Question 1

T Ltd paid $240 000 in wages during the year. The opening balance of Accrued wages was $8 000 and the closing balance was $10 000. What was the wages expense for the year?

Accepted Answer

The wages expense for the year can be calculated by adding the opening balance of accrued wages to the total wages paid during the year and then subtracting the closing balance of accrued wages. This gives us $240,000 + $8,000 - $10,000 = $238,000. However, the correct calculation should actually result in an increase in the expense due to the higher closing balance of accrued wages, making the correct calculation $240,000 + ($10,000 - $8,000) = $242,000.

Question 2

Which of the following would be recorded as an asset?

Accepted Answer

Prepaid expenses are payments made for goods or services that will be received in the future. Since the company has already paid for these and they will result in future economic benefits, they are recorded as assets on the balance sheet. Accrued expenses and revenue received in advance are both liabilities, not assets.

Question 3

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?

Accepted Answer

When the credit portion of an adjusting entry increases the balance of a liability account, the debit portion typically increases the balance of an expense account, reflecting the recognition of an expense incurred but not yet paid or recorded.

Question 4

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

Accepted Answer

Omitting the adjusting entry for accrued salaries results in not recording an expense that has been incurred but not yet paid. This means the salary expense for the year is understated, which in turn overstates the net profit. Since retained profit is calculated after considering net profit, an overstated net profit leads to an overstated retained profit.

Question 5

On 1 May 2018, A Ltd pays $9 600 for a one-year fire insurance policy that expires on 30 April 2019. After the adjusting entry, what would be the balance of prepaid insurance in the balance sheet at 30 June 2018?

Accepted Answer

The one-year insurance policy covers the period from 1 May 2018 to 30 April 2019, which means that A Ltd has prepaid the insurance for the whole year. 
As of 30 June 2018, only two months (May and June) have passed since the purchase of the insurance policy. Thus, the prepaid insurance balance as of 30 June 2018 would be:
Prepaid insurance balance = Total insurance premium - Insurance expense for two months
Prepaid insurance balance = $9,600 - ($9,600/12 * 2) = $8,000
Therefore, the correct answer is B) $8,000.

Question 6

Which of the following is recorded as an asset?

Accepted Answer

Accrued revenue is revenue that has been earned but not yet received or recorded. Since it represents the right to receive cash or other assets in the future, it is recorded as an asset.

Question 7

Which of the following cash flows involve revenues or expenses?

Accepted Answer

Payment of dividends and cash purchase of inventory are not directly related to revenues or expenses; they are financing and investing activities, respectively. Issuing shares for cash is a financing activity.

Question 8

Able Ltd operates on a five-day working week. Employees are paid on Thursday for work completed to Wednesday. The weekly wages bill is $80 000. If 30 June 2019 fell on a Tuesday, what was the accrued wages payable on 30 June 2019?

Accepted Answer

The answer of Able Ltd operates on a five-day working...

Question 9

On 15 September 2019, a surveyor received an advance of $7 000 from a client for future services. The work was completed to the client's satisfaction on 10 October 2019. The surveyor uses accrual accounting. What is the journal entry made by the surveyor on 15 September 2019?

Accepted Answer

The journal entry made by the surveyor on 15 September 2019 would be to debit Cash (as they received $7,000) and credit Unearned revenue (as they have not yet performed the services). This is consistent with accrual accounting principles, as revenue should only be recognized once the services have been rendered. Therefore, the correct journal entry is DR Cash CR Unearned revenue.

Question 10

BM Ltd has a $30 000 balance in its Unearned service revenue account. Where would this account appear in the financial statements?

Accepted Answer

Unearned service revenue is a liability because BM Ltd has received payment for services it has not yet provided. It would appear as a current liability in the balance sheet. Option A is incorrect because unearned revenue is not recognized as revenue until the services are provided. Option B is incorrect because although unearned service revenue has a monetary value, it is not considered an asset because it does not represent economic benefits to the company until the services are provided. Option D is incorrect as the question explicitly asks where the account would appear in the financial statements, and therefore there must be an answer.

