Test bank accounting 25th editon warren chapter 3 the adjusting process

Chapter The Adjusting Process Student: _ The system of accounting where revenues are recorded when they are earned and expenses are recorded when they are incurred is called the cash basis of accounting True False Generally accepted accounting principles require accrual-basis accounting True False The revenue recognition concept states that revenue should be recorded in the same period as the cash is received True False The matching concept requires expenses be recorded in the same period that the related revenue is recorded True False The financial statements measure precisely the financial condition and results of operations of a business True False An example of deferred revenue is Unearned Rent True False Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has been earned True False If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a liability account True False Proper reporting of revenues and expenses in a period is due to the accounting period concept True False 10 Revenue recognition concept requires that the reporting of revenue be included in the period when cash for the service is received True False 11 Revenues and expenses should be recorded in the same period to which they relate True False 12 The matching concept supports matching expenses with the related revenues True False 13 Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis of accounting True False 14 The updating of accounts is called the adjusting process True False 15 Adjusting entries are made at the end of an accounting period to adjust accounts on the balance sheet True False 16 Adjusting entries affect only expense and asset accounts True False 17 An adjusting entry would adjust revenue so it is reported when earned and not when cash is received True False 18 An adjusting entry would adjust an expense account so the expense is reported when incurred True False 19 An adjusting entry to accrue an incurred expense will affect total liabilities True False 20 The difference between deferred revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and deferred revenue has never been recorded True False 21 Deferrals are recorded transactions that delay the recognition of an expense or revenue True False 22 Adjustments for accruals are needed to record a revenue that has been earned or an expense that has been incurred but not recorded True False 23 Unearned revenue is a liability True False 24 The systematic allocation of land's cost to expense is called depreciation True False 25 The difference between the balance of a fixed asset account and the balance of its related accumulated depreciation account is termed the book value of the asset True False 26 The Accumulated Depreciation's account balance is the sum of the depreciation expense recorded in past periods True False 27 Accumulated Depreciation accounts are liability accounts True False 28 Accumulated Depreciation is reported on the income statement True False 29 A contra asset account for Land will normally appear in the balance sheet True False 30 Depreciation Expense is reported on the balance sheet as an addition to the related asset True False 31 A company pays $36,000 for twelve month's rent on October The adjusting entry on December 31 is debit Rent Expense, $9,000 and credit Prepaid Rent, $9,000 True False 32 A company pays $360 for a yearly trade magazine on August The adjusting entry on December 31 is debit Unearned Subscription Revenue, $150 and credit Subscription Revenue, $150 True False 33 A company depreciates its equipment $500 a year The adjusting entry for December 31 is debit Depreciation Expense, $500 and credit Equipment, $500 True False 34 A company pays an employee $3,000 for a five day work week, Monday - Friday The adjusting entry on December 31, which is a Wednesday, is debit Wages Expense, $1,800 and credit Wages Payable, $1,800 True False 35 A company pays $6,500 for two season tickets on September If $2,500 is earned by December 31, the adjusting entry made at that time is debit Cash, $2,500 and credit Ticket Revenue, $2,500 True False 36 A company realizes that the last two day's revenue for the month was billed but not recorded The adjusting entry on December 31 is debit Accounts Receivable and credit Fees Earned True False 37 At year-end, the balance in the prepaid insurance account, prior to any adjustments, is $6,000 The amount of the journal entry required to record insurance expense will be $4,000 if the amount of unexpired insurance applicable to future periods is $2,000 True False 38 A fixed asset’s market value is reflected in the Balance Sheet True False 39 If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both liabilities and owner's equity will be understated for the period True False 40 If the adjustment to recognize expired insurance at the end of the period is inadvertently omitted, the assets at the end of the period will be understated True False 41 If the adjustment of the unearned rent account at the end of the period to recognize the amount of rent earned is inadvertently omitted, the net