Ch3 Adjusting Accounts And Preparing Financial Exam Prep

Chapter 03 Adjusting Accounts and Preparing Financial Statements

MULTIPLE CHOICE QUESTIONS

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

1. True
2. False

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

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

True

1. False

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Interim financial statements report a company's business activities for a one-year period.

1. True
2. False

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

A fiscal year refers to an organization's accounting period that spans twelve consecutive months or 52 weeks.

True

1. False

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Adjusting entries are made after the preparation of financial statements.

1. True
2. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Adjusting entries result in a better matching of revenues and expenses for the period.

1. True
2. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Two main accounting principles used in accrual accounting are expense recognition and full closure.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are correctly recorded.

True

1. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

The expense recognition (matching) principle does not aim to record expenses in the same accounting period as the revenue earned as a result of these expenses.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and accrued revenues.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

The cash basis of accounting commonly increases the comparability of financial statements from period to period.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued items.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Since the revenue recognition principle requires that revenues be recorded when earned, there are no unearned revenues in accrual accounting.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The expense recognition (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

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The cash basis of accounting is a system in which revenues are recorded when earned and expenses are recorded when incurred.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The cash basis of accounting recognizes revenues when cash payments from customers are received.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The accrual basis of accounting recognizes revenues when cash is received from customers.

1. True
2. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The accrual basis of accounting recognizes expenses when cash is paid.

1. True
2. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Recording revenues early overstates current-period income; recording revenues late understates current period income.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Recording expenses early overstates current-period income; recording expenses late understates current period income.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Prior to recording adjusting entries at the end of an accounting period, some accounts may not show correct balances even though all transactions were properly recorded.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A company paid $9,000 for a twelve-month insurance policy on February 1. The policy coverage began on February 1. On February 28, $750 of insurance expense must be recorded.

True

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The accrual basis of accounting reflects the principle that revenue is recorded when it is earned, not when cash is received.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The accrual basis of accounting requires adjustments to recognize revenues in the periods they are earned and to match expenses with revenues.

True

1. False

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Adjusting entries are designed primarily to correct accounting errors.

1. True
2. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Adjustments are necessary to bring an asset or liability account to its proper amount and also update a related expense or revenue account.

True

1. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Each adjusting entry will affect a balance sheet account.

1. True
2. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Adjusting entries always affect the cash account.

1. True
2. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Accrued expenses at the end of one accounting period are expected to result in cash payments in a future period.

True

1. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Accrued revenues at the end of one accounting period are expected to result in cash collections in a future period.

True

1. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Each adjusting entry affects one or more income statement account, one or more balance sheet account, and never cash.

True

1. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Accrued expenses reflect transactions where cash is paid before a related expense is recognized.

1. True
2. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Under the accrual basis of accounting, adjustments are often made for prepaid expenses and unearned revenues.

True

1. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The entry to record a cash receipt from a customer when the service is to be provided in a future period involves a debit to an unearned revenue account.

True

1. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Costs incurred during an accounting period but unpaid and unrecorded are accrued expenses.

1. True
2. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

An adjusting entry often includes an entry to Cash.

1. True
2. False

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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

1. False

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are both understated.

True

1. False

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Failure to record depreciation expense will overstate assets and understate expenses.

1. True
2. False

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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

1. False

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Profit margin can also be called return on sales.

1. True
2. False

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: FN Decision Making; BB Resource Management

Profit margin measures the relation of debt to assets.

1. True
2. False

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: FN Decision Making; BB Resource Management

Profit margin reflects the percent of profit in each dollar of revenue.

1. True
2. False

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: FN Decision Making; BB Resource Management

Profit margin is calculated by dividing net sales by net income.

1. True
2. False

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: FN Decision Making; BB Resource Management

Torsten 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

1. False

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: FN Decision Making; BB Resource Management

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

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one year of rent in advance (lease beginning January 1), and adjusting entries are made at the end of each month, the balance remaining in Prepaid Rent on December 1 should be $1,500.

True

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related asset.

True

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A salary owed to employees is an example of an accrued expense.

1. True
2. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

In accrual accounting, accrued revenues are recorded as liabilities.

1. True
2. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Depreciation expense is an example of an accrued expense.

1. True
2. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Earned but uncollected revenues are recorded during the adjusting process with a credit to a revenue account and a debit to an expense account.

True

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Depreciation expense for a period is the portion of a plant asset's cost that is allocated to that period.

True

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

All plant assets, including land, are depreciated.

1. True
2. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Net income for a period will be understated if accrued revenues are not recorded at the end of the accounting period.

True

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Depreciation measures the decline in market value of an asset.

1. True
2. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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 entry on December 31 will include a debit to Salaries Expense and a credit to Cash.

True

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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 physical count of supplies indicates the cost of unused supplies is $3,200. The adjusting entry would include a $2,800 debit to Supplies.

True

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A company performs 20 days of 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 required adjusting entry includes a $4,000 debit to Unearned Revenue.

True

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A company performs 20 days of work on a 30-day contract before the end of the year. The total contract is valued at $6,000, with payment received in advance. The $6,000 cash receipt was initially recorded as Unearned Revenue. The required adjusting entry includes a $4,000 debit to Unearned Revenue.

True

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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

1. False

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The adjusted trial balance must be prepared before the adjusting entries are made.

1. True
2. False

Learning Objective: 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded.

True

1. False

Learning Objective: 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Financial statements can be prepared directly from the information in the adjusted trial balance.

1. True
2. False

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

Asset and liability balances are transferred from the adjusted trial balance to the income statement.

1. True
2. False

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

Asset and liability balances are transferred from the adjusted trial balance to the balance sheet.

1. True
2. False

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

Revenue and expense balances are transferred from the adjusted trial balance to the income statement.

True

1. False

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

In preparing statements from the adjusted trial balance, the balance sheet must be prepared first.

1. True
2. False

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Reporting

It is acceptable to record prepayment of expenses as debits to expense accounts if an adjusting entry is made at the end of the period to bring the asset account balance to the correct unused or unexpired amount.

True

1. False

Learning Objective: 03-P4 Appendix 3A-Explain the alternatives in accounting for prepaids. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

It is acceptable to record cash received in advance of providing products or services to revenue accounts if an adjusting entry is made at the end of the period to bring the liability account balance to the correct unearned amount.

True

1. False

Learning Objective: 03-P4 Appendix 3A-Explain the alternatives in accounting for prepaids. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The time period assumption assumes that an organization's activities may be divided into specific reporting time periods including all of the following except:

Months.

1. Days.
2. Fiscal years.
3. Calendar years.
4. Quarters.

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

A broad principle that requires identifying the activities of a business with specific time periods such as months, quarters, or years is the:

Time period assumption.

1. Operating cycle of a business.
2. Going-concern assumption.
3. Accrual basis of accounting.
4. Expense recognition (matching) principle.

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Interim financial statements refer to financial reports:

1. That show the assets above the liabilities and the liabilities above the equity.
2. That cover less than one year, usually spanning one, three, or six-month periods.
3. That are prepared before any adjustments have been recorded.
4. Where the adjustment process is used to assign revenues to the periods in which they are earned and to match expenses with revenues.
5. Where revenues are reported on the income statement when cash is received and expenses are reported when cash is paid.

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Reporting

The 12-month period that ends when a company's sales activities are at their lowest level is called the:

Natural business year.

1. Interim period.
2. Fiscal year.
3. Accounting period.
4. Calendar year.

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The length of time covered by a set of periodic financial statements, primarily a year for most companies, is referred to as the:

Calendar year.

1. Accounting period.
2. Business cycle.
3. Fiscal year.
4. Natural business year.

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The accounting principle that requires revenue to be recorded when earned is the:

1. Expense recognition (matching) principle.
2. Going-concern assumption.
3. Time period assumption.
4. Accrual reporting principle.
5. Revenue recognition principle.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Adjusting entries:

1. Affect only income statement accounts.
2. Affect only equity accounts.
3. Affect cash accounts.
4. Affect only balance sheet accounts.
5. Affect both income statement and balance sheet accounts.

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The main purpose of adjusting entries is to:

1. Correct errors in the accounting records.
2. Recognize assets purchased during the period.
3. Record internal transactions and events.
4. Recognize debts paid during the period.
5. Record external transactions and events.

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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:

Expense recognition (Matching) principle.

1. Recognition principle.
2. Cost principle.
3. Time period principle.
4. Cash basis of accounting.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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:

Cash basis accounting.

1. Revenue recognition accounting.
2. Current basis accounting.
3. Accrual basis accounting.
4. Operating cycle accounting.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Adjusting entries made at the end of an accounting period accomplish all of the following except:

1. Assigning expenses to the periods in which they are incurred.
2. Assigning revenues to the periods in which they are earned.
3. Assuring that financial statements reflect the revenues earned and the expenses incurred.
4. Updating liability and asset accounts to their proper balances.
5. Assuring that external transaction amounts remain unchanged.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is:

The time period assumption.

1. Accrual basis accounting.
2. Revenue basis accounting.
3. The expense recognition (matching) principle.
4. Cash basis accounting.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued revenues are all examples of:

Income statement accounts.

1. Asset and equity.
2. Items that require contra accounts.
3. Items that require adjusting entries.
4. Asset accounts.

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The accrual basis of accounting:

1. Recognizes expenses when paid in cash.
2. Is generally accepted for external reporting because it is more useful than cash basis for most business decisions.

Recognizes revenues when received in cash.

1. Is flawed because it gives complete information about cash flows.
2. Eliminates the need for adjusting entries at the end of each period.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

In its first year of operations, Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers); Incurred expenses of $35,000 ($31,000 cash paid toward them); Prepaid $8,000 cash for costs that will not be expensed until next year. Net income under the accrual basis of accounting is:

A) $13,000. B) $21,000. C) $25,000. D) $17,000.

None of these options are

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

In its first year of operations, Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers); Incurred expenses of $35,000 ($31,000 cash paid toward them); Prepaid $8,000 cash for costs that will not be expensed until next year. Net income under the cash basis of accounting is:

A) $21,000. B) $13,000. C) $25,000. D) $17,000.

None of the above.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Which of the following statements is incorrect?

1. Adjusting entries affect only balance sheet accounts.
2. Adjustments to prepaid expenses and unearned revenues involve previously recorded assets and liabilities.

