Introductory Financial Accounting for Business Thomas Edmonds 1st Edition- Test Bank
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Sample Test
Introductory Financial Accounting for Business, 1e (Edmonds)
Chapter 3 Accounting for Deferrals
Indicate how each event affects the financial statements model.
Use the following letters to record your answer in the box shown below each
element. You do not need to enter amounts.
Increase = I
Decrease = D Not Affected = NA
(Note that “Not Affected” means that the event does not affect
that element of the financial statements or that the event causes an increase
in that element, which is offset by a decrease in that same element.)
1) Green Company paid $900 cash to purchase supplies.
Assets Liabilities
Equity
Revenue
Expenses
Net Income Stmt of Cash Flows
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D)
Paying cash to purchase supplies decreases one asset account
(cash) and increases asset account (supplies). The total amount of assets is
not affected. It does not affect the income statement. Even though cash has
been paid, expense recognition is deferred until the supplies are used. It will
be reported as a cash outflow from operating activities on the statement of
cash flows.
Difficulty: 1 Easy
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
2) Nickle Company performed a physical count of supplies and
determined that the company used $600 of supplies during the year.
Assets
Liabilities
Equity
Revenue
Expenses
Net Income Stmt of Cash Flows
Answer: (D) (NA) (D) (NA) (I) (D) (NA)
Recognizing supplies expense is an asset use transaction. Assets
(supplies) decrease and stockholder’s equity (retained earnings) decreases. The
recognition of supplies expense would cause the amount of net income shown on
the income statement to decrease. There is no cash payment associated with the
use of supplies. Because the expense recognition did not involve the payment of
cash, there is no effect on the statement of cash flows.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
3) On February 1, Year 1, Owen Company paid $24,000 cash to
lease office space for one year beginning immediately.
Assets
Liabilities
Equity
Revenue
Expenses
Net Income Stmt of Cash Flows
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D)
The cost of the office space is recognized as an asset. The
asset account, Prepaid Rent, increases and the asset account, Cash, decreases.
Expense recognition is deferred until Owen Company uses the office space to
help generate revenue. Since the expense is deferred, there is no impact on
stockholders’ equity (retained earnings) nor on the income statement. There is
a cash outflow for operating activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
4) Owen Company recognizes rent expense for the period from
February 1, Year 1, to December 31, Year 1. Assume the company paid $24,000
cash to lease the office space on February 1, Year 1.
Assets
Liabilities
Equity
Revenue
Expenses
Net Income Stmt of Cash Flows
Answer: (D) (NA) (D) (NA) (I) (D) (NA)
At the end of Year 1, Owen is required to expense the amount of
office space that has been used. Since Owen paid $24,000 on February 1, Year 1,
to rent office space for one year, the portion of the lease cost that
represents the office use from February 1 to December 31 is 11 months and
$22,000. Recognizing rent expense will decrease assets, Prepaid Rent, and
stockholders’ equity (retained earnings). Rent expense will decrease net
income. There is no effect on the statement of cash flows because the cash was
paid on February 1, Year 1.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
5) Calloway Company collected $750 from a customer for services
that Calloway agrees to perform in the future.
Assets
Liabilities
Equity
Revenue
Expenses
Net Income Stmt of Cash Flows
Answer: (I) (I) (NA) (NA) (NA) (NA) (I)
Collecting a payment in advance from a customer increases assets
(cash) and increases liabilities (unearned revenue). It does not affect the
income statement. Revenue will not be recognized until the services are
provided. It will be reported as a cash inflow from operating activities on the
statement of cash flows.
Difficulty: 1 Easy
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
6) Jennings Company makes an adjusting entry to recognize $500
of the previously unearned revenue earned that it has now earned by providing
services to its client during the period.
Assets
Liabilities
Equity
Revenue
Expenses
Net Income Stmt of Cash Flows
Answer: (NA) (D) (I) (I) (NA) (I) (NA)
The year-end adjustment moves $500 from the Unearned Revenue
account to the Revenue account. This adjustment is a claims exchange
transaction. Assets are not affected. On the balance sheet, liabilities
(Unearned Revenue) decrease and stockholders’ equity (Retained Earnings)
increases. On the income statement, revenue and net income increase. The
statement of cash flows is not affected.
Difficulty: 1 Easy
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
7) On January 1, Year 1, Monica Company paid $41,000 cash to
purchase a truck.
Assets
Liabilities
Equity Revenue
Expenses
Net Income Stmt of Cash Flows
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D)
Purchasing a truck for cash is an asset exchange transaction.
The asset account, Cash, decreases and the asset account, Truck, increases. The
purchase does not affect the income statement. Because the asset has a long
term useful life the cash outflow is categorized as an investing activity on
the statement of cash flows.
Difficulty: 1 Easy
Topic: Accounting for Depreciation
Learning Objective: 03-05 Compute depreciation expense and
show how it affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
8) Cason Company recorded $2,000 of depreciation expense on a
delivery van.
Assets
Liabilities
Equity
Revenue
Expenses
Net Income Stmt of Cash Flows
Answer: (D) (NA) (D) (NA) (I) (D) (NA)
Recording depreciation expense decreases assets (increases the
contra-asset accumulated depreciation) and decreases equity (depreciation
expense decreases retained earnings). It increases expenses and decreases net
income. It does not affect cash flows.
Difficulty: 1 Easy
Topic: Accounting for Depreciation
Learning Objective: 03-05 Compute depreciation expense and
show how it affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
9) Cornelius Company purchased supplies on account. Would the
business event be classified as an asset source, asset use or asset exchange
transaction?
Answer: Accounts Payable
Purchasing supplies on account is an asset source transaction.
The asset account, Supplies, increases and the liability account, Accounts
payable, increases.
Difficulty: 1 Easy
Topic: Debit/Credit Terminology
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
10) What effect does being paid cash for services to be provided
in the future normally have on the accounting equation?
Answer: When a company is paid cash for services to be
provided in the future, it is considered unearned revenue. The asset account,
Cash, increases and the liability account, Unearned Revenue increases. There is
no effect on stockholders’ equity. The cash inflow is reported on the statement
of cash flows as an operating activity.
Difficulty: 1 Easy
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
11) What is the formula for calculating depreciation expense
using the straight-line method?
