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Chapter 3—The Matching Concept and the Adjusting Process

TRUE/FALSE

1. The accrual basis of accounting requires revenue be recorded when cash is received from
customers.

ANS: F DIF: 1 OBJ: 01

2. The revenue recognition concept allows businesses to recognize revenue either when cash is
received or the sale occurs.

ANS: F DIF: 1 OBJ: 01

3. The accrual basis of accounting requires expenses be recorded in the same period that the related
revenue is recorded.

ANS: T DIF: 1 OBJ: 01

4. The matching concept requires that the income statement for a time period be matched with the
cash flow statement of the same time period.

ANS: F DIF: 1 OBJ: 01

5. The matching concept does not support the accrual method of accounting.

ANS: F DIF: 5 OBJ: 01

6. Adjusting entries are made at the end of an accounting period to adjust accounts on the income
statement and balance sheet.

ANS: T DIF: 1 OBJ: 02

7. Adjusting entries affect only income statement accounts.

ANS: F DIF: 1 OBJ: 02

8. Prepaid expenses are deferred expenses.

ANS: T DIF: 1 OBJ: 02

9. An example of deferred revenue is Unearned Rent.

ANS: T DIF: 2 OBJ: 02

10. Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue
has been earned.

ANS: T DIF: 2 OBJ: 02

11. Prepaid expenses need to be adjusted at the end of the accounting period.
ANS: T DIF: 1 OBJ: 02

12. An adjusting entry would adjust revenue so it is reported when earned and not when cash is
received.

ANS: T DIF: 5 OBJ: 02

13. An adjusting entry would adjust an expense account so the expense is reported when incurred.

ANS: T DIF: 5 OBJ: 02

14. An adjusting entry to a prepaid expense is not required to recognize expired expenses.

ANS: F DIF: 5 OBJ: 02

15. An adjusting entry to accrue an incurred expense will affect total liabilities.

ANS: T DIF: 5 OBJ: 02

16. The difference between deferred revenue and accrued revenue is that accrued revenue has been
recorded and needs adjusting and deferred revenue has never been recorded.

ANS: F DIF: 1 OBJ: 02

17. A prepaid expense is not an example of an accrued expense.

ANS: T DIF: 1 OBJ: 02

18. Deferrals are recorded transactions that delay the recognition of an expense or revenue.

ANS: T DIF: 1 OBJ: 02

19. Adjustments for accruals are needed to record a revenue that has been earned or an expense that
has been incurred but not recorded.

ANS: T DIF: 1 OBJ: 02

20. Accruals are used to record prepaid insurance on the balance sheet.

ANS: F DIF: 1 OBJ: 02

21. Deferrals are transactions that only affect the income statement.

ANS: F DIF: 1 OBJ: 02

22. If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a
liability account.

ANS: F DIF: 1 OBJ: 02

23. The systematic allocation of a fixed asset's cost to expense is called amortization.

ANS: F DIF: 1 OBJ: 03


24. The difference between the balance of a fixed asset account and the balance of its related
accumulated depreciation account is termed the book value of the asset.

ANS: T DIF: 1 OBJ: 03

25. Accumulated depreciation accounts are contra liability accounts.

ANS: F DIF: 1 OBJ: 03

26. Accumulated depreciation is reported on the balance sheet.

ANS: T DIF: 1 OBJ: 03

27. A contra asset account for buildings will normally appear on the balance sheet.

ANS: T DIF: 1 OBJ: 03

28. A building was purchased for $100,000. Assuming annual depreciation of $2,000, the book value
of the building one year later is $98,000.

ANS: T DIF: 5 OBJ: 03

29. The difference between the balance of a fixed asset account and the balance of its related
accumulated depreciation account is termed the book value of the asset.

ANS: T DIF: 1 OBJ: 03

30. A contra asset account for land will normally appear in the balance sheet.

ANS: F DIF: 1 OBJ: 03

31. Depreciation expense accounts are expense accounts.

ANS: T DIF: 1 OBJ: 03

32. Depreciation expense is reported on the balance sheet as an addition to the related asset.

ANS: F DIF: 1 OBJ: 03

33. If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both
liabilities and owner's equity will be overstated for the period.

ANS: F DIF: 5 OBJ: 04

34. If the adjustment for accrued taxes at the end of the period is inadvertently omitted, net income
for the period will be overstated.

ANS: T DIF: 5 OBJ: 04

35. If the adjustment to recognize expired insurance at the end of the period is inadvertently omitted,
the assets at the end of the period will be understated.
ANS: F DIF: 5 OBJ: 04

36. If the adjustment of the supplies account at the end of the period to recognize the cost of supplies
used is inadvertently omitted, liabilities on the balance sheet at the end of the period will be
overstated.

