Horngren's Accounting,11e (Miller-Nobles) Chapter 3 The Adjusting Process. Learning Objective 3-1

Transcription

1 Horngren's Accounting 11th Edition Test Bank Miller-Nobles TEST BANK for Horngren's Accounting 11th Edition by Tracie L. Miller-Nobles, Brenda L. Mattison, Ella Mae Matsumura. All chapters instant download: Horngren's Accounting,11e (Miller-Nobles) Chapter 3 The Adjusting Process Learning Objective 3-1 1) The major difference between a cash basis accounting system and an accrual basis accounting system is the timing of recording revenues and assets. Answer: FALSE LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 2) Recipes, Inc. purchased $2,000 of supplies on account. Under the accrual basis of accounting, no entry is made until the amount is paid. Answer: FALSE LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 3) In cash basis accounting, revenue is recorded when cash is received, and expenses are recorded when they are paid. Answer: TRUE LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 4) Under accrual basis accounting, revenue is recorded only when cash is received. Answer: FALSE LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 5) Under cash basis accounting, revenue is recorded when it is earned, regardless of when cash is received. 1

2 Answer: FALSE LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 2

3 6) Under accrual basis accounting, an expense is recorded only when cash is paid. Answer: FALSE LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 7) Under cash basis accounting, an expense is recorded only when cash is paid. Answer: TRUE LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 8) Generally Accepted Accounting Principles (GAAP) require the use of accrual basis of accounting. Answer: TRUE LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 9) If a company is using accrual basis accounting, when should it record revenue? A) when cash is received, even though services may be performed at a later date B) when services are performed, even though cash may be received at a later date C) when services are performed and cash is received D) when cash is received, 30 days after the completion of the services Answer: B LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 10) When does a company account for revenue if it uses cash basis accounting? A) when services are performed, even though cash may be received at a later date B) when cash is received after the service is performed C) when the services are being performed D) when cash is received, either prior to, at the time of, or after the services are performed Answer: D LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 3

4 11) The cash basis of accounting ignores. A) payables B) revenue C) cash D) expenses Answer: A LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 12) A company receives payment from one of its customers on August 5 for services performed on July 21. Which of the following entries would be recorded if the company uses accrual basis accounting? A) Cash 1,000 Accounts Receivable 1,000 B) Salaries Expense 1,000 Cash 1,000 C) Cash 1,000 Service Revenue 1,000 D) Supplies 1,000 Cash 1,000 Answer: A LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 4

5 13) Which of the following entries would be recorded by a company that uses the cash basis method of accounting? A) Cash 1,000 Accounts Receivable 1,000 B) Salaries Expense 1,000 Salaries Payable 1,000 C) Prepaid Rent 1,000 Cash 1,000 D) Rent Expense 1,000 Cash 1,000 Answer: D LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 14) Which of the following statements is true of accrual basis accounting? A) Accrual basis accounting is required by Generally Accepted Accounting Principles (GAAP). B) Accrual basis accounting records expenses only when cash has been paid for them. C) Accrual basis accounting records revenue only when cash is received. D) Accrual basis accounting always results in greater net income than cash basis accounting. Answer: A LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 5

6 15) At the time the transaction occurred, which of the following would result in an increase in net income under the accrual basis of accounting, but would not result in an increase in net income under cash basis accounting? A) purchase of supplies for cash B) performance of services on account C) use of supplies purchased earlier D) receipt of cash for services that were performed earlier on account Answer: B LO: 3-1 AACSB: Analytical thinking PE Question Type: Critical thinking H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 16) Which of the following accounts would be used under the accrual basis of accounting, but not under cash basis accounting? A) Cash B) Unearned Revenue C) Service Revenue D) Salaries Expense Answer: B LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 17) What is the difference between cash basis accounting and accrual basis accounting? ash basis accounting records revenues only when cash is received and expenses only when cash is paid. Accrual basis accounting records revenues when earned and expenses when incurred. LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 18) The Family Dental Company prepays the rent on its dental office. On July 1, the corporation paid $18,000 for 6 months of rent. How much Rent Expense should Family Dental Company record the three months ended September 30 under the cash basis? Why? Answer: Family Dental should report Rent Expense of $18,000 because expenses are recorded when cash is paid. LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) 6

7 19) The Brighton Dental Company prepays the rent on its dental office. On July 1, the business paid $18,000 for 6 months of rent. How much Rent Expense should Brighton Dental Company record the three months ended September 30 under the accrual basis? Why? Answer: Brighton Dental should report Rent Expense of $9,000 because expense is recorded when incurred. LO: 3-1 H2 : What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1) Learning Objective 3-2 1) List and briefly discuss three accounting concepts and principles that apply to accrual basis accounting. Answer: 1. Time period concept A business's activities can be sliced into small time segments and financial statements can be prepared for specific periods of time. 2. Revenue recognition principle Revenue is recorded when it has been earned. 3. Matching principle Expenses are matched against the revenues of the period. This ensures that all expenses are recorded when they are incurred. LO: 3-2 H2 : What Concepts and Principles Apply to Accrual Basis Accounting? (H1) 2) The accounting period used for the annual financial statements is called the fiscal year. Answer: TRUE LO: 3-2 H2 : The Time Period Concept 3) The goal of the time period concept is to compute an accurate net income or net loss. Answer: FALSE LO: 3-2 H2 : The Time Period Concept 7

