since the business has computers, it is important to record a portion of their costs each accounting period. This process is called depreciation. Instead of showing the cost as an expense when the computers are purchased (cash basis), the cost is allocated to the accounting periods in which the computers are used (accrual basis). This makes net income more meaningful because it reflects a matching of the expense to the period in which revenues were earned. The cost of the computers, less the accumulation of depreciation that has been taken, is shown as an asset on the balance sheet. Thus, the user can see that these assets are available for future use. Also, generally accepted accounting principles require the use of the accrual basis of accounting. It will be better to use the accrual basis of accounting. Ans: N/A, SO 2, BT: C, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 93 S-A E 292 The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the periodicity assumption and the revenue re cognition and expense recognition principles provide guidance to accountants in preparing an in come statement. Solution 292 The periodicity assumption assumes that the financial and operating life of an accounting entity, such as a business enterprise, can be broken up into arbitrary time periods. The revenue recogni tion and expense recognition principles are the basic rules for allocating revenues and expenses to these arbitrary time periods under the accrual basis of accounting. The revenue recognition prin ciple dictates the time period to which revenue is to be allocated and recognized, that is, on which income statement the revenue is to be reported. The expense recognition principle dictates the time period to which costs are allocated and recognized as expenses, that is, on which income state ment the expenses are to be reported and matched against revenues in the determination of net in come. Ans: N/A, SO 1 & 2, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication S-A E 293 As a recent graduate in accounting, and the financial director of a political candidate in a current election, you have been asked to explain many questions concerning how governmental accounting differs from corporate accounting. Instructions: (a) Discuss the differences between cash basis and accrual basis accounting. (b) Prepare a memo to your candidate explaining why governmental entities favor the cash basis of accounting. FOR INSTRUCTOR USE ONLY 4- 94 Test Bank for Accounting, Fourth Edition Solution 293 (a) The cash basis of accounting recognizes revenues and expenses when cash is received and paid. This can lead to misleading financial statements by simply speeding up or delaying the cash from sales and expense transactions. The accrual basis of accounting recognizes reven ues and expenses when those items occur. Information presented on an accrual basis reveals relationships that are useful in predicting future results. (b) TO: Candidate FROM: Financial director SUBJECT: Governmental Accounting Practice Governments favor the cash basis of accounting because expenses are only recognized when paid. This results in a large number of unrecorded liabilities that if recorded, would make the governments deficits even larger than currently reported. No elected official or governmental bureaucrat wants to be held accountable for increasing the deficit because of changing to the accrual basis of accounting. Ans: N/A, SO 2, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication S-A E 294 The long-term liability section of Alpha Corporations Balance Sheet includes the following accounts Notes Payable Mortgage Payable Salaries Payable Accumulated Depreciation Total Long-Term Liabilities $100,00 0 250, 000 75,0 00 125,000 $550,00 0 Alpha Corporation is an established company and does not experience any financial difficulties or have any cash flow problems. Discuss at least two items that are questionable as long-term liabilit ies. Solution 294 Salaries Payable should not be reported as a long-term liability. This represents the amounts owed to employees. If the corporation does not have any financial difficulties or cash flow problems, the salaries should be paid within one year. Accumulated Depreciation is a contra asset account. The balance is subtracted from the cost of the related asset in the Property, Plant, and Equipment section of the balance sheet. Are all of the notes payable, including the mortgage, actually long-term (due after one year)? If not, the portion due within one year should be reported as a current liability instead. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 95 Ans: N/A, SO 3, 4, & 5, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication S-A E 295 What is the purpose of the preparation of adjusting entries? Solution S-A E 295 Adjusting entries are needed to ensure that the revenue recognition and expense recognition prin ciples are followed. The use of adjusting entries makes it possible to produce accurate financial statements at the end of the period. Their purpose is to bring all accounts up to date. Ans: N/A, SO 3, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Communication S-A E 296 Briefly distinguish between a deferral and an accrual. Solution 296 A deferral is the postponement of the recognition of an expense already paid or of a revenue already received. An accrual is the recognition of an expense or revenue that has arisen but that has not yet been recorded, and cash has not been paid or received. Ans: N/A, SO 3, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Communication S-A E 297 In developing an accounting information system, it is important to establish procedures whereby all transactions that affect the components of the accounting equation are recorded. Why then, is it of ten necessary to adjust the accounts before financial