ANS: F DIF: 5 OBJ: 04

37. If the adjustment of the prepaid rent account at the end of the period to recognize the cost of rent
expired is inadvertently omitted, the net income for the period will be overstated.

ANS: T DIF: 5 OBJ: 04

38. If the adjustment for depreciation for the year is inadvertently omitted, the assets on the balance
sheet at the end of the period will be understated.

ANS: F DIF: 5 OBJ: 04

39. If the adjustment of the supplies account at the end of the period to recognize the cost of supplies
used is inadvertently omitted, supplies on the balance sheet at the end of the period will be
understated.

ANS: F DIF: 5 OBJ: 04

40. The balance in the prepaid insurance account before adjustment at the end of the year is $4,000.
The amount in the journal entry required to record insurance expense will be $2,500 if the
amount of unexpired insurance applicable to future periods is $1,500.

ANS: T DIF: 5 OBJ: 04

41. If the adjustment to record the amount of prepaid insurance expired during the period is
inadvertently omitted, the assets at the end of the period will be overstated.

ANS: T DIF: 5 OBJ: 04

42. Vertical analysis is comparing each item in a statement with another item in the same statement.

ANS: T DIF: 1 OBJ: 05

43. The vertical analysis of a balance sheet is performed by dividing every item on the balance sheet
by the amount of total assets. This will give a percentage for each asset on the balance sheet.

ANS: T DIF: 1 OBJ: 05

44. The vertical analysis of an income statement is performed by dividing every item on the income
statement by the amount of expenses.

ANS: F DIF: 1 OBJ: 05

MULTIPLE CHOICE

1. The revenue recognition concept:


a. is in not in conflict with the cash method of accounting
b. determines when revenue is credited to a revenue account
c. states that revenue is not recorded until the cash is received
d. controls all revenue reporting for the cash basis of accounting
ANS: B DIF: 3 OBJ: 01

2. The matching concept:


a. addresses the relationship between the journal and the balance sheet
b. determines whether the normal balance of an account is a debit or credit
c. requires that the dollar amount of debits equal the dollar amount of credits on a trial
balance
d. determines that expenses related to revenue be reported at the same time the revenue is
reported
ANS: D DIF: 3 OBJ: 01

3. Using accrual accounting, revenue is recorded and reported only:


a. when cash is received without regard to when the services are rendered
b. when the services are rendered without regard to when cash is received
c. when cash is received at the time services are rendered
d. if cash is received after the services are rendered
ANS: B DIF: 1 OBJ: 01

4. Using accrual accounting, expenses are recorded and reported only:


a. when they are incurred, whether or not cash is paid
b. when they are incurred and paid at the same time
c. if they are paid before they are incurred
d. if they are paid after they are incurred
ANS: A DIF: 1 OBJ: 01

5. If the effect of the debit portion of an adjusting entry is to increase the balance of an expense
account, which of the following describes the effect of the credit portion of the entry?
a. decreases the balance of an owner's equity account
b. increases the balance of an liability account
c. increases the balance of an asset account
d. decreases the balance of an expense account
ANS: B DIF: 5 OBJ: 02

6. If the effect of the credit portion of an adjusting entry is to increase the balance of a liability
account, which of the following describes the effect of the debit portion of the entry?
a. increases the balance of a contra asset account
b. increases the balance of an asset account
c. decreases the balance of an owner's equity account
d. increases the balance of an expense account
ANS: D DIF: 5 OBJ: 02

7. The primary difference between deferred and accrued expenses is that deferred expenses have:
a. been incurred and accrued expenses have not
b. not been incurred and accrued expenses have been incurred
c. been recorded and accrued expenses have not been incurred
d. not been recorded and accrued expenses have been incurred
ANS: B DIF: 1 OBJ: 02

8. Accrued expenses have:


a. not yet been incurred, paid, or recorded
b. been incurred, not paid, but have been recorded
c. been incurred, not paid, and not recorded
d. been paid but have not yet been incurred
ANS: C DIF: 1 OBJ: 02

9. Accrued revenue has:


a. been earned and cash received
b. been earned and not recorded as revenue
c. not been earned but recorded as revenue
d. not been recorded as revenue but cash has been received
ANS: B DIF: 1 OBJ: 02

10. Deferred expenses have:


a. not yet been recorded as expenses or paid
b. been recorded as expenses and paid
c. been incurred and paid
d. not yet been recorded as expenses
ANS: D DIF: 1 OBJ: 02

11. Deferred revenue is revenue that is:


a. earned and the cash has been received
b. earned but the cash has not been received
c. not earned and the cash has not been received
d. not earned but the cash has been received
ANS: D DIF: 1 OBJ: 02