8 4) Which of the following is considered a fiscal year? A) six months B) three months C) twelve months D) four months LO: 3-2 H2 : The Time Period Concept 5) The accounting principle that ensures all expenses are recorded during the period when they are incurred and offsets those expenses against the revenues of the period is called the principle. A) comparison B) accrual C) matching D) revenue recognition LO: 3-2 H2 : The Time Period Concept 6) Which of the following accounting terms assumes that a business's activities can be divided into small segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year? A) adjusting entry concept B) economic entity concept C) matching principle D) time period concept Answer: D LO: 3-2 H2 : The Time Period Concept 7) Which of the following assumes that financial statements of a business can be prepared for specific periods? A) matching principle B) revenue recognition principle C) time period concept D) adjusting entry principle LO: 3-2 H2 : The Time Period Concept 8

9 8) The revenue recognition principle is the basis for recording revenues-both when to record revenue and the amount of revenue to record. Answer: TRUE LO: 3-2 H2 : The Revenue Recognition Principle 9) Revenue is earned when the business has. A) entered into an agreement with the customer about the goods or services to be delivered B) prepared a journal entry to record revenue C) received cash from the customer before goods or services are delivered D) delivered a good or service to the customer Answer: D LO: 3-2 H2 : The Revenue Recognition Principle 10) The revenue recognition principle guides accountants in. A) ensuring only revenues received in cash are recorded B) determining when to record expenses C) determining when to record revenues D) ensuring expenses are deducted from revenues LO: 3-2 H2 : The Revenue Recognition Principle 9

10 11) Which of the following entries would be made as the result of the revenue recognition principle? A) Service Expense 1,000 Service Revenue 1,000 B) Accounts Receivable 1,000 Service Revenue 1,000 C) Salaries Expense 1,000 Accounts Payable 1,000 D) Depreciation Expense 1,000 Accumulated Depreciation 1,000 Answer: B LO: 3-2 H2 : The Revenue Recognition Principle 12) The matching principle is also called the. A) adjusting entry concept B) revenue recognition principle C) expense recognition principle D) time period concept LO: 3-2 H2 : The Matching Principle 13) Which of the following accounting elements does the matching principle help to match? A) revenues and liabilities B) expenses and assets C) expenses and revenues D) expenses and liabilities LO: 3-2 H2 : The Matching Principle 14) To match expenses against revenues means to. 10

11 A) add expenses incurred during one period from revenues earned during that same period B) subtract expenses incurred during one period from revenues earned during the previous period C) add expenses incurred during one period from revenues earned during the previous period D) subtract expenses incurred during one period from revenues earned during that same period Answer: D LO: 3-2 H2 : The Matching Principle 15) The matching principle states that. A) financial statements can be prepared for specific periods B) a business's activities can be sliced into small time segments C) all expenses should be recorded when they are incurred during the period D) companies should record revenue when it has been earned LO: 3-2 H2 : The Matching Principle 16) The time period concept states that. A) financial statements can be prepared for specific periods B) all expenses should be recorded when they are incurred during the period C) companies should record revenue when it has been earned D) expenses incurred during a period should be matched against the revenues of the period Answer: A LO: 3-2 H2 : The Matching Principle 11

12 17) Which of the following entries would be made because of the matching principle? A) Salaries Expense 1,000 Service Revenue 1,000 B) Cash 1,000 Salaries Expense 1,000 C) Salaries Expense 1,000 Salaries Payable 1,000 D) Cash 1,000 Unearned Revenue 1,000 LO: 3-2 H2 : The Matching Principle 12

13 Learning Objective 3-3 1) An adjusting entry is completed. A) at the beginning of the accounting period B) at the end of the accounting period C) when the balance sheet is prepared D) when accounts need to be balanced in the ledger Answer: B H2 : What Are Adjusting Entries and How Do We Record Them? (H1) 2) Adjusting entries are needed to correctly measure the. A) ending balance in the Cash account B) net income (loss) on the balance sheet C) net income (loss) on the income statement D) beginning balance in the Cash account H2 : What Are Adjusting Entries and How Do We Record Them? (H1) 3) An adjusting entry that credits Salaries Payable is an example of a(n). A) accrued expense B) deferred revenue C) accrued revenue D) deferred expense Answer: A H2 : Accrued Expenses 4) An expense that has been incurred but not yet paid is called a(n). A) accrued revenue B) deferred expense C) deferred revenue D) accrued expense Answer: D H2 : Accrued Expenses 13

14 5) Classic Artists' Services signed a contract with a maintenance service company to maintain a building that Classic will use for office purposes. The contract states that the work will begin work on February 1 and end on May 31. Classic Artists' will pay the maintenance service company $16,000 at the end of May. It accrues Maintenance Expense at the end of every month. What is the balance in the Accounts Payable account for amounts owed to the maintenance service company at the end of March? A) Debit balance of $16,000 B) Credit balance of $8,000 C) Debit balance of $8,000 D) Credit balance of $16,000 Answer: B Explanation: B) H2 : Accrued Expenses 6) Saturn Services Company signed a one-year $24,000 note payable at 8% interest on May 1, How much interest expense must be accrued on May 31, 2017? (Round any intermediate calculations to two decimal places, and your final answer to the nearest whole number.) A) $1,920 B) $12,800 C) $160 D) $80 Explanation: C) H2 : Accrued Expenses 7) Jupiter Company signed a one-year $47,000 note payable at 8% interest on May 1, If Jupiter Company only adjusts its accounts once a year at year-end, how much interest expense was accrued on December 31, 2016? (Round any intermediate calculations to two decimal places, and your final answer to the nearest whole number.) A) $940 B) $3,760 C) $2,820 D) $3,133 Explanation: C) Interest Expense from May to December, H2 : Accrued Expenses 14

