Deck 3: The Adjusting Process

Question 1

Under cash-basis accounting,an expense is recorded ONLY when cash is paid out.

Answer 1

True

Question 2

Which of the following entries would be recorded if a company is using the cash-basis method of accounting?

A) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 1000 & \\\hline \text { Accounts receivable } & & 1000 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | r | } \hline \text { Salary expense } & 1000 & \\\hline \text { Salary payable } & & 1000 \\\hline\end{array}$$
C) $$\begin{array} { | l | r | r | } \hline \text { Rent expense } & 1000 & \\\hline \text { Cash } & & 1000 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | r | } \hline \text { Prepaid rent } & 1000 & \\\hline \text { Cash } & & 1000 \\\hline\end{array}$$

Answer 2

$$\begin{array} { | l | r | r | } \hline \text { Rent expense } & 1000 & \\\hline \text { Cash } & & 1000 \\\hline\end{array}$$

Question 3

Every time supplies are used during the accounting period,the asset 'supplies' should be reduced and the 'supplies expense' should be increased.

Answer 3

False

Question 4

Accrual accounting requires adjusting entries at regular intervals throughout the accounting period.

Question 5

Entries that record cash paid out before the expense is incurred are:

A) accrued expenses.
B) prepaid expenses.
C) unearned revenues.
D) accrued revenues.

Question 6

If a company is using the cash-basis method of accounting,when is revenue recorded?

A) When cash is received, at a time after the services were rendered
B) When services are rendered, even though cash may be received at a later date
C) When cash is received, either prior to the services being rendered or at a time after the services were rendered
D) When cash is received, prior to the services being rendered

Question 7

Which of the following situations would result in an increase in profit under the accrual method of accounting,but would NOT result in an increase in profit under the cash-basis method of accounting?

A) Use of supplies purchased earlier
B) Receipt of cash for services that were performed earlier on credit
C) Performance of services on credit
D) Purchase of supplies for cash

Question 8

Which of the following accounts would be used under the accrual method of accounting,but NOT under the cash-basis method of accounting?

A) Equipment
B) Salary expense
C) Cash
D) Unearned revenue

Question 9

Under accrual basis accounting,an expense is recorded ONLY when the cash is paid out.

Question 10

Entries that record an expense before the cash is paid are:

A) unearned revenues.
B) prepaid expenses.
C) accrued expenses.
D) accrued revenues.

Question 11

Under accrual basis accounting,revenue is recorded ONLY when cash is received.

Question 12

How do the adjusting entries differ from other journal entries?

A) Adjusting entries are made only at the end of the period.
B) Adjusting entries never affect cash.
C) Adjusting entries always either increase revenue or increase an expense.
D) All of the above are true.

Question 13

If a company is using the accrual method of accounting,when is revenue recorded?

A) When cash is received, 30 days after the completion of the services
B) When cash is received, before the completion of the services
C) When cash is received, even though services may be rendered at a later date
D) When services are rendered, even though cash may be received at a later date

Question 14

Which of the following accounts would NOT be included in the adjusting entries made at the end of an accounting period?

A) Prepaid insurance
B) Accounts payable
C) Cash
D) Accounts receivable

Question 15

Which of the following entries would be recorded ONLY if a company is using the accrual method of accounting?

A) $$\begin{array} { | l | r | r | } \hline \text { Salary expense } & 1000 & \\\hline \text { Cash } & & 1000 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 1000 & \\\hline \text { Service revenue } & & 1000 \\\hline\end{array}$$
C) $$\begin{array} { | l | r | r | } \hline \text { Supplies } & 1000 & \\\hline \text { Cash } & & 1000 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 1000 & \\\hline \text { Accounts receivable } & & 1000 \\\hline\end{array}$$

Question 16

The end-of-period process starts with the:

A) balance sheet.
B) adjusted trial balance.
C) unadjusted trial balance.
D) income statement.

Question 17

In cash-basis accounting,revenue is recognised when cash is received and expenses are recognised when they are paid.