Answer: (Asset Cost – Salvage value) / Useful life =
Depreciation expense
Difficulty: 2 Medium
Topic: Accounting for Depreciation
Learning Objective: 03-05 Compute depreciation expense and
show how it affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Risk Analysis
12) What type of assets would a company depreciate?
Answer: Companies depreciate long-term assets that it
plans to use over multiple accounting cycles.
Difficulty: 2 Medium
Topic: Accounting for Depreciation
Learning Objective: 03-05 Compute depreciation expense and
show how it affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Risk Analysis
13) Depreciation expense is reported on which financial
statement?
Answer: Income Statement
Difficulty: 2 Medium
Topic: Accounting for Depreciation
Learning Objective: 03-05 Compute depreciation expense and
show how it affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Risk Analysis
14) Explain the significance of the return-on-assets ratio. Who
(what category or type of financial statement users) would normally be most
interested in this ratio, and why?
Answer: The return-on-assets ratio measures the
relationship between the level of income and the size of the investment. The
stockholders would normally be interested in this ratio to assess how
effectively a company is using its assets to generate income. Investors would
prefer a company to have a higher return-on-assets ratio.
Difficulty: 2 Medium
Topic: The Financial Analyst
Learning Objective: 03-06 Use a return-on-assets ratio, a
debt-to-assets ratio, and a return-on-equity ratio to analyze financial
statements.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Risk Analysis
15) Explain the significance of the return-on-equity ratio. Who
(what category or type of financial statement users) would normally be most
interested in this ratio, and why?
Answer: The return-on-equity ratio measures the
relationship between net income and stockholders’ equity. The stockholders
would normally be most interested in this ratio because it measures how well
the company is using their investment to earn income.
Difficulty: 2 Medium
Topic: The Financial Analyst
Learning Objective: 03-06 Use a return-on-assets ratio, a
debt-to-assets ratio, and a return-on-equity ratio to analyze financial
statements.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Risk Analysis
16) What does the debt-to-assets ratio indicate about the level
of a company’s debt risk? Who would normally be most interested in this ratio?
Answer: The relationship between total debt and total
assets can be measured by the debt-to-assets ratio. With a high debt-to-assets
ratio, a company experiences a great degree of debt risk. A company with a high
debt-to-assets ratio may be forced into bankruptcy if it is unable to meet the
required payments on its outstanding debt. The company’s creditors would likely
be most interested in this ratio.
Difficulty: 1 Easy
Topic: The Financial Analyst
Learning Objective: 03-06 Use a return-on-assets ratio, a
debt-to-assets ratio, and a return-on-equity ratio to analyze financial
statements.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Risk Analysis
17) What is financial leverage? What financial ratio can be
increased by using financial leverage?
Answer: Financial leverage is the use of borrowed money to
increase return on stockholders’ investment. If a company can borrow money at
8% and invest it at 10%, it can increase its return-on-equity ratio.
Difficulty: 1 Easy
Topic: The Financial Analyst
Learning Objective: 03-06 Use a return-on-assets ratio, a
debt-to-assets ratio, and a return-on-equity ratio to analyze financial
statements.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Risk Analysis
18)
Account No. Account Title
(1) Cash
(2)
Service Revenue
(3)
Accounts Receivable
(4)
Salaries Expense
(5)
Dividends
(6) Common
Stock
(7)
Salaries Payable
(8)
Retained Earnings
Which of the following is a true statement? (Note: A statement
may be true even if it does not identify all accounts that appear on that
particular financial statement.)
1. A)
Account numbers 2, 4, and 5 will appear on the income statement.
2. B)
Account numbers 1, 3, and 8 will appear on the balance sheet.
3. C)
Account numbers 2, 5, and 8 will appear on the statement of cash flows.
4. D)
Account numbers 4, 5, and 6 will appear on the statement of changes in
stockholders’ equity.
Answer: B
Explanation: A balance sheet reports assets, liabilities,
and stockholders’ equity as of a selected date (usually the end of an accounting
period). Cash and accounts receivable are asset accounts. Retained earnings is
a stockholders’ equity account.
Difficulty: 2 Medium
Topic: Prepare Financial Statements
Learning Objective: 03-04 Use a list of accounts to
prepare financial statements containing deferrals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
19) During Bruce Company’s first year of operations, the company
purchased $2,300 of supplies. At year-end, a physical count of the supplies on
hand revealed that $825 of unused supplies were available for future use. How
will the related adjusting entry affect the company’s financial statements?
475.
A) Expenses will increase and assets will decrease by $1,475.
476.
B) Assets and expenses will both increase by $825.
477.
C) Expenses and assets will both increase by $1,475.
478.
D) The related adjusting entry has no effect on net income or
the accounting equation.
Answer: A
Explanation: The company used $1,475 ($2,300 − $825) of
supplies during its first year of operations. The adjusting entry to recognize
supplies expense will decrease stockholders’ equity (retained earnings) and
decrease assets (supplies) by $1,475. It will increase expenses and decrease
net income.
Difficulty: 3 Hard
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
20) Recognizing an expense may be accompanied by which of the
following?
1. A) A
decrease in liabilities
2. B) An
increase in assets
3. C) A
decrease in revenue
4. D) A
decrease in assets
Answer: D
Explanation: Recognizing an expense may be accompanied by
a decrease in assets (i.e. cash, prepaid rent or insurance) or an in increase
in liabilities (i.e. accounts payable, salaries payable).
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
21) Which of the following statements is true regarding accrual
accounting?
1. A)
Revenue is recorded only when cash is collected.
2. B)
Expenses are recorded when they are incurred.
3. C)
Revenue is recorded in the period when it is earned.
4. D)
Revenue is recorded in the period when it is earned and expenses are recorded
when they are incurred.
Answer: D
Explanation: Revenue is recognized when earned and
expenses are recognized when incurred, regardless of when cash is exchanged.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
22) Recognition of revenue may be accompanied by which of the
following?
1. A) A
decrease in a liability
2. B) An
increase in a liability
3. C) An
increase in an asset
4. D) An
increase in an asset or a decrease in a liability
Answer: D
Explanation: Recognizing revenue may be accompanied by
either an increase in assets (cash or accounts receivable) or a decrease in
liabilities (unearned revenue).
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
23) Which of the following events would require a year-end
adjusting entry?
1. A)
Purchasing supplies for cash during the year
2. B)
Purchasing land for cash during the year
3. C)
Providing services on account during the year
4. D)
Each of these events would require a year-end adjusting entry.
