Ch3

Student: ___________________________________________________________________________

1. Accrual-basis accounting involves recording revenues when earned and recording expenses with
their related revenues.

True False
2. The revenue recognition principle states that we record revenue in the period in which we collect

cash. True False

3. According to the revenue recognition principle, if a company provides services to a customer in the current
year but does not collect cash until the following year, the company should report the revenue in the current
year.

True False
4. Jones Corporation provides services to a customer on June 17, but the customer does not pay for the
services until August 12. According to the revenue recognition principle, Jones Corporation should record
the revenue on August 12.

True False
5. The matching principle states that we recognize expenses in the same period as the revenues they help to
generate.

True False
6. According to the matching principle, if costs associated with producing revenue in the current year are
not paid in cash until the following year, the costs should be expensed in the current year.

True False
7. Under cash-basis accounting, we record revenues at the time we receive cash and expenses at the time
we pay cash.

True False
8. Under cash-basis accounting, the timing of cash inflows and outflows exactly matches the reporting
of revenues and expenses in the income statement.

True False
9. Under cash-basis accounting, if a company provides services to a customer in the current year but does
not collect cash until the following year, the company should report the revenue in the current year.

True False
10. Under cash-basis accounting, if costs associated with producing revenue in the current year are not paid
in cash until the following year, the costs should be expensed in the following year.

True False
11. Because cash-basis accounting violates both the revenue recognition principle and the matching principle,
it is generally not accepted in preparing financial statements.

True False
12. Adjusting entries involve recording events that have occurred but that have not yet been recorded by the
end of the period.

True False
13. Adjusting entries should be prepared after financial statements are prepared.

True False

14. Because adjusting entries allow the proper application of the revenue recognition principle or the
matching principle, they are a necessary part of cash-basis accounting.

True False
15. Prepaid expenses involve payment of cash (or an obligation to pay cash) for the purchase of an asset
before the expense is incurred.

True False
16. Unearned revenues occur when cash is received after the revenue is

earned. True False

17. Accrued expenses involve the payment of cash before recording an expense and a

liability. True False

18. Accrued revenues involve the receipt of cash after the revenue has been earned and an asset has
been recorded.

True False
19. The adjusting entry for a prepaid expense always includes a debit to an expense account and a credit to
a liability account.

True False
20. The adjusting entry for a prepaid expense has the effect of reducing total assets and reducing net

income. True False

21. The Supplies account is an example of an accrued

expense. True False

22. Suppose Simeon Company begins the year with $1,000 in supplies, purchases an additional $5,500 of
supplies during the year, and ends the year with $700 in supplies. The year-end adjusting entry includes
Supplies Expense of $7,200.

True False
23. The adjusting entry for an unearned revenue always includes a debit to an asset account and a credit to
a revenue account.

True False
24. The adjusting entry for an unearned revenue has the effects of reducing liabilities and increasing net
income.

True False
25. On November 1, 2012, a company receives $1,800 for services to be provided evenly over the next
six months. The December 31, 2012, adjusting entry for the company would include a credit to
Unearned Revenue for $600.

True False
26. The adjusting entry for an accrued expense always includes a debit to an expense account and a credit to
a liability account.

True False
27. The adjusting entry for an accrued expense has the effects of decreasing net income and decreasing
liabilities.

True False
28. On December 31, 2012, employees who earn $500 per day have worked eight days and will be paid on
January 6, 2013. The adjusting entry on December 31, 2012, includes a debit to Salaries Expense for
$4,000.

True False
29. At December 31, 2012, a company has received, but not paid, a utility bill for $250. The amount of utility
expense for the current period equals $250.

True False
30. The adjusting entry for an accrued revenue always includes a debit to a liability account and a credit to
a revenue account.

True False
31. The adjusting entry for an accrued revenue has the effects of increasing assets and increasing net

income. True False

32. Adjusting entries are unnecessary for transactions that do not involve revenue or expense activities, such
as selling common stock or paying dividends.

True False
33. Adjusting entries are not necessary when cash is received at the same time revenues are

earned. True False

34. Adjusting entries are not necessary when cash is paid at the same time expenses are

incurred. True False

35. A post-closing trial balance is a list of all accounts and their balances after we have updated
account balances for adjusting entries.

True False
36. Once the adjusted trial balance is complete, financial statements are

prepared. True False

37. A classified balance sheet separates assets into current and long-term, and separates liabilities into current
and long-term.

True False
38. Current assets are assets that provide a benefit to a company over more than one year.

True False

39. Long-term assets are assets that provide a benefit to a company for more than one year.

True False

40. Current liabilities are liabilities due within one year.

True False

41. Long-term liabilities are liabilities due in more than one year.

True False

42. Long-term asset categories include investments; property, plant, and equipment; and intangible assets.

True False

43. The components of retained earnings include assets, expenses, and

dividends. True False

44. Closing entries transfer the balances of all temporary accounts (revenues, expenses, and dividends) to
the balance of the Common Stock account.

True False
45. The closing entry for revenue accounts includes a debit to Retained Earnings and a credit to all
revenue accounts.

