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Import Settings: Base Settings: Brownstone Default Information Field: Difficulty Information Field: LO Highest Answer Letter: E Multiple

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Chapter: Chapter 4: Adjusting Accounts for Financial Statements

True/False

1. Adjusting entries are designed primarily to correct errors made by bookkeepers. Ans: False Difficulty: Easy LO: 1

2. Adjusting entries are made after the preparation of financial statements. Ans: False Difficulty: Easy LO: 1

3. Prior to making adjusting entries at the end of an accounting period, some accounts may not show proper financial statement amounts even though all transactions were correctly recorded. Ans: True Difficulty: Moderate LO: 1

4. Adjusting entries are used to record the effects of internal economic events.

Ans: True Difficulty: Moderate LO: 1

5. External business transactions are transactions between the business entity and some other (outside) party. Ans: True Difficulty: Easy LO: 1

6. Internal transactions have no effect on the accounting equation. Ans: False Difficulty: Easy LO: 1

7. If equipment were purchased from an outside party, the using up of the equipment's economic benefit would be considered an external transaction. Ans: False Difficulty: Moderate LO: 1

8. Internal transactions often include cash payments. Ans: False Difficulty: Hard LO: 1

9. A company's fiscal year must correspond with the calendar year. Ans: False Difficulty: Easy LO: 2

10. The time period principle assumes that an organization's activities can be divided into specific periods. Ans: True Difficulty: Easy LO: 2

11. Interim statements cover a firm's business activity for one year. Ans: False Difficulty: Easy LO: 2

12. The 12 consecutive months (or 52 weeks) selected as an organization's accounting period is called the fiscal year. Ans: True Difficulty: Moderate LO: 2

13. The natural business year can only be used when the seasonal variation in sales does not match the calendar year. Ans: True Difficulty: Hard LO: 2

14. Adjusting entries are required to match revenues and expenses. Ans: True Difficulty: Easy LO: 2

15. The two main accounting principles used in the adjusting process are matching and full disclosure. Ans: False Difficulty: Easy LO: 2

16. The matching principle requires that revenue be assigned to the accounting period in which it is earned. Ans: False Difficulty: Easy LO: 2

17. The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and accrued revenues. Ans: True Difficulty: Moderate LO: 2

18. Since the revenue recognition principle requires that revenues be earned, there is no such thing as unearned revenues in accounting. Ans: False Difficulty: Moderate

LO: 2

19. The economic effect of an expense is incurred when the benefit expires or is used up, not when cash is paid. Ans: True Difficulty: Moderate LO: 2

20. The cash basis of accounting commonly results in financial statements that are not comparable from period to period. Ans: True Difficulty: Moderate LO: 3

21. Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued items. Ans: True Difficulty: Moderate LO: 3

22. The cash basis of accounting is an accounting system in which revenues are reported in the income statement when cash is received and expenses are reported when cash is paid. Ans: True Difficulty: Moderate LO: 3

23. Both the accrual basis and the cash basis of accounting increase the comparability of

financial statement information from period to period. Ans: False Difficulty: Moderate LO: 3

24. The accrual basis of accounting is an accounting system in which revenues are reported as earned when cash is received. Ans: False Difficulty: Moderate LO: 3

25. Generally, accrual basis accounting results in a more accurate measurement of net income for the period than does cash basis accounting. Ans: True Difficulty: Moderate LO: 3

26. The accrual basis of accounting reflects the understanding that the economic effect of revenue generally occurs when it is earned, not when cash is received. Ans: True Difficulty: Easy LO: 3

27. The accrual basis of accounting is a system of accounting in which the adjustment process is used to assign revenues to the periods in which they are earned and to match expenses with revenues. Ans: True Difficulty: Moderate LO: 3

28. FastForward paid $3,000 for a six-month insurance policy for the company van. The policy coverage began on February 1. On February 28, $250 of insurance expense must be reported. Ans: False Difficulty: Moderate LO: 4

29. On October 15, FastForward received $12,500 as a down payment on a consulting contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of the contract was completed. FastForward needs to prepare an adjusting entry for $1,250. Ans: True Difficulty: Moderate LO: 4

30. Adjustments are necessary for transactions and events that extend over more than one accounting period. Ans: True Difficulty: Easy LO: 4

31. An adjusting entry can only affect income statement accounts. Ans: False Difficulty: Easy LO: 4

32. Accrued expenses reflect transactions where cash is paid before a related expense is recognized.

Ans: False Difficulty: Moderate LO: 4

33. Earned but uncollected revenues that are recorded during the adjusting process, with a credit to a revenue account and a debit to an expense account, are referred to as accrued expenses. Ans: False Difficulty: Moderate LO: 4

34. Adjusting entries are always dated at the end of the accounting period. Ans: True Difficulty: Easy LO: 4

35. Adjusting entries are posted just like regular day-to-day entries. Ans: True Difficulty: Easy LO: 4

36. Adjusting entries may affect only balance sheet accounts. Ans: False Difficulty: Easy LO: 4

37. Before an adjusting entry is made, the amount in Prepaid Insurance is overstated and

Insurance Expense is overstated. Ans: False Difficulty: Moderate LO: 4

38. Before an adjusting entry is made, the amount in Salaries Expense is understated and the amount in Salaries Payable is also understated. Ans: True Difficulty: Moderate LO: 4

39. FastForward owes its employees $7,000 for the week ended March 31. The company will pay the employees on April 5. The adjusting journal entry prepared on March 31 will include a debit to Salaries Expense and a credit to Cash. Ans: False Difficulty: Moderate LO: 4

40. Failure to record amortization expense will overstate the asset and understate the expense. Ans: True Difficulty: Hard LO: 4

41. A contra account is an account the balance of which is added to the balance of an associated account to show a more proper amount for the item recorded in the associated account. Ans: False Difficulty: Easy LO: 4

42. If on January 1 of this year, a company paid $12,000 rent for one year and adjusting entries are made at the end of each month, the balance of Prepaid Rent at December 1 of this year should be $1,000. Ans: True Difficulty: Easy LO: 4

43. Accumulated amortization is shown on the balance sheet as a subtraction from the cost of an asset. Ans: True Difficulty: Easy LO: 4

44. A contra-asset account has a normal debit balance. Ans: False Difficulty: Moderate LO: 4

45. The entry to record a cash receipt from a customer when the service to be provided to earn the cash has not yet been performed involves a debit to an unearned revenue account. Ans: False Difficulty: Moderate LO: 4

46. Amortization expense for a period is the portion of a plant asset's cost that is allocated to that period.

Ans: True Difficulty: Moderate LO: 4

47. All items of plant and equipment, including land, eventually wear out or lose their usefulness. Ans: False Difficulty: Moderate LO: 4

48. During August, FastForward purchased $4,000 worth of supplies. At August 31 the adjusted balance in the Supplies account was $2,800. The adjusting entry included a $1,200 debit to Supplies. Ans: False Difficulty: Hard LO: 4

49. The amount of the month-end adjusting entry for Insurance Expense is $1,000. If the entry is not made then expenses are understated by $1,000 and net income is overstated by $1,000. Ans: True Difficulty: Hard LO: 4