income for the period will be understated True False 42 If the adjustment for depreciation for the year is inadvertently omitted, the assets on the balance sheet at the end of the period will be understated True False 43 Adjusting journal entries are dated on the last day of the period True False 44 By ignoring and not posting the adjusting journal entries to the appropriate accounts, net income will always be overstated True False 45 The financial statements are prepared from the unadjusted trial balance True False 46 The adjustment for accrued fees was debited to Accounts Payable instead of Accounts Receivable This error will be detected when the Adjusted Trial Balance is prepared True False 47 The adjusted trial balance verifies that total debits equals total credits before the adjusting entries are prepared True False 48 Vertical analysis compares each item in a financial statement with a total amount from the same statement True False 49 When preparing an income statement vertical analysis, each revenue and expense is expressed as a percent of net income True False 50 Vertical analysis is useful for analyzing financial statement changes over time True False 51 The revenue recognition concept A is not in conflict with the cash method of accounting B determines when revenue is credited to a revenue account C states that revenue is not recorded until the cash is received D controls all revenue reporting for the cash basis of accounting 52 The matching concept A addresses the relationship between the journal and the balance sheet B determines whether the normal balance of an account is a debit or credit C requires that the dollar amount of debits equal the dollar amount of credits on a trial balance D states that the revenues and related expenses should be reported in the same period 53 Using accrual accounting, revenue is recorded and reported only A when cash is received without regard to when the services are rendered B when the services are rendered without regard to when cash is received C when cash is received at the time services are rendered D if cash is received after the services are rendered 54 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 55 One of the accounting concepts upon which deferrals and accruals are based is A matching B cost C price-level adjustment D conservatism 56 If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account, which of the following describes the effect of the credit portion of the entry? A decreases the balance of an owner's equity account B increases the balance of a liability account C increases the balance of an asset account D decreases the balance of an expense account 57 If the effect of the credit portion of an adjusting entry is to increase the balance of a liability account, which of the following describes the effect of the debit portion of the entry? A increases the balance of a contra asset account B increases the balance of an asset account C decreases the balance of an owner's equity account D increases the balance of an expense account 58 Prior to the adjusting process, accrued expenses have A not yet been incurred, paid, or recorded B been incurred, not paid, but have been recorded C been incurred, not paid, and not recorded D been paid but have not yet been incurred 59 Prior to the adjusting process, accrued revenue has A been earned and cash received B been earned and not recorded as revenue C not been earned but recorded as revenue D not been recorded as revenue but cash has been received 60 Deferred expenses have A not yet been recorded as expenses or paid B been recorded as expenses and paid C been incurred and paid D not yet been recorded as expenses 61 Deferred revenue is revenue that is A earned and the cash has been received B earned but the cash has not been received C not earned and the cash has not been received D not earned but the cash has been received 62 Adjusting entries are A the same as correcting entries B needed to bring accounts up to date and match revenue and expense C optional under generally accepted accounting principles D rarely needed in large companies 63 Adjusting entries affect at least one A income statement account and one balance sheet account B revenue and the drawing account C asset and one owner's equity account D revenue and one capital account 64 The general term employed to indicate an expense that has not been paid and has not yet been recognized in the accounts by a routine entry is A capital B deferral C accrual D inventory 65 Which of the following is not a characteristic of accrual basis of accounting? A Revenues and expenses are reported in the period in which cash is received or paid B Revenues are reported on the income statement in the period in which they are earned C Accrual basis of accounting supports the matching concept D Expenses are reported in the same period as the revenues to which they relate 66 Generally accepted accounting principles requires that companies use the of accounting A cash basis B deferral basis C accrual basis D account basis 67 The cash basis of accounting records revenues and expenses when the cash is exchanged