CHAPTER 4

ACCRUAL ACCOUNTING CONCEPTS

CHAPTER LEARNING OBJECTIVES

1. Explain the accrual basis of accounting and the reasons for adjusting entries. The revenue recognition principle dictates that companies recognize revenue when a performance obligation has been satisfied. The expense recognition principle dictates that companies recognize expenses in the period when the company makes efforts to generate those revenues.

Under the cash basis, companies record events only in the periods in which the company receives or pays cash. Accrual-based accounting means that companies record, in the periods in which the events occur, events that change a company's financial statements even if cash has not been exchanged.

Companies make adjusting entries at the end of an accounting period. These entries ensure that companies record revenues in the period in which the performance obligation is satisfied and that companies recognize expenses in the period in which they are incurred. The major types of adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses.

2. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals at the statement date to record the portion of the deferred item that represents the expense incurred or the revenue for services performed in the current accounting period.

3. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries.

4. Prepare an adjusted trial balance and closing entries. An adjusted trial balance is a trial balance that shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period.

One purpose of closing entries is to transfer net income or net loss for the period to Retained Earnings. A second purpose is to “zero-out” all temporary accounts (revenue accounts, expense accounts, and Dividends) so that they start each new period with a zero balance. To accomplish this, companies “close” all temporary accounts at the end of an accounting period. They make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed.

The required steps in the accounting cycle are (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize and post-closing entries, and (9) prepare a post-closing trial balance.

*5. Describe the purpose and the basic form of a worksheet. The worksheet is a tool used to make it easier to prepare adjusting entries and the financial statements. Companies often prepare a worksheet using a computer spreadsheet. The sets of columns of the worksheet are, from left to right, the unadjusted trial balance, adjustments, adjusted trial balance, income statement, and balance sheet.

Difficulties:

Easy: 114

Medium: 178

Hard: 48

Question List by Section

Accrual-Basis Accounting and Adjusting Entries: 1, 2, 56, 57, 62, 63, 69, 318, 331

The Revenue Recognition Principle: 3, 5, 70, 71, 73, 79, 80, 82, 97, 98, 99, 319

Five-Step Revenue Recognition Process: 58, 59, 60, 61, 67, 320

The Expense Recognition Principle: 4, 6, 7, 8, 68, 72, 74, 75, 76, 77, 78, 81, 84, 321

Accrual Versus Cash Basis Accounting: 9, 10, 64, 85, 86, 87, 88, 89, 90, 91, 92, 93, 94, 95, 96, 290, 291, 292, 293, 294, 332

The Need for Adjusting Entries: 11, 12, 13, 14, 65, 66, 104, 105, 106, 108, 109, 110, 112, 113, 114, 330, 334

Types of Adjusting Entries: 15, 16, 17, 18, 19, 20, 21, 22, 23, 100, 101, 102, 103, 107, 111, 115, 116, 117, 118, 119, 120, 121, 122, 123, 124, 125, 272, 273, 274, 275, 281, 282, 322, 335, 336

Adjusting Entries for Deferrals

Prepaid Expenses: 31, 135, 136, 139, 143, 145, 165, 184, 271, 283, 323

Supplies: 130, 131, 132, 133, 134, 146, 147, 148, 156, 169, 183, 185

Insurance: 153, 154, 157, 173, 174, 175, 181, 182, 186

Depreciation: 24, 25, 26, 28, 138, 140, 155, 158, 164, 166, 176, 177, 187

Need for Adjustment: 178, 324

Statement Presentation: 32, 129, 152, 163, 167, 170, 179

Unearned Revenues: 27, 29, 30, 126, 127, 128, 137, 141, 142, 144, 150, 151, 168, 171, 1 72, 188, 189, 277, 278, 279, 339

Adjusting Entries for Accruals

Accrued Revenues: 33, 160, 195, 201, 202, 203, 205, 206, 209, 210

Accrued Expenses: 159, 193, 204

Accrued Interest: 35, 36, 192, 194, 196, 197, 198, 199, 207, 208, 211, 212, 213, 214, 219, 220, 280

Accrued Salaries: 34, 190, 191, 215, 216, 217, 218, 312, 313, 325

Summary of Basic Relationships: 200, 276, 289, 295, 296, 297, 298, 299, 300, 301, 302, 303, 304, 305, 306, 307, 308, 309, 310, 311, 314

The Adjusted Trial Balance and Closing Entries

Preparing the Adjusted Trial Balance: 38, 221, 222, 225, 227, 228, 230, 234, 326

Preparing Financial Statements: 37, 223, 224, 226, 229, 231, 232, 233, 241, 285, 286, 316

Quality of Earnings: 53, 54, 337

Closing the Books

Preparing Closing Entries: 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 50, 235, 236, 237, 246, 249, 250, 251, 257, 258, 259, 260, 261, 262, 288, 317, 327

Preparing a Post-Closing Trial Balance: 43, 238, 239, 240, 242, 243, 244, 245, 247, 248, 263, 264, 265, 287, 328

Summary of the Accounting Cycle: 49, 52, 252, 253, 254, 255, 256

Using a Worksheet: 55, 266, 267, 268, 269, 270

TRUE-FALSE STATEMENTS

1. The periodicity assumption states that the economic life of a business entity can be divided into artificial time periods.

2. The periodicity assumption is often referred to as the expense recognition principle.

3. The revenue recognition principle dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied.

4. Expense recognition is tied to revenue recognition.

5. The revenue recognition principle and the expense recognition principle are helpful guides used in determining net income or net loss for a period.

6. The expense recognition principle requires that efforts be related to accomplishments.

7. Recognizing when an expense contributes to the production of revenue is critical.

8. The expense recognition principle is frequently referred to as the matching principle.

9. Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

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

11. Adjusting entries are often made because some business events are not recorded as they occur.

12. Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.

13. Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.

14. An adjusting entry would be made to the revenue account only when cash is received.

15. An adjusting entry to a prepaid expense is required to recognize expired costs.

16. An adjusting entry always includes two balance sheet accounts.

17. An adjusting entry always includes a balance sheet account and an income statement account.

18. Revenue received before it is recognized and expenses paid before being used or consumed are both initially recorded as liabilities.

19. Revenue received before it is recognized and expenses used or consumed before being paid are both initially recorded as liabilities.

20. Accrued revenues are revenues that have been received but not yet recognized.

21. Accrued revenues are revenues that have been performed but not yet recorded.

22. The difference between unearned revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and unearned revenue has never been recorded.

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

24. The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.

25. The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.

26. Accumulated Depreciation is a liability account and has a credit normal account balance.

27. A liability-revenue account relationship exists with an unearned rent revenue adjusting entry.

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

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

30. The adjusting entry for unearned revenue results in an increase (a debit) to an asset account and an increase (a credit) to a revenue account.

31. Asset prepayments become expenses when they expire.

32. A contra asset account is subtracted from a related account in the balance sheet.

33. Accrued revenues are revenues that have been recorded but cash has been received before financial statements have been prepared.

34. The adjusting entry for accrued salaries requires a debit to Salaries and Wages Payable.

35. The accrued interest for a three month note payable of $10,000 dated December 1, 2025 at an interest rate of 6% is $150 on December 31, 2025.

36. Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders’ equity are overstated.

37. Financial statements can be prepared from the information provided by an adjusted trial balance.

38. An adjusted trial balance must be prepared before the adjusting entries can be recorded.

39. Closing entries deal primarily with the balances of permanent accounts.

40. The only accounts that are closed are temporary accounts.

41. When closing entries are prepared, each income statement account is closed directly to retained earnings.

42. Cash is a temporary account.

43. The post-closing trial balance will contain only permanent—balance sheet—accounts.

44. Accounts receivable is a permanent account.

45. The Dividends account is closed to the Income Summary account at the end of each year.

46. A revenue account is closed with a credit to the revenue account and a debit to Income Summary.

47. An expense account is closed with a credit to the expense account and a debit to the Income Summary account.

48. Financial statements should be prepared before the closing entries are made.

49. In the accounting cycle, closing entries are prepared before adjusting entries.

50. Closing entries result in the transfer of net income or net loss into the Retained Earnings account.

51. The post-closing trial balance will have fewer accounts than the adjusted trial balance.

52. The accounting cycle begins with the journalizing of the transactions.

53. The quality of a company’s earnings is enhanced by transparency.

54. Earnings management refers to the practice of attempting to meet analysts’ expectations regarding net income for a specific period of time.

*55. A multiple-column worksheet used in the adjustment process is a permanent accounting record.

MULTIPLE CHOICE QUESTIONS

56. The periodicity assumption states that

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

b. estimates should not be made if a transaction affects more than one time period.

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

d. the economic life of a business can be divided into artificial time periods.

57. An accounting period starting on April 1 that is one year long is called a (an)

a. fiscal year.

b. interim period.

c. calendar year.

d. multi-period.

58. Suppose that Best Buy places an order for computers with Microsoft on December 17. The computers are delivered on December 20. Best Buy receives the invoice on December 21 and pays it on December 29. On what date does Microsoft satisfy its performance obligation?

a. December 17

b. December 20

c. December 21

d. December 29

59. Suppose that Best Buy places an order for computers with Microsoft on December 17. The computers are delivered on December 20. Best Buy receives the invoice on December 21 and pays it on December 29. On what date does Best Buy satisfy its performance obligation?

a. December 17

b. December 20

c. December 21

d. Best Buy does not have a performance obligation.

60. Suppose that Old Navy schedules an appointment with A1 Electrical Services on May 2. A1 services Old Navy’s electrical system on May 9 and leaves an invoice at that time. Old Navy pays the invoice on May 19. On what date does A1 satisfy its performance obligation?

a. May 2

b. May 9

c. May 19

d. A1does not have a performance obligation.

61. Suppose that Old Navy schedules an appointment with A1 Electrical Services on May 2. A1 services Old Navy’s electrical system on May 9 and leaves an invoice at that time. Old Navy pays the invoice on May 19. On what date does Old Navy satisfy its performance obligation?

a. May 2

b. May 9

c. May 19

d. Old Navy does not have a performance obligation.

62. One of the accounting concepts upon which adjustments for prepayments and accruals are based is

a. expense recognition.

b. cost.

c. monetary unit.

d. economic entity.

63. An accounting time period that is one year in length is called

a. a fiscal year.

b. an interim period.

c. the time period assumption.

d. a reporting period.

64. Which statement is not true concerning the accrual basis of accounting?

1. Transactions are recorded when payment is made for the costs incurred.
2. GAAP requires the accrual basis for financial reporting.

c. Transactions are recorded when events occur.

d. Revenue is recognized when services are performed.

65. Adjustments would not be necessary if financial statements were prepared to reflect net income from

a. monthly operations.

b. fiscal year operations.

c. interim operations.

d. lifetime operations.

