Deck 3: Accrual Basis of Accounting

Question 1

An accrued expense is one that has been incurred but not yet paid.

Answer 1

True

Question 2

Prepaid rent is an example of a contra account, and is used to record a reduction to its related account, rent expense.

Answer 2

False

Question 3

Adjusting entries always impact the income statement and the cash account.

Answer 3

False

Question 4

The book value of a building is equivalent to its historical cost.

Question 5

Adjusting unearned revenues causes a liability to decline.

Question 6

Each adjusting entry affects a balance sheet account and an income statement account.

Question 7

An adjusting entry to record depreciation expense is an example of an adjustment that accrues an expense to reflect its incurrence during the accounting period even though it is not yet paid or recorded.

Question 8

An adjusted trial balance is a listing of all the year-end balance sheet accounts, since all the income statement accounts have been closed to zero.

Question 9

Permanent accounts are the accounts presented on the balance sheet.

Question 10

Temporary accounts for a corporation consist of the revenue, expense, and retained earnings accounts.

Question 11

Adjusting entries must be posted before the closing process begins.

Question 12

A temporary account is closed at year-end when its balance is transferred to Retained Earnings.

Question 13

In accounting for a corporation, the Retained Earnings account is closed at the end of each accounting period.

Question 14

At the end of the accounting period, the dividends account is not closed as it is a permanent account.

Question 15

The complete accounting cycle begins with the analysis of transactions and ends with the preparation of financial statements.

Question 16

All accounts in the general ledger are closed at a company's fiscal year end in order to facilitate preparation of the financial statements and to ready the accounts for the activities of the next year.

Question 17

Corporation revenue and expense accounts are considered temporary subdivisions of the corporation's common stock.

Question 18

Which one of the following is not a reason for which adjustments are made?

A) To close the income statement accounts and prepare them for the following year's activity
B) To allocate used or expired assets to reflect expenses incurred in the period
C) To allocate the earned portion of unearned revenue to reflect revenues earned during the period
D) To accrue expenses to reflect expenses incurred in the period that are not yet paid or recorded

Question 19

Which of the following is a distinguishing characteristic of a deferral?

A) It affects at least one liability account
B) It always impacts the cash account
C) It includes the adjustment of an amount previously recorded in a balance sheet account
D) It increases a balance sheet account and decreases an income statement account

Question 20

A company provides services to clients during the period that are neither paid for, nor billed to the clients. What must the company do?

A) Bill the client prior to year end in order to recognize the revenue
B) Record the revenues as a liability at the end of the year
C) Accrue revenue by making an adjustment at the end of the period
D) All of the above are true

Question 21

As of the beginning of the year, the company had equipment totaling $900,000 which was depreciated at $75,000 per year. If the company makes the appropriate adjusting entry at year end, which of the following is one part of the journal entry that will be made?

A) Increase Depreciation Expense for $75,000
B) Decrease Accumulated Depreciation for $75,000
C) Increase Equipment for $75,000
D) Decrease Depreciation Expense for $75,000

Question 22

When adjusting for depreciation, which of the following is one effect of the adjustment?

A) Accumulated depreciation is decreased
B) The asset's book value declines
C) The cost of the equipment declines
D) The market value of the equipment declines

Question 23

An accrual of wages expense would produce what effect on the balance sheet?

A) Increase liabilities and decrease equity
B) Decrease liabilities and increase equity
C) Increase assets and increase liabilities
D) Decrease assets and decrease liabilities

Question 24

As supplies and PPE assets on the balance sheet are consumed, they are reflected:

A) As a revenue on the income statement
B) As an expense on the income statement
C) As common stock on the balance sheet
D) Assets are never consumed

Question 25

An adjusting entry will not take the format of which one of the following?

A) An increase to an expense account and an increase to a liability account
B) An increase to an asset account and increase to a revenue account
C) An increase to an expense account and an increase to a revenue account
D) A decrease to a liability account and an increase to a revenue account
E) An increase to an expense account and a decrease to an asset account

Question 26

Which one of the following errors causes an overstatement of net income?

