Horngren’s Accounting 11th Edition by Tracie L. Miller – Test Bank

 

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Sample Test

Horngren’s Accounting,11e (Miller-Nobles)

Chapter 3  The Adjusting Process

 

Learning Objective 3-1

 

1) The major difference between a cash basis accounting system and an accrual basis accounting system is the timing of recording revenues and assets.

Answer:  FALSE

Diff: 1

LO:  3-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

2) Recipes, Inc. purchased $2,000 of supplies on account. Under the accrual basis of accounting, no entry is made until the amount is paid.

Answer:  FALSE

Diff: 1

LO:  3-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

3) In cash basis accounting, revenue is recorded when cash is received, and expenses are recorded when they are paid.

Answer:  TRUE

Diff: 1

LO:  3-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

4) Under accrual basis accounting, revenue is recorded only when cash is received.

Answer:  FALSE

Diff: 1

LO:  3-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

5) Under cash basis accounting, revenue is recorded when it is earned, regardless of when cash is received.

Answer:  FALSE

Diff: 1

LO:  3-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

6) Under accrual basis accounting, an expense is recorded only when cash is paid.

Answer:  FALSE

Diff: 1

LO:  3-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

7) Under cash basis accounting, an expense is recorded only when cash is paid.

Answer:  TRUE

Diff: 1

LO:  3-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

8) Generally Accepted Accounting Principles (GAAP) require the use of accrual basis of accounting.

Answer:  TRUE

Diff: 1

LO:  3-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

9) If a company is using accrual basis accounting, when should it record revenue?

1.   A) when cash is received, even though services may be performed at a later date

2.   B) when services are performed, even though cash may be received at a later date

3.   C) when services are performed and cash is received

4.   D) when cash is received, 30 days after the completion of the services

Answer:  B

Diff: 1

LO:  3-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

10) When does a company account for revenue if it uses cash basis accounting?

1.   A) when services are performed, even though cash may be received at a later date

2.   B) when cash is received after the service is performed

3.   C) when the services are being performed

4.   D) when cash is received, either prior to, at the time of, or after the services are performed

Answer:  D

Diff: 1

LO:  3-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

11) The cash basis of accounting ignores ________.

1.   A) payables

2.   B) revenue

3.   C) cash

4.   D) expenses

Answer:  A

Diff: 2

LO:  3-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

12) A company receives payment from one of its customers on August 5 for services performed on July 21. Which of the following entries would be recorded if the company uses accrual basis accounting?

 

A)

Cash      1,000

Accounts Receivable                                1,000

 

B)

Salaries Expense              1,000

Cash                                1,000

 

C)

Cash      1,000

Service Revenue                        1,000

 

D)

Supplies               1,000

Cash                                1,000

 

Answer:  A

Diff: 1

LO:  3-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

13) Which of the following entries would be recorded by a company that uses the cash basis method of accounting?

 

A)

Cash      1,000

Accounts Receivable                                1,000

 

B)

Salaries Expense              1,000

Salaries Payable                          1,000

 

C)

Prepaid Rent      1,000

Cash                                1,000

 

D)

Rent Expense    1,000

Cash                                1,000

 

Answer:  D

Diff: 2

LO:  3-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

14) Which of the following statements is true of accrual basis accounting?

1.   A) Accrual basis accounting is required by Generally Accepted Accounting Principles (GAAP).

2.   B) Accrual basis accounting records expenses only when cash has been paid for them.

3.   C) Accrual basis accounting records revenue only when cash is received.

4.   D) Accrual basis accounting always results in greater net income than cash basis accounting.

Answer:  A

Diff: 1

LO:  3-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

 

15) At the time the transaction occurred, which of the following would result in an increase in net income under the accrual basis of accounting, but would not result in an increase in net income under cash basis accounting?

1.   A) purchase of supplies for cash

2.   B) performance of services on account

3.   C) use of supplies purchased earlier

4.   D) receipt of cash for services that were performed earlier on account

Answer:  B

Diff: 2

LO:  3-1

AACSB:  Analytical thinking

AICPA Functional:  Measurement

PE Question Type:  Critical thinking

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

16) Which of the following accounts would be used under the accrual basis of accounting, but not under cash basis accounting?

1.   A) Cash

2.   B) Unearned Revenue

3.   C) Service Revenue

4.   D) Salaries Expense

Answer:  B

Diff: 1

LO:  3-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

17) What is the difference between cash basis accounting and accrual basis accounting?

Answer:  Cash basis accounting records revenues only when cash is received and expenses only when cash is paid.  Accrual basis accounting records revenues when earned and expenses when incurred.

Diff: 1

LO:  3-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

18) The Family Dental Company prepays the rent on its dental office. On July 1, the corporation paid $18,000 for 6 months of rent. How much Rent Expense should Family Dental Company record the three months ended September 30 under the cash basis? Why?

Answer:  Family Dental should report Rent Expense of $18,000 because expenses are recorded when cash is paid.

Diff: 1

LO:  3-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

 

 

19) The Brighton Dental Company prepays the rent on its dental office.  On July 1, the business paid $18,000 for 6 months of rent. How much Rent Expense should Brighton Dental Company record the three months ended September 30 under the accrual basis? Why?

Answer:  Brighton Dental should report Rent Expense of $9,000 because expense is recorded when incurred.

Diff: 1

LO:  3-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H1)

Learning Objective 3-2

 

1) List and briefly discuss three accounting concepts and principles that apply to accrual basis accounting.

Answer:

1.   Time period concept — A business’s activities can be sliced into small time segments and financial statements can be prepared for specific periods of time.

2.   Revenue recognition principle — Revenue is recorded when it has been earned.

3.   Matching principle — Expenses are matched against the revenues of the period. This ensures that all expenses are recorded when they are incurred.

Diff: 2

LO:  3-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Concepts and Principles Apply to Accrual Basis Accounting? (H1)

 

2) The accounting period used for the annual financial statements is called the fiscal year.

Answer:  TRUE

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Time Period Concept

 

3) The goal of the time period concept is to compute an accurate net income or net loss.

Answer:  FALSE

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Time Period Concept

 

 

4) Which of the following is considered a fiscal year?

1.   A) six months

2.   B) three months

3.   C) twelve months

4.   D) four months

Answer:  C

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Time Period Concept

5) The accounting principle that ensures all expenses are recorded during the period when they are incurred and offsets those expenses against the revenues of the period is called the ________ principle.

