Question 1

Which of the following is an example of an error that would cause the trial balance to be out of balance?

Accepted Answer

This journal entry causes an imbalance in the trial balance because the debits and credits do not equal each other. The debit is for $525 while the credit is for $552, resulting in a difference of $27.

Question 2

This month, Grass is Greener Lawn Service pays cash for $4,000 of grass fertilizer to be used two months from now. What journal entry will Grass is Greener record this month?

Accepted Answer

The correct journal entry is to debit supplies for $4,000 and credit cash for $4,000 because the company is paying cash for supplies (fertilizer) that will be used in the future, not immediately expensing them.

Question 3

A company's revenue recognition policy:

Accepted Answer

The company's revenue recognition policy is usually described in the notes to a company's financial statements.

Question 4

In January, the Caribbean Dream Resort books and accepts a cash payment for $32,000 for vacation services to be provided during spring break in March. The $32,000 would be recorded during January as a:

Accepted Answer

The payment received in advance for vacation services constitutes unearned revenue, which is a liability for the company until the services are provided. Therefore, the correct journal entry is a debit to Cash (asset) and a credit to Unearned Revenue (liability).

Question 5

Sparkling Pools provides $1,000 of pool maintenance services during July and collects payment in August. The company performs $1,600 of pool maintenance services during July that were paid for in June. The company accepts an order to perform $500 of pool maintenance services in August and will be paid in the same month. Revenue should be credited for:

Accepted Answer

Revenue is recognized when earned, not when payment is received or made. Thus, $1,600 + $1,000 in July when services were performed, and $500 in August for the services to be performed then.

Question 6

In January, the Huntington Beach Resort (HBR) accepts your reservation and receives your $2,000 payment for a week of sun and fun in California during spring break. The $2,000 would be recorded by HBR during January as a debit to:

Accepted Answer

The $2,000 payment is received in advance for services that will be provided in the future, so it is considered Unearned Revenue at the time of payment. Therefore, the transaction should be recorded as a debit to Cash (asset) and a credit to Unearned Revenue (liability).

Question 7

Trudy's Café paid employees $50,000 in September for work done that month. What journal entry will Trudy's record in September, assuming Trudy's did not owe any amounts to employees at the end of August?

Accepted Answer

The answer of Trudy's Café paid employees $50,000 in September...

Question 8

Austin Insurance (AI) earned $10,000 revenue for services provided. Which of the following is correct?

Accepted Answer

Revenue should be credited when services have been provided, regardless of when cash is received. The timing of cash receipts would affect the debiting of Accounts Receivable, but not the crediting of revenue.

Question 9

In September, a customer signed a contract to have his house painted and paid for the job in October. The painting company bought the paint in August on account and paid for it in September. The painting company painted the house in November. According to the revenue and matching principles, the painting company should record:

Accepted Answer

According to the revenue recognition principle, revenue should be recognized when the service is performed, in this case, when the house was painted in November. According to the matching principle, expenses should be matched with the revenues, which means that the paint expense should also be recognized in November when the service (painting the house) was performed.

Question 10

This month, a company performed $517,000 of services and incurred total expenses of $438,000. If the company was paid in cash for all its services and paid cash for all its expenses, these transactions would cau se:

Accepted Answer

The company performed services worth $517,000 and received payment in cash, which would result in an increase in cash by $517,000. The company also incurred expenses of $438,000 and paid for them in cash, resulting in a decrease in cash by $438,000. Therefore, the net increase in cash would be $79,000 ($517,000 - $438,000), which matches option C. The revenues would increase by $517,000, expenses would increase by $438,000, and cash would increase by $79,000. There is no mention of any changes in contributed capital or retained earnings, so options A and B can be eliminated. Option D is incorrect because revenues are not increased by $79,000; rather, they are increased by $517,000.

Question 11

On October 10, a company paid $12,000 to its suppliers, of which $2,000 was for supplies received on October 10 and $10,000 was for supplies received and recorded during September. The $12,000 payment would be recorded as a:

Accepted Answer

The company paid $2,000 for supplies received on October 10, which would be recorded as a debit to Supplies because the company now owns the supplies. The remaining $10,000 was for supplies received and recorded during September, which would be recorded as a debit to Accounts Payable because the company had not yet paid for these supplies. Finally, the entire $12,000 payment would be recorded as a credit to Cash because the company paid with cash. Therefore, the best choice is D.

Question 12

An increase in revenue will always:

Accepted Answer

An increase in revenue will increase the company's net income, which in turn will increase the retained earnings component of stockholders' equity. Therefore, choice A, an increase in stockholders' equity, is the correct answer.

Question 13

Which of the following journal entries would decrease stockholders' equity?

Accepted Answer

Debiting Insurance Expense and crediting Cash will decrease stockholders' equity because it is reducing an asset (Cash) and increasing an expense account (Insurance Expense), which reduces net income and ultimately decreases stockholders' equity.

Question 14

On the 15th of the month, a company receives $8,000 in payments from customers. $1,000 is for services performed on that day and the remaining is payment for services performed in the previous month. The $8,000 cash receipt would be recorded as a:

Accepted Answer

The $8,000 cash receipt represents payment for services performed in the previous month ($7,000) and for services performed on that day ($1,000). The $7,000 is a decrease in accounts receivable, so it should be credited. The $1,000 is revenue earned on that day, so it should be credited as well. Cash is being received, so it should be debited for the full $8,000. Therefore, the correct entry is a debit of $8,000 to Cash, a credit of $7,000 to Accounts Receivable, and a credit of $1,000 to Service Revenue. Option B shows the correct debits and credits.

Question 15

Sparkling Pools received a bill for $1,200 for running newspaper ads during the last two weeks of July; the bill will be paid on August 1. Advertising expense should be:

Accepted Answer

The expense should be recognized in the period in which it was incurred, which is July, when the ads were run. According to the matching principle in accounting, expenses are matched with the revenues they help generate within the same period. Therefore, the advertising expense should be debited in July for $1,200, reflecting the cost incurred during that period.

Question 16

The unadjusted trial balance:

Accepted Answer

The unadjusted trial balance is created to determine that total debits equal total credits, which helps to identify any errors in recording transactions. It is not a preliminary financial statement and does not necessarily list account names in alphabetical order.

Question 17

Which account is least likely to be credited when an expense is recorded?

Accepted Answer

Accounts Receivable represents amounts owed to the company by its customers for goods or services already delivered. If an expense is recorded, it means the company has paid for something and therefore, it is unlikely that Accounts Receivable will be credited.

Question 18

In January, a company pays for advertising space in the local paper for ads to be run during the months of January, February, and March at $1,500 a month. The payment would be recorded in January as a:

Accepted Answer

The payment is recorded as a debit to Advertising Expense for the current month's expense, a debit to Prepaid Advertising for future months, and a credit to Cash for the total payment.

Question 19

Which of the following groups of accounts contains only those that normally have credit balances?

Accepted Answer

Accounts Payable, Retained Earnings, and Service Revenue are all accounts that typically have credit balances.

Question 20

Which of the following is not true about the unadjusted trial balance?

Accepted Answer

An unadjusted trial balance is an internal document used to prepare financial statements and is not part of the financial statements issued to external decision makers.

Quiz 3: Reporting Operating Results on the Income Statement