66. Management usually wants ________ financial statements while the IRS requires all businesses to file _________ tax returns.

a. annual, annual

b. monthly, annual

c. quarterly, monthly

d. monthly, monthly

67. Which of the following describes the timing of when revenue is recognized?

a. In the period in which the related expenses are paid

b. In the period in which the performance obligation is satisfied

c. In the period in which payment is received for goods sold or work performed

d. In the period in which the costs associated with earning the revenue are incurred and payment is received for goods sold or work performed

68. Expenses are recognized when

a. they contribute to the production of revenue.

b. they are paid.

c. they are billed by the supplier.

d. the invoice is received.

69. Which of the following is not generally an accounting time period?

a. A week

b. A month

c. A quarter

d. A year

70. The revenue recognition principle dictates that revenue should be recognized in the accounting records

a. when cash is received.

b. when the performance obligation is satisfied.

c. at the end of the month.

d. in the period that income taxes are paid.

71. In a service-type business, revenue is recognized

a. at the end of the month.

b. at the end of the year.

c. when the service is performed.

d. when cash is received.

72. The expense recognition principle matches

a. customers with businesses.

b. expenses with revenues.

c. assets with liabilities.

d. creditors with businesses.

73. A1 Auto Shop follows the revenue recognition principle. A1 services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to A1 on September 5. A1 receives the check in the mail on September 6. When should A1 show that the revenue was recognized?

a. August 31

b. August 1

c. September 5

d. September 6

74. A company spends $20 million dollars for an office building. Over what period should the cost be allocated to depreciation expense?

a. When the $20 million is expended in cash.

b. All in the first year.

c. After $20 million in revenue is earned.

75. The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that

a. assets should be matched with liabilities.

b. efforts should be matched with accomplishments.

c. dividends should be matched with stockholder investments.

d. cash payments should be matched with cash receipts.

76. Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)?

a. Historical cost principle.

b. Periodicity principle.

c. Revenue recognition principle.

d. Expense recognition principle.

77. A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When should the $1,000 be recognized as revenue?

a. December 5

b. December 10

c. November 30

d. December 1

78. A furniture factory's employees work overtime to finish an order that is sold on January 31. The office sends a statement to the customer in early February and payment is received by mid-February. The overtime wages should be expensed in

a. January.

b. February.

c. the period when the workers receive their checks.

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

79. Which of the following transactions would not involve the recognition of revenue?

a. Recording revenue as an adjusting entry on the last day of the accounting period.

b. Receiving cash from an established customer for services to be performed over the next three months.

c. Billing customers on June 30 for services completed during June.

d. Receiving cash for services performed.

80. Why do generally accepted accounting principles require the application of the revenue recognition principle?

a. Failure to apply the revenue recognition principle could lead to a misstatement of revenue.

b. It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve.

c. Recording revenue when cash is received is an objective application of the revenue recognition principle.

d. Accounting software has made the revenue recognition easy to apply.

81. On April 1, 2025, Acme Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years. Acme records depreciation expense of $48,000 for the calendar year ending December 31, 2025. Which accounting principle has been violated?

a. Depreciation principle

b. No principle has been violated.

c. Cash principle

d. Expense recognition principle

82. Under the cash basis of accounting,

a. revenue is recognized when services are performed.

b. expenses are matched with the revenue that is produced.

c. cash must be received before revenue is recognized.

d. a promise to pay is sufficient to recognize revenue.

83. Under the accrual basis of accounting,

a. cash must be received before revenue is recognized.

b. net income is calculated by matching cash outflows against cash inflows.

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

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

84. Using accrual accounting, expenses are recorded and reported only

a. when they are incurred whether or not cash is paid.

b. when they are incurred and paid at the same time.

c. if they are paid before they are incurred.

d. if they are paid after they are incurred.

85. A small company may be able to justify using a cash basis of accounting if they have

a. sales under $1,000,000.

b. no accountants on staff.

c. few receivables and payables.

d. all sales and purchases on account.

86. Which of the following statements is correct?

a. As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.

b. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.

c. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.

d. As long as management is ethical, there are no problems with using the cash basis of accounting.

87. The following is selected information from Ace Corporation for the fiscal year ending October 31, 2025.

Using on the accrual basis of accounting, what is Ace Corporation’s net income for the year ending October 31, 2025?

a. $254,000

b. $224,000

c. $208,000

d. $270,000

88. The following is selected information from Acme Corporation for the fiscal year ending

October 31, 2025:

Using on the accrual basis of accounting, what is Acme Corporation’s net income for the year ending October 31, 2025?

a. $132,000

b. $116,000

c. $106,000

d. $140,000

89. A company had the following transactions during 2024:

• Sales of $9,000 on account
• Collected $4,000 for services to be performed in 2025
• Paid $3,750 cash in salaries for 2024
• Purchased airline tickets for $500 in December for a trip to take place in 2025

What is the company’s 2024 net income using accrual basis accounting?

a. $5,750

b. $9,750

c. $9,250

d. $5,250

90. A company had the following transactions during 2024:

• Sales of $9,000 on account
• Collected $4,000 for services to be performed in 2025
• Paid $2,650 cash in salaries
• Purchased airline tickets for $500 cash in December for a trip to take place in 2025

What is the company’s 2024 net income using cash basis accounting?

a. $10,350

b. $1,350

c. $9,850

d. $850

91. A1 Manufacturing Company had the following transactions during 2024:

• Sales of $10,800 on account
• Collected $4,800 for services to be performed in 2025
• Paid $2,600 cash in salaries for 2024
• Purchased airline tickets for $600 cash in December for a trip to take place in 2025

What is A1’s 2024 net income using accrual accounting?

a. $8,800

b. $13,600

c. $13,000

d. $8,200

92. A1 Manufacturing Company had the following transactions during 2024:

• Sales of $10,800 on account
• Collected $4,800 for services to be performed in 2025
• Paid $2,600 cash in salaries
• Purchased airline tickets for $600 in December for a trip to take place in 2025

What is A1’s 2024 net income using cash basis accounting?

a. $1,600

b. $2,800

c. $13,000

d. $2,200

93. Given the accrual basis data below for a firm in its first year of operation, determine net in come under the cash basis of accounting.

Revenue recognized $19,000

Accounts receivable 3,000

Expenses incurred 7,250

Accounts payable (related to expenses) 750

Supplies purchased with cash 1,800

a. $9,500

b. $14,000

c. $7,700

d. $9,950

94. Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting.

Revenue recognized $19,000

Accounts receivable 3,000

Expenses incurred 7,250

Accounts payable (related to expenses) 750

Supplies purchased with cash 1,800

a. $11,750

b. $14,000

c. $9,500

d. $12,200

95. Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting.

Cash received from customers $45,000

Accounts receivable 12,000

Cash paid for expenses 26,000

Accounts payable (related to expenses) 3,000

Prepaid rent for next period 7,000

a. $19,000

b. $28,000

c. $21,000

d. $12,000

96. Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting.

Cash received from customers $45,000

Accounts receivable 12,000

Cash paid for expenses 26,000

Accounts payable (related to expenses) 3,000

Prepaid rent for next period 7,000

a. $19,000

b. $28,000

c. $21,000

d. $12,000

97. Under the cash basis of accounting, an amount received from a customer in advance of providing the services would be reported as a(n):

a. revenue.

b. liability.

c. expense.

d. prepaid expense.

98. Which of the following would not be an application of the revenue recognition or expense recognition principle?

a. Recording accrued salaries and wages expense.

b. Recording accrued interest revenue.

c. Recording the collection of an advance customer payment as revenue.

d. Recording prepaid expense adjustments.

99. Why was Apple required to spread their iPhone sales revenues over a two-year period?

a. Because of its newness, their returns might exceed the normal level of returns

b. Because they were required to provide software updates over that two-year period

c. Because that was the estimated life of the iPhone

d. Because they needed to defer revenue recognition since they had a swap program available for future models

100. Which of the following is an example of a deferral adjusting entry?

a. Accrued expense

b. Accrued revenue

c. Prepaid expense

d. All of these choices are correct.

101. A primary difference between prepaid and accrued expenses is that prepaid expenses have

a. been incurred and accrued expenses have not.

b. not been paid and accrued expenses have.

c. been paid and accrued expenses have not.

d. not been recorded and accrued expenses have.

102. A primary difference between accrued revenues and unearned revenues is that accrued revenues have

a. not been recognized as revenue and unearned revenues have been.

b. been received in cash and unearned revenues have not.

c. been recorded as a liability and unearned revenues have not.

d. not been received in cash and unearned revenues have.

103. The general term used to indicate an expense that has not been paid or a revenue that has not been received and which has not yet been recognized in the accounts is

a. contra asset.

b. prepayment.

c. asset.

d. accrued.

104. Accounts often need to be adjusted because

a. there are never enough accounts to record all the transactions.

b. many transactions affect more than one time period.

c. there are always errors made in recording transactions.

d. management can't decide what they want to report.

105. Adjusting entries are made to ensure that

a. expenses are recognized in the period in which they are incurred.

b. revenues are recorded in the period in which the performance obligation is satisfied.

c. balance sheet and income statement accounts have correct balances at the end of an accounting period.

106. Adjusting entries are

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

b. usually required before financial statements are prepared.

c. made whenever management desires to change an account balance.

d. made to balance sheet accounts only.

107. Each of the following is a major type (or category) of adjusting entry except

a. earned expenses.

b. prepaid expenses.

c. accrued expenses.

d. accrued revenues.

108. Adjusting entries are required

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

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

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

109. Which one of the following is not a justification for adjusting entries?

a. Adjusting entries are necessary to ensure that the revenue recognition principle is

followed.

b. Adjusting entries are necessary to ensure that the expense recognition principle is

followed.

c. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP.

d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

110. Why are adjusting entries necessary?

1. To update amounts in retained earnings for activity that occurred during the period
2. To correct errors due to erroneous recording of journal entries
3. To update accounts due to resources used, amounts expired due to the passage of time, or amounts that may need to be recorded
4. To remove the balances of temporary accounts so that financial statements can be prepared

111. An adjusting entry

a. affects two balance sheet accounts.

b. affects two income statement accounts.

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

d. is always a compound entry.

112. Adjusting entries are

a. the same as correcting entries.

b. needed to ensure that the expense recognition principle is followed.

c. optional.

d. rarely needed.

113. The preparation of adjusting entries is

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

b. needed to ensure that the expense recognition principle is followed.

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

d. optional when financial statements are prepared.

114. If a resource has been consumed but a bill has not been received at the end of the account- ing period, then

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

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

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

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

115. An asset–expense relationship exists with

a. liability accounts.

b. revenue accounts.

c. prepaid expense adjusting entries.

d. accrued expense adjusting entries.

116. A liability–revenue relationship exists with

a. asset accounts.

b. revenue accounts.

c. unearned revenue adjusting entries.

d. accrued expense adjusting entries.