Adjusting entries can be used to record both accrued expenses and accrued revenues.

1. Prepaid expenses, depreciation, and unearned revenues often require adjusting entries to record the effects of the passage of time.
2. Accrued expenses and accrued revenues involve assets and liabilities that had not previously been recorded.

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

An adjusting entry could be made for each of the following except:

1. Unearned revenues.
2. Accrued expenses.
3. Depreciation.
4. Prepaid expenses.
5. Owner investments.

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on December 31. This oversight would:

Overstate assets by $28,000.

1. Have no effect on net income.
2. Understate net income by $28,000.
3. Overstate net income by $28,000.
4. Understate assets by $28,000.

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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:

Assets, net income, and equity understated.

1. Assets overstated and equity understated.
2. Assets and equity both understated.
3. Assets, net income, and equity overstated.
4. Assets overstated, net income understated, and equity overstated.

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

If a company failed to make the end-of-period adjustment to move the amount of management fees that were earned from the Unearned Management Fees account to the Management Fees Revenue account, this omission would cause:

An overstatement of liabilities.

1. An overstatement of assets.
2. An understatement of liabilities.
3. An overstatement of net income.
4. An overstatement of equity.

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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 move the portion of these fees that has been earned to a revenue account, one effect will be:

An understatement of assets.

1. An understatement of equity.
2. An overstatement of assets.
3. An understatement of liabilities.
4. An overstatement of equity.

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Profit margin is defined as:

1. Net income divided by assets.
2. Net sales divided by assets.
3. Net income divided by net sales.
4. Net sales divided by net income.
5. Revenues divided by net sales.

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: FN Decision Making; BB Resource Management

A company earned $3,000 in net income for October. Its net sales for October were $10,000. Its profit margin is:

A) 333%. B) 33%. C) 33.3% D) 3%. E) 30%.

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: FN Decision Making; BB Resource Management

All of the following statements regarding profit margin are true except:

1. Profit margin is not a useful measure of a company's operating results.
2. Profit margin is also called return on sales.
3. Profit margin can be used to compare a firm's performance to its competitors.
4. Profit margin reflects the percent of profit in each dollar of revenue.
5. Profit margin is calculated by dividing net income by net sales.

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: FN Decision Making; BB Resource Management

A company had $7,000,000 in net income for the year. Its net sales were $15,200,000 for the same period. Calculate its profit margin.

A) 85.4%. B) 46.1%. C) 53.9%. D) 217.1%. E) 117.1%.

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: FN Decision Making; BB Resource Management

On July 1 Plum Co. paid $7,500 cash for management services to be performed over a two-year period. Plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. On July 1 Plum should record:

A debit to an expense and credit to Cash for $7,500.

1. A debit to Cash for $7,500 and a credit to an expense for $7,500.
2. A debit to an expense and credit to a prepaid expense for $7,500.
3. A credit to a prepaid expense and a debit to Cash for $7,500.
4. A debit to a prepaid expense and a credit to Cash for $7,500.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On July 1 of the current calendar year, Plum Co. paid $7,500 cash for management services to be performed over a two-year period beginning July 1. Plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 of the current year for Plum would include:

A credit to a liability and a debit to a prepaid expense for $1,875.

1. A debit to an expense and a credit to a prepaid expense for $1,875.
2. A debit to a prepaid expense and a credit to an expense for $1,875.
3. A debit to an expense and a credit to a prepaid expense for $5,625.
4. A debit to a prepaid expense and a credit to Cash for $5,625.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Accrued revenues:

1. At the end of one accounting period result in cash receipts in a future period.
2. Are listed on the balance sheet as liabilities.
3. At the end of one accounting period often result in cash payments in the next period.
4. Are recorded at the end of an accounting period because cash has already been received for revenues earned.

Are also called unearned revenues.

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

An account linked with another account that has an opposite normal balance and is subtracted from the balance of the related account is a(n):

Intangible asset.

1. Contra account.
2. Accrued revenue.
3. Accrued expense.
4. Adjunct account.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The total amount of depreciation recorded against an asset over the entire time the asset has been owned:

Is referred to as accumulated depreciation.

1. Is referred to as an accrued asset.
2. Is only recorded when the asset is disposed of.
3. Is referred to as depreciation expense.
4. Is shown on the income statement of the final period.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

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:

Accumulated depreciation.

1. An accrued account.
2. A contra account.
3. Depreciation expense.
4. The expense recognition (matching) principle.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

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:

Debit Office Supplies $254 and credit Office Supplies Expense $254.

1. Debit Office Supplies $105 and credit Supplies Expense $254.
2. Debit Office Supplies $105 and credit Office Supplies Expense $105.
3. Debit Office Supplies Expense $254 and credit Office Supplies $254.
4. Debit Office Supplies Expense $105 and credit Office Supplies $105.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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:

Debit Legal Fees Earned and credit Unearned Legal Fees.

1. Debit Unearned Legal Fees and credit Accounts Receivable.
2. Debit Cash and credit Legal Fees Earned.
3. Debit Cash and credit Unearned Legal Fees.
4. Debit Unearned Legal Fees and credit Legal Fees Earned.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On April 1, a company paid the $1,350 premium on a three-year insurance policy with benefits beginning on that date. What amount of the insurance expense will be reported on the annual income statement for the year ended December 31?

A) $1,350.00. B) $337.50. C) $37.50. D) $1,012.50. E) $450.00.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On July 1, a company paid the $2,400 premium on a one-year insurance policy with benefits beginning on that date. What will be the insurance expense on the annual income statement for the first year ended December 31?

A) $2,400. B) $1,200. C) $400. D) $1,400. E) $1,000.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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?

B) $75. A) $250 - $75 = $175	C) $325.	D) $125.	E) $250.
B) $250 - $75 = $175
C) $250 - $75 = $175
D) $250 - $75 = $175
E) $250 - $75 = $175

A) $175.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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:

Debit Prepaid Insurance, $360; credit Insurance Expense, $360.

1. Debit Prepaid Insurance, $1,800; credit Cash, $1,800.
2. Debit Insurance Expense, $360; credit Prepaid Insurance, $360.
3. Debit Insurance Expense, $360; credit Prepaid Insurance, $1,440.
4. Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Unearned revenue is reported in the financial statements as:

1. A liability on the balance sheet.
2. A financing activity on the statement of cash flows.
3. A revenue on the balance sheet.
4. An asset on the balance sheet.
5. An unearned revenue on the income statement.

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Which of the following assets is not depreciated?

1. Land.
2. Buildings.
3. Equipment.
4. Store fixtures.
5. Computers.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Which of the following does not require an adjusting entry at year-end?

1. Cash invested by owner.
2. Expired portion of prepaid insurance.
3. Accrued interest on notes payable.
4. Accrued wages.
5. Supplies used during the period.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On May 1, a two-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 first year ended December 31?

A) $5,270. B) $6,750. C) $750. D) $6,000. E) $18,000.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Fragmental Co. leased a portion of its store to another company for eight months beginning on October 1, at a monthly rate of $800. Fragmental collected the entire $6,400 cash on October 1 and recorded it as unearned revenue. Assuming adjusting entries are only made at year-end, the adjusting entry made by Fragmental Co. on December 31 would be:

A debit to Rent Revenue and a credit to Cash for $2,400.

1. A debit to Rent Revenue and a credit to Unearned Rent for $2,400.
2. A debit to Unearned Rent and a credit to Rent Revenue for $4,000.
3. A debit to Unearned Rent and a credit to Rent Revenue for $2,400.
4. A debit to Cash and a credit to Rent Revenue for $6,400.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On May 1, Sellers Marketing Company received $1,500 from Franco Marcelli for a marketing campaign effective from May 1 this year to 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. Assuming adjustments are only made at year-end, the adjusting entry on December 31 would be:

A debit to Fees Earned and a credit to Cash for $1,000.

1. A debit to Unearned Fees and a credit to Cash for $500.
2. A debit to Unearned Fees and a credit to Fees Earned for $1,000.
3. A debit to Fees Earned and a credit to Cash for $500.
4. A debit to Fees Earned and a credit to Unearned Fees for $500.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Incurred but unpaid expenses that are recorded during the adjusting process with a debit to an expense and a credit to a liability are:

Net expenses.

1. Accrued expenses.
2. Prepaid expenses.
3. Intangible expenses.
4. Unearned expenses.

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The adjusting entry at the end of an accounting period to record the unpaid salaries of employees for work provided is:

Debit Salaries Payable and credit Salaries Expense.

1. Debit Unpaid Salaries and credit Salaries Payable.
2. Debit Cash and credit Salaries Expense.
3. Debit Salaries Expense and credit Salaries Payable.
4. Debit Salaries Expense and credit Cash.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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:

Debit Unpaid Salaries $600 and credit Salaries Payable $600.

1. Debit Salaries Expense $400 and credit Cash $400.
2. Debit Salaries Payable $400 and credit Salaries Expense $400.
3. Debit Salaries Expense $600 and credit Salaries Payable $600.
4. Debit Salaries Expense $400 and credit Salaries Payable $400.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A company pays its employees $4,000 each Friday, which amounts to $800 per day for the five-day workweek that begins on Monday. If the monthly accounting period ends on Thursday and the employees worked through Thursday, the amount of salaries earned but unpaid at the end of the accounting period is:

A) $800. B) $4,000. C) $2,400. D) $3,200. E) $1,600.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The adjusting entry to record the salaries earned due to employees for services provided but unpaid at the end of the accounting period affects the accounts in which of the following ways?

Debit Salaries Expense and credit Salaries Payable.

1. Debit Salaries Payable and credit Salaries Expense.
2. Debit Cash and credit Salaries Expense.
3. Debit Accrued Salaries and credit Salaries Payable.
4. Debit Salaries Expense and credit Cash.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On January 1, Eastern College received $1,200,000 from its students for the spring semester that it recorded in Unearned Tuition and Fees. The term spans four months beginning on January 2 and the college spreads the revenue evenly over the months of the term. Assuming the college prepares adjustments monthly, what amount of tuition revenue should the college recognize on February 28?