1.   A) comparison

2.   B) accrual

3.   C) matching

4.   D) revenue recognition

Answer:  C

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Time Period Concept

 

6) Which of the following accounting terms assumes that a business’s activities can be divided into small segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year?

1.   A) adjusting entry concept

2.   B) economic entity concept

3.   C) matching principle

4.   D) time period concept

Answer:  D

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Time Period Concept

 

7) Which of the following assumes that financial statements of a business can be prepared for specific periods?

1.   A) matching principle

2.   B) revenue recognition principle

3.   C) time period concept

4.   D) adjusting entry principle

Answer:  C

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Time Period Concept

 

8) The revenue recognition principle is the basis for recording revenues-both when to record revenue and the amount of revenue to record.

Answer:  TRUE

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Revenue Recognition Principle

9) Revenue is earned when the business has ________.

1.   A) entered into an agreement with the customer about the goods or services to be delivered

2.   B) prepared a journal entry to record revenue

3.   C) received cash from the customer before goods or services are delivered

4.   D) delivered a good or service to the customer

Answer:  D

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Revenue Recognition Principle

 

10) The revenue recognition principle guides accountants in ________.

1.   A) ensuring only revenues received in cash are recorded

2.   B) determining when to record expenses

3.   C) determining when to record revenues

4.   D) ensuring expenses are deducted from revenues

Answer:  C

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Revenue Recognition Principle

 

 

11) Which of the following entries would be made as the result of the revenue recognition principle?

 

A)

Service Expense               1,000

Service Revenue                         1,000

 

B)

Accounts Receivable      1,000

Service Revenue                         1,000

 

C)

Salaries Expense              1,000

Accounts Payable                       1,000

 

D)

Depreciation Expense    1,000

Accumulated Depreciation                                     1,000

 

Answer:  B

Diff: 2

LO:  3-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  The Revenue Recognition Principle

12) The matching principle is also called the ________.

1.   A) adjusting entry concept

2.   B) revenue recognition principle

3.   C) expense recognition principle

4.   D) time period concept

Answer:  C

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Matching Principle

 

13) Which of the following accounting elements does the matching principle help to match?

1.   A) revenues and liabilities

2.   B) expenses and assets

3.   C) expenses and revenues

4.   D) expenses and liabilities

Answer:  C

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Matching Principle

 

14) To match expenses against revenues means to ________.

1.   A) add expenses incurred during one period from revenues earned during that same period

2.   B) subtract expenses incurred during one period from revenues earned during the previous period

3.   C) add expenses incurred during one period from revenues earned during the previous period

4.   D) subtract expenses incurred during one period from revenues earned during that same period

Answer:  D

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Matching Principle

 

15) The matching principle states that ________.

1.   A) financial statements can be prepared for specific periods

2.   B) a business’s activities can be sliced into small time segments

3.   C) all expenses should be recorded when they are incurred during the period

4.   D) companies should record revenue when it has been earned

Answer:  C

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Matching Principle

16) The time period concept states that ________.

1.   A) financial statements can be prepared for specific periods

2.   B) all expenses should be recorded when they are incurred during the period

3.   C) companies should record revenue when it has been earned

4.   D) expenses incurred during a period should be matched against the revenues of the period

Answer:  A

Diff: 1

LO:  3-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Matching Principle

 

 

17) Which of the following entries would be made because of the matching principle?

 

A)

Salaries Expense              1,000

Service Revenue                         1,000

 

B)

Cash      1,000

Salaries Expense                         1,000

 

C)

Salaries Expense              1,000

Salaries Payable                           1,000

 

D)

Cash      1,000

Unearned Revenue                                   1,000

 

Answer:  C

Diff: 2

LO:  3-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  The Matching Principle

 

 

Learning Objective 3-3

 

1) An adjusting entry is completed ________.

1.   A) at the beginning of the accounting period

2.   B) at the end of the accounting period

3.   C) when the balance sheet is prepared

4.   D) when accounts need to be balanced in the ledger

Answer:  B

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Are Adjusting Entries and How Do We Record Them? (H1)

2) Adjusting entries are needed to correctly measure the ________.

1.   A) ending balance in the Cash account

2.   B) net income (loss) on the balance sheet

3.   C) net income (loss) on the income statement

4.   D) beginning balance in the Cash account

Answer:  C

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Are Adjusting Entries and How Do We Record Them? (H1)

 

3) An adjusting entry that credits Salaries Payable is an example of a(n) ________.

1.   A) accrued expense

2.   B) deferred revenue

3.   C) accrued revenue

4.   D) deferred expense

Answer:  A

Diff: 2

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Accrued Expenses

 

4) An expense that has been incurred but not yet paid is called a(n) ________.

1.   A) accrued revenue

2.   B) deferred expense

3.   C) deferred revenue

4.   D) accrued expense

Answer:  D

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Accrued Expenses

 

5) Classic Artists’ Services signed a contract with a maintenance service company to maintain a building that Classic will use for office purposes. The contract states that the work will begin work on February 1 and end on May 31. Classic Artists’ will pay the maintenance service company $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 service company at the end of March?

1.   A) Debit balance of $16,000

2.   B) Credit balance of $8,000

3.   C) Debit balance of $8,000

4.   D) Credit balance of $16,000

Answer:  B

Explanation:  B)

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Expenses

 

6) Saturn Services Company signed a one-year $24,000 note payable at 8% interest on May 1, 2017. How much interest expense must be accrued on May 31, 2017? (Round any intermediate calculations to two decimal places, and your final answer to the nearest whole number.)

1.   A) $1,920

2.   B) $12,800

3.   C) $160

4.   D) $80

Answer:  C

Explanation:  C)

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Expenses

 

7) Jupiter Company signed a one-year $47,000 note payable at 8% interest on May 1, 2016. If Jupiter Company only adjusts its accounts once a year at year-end, how much interest expense was accrued on December 31, 2016? (Round any intermediate calculations to two decimal places, and your final answer to the nearest whole number.)

1.   A) $940

2.   B) $3,760

3.   C) $2,820

4.   D) $3,133

Answer:  C

Explanation:  C) Interest Expense from May to December,

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Expenses

8) Magnolia Tree Service has a weekly payroll of $50,000.  December 31, 2016 falls on Thursday and Magnolia will pay its employees the following Monday (January 4, 2017) for the previous full week.  Assume that Magnolia has a five-day workweek and has an unadjusted balance in Salaries Expense of $845,000.  Prepare the December 31, 2016 adjusting entry.

