CHAPTER 3

ADJUSTING THE ACCOUNTS

Summary of Questions by Study Objectives
and Bloom’s Taxonomy

Note: K = Knowledge C = Comprehension AP = Application

* This topic is dealt with in an Appendix to the chapter.

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Note: TF = True-False MC = Multiple Choice Ma = Matching

* This topic is dealt with in an Appendix to the chapter.

Summary of Questions by LEVEL OF DIFFICULTY (LOD)

Note: E = Easy M = Medium H=Hard

* This topic is dealt with in an Appendix to the chapter.

CHAPTER STUDY OBJECTIVES

1. Explain accrual basis accounting, and when to recognize revenues and expenses. In order to provide timely information, accountants divide the life of a business into specific time periods. Therefore it is important to record transactions in the correct time period. Under accrual basis accounting, events that change a company’s financial statements are recorded in the periods in which the events occur, rather than in the periods in which the company receives or pays cash. Revenue and expense recognition criteria provide guidance about when to recognize revenues and expenses. Revenue is recognized when the service has been performed or the goods have been sold and delivered, as long as the revenue can be reliably measured and collection is reasonably certain based on the Revenue Recognition Principle. Expenses are recorded in the same period as revenue is recognized, if there is a direct association between the revenues and expenses, to ensure that they are matched. If there is no association between revenues and expenses, expenses are recorded in the period they are incurred.

2. Prepare adjusting entries for prepayments. Prepayments are either prepaid expenses or unearned revenues. Adjusting entries for prepayments record the portion of the prepayment that applies to the expense or revenue of the current accounting period. The adjusting entry for prepaid expenses debits (increases) an expense account and credits (decreases) an asset account. For a long-lived asset, the contra asset account Accumulated Depreciation is used instead of crediting the asset account directly. The adjusting entry for unearned revenues debits (decreases) a liability account and credits (increases) a revenue account.

3. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues and expenses that apply to the current accounting period and that have not yet been recognized through daily journal entries. The adjusting entry for accrued revenue debits (increases) a receivable account and credits (increases) a revenue account. The adjusting entry for an accrued expense debits (increases) an expense account and credits (increases) a liability account.

4. Describe the nature and purpose of an adjusted trial balance, and prepare one. An adjusted trial balance shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. It proves that the total of the accounts with debit balances is still equal to the total of the accounts with credit balances after the adjustments have been posted. Financial statements are prepared from an adjusted trial balance in the following order: (1) income statement, (2) statement of owner’s equity, and (3) balance sheet.

5. Prepare adjusting entries for the alternative treatment of prepayments (Appendix 3A). Under certain circumstances, prepayments may initially be debited (increased) to an expense account. Unearned revenues may initially be credited (increased) to a revenue account. At the end of the period, these accounts may be overstated. The adjusting entries for prepaid expenses are a debit (increase) to an asset account and a credit (decrease) to an expense account. Adjusting entries for unearned revenues are a debit (decrease) to a revenue account and a credit (increase) to a liability account. It does not matter which alternative is used to record and adjust prepayments, as the ending account balances will be the same with both methods, assuming that the entries are prepared correctly.

TRUE-FALSE STATEMENTS

1. Because accounting often requires estimates to be made to assess the effect of a transaction, the shorter the time period, the easier it becomes to determine the proper adjustments.

2. An interim period of a company can be any time period of less than one year.

3. A company needs to divide the life of its business into accounting periods in order to provide useful and relevant information to the people who use its financial statements.

4. The fiscal year of the company must be the same as a calendar year.

5. Accounting time periods that are more than one year in length are referred to as interim periods.

6. Many business transactions will affect more than one accounting period.

7. In the accrual basis of accounting, revenue is recognized when the cash for the transaction is received.

8. In the accrual basis of accounting, expenses are recognized when the services are used or the goods are consumed, not when the cash is paid.

9. The cash basis of accounting is more useful than the accrual basis as the balance in the bank account is always reflected in the financial statements.

10. The accrual basis of accounting is more complex than the cash basis of accounting as it involves such decisions as determining when to record revenues and expenses.

11. The cash basis of accounting is not in accordance with generally accepted accounting principles.

12. Revenue is recognized when there is a decrease in assets or an increase in liabilities as the result of the company’s business activities with its customers.