Answer: A
Explanation: Purchasing supplies requires a year-end
adjusting entry to recognize the expense associated with the amount of supplies
used during the year. Purchasing land for cash does not require an adjusting
entry and providing services on account does not require an adjusting entry at
the end of the accounting period.
Difficulty: 3 Hard
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
24) How does the adjusting entry to recognize the portion of the
unearned revenue that a company earned during the accounting period affect the
elements of the financial statements?
1. A) An
increase in assets and a decrease in liabilities.
2. B) An
increase in liabilities and a decrease in equity.
3. C) A
decrease in liabilities and an increase in equity.
4. D) A
decrease in assets and a decrease in liabilities.
Answer: C
Explanation: Recognizing the portion of the unearned
revenue that a company earned during the accounting period involves a decrease
in liabilities (unearned revenue) and an increase in equity (retained earnings
as a result of revenue).
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
25) On December 1, Year 1, Jack’s Snow Removal Company received
$6,000 of cash in advance from a customer and promised to provide services for
that customer during the months of December, January, and February. How will
the Year 1 year-end adjustment to recognize the partial expiration of the
contract impact the elements of the financial statements model?
1. A)
Total assets will increase by $2,000.
2. B)
Equity will increase by $2,000.
3. C)
Total liabilities will increase by $2,000.
4. D)
Total assets will increase by $2,000 and equity will increase by $2,000.
Answer: B
Explanation: The year-end adjustment to recognize one
month’s work on the three-month contract results in a $2,000 decrease in
liabilities (unearned revenue) and a $2,000 increase in equity (retained
earnings due to recognizing revenue).
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
26) On January 1, Year 2, the Supplies account of Sheldon
Company had a balance of $1,200. During the year, the company purchased $3,400
of supplies on account and made partial payments totaling $3,000 on those
accounts. On December 31, Year 2, Sheldon determined that there were $1,400 of
supplies on hand. Which of the following would be reported on Sheldon’s Year 2
financial statements?
1. A)
$1,600 of supplies; $200 of supplies expense
2. B)
$1,400 of supplies; $2,000 of supplies expense
3. C)
$1,400 of supplies; $3,200 of supplies expense
4. D)
$1,600 of supplies; $3,400 of supplies expense
Answer: C
Explanation: Supplies = Amount on hand at end of year of
$1,400
Supplies expense = Beginning balance of Supplies account of
$1,200 + Supplies purchased of $3,400 − Ending balance of Supplies account of
$1,400 = $3,200
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
27) On October 1, Year 1, Jason Company paid $7,200 to lease
office space for one year beginning immediately. What is the amount of rent
expense that will be reported on the Year 1 income statement and what is the
cash outflow for rent that would be reported on the Year 1 statement of cash
flows?
1. A)
$7,200; $7,200
2. B)
$1,800; $1,800
3. C)
$1,800; $7,200
4. D)
$1,200; $7,200
Answer: C
Explanation: Monthly rent expense = Payment of $7,200 ÷ 12
months = $600 per month
Rent expense (on the income statement) = $600 per month × 3
months = $1,800
The $7,200 payment is the cash outflow for rent that will be
reported on the statement of cash flows.
Difficulty: 3 Hard
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
28) When a revenue or an expense event is recognized after cash
has been exchanged it is referred to as
1. A) an
accrual
2. B) a
deferral
3. C)
either an accrual or deferral
4. D)
neither of these terms describe this event
Answer: B
Explanation: A deferral occurs when a company postpones,
delays or otherwise puts off the recognition of a revenue or an expense. The
revenue or expense event is recognized after cash has been exchanged.
Difficulty: 2 Medium
Topic: Accounting for Supplies; Accounting for Unearned
Revenue; Accounting for Prepaid Items
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.; 03-03 Show how accounting for unearned revenues
affects financial statements.; 03-02 Show how accounting for prepaid items
affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Decision Making
29) How would a payment for rent paid in advance be classified?
1. A)
Asset source transaction
2. B)
Asset use transaction
3. C)
Asset exchange transaction
4. D)
Claims exchange transaction
Answer: C
Explanation: Purchasing prepaid rent increases one asset
(prepaid rent) and decreases another asset (cash). Therefore, it is classified
as an asset exchange transaction.
Difficulty: 1 Easy
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
30) Which of the following accounts would not appear on a
balance sheet?
1. A)
Service Revenue
2. B)
Supplies
3. C)
Unearned Revenue
4. D)
Prepaid Rent
Answer: A
Explanation: Service Revenue is an income statement
account and, as such, it does not appear on the balance sheet. Unearned
Revenue, despite having the word “revenue” in its title, is a liability account
that appears on the balance sheet. Supplies and prepaid rent are both assets
that appear on the balance sheet.
Difficulty: 2 Medium
Topic: Prepare Financial Statements
Learning Objective: 03-04 Use a list of accounts to
prepare financial statements containing deferrals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
31) Which of the following would cause net income on the accrual
basis to be different from (either higher or lower than) “cash provided by
operating activities” on the statement of cash flows?
1. A)
Purchased land for cash
2. B)
Purchased supplies for cash
3. C)
Paid advertising expense
4. D)
Paid dividends to stockholder
Answer: B
Explanation: Purchasing supplies for cash is a cash
outflow for operating activities, but will not be reported as an expense until
the supplies are used. Purchasing land is a cash outflow for investing
activities and does not affect net income. Paying advertising expense causes
equal decreases in net income and cash flows from operating activities. Paying
dividends to stockholders is a cash outflow for financing activities and does
not affect net income.
Difficulty: 3 Hard
Topic: Prepare Financial Statements; Accounting for
Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.; 03-04 Use a list of accounts to prepare
financial statements containing deferrals.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
32) Duluth Co. collected a $6,000 cash advance from a customer
on November 1, Year 1 for services to be provided over a six-month period
beginning on that date. If the year-end adjustment is properly recorded, what
will be the effect of the adjusting entry on Duluth’s Year 1 financial
statements?
1. A)
Increase assets and decrease liabilities
2. B)
Increase assets and increase revenues
3. C)
Decrease liabilities and increase revenues
4. D) No
effect
Answer: C
Explanation: The adjusting entry to recognize revenue
earned on the contract will increase revenues and decrease liabilities
(unearned revenue).