Question 18

Accrual accounting records transactions ONLY when cash is received or paid.

Question 19

Entries that record cash collected before the revenues are earned are:

A) accrued revenues.
B) unearned revenues.
C) accrued expenses.
D) prepaid expenses.

Question 20

If supplies have been used up during the accounting period,the correct adjusting entry would be:

A) reduce the asset 'supplies' and reduce the 'supplies expense'.
B) reduce the asset 'supplies' and increase the 'supplies expense'.
C) increase the asset 'supplies' and reduce the 'supplies expense'.
D) increase the asset 'supplies' and increase 'supplies expense'.

Question 21

Classic Artists' Services has hired a maintenance man to maintain a building they use for instruction.He will begin work on 1 February and work through till 31 May.Classic Artists' will pay the maintenance man $16,000 at the end of May.It accrues Maintenance expense at the end of every month.What is the balance in the Accounts payable account for amounts owed to the maintenance man at the end of March?

A) Credit balance of $16,000
B) Debit balance of $16,000
C) Credit balance of $8000
D) Debit balance of $8000

Question 22

Healthy Living,a diet magazine,collected $1,440,000 in subscription revenue on 31 May.Healthy Living earns a minimum of $1,080,000 from the buyers who are not the subscribers.Each subscriber will receive an issue of the magazine for each of the next 12 months,beginning with the June issue.The company uses the accrual method of accounting.By the end of December,what is the amount of Subscription revenue that has been earned?

A) $1,080,000
B) $840,000
C) $600,000
D) $1,440,000

Question 23

A business acquired equipment for $135,000 on 1 January 2017.The equipment will be depreciated over five years of its useful life using the straight-line depreciation method.The business records depreciation once a year on 31 December.Which of the following is the adjusting entry required to record depreciation on equipment for the year 2017? (Assume the salvage value of the acquired equipment to be zero.)

A) Debit $27,000 to Depreciation expense and credit $135,000 to Accumulated depreciation.
B) Debit $27,000 to Depreciation expense and credit $27,000 to Equipment.
C) Debit $27,000 to Depreciation expense and credit $27,000 to Accumulated depreciation.
D) Debit $135,000 to Equipment and credit $135,000 to Cash.

Question 24

In accounting,depreciation is the:

A) sale of an asset.
B) estimation of an asset's current value.
C) method of spreading the cost of an asset over its useful life.
D) decline in market value of an asset.

Question 25

Henry Tax Planning Service bought production equipment for $9600 on 1 January 2017.It has an estimated useful life of five years and zero residual value.Henry uses the straight-line method to calculate depreciation and records depreciation expense in the books at the end of every month.As of 30 June 2017,the book value of this equipment shown on Henry's balance sheet will be:

A) $10,560
B) $9600
C) $9760
D) $8640

Question 26

On 1 January 2017,the Accounts receivable of Linda Company had a debit balance of $170,000.During January,the company provided services for $400,000 on account.The company collected $240,000 from its customers on account in January.What was the ending balance in the Accounts receivable account at the end of January?

A) $570,000
B) $400,000
C) $330,000
D) $160,000

Question 27

Qwerty Ltd prepaid $3600 on 1 November 2016 for a one-year insurance premium.On 1 January 2017 of the next year (after 31 December adjustments),the Prepaid insurance account will have a debit balance of:

A) $3900
B) $3000
C) $3600
D) $3300

Question 28

The following information is available for Able Company's Office supplies account.
$$\begin{array} { | l | l | } \hline \text { Beginning balance } & \$ 1600 \\\hline \text { Office supplies expensed } & 7000 \\\hline \text { Ending balance } & 4000 \\\hline\end{array}$$
From the above information,calculate the amount of office supplies purchased.

A) $9400
B) $1600
C) $4000
D) $7000

Question 29

A contra account has two characteristics: (1)a contra account is paired with its related account and (2)a contra account's normal balance is the same as that of the related account.