A) $300,000. B) $600,000. C) $1,200,000. D) $800,000. E) $900,000.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On January 1, Fashion Forward Magazine received $15,000 from subscribers for the annual subscriptions that it recorded in Unearned Subscription Revenue. The issues of the magazine are mailed to subscribers quarterly. What amount of subscription revenue should the magazine recognize on March 31 when the first issue is sent in March?

A) $1,250. B) $3,750. C) $15,000. D) $7,500. E) $0.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

An adjusting entry was made on year-end December 31 to accrue salary expense of $1,200. Assuming the company does not prepare reversing entries, which of the following entries would be prepared to record the $3,000 payment of salaries in January of the following year?

A)

Salaries Payable	1,200
Salaries Expense		1,200

Salaries Payable	1,200
Cash		1,200

Salaries Payable	1,200
Salaries Expense	1,800
Cash		3,000

Salaries Expense	3,000
Cash		3,000

Salaries Payable	3,000
Cash		3,000

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The difference between the cost of an asset and the accumulated depreciation for that asset is called

1. Prepaid Depreciation.
2. Unearned Depreciation.
3. Book Value.
4. Depreciation Expense.
5. Depreciation Value.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

A company purchased a new delivery van at a cost of $45,000 on July 1. The delivery van 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 van during the first year ended December 31?

A) $4,000. B) $7,000. C) $3,500. D) $3,250. E) $6,500.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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) $3,700. B) $2,700. C) $2,900. D) $3,300. E) $3,500.

600

2,900

3,100

400

600

2,900

3,100

400

600

2,900

3,100

400

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

If a company records prepayment of expenses in an asset account, the adjusting entry when all or part of the prepaid asset is used or expired would:

Result in a debit to a liability and a credit to an asset account.

1. Decrease cash.
2. Result in a debit to an expense and a credit to an asset account.
3. Cause an accrued liability account to exist.
4. Cause an adjustment to prior expense to be overstated and assets to be understated.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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. Assuming the company does not prepare reversing entries, the January 31 and February 9 journal entries are:

A) 1/31	Salaries Expense…………………………. Salaries Payable……………………...	1,400	1,400
2/9	Salaries Expense………………………….. Cash…………………………………...	7,000	7,000
B) 1/31	Salaries Payable …………………………..	1,400
	Salaries Expense……………………...		1,400
2/9	Salaries Expense…………………………..	5,600
	Salaries Payable…………………………	1,400
	Cash…………………………………...		7,000
C) 1/31	Salaries Expense…………………………..	1,400
	Cash…………………………………..		1,400
2/9	Salaries Expense………………………….	7,000
	Cash………………………………….		7,000

D) 1/31	Salaries Expense ………………………… Salaries Payable …………................	1,400	1,400
2/9	Salaries Payable ………………………….	7,000
	Salaries Expense ………………………… Cash..…………………………………	1,400	7,000
E) 1/31	Salaries Expense………………………….	1,400
	Salaries Payable………………………		1,400
2/9	Salaries Expense…………………………..	5,600
	Salaries Payable…………………………...	1,400
	Cash…………………………………...		7,000
Answer: E Explanation:	A)
	B) C) D) E)

Diff: 3

Topic: Adjusting Entries

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

If accrued salaries were recorded on December 31 with a debit to Salaries Expense and a credit to Salaries Payable, and no reversing entries were made on January 1, the entry to record payment of these wages on the following January 5 would include:

A debit to Cash and a credit to Salaries Payable.

1. A debit to Cash and a credit to Prepaid Salaries.
2. A debit to Salaries Payable and a credit to Salaries Expense.
3. A debit to Salaries Payable and a credit to Cash.
4. No entry would be necessary on January 5.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On December 1, Simpson Marketing Company received $3,600 from a customer for a 2-month marketing plan to be completed January 31 of the following year. The cash receipt was recorded as unearned fees. The adjusting entry for the year ended December 31 would include:

a credit to Unearned Fees for $1,800.

1. a debit to Earned Fees for $3,600.
2. a debit to Earned Fees for $1,800.
3. a credit to Earned Fees for $3,600.
4. a debit to Unearned Fees for $1,800.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Wilson Company paid $4,800 for a 4-month insurance premium in advance on November 1, with coverage beginning on that date. The balance in the prepaid insurance account before adjustment at the end of the year is $4,800 and no adjustments had been made previously. The adjusting entry required on December 31 is:

Debit Insurance Expense, $2,400; credit Prepaid Insurance, $2,400.

1. Debit Prepaid Insurance, $2,400; credit Insurance Expense, $2,400.
2. Debit Prepaid Insurance, $1,200; credit Insurance Expense, $1,200.
3. Debit Cash, $4,800; Credit Prepaid Insurance, $4,800.
4. Debit Insurance Expense, $1,200; credit Prepaid Insurance, $1,200.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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?

Debit Insurance Expense, $3,250; credit Prepaid Insurance, $3,250.

1. Debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500.
2. Debit Insurance Expense, $7,750; credit Prepaid Insurance, $7,750.
3. Debit Cash, $7,750; Credit Prepaid Insurance, $7,750.
4. Debit Prepaid Insurance, $4,500; credit Insurance Expense, $4,500.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The subscriptions started immediately. What is the amount of revenue that should be recorded by Griffith Publishing Company for the first year of the subscription assuming the company uses a calendar-year reporting period?

A) $387. B) $430. C) $516. D) $129. E) $0.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The subscriptions started immediately. What is the amount of revenue that should be recorded by Griffith Publishing Company for the second year of the subscription assuming the company uses a calendar-year reporting period?

A) $129. B) $430. C) $516. D) $387. E) $0.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The company credited Unearned Fees for the amount received and the subscriptions started immediately. Assuming adjustments are only made at

year-end, What is the adjusting entry that should be recorded by Griffith Publishing Company on December 31 of the first year?

debit Unearned Fees, $387; credit Fees Earned, $387.

1. debit Unearned Fees, $1,161; credit Fees Earned, $1,161.
2. debit Unearned Fees, $1,548; credit Fees Earned, $1,548.
3. debit Unearned Fees, $129; credit Fees Earned, $129.
4. debit Unearned Fees, $516; credit Fees Earned, $516.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The company credited Unearned Fees for the amount received and the subscriptions started immediately. Assuming adjustments are only made at

year-end, What is the adjusting entry that should be recorded by Griffith Publishing Company on December 31 of the second year?

debit Unearned Fees, $387; credit Fees Earned, $387.

1. debit Unearned Fees, $1,161; credit Fees Earned, $1,161.
2. debit Unearned Fees, $129; credit Fees Earned, $129.
3. debit Unearned Fees, $1,548; credit Fees Earned, $1,548.
4. debit Unearned Fees, $516; credit Fees Earned, $516.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On April 1, Santa Fe, Inc. paid Griffith Publishing Company $1,548 for 36-month subscriptions to several different magazines. Santa Fe debited the prepayment to a Prepaid Subscriptions account, and the subscriptions started immediately. What amount should appear in the Prepaid Subscription account for Santa Fe, Inc. after adjustments on December 31 of the first year assuming the company is using a calendar-year reporting period and no previous adjustment has been made?

A) $387. B) $1,548. C) $0. D) $516. E) $1,161.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On April 1, Santa Fe, Inc. paid Griffith Publishing Company $1,548 for 36-month subscriptions to several different magazines. Santa Fe debited the prepayment to a Prepaid Subscriptions account, and the subscriptions started immediately. What amount should appear in the Prepaid Subscription account for Santa Fe, Inc. after adjustments on December 31 of the second year assuming the company is using a calendar-year reporting period and the previous year adjustment had been made?

A) $387. B) $1,548. C) $516. D) $645. E) $0.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On April 1, Santa Fe, Inc. paid Griffith Publishing Company $1,548 for 36-month subscriptions to several different magazines. Santa Fe debited the prepayment to a Prepaid Subscriptions account, and the subscriptions started immediately. What adjusting entry should be made by Santa Fe, Inc. for the adjustment on December 31 of the first year assuming the company is using a calendar-year reporting period and no previous adjustments had been made?

Debit Subscription Expense $516 and credit Prepaid Subscriptions $516.

1. Debit Unearned Subscriptions $387 and credit Subscription Expense $387.
2. Debit Subscription Expense $387 and credit Cash $387.
3. Debit Prepaid Subscriptions $516 and credit Subscription Expense $516.
4. Debit Subscription Expense $387 and credit Prepaid Subscriptions $387.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

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?

It will understate assets by $9,000.

1. It will overstate assets and liabilities by $9,000.
2. It will understate net income by $9,000.
3. It will have no effect on income.
4. It will understate expenses and overstate net income by $9,000.

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The correct adjusting entry for accrued and unpaid employee salaries of $9,000 on December 31 is:

1. debit Salary Expense, $9,000; credit Cash, $9,000
2. debit Salary Expense, $9,000; credit Fees Earned, $9,000
3. debit Salary Expense, $9,000; credit Salaries Payable, $9,000
4. debit Salary Expense, $9,000; credit Prepaid Salary, $9,000
5. debit Salaries Payable, $9,000; credit Salary Expense $9,000

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A company purchased new furniture at a cost of $14,000 on September 30. The furniture is estimated to have a useful life of 8 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 furniture for the first year ended December 31?

A) $375.00 B) $1,750 C) $437.50 D) $1,500.00 E) $500

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A company purchased new furniture at a cost of $14,000 on September 30. The furniture is estimated to have a useful life of 8 years and a salvage value of $2,000. The company uses the straight-line method of depreciation. What is the book value of the furniture on December 31 of the first year?

A) $12,500.00 B) $13,625.00 C) $13,562.50 D) $12,250.00 E) $13,500.00

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A company purchased new furniture at a cost of $16,000 on January 1. The furniture is estimated to have a useful life of 6 years and a $1,000 salvage value. The company uses the straight-line method of depreciation. What is the book value of the furniture on December 31 of the first year?

A) $13,333 B) $16,000 C) $13,500 D) $15,000 E) $2,500

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The balances in Sanchez Accounting Services' office supplies account on February 1 and February 28 were $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) $1,500 B) $2,325 C) $3,100 D) $1,525 E) $1,075

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

If Regent Tax Services' office supplies account balance on March 1 was $1,400, the company purchased $675 of supplies during the month, and a physical count of supplies on hand at the end of March indicated $1,250 unused, what is the amount of the adjusting entry for office supplies on March 31?