statements are prepared even in a properly designed accounting system? Identify the major types of adjustments that are frequently made and give a specific example of each. Solution 297 Account balances must be adjusted before financial statements are prepared, even in a properly designed accounting system, because (1) some of the recorded transactions have been recognized prematurely and (2) some effects on components of the accounting equation have not been recor ded. Deferrals are types of adjustments of recorded transactions that must be allocated to future periods as well as the current period. Examples of deferral-type adjustments are prepaid rent, pre paid insurance, and unearned revenue. Accruals are adjustments of unrecorded transactions that must be recognized in the current period. Examples of accrual-type adjustments are salaries and wages payable, interest payable, and interest receivable. Ans: N/A, SO 3, BT: K, Difficulty: Medium, TOT: 7 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Medium, AICPA PC: Problem Solving FOR INSTRUCTOR USE ONLY 4- 96 Test Bank for Accounting, Fourth Edition S-A E 298 Companies are continually under pressure to Make the Numbers to have earnings that are in line with expectations. Explain the terms earnings management and quality of earnings. Solution 298 Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Such action is undertaken to help a company meet target financial num bers. Quantity of earnings indicates the level of full and transport information that a company provides to users of financial statements. Ans: N/A, SO 8, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication S-A E 299 (Ethics) Benson and Jencks is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Benson and Jencks introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one 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 Cor rect-O-Pen, as the product was named, was an overwhelming success. The success of the product has Fern Donald, the manager of the New Products division, worried, however. She was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. She did not want sales per sonnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. She preferred to complete testing of the pen first, so that more confid ence could be placed in the results. Top management, however, declined the tests. Ms. Donald then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current ex penses 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. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 97 Solution 299 1. The choices include: 1. Follow the manager's instructions. 2. Explain to the manager why you cannot follow her instructions. 3. Report the manager's actions to her superior. 4. Resign. There are probably other alternatives as well. Students should be able to come up with at least #1 and #2. 2. Of the choices, #1 is unethical because it will cause the financial statements to be misleading. #3 and #4 are rather drastic measures that do not seem to be indicated, at least not yet. #2, therefore, is the best choice. Ans: N/A, SO 3, BT: E, Difficulty: Medium, TOT: 10 min., AACSB: Ethics, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication S-A E 300 (Communication) A new sales representative, Eddy Wherli, has just received his copy of the month-end financial re ports. He is puzzled by the term "unearned revenue." He left the following e-mail message for you on the company's bulletin board system: What is this??? Creative Accounting, or what??? Line item 12 on year-to-date financials shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we earned it, or we did n't . . . Right??! Is this how you guys lower our commissions? Reply to e.wherli@sbd Required: Write a response to send to Eddy. (Since the answer is being prepared for a "bulletin board" type system, it can be in informal language and can respond in kind to the humor. However, proper grammar and spelling are essential, as is the message about what unearned revenue really is.) Solution 300 FOR INSTRUCTOR USE ONLY 4- 98 Test Bank for Accounting, Fourth Edition Since the answer is being prepared for a "bulletin board" type system, it can be in informal language and can respond in kind to the humor. However, proper grammar and spelling are essential, as is the message about what unearned revenue really is. A proposed message follows: EddyWhat a pleasant surprise to hear from you! Maybe you can teach those other guys in your department something about living in the present! Do you know some of them still write me notes on paper??? Unbelievable, right??! Now to your question. Your unearned revenue is the sales you made that us smart guys in accounting didn't figure you had earned, so we just took it away from you! Might as well save the company some dough for our own bonuses, right?? Seriously, Eddyunearned revenue is the result of your getting customers of the kind we likethey pay in advance! When they pay before we can even get their products made or shipped, we can't count the money they pay us as revenue. What we actually have is a li abilityan obligation to make and ship products. So that's how us (smart guys) in ac counting count itas a liability. You happened to have about 25% of your sales that fit in that category. When production can catch up with orders, you'll get credit for the sales. (Take heartIt'll seem like Christmas all over again) Thanks again for actually using the system. Talk to me again sometime . . . Reply to Ans: N/A, SO 3, BT: C, Difficulty: Medium, TOT: 20 min., AACSB: Communication, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 99 International Financial Reporting Standards True-False Statements 1. The cash basis of accounting is not in accordance with IFRS. Register to View AnswerSO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 2. The expense