12. Adjusting entries are:


a. the same as correcting entries
b. needed to bring accounts up to date and match revenue and expense
c. optional under generally accepted accounting principles
d. rarely needed in large companies
ANS: B DIF: 1 OBJ: 02

13. Adjusting entries affect at least one:


a. income statement account and one balance sheet account
b. revenue and the drawing account
c. asset and one owner's equity account
d. revenue and one capital account
ANS: A DIF: 1 OBJ: 02

14. At the end of the fiscal year, the usual adjusting entry to prepaid insurance to record expired
insurance was omitted. Which of the following statements is true?
a. Total assets at the end of the year will be understated.
b. Owner's equity at the end of the year will be understated.
c. Net income for the year will be overstated.
d. Insurance Expense will be overstated.
ANS: C DIF: 5 OBJ: 03

15. The balance in the prepaid rent account before adjustment at the end of the year is $15,000,
which represents three months' rent paid on December 1. The adjusting entry required on
December 31 is:
a. debit Rent Expense, $5,000; credit Prepaid Rent, $5,000
b. debit Prepaid Rent, $10,000; credit Rent Expense, $5,000
c. debit Rent Expense, $10,000; credit Prepaid Rent, $5,000
d. debit Prepaid Rent, $5,000; credit Rent Expense, $5,000
ANS: A DIF: 5 OBJ: 03

16. The balance in the prepaid rent account before adjustment at the end of the year is $20,000,
which represents four months' rent paid on December 1. The adjusting entry required on
December 31 is:
a. debit Rent Expense, $15,000; credit Prepaid Rent, $15,000
b. debit Prepaid Rent, $15,000; credit Rent Expense, $15,000
c. debit Rent Expense, $5,000; credit Prepaid Rent, $5,000
d. debit Prepaid Rent, $5,000; credit Rent Expense, $5,000
ANS: C DIF: 5 OBJ: 03

17. At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted.
Which of the following statements is true?
a. Total assets will be understated at the end of the current year.
b. The balance sheet and income statement will be misstated but the statement of owner's
equity will be correct for the current year.
c. Net income will be overstated for the current year.
d. Total liabilities and total assets will be understated.
ANS: C DIF: 5 OBJ: 03

18. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was
omitted. Which of the following statements is true?
a. Salary Expense for the year was understated.
b. The total of the liabilities at the end of the year was overstated.
c. Net income for the year was understated.
d. Owner's equity at the end of the year was understated.
ANS: A DIF: 5 OBJ: 03

19. At the end of the preceding year, the usual adjusting entry for accrued salaries owed to employees
was omitted. The error was not corrected, but the preceding year salaries were included in the
first salary payment and journal entry in the current year. Which of the following statements is
true?
a. Salary Expense was overstated and net income was understated for the current year.
b. Salaries Payable is overstated at the end of the current year.
c. Salary Expense was overstated and net income was understated for the preceding year.
d. Capital is overstated at the end of the current year.
ANS: A DIF: 5 OBJ: 03

20. The balance in the prepaid rent account before adjustment at the end of the year is $20,000,
which represents five months' rent paid on November 1. The adjusting entry required on
December 31 is:
a. debit Rent Expense, $8,000; credit Prepaid Rent, $8,000
b. debit Rent Expense, $12,000; credit Prepaid Rent, $12,000
c. debit Prepaid Rent, $20,000; credit Rent Expense, $20,000
d. debit Prepaid Rent, $8,000; credit Rent Expense, $8,000
ANS: A DIF: 5 OBJ: 03

21. The balance in the prepaid rent account before adjustment at the end of the year is $12,000,
which represents three months' rent paid on November 1. The adjusting entry required on
December 31 is:
a. debit Rent Expense, $8,000; credit Prepaid Rent, $8,000
b. debit Rent Expense, $4,000; credit Prepaid Rent, $4,000
c. debit Prepaid Rent, $8,000; credit Rent Expense, $8,000
d. debit Prepaid Rent, $4,000; credit Rent Expense, $4,000
ANS: A DIF: 5 OBJ: 03

22. The balance in the office supplies account on June 1 was $5,200, supplies purchased during June
were $2,500, and the supplies on hand at June 30 were $2,000. The amount to be used for the
appropriate adjusting entry is:
a. $4,500
b. $2,500
c. $9,700
d. $5,700
ANS: D DIF: 3 OBJ: 03

23. The balance in the office supplies account on March 1 was $2,200, supplies purchased during
March were $1,800, and the supplies on hand at March 31 were $1,500. The amount to be used
for the appropriate adjusting entry is:
a. $2,500
b. $3,300
c. $5,500
d. $2,200
ANS: A DIF: 3 OBJ: 03