13. An expense is recognized when there is an increase in assets or a decrease in liabilities from consuming a service or asset in the company’s business activities with its customers.

14. Revenue recognition is restricted to situations when the service has been performed and the revenue can be reliably measured and a collection is reasonably certain.

15. Expense recognition is tied to revenue recognition when there is a direct association between the cost incurred and the earning of revenue.

16. There is always a direct relationship between revenues and expenses.

17. Adjusting entries are often made because some business events are NOT recorded as they occur.

18. Adjusting entries are NOT necessary if the trial balance debit and credit columns balances are equal.

19. An adjusting entry will always debit an asset to increase the asset.

20. Adjusting journal entries are only necessary when year end financial statements are prepared.

21. Prepayments are always made with cash.

22. Prepayments must always be debited to an asset account and credited to a liability account.

23. Unearned revenue is a cash payment which has been received in advance and it is recorded as an asset of the business.

24. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.

25. Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

26. To decrease an unearned revenue account, a credit entry to that account must be made.

27. The straight-line method of depreciation will allocate a portion of the cost of the asset to each year of useful life of the asset.

28. The useful life of an asset is always known at the time the asset is purchased.

29. The annual depreciation expense is equal to the cost of the asset divided by the useful life of the asset (in years).

30. Accumulated depreciation is a contra asset account.

31. Accumulated depreciation is shown as a deduction from the asset on the company’s Balance Sheet.

32. The normal balance of the accumulated depreciation is always a debit.

33. Accumulated depreciation is shown in the liability section of the Balance Sheet because its normal balance is a credit.

34. The difference between the cost of the asset and its accumulated depreciation is called the “carrying amount” of the asset.

35. The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

36. An adjusting entry will credit a liability to increase the liability.

37. Accrued expenses are expenses that have been incurred but have not been recorded yet in the records.

38. An adjusting entry always involves two balance sheet accounts.

39. If an Interest Expense account is debited in an adjusting entry, then the account credited will be Interest Revenue.

40. If an Interest Receivable account is debited in an adjusting entry, then the account credited will be Interest Revenue.

41. If the debits equal the credits in the adjusted trial balance, it means that all of the entries have been made.

42. In the adjusted trial balance, if some of your adjusting entries have been posted twice, the debit totals will equal the credit totals on the trial balance.

43. An adjusted trial balance is necessary to prepare financial statements.

*44. When a prepayment is made for an insurance policy, the debit may be made to the Insurance Expense account.

*45. When the original entry for prepaid insurance is debited to Insurance Expense, the adjusting entry would debit Insurance Expense and credit Prepaid Insurance.

*46. When the original entry for unearned revenue is credited to Revenue, the adjusting entry will debit Revenue and credit Unearned Revenue for the unearned amount at the date of the Financial Statements.

*47. If an Expense account is debited when the payment for a prepaid expense is made, no adjusting entry is required.

*48. An adjusting entry requiring a debit to Unearned Revenue indicates that the initial transaction was charged to a liability account.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

49. A business will divide the life of its business into specific accounting periods because

a. a transaction can only affect one period of time.

b. the number of transactions will be more evenly divided between periods.

c. adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations.

d. It will provide useful information to the business’s users.

50. An accounting time period that is one year in length, which could, but does not need to begin on January 1, is referred to as

a. a fiscal year.

b. an interim period.

c. final reporting period.

d. a reporting period.

51. Management usually desires _________ financial statements and the Canada Revenue Agency requires all businesses to file __________ tax returns.

a. annual, annual

b. monthly, annual

c. quarterly, monthly

d. monthly, monthly

52. A company is required to prepare adjusting entries for its financial statements because

a. Canada Revenue Agency requires adjusting entries.

b. the cash balance would not be properly reflected.

c. long-term assets must be expensed when purchased.

d. transactions may relate to more than one accounting period.

53. In general, the shorter the time period, the difficulty of making the proper adjustments to accounts

a. is increased.

b. is decreased.

c. is unaffected.

d. depends on the number of transactions in the period.

54. Which of the following is NOT a common accounting period chosen by businesses?

a. Daily

b. Monthly

c. Quarterly

d. Annually

55. Which of the following accounting periods would NOT be referred to as an interim period?

a. Monthly

b. Quarterly

c. Semi-annually

d. Annually

56. The fiscal year of a business is usually determined by

a. the Canada Revenue Agency.

b. the Tax Act.

c. the business.

d. provincial securities and exchange commissions.

