Question 1

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 always either increase revenue or increase an expense.
C)Adjusting entries never affect cash.
D)All of the above are true.

Accepted Answer

Adjusting entries are made at the end of the period, they adjust revenues and expenses, and they do not involve cash transactions.

Question 2

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.

Accepted Answer

The answer of A contra account has two characteristics: (1)a...

Question 3

Smith borrows $10 000 on a one- year loan payable that charges interest at 12% per year. He will repay the principal and interest at the end of the one- year period. Smith makes accrual adjustments and each month, he records interest expense of $1 200.

Accepted Answer

The monthly interest expense should be $100, not $1,200. The annual interest is $1,200 ($10,000 * 12%), so the monthly interest is $1,200 / 12 = $100.

Question 4

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

Accepted Answer

This is because unearned revenue is money received in advance for services that have not yet been provided. When the services are eventually provided, the unearned revenue account is debited and the service revenue account is credited to recognize the revenue earned.

Question 5

At 1 January, Smith has a beginning balance in Unearned revenue of $1 000. During January, he earns $800 of that amount. He also collects $4 000 from a new customer for services to be rendered the following month. As of the end of January, the Unearned revenue account had a balance of $4 800.

Accepted Answer

The Unearned revenue account should have a balance of $4,200 at the end of January. Starting with $1,000, Smith earns $800, reducing it to $200. Adding $4,000 collected for future services results in a balance of $4,200.

Question 6

Argyle Designs has a contract to design 20 new dresses for a customer, and will collect a total of $40 000 when the design services are complete. They start on 1 June. As of 30 June, Argyle has finished 4 of the 20 designs. They will make an adjusting entry at the end of June to accrue $10 000 of service revenue.

Accepted Answer

The answer of Argyle Designs has a contract to design...

Question 7

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

Accepted Answer

Accrual accounting requires revenue to be recorded when it is earned, not when the cash is received.

Question 8

If supplies have been used up during the accounting period, the correct adjusting entry would be:
A)increase the asset 'supplies' and increase 'supplies expense.'
B)increase the asset 'supplies' and reduce the 'supplies expense.'
C)reduce the asset 'supplies' and reduce the 'supplies expense.'
D)reduce the asset 'supplies' and increase the 'supplies expense.'

Accepted Answer

When supplies are used up, the asset 'supplies' decreases, and 'supplies expense' increases to reflect the cost of supplies used during the period.

Question 9

At 1 January, Smith has $1 200 of supplies on hand. During January, Smith purchases $3 000 worth of new supplies. At the end of the month, a count reveals $500 worth of supplies remaining on the shelves. The adjustment entry needed will include a debit to Supply expense of $3 700.

Accepted Answer

The adjustment entry for supplies expense is calculated by adding the beginning inventory ($1,200) and purchases ($3,000), then subtracting the ending inventory ($500), resulting in a supplies expense of $3,700.

Question 10

Prepaid insurance is an asset account.

Accepted Answer

Prepaid insurance is an asset account because it represents a payment made in advance for future insurance coverage. As the coverage is utilized over time, the prepaid insurance account is gradually expensed and reduces in value.

Question 11

In the case of Unearned revenue, the cash is received first, and the revenue is earned later.

Accepted Answer

Unearned revenue is a liability account that represents cash received from a customer in advance of providing goods or services. The revenue is considered unearned until the goods or services have been provided to the customer, at which point it is recognized as earned revenue. Therefore, cash is received first, and revenue is earned later.

Question 12

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

Accepted Answer

The adjusting entry for a prepaid expense at the end of a period consists of a debit to an expense account (reflecting the expense incurred during the period) and a credit to the prepaid expense account (to reduce the balance for the portion that has been used up).

Question 13

Smith owns manufacturing equipment that originally cost $12 600 and has an estimated useful life of 7 years. Smith records depreciation monthly in the amount of $100.

Accepted Answer

Since the equipment's estimated useful life is 7 years, the annual depreciation would be $1,800 ($12,600 divided by 7). Monthly depreciation would be $150 ($1,800 divided by 12). Therefore, recording $100 monthly as depreciation is not correct and would result in an understatement of expenses and overstatement of net income.

Question 14

At 1 January, Smith has a beginning balance in Prepaid insurance expense of $1 200. Smith pays insurance premiums once a year, and his total premium is $4 800. As of the end of February, the balance in prepaid insurance is $2 000.

Accepted Answer

The balance in prepaid insurance should be $3,200 at the end of February, not $2,000. The annual premium is $4,800, so the monthly expense is $400. After two months, $800 should be expensed, leaving $3,200 in prepaid insurance.

Question 15

Smith signed a contract with a service provider for security services at a rate of $250 per month for the period of January through June. He will pay the service provider the entire amount at the end of June. Smith makes adjusting entries each month. During the month of February, Smith will record total security services expense of $500.

Accepted Answer

The answer of Smith signed a contract with a service...

Question 16

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

Accepted Answer

The adjusting entry for unearned revenue includes a debit to Unearned Revenue (a liability account) and a credit to Service Revenue (or a relevant revenue account), reflecting the recognition of revenue as it is earned.

Question 17

Contra asset accounts like Accumulated depreciation have normal debit balances.

Accepted Answer

Contra asset accounts have normal credit balances, not debit balances. This is because they are used to offset the balance of an asset account and reduce its overall value.

Question 18

Prepaid rent is an expense account.

Accepted Answer

Prepaid rent is not an expense account, it is a current asset account that represents rent paid in advance. It is only recognized as an expense when the period for which it was paid has lapsed.

Question 19

Adjusting entries NEVER involve:
A)expenses.
B)revenues.
C)liabilities.
D)cash.

Accepted Answer

Adjusting entries are made to update the accounts before financial statements are prepared, and they never involve cash because cash transactions are recorded when they occur.

Question 20

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

Accepted Answer

At the end of a period, a prepaid expense account usually needs to be adjusted to reflect the amount of the expense that has been consumed or used during the period. This is done by making an adjusting journal entry that debits the expense account and credits the prepaid expense account by the same amount. Therefore, the statement that the adjusting entry required at the end of a period consists of a credit to prepaid expense is false.

Quiz 3: The Adjusting Process

How do the adjusting entries differ from other journal entries?

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.