while the accrual basis of accounting A records revenues when they are earned and expenses when they are paid B records revenues and expenses when they are incurred C records revenues when cash is received and expenses when they are incurred D records revenues and expenses when the company needs to apply for a loan 68 By matching revenues and expenses in the same period in which they incur A net income or loss will always be underestimated B net income or loss will always be overestimated C net income or loss will be properly reported on the income statement D net income or loss will not be determined 69 Adjusting entries always include A only income statement accounts B only balance sheet accounts C the cash account D at least one income statement account and one balance sheet account 70 Prepaid expenses are eventually expected to A become expenses when their future economic value expires B become revenues when services are performed C become expenses in the period when they are paid D become revenues when the liability is no longer owed 71 Which of the following is considered to be unearned revenue? A Concert tickets sold last month for yesterday’s performance B Concert tickets sold yesterday on credit for yesterday’s performance C Concert tickets that were not sold for the current performance D Concert tickets sold for next month’s performance 72 Which of the following is an example of accrued revenue? A Swimming pool cleaning that has been paid for three months in advance B Swimming pool cleaning that has been provided but has not been billed or paid C An agreement has been signed for swimming pool cleaning for the next three months D Swimming pool cleaning that has been provided and paid on the same day 73 Which of the following is considered to be an accrued expense? A A computer technician has installed the latest software updates and was paid on the same day B A computer technician has been paid in advance to install software updates as they become available C A computer technician has just signed an agreement with you regarding pricing for future work D A computer technician has installed the latest software updates, but you have not received their invoice for payment 74 Which account would normally not require an adjusting entry? A Wages Expense B Accounts Receivable C Accumulated Depreciation D Smith, Capital 75 Which one of the accounts below would likely be included in an accrual adjusting entry? A Insurance Expense B Prepaid Rent C Interest Expense D Unearned Rent 76 Which one of the following accounts below would likely be included in a deferral adjusting entry? A Interest Revenue B Unearned Revenue C Salaries Payable D Accounts Receivable 77 The balance in the prepaid rent account before adjustment at the end of the year is $32,000, which represents four months' rent paid on December The adjusting entry required on December 31 is A debit Rent Expense, $8,000; credit Prepaid Rent, $8,000 B debit Prepaid Rent, $24,000; credit Rent Expense, $8,000 C debit Rent Expense, $24,000; credit Prepaid Rent, $8,000 D debit Prepaid Rent, $8,000; credit Rent Expense, $8,000 (b) T h e fi rs t jo u r n al e nt r y is re q ui re d to re c o r d th e e x p e n s e o f th e in d e p e n d e nt c o nt ct o r in th e p er io d in w hi c h th e s er vi 180 On November 15th, Great Designs Company purchased an advertising campaign for the month of December Great Designs paid cash of $2,700 in advance The advertising campaign ran in December (a) Prepare all necessary journal entries for the advertising campaign for November and December (b) Explain why you prepared this/these journal entries (a) Nov 15 Cash P 2,700 re p d A d v er ti si n g 2,700 Dec 31 A 2,700 d v er ti si n g E x p e n s e Prepaid Advertising 2,700 (b) Under the matching concept, the expense should be recorded in the month of December when the advertising campaign ran -even though the cash was paid in November Thus, the November journal creates an asset, Prepaid Advertising The December 31st entry recognizes the advertising expense in December and eliminates the prepaid asset 181 On January 2, Safe Boating Monthly received a check for $96 from a subscriber for a 12-month subscription The January issue was mailed on January 15th Prepare the necessary entries for the month of January Jan Jan 15 or 31 Cash 96 Unea rned Subs cripti ons Unea rned Subs cripti ons Subs cripti ons Reve nues 96 The second entry can be made either on January 15th when the issue is mailed or on the 31st with other adjusting entries 182 Prepare the December 31 adjusting entries for the following transactions Omit explanations Fees accrued but unbilled total $6,300 The supplies account balance on December 31 is $4,750 Supplies on hand are $960 Wages accrued but not paid are $2,700 Depreciation of office equipment is $1,650 Rent expired during year, $10,800 Date Description Post Ref Debit Credit Date Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Description Accounts Receivable Revenues Post Ref Debit 6,300 Credit 6,300 Supplies Expense ($4,750 - $960) Supplies 3,790 Wages Expense Wages Payable 2,700 Depreciation