57. The revenue recognition criteria states that revenue of a business is recognized

a. when cash is received.

b. when it is earned.

c. at the end of the year.

d. in the period that the expenses to earn that revenue are incurred.

58. In a service-type business, revenue is considered earned

a. at the end of the month.

b. at the end of the year.

c. when the service is performed.

d. when cash is received.

59. Revenue will be recognized when the following occurs as a result of a business activity with a customer.

a. There is an increase in assets.

b. There is an increase in liabilities.

c. There is a decrease in assets.

d. None of the above.

60. Expenses should be recognized, excluding transactions with owners, when which of the following occurs?

a. There is an increase in assets.

b. There is an increase of liabilities.

c. There is a decrease in liabilities.

d. None of the above.

61. A company spends $10 million dollars for an office building. Over what period of time should the cost be written off?

a. when the $10 million is expended in cash

b. all in the first year

c. over the useful life of the building

d. over the physical life of the building

62. Expense recognition is tied to revenue recognition when

a. cash has been received for the revenue.

b. efforts should be matched with accomplishments.

c. when there is a direct association with the costs incurred and when the revenue is earned.

d. cash payments have been expended in the same accounting period.

63. A dress shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and payment from the customer is received on December 10. The dress shop follows GAAP and recognizes revenue accordingly. When is the $1,000 considered to be earned?

a. December 5

b. December 10

c. November 30

d. December 1

64. A furniture factory's employees work overtime to finish an order that is sold on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. According to the expense recognition criteria the overtime wages should be expensed in

a. February.

b. March.

c. the period when the workers receive their cheques.

d. either in February or March depending on when the pay period ends.

65. On June 28, Bronnie’s provided consulting services to Maisie Company. Bronnie’s billed Maisie on July 2 for $800 related to these services. On July 5, Maisie paid the invoice in full. Bronnie’s only cost related to this sale was $250 in salaries expense. Bronnie’s paid the salaries on July 3. Assuming Bronnie’s Company has a June 30 year end, the company’s profit for the Maisie’s job on the June 30 financial statements should be

a. 0.

b. $800.

c. $550.

d. $250.

66. Tantramar Construction has an October 31 year end. On October 20 Tantramar received a payment from Cantech Industries in the amount of $25,000 as an advance on the construction for the new head office of Cantech. Construction was to have started October 25 but due to an early snowfall, construction did not start until November 7. Construction is scheduled to be completed December 31. Following the revenue recognition criteria, the revenue which Tantramar should record in its October 31 Financial Statements is

a. $10,000.

b. $5,000.

c. 0.

d. none of the above.

67. Under the accrual basis of accounting

a. cash must be disbursed before an expense is recognized.

b. profit is calculated by matching cash outflows against cash inflows.

c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.

d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

68. Adjusting entries are needed

a) every time cash is received.

b) every time financial statements are prepared.

c) every time expenses are incurred or revenue is performed.

d) never if you are reporting on an annual basis.

69. Companies reporting under IFRS must prepare adjusting entries every

a) month.

b) day.

c) year.

d) quarter.

70. When using accrual basis accounting, financial statement preparers must

a) provide a supplementary note detailing that accrual accounting has been used.

b) state within a note that cash basis accounting is not acceptable under GAAP.

c) provide no supplementary note because the underlying assumption is that accrual basis of accounting is used on all financial statements.

d) none of the above.

71. Which of the following items is NOT classified as an adjusting entry?

a) prepaid expenses

b) accrued expenses

c) unearned revenues

d) owner’s capital

72. A 52 week period is called a(n)

a) fiscal year.

b) interim period.

c) quarter.

d) business period.

73. Shediac Bay Marina has a September 30 year end. On August 15, 2014, it purchased a new marine crane to assist it with the autumn pull out of the boats in the marina. The physical life of the crane is expected to be 15 years, but Shediac plans to keep the crane for only 10 years and then trade it in for a newer model. The original cost of the crane is $50,000. The amount of depreciation that Shediac should show in its financial statements for the year ended September 30, 2014 is

a. $3,333.

b. $5,000.

c. $ 417.

d. $ 625.