A) $675 B) $1,975 C) $825 D) $525 E) $1,250

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A physical count of supplies on hand at the end of May for Masters, Inc. indicated $1,250 of supplies on hand. The general ledger balance before any adjustment is $2,100. What is the adjusting entry for office supplies that should be recorded on May 31?

Debit Supplies Expense $1,250 and credit Supplies $2,100.

1. Debit Prepaid Supplies $850 and credit Supplies Expense $850.
2. Debit Supplies $1,250 and credit Cash $1,250.
3. Debit Supplies Expense $1,250 and credit Supplies $1,250.
4. Debit Supplies Expense $850 and credit Supplies $850.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Which of the following statements is incorrect?

1. Property, plant, and equipment are referred to as plant assets.
2. Interim financial reports can be based on one-month or three-month accounting periods.
3. The fiscal year is any 12 consecutive months (or 52 weeks) used by a business as its annual accounting period.

An income statement reports revenues earned less expenses incurred.

1. An unadjusted trial balance shows the account balances after they have been revised to reflect the effects of end-of-period adjustments.

Learning Objective: 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

A trial balance prepared after adjustments have been recorded is called a(n):

1. Balance sheet.
2. Classified balance sheet.
3. Unclassified balance sheet.
4. Adjusted trial balance.
5. Unadjusted trial balance.

Learning Objective: 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

A trial balance prepared before any adjustments have been recorded is:

1. An unadjusted trial balance.
2. Only prepared once a year.
3. Used to prepare financial statements.
4. An adjusted trial balance.
5. Correct with respect to proper balance sheet and income statement amounts.

Learning Objective: 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The adjusted trial balance contains information pertaining to:

1. All general ledger accounts.
2. Balance sheet accounts only.
3. Revenue accounts only.
4. Income statement accounts only.
5. Asset accounts only.

Learning Objective: 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Financial statements are typically prepared in the following order:

1. Income statement, statement of owner's equity, balance sheet.
2. Income statement, balance sheet, statement of owner's equity.
3. Balance sheet, statement of owner's equity, income statement.
4. Balance sheet, income statement, statement of owner's equity.
5. Statement of owner's equity, balance sheet, income statement.

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

A balance sheet that places the assets above the liabilities and equity is called a(n):

1. Classified balance sheet.
2. Account form balance sheet.
3. Unclassified balance sheet.
4. Report form balance sheet.
5. Unadjusted balance sheet.

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

A balance sheet that places the liabilities and equity to the right of the assets is a(n):

1. Report form balance sheet.
2. Classified balance sheet.
3. Unclassified balance sheet.
4. Account form balance sheet.
5. Interim balance sheet.

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

Under the alternative method for accounting for unearned revenue, which of the following pairs of journal entry formats is correct?

A)

Initial Entry	Adjusting Entry
Consulting Revenue	Unearned Revenue
Cash	Consulting Revenue

Initial Entry	Adjusting Entry
Cash	Unearned Revenue
Unearned Revenue	Cash

Initial Entry	Adjusting Entry
Cash	Consulting Revenue
Consulting Revenue	Unearned Revenue

Initial Entry	Adjusting Entry
Cash	Unearned Consulting Revenue
Unearned Consulting Revenue	Consulting Revenue

Initial Entry	Adjusting Entry
Cash	Consulting Revenue
Unearned Revenue	Unearned Revenue

Learning Objective: 03-P4 Appendix 3A-Explain the alternatives in accounting for prepaids. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Under the alternative method for recording prepaid expenses, which is the correct set of journal entries?

A)

Initial Entry	Adjusting Entry
Prepaid Insurance	Cash
Insurance Expense	Prepaid Insurance

Initial Entry	Adjusting Entry
Prepaid Insurance	Insurance Expense
Cash	Prepaid Insurance

Initial Entry	Adjusting Entry
Prepaid Insurance	Prepaid Insurance
Cash	Insurance Expense

Initial Entry	Adjusting Entry
Insurance Expense	Prepaid Insurance
Cash	Insurance Expense

Initial Entry	Adjusting Entry
Cash	Prepaid Insurance
Insurance Expense	Insurance Expense

Learning Objective: 03-P4 Appendix 3A-Explain the alternatives in accounting for prepaids. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Which of the following statements related to U.S. GAAP and IFRS is incorrect?

1. U.S. GAAP balance sheets report current items first.
2. IFRS balance sheets normally present noncurrent items first.
3. Both U.S. GAAP and IFRS include guidance for adjusting entries.
4. U.S. GAAP does not require items to be separated by current and noncurrent classifications on the balance sheet.

Both U.S. GAAP and IFRS prepare the same four financial statements.

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Understand

AACSB: Communication

AICPA: FN Reporting; BB Global

On December 1, Milton Company borrowed $300,000, at 8% annual interest, from the Tennessee National Bank. Interest is paid when the loan matures one year from the issue date. What is the adjusting entry for accruing interest that Milton would need to make on December 31, the calendar year-end?

debit Interest Expense, $2,000; credit Interest Payable, $2,000.

1. debit Interest Payable, $2,000; credit Interest Expense, $2,000.
2. debit Interest Expense, $2,000; credit Cash, $2,000.
3. debit Interest Expense, $4,000; credit Interest Payable, $4,000.
4. debit Interest Expense, $24,000; credit Interest Payable, $24,000.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On September 1, Kennedy Company loaned $100,000, at 12% annual interest, to a customer. Interest and principal will be collected when the loan matures one year from the issue date. Assuming adjustments are only made at year-end, what is the adjusting entry for accruing interest that Kennedy would need to make on December 31, the calendar year-end?

Debit Cash, $4,000; credit Interest Revenue, $4,000.

1. Debit Interest Expense, $4,000; credit Interest Payable, $4,000
2. Debit Interest Expense, $12,000; credit Interest Payable, $12,000
3. Debit Interest Receivable, $12,000; credit Cash, $12,000
4. Debit Interest Receivable, $4,000; credit Interest Revenue, $4,000.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A roofing company collects fees when jobs are complete. The work for one customer, whose job was bid at $3,000, has been completed as of December 31, but the customer has not yet been billed. Assuming adjustments are only made at year-end, what is the adjusting entry the company would need to make on December 31, the calendar year-end?

Debit Roofing Fees Revenue, $3,000; credit Accounts Receivable, $3,000

1. Debit Cash, $3,000; credit Roofing Fees Revenue, $3,000
2. Debit Roofing Fees Revenue, $3,000; credit Cash, $3,000
3. Debit Accounts Receivable, $3,000; credit Roofing Fees Revenue, $3,000
4. No adjustment is required.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

All of the following are true regarding prepaid expenses except:

1. They are paid for in advance of receiving their benefits.
2. When they are used, their costs become expenses.
3. They are assets.
4. The adjusting entry for prepaid expenses increases expenses and decreases liabilities.
5. The adjusting entry for prepaid expenses increases expenses and decreases assets.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

An annual reporting period consisting of any twelve consecutive months is known as:

1. Calendar year.
2. Interim financial period.
3. Seasonal year.
4. Fiscal year.
5. Natural business year.

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Remember

AACSB: Analytical Thinking AICPA: BB Industry; FN Reporting

Two accounting principles central to accrual accounting basis that are relied on in the adjusting process are:

Revenue recognition and going-concern.

1. Revenue recognition and monetary unit.
2. Expense recognition (matching) and cost.
3. Revenue recognition and Expense recognition (matching).
4. Expense recognition (matching) and business entity.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

All of the following are true regarding unearned revenues except:

1. The adjusting entry for unearned revenues increases assets and increases revenues.
2. The adjusting entry for unearned revenues increases revenues and decreases liabilities.
3. They are payments received in advance of services performed.
4. They are liabilities.
5. As they are earned, they become revenues.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Assuming prepaid expenses are originally recorded in balance sheet accounts, the adjusting entry to record use of a prepaid expense is:

Increase an expense; decrease a liability.

1. Increase an expense; decrease an asset.
2. Increase an asset; increase revenue.
3. Increase an expense; increase a liability.
4. Decrease a liability; increase revenue.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Assuming unearned revenues are originally recorded in balance sheet accounts, the adjusting entry to record earning of unearned revenue is:

Decrease a liability; increase revenue.

1. Increase an expense; increase a liability.
2. Increase an expense; decrease a liability.
3. Increase an asset; increase revenue.
4. Increase an expense; decrease an asset.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The adjusting entry to record an accrued expense is:

1. Decrease a liability; increase revenue.
2. Increase an expense; increase a liability.
3. Increase an expense; decrease a liability.
4. Increase an asset; increase revenue.
5. Increase an expense; decrease an asset.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The adjusting entry to record an accrued revenue is:

1. Increase an expense; decrease an asset.
2. Decrease a liability; increase revenue.
3. Increase an expense; increase a liability.
4. Increase an expense; decrease a liability.
5. Increase an asset; increase revenue.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On October 1, Goodwell Company rented warehouse space to a tenant for $2,500 per month. The tenant paid five months' rent in advance on that date, with the lease beginning immediately. The cash receipt was credited to the Unearned Rent account. The company's annual accounting period ends on December 31. The adjusting entry needed on December 31 is:

Debit Rent Receivable, $12,500; credit Rent Earned, $12,500.

1. Debit Unearned Rent, $5,000; credit Rent Earned, $5,000.
2. Debit Rent Receivable, $7,500; credit Rent Earned, $7,500.
3. Debit Unearned Rent, $12,500; credit Rent Earned, $12,500.
4. Debit Unearned Rent, $7,500; credit Rent Earned, $7,500.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On October 1, Goodwell Company rented warehouse space to a tenant for $2,500 per month and received $12,500 for five months' rent in advance on that date, with the lease beginning immediately. The cash receipt was credited to the Unearned Rent account. The company's annual accounting period ends on December 31. The Unearned Rent account balance at the end of December, after adjustment, should be:

A) $5,000. B) $10,000. C) $7,500. D) $12,500. E) $2,500.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Sanborn Company rents space to a tenant for $2,200 per month. The tenant currently owes rent for 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:

Debit Unearned Rent, $4,400; credit Rent Earned, $4,400.