Question 11

A payment for insurance on 1 June for $120 000, covering the period 1 June 2018 to 31 May 2019, was recorded as a prepayment. No adjusting entry was made at 30 June 2019. As a result:

Accepted Answer

The insurance payment of $120,000 covers a 12-month period. By 30 June 2019, the entire insurance period has been utilized, so there should be no prepayment remaining. However, if no adjusting entry was made, the prepayment account would still show the $120,000 as an asset, which is incorrect. The correct treatment would have been to expense the entire amount over the coverage period. Since the prepayment was not adjusted, it means the expense was not recognized, leading to profit being overstated by the amount that should have been expensed ($120,000 for the full year). However, since the question specifies the error was identified at the end of the period, the entire amount should have been recognized as an expense, leaving no balance in prepayments. Thus, the mistake leads to both profit and total assets being overstated by the monthly insurance cost ($120,000/12 = $10,000) that should have been expensed in June.

Question 12

Which of the following does NOT appear in the balance sheet?

Accepted Answer

Rent revenue is an income statement item and does not appear on the balance sheet. Rent payable, prepaid commission, and rent revenue received in advance are all balance sheet items.

Question 13

The Supplies account has a balance of $750 at the beginning of the year and was debited during the year for $2 800, representing the total of supplies purchased during the year. If $950 of supplies are on hand at the end of the year, what is the supplies expense to be reported on the profit and loss statement for the year?

Accepted Answer

The supplies expense is calculated by adding the beginning balance of supplies to the purchases during the year, then subtracting the ending balance. This gives us $750 (beginning balance) + $2,800 (purchases) - $950 (ending balance) = $2,600.

Question 14

On 30 June 2019, a company estimates that it will incur warranty costs of $150 000 in the next financial year on products sold during the year just ended. What is the journal entry made on 30 June 2019 related to warranties?

Accepted Answer

The correct journal entry to record an estimated warranty expense is to debit (increase) Warranty Expense and credit (increase) Warranty Liability. This reflects the company's expectation of future costs related to warranties on products sold, recognizing the expense in the same period the related revenue is recognized, in accordance with the matching principle.

Question 15

On 27 September 2019, a builder received an advance of $50 000 from a client for future work. The work was completed to the client's satisfaction on 3 December 2019. What is the journal entry made by the builder on 3 December 2019?

Accepted Answer

The builder received an advance of $50 000 from the client on 27 September 2019. This advance was recorded as unearned revenue. When the work was completed on 3 December 2019, the builder should recognize the revenue earned by debiting the unearned revenue account and crediting the sales revenue account. Hence, the journal entry made by the builder on 3 December 2019 is DR Unearned revenue CR Sales revenue.

Question 16

What is the correct adjusting entry at 30 June, the end of the financial year, based on a Supplies account balance, before adjustment, of $5 200 and supplies inventory, on 30 June, of $2 200?

Accepted Answer

The correct adjusting entry is to debit Supplies Expense and credit Supplies for the amount of supplies used during the period. The beginning balance was $5,200, and the ending inventory is $2,200, indicating $3,000 of supplies were used ($5,200 - $2,200 = $3,000).

Question 17

If a company neglects to make an adjustment for accrued expenses:

Accepted Answer

Neglecting to adjust for accrued expenses means expenses that have been incurred but not yet recorded are omitted. This results in higher profit (because expenses are understated) and lower liabilities (because the obligation to pay these expenses is not recognized), making choice A correct.

Question 18

On 1 July 2018, Green Ltd had office supplies costing $20 000. During the year ended 30 June 2019, the company purchased supplies costing $32 000. Of these, $4 000 worth was returned to the supplier as unsatisfactory. At 30 June 2019, it was ascertained that $7 000 worth of the supplies remained unused. What was the value of Green Ltd's office supplies expense for year ended 30 June 2019?

Accepted Answer

The office supplies expense for the year ended 30 June 2019 can be calculated as follows:

Beginning office supplies = $20 000
Plus purchases = $32 000 - $4 000 (returned) = $28 000
Minus ending office supplies = $7 000

Therefore, office supplies expense = $20 000 + $28 000 - $7 000 = $41 000. So, the correct answer is option B.

Question 19

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

Accepted Answer

The omission of the adjusting entry for depreciation on equipment will result in an overstatement of net profit for the current year because the expense was not recognized. This will affect both the profit and loss statement and the balance sheet. However, total assets and total liabilities will not be affected.

Question 20

Which of the following entries is an example of asset consumption recognised over future time periods?

Accepted Answer

DR Cost of goods sold and CR Inventory is an example of asset consumption recognized over future time periods, as inventory is consumed or sold in the future resulting in cost of goods sold being recognized. The other options do not involve asset consumption recognized over future time periods.

Quiz 5: Accrual Accounting Adjustments