50. Salaries earned by employees, but unrecorded, are an example of an accrued expense. Ans: True Difficulty: Easy LO: 4

51. In accrual basis accounting, accrued revenues are recorded as liabilities. Ans: False Difficulty: Easy LO: 4

52. Amortization expense is an example of accrued expense. Ans: False Difficulty: Easy LO: 4

53. If you fail to record accrued salaries at the end of the month, net income for the month will be overstated. Ans: True Difficulty: Moderate LO: 4

54. Expenses incurred during an accounting period but that, prior to end-of-period adjustments, remain unrecorded because payment is not due are referred to as accrued expenses. Ans: True Difficulty: Moderate LO: 4

55. FastForward performs 20 days' work on a 30-day contract. The total contract is valued at $6,000. The adjusting entry of $4,000 includes a credit to unearned revenue. Ans: False Difficulty: Hard LO: 4

56. Accrued expenses at the end of one period result in cash payments in a subsequent period. Ans: True Difficulty: Easy LO: 4

57. Accrued revenues at the end of one period result in cash payments in a subsequent period. Ans: False Difficulty: Easy LO: 4

58. On January 8, FastForward records $5,000 of accrued salaries. On January 15, $10,000 of salaries are paid. The payroll for the period January 1-15 totalled $10,000. Ans: True Difficulty: Moderate LO: 4

59. FastForward entered into a two-month contract for $50,000 on April 1. FastForward earned $25,000 of the contract in April and billed the customer. FastForward should recognize the revenue when it receives the customer's cheque. Ans: False Difficulty: Moderate LO: 4

60. The book value of an asset is equivalent to the market value of that asset. Ans: False Difficulty: Moderate

LO: 4

61. An adjusting entry may include an entry to Cash. Ans: False Difficulty: Moderate LO: 5

62. Before adjusting for accrued revenues, both assets and equity are understated. Ans: True Difficulty: Moderate LO: 5

63. An unadjusted trial balance is a listing of accounts prepared before adjustments are recorded. Ans: True Difficulty: Easy LO: 6

64. The adjusted trial balance must be prepared before the adjusting entries are made. Ans: False Difficulty: Easy LO: 6

65. Financial statements can be prepared directly from the information in the adjusted trial balance. Ans: True Difficulty: Easy

LO: 7

66. The report format is considered to be the only correct format for the balance sheet. Ans: False Difficulty: Easy LO: 7

67. The account format of the balance sheet matches the accounting equation. Assets are on the left side of the statement. Liabilities and owner's equity are on the right side of the statement. Ans: True Difficulty: Easy LO: 7

68. In preparing financial statements from the trial balance, the balance sheet is prepared first. Ans: False Difficulty: Moderate LO: 7

69. Correcting entries are a specialized type of adjusting entry. Ans: False Difficulty: Moderate LO: 8

70. Correcting entries cannot involve cash. Ans: False Difficulty: Easy

LO: 8

71. Correcting an error always requires two entries. Ans: False Difficulty: Moderate LO: 8

72. Computerized accounting systems should include controls to show when and where corrections are made. Ans: True Difficulty: Moderate LO: 8

73. Prepaid expenses may be recorded as debits to expense accounts. Ans: True Difficulty: Easy LO: 9

74. It is acceptable to credit unearned revenues to revenue accounts when cash is received. Ans: True Difficulty: Easy LO: 9

75. Under the alternative method for recording prepaid expenses, the purchase of insurance for cash would be recorded as a debit to Cash and a credit to Prepaid Insurance. Ans: False

Difficulty: Moderate LO: 9

76. Under the alternative method for recording unearned revenue, the receipt of cash in advance of performing services would be recorded as a credit to Unearned Revenue and a debit to Cash. Ans: False Difficulty: Moderate LO: 9

Multiple Choice

77. The main purpose of adjusting entries is to: A) Record external transactions and events. B) Record internal transactions and events. C) Recognize revenues received during the period. D) Recognize expenses paid during the period. E) Adjust assets to their market value. Ans: B Difficulty: Moderate LO: 1

78. The time period principle assumes that an organization's activities can be divided into specific time periods including: A) One month. B) Quarters. C) Fiscal year. D) Calendar year. E) Any of the above. Ans: E Difficulty: Easy LO: 2

79. A broad principle that requires identifying the activities of a business with specific time periods such as months, quarters, or years is the: A) Operating cycle of a business. B) Time period principle. C) Going-concern principle. D) Matching principle. E) Accrual basis of accounting. Ans: B Difficulty: Moderate LO: 2

80. Interim financial reports are financial reports: A) Covering less than one year, usually based on one- or three-month periods. B) That are prepared before any adjustments have been recorded. C) That show the assets above the liabilities and the liabilities above the owner's equity. D) In which revenues are reported in the income statement when cash is received and expenses are reported when cash is paid. E) In which the adjustment process is used to assign revenues to the periods in which they are earned and to match expenses with revenues. Ans: A Difficulty: Moderate LO: 2

81. The 12-month period that ends when a company's activities are at their lowest point is called the: A) Fiscal year. B) Calendar year. C) Natural business year. D) Accounting period. E) Interim period. Ans: C Difficulty: Moderate LO: 2

82. The length of time covered by periodic financial statements and other reports is the: A) Fiscal year. B) Natural business year. C) Accounting period. D) Business cycle. E) Operating cycle. Ans: C Difficulty: Moderate LO: 2

83. The accounting principle that requires revenue to be reported when earned is the: A) Matching principle. B) Revenue recognition principle. C) Time period principle. D) Cost principle. E) Going concern principle. Ans: B Difficulty: Easy LO: 2

84. The broad principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses is the: A) Recognition principle. B) Cost principle. C) Cash basis of accounting. D) Matching principle. E) Time period principle. Ans: D Difficulty: Moderate LO: 2

85. The approach to preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid is called: A) Accrual basis accounting. B) The operating cycle of a business. C) Cash basis accounting. D) The revenue recognition principle. E) The matching principle. Ans: C Difficulty: Moderate LO: 3

86. The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is: A) Accrual basis accounting. B) The operating cycle of a business. C) Cash basis accounting. D) The revenue recognition principle. E) The matching principle. Ans: D Difficulty: Moderate LO: 3

87. The accrual basis of accounting: A) Is generally accepted for external reporting because it gives more useful information. B) Is not acceptable because it gives incomplete information about cash flows. C) Recognizes revenues when received. D) Recognizes expenses when paid. E) Eliminates the need for adjusting entries. Ans: A Difficulty: Hard LO: 3

88. Adjusting entries are journal entries made at the end of an accounting period for the purpose

of: A) Updating related liability and asset accounts. B) Assigning revenues to the period in which they are earned. C) Assigning expenses to the period in which the expiration of benefit has incurred. D) Recording internal transactions. E) All of these answers are correct. Ans: E Difficulty: Moderate LO: 4

89. Adjusting entries: A) Affect only income statement accounts. B) Affect only balance sheet accounts. C) Affect both income statement and balance sheet accounts. D) Affect only cash flow statement accounts. E) Affect only equity accounts. Ans: C Difficulty: Moderate LO: 4

90. Prepaid expenses, amortization, accrued expenses, unearned revenues, and accrued revenues are all examples of: A) Items that require contra accounts. B) Items that require adjusting entries. C) Classified balance sheet accounts. D) Assets. E) Income statement accounts. Ans: B Difficulty: Moderate LO: 4

91. Which of the following statements is correct? A) Prepaid expenses, amortization, and unearned revenues involve previously recorded assets and liabilities.

