ch03

Student: ___________________________________________________________________________

1. A company's fiscal year must correspond with the calendar year.

True False
2. The time period assumption assumes that an organization's activities can be divided into specific time
periods.
True False
3. Interim statements report a company's business activities for a one-year period.
True False
4. A fiscal year refers to an organization's accounting period that spans twelve consecutive months or 52
weeks.
True False
5. Adjusting entries are made after the preparation of financial statements.
True False
6. Adjusting entries result in a better matching of revenues and expenses for the period.
True False
7. Two main accounting principles used in accrual accounting are matching and full closure.
True False
8. Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are
correctly recorded.
True False
9. The matching principle does not aim to record expenses in the same accounting period as the revenue
earned as a result of these expenses.
True False
10. The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and
accrued revenues.
True False
11. The cash basis of accounting commonly results in financial statements that are less comparable from
period to period than the accrual basis of accounting.
True False
12. Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued
items.
True False
13. Since the revenue recognition principle requires that revenues be recorded when earned, there are no
unearned revenues in accrual accounting.
True False
14. The matching principle requires that expenses get recorded in the same accounting period as the revenues
that are earned as a result of the expenses, not when cash is paid.
True False
15. The cash basis of accounting is an accounting system in which revenues are recorded when cash is
received and expenses are recorded when cash is paid.
True False
16. The cash basis of accounting recognizes revenues when cash payments from customers are received.
True False
17. The accrual basis of accounting recognizes revenues when cash is received from customers.
True False
18. The accrual basis of accounting recognizes expenses when cash is paid.
True False
19. Recording revenues early overstates current-period income; recording revenues late understates current
period income.
True False
20. Recording expenses early overstates current-period income; recording expenses late understates current
period income.
True False
21. Prior to recording 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.
True False
22. A company paid $9,000 for a six-month insurance policy. The policy coverage began on February 1. On
February 28, $150 of insurance expense must be recorded.
True False
23. On October 15, a company received $15,000 cash as a down payment on a consulting contract. The
amount was credited to Unearned Consulting Revenue. By October 31, 10% of the services required by
the contract were completed. The company will record consulting revenue of $1,500 from this contract
for October.
True False
24. The accrual basis of accounting reflects the principle that revenue is recorded when it is earned, not when
cash is received.
True False
25. The accrual basis of accounting requires adjustments to recognize revenues in the periods they are earned
and to match expenses with revenues.
True False
26. Adjusting entries are designed primarily to correct accounting errors.
True False
27. Adjustments are necessary to bring an asset or liability account to its proper amount and also update a
related expense or revenue account.
True False
28. Each adjusting entry can only affect a balance sheet account.
True False
29. Accrued expenses at the end of one accounting period are expected to result in cash payments in a future
period.
True False
30. Accrued revenues at the end of one accounting period are expected to result in cash payments in a future
period.
True False
31. Each adjusting entry affects only one or more income statements account and never cash.
True False
32. Accrued expenses reflect transactions where cash is paid before a related expense is recognized.
True False
33. Under the accrual basis of accounting, adjustments are often made for prepaid expenses and unearned
revenues.
True False
34. The entry to record a cash receipt from a customer when the service to be provided has not yet been
performed involves a debit to an unearned revenue account.
True False
35. Costs incurred during an accounting period but unpaid and unrecorded are accrued expenses.
True False
36. An adjusting entry often includes an entry to Cash.
True False
37. Before an adjusting entry is made to recognize the cost of expired insurance for the period, Prepaid
Insurance and Insurance Expense are both overstated.
True False
38. Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are
both understated.
True False
39. Failure to record depreciation expense will overstate the asset and understate the expense.
True False
40. A company's month-end adjusting entry for Insurance Expense is $1,000. If this entry is not made then
expenses are understated by $1,000 and net income is overstated by $1,000.
True False
41. Profit margin can also be called return on sales.
True False
42. Profit margin measures the relation of debt to assets.
True False
43. Profit margin reflects the percent of profit in each dollar of revenue.
True False
44. Profit margin is calculated by dividing net sales by net income.
True False
45. Ben had total assets of $149,501,000, net income of $6,242,000, and net sales of $209,203,000. Its profit
margin was 2.98%.
True False
46. A contra account is an account linked with another account; it is added to that account to show the proper
amount for the item recorded in the associated account.
True False
47. If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one year of rent
in advance and adjusting entries are made at the end of each month, the balance of Prepaid Rent as of
December 1 should be $1,500.
True False
48. Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related
asset.
True False
49. A salary owed to employees is an example of an accrued expense.
True False
50. In accrual accounting, accrued revenues are recorded as liabilities.
True False
51. Depreciation expense is an example of an accrued expense.
True False
52. Earned but uncollected revenues are recorded during the adjusting process with a credit to a revenue and
a debit to an expense.
True False
53. Depreciation expense for a period is the portion of a plant asset's cost that is allocated to that period.
True False
54. All plant assets, including land, eventually wear out or decline in usefulness.
True False
55. Net income for a period will be overstated if accrued salaries are not recorded at the end of the accounting
period.
True False
56. Depreciation measures the decline in market value of an asset.
True False
57. A company owes its employees $5,000 for the year ended December 31. It will pay employees on
January 6 for the previous two weeks' salaries. The year-end adjusting on entry on December 31 will
include a debit to Salaries Expense and a credit to Cash.
True False
58. A company purchased $6,000 worth of supplies in August and recorded the purchase in the Supplies
account. On August 31, the fiscal year-end, the supplies count equaled $3,200. The adjusting entry would
include a $2,800 debit to Supplies.
True False
59. A company performs 20 days work on a 30-day contract before the end of the year. The total contract
is valued at $6,000 and payment is not due until the contract is fully completed. The adjusting entry
includes a $4,000 credit to unearned revenue.
True False
60. A company entered into a 2-month contract for $50,000 on April 1. It earned $25,000 of the contract
services in April and billed the customer. The company should recognize the revenue when it receives the
customer's check.
True False
61. The adjusted trial balance must be prepared before the adjusting entries are made.
True False
62. An unadjusted trial balance is a list of accounts and balances prepared before adjustments are
recorded.
True False
63. Financial statements can be prepared directly from the information in the adjusted trial balance.
True False
64. Asset and liability balances are transferred from the adjusted trial balance to the income statement.
True False
65. Revenue and expense balances are transferred from the adjusted trial balance to the income
statement.
True False
66. In preparing statements from the adjusted trial balance, the balance sheet must be prepared first.
True False
67. It is acceptable to record prepayment of expenses as debits to expense accounts.
True False
68. It is acceptable to record cash received in advance of providing products or services to revenue
accounts.
True False
69. The time period assumption assumes that an organization's activities can be divided into specific time
periods including all of the following except:
A. Months.
B. Quarters.
C. Fiscal years.
D. Calendar years.
E. Days.
70. 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 assumption.
C. Going-concern assumption.
D. Matching principle.
E. Accrual basis of accounting.
71. Interim financial statements refer to financial reports:
A. That cover less than one year, usually spanning one, three, or six-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 equity.
D. Where revenues are reported on the income statement when cash is received and expenses are reported
when cash is paid.
E Where the adjustment process is used to assign revenues to the periods in which they are earned and to
. match expenses with revenues.
72. The 12-month period that ends when a company's sales activities are at their lowest level is called
the:
A. Fiscal year.
B. Calendar year.
C. Natural business year.
D. Accounting period.
E. Interim period.
73. The length of time covered by a set of periodic financial statements is referred to as the:
A. Fiscal cycle.
B. Natural business year.
C. Accounting period.
D. Business cycle.
E. Operating cycle.
74. The accounting principle that requires revenue to be recorded when earned is the:
A. Matching principle.
B. Revenue recognition principle.
C. Time period assumption.
D. Accrual reporting principle.
E. Going-concern assumption.
75. 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.
76. The main purpose of adjusting entries is to:
A. Record external transactions and events.
B. Record internal transactions and events.
C. Recognize assets purchased during the period.
D. Recognize debts paid during the period.
E. Correct errors.
77. 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.
78. The system of 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. Operating cycle accounting.
C. Cash basis accounting.
D. Revenue recognition accounting.
E. Current basis accounting.