Answer:

Salaries Expense              40,000

Salaries Payable                                40,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Expenses

 

9) Melville Services has a weekly payroll of $50,000.  December 31, 2016 falls on Thursday and Melville will pay its employees the following Monday (January 4, 2017) for the previous full week.  Assume that Melville has a five-day workweek and has an unadjusted balance in Salaries Expense of $845,000.  Prepare the January 4, 2017 journal entry.  Reversing entries are not made.

Answer:

Salaries Expense              10,000

Salaries Payable                40,000

Cash                      50,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Expenses

 

10) A business hired a repair service to overhaul its plumbing system. The repair service began work on September 15 and intends to complete it on October 15. The business will pay the repair service $4,000 when the work is completed. As of September 30, the work was 50% complete. Provide the adjusting entry to accrue repair expense by the end of September. (Ignore explanation.)

Answer:

Repair Expense 2,000

Accounts Payable                     2,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Expenses

 

11) A business hired a repair service to overhaul its plumbing system. The repair service began work on September 15 and completed it on October 15. The business agreed to pay the service $4,000 when the work was completed. As of September 30, the work was 50% complete, and the business made an adjusting entry to accrue repair expense as of the end of September. On October 15, the work was completed, and the repair service was paid in full. Provide the journal entry for the cash payment on October 15. (Ignore explanation.)

Answer:

Repair Expense 2,000

Accounts Payable            2,000

Cash                               4,000

Diff: 3

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Expenses

 

12) Accrued revenue represents the receipt of cash before the revenue has been earned.

Answer:  FALSE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Accrued Revenues

 

13) Adjusting entries may involve any account, including Cash.

Answer:  FALSE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Accrued Revenues

 

14) Adjusting entries either credit a revenue account or debit an expense account.

Answer:  TRUE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Accrued Revenues

 

 

15) On June 1, Edison Company borrowed $24,000 on a one-year Note Payable with an interest rate of 10% per year. It will repay the principal and interest at the end of the one-year period. The company makes accrual adjustments at the end of each month. The company should record interest expense of $2,400 on June 30.

Answer:  FALSE

Explanation:  Interest Expense = ($24,000 × 10%) / 12 = $200

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

16) Laramie Company signed a contract with a service provider for security services at a rate of $270 per month for the period of January through June. Laramie Company will pay the service provider the entire amount at the end of June. The company makes adjusting entries each month. During the month of June, it should record total security expense of $540.

Answer:  FALSE

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

 

17) Argyle Designs has entered into a contract to design 10 new dresses for a customer. It will collect a total of $49,000 after the design services are complete. Argyle started design work on June 1. As of June 30, it finished 2 of the 10 designs. The company will make an adjusting entry at the end of June to accrue $12,250 of service revenue.

Answer:  FALSE

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

 

 

18) Kostner Financial Services performed accounting services for a client in December. A bill was mailed to the client on December 30. The company received the client’s check by mail on January 5. Which of the following accounts should appear on the income statement for the year ended December 31 as related to the services performed?

1.   A) Service Revenue

2.   B) Unearned Revenue

3.   C) Accounts Payable

4.   D) Prepaid Expense

Answer:  A

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

19) Bryson Accounting Services performed accounting services for a client in December. A bill was mailed to the client on December 30. The company received a check by mail on January 5. Which of the following accounts should appear on the balance sheet as of December 31 as related to the services performed?

1.   A) Prepaid Expense

2.   B) Accounts Receivable

3.   C) Unearned Revenue

4.   D) None, there is no entry in December.

Answer:  B

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

 

20) The employees of Sinclair Services Company worked the last two weeks of December. They received their paychecks on January 2. Which of the following accounts should appear on the balance sheet as of December 31?

1.   A) Accounts Payable

2.   B) Salaries Payable

3.   C) Salaries Expense

4.   D) Prepaid Expense

Answer:  B

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

 

 

21) The employees of Leicester Services Company worked the last two weeks of December, 2016. They received their paychecks on January 2, 2017. Which of the following accounts should appear on the income statement for the year ended December 31, 2016?

1.   A) Salaries Expense

2.   B) Prepaid Expense

3.   C) Salaries Payable

4.   D) Unearned Revenue

Answer:  A

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

22) Anthony Delivery Service has a weekly payroll of $34,000.  December 31 falls on Tuesday and Anthony will pay its employees the following Monday (January 6) for the previous full week.  Assume that Anthony has a five-day workweek and has an unadjusted balance in Salaries Expense of $945,000.  What is the December 31 balance of Salaries Expense after adjusting entries are recorded and posted?

1.   A) $945,000

2.   B) $979,000

3.   C) $965,400

4.   D) $958,600

Answer:  D

Explanation:  D) Salaries Expense: $945,000 + ($34,000 / 5 × 2 days ) = $958,600

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

 

23) Mason Painting Services has a weekly payroll of $30,000.  December 31 falls on Wednesday and Mason will pay its employees the following Monday (January 5) for the previous full week.  Assume that Mason has a five-day workweek and has an unadjusted balance in Salaries Expense of $800,000.  What amount should be debited to Salaries Expense on December 31?

1.   A) $800,000

2.   B) $12,000

3.   C) $30,000

4.   D) $18,000

Answer:  D

Explanation:  D) $30,000 / 5 = $6,000 per day × 3 days = $18,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

 

 

24) Accrued revenue is revenue that ________.

1.   A) has been collected and earned

2.   B) the business has collected in cash, but not yet earned

3.   C) the business has earned, but not yet collected in cash

4.   D) will be collected and earned in the future

Answer:  C

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Accrued Revenues

25) An adjusting entry that debits Accounts Receivable is an example of a(n) ________.

1.   A) deferred expense

2.   B) accrued revenue

3.   C) accrued expense

4.   D) deferred revenue

Answer:  B

Diff: 2

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Accrued Revenues

 

26) Revenue that has been earned but not yet collected in cash is called a(n) ________.

1.   A) accrued revenue

2.   B) deferred expense

3.   C) deferred revenue

4.   D) accrued expense

Answer:  A

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Accrued Revenues

 

 

27) On January 1, 2015, the Accounts Receivable of Linda Company had a debit balance of $150,000. During January, the company provided services for $600,000 on account. The company collected $230,000 from its customers on account in January. What was the ending balance in the Accounts Receivable account at the end of January?