24. The entry to adjust for the cost of supplies used during the accounting period is:
a. Supplies, debit; Income Summary, credit
b. Income Summary, debit; Supplies, credit
c. Accounts Payable, debit; Supplies Expenses, credit
d. Supplies Expense, debit; Supplies, credit
ANS: D DIF: 1 OBJ: 03

25. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid
insurance account balance before adjustment, $15,500, and unexpired amounts per analysis of
policies, $4,500?
a. debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500
b. debit Insurance Expense, $15,500; credit Prepaid Insurance, $15,500
c. debit Prepaid Insurance, $11,500; credit Insurance Expense, $11,500
d. debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,000
ANS: D DIF: 5 OBJ: 03

26. The entry to adjust for the cost of supplies used during the accounting period is:
a. Supplies Expense, debit; Supplies, credit
b. Income Summary, debit; Supplies, credit
c. Accounts Payable, debit; Supplies, credit
d. Supplies, debit; credit Income Summary
ANS: A DIF: 1 OBJ: 03

27. What is the proper adjusting entry at May 31, the end of the fiscal year, based on a prepaid
insurance account balance before adjustment, $9,500, and unexpired amounts per analysis of
policies, $4,500?
a. debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500
b. debit Prepaid Insurance, $5,000; credit Prepaid Insurance, $5,000
c. debit Insurance Expense, $13,500; credit Prepaid Insurance, $13,500
d. debit Insurance Expense, $5,000; credit Prepaid Insurance, $5,000
ANS: D DIF: 5 OBJ: 03

28. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a supplies
account balance before adjustment, $4,200, and supplies inventory on June 30, $1,200?
a. debit Supplies, $1,200; credit Supplies Expense, $1,200
b. debit Supplies Expense, $1,200; credit Supplies, $1,200
c. debit Supplies Expense, $3,000; credit Supplies, $3,000
d. debit Supplies, $4,200; credit Supplies Expense, $4,200
ANS: C DIF: 5 OBJ: 03

29. A business pays weekly salaries of $20,000 on Friday for a five-day week ending on that day.
The adjusting entry necessary at the end of the fiscal period ending on Thursday is:
a. debit Salaries Payable, $16,000; credit Cash, $16,000
b. debit Salary Expense, $16,000; credit Drawing, $16,000
c. debit Salary Expense, $16,000; credit Salaries Payable, $16,000
d. debit Drawing, $16,000; credit Cash, $16,000
ANS: C DIF: 5 OBJ: 03

30. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a supplies
account balance before adjustment, $9,000, and supplies inventory on June 30, $2,000?
a. debit Supplies, $7,000; credit Supplies Expense, $7,000
b. debit Supplies Expense, $7,000; credit Supplies, $7,000
c. debit Supplies Expense, $2,000; credit Supplies, $2,000
d. debit Supplies, $2,000; credit Supplies Expense, $2,000
ANS: B DIF: 5 OBJ: 03

31. A business pays weekly salaries of $30,000 on Friday for a five-day week ending on that day.
The adjusting entry necessary at the end of the fiscal period ending on Wednesday is:
a. debit Salaries Payable, $18,000; credit Cash, $18,000
b. debit Salary Expense, $18,000; credit Drawing, $18,000
c. debit Salary Expense, $18,000; credit Salaries Payable, $18,000
d. debit Drawing, $18,000; credit Cash, $18,000
ANS: C DIF: 5 OBJ: 03
32. The balance in the prepaid insurance account before adjustment at the end of the year is $10,000.
If the additional data for the adjusting entry is (1) "the amount of insurance expired during the
year is $8,500," as compared to additional data stating (2) "the amount of unexpired insurance
applicable to a future period is $1,500," for the adjusting entry:
a. the debit and credit amount for (1) would be the same as (2) but the accounts would be
different
b. the accounts for (1) would be the same as the accounts for (2) but the amounts would be
different
c. the accounts and amounts would be the same for both (1) and (2)
d. there is not enough information given to determine the correct accounts and amounts
ANS: C DIF: 5 OBJ: 03

33. Tangible assets used in the business that are of a relatively fixed or permanent nature are called:
a. fixed assets
b. revenues
c. expenses
d. capital
ANS: A DIF: 1 OBJ: 03

34. At the end of the fiscal year, June Company omitted the usual adjusting entry for depreciation on
equipment. Which of the following statements is true?
a. Net income will be understated for the current year.
b. Total assets will be understated at the end of the current year.
c. The balance sheet, income statement, and statement of owner's equity will be misstated for
the current year.
d. Expenses will be overstated at the end of the current year.
ANS: C DIF: 5 OBJ: 03

35. The difference between the balance of a fixed asset account and the related accumulated
depreciation account is termed:
a. historical cost
b. contra asset
c. book value
d. market value
ANS: C DIF: 1 OBJ: 03