1. Debit Rent Receivable, $4,400; credit Rent Earned, $4,400.
2. Debit Rent Receivable, $6,600; credit Rent Earned, $6,600.
3. Debit Rent Receivable, $2,200; credit Rent Earned, $2,200.
4. Debit Unearned Rent, $2,200; credit Rent Earned, $2,200.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Sanborn 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:

Debit Salaries Expense, $5,400; credit Cash, $5,400.

1. Debit Salaries Expense, $5,400; credit Salaries Payable, $5,400.
2. Debit Salaries Payable, $5,400; credit Salaries Expense, $5,400.
3. Debit Salaries Expense, $9,000; credit Salaries Payable, $9,000.
4. Debit Salaries Expense, $3,600; credit Salaries Payable, $3,600.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On January 1, Imlay Company purchases manufacturing equipment costing $95,000 that is expected to have a five-year life and an estimated salvage value of $5,000. Imlay uses the

straight-line depreciation method to allocate costs, and only prepares adjustments at year-end. The adjusting entry needed on December 31 of the first year is:

Debit Depreciation Expense, $18,000; credit Equipment, $18,000.

1. Debit Depreciation Expense, $9,000; credit Accumulated Depreciation, $9,000.
2. Debit Depreciation Expense, $18,000; credit Accumulated Depreciation, $18,000.
3. Debit Depreciation Expense, $9,000; credit Equipment, $9,000.
4. Debit Depreciation Expense, $90,000; credit Accumulated Depreciation, $90,000.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Holman Company owns equipment with an original cost of $95,000 and an estimated salvage value of $5,000 that is being depreciated at $15,000 per year using the straight-line depreciation method, and only prepares adjustments at year-end. The adjusting entry needed to record annual depreciation is:

Debit Depreciation Expense, $15,000; credit Equipment, $15,000.

1. Debit Depreciation Expense, $15,000; credit Accumulated Depreciation, $15,000.
2. Debit Depreciation Expense, $10,000; credit Accumulated Depreciation, $10,000.
3. Debit Depreciation Expense, $10,000; credit Equipment, $10,000.
4. Debit Equipment, $15,000; credit Accumulated Depreciation, $15,000.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On November 1, Jovel Company loaned another company $100,000 at a 6.0% 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 amount of interest revenue that should be reported in the first year is:

A) $5,000. B) $1,000. C) $6,000. D) $16,667. E) $0.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On November 1, Jovel Company loaned another company $100,000 at a 6.0% 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, and adjustments are only made at year-end. The adjusting entry needed on December 31 is:

Debit Interest Receivable, $500; credit Interest Revenue, $500.

1. Debit Interest Receivable, $1,000; credit Interest Revenue, $1,000.
2. No entry required.
3. Debit Interest Expense, $1,000; credit Note Payable, $1,000.
4. Debit Interest Expense, $5,000; credit Interest Payable, $5,000.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On December 1, Casualty Insurance Company borrowed $50,000 at a 6.0% interest rate from One Mutual Bank. The note payable plus interest will not be paid until April 1 of the following year. The company's annual accounting period ends on December 31 and adjustments are only made at year-end. The adjusting entry needed on December 31 is:

Debit Interest Expense, $250; credit Interest Payable, $250.

1. Debit Interest Expense, $250; credit Note Payable, $250.
2. Debit Interest Payable, $1,000; credit Interest Expense, $1,000.
3. Debit Interest Expense, $1,000; credit Interest Payable, $1,000.
4. No entry required.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Which of the following statements is incorrect?

1. An adjusted trial balance is a list of accounts and balances prepared after adjusting entries have been recorded and posted to the ledger.
2. Financial statements should be prepared directly from information in the unadjusted trial balance.
3. An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded.

Financial statements can be prepared directly from information in the adjusted trial balance.

1. Each trial balance amount is used in preparing the financial statements.

Learning Objective: 03-P2 Explain and prepare an adjusted trial balance.; 03-P3 Prepare financial statements from an adjusted trial balance.

Bloom's: Understand AACSB: Analytical Thinking

AICPA: BB Industry; FN Reporting

On December 31, Carmack Company received a $215 utility bill for December that it will not pay until January 15. The adjusting entry needed on December 31 to accrue this expense is:

Debit Accounts Payable $215; credit Utilities Expense $215.

1. Debit Prepaid Utilities $215; credit Accounts Payable $215.
2. Debit Prepaid Utilities $215; credit Cash $215.
3. Debit Utilities Expense $215; credit Accounts Payable $215.
4. Debit Utilities Expense $215; credit Prepaid Utilities $215.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On December 31, Winters Company received a $385 bill for the purchase of supplies in December that it will not pay for until January 15. Winters follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry needed on December 31 to accrue this cost is:

Debit Supplies $385; credit Accounts Payable $385.

1. Debit Supplies Expense $385; credit Supplies $385.
2. Debit Accounts Payable $385; credit Supplies $385.
3. Debit Accounts Payable $385; credit Cash $385.
4. Debit Supplies Expense $385; credit Cash $385.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On December 31, Carmack Company's Prepaid Insurance account had a balance before adjustment of $6,000. The insurance was purchased on July 1 of the same year for one year of insurance coverage, with coverage beginning on that date. The adjusting entry needed on December 31 is:

Debit Prepaid Insurance $6,000; credit Cash $6,000.

1. Debit Insurance Expense $3,000; credit Prepaid Insurance $3,000.
2. Debit Insurance Expense $3,000; credit Accounts Payable $3,000.
3. Debit Insurance Expense $6,000; credit Accounts Payable $6,000.
4. Debit Cash $6,000; credit Prepaid Insurance $6,000.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

On December 31, Winters Company's Prepaid Rent account had a balance before adjustment of

$6,000. Three months' rent was paid in advance on December 1, the first day of the lease term. The adjusting entry needed on December 31 is:

Debit Cash $2,000; credit Prepaid Rent $2,000.

1. Debit Rent Expense $2,000; credit Accounts Payable $2,000.
2. Debit Rent Expense $6,000; credit Accounts Payable $6,000.
3. Debit Rent Expense $2,000; credit Prepaid Rent $2,000.
4. Debit Prepaid Rent $6,000; credit Cash $6,000.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

SHORT ANSWER QUESTIONS

Match the following terms with the appropriate definition.
Accrual basis accounting
Cash basis accounting
Fiscal year
Interim financial statements
Depreciation
Straight-line depreciation
Time period assumption
Expense recognition (matching) principle
Accrued revenues

_____ 1. Any 12 consecutive months or 52-week period that a company adopts for its annual reporting period.

2. A method that allocates equal amounts of an asset's cost (less any salvage value) to depreciation expense during its useful life.

_____ 3. Assumes that an organization's activities can be divided into specific time periods such as months, quarters, or years.

_____ 4. Aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses.

_____ 5. The accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred.

_____ 6. The process of allocating the costs of long-term assets to the income statement over their expected useful lives.

_____ 7. Revenues earned in a period that are both unrecorded and not yet received in cash or other assets.

_____ 8. The accounting system that recognizes revenue when cash is received and records expenses when cash is paid.

_____ 9. A set of financial statements that covers less than one year, typically one, three, or six months of activity.

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance.; 03-C1 Explain the importance of periodic reporting and the time period assumption.; 03-C2 Explain accrual accounting and how it improves financial statements.; 03-P1 Prepare and explain adjusting entries.

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

Match the following terms with the appropriate definition.
Accrued expenses
Adjusting entry
Adjusted trial balance
Prepaid expenses
Report form balance sheet
Accounting period
Contra account
Profit margin
Unadjusted trial balance
Natural business year

_____ 1. A 12-month period, used by companies with seasonal variation, that ends when a company's sales activities are at their lowest point.

_____ 2. A journal entry made at the end of an accounting period to reflect a transaction or event that is not yet recorded; affects one or more income statement account and one or more balance sheet account, but never cash.

_____ 3. An account linked with another account and having an opposite normal balance.

4. Items paid for in advance of receiving their benefits; recorded as an asset when purchased and expensed when used.

_____ 5. Any length of time that an organization's activities are divided into and reported by financial statements.

_____ 6. A listing of accounts and balances prepared after adjustments are recorded and posted to the ledger.

7. A balance sheet that lists items vertically in the order of assets, liabilities and equity.

8. Costs that are incurred in a period but are both unpaid and unrecorded, requiring an adjustment at the end of the period.

_____ 9. A listing of accounts and balances prepared after external transactions are recorded but before adjustments are recorded.

_____ 10. A useful measure of a company's operating results determined by dividing net income by net sales.

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption.; 03-C3 Identify the types of

adjustments and their purpose.; 03-P2 Explain and prepare an adjusted trial balance.; 03-P3 Prepare financial statements from an adjusted trial balance.; 03-A2 Compute profit margin and describe its use in analyzing company performance.

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

Match the following types of adjustments (a though d) with the transactions (1 through 4).

Prepaid expense Unearned revenue Accrued expense Accrued revenue
Answer: 1. Used to record revenue earned for which cash was received in advance.	2
2. Used to record expiration or use of prepaid insurance.	1
3. Used to record revenue earned for which cash has not been received.	4
4. Used to record wages owed, but not yet paid.	3

Explanation:

Diff: 2

Topic: Adjusting Entries

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Discuss the importance of periodic reporting and the time period assumption.

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Reporting

Discuss how accrual accounting enhances the usefulness of financial statements.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

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

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Explain the purpose of adjusting entries at the end of a period and provide an example of an adjusting entry.

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

List the three-steps of the adjusting process.

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

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

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Explain how accounting adjustments affect financial statements and provide an example of an adjustment that would impact the statements if not recorded.

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Reporting

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

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Apply

AACSB: Communication

AICPA: BB Industry; FN Resource Management

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

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Describe the adjusting entries, including the accounts used, for 1) prepaid expenses, 2) depreciation and 3) unearned revenues.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Describe the adjusting entries, including the accounts used, for 1) accrued expenses and 2) accrued revenues.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

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

Learning Objective: 03-P1 Prepare and explain adjusting entries.; 03-P4 Appendix 3A-Explain the alternatives in accounting for prepaids.

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Measurement

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

Learning Objective: 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Why are financial statements prepared in a specific order? What is the usual order in which financial statements are prepared from the adjusted trial balance?