1.   A) $370,000

2.   B) $750,000

3.   C) $520,000

4.   D) $600,000

Answer:  C

Explanation:  C) Ending balance as of January 31, 2015, in   Debits – Credits

 

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

28) Techno Technical Services is working on a six-month job for a client, starting on February 1. It will collect $30,000 from its customer when the job is finished but the revenue is earned evenly over the six months. On March 31, before adjusting entries are made, Techno’s Accounts Receivable account had a debit balance of $6,000. After the March 31 monthly adjusting entry has been made, what will be the balance in Accounts Receivable?

1.   A) Debit balance of $5,000

2.   B) Credit balance of $25,000

3.   C) Debit balance of $11,000

4.   D) Debit balance of $30,000

Answer:  C

Explanation:  C)

Balance in Accounts Receivable before adjusting entry  $6,000

Add Accounts Receivable of new job on March 31

$30,000 / 6 months          5,000

Ending balance in Accounts Receivable  $11,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

 

 

29) Allen Company is hired on December 15, 2016 to perform services, beginning on December 16, 2016. Under this agreement, Allen will earn $3,700 monthly and receive payment on January 15, 2017.  What amount of service revenue should be recorded for the year ending December 31, 2016?

1.   A) 0

2.   B) $1,850

3.   C) $3,700

4.   D) There is not enough information to answer this.

Answer:  B

Explanation:  B) Allen has earned revenue from December 16 – December 31, 2016.  $3,700 / 2 = $1,850

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

30) Dalton Delivery Service is hired on October 31, 2016 to perform services, beginning on November 1, 2016.  The delivery services will be performed for six months at a rate of $3,200 per month.  Dalton’s fiscal year ends on December 31.  What amount of service revenue should be recorded as an adjusting entry on December 31, 2016?

1.   A) $3,200

2.   B) 0

3.   C) $6,400

4.   D) $9,600

Answer:  C

Explanation:  B) Dalton has earned revenue for November and December 2016 – $3,200 × 2 = $6,400

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

 

31) Luminous Electrical performed services of $8,000 on January 24 and invoiced the customer. Luminous received the $8,000 on January 31. Provide the journal entry on January 24 when services were performed. (Ignore explanation.)

Answer:

Accounts Receivable      8,000

Service Revenue                       8,000

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

 

 

32) Bright Lights Electrical performed services of $8,000 on January 24 and invoiced the customer. Bright Lights received the $8,000 on January 31. Provide the journal entry on January 31 when the cash was received. (Ignore explanation.)

Answer:

Cash      8,000

Accounts Receivable                              8,000

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

 

 

33) The accounting records of Marcus Service Company include the following selected, unadjusted balances at June 30:  Accounts Receivable, $2,700; Office Supplies, $1,800; Prepaid Rent, $3,600; Equipment, $15,000; Accumulated Depreciation – Equipment, $1,800; Salaries Payable, $0; Unearned Revenue, $2,400; Office Supplies Expense, $2,800; Rent Expense, $0; Salaries Expense, $15,000; Service Revenue, $40,500.

 

The following data developed for adjusting entries are as follows:

 

1.   Service revenue accrued, $1,400

2.   Unearned Revenue that has been earned, $800

3.   Office Supplies on hand, $700

4.   Salaries owed to employees, $1,800

5.   One month of prepaid rent has expired, $1,200

6.   Depreciation on equipment, $1,500

 

Journalize the adjusting entries. Omit explanations.

 

Accounts             Debit     Credit

a

 

b

 

c

 

d

 

e

 

f

 

 

 

 

Answer:

Accounts             Debit     Credit

a              Accounts Receivable

Service Revenue          1,400

1,400

b             Unearned Revenue

Service Revenue            800

800

c              Office Supplies Expense

Office Supplies              1,100

1,100

d             Salaries Expense

Salaries Payable            1,800

1,800

e             Rent Expense

Prepaid Rent  1,200

1,200

f              Depreciation Expense – Equipment

Accumulated Depreciation –

Equipment       1,500

 

1,500

Diff: 3

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Accrued Revenues

 

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

Answer:  TRUE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Revenues

35) 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.

Answer:  FALSE

Diff: 2

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Revenues

 

36) 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.

Answer:  TRUE

Diff: 2

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Revenues

 

 

37) On January 1, Unearned Revenue of Grossman Company had a beginning balance of $1,400. During January, the company earned $700 of the deferred revenue. The company also collected $4,000 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 $4,000.

Answer:  FALSE

Explanation:  Unearned Revenue = $1,400 – $700 + $4,000 = $4,700

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Revenues

 

38) Unearned Revenue is classified as a(n) ________ account.

1.   A) liability

2.   B) asset

3.   C) revenue

4.   D) equity

Answer:  A

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Revenues

39) Healthy Living, a diet magazine, collected $240,000 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 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.)

1.   A) $100,000

2.   B) $180,000

3.   C) $240,000

4.   D) $140,000

Answer:  D

Explanation:  D)

Diff: 3

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Revenues

 

 

40) Get in Shape, a healthy living magazine, collected $528,000 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?

1.   A) $220,000

2.   B) $308,000

3.   C) $528,000

4.   D) $396,000

Answer:  A

Explanation:  A)

Unearned Revenue        $528,000

Number of months of subscription          12 months

Subscription Revenue per month ($528,000 / 12)              $44,000

Number of months from May till December        7 months

Subscription Revenue from May till December ($44,000 × 7 months)       $308,000

Unearned Revenue as of December ($528,000 – $308,000)            $220,000

Diff: 3

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Revenues

 

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

1.   A) accrued revenue

2.   B) accrued expense

3.   C) deferred revenue

4.   D) deferred expense

Answer:  C

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Revenues

42) Unearned revenue is recorded when ________.

1.   A) revenue will be both collected and earned in the future

2.   B) the business has collected cash, but not yet earned the revenue

3.   C) revenue has been collected and earned during the same accounting period

4.   D) the business has earned, but not collected, cash for the revenue

Answer:  B

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Revenues

 

 

43) The advance cash receipts of future revenues are called ________.

1.   A) accrued revenues

2.   B) deferred expenses

3.   C) deferred revenues

4.   D) accrued expenses

Answer:  C

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Revenues

 

44) Pluto Promotions sells tickets in advance for its weekly productions and records the proceeds as Unearned Revenue. At the end of each month, the company makes an adjusting entry to account for the tickets used during the month (ticket revenue.) On March 1, the Unearned Revenue account had a credit balance of $2,000. During March, it sold 300 tickets at $30 each, and 250 tickets were used during the month. What is the balance in Unearned Revenue at the end of March?