True False
46. The closing entry for expense accounts includes a debit to Retained Earnings and a credit to all
expense accounts.

True False
47. The closing entry for dividends includes a debit to the Dividends account and a credit to Retained

Earnings. True False

48. If the beginning balance of Retained Earnings equals $10,000, net income for the year equals $6,000,
and dividends for the year equal $2,000, then the ending balance of Retained Earnings equals $18,000.

True False
49. If the beginning balance of Retained Earnings equals $12,000, the ending balance of Retained Earnings
equals $15,000, and dividends for the year equal $1,000, then net income for the year equals $4,000.

True False
50. After closing entries are prepared, all asset and liability accounts have a balance of

zero. True False

51. After closing entries are prepared, the balance of Retained Earnings is updated to reflect the activity in
the revenue, expense, and dividend accounts for the period.

True False
52. The post-closing trial balance is a list of all accounts and their balances at a particular date after the
account balances have been updated for closing entries.

True False
53. The post-closing trial balance does not include any assets or liabilities, because these accounts all have zero
balances after closing entries.

True False
54. The revenue recognition principle states that:

A. Revenue should be recognized in the period the cash is received.

B. Revenue should be recognized in the period earned.
C. Revenue should be recognized in the balance sheet.
D. Revenue is a component of common stock.
55. The matching principle is the principle that states:

A. All costs that are used to generate revenue are recorded in the period the revenue is recognized.
B. All transactions are recorded at the exchange price.
C. The business is separate from its owners.
D. The business will continue to operate indefinitely unless there is evidence to the contrary.
56. Which of the following accounting principles states that expenses are recognized in the same period as
the revenues they help to generate?

A. Accounting equation.
B. Revenue recognition.
C. Matching principle.
D. Conservatism.
57. The primary difference between accrual-basis and cash-basis accounting is:

A. The timing of when revenues and expenses are recorded.

B. Cash-basis accounting is allowed for financial reporting purposes but not accrual-basis accounting.
C. Accrual-basis accounting violates both the revenue recognition and matching principles.
D. Adjusting entries are only a necessary part of cash-basis accounting.
58. When the amount of interest receivable decreases during an accounting period:

A. Accrual-basis revenues exceed cash collections from borrowers.

B. Accrual-basis net income exceeds cash-basis net income.
C. Accrual-basis revenues are less than cash collections from borrowers.
D. Accrual-basis expenses are less than cash payments to borrowers.
59. When the balance of the Unearned Revenue account decreases during an accounting period:

A. Accrual-basis revenues exceed cash collections from customers.

B. Accrual-basis expenses exceed cash collections from customers.
C. Accrual-basis revenues are less than cash collections from customers.
D. Accrual-basis net income is less than cash-basis net income.
60. Which transaction would not be recorded under cash-basis accounting?

A. Providing services to customers for cash.

B. Purchasing one year of rent in advance.
C. Paying salaries to employees.
D. Purchasing supplies on account.
61. Which of the following statements are
correct? For accrual-basis accounting:
(1) record revenues when earned
(2) record expenses when cash is paid

(3) record revenue when cash is received

(4) record expenses when benefit is received

A. (1) and (4)

B. (2) and (3)
C. (1) and (3)
D. (2) and (4)
62. On July 1, 2012, Rents-A-Lot Inc. paid $72,000 for 36 months of advance rent on its warehouse. What
would be the amount of rent expense in the 2013 financial statements for Rents-A-Lot under both
cash-basis and accrual-basis accounting?

A. Cash-basis = $24,000; Accrual-basis = $24,000.

B. Cash-basis = $72,000; Accrual-basis = $12,000.
C. Cash-basis = $0; Accrual-basis = $24,000.
D. Cash-basis = $0; Accrual-basis = $12,000.
63. The following information pertains to Sooner Company:

Assuming that Sooner Company uses cash-basis accounting, when would the company record the
expense related to the supplies?

A. May 2.
B. May 8.
C. May 15.
D. May 20.
64. The following information pertains to Sooner Company:

Assuming that Sooner Company uses accrual-basis accounting, when would the company record
the expense related to the supplies?

A. May 2.
B. May 8.
C. May 15.
D. May 20.
65. Consider the following events for Betterment Incorporated:

Under accrual-basis accounting, what is the appropriate day to record the revenues related to lawn services?

A. January 1.
B. January 7.
C. January 9.
D. January 12.
66. Consider the following events for Betterment Incorporated:

Under accrual-basis accounting, what is the appropriate day to record the expenses related to the gasoline?

A. January 1.
B. January 7.
C. January 12.
D. January 13.
67. Consider the following events for Betterment Incorporated:

Under cash-basis accounting, what is the appropriate day to record the expenses related to the gasoline?

A. January 1.
B. January 9.
C. January 12.
D. January 13.
68. Consider the following events for Sophia Incorporated:

Under accrual-basis accounting, what is the appropriate day to record the revenues from the sand
volleyball camp?

A. April 5.
B. April 6.
C. April 12.
D. April 21.
69. Consider the following events for Sophia Incorporated:

Under accrual-basis accounting, what is the appropriate day to record the expenses related to the
sand volleyball camp?

