Accrual and Closing | 1st Test Bank

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Chapter 5

Accrual and Closing

Test Bank

True/False Questions

1. A company purchased £30,000 of cotton fabric on credit from Egypt on 2 November 2011 to use in the production of summer shirts. On 17 November 2011, the company paid the amount owed. The fabric is received on 5 November 2011 and used in production on 7 November 2011. Under cash-basis accounting, the purchase would be recorded on 2 November 2011 and the payment on 17 November 2011.

Page: p236

1. Moorea Marine Services, LLC services yachts. On 2 May 2010 a customer brings her boat in to have the engine repaired. On 30 May 2010, the work is completed. On 2 June 2010 the customer picks up her sailboat and on 5 June 2010 Moorea Marine Services receives payment which has been wired from the customer’s London bank. Under accrual basis accounting, service revenue would be recognized on 30 May 2010.

Page: p236

1. Adjusting entries must meet two criteria: 1) they cannot involve cash and 2) both the statement of comprehensive income and the statement of financial position are affected.

Page: p241

1. Cenek Systems, Inc. has a contract with a customer to provide programming services. The work would was completed on 29 June 2010 however the customer has not been billed for payment nor has the customer paid. Cenek’s fiscal year ends 30 June. No adjusting entry is needed for the programming services contract until the customer is billed for the services.

Page: p243

1. Akilina Travel, Ltd. has three employees. The amount of the payroll each week is €3,500 for all employees. The workweek is from Monday through Friday. Employees are paid on Friday. The reporting period ends on 30 June 2011 which is Thursday. The Akilina would make an adjusting entry on 30 June 2011 with a debit to salaries expense for €3,500 and a credit to salaries payable for €3,500.

Page: p243

1. On 27 February 2010, Udaya Cosmetics, Ltd. receives an advance payment of €17,500 in cash from a customer for one-half of the cost of the merchandise being bought. The merchandise will be shipped on 4 March 2010. On 27 February 2010 Udaya would make an adjusting entry to record cash for €17,500 and credit unearned revenue for €17,500.

Page: p245

1. A company pays ¥228,000 for six months advance rent on a warehouse. The company reports its financial results on a monthly basis. At the end of each of the six months an adjusting entry would be recorded to debit rent expense for ¥38,000 and credit pre-paid rent for ¥38,000.

Page: p247

1. A company pays $86,400 in advance for insurance coverage on a small manufacturing facility. The company reports financial results on a monthly basis. At the end of each of the following twelve months an adjusting entry would be recorded to debit insurance expense for $7,200 and credit cash for $7,200.

Page: p247

1. Adjusting entries are recorded in the journal and posted to the ledger.

Page: p249

1. Temporary accounts include revenues, expenses and dividends.

Page: p258

1. Retained earnings is a temporary account.

Page: p260

1. Reserves are permanent accounts.

Page: p260

1. Typical closing entries would be: 1) close revenue to income summary, 2) close expenses to income summary, 3) close dividends to income summary, and 4) close income summary to retained earnings.

Page: p260

1. The post-closing trial balance will have net debit or credit balances only for accounts that appear on the statement of financial position. All other accounts have a zero balance.

Page: p263

1. A closing entry could include a debit or credit to cash.

Page: p258

1. A closing entry could include a debit or credit to insurance expense.

Page: p258

1. A closing entry could include a debit or credit to trade accounts payable.

Page: p258

1. A company has a monthly reporting period. At the end of August 2011, the accounting department fails to record the closing entries. As a result, revenue for September 2011 will be overstated.

Page: p258

1. A company has a monthly reporting period. At the end of March 2009, the accounting department fails to record the closing entry for expenses. As a result, profit or loss for April 2009 will be overstated.

Page: p258

1. A company has a monthly reporting period. At the end of February 2010, the accounting department fails to record the closing entry for dividends. As a result, profit or loss for March 2010 will be understated.

Page: p258

1. When preparing an extend trial balance worksheet, profit or loss shown in the credit column on the statement of comprehensive income would be a profit and would be shown in the debit column of the statement of financial position.

