Question 1

ABC Tax Planning Service started business in January 2018. The company rented an office for $5,400 per month starting from January 1, 2018. On that day, ABC prepaid the rent through June 30. The company makes adjusting entries at the end of each month. What is the balance in the Prepaid Rent account as of April 30, 2018?
A) $10,800
B) $900
C) $5,400
D) $2,700

Accepted Answer

ABC Tax Planning Service prepaid 6 months of rent at $5,400 per month, totaling $32,400. By April 30, 2018, they would have used 4 months of rent, leaving 2 months prepaid. Thus, the balance in the Prepaid Rent account is 2 months * $5,400 = $10,800.

Question 2

On January 1, Unearned Revenue of Commercial Plumbing Services, Inc. had a beginning balance of $1,800. During January, the company earned $500 of the deferred revenue. The company also collected $5,000 from a new customer for services to be performed the following month. At the end of January, the Unearned Revenue account should have a balance of $5,000.

Accepted Answer

At the beginning of January, the company had $1,800 of unearned revenue. During January, they earned $500 of this revenue, which means they have $1,300 left in unearned revenue. However, they also collected $5,000 from a new customer, which means they now have $6,300 of unearned revenue.

Therefore, at the end of January, the Unearned Revenue account should have a balance of $6,300, not $5,000. The statement is false.

Question 3

The liability created when a business collects cash from its customers before completing a service or delivering a product is called ________.
A) accrued revenue
B) accrued expense
C) deferred revenue
D) deferred expense

Accepted Answer

The liability created when a business collects cash from its customers before completing a service or delivering a product is called deferred revenue. Accrued revenue refers to revenue earned but not yet received or recorded, while accrued expense refers to expenses incurred but not yet paid or recorded. Deferred expense refers to an expense that is paid in advance but not yet consumed or used.

Question 4

On July 1, Lamba, Inc. paid rent of $15,000 for an equipment storage building from July 1 until December 31. Prepare the adjusting journal entry on July 31. (Ignore explanation). Assume the deferred expense is initially recorded as an asset.

Accepted Answer

The answer of On July 1, Lamba, Inc. paid rent...

Question 5

Justice, Inc. purchased a machine for $15,000 two 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) $12,000
B) $3,000
C) $16,500
D) $15,000

Accepted Answer

The straight-line depreciation method calculates depreciation by evenly allocating the cost of the asset over its useful life. The annual depreciation expense is ($15,000 / 10 years) = $1,500. After 2 years, the total depreciation is $1,500 * 2 = $3,000. The current book value is the original cost minus the accumulated depreciation: $15,000 - $3,000 = $12,000.

Question 6

Big Rig Delivery Service has the following plant assets: Communications Equipment: Cost, $3,840 with useful life of 8 years; Delivery Equipment: Cost, $17,568 with useful life of 12 years; and Computer: Cost, $13,440 with useful life of 4 years. Assume the residual value of all the assets is zero and the straight-line method is used. Big Rig's monthly depreciation journal entry will include a ________.
A) debit to Depreciation Expense - Equipment of $5,304
B) credit to Depreciation Expense - Equipment of $5,304
C) debit to Accumulated Depreciation - Equipment of $442
D) credit to Accumulated Depreciation - Equipment of $442

Accepted Answer

To calculate monthly depreciation for each asset, divide the cost by the useful life in months. Communications Equipment: $3,840 / (8*12) = $40/month. Delivery Equipment: $17,568 / (12*12) = $122/month. Computer: $13,440 / (4*12) = $280/month. Total monthly depreciation = $40 + $122 + $280 = $442. The journal entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation for $442.

Question 7

If a company receives cash before it does the work or delivers a product, no journal entry is needed until the revenue has been earned.

Accepted Answer

When a company receives cash before it does the work or delivers a product, it should record the receipt of cash as a liability, such as Unearned Revenue. Once the revenue is earned, the liability account is reduced, and the revenue is recognized through a journal entry.

Question 8

On July 1, Delta, Inc. prepaid rent for an equipment storage building. Delta paid $20,000 to rent the building from July 1 through the end of the year. Prepare the journal entry needed on July 1 when the payment is made. (Ignore explanation). Assume the deferred expense is initially recorded as an asset.

Accepted Answer

The answer of On July 1, Delta, Inc. prepaid rent...

Question 9

Maxwell Tax Planning Service bought communications equipment for $10,200 on January 1, 2019. The equipment has an estimated useful life of five years and zero residual value. Maxwell uses the straight-line method to calculate depreciation and records depreciation expense in the books at the end of each month. As of June 30, 2019, the balance in the Accumulated Depreciation account for this equipment is ________.
A) $170
B) $2,040
C) $850
D) $1,020

Accepted Answer

The straight-line depreciation expense per year for the equipment is calculated as (Cost - Residual Value) / Useful Life. Here, it is ($10,200 - $0) / 5 = $2,040 per year. For six months, the depreciation is $2,040 / 2 = $1,020.

Question 10

Deferred Revenue is a liability created when a business collects cash from customers in advance of completing a service or delivering a product.

Accepted Answer

Deferred Revenue is a liability on the balance sheet and represents the obligation of the business to provide services or products to its customers in the future, for which it has already received payment.