117. Adjusting entries can be classified as

a. postponements and advances.

b. accruals and deferrals.

c. deferrals and postponements.

d. accruals and advances.

118. Which of the following items describe the two classifications of adjusting entries?

a. Postponements and advances

b. Accruals and advances

c. Deferrals and postponements

d. Accruals and deferrals

119. Which of the following describes an accrued expense?

a. Expenses incurred but not yet paid or recorded

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

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

d. Expenses incurred and already paid or recorded

120. Accrued revenues are

a. received and recorded as liabilities before they are recognized as revenues.

b. recognized as revenues and recorded as liabilities before they are received.

c. performed but not yet received or recorded as revenues.

d. recognized and already received and recorded as revenues.

121. Prepaid expenses are expenses that are

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

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

c. incurred but not yet paid or recorded.

d. incurred and already paid or recorded.

122. Goods purchased for future use in the business, such as supplies, are called

a. prepaid expenses.

b. revenues.

c. stockholders’ equity.

d. liabilities.

123. Accrued expenses are expenses that are

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

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

c. incurred but not yet paid or recorded.

d. incurred and already paid or recorded.

124. Before adjusting entries, unearned revenues are

a. received and recorded as liabilities before they are recognized as revenue.

b. recognized as revenue and recorded as liabilities before they are received.

c. recognized as revenue but not yet received or recorded.

d. recognized as revenue and already received and recorded.

125. Adjusting entries affect at least

a. one revenue and one expense account.

b. one asset and one liability account.

c. one revenue and one balance sheet account.

d. one income statement account and one balance sheet account.

126. An architecture firm collected $2,000 for architecture services to be provided in the future and recorded it as a liability. No entry was made at the time the service was provided. If no adjusting entry is made, this would cause

a. revenues to be overstated.

b. net income to be overstated.

c. liabilities to be understated.

d. revenues to be understated.

127. An adjusting entry can include a

a. debit to an asset and a credit to a liability.

b. debit to a revenue and a credit to an asset.

c. debit to a liability and a credit to a revenue.

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

128. A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause:

a. expenses to be overstated.

b. net income to be overstated.

c. liabilities to be understated.

d. revenues to be understated.

129. On January 1, 2025, Ace Supply Company purchased equipment for $54,000. The company is depreciating the equipment at the rate of $750 per month. The book value of the equipment at December 31, 2025 is:

a. $0.

b. $9,000.

c. $45,000.

d. $54,000.

130. Acme Laundry Company purchased $8,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $1,500 on hand. The adjusting entry that should be made by the company on June 30 is

a. debit Supplies Expense, $1,500; credit Supplies, $1,500.

b. debit Supplies, $7,000; credit Supplies Expense, $7,000.

c. debit Supplies, $1,500; credit Supplies Expense, $1,500.

d. debit Supplies Expense, $7,000; credit Supplies, $7,000.

131. A1 Service Company purchased office supplies costing $7,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $2,500 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be

a. debit Supplies Expense, $2,500; credit Supplies, $2,500.

b. debit Supplies, $4,500; credit Supplies Expense, $4,500.

c. debit Supplies Expense, $4,500; credit Supplies, $4,500.

d. debit Supplies, $2,500; credit Supplies Expense, $2,500.

132. A company purchased office supplies costing $5,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $900 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be:

a. debit Supplies Expense, $5,900; credit Supplies, $5,900.

b. debit Supplies, $900; credit Supplies Expense, $900.

c. debit Supplies Expense, $4,100; credit Supplies, $4,100.

d. debit Supplies, $4,100; credit Supplies Expense, $4,100.

133. Unearned revenue is classified as a(n)

a. asset.

b. revenue.

c. contra revenue.

d. liability.

134. A1 Service Company purchased office supplies costing $7,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,800 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be:

a. debit Supplies Expense, $5,200; credit Supplies, $5,200.

b. debit Supplies, $1,800; credit Supplies Expense, $1,800.

c. debit Supplies Expense, $1,800; credit Supplies, $1,800.

d. debit Supplies, $5,200; credit Supplies Expense, $5,200.

135. On July 1 the A1 Shoe Store paid $24,000 to Acme Realty for 6 months’ rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the A1 Shoe Store is

a. debit Rent Expense, $24,000; credit Prepaid Rent, $4,000.

b. debit Prepaid Rent, $4,000; credit Rent Expense, $4,000.

c. debit Rent Expense, $4,000; credit Prepaid Rent, $4,000.

d. debit Rent Expense, $24,000; credit Prepaid Rent, $20,000.

136. The balance in the prepaid rent account before adjustment at the end of the year is $12,000 and represents three months’ rent paid on December 1. The adjusting entry required on December 31 is

a. debit Prepaid Rent, $4,000; credit Rent Expense $4,000.

b. debit Prepaid Rent, $8,000; credit Rent Expense, $8,000.

c. debit Rent Expense, $12,000; credit Prepaid Rent, $12,000.

d. debit Rent Expense, $4,000; credit Prepaid Rent, $4,000.

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

a. debit Unearned Service Revenue and credit Cash.

b. debit Unearned Service Revenue and credit Service Revenue.

c. debit Unearned Service Revenue and credit Prepaid Expense.

d. debit Unearned Service Revenue and credit Accounts Receivable.

138. Accumulated Depreciation is a(n)

a. expense account.

b. stockholders’ equity account.

c. liability account.

d. contra asset account.

139. The Acme Company purchased equipment for $15,000 on December 1. It is estimated that annual depreciation on the computer will be $3,000. If financial statements are to be prepared on December 31, the company should make the following adjusting entry

a. debit Depreciation Expense, $3,000; credit Accumulated Depreciation, $3,000.

b. debit Depreciation Expense, $250; credit Accumulated Depreciation, $250.

c. debit Depreciation Expense, $12,000; credit Accumulated Depreciation, $12,000.

d. debit Equipment, $15,000; credit Accumulated Depreciation, $15,000.

140. Which one of the following is true as it relates to the Accumulated Depreciation account?

a. It is a contra account.

b. It is offset against an asset account on the income statement.

c. It represents the portion of the cost of a long-lived asset that has been allocated as a cost during the current accounting period.

d. It is an operating expense.

141. Adjustments for unearned revenue

a. decrease liabilities and increase revenues.

b. increase liabilities and increase revenues.

c. increase assets and increase revenues.

d. decrease revenues and decrease assets.

142. A1 Realty Company received a check for $18,000 on July 1, which represents a 6-month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $18,000. Financial statements will be prepared on July 31. A1 Realty should make the following adjusting entry on July 31

a. debit Unearned Rent Revenue, $3,000; credit Rent Revenue, $3,000.

b. debit Rent Revenue, $3,000; credit Unearned Rent Revenue, $3,000.

c. debit Unearned Rent Revenue, $18,000; credit Rent Revenue, $18,000.

d. debit Cash, $18,000; credit Rent Revenue, $18,000.

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

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

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

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

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

144. The adjusting entry to an unearned revenue account will

a. decrease liabilities and increase revenues.

b. increase liabilities and increase revenues.

c. increase assets and increase revenues.

d. decrease revenues and decrease assets.

145. Payments of expenses that will benefit more than one accounting period are initially identified as

a. expenses.

b. revenues.

c. assets.

d. liabilities.

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

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

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

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

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

147. If a company fails to make an adjusting entry to record supplies expense, then

a. stockholders’ equity will be understated.

b. expense will be understated.

c. assets will be understated.

d. net income will be understated.

148. Supplies are recorded as assets when purchased. Therefore, the credit to Supplies in the adjusting entry is for the amount of supplies

a. remaining.

b. purchased.

c. used.

d. either used or remaining.

149. If a company fails to adjust the Unearned Revenue account at the end of the period,

a. liabilities will be understated and revenues will be understated.

b. liabilities will be overstated and revenues will be understated.

c. assets will be overstated and revenues will be understated.

d. assets will be understated and revenues will be understated.

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

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

b. Expenses will be overstated and net income and stockholders’ equity will be understated.

c. Assets will be overstated and net income and stockholders’ equity will be understated.

d. Assets will be overstated and net income and stockholders’ equity will be overstated.

151. If Acme Playhouse fails to adjust the Unearned Ticket Revenue account for revenue that should be recognized, what effect will this have on that month’s financial statements?

a. Assets will be understated and revenues will be understated.

b. Liabilities will be understated and revenues will be understated.

c. Liabilities will be overstated and revenues will be understated.

d. Assets will be overstated and revenues will be understated.

152. On January 1, 2024, Acme Inc. purchased equipment for $25,000. The company is depreciating the equipment at the rate of $1,000 per month. At January 31, 2025, the balance in Accumulated Depreciation is

a. $1,000 debit.

b. $12,000 credit.

c. $13,000 credit.

d. $62,000 debit.

153. At December 31, 2025, before any year-end adjustments, A1 Supply Company's Prepaid Insurance account had a balance of $5,800. It was determined that $2,600 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be

a. $2,600.

b. $3,200.

c. $5,800.

d. $2,800.

154. At December 31, 2025, before any year-end adjustments, Ace Manufacturing Company's Prepaid Insurance account had a balance of $4,200. It was determined that $1,800 of the Prepaid Insurance had expired. The adjusted balance for Prepaid Insurance at year-end would be

a. $1,800.

b. $2,400.

c. $5,700.

d. $4,200.

155. At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted. Which of the following statements is true?

a. Net income will be overstated for the current year.

b. Total assets will be understated at the end of the current year.

c. The balance sheet and income statement will be misstated but the retained earnings statement will be correct for the current year.

d. Total expenses will be overstated at the end of the current year.

156. The unadjusted trial balance for Acme Corporation appears as follows:

Acme Corporation

Trial Balance

December 31, 2025

Cash $ 300

Accounts Receivable 522

Prepaid Insurance 82

Supplies 180

Equipment 4,000

Accumulated Depreciation - Equipment $ 600

Accounts Payable 384

Common Stock 1,200

Retained Earnings 1,400

Service Revenue 3,000

Salaries and Wages Expense 1,000

Rent Expense 500

$6,584 $6,584

If on December 31, 2025, supplies on hand were $40, the adjusting entry would include a

a. debit to Supplies for $40.

b. credit to Supplies for $40.

c. debit to Supplies Expense for $140.

d. credit to Supplies Expense for $140.

157. The unadjusted trial balance for Acme Corporation appears as follows:

Acme Corporation

Trial Balance

December 31, 2025

Cash $ 300

Accounts Receivable 522

Prepaid Insurance 82

Supplies 180

Equipment 4,000

Accumulated Depreciation - Equipment $ 600

Accounts Payable 384

Common Stock 1,200

Retained Earnings 1,400

Service Revenue 3,000

Salaries and Wages Expense 1,000

Rent Expense 500

$6,584 $6,584

If on December 31, 2025, the insurance still unexpired amounted to $20, the adjusting entry would include a

a. debit to Prepaid Insurance for $62.

b. credit to Prepaid Insurance for $20.

c. debit to Insurance Expense for $62.

d. debit to Prepaid Insurance for $20.