Expense Accumulated Depreciation 1,650 Rent Expense Prepaid Rent 10,800 3,790 2,700 1,650 10,800 183 Prepare adjusting entries for the following transactions: (a) (b) (c) (d) (e) The beginning balance of the Supplies account was $245 During the month the company bought additional supplies in the amount of $735 At the end of the month a physical inventory showed $343 of unused supplies The company has a 12% Note Payable in the amount of $17,000 due in months The interest expense for the month has not been recorded The company has two employees The manager is paid on the 15th of every month for work performed during the first half of the month and on the 1st of the following month for the work performed during the second half of the month His monthly salary is $5,500 The other employee is paid $650 for each day work week (Monday - Friday) The last day of the month fell on Thursday The unearned revenue account shows a balance of $46,000 According to the manager 60% of that amount has been earned At the end of the month $5,700 of services had been performed but not yet billed (a) Supplies Expense ($245 + $735 - $343) 637 Supplies (b) 637 Interest Expense ($17,000 x 12%/12) 170 Interest Payable (c) 170 Wages and Salary Expense 3,270 Wages and Salary Payable 3,270 (($5 ,500 /2) + ($650/5 x 4)) (d) Unearned Revenues 27,600 Fees Earned 27,600 ($46 ,000 x 60%) (e) Accounts Receivable 5,700 Fees Earned 5,700 184 At the end of the fiscal year, the following adjusting entries were omitted: (a) (b) No adjusting entry was made to transfer the $1,750 of prepaid insurance from the asset account to the expense account No adjusting entry was made to record accrued fees of $525 for services provided to customers Assuming that financial statements are prepared before the errors are discovered, indicate the effect of each error, considered individually, by inserting the dollar amount in the appropriate spaces Insert "0" if the error does not affect the item (1) (2) (3) (4) Error (a) Overstated Error (b) Understated Overstated Understated $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Assets at December 31 would be Liabilities at Dec 31 would be Net income for the year would be Owner's equity at Dec 31 would be (1) (2) (3) (4) Error (a) Overstated Error (b) Understated Overstated Understated $1,750 $ -0- $ -0- $525 $ -0- $ -0- $ -0- $ -0- $1,750 $ -0- $ -0- $525 $1,750 $ -0- $ -0- $525 Assets at December 31 would be Liabilities at Dec 31 would be Net income for the year would be Owner's equity at Dec 31 would be 185 On April 30, a business estimates depreciation on equipment used during the first year of operations to be $2,900 (a) Journalize the adjusting entry required as of April 30 (b) If the adjusting entry in (a) were omitted, which items would be erroneously stated on (1) the income statement for the year and (2) the balance sheet as of April 30? (a) (b) Depreciat 2,900 ion Expense Accum ulated Depreciat ion Equipmen t (1) (2) Depreciation expense would be understated Net income would be overstated Accumulated depreciation would be understated, and total assets would be overstated Owner's equity would be overstated 2,900 186 Journalize the six entries to adjust the accounts at December 31 (Hint: One of the accounts was affected by two different adjusting entries) Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation Wages Payable Unearned Fees Ann Cole, Capital Fees Earned Wages Expense Supplies Expense Insurance Expense Depreciation Expense Total Unadjusted Trial Balance Debit Balances 5,000 32,000 3,600 4,000 11,000 Adjusted Trial Balance Credit Balances Debit Balances 5,000 32,600 100 1,400 11,000 1,700 2,000 3,500 22,000 75,000 8,900 22,000 69,000 44,300 99,900 Credit Balances 46,300 3,500 2,600 1,700 104,200 99,900 Accounts Receivable Fees Earned 600 Supplies Expense Supplies 3,500 Insurance Expense Prepaid Insurance 2,600 Depreciation Expense Accumulated Depreciation 1,700 Unearned Fees Fees Earned 5,400 Wages Expense Wages Payable 2,000 104,200 600 3,500 2,600 1,700 5,400 2,000 187 Jacki Lopez started JVL Consulting on January 1, 2014 The following are the account balances at the end of the first month of business, before adjusting entries were recorded: Accounts Payable Accounts Receivable Cash Consulting Revenue Equipment Jacki Lopez, Capital Jacki Lopez, Drawing Prepaid Rent Supplies $300 750 6,300 4,925 7,000 15,000 1,375 4,000 800 Adjustment data: Supplies on hand at the end of the month: $150 Unbilled Consulting Revenue: $700 Rent expense for the month: $1,000 Depreciation on equipment: $90 (a) Prepare the required adjusting entries, adding accounts as needed (b) Prepare an Adjusted Trial Balance for JVL Consulting as of January 31, 2014 (a) Supplies Expense Supplies Accounts Receivable Consulting Revenue Rent Expense Prepaid Rent Depreciation Expense Accumulated Depreciation - Equipment 650 0 700 , 0 1,000 90 (b) JV L Co nsu ltin g Adj uste d Tri al Bal anc e Jan uar y 31, 201 Acc Debit Balances oun ts Cas $ h Acc 1,450 oun ts Rec eiv abl e Sup 150 plie s Pre 3,000 pai d Ren t Equ 7,000 ipm ent 6,300 C r e d i t B a l a n c e s Acc um ulat ed De