74. Accounts often need to be adjusted because

a. there is difficulty in determining which period a transaction should be recorded.

b. many transactions affect more than one accounting period.

c. there are always errors made in recording transactions.

d. management may direct expenses to be recorded in future periods to increase this period’s profit.

75. Adjusting entries are

a. not necessary if the accounting system is operating properly.

b. usually required before financial statements are prepared.

c. made when the cash basis of accounting is used.

d. made to income statements accounts only.

76. Adjusting entries are required

a. because some costs expire with the passage of time and have not yet been journalized.

b. when the company's profits are below the budget.

c. when expenses are recorded in the period in which they are earned.

d. when revenues are recorded in the period in which they are earned.

77. An adjusting entry

a. affects two balance sheet accounts.

b. affects two income statement accounts.

c. affects a balance sheet account and an income statement account.

d. is always a compound entry.

78. The preparation of adjusting entries is

a. straight forward because the accounts that need adjustment will be out of balance.

b. required every time financial statements are prepared.

c. only required for accounts that do not have a normal balance.

d. optional when financial statements are prepared.

79. An asset—expense relationship exists with

a. liability accounts.

b. revenue accounts.

c. prepaid expense adjusting entries.

d. accrued expense adjusting entries.

80. Pooley Electric Company purchased office supplies costing $4,000 and debited Office Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,600 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be

a. debit Office Supplies Expense, $1,600; credit Office Supplies, $1,600.

b. debit Office Supplies, $2,400; credit Office Supplies Expense, $2,400.

c. debit Office Supplies Expense, $2,400; credit Office Supplies, $2,400.

d. debit Office Supplies, $1,600; credit Office Supplies Expense, $1,600.

81. Sackville Harness Shop received $2,000 cash for harness services to be provided in the future. The full amount was credited to the liability account Unearned Harness Fees. If the Harness services have been provided at the end of the accounting period and no adjusting entry is made, this would cause

a. expenses to be overstated.

b. profit to be overstated.

c. liabilities to be understated.

d. revenues to be understated.

82. Prepaid expenses are

a. paid and recorded in an asset account before they are used or consumed.

b. paid and recorded in an asset account after they are used or consumed.

c. incurred but not yet paid or recorded.

d. incurred and already paid or recorded.

83. Which of the following reflect the balances of prepayment accounts prior to adjustment?

a. Balance sheet accounts are understated and income statement accounts are understated.

b. Balance sheet accounts are overstated and income statement accounts are overstated.

c. Balance sheet accounts are overstated and income statement accounts are understated.

d. Balance sheet accounts are understated and income statement accounts are overstated.

84. The Kookie Kutter Bakery purchased $6,500 worth of baking supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the baking supplies indicated only $3,000 on hand. The adjusting entry that should be made by the company on June 30 is

a. debit Baking Supplies Expense, $3,000; credit Baking Supplies, $3,000.

b. debit Baking Supplies Expense, $3,500; credit Baking Supplies, $3,000.

c. debit Baking Supplies, $3,500; credit Baking Supplies Expense, $3,500.

d. debit Baking Supplies Expense, $3,500; credit Baking Supplies, $3,500.

85. On July 1 the Fog Forest Gallery paid $4,000 to Tapley Realty for 4 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on August 31, the adjusting entry to be made by the Fog Forest is

a. debit Rent Expense, $3,000; credit Prepaid Rent, $1,000.

b. debit Prepaid Rent, $2,000; credit Rent Expense, $2,000.

c. debit Rent Expense, $1,000; credit Prepaid Rent, $3,000.

d. debit Rent Expense, $2,000; credit Prepaid Rent, $2,000.

86. Depreciation Expense for a period can be calculated by taking the

a. original cost of a long-lived asset – accumulated depreciation.

b. original cost of a long-lived asset ÷ depreciation rate.

c. original cost of a long-lived asset ÷ useful life.

d. fair value of a long-lived asset ÷ useful life.

87. Accumulated Depreciation is

a. an expense account.

b. an owner's equity account.

c. a liability account.

d. a contra asset account.