158. The unadjusted trial balance for Acme Corporation appears as follows:

Acme Corporation

Trial Balance

December 31, 2025

Cash $ 300

Accounts Receivable 522

Prepaid Insurance 82

Supplies 180

Equipment 4,000

Accumulated Depreciation - Equipment $ 600

Accounts Payable 384

Common Stock 1,200

Retained Earnings 1,400

Service Revenue 3,000

Salaries and Wages Expense 1,000

Rent Expense 500

$6,584 $6,584

If the estimated depreciation for equipment was $600, the adjusting entry would include a

a. credit to Accumulated Depreciation - Equipment for $600.

b. credit to Depreciation Expense for $600.

c. debit to Accumulated Depreciation - Equipment for $600.

d. credit to Equipment for $600.

159. The unadjusted trial balance for Acme Corporation appears as follows:

Acme Corporation

Trial Balance

December 31, 2025

Cash $ 300

Accounts Receivable 522

Prepaid Insurance 82

Supplies 180

Equipment 4,000

Accumulated Depreciation - Equipment $ 600

Accounts Payable 384

Common Stock 1,200

Retained Earnings 1,400

Service Revenue 3,000

Salaries and Wages Expense 1,000

Rent Expense 500

$6,584 $6,584

As of December 31, 2025, December’s rent of $150 had not been recorded or paid. The adjusting entry would include a

a. credit to Accumulated Rent for $150.

b. credit to Cash for $150.

c. debit to Rent Payable for $150

d. debit to Rent Expense for $150

160. The unadjusted trial balance for Acme Corporation appears as follows:

Acme Corporation

Trial Balance

December 31, 2025

Cash $ 300

Accounts Receivable 522

Prepaid Insurance 82

Supplies 180

Equipment 4,000

Accumulated Depreciation - Equipment $ 600

Accounts Payable 384

Common Stock 1,200

Retained Earnings 1,400

Service Revenue 3,000

Salaries and Wages Expense 1,000

Rent Expense 500

$6,584 $6,584

If service for $175 had been performed but not billed, the adjusting entry at the end of the period would include a

a. debit to Service Revenue for $175.

b. credit to Unearned Service Revenue for $175.

c. credit to Service Revenue for $175.

d. debit to Unearned Revenue for $175.

161. Depreciation is the process of

a. valuing an asset at its fair value.

b. increasing the value of an asset over the periods in which it is used.

c. allocating the cost of an asset to the periods in which it is used.

d. writing down an asset to its real value each accounting period.

162. The difference between the balance of a plant asset account and the related accumulated depreciation account is termed

a. market value.

b. contra asset.

c. book value.

d. liability.

163. A new accountant working for Ace Company records $800 of depreciation expense on store equipment as follows:

Dr. Cr.

Depreciation Expense …………………….. 822

Accumulated Depreciation - Equipment 822

The effect of this entry is to

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

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

c. overstate the book value of the depreciable assets at December 31.

d. understate the book value of the depreciable assets as of December 31.

164. From an accounting standpoint, the acquisition of long-lived assets is essentially a(n)

a. accrual of expense.

b. accrual of revenue.

c. accrual of unearned revenue.

d. prepaid expense.

165. If a business pays rent in advance and debits a prepaid rent account, the company receiving the rent payment will credit

a. cash.

b. prepaid rent.

c. unearned rent revenue.

d. accrued rent revenue.

166. An accumulated depreciation account

a. is a contra liability account.

b. increases on the debit side.

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

d. has a normal credit balance.

167. The difference between the cost of a depreciable asset and its related accumulated depreciation is referred to as the

a. market value of the asset.

b. blue book value of the asset.

c. book value of the asset.

d. depreciated difference of the asset.

168. Which of the following would not result in unearned revenue?

a. Rent collected in advance from tenants.

b. Services performed on account.

c. Sale of season tickets to football games.

d. Sale of two-year magazine subscriptions.

169. The policy at Acme Corporation is to expense all office supplies at the time of purchase. On the last day of the accounting period, there are $1,100 of unused office supplies on hand and the balance of supplies expense is $3,500. What should the accountant do to prepare accrual-basis financial statements?

a. Debit Supplies and credit Supplies Expense for $1,100.

b. Nothing, company policy says to expense supplies when purchased.

c. Convince management to change its policy to avoid problems in the future.

d. Debit Supplies Expense for $2,400 and credit Supplies for $2,400.

170. Which statement is correct?

a. Accumulated Depreciation should always have a debit balance in the adjusted trial
balance.

b. Accumulated Depreciation is added to the long-term liabilities on the balance sheet.

c. Accumulated Depreciation - Equipment represents the total cost of equipment that has expired up to the date of the balance sheet.

d. Accumulated Depreciation is used to reveal the fair value of the related asset on the date of the balance sheet.

171. Acme Supply Company collected $14,400 in May of 2024 for 4 months of service which would take place from October of 2024 through January of 2025. The revenue reported from this transaction during 2024 would be

a. $0.

b. $10,800.

c. $14,400.

d. $3,600.

172. Ace Company collected $11,200 in September of 2024 for 4 months of service which would take place from October of 2024 through January of 2025. The revenue reported from this transaction during 2025 would be

a. $0.

b. $8,400.

c. $11,200.

d. $2,800.

173. Ace Manufacturing Corporation purchased a one-year insurance policy in January 2024 for $36,000. The insurance policy is in effect from March 2024 through February 2025. If the company neglects to make the proper December 31, 2024 year-end adjustment for the expired insurance

a. net income and assets will be understated by $30,000.

b. net income and assets will be overstated by $30,000.

c. net income and assets will be understated by $6,000.

d. net income and assets will be overstated by $6,000.

174. Acme Supply Corporation purchased a one-year insurance policy in February 2024 for $42,000. The insurance policy is in effect from March 2024 through February 2025. If the company neglects to make the proper December 31, 2025 year-end adjustment for the expired insurance

a. net income and assets will be understated by $35,000.

b. net income and assets will be overstated by $35,000.

c. net income and assets will be understated by $7,000.

d. net income and assets will be overstated by $7,000.

175. At March 1, 2025, Acme Inc. had supplies on hand of $2,000. During the month, Acme purchased supplies of $2,900 and used supplies of $2,800. The March 31 balance sheet should report what balance in the Supplies account?

a. $2,000

b. $2,100

c. $2,800

d. $2,900

176. A1 Service Company purchased equipment for $9,000 on January 1, 2025. The company expects to use the equipment for 3 years. It has no salvage value. Monthly depreciation expense on the asset is

a. $0.

b. $250.

c. $3,000.

d. $9,000.

177. Which one of the following is a contra account with a credit balance?

a. Depreciation Expense

b. Accumulated Depreciation

c. Sales Discounts

d. Cost of Goods Sold

178. What is the purpose of recording depreciation on plant assets?

a. To adjust the asset amount on the balance sheet to fair value

b. To allocate the cost of the asset to expense in the accounting periods in which the asset was used to generate revenue

c. To properly apply the cost principle

d. To provide funds for the replacement of the asset when it reaches the end of its useful life

179. Ace Services Company purchased equipment for $12,000 on January 1, 2025. The company expects to use the equipment for 5 years. It has no salvage value. What balance would be reported on the December 31, 2025 balance sheet for Accumulated Depreciation?

a. $0 because Accumulated Depreciation is reported on the Income Statement.

b. $2,400

c. $9,600

d. $12,000

180. A1 Realty Company received a check for $24,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $24,000. Financial statements will be prepared on July 31. A1 Realty should make the following adjusting entry on July 31:

a. debit Unearned Rent Revenue, $4,000; credit Rent Revenue, $4,000.

b. debit Rent Revenue, $4,000; credit Unearned Rent Revenue, $4,000.

c. debit Unearned Rent Revenue, $24,000; credit Rent Revenue, $24,000.

d. debit Cash, $24,000; credit Rent Revenue, $24,000.

181. Acme Inc. purchased a 12-month insurance policy on March 1, 2025 for $2,400. At March 31, 2025, the adjusting journal entry to record expiration of this asset will include

a. a debit to Prepaid Insurance and a credit to Cash for $2,400.

b. a debit to Prepaid Insurance and a credit to Insurance Expense for $240.

c. a debit to Insurance Expense and a credit to Prepaid Insurance for $200.

d. a debit to Insurance Expense and a credit to Cash for $200.

182. Ace Enterprises purchased an 18-month insurance policy on May 31, 2025 for $10,800. The December 31, 2025 balance sheet would report Prepaid Insurance of

a. $0 because Prepaid Insurance is reported on the Income Statement.

b. $4,200.

c. $6,600.

d. $10,800.

183. At March 1, A1 Realty Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $950 and consumed supplies of $800. If no adjusting entry is made for supplies,

a. stockholders' equity will be overstated by $800.

b. expenses will be understated by $950.

c. assets will be understated by $350.

d. net income will be understated by $800.

184. Ace Service Inc. pays its rent of $60,000 annually on January 1 and makes monthly adjusting entries. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true?

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

b. Expenses will be overstated by $5,000 and net income and stockholders' equity will be understated by $5,000.

c. Assets will be overstated by $10,000 and net income and stockholders' equity will be understated by $10,000.

d. Assets will be overstated by $5,000 and net income and stockholders' equity will be overstated by $5,000.