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
33) On September 1, Year 1, Gomez Company collected $9,000 in
advance from a customer for services to be provided over a one-year period
beginning on that date. How much revenue would Gomez Company report related to
this contract on its income statement for the year ended December 31, Year 1?
How much would the company report as net cash flows from operating activities
for Year 1?
1. A)
$3,000; $3,000
2. B)
$9,000; $9,000
3. C)
$3,000; $9,000
4. D)
$0; $9,000
Answer: C
Explanation: Monthly revenue = Receipt of $9,000 ÷ 12
months = $750 per month
Revenue (on the income statement) = $750 per month × 4 months
(September through December) = $3,000
The company will recognize the $9,000 received as a cash inflow
for operating activities in Year 1.
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
34) What is the purpose of the accrual basis of accounting?
1. A)
Recognize revenue when it is collected from customers.
2. B)
Match assets with liabilities during the proper accounting period.
3. C)
Recognize expenses when cash disbursements are made.
4. D)
Recognizing revenue when it is earned and expenses when they are incurred,
regardless of when cash changes hands.
Answer: D
Explanation: Recognizing revenue when it is earned and
expenses when they are incurred, regardless of when cash changes hands, is
commonly called accrual accounting.
Difficulty: 2 Medium
Topic: Accounting for Supplies; Accounting for Unearned
Revenue; Accounting for Prepaid Items
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.; 03-03 Show how accounting for unearned revenues
affects financial statements.; 03-02 Show how accounting for prepaid items
affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
35) Which of the following is an asset use transaction?
1. A)
Purchased land for cash
2. B)
Recorded rent expense at the end of the period
3. C)
Borrowed cash from the bank
4. D)
Accrued salary expense at the end of the period
Answer: B
Explanation: Recording rent expense at the end of the period
is an asset use transaction that decreases assets (prepaid rent) and decreases
equity (retained earnings). Purchasing land for cash is an asset exchange
transaction. Borrowing cash from a bank is an asset source transaction.
Accruing salary expense is a claims exchange transaction.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
36) Which of the following is a claims exchange transaction?
1. A)
Recognized revenue earned on a contract where the cash had been collected at an
earlier date
2. B)
Issued common stock
3. C)
Provided services on account
4. D) Purchased
land for cash
Answer: A
Explanation: Recognizing revenue earned on a contract
where the cash had been collected at an earlier date is a claims exchange
transaction that decreases liabilities (unearned revenue) and increases equity
(retained earnings). Purchasing land for cash is an asset exchange
transactions. Issuing common stock is an asset source transaction. Providing
services on account is an asset source transaction.
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
37) Joseph Company purchased a delivery van on January 1, Year 1
for $35,000. The van is estimated to have a 5-year useful life and a $5,000
salvage value. How much expense should Joseph recognize in Year 1 related to
the use of the van?
1. A)
$6,000
2. B)
$7,000
3. C)
$30,000
4. D)
$5,000
Answer: A
Explanation: Depreciation expense = (Cost of $35,000 −
Salvage value of $5,000) ÷ Useful life of five years = $6,000
Difficulty: 1 Easy
Topic: Accounting for Depreciation
Learning Objective: 03-05 Compute depreciation expense and
show how it affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
38) Which of the following events involves a deferral?
1. A)
Recording interest that has been earned but not received.
2. B)
Recording revenue that has been earned but not yet collected in cash.
3. C)
Recording supplies that have been purchased with cash but not yet used.
4. D)
Recording salaries owed to employees at the end of the year that will be paid
during the following year.
Answer: C
Explanation: Recording the purchase of supplies
constitutes a deferral because it involves the payment of cash before an
expense (in this case, supplies expense) is recognized.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
39) The entry to recognize depreciation expense incurred on
equipment involves which of the following?
1. A) A decrease
in assets
2. B) An
increase in liabilities
3. C) An
increase in assets
4. D) A
decrease in liabilities
Answer: A
Explanation: Recognizing depreciation expense involves a
decrease in assets due to an increase in the contra-asset accumulated
depreciation and a decrease in equity due to recognizing depreciation expense.
Difficulty: 2 Medium
Topic: Accounting for Depreciation
Learning Objective: 03-05 Compute depreciation expense and
show how it affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
40) The following accounts and balances were drawn from the
records of Barnes Company:
Cash
$
4,500
Accounts receivable
$
2,700
Equipment
$
10,000
Accumulated
depreciation
$
3,200
Accounts
payable
$
2,800
Common stock
$
6,000
Based on this information alone the amount of Barnes’s retained
earnings is:
600.
A) $11,600.
601.
B) $17,200.
602.
C) $5,200.
603.
D) None of these answers is correct.
Answer: C
Explanation: Assets = $4,500 + $2,700 + $10,000 − $3,200 =
$14,000
Assets of $14,000 = Liabilities of $2,800 + Equity
Equity = $11,200
Equity = Common stock of $6,000 + Retained earnings
$11,200 = $6,000 + Retained earnings
Retained Earnings = $5,200
Difficulty: 2 Medium
Topic: Accounting for Depreciation
Learning Objective: 03-05 Compute depreciation expense and
show how it affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
41) Consider how each of the transactions listed below affect
net income reported on the income statement and the net cash flows from
operating activities reported on the statement of cash flows. Which
transaction(s) would affect the income statement in a different period from the
statement of cash flows?
1. A)
Recognized depreciation expense on equipment
2. B)
Incurred operating expenses on account
3. C)
Paid interest that was accrued in a prior year
4. D)
All of these answer choices would affect the income statement in a different
period from the statement of cash flows
Answer: D
Explanation: Recognizing depreciation expense reduces net
income, but does not affect cash flows from operating activities. Incurring
operating expenses on account also reduces net income, but does not affect cash
flows from operating activities. Paying interest that was accrued in a prior
year will reduce cash flows from operating activities, but will not affect net
income.
Difficulty: 2 Medium
Topic: Prepare Financial Statements; Accounting for
Depreciation
Learning Objective: 03-05 Compute depreciation expense and
show how it affects financial statements.; 03-04 Use a list of accounts to
prepare financial statements containing deferrals.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
42) On January 1, Year 1, Alabama Company purchased a machine
for $26,000. The machine has an estimated useful life of 4 years and an
estimated salvage value of $6,000. What is the book value of the machine
reported on Alabama’s balance sheet as of December 31, Year 1?