88. Dorchester Museum purchased a computer for $3,600 on December 1. It is estimated that the useful life of the computer will be 3 years. If financial statements are to be prepared on December 31, the company should make the following adjusting entry

a. debit Depreciation Expense, $100; credit Computer, $100.

b. debit Depreciation Expense, $100; credit Accumulated Depreciation, $100.

c. debit Depreciation Expense, $1,200; credit Accumulated Depreciation, $1,200.

d. debit Cash, $100; credit Accumulated Depreciation, $100.

89. Patterson Realty Company received a cheque for $21,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $21,000. Financial statements will be prepared on July 31. Patterson Realty should make the following adjusting entry on July 31

a. debit Unearned Rent Revenue, $3,500; credit Rent Revenue, $3,500.

b. debit Rent Revenue, $3,500; credit Unearned Rent Revenue, $3,500.

c. debit Unearned Rent Revenue, $21,000; credit Rent Revenue, $21,000.

d. debit Cash, $21,000; credit Rent Revenue, $21,000.

90. As prepaid expenses expire with the passage of time, the correct adjusting entry will be a

a. debit to an asset account and a credit to an expense account.

b. debit to an expense account and a credit to an asset account.

c. debit to an asset account and a credit to an asset account.

d. debit to an expense account and a credit to an expense account.

91. Which of the following would NOT appear on a company’s adjusted trial balance?

a. ending owner’s capital

b. beginning owner’s capital

c. the company’s assets

d. the company’s liabilities

92. If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month's financial statements?

a. Failure to make an adjustment does not affect the financial statements.

b. Expenses will be overstated and profit and owner's equity will be understated.

c. Assets will be overstated and profit and owner's equity will be understated.

d. Assets will be overstated and profit and owner's equity will be overstated.

93. At December 31, 2014, before any year-end adjustments, Fawcett Foundry Company's Insurance Expense account had a balance of $725 and its Prepaid Insurance account had a balance of $2,900. It was determined that $1,500 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be

a. $1,500.

b. $725.

c. $2,225.

d. $1,125.

94. At December 31, 2014, before any year-end adjustments, Fawcett Foundry Company's Insurance Expense account had a balance of $725 and its Prepaid Insurance account had a balance of $2,900. It was determined that $1,500 of the Prepaid Insurance had not expired. The adjusted balance for Insurance Expense for the year would be

a. $1,500.

b. $2,125.

c. $2,225.

d. $1,125.

95. Percy’s Kitchens paid $18,200 for a one-year insurance policy on January 1 and recorded the entire amount as prepaid insurance. Before preparing its March 31 financial statements the company should make which of the following adjusting entries?

a. debit Cash, $9,100; credit Prepaid Insurance, $9,100.

b. debit Cash, $18,200; credit Insurance Expense, $18,200.

c. debit Insurance Expense, $4,550 credit Prepaid Insurance $4,550.

d. debit Prepaid Insurance, $13,650; credit Insurance Expense, $13,650.

96. Depreciation of a long-lived asset is the process of

a. valuing a long-lived asset at its fair value.

b. increasing the cost of a long-lived asset over the periods the asset benefits.

c. allocating the cost of a long-lived asset to an expense over the periods the asset provides a benefit to the entity.

d. writing down a long-lived asset to its real value each accounting period.

97. A new accountant working for Amherst Sobey’s Store records $800 Depreciation Expense on store equipment on December 31 as follows:

Dr. Depreciation Expense 800

Cr. Cash 800

The effect of this entry is to

a. adjust the accounts to their proper amounts on December 31.

b. understate total assets on the balance sheet as of December 31.

c. overstate the carrying amount of the long-lived assets at December 31.

d. understate the carrying amount of the long-lived assets as of December 31.

98. From an accounting standpoint, the acquisition of production equipment can be thought of as a long-term

a. accrual of expense.

b. accrual of revenue.

c. accrual of unearned revenue.

d. prepayment for services.

99. In calculating depreciation, the number of years of useful life of the asset is

a. known with certainty.

b. an estimate.

c. the estimated time period before repairs or maintenance will be required.

d. based on the cost of the asset.

100. An accumulated depreciation account

a. is a contra-liability account.

b. increases on the debit side.

c. is offset against total assets on the balance sheet.

d. has a normal credit balance.

101. The difference between the cost of a long-lived asset and its related accumulated depreciation is referred to as the

a. fair value of the long-lived asset.

b. blue book value of the long-lived asset.

c. carrying amount of the long-lived asset.

d. depreciated difference of the long-lived asset.