Question 11

Unearned Revenue is classified as a(n) ________ account.
A) liability
B) asset
C) revenue
D) equity

Accepted Answer

Unearned Revenue is money received by a company in advance for goods or services that have not yet been provided. This creates a liability for the company since they owe the customers the goods or services in the future. Therefore, Unearned Revenue is classified as a liability account.

Question 12

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

Accepted Answer

Deferred revenue refers to a situation where a company receives cash from a customer for goods or services that have not yet been provided or earned. The company recognizes the cash received as a liability on its balance sheet until the revenue is earned, at which point it is recognized as revenue on the income statement.

Question 13

Oakland Tax Planning Service bought computer equipment for $22,000 on January 1, 2018. It has an estimated useful life of four years and zero residual value. Oakland uses the straight-line method to calculate depreciation and records depreciation expense in the books at the end of each month. Calculate the amount of Depreciation Expense for the period, January 1, 2018 through September 30, 2018, for this equipment. (Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.)
A) $5,500
B) $4,125
C) $5,958
D) $4,583

Accepted Answer

The answer of Oakland Tax Planning Service bought computer equipment...

Question 14

Wellness, a healthy living magazine, collected $504,000 in subscription revenue on May 31. Each subscriber will receive an issue of the magazine in 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 as of December 31?
A) $210,000
B) $294,000
C) $504,000
D) $378,000

Accepted Answer

Unearned Revenue = Subscription Revenue - Earned RevenueEarned Revenue = Subscription Revenue / Number of Months * Number of Months PassedEarned Revenue = 504,000 / 12 * 7 = 294,000Unearned Revenue = 504,000 - 294,000 = 210,000

Question 15

In the case of deferred revenue, the adjusting entry at the end of the period includes a debit to Service Revenue. Assume the deferred revenue is initially recorded as a liability.

Accepted Answer

In the case of deferred revenue, the adjusting entry at the end of the period includes a debit to a liability account (such as Deferred Revenue or Unearned Revenue) and a credit to a revenue account (such as Service Revenue), recognizing the revenue that has been earned during the period.

Question 16

In the case of deferred revenue, the adjusting entry at the end of the period includes a credit to Service Revenue. Assume the deferred revenue is initially recorded as a liability.

Accepted Answer

This is correct because deferred revenue is a liability account representing revenue that has been received in advance but has not yet been earned. At the end of the period, an adjusting entry is required to recognize the portion of revenue that has been earned, which is credited to Service Revenue.

Question 17

On April 1, Beta, Inc. purchased office supplies for $1,500. At the end of April, Beta's employees took a count of the remaining supplies and found that there was $500 of supplies left. Provide the adjusting entry needed at the end of April. (Ignore explanation). Assume the office supplies were initially recorded as an asset. Assume there were no office supplies on hand prior to the purchase on April 1.

Accepted Answer

The answer of On April 1, Beta, Inc. purchased office...

Question 18

Watson Tax Planning Service has the following plant assets: Communications Equipment: Cost, $6,880 with useful life of eight years; Furniture: Cost, $22,800 with useful life of 12 years; and Computer: Cost, $13,600 with useful life of four years. (Assume residual value of all the assets is zero.) Watson's monthly depreciation expense calculated using the straight-line method is ________. (Round any intermediate calculations to two decimal places, and your final answer to the nearest cent.)
A) $283.33
B) $158.33
C) $71.67
D) $513.33

Accepted Answer

The total monthly depreciation expense is calculated by adding the monthly depreciation of each asset. For the Communications Equipment: $6,880 / (8 * 12) = $71.67 per month. For the Furniture: $22,800 / (12 * 12) = $158.33 per month. For the Computer: $13,600 / (4 * 12) = $283.33 per month. Adding these together gives $71.67 + $158.33 + $283.33 = $513.33 per month.

Question 19

Hudson Landscaping Service bought equipment for $9,600 on January 1, 2019. It has an estimated useful life of five years and zero residual value. Hudson uses the straight-line method to calculate depreciation and records depreciation expense in the books at the end of every month. As of June 30, 2019, the book value of this equipment shown on its balance sheet will be ________.
A) $8,640
B) $9,600
C) $10,560
D) $9,760

Accepted Answer

The equipment depreciates at a rate of $9,600 / 5 years = $1,920 per year. Monthly depreciation is $1,920 / 12 = $160. For 6 months (January to June), the total depreciation is $160 * 6 = $960. The book value as of June 30, 2019, is $9,600 (initial cost) - $960 (accumulated depreciation) = $8,640.

Question 20

Improvements, a home improvement magazine, collected $960,000 in subscription revenue on June 30. Each subscriber will receive an issue of the magazine in each of the next 12 months, beginning with the July issue. The company uses the accrual method of accounting. What is the amount of Subscription Revenue that has been earned by the end of December? (Round any intermediate calculations to two decimal places, and your final answer to the nearest whole number.)
A) $400,000
B) $560,000
C) $960,000
D) $480,000

Accepted Answer

To determine the amount of Subscription Revenue that has been earned by the end of December, we need to divide the total subscription revenue by the number of issues to be delivered, and then multiply it by the number of issues already delivered by that point.

Total subscription revenue = $960,000 
Number of issues to be delivered = 12 
Issues delivered by the end of December = 6 (July to December)

Therefore, Subscription Revenue earned by the end of December = ($960,000 / 12) x 6 = $480,000.

Hence, the correct answer is D.

Quiz 3: The Adjusting Process

The liability created when a business collects cash from its customers before completing a service or delivering a product is called ________.