15 8) Magnolia Tree Service has a weekly payroll of $50,000. December 31, 2016 falls on Thursday and Magnolia will pay its employees the following Monday (January 4, 2017) for the previous full week. Assume that Magnolia has a five-day workweek and has an unadjusted balance in Salaries Expense of $845,000. Prepare the December 31, 2016 adjusting entry. Answer: Salaries Expense 40,000 Salaries Payable 40,000 H2 : Accrued Expenses 9) Melville Services has a weekly payroll of $50,000. December 31, 2016 falls on Thursday and Melville will pay its employees the following Monday (January 4, 2017) for the previous full week. Assume that Melville has a five-day workweek and has an unadjusted balance in Salaries Expense of $845,000. Prepare the January 4, 2017 journal entry. Reversing entries are not made. Answer: Salaries Expense 10,000 Salaries Payable 40,000 Cash 50,000 H2 : Accrued Expenses 10) A business hired a repair service to overhaul its plumbing system. The repair service began work on September 15 and intends to complete it on October 15. The business will pay the repair service $4,000 when the work is completed. As of September 30, the work was 50% complete. Provide the adjusting entry to accrue repair expense by the end of September. (Ignore explanation.) Answer: Repair Expense 2,000 Accounts Payable 2,000 H2 : Accrued Expenses 15

16 11) A business hired a repair service to overhaul its plumbing system. The repair service began work on September 15 and completed it on October 15. The business agreed to pay the service $4,000 when the work was completed. As of September 30, the work was 50% complete, and the business made an adjusting entry to accrue repair expense as of the end of September. On October 15, the work was completed, and the repair service was paid in full. Provide the journal entry for the cash payment on October 15. (Ignore explanation.) Answer: Repair Expense 2,000 Accounts Payable 2,000 Cash 4,000 Diff: 3 H2 : Accrued Expenses 12) Accrued revenue represents the receipt of cash before the revenue has been earned. Answer: FALSE H2 : Accrued Revenues 13) Adjusting entries may involve any account, including Cash. Answer: FALSE H2 : Accrued Revenues 14) Adjusting entries either credit a revenue account or debit an expense account. Answer: TRUE H2 : Accrued Revenues 16

17 15) On June 1, Edison Company borrowed $24,000 on a one-year Note Payable with an interest rate of 10% per year. It will repay the principal and interest at the end of the one-year period. The company makes accrual adjustments at the end of each month. The company should record interest expense of $2,400 on June 30. Answer: FALSE Explanation: Interest Expense = ($24,000 10%) / 12 = $200 H2 : Accrued Revenues 16) Laramie Company signed a contract with a service provider for security services at a rate of $270 per month for the period of January through June. Laramie Company will pay the service provider the entire amount at the end of June. The company makes adjusting entries each month. During the month of June, it should record total security expense of $540. Answer: FALSE H2 : Accrued Revenues 17) Argyle Designs has entered into a contract to design 10 new dresses for a customer. It will collect a total of $49,000 after the design services are complete. Argyle started design work on June 1. As of June 30, it finished 2 of the 10 designs. The company will make an adjusting entry at the end of June to accrue $12,250 of service revenue. Answer: FALSE H2 : Accrued Revenues 17

18 18) Kostner Financial Services performed accounting services for a client in December. A bill was mailed to the client on December 30. The company received the client's check by mail on January 5. Which of the following accounts should appear on the income statement for the year ended December 31 as related to the services performed? A) Service Revenue B) Unearned Revenue C) Accounts Payable D) Prepaid Expense Answer: A H2 : Accrued Revenues 19) Bryson Accounting Services performed accounting services for a client in December. A bill was mailed to the client on December 30. The company received a check by mail on January 5. Which of the following accounts should appear on the balance sheet as of December 31 as related to the services performed? A) Prepaid Expense B) Accounts Receivable C) Unearned Revenue D) None, there is no entry in December. Answer: B H2 : Accrued Revenues 20) The employees of Sinclair Services Company worked the last two weeks of December. They received their paychecks on January 2. Which of the following accounts should appear on the balance sheet as of December 31? A) Accounts Payable B) Salaries Payable C) Salaries Expense D) Prepaid Expense Answer: B H2 : Accrued Revenues 18

19 21) The employees of Leicester Services Company worked the last two weeks of December, They received their paychecks on January 2, Which of the following accounts should appear on the income statement for the year ended December 31, 2016? A) Salaries Expense B) Prepaid Expense C) Salaries Payable D) Unearned Revenue Answer: A H2 : Accrued Revenues 22) Anthony Delivery Service has a weekly payroll of $34,000. December 31 falls on Tuesday and Anthony will pay its employees the following Monday (January 6) for the previous full week. Assume that Anthony has a five-day workweek and has an unadjusted balance in Salaries Expense of $945,000. What is the December 31 balance of Salaries Expense after adjusting entries are recorded and posted? A) $945,000 B) $979,000 C) $965,400 D) $958,600 Answer: D Explanation: D) Salaries Expense: $945,000 + ($34,000 / 5 2 days ) = $958,600 H2 : Accrued Revenues 23) Mason Painting Services has a weekly payroll of $30,000. December 31 falls on Wednesday and Mason will pay its employees the following Monday (January 5) for the previous full week. Assume that Mason has a five-day workweek and has an unadjusted balance in Salaries Expense of $800,000. What amount should be debited to Salaries Expense on December 31? A) $800,000 B) $12,000 C) $30,000 D) $18,000 Answer: D Explanation: D) $30,000 / 5 = $6,000 per day 3 days = $18,000 H2 : Accrued Revenues 19

20 24) Accrued revenue is revenue that. A) has been collected and earned B) the business has collected in cash, but not yet earned C) the business has earned, but not yet collected in cash D) will be collected and earned in the future H2 : Accrued Revenues 25) An adjusting entry that debits Accounts Receivable is an example of a(n). A) deferred expense B) accrued revenue C) accrued expense D) deferred revenue Answer: B H2 : Accrued Revenues 26) Revenue that has been earned but not yet collected in cash is called a(n). A) accrued revenue B) deferred expense C) deferred revenue D) accrued expense Answer: A H2 : Accrued Revenues 20