185. A1 Advertising has an opening balance in its supplies account of $2,400 and purchases $3,000 of supplies during the year. A year-end physical count shows $2,800 in supplies inventory. Which is the appropriate adjusting journal entry at year end?

a. Supplies Expense 2,600

Supplies 2,600

b. Supplies Expense 2,800

Supplies 2,800

c. Supplies 2,600

Supplies Expense 2,600

d. Supplies 3,000

Cash 3,000

186. The fiscal year opened for Ace Manufacturing with a $2,700 balance in its Prepaid Insurance account. They purchased $9,600 in insurance policies during the year. If $1,725 of insurance has expired during the year, what is the year-end balance in the Prepaid Insurance account?

a. $10,575

b. $12,300

c. $7,875

d. $5,175

187. Equipment was purchased by A1 Manufacturing on January 1, 2025, for $125,000. A1’s

policy is to adjust its accounts at year-end. Which is the appropriate adjusting journal entry to record depreciation at year-end if the company expects to use the equipment for five years with no salvage value?

a. Depreciation Expense 25,000

Accumulated Depreciation – Equipment 25,000

b. Accumulated Depreciation – Equipment 25,000

Depreciation Expense 25,000

c. Depreciation Expense 25,000

Equipment 25,000

d. Accumulated Depreciation – Equipment 25,000

Equipment 25,000

188. Ace Marketing received $60,000 from a customer on January 2, 2025 for services to be provided evenly over the next two years. The appropriate adjusting journal entry to recognize revenue at Ace's fiscal year-end on December 31, 2025 would be:

a. Unearned Service Revenue 30,000

Service Revenue 30,000

b. Service Revenue 30,000

Unearned Service Revenue 30,000

c. Service Revenue 30,000

Cash 30,000

d. Unearned Service Revenue 30,000

Cash 30,000

189. A customer paid $60,000 to Ace Marketing on December 30, 2023, to perform services from January 1, 2024 through December 31, 2027. If Ace fails to record the revenue that should be recognized, ________ would be understated by ________ each year.

a. net income, $15,000

b. net income, $12,000

c. liabilities, $15,000

d. assets, $12,000

190. Acme Industries employs a five-day workweek and a September 30 year-end. Normal

weekly wages amount to $36,000. If September 30 falls on a Wednesday, what is the

appropriate adjusting journal entry at fiscal year-end?

a. Salaries and Wages Expense 21,600

Salaries and Wages Payable 21,600

b. Salaries and Wages Expense 36,000

Salaries and Wages Payable 36,000

c. Salaries and Wages Expense 7,200

Salaries and Wages Payable 7,200

d. Salaries and Wages Expense 21,600

Cash 21,600

191. Acme Industries employs a five-day workweek and a September 30 year-end. Normal weekly wages amount to $35,000. If September 30 is a Wednesday, what is the appropriate journal entry on October 2, the next payday for Acme?

a. Salaries and Wages Expense 14,000

Salaries and Wages Payable 21,000

Cash 35,000

b. Salaries and Wages Expense 21,000

Salaries and Wages Payable 14,000

Cash 35,000

c. Salaries and Wages Expense 21,000

Cash 21,000

d. Salaries and Wages Payable 14,000

Cash 14,000

192. A1 Corporation signed a six-month, 12% note payable of $10,000 on October 1, 2025. By recording the interest expense related to the note only when it is paid on April 1, 2026, A1 will understate expenses by _______on its year-end financial statements on December 31, 2025.

a. $300

b. $600

c. $0

d. $11,200

193. If a company fails to adjust for accrued expenses, what effect will this have on that month's financial statements?

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

b. Expenses will be understated and net income and stockholders’ equity will be overstated.

c. Assets will be overstated and net income and stockholders’ equity will be understated.

d. Assets will be overstated and net income and stockholders’ equity will be overstated.

194. Acme Industries borrows $20,000 at 7% annual interest for six months on October 1, 2025. Which is the appropriate entry to accrue interest if Acme has a December 31, 2025 year-end?

a. Interest Expense 350

Interest Payable 350

b. Interest Expense 1,400

Interest Payable 1,400

c. Interest Expense 350

Notes Payable 350

d. Notes Payable 1,400

Interest Payable 1,400

195. A1 Consulting uses the accrual basis of accounting and a fiscal year ending December 31. Beginning on September 1, 2024, A1 performs services for Acme International at a rate of $5,000 per month. On February 12, 2025, Acme pays A1 $25,000 in full for all services rendered from September 1, 2024 to January 31, 2025. By not recording any adjustment as of December 31, 2024 related to services provided to Acme, A1 understated revenues by ________ on its 2024 income statement.

a. $20,000

b. $5,000

c. $25,000

d. $15,000

196. Acme Industries signs a $40,000, 9%, 6-month note payable on September 1, 2024. How much interest expense will Acme report in its December 31, 2025 financial statements?

a. $600

b. $1,200

c. $1,800

d. $0

197. On August 15, 2025, Ace Industries signs a $200,000, 8%, twelve-month note payable. Which of the following entries correctly records the accrued interest on December 31, 2025?

a. Interest Expense 6,000

Interest Payable 6,000

b. Interest Expense 5,333.33

Interest Payable 5,333.33

c. Interest Expense 16,000

Interest Payable 16,000

d. Interest Expense 10,000

Interest Payable 10,000

198. A1 Automotive signed a $5,000,120-day note payable on October 1 that bears interest at an annual rate of 9%. How much will appear on A1’s income statement for interest expense related to this note at December 31?

a. $450

b. $150

c. $112.50

d. $4,500

199. On November 1, 2024, Acme Industries, which uses a calendar year as its fiscal year, signs a $30,000, 7%, six-month note payable. Which of the following entries correctly records the payment of the note and entire interest on May 1, 2025?

a. Notes Payable 30,000

Interest Expense 700

Interest Payable 350

Cash 31,050

b. Notes Payable 32,100

Cash 32,100

c. Notes Payable 31,050

Cash 31,050

d. Notes Payable 30,000

Interest Expense 1,050

Cash 31,050

200. An adjusting entry can include a

a. debit to an asset and a credit to a revenue.

b. debit to a revenue and a credit to an asset.

c. credit to an expense and a debit to a revenue.

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

201. A revenue–asset relationship exists with

a. prepaid expense adjusting entries.

b. accrued expense adjusting entries.

c. unearned revenue adjusting entries.

d. accrued revenue adjusting entries.

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

a. understated liability and an overstated revenue.

b. overstated asset and an understated revenue.

c. understated expense and an overstated revenue.

d. understated asset and an understated revenue.

203. Adjustments for accrued revenues

a. increase assets and increase revenues.

b. increase assets and increase liabilities.

c. decrease assets and increase revenues.

d. decrease liabilities and increase revenues.

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

a. net income to be understated.

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

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

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

205. Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause

a. net income to be overstated.

b. an understatement of assets and an understatement of revenues.

c. an understatement of revenues and an understatement of liabilities.

d. an understatement of revenues and an overstatement of liabilities.

206. An adjusting entry made to record accrued interest on a note receivable due next year consists of a

a. debit to Interest Expense and a credit to Interest Payable.

b. debit to Interest Receivable and a credit to Interest Revenue.

c. debit to Interest Expense and a credit to Notes Payable.

d. debit to Interest Expense and a credit to Cash.

207. Suppose that Target Inc. borrowed $50,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be

a. debit Interest Expense, $3,000; credit Interest Payable, $3,000.

b. debit Interest Expense, $250; credit Interest Payable, $250.

c. debit Note Payable, $3,000; credit Cash, $3,000.

d. debit Cash, $750; credit Interest Payable, $750.

208. Suppose that Old Navy borrowed $15,000 from the bank signing a 6%, 3-month note on October 1, 2024. Principal and interest are payable to the bank on January 1, 2025. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on October 31, 2024, would be

a. debit Interest Expense, $75; credit Interest Payable, $75.

b. debit Interest Expense, $900; credit Interest Payable, $900.

c. debit Note Payable, $900; credit Cash, $900.

d. debit Cash, $75; credit Interest Payable, $75.

209. Katy Perry, CPA has performed $500 of services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Katy make?

a. Debit Cash and credit Unearned Service Revenue

b. Debit Accounts Receivable and credit Unearned Service Revenue

c. Debit Accounts Receivable and credit Service Revenue

d. Debit Unearned Service Revenue and credit Service Revenue

210. Katy Perry, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will she make upon receipt of the payments?

a. Debit Unearned Service Revenue and credit Service Revenue

b. Debit Cash and credit Accounts Receivable

c. Debit Accounts Receivable and credit Service Revenue

d. Debit Cash and credit Service Revenue

211. Acme Real Estate signed a four-month note payable in the amount of $20,000 on September 1. The note requires interest at an annual rate of 9%. The amount of interest to be accrued at the end of September is

a. $600.

b. $150.

c. $1,800.

d. $200.

212. A1 Real Estate signed a four-month note payable in the amount of $40,000 on May 1. The note requires interest at an annual rate of 6%. The amount of interest to be accrued at the end of May is

a. $2,400.

b. $600.

c. $200.

d. $450.

213. A gift shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $50,000 with annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest?

a. Interest Expense 500

Interest Payable 500

b. Interest Expense 750

Interest Payable 750

c. Interest Expense 500

Cash 500

d. Interest Expense 750

Note Payable 750

214. A1 Ski Shop signs a three-month note payable to help finance increases in inventory for the winter ski season. The note is signed on October 1, 2025 in the amount of $30,000 with annual interest of 6%. What is the adjusting entry to be made on December 31, 2025 for the interest expense accrued to that date, assuming that no entries have been made previously to accrue interest?

a. Interest Expense 150

Interest Payable 150

b. Interest Expense 300

Interest Payable 300

c. Interest Expense 450

Interest Payable 450

d. Interest Expense 1,800

Note Payable 1,800

215. Suppose that Verizon paid employee wages on and through Friday, January 26, and the next payroll will be paid in February. There are three more working days in January (29–31). Employees work 5 days a week and the company pays $1,200 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January?

a. Salaries and Wages Expense 1,200

Salaries and Wages Payable 1,200

b. Salaries and Wages Expense 6,000

Salaries and Wages Payable 6,000

c. Salaries and Wages Expense 3,600

Salaries and Wages Payable 3,600

d. No adjusting entry is required.

216. Kim Kardashian earned a salary of $500 for the last week of October. She will be paid on November 1. The adjusting entry for Kim’s employer on October 31 is

a. No entry is required.

b. Salaries and Wages Expense 500

Salaries and Wages Payable 500

c. Salaries and Wages Expense 500

Cash 500

d. Salaries and Wages Payable 500

Cash 500

217. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. Which of the following statements is true?

a. Salaries and Wages Expense for the year is overstated.

b. Liabilities at the end of the year are understated.

c. Assets at the end of the year are understated.

d. Stockholders’ equity at the end of the year is understated.

218. A company shows a balance in Salaries and Wages Payable of $50,000 at the end of the month. The next payroll amounting to $75,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries?

a. Salaries and Wages Expense 75,000

Salaries and Wages Payable 75,000

b. Salaries and Wages Expense 75,000

Cash 75,000

c. Salaries and Wages Expense 25,000

Cash 25,000

d. Salaries and Wages Payable 50,000

Salaries and Wages Expense 25,000

Cash 75,000

219. Suppose that Ralph Lauren issued a one-year 6% $400,000 note on April 30, 2025. Interest expense for the year ended December 31, 2025 was

a. $24,000.

b. $18,000.

c. $16,000.

d. $14,000.

220. Suppose that Ulta Corporation issued a one-year 10% $400,000 note on April 30, 2025.

Assuming that the company only accrues interest at year-end, the interest expense to be

recorded at December 31, 2025 is (rounded to the nearest dollar):

a. $36,000.

b. $27,000.

c. $26,667.

d. $40,000.

221. Which of the statements below is not true?

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

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

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

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

222. Which statement is incorrect concerning the adjusted trial balance?

a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.

b. The adjusted trial balance provides the primary basis for the preparation of financial statements.

c. The adjusted trial balance lists the account balances in order of their magnitude.

d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.