79. Adjusting entries made at the end of an accounting period accomplish all of the following except:
A. Updating liability and asset accounts to their proper balances.
B. Assigning revenues to the periods in which they are earned.
C. Assigning expenses to the periods in which they are incurred.
D. Assuring that financial statements reflect the revenues earned and the expenses incurred.
E. Assuring that external transaction amounts remain unchanged.
80. The approach to preparing financial statements based on recognizing revenues when they are earned and
matching expenses to those revenues is:
A. Cash basis accounting.
B. The matching principle.
C. The time period assumption.
D. Accrual basis accounting.
E. Revenue basis accounting.
81. Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued revenues are all
examples of:
A. Items that require contra accounts.
B. Items that require adjusting entries.
C. Asset and equity.
D. Asset accounts.
E. Income statement accounts.
82. The accrual basis of accounting:
A. Is generally accepted for external reporting because it is more useful than cash basis for most business
decisions.
B. Is flawed because it gives complete information about cash flows.
C. Recognizes revenues when received in cash.
D. Recognizes expenses when paid in cash.
E. Eliminates the need for adjusting entries at the end of each period.
83. Which of the following statements is incorrect?
A. Adjustments to prepaid expenses, depreciation, and unearned revenues involve previously recorded
assets and liabilities.
B. Accrued expenses and accrued revenues involve assets and liabilities that had not previously been
recorded.
C. Adjusting entries can be used to record both accrued expenses and accrued revenues.
D.Prepaid expenses, depreciation, and unearned revenues often require adjusting entries to record the
effects of the passage of time.
E. Adjusting entries affect the cash account.
84. An adjusting entry could be made for each of the following except:
A. Prepaid expenses.
B. Depreciation.
C. Owner withdrawals.
D. Unearned revenues.
E. Accrued revenues.
85. A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on December
31. This oversight would:
A. Understate net income by $28,000.
B. Overstate net income by $28,000.
C. Have no effect on net income.
D. Overstate assets by $28,000.
E. Understate assets by $28,000.
86. If a company mistakenly forgot to record depreciation on office equipment at the end of an accounting
period, the financial statements prepared at that time would show:
A. Assets overstated and equity understated.
B. Assets and equity both understated.
C. Assets overstated, net income understated, and equity overstated.
D. Assets, net income, and equity understated.
E. Assets, net income, and equity overstated.
87. If a company failed to make the end-of-period adjustment to remove from the Unearned Management
Fees account the amount of management fees that were earned, this omission would cause:
A. An overstatement of net income.
B. An overstatement of assets.
C. An overstatement of liabilities.
D. An overstatement of equity.
E. An understatement of liabilities.
88. A company records the fees for legal services paid in advance by its clients in an account called Unearned
Legal Fees. If the company fails to make the end-of-period adjusting entry to record the portion of these
fees that has been earned, one effect will be:
A. An overstatement of equity.
B. An understatement of equity.
C. An understatement of assets.
D. An understatement of liabilities.
E. An overstatement of assets.
89. Profit margin is defined as:
A. Revenues divided by net sales.
B. Net sales divided by assets.
C. Net income divided by net sales.
D. Net income divided by assets.
E. Net sales divided by net income.
90. A company earned $2,000 in net income for October. Its net sales for October were $10,000. Its profit
margin is:
A. 2%.
B. 20%.
C. 200%.
D. 500%.
E. $8,000.
91. All of the following statements regarding profit margin are true except:
A. Profit margin reflects the percent of profit in each dollar of revenue.
B. Profit margin is also called return on sales.
C. Profit margin can be used to compare a firm's performance to its competitors.
D. Profit margin is calculated by dividing net income by net sales.
E. Profit margin is not a useful measure of a company's operating results.
92. A company had $9,000,000 in net income for the year. Its net sales were $13,200,000 for the same
period. Calculate its profit margin.
A. 17.5%.
B. 28.0%.
C. 62.5%.
D. 160.0%.
E. 68.2%
93. On June 30 Apricot Co. paid $7,500 cash for management services to be performed over a two-year
period. Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash
payment. On June 30 Apricot should record:
A. A credit to an expense for $7,500.
B. A debit to an expense for $7,500.
C. A debit to a prepaid expense for $7,500.
D. A credit to a prepaid expense for $7,500.
E. A debit to Cash for $7,500.
94. On June 30 of the current calendar year, Apricot Co. paid $7,500 cash for management services to
be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to
asset accounts at the time of cash payment. The adjusting entry on December 31 for Apricot would
include:
A. A debit to an expense for $5,625.
B. A debit to a prepaid expense for $5,625.
C. A debit to an expense for $1,875.
D. A debit to a prepaid expense for $1,875.
E. A credit to a liability for $1,875.
95. Accrued revenues:
A. At the end of one accounting period often result in cash receipts from customers in the next period.
B. At the end of one accounting period often result in cash payments in the next period.
C. Are also called unearned revenues.
D. Are listed on the balance sheet as liabilities.
E. Are recorded at the end of an accounting period because cash has already been received for revenues
earned.
96. An account linked with another account that has an opposite normal balance and that is subtracted from
the balance of the related account is a(n):
A. Accrued expense.
B. Contra account.
C. Accrued revenue.
D. Intangible asset.
E. Adjunct account.
97. The total amount of depreciation recorded against an asset or group of assets during the entire time the
asset or assets have been owned:
A. Is referred to as depreciation expense.
B. Is referred to as accumulated depreciation.
C. Is shown on the income statement of the final period.
D. Is only recorded when the asset is disposed of.
E. Is referred to as an accrued asset.
98. The periodic 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. Accumulated depreciation.
B. A contra account.
C. The matching principle.
D. Depreciation expense.
E. An accrued account.
99. Prior to recording adjusting entries, the Office Supplies account had a $359 debit balance. A physical
count of the supplies showed $105 of unused supplies available. 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. Debit Office Supplies $105 and credit Supplies Expense $254.
100.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 those 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. Debit Unearned Legal Fees and credit Accounts Receivable.
101.On April 1, a company paid the $1,350 premium on a three-year insurance policy with benefits beginning
on that date. What will be the insurance expense on the annual income statement for the year ended
December 31?
A. $1,350.00.
B. $450.00.
C. $1,012.50.
D. $337.50.
E. $37.50.
102.A company had no office supplies available at the beginning of the year. During the year, the company
purchased $250 worth of office supplies. On December 31, $75 worth of office supplies remained. How
much should the company report as office supplies expense for the year?
A. $75.
B. $125.
C. $175.
D. $250.
E. $325.
103.On January 1 a company purchased a five-year insurance policy for $1,800 with coverage starting
immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records
adjustments only at year-end, the adjusting entry at the end of the first year 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, $360; credit Prepaid Insurance, $1,440.
104.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.
105.Which of the following assets is not depreciated?
A. Store fixtures.
B. Computers.
C. Land.
D. Buildings.
E. All of these are depreciated.
106.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.
107.On April 30, a three-year insurance policy was purchased for $18,000 with coverage to begin
immediately. What is the amount of insurance expense that would appear on the company's income
statement for the year ended December 31?
A. $500.
B. $4,000.
C. $6,000.
D. $14,000.
E. $18,000.
108.PPW Co. leased a portion of its store to another company for eight months beginning on October 1, at
a monthly rate of $800. This other company paid the entire $6,400 cash on October 1, which PPW Co.
recorded as unearned revenue. The journal entry made by PPW Co. at year-end on December 31 would
include:
A. A debit to Rent Earned for $2,400.
B. A credit to Unearned Rent for $2,400.
C. A debit to Cash for $6,400.
D. A credit to Rent Earned for $2,400.
E. A debit to Unearned Rent for $4,000.
109.On May 1, Giltus Advertising Company received $1,500 from Julie Bee for advertising services to be
completed April 30 of the following year. The Cash receipt was recorded as unearned fees and at year-
end on December 31, $1,000 of the fees had been earned. The adjusting entry on December 31 would
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.
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:
A. Intangible expenses.
B. Prepaid expenses.
C. Unearned expenses.
D. Net expenses.
E. Accrued expenses.
111.The adjusting entry to record the earned but unpaid salaries of employees at the end of an 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.
112.A company pays each of its two office employees each Friday at the rate of $100 per day for a five-
day week that begins on Monday. If the monthly accounting period ends on Tuesday and the employees
worked on both Monday and Tuesday, the month-end adjusting entry to record the salaries earned but
unpaid is:
A. Debit Unpaid Salaries $600 and credit Salaries Payable $600.
B. Debit Salaries Expense $400 and credit Salaries Payable $400.
C. Debit Salaries Expense $600 and credit Salaries Payable $600.
D. Debit Salaries Payable $400 and credit Salaries Expense $400.
E. Debit Salaries Expense $400 and credit Cash $400.
113.On January 1, Southwest College received $1,200,000 in Unearned Tuition Revenue from its students for
the spring semester, which spans four months beginning on January 2. What amount of tuition revenue
should the college recognize on January 31?
A. $300,000.
B. $600,000.
C. $800,000.
D. $900,000.
E. $1,200,000.
114.An adjusting entry was made on year-end December 31 to accrue salary expense of $1,200. Which of the
following entries would be prepared to record the $3,000 payment of salaries in January of the following