Question 30

Viva Ltd had bought machine X for $15,900 2 years ago.The machine had no residual value and had an estimated useful life of 10 years.If the company uses the straight-line depreciation method,calculate the current book value of the machine.

A) $12,720
B) $19,080
C) $3180
D) $15,900

Question 31

Healthy Living,a diet magazine,collected $492,000 in subscription revenue on 31 May.Healthy Living earns a minimum of $369,000 from the buyers who are not the subscribers.Each subscriber will receive an issue of the magazine for each of the next 12 months,beginning with the June issue.The company uses the accrual method of accounting.What is the balance in the Unearned revenue account on 31 December?

A) $287,000
B) $492,000
C) $205,000
D) $369,000

Question 32

To accrue revenue means that the cash receipt is recorded before the revenue is earned.

Question 33

Education for All sells tickets in advance for their weekly productions and records the proceeds as Unearned revenue.At the end of each month,Education for All makes an adjusting entry to account for the tickets used during the month (ticket revenue).On 1 March,the Unearned revenue account had a credit balance of $5000.During March,they sold 600 tickets at $30 each and 550 tickets were used during the month.What is the balance in Unearned revenue at the end of March?

A) credit balance of $6500
B) debit balance of $6500
C) credit balance of $5000
D) debit balance of $5000

Question 34

ABC Company signed a one-year $48,000 loan payable at 8% interest on 1 May 2017.If ABC only adjusts their accounts once a year at year-end,how much interest expense was accrued on 31 December 2017?

A) $3840
B) $1280
C) $2560
D) $3200

Question 35

Ursula Tax Planning Service has the following plant assets: Communications equipment: Cost,$7120 with useful life of eight years; Furniture: Cost,$24,000 with useful life of 12 years; and Computer: Cost,$13,600 with useful life of four years.
Ursula's monthly depreciation expense calculated using the straight-line method is: (Assume salvage value of all the assets to be zero)

A) $74
B) $283
C) $524
D) $167

Question 36

The Accumulated depreciation account is:

A) an expense account.
B) a contra account to the asset being depreciated.
C) a record of the sum of all the depreciation recorded.
D) both a record of the sum of all the depreciation recorded and a contra account to the asset being depreciated.

Question 37

Ursula Tax Planning Service has the following plant assets: Communications equipment: Cost,$3840 with useful life of 8 years; Furniture: Cost,$17,280 with useful life of 12 years; and Computer: Cost,$13,440 with useful life of 4 years.Assume the salvage value of all the assets is zero and the straight-line method is used.
Ursula's monthly depreciation journal entry will include a:

A) debit to Accumulated depreciation of $440
B) credit to Accumulated depreciation of $440
C) debit to Depreciation expense of $5280
D) credit to Depreciation expense of $5280

Question 38

ABC Company signed a one-year $24,000 loan payable at 8% interest on 1 May 2016.How much interest expense must be accrued on 31 May 2016?

A) $1920
B) $80
C) $160
D) $12,800

Question 39

Prepaid insurance is an asset account.

Question 40

Smith Technical Services is working on a six-month job for a client,starting on 1 February.They will collect $20,000 from their customer when the job is finished.On 1 March,their Accounts receivable account had a debit balance of $4000.At the end of March,after monthly adjusting entries have been made,what will be the balance in Accounts receivable?

A) Debit balance of $3333
B) Debit balance of $7333
C) Credit balance of $16,667
D) Debit balance of $20,000

Question 41

In the case of a prepaid expense,the adjusting entry required at the end of a period consists of a debit to Prepaid expense.

Question 42

In the case of Unearned revenue,the adjusting entry at the end of the period includes a debit to Service revenue.

Question 43

All of a company's accounts and their balances appear on the:

A) statement of retained earnings.
B) income statement.
C) balance sheet.
D) adjusted trial balance.

Question 44

The financial statements should be prepared in this order: 1)income statement,2)balance sheet and 3)statement of changes in equity.