recognition principle requires that efforts be matched with accomplishments. Register to View AnswerSO1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 3. Adjusting entries are needed to enable financial statements to conform to International Fin ancial Reporting Standards (IFRS). Register to View AnswerSO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving Multiple Choice Questions 4. Which of the following are in accordance with IFRS? a. Accrual basis accounting b. Cash basis accounting c. Both accrual basis and cash basis accounting d. Neither accrual basis nor cash basis accounting Register to View AnswerSO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication 5. Wong Ho Company had the following transactions during 2011: Sales of 9,000 on account Collected 4,000 for services to be performed in 2012 Paid 1,250 cash in salaries Purchased airline tickets for 500 in December for a trip to take place in 2012 What is Wong Hos 2011 net income using accrual accounting? a. 7,750. b. 11,750. c. 11,250. d. 7,250. Register to View AnswerSO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving 6. Under International Financial Reporting Standards (IFRS) a. The cash-basis method of accounting is accepted. b. Events are recorded in the period in which the event occurs. FOR INSTRUCTOR USE ONLY 4- 100 Test Bank for Accounting, Fourth Edition c. Interim period financial statements are either a calendar year or a fiscal year. d. A fiscal year is an accounting time period encompassing less than 12 months. Register to View AnswerSO 2, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving 7. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, 20,500, and unexpired amounts per analysis of policies of 6,000? a. Debit Insurance Expense, 6,000; Credit Prepaid Insurance, 6,000. b. Debit Insurance Expense, 20,500; Credit Prepaid Insurance, 20,500. c. Debit Prepaid Insurance, 14,500; Credit Insurance Expense, 14,500. d. Debit Insurance Expense, 14,500; Credit Prepaid Insurance, 14,500. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 8. Karcan, Inc. purchased supplies costing 2,500 on January 1, 2011 and recorded the transaction by increasing assets. At the end of the year 1,300 of the supplies are still on hand. How will the adjusting entry impact Karcan, Inc.s statement of financial position at Decem ber 31, 2011? a. Decreased assets 1,300. b. Increased equity 1,300. c. Increased liabilities 1,200. d. Decreased assets 1,200. Register to View AnswerSO 4, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 9. Karcan, Inc. purchased supplies costing 2,500 on January 1, 2011 and recorded the trans action by increasing assets. At the end of the year 1,300 of the supplies are still on hand. If Karcan, Inc. does not make the appropriate adjusting entry, what is the impact on its state ment of financial position at December 31, 2011? a. Assets overstated by 1,200. b. Equity understated by 1,200. c. Equity overstated by 1,300. d. Assets overstated by 1,300. Register to View AnswerSO 4, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 10. Similarities between International Financial Reporting Standards (IFRS) and U.S. GAAP in clude all of the following except a. Cash-basis accounting is not in accordance with either IFRS or U.S. GAAP. FOR INSTRUCTOR USE ONLY Accrual Accounting Concepts 4- 101 b. Both IFRS and U.S. GAAP allow revaluation of items such as land and buildings to fair value. c. Both IFRS and U.S. GAAP divide the economic life of companies into artificial time peri ods. d. The form and content of financial statements are very similar under IFRS and U.S. GAAP. Register to View AnswerSO 7, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solv ing Brief Exercises 10. The statements of financial position of Rocky Acre Spread Ltd. include the following: 11. 12/31/12 4,300 5,000 3,600 -0- Interest Receivable Supplies Wages Payable Unearned Revenue 12/31/11 -03,000 3,800 4,000 The income statement for 2012 shows the following: Interest Revenue 18,400 Service Revenue 75,700 Supplies Expense 8,700 Wages Expense 41,000 Instructions Calculate the following for 2012: 1. Cash received for interest. 2. Cash paid for supplies. 3. Cash paid for wages. 4. Cash received for revenue. Solution 11 (15 min.) 1. Cash received for interest = Interest Revenue Less: Interest Receivable Cash Received 2. Cash paid for supplies = Supplies Expense Less: Supplies (2011) Add: Supplies (2012) Cash Paid 3. Cash paid for wages = Wages Expense Add: Wages Payable (2011) 14,100 18,400 4,300 14,100 10,700 8,700 3,000 5,700 5,000 10,700 41,200 41,000 3,800 FOR INSTRUCTOR USE ONLY 4- 102 Test Bank for Accounting, Fourth Edition Less: Wages Payable (2012) Cash Paid 44,800 3,600 41,200 4. Cash received for revenue = Service Revenue 75,700 Less: Unearned Revenue (2011) 4,000 Cash Received 71,700 71,700 SO 2, BT: AP Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving 12. Use the following income statement for the year 2011 for Haggrad Ltd. to prepare entries to close the revenue and expense accounts for the company. Service revenue Expenses: Salaries Expense Rent Expense Insurance Expense Total expenses Net income (loss) Ans: 90,300 40,000 25,000 6,500 71,500 18,800 N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: No Solution 12 (5 min.) Service Revenue............................................................. Income Summary................................................. 90,300 Income Summary............................................................. Salaries Expense................................................ Rent Expense...................................................... Insurance Expense.............................................. 71,500 FOR INSTRUCTOR USE ONLY 90,300 40,000 25,000 6,500 ... View Full Document

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