year?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E
115.The difference between the cost of an asset and the accumulated depreciation for that asset is called
A. Depreciation Expense.
B. Unearned Depreciation.
C. Prepaid Depreciation.
D. Depreciation Value.
E. Book Value.
116.A company purchased a new truck at a cost of $42,000 on July 1. The truck is estimated to have a useful
life of 6 years and a salvage value of $3,000. The company uses the straight-line method of depreciation.
How much depreciation expense will be recorded for the truck during the first year ended December 31?

A. $3,250.
B. $3,500.
C. $4,000.
D. $6,500.
E. $7,000.
117.A company's 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
period?
A. $2,700.
B. $2,900.
C. $3,300.
D. $3,500.
E. $3,700.
118.If a company records prepayment of expenses in an asset account, the adjusting entry would:
A. Result in a debit to an expense and a credit to an asset account.
B. Cause an adjustment to prior expense to be overstated and assets to be understated.
C. Cause an accrued liability account to exist.
D. Result in a debit to a liability and a credit to an asset account.
E. Decrease cash.
119.A company recorded 2 days of accrued salaries of $1,400 for its employees on January 31. On February
9, it paid its employees $7,000 for these accrued salaries and for other salaries earned through February 9.
The January 31 and February 9 journal entries are:
A.

B.

C.

D.

E.

120.If accrued salaries were recorded on December 31 with a credit to Salaries Payable, the entry to record
payment of these wages on the following 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.
121.On May 1, Carter Advertising Company received $3,600 from Kaitlyn Breanna for advertising services
to be completed April 30 of the following year. The Cash receipt was recorded as unearned fees. The
adjusting entry for the year ended December 31, Year 2 would include:
A. a debit to Earned Fees for $3,600.
B. a debit to Unearned Fees for $1,200.
C. a credit to Unearned Fees for $1,200.
D. a debit to Earned Fees for $2,400.
E. a credit Earned Fees for $2,400.
122.The balance in the prepaid insurance account before adjustment at the end of the year is $4,800, which
represents the insurance premiums for four months. The premiums were paid on November 1. The
adjusting entry required on December 31 is:
A. Debit Insurance Expense, $2,400; credit Prepaid Insurance, $2,400.
B. Debit Prepaid Insurance, $2,400; credit Insurance Expense, $2,400.
C. Debit Insurance Expense, $1,200; credit Prepaid Insurance, $1,200.
D. Debit Prepaid Insurance, $1,200; credit Insurance Expense, $1,200.
E. Debit Cash, $4,800; Credit Prepaid Insurance, $4,800.
123.What is the proper adjusting entry at December 31, the end of the accounting period, if the balance in the
prepaid insurance account is $7,750 before adjustment, and the unexpired amount per analysis of policies
is, $3,250?
A. Debit Insurance Expense, $3,250; credit Prepaid Insurance, $3,250.
B. Debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500.
C. Debit Prepaid Insurance, $4,500; credit Insurance Expense, $4,500.
D. Debit Insurance Expense, $7,750; credit Prepaid Insurance, $7,750.
E. Debit Cash, $7,750; Credit Prepaid Insurance, $7,750.
124.On March 31, Phoenix, Inc. paid Melanie Publishing Company $15,480 for a 3-year subscription for five
different magazines. The subscriptions started immediately. What is the amount of revenue that should
be recorded by Melanie Publishing Company for each year of the subscription assuming Melanie uses a
calendar reporting period?
A. $15,480; $0; $0; $0.
B. $5,160; $5,160; $5,160.
C. $3,870; $5,160; $5,160; $1,290.
D. $0; $0; $0; $15,480.
E. The answer cannot be determined based on the information given.
125.On March 31, Phoenix, Inc. paid Melanie Publishing Company $15,480 for a 3-year subscription for
five different magazines. The subscriptions started immediately. What is the adjusting entry that should
be recorded by Melanie Publishing Company on December 31 of the first year if the credit to record the
collection was made to Unearned Fees?
A. Debit Unearned Fees, $15,480; credit Fees Earned, $15,480.
B. Debit Unearned Fees, $5,160; credit Fees Earned, $5,160.
C. Debit Unearned Fees, $11,610; credit Fees Earned, $11,610.
D. Debit Unearned Fees, $1,290; credit Fees Earned, $1,290.
E. Debit Unearned Fees, $3,870; credit Fees Earned, $3,870.
126.On March 31, Phoenix, Inc. paid Melanie Publishing Company $15,480 for a 3-year subscription for five
different magazines. The subscriptions started immediately. What amount should appear in the Prepaid
Subscription account for Phoenix Company after adjustments on December 31 each year assuming
Phoenix using a calendar reporting period?
A. $15,480; $11,610; $6,540; $1,290.
B. $3,870; $5,160; $5,160; $1,290.
C. $5,160; $5,160; $5,160.
D. $11,610; $6,450; $1,290; $0.
E. The answer cannot be determined based on the information given.
127.A company made no adjusting entry for accrued and unpaid employee salaries of $9,000 on December
31. Which of the following statements is true?
A. It will have no effect on income.
B. It will overstate assets and liabilities by $9,000.
C. It will understate net income by $9,000.
D. It will understate assets by $9,000.
E. It will understate expenses and overstate net income by $9,000.
128.A company made no adjusting entry for accrued and unpaid employee salaries of $9,000 on December
31. The entry to record the adjusting entry should have been:
A. debit Salary Expense, $9,000; credit Cash, $9,000
B. debit Salary Expense, $9,000; credit Fees Earned, $9,000
C. debit Salary Expense, $9,000; credit Prepaid Salary, $9,000
D. debit Salary Expense, $9,000; credit Salaries Payable, $9,000
E. debit Salaries Payable, $9,000; credit Salary Expense
129.A company purchased new computers at a cost of $14,000 on September 30. The computers are estimated
to have a useful life of 4 years and a salvage value of $2,000. The company uses the straight-line method
of depreciation. How much depreciation expense will be recorded for the computers for the first year
ended December 31?
A. $250
B. $750
C. $875
D. $1,000
E. $3,000
130.The balance in Tee Tax Services' office supplies account on February 1 and February 28 was $1,200 and
$375, respectively. If the office supplies expense for the month is $1,900, what amount of office supplies
was purchased during February?
A. $1,075
B. $1,500
C. $1,525
D. $2,325
E. $3,100
131.Which of the following statements is incorrect?
A. An income statement reports revenues earned less expenses incurred.
B An unadjusted trial balance shows the account balances after they have been revised to reflect the
. effects of end-of-period adjustments.
C. Interim financial reports can be based on one-month or three-month accounting periods.
D. The fiscal year is any 12 consecutive months (or 52 weeks) used by a business as its annual accounting
period.
E. Property, plant, and equipment are referred to as plant assets.
132.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. Classified balance sheet.
E. Unclassified balance sheet.
133.A trial balance prepared before any adjustments have been recorded is:
A. An adjusted trial balance.
B. Used to prepare financial statements.
C. An unadjusted trial balance.
D. Correct with respect to proper balance sheet and income statement amounts.
E. Only prepared once a year.
134.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.
135.Financial statements are typically 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.
136.A balance sheet that places the assets above the liabilities and equity is called a(n):
A. Report form balance sheet.
B. Account form balance sheet.
C. Classified balance sheet.
D. Unadjusted balance sheet.
E. Unclassified balance sheet.
137.A balance sheet that places the liabilities and equity to the right of the assets is a(n):
A. Account form balance sheet.
B. Report form balance sheet.
C. Interim balance sheet.
D. Classified balance sheet.
E. Unclassified balance sheet.
138.Under the alternative method for accounting for unearned revenue, which of the following pairs of