223. Can financial statements be prepared directly from the adjusted trial balance?

a. They cannot. The general ledger must be used.

b. Yes, the adjusted trial balance shows the adjusted balances from the general ledger.

c. No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose.

d. They can because that is the only reason that an adjusted trial balance is prepared.

224. The primary source used in the preparation of the financial statements is the

a. trial balance.

b. post-closing trial balance.

c. general trial balance.

d. adjusted trial balance.

225. Which of the following accounts will reflect the account’s beginning balance on the adjusted trial balance?

a. Prepaid rent

b. Retained earnings

c. Prepaid insurance

d. Unearned revenue

226. The following accounts show balances on the adjusted trial balance. Which of these account balances will not appear the same on the balance sheet?

a. Retained earnings

b. Accounts receivable

c. Common stock

d. Notes payable

227. Which trial balance will consist of the greatest number of accounts?

a. Post-closing trial balance

b. Unadjusted trial balance

c. Adjusted trial balance

d. All of the above will contain the same number of accounts.

228. Based on the account balances below, what is the total of the debit and credit columns of the adjusted trial balance?

Service revenue $5,300 Equipment $7,400

Cash 2,525 Prepaid insurance 1,225

Unearned service rev. 5,320 Depreciation expense 640

Salaries and wages expense 1,050 Accum. depreciation 1,280

Common stock 390 Retained earnings 550

a. $11,150

b. $12,840

c. $11,560

d. $12,430

229. Given the following adjusted trial balance:

Debit Credit

Cash $1,662

Accounts receivable 2,098

Inventory 3,124

Prepaid rent 86

Equipment 300

Accumulated depreciation-equipment 52

Accounts payable 82

Unearned service revenue 122

Common stock 206

Retained earnings 6,610

Service revenue 368

Interest revenue 56

Salaries and wages expense 160

Travel expense 66

Total $7,496 $7,496

Net income for the year is

a. $198.

b. $370.

c. $424.

d. $596.

230. Which of the following errors will cause a trial balance to be out of balance?

a. Posting the issuance of stock as a debit to Cash and a credit to Common stock

b. Recording the payment of prepaid rent as rent expense

c. Posting a debit amount as a credit in the ledger

d. Posting a journal entry twice

231. Given the following adjusted trial balance:

Debit Credit

Cash $1,662

Accounts receivable 2,098

Inventory 3,124

Prepaid rent 86

Equipment 300

Accumulated depreciation-equipment 52

Accounts payable 82

Unearned service revenue 122

Common stock 206

Retained earnings 6,610

Service revenue 368

Interest revenue 56

Salaries and wages expense 160

Travel expense 66

Total $7,496 $7,496

After closing entries have been posted, the balance in retained earnings will be:

a. $6,440.

b. $6,612.

c. $6,980.

d. $6,808.

232. Given the following adjusted trial balance:

Debit Credit

Cash $ 831

Accounts receivable 1,049

Inventory 1,562

Prepaid rent 43

Equipment 150

Accumulated depreciation-equipment 26

Accounts payable 41

Unearned service revenue 61

Common stock 103

Retained earnings 3,305

Service revenue 184

Interest revenue 28

Salaries and wages expense 80

Travel expense 33

Total $3,748 $3,748

Net income for the year is

a. $99.

b. $184.

c. $212.

d. $298.

233. Given the following adjusted trial balance:

Debit Credit

Cash $ 831

Accounts receivable 1,049

Inventory 1,562

Prepaid rent 43

Equipment 150

Accumulated depreciation-equipment 26

Accounts payable 41

Unearned service revenue 61

Common stock 103

Retained earnings 3,305

Service revenue 184

Interest revenue 28

Salaries and wages expense 80

Travel expense 33

Total $3,748 $3,748

After closing entries have been posted, the balance in retained earnings will be

a. $3,306.

b. $3,220.

c. $3,490.

d. $3,404.

234. Which statement is correct concerning the adjusted trial balance?

a. An adjusted trial balance eliminates the need for the preparation of financial statements.

b. The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the ledger.

c. An adjusted trial balance will contain only permanent—balance sheet—accounts.

d. The adjusted trial balance is prepared after the adjusting entries have been journalized but before they have been posted.

235. Which of the following is a true statement about closing the books of a corporation?

a. Expenses are closed to the Expense Summary account.

b. Only revenues are closed to the Income Summary account.

c. Revenues and expenses are closed to the Income Summary account.

d. Revenues, expenses, and the Dividends account are closed to the Income Summary account.

236. The closing entry process consists of closing

a. all asset and liability accounts.

b. out the Retained Earnings account.

c. all permanent accounts.

d. all temporary accounts.

237. Which account will have a zero balance after closing entries have been journalized and posted?

a. Service Revenue

b. Supplies

c. Prepaid Insurance

d. Accumulated Depreciation

238. A post-closing trial balance will show:

a. zero balances for all accounts.

b. zero balances for balance sheet accounts.

c. only balance sheet accounts.

d. only income statement accounts.

239. Which types of accounts will appear in the post-closing trial balance?

a. Permanent accounts.

b. Temporary accounts.

c. Accounts shown in the income statement columns of a worksheet.

240. What type of accounts can be found on a post-closing trial balance?

a. All accounts that have balances after the closing process is complete

b. Permanent and temporary accounts

c. Assets, expenses, revenues, and liabilities

d. Accounts that have been closed during the period

241. Suppose that Target fails to record an adjusting entry for accrued expenses at the end of June. What effect does this have on the financial statements?

a. Expenses are overstated and revenues are understated.

b. Assets are overstated and expenses are understated.

c. Expenses and liabilities are understated.

d. Revenues and expenses are understated.

242. The purpose of the post-closing trial balance is to

a. prove that no mistakes were made.

b. prove the equality of the permanent account balances that are carried forward into the next accounting period.

c. prove the equality of the temporary account balances that are carried forward into the next accounting period.

d. list all the balance sheet accounts in alphabetical order for easy reference.

243. Closing entries

a. are prepared before the financial statements.

b. reduce the number of permanent accounts.

c. cause the revenue and expense accounts to have zero balances.

d. summarize the activity in every account.

244. Which of the following account’s balance will change between the adjusted trial balance and the post-closing trial balance?

a. Common Stock

b. Prepaid Rent

c. Unearned Service Revenue

d. Retained Earnings

245. Which type of accounts will not appear in the post-closing trial balance?

a. Asset accounts

b. Permanent accounts

c. Liability accounts

d. Temporary accounts

246. There are usually how many closing journal entries?

a. 5

b. 4

c. 3

d. 2

247. Given the following adjusted trial balance, what will be the totals for the debit and credit columns of the post-closing trial balance?

Debit Credit

Cash $1,662

Accounts receivable 2,098

Inventory 3,124

Prepaid rent 86

Equipment 300

Accumulated depreciation-equipment $ 52

Accounts payable 82

Unearned service revenue 172

Common stock 206

Retained earnings 6,610

Service revenue 318

Interest revenue 56

Salaries and wages expense 160

Travel expense 66

Totals $7,496 $7,496

a. $7,496

b. $7,218

c. $7,444

d. $7,270

248. Given the following adjusted trial balance, what will be the totals for the debit and credit columns of the post-closing trial balance?

Debit Credit

Cash $ 831

Accounts receivable 1,049

Inventory 1,562

Prepaid rent 43

Equipment 150

Accumulated depreciation-equipment $ 26

Accounts payable 41

Unearned service revenue 86

Common stock 103

Retained earnings 3,305

Service revenue 159

Interest revenue 28

Salaries and wages expense 80

Travel expense 33

Totals $3,748 $3,748

a. $3,635

b. $3,609

c. $3,748

d. $3,722

249. The following information is from the Income Statement of A1 Laundry Service:

Revenues

Service Revenue $6,500

Expenses

Salaries and wages expense $ 2,450

Advertising expense 500

Rent expense 300

Supplies expense 200

Insurance expense 100

Total expenses 3,550

Net Income $2,950

The entry to close the Service Revenue account includes a

a. debit to Service Revenue for $6,500.

b. credit to Service Revenue for $6,500.

c. debit to Income Summary for $6,500.

d. debit to Retained Earnings for $6,500.

250. The following information is from the Income Statement of A1 Laundry Service:

Revenues

Service Revenue $6,500

Expenses

Salaries and Wages expense $ 2,450

Advertising expense 500

Rent expense 300

Supplies expense 200

Insurance expense 100

Total expenses 3,550

Net Income $2,950

The entry to close the expense accounts includes a

a. credit to Income Summary for $3,550.

b. debit to Income Summary for $3,550.

c. debit to Salaries and Wages Expense for $2,450.

d. credit to Retained Earnings for $3,550.

251. The following information is from the Income Statement of A1 Laundry Service:

Revenues

Service Revenue $6,500

Expenses

Salaries and Wages expense $ 2,450

Advertising expense 500

Rent expense 300

Supplies expense 200

Insurance expense 100

Total expenses 3,550

Net Income $2,950

The entry to close Income Summary includes a:

a. credit to Income Summary for $2,950.

b. debit to Income Summary for $2,950.

c. debit to Retained Earnings for $2,950.

d. credit to Common Stock for $2,950.

252. The final step in the accounting cycle is to prepare

a. closing entries.

b. financial statements.

c. a post-closing trial balance.

d. adjusting entries.

253. The first required step in the accounting cycle is:

a. adjusting entries.

b. journalizing transactions.

c. analyzing transactions.

d. posting transactions.

254. How many required steps are there in the accounting cycle?

a. 11

b. 9

c. 7

d. 5

255. Which of the following steps in the accounting cycle usually occurs only at the end of a company’s annual accounting period?

a. Step 3: Post to the ledger accounts.

b. Step 7: Prepare financial statements.

c. Step 6: Prepare adjusting trial balance.

d. Step 9: Prepare a post-closing trial balance.

256. The Accounts Receivable account has a beginning balance of $52,000 and an ending balance of $74,000. If total sales on account were $42,000 for the year, what were the total collections on account?

a. $20,000

b. $64,000

c. $74,000

d. $84,000

257. The following information is from the Income Statement of A1 Lawn Service for the quarter ending September 2025:

Service Revenue $4,500

Expenses

Salaries and Wages expense $ 2,000

Supplies expense 400

Insurance expense 100

Total expenses 2,500

Net Income $2,000

The balance in Retained Earnings at July 1 was $3,200. A1 distributed dividends of $2,200 during the period. The company perform the closing process quarterly. After closing revenue and expenses, Income Summary will have a balance of

a. $2,000 debit.

b. $2,000 credit.

c. $1,800 credit.

d. $2,200 debit.