B) Accrued expenses and accrued revenues involve assets and liabilities that have not yet been recorded. C) Adjusting entries are used to record both accrued expenses and accrued revenues D) Prepaid expenses, amortization, and unearned revenues require adjusting entries to record the effects of the passage of time. E) All of these answers are correct. Ans: E Difficulty: Hard LO: 4

92. An account the balance of which is subtracted from the balance of a related account so that more complete information than simply the net amount is provided is a(n): A) Accrued expense. B) Contra account. C) Accrued revenue. D) Prepaid expense. E) Withdrawal. Ans: B Difficulty: Moderate LO: 4

93. The total amount of amortization recorded for an asset during the entire time the asset has been owned: A) Is not shown on the balance sheet. B) Is referred to as accumulated amortization. C) Is shown on the income statement. D) Is shown on the statement of owner's equity. E) Is recorded in a liability account. Ans: B Difficulty: Moderate LO: 4

94. The expense created by allocating the cost of plant and equipment to the periods in which they are used, representing the expense of using the assets, is called:

A) B) C) D) E)

Accumulated amortization. The cash basis of accounting. The matching principle. Amortization. Allowance for amortization.

Ans: D Difficulty: Moderate LO: 4

95. Prior to recording adjusting entries, the Office Supplies account had a $359 debit balance while a physical count of the supplies showed $105 of unused supplies on hand. Thus, the required adjusting entry is: A) Debit Office Supplies $105 and credit Office Supplies Expense $105. B) Debit Office Supplies Expense $105 and credit Office Supplies $105. C) Debit Office Supplies Expense $254 and credit Office Supplies $254. D) Debit Office Supplies $254 and credit Office Supplies Expense $254. E) Some other entry. Ans: C Difficulty: Moderate LO: 4

96. If throughout an accounting period the fees for legal services paid in advance by clients are recorded in an account called Unearned Legal Fees, the end-of-period adjusting entry to record the portion of these fees that has been earned is: A) Debit Cash and credit Legal Fees Earned. B) Debit Cash and credit Unearned Legal Fees. C) Debit Unearned Legal Fees and credit Legal Fees Earned. D) Debit Legal Fees Earned and credit Unearned Legal Fees. E) Some other entry. Ans: C Difficulty: Moderate LO: 4

97. A company paid the $1,350 premium on a three-year insurance policy on April 1, 2011. The

policy gave protection beginning on that date. How many dollars of the premium will appear as an expense on the calendar year 2011 income statement assuming the accrual basis of accounting? Assuming the cash basis of accounting? A) $1,350 accrual basis; $337.50 cash basis. B) $450 accrual basis; $450 cash basis. C) $1,012.50 accrual basis; $1,350 cash basis. D) $337.50 accrual basis; $1,350 cash basis. E) $1,350 accrual basis; $1,350 cash basis. Ans: D Difficulty: Moderate LO: 4

98. Yang Company had no office supplies on hand at the beginning of the year. During the year, the company purchased $250 worth of office supplies. At the end of the year, $75 worth of office supplies were on hand. How much should Yang Company report as office supplies expense for the year? A) $ 75. B) $125. C) $175. D) $250. E) $325. Ans: C Difficulty: Moderate LO: 4

99. On January 1, 2011, Banana Company purchased a five-year insurance policy for $1,800. If the cost was debited to Prepaid Insurance, the adjusting entry at the end of 2011 is: A) Debit Prepaid Insurance, $1,800; credit Cash, $1,800. B) Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440. C) Debit Prepaid Insurance, $360; credit Insurance Expense, $360. D) Debit Insurance Expense, $360; credit Prepaid Insurance, $360. E) Debit Insurance Expense, $1,800, credit Prepaid Insurance $1,800. Ans: D Difficulty: Moderate LO: 4

100. An adjusting entry could be made for all of the following except: A) Prepaid expenses. B) Amortization expense. C) Owner withdrawals. D) Unearned revenues. E) Accrued revenues. Ans: C Difficulty: Moderate LO: 4

101. Which of the following assets is not amortized? A) Store fixtures. B) Computers. C) Land. D) Buildings. E) Trucks. Ans: C Difficulty: Easy LO: 4

102. Which of the following does not require an adjusting entry at year-end? A) Accrued interest on notes payable. B) Supplies used during the period. C) Cash invested by owner. D) Accrued wages. E) Expired portion of prepaid insurance. Ans: C Difficulty: Easy LO: 4

103. The premium on a three-year insurance policy purchased on April 30, 2011, was $18,000. What is the amount of insurance expense that should be presented on the company's income

statement for the year ended December 31, 2011? A) $ 2,000. B) $ 4,000. C) $ 6,000. D) $12,000. E) $14,000. Ans: B Difficulty: Moderate LO: 4

104. Yang leased a portion of its store to Tang for eight months beginning on October 1, at a monthly rate of $200. Tang paid the entire $1,600 on October 1, which Yang recorded as unearned revenue. The journal entry made by Yang at year-end, December 31, would include: A) A debit to Rent Earned for $600. B) A credit to Unearned Rent for $600. C) A debit to Cash for $1,600. D) A credit to Rent Earned for $600. E) A debit to Unearned Rent for $1,000. Ans: D Difficulty: Moderate LO: 4

105. On May 1, 2011. Wasp Advertising Company received $1,500 from Julie Bee for advertising services to be completed by April 30, 2012. Assume the receipt was recorded as unearned fees and that at December 31, 2011, $500 of the fees had been earned. The adjusting entry prepared by Wasp on December 31, 2011, should include: A) A debit to Unearned Fees for $500. B) A credit to Unearned Fees for $500. C) A credit to Earned Fees for $1,000. D) A debit to Earned Fees for $1,000. E) A debit to Earned Fees for $500. Ans: A Difficulty: Moderate LO: 4

106. The Crimson Cartage Company purchased a new truck at a cost of $42,000 on July 1, 2011. The truck is estimated to have a useful life of six years and a residual value of $6,000. How much amortization expense will be recorded for the truck during the year ended December 31, 2011? A) $3,000. B) $3,500. C) $4,000. D) $6,000. E) $7,000. Ans: A Difficulty: Moderate LO: 4

107. The Office Supplies account shows a beginning balance of $600 and an ending balance of $400. If office supplies expense for the year is $3,100, what amount of office supplies was purchased during the year? A) $2,700. B) $2,900. C) $3,300. D) $3,500. E) $3,700. Ans: B Difficulty: Hard LO: 4

108. For a prepaid expense, the adjusting entry would: A) Result in a debit to an expense account and a credit to an asset account. B) Cause a prepaid expense to be overstated and liabilities to be understated. C) Result in a credit to an expense account and a debit to an asset account. D) Result in a debit to a liability account and a credit to an asset account. E) Decrease cash. Ans: A Difficulty: Hard LO: 4

109. The Creative Company has several insurance policies in force with payments due at various times. The following information refers to prepaid insurance and insurance expense on two successive dates. Prepaid insurance Insurance expense Dec. 31, 2011 $5,000 3,200 Dec. 31, 2012 $4,250 4,500

The amount of cash paid for insurance by Creative Company in 2012 was: A) $3,750. B) $4,250. C) $4,500. D) $5,000. E) $8,750. Ans: A Difficulty: Hard LO: 4

110. Incurred but unpaid expenses that are recorded during the adjusting process with a debit to an expense and a credit to a liability are called A) Operating expenses. B) Prepaid expenses. C) Unearned expenses. D) Accounts payable. E) Accrued expenses. Ans: E Difficulty: Moderate LO: 4

111. The adjusting entry to record the earned but unpaid salaries of employees at the end of the accounting period is: A) Debit Unpaid Salaries and credit Salaries Payable. B) Debit Salaries Payable and credit Salaries Expense. C) Debit Salaries Expense and credit Cash. D) Debit Salaries Expense and credit Salaries Payable. E) Debit Cash and credit Salaries Expense.