journal entry formats is correct?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E
139.Under the alternative method for recording prepaid expenses, which is the correct set of journal entries?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E
140.Which of the following statements related to U.S. GAAP and IFRS is incorrect?
A. Both U.S. GAAP and IFRS include guidance for adjusting entries.
B. Both U.S. GAAP and IFRS prepare the same four financial statements.
C. U.S. GAAP does not require items to be separated by current and noncurrent classifications on the
balance sheet.
D. U.S. GAAP balance sheets report current items first.
E. IFRS balance sheets normally present noncurrent items first.
141.On December 1, Miller Company borrowed $300,000, at 8% annual interest, from the Nomo Bank.
Miller has 60 days before the first payment is required. What is the adjusting entry that Miller would need
to make on December 31, the calendar year-end?
A. Debit Interest Payable, $2,000; credit Interest Expense, $2,000.
B. Debit Interest Expense, $2,000; credit Interest Payable, $2,000.
C. Debit Interest Expense, $2,000; credit Cash, $2,000.
D. Debit Interest Expense, $4,000; credit Interest Payable, $4,000.
E. Debit Interest Expense, $24,000; credit Interest Payable, $24,000.
142.All of the following are True regarding prepaid expenses except:
A. They are paid for in advance of receiving their benefits.
B. They are assets.
C. When they are used, their costs become expenses.
D. The adjusting entry for prepaid expenses increases expenses and increases liabilities.
E. The adjusting entry for prepaid expenses increases expenses and decreases assets.
143.An annual reporting period consisting of any twelve consecutive months is known as:
A. Fiscal year.
B. Calendar year.
C. Interim financial period.
D. Natural business year.
E. Seasonal year.
144.Two accounting principles that are relied on in the adjusting process are:
A. Revenue recognition and monetary unit.
B. Revenue recognition and going-concern.
C. Matching and cost.
D. Matching and business entity.
E. Revenue recognition and matching.
145.All of the following are True regarding unearned revenues except:
A. They are payments received in advance of services performed.
B. The adjusting entry for unearned revenues increases assets and increases revenues.
C. The adjusting entry for unearned revenues increases revenues and decreases liabilities.
D. They are liabilities.
E. As they are earned, they become revenues.
146.Assuming prepaid expenses are originally recorded in balance sheet accounts, the adjusting entry to
record use of a prepaid expense is:
A. Increase an expense; increase a liability.
B. Increase an asset; increase revenue.
C. Decrease a liability; increase revenue.
D. Increase an expense; decrease an asset.
E. Increase an expense; decrease a liability.
147.Assuming unearned revenues are originally recorded in balance sheet accounts, the adjusting entry to
record earning of unearned revenue is:
A. Increase an expense; increase a liability.
B. Increase an asset; increase revenue.
C. Decrease a liability; increase revenue.
D. Increase an expense; decrease an asset.
E. Increase an expense; decrease a liability.
148.The adjusting entry to record an accrued expense is:
A. Increase an expense; increase a liability.
B. Increase an asset; increase revenue.
C. Decrease a liability; increase revenue.
D. Increase an expense; decrease an asset.
E. Increase an expense; decrease a liability.
149.The adjusting entry to record an accrued revenue is:
A. Increase an expense; increase a liability.
B. Increase an asset; increase revenue.
C. Decrease a liability; increase revenue.
D. Increase an expense; decrease an asset.
E. Increase an expense; decrease a liability.
150.On October 1, Haslip Company rented warehouse space to a tenant for $2,500 per month. The tenant paid
five months' rent in advance on that date. The payment was recorded to the Unearned Rent account. The
company's annual accounting period ends on December 31. The adjusting entry needed on December 31
is:
A. Debit Rent Receivable, $12,500; credit Rent Earned, $12,500.
B. Debit Rent Receivable, $7,500; credit Rent Earned, $7,500.
C. Debit Unearned Rent, $7,500; credit Rent Earned, $7,500.
D. Debit Unearned Rent, $5,000; credit Rent Earned, $5,000.
E. Debit Unearned Rent, $12,500; credit Rent Earned, $12,500.
151.Alex Company rents space to a tenant for $2,200 per month. The tenant currently owes two months rent,
November and December. The tenant has agreed to pay the November, December, and January rents in
full on January 15 and has agreed not to fall behind again. The adjusting entry needed on December 31
is:
A. Debit Rent Receivable, $6,600; credit Rent Earned, $6,600.
B. Debit Unearned Rent, $4,400; credit Rent Earned, $4,400.
C. Debit Unearned Rent, $2,200; credit Rent Earned, $2,200.
D. Debit Rent Receivable, $4,400; credit Rent Earned, $4,400.
E. Debit Rent Receivable, $2,200; credit Rent Earned, $2,200.
152.Alex Company has 10 employees, who earn a total of $1,800 in salaries each working day. They are paid
on Monday for the five-day workweek ending on the previous Friday. Assume that year ended December
31, is a Wednesday and all employees will be paid salaries for five full days on the following Monday.
The adjusting entry needed on December 31 is:
A. Debit Salaries Expense, $5,400; credit Salaries Payable, $5,400.
B. Debit Salaries Expense, $3,600; credit Salaries Payable, $3,600.
C. Debit Salaries Expense, $9,000; credit Salaries Payable, $9,000.
D. Debit Salaries Payable, $5,400; credit Salaries Expense, $5,400.
E. Debit Salaries Expense, $5,400; credit Cash, $5,400.
153.On January 1, Alco Company purchases manufacturing equipment costing $95,000 that is expected to
have a five-year life and an estimated salvage value of $5,000. Alco uses the straight-line depreciation
method to allocate costs. The adjusting entry needed on December 31 is:
A. Debit Depreciation Expense, $9,000; credit Accumulated Depreciation, $9,000.
B. Debit Depreciation Expense, $18,000; credit Accumulated Depreciation, $18,000.
C. Debit Depreciation Expense, $90,000; credit Accumulated Depreciation, $90,000.
D. Debit Depreciation Expense, $18,000; credit Equipment, $18,000.
E. Debit Depreciation Expense, $9,000; credit Equipment, $9,000.
154.On November 1, Jay Company loaned an affiliate $100,000 at a 9.0% interest rate. The note receivable
plus interest will not be collected until March 1 of the following year. The company's annual accounting
period ends on December 31. The adjusting entry needed on December 31 is:
A. Debit Interest Receivable, $750; credit Interest Revenue, $750.
B. Debit Interest Expense, $750; credit Interest Payable, $750.
C. Debit Interest Expense, $1,500; credit Interest Payable, $1,500.
D. Debit Interest Receivable, $2,250; credit Interest Revenue, $2,250.
E. Debit Interest Receivable, $1,500; credit Interest Revenue, $1,500.
155.Which of the following statements is incorrect?
A. An unadjusted trial balance is a list of accounts and balances prepared before adjustments are
recorded.
B An adjusted trial balance is a list of accounts and balances prepared after adjusting entries have been
. recorded and posted to the ledger.
C. Each trial balance amount is used in preparing the financial statements.
D. Financial statements should be prepared directly from information in the unadjusted trial balance.
E. Financial statements can be prepared directly from information in the adjusted trial balance.
156.Match the following terms with the appropriate definition.
1. Cash basis Items paid for in advance of receiving their benefits. _
accounting __
_
2. Prepaid Allocates equal amounts of an asset's cost (less any salvage _
expenses value) to depreciation expense during its useful life. __
_
3. Time A principle that assumes that an organization's activities _
period can be divided into specific time periods such as months,__
principle quarters, or years. _
4. Profit The principle that requires expenses to be reported in the _
margin same period as the revenues that were earned as a result of the__
expenses. _
5. Accrued The accounting system that recognizes revenues when _
revenues earned and expenses when incurred. __
_
6. Straight- The expense created by allocating the cost of plant and _
line equipment to the periods in which they are used. __
depreciation _
7. Matching Revenues earned in a period that are both unrecorded and _
principle not yet received in cash or other assets. __
_
8. Depreciati The accounting system where revenues are recognized _
on expense when cash is received and expenses are recorded when cash is__
paid. _
9. Accrual Net income divided by net sales. _
basis __
accounting _
157.Match the following terms with the appropriate definition.
1. Natural A 12 month period that ends when a company's sales _
business activities are at their lowest point. __
year _
2. Report A journal entry used at the end of an accounting period to _
form bring an asset or liability account balance to its proper amount__
balance and update the related expense or revenue account. _
sheet
3. Contra An account linked with another account and having an _
account opposite normal balance. __
_
4. Account The consecutive 12 months (or 52 weeks) selected as the _
form organization's annual accounting period. __
balance _
sheet
5. Adjustin The length of time covered by financial statements. _
g entry __
_
6. Unadju A listing of accounts and balances prepared after adjustments _
sted trial are recorded and posted to the ledger. __
balance _
7. h A balance sheet that lists items vertically in the order: assets, _
Interim liabilities and equity. __
financial _
reports
8. Account A balance sheet that lists assets on the left side and liabilities _
ing period and equity on the right. __
_
9. Adjusted A listing of accounts and balances prepared before _
trial adjustments are recorded. __
balance _
10. Fiscal Financial reports covering less than one year, usually one, _
year three, or six-month periods. __
_
158.Match the following types of adjustments (a though d) with the transactions (1 through 4).
1. Accrued expense Used to record revenue received in advance. ____