A. April 5.
B. April 12.
C. April 21.
D. April 23.
70. Consider the following events for Sophia Incorporated:

Under cash-basis accounting, what is the appropriate day to record the expenses related to the
sand volleyball camp?

A. April 5.
B. April 12.
C. April 21.
D. April 23.
71. Consider the following events for Sophia Incorporated:

Under cash-basis accounting, what is the appropriate day to record the revenues related to the
sand volleyball camp?

A. April 5.
B. April 12.
C. April 21.
D. April 23.
72. Which of the following is a possible adjusting journal entry?

A. Debit Cash, credit Accounts Payable.

B. Debit Service Revenue, credit Cash.
C. Debit Salaries Expense, credit Salaries Payable.
D. Debit Utilities Expense, credit Retained Earnings.
73. Adjusting entries are primarily needed for:

A. Cash-basis accounting.
B. Accrual-basis accounting.
C. Current value accounting.
D. Manual accounting systems.
74. Which of the following is true about adjusting entries?

A. Entries are necessary due to the conservatism principle.

B. Entries can be done at the beginning or end of the accounting period.
C. They zero the balance of all income statement accounts.
D. They are a necessary part of accrual-basis accounting.
75. Making insurance payments in advance is an example of:

A. An accrued revenue.
B. An accrued expense.
C. An unearned revenue.
D. A prepaid expense.
76. When a magazine sells subscriptions to customers, it is an example of:

A. An accrued expense.
B. An accrued revenue.
C. A prepaid expense.
D. An unearned revenue.
77. When a company makes an end-of-period adjusting entry which includes a credit to Prepaid Rent, the debit
is usually made to:

A. Cash.
B. Rent Expense.
C. Rent Payable.
D. Rent Receivable.
78. When a company makes an end-of-period adjusting entry which includes a debit to Supplies Expense,
the usual credit entry is made to:

A. Accounts Payable.
B. Supplies.
C. Cash.
D. Retained Earnings.
79. Prepayments occur when:

A. Cash payment (or an obligation to pay cash) occurs before the expense recognition.
B. Sales are delayed pending credit approval.
C. Customers are unable to pay the full amount due when goods are delivered.
D. Cash payment occurs after the expense is incurred and liability is recorded.
80. An example of an adjusting entry would not include:

A. Recording the use of office supplies.

B. Recording the expiration of prepaid insurance.
C. Recording unpaid salaries.
D. Paying salaries to company employees.
81. Which of the following would not typically be used as an adjusting entry?

A. Option a
B. Option b
C. Option c
D. Option d
82. The adjusting entry required when amounts previously recorded as unearned revenues are earned includes:

A. A debit to a liability.
B. A debit to an asset.
C. A credit to a liability.
D. A credit to an asset.
83. Adjusting entries:

A. Often include the Cash account.

B. Usually are recorded at the beginning of the accounting period.
C. Always involve at least one income statement account and one balance sheet account.
D. Adjust the balance of revenue and expense accounts to zero.
84. The adjusting entry required to record accrued expenses includes:

A. A credit to Cash.
B. A debit to an asset.
C. A credit to an asset.
D. A credit to liability.
85. Yummy Foods purchased a one-year hazard insurance policy on August 1 and recorded the $4,200
premium to prepaid insurance. At its December 31 year-end, Yummy Foods would record which of the
following adjusting entries?

A. Option a
B. Option b
C. Option c
D. Option d
86. The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues
payroll checks totaling $32,000. The current pay period ends on Friday, January 3. Neat Clothes is now
preparing financial statements for the year ended December 31. What is the adjusting entry to record
accrued salaries at the end of the year?

A. Option a
B. Option b
C. Option c
D. Option d
87. On April 1, a $4,800 premium on a one-year insurance policy on equipment was paid and charged to
Prepaid Insurance. At the end of the year, the financial statements would report:

A. Insurance Expense, $4,800; Prepaid Insurance $0.

B. Insurance Expense, $3,600; Prepaid Insurance $1,200.
C. Insurance Expense, $3,650; Prepaid Insurance $4,800.
D. Insurance Expense, $1,200; Prepaid Insurance $3,600.
88. On September 1, 2012, Gold Magazine sold 400 one-year subscriptions for $90 each. The total amount
received was credited to Unearned Revenue. What would be the required adjusting entry at December
31, 2012?

A. Option a
B. Option b
C. Option c
D. Option d
89. During the year, Cheng Company paid salaries of $24,000. In addition, $8,000 in salaries has accrued by
the end of the year but has not been paid. The year-end adjusting entry would include which one of the
following?

A. Debit to Salaries Expense for $32,000.

B. Credit to Salaries Expense of $8,000.
C. Debit to Salaries Payable for $24,000.
D. Credit to Salaries Payable for $8,000.
90. At the beginning of December, Global Corporation had $2,000 in supplies on hand. During the month,
supplies purchased amounted to $3,000, but by the end of the month the supplies balance was only $800.
What is the appropriate month-end adjusting entry?