36. The adjusting entry to record the depreciation of equipment for the fiscal period is:
a. debit Depreciation Expense; credit Equipment
b. debit Depreciation Expense; credit Accumulated Depreciation
c. debit Accumulated Depreciation; credit Depreciation Expense
d. debit Equipment; credit Depreciation Expense
ANS: B DIF: 1 OBJ: 03

37. As time passes, fixed assets other than land lose their capacity to provide useful services. To
account for this decrease in usefulness, the cost of fixed assets is systematically allocated to
expense through a process called:
a. rent
b. depreciation
c. amortization
d. depletion
ANS: B DIF: 1 OBJ: 03

38. The net income reported on the income statement is $90,000. However, adjusting entries have
not been made at the end of the period for supplies expense of $2,500 and accrued salaries of
$3,400. Net income, as corrected, is:
a. $84,100
b. $96,600
c. $90,000
d. $97,500
ANS: A DIF: 3 OBJ: 03

39. The net income reported on the income statement is $90,000. However, adjusting entries have
not been made at the end of the period for supplies expense of $2,700 and accrued salaries of
$1,300. Net income, as corrected, is:
a. $87,300
b. $90,000
c. $88,700
d. $86,000
ANS: D DIF: 3 OBJ: 03

40. The entry to adjust the accounts for wages accrued at the end of the accounting period is:
a. Wages Payable, debit; Wages Income, credit
b. Wages Income, debit; Wages Payable, credit
c. Wages Payable, debit; Wages Expense, credit
d. Wages Expense, debit; Wages Payable, credit
ANS: D DIF: 1 OBJ: 03

41. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was
omitted. Which of the following statements is true?
a. Salary Expense for the year is understated.
b. Liabilities at the end of the year are overstated.
c. Assets at the end of the year are understated.
d. Owner's equity at the end of the year is understated.
ANS: A DIF: 5 OBJ: 03

42. The supplies account has a balance of $1,000 at the beginning of the year and was debited during
the year for $2,800, representing the total of supplies purchased during the year. If $750 of
supplies are on hand at the end of the year, the supplies expense to be reported on the income
statement for the year is:
a. $750
b. $3,550
c. $3,800
d. $3,050
ANS: D DIF: 3 OBJ: 03

43. The supplies account has a balance of $1,150 at the beginning of the year and was debited during
the year for $1,800, representing the total of supplies purchased during the year. If $500 of
supplies are on hand at the end of the year, the supplies expense to be reported on the income
statement for the year is:
a. $2,950
b. $500
c. $2,450
d. $3,450
ANS: C DIF: 3 OBJ: 03

44. If the prepaid rent account before adjustment at the end of the month has a debit balance of
$1,600, representing a payment made on the first day of the month, and if the monthly rent was
$800, the amount of prepaid rent that would appear on the balance sheet at the end of the month,
after adjustment, is:
a. $800
b. $400
c. $2,400
d. $1,600
ANS: A DIF: 3 OBJ: 03

45. If the prepaid rent account before adjustment at the end of the month has a debit balance of
$1,500, representing a payment made on the first day of the month, and if the monthly rent was
$1,000, the amount of prepaid rent that would appear on the balance sheet at the end of the
month, after adjustment, is:
a. $500
b. $1,000
c. $1,500
d. $2,500
ANS: A DIF: 3 OBJ: 03

46. The net income reported on the income statement is $70,000. However, adjusting entries have
not been made at the end of the period for supplies expense of $500 and accrued salaries of
$1,300. Net income, as corrected, is:
a. $71,800
b. $70,500
c. $68,200
d. $70,000
ANS: C DIF: 3 OBJ: 03

47. The net income reported on the income statement is $80,000. However, adjusting entries have
not been made at the end of the period for depreciation expense of $2,500 and accrued salaries of
$1,500. Net income, as corrected, is:
a. $76,000
b. $80,000
c. $82,500
d. $84,000
ANS: A DIF: 3 OBJ: 03

48. The adjusting entry to record the depreciation of equipment for the fiscal period is:
a. debit Depreciation Expense; credit Equipment
b. debit Depreciation Expense; credit Accumulated Depreciation
c. debit Accumulated Depreciation; credit Depreciation Expense
d. debit Equipment; credit Depreciation
ANS: B DIF: 1 OBJ: 03
49. Depreciation Expense and Accumulated Depreciation are classified, respectively, as:
a. expense, contra asset
b. asset, contra liability
c. revenue, asset
d. contra asset, expense
ANS: A DIF: 1 OBJ: 03

50. The type of account and normal balance of Accumulated Depreciation is:
a. asset, credit
b. asset, debit
c. contra asset, credit
d. contra asset, debit
ANS: C DIF: 1 OBJ: 03