21 27) On January 1, 2015, the Accounts Receivable of Linda Company had a debit balance of $150,000. During January, the company provided services for $600,000 on account. The company collected $230,000 from its customers on account in January. What was the ending balance in the Accounts Receivable account at the end of January? A) $370,000 B) $750,000 C) $520,000 D) $600,000 Explanation: C) Ending balance as of January 31, 2015, in Debits - Credits H2 : Accrued Revenues 28) Techno Technical Services is working on a six-month job for a client, starting on February 1. It will collect $30,000 from its customer when the job is finished but the revenue is earned evenly over the six months. On March 31, before adjusting entries are made, Techno's Accounts Receivable account had a debit balance of $6,000. After the March 31 monthly adjusting entry has been made, what will be the balance in Accounts Receivable? A) Debit balance of $5,000 B) Credit balance of $25,000 C) Debit balance of $11,000 D) Debit balance of $30,000 Explanation: C) Balance in Accounts Receivable before adjusting entry $6,000 Add Accounts Receivable of new job on March 31 $30,000 / 6 months 5,000 Ending balance in Accounts Receivable $11,000 H2 : Accrued Revenues 21

22 29) Allen Company is hired on December 15, 2016 to perform services, beginning on December 16, Under this agreement, Allen will earn $3,700 monthly and receive payment on January 15, What amount of service revenue should be recorded for the year ending December 31, 2016? A) 0 B) $1,850 C) $3,700 D) There is not enough information to answer this. Answer: B Explanation: B) Allen has earned revenue from December 16 - December 31, $3,700 / 2 = $1,850 H2 : Accrued Revenues 30) Dalton Delivery Service is hired on October 31, 2016 to perform services, beginning on November 1, The delivery services will be performed for six months at a rate of $3,200 per month. Dalton's fiscal year ends on December 31. What amount of service revenue should be recorded as an adjusting entry on December 31, 2016? A) $3,200 B) 0 C) $6,400 D) $9,600 Explanation: B) Dalton has earned revenue for November and December $3,200 2 = $6,400 H2 : Accrued Revenues 31) Luminous Electrical performed services of $8,000 on January 24 and invoiced the customer. Luminous received the $8,000 on January 31. Provide the journal entry on January 24 when services were performed. (Ignore explanation.) Answer: Accounts Receivable 8,000 Service Revenue 8,000 H2 : Accrued Revenues 22

23 32) Bright Lights Electrical performed services of $8,000 on January 24 and invoiced the customer. Bright Lights received the $8,000 on January 31. Provide the journal entry on January 31 when the cash was received. (Ignore explanation.) Answer: Cash 8,000 Accounts Receivable 8,000 H2 : Accrued Revenues 23

24 33) The accounting records of Marcus Service Company include the following selected, unadjusted balances at June 30: Accounts Receivable, $2,700; Office Supplies, $1,800; Prepaid Rent, $3,600; Equipment, $15,000; Accumulated Depreciation - Equipment, $1,800; Salaries Payable, $0; Unearned Revenue, $2,400; Office Supplies Expense, $2,800; Rent Expense, $0; Salaries Expense, $15,000; Service Revenue, $40,500. The following data developed for adjusting entries are as follows: a. Service revenue accrued, $1,400 b. Unearned Revenue that has been earned, $800 c. Office Supplies on hand, $700 d. Salaries owed to employees, $1,800 e. One month of prepaid rent has expired, $1,200 f. Depreciation on equipment, $1,500 Journalize the adjusting entries. Omit explanations. Accounts Debit Credit a b c d e f 24

25 Answer: Accounts Debit Credit Accounts Receivable a Service Revenue 1,400 1,400 b Unearned Revenue Service Revenue c Office Supplies Expense Office Supplies 1,100 1,100 d Salaries Expense Salaries Payable 1,800 1,800 e Rent Expense Prepaid Rent 1,200 1,200 f Depreciation Expense - Equipment Accumulated Depreciation - Equipment 1,500 1,500 Diff: 3 H2 : Accrued Revenues 34) In the case of deferred revenue, the cash is received first, and the revenue is earned later. Answer: TRUE H2 : Deferred Revenues 35) In the case of deferred revenue, the adjusting entry at the end of the period includes a debit to Service Revenue. Assume the deferred revenue is initially recorded as a liability. Answer: FALSE H2 : Deferred Revenues 36) In the case of deferred revenue, the adjusting entry at the end of the period includes a credit to Service Revenue. Assume the deferred revenue is initially recorded as a liability. Answer: TRUE H2 : Deferred Revenues 25

26 37) On January 1, Unearned Revenue of Grossman Company had a beginning balance of $1,400. During January, the company earned $700 of the deferred revenue. The company also collected $4,000 from a new customer for services to be performed the following month. At the end of January, the Unearned Revenue account should have a balance of $4,000. Answer: FALSE Explanation: Unearned Revenue = $1,400 - $700 + $4,000 = $4,700 H2 : Deferred Revenues 38) Unearned Revenue is classified as a(n) account. A) liability B) asset C) revenue D) equity Answer: A H2 : Deferred Revenues 39) Healthy Living, a diet magazine, collected $240,000 in subscription revenue on May 31. Each subscriber will receive an issue of the magazine in each of the next 12 months, beginning with the June issue. The company uses the accrual method of accounting. What is the amount of Subscription Revenue that has been earned by the end of December? (Round any intermediate calculations to two decimal places, and your final answer to the nearest whole number.) A) $100,000 B) $180,000 C) $240,000 D) $140,000 Answer: D Explanation: D) Diff: 3 H2 : Deferred Revenues 26