A. Debit Cash $4,200, credit Supplies $4,200.

B. Debit Supplies $4,200, credit Supplies Expense $4,200.
C. Debit Supplies Expense $4,200, credit Supplies $4,200.
D. Debit Cash $800, credit Supplies $800.
91. Eve's Apples opened for business on January 1, 2012, and paid for two insurance policies effective that
date. The liability policy was $36,000 for eighteen-months, and the crop damage policy was $12,000 for a
two-year term. What was the balance in Eve's Prepaid Insurance account as of December 31, 2012?

A. $9,000.
B. $18,000.
C. $30,000.
D. $48,000.
92. A list of all accounts and their balances after updating account balances for adjusting entries is referred
to as:

A. A trial balance.
B. An adjusted trial balance.
C. A post-closing trial balance.
D. An accounting trial balance.
93. An adjusted trial balance:

A. Is a list of all accounts and their balances after adjusting entries.

B. Is a list of all accounts and their balances before adjusting entries.
C. Is a list of all accounts and their balances after closing entries.
D. Is a trial balance adjusted for cash-basis accounting.
94. Resources owned by the company that will provide a benefit for more than one year are called:

A. Current assets.
B. Current liabilities.
C. Long-term assets.
D. Revenues.
95. The following financial information is from Shovels Construction Company for 2012:

What is the amount of current assets, assuming the accounts above reflect normal activity?

A. $20,000.
B. $60,000.
C. $140,000.
D. $175,000.
96. Consider the following items:
Land
Accounts Receivable
Notes Payable (due in three years)
Accounts Payable
Retained Earnings
Prepaid Rent
Unearned Revenue
Buildings
Notes Payable (due in six months)
Equipment
How many of the items listed above are generally long-term assets?

A. 2
B. 3
C. 4
D. 5
97. The following financial information is from Bronco Company. All debt is due within one year unless stated
otherwise.

What is the amount of current liabilities?

A. $63,000.
B. $28,000.
C. $45,600.
D. $22,000.
98. The following table contains financial information for Trumpeter Inc. before closing entries:

What is Trumpeter's net income?

A. $3,500.
B. $2,500.
C. $5,000.
D. $5,500.
99. The following table contains financial information for Trumpeter Inc. before closing entries:

What is the amount of Trumpeter's total assets?

A. $81,500
B. $82,500
C. $68,500
D. $83,500
100.The closing entry for expenses includes:

A. A debit to Dividends and a credit to all expense accounts.

B. A debit to Retained Earnings and a credit to all expense accounts.
C. A debit to Revenues and a credit to Retained Earnings.
D. A debit to Revenues and a credit to all expense accounts.
101.The primary purpose of closing entries is to:

A. Prove the equality of the debit and credit entries in the general journal.
B. Ensure that all assets and liabilities are recognized in the appropriate period.
C.Update the balance of Retained Earnings and prepare revenue, expense, and dividend accounts for next
period's transactions.
D. Assure that adjusting entries balance.
102.The following table contains financial information for Fisher Inc. for 2012 before closing entries:

How many of the above accounts are permanent?

A. 3
B. 4
C. 5
D. 6
103.Permanent accounts would not include:

A. Interest Expense.
B. Salaries Payable.
C. Prepaid Rent.
D. Unearned Revenues.
104.The purpose of closing entries is to transfer:

A. Accounts Receivable to Retained Earnings when an account is fully paid.

B. Balances in temporary accounts to a permanent account.
C. Inventory to Cost of Goods Sold when merchandise is sold.
D. Assets and liabilities when operations are discontinued.
105.Which of the following is a possible closing entry?

A. Debit Cash, credit Service Revenue.

B. Debit Cash, credit Retained Earnings.
C. Debit Service Revenue, credit Retained Earnings.
D. Debit Dividends, credit Retained Earnings.
106.Permanent accounts would not include:

A. Accounts Payable.
B. Office Supplies.
C. Utilities Expense.
D. Common Stock.
107.Temporary accounts would not include:

A. Salaries Payable.
B. Advertising Expense.
C. Supplies Expense.
D. Dividends.
108.Of the following six accounts, which ones have temporary balances?
(1) Service Revenue
(2) Dividends
(3) Salaries Expense
(4) Common Stock
(5) Retained Earnings
(6) Cash

A. (1), (2), and (3)

B. (4), (5), and (6)
C. (2), (4), and (5)
D. (1), (3), and (5)
109.The ending Retained Earnings balance of Juan's Mexican Restaurant chain increased by $3.2 million from
the beginning of the year. The company declared a dividend of $1.3 million during the year. What was the
net income earned during the year?

A. $1.9 million
B. $3.2 million
C. $4.5 million
D. $1.3 million
110.The Retained Earnings account had a beginning credit balance of $26,000. During the period, the business
had a net loss $12,000, and the company paid dividends of $8,000. The ending balance in the Retained
Earnings account is:

A. $6,000
B. $30,000
C. $22,000
D. $14,000
111.The closing process includes which of the following?

A. Closing the balance of the retained earnings account to zero.

B. Closing the balance of only the dividends account to zero.
C. Closing the balances of only revenue and expense accounts to zero.
D. Closing the balances of revenue, expense and dividend accounts to zero.
112. Frosty Inc. has the following balances on December 31 prior to closing entries:

Based upon the balances above, what net adjustment would be made to Retained Earnings due to closing
entries?