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Understand

AACSB: Analytic

AICPA: BB Industry; FN Reporting

Explain how the owner of a company uses the accrual basis of accounting.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.; 03-P3 Prepare financial statements from an adjusted trial balance.

Bloom's: Understand AACSB: Analytic

AICPA: BB Industry; FN Reporting

ESSAY QUESTIONS

On December 31, the year end, a company forgot to record $6,000 of depreciation on machinery. In the current year financial statements, what is the effect of this error on assets, net income, and equity?

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Analyze

AACSB: Analytic

AICPA: BB Industry; FN Measurement

100

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.

Failed to accrue interest expense of $200.
Forgot to record $7,700 of depreciation on machinery.
Failed to accrue $1,300 of revenue earned but not collected.

Error	Revenues	Expenses	Assets	Liabilities	Equity
EX	-$600	0	0	+$600	-$600
1.	_________	_________	_________	_________	_________
2.	_________	_________	_________	_________	_________
3.	_________	_________	_________	_________	_________

Answer:	Error	Revenues	Expenses	Assets	Liabilities	Equity
	1.	0	-$200	0	-$200	+$200
	2.	0	-$7,700	+$7,700	0	+$7,700
	3.	-$1,300	0	-$1,300	0	-$ 1,300

Diff: 3

Topic: Links to Financial Statements

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Analyze

AACSB: Analytic

AICPA: BB Industry; FN Measurement

A company issued financial statements for the year ended December 31, but failed to include the following adjusting entries:
Accrued interest revenue earned of $1,200.
Depreciation expense of $4,000.
Portion of prepaid insurance expired (an asset) used $1,100.
Accrued taxes of $3,200.
Revenues of $5,200, 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:

Assets		Liabilities	Equity	Net Income
Reported
amounts	$350,000	$200,000	$150,000	$70,000
Add (subtract) to
correct for item:
A	101

A
B
C
D
E
Corrected amounts	$	$	$	$

Assets		Liabilities	Equity	Net Income
Reported
amounts	$350,000	$200,000	$150,000	$70,000
Add (subtract) to
correct for item:
A	1,200		1,200	1,200
B	(4,000)		(4,000)	(4,000)
C	(1,100)		(1,100)	(1,100)
D		3,200	(3,200)	(3,200)
E		(5,200)	5,200	5,200
Corrected amoun	ts $346,100	$198,000	$148,100	$68,100

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Analyze

AACSB: Analytic

AICPA: BB Industry; FN Measurement

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.

	Error	Revenues	Expenses	Assets	Liabilities	Equity
Ex.	Did not record depreciation for this period	0	-	+	0	+
1.	Did not record unpaid telephone bill
2.	Did not adjust unearned revenue account for revenue earned this period.
3.	Did not adjust shop supplies for supplies used this period
4.	Did not accrue employee salaries for this period
5. McGraw-H	Recorded rent expense owed ill Education.All rights reserved. No rep	102 roduction or distri	bution with	out the prior wr	itten consent	of McGraw-Hill

Recorded rent expense owed

with a debit to insurance expense and a credit to rent payable

	Error	Revenues	Expenses	Assets	Liabilities	Equity
Ex.	Did not record depreciation for this period	0	-	+	0	+
1.	Did not record unpaid telephone bill	0	-	0	-	+
2.	Did not adjust unearned revenue account for revenue earned this period.	-	0	0	+	-
3.	Did not adjust shop supplies for supplies used this period	0	-	+	0	+
4.	Did not accrue employee salaries for this period	0	-	0	-	+
5.	Recorded rent expense owed with a debit to insurance expense and a credit to rent payable	0	0	0	0	0

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Analyze

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Andrew's net income was $280,000; its total assets were $1,050,000; and its net sales were

$3,500,000. Calculate the company's profit margin ratio.

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Apply

AACSB: Analytic

AICPA: BB Resource Management; FN Decision Making

Farmers' net income was $740,000 and its net sales were $8,000,000. Calculate its profit margin ratio.

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Apply

AACSB: Analytic

AICPA: BB Resource Management; FN Decision Making

From the information provided, calculate Giuseppe'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.

	2017	2016	2015
Net income	$ 2,630	$ 2,100	$ 1,850
Net Sales	36,500	32,850	31,200
Total Assets	400,000	385,000	350,000

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Analyze

AACSB: Analytic

AICPA: BB Critical Thinking; FN Decision Making

On December 14, Branch Company received $3,000 cash for 30 days of consulting services that will be completed on January 13. Branch records all such prepayments by customers in a liability account. Prepare the December 31 adjusting entry.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

On December 31, Chu Company had performed $3,000 of management services for clients that had not yet been billed. Prepare Chu's adjusting entry to record these fees earned.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

A company's employees earn a total of $10,000 per week for a 5-day week that begins on Monday. December 31 of Year 1 is a Monday, and all employees worked that day.
Prepare the required adjusting journal entry to record accrued salaries on December 31, Year 1.
Prepare the journal entry to record the payment of salaries on January 4, Year 2. (Assume no reversing entries were made).

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Glisten Co. leases an office to a tenant at the rate of $3,000 per month. The tenant contacted Glisten and arranged to pay the rent for December on January 8 of the following year. Glisten agrees to this arrangement.

a.) Prepare the journal entry that Glisten 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 (Assume no reversing entries were made).

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Prior to recording adjusting entries on December 31, a company's Office Supplies account had an

$780 debit balance. A physical count of the supplies showed $425 of unused supplies available as of December 31. Prepare the required adjusting entry.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Complete the following by filling in the blanks:
The Prepaid Insurance account had a $545 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.

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 $275; consequently, if all supplies were accounted for,

$ of office supplies must have been purchased during the year.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Werner Company had $1,300 of store supplies at the beginning of the current year. During this year, Werner purchased $6,250 worth of store supplies. On December 31, $1,125 worth of store supplies remained. Calculate the amount of Werner Company's store supplies expense for the current year.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Prepare general journal entries on December 31 to record the following unrelated year-end adjustments.
Estimated depreciation on equipment for the year, $4,500.
The Prepaid Insurance account has a $3,680 debit balance before adjustment. An examination of insurance policies shows $600 of insurance expired.
The Prepaid Insurance account has a $2,400 debit balance before adjustment. An examination of insurance policies shows $950 of unexpired insurance.
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.
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.

The company collects rent monthly from its tenants. One tenant whose rent is $1,000 per month

has not paid his rent for December.

Answer: a.

Dec. 31

Depr. Expense–Equipment Accum. Depr.–Equipment

4,500

Insurance Expense Prepaid Insurance

Insurance Expense

600

1,450

600

Prepaid Insurance

1,450

Diff: 3

($2,400 - $950 = $1,450 expired)

31 Office Salaries Expense 900

Office Salaries Payable 900

(3 Employees * 3 days * $100/day/employee = $900)

31 Unearned Rent 1,400

Rent Earned 1,400

($700/mo * 2 months earned = $1,400)

31 Accounts Receivable (or Rent Receivable) 1,000

Rent Earned 1,000

Topic: Adjusting entries

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Rogers Company's employees are paid a total of $1,600 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 Rogers Company should make to accrue salaries.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

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

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Juno Company had $500 of office supplies available at the beginning of the current year. During the year Juno Company purchased $2,750 worth of office supplies, which were debited to the office supplies account. On December 31 of this year, $375 worth of office supplies remained.
Calculate the amount of Juno Company's office supplies expense for the current year. (Show your calculations.)
Prepare the journal entry to adjust the supplies account.

Answer: a.	Beginning Supplies	$500
	+Purchases	2,750
	Available	$3,250
	-Ending Supplies	375
	Supplies used	$2,875

Diff: 3

12/31 Office Supplies Expense 2,875

Office Supplies 2,875

Topic: Adjusting entries

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

During the current year ended December 31, clients paid fees in advance for accounting services amounting to $15,000. These fees were recorded in an account called Unearned Accounting Fees. If $3,500 of these fees remains unearned on December 31 of this year, prepare the required December 31 adjusting entry to bring the accounts up to date.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

The following unadjusted and adjusted trial balances are from the current year's accounting system for Excelsior.

Excelsior Trial Balances

For Year Ended December 31

Unadjusted Adjusted

Trial Balance Trial Balance Debit Credit Debit Credit

Cash	11,300		11,300
Accounts receivable	16,340		17,140
Office supplies	1,145		645
Prepaid advertising	1,000		450
Building Accumulated depreciation–Building	26,700	1,300	26,700	6,300
Accounts payable		3,320		3,500
Unearned services revenue		4,410		3,010
D. Ruiz, Capital		17,905		17,905
Services revenue Salaries expense	34,500	72,400	34,500	74,600
Utilities expense	5,450		5,630
Advertising expense	2,900		3,450
Supplies expense			500

Depreciation expense– building 5,000

Total 99,335 99,335 105,315 105,315

Present the six adjusting entries in general journal form that explain the changes in the account balances from the unadjusted to the adjusted trial balance.

d.	Dec. 31	Depreciation Expense–Building	5,000
		Accumulated Depreciation– Building		5,000
		To record depreciation.

Learning Objective: 03-P1 Prepare and explain adjusting entries.; 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Analyze

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Trapper Company's unadjusted and adjusted trial balances on December 31 of the current year are as follows:

Unadjusted Adjusted

Trial Balance Trial Balance

Cash 4,000 4,000

Prepaid insurance 1,500 1,200

Equipment 9,000 9,000 Accumulated depreciation–

Equipment 800 1,800

Salaries payable 1,000

Unearned repair fees 2,500 600

Repair fees earned 10,000 11,900

Salaries expense 3,500 4,500

Depreciation expense–Equip. 1,000

Insurance expense		700		1,000
Black, Capital			5,400	5,400
		18,700	18,700	20,700 20,700
Present the four adjusting journal entries that were recorded by Trapper Company.
Answer: Dec.	31	Insurance Expense Prepaid Insurance		300	300
	31	Depreciation Expense–Equipment Accum. Depr. —Equipment		1,000	1,000
	31	Salaries Expense Salaries Payable		1,000	1,000
	31	Unearned Repair Fees Repair Fees Earned		1,900	1,900
Diff: 3

Topic: Adjusting entries; Adjusted Trial Balance

Learning Objective: 03-P1 Prepare and explain adjusting entries.; 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Analyze

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Record the December 31 adjusting entries for the following transactions and events in general journal form. Assume that December 31 is the end of the annual accounting period.
The Prepaid Insurance account shows a debit balance of $2,340, representing the cost of a

two-year fire insurance policy that was purchased on October 1 of the current year and has not been adjusted to-date.