2. Unearned Used to record expiration of prepaid insurance. ____

revenue
3. Accrued revenue Used to record revenue earned but not ____
received.
4. Prepaid expense Used to record wages owed, but not paid. ____

159.Discuss the importance of periodic reporting and the time period assumption.
160.Discuss how accrual accounting enhances the usefulness of financial statements.

161.Identify the differences between accrual accounting and cash basis accounting.

162.Explain the purpose of adjusting entries at the end of a period.

163.List the three-steps of the adjusting process.

164.Identify the types of adjusting entries and explain the purpose of each type.

165.Explain how accounting adjustments affect financial statements.

166.How is profit margin calculated? Discuss its use in analyzing a company's performance.

167.Describe the types of entries required in later periods that result from accruals.

168.What are the types of adjusting entries used for prepaid expenses, depreciation and unearned revenues?

169.What are the types of adjusting entries used for accrued expenses and accrued revenues?

170.Describe the two alternate methods used to account for prepaid expenses.

171.What is an adjusted trial balance? Why is it prepared?

172.What is the usual order in which financial statements are prepared from the adjusted trial balance? Why
are they prepared in that order?

173.Explain how the owner of Cheezburger Network uses the accrual basis of accounting.

174.On December 31, the year end, a company forgot to record $7,000 of depreciation on office equipment.
In the current year financial statements, what is the effect of this error on assets, net income, and equity?

175.Given the table 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. The first one is done as an example.
Ex. Failed to recognize that $600 of unearned revenues, previously recorded as liabilities, had been earned
by year-end.
1. Failed to accrue salaries expense of $1,200.
2. Forgot to record $2,700 of depreciation on office equipment.
3. Failed to accrue $300 of interest on a note receivable.
176.A company issued financial statements for the year ended December 31, but failed to include the
following adjusting entries:
A. Accrued service fees earned of $2,200.
B. Depreciation expense of $8,000.
C. Portion of office supplies (an asset) used $3,100.
D. Accrued salaries of $5,200.
E. Revenues of $7,200, originally recorded as unearned, have been earned by the end of the year.
Determine the correct amounts for the December 31 financial statements by completing the following

table:

177.Using the table 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. The first one is
provided as an example

178.Reed's net income was $180,000; its total assets were $1,050,000; and its net sales were $3,500,000.
Calculate the company's profit margin ratio.
179.Ned's net income was $780,000; its net assets were $5,200,000; and its net sales were $9,000,000.
Calculate its profit margin ratio.

180.From the information provided, calculate Wooden's profit margin ratio for each of the three years.
Comment on the results, assuming that the industry average for the profit margin ratio is 6% for each of

the three years.

181.On December 14 Bench Company received $3,700 cash for consulting services that will be performed
in January. Bench records all such prepayments in a liability account. Prepare a general journal entry to
record the $3,700 cash receipt.

182.On December 31, Connelly Company had performed $5,000 of management services for clients that had
not yet been billed. Prepare Connelly's adjusting entry to record these fees earned.

183.A company has 20 employees who each earn $500 per week for a 5-day week that begins on Monday.
December 31 of Year 1 is a Monday, and all 20 employees worked that day.
a) Prepare the required adjusting journal entry to record accrued salaries on December 31, Year 1.
b) Prepare the journal entry to record the payment of salaries on January 4, Year 2.
184.Pfister Co. leases an office to a tenant at the rate of $5,000 per month. The tenant contacted Pfister
and arranged to pay the rent for December on January 8 of the following year. Pfister agrees to this
arrangement.
a.) Prepare the journal entry that Pfister must make at year ended December 31 to record the accrued rent
revenue.
b.) Prepare the journal entry to record the receipt of the rent on January 8 of the following year.

185.Prior to recording adjusting entries on December 31, a company's Store Supplies account had an $880
debit balance. A physical count of the supplies showed $325 of unused supplies available as of December
31. Prepare the required adjusting entry.