1.   A) credit balance of $3,500

2.   B) debit balance of $2,000

3.   C) credit balance of $2,000

4.   D) debit balance of $3,500

Answer:  A

Explanation:  A)

Beginning balance in Unearned Revenue              $2,000

Add value of tickets unused on March 31

300 – 250 = 50 tickets × $30 per ticket         1,500

Ending balance in Unearned Revenue    $3,500

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Revenues

 

45) On December 31, 2016, the balance in Pinnacle Exploration Company’s Unearned Revenue account was a credit of $6,000. In January, 2017, the company received an advance payment of $14,000 from a new customer for services to be performed. By January 31, adjustments were made to recognize $4,000 of the revenue that had been earned during January. What was the balance in Unearned Revenue on January 31, 2017?

1.   A) $4,000 credit

2.   B) $14,000 debit

3.   C) $6,000 credit

4.   D) $16,000 credit

Answer:  D

Explanation:  D)

Beginning balance in Unearned Revenue              $6,000

Add advance payment received                14,000

Less Unearned Revenue recognized as Service Revenue               (4,000)

Ending balance in Unearned Revenue    $16,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Revenues

 

46) Unearned Revenue is a(n) ________ account and carries a normal ________ balance.

1.   A) liability; credit

2.   B) asset; credit

3.   C) revenue; debit

4.   D) asset; debit

Answer:  A

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Revenues

 

47) A company received $5,000 for 100 one-year subscriptions on July 1. The journal entry to record this cash receipt would include a ________. The company uses a liability account for revenue received in advance.

1.   A) credit to Accounts Payable for $5,000

2.   B) debit to Prepaid Expenses for $5,000

3.   C) credit to Unearned Revenue for $5,000

4.   D) debit to Note Payable for $5,000

Answer:  C

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Revenues

 

48) Explore, a travel magazine, collected $500,000 in subscription revenue in May. 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. Provide the journal entry for collection of cash in May. (Ignore explanation.) Assume the magazine initially records a liability for the subscription revenue.

Answer:

Cash      500,000

Unearned Revenue                                500,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Revenues

 

49) At Sea, a cruise industry magazine, collected $480,000 in subscription revenue in May. 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 basis of accounting. Provide the adjusting entry needed on June 30. (Ignore explanation.) Assume the magazine initially records a liability for the subscription revenue.

Answer:

Unearned Revenue        40,000

Subscription Revenue                            40,000

 

Explanation:

Monthly subscription amount = $480,000 / 12 months = $40,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Revenues

 

50) Prepaid Insurance is an asset account that appears on the balance sheet.

Answer:  TRUE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

51) Prepaid Rent is an expense account that appears on the income statement.

Answer:  FALSE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

52) A contra account’s normal balance (debit or credit) is the opposite of the normal balance of the related account.

Answer:  TRUE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

53) The sum of all the depreciation expenses recorded to date for a depreciable asset is called residual value.

Answer:  FALSE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

54) The depreciation method that allocates an equal amount of depreciation each year is called the straight-line method.

Answer:  TRUE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

55) In the case of a deferred expense, the adjusting entry required at the end of a period will consist of a debit to the Prepaid Expense account. Assume the deferred expense was initially recorded as an asset.

Answer:  FALSE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

56) In the case of a deferred expense, the adjusting entry required at the end of a period will consist of a credit to the Prepaid Expense account. Assume the deferred expense was initially recorded as an asset.

Answer:  TRUE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

57) Contra asset accounts, such as Accumulated Depreciation, always have normal debit balances.

Answer:  FALSE

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

58) On January 1, 2016, Prepaid Insurance of Maywood Company had a beginning balance of $900. Three months of insurance premiums remain in the beginning balance. On February 1, 2016, the company paid an annual insurance premium in the amount of $3,400 for the period beginning April 1. On February 28, 2016, the balance in Prepaid Insurance is $600. The deferred expense was initially recorded as an asset.

Answer:  FALSE

Explanation:  Insurance premium per month = $900 / 3 = $300

Balance in Prepaid Insurance as of

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

59) On January 1, Ogden Company had $1,500 of supplies on hand. During January, Ogden purchased $5,500 worth of new supplies. At the end of the month, a count revealed $600 worth of supplies remaining on the shelves. The adjusting entry needed will include a debit to Supplies Expense of $6,400. The supplies were initially recorded as an asset.

Answer:  TRUE

Explanation:  Supplies Expense = $1,500 + $5,500 – $600 = $6,400

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

60) Holland Company purchased manufacturing equipment for $10,920. It has an estimated useful life of seven years and no residual value. The company should record depreciation expense of $80 per month. (Assume that the company uses the straight-line method.)

Answer:  FALSE

Explanation:  Depreciation Expense per month = ($10,920 / 7) / 12 = $130

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

 

61) Kittery Services purchased computers that are to be used in its consultancy services. Based on the matching principle, the related account that should appear on the income statement for the year ended December 31, 2016 is ________.

1.   A) Depreciation Expense

2.   B) Service Revenue

3.   C) Accumulated Depreciation

4.   D) Equipment Expense

Answer:  A

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

62) Harvard Financial Services purchased computers that are to be used in its consultancy services. Based on the matching principle, what account, other than Computers, should appear on the balance sheet as of December 31, 2016?

1.   A) Depreciation Expense

2.   B) Service Revenue

3.   C) Accumulated Depreciation

4.   D) Equipment Expense

Answer:  C

Diff: 1

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

 

63) The following Office Supplies account information is available for Able Company:

 

Beginning balance           $1,200

Office Supplies expensed            6,000

Ending balance  3,000

 

From the above information, calculate the amount of office supplies purchased.

1.   A) $7,800

2.   B) $6,000

3.   C) $1,200

4.   D) $3,000

Answer:  A

Explanation:  A)

Office Supplies:

Ending balance  $3,000

Add Office Supplies expensed   6,000

9,000

Less beginning balance  1,200

Office Supplies purchased           $7,800

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

64) The asset account, Office Supplies had a beginning balance of $5,400.  During the accounting period, office supplies were purchased, on account, for $5,400.  A physical count, on the last day of the accounting period, shows $2,300 of office supplies on hand.  What is the amount of Supplies Expense for the accounting period?