The Store Supplies account has a debit balance of $400; a year-end inventory count reveals $80 of supplies still on hand.
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.
Estimated depreciation on store equipment is $600.
Accrued salaries amount to $1,400.

Learning Objective: 03-P1 Prepare and explain adjusting entries.; 03-P4 Appendix 3A-Explain the alternatives in accounting for prepaids.

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

Based on the unadjusted trial balance for Highlight Styling and the adjusting information given below, prepare the adjusting journal entries for Highlight Styling.

Highlight Stylings' unadjusted trial balance for the current year follows:

Highlight Styling Trial Balance December 31

Cash………………………………………………….	$ 2,200
Prepaid insurance …………………………………...	1,680
Shop supplies .............................................................	790
Shop equipment …………………………………….	3,860
Accumulated depreciation–shop equipment ………..		$ 770
Building……………………………………………...	59,500
Accumulated depreciation–building………………..		3,840
Land ………………….	55,000
Unearned rent………………………………………..		2,600
Long-term notes payable…………………………….		50,000
Bella Hanson, Capital ……………………………….		48,860
Rent earned ………………………………………….		2,400
Fees earned ………………………………………….		23,400
Wages expense ……………………………………...	3,200
Utilities expense ……………………………………	690
Property taxes expense …………………………….	600
Interest expense ……………………………………	4,350	________
Totals ………………………………………………..	$131,870	$131,870

Additional information:

An insurance policy examination showed $1,040 of expired insurance.
An inventory count showed $210 of unused shop supplies still available.
Depreciation expense on shop equipment, $350.
Depreciation expense on the building, $2,020.
A beautician is behind on space rental payments, and this $200 of accrued revenues was unrecorded at the time the trial balance was prepared.
$800 of the Unearned Rent account balance was still unearned by year-end.
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.
Three months' property taxes, totaling $450, have accrued. This additional amount of property taxes expense has not been recorded.
One month's interest on the note payable, $600, has accrued but is unrecorded.

Answer: a.	Insurance expense Prepaid insurance	1,040	1,040
b.	Shop supplies expense Shop supplies	580	580
	(Calculation: $790 - 210 = 580 used)
c.	Depreciation expense, Shop equipment	350
	Accumulated depreciation - Shop equipment		350
d.	Depreciation expense, Building	2,020
	Accumulated depreciation - Building		2,020
e.	Accounts receivable Rent earned	200	200
f.	Unearned rent ($2,600 - $800 = $1,800)earned)		1,800
g.	Rent earned Wages expense	200	1,800
	Wages payable		200
h.	(Calculation: $50/day * 4 days = $200) Property taxes expense	450
i.	Property taxes payable Interest expense Interest payable	600	450 600

Diff: 3

Topic: Adjusting entries

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Analyze

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Based on the unadjusted trial balance for Glow Styling and the adjusting information given below, prepare the adjusting journal entries for Glow Styling. After completing the adjusting entries, prepare the trial balance for Glow Styling.

Glow Styling unadjusted trial balance for the current year follows:

Glow Styling Trial Balance December 31

$131,870

Cash………………………………………………….	$ 4,200
Prepaid insurance …………………………………...	1,480
Shop supplies .............................................................	990
Shop equipment …………………………………….	3,860
Accumulated depreciation–shop equipment ………..		$ 770
Building……………………………………………...	57,500
Accumulated depreciation–building………………..		3,840
Land ………………….	55,000
Unearned rent………………………………………..		1,600
Long-term notes payable…………………………….		50,000
Bella Hanson, Capital ……………………………….		49,860
Rent earned ………………………………………….		2,400
Fees earned ………………………………………….		23,400
Wages expense ……………………………………...	3,200
Utilities expense ……………………………………	690
Property taxes expense …………………………….	600
Interest expense ……………………………………	4,350	________
Totals ………………………………………………..	$131,870
Totals ………………………………………………..

Additional information:

An insurance policy examination showed $1,240 of expired insurance.
An inventory count showed $210 of unused shop supplies still available.
Depreciation expense on shop equipment, $350.
Depreciation expense on the building, $2,220.
A beautician is behind on space rental payments, and this $200 of accrued revenues was unrecorded at the time the trial balance was prepared.
$800 of the Unearned Rent account balance was earned by year-end.
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.
Three months' property taxes, totaling $450, have accrued. This additional amount of property taxes expense has not been recorded.
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 Glow Styling.

Cash	$ 4,200
Rent receivable……………………………..….	200
Prepaid insurance…………………………...	240
Shop supplies .......................................................	210
Shop equipment …………….……………….	3,860
Accumulated depreciation–shop equipment ……		$ 1,120
Building…………………………………………..	57,500
Accumulated depreciation–building……………..		6,060
Land …………………………………………	55,000
Wages Payable…………………………………..		200
Property taxes payable…………………………		450
Interest payable…………………………………		600
Unearned rent…………………………………..		800
Long-term notes payable……………………….		50,000
Bella Hanson, Capital ……………………………		49,860
Rent earned …………………………………….		3,400
Fees earned …………………………………….		23,400
Wages expense ………………………………...	3,400
Utilities expense ………………………………	690
Property taxes expense ………………………….	1,050
Insurance expense ………………………………	1,240
Shop supplies expense…………………………	780
Depreciation expense–shop equipment………..	350
Depreciation expense–building……………..	2,220
Interest expense …………………………………	4,950
Totals………………………………………..	$135,89	$135,89
	0	0

Learning Objective: 03-P1 Prepare and explain adjusting entries.; 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Analyze

AACSB: Analytic

AICPA: BB Industry; FN Measurement

117

Using the information presented below, prepare an income statement from the adjusted trial balance of Dodson Containers.

DODSON CONTAINERS

Adjusted Trial Balance December 31

Cash	$ 3,050
Accounts receivable	400
Prepaid insurance	830
Office supplies	80
Office equipment	4,200
Accumulated depreciation–office equipment		$ 1,100
Buildings	98,000
Accumulated depreciation–buildings		28,000
Land	115,000
Wages Payable		880
Property taxes payable		1,400
Interest payable		2,200
Unearned rent		460
Long-term notes payable		150,000
Frank Dodson, Capital		40,340
Frank Dodson, Withdrawals	21,000
Rent earned		67,500
Wages expense	29,000
Utilities expense	2,900
Property taxes expense	2,400
Insurance expense	5,800
Office supplies expense	250
Depreciation expense–office equipment	400
Depreciation expense–buildings	5,570
Interest expense	3,000 $291,880	________ $291,880
Totals

Revenues
Rent earned		$67,500
Operating expenses
Wages expense	$29,000
Utilities expense 118	2,900

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Reporting

Using the information presented below, prepare a statement of owner's equity and balance sheet from the adjusted trial balance of Dodson Containers. Mr. Dodson's capital account balance of

$40,340 consists of a $30,340 beginning-year balance plus a $10,000 investment during the current year.

DODSON CONTAINERS

Adjusted Trial Balance December 31

Cash	$ 3,050
Accounts receivable…	400
Prepaid insurance ..	830
Office supplies .............	80
Office equipment …	4,200
Accumulated depreciation–office equipment		$ 1,100
Buildings…………..	98,000
Accumulated depreciation–buildings..		28,000
Land….	115,000
Wages Payable………		880
Property taxes payable		1,400
Interest payable…..		2,200
Unearned rent…….		460
Long-term notes payable…………….		150,000
Frank Dodson, Capital .		40,340
Frank Dodson, Withdrawals	21,000
Rent earned ………		67,500
Wages expense …..	29,000
Utilities expense … 1	19 2,900

Utilities expense …	2,900
Property taxes expense ……………..	2,400
Insurance expense..	5,800
Office supplies expense	250
Depreciation expense–office equipment	400
Depreciation expense–buildings……..	5,570
Interest expense …	3,000 $291,880	________ $291,880
Totals …………….

Frank Dodson, Capital, January 1		$30,340
Plus: Owner’s investments	$10,000
Net income	18,180	28,180 $58,520

Less withdrawals by owner		21,000
Frank Dodson, Capital, December 31		$37,520

Assets
Cash		$ 3,050
Accounts Receivable		400
Prepaid Insurance		830
Office Supplies		80
Land		115,000
Office Equipment	$ 4,200
Less: Accumulated depreciation	1,100	3,100
Buildings	98,000
Less: Accumulated depreciation	28,000	70,000
Total assets		$192,460

Liabilities
Wages Payable	$ 880
Property Taxes Payable	1,400
Interest Payable	2,200
Unearned Rent	460
Long-Term Note Payable	150,000
Total Liabilities		$154,940

Equity 120

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Reporting

Using the information given below, prepare an income statement and owner's equity statement for Rapid Car Services from the adjusted trial balance. Owner Stella Grafton did not make any additional investments in the company during the year.

Rapid Car Services Adjusted Trial Balance

For the year ended December 31

Cash	$ 33,000
Accounts receivable	14,200
Office supplies	1,700
Vehicles	100,000
Accumulated depreciation — Vehicles		45,000
Accounts payable		11,500
Stella Grafton, Capital		71,900
Stella Grafton, Withdrawals	40,000
Fees earned		155,000
Rent expense	13,000
Office supplies expense	2,000
Utilities expense	2,500
Depreciation Expense — Vehicles	15,000
Salary expense	50,000
Fuel expense	12,000	________
Totals	$283,400	$283,400

Stella Grafton, Capital, January 1	$ 71,900
Plus: Net income	60,500
	$132,400
Less: Withdrawals by owner	40,000
Stella Grafton, Capital, December 31	$ 92,400

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Reporting

Using the information given below, prepare a balance sheet for Rapid Car Services from the adjusted trial balance. Owner Stella Grafton did not make any additional investments in the company during the year.