102. If a business has several types of long-lived assets such as equipment, buildings, and trucks,

a. there should be only one accumulated depreciation account.

b. there should be separate accumulated depreciation accounts for each type of long-lived asset.

c. all the long-lived asset accounts will be recorded in one general ledger account.

d. there is no need for an accumulated depreciation account.

103. Which of the following would NOT result in unearned revenue?

a. rent collected in advance from tenants

b. services performed on account

c. sale of season tickets to hockey games

d. sale of two-year magazine subscriptions

104. If a business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit

a. Cash.

b. Prepaid Rent.

c. Unearned Rent Revenue.

d. Accrued Rent Revenue.

105. If a business has received cash in advance of services performed and credits a liability account, the adjusting entry needed after the services are performed will be

a. debit Unearned Revenue and credit Cash.

b. debit Unearned Revenue and credit Service Revenue.

c. debit Unearned Revenue and credit Prepaid Expense.

d. debit Unearned Revenue and credit Accounts Receivable.

106. Anika Company purchased a plot of land for $100,000 on January 1^st. It plans to hold the land for 7 years and then sell it. What is the amount of annual depreciation to be recorded?

a. 14,286

b. 0

c. 1,190

d. 10,000

107. Amortization is a term which means the same as Depreciation. Which of the following standards discourages but does NOT restrict the use of the term “Amortization” on depreciable assets?

a. ASPE

b. IFRS

c. GAAP

d. CICA

108. Land is not a depreciable asset because

a. the future value of land cannot be determined.

b. land has an unlimited useful life.

c. land may deteriorate in the future.

d. land is classified as a current asset.

109. If a resource has been consumed but an invoice has not been received at the end of the accounting period, then

a. an expense should be recorded when the invoice is received.

b. an expense should be recorded when the cash is paid out.

c. an adjusting entry should be made recognizing the expense.

d. it is optional whether to record the expense before the invoice is received.

110. Accrued revenues are

a. received and recorded as liabilities before they are earned.

b. earned and recorded as liabilities before they are received.

c. earned but not yet received or recorded.

d. earned and already received and recorded.

111. Accrued expenses are

a. paid and recorded in an asset account before they are used or consumed.

b. paid and recorded in an asset account after they are used or consumed.

c. incurred but not yet paid or recorded.

d. incurred and already paid or recorded.

112. Unearned revenues are

a. received and recorded as liabilities before they are earned.

b. earned and recorded as liabilities before they are received.

c. earned but not yet received or recorded.

d. earned and already received and recorded.

113. A liability-revenue relationship exists with

a. prepaid expense adjusting entries.

b. accrued expense adjusting entries.

c. unearned revenue adjusting entries.

d. accrued revenue adjusting entries.

114. The accounts of a business before an adjusting entry is made to record an accrued revenue reflect an

a. understated liability and an overstated owner's capital.

b. overstated asset and an understated revenue.

c. understated expense and an overstated revenue.

d. understated asset and an understated revenue.

115. Mount Allison University borrowed $20,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements and uses months rather than days to calculate interest, the adjusting entry that the company should make for interest on September 30, would be

a. debit Interest Expense, $400; credit Interest Payable, $400.

b. debit Interest Expense, $100; credit Interest Payable, $100.

c. debit Note Payable, $1,200; credit Cash, $1,200.

d. debit Cash, $100; credit Interest Payable, $100.

116. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause

a. profit to be understated.

b. an overstatement of assets and an overstatement of liabilities.

c. an understatement of expenses and an understatement of liabilities.

d. an overstatement of expenses and an overstatement of liabilities.

117. Jane Richards, CGA, has performed $2,000 of accounting services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Jane make?

a. debit Cash and credit Unearned Revenue

b. debit Accounts Receivable and credit Unearned Revenue

c. debit Accounts Receivable and credit Service Revenue

d. debit Unearned Revenue and credit Service Revenue

118. Jane Richards, CGA, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will she make upon receipt of the payments?

a. Debit Unearned Revenue and credit Service Revenue.

b. Debit Cash and credit Accounts Receivable.

c. Debit Accounts Receivable and credit Service Revenue.

d. Debit Cash and credit Service Revenue.