1.   A) $5,400

2.   B) $2,300

3.   C) $8,500

4.   D) $3,100

Answer:  C

Explanation:  C)

Office Supplies:

Beginning balance           $5,400

Add Office Supplies purchased  5,400

10,800

Less Ending balance           2,300

Office Supplies expensed            $8,500

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

65) The asset account, Office Supplies, had a beginning balance of $3,900.  During the accounting period, office supplies were purchased, on account, for $2,600.  Supplies Expense for the accounting period is $4,500.  What is the ending balance of Office Supplies?

1.   A) $6,500

2.   B) $2,000

3.   C) $4,500

4.   D) $5,800

Answer:  B

Explanation:  B)

Office Supplies:

Beginning balance           $3,900

Add Office Supplies purchased  2,600

6,500

Less Office Supplies expensed   4,500

Office Supplies  $2,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

66) During the accounting period, office supplies were purchased on account for $3,900.  A physical count, on the last day of the accounting period, shows $1,600 of office supplies on hand. Supplies Expense for the accounting period is $3,100. What was the beginning balance of Office Supplies?

1.   A) $4,700

2.   B) $2,300

3.   C) $800

4.   D) There is not enough information to answer this question.

Answer:  C

Explanation:  C)

Office Supplies:

Ending balance  $1,600

Add Office Supplies expensed   3,100

4,700

Less Office Supplies purchased 3,900

Office Supplies Beginning Balance            $800

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

 

67) The entry to record depreciation includes a debit to the ________.

1.   A) Equipment account

2.   B) Cash account

3.   C) Accumulated Depreciation account

4.   D) Depreciation Expense account

Answer:  D

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

68) The entry to record depreciation includes a credit to the ________.

1.   A) Depreciation Payable account

2.   B) Cash account

3.   C) Accumulated Depreciation account

4.   D) Depreciation Expense account

Answer:  C

Diff: 1

LO:  3-3

AACSB:  Interpersonal relations and teamwork

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

69) If an adjusting entry includes a debit to Rent Expense, it indicates that the payment of rent had been previously recorded as a(n) ________.

1.   A) deferred expense

2.   B) depreciation expense

3.   C) accrued expense

4.   D) accrued revenue

Answer:  A

Diff: 2

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

70) The allocation of a plant asset’s cost to expense over its useful life is called ________.

1.   A) residual value

2.   B) book value

3.   C) accrued revenue

4.   D) depreciation

Answer:  D

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

 

71) The expected value of a depreciable asset at the end of its useful life is called ________.

1.   A) book value

2.   B) residual value

3.   C) accrued revenue

4.   D) accrued expense

Answer:  B

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

72) A depreciable asset’s cost minus accumulated depreciation is called ________.

1.   A) book value

2.   B) residual value

3.   C) accrued revenue

4.   D) accrued expense

Answer:  A

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

73) Which of the following is the correct formula for calculating depreciation under the straight-line method?

1.   A) Straight-line depreciation = (Cost + Residual value) / Useful life

2.   B) Straight-line depreciation = (Cost – Residual value) / Useful life

3.   C) Straight-line depreciation = (Cost + Residual value) × Useful life

4.   D) Straight-line depreciation = (Cost – Residual value) × Useful life

Answer:  B

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

74) The sum of all the depreciation expense recorded to date for a depreciable asset is called ________.

1.   A) book value

2.   B) residual value

3.   C) depreciation expense

4.   D) accumulated depreciation

Answer:  D

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

 

75) Which of the following is a contra account?

1.   A) Depreciation Expense

2.   B) Accumulated Depreciation

3.   C) Unearned Revenue

4.   D) Earned Revenue

Answer:  B

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

76) The advance cash payments of future expenses are called ________.

1.   A) accrued revenues

2.   B) deferred expenses

3.   C) deferred revenues

4.   D) accrued expenses

Answer:  B

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

77) For accounting purposes, depreciation refers to the ________.

1.   A) method of allocating the cost of a plant asset to expense it over its useful life

2.   B) method of declining the market value of an asset to its book value

3.   C) method of estimating an asset’s current market value

4.   D) process of selling a used asset

Answer:  A

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

78) The Accumulated Depreciation account is ________.

1.   A) a record of the sum of all the depreciation expense recorded

2.   B) the price quoted to the buyer of a used asset

3.   C) an expense account

4.   D) the expense account used to expense the cost of an asset

Answer:  A

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

 

79) Qwerty Company prepaid $8,400 on November 1, 2014 for a one-year insurance premium. On January 1, 2015 of the next year (after December 31 adjustments), the Prepaid Insurance account will have a debit balance of ________. (Round any intermediate calculations to two decimal places, and your final answer to the nearest whole number.)

1.   A) $7,700

2.   B) $9,100

3.   C) $8,400

4.   D) $7,000

Answer:  D

Explanation:  D) Ending balance of Prepaid Insurance balance on

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

80) A business purchased equipment for $120,000 on January 1, 2017. The equipment will be depreciated over the five years of its estimated useful life using the straight-line depreciation method. The business records depreciation once a year on December 31. Which of the following is the adjusting entry required to record depreciation on equipment for the year 2017? (Assume the residual value of the acquired equipment to be zero.)

1.   A) Debit $120,000 to Equipment, and credit $120,000 to Cash.

2.   B) Debit $24,000 to Depreciation Expense—Equipment, and credit $120,000 to Accumulated Depreciation—Equipment.

3.   C) Debit $24,000 to Depreciation Expense—Equipment, and credit $24,000 to Accumulated Depreciation—Equipment.

4.   D) Debit $24,000 to Depreciation Expense, and credit $24,000 to Equipment.

Answer:  C

Explanation:  C) Depreciation Expense = $120,000 / 5 years = $24,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

 

81) On September 1, 2016, Joy Company paid $6,000 in advance for an eight-month rental space covering the period of September, 2016 through April 2017. The deferred expense was initially recorded as an asset. Joy Company makes adjusting entries once a year at year-end. The adjusting entry on December 31, 2016 would include a ________.

1.   A) debit of $6,000 to Cash

2.   B) credit of $6,000 to Prepaid Rent

3.   C) debit of $3,000 to Rent Expense

4.   D) credit of $3,000 to Rent Expense

Answer:  C

Explanation:  C) Prepaid Rent on December 31, 2014 = $6,000 × 4/8 = $3,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

82) Accumulated Depreciation is a(n) ________ account and carries a normal ________ balance.

1.   A) revenue; debit

2.   B) expense; debit

3.   C) contra asset; credit

4.   D) liability; credit

Answer:  C

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

83) What type of account is Prepaid Rent, and what is its normal balance?