51. The type of account and normal balance of Prepaid Rent is:
a. contra asset, debit
b. expense, debit
c. asset, credit
d. asset, debit
ANS: D DIF: 1 OBJ: 03

52. Data for an adjusting entry described as "accrued wages, $2,020" means to debit:
a. Wages Expense and credit Wages Payable
b. Wages Payable and credit Wages Expense
c. Accounts Receivable and credit Wages Expense
d. Drawing and credit Wages Payable
ANS: A DIF: 5 OBJ: 03

53. Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the adjusting
entry is for the amount of supplies:
a. that are in the ending balance
b. purchased
c. used
d. either used or remaining
ANS: C DIF: 5 OBJ: 03

54. If there is a balance in the prepaid rent account after adjusting entries are made, it represents a(n):
a. deferral
b. accrual
c. revenue
d. liability
ANS: A DIF: 1 OBJ: 03

55. If there is a balance in the unearned subscriptions account after adjusting entries are made, it
represents a(n):
a. deferral
b. accrual
c. drawing
d. revenue
ANS: A DIF: 1 OBJ: 03

56. One of the accounting concepts upon which deferrals and accruals are based is:
a. matching
b. cost
c. price-level adjustment
d. conservatism
ANS: A DIF: 1 OBJ: 03

57. The general term employed to indicate an expense that has not been paid and has not yet been
recognized in the accounts by a routine entry is:
a. capital
b. deferral
c. accrual
d. inventory
ANS: C DIF: 1 OBJ: 03

58. The cost of office supplies to be used in future periods is ordinarily shown on the balance sheet as
a(n):
a. capital
b. asset
c. contra asset
d. liability
ANS: B DIF: 1 OBJ: 03

59. Which of the following is an example of a prepaid expense?


a. Supplies
b. Accounts Receivable
c. Unearned Subscriptions
d. Unearned Fees
ANS: A DIF: 1 OBJ: 03

60. The unexpired insurance at the end of the fiscal period represents:
a. an accrued asset
b. an accrued liability
c. an accrued expense
d. a deferred expense
ANS: D DIF: 1 OBJ: 03

61. The supplies account has a balance of $975 at the beginning of the year and was debited during
the year for $2,700, representing the total of supplies purchased during the year. If $700 of
supplies are on hand at the end of the year, the supplies expense to be reported on the income
statement for the year would be:
a. $975
b. $950
c. $2,975
d. $3,675
ANS: C DIF: 3 OBJ: 03
62. The supplies account has a balance of $500 at the beginning of the year and was debited during
the year for $2,900, representing the total of supplies purchased during the year. If $750 of
supplies are on hand at the end of the year, the supplies expense to be reported on the income
statement for the year would be:
a. $1,650
b. $2,150
c. $2,400
d. $2,650
ANS: D DIF: 3 OBJ: 03

63. Accrued revenues would appear on the balance sheet as:


a. assets
b. liabilities
c. capital
d. prepaid expenses
ANS: A DIF: 1 OBJ: 03

64. Prepaid advertising, representing payment for the next quarter, would be reported on the balance
sheet as a(n):
a. asset
b. liability
c. contra asset
d. expense
ANS: A DIF: 1 OBJ: 03

65. Unearned rent, representing rent for the next six months' occupancy, would be reported on the
landlord's balance sheet as a(n):
a. asset
b. liability
c. capital account
d. revenue
ANS: B DIF: 1 OBJ: 03

66. Accrued expenses are ordinarily reported on the balance sheet as:
a. assets
b. liabilities
c. fixed assets
d. prepaid expenses
ANS: B DIF: 1 OBJ: 03

67. Fees receivable would appear on the balance sheet as a(n):


a. asset
b. liability
c. fixed asset
d. unearned revenue
ANS: A DIF: 1 OBJ: 03

68. The general term employed to indicate a delay of the recognition of an expense already paid or of
a revenue already received is:
a. depreciation
b. deferral
c. accrual
d. inventory
ANS: B DIF: 1 OBJ: 03

69. The adjusting entry for rent earned that is currently recorded in the unearned rent account is:
a. Unearned Rent, debit; Rent Revenue, credit
b. Rent Revenue, debit; Unearned Rent, credit
c. Unearned Rent, debit; Income Summary, credit
d. Rent Expense, debit; Unearned Rent, credit
ANS: A DIF: 5 OBJ: 03

70. The unearned rent account has a balance of $40,000. If $3,000 of the $40,000 is unearned at the
end of the accounting period, the amount of the adjusting entry is:
a. $3,000
b. $40,000
c. $37,000
d. $43,000
ANS: C DIF: 3 OBJ: 03

71. The unearned rent account has a balance of $20,000. If $5,000 of the $20,000 is unearned at the
end of the accounting period, the amount of the adjusting entry is:
a. $5,000
b. $10,000
c. $15,000
d. $20,000
ANS: C DIF: 3 OBJ: 03