119. Rockport Quarry signed a four-month, 5%, $9,000 note payable on September 1. The amount of interest to be accrued at the end of September is

a. $150.

b. $450.

c. $112.50.

d. $37.50.

120. The Crofter Gift shop signs a three-month, 6% note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $40,000. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest?

a. Interest Expense 400

Interest Payable 400

b. Interest Expense 2,400

Interest Payable 2,400

c. Interest Expense 600

Interest Payable 600

d. Interest Expense 2,400

Note Payable 2,400

121. The Boltenhouse Museum paid employee wages on and through Friday, August 23, and the next payroll will be paid September 5. There are four more working days in August (26–29). Employees work 5 days a week and the company pays $800 a day in wages. What will be the adjusting entry to accrue wages expense at the end of August?

a. Wages Expense 800

Wages Payable 800

b. Wages Expense 3,200

Wages Payable 3,200

c. Wages Expense 4,000

Wages Payable 4,000

d. No adjusting entry is required.

122. Marshwinds Wind Turbines shows a balance in Salaries Payable of $80,000 at the end of the month. The next payroll amounting to $100,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries?

a. Salaries Expense 100,000

Salaries Payable 100,000

b. Salaries Expense 80,000

Cash 80,000

c. Salaries Expense 20,000

Cash 20,000

d. Salaries Expense 20,000

Salaries Payable 80,000

Cash 100,000

123. Which of the following is NOT considered an accrued expense account?

a. Depreciation Expense

b. Salaries Expense

c. Rent Expense

d. Interest Expense

124. Three factors determine the amount of interest that has accumulated. Which factor listed below is NOT applicable in determining interest accumulation?

a. annual interest rate

b. principal amount of the note

c. the amount of your next payment

d. the length of the note outstanding

125. Why do salary expenses need to be accrued at the financial reporting date?

a. Salaries incurred are an actual expense for the time period in which they are accrued.

b. If not accrued the company will not have to pay the amounts in the future.

c. The liability account will be overstated if not accrued.

d. The expense account will be overstated if not accrued.

126. A company usually determines the amount of supplies used during a period by

a. adding the supplies on hand to the balance of the Supplies account.

b. summing the amount of supplies purchased during the period.

c. taking the difference between the supplies purchased and the supplies paid for during the period.

d. taking the difference between the balance of the Supplies account and the cost of supplies on hand.

127. Which of the following would be prepared immediately after all adjusting entries for a period have been made?

a. the initial Trial Balance

b. the adjusted Trial Balance

c. the Statement of Owners Equity

d. the Balance Sheet

128. An adjusted trial balance

a. is prepared after the financial statements are completed.

b. proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made.

c. is a required financial statement under generally accepted accounting principles.

d. proves that all adjusting journal entries have been made.

129. Which of the statements below is NOT true?

a. An adjusted trial balance should show ledger account balances.

b. An adjusted trial balance can be used to prepare financial statements.

c. An adjusted trial balance proves the mathematical equality of debits and credits in the ledger.

d. An adjusted trial balance is prepared before all transactions have been journalized.

*130. Once an unadjusted trial balance has been prepared, the next step in the accounting cycle is

a. calculate profit.

b. calculate owner’s capital at the end of the period.

c. analyze the accounts for adjusting entries which need to be made.

d. prepare financial statements.

*131. Pooley Electric Company purchased office supplies costing $4,000 and debited Office Supplies expense for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,600 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be

a. debit Office Supplies Expense, $1,600; credit Office Supplies, $1,600.

b. debit Office Supplies, $2,400; credit Office Supplies Expense, $2,400.

c. debit Office Supplies Expense, $2,400; credit Office Supplies, $2,400.

d. debit Office Supplies, $1,600; credit Office Supplies Expense, $1,600.

*132. The Kookie Kutter Bakery purchased $6,500 worth of baking supplies on June 2 and recorded the purchase as an expense. On June 30, an inventory of the baking supplies indicated $3,000 of supplies is still on hand. The adjusting entry that should be made by the company on June 30 is

a. debit Baking Supplies Expense, $3,000; credit Baking Supplies, $3,000.

b. debit Baking Supplies Expense, $3,500; credit Baking Supplies, $3,000.

c. debit Baking Supplies, $3,000; credit Baking Supplies Expense, $3,000.

d. debit Baking Supplies Expense, $3,500; credit Baking Supplies, $3,500.