186.Complete the following by filling in the blanks:

(1) The Prepaid Insurance account had a $455 debit balance at the beginning of the current year; $650 of
insurance premiums were paid during the year; and the year-end 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 the current 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 the current
asset, office supplies, at $225; consequently, if all supplies were accounted for, $_____________ of
office supplies must have been purchased during the year.

187.Topflight Company had $1,500 of store supplies at the beginning of the current year. During this year,
Topflight purchased $8,250 worth of store supplies. On December 31, $1,125 worth of store supplies
remained. Calculate the amount of Topflight Company's store supplies expense for the current year.
188.Prepare general journal entries on December 31 to record the following unrelated year-end adjustments.
a. Estimated depreciation on office equipment for the year, $4,000.
b. The Prepaid Insurance account has a $3,680 debit balance before adjustment. An examination of
insurance policies shows $950 of insurance expired.
c. The Prepaid Insurance account has a $2,400 debit balance before adjustment. An examination of
insurance policies shows $600 of unexpired insurance.
d. The company has three office employees who each earn $100 per day for a five-day 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, the company received 6 months' rent in advance from a tenant whose rent is $700 per
month. The $4,200 was credited to the Unearned Rent account.
f. The company collects rent monthly from its tenants. One tenant whose rent is $750 per month has not
paid his rent for December.

189.Barnes Company has 20 employees who are each paid $80 per day for a 5-day workweek. The employees
are paid each Friday. This year the accounting period ends on Tuesday. Prepare the December 31 year-
end adjusting journal entry Barnes Company should make to accrue wages.

190.Show the December 31 adjusting entry to record $750 of earned but unpaid salaries of employees at the
end of the current accounting period.

191.Western Company had $500 of store supplies available at the beginning of the current year. During the
year Western Company purchased $2,750 worth of store supplies. On December 31 of this year $375
worth of store supplies remained.
a. Calculate the amount of Western Company's store supplies expense for the current year. (Show your
calculations.)
b. Prepare the journal entry to adjust the supplies account.
192.During the current year ended December 31, 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 remain unearned on December 31 of this year present the December 31 adjusting
entry to bring the accounts up to date.

193.The following unadjusted and adjusted trial balances were taken from the current year's accounting

system for High Point.

In general journal form, present the six adjusting entries that explain the changes in the account balances
from the unadjusted to the adjusted trial balance.
194.Black Company's unadjusted and adjusted trial balances on December 31 of the current year are as
follows

Present the four adjusting journal entries that were recorded by Black Company.

195.In general journal form, record the December 31 adjusting entries for the following transactions and
events. Assume that December 31 is the end of the annual accounting period.
a. The Prepaid Insurance account shows a debit balance of $2,340, 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 count 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 depreciation on office equipment is $600.
e. Accrued salaries amount to $400.
196.Based on the unadjusted trial balance for Bella's Beauty Salon and the adjusting information given below,
prepare the adjusting journal entries for Bella's Beauty Salon.
Bella Beauty Salon's unadjusted trial balance for the current year

follows:
Additional information:
a. An insurance policy examination showed $1,240 of expired insurance
b. An inventory count showed $210 of unused shop supplies still available.
c. Depreciation expense on shop equipment, $350.
d. Depreciation expense on the building, $2,220.
e. A beautician is behind 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, totaling $450, have accrued. This additional amount of property taxes
expense has not been recorded
i. One month's interest on the note payable, $600, has accrued but is unrecorded.
197.Based on the unadjusted trial balance for Bella's Beauty Salon and the adjusting information given below,
prepare the adjusting journal entries for Bella's Beauty Salon. After completing the adjusting entries,
prepare the trial balance for Bella's Beauty Salon.
Bella Beauty Salon's unadjusted trial balance for the current year follows:

Additional information:
a. An insurance policy examination showed $1,240 of expired insurance.
b. An inventory count showed $210 of unused shop supplies still available.
c. Depreciation expense on shop equipment, $350.
d. Depreciation expense on the building, $2,220.
e. A beautician is behind 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, totaling $450, have accrued. This additional amount of property taxes
expense has not been recorded.
i. One month's interest on the note payable, $600, has accrued but is unrecorded. Use the above
information to prepare the adjusted trial balance for Bella's Beauty Salon.
198.Using the information presented below, prepare an income statement from the adjusted trial balance of

Hanson Storage.
199.Using the information presented below, prepare a statement of owner's equity and balance sheet
from the adjusted trial balance of Hanson Storage. Ms. Hanson's capital account balance of
$40,340 consists of a $30,340 beginning-year balance plus a $10,000 investment during the current

year.
200.Using the information given below, prepare an income statement and owner's equity statement for Martin
Sky Taxi Services from the adjusted trial balance. Helena Martin did not make any additional investments
in the company during the year.

201.Using the information given below, prepare a balance sheet for Martin Sky Taxi Services from the
adjusted trial balance. Helena Martin did not make any additional investments in the company during the

year.
202.Manning, Co. collected 6-months' rent in advance from a tenant on November 1 of the current year.
When it collected the cash, it recorded the following entry:

Prepare the required adjusting entry at December 31 of the current year.

203.On October 1 of the current year, Morton Company paid $9,600 cash for a one-year insurance policy that
took effect on that day. On the date of the payment, Morton recorded the following entry:

Prepare the required adjusting entry at December 31 of the current year.

204.Harrow Co. is a multi-million business. The business results for the year have been seriously impacted
by a slowing economy. The company wants to improve its net income. It has incurred $2,500,000 in
unpaid salaries at the end of the year and wants to leave those amounts unrecorded at the end of the
year. (a) How would this omission affect the financial statements of Harrow? (b) Which accrual basis of
accounting principles does this omission violate? (c) Would this be considered an ethical problem?

205.The following information is available for Hughes Co.

From the information provided, calculate Hughes' profit margin ratio for each of the three years. In 2010
economic conditions and a slowing economy impacted the results of operations. Comment on the results,
assuming that the industry average for the profit margin ratio is 7% for each of the three years.
206.The unadjusted trial balance and the adjustment data for Harris Training Institute are given below along
with adjusting entry information. If these adjustments are not recorded, what is the impact on net income?
Show calculation for net income without the adjustments and net income with the adjustments. Which
one gives the most accurate net income? What accounting principles are being violated if the adjustments
are not made?

Additional information items:

a. The Prepaid Insurance account consists of a payment for a 1 year policy. An analysis of the insurance
invoice indicates that one half of the policy has expired by the end of the December 31 year-end.
b. A cash payment for space sublet for 8 months was received on July 1 and was credited to Unearned
Rent.
c. Accrued interest expense on the note payable of $1,000 has been incurred but not paid.
207.The unadjusted trial balance and the adjustment data for Harris Training Institute are given below along
with adjusting entry information. What is the impact of the adjusting entries on the balance sheet? Show
calculation for total assets, total liabilities, and owner's equity without the adjustments; show calculation
for total assets, total liabilities, and owner's equity with the adjustments. Which one gives the most
accurate presentation of the balance sheet?

Additional information items:

a. The Prepaid Insurance account consists of a payment for a 1 year policy. An analysis of the insurance
invoice indicates that one half of the policy has expired by the end of the December 31 year-end.
b. A cash payment for space sublet for 8 months was received on July 1 and was credited to Unearned
Rent.
c. Accrued interest expense on the note payable of $1,000 has been incurred but not paid.