Question 45

Which of the following lists a company's assets,liabilities and equity to report its financial position?

A) Balance sheet
B) Statement of changes in equity
C) Adjusted trial balance
D) Income statement

Question 46

If a company fails to make an adjusting entry for accrued revenues,the profit will be overstated.

Question 47

The accounting records of Patricia Event Planning Service include the following select unadjusted balances on 31 December 2016: Salaries expense,$6,000; Service revenue: $20,000; Unearned revenue,$400; Supplies expense,$600; Rent expense,$300; Depreciation expense-equipment,$200.

Later in December,she worked with a new client and provided event planning services for an upcoming event.When the event is complete in January 2017,she will collect the full amount of $2400 from her client.As of the end of December 2017,she rendered one-third of the services covered by the contract.She made the accrual adjustments.The final adjusted balance of Service revenue,as shown on the adjusted trial balance,should be a:

A) credit balance of $20,000
B) debit balance of $22,400
C) credit balance of $20,800
D) debit balance of $2400

Question 48

On the first day of January,Patricia borrowed $5000 on a one-year loan payable bearing interest at 7% per year.The loan specifies that principal and interest must be paid in full at the end of the one-year period.On 30 June,the adjusted trial balance will show Interest payable of:

A) $175 credit
B) $350 debit
C) $175 debit
D) $350 credit

Question 49

Understating expenses occurs by:

A) omitting depreciation expense at the end of the year.
B) recording depreciation expense twice at the end of the year.
C) recording depreciation over an estimated life of an equipment.
D) paying in advance for insurance and creating a prepaid insurance account.

Question 50

Smith owns manufacturing equipment that was bought for $11 760.It has an estimated useful life of seven years.Smith should record depreciation expense of $90 per month.

Question 51

On 1 January,Smith had $2 500 of supplies on hand.During January,Smith purchased $6 000 worth of new supplies.At the end of the month,a count revealed $800 worth of supplies remaining on the shelves.The adjustment entry needed will include a debit to Supplies expense of $7 700.The supplies were initially recorded as an asset.

Question 52

Al Shonky wants to improve his profit to support a bank loan application.How might he achieve this ethically?

A) recognise unearned revenue as profit before providing goods to customers
B) omit depreciation for this year
C) pay the electricity bill before the due date
D) increase sales by opening his store an extra day each week

Question 53

Which of the following strategies may be considered an unethical way to increase reported profit?

A) recognise $3 000 of accrued wages when in reality $2 000 wages are owing
B) sell inventory at reduced prices in a special Saturday Sale
C) depreciate a machine over eight years , when its estimated life is six years
D) record $100 received from a customer as unearned revenue instead of revenue

Question 54

The cash basis of accounting provides opportunities for manipulation of reported profits.

Question 55

Patricia Event Planning Service collects fees from their customers in advance.On 1 January 2016,the balance of her Unearned revenue account had a balance of $5000 (Cr.).During January and February,she collected $3000 and $700 as advance fees.During the two-month period,she rendered services of $7500 .What is the balance in Unearned revenue at the end of February?

A) Debit balance of $1200
B) Credit balance of $1200
C) Debit balance of $5000
D) Credit balance of $5000

Question 56

In the case of Unearned revenue,the adjusting entry at the end of the period includes a credit to Service revenue.

Question 57

Profit from the income statement is reported in the assets section of the balance sheet.

Question 58

Smith borrowed $24 000 on a one-year Loan payable with an interest rate of 10% per year on 1 June.He will repay the principal and interest at the end of the one-year period.Smith makes accrual adjustments at the end of each month.He should record interest expense of $2 400 on 30 June.

Question 59

Financial statements are prepared from a(n):

A) adjusted trial balance.
B) unadjusted trial balance.
C) general journal.
D) general ledger.

Question 60

In the case of a prepaid expense,the adjusting entry required at the end of a period consists of a credit to Prepaid expense.

Question 61

Overstating expenses could be an unethical strategy used to improve the profit result.