pre ciat ionEqu ipm ent Acc oun ts Pay abl e Jac ki Lop ez, Cap ital Jac 1,375 ki Lop ez, Dra win g Co nsu ltin g Rev enu e De 90 pre ciat ion Exp ens e Ren 1,000 t Exp ens e Sup 650 plie s Exp ens e Tot $21,015 als $ 0 , 0 , $ , 188 Complete the missing items in the following chart: Prepaid Expenses Examples Supplies, (a) Adjusting Entry Dr Expense Cr Asset Financial Statement Impact if Adjusting Entry is Omitted Income Statement: Revenues: No effect Expenses: Understated Net income: (b) Balance Sheet: Assets: (c) Liabilities: (d) Owner’s equity: Overstated Unearned Revenues Examples Unearned Rent, (e) Adjusting Entry (f) Financial Statement Impact if Adjusting Entry is Omitted Income Statement: Revenues: (g) Expenses: No effect Net income: (h) Balance Sheet: Assets: (i) Liabilities: Overstated Owner’s equity: (j) Accrued Revenues Examples Adjusting Entry Interest income due on a Dr Asset note, Cr Revenue (k) Accrued Expenses Examples Interest due on a Notes Payable, (p) Adjusting Entry (q) Financial Statement Impact if Adjusting Entry is Omitted Income Statement: Revenues: (l) Expenses: (m) Net income: Understated Balance Sheet: Assets: (n) Liabilities: (o) Owner’s equity: Understated Financial Statement Impact if Adjusting Entry is Omitted Income Statement: Revenues: No effect Expenses: (r) Net income: (s) Balance Sheet: Assets: (t) Liabilities: Understated Owner’s equity: (u) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) (r) (s) (t) (u) Prepaid Rent or Prepaid Insurance Overstated Overstated No effect Retainer fee or Magazine subscription Dr Liability, Cr Revenue Understated Understated No effect Understated Services performed but not yet billed Understated No effect Understated No effect Unpaid wages Dr Expense, Cr Liability Understated Overstated No effect Overstated 189 Two income statements for Debra’s Design Services are shown below: Debra’s Design Services Income Statements For the Years Ended December 31, 2012 and 2011 2011 20 12 Fees earned Operating expenses: Wages expense Rent expense Supplies expense Miscellaneous expense Total operating expenses Net income $7$696,520 65 ,3 40 25214,600 4, 00 12108,000 0, 00 7698,715 ,5 00 16,420 _ _1 1, 68 $4$437,735 62 ,1 80 $3$258,785 03 ,1 60 (a) Prepare a vertical analysis of Debra’s Design Services income statements (b) What type of trend(s) are indicated: favorable or unfavorable trend? (c) What other information would enhance the analysis? (a) Debra’s Design Services Income Statements For the Years Ended December 31, 2012 and 2011 2012 2011 Fees earned Operating expenses: Wages expense Rent expense Supplies expense Miscellaneous expense Total operating expenses Net income Amount $765,340 Percent 100.0% Amount $696,520 Percent 100.0% 254,000 120,000 76,500 11,680 $462,180 $303,160 33.2% 15.7% 10.0% 1.5% 60.4% 39.6% 214,600 108,000 98,715 16,420 $437,735 $258,785 30.8% 15.5% 14.2% 2.4% 62.8% 37.2% (b) The vertical analysis shows both favorable and unfavorable trends The increase in wages expense of 2.4% (33.2% - 30.8%) is unfavorable The decrease in supplies expense of 4.2% (14.2% - 10.0%) and miscellaneous expense of 0.9% (2.4% - 1.5%) are both favorable Rent as a percentage of fees earned stayed constant The net result is favorable an increase in net income as a percentage of fees earned from 37.2% to 39.6% (c) The analysis can be enhanced by comparisons with industry averages 190 A business pays bi-weekly salaries of $20,000 every other Friday for a ten-day period ending on that day The last pay day of December is Friday, December 27 Assuming the next pay period begins on Monday, December 30, journalize the adjusting entry necessary at the end of the fiscal period (December 31) Date Description Post Ref Debit Credit Post Ref Debit Credit ANS: $20,000/10 = $2,000 X days = $4,000 Date Description December 31 Salary Expense Salary Payable 4,000 4,000 191 A business pays bi-weekly salaries of $20,000 every other Friday for a ten-day period ending on that day The last pay day of December is Friday, December 27 Assuming the next pay period begins on Monday, December 30 and the proper adjusting entry is journalized at the end of the fiscal period (December 31) Journalize the entry for the payment of the payroll on Friday, January 10 Date Description Post Ref Debit Credit ANS: $20,000/10 = $2,000 X days = $4,000 Accrued salaries for December $20,000 - $4,000 = $16,000 Salary Expense for January Date Description January 10 Salary Expense Salary Payable Cash Post Ref Debit Credit 16,000 4,000 20,000 ... the accrual basis of accounting, some businesses prefer using the cash basis of accounting True False 14 The updating of accounts is called the adjusting process True False 15 Adjusting entries... balance prepared? A Before adjusting journal entries are posted B After adjusting journal entries are posted C After the adjusting journal entries are journalized D Before the adjusting journal entries... of accounting A cash basis B deferral basis C accrual basis D account basis 67 The cash basis of accounting records revenues and expenses when the cash is exchanged while the accrual basis of accounting