208.Using the selected information given below for Bliss Company, calculate return on assets, debt ratio,
and profit margin. Comment on the results of operations and the financial position of the company for the

year.
Return on assets = ($950,000-795,000)/((1,900,000+1,500,000)/2) =9.1%
Debt ratio=$850,000/1,900,000=44.7%
Profit margin=$155,000/950,000=16.3%
209.Prepare adjusting entries for the year ended December 31, for each of these separate situations. Assume
that prepaid expenses are initially recorded in asset accounts and that fees collected in advance are
initially recorded as liabilities.
a. The Prepaid Rent account has a debit balance of $12,000 before adjustment, representing a prepayment
for four months rent made on December 1 of the current year.
b. One-third of the work related to $18,000 of cash received in advance was performed during this period.
c. Unpaid accrued salaries at December 31 amounts to $15,000
d. Work was completed for a client on December 31 in the amount of $21,000, but was not previously
billed or recorded.
e. Estimated depreciation on office equipment is $27,000.

210.Salvo Co. had the following transactions in the last two months of its year ended December 31.
Prepare entries for these transactions under the method that records prepaid expenses as expenses
and records unearned revenues as revenues. Also prepare adjusting entries at the end of the

year.

211.The following two separate situations require adjusting journal entries to prepare financial statements
as of the fiscal year ended April 30. For each situation, present both the April 30 adjusting entry and the
subsequent entry during May to record the payment of the accrued expenses or receipt of the accrued
revenue.
a. Cage Company has 10 employees, who earn a total of $2,900 in salaries each working day. They
are paid on Monday for the five-day workweek ending on the previous Friday. Assume that fiscal year
ended April 30, is a Thursday and all employees will be paid salaries for five full days on the following
Monday. All employees worked each day.
b. Services of $4,000 have been performed for a client through April 30. The client will pay the entire
amount of the contract when services are completed on May 23.
c. Paid the employees salaries on May 4
d. Received payment from the client in the amount of $11,500 for services that are now completed on
May 23.
212.Companies experiencing seasonal variations in sales often choose a fiscal year corresponding to their
________________________ year.
________________________________________
213.______________________ are required at the end of the accounting period because certain internal
transactions and events remain unrecorded.
________________________________________
214.Accrual accounting and the adjusting process rely on two principles: the ___________________ principle
and the ________________________ principle.
________________________________________
215.______________________ basis accounting means that revenues are recognized when cash is received
and that expenses are recorded when cash is paid. ________________________ basis accounting means
that the financial effects of revenues and expenses are recorded when earned or incurred.
________________________________________
216.Adjusting is a three-step process (1) ____________________________, (2)
__________________________, and (3) ____________________________.
________________________________________
217.__________________________ 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).
________________________________________
218.Accrued revenues at the end of one accounting period often result in cash _______________________ in
the next period.
________________________________________
219.______________________ revenues are liabilities requiring delivery of products and for services.
________________________________________
220.If a prepaid expense account were not adjusted for the amount used, on the balance sheet assets would be
___________________ and equity would be __________________.
________________________________________
221.Profit margin = ___________________ divided by net sales.
________________________________________
222.The ________________________________ depreciation method allocates equal amounts of an asset's
cost to depreciation during its useful life.
________________________________________
223.__________________________ is the process of allocating the cost of plant assets to their expected
useful lives.
________________________________________
224.A _____________ account is an account linked with another account, having an opposite normal balance,
and reported as a subtraction from that other account's balance.
________________________________________
225.__________________ expenses are those costs that are incurred in a period but are both unpaid and
unrecorded.
________________________________________
226.An _______________________ is a listing of all of the accounts in the ledger with their account balances
before adjustments are made.
________________________________________
227.An _______________________ is a listing of all of the accounts in the ledger with their account balances
after adjustments are made.
________________________________________
 ch03 Key
1. FALSE

2. TRUE

3. FALSE

4. TRUE

5. FALSE

6. TRUE

7. FALSE

8. TRUE

9. FALSE

10. TRUE

11. TRUE

12. TRUE

13. FALSE

14. TRUE

15. TRUE

16. TRUE

17. FALSE

18. FALSE

19. TRUE

20. FALSE

21. TRUE

22. FALSE

23. TRUE

24. TRUE

25. TRUE

26. FALSE

27. TRUE

28. FALSE

29. TRUE

30. FALSE

31. FALSE

32. FALSE

33. TRUE

34. FALSE

35. TRUE

36. FALSE
37. FALSE

38. TRUE

39. TRUE

40. TRUE

41. TRUE

42. FALSE

43. TRUE

44. FALSE

45. TRUE

46. FALSE

47. TRUE

48. TRUE

49. TRUE

50. FALSE

51. FALSE

52. FALSE

53. TRUE

54. FALSE

55. TRUE

56. FALSE

57. FALSE

58. FALSE

59. FALSE

60. FALSE

61. FALSE

62. TRUE

63. TRUE

64. FALSE

65. TRUE

66. FALSE

67. TRUE

68. TRUE

69. E

70. B

71. A

72. C

73. C

74. B
75. C

76. B

77. D

78. C

79. E

80. D

81. B

82. A

83. E

84. C

85. B

86. E

87. C

88. B

89. C

90. B

91. D

92. E

93. C

94. C

95. A

96. B

97. B

98. D

99. C

100. C

101. D

102. C

103. D

104. B

105. C

106. C

107. B

108. D

109. C

110. E

111. D

112. B
113. A

114. E

115. E

116. A

117. B

118. A

119. E

120. C

121. B

122. A

123. B

124. C

125. E

126. D

127. E

128. D

129. B

130. A

131. B

132. B

133. C

134. D

135. D

136. A

137. A

138. B

139. A

140. C

141. B

142. D

143. A

144. E

145. B

146. D

147. C

148. A

149. B

150. C
151. D

152. A

153. B

154. E

155. D

156. Prepaid expenses :: Items paid for in advance of receiving their benefits. and Straight-line depreciation :: Allocates equal amounts of
an asset's cost (less any salvage value) to depreciation expense during its useful life. and Time period principle :: A principle that assumes
that an organization's activities can be divided into specific time periods such as months, quarters, or years. and Matching principle :: The
principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses. and Accrual
basis accounting :: The accounting system that recognizes revenues when earned and expenses when incurred. and Depreciation expense :: The
expense created by allocating the cost of plant and equipment to the periods in which they are used. and Accrued revenues :: Revenues earned
in a period that are both unrecorded and not yet received in cash or other assets. and Cash basis accounting :: The accounting system where
revenues are recognized when cash is received and expenses are recorded when cash is paid. and Profit margin :: Net income divided by net
sales.

157. Natural business year :: A 12 month period that ends when a company's sales activities are at their lowest point. and Adjusting entry :: A
journal entry used at the end of an accounting period to bring an asset or liability account balance to its proper amount and update the related
expense or revenue account. and Contra account :: An account linked with another account and having an opposite normal balance. and Fiscal
year :: The consecutive 12 months (or 52 weeks) selected as the organization's annual accounting period. and Accounting period :: The
length of time covered by financial statements. and Adjusted trial balance :: A listing of accounts and balances prepared after adjustments are
recorded and posted to the ledger. and Report form balance sheet :: A balance sheet that lists items vertically in the order: assets, liabilities and
equity. and Account form balance sheet :: A balance sheet that lists assets on the left side and liabilities and equity on the right. and Unadjusted
trial balance :: A listing of accounts and balances prepared before adjustments are recorded. and h Interim financial reports :: Financial reports
covering less than one year, usually one, three, or six-month periods.

158. Unearned revenue :: Used to record revenue received in advance. and Prepaid expense :: Used to record expiration of prepaid
insurance. and Accrued revenue :: Used to record revenue earned but not received. and Accrued expense :: Used to record wages owed, but not
paid.

159. 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 assumption assumes that an
organization's activities can be divided into specific time periods such as months, quarters or years.

160. The accrual accounting method recognizes revenue when earned and expenses when incurred. In this way, accrual accounting better reflects
business performance than information about cash receipts and payments. Accrual accounting also increases the comparability of financial
statements from one period to another.