Page: p284

Multiple Choice Questions

1. Revenue must be accrued by recording an adjusting entry for which of the following?
   1. An orchestra receives a cash advance for an engagement the following month
   2. An office cleaning business was hired for a special two day job which has been completed but for which the customer has not yet been billed
   3. A retail book store received an order from an overseas customer. The books have been shipped and a bill has been sent to the customer requesting payment.
   4. An office supplies company sells copier paper to a customer. The paper has been delivered and a bill has been sent to the customer requesting payment within three days before the end of the office supply company’s reporting period.

Page: p240

1. Which of the following is not an adjusting entry?
   1. Debit unearned revenue; credit revenue
   2. Debit insurance expense; credit pre-paid insurance
   3. Debit cash; credit unearned revenue
   4. Debit wages expense; credit wages payable

Page: p240

1. Which of the following is not an adjusting entry?
   1. Debit unearned revenue; credit revenue
   2. Debit rent expense; credit rent payable
   3. Debit rent expense; credit pre-paid rent
   4. Debit unearned revenue; credit pre-paid expenses

Page: p240

1. A company sells a subscription to a financial journal for £288 per year which customers pay in advance. The company has a monthly reporting period and its fiscal year ends on 31 December. At the end of each month, the company would take which of the following actions?
   1. No adjusting would be necessary
   2. An adjusting entry would be recorded to debit pre-paid subscriptions for £24 and credit subscription revenue for £24
   3. An adjusting entry would be recorded to debit pre-paid subscriptions for £288 and credit subscription revenue for £288
   4. An adjusting entry would be recorded at the end of the company’s fiscal year to debit pre-paid subscriptions for £288 and credit subscription revenue for £288

Page: p245

1. A real estate development company leases office space in one of its towers. In the year ended 31 December 2010, the company had received payments from tenants totaling $19,503,000. The following amounts were reported for rent in arrears and in advance:

All amounts in arrears were subsequently received. What amount for rental income should be reported in the statement of comprehensive income at 31 December 2010?

1. $1,287,000
2. $1,209,000
3. $1,260,000
4. $1,251,000

Page: p247

1. A company hires four people for five days to work on a telephone advertising campaign. Which of the following independent circumstances would not require an adjusting entry?
   1. Workers are paid on the last day of the work period. On the third day of the work period, the company’s reporting period ends.
   2. The company pays each of the four employees in cash at the end of each day’s work.
   3. The company pays the employees the week before the work begins.
   4. The company’s reporting period ends on the fifth day. Employees will be paid one week after completion of the work.

Page: p243

1. Which of the following is not a temporary account?
   1. Dividends
   2. Insurance expense
   3. Retained earnings
   4. Cost of goods sold

Page: p258

1. Which of the following is not a permanent account?
   1. Retained earnings
   2. Dividends
   3. Trade accounts payable
   4. Trade accounts receivable

Page: p258

1. Which of the following statements does not accurately describe the closing process?
   1. Income summary is closed to retained earnings
   2. Dividends are closed to income summary
   3. Expenses are closed to income summary
   4. Revenue is closed to income summary
2. In which of the following accounting process reports do temporary accounts have a zero balance?

1 trial balance

2 post-closing trial balance at the end of the reporting period

3 adjusted trial balance

4 ledger at the beginning of a reporting period

1. All have zero balances
2. 2, 3 and 4 only
3. 2 only
4. 2 and 4 only

Page: p264

1. A company’s accountant fails to record the closing entries for the fiscal year ended 31 December 2010. The company reported a profit and paid dividends of £20,000 in both 2010 and 2011. Which of the following statements is inaccurate with regard to 2011’s financial statements if all temporary accounts were closed at the end of 2011?
   1. Revenues will be understated
   2. Net income will be overstated
   3. Retained earnings will not be affected
   4. Expenses will be overstated

Page: p258

1. On 30 June 2010, a company received $120 in advance for a year’s subscription to its magazine. However, the company’s account fails to record the adjusting entries related to this transaction during 2010. Which of the following statements is accurate regarding the effect of this error on the financial statements at 31 December 2010?
   1. Revenue will be understated by $60
   2. Revenue will be understated by $120
   3. Profit will be understated by $120
   4. Retained earnings will be overstated by $60

Page: p258

Essay Questions

1. Discuss the difference between cash-basis accounting and accrual accounting.
2. Explain the two criteria that all adjusting entries must meet.
3. Explain what an adjusting entry is and why it is recorded.
4. Explain the four types of adjusting entries?

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