Ans: D Difficulty: Moderate LO: 4

112. A business pays each of its two office employees each Friday at the rate of $60 per day for a five-day week that begins on Monday. If the accounting period ends on Tuesday and the employees worked on both Monday and Tuesday, the adjusting entry to record the salaries earned but unpaid is: A) Debit Unpaid Salaries $360 and credit Salaries Payable $360. B) Debit Office Salaries Expense $240 and credit Salaries Payable $240. C) Debit Office Salaries Expense $360 and credit Salaries Payable $360. D) Debit Salaries Payable $240 and credit Office Salaries Expense $240. E) Debit Salaries Expense $240 and credit Cash $240. Ans: B Difficulty: Moderate LO: 4

113. An adjusting entry was made on December 31, 2011, to accrue salaries expense of $1,200. Which of the following entries would be prepared to record the next payment of salaries, on January 5, 2012, in the amount of $3,000? A) Salaries Expense 3,000 Cash 3,000 B) Salaries Payable Cash C) Salaries Payable Cash D) Salaries Expense Salaries Payable E) Salaries Payable Salaries Expense Cash Ans: E 3,000 3,000 1,200 1,200 1,200 1,200 1,200 1,800 3,000

Difficulty: Moderate LO: 4

114. If accrued salaries were recorded on December 31 with a credit to Salaries Payable, the entry to record payment of these wages on January 5 would include: A) A debit to Cash and a credit to Salaries Payable. B) A debit to Cash and a credit to Prepaid Salaries. C) A debit to Salaries Payable and a credit to Cash. D) A debit to Salaries Payable and a credit to Salaries Expense. E) No entry would be necessary on January 5. Ans: C Difficulty: Moderate LO: 4

115. HCF, a finance company, lends Able Business $2,400 at 5% for three months on December 1, 2011. HCF's adjusting entry on December 31, 2011, should include: A) A debit to Interest Earned for $10. B) A credit to Interest Receivable for $10. C) A credit to Interest Earned for $10. D) A debit to Cash for $10. E) A debit to Interest Expense for $10. Ans: C Difficulty: Moderate LO: 4

116. Accrued revenues: A) Are paid in advance. B) At the end of one accounting period often result in cash receipts from customers in the next period. C) At the end of one accounting period often result in cash payments in the next period. D) Are also called unearned revenues. E) Are listed on the balance sheet as liabilities. Ans: B Difficulty: Moderate

LO: 4

117. In January, Denton Mabrey College received $120,000 in Unearned Tuition Revenue from its students for the spring semester, which lasts four months. On January 31, the college should recognize which amount for tuition revenue? A) $ 30,000. B) $ 60,000. C) $ 80,000. D) $ 90,000. E) $120,000. Ans: A Difficulty: Moderate LO: 4

118. On January 31 of this year, FastForward recorded 2 days of accrued salaries ($140) for its employees. On February 9, the company paid its employees a total of $700. The correct journal entries at January 31 and February 9 are: A) Salaries Expense 140 Salaries Payable 140 Salaries Payable 700 Salaries Expense 140 Cash 700 B) Salaries Payable 140 Salaries Expense Salaries Expense 560 Salaries Payable 140 Cash C) Salaries Expense Cash Salaries Expense Cash 140 140 700 700 140 700 140 700

D) Salaries Expense 140 Salaries Payable Salaries Expense 700 Cash

E) Salaries Expense 140 Salaries Payable Salaries Expense 560 Salaries Payable 140 Cash Ans: E Difficulty: Hard LO: 4

140 700

119. Sam's Pet Emporium purchased equipment on January 1 for $25,000. The equipment will be used for five years, after which the estimated residual value will be $2,000. Using straightline amortization, what is the amortization expense for the first year of the asset's life? A) $2,000 B) $4,600 C) $4,625 D) $5,000 E) $5,400 Ans: B Difficulty: Moderate LO: 4

120. Josh's Computer Business owns computer equipment which cost $6,000 when it was purchased three years ago. No residual value was expected. The equipment's current book value is $2,400. What is the amortization expense per year using straight-line amortization? A) $ 800 B) $1,000 C) $1,100 D) $1,200 E) $1,500 Ans: D Difficulty: Hard LO: 4

121. Due to an oversight, the company bookkeeper made no adjusting entry for accrued and unpaid employee wages of $24,000 on December 31. This oversight would: A) Understate net income by $24,000. B) Overstate net income by $24,000. C) Have no effect on net income. D) Overstate liabilities. E) Have no effect on the balance sheet. Ans: B Difficulty: Moderate LO: 5

122. If an accountant forgot to record amortization on office equipment at the end of an accounting period, what is the effect on the statements prepared at that time? A) The assets are overstated and owner's equity is understated. B) The assets and owner's equity are both understated. C) The assets are overstated, net income is understated, and owner's equity is overstated. D) The assets, net income, and owner's equity are understated. E) The assets, net income, and owner's equity are overstated. Ans: E Difficulty: Hard LO: 5

123. If the accountant failed to make the end-of-period adjustment to reduce the Unearned Management Fees account by the amount of management fees earned, the omission would cause: A) An overstatement of net income. B) An overstatement of assets. C) An overstatement of liabilities. D) An overstatement of owner's equity. E) An understatement of expenses. Ans: C Difficulty: Hard LO: 5

124. Throughout an accounting period the fees for legal services paid in advance by clients are

recorded in an account called Unearned Legal Fees. If the accountant fails to make the end-ofperiod adjusting entry to record the portion of these fees that has been earned, one effect will be: A) An overstatement of owner's equity. B) An understatement of owner's equity. C) An understatement of assets. D) An understatement of liabilities. E) An overstatement of net income. Ans: B Difficulty: Hard LO: 5

125. If the accountant failed to make an adjusting entry at the end of the period to record amortization for the period, the omission will cause: A) An overstatement of expenses. B) An overstatement of revenues. C) An understatement of assets. D) An overstatement of liabilities. E) An overstatement of assets. Ans: E Difficulty: Hard LO: 5

126. Which of the following statements is incorrect? A) An adjusted trial balance shows the account balances after they have been revised to reflect the effects of end-of-period adjustments. B) Interim financial reports can be based on one-month or three-month accounting periods. C) The fiscal year is any 12 consecutive months used by a business as its annual accounting period. D) Property, plant, and equipment are capital assets. E) The cash basis of accounting is consistent with GAAP. Ans: E Difficulty: Hard LO: 2,3,4,6

127. A trial balance prepared before any adjustments have been recorded is: A) An adjusted trial balance. B) Used to prepare the financial statements. C) An unadjusted trial balance. D) Correct with respect to proper balance sheet and income statement amounts. E) Will not have the debits equal to the credits. Ans: C Difficulty: Easy LO: 6

128. The adjusted trial balance contains information pertaining to: A) Asset accounts only. B) Balance sheet accounts only. C) Income statement accounts only. D) All general ledger accounts. E) Revenue accounts only. Ans: D Difficulty: Moderate LO: 6

129. A trial balance prepared after adjustments have been recorded is called a(n): A) Balance sheet. B) Adjusted trial balance. C) Unadjusted trial balance. D) Summary trial balance. E) Income statement. Ans: B Difficulty: Easy LO: 6

130. Financial statements are prepared in the following order: A) Balance sheet, statement of owner's equity, income statement. B) Statement of owner's equity, balance sheet, income statement. C) Income statement, balance sheet, statement of owner's equity.