27 40) Get in Shape, a healthy living magazine, collected $528,000 in subscription revenue on May 31. Each subscriber will receive an issue of the magazine in each of the next 12 months, beginning with the June issue. The company uses the accrual method of accounting. What is the balance in the Unearned Revenue account as of December 31? A) $220,000 B) $308,000 C) $528,000 D) $396,000 Answer: A Explanation: A) Unearned Revenue $528,000 Number of months of subscription 12 months Subscription Revenue per month ($528,000 / 12) $44,000 Number of months from May till December 7 months Subscription Revenue from May till December ($44,000 7 months) $308,000 Unearned Revenue as of December ($528,000 - $308,000) $220,000 Diff: 3 H2 : Deferred Revenues 41) The liability created when a business collects cash from its customers before completing a service or delivering a product is called. A) accrued revenue B) accrued expense C) deferred revenue D) deferred expense H2 : Deferred Revenues 42) Unearned revenue is recorded when. A) revenue will be both collected and earned in the future B) the business has collected cash, but not yet earned the revenue C) revenue has been collected and earned during the same accounting period D) the business has earned, but not collected, cash for the revenue Answer: B H2 : Deferred Revenues 27

28 43) The advance cash receipts of future revenues are called. A) accrued revenues B) deferred expenses C) deferred revenues D) accrued expenses H2 : Deferred Revenues 44) Pluto Promotions sells tickets in advance for its weekly productions and records the proceeds as Unearned Revenue. At the end of each month, the company makes an adjusting entry to account for the tickets used during the month (ticket revenue.) On March 1, the Unearned Revenue account had a credit balance of $2,000. During March, it sold 300 tickets at $30 each, and 250 tickets were used during the month. What is the balance in Unearned Revenue at the end of March? A) credit balance of $3,500 B) debit balance of $2,000 C) credit balance of $2,000 D) debit balance of $3,500 Answer: A Explanation: A) Beginning balance in Unearned Revenue $2,000 Add value of tickets unused on March = 50 tickets $30 per ticket 1,500 Ending balance in Unearned Revenue $3,500 H2 : Deferred Revenues 28

29 45) On December 31, 2016, the balance in Pinnacle Exploration Company's Unearned Revenue account was a credit of $6,000. In January, 2017, the company received an advance payment of $14,000 from a new customer for services to be performed. By January 31, adjustments were made to recognize $4,000 of the revenue that had been earned during January. What was the balance in Unearned Revenue on January 31, 2017? A) $4,000 credit B) $14,000 debit C) $6,000 credit D) $16,000 credit Answer: D Explanation: D) Beginning balance in Unearned Revenue $6,000 Add advance payment received 14,000 Less Unearned Revenue recognized as Service Revenue (4,000) Ending balance in Unearned Revenue $16,000 H2 : Deferred Revenues 46) Unearned Revenue is a(n) account and carries a normal balance. A) liability; credit B) asset; credit C) revenue; debit D) asset; debit Answer: A H2 : Deferred Revenues 47) A company received $5,000 for 100 one-year subscriptions on July 1. The journal entry to record this cash receipt would include a. The company uses a liability account for revenue received in advance. A) credit to Accounts Payable for $5,000 B) debit to Prepaid Expenses for $5,000 C) credit to Unearned Revenue for $5,000 D) debit to Note Payable for $5,000 H2 : Deferred Revenues 29

30 48) Explore, a travel magazine, collected $500,000 in subscription revenue in May. Each subscriber will receive an issue of the magazine for each of the next 12 months, beginning with the June issue. The company uses the accrual method of accounting. Provide the journal entry for collection of cash in May. (Ignore explanation.) Assume the magazine initially records a liability for the subscription revenue. Answer: Cash 500,000 Unearned Revenue 500,000 H2 : Deferred Revenues 49) At Sea, a cruise industry magazine, collected $480,000 in subscription revenue in May. Each subscriber will receive an issue of the magazine for each of the next 12 months, beginning with the June issue. The company uses the accrual basis of accounting. Provide the adjusting entry needed on June 30. (Ignore explanation.) Assume the magazine initially records a liability for the subscription revenue. Answer: Unearned Revenue 40,000 Subscription Revenue 40,000 Explanation: Monthly subscription amount = $480,000 / 12 months = $40,000 H2 : Deferred Revenues 50) Prepaid Insurance is an asset account that appears on the balance sheet. Answer: TRUE 51) Prepaid Rent is an expense account that appears on the income statement. Answer: FALSE 30

31 52) A contra account's normal balance (debit or credit) is the opposite of the normal balance of the related account. Answer: TRUE 53) The sum of all the depreciation expenses recorded to date for a depreciable asset is called residual value. Answer: FALSE 54) The depreciation method that allocates an equal amount of depreciation each year is called the straight-line method. Answer: TRUE 55) In the case of a deferred expense, the adjusting entry required at the end of a period will consist of a debit to the Prepaid Expense account. Assume the deferred expense was initially recorded as an asset. Answer: FALSE 56) In the case of a deferred expense, the adjusting entry required at the end of a period will consist of a credit to the Prepaid Expense account. Assume the deferred expense was initially recorded as an asset. Answer: TRUE 57) Contra asset accounts, such as Accumulated Depreciation, always have normal debit balances. Answer: FALSE 31