Rapid Car Services Adjusted Trial Balance

For the year ended December 31

Cash	$ 33,000
Accounts receivable	14,200
Office supplies	1,700
Vehicles	100,000
Accumulated depreciation — Vehicles		45,000
Accounts payable		11,500
Stella Grafton, Capital		71,900
Stella Grafton, Withdrawals	40,000
Fees earned		155,000
Rent expense	13,000
Office supplies expense	2,000
Utilities expense	2,500
Depreciation Expense — Vehicles	15,000
Salary expense	50,000
Fuel expense	12,000	________

Totals $283,400 $283,400

Cash		$33,000
Accounts receivable		14,200
Office supplies Vehicles	$100,000	1,700
Accumulated depreciation — Vehicles	(45,000)	55,000
Total assets		$103,900
Liabilities Accounts payable		$11,500
Equity Stella Grafton, Capital		$92,400
Total liabilities and equity		$103,900

Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Reporting

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

Oct. 01 Cash 15,000

Rent Revenue Earned 15,000

Assuming Abdulla only prepares adjustments at year-end, prepare the required adjusting entry at December 31 of the current year.

Learning Objective: 03-P4 Appendix 3A-Explain the alternatives in accounting for prepaids. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

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

Nov. 01 Insurance Expense 9,600

Cash 9,600

Assuming Salinger only prepares adjustments at year-end, prepare the required adjusting entry at December 31 of the current year.

Learning Objective: 03-P4 Appendix 3A-Explain the alternatives in accounting for prepaids. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Carroll Co. is a multi-million dollar business. The business results for the year have been impacted significantly by a slowing economy. The company wants to increase its net income. It has incurred

$2,900,000 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 Carroll? (b) Which accrual basis of accounting principles does this omission violate? (c) Would this be considered an ethical problem?

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements.; 03-C2 Explain accrual accounting and how it improves financial statements.

Bloom's: Analyze AACSB: Ethics

AICPA: BB Legal; BB Critical Thinking; FN Measurement; FN Risk Analysis

124

The following information is available for Hatter Co.

	2017	2016	2015
Net income	2,500	1,700	1,900
Net sales	37,000	35,000	32,000
Total assets	420,000	395,000	375,000

From the information provided, calculate Hatter's profit margin ratio for each of the three years. In 2016, 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.

	NI	$ 2,500	$ 1,700	$ 1,900
Profit margin =	Sales	$37,000	$35,000	$32,000

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Analyze

AACSB: Analytic

AICPA: BB Critical Thinking; FN Decision Making

The unadjusted trial balance and the adjustment data for Porter Business Institute are given below along with adjusting entry information. What is the impact on net income if these adjustments are not recorded? Show the calculation for net income without the adjustments and net income with the adjustments. Which one gives the most accurate net income? Which accounting principles are being violated if the adjustments are not made?

Porter Business Institute Unadjusted Trial Balance December 31 (in millions)
Cash………	$ 58,000
Accounts receivable…………..	59,000
Prepaid insurance …………...	12,000
Equipment …	8,000
Accumulated depreciation–equipment ………..		$ 2,000
Buildings……	57,500
Accumulated depreciation–buildings…………..		17,500
Land 125	55,000

Land	55,000
Unearned rent.		16,000
Long-term notes payable……….		50,000
Porter, Capital .		115,600
Tuition fees earned ……….		74,000
Training fees earned …….		23,400
Wages expense ……………	32,000
Utilities expense ………….	8,000
Property taxes expense ……	5,000
Interest expense ……………	4,000	________
Totals …….	$ 298,500	$298,500

Additional information items:

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.
A cash payment for space sublet for 8 months was received on July 1 and was credited to Unearned Rent.
Accrued interest expense on the note payable of $1,000 has been incurred but not paid.

Unadjusted revenues (74,000 + 23,400)	97,400
Unadjusted expenses (32,000 + 8,000 + 5,000 + 4,000)	49,000
Net income	48,400

Adjusted revenues (97,400 + 12,000 Rent earned)	109,400
Adjusted expenses (32,000 + 8,000 + 5,000 + 6,000 + 5,000)	56,000
Net income		53,400

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.; 03-P1 Prepare and explain adjusting entries.; 03-P3 Prepare financial statements from an adjusted trial balance.

Bloom's: Analyze AACSB: Analytic

AICPA: BB Critical Thinking; FN Measurement

The unadjusted trial balance and the adjustment data for Porter Business Institute are shown below along with adjusting entry information. What is the impact of the adjusting entries on the balance sheet? Show the calculation for total assets, total liabilities, and owner's equity without the adjustments; show the calculation for total assets, total liabilities, and owner's equity with the adjustments. Which one provides the most accurate presentation of the balance sheet?

Porter Business Institute Unadjusted Trial Balance December 31 (in millions)
Cash………	$ 58,000
Accounts receivable…………..	59,000
Prepaid insurance …………...	12,000
Equipment …	8,000
Accumulated depreciation–equipment ………..		$ 2,000
Buildings……	57,500
Accumulated depreciation–buildings…………..		17,500
Land	55,000
Unearned rent.		16,000
Long-term notes payable……….		50,000
Porter, Capital .		115,600
Tuition fees earned ……….		74,000
Training fees earned …….		23,400
Wages expense ……………	32,000
Utilities expense ………….	8,000
Property taxes expense ……	5,000
Interest expense ……………	4,000	________
Totals …….	$ 298,500	$298,500

Additional information items:

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.
A cash payment for space sublet for 8 months was received on July 1 and was credited to Unearned Rent.
Accrued interest expense on the note payable of $1,000 has been incurred but not paid.

Answer: Total assets before adjustment	230,000
(58,000 + 59,000+12,000+8,000-2,000+57,500-17,500+55,000)
Total liabilities before adjustments (16,000 + 50,000)	66,000
Total equity before adjustments (115,600 + 48,400)	164,000

Answer:	Total assets after adjustments	224,000
	(58,000+59,000+6,000+8,000-2,000+57,500-17,500+55,000)
	Total liabilities after adjustments (4,000+50,000+1,000)	55,000
	Unearned rent decreases to $4,000 and Interest Payable
	Increases to $1,000
	Total equity after adjustments (115,600+53,400)	169,000

Diff: 3

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.

Topic: Accrual Basis versus Cash Basis; Adjusting entries; Preparing Financial Statements

Bloom's: Analyze AACSB: Analytic

AICPA: BB Critical Thinking; FN Measurement

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

Sales	1,050,000
Expenses	795,000
Assets (beginning of the year)	1,500,000
Assets (end of the year)	1,900,000
Liabilities	850,000

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Analyze

AACSB: Analytic

AICPA: BB Critical Thinking; FN Decision Making

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.
The Prepaid Rent account has a debit balance of $8,000 before adjustment, representing a prepayment for four months' rent made on December 1 of the current year.
One-third of the work related to $18,000 of cash received in advance was performed during this period.
Unpaid accrued salaries at December 31 amounts to $15,000
Work was completed for a client on December 31 in the amount of $21,000, but was not previously billed or recorded.
Estimated depreciation on office equipment is $27,000.

c.	Salaries Expense Salaries Payable	15,000	15,000
d.	Accounts Receivable Earned Revenue	21,000	21,000
e.	Depreciation Expense–Equipment Accumulated Depreciation–Equipment	27,000	27,000

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

Gracio 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.

130

Nov. 1	Paid $11,400 for 12 months of insurance coverage through October 31 of next year.
5	Received $8,000 cash for future services to be provided to a customer.
7	Paid $10,000 for future advertising.
Dec. 31	A portion of the insurance paid for on November 1 has expired. No adjustment was made in November to the insurance account.
31	Services of $2,500 are not yet provided to the customer who paid on November
31

Services of $2,500 are not yet provided to the customer who paid on November

Of the advertising paid for on November 7, $1,500 is not yet used.

Answer: Nov. 1	Insurance Expense Cash	11,400	11,400
Nov. 5	Cash	8,000
Fees Earned 8,000
Nov. 7	Advertising Expense Cash	10,000	10,000
Dec. 31	Prepaid Insurance Insurance Expense	9,500	9,500
($11,400 * 10/12=$9,500)
Dec. 31	Fees Earned	2,500
	Unearned Fees		2,500
Dec. 31	Prepaid Advertising Advertising Expense	1,500	1,500

Diff: 3

Topic: Alternative Accounting of Prepayments

Learning Objective: 03-P4 Appendix 3A-Explain the alternatives in accounting for prepaids. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

For each of the following two separate situations, 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. Assume the company does not prepare reversing entries.
Nicolas Company has 5 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 worked each day and will be paid salaries for five full days on the following Monday.
Services of $3,000 have been performed for Clevenger Company through April 30. The client will pay the entire amount of the contract when services are completed on May 23.
Paid the employees' salaries on May 4.
Received payment from Clevenger Company for services that are now completed on May 23.

May 4 Salaries Expense	2,900
Salaries Payable	11,600
Cash		14,500

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

SHORT ANSWER QUESTIONS

Companies experiencing seasonal variations in sales often choose a fiscal year corresponding to their ________ year.

Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

________ are required at the end of the accounting period because certain internal transactions and events remain unrecorded.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Accrual accounting and the adjusting process rely on two principles: the ________ principle and the ________ principle.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

________ 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.

Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

243) Adjusting is a three-step process (1) , (2) , and (3) .

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

________ 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).

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Accrued revenues at the end of one accounting period often result in cash ________ in the next period.

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

________ revenues are liabilities requiring delivery of products and for services.

Learning Objective: 03-C3 Identify the types of adjustments and their purpose. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

If a prepaid expense account were not adjusted for the amount used, on the balance sheet assets would be ________ and equity would be ________.

Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements. Bloom's: Analyze

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Profit margin = divided by net sales.

Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

The ________ depreciation method allocates equal amounts of an asset's cost to depreciation during its useful life.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

is the process of allocating the cost of plant assets to the income statement over their expected useful lives.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

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.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

________ expenses are those costs that are incurred in a period but are both unpaid and unrecorded.

Learning Objective: 03-P1 Prepare and explain adjusting entries. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

An is a listing of all of the accounts in the ledger with their account balances before

adjustments are made.

Learning Objective: 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

An is a listing of all of the accounts in the ledger with their account balances after

adjustments are made.

Learning Objective: 03-P2 Explain and prepare an adjusted trial balance. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

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Created Date:

Aug 21, 2025

Chapter Name:

Chapter 3 Adjusting Accounts And Preparing Financial Statements

Author:

John J. Wild

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