D) Income statement, statement of owner's equity, balance sheet. E) Balance sheet, income statement, statement of owner's equity. Ans: D Difficulty: Moderate LO: 7

131. A balance sheet that places the assets above the liabilities and owner's equity is called a(n): A) Report form balance sheet. B) Account form balance sheet. C) Adjusted balance sheet. D) Unadjusted balance sheet. E) The accounting equation. Ans: A Difficulty: Moderate LO: 7

132. A balance sheet that places the liabilities and owner's equity to the right of the assets is a(n): A) Report form balance sheet. B) Account form balance sheet. C) Adjusted balance sheet. D) Unadjusted balance sheet. E) The accounting equation. Ans: B Difficulty: Moderate LO: 7

133. Unearned revenue is reported in the financial statements as: A) A revenue on the balance sheet. B) A liability on the balance sheet. C) An unearned revenue on the income statement. D) An asset on the balance sheet. E) An operating activity on the statement of cash flows.

Ans: B Difficulty: Moderate LO: 7

134. The following journal entry (incorrectly) recorded the purchase of office supplies for $1,200 on credit: Office Equipment 1,200 Accounts Payable 1,200 What entry or entries best correct and document the correction of this error? A) None required. The original entry above is correct. B) Accounts Payable 1,200 Office Equipment 1,200 Office Supplies 1,200 Accounts Payable 1,200 C) Office Supplies Accounts Payable D) Accounts Payable Office Equipment Office Supplies Office Equipment E) Accounts Payable Office Supplies Office Supplies Office Equipment Ans: B Difficulty: Moderate LO: 8 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200

135. The following journal entry (incorrectly) recorded the purchase of office supplies for $1,200 on credit: Office Equipment 1,200 Accounts Payable 1,200 If only one entry is to be made to correct this entry it would be: A) None required. The original entry above is correct.

B) Accounts Payable Office Supplies C) Office Supplies Accounts Payable D) Office Supplies Office Equipment E) Accounts Payable Office Equipment Ans: D Difficulty: Moderate LO: 8

1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200

Short Answer

136. At year-end, the accountant for Del Carpio Diaper Service noted the following errors in the trial balance: (1) The bookkeeper understated the total debits to the Cash account by $500 when calculating the account balance. (2) A credit sale for $311 was recorded as a credit to the revenue account, but the offsetting debit was not posted. (3) A cash payment to a creditor for $2,600 was never recorded. (4) The $680 balance of the Prepaid Insurance account was listed in the credit column of the trial balance. (5) A $24,900 truck purchase was recorded as a $24,090 debit to Vehicles and a $24,090 credit to Notes Payable. (6) A purchase of office supplies for $150 was recorded as a debit to Office Equipment. The offsetting credit entry was correct. (7) An additional investment of $4,000 by T. Del Carpio was recorded as a debit to T. Del Carpio, Capital and as a credit to Cash. (8) The payment of the $510 utility bill for December was recorded twice. (9) The revenue account balance of $79,817 was listed on the trial balance as $97,817. (10 A $1,000 withdrawal made by the owner was recorded to the correct ) accounts as $100.

Using the form below, indicate if each error would cause the trial balance to be out of balance, the amount of any imbalance, and if a correcting entry is required. Would the error cause the trial balance to be out of balance? Yes No ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ Amount of Imbalance __________ _ __________ _ __________ _ __________ _ __________ _ __________ _ __________ _ __________ _ __________ _ __________ _ Correcting Journal Entry Required? (Yes/No) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________

Error (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Ans:

Difficulty: Moderate LO: 8

Multiple Choice

137. Under the alternative method for accounting for unearned revenues, which of the following pairs of journal entry formats is correct? A) Original entry: Cash Unearned Consulting Revenue Adjusting entry: Unearned Consulting Revenue Consulting Revenue B) Original entry: Cash Consulting Revenue Adjusting entry: Consulting Revenue Unearned Revenue C) Original entry: Cash Unearned Revenue Adjusting entry: Unearned Revenue Cash D) Original entry: Consulting Revenue Cash Adjusting entry: Unearned Revenue Consulting Revenue E) Original entry: Cash Unearned Revenue Adjusting entry: Consulting Revenue Unearned Revenue Ans: B Difficulty: Moderate LO: 9

138. Under the alternative method for accounting for prepaid expenses, which of the following pairs of journal entry formats is correct? A) Original entry: Insurance Expense Cash Adjusting entry: Prepaid Insurance Insurance Expense B) Original entry: Cash Insurance Expense Adjusting entry: Prepaid Insurance Insurance Expense C) Original entry: Prepaid Insurance Cash Adjusting entry: Prepaid Insurance Insurance Expense D) Original entry: Insurance Expense Cash Adjusting entry: Insurance Expense Prepaid Insurance E) Original entry: Prepaid Insurance Insurance Expense Adjusting entry: Cash Prepaid Insurance Ans: A Difficulty: Moderate LO: 9

Short Answer

139. Match the following terms with the appropriate definition.

(a) Accrual basis accounting (b) Cash basis accounting (c) Prepaid expenses (d) Amortization (e) Straight-line amortization (f) Time period principle (g) Matching principle (h) Accrued revenues _______ (1) _______ (2) _______ (3) _______ (4) _______ (5) _______ (6) _______ (7) _______ (8) Revenues earned in a period that are both unrecorded and not yet received in cash or other assets. Revenues are recognized when cash is received and expenses are recorded when cash is paid. The broad principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses. Items paid for in advance of receiving their benefits. The expense created by allocating the cost of plant and equipment to the periods in which they are used. Allocates equal amounts of an asset's cost to amortization expense during its useful life. The approach to preparing financial statements that uses the adjusting process to recognize revenues when earned and expenses when incurred. A broad principle that assumes that an organization's activities can be divided into specific time periods such as months, quarters, or years.

Ans: (1) h (2)b (3) g (4) c (5) d (6) e (7) a (8) f Difficulty: Moderate LO: 1-4

140. Match the following terms with the appropriate definition. (a) Account form balance sheet (b) Adjusting entry (c) Unadjusted trial balance (d) Fiscal year (e) Report form balance sheet (f) Accounting period (g) Contra account (h) Interim financial statements (i) Adjusted trial balance (j) Natural business year _______ (1) An account linked with another account and having an opposite normal balance.