72. Vertical analysis can result from:


a. comparing each item on balance sheets from two different periods with each other
b. comparing each item on balance sheets from two different companies for two different
periods with each other
c. comparing each item on an income statement with the amount of assets on the balance
sheet
d. comparing each item on a balance sheet with the amount of total assets on the balance
sheet
ANS: D DIF: 3 OBJ: 05

73. Vertical analysis can be:


a. used to compare a single company with the industry averages
b. prepared for more than one period to identify trends within a single company
c. prepared for both the income statement and the balance sheet
d. all of the other choices are true
ANS: D DIF: 2 OBJ: 05

PROBLEM
1. On May 1 a business paid $4,800 for liability insurance for the fiscal year then beginning. Also
on May 1 the same business entered into a rental contract for equipment for $12,000 annually,
payable annually, beginning May 1. Determine the following amounts: (a) prepaid insurance as
of May 31, (b) prepaid rent as of May 31 (c) total insurance and rent expense for May.

ANS:

(a) $4,400
(b) $11,000
(c) $1,400

DIF: 1 OBJ: 03

2. For each of the following, journalize the necessary adjusting entry.

(a) A business pays weekly salaries of $25,000 on Friday for a five-day week ending
on that day. Journalize the necessary adjusting entry at the end of the fiscal period,
assuming that the fiscal period ends (1) on Wednesday, (2) on Thursday.
(b) The balance in the prepaid insurance account before adjustment at the end of the
year is $16,000. Journalize the adjusting entry required under each of the following
alternatives: (1) the amount of insurance expired during the year is $6,500, (2) the
amount of unexpired insurance applicable to a future period is $2,500.
(c) On July 1 of the current year, a business pays $30,000 to the city for license taxes
for the coming fiscal year. The same business is also required to pay an annual
property tax at the end of the year. The estimated amount of the current year's
property tax allocable to July is $3,600. (1) Journalize the two adjusting entries
required to bring the accounts affected by the taxes up to date as of July 31. (2)
What is the amount of tax expense for July?
(d) The estimated depreciation on equipment for the year is $99,000.

ANS:

(a) (1) Salary Expense 15,000


Salaries Payable 15,000

(2) Salary Expense 20,000


Salaries Payable 20,000

(b) (1) Insurance Expense 6,500


Prepaid Insurance 6,500

(2) Insurance Expense 13,500


Prepaid Insurance 13,500

(c) (1) Taxes Expense 2,500


Prepaid License Taxes 2,500

Taxes Expense 3,600


Property Taxes Payable 3,600

(2) $6,100 ($2,500 + $3,600)

(d) Depreciation Expense - Equipment 99,000


Accumulated Depreciation - Equipment 99,000
DIF: 3 OBJ: 03

3. At the end of the fiscal year, the following adjusting entries were omitted:

(a) No adjusting entry was made to transfer the $2,000 of prepaid insurance from the
asset account to the expense account.
(b) No adjusting entry was made to record accrued fees of $1,000 for services provided
to customers.

Assuming that financial statements are prepared before the errors are discovered, indicate the
effect of each error, considered individually, by inserting the dollar amount in the appropriate
spaces. Insert "0" if the error does not affect the item.

Error (a) Error (b)


Over- Under- Over- Under-
stated stated stated stated

(1) Assets at December


31 would be $ $ $ $

(2) Liabilities at
Dec. 31 would be $ $ $ $

(3) Net income for the


year would be $ $ $ $

(4) Owner's equity at


Dec. 31 would be $ $ $ $

ANS:

Error (a) Error (b)


Over- Under- Over- Under-
stated stated stated stated

(1) Assets at December


31 would be $2,000 $ -0- $ -0- $1,000

(2) Liabilities at
Dec. 31 would be $ -0- $ -0- $ -0- $ -0-

(3) Net income for the


year would be $2,000 $ -0- $ -0- $1,000

(4) Owner's equity at


Dec. 31 would be $2,000 $ -0- $ -0- $1,000

DIF: 3 OBJ: 03

4. There was a $500 balance in the supplies account at the beginning of the period. During the
period, the supplies account was increased by $1,000 for supplies purchased. At the end of the
period before adjustment, $400 of supplies were on hand. Journalize the necessary adjusting
entry.

ANS:
Supplies Expense 1,100
Supplies 1,100

DIF: 1 OBJ: 03

5. At January 31, the end of the first month of the year, the usual adjusting entry transferring expired
insurance to an expense account is omitted. Which items will be incorrectly stated, because of
the error, on (a) the income statement for January and (b) the balance sheet as of January 31?
Also indicate whether the items in error will be overstated or understated.