*133. On July 1 the Fog Forest Gallery paid $8,000 to Tapley Realty for 4 months rent beginning July 1. Rent Expense was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the Fog Forest is

a. debit Rent Expense, $2,000; credit Prepaid Rent, $2,000.

b. debit Prepaid Rent, $6,000 credit Rent Expense, $6,000.

c. debit Rent Expense, $6,000; credit Prepaid Rent, $6,000.

d. debit Prepaid Rent, $2,000; credit Rent Expense, $2,000.

*134. If a company pays rent in advance and debits a Rent Expense account, an adjusting entry is prepared at the end of the year if

a. the company’s profit is overstated.

b. the company’s liabilities are understated.

c. a portion of the rent is still prepaid.

d. the company’s expenses are understated.

*135. Johnny S is a barber who does his own accounting for his shop. When he buys supplies he routinely debits Supplies Expense. Johnny purchased $3,100 of supplies in January and his inventory at the end of January shows $600 of supplies remaining. What adjusting entry should Johnny make on January 31?

a. Supplies Expense 600

Supplies 600

b. Supplies Expense 3,100

Cash 3,100

c. Supplies 600

Supplies Expense 600

d. Supplies Expense 2,500

Supplies 2,500

*136. Ove is a lawyer who requires that his clients pay him in advance of legal services rendered. Ove routinely credits Legal Fee Revenue when his clients pay him in advance. In June, Ove collected $16,000 in advance fees and completed 75% of the work related to these fees. What adjusting entry is required by Ove's firm at the end of June?

a. Unearned Revenue 12,000

Legal Fee Revenue 12,000

b. Unearned Revenue 4,000

Legal Fee Revenue 4,000

c. Cash 16,000

Legal Fee Revenue 16,000

d. Legal Fee Revenue 4,000

Unearned Revenue 4,000

*137. If prepaid expenses are initially recorded in expense accounts and have not all been used at the end of the accounting period, then failure to make an adjusting entry will cause

a. assets to be understated.

b. assets to be overstated.

c. expenses to be understated.

d. contra assets to be overstated.

*138. If unearned revenues are initially recorded in revenue accounts and have not all been earned at the end of the accounting period, then failure to make an adjusting entry will cause

a. liabilities to be overstated.

b. revenues to be understated.

c. revenues to be overstated.

d. accounts receivable to be overstated.

*139. On January 2, 2013, Gridstone Quarry purchased a general liability insurance policy for $3,600 for coverage for the calendar year. The entire $3,600 was charged to Insurance Expense on January 2, 2013. If the firm prepares monthly financial statements, the proper adjusting entry on January 31, 2013, will be

a. Insurance Expense 3,300

Prepaid Insurance 3,300

b. Prepaid Insurance 3,300

Insurance Expense 3,300

c. Insurance Expense 300

Prepaid Insurance 300

d. Prepaid Insurance 300

Insurance Expense 300

140. What is the “maximum” time frame for preparing adjusting entries under both ASPE and IFRS?

a) ASPE prepares adjusting entries monthly, IFRS prepares adjusting entries monthly.

b) IFRS prepares adjusting entries quarterly, ASPE prepares adjusting entries quarterly.

c) ASPE prepares adjusting entries annually, IFRS prepares adjusting entries quarterly.

d) IFRS prepares adjusting entries annually, ASPE prepares adjusting entries quarterly.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

MATCHING

141. Match the items below by entering the appropriate code letter in the space provided.

A. Interim period F. Accrued revenues

B. Fiscal year G. Depreciation

C. Unearned revenue H. Accumulated depreciation

D. Prepaid expenses I. Accrued expenses

E. Adjusted Trial Balance J. Carrying amount

1. An accounting period of less than 12 months

2. An accounting period of 12 months or 52 weeks

3. Expenses paid before they are incurred

4. Original cost less accumulated depreciation

5. Cash which has been received in advance of services being performed

6. A contra asset account

7. A cost allocation process

8. A Trial Balance prepared after the adjusting entries have been made

9. Revenues earned but not yet received

10. Expenses incurred but not yet paid

ANSWERS TO MATCHING

1. A

2. B

3. D

4. J

5. C

6. H

7. G

8. E

9. F

10. I

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