258. Which one of the following accounts is closed at the end of an accounting period?

a. Retained Earnings

b. Dividends

c. Unearned Sales Revenue

d. Accumulated Depreciation

259. Which statement is true concerning the preparation of closing entries?

a. They can be prepared before or after adjusting entries.

b. They cause the balances of all accounts at the end of the period to be adjusted to

zero.

c. They are necessary before financial statements can be prepared.

d. They result in updating the balance in Retained Earnings for the period.

260. The following information is from the Income Statement of A1 Lawn Service for the quarter ending September 2025:

Service Revenue $4,500

Expenses

Salaries and Wages expense $ 2,000

Supplies expense 400

Insurance expense 100

Total expenses 2,500

Net Income $2,000

The balance in Retained Earnings at July 1 was $3,200. A1 distributed dividends of $2,200 during the period. They perform the closing process quarterly. After closing entries have been posted, Retained Earnings will have a balance of

a. $1,000 debit.

b. $3,000 credit.

c. $5,200 credit.

d. $2,800 credit.

261. The following information is from the Income Statement of A1 Lawn Service for the quarter ending September 2025:

Service Revenue $4,500

Expenses

Salaries and Wages expense $ 2,000

Supplies expense 400

Insurance expense 100

Total expenses 2,500

Net Income $2,000

The balance in Retained Earnings at July 1 was $3,200. A1 distributed dividends of $2,200 during the period. They perform the closing process quarterly. Which of the following is not one of the closing entries that the company will make?

a. Credit Income Summary for $4,500, Debit Retained Earnings for $4,500

b. Debit Retained Earnings for $2,200, Credit Dividends for $2,200

c. Debit Service Revenue $4,500, Credit Income Summary for $4,500

d. Debit Income Summary for $2,000, Credit Retained Earnings for $2,000

262. Which of the following accounts is adjusted but is not closed?

a. Supplies Expense

b. Supplies

c. Depreciation Expense

d. Service Revenue

263. Which of the following accounts would appear in an adjusted trial balance but not a post-closing trial balance?

a. Depreciation Expense

b. Accumulated Depreciation

c. Unearned Revenue

d. Supplies

264. Which of the following accounts is neither adjusted nor closed?

a. Supplies Expense

b. Unearned Revenue

c. Accumulated Depreciation

d. Cash

265. Which of the following accounts is both adjusted and closed?

a. Supplies

b. Unearned Revenue

c. Depreciation Expense

d. Accumulated Depreciation

*266. The worksheet is

a. part of the journal.

b. a financial statement.

c. part of the ledger.

*267. The worksheet starts with two columns for the

a. adjustments.

b. financial statements.

c. trial balance.

d. adjusted trial balance.

*268. The worksheet does not contain columns for the

a. income statement.

b. statement of retained earnings.

c. balance sheet.

d. adjusted trial balance.

*269. The worksheet contains columns for the

a. statement of retained earnings.

b. statement of cash flows.

c. post-closing trial balance.

d. balance sheet.

*270. Net income is shown on the worksheet under the

a. debit column of the adjusted trial balance and the credit column of retained earnings.

b. debit column of the income statement and the credit column of the balance sheet.

c. credit column of the adjusted trial balance and the debit column of retained earnings.

d. credit column of the income statement and the debit column of the balance sheet.

BRIEF EXERCISES

Be. 271

Identify the effect, if any, that each of the following transactions would have upon cash and retained earnings. Determine the dollar amount and the effect (+, –, N).

Retained

_Cash__ Earnings

1. Purchases equipment for $3,000 _______ _______

2. Purchased $200 of supplies for cash _______ _______

3. Recorded an adjusting entry to record use of

$110 of the above supplies. _______ _______

4. Received $600 from customers in payment of

their accounts _______ _______

5. Recorded depreciation of equipment for period

used, $900. _______ _______

Ex. 290

The balance sheets of A1 Nail Bar include the following:

12/31/25 12/31/24

Interest Receivable $4,300 $ -0-

Supplies 5,000 3,900

Salaries and Wages Payable 3,700 3,800

Unearned Service Revenue -0- 4,000

The income statement for 2025 shows the following:

Interest Revenue $17,500

Service Revenue 78,700

Supplies Expense 10,700

Salaries and Wages Expense 48,000

Instructions:

Assume all purchases are made with cash and the beginning and ending balances in Accounts Payable are zero. Assume all services are paid upon performance and the beginning and ending balances in Accounts Receivable are zero. Calculate the following for 2025:

1. Cash received for interest.

2. Cash paid for supplies.

3. Cash paid for salaries and wages.

4. Cash received for service revenue.

Ex. 291

The 2025 income statement for a company showed rent expense of $9,500 and salaries expense of $8,600. The related balance sheet account balances at year-end last year and this year were as follows:

2025 2024

Prepaid Rent $900 $300

Salaries and Wages Payable 500 400

Calculate the following for 2025:

1. Cash paid for rent.

2. Cash paid for salaries.

Ex. 292

A company using the cash basis of accounting reports net income for 2025 of $45,460. If the company had used the accrual basis of accounting it would have reported the following year-end balances:

2025 2024

Accounts receivable $3,850 $5,100

Supplies 1,740 1,950

Salaries and wages payable 3,600 2,250

Other unpaid amounts 2,400 2,100

Instructions:

Determine the company’s net income under the accrual basis of accounting. Show your calculations. Use the column headings shown below.

Explanation Amount

Ex. 293

A1 Accounting Services began operations on July 1. It allows its clients 90 days to pay for services received. On the other hand, the company’s suppliers require payment for their goods and services within 30 days. A1 prepaid its office rent for 12 months on July 1. At the end of the year, December 31, the company had yet to pay its last month’s utility bill.

Instructions:

Explain how cash and accrual basis accounting would handle each of the events described above. Use the column headings shown below.

Event Cash Basis Accrual Basis

Ex. 294

Acme Company prepared the following income statement using the cash basis of accounting for its first year of operations:

ACME COMPANY

Income Statement, Cash Basis

For the Year Ended December 31, 2024

Service revenue (does not include $40,000 of services rendered on account

because the collection will not be until 2025) $380,000

Expenses (does not include $20,000 of expenses on account because

payment will not be made until 2025) 220,000

Net income $160,000

Additional data:

1. Depreciation on a company automobile for the year amounted to $7,000. This amount is not included in the expenses above.

2. On January 1, 2024, paid for a two-year insurance policy on the automobile amounting to $1,600. This amount is included in the expenses above.

Instructions:

(a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change.

(b) Explain which basis (cash or accrual) provides a better measure of income.

Ex. 295

On December 31, 2025, a company prepared an income statement and balance sheet and failed to include three adjusting entries. The incorrect income statement showed net income of $40,000. The balance sheet showed total assets, $130,000; total liabilities, $60,000; and stockholders’ equity, $70,000.

The data for the three adjusting entries were:

(1) Depreciation of $9,000 was not recorded on equipment.

(2) Salaries and Wages amounting to $10,000 for the last two days in December were not paid and not recorded. The next payroll will be in January.

(3) Rent of $8,000 was paid for two months in advance on December 1. The entire amount was debited to Prepaid Rent when paid.

Instructions:

Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses):

Item Net Income Total Assets Total Liabilities Stockholders’ Equity

Incorrect balances $ 40,000 $130,000 $ 60,000 $ 70,000

Effects of:

Depreciation

Salaries and Wages

Rent

Correct Balances

Ex. 296

A company accumulates the following adjustment data at December 31.

1. Revenue of $1,100 collected in advance has been earned.

2. Salaries of $600 are unpaid.

3. Prepaid rent totaling $400 has expired.

4. Supplies of $550 have been used.

5. Revenue earned but unbilled totals $750.

6. Utility expenses of $300 are unpaid.

7. Interest of $250 should be accrued on a note payable.

Instructions:

(a) For each of the above items indicate:

1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense).

2. The account relationship (revenue/liability, expense/liability, revenue/asset, expense/asset).

3. The status of account balances before adjustment (understatement or overstatement).

4. The adjusting entry.

(b) Assume net income before the adjustments listed above was $22,500. What is the adjusted net income?

Account Balances Income Effect

Before Adjustment Of Adjustment

Type of Account (Understatement Increase

Adjustment Relationship or Overstatement) Adjusting Entry (Decrease)

Ex. 297

The adjusted trial balance of a company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry.

(a) (b)

Balance Sheet Account Type of Adjusting Entry Related Account

1. Supplies

2. Accounts Receivable

3. Prepaid Insurance

4. Accumulated Depreciation—

Equipment

5. Interest Payable

6. Salaries and Wages Payable

7. Unearned Service Revenue

Ex. 298

Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided.

TERMS:

A. Prepaid Expenses

B. Unearned Revenues

C. Accrued Revenues

D. Accrued Expenses

STATEMENTS:

1. A revenue not yet earned; collected in advance.

2. Office supplies on hand that will be used in the next period.

3. Subscription revenue collected; not yet earned.

4. Rent not yet collected; performance obligation already satisfied.

5. An expense incurred; not yet paid or recorded.

6. A revenue for which performance obligation is satisfied; not yet collected or recorded.

7. An expense not yet incurred; paid in advance.

8. Interest expense incurred; not yet paid or recorded.

Ex. 299

A review of the ledger of a company at December 31, 2025, produces the following data pertaining to the preparation of annual adjusting entries:

(a) Salaries and Wages Payable, $0: Salaries are paid every Friday for the current week. Five employees receive a weekly salary of $800, and three employees earn a weekly salary of $700. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December.

(b) Unearned Rent Revenue, $60,000: The company had several lease contracts during the year as shown below:

Total Rent

Term per Number of

Date (in months) lease leases

Oct. 1 12 $ 8,000 3

Dec. 1 12 18,000 2

(c) Notes Receivable, $90,000: This is a 6-month note, dated November 1, 2025, with a 6% interest rate.

Instructions:

Prepare the adjusting entries at December 31, 2025. Show all computations.

Ex. 300

A review of the ledger of a company at December 31, 2025, produces the following data pertaining to the preparation of annual adjusting entries:

(a) Notes Payable, $80,000: This is a 9-month note, dated September 1, 2025, with a 9% interest rate.

(b) Prepaid Rent, $648,000. The company rents offices throughout the Midwest. During 2025 it signed 10 leases as shown below:

Term Monthly Number of

Date (in months)   Rent        Leases   

Sept. 1 8 $ 4,500 4

Nov. 1 12 7,000 6

(c) Unearned Service Revenue $175,800. During 2025 the company entered into 13 monthly service contracts with clients. The clients prepaid for the services to be provided over the contract period in an even manner.

Service Period Total Amount Number of

Date (in months) Per Contract Contracts

Aug. 1 9 $12,600 8

Oct. 1 6 15,000 5

Instructions:

Prepare the adjusting entries at December 31, 2025. Show all computations.

Ex. 301

A semi-professional hockey team prepares financial statements on a monthly basis. Their season begins in October, but in September the team engaged in the following transactions:

(a) Paid $150,000 to Oklahoma City as advance rent for use of Oklahoma City Arena for the six-month period October 1 through March 31.