1. A)
$26,000
2. B)
$19,500
3. C)
$21,000
4. D)
$15,000
Answer: C
Explanation: Accumulated depreciation at end of Year 1 =
(Cost of $26,000 − Salvage value of $6,000) ÷ 4 years = $5,000
Book value = Cost of $26,000 cost − Accumulated depreciation of
$5,000 = $21,000
Difficulty: 2 Medium
Topic: Computing Depreciation Expense; Accounting for
Depreciation
Learning Objective: 03-05 Compute depreciation expense and
show how it affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
43) On May 1, Year 2, Cole Company paid $12,000 cash for
supplies. The Year 2 adjusting entry to recognize the amount of supplies used
during Year 2
1. A)
increases the amount of supplies expense recognized in Year 2
2. B)
decreases the amount of liabilities shown on the Year 2 balance sheet
3. C)
increases the amount of liabilities shown on the Year 2 balance sheet
4. D)
decreases the amount of supplies expense recognized in Year 2
Answer: A
Explanation: The adjusting entry at the end of year 2 to
recognize supplies expense causes assets (supplies) to decrease and
stockholders’ equity (retained earnings) to decrease. Supplies expense
decreases net income.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
44) When a company purchases supplies on account
1. A)
Cash flow from financing activities decreases
2. B)
Total assets decrease
3. C)
Expenses increase
4. D)
Liabilities increase
Answer: D
Explanation: Purchasing on account means that the buyer
does not pay cash at the time of purchase. Instead the buyer incurs an
obligation (accounts payable) to pay cash in the future. When supplies are
purchased on account, assets (supplies) and liabilities (accounts payable)
increase. The cash flow associated with the purchase of supplies is an
operating activity not a financing activity.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
45) Hawk Company purchased $300 of supplies on account. Which of
the following shows how this purchase will affect Hawk’s ledger accounts?
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
Supplies
Accounts
Payable
Common
Stock Retained
Earnings
1. 800
800
2. (800)
(800)
3. (800)
800
4.
800
(800)
1. A)
Option A
2. B)
Option B
3. C)
Option C
4. D)
Option D
Answer: A
Explanation: Purchasing on account means that the buyer
does not pay cash at the time of purchase. Instead the buyer incurs an
obligation (accounts payable) to pay cash in the future. When supplies are
purchased on account, assets (supplies) and liabilities (accounts payable)
increase.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
46) Knoll Company started Year 2 with a $1,000 balance in its
Cash account, a $200 balance in its Supplies account and a $1,200 balance in
its common stock account. During Year 2, the company experienced the following
events:
(1) Paid $600 cash to purchase supplies.
(2) Physical count revealed $50 of supplies on hand at the end
of Year 2.
Based on this information the amount of supplies expense
reported on the Year 2 income statement is
1. A)
$600
2. B)
$750
3. C)
$800
4. D)
$850
Answer: B
Explanation: Since the Company started the accounting
period with $200 of supplies and then purchased an additional $600 of supplies
during the accounting period, there was a total amount of $800 ($200 + $600) of
supplies that were available to be used during the accounting period. Since
there were only $50 of supplies on hand at the end of the accounting period,
$750 ($800 − $50) had to have been used. Assets, in this case supplies, used in
the process of producing revenue are called expenses.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
47) Chester Company started Year 2 with a $2,000 balance in its
Cash account, a $500 balance in its Supplies account, and a $2,500 balance in
its Common Stock account. During Year 2, the company experienced the following
events:
(1) Paid $1,400 cash to purchase supplies.
(2) Physical count revealed $300 of supplies on hand at the end
of Year 2.
Based on this information, which of the following shows how the
year-end adjusting entry required to recognize supplies expense would affect
Chester’s account balances?
Assets =
Liabilities
+
Stockholders’ Equity
Cash
Supplies
Accounts
Payable
Common
Stock Retained
Earnings
1. (1,600)
(1,600)
2. 1,600
1,600
3. (1,400)
1,400
4. (1,400)
(1,400)
1. A)
Option A
2. B)
Option B
3. C)
Option C
4. D)
Option D
Answer: A
Explanation: The amount of supplies available for use is
$1,900 ($500 beginning balance in the Supplies account plus the $1,400 amount
of supplies purchased). Given that there was $300 of supplies on hand at the
end of the accounting period, $1,600 ($1,900 available − $300 ending balance)
of supplies must have been used during the period. The amount of supplies used
would be recorded as an expense. The expense recognition would cause assets
(supplies) to decrease by $1,600, supplies expense to increase by $1,600, and
equity (retained earnings) to decrease by $1,600.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
48) Pizitz Company experienced a business event that affected
its financial statements as indicated below.
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev. −
Exp.
= Net
Inc.
NA
NA
NA
NA
NA
NA −OA
Which of the following events could have caused these effects?
1. A)
Paid cash to reduce supplies payable
2. B)
Recognized supplies expense
3. C)
Paid cash to purchase supplies
4. D)
Purchased supplies on account
Answer: C
Explanation: Paying cash to purchase supplies is an asset
exchange transaction. One asset (cash) decreases and another asset (supplies)
increases. Total assets are not affected. The income statement is not affected
at the time supplies are purchased. Instead, the income statement will be
affected at the time the amount of supplies used is determined at the end of the
accounting period. Since cash was paid to purchase the supplies, there will be
a cash outflow from operating activities shown on the statement of cash flows.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
49) Which of the following shows how paying cash to purchase
supplies will affect a company’s financial statements?
A)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
NA
NA
NA NA
NA
NA −OA
B)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
NA
NA
NA
NA
NA
NA NA
C)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
−
NA
−
NA
NA
NA −OA
D)
Balance Sheet Income Statement
Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
−
NA
−
NA
+
− NA
Answer: A
Explanation: Paying cash to purchase supplies is an asset
exchange transaction. One asset (cash) decreases and another asset (supplies)
increases. Total assets are not affected. The income statement is not affected
at the time supplies are purchased. Instead, the income statement will be
affected at the time the amount of supplies used is determined at the end of
the accounting period. Since cash was paid to purchase the supplies, there will
be a cash outflow from operating activities shown on the statement of cash
flows.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
50) Which of the following shows how adjusting the accounts to
recognize supplies expense will affect a company’s financial statements?