A. Increase of $11,000.
B. Increase of $13,000.
C. Increase of $12,000.
D. Increase of $14,000.
113.A list of all accounts and their balances after posting closing entries is referred to as:

A. A trial balance.
B. An adjusted trial balance.
C. A post-closing trial balance.
D. An accounting trial balance.
114.A post-closing trial balance:

A. Is a list of all accounts and their balances after adjusting entries.

B. Is a list of all accounts and their balances before adjusting entries.
C. Is a list of all accounts and their balances after closing entries.
D. Is a trial balance adjusted for cash-basis accounting.
115. For each transaction below, calculate the amount of revenue to be recognized in the current period
using accrual-basis accounting:
(a) Performed $24,000 of services during the month and received full cash payment from customers at the
time of service.
(b) Performed $9,000 of services during the month and billed customers. Customers are expected to
pay next month.
(c) Received $12,000 cash from customers for services to be provided next month.

116. For each transaction below, calculate the amount of expense to be recognized in the current period using
accrual-basis accounting
(a) Paid $3,500 on account for supplies purchased last period. All supplies were used last month.
(b) Paid $5,000 cash for advertising in the current period.
(c) Employees worked in the current period but will not be paid until the following period, $4,500.
117.A company reports the following amounts: Assets = $6,000; Liabilities = $2,000; Stockholders' equity =
$4,000; Dividends = $500; Revenues = $5,000; and Expenses = $3,000. What amount is reported for
net income?

118.A company receives $2,500 cash from customers for services to be provided next month. Record the cash
receipt using (a) accrual-basis accounting and (b) cash-basis accounting.

119.A company performs $2,800 of services during the month and bills customers. The customers are expected
to pay next month. Record the customer billing using (a) accrual-basis accounting and (b) cash-basis
accounting.

120.A company performs $4,200 of services during the month and receives full cash payment from customers
at the time of service. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis
accounting.
121.A company pays $1,700 cash to employees for work performed during the month. Record the payment
using (a) accrual-basis accounting and (b) cash-basis accounting.

122.A company receives a $700 utility bill for the current month but does not plan to pay the bill until early
next month. Record the receipt of the utility bill using (a) accrual-basis accounting and (b) cash-basis
accounting.

123.A company pays $1,200 on account for supplies purchased last month. All supplies were used last month.
Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting.

124.A company maintains its records using cash-basis accounting. During the year, the company received cash
from customers, $34,000, and paid cash for taxes, $24,000. At the beginning of the year, customers owe the
company $3,000. By the end of the year, customers owe $5,000. At the beginning of the year, the company
owes taxes of $4,000. At the end of the year, the company owes taxes of $5,000. Determine cash-basis net
income and accrual-basis net income for the year.
125.The following data are taken from the cash-basis accounting records of Myerson Company for the
year ended December 31, 2012:

Calculate the amount of revenues and expenses for 2012 under cash-basis accounting.

126.The following data are taken from the cash-basis accounting records of Myerson Company for the
year ended December 31, 2012:

Calculate the amount of revenues and expenses for 2012 under accrual-basis accounting.

127.At the beginning of the period, a company reports a balance in office supplies of $500. During the period,
the company purchases an additional $3,500 of office supplies for cash. By the end of the period, only
$700 of office supplies remains. Record the period-end adjusting entry.
128.Suppose a company rents office space for one year, paying $12,000 ($1,000/month) in advance on
September 1. Record the adjusting entry on December 31.

129.A company purchases one year of flood insurance in advance on May 1, paying $24,000 ($2,000/month).
Record the adjusting entry on December 31.

130.A company purchases new equipment for $24,000 cash on August 1, 2012. At the time of purchase, the
equipment is expected to be used in operations for four years (48 months) and have no resale or scrap
value at the end. The company depreciates the equipment evenly over the 48 months ($500/month). Record
the adjusting entry for depreciation on December 31, 2012.

131.Suppose a customer rents a vehicle for four months from Rent-A-Car on October 1, paying $4,000
($1,000/ month). Record Rent-A-Car's adjusting entry on December 31.
132.A company pays its employees $5,600 every two weeks ($400/day). The current two-week pay period ends
on December 26, 2012, and employees are paid $5,600. The next two-week pay period ends on January 9,
2013, and employees will be paid $5,600. Record the adjusting entry on December 31, 2012.

133.A company borrows $20,000 with 8% interest on October 1, 2012. This amount plus interest is due on
September 30, 2013. Record the adjusting entry on December 31, 2012.

134.A company lends $30,000 with 10% interest on May 1, 2012. This amount plus interest is due on April 30,
2013. Record the adjusting entry on December 31, 2012.

135.For each of the following accounts, indicate whether the account is shown in the income statement or the
balance sheet:
136.Prepare adjusting journal entries, as needed, for the following items.
(a) The Supplies account shows a balance of $500, but a count of supplies reveals only $200 on hand
at year-end.
(b) The company initially records the payments of all insurance premiums as prepaid insurance. The
unadjusted trial balance at year-end shows a balance of $500 in Prepaid Insurance. A review of insurance
policies reveals that $100 of insurance is unexpired.
(c) Employees work Monday through Friday, and salaries of $2,500 per week are paid each Friday. The
company's year-end falls on Tuesday.
(d) At year-end, the company received a utility bill for December's electricity usage of $200 that will
be paid in early January.