ANS:

(a) Insurance expense (or expenses) will be understated. Net income will be
overstated.
(b) Prepaid insurance (or assets) will be overstated. Owner's equity will be overstated.

DIF: 1 OBJ: 03

6. On December 1, 2002, $6,000 was received for services to be performed from December 1, 2002
until May 31, 2003. Make the December 31, 2002 adjusting journal entry to correctly reflect the
revenue earned during 2002 if $2,000 of services were rendered during the month of December
2002.

ANS:

Unearned Fees 2,000


Fees Earned 2,000

DIF: 1 OBJ: 03

7. At the end of June, the first month of the year, the usual adjusting entry transferring rent earned to
a revenue account from the unearned rent account was omitted. Indicate which items will be
incorrectly stated, because of the error, on (a) the income statement for June and (b) the balance
sheet as of June 30. Also indicate whether the items in error will be overstated or understated.

ANS:

(a) Rent revenue (or revenues) will be understated. Net income will be understated.
(b) Owner's equity at the end of the period will be understated. Unearned rent (or
liabilities) will be overstated.

DIF: 3 OBJ: 03

8. Journalize the adjusting entry to record depreciation on equipment for the year of $1,050.

ANS:

Depreciation Expense 1,050


Accumulated Depreciation-Equipment 1,050

DIF: 1 OBJ: 03
9. On June 30, a business estimates depreciation on equipment used during the first year of
operations to be $3,000. (a) Journalize the adjusting entry required as of June 30. (b) If the
adjusting entry in (a) were omitted, which items would be erroneously stated on (1) the income
statement for the year and (2) the balance sheet as of June 30?

ANS:

(a) Depreciation Expense 3,000


Accumulated Depreciation 3,000
(b) (1) Depreciation expense would be understated. Net income would
be overstated.
(2) Accumulated depreciation would be understated, and total
assets would be overstated. Owner's equity would be overstated.

DIF: 3 OBJ: 03

10. Salaries of $5,000 are paid for a five-day week on Friday. The month ended on Tuesday. Prepare
the adjusting journal entry.

ANS:

Salaries Expense 2,000


Salaries Payable 2,000

DIF: 1 OBJ: 03

11. Accrued salaries of $1,500 owed to employees for December 29, 30, and 31 are not taken into
consideration in preparing the financial statements for the year ended December 31. Indicate
which items will be erroneously stated, because of the error, on (a) the income statement for the
year and (b) the balance sheet as of December 31. Also indicate whether the items in error will be
overstated or understated.

ANS:

(a) Salary expense (or expenses) will be understated. Net income will be overstated.
(b) Salaries payable (or liabilities) will be understated. Owner's equity will be
overstated.

DIF: 3 OBJ: 03

12. Journalize the six entries that adjust the accounts at December 31. One of the accounts was
affected by two different adjusting entries.

Unadjusted Adjusted
Trial Balance Trial Balance
Cash 3,000 3,000
Accounts Receivable 30,000 30,500
Supplies 1,700 100
Prepaid Insurance 2,000 400
Equipment 9,000 9,000
Accumulated Depreciation 1,500
Wages Payable 4,000
Unearned Fees 6,000 1,500
Ann Cole, Capital 20,000 20,000
Fees Earned 62,000 67,000
Wages Expense 42,300 46,300
Supplies Expense 1,600
Insurance Expense 1,600
Depreciation Expense 1,500
Total 88,000 88,000 94,000 94,000
====== ====== ====== ======

ANS:

Accounts Receivable 500


Fees Earned 500

Supplies Expense 1,600


Supplies 1,600

Insurance Expense 1,600


Prepaid Insurance 1,600

Depreciation Expense 1,500


Accumulated Depreciation 1,500

Unearned Fees 4,500


Fees Earned 4,500

Wages Expense 4,000


Wages Payable 4,000

DIF: 3 OBJ: 04

13. Prepare a vertical analysis of the information given. Round to one decimal place.

Betty Bee, Attorney At Law


Income Statement
For the Year Ended Dec. 31, 2002

Fees earned $100,000


Operating expenses:
Wages expense $ 30,000
Rent expense 20,000
Total operating expenses $ 50,000
Net income $ 50,000
========

ANS:

Al Jones, Consultant
Income Statement
For the Year Ended Dec. 31, 2002

Amount Percent
Fees earned $100,000 100%
Operating expenses:
Wages expense $ 30,000 30%
Rent expense 20,000 20%
Total operating expenses $ 50,000 50%
Net income $ 50,000 50%
========

100,000 ÷ 100,000 = 100%


30,000 ÷ 100,000 = 30.0%
20,000 ÷ 100,000 = 20%
50,000 ÷ 100,000 = 50%
50,000 ÷ 100,000 = 50%

DIF: 3 OBJ: 05

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