A)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
−
−
NA
NA
+
− NA
B)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
−
NA
− NA
+
− −OA
C)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp. =
Net Inc.
−
NA
−
NA
+
− NA
D)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
= Liab.
+
Equity Rev.
− Exp.
= Net
Inc.
−
NA
−
NA
+
− +OA
Answer: C
Explanation: Recognizing supplies expense at the end of
the accounting period is an asset use transaction. The asset account (cash)
decreases, supplies expense increases, net income decreases, and stockholders’
equity (retained earnings) decreases. There is no effect on cash flow. The
effect on cash flow occurs at the time the company pays for the supplies not
when the supplies are expensed.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies
affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
51) A deferral
1. A)
exists when a company pays cash at the same time the associated expense is
recognized.
2. B)
exists when a company pays cash after recognizing the associated expense.
3. C)
exists when a company pays cash before recognizing the associated expense.
Answer: C
Explanation: Companies use deferrals to recognize expenses
in the period they are incurred regardless of when cash is paid. For example, a
company could pay $1,200 for the right to use office space in the future. In
this case, the company would defer the expense recognition by recording the
cost (cash payment) in an asset account. Then the expense would be recognized later
in the period in which the office space is used to generate revenue. In
summary, a deferred expense occurs when a company pays cash before recognizing
the associated expense.
Difficulty: 2 Medium
Topic: Accounting for Supplies; Accounting for Prepaid Items
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
52) Which of the following statements is false?
1. A)
Prepaid insurance is a liability reported on the balance sheet.
2. B)
Prepaid insurance indicates that a company has already paid cash for insurance
coverage that protects the company for some future time period.
3. C)
Prepaid insurance is a deferred expense.
4. D)
Prepaid insurance represents a future economic benefit.
Answer: A
Explanation: Prepaid insurance is an asset account (not a
liability account) that appears on the balance sheet.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
53) Bates Company paid $1,600 cash for the right to use office
space during the coming year. Which of the following shows how this event would
affect Bates’ ledger accounts?
Assets
=
Liabilities
+
Stockholders’ Equity
Cash Prepaid
Rent
Accounts
Payable
Common
Stock Retained
Earnings
1. 1,600
1,600
2. (1,600)
1,600
3. 1,600
1,600
4. (1,600)
(1,600)
1. A)
Option A
2. B)
Option B
3. C)
Option C
4. D)
Option D
Answer: B
Explanation: Paying cash to purchase the right to use
office space in the future is an asset exchange event. One asset account (cash)
decreases and another asset account (prepaid rent) increases. The recognition
of rent expense is deferred until a future date when the office space is used
in the process of generating revenue.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
54) Which of the following shows how paying cash to lease an
office building for the upcoming year affects a company’s financial statements?
A)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
NA
NA
NA
NA
NA
NA −OA
B)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp. =
Net Inc.
NA
NA
NA
NA
+
− −OA
C)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
= Liab.
+
Equity Rev.
− Exp.
= Net
Inc.
−
NA
−
NA
NA
NA −OA
D)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
NA
NA
NA
NA
NA
NA −IA
Answer: A
Explanation: Paying cash to lease an office building that
will be used in the future is an asset exchange transaction. One asset account
(cash) decreases and another asset account (prepaid rent) increases. The amount
of total assets is not affected (NA). The income statement is not affected. The
cash outflow is shown in the operating activities section of the statement of
cash flows.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
55) On August 1, Year 1, Lace Company paid $2,400 cash for an
insurance policy that would provide protection for a one-year term. Which of
the following shows how the required adjustment on December 31, Year 1, will
affect Lace Company’s ledger accounts?
Assets
=
Liabilities
+ Stockholders’
Equity
Cash Prepaid
Rent
Accounts
Payable
Common
Stock Retained
Earnings
1. (2,400)
2,400
2. (800)
(800)
3. 2,400
2,400
4. (1,000)
(1,000)
1. A)
Option A
2. B)
Option B
3. C)
Option C
4. D)
Option D
Answer: D
Explanation: Cost per month = $2,400 total ÷ 12 months =
$200 per month
As of December 31, Year 1:
Amount used = $200 per month × 5 months = $1,000 insurance
expense
The expense recognition causes the asset (Prepaid Insurance) to
decreases. Further the expense recognition causes net income to decrease which
ultimately causes retained earnings to decrease.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
56) On October 1, Year 1, Wilson Company paid cash for an
insurance policy that would provide protection for a one-year term. Which of
the following shows how the required adjusting entry on December 31, Year 1
will affect Wilson’s financial statements?
A)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
NA
NA
NA
NA
+
− −OA
B)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
−
NA
−
NA
+
− NA
C)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
−
NA
−
NA
NA
NA −OA
D)
Balance Sheet Income Statement
Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
NA
NA
NA
NA
NA
NA NA
Answer: B
Explanation: The adjusting entry is an asset use
transaction. The asset account (prepaid insurance) decreases reflecting the use
of insurance coverage. The expense recognition decreases the amount of net income
and ultimately stockholders’ equity (retained earnings). The cash flow occurred
at the time the insurance was purchased. There is no cashflow effect at the
time the expense is recognized on December 31.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
57) On March 1, Year 1, Presco Enterprises paid $1,200 cash for
an insurance policy that would provide protection for a one-year term. The
company’s fiscal closing date is December 31. Based on this information, the
amount of insurance expense appearing on the Year 1 income statement would be
1. A)
$200
2. B)
$500
3. C) $1,000
4. D)
$1,200
Answer: C
Explanation: Cost per month = $1,200 total ÷ 12 months =
$100 per month
As of December 31, Year 1:
Amount used = $100 per month × 10 months = $1,000 insurance
expense
Future benefit = $100 per month × 2 months = $200 prepaid
insurance
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
58) On November 1, Year 1, Falloch, Inc. paid $3,600 cash for a
contract allowing the company to use office space for one year. The company’s
fiscal closing date is December 31. Based on this information, the amount of
cash flow from operating activities appearing on the Year 1 statement of cash
flows would be
1. A)
$2,100
2. B)
$3,000
3. C)
$3,300
4. D)
$3,600
Answer: D
Explanation: The cash outflow is not affected by how much
of the office space has or has not been used. Since $2,400 cash was paid in
Year 1, there would be a $2,400 cash outflow from operating activities shown on
the Year 1 statement of cash flows. There would be zero cash flow shown on the
Year 2 statement of cash flows.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
59) On June 1, Year 1, Maverick Company paid $1,200 cash for an insurance
policy that would protect the company for one year. The company’s fiscal
closing date is December 31. Based on this information, the amount of insurance
expense and the cash flow from operating activities shown on the Year 1
financial statements would be
A)
Insurance
Expense Cash Flow
500 1,200
B)
Insurance
Expense Cash Flow
700 1,200
C)
Insurance
Expense Cash Flow
1,200 1,200
D)
Insurance
Expense Cash Flow
700 500
Answer: B
Explanation: Cost per month = $1,200 total ÷ 12 months =
$100 per month
As of December 31, Year 1:
Amount used = $100 per month × 7 months = $700 insurance expense
Future benefit = $100 per month × 5 months = $500 prepaid
insurance
Since all of the cash was paid in Year 1, the total $1,200 cash
outflow would be shown on the Year 1 statement of cash flows. Zero would be
shown in Year 2.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid
items affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
60) A deferral
1. A)
exists when a company receives cash after recognizing the associated revenue.