_______ (2)

A 12-month period that ends when a company's sales activities are at their lowest point. _______ (3) A listing of accounts and balances prepared before adjustments are recorded and posted to the ledger. _______ (4) A balance sheet that lists assets on the left and liabilities and owner's equity on the right side. _______ (5) Financial reports covering less than one year. _______ (6) The length of time covered by financial statements and other reports. _______ (7) A journal entry used at the end of an accounting period to bring an asset or liability account balance to its proper amount while also updating the related expense or revenue account. _______ (8) A balance sheet that lists items vertically with assets above the liabilities and owner's equity. _______ (9) The 12 consecutive months (or 52 weeks) selected as an organization's annual accounting period. _______ (10) A listing of accounts and balances prepared after adjustments are recorded and posted to the ledger. Ans: (1) g (2) j (3) c (4) a (5) h (6) f (7) b (8) e (9) d (10) i Difficulty: Moderate LO: 1-6

141. Match the following types of accounts with each of the following transactions. (a) Prepaid expense (b) Unearned revenue (c) Accrued expense (d) Accrued revenue _______ (1) Entry to record wages owed, but not paid. _______ (2) Entry to record revenue earned but not received. _______ (3) Entry to record expiration of prepaid insurance. _______ (4) Entry to record revenue received in advance. Ans: (1) c (2) d (3) a (4) b Difficulty: Moderate LO: 4

142. On December 14, 2011, Bench Company received $3,700 for consulting services that will be performed in January 2012. Prepare a general journal entry to record the receipt.

Ans: Dec. 14 Cash 3,700 Unearned Consulting Fees To record receipt for consulting services in January Difficulty: Easy LO: 4

3,700

143. Prior to recording adjusting entries on December 31, the Store Supplies account had an $880 debit balance, while a physical count of the supplies showed $325 of unused supplies on hand. Prepare the required adjusting entry. Ans: Store Supplies Expense 555 Dec. 31 Store Supplies 555 To adjust for store supplies used ($880 - $325 = $555) Difficulty: Moderate LO: 4

144. Topflight Company had $1,500 of store supplies on hand at the beginning of 2011. During 2011 Topflight purchased $8,250 worth of store supplies. On December 31, 2011, $1,125 worth of store supplies remained. What is the amount of Topflight Company's store supplies expense for 2011? Ans: $1,500 + $8,250 - $1,125 = $8,625 Difficulty: Moderate LO: 4

145. During the year ended December 31, 2011, clients paid fees in advance for accounting services amounting to $25,000. These fees were recorded in an account called Unearned Accounting Fees. If $3,500 of these fees are still unearned on December 31, 2011, what is the required December 31 adjusting entry? Ans: Unearned Accounting Fees 21,500 Dec. 31 Accounting Fees Earned 21,500 To record accounting fees earned ($25,000 - $3,500 = $21,500) Difficulty: Moderate

LO: 4

146. Barnes Company has 20 employees who are each paid $80 per day for a 5-day workweek. The employees are paid every Friday. This year the accounting period ends on Tuesday. What is the December 31 adjusting journal entry Barnes Company should make to accrue salaries owing? Ans: Dec. 31 Salaries Expense 3,200 Salaries Payable 3,200 To record accrued salaries ($80 x 20 x 2 = $3,200) Difficulty: Moderate LO: 4

147. Prepare the December 31 adjusting entry to record $750 of earned but unpaid salaries. Ans: Dec. 31 Salaries Expense 750 Salaries Payable 750 To record accrued salaries. Difficulty: Easy LO: 4

148. On December 31, Connelly Company had performed $5,000 of management services for clients that had not yet been billed to the clients. Prepare an adjusting entry to record these fees. Ans: Dec. 31 Accounts Receivable 5,000 Management Fees Earned 5,000 To record accrued revenue. Difficulty: Easy LO: 4

149. Explain the purpose of preparing adjusting entries at the end of a period. Ans: Although all external transactions may be recorded correctly, internal transactions and events may not be recorded. Adjusting entries are used to record internal transactions. Examples of internal events requiring adjusting entries would be the recognition of accrued revenue, amortization, and expiration of prepaid expenses.

Difficulty: Moderate LO: 1

150. Discuss the importance of periodic reporting and the time period principle. Ans: For information to be valuable to decision makers, it must be presented in a timely fashion. To provide timely information for decision making, accounting systems are designed to prepare periodic reports at regular intervals. The time period principle assumes that an organization's activities can be divided into specific time periods such as months, quarters or years. Difficulty: Moderate LO: 2

151. Discuss how accrual accounting adds usefulness to financial statements. Ans: The accrual accounting method recognizes revenue when earned and expenses when incurred. Accrual accounting measures the economic effect of transactions. Difficulty: Moderate LO: 3

152. Explain the difference between cash basis accounting and accrual basis accounting. Ans: Accrual basis accounting recognizes revenues when earned, and expenses when incurred. Cash basis accounting recognizes revenues when cash is received, and expenses when cash is paid out. Difficulty: Moderate LO: 3

153. Identify the types of adjusting entries and explain the purpose of each type. Ans: There are two major types of adjusting entries: accruals and deferrals. Both of these groups can be subdivided into revenues and expenses. The purpose of accrual adjusting entries is to recognize revenues that have been earned and not received and expenses that have been incurred, but not yet paid. Deferrals, on the other hand, recognize that cash has already been received or paid. The purpose of deferrals is to adjust for revenue that has been received but not

earned and expenses that have been paid but not incurred. Difficulty: Hard LO: 4

154. Discuss the types of adjusting entries used for prepaid expenses, amortization, and unearned revenues. Ans: Prepaid expenses are deferrals, or expenses paid for in advance. The purpose of the adjusting entry for prepaid expenses is to recognize the using up of the asset paid for in advance. Amortization is the recognition of the decline in usefulness of capital assets. The adjusting entry for amortization recognizes this event and treats it as an expense. Unearned revenues represent cash paid in advance for products or services. The adjusting entry for unearned revenues recognizes that revenue has been earned through the delivery of a product or service, having been paid for in advance. Difficulty: Hard LO: 4

155. Discuss the types of adjusting entries used for accrued expenses and accrued revenues. Ans: Accrued expenses are expenses that have been incurred but not yet paid for. Adjusting entries for accrued expenses increase expenses and also increase liabilities to recognize that an expense has been incurred but not yet paid. Accrued revenues are revenues that have been earned but not yet received in cash or receivables. The adjusting entry recognizes the revenue and also establishes an account receivable. Difficulty: Hard LO: 4

156. Describe the types of entries required in later periods that result from accruals. Ans: Accrued revenues in one period result in cash received in later periods. Accrued expenses in one period result in cash payments made in later periods. When the cash for these items is received or paid, journal entries must be made to recognize receipt, payment, and the removal of the accrued revenues or accrued expenses from the accounts. Difficulty: Moderate LO: 4