1.   A) It is an expense account and has a debit balance.

2.   B) It is a liability account and has a credit balance.

3.   C) It is a revenue account and has a credit balance.

4.   D) It is an asset account and has a debit balance.

Answer:  D

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

 

84) What is the term used for the difference between the Equipment account and the Accumulated Depreciation account?

1.   A) contra asset

2.   B) market value

3.   C) historical cost

4.   D) book value

Answer:  D

Diff: 1

LO:  3-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Deferred Expenses

 

85) Hank’s Tax Planning Service started business in January 2016. The company rented an office for $1,800 per month starting from January 1, 2016. On that day, Hank 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, 2016?

1.   A) $3,600

2.   B) $300

3.   C) $1,800

4.   D) $900

Answer:  A

Explanation:  A)

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

86) Russin Tax Planning Service bought computer equipment for $24,000 on January 1, 2016. It has an estimated useful life of four years and zero residual value. Russin uses the straight-line method to calculate depreciation and records depreciation expense in the books at the end of every month. Calculate the amount of Depreciation Expense for the period, January 1, 2016 through September 30, 2016, for this equipment. (Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.)

1.   A) $6,000

2.   B) $4,500

3.   C) $6,500

4.   D) $5,000

Answer:  B

Explanation:  B) Straight-line depreciation = (Cost – Residual value) / Useful life

Straight-line depreciation = ($24,000 – 0) / 4 years = $6,000 per year

 

Depreciation Expense from January to

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

87) Downs Tax Planning Service bought communications equipment for $9,600 on January 1, 2017. It has an estimated useful life of five years and zero residual value. Downs 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, 2017, the balance in the Accumulated Depreciation account for this equipment is ________.

1.   A) $160

2.   B) $1,920

3.   C) $800

4.   D) $960

Answer:  D

Explanation:  D) Straight-line depreciation = (Cost – Residual value) / Useful life

Straight-line depreciation = ($9,600 – 0) / 5 years = $1,920 per year

 

 

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

88) DeLito Tax Planning Service bought production equipment for $11,400 on January 1, 2017. It has an estimated useful life of five years and zero residual value. DeLito 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, 2017, the book value of this equipment shown on its balance sheet will be ________.

1.   A) $10,260

2.   B) $11,400

3.   C) $12,540

4.   D) $11,590

Answer:  A

Explanation:  A) Straight-line depreciation = (Cost – Residual value) / Useful life

Straight-line depreciation = ($11,400 – 0) / 5 years = $2,280 per year

 

 

Book value of equipment = $11,400 – $1,140 = $10,260

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

89) Ursula Tax Planning Service has the following plant assets: Communications equipment: Cost, $6,960 with useful life of eight years; Furniture: Cost, $19,200 with useful life of 12 years; and Computer: Cost, $14,000 with useful life of four years. (Assume residual value of all the assets is zero.) Ursula’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 dollar.)

291.             A) $291.67

292.             B) $133.33

293.             C) $72.50

294.             D) $498

Answer:  D

Explanation:  D) Straight-line depreciation = (Cost – Residual value) / Useful life

Straight-line depreciation for:

Communications

 

 

 

Diff: 3

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

90) Ariel Tax Planning Service has the following plant assets: Communications equipment: Cost, $9,600 with useful life of 8 years; Furniture: Cost, $17,712 with useful life of 12 years; and Computer: Cost, $14,400 with useful life of 4 years. Assume the residual value of all the assets is zero and the straight-line method is used.

 

Ariel’s monthly depreciation journal entry will include a ________.

1.   A) debit to Depreciation Expense of $6,276

2.   B) credit to Depreciation Expense of $6,276

3.   C) debit to Accumulated Depreciation of $523

4.   D) credit to Accumulated Depreciation of $523

Answer:  D

Explanation:  D) Straight-line depreciation = (Cost – Residual value) / Useful life

Straight-line depreciation for:

 

 

 

 

Diff: 3

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

91) Viva Company bought machine X for $18,000 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.

1.   A) $14,400

2.   B) $3,600

3.   C) $19,800

4.   D) $18,000

Answer:  A

Explanation:  A)

Book value of machine X

 

Machine X           $18,000

Less: Accumulated dep. ($1,800 × 2)             3,600

Book value of machine X              $14,400

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

92) On July 1, Alpha Company prepaid rent for a small equipment storage area. Alpha paid $20,000 to rent the area from July 1 through the end of the year. Provide the journal entry needed on July 1 when the payment is made. (Ignore explanation.) Assume the deferred expense is initially recorded as an asset.

Answer:

Prepaid Rent      20,000

Cash                               20,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

93) On July 1, Omega Company paid rent of $15,000 for a small equipment storage area from July 1 until December 31. Provide the adjusting journal entry on July 31. (Ignore explanation.) Assume the deferred expense is initially recorded as an asset.

Answer:

Rent Expense    2,500

Prepaid Rent                               2,500

 

Explanation:

Rent Expense = $15,000 × 1/6 = $2,500

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

94) On April 1, Balsa Company purchased office supplies for $1,500. At the end of April, they 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.

Answer:

Supplies Expense             1,000

Office Supplies                           1,000

 

Explanation:

Supplies Expense = Beginning balance in Office Supplies – Ending balance in Office Supplies

Supplies Expense = $1,500 – $500 = $1,000

Diff: 2

LO:  3-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Deferred Expenses

 

Learning Objective 3-4

 

1) An adjusted trial balance does not list the revenues and expenses of a business.

Answer:  FALSE

Diff: 2

LO:  3-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Purpose of the Adjusted Trial Balance and How Do We Prepare It? (H1)

 

2) The adjusted trial balance shows ________.

1.   A) account balances after adjustments

2.   B) revenue and expense accounts only

3.   C) account balances before adjustments

4.   D) balance sheet accounts only

Answer:  A

Diff: 2

LO:  3-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Purpose of the Adjusted Trial Balance and How Do We Prepare It? (H1)

 

3) Deborah Consultants had the following accounts and account balances after adjusting entries. Assume all accounts have normal balances. Calculate the amount of service revenue and prepare the adjusted trial balance for Deborah Consultants as of December 31, 2017.

 

Cash      $6,000   Deborah, Withdrawals   $3,000

Accounts Receivable      2,000     Service Revenue              ?