A) Failure to accrue revenue earned but not billed
B) Failure to record collection of an account receivable
C) Failure to record a portion of fees received in advance that is earned by year-end
D) Failure to record depreciation expense
E) None of the above

Question 27

Which one of the following errors causes an understatement of net income?

A) Failure to accrue revenue earned but not billed
B) Failure to accrue wages earned but not yet paid to employees
C) Failure to record depreciation expense
D) Failure to record payment of account payable
E) None of the above

Question 28

M. Mabrey received $2,500 from a tenant on December 1 for five months' rent of an office. This rent was for December, January, February, March, and April. If Mabrey increased Cash and increased Unearned Rental Income for $2,500 on December 1, what necessary adjustment would be made on December 31?

Question 29

P. Disco received $2,400 from a tenant on December 1 for three months' rent of an office. This rent was for December, January, and February. If Disco increased Cash and increased Unearned Rental Income for $2,400 on December 1, what necessary adjustment would be made on December 31?

Question 30

Early in the accounting period, a customer paid $1,500 for services in advance of receiving them; Cash was increased and Unearned Service Fees was increased for $1,500. At the end of the accounting period, two-thirds of the services paid for had yet to be performed.
What necessary adjustment would be made at the end of the period?

Question 31

On September 1, Best Company began a contract to provide services to Wildwood Company for six months, with the total $10,800 payment to be made at the end of the six-month period. Equal services are provided each month. The firm uses the account Fees Receivable to reflect amounts due but not yet billed.
What proper adjustment would Best Company make on December 31, the end of the accounting period (no previous adjustment has been made)?

Question 32

On December 31, the end of the accounting period, $5,300 in service fees had been earned but not billed or received. The firm uses the account Fees Receivable to reflect amounts due but not yet billed.
The proper adjustment would be:

Question 33

Smith Company paid $26,400 for a four-year insurance policy on September 1 and recorded the $26,400 as an increase to Prepaid Insurance and a decrease to Cash. What adjustment should Smith make on December 31, the end of the accounting period (no previous adjustment has been made)?

Question 34

Williams Company paid $24,000 for a two-year insurance policy on October 1 and recorded the $24,000 as an increase to Prepaid Insurance and a decrease to Cash. What adjustment should Williams make on December 31, the end of the accounting period (no previous adjustment has been made)?

Question 35

Office Supplies had a beginning balance of $8,000. During the month, purchases of office supplies totaling $2,000 were added to the Office Supplies account. If $3,000 worth of office supplies is still on hand at month-end, what is the proper adjustment?

Question 36

Printing Supplies had a beginning balance of $4,000. During the month, purchases of printing supplies totaling $3,000 were added to the Printing Supplies account. If $2,000 worth of printing supplies is still on hand at month-end, what is the proper adjustment?

Question 37

During their first year, Smith and Associates bought $16,000 worth of supplies for their CPA firm. When purchased, the Supplies account was increased and Accounts Payable increased.
What adjustment would Smith and Associates make if $4,000 worth of supplies were on hand at year-end?

Question 38

The Supplies account balance at the end of the period is $22,000. Supplies totaling $18,800 have been purchased during the period and added to Supplies. A physical count shows $5,000 worth of supplies on hand at the end of the period.
The proper adjusting entry is:

Question 39

West Company signed a one-year lease on April 1, and paid the $11,400 total year's rent in advance. West recorded the transaction as increase to Prepaid Rent and a decrease to Cash.
What adjustment should West make on December 31 (no previous adjustment has been made)?

Question 40

Forrester Company signed a two-year lease on July 1, and paid the $17,400 total rent in advance. Forrester recorded the transaction as an increase to Prepaid Rent and a decrease to Cash. What adjustment should Forrester make on December 31 (no previous adjustment has been made)?

Question 41

Liberty Company calculates that interest of $900 has accrued at December 31 on outstanding notes payable. How should Liberty record this on December 31?