157. Prepare general journal entries on December 31 to record the following unrelated year-end adjustments. (a) Estimated amortization on office equipment for the year, $3,600. (b) The Prepaid Insurance account has a $2,580 debit balance before adjustment. An examination of insurance policies shows $890 of insurance expired. (c) The Prepaid Insurance account has a $2,150 debit balance before adjustment. An examination of insurance policies shows $525 of unexpired insurance. (d) A business has three office employees who each earn $75 per day for a fiveday workweek that ends on Friday. The employees were paid on Friday, December 26, and have worked full days on Monday, Tuesday, and Wednesday, December 29, 30, and 31. (e) On November 1, a property owner received 6 months' rent in advance from a tenant whose rent is $675 per month. The $4,050 was credited to the Unearned Rent account. (f) A property owner collects rent monthly from his tenants. One tenant whose rent is $750 per month has not paid his rent for December. An s: (a) Dec.31 Amort. Expense, Office Equipment Accum. Amort., Office Equipment To record amortization expense for year (b) 31 Insurance Expense Prepaid Insurance To record expired insurance 890 890 3,600 3,600

(c)

31

Insurance Expense 1,625 Prepaid Insurance To record expired insurance ($2,150 - $525) Office Salaries Expense Office Salaries Payable To record accrued salaries ($75 x 3 x 3) 675

1,625

(d)

31

675

(e)

31

Unearned Rent 1,350 Rent Earned To record 2 months rent earned ($675 x 2) Accounts Receivable (Rent Receivable) Rent Earned To record rent due for December 750

1,350

(f)

31

750

Difficulty: Moderate LO: 4

158. In general journal form, record adjusting entries for the following items. Year end is December 31. (a) The Prepaid Insurance account shows a debit balance of $2,400, representing the cost of a three-year fire insurance policy that was purchased on October 1 of the current year. (b) The Office Supplies account has a debit balance of $400; a year-end inventory reveals $80 of supplies still on hand. (c) On November 1 of the current year, Rent Earned was credited for $1,500. This amount represented the rent earned for a three-month period beginning November 1. (d) Estimated amortization on office equipment is $600. (e) Accrued salaries amount to $400. An s: (a) Insurance Expense Prepaid Insurance To record expired insurance ($2,400 x 3/36) Office Supplies Expense (b) Office Supplies To record office supplies used ($400 - $80) (c) Rent Earned 500 Unearned Rent ($1,500/3) To adjust rent earned for unearned portion ($1,500/3 unearned) Amortization Expense, Office Equipment 600 (d) Accumulated Amortization, Office Equipment To record amortization for year Salaries Expense 400 (e) Salaries Payable To record accrued salaries Difficulty: Moderate LO: 4, 9 320 500 200

320

600

400

159. Ruiz Advisory Service's unadjusted and adjusted trial balances on December 31, 2011 are as follows:

In general journal form, prepare the adjusting entries that were recorded by Ruiz Advisory Service. A Dec. 31 Accounts Receivable 800 ns : (a ) Service Revenue 800 To adjust for revenues earned but not yet collected ($17,140 - $16,340). (b ) Dec. 31 Supplies Expense Office Supplies To adjust for supplies used ($1,041 - $641). (c ) Dec. 31 Advertising Expense Prepaid Advertising 650 650 400 400

To adjust for advertising services used ($1,100 - $450). (d ) Dec. 31 Amortization Expense, Building Accumulated Amortization, Building To record amortization. (e ) Dec. 31 Utilities Expense 180 5,000 5,000

Accounts Payable 180 To adjust for accrued utilities expense ($3,500 - $3,320). (f ) Dec. 31 Unearned Services Revenue 1,400

Services Revenue 1,400 To adjust for earned revenue previously collected ($4,410 $3,010). Difficulty: Hard LO: 4

160. Blueberry Company's unadjusted and adjusted trial balances on December 31, 2011, are as follows:

In general journal form, prepare the adjusting entries that were recorded by Blueberry Company. Ans:

Difficulty: Hard LO: 4

161. Richard Starr's consulting business receives cash from customers in the following pattern: 70% of the amount billed for services performed in a month is received during the month that the

services are performed; 30% is received in the following month. In August, Richard billed $3,000 for services performed that month. During September, cash receipts from customers amounted to $7,200. Calculate the amount of revenue earned during September. Ans: Service fees collected in September $7,200 Deduct: August service fees ($3,000 30%) 900 Therefore, September fees collected in September $6,300 And revenue earned in September ($6,300/70%) $9,000 Difficulty: Hard LO: 4

162. Of the office supplies Sandhu Consulting buys each month, 60% are paid for during the same month and 40% are paid for during the following month. During July, Sandhu purchased $600 of office supplies. During August, Sandhu paid $450 for office supplies. The office supplies inventory was $160 on July 31 and was $90 on August 31. What should be reported as office supplies expense for August? Ans: Payments during August August payments related to July purchases ($600 40%) August payments related to August purchases August purchases ($210/60%) July 31 inventory Supplies available during August August 31 inventory Office supplies expense for August $450 240 $210 $350 160 $510 90 $420

Difficulty: Hard LO: 4

163. Explain the difference between the book value and the market value of an asset. Ans: The book value of an asset is the cost minus the accumulated amortization. The market value of an asset is the amount the asset can be sold for. The market value is not tied to the book value of an asset.

Difficulty: Moderate LO: 4

164. The chief accountant was reviewing the financial statements that you had prepared for the current year with comparative results from last year. She asked you the following questions. 1. Why is Trucking Expense so high? 2. Why is Supplies Expense so low? 3. Why is Unearned Revenue so high? You then investigated the records, and as a result, determined the following: 1. The $20,000 cost of a truck was posted to Trucking Expense. 2. Office supplies costing $1,500 were used, and the entry to record the use debited Amortization Expense. 3. The company had received a large payment for an order to be delivered next year. Required: Prepare the necessary journal entries to correct any errors discovered as part of the investigation. Ans: 1. To correct the error in debiting a truck purchase to Trucking Expense. Truck 20,000 Trucking Expense 20,000 2. To correct the error in debiting use of supplies to Amortization Expense Office Supplies Expense 1,500 Amortization Expense 3. Original was correct; no further entries are required. Difficulty: Moderate LO: 4, 8

165. Hair by Harriette's unadjusted trial balance is as follows:

Use the following information to prepare an adjusted trial balance: (a Examination of an insurance policy showed $1,240 of expired insurance. ) (b An inventory showed $210 of unused shop supplies on hand. ) (c Estimated amortization expense on shop equipment, $350. ) (d Estimated amortization expense on the building, $2,220. ) (e A beautician is in arrears on space rental payments, and this $200 of ) accrued revenues was unrecorded at the time the trial balance was prepared. (f $800 of the Unearned Rent account balance was earned by year-end. ) (g The one employee, a receptionist, works a five-day workweek at $50 per ) day. The employee was paid last week but has worked four days this week for which she has not been paid. (h Three months' property taxes, totalling $450, have accrued. This has not ) been recorded. (i) One month's interest on the note payable, $1,200, has accrued but is unrecorded.