32 58) On January 1, 2016, Prepaid Insurance of Maywood Company had a beginning balance of $900. Three months of insurance premiums remain in the beginning balance. On February 1, 2016, the company paid an annual insurance premium in the amount of $3,400 for the period beginning April 1. On February 28, 2016, the balance in Prepaid Insurance is $600. The deferred expense was initially recorded as an asset. Answer: FALSE Explanation: Insurance premium per month = $900 / 3 = $300 Balance in Prepaid Insurance as of 59) On January 1, Ogden Company had $1,500 of supplies on hand. During January, Ogden purchased $5,500 worth of new supplies. At the end of the month, a count revealed $600 worth of supplies remaining on the shelves. The adjusting entry needed will include a debit to Supplies Expense of $6,400. The supplies were initially recorded as an asset. Answer: TRUE Explanation: Supplies Expense = $1,500 + $5,500 - $600 = $6,400 60) Holland Company purchased manufacturing equipment for $10,920. It has an estimated useful life of seven years and no residual value. The company should record depreciation expense of $80 per month. (Assume that the company uses the straight-line method.) Answer: FALSE Explanation: Depreciation Expense per month = ($10,920 / 7) / 12 = $130 32

33 61) Kittery Services purchased computers that are to be used in its consultancy services. Based on the matching principle, the related account that should appear on the income statement for the year ended December 31, 2016 is. A) Depreciation Expense B) Service Revenue C) Accumulated Depreciation D) Equipment Expense Answer: A 62) Harvard Financial Services purchased computers that are to be used in its consultancy services. Based on the matching principle, what account, other than Computers, should appear on the balance sheet as of December 31, 2016? A) Depreciation Expense B) Service Revenue C) Accumulated Depreciation D) Equipment Expense 33

34 63) The following Office Supplies account information is available for Able Company: Beginning balance $1,200 Office Supplies expensed 6,000 Ending balance 3,000 From the above information, calculate the amount of office supplies purchased. A) $7,800 B) $6,000 C) $1,200 D) $3,000 Answer: A Explanation: A) Office Supplies: Ending balance $3,000 Add Office Supplies expensed 6,000 9,000 Less beginning balance 1,200 Office Supplies purchased $7,800 64) The asset account, Office Supplies had a beginning balance of $5,400. During the accounting period, office supplies were purchased, on account, for $5,400. A physical count, on the last day of the accounting period, shows $2,300 of office supplies on hand. What is the amount of Supplies Expense for the accounting period? A) $5,400 B) $2,300 C) $8,500 D) $3,100 Explanation: C) Office Supplies: Beginning balance $5,400 Add Office Supplies purchased 5,400 10,800 Less Ending balance 2,300 Office Supplies expensed $8,500 65) The asset account, Office Supplies, had a beginning balance of $3,900. During the accounting period, 34

35 office supplies were purchased, on account, for $2,600. Supplies Expense for the accounting period is $4,500. What is the ending balance of Office Supplies? A) $6,500 B) $2,000 C) $4,500 D) $5,800 Answer: B Explanation: B) Office Supplies: Beginning balance $3,900 Add Office Supplies purchased 2,600 6,500 Less Office Supplies expensed 4,500 Office Supplies $2,000 66) During the accounting period, office supplies were purchased on account for $3,900. A physical count, on the last day of the accounting period, shows $1,600 of office supplies on hand. Supplies Expense for the accounting period is $3,100. What was the beginning balance of Office Supplies? A) $4,700 B) $2,300 C) $800 D) There is not enough information to answer this question. Explanation: C) Office Supplies: Ending balance $1,600 Add Office Supplies expensed 3,100 4,700 Less Office Supplies purchased 3,900 Office Supplies Beginning Balance $800 35

36 67) The entry to record depreciation includes a debit to the. A) Equipment account B) Cash account C) Accumulated Depreciation account D) Depreciation Expense account Answer: D 68) The entry to record depreciation includes a credit to the. A) Depreciation Payable account B) Cash account C) Accumulated Depreciation account D) Depreciation Expense account AACSB: Interpersonal relations and teamwork 69) If an adjusting entry includes a debit to Rent Expense, it indicates that the payment of rent had been previously recorded as a(n). A) deferred expense B) depreciation expense C) accrued expense D) accrued revenue Answer: A 70) The allocation of a plant asset's cost to expense over its useful life is called. A) residual value B) book value C) accrued revenue D) depreciation Answer: D 36

37 71) The expected value of a depreciable asset at the end of its useful life is called. A) book value B) residual value C) accrued revenue D) accrued expense Answer: B 72) A depreciable asset's cost minus accumulated depreciation is called. A) book value B) residual value C) accrued revenue D) accrued expense Answer: A 73) Which of the following is the correct formula for calculating depreciation under the straight-line method? A) Straight-line depreciation = (Cost + Residual value) / Useful life B) Straight-line depreciation = (Cost - Residual value) / Useful life C) Straight-line depreciation = (Cost + Residual value) Useful life D) Straight-line depreciation = (Cost - Residual value) Useful life Answer: B 74) The sum of all the depreciation expense recorded to date for a depreciable asset is called. A) book value B) residual value C) depreciation expense D) accumulated depreciation Answer: D 37

38 75) Which of the following is a contra account? A) Depreciation Expense B) Accumulated Depreciation C) Unearned Revenue D) Earned Revenue Answer: B 76) The advance cash payments of future expenses are called. A) accrued revenues B) deferred expenses C) deferred revenues D) accrued expenses Answer: B 77) For accounting purposes, depreciation refers to the. A) method of allocating the cost of a plant asset to expense it over its useful life B) method of declining the market value of an asset to its book value C) method of estimating an asset's current market value D) process of selling a used asset Answer: A 78) The Accumulated Depreciation account is. A) a record of the sum of all the depreciation expense recorded B) the price quoted to the buyer of a used asset C) an expense account D) the expense account used to expense the cost of an asset Answer: A 38