161. Accrual accounting records revenues in the period earned, and expenses in the period incurred. The cash basis, on the other hand records
revenues when cash is received, and expenses when cash is paid.

162. Even though external transactions may be recorded promptly, internal transactions and events may not be recorded. Adjusting entries are
used to bring an asset or liability account balance to its proper amount and to also update a related expense or revenue account. Examples of
internal events requiring adjusting entries would be the recognition of revenue earned or expenses incurred during an accounting period when the
corresponding cash received or cash paid occurs in another period.

(3) Record entry to get from step 1 to step 2.

(2) Compute what the current account balance should be.
163. (1) Compute the current account balance.

164. Adjusting entries can be grouped into two general categories: accruals and deferrals. Both of these groups can be further 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.

165. Without accounting adjustments many accounts would have balances that do not reflect the proper financial performances and financial
condition of the company. 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 better reflect the financial condition and performance of the company.

166. Profit margin is calculated by dividing net income by net sales. The resulting percent reflects the percent of profit a company makes for every
dollar in sales. The profit margin ratio is useful in comparing a company's performance to that of its competitors, and as a relative measure of the
company's performance across periods.

167. 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.
168. 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. Depreciation is the recognition of the decline in usefulness of plant and equipment assets. The adjusting
entry for depreciation 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.

169. 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. The adjusting entry recognizes the revenue and also establishes a receivable.

170. The first 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. The second 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.

171. An adjusted trial balance is a list of accounts and balances prepared after adjusting entries are recorded and posted to the ledger. The purpose
of the adjusted trial balance is to ensure that total debits equal total credits for all accounts in the ledger.

172. The income statement is prepared first. The amount of net income is then used in the statement of owner's equity to calculate the ending
balance in the owner's capital account. The ending balance in the owner's capital account is then transferred to the balance sheet. The statement of
cash flows is usually prepared last.

173. The owner understood the importance of an accounting system and set one up early to account for everything. He learned about deferrals and
accruals and monitored the adjusting of revenues and expenses so that good business decisions could be made. The owner insists on timely and
accurate preparation of financial statements so that reliable business decisions can be made.

3.) Equity is overstated by $7,000.

2.) Net income is overstated by $7,000.
Feedback: 1.) Assets are overstated by $7,000.
174. Answers will vary

Feedback:
175. Answers will vary

Feedback:
176. Answers will vary
Feedback:
177. Answers will vary

Feedback: $180,000/$3,500,000 = 5.1%

178. Answers will vary

Feedback: $780,000/$9,000,000 = 8.7%

179. Answers will vary

Analysis comment: The profit margin has increased in all three years and has exceeded the industry average in the last two years. These results
reflect positively on Wooden and its trend in profitability.

Feedback:
180. Answers will vary

Feedback:
181. Answers will vary

Feedback:
182. Answer will vary

Feedback:
183. Answer will vary
Feedback:
184. Answers will vary

Feedback:
185. Answers will vary

(2) $465 = $225 + $475 - $235

Feedback: (1) $685 = $455 + $650 - $420
186. Answers will vary

Feedback: $1,500 + $8,250 - $1,125 = $8,625

187. Answers will vary

Feedback:
188. Answers will vary

Feedback:
189. Answers will vary
Feedback:
190. Answers will vary

Feedback:
191. Answers will vary

Feedback:
192. Answers will vary

Feedback:
193. Answers will vary
Feedback:
194. Answers will vary

Feedback: (all entries dated December 31)

195. Answers will vary
Feedback:
196. Answers will vary

Feedback:
197. Answers will vary
Feedback:
198. Answers will vary

Feedback:
199. Answers will vary
Feedback:
200. Answers will vary

Feedback:
201. Answers will vary

($15,000/6 mo. = $2,500/mo; 4 mo. unearned = 4 x $2,500 = $10,000)

Feedback:
202. Answers will vary
($9,600/12 mo. = $800/mo.; 9 mo. prepaid = 9 x $800 = $7,200)

Feedback:
203. Answers will vary

c. Yes, it would be considered unethical and a violation of generally accepted accounting principles. Financial statement users could be misled by
the omission of the expense and the overstatement of net income.
b. Comparability and matching principles.
Feedback: a. The net income would be overstated because the expense was omitted. Liabilities would be understated and owners' equity would be
overstated.
204. Answers will vary

Hughes Co. did rebound from the slowing economy and increased the profit margin to 6.8% in 2011, which is just short of the industry average of
7%. If Hughes' sales and profits continue to increase at the same rate for next year, the company will exceed the 7% profit margin ratio.

Feedback:
205. Answers will vary

The accrual basis gives the most accurate net income because it requires all revenues to be recorded when earned and all expenses to be recorded
when incurred. This follows the matching principle which states that expenses of the period should be matched with revenues of the period. There
is a net increase of $5,000 in net income. Revenues increase by $12,000 to recognize the rent earned. Expenses increase by $7,000; a $6,000
increase in Insurance Expense and a $1,000 increase in Interest Expense.

Feedback:
206. Answers will vary
The accrual basis gives the most accurate balance sheet presentation. Prepaid insurance has been reduced to show the portion related to future
periods. Liabilities now show the correct balance in Unearned Rent and Interest Payable. Equity increased because of the increase in Net Income.

Feedback:
207. Answers will vary

Feedback: The company is performing well. Profit margin and debt ratio are at acceptable levels. Return on assets may be low. This would depend
on the type of business and expectations of management. The increase in assets during the year could have resulted in the lowering of return on
assets. This would need to be compared to prior years and to industry standards, and should be monitored in subsequent years.
208. Answers will vary

Feedback:
209. Answers will vary

Feedback:
210. Answers will vary
Feedback:
211. Answers will vary

212. Natural business

213. Adjusting entries

214. Revenue recognition; matching

215. Cash; Accrual

216. (1) Compute current account balance; (2) Compute what the account balance should be; (3) Record entry to get from step 1 to step 2

217. Accrued expenses; Accrued revenues

218. Receipts (or inflows)

219. Unearned

220. Overstated; overstated

221. Net income

222. Straight-line

223. Depreciation

224. Contra

225. Accrued

226. Unadjusted trial balance

227. Adjusted trial balance

 ch03 Summary
Category # of Questions
AACSB: Analytic 143
AACSB: Communications 81
AACSB: Critical Thinking 2
AACSB: Ethics 1
AICPA BB: Critical Thinking 5
AICPA BB: Global 1
AICPA BB: Industry 209
AICPA BB: Legal, Critical Thinking 1
AICPA BB: Resource Management 11
AICPA FN: Decision Making 36
AICPA FN: Measurement 168
AICPA FN: Measurement, Risk Analysis 1
AICPA FN: Reporting 21
AICPA FN: Resource Management 1
Blooms: Analyze 15
Blooms: Apply 77
Blooms: Remember 62
Blooms: Understand 73
Difficulty: Easy 62
Difficulty: Hard 91
Difficulty: Medium 74
Fundamental - Chapter 03 227
Learning Objective: A1 Explain how accounting adjustments link to financial statements. 17
Learning Objective: A2 Compute profit margin and describe its use in analyzing company performance. 17
Learning Objective: C1 Explain the importance of periodic reporting and the time period assumption. 13
Learning Objective: C2 Explain accrual accounting and how it improves financial statements. 35
Learning Objective: C3 Identify the types of adjustments and their purpose. 27
Learning Objective: P1 Prepare and explain adjusting entries. 95
Learning Objective: P2 Explain and prepare an adjusted trial balance. 15
Learning Objective: P3 Prepare financial statements from an adjusted trial balance. 19
Learning Objective: P4 Appendix 3A —Explain the alternatives in accounting for prepaids. 9