137.The adjusted trial balance for China Tea Company at December 31, 2012, is presented below:

Prepare an income statement for China Tea Company for the year ended December 31, 2012:
138.The adjusted trial balance for China Tea Company at December 31, 2012, is presented below:

Prepare a classified balance sheet for China Tea Company as of December 31, 2012:
139.The December 31, 2012, post-closing trial balance for Strong Corporation is presented below:

Prepare a classified balance sheet for Strong Corporation at December 31, 2012.

140.The following is selected financial information for Osmond Dental Laboratories for 2012 and 2013:

Osmond issued 2,000 shares of additional capital stock in 2013 for $20,000. There were no other capital
transactions. Prepare a statement of stockholders' equity for the year ended December 31, 2013.
141.The adjusted trial balance for Yondel Company at December 31, 2012 is presented below:

Prepare the closing entries for Yondel Company for the year ended December 31, 2012.

142.The adjusted trial balance for China Tea Company at December 31, 2012 is presented below:

Prepare the closing entries for China Tea Company for the year ended December 31, 2012.
143.The year-end adjusted trial balance included the following account balances: Cash, $5,000; Equipment,
$25,000; Accounts payable, $7,000; Common stock, $15,000; Retained earnings, $6,000; Dividends,
$1,000; Service revenue, $18,000; Salaries expense, $9,000; and Utilities expense, $6,000. Prepare the
post-closing trial balance.

144.Describe what is meant by unearned revenues and give two examples.

145.Describe what is meant by prepaid expenses and give two examples.

146.What is an accrued expense?

147.What is the difference between permanent accounts and temporary accounts and why does an accounting
system have both types of accounts?

148.What are the purposes of closing entries?

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms.
Match each phrase with the correct term by placing the letter designating the term in the space
provided. Terms:
a. Accrued expenses
b. Adjusted trial balance
c. Adjusting entries
d. Depreciation expense
e. Balance sheet
f. Prepaid expenses
g. Expenses
h. Post-closing trial balance
i. Income statement
j. Trial balance
149.____ Financial statement showing that assets equal liabilities plus stockholders' equity.
Answer: e

150.____ Assets created before the expense is recognized.

Answer: f

151.____ A list of accounts and their balances used as the source data to prepare the financial statements.
Answer: b

152.____ Financial statement that provides a measure of net

income. Answer: i
153.____ A list of only permanent accounts and their balances prepared to prove that total debits equal total
credits.
Answer: h

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms.
Match each phrase with the correct term by placing the letter designating the term in the space provided.
Terms:
a. Accrued expenses
b. Adjusted trial balance
c. Adjusting entries
d. Depreciation expense
e. Balance sheet
f. Prepaid expenses
g. Expenses
h. Post-closing trial balance
i. Income statement
j. Trial balance
154.____ A list of accounts and their balances prepared before adjusting entries are recorded.
Answer: j

155.____ Records events that have occurred but not previously recorded.
Answer: c

156.____ Represent outflows of resources incurred to generate revenues.

Answer: g

157.____ Liabilities created when expenses are recognized before cash

flows. Answer: a

158.____ An account that reflects an estimate.

Answer: d

159.Which of the following accounts is(are) listed in a post-closing trial balance?

A. Prepaid Rent.
B. Accounts Payable.
C. Salaries Expense.
D. Two of these three accounts would be included in a post-closing trial balance.
160.Which of the following describes the purpose(s) of closing entries?

A. Adjust the balances of asset and liability accounts for unrecorded activity during the period.
B. Transfer the balances of temporary accounts to common stock.
C. Reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next
period.
D. Both b and c.
161.A company provided $1,500 of services to customers during the month of May. The customers paid in
June. What would the impact of these transactions be during May on each of the following three
items? Cash Cash-basis Accrual-basis
Balance Net Income Net Income

A. No effect No effect Increase

B. No effect No effect No Effect
C. Increase Increase Increase
D. Increase Increase No effect
162.A company purchased $400 of office supplies on account during May. All the supplies were used in May,
and the account was paid during June. What would the impact of these transactions being during May on
each of the following three items?
Cash Cash-basis Accrual-basis
Balance Net Income Net Income

A. No effect No effect Decrease

B. Decrease Decrease No Effect
C. Decrease Decrease Decrease
D. Decrease No effect No effect
163.A company paid $900 to workers during May. Of this amount, $600 was for work performed in April,
while the other $300 was for work performed during May. What would the impact of this transaction be
during May on each of the following three items?
Cash Cash-basis Accrual-basis
Balance Net Income Net Income

A. No effect No effect Decrease

B. Decrease Decrease No Effect
C. Decrease Decrease Decrease
D. Decrease No effect No effect
164.Air France collected cash on February 4 from the sale of a ticket to a customer on January 26.The flight
took place on April 5. According to the revenue recognition principle, in which month should Air France
have recognized this revenue?