Ans:

Difficulty: Hard LO: 4, 6

166. Discuss the two alternate methods used to account for prepaid expenses. Ans: The first method places all prepaid expenses into asset accounts when cash is paid. Adjusting entries are used to recognize expired amounts which are placed into expense accounts. The second method places all prepaid expenses in the expense accounts when cash is paid. Adjusting entries are used to place unexpired amounts into the asset accounts. Difficulty: Moderate

LO: 4, 9

167. For the current year, the net income of Alpha and Omega was incorrectly calculated as $547,715 for the year ended December 31. You are called in as the accountant to determine the correct net income. After examination of the accounts, you find the following errors: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10 ) Office supplies (ending inventory) Amortization expense, building Amortization expense, equipment Salaries payable (end of year) Prepaid insurance (end of year) Rent expense Interest expense Property taxes expense Services fees earned Rental revenue Overstated $ 115 5,800 1,600 4,400 500 1,200 950 2,500 500 Understated $ 650

Calculate the correct net income for this year. Ans: Net income, unadjusted $547,715 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10 ) Office supplies Amortization expense, building Amortization expense, equipment Salaries payable Prepaid insurance Rent expense Interest expense Property taxes expense Services fees earned Rental revenue 115 + 5,800 560 + 1,600 + 4,400 500 1,200 + 950 + 2,500 500 $560,000 Difficulty: Moderate LO: 5

168. On December 31, 2011, the accountant for a proprietorship forgot to record $7,000 of

amortization on office equipment. In the 2011 financial statements, what is the effect of this error on assets, net income, and owner's equity? Ans: (1) Assets are overstated by $7,000 (accum amort understated). (2) Net income is overstated by $7,000 (expense understated). (3) Owner's equity is overstated by $7,000. Difficulty: Moderate LO: 5

169. Given the schedule below, indicate the impact of the following errors made during the adjusting entry process. Use a "+" followed by the amount for overstatements, a "-" followed by the amount for understatements, and a "0" for no effect. (1) Recorded accrued salaries expense of $1,200 with a debit to Prepaid Salaries. (2) The bookkeeper forgot to record $2,700 of amortization on office equipment. (3) Failed to accrue $300 of interest on a note receivable. Ex. Failed to recognize that $600 of unearned revenues, previously recorded as liabilities, had been earned by year-end. Error Revenues Expenses Assets Liabilities Owner's Equity Ex. -$600 0 0 +$600 -$600 (1) ______ ______ ______ _______ _______ (2) ______ ______ ______ _______ _______ (3) ______ ______ ______ _______ _______ Ans: Error (1) (2) (3) Revenue s 0 0 -$300 Expenses -$1,200 -$2,700 0 Assets +$1,200 +$2,700 -$ 300 Liabilities 0 0 0 Owner's Equity +$1,200 +$2,700 -$ 300

Difficulty: Hard LO: 5

170. The Surrey Service Company issued financial statements for last year, but failed to include the following adjusting entries: (A) Accrued service fees earned of $2,300. (B) Amortization expense of $5,000.

(C) Office supplies used, $2,100. (D) Accrued salaries of $3,400. (E) Revenues of $4,600, originally recorded as unearned, but earned by the end of the year. Determine the correct amounts for last year's financial statements by completing the following schedule:

Ans:

Difficulty: Hard LO: 5

171. Using the schedule below, indicate the impact of the following errors made during the adjusting entry process. Use a "+" for overstatements, a "-" for understatements, and a "0" for no effect.

Ans:

Difficulty: Hard LO: 5

172. Explain how accounting adjustments affect financial statements. Ans: Without adjustments accounts would have mixed balances which would have both income statement and balance sheet amounts. For example, a Prepaid Insurance account that was unadjusted would include an amount covering the expired cost (expense) plus an amount for the unexpired cost (asset). Adjusting entries thus enhance the accuracy of financial statements so that the amounts on the statements accurately reflect the values in the accounts. Difficulty: Hard LO: 5

173. Discuss the purpose of an adjusted trial balance. Ans: An adjusted trial balance is a list of accounts and balances prepared after adjusting entries are recorded and posted to the ledger. It is used to prepare the financial statements. Difficulty: Easy LO: 6

174. Identify and explain the reasons for the order in which financial statements are prepared. Ans: The income statement is prepared first. The amount of net income is then used in the statement of owner's equity in order to calculate the ending balance in the capital account. The ending balance in the capital account is then transferred to the balance sheet, which is prepared last. Difficulty: Easy LO: 7

Reference: Ref 4-1

175. Prepare an income statement based on the adjusted trial balance above. Ans:

Refer To: Ref 4-1 Difficulty: Hard LO: 7

176. Prepare a statement of owner's equity from the adjusted trial balance above. Mr. Clausen's capital account balance of $30,520 consists of a $20,520 balance on December 31, 2011, plus an additional $10,000 investment during 2011. Ans:

Refer To: Ref 4-1 Difficulty: Hard LO: 7

177. Prepare a balance sheet from the adjusted trial balance above. Ans:

Refer To: Ref 4-1 Difficulty: Hard LO: 7

Fill-In-The-Blank

178. Adjusting entries are required at the end of the accounting period because ____________________________________________.

Ans: Internal transactions and events remain unrecorded Difficulty: Moderate LO: 1

179. Companies experiencing seasonal variations in sales often choose a fiscal year corresponding to their ________________________. Ans: Natural business year Difficulty: Moderate LO: 2

180. ______________________ accounting means that revenues are recognized when cash is received and that expenses are recorded when cash is paid. ______________________ accounting means that the economic effects of revenues and expenses are recorded when earned or incurred. Ans: Cash basis; accrual basis Difficulty: Moderate LO: 3

181. Complete the following by filling in the blanks: (1) The Prepaid Insurance account had a $455 debit balance at the beginning of a year; $650 of insurance premiums were paid during the year and debited to Prepaid Insurance; and the yearend balance sheet showed $420 of Prepaid Insurance. Consequently, the income statement for the year must have shown $__________ of Insurance Expense. (2) The Office Supplies account began a year with a $235 debit balance; the income statement for the year showed $475 of Office Supplies Expense; and the year-end balance sheet showed Office Supplies at $225. Consequently, if all supplies were accounted for, $________ of office supplies must have been purchased during the year. Ans: (1) $685 (2) $465 Difficulty: Moderate LO: 4

182. Prepaid expenses, amortization, and unearned revenues each reflect transactions where cash is received or paid ______________ a related expense or revenue is recognized. Ans: Before Difficulty: Hard LO: 4

183. Before adjustment, a prepaid expense account would contain an asset amount that is ___________________ and an expense amount that is ___________________. Ans: Overstated; understated Difficulty: Hard LO: 4

184. The ________________________________ method allocates equal amounts of an asset's cost to amortization during its useful life. Ans: Straight-line amortization Difficulty: Easy LO: 4

185. __________________________ refer to costs incurred in a period that are both unpaid and unrecorded. ______________________ refer to revenues earned in a period that are both unrecorded and not yet received in cash or other assets. Ans: Accrued expenses; accrued revenues Difficulty: Moderate LO: 4

186. Accrued revenues at the end of one accounting period often result in cash _______________________ in the next period. Ans: Receipts

Difficulty: Moderate LO: 4

187. ______________________ are liabilities requiring delivery of products and services. Ans: Unearned revenues Difficulty: Moderate LO: 4

188. The amount that an asset can be sold for is called its _________________. Ans: Market value Difficulty: Easy LO: 4

189. The cost of an asset less its accumulated amortization is called the _____________. Ans: Book value Difficulty: Easy LO: 4

190. _______________________ is a listing of all of the accounts in the ledger with balances before adjustments are made. Ans: Unadjusted trial balance Difficulty: Easy LO: 6

191. The _____________________ of the balance sheet lists the asset accounts on the left side and liabilities and owner's equity on the right side. The ______________________ of the

balance sheet lists items vertically with assets followed by liabilities then owner's equity. Ans: Account form; report form Difficulty: Moderate LO: 7