Office Supplies  1,800     Salaries Expense              4,000

Equipment          15,000   Rent Expense    800

 

Accumulated Depreciation—      9,000     Depreciation Expense—               1,500

Equipment                          Equipment

Deborah, Capital              15,000   Supplies Expense             500

Answer:               Deborah Consultants

Adjusted Trial Balance

December 31, 2017

Balance

Account Title      Debit     Credit

Cash      $6,000

Accounts Receivable      2,000

Office Supplies  1,800

Equipment          15,000

Accumulated Depreciation—Equipment               $9,000

Deborah, Capital              15,000

Deborah, Withdrawals   3,000

Service Revenue              10,600

Salaries Expense              4,000

Rent Expense    800

Depreciation Expense—Equipment         1,500

Supplies Expense             500         ______

Total      $34,600 $34,600

 

Service Revenue = $34,600 – $9,000 – $15,000 = $10,600

Diff: 2

LO:  3-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Purpose of the Adjusted Trial Balance and How Do We Prepare It? (H1)

 

 

4) Bryan Consultants had the following balances before preparing adjusting entries in the books on December 31, 2017.

 

Cash      $6,000   T. Bryan, Withdrawals    $3,000

Accounts Receivable      2,000     Service Revenue              10,600

Office Supplies  1,800     Salaries Expense              4,000

Equipment          15,000   Rent Expense    800

 

Accumulated Depreciation—      9,000     Depreciation Expense—               1,500

Equipment                          Equipment

1.   Bryan, Capital 15,000 Supplies Expense             500

 

Prepare the adjusted trial balance after considering these adjustments:

800.             Office Supplies used, $800. Assume the office supplies were initially recorded as an asset.

801.             Accrued salaries on December 31, $600.

802.             Revenue earned but not recorded, $200.

Answer:               Bryan Consultants

Adjusted Trial Balance

December 31, 2017

Balance

Account Title      Debit     Credit

Cash      $6,000

Accounts Receivable      2,200

Office Supplies  1,000

Equipment          15,000

Accumulated Depreciation—Equipment               $9,000

Salaries Payable                600

1.   Bryan, Capital 15,000

2.   Bryan, Withdrawals 3,000

Service Revenue              10,800

Supplies Expense             1,300

Salaries Expense              4,600

Rent Expense    800

Depreciation Expense—Equipment         1,500     ______

Total      $35,400 $35,400

Diff: 3

LO:  3-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Purpose of the Adjusted Trial Balance and How Do We Prepare It? (H1)

 

 

Learning Objective 3-5

 

1) If a company fails to make an adjusting entry for accrued revenues, the net income will be overstated.

Answer:  FALSE

Diff: 1

LO:  3-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)

 

2) If a company fails to make an adjusting entry for deferred expense, the assets will be overstated. Assume the deferred expense is initially recorded as an asset.

Answer:  TRUE

Diff: 1

LO:  3-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)

3) The accountant for Jones Auto Repair failed to make an adjusting entry to record $5,000 of unpaid salaries for the last two weeks of the year. Which of the following is an effect of this omission?

1.   A) The net income will be overstated.

2.   B) The total assets will be understated.

3.   C) The net income will be understated.

4.   D) The total assets will be overstated.

Answer:  A

Diff: 2

LO:  3-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)

 

4) Financial statements are prepared from the balances in a(n) ________.

1.   A) general journal

2.   B) chart of accounts

3.   C) unadjusted trial balance

4.   D) adjusted trial balance

Answer:  D

Diff: 1

LO:  3-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)

 

 

5) All of the accounts and the account balances of a company appear on the ________.

1.   A) statement of retained earnings

2.   B) balance sheet

3.   C) adjusted trial balance

4.   D) income statement

Answer:  C

Diff: 1

LO:  3-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)

 

6) The accountant of Omega Consulting failed to make an adjusting entry to record $6,000 for unearned service revenues that were earned before the end of the fiscal year. Assume the company initially recorded a liability. Which of the following statements is true?

1.   A) The total liabilities will be overstated.

2.   B) The total liabilities will be understated.

3.   C) The total assets will be overstated.

4.   D) The total assets will be understated.

Answer:  A

Diff: 2

LO:  3-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)

7) The accountant for Sparks Electric failed to make an adjusting entry to record $3,000 of telephone expenses for the last two months of the year. Which of the following statements is true?

1.   A) The total liabilities will be overstated.

2.   B) The total liabilities will be understated.

3.   C) The total assets will be overstated.

4.   D) The total assets will be understated.

Answer:  B

Diff: 2

LO:  3-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)

 

 

8) The accountant of Skyscrapers Architectural Services failed to make an adjusting entry to record $7,000 of depreciation expense. Which of the following statements is true?

1.   A) The total liabilities will be overstated.

2.   B) The equity will be understated.

3.   C) The total assets will be overstated.

4.   D) The total assets will be understated.

Answer:  C

Diff: 2

LO:  3-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)

 

9) The accountant of Zeus Legal Services failed to make an adjusting entry for supplies that had been used for the year. Assume the supplies were initially recorded as an asset. Which of the following statements is true?

1.   A) The total liabilities will be overstated.

2.   B) The equity will be understated.

3.   C) The total assets will be overstated.

4.   D) The total assets will be understated.

Answer:  C

Diff: 2

LO:  3-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)

10) The accountant of Delta Company failed to make an adjusting entry to record $6,000 of unearned service revenue that has now been earned. Assume the deferred revenue was initially recorded as a liability. Which of the following statements is true?

1.   A) The total revenue will be overstated.

2.   B) The total revenue will be understated.

3.   C) The total expenses will be overstated.

4.   D) The total expenses will be understated.

Answer:  B

Diff: 2

LO:  3-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)

 

 

11) The accountant for Hobson Electrical Repair failed to make an adjusting entry to record $5,000 of unpaid salaries for the last two weeks of the year. Which of the following statements is true?

1.   A) The total revenue will be overstated.

2.   B) The total revenue will be understated.

3.   C) The total expenses will be overstated.

4.   D) The total expenses will be understated.

Answer:  D

Diff: 2

LO:  3-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)

 

12) The accountant of Barnes Architectural Services failed to make an adjusting entry to record $7,000 of depreciation expense. Which of the following statements is true?

1.   A) The total revenue will be overstated.

2.   B) The total revenue will be understated.

3.   C) The total expenses will be overstated.

4.   D) The total expenses will be understated.

Answer:  D

Diff: 2

LO:  3-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  What Is the Impact of Adjusting Entries on the Financial Statements? (H1)