2. B)
exists when a company receives cash at the same time the associated revenue is
recognized.
3. C)
exists when a company receives cash before recognizing the associated revenue.
Answer: C
Explanation: Note that revenues as well as expenses can be
deferred. A deferral occurs whenever a company receives or pays cash but defers
(delays) the recognition of the related revenue or expense. Recall that revenue
cannot be recognized before the work has been done. This is true even if the
company has already received the cash for the work that will be done in the
future. In this case the company would receive the cash but defer the
recognition of revenue until it has completed the work.
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
61) Langley Inc. accepted a $24,000 retainer for which the
company agreed to provide services in the future. Recognizing this event would
1. A)
defer the recognition of revenue.
2. B)
increase the balance in the company’s cash account.
3. C)
cause the company’s liabilities to increase.
4. D)
All of the answers are correct.
Answer: D
Explanation: Collecting cash for services to be provided
in the future is an asset source transaction. The asset account (cash) and the
liability account (unearned revenue) increase. The unearned revenue account
shows the company’s obligation to perform services in the future. Revenue
recognition is deferred until the services are actually performed.
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
62) Amelia Consulting Services collected $12,000 cash for
services to be provided in the future. Which of the following shows how
recognizing the cash receipt will affect the company’s ledger accounts?
Assets
=
Liabilities
+
Stockholders’ Equity
Cash Prepaid
Rent
Unearned
Revenue
Common
Stock Retained
Earnings
1.
12,000
(12,000)
2. 12,000
12,000
3. 12,000
12,000
4.
(12,000)
12,000
1. A)
Option A
2. B)
Option B
3. C)
Option C
4. D)
Option D
Answer: B
Explanation: Collecting cash for services to be provided
in the future is an asset source transaction. The asset account (cash) and the
liability account (unearned revenue) increase. The retained earnings account is
not affected because the revenue recognition is deferred.
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
63) Which of the following shows how the event “collected cash
for services to be rendered in the future” affects a company’s financial
statements?
A)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
+
NA
+
NA
NA
NA +OA
B)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
+
+
NA
NA
NA
NA +OA
C)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
= Liab.
+
Equity Rev.
− Exp.
= Net
Inc.
+
+
NA
NA
+
− +OA
D)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
+
+
NA
NA
NA
NA NA
Answer: B
Explanation: Collecting cash for services to be rendered
in the future is an asset source transaction. The asset account (cash)
increases and the liability account (unearned revenue) increases. Since the
revenue recognition is deferred (delayed), there is no effect on the income
statement. A cash inflow from operating activities is shown on the statement of
cash flows.
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
64) On September 1, Year 1, Zelda Company collected $120,000
cash for services to be provided for one year beginning immediately. The
company’s fiscal closing date is December 31. Based on this information, the
amount of revenue appearing on the Year 1 income statement would be
1. A)
$30,000
2. B)
$40,000
3. C)
$80,000
4. D)
$120,000
Answer: B
Explanation: Revenue earned per month = $120,000 total ÷
12 months = $10,000 per month
As of December 31, Year 1:
Amount earned = $10,000 per month × 4 months = $40,000 service
revenue
Future obligation = $10,000 per month × 8 months = $80,000 unearned
revenue
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
65) On September 1, Year 1, Gomez Company collected $9,000 in
advance from a customer for services to be provided over a one-year period
beginning on that date. How much revenue would Gomez Company report related to
this contract on its income statement for the year ended December 31, Year 1?
How much would the company report as net cash flows from operating activities
for Year 1?
1. A)
$3,000; $3,000
2. B)
$9,000; $9,000
3. C)
$3,000; $9,000
4. D)
$0; $9,000
Answer: C
Explanation: Monthly revenue = Receipt of $9,000 ÷ 12
months = $750 per month
Revenue (on the income statement) = $750 per month × 4 months
(September through December) = $3,000
The company will recognize the $9,000 received as a cash inflow
for operating activities in Year 1.
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
66) On June 1, Year 1, Jack Associates collected $48,000 cash
for consulting services to be provided for one year beginning immediately.
Based on this information, which of the following shows how the required
adjustment on December 31, Year 1, would affect Jack’s ledger accounts?
Assets
=
Liabilities
+
Stockholders’ Equity
Cash Prepaid
Rent
Unearned
Revenue
Common
Stock Retained
Earnings
1.
(28,000)
28,000
2.
20,000
(20,000)
3.
(20,000)
20,000
4.
28,000
(28,000)
1. A)
Option A
2. B)
Option B
3. C)
Option C
4. D)
Option D
Answer: A
Explanation: Revenue earned per month = $48,000 total ÷ 12
months = $4,000 per month
As of December 31, Year 1:
Amount earned = $4,000 per month × 7 months = $28,000 service
revenue
Recognizing deferred revenue is a claims exchange transaction.
The liability account (unearned revenue) decreases. The revenue recognition
increases net income which ultimately increases retained earnings.