(b) Collected $450,000 cash from sales of season tickets for the team's 30 home games. This amount was credited to Unearned Ticket Revenue.

(c) During the month of October, the team played five home games.

Instructions:

Prepare the adjusting entries required at October 31 for the transactions above.

Ex. 302

A semi-professional baseball team prepares financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions:

(a) Paid $120,000 to Lawrence City as advance rent for use of Lawrence City Stadium for the six-month period April 1 through September 30.

(b) Collected $600,000 cash from sales of season tickets for the team's 20 home games. This amount was credited to Unearned Ticket Revenue.

(c) During the month of April, the team played four home games and five road games.

Instructions:

Prepare the adjusting entries required at April 30 for the transactions above.

Ex. 303

Prepare adjusting entries for the following transactions. Omit explanations.

1. Depreciation on equipment is $1,340 for the accounting period.

2. Interest owed on a loan but not paid or recorded is $275.

3. There was no beginning balance of supplies and $550 of office supplies were purchased during the period. At the end of the period $100 of supplies were on hand.

4. Prepaid rent had a $1,000 normal balance prior to adjustment. By year-end $700 had expired.

5. Salaries incurred by year-end but not yet paid or recorded amounted to $900.

Ex. 304

Prepare adjusting entries for the following transactions. Omit explanations.

1. Unrecorded interest accrued on savings bonds is $410.

2. Property taxes incurred but not paid or recorded amount to $800.

3. Unearned service revenue of $4,000 was collected in advance. By year-end $700 was still unearned.

4. Prepaid insurance had a $750 debit balance prior to adjustment. By year-end, 60 percent was still unexpired.

5. Salaries incurred by year-end but not yet paid or recorded amounted to $650.

Ex. 305

Prepare year-end adjustments for the following transactions. Omit explanations.

1. Accrued interest on notes receivable is $30.

2. $1,000 of unearned service revenue should be recognized as revenue.

3. Three years’ rent, totaling $45,000, was paid in advance at the beginning of the year.

4. Services totaling $2,900 had been performed but not yet billed at the end of the year.

5. Depreciation on equipment totaled $6,500 for the year.

6. Supplies purchased totaled $850. By year-end, only $250 of supplies remained.

7. Salaries owed to employees at the end of the year total $960.

Ex. 306

A company purchased a delivery truck on June 1 for $30,000, paying $10,000 cash and signing a 6%, 2-month note for the remaining balance. The truck is expected to depreciate $6,000 each year. The company prepares monthly financial statements.

Instructions:

(a) Prepare the general journal entry to record the acquisition of the delivery truck on June 1.

(b) Prepare any adjusting journal entries that should be made on June 30.

(c) Show how the delivery truck will be reflected on the company's balance sheet on June 30.

Ex. 307

Acme Company prepares monthly financial statements. Below are listed some selected accounts and their balances on the September 30 trial balance before any adjustments have been made for the month of September.

ACME COMPANY

Trial Balance (Selected Accounts)

September 30, 2025

Debit Credit

Supplies $ 2,700

Prepaid Insurance 4,800

Equipment 16,200

Accumulated Depreciation—Equipment $ 1,000

Unearned Rent Revenue 1,200

(Note: Debit column does not equal credit column because this is a partial listing of selected account balances.)

An analysis of the account balances by the company's accountant provided the following additional information:

1. A physical count of office supplies revealed $1,000 on hand on September 30.

2. A two-year life insurance policy was purchased on September 1 for $4,800.

3. Office equipment depreciates $3,000 per year.

4. The amount of rent received in advance that remains unearned at September 30 is $300.

Instructions:

Using the information given, prepare the adjusting entries that should be made by Acme Company on September 30.

Ex. 308

Prepare the required end-of-period adjusting entries for each independent case listed below.

Case 1

A company began the year with a $3,000 balance in the Supplies account. During the year, $8,500 of additional supplies were purchased. A physical count of supplies on hand at the end of the year revealed that $8,300 worth of supplies had been used during the year. No adjusting entry has been made until year-end.

Case 2

A company has a calendar year-end accounting period. On July 1, the company purchased office equipment for $30,000. It is estimated that the office equipment will depreciate $200 each month. No adjusting entry has been made until year-end.

Case 3

A company is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 2 tenants in $900 per month apartments and one tenant in the $1,000 per month apartment had not paid their December rent as of December 31.

Ex. 309

A1 Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered.

A1 INSURANCE AGENCY

Income Statement

For the Month Ended June 30

Revenues

Service Revenue $40,000

Expenses

Salaries and Wages Expense $12,000

Advertising Expense 800

Rent Expense 4,200

Depreciation Expense 2,800

Total Expenses 19,800

Net Income $20,200

Additional data: When the income statement was prepared, the company accountant neglected to take into consideration the following information:

1. A utility bill for $1,200 was received on the last day of the month for electric and gas service for the month of June.

2. A company insurance salesman sold a life insurance policy to a client for a premium of $10,000. The agency billed the client for the policy and is entitled to a commission of 20%.

3. Supplies on hand at the beginning of the month were $2,500. The agency purchased additional supplies during the month for $1,500 in cash and $1,200 of supplies were on hand at June 30.

4. The agency purchased a new car at the beginning of the month for $24,000 cash. The car will depreciate $6,000 per year.

5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5.

Instructions:

Prepare a corrected income statement.

Ex. 310

One part of an adjusting entry is given below.

Instructions:

Indicate the account title for the other part of the entry.

1. Unearned Service Revenue is debited.

2. Prepaid Rent is credited.

3. Accounts Receivable is debited.

4. Depreciation Expense on equipment is debited.

5. Utilities Expense is debited.

6. Interest Payable is credited.

7. Service Revenue is credited (give two possible debit accounts).

8. Interest Receivable is debited.

Ex. 311

The following ledger accounts are used by the Ace Race Track:

Accounts Receivable

Prepaid Advertising

Prepaid Rent

Unearned Sales Revenue

Sales Revenue

Advertising Expense

Rent Expense

Instructions:

For each of the transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on November 30, the end of the fiscal year.

(a) On November 1, paid rent on the track facility for three months, $150,000.

(b) On November 1, sold season tickets for admission to the racetrack. The racing season is year-round with 25 racing days each month. Season ticket sales totaled $960,000.

(c) On November 1, borrowed $250,000 from First National Bank by issuing a 6% note payable due in three months.

(d) On November 5, programs for 20 racing days in November, 25 racing days in December and 15 racing days in January were printed for $3,000.

(e) The accountant for the concessions company reported that gross receipts for November were $140,000. Ten percent is due to Ace and will be remitted by December 10.

Ex. 312

A company has an accounting fiscal year, which ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred.

Date Amount

Monday June 28 $3,200

Tuesday June 29 2,800

Wednesday June 30 2,900

Thursday July 1 3,000

Friday July 2 2,600

Instructions:

(a) Prepare any necessary adjusting journal entries that should be made at year-end on June 30.

(b) Prepare the journal entry to record the payment of the weekly payroll on July 2.

Ex. 313

On Friday of each week, a company pays its personnel weekly wages amounting to $45,000 for a five-day work week.

Instructions:

(a) Prepare the necessary adjusting entry at year-end, assuming December 31 falls on Wednesday.

(b) Prepare the journal entry for payment of the week's wages on the payday, which is Friday, January 2 of the next year.

Ex. 314

Presented below is the Trial Balance and Adjusted Trial Balance for Stabler Company on December 31.

STABLER COMPANY

Trial Balance

December 31

Before Adjustment After Adjustment

Dr. Cr. Dr. Cr.

Cash $ 3,000 $ 3,000

Accounts Receivable 2,800 3,700

Prepaid Rent 2,100 1,500

Supplies 1,200 700

Equipment 18,000 18,000

Accumulated Depreciation—

Equipment $ 1,300 $ 1,500

Accounts Payable 2,700 3,000

Notes Payable 10,000 10,000

Interest Payable 120

Salaries and Wages Payable 800

Unearned Service Revenue 4,460 4,060

Common Stock 8,200 8,200

Dividends 3,200 3,200

Service Revenue 8,000 9,300

Salaries and Wages Expense 2,060 2,860

Utilities Expense 1,800 2,100

Rent Expense 500 1,100

Supplies Expense 500

Depreciation Expense 200

Interest Expense 120

Totals $34,660 $34,660 $36,980 $36,980

Instructions:

Prepare in journal form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance.

Ex. 315

The Katy’s Petting Zoo operates a drive-through tourist attraction in Maine. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the following:

Prepaid Rent $ 18,000

Buildings 42,000

Accumulated Depreciation—Buildings 5,500

Unearned Ticket Revenue 600

Other data:

1. Three months’ rent had been prepaid on April 1.

2. The buildings are being depreciated at $6,000 per year.

3. The unearned ticket revenue represents tickets sold for future zoo visits. The tickets were sold at $4.00 each on April 1. During April, twenty of the tickets were used by customers.

Instructions:

(a) Calculate the following:

1. Monthly rent expense.

2. The age of the buildings in months.

3. The number of tickets sold on April 1.

(b) Prepare the adjusting entries that were made by the Katy’s Petting Zoo on April 30.

Ex. 316

The adjusted trial balance of A1 Financial Planners appears below and using the information from the adjusted trial balance, you are to prepare for the month ending December 31:

1. an income statement;

2. a retained earnings statement; and

3. a balance sheet.

A1 FINANCIAL PLANNERS

Adjusted Trial Balance

December 31, 2025

Debit Credit

Cash $ 15,400

Accounts Receivable 2,200

Supplies 1,800

Equipment 15,500

Accumulated Depreciation—Equipment $ 4,000

Accounts Payable 3,000

Unearned Service Revenue 5,000

Common Stock 15,000

Retained Earnings 7,400

Dividends 3,500

Service Revenue 9,500

Supplies Expense 1,100

Depreciation Expense 2,500

Rent Expense 1,900

$43,900 $43,900

Ex. 317

The adjusted trial balance shown below is for Acme Company at the end of its fiscal year:

ACME COMPANY

Adjusted Trial Balance

March 31, 2025

Debit Credit

Cash $12,900

Accounts Receivable 9,400

Supplies 700

Prepaid Insurance 2,500

Equipment 16,000

Accumulated Depreciation—Equipment $ 4,800

Accounts Payable 5,800

Salaries and Wages Payable 1,100

Unearned Rent Revenue 600

Common Stock 15,000

Retained Earnings 5,600

Dividends 5,800

Service Revenue 34,600

Rent Revenue 14,400

Salaries and Wages Expense 18,100

Supplies Expense 1,800

Rent Expense 12,000

Insurance Expense 1,500

Depreciation Expense 1,200

$81,900 $81,900

Instructions:

Prepare the closing entries for the temporary accounts at March 31.