A. January.
B. February.
C. April.
D. Evenly in each of the three months.
165.A customer purchased a drill press on November 14 on account from Sears. The drill press was delivered
two weeks later. The customer paid for the drill press on December 5. When should Sears record the
revenue for this transaction according to the revenue recognition principle?

A. November.
B. December.
C. Evenly in each of the two months.
D. One-third in November and two-thirds in December.
166.Which of the following is(are) true regarding the characteristics of adjusting entries?

A. Adjusting entries reduce the balance of revenue, expense, and dividend accounts to zero.
B. Adjusting entries allow for the proper application of the revenue recognition principle.
C. Adjusting entries allow for the proper application of the matching principle.
D. Both b and c are true.
167.Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions
would have the same income statement impact in April regardless of whether the company used accrual-
basis or cash-basis accounting?

A. Received $600 from customers for services to be provided in May.

B. Paid $1,800 for a six-month insurance policy covering the period July 1—December 31.
C. Paid $700 for an advertisement that appeared in the April 17 edition of the Las Vegas Sun newspaper.
D. Received $300 from customers for services performed in March.
168.Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions
would have the same income statement impact in April regardless of whether the company used accrual-
basis or cash-basis accounting?

A. Purchased $500 of office supplies on account (supplies were used in May and paid for in May).
B. Paid $1,800 for a six-month insurance policy covering the period July 1—December 31.
C. Paid $700 for an advertisement that appeared in the May 17 edition of the Las Vegas Sun newspaper.
D. Received $300 from customers for services performed in March.
169.Which accounting principle states that a company should "record revenues when they are earned"?

A. Matching
B. Revenue recognition
C. Conservatism
D. Materiality
170.The following events pertain to Jasper Corporation:
May 1 Jasper purchased office supplies of $3,000 on account.
May 5 The office supplies were shipped to Jasper.
May 8 Jasper used these office supplies for a one-time event.
May 9 Jasper paid $3,000 cash for the office supplies purchased on May 1.
Using cash-basis accounting, on which date should Jasper record supplies expense?

A. May 1.
B. May 5.
C. May 8.
D. May 9.
171.On July 1, 2012, Charlie Co. paid $18,000 to Rent-An-Office for rent covering 18 months from July 2012
through December 2013. What adjusting entry should Charlie Co. record on December 31, 2012?

A. Option a
B. Option b
C. Option c
D. Option d
172.Which of the following is a permanent account?

A. Dividends
B. Service Revenue
C. Advertising Expense
D. Retained Earnings
173.Which one of the following accounts would NOT have a balance after closing entries?

A. Unearned Revenue
B. Supplies
C. Prepaid Rent
D. Dividends
174.The following events pertain to Bills Company:
December 28, 2012 - Bills was contacted by a customer for possible accounting and tax
services.
December 30, 2012 - Bills signed a formal agreement with the customer to
provide accounting and tax services in 2013.
January 4, 2013 - The customer paid $1,000 in advance for the services to be provided by Bills Company.
January 11, 2013 - Bills provided accounting and tax services to the customer.
Using cash-basis accounting, on which date should Bills Company record revenue for the accounting
and tax services?

A. December 30, 2012.

B. December 31, 2012.
C. January 4, 2013.
D. January 11, 2013.
175.Which of the following accounts will NOT be involved in closing entries?

A. Prepaid Insurance.
B. Service Revenue.
C. Utilities Expense.
D. Retained Earnings.
176.Which of the following regarding adjusting entries is correct?

A. Adjusting entries are recorded for all external transactions.

B. Adjusting entries are recorded to make sure all cash inflows and outflows are recorded in the current
period.
C. Adjusting entries are needed because we use accrual-basis accounting.
D. After adjusting entries, all temporary accounts should have a balance of zero.
177.The following events pertain to Bills Company:
December 28, 2012 - Bills was contacted by a customer for possible accounting and tax
services.
December 30, 2012 - Bills signed a formal agreement with the customer to
provide accounting and tax services in 2013.
January 4, 2013 - The customer paid $1,000 in advance for the services to be provided by Bills Company.
January 11, 2013 - Bills provided accounting and tax services to the customer.
Using accrual-basis accounting, on which date should Bills Company record revenue for the
accounting and tax services?

A. December 30, 2012.

B. December 31, 2012.
C. January 4, 2013.
D. January 11, 2013.
178.When a company prepares closing entries, which one of the following is NOT a correct closing entry?

A. Debit Retained Earnings; credit Salaries Expense.

B. Debit Dividends; credit Retained Earnings.
C. Debit Service Revenue; credit Retained earnings.
D. All of the above are correct.
179.In the first three years of operations, Lindsey Corporation earned net income/loss of -$150,000, $100,000,
and $250,000. At the end of the third year, Lindsey Corporation has a balance of $120,000 for its Retained
Earnings account. What is the total amount of dividends Lindsey Corporation paid over the three years?

A. $130,000.
B. $120,000.
C. $80,000.
D. $380,000.
180.For the first three years of operations, the company reports net income of $1,000, $2,000, and $3,000, and
pays dividends of $500, $1,000, and $1,000. What is the balance of retained earnings at the end of the
third year?