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
67) On February 1, Year 1, Cora Company collected $60,000 cash
for consulting services to be provided for one year beginning immediately. The
company’s fiscal closing date is December 31. Based on this information, the
amount of unearned revenue appearing on the December 31, Year 2 balance sheet
would be
1. A)
$60,000
2. B)
$55,000
3. C)
$5,000
4. D)
zero
Answer: D
Explanation: Revenue earned per month = $60,000 total ÷ 12
months = $5,000 per month
As of December 31, Year 1:
Amount earned = $5,000 per month × 11 months = $55,000 service
revenue
Future obligation = $5,000 per month × 1 month = $5,000 unearned
revenue
As of December 31, Year 2:
Amount earned = $5,000 per month × 1 months = $5,000 service
revenue
All of the revenue has been earned by the end of Year 2 so the
amount of unearned revenue is zero on December 31, Year 2.
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
68) Which of the following shows how the adjusting entry to
recognize services provided to a client who paid for the services prior to the
work being performed?
A)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
−
NA
−
+
NA
+ NA
B)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
+
+
NA
+
NA
+ +IA
C)
Balance Sheet Income
Statement Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp. =
Net Inc.
NA
−
+
+
NA
+ NA
D)
Balance Sheet Income Statement
Stmt of
Cash Flows
Assets
=
Liab.
+
Equity Rev.
−
Exp.
= Net
Inc.
NA
−
+
+
NA
+ +OA
Answer: C
Explanation: When a company collects cash for services
before they are provided, the company recognizes an obligation to provide the
services in the future (unearned revenue). When the company settles its
obligation by providing services, the liability account (unearned revenue)
decreases and the revenue account increases. This is a claims exchange
transaction. The increase in revenue causes net income to increase. The
increase in net income causes stockholders’ equity (retained earnings) to
increase. There is no effect on cash flow because the cash flow was previously
recognized at the time the cash was collected from the client.
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
69) On August 1, Year 1, Carson Company collected $84,000 for
services to be provided for one year beginning immediately. The company’s
fiscal closing date is December 31. Based on this information, the amount of
service revenue and the cash flow from operating activities shown on the Year 1
financial statements would be
A)
Service
Revenue
Cash Flow
35,000 84,000
B)
Service
Revenue
Cash Flow
42,000 84,000
C)
Service
Revenue
Cash Flow
35,000 35,000
D)
Service
Revenue
Cash Flow
84,000 49,000
Answer: A
Explanation: Revenue earned per month = $84,000 total ÷ 12
months = $7,000 per month
As of December 31, Year 1:
Amount earned = $7,000 per month × 5 months = $35,000 service
revenue
All of the cash was collected in Year 1. The cash inflow from operating
activities on the December 31, Year 1 statement of cash flows would be $84,000.
Difficulty: 2 Medium
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned
revenues affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
70) On December 31, Year 3, Supplies, Inc. adjusted its records
to recognize $10,000 of accrued salaries. Based on this information alone, the
1. A)
balance sheet at the beginning of Year 4 would show $10,000 of accrued salaries
expense.
2. B)
balance sheet at the beginning of Year 4 would show $10,000 of accrued salaries
payable.
3. C)
income statement for Year 3 would show $10,000 of accrued salaries payable.
4. D)
income statement for Year 4 would show $10,000 of accrued salaries expense.
Answer: B
Explanation: The adjusting entry recognizes accrued salary
expense and accrued salaries payable. The expense account would be closed at
the end of Year 3 and would not be shown on the Year 4 income statement.
However, the accrued salaries payable account is a permanent account. The
account would not be closed. Instead, the balance would be carried forward to
the beginning Year 4 balance sheet.
Difficulty: 2 Medium
Topic: Prepare Financial Statements
Learning Objective: 03-04 Use a list of accounts to
prepare financial statements containing deferrals.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
71) Foster Company’s December 31, Year 1, balance sheet showed
$2,700 cash, $1,000 common stock, and $1,700 retained earnings. The company
experienced the following event during Year 2. On October 1, collected $12,000
in advance for an agreement to provide office space for one year beginning
immediately.
Based on this information alone,
1. A)
the Year 3 income statement would show $9,000 of rent revenue.
2. B)
the Year 3 balance sheet would show $9,000 of rent revenue.
3. C)
the Year 2 income statement would show $3,000 of unearned rent revenue.
4. D)
the Year 2 balance sheet would show $3,000 of unearned rent revenue.
Answer: A
Explanation: Earnings per month = $12,000 total ÷ 12
months = $1,000 per month
As of December 31, Year 2:
Amount earned = $1,000 per month × 3 months = $3,000 earned
revenue
Future obligation = $1,000 per month × 9 months = $9,000
unearned revenue
The $3,000 earned revenue is shown on the Year 2 income
statement and the $9,000 remaining balance in the unearned revenue account is
shown on the Year 2 balance sheet.
As of December 31, Year 3:
Amount earned = $1,000 per month × 9 = $9,000 earned revenue
Since all of the revenue has been earned by December 31, Year 3,
the balance in the unearned revenue account on the Year 3 balance sheet is
zero.
Difficulty: 2 Medium
Topic: Prepare Financial Statements
Learning Objective: 03-04 Use a list of accounts to
prepare financial statements containing deferrals.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
72) Hans Company’s December 31, Year 1, balance sheet showed
$800 cash, $500 supplies, $400 accounts payable, $300 common stock, and $600
retained earnings. The company experienced the following events during year 2.
(1) Purchased $1,000 of supplies on account
(2) Earned $2,000 cash revenue
(3) Paid $1,200 cash to reduce accounts payable created in Event
1 above
(4) Physical count revealed $300 of supplies on hand at the end
of Year 2
Based on this information, the company would report
1. A) a
$200 balance in the accounts payable account on the Year 2 balance sheet.
2. B) a
$800 net cash inflow from operating activities on the Year 2 statement of cash
flows.
3. C) a
$1,200 supplies expense on the Year 2 income statement.
4. D)
All of the answers are correct.
Answer: D
Explanation: Amount of supplies expense: $500 beginning
balance in supplies + $1,000 supplies purchased = $1,500 supplies available for
use; $1,500 supplies available for use − $300 ending balance of supplies =
$1,200 supplies expense shown on the Year 2 income statement.
Amount of accounts payable balance: $400 beginning balance +
$1,000 increase due to purchase of supplies − $1,200 payment to reduce accounts
payable = $200 ending balance of accounts payable shown on the Year 2 balance
sheet.
Difficulty: 2 Medium
Topic: Prepare Financial Statements
Learning Objective: 03-04 Use a list of accounts to
prepare financial statements containing deferrals.
Bloom’s: Apply
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