39 79) Qwerty Company prepaid $8,400 on November 1, 2014 for a one-year insurance premium. On January 1, 2015 of the next year (after December 31 adjustments), the Prepaid Insurance account will have a debit balance of. (Round any intermediate calculations to two decimal places, and your final answer to the nearest whole number.) A) $7,700 B) $9,100 C) $8,400 D) $7,000 Answer: D Explanation: D) Ending balance of Prepaid Insurance balance on 80) A business purchased equipment for $120,000 on January 1, The equipment will be depreciated over the five years of its estimated useful life using the straight-line depreciation method. The business records depreciation once a year on December 31. Which of the following is the adjusting entry required to record depreciation on equipment for the year 2017? (Assume the residual value of the acquired equipment to be zero.) A) Debit $120,000 to Equipment, and credit $120,000 to Cash. B) Debit $24,000 to Depreciation Expense Equipment, and credit $120,000 to Accumulated Depreciation Equipment. C) Debit $24,000 to Depreciation Expense Equipment, and credit $24,000 to Accumulated Depreciation Equipment. D) Debit $24,000 to Depreciation Expense, and credit $24,000 to Equipment. Explanation: C) Depreciation Expense = $120,000 / 5 years = $24,000 39

40 81) On September 1, 2016, Joy Company paid $6,000 in advance for an eight-month rental space covering the period of September, 2016 through April The deferred expense was initially recorded as an asset. Joy Company makes adjusting entries once a year at year-end. The adjusting entry on December 31, 2016 would include a. A) debit of $6,000 to Cash B) credit of $6,000 to Prepaid Rent C) debit of $3,000 to Rent Expense D) credit of $3,000 to Rent Expense Explanation: C) Prepaid Rent on December 31, 2014 = $6,000 4/8 = $3,000 82) Accumulated Depreciation is a(n) account and carries a normal balance. A) revenue; debit B) expense; debit C) contra asset; credit D) liability; credit 83) What type of account is Prepaid Rent, and what is its normal balance? A) It is an expense account and has a debit balance. B) It is a liability account and has a credit balance. C) It is a revenue account and has a credit balance. D) It is an asset account and has a debit balance. Answer: D 40

41 84) What is the term used for the difference between the Equipment account and the Accumulated Depreciation account? A) contra asset B) market value C) historical cost D) book value Answer: D 85) Hank's Tax Planning Service started business in January The company rented an office for $1,800 per month starting from January 1, On that day, Hank prepaid the rent through June 30. The company makes adjusting entries at the end of each month. What is the balance in the Prepaid Rent account as of April 30, 2016? A) $3,600 B) $300 C) $1,800 D) $900 Answer: A Explanation: A) 41

42 86) Russin Tax Planning Service bought computer equipment for $24,000 on January 1, It has an estimated useful life of four years and zero residual value. Russin uses the straight-line method to calculate depreciation and records depreciation expense in the books at the end of every month. Calculate the amount of Depreciation Expense for the period, January 1, 2016 through September 30, 2016, for this equipment. (Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.) A) $6,000 B) $4,500 C) $6,500 D) $5,000 Answer: B Explanation: B) Straight-line depreciation = (Cost - Residual value) / Useful life Straight-line depreciation = ($24,000-0) / 4 years = $6,000 per year Depreciation Expense from January to 87) Downs Tax Planning Service bought communications equipment for $9,600 on January 1, It has an estimated useful life of five years and zero residual value. Downs uses the straight-line method to calculate depreciation and records depreciation expense in the books at the end of every month. As of June 30, 2017, the balance in the Accumulated Depreciation account for this equipment is. A) $160 B) $1,920 C) $800 D) $960 Answer: D Explanation: D) Straight-line depreciation = (Cost - Residual value) / Useful life Straight-line depreciation = ($9,600-0) / 5 years = $1,920 per year 42

43 88) DeLito Tax Planning Service bought production equipment for $11,400 on January 1, It has an estimated useful life of five years and zero residual value. DeLito uses the straight-line method to calculate depreciation and records depreciation expense in the books at the end of every month. As of June 30, 2017, the book value of this equipment shown on its balance sheet will be. A) $10,260 B) $11,400 C) $12,540 D) $11,590 Answer: A Explanation: A) Straight-line depreciation = (Cost - Residual value) / Useful life Straight-line depreciation = ($11,400-0) / 5 years = $2,280 per year Book value of equipment = $11,400 - $1,140 = $10,260 89) Ursula Tax Planning Service has the following plant assets: Communications equipment: Cost, $6,960 with useful life of eight years; Furniture: Cost, $19,200 with useful life of 12 years; and Computer: Cost, $14,000 with useful life of four years. (Assume residual value of all the assets is zero.) Ursula's monthly depreciation expense calculated using the straight-line method is. (Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.) A) $ B) $ C) $72.50 D) $498 Answer: D Explanation: D) Straight-line depreciation = (Cost - Residual value) / Useful life Straight-line depreciation for: Communications Diff: 3 43

44 90) Ariel Tax Planning Service has the following plant assets: Communications equipment: Cost, $9,600 with useful life of 8 years; Furniture: Cost, $17,712 with useful life of 12 years; and Computer: Cost, $14,400 with useful life of 4 years. Assume the residual value of all the assets is zero and the straight-line method is used. Ariel's monthly depreciation journal entry will include a. A) debit to Depreciation Expense of $6,276 B) credit to Depreciation Expense of $6,276 C) debit to Accumulated Depreciation of $523 D) credit to Accumulated Depreciation of $523 Answer: D Explanation: D) Straight-line depreciation = (Cost - Residual value) / Useful life Straight-line depreciation for: Diff: 3 91) Viva Company bought machine X for $18,000 two years ago. The machine had no residual value and had an estimated useful life of 10 years. If the company uses the straight-line depreciation method, calculate the current book value of the machine. A) $14,400 B) $3,600 C) $19,800 D) $18,000 Answer: A Explanation: A) Book value of machine X Machine X $18,000 Less: Accumulated dep. ($1,800 2) 3,600 Book value of machine X $14,400 44