A. $2,000.
B. $2,500.
C. $3,500.
D. $6,000.
181.When a company provides services on account, which of the following would be recorded using cash-basis
accounting?

A. Debit to Cash.
B. Debit to Service Revenue.
C. Credit to Unearned Revenue.
D. No entry would be recorded.
182.Which of the following is true concerning temporary and permanent accounts?

A. Cash is a temporary account.

B. Permanent accounts represent activity over the entire life of the company.
C. Permanent accounts must be closed at the end of every reporting period.
D. Temporary accounts represent activity over the previous three years.
183.The following table contains financial information for Trumpter's Inc. before closing entries:

What is the amount of Trumpter's total liabilities?

A. $5,000
B. $78,500
C. $68,500
D. $83,500
 Ch3 Key
1. TRUE

2. FALSE

3. TRUE

4. FALSE

5. TRUE

6. TRUE

7. TRUE

8. TRUE

9. FALSE

10. TRUE

11. TRUE

12. TRUE

13. FALSE

14. FALSE

15. TRUE

16. FALSE

17. FALSE

18. TRUE

19. FALSE

20. TRUE

21. FALSE

22. FALSE

23. FALSE

24. TRUE

25. FALSE

26. TRUE

27. FALSE

28. TRUE

29. TRUE

30. FALSE

31. TRUE

32. TRUE
33. TRUE

34. TRUE

35. FALSE

36. TRUE

37. TRUE

38. FALSE

39. TRUE

40. TRUE

41. TRUE

42. TRUE

43. FALSE

44. FALSE

45. FALSE

46. TRUE

47. FALSE

48. FALSE

49. TRUE

50. FALSE

51. TRUE

52. TRUE

53. FALSE

54. B

55. A

56. C

57. A

58. C

59. A

60. D

61. C

62. C

63. D

64. C

65. D

66. C

67. D
68. D

69. C

70. D

71. B

72. C

73. B

74. D

75. D

76. D

77. B

78. B

79. A

80. D

81. B

82. A

83. C

84. D

85. A

86. D

87. B

88. D

89. D

90. C

91. B

92. B

93. A

94. C

95. B

96. B

97. B

98. D

99. D

100. B

101. C

102. D
103. A

104. B

105. C

106. C

107. A

108. A

109. C

110. A

111. D

112. A

113. C

114. C

115. (a) $24,000; (b) $9,000; (c) $0.

116. (a) $0; (b) $5,000; (c) $4,500.

117. $2,000

118.

119.

120.

121.

122.

123.
124.

125. Cash-basis revenues = $20,000 + $300,000 = $320,000.

126. Accrual-basis revenues = $400,000.

127.

128.

129.

130.

131.

132.

133.

134.

135.

136.
137.

138.
139.

140.

141.
142.

143.
*Ending Retained Earnings = Beginning Retained Earnings ($6,000) + Revenues ($18,000) - Expenses ($9,000 + $6,000) - Dividends ($1,000)
= $8,000.

144. Unearned revenues are inflows of resources before the earnings process is complete. Examples include magazine subscription payments
received in advance by a publishing firm or rent payments received in advance by a property leasing firm. A liability exists because of the obligation
to provide the service.

145. Prepaid expenses are outflows of resources that create benefits that will last beyond the current reporting period. Examples include insurance or
rent paid in advance of use.

146. An accrued expense results from an expense being incurred and a liability recorded prior to cash payment. Examples include interest payable
and salaries payable.

147. Permanent accounts represent assets, liabilities, and stockholders' equity at a point in time. Temporary accounts represent changes in retained
earnings caused by changes in dividend, revenue, and expense accounts. The temporary accounts are closed out annually to facilitate measuring
income on an annual basis, but the permanent account balances are carried forward from period to period.

148. The closing process serves a dual purpose: (1) to reduce the balances of temporary accounts to zero so they are ready to measure activity in the
next accounting period, and (2) to transfer the balances of these temporary accounts to the Retained Earnings account so it reflects the activity that
has occurred in the temporary accounts during the period.

149.

150.

151.

152.

153.

154.

155.

156.

157.

158.

159. D

160. C

161. A

162. A
163. C

164. C

165. A

166. D

167. C

168. A

169. B

170. D

171. D

172. D

173. D

174. C

175. A

176. C

177. D

178. B

179. C

180. C

181. D

182. B

183. A
 Ch3 Summary
Category # of Questions
AACSB: Analytic 65
AACSB: Reflective Thinking 118
AICPA: Critical Thinking 79
AICPA: Measurement 89
AICPA: Reporting 15
Blooms: Analysis 45
Blooms: Application 36
Blooms: Comprehension 67
Blooms: Knowledge 30
Blooms: Synthesis 5
Difficulty: Easy 41
Difficulty: Hard 19
Difficulty: Medium 123
Learning Objective: 03-01 Record revenues using the revenue recognition principle and expenses using the matching 19
principle.
Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. 38
Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. 68
Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. 13
Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. 25
Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. 29
Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. 16
Spiceland - Chapter 03 185