45 92) On July 1, Alpha Company prepaid rent for a small equipment storage area. Alpha paid $20,000 to rent the area from July 1 through the end of the year. Provide the journal entry needed on July 1 when the payment is made. (Ignore explanation.) Assume the deferred expense is initially recorded as an asset. Answer: Prepaid Rent 20,000 Cash 20,000 93) On July 1, Omega Company paid rent of $15,000 for a small equipment storage area from July 1 until December 31. Provide the adjusting journal entry on July 31. (Ignore explanation.) Assume the deferred expense is initially recorded as an asset. Answer: Rent Expense 2,500 Prepaid Rent 2,500 Explanation: Rent Expense = $15,000 1/6 = $2,500 94) On April 1, Balsa Company purchased office supplies for $1,500. At the end of April, they took a count of the remaining supplies and found that there was $500 of supplies left. Provide the adjusting entry needed at the end of April. (Ignore explanation.) Assume the office supplies were initially recorded as an asset. Assume there were no office supplies on hand prior to the purchase on April 1. Answer: Supplies Expense 1,000 Office Supplies 1,000 Explanation: Supplies Expense = Beginning balance in Office Supplies - Ending balance in Office Supplies Supplies Expense = $1,500 - $500 = $1,000 45

46 Learning Objective 3-4 1) An adjusted trial balance does not list the revenues and expenses of a business. Answer: FALSE LO: 3-4 H2 : What Is the Purpose of the Adjusted Trial Balance and How Do We Prepare It? (H1) 2) The adjusted trial balance shows. A) account balances after adjustments B) revenue and expense accounts only C) account balances before adjustments D) balance sheet accounts only Answer: A LO: 3-4 H2 : What Is the Purpose of the Adjusted Trial Balance and How Do We Prepare It? (H1) 46

47 3) Deborah Consultants had the following accounts and account balances after adjusting entries. Assume all accounts have normal balances. Calculate the amount of service revenue and prepare the adjusted trial balance for Deborah Consultants as of December 31, Cash $6,000 Deborah, Withdrawals $3,000 Accounts Receivable 2,000 Service Revenue? Office Supplies 1,800 Salaries Expense 4,000 Equipment 15,000 Rent Expense 800 Accumulated Depreciation 9,000 Depreciation Expense 1,500 Equipment Equipment Deborah, Capital 15,000 Supplies Expense 500 Answer: Deborah Consultants Adjusted Trial Balance December 31, 2017 Balance Account Title Debit Credit Cash $6,000 Accounts Receivable 2,000 Office Supplies 1,800 Equipment 15,000 Accumulated Depreciation Equipment $9,000 Deborah, Capital 15,000 Deborah, Withdrawals 3,000 Service Revenue 10,600 Salaries Expense 4,000 Rent Expense 800 Depreciation Expense Equipment 1,500 Supplies Expense 500 Total $34,600 $34,600 Service Revenue = $34,600 - $9,000 - $15,000 = $10,600 LO: 3-4 H2 : What Is the Purpose of the Adjusted Trial Balance and How Do We Prepare It? (H1) 47

48 4) Bryan Consultants had the following balances before preparing adjusting entries in the books on December 31, Cash $6,000 T. Bryan, Withdrawals $3,000 Accounts Receivable 2,000 Service Revenue 10,600 Office Supplies 1,800 Salaries Expense 4,000 Equipment 15,000 Rent Expense 800 Accumulated Depreciation 9,000 Depreciation Expense 1,500 Equipment Equipment T. Bryan, Capital 15,000 Supplies Expense 500 Prepare the adjusted trial balance after considering these adjustments: a. Office Supplies used, $800. Assume the office supplies were initially recorded as an asset. b. Accrued salaries on December 31, $600. c. Revenue earned but not recorded, $200. Answer: Bryan Consultants Adjusted Trial Balance December 31, 2017 Balance Account Title Debit Credit Cash $6,000 Accounts Receivable 2,200 Office Supplies 1,000 Equipment 15,000 Accumulated Depreciation Equipment $9,000 Salaries Payable 600 T. Bryan, Capital 15,000 T. Bryan, Withdrawals 3,000 Service Revenue 10,800 Supplies Expense 1,300 Salaries Expense 4,600 Rent Expense 800 Depreciation Expense Equipment 1,500 Total $35,400 $35,400 Diff: 3 LO: 3-4 H2 : What Is the Purpose of the Adjusted Trial Balance and How Do We Prepare It? (H1) 48

49 Learning Objective 3-5 1) If a company fails to make an adjusting entry for accrued revenues, the net income will be overstated. Answer: FALSE LO: 3-5 H2 : What Is the Impact of Adjusting Entries on the Financial Statements? (H1) 2) If a company fails to make an adjusting entry for deferred expense, the assets will be overstated. Assume the deferred expense is initially recorded as an asset. Answer: TRUE LO: 3-5 H2 : What Is the Impact of Adjusting Entries on the Financial Statements? (H1) 3) The accountant for Jones Auto Repair failed to make an adjusting entry to record $5,000 of unpaid salaries for the last two weeks of the year. Which of the following is an effect of this omission? A) The net income will be overstated. B) The total assets will be understated. C) The net income will be understated. D) The total assets will be overstated. Answer: A LO: 3-5 H2 : What Is the Impact of Adjusting Entries on the Financial Statements? (H1) 4) Financial statements are prepared from the balances in a(n). A) general journal B) chart of accounts C) unadjusted trial balance D) adjusted trial balance Answer: D LO: 3-5 H2 : What Is the Impact of Adjusting Entries on the Financial Statements? (H1) 49