Question 42

Assume December 31 is a Wednesday. Wages are paid every Friday, and the weekly payroll (for five days) amounts to $3,000. To record the correct amount of expense for December, the firm makes the following adjustment on December 31:

Question 43

Benson Company calculates it has earned (but not yet collected or recorded) interest of $525 at December 31 on outstanding notes receivable. How should Benson record this on December 31?

Question 44

Assume December 31 is a Monday. Wages are paid every Friday, and the weekly payroll (for five days) amounts to $6,000. To record the correct amount of expense for December, the firm makes the following entry on December 31:

Question 45

On July 1, Mize paid $24,000 for a two-year insurance policy, increasing Prepaid Insurance for the full amount. If the adjusting entry is not made at December 31, the end of the accounting period, how does the error affect this year's financial statements?

A) Overstates assets
B) Overstates revenue
C) Understates common stock
D) Overstates expenses
E) Does none of the above

Question 46

A company's failure to record depreciation expense at the end of an accounting period results in:

A) Understated income
B) Understated assets
C) Overstated expenses
D) Overstated assets
E) None of the above

Question 47

On December 1, Ford Company received three months' rental income in advance and increased a liability account. On December 31, the end of the accounting period, Ford failed to make an adjusting entry reflecting that a portion of this rent had been earned. This error results in:

A) Overstated liabilities
B) Understated assets
C) Overstated assets
D) Overstated revenue
E) None of the above

Question 48

During the current accounting period, Bentley Company paid $1,000 for advertising services in advance of receiving them. Prepaid Advertising was increased and Cash was decreased for $1,000. At the end of the accounting period, three- fourths of the services paid for had yet to be received.
The proper adjustment is:

Question 49

During the current accounting period, Mulholland Company paid $1,000 for advertising services in advance of receiving them. Prepaid Advertising was increased and Cash was decreased for $1,000. At the end of the accounting period, three-fourths of the services paid for had been received.
The proper adjusting entry is:

Question 50

At the end of the accounting period, the Service Fees Earned account has a balance of $76,000. The accountant makes two adjustments--one to accrue unbilled service fees of $6,000, and the other to reduce the Unearned Service Fees liability account by $900.
After the adjustments are posted, the Service Fees Earned account has a balance of:

A) $75,400
B) $82,900
C) $79,900
D) $72,100
E) None of the above

Question 51

At the end of the accounting period, the Legal Fees Earned account has a balance of $75,000. The accountant makes two adjustments--one to accrue unbilled legal fees earned of $2,500, and the other to reduce the Unearned Legal Fees liability account by $500.
After the adjustments are posted, the Legal Fees Earned account has a balance of

A) $77,500
B) $78,000
C) $81,500
D) $82,500
E) None of the above

Question 52

In preparing its adjusting entries at the end of this year, Johns Company neglected to adjust the Prepaid Insurance account for the amount of insurance expired during the year. This error:

A) Understates this year's net income and overstates both retained earnings and assets at year-end
B) Overstates this year's net income and understates both retained earnings and assets at year-end
C) Understates this year's net income and understates both retained earnings and assets at year-end
D) Overstates this year's net income and overstates both retained earnings and assets at year-end
E) None of the above

Question 53

In preparing its adjusting entries at the end of this year, Filbert Company neglected to adjust the Unearned Service Fees account for the amount of such fees earned during the year. This error

A) Understates this year's net income and retained earnings at year-end and overstates liabilities at year-end
B) Overstates this year's net income and retained earnings at year-end and understates liabilities at year-end
C) Understates this year's net income and understates both retained earnings and liabilities at year-end
D) Overstates this year's net income and overstates both retained earnings and liabilities at year-end
E) None of the above

Question 54

In preparing its adjusting entries at the end of this year, Milton Company neglected to accrue employees' wages earned but not yet paid or recorded. This error:

A) Understates this year's net income and overstates both liabilities and retained earnings at year-end
B) Overstates this year's net income and overstates both liabilities and retained earnings at year-end
C) Overstates this year's net income and liabilities at year-end, and understates retained earnings at year-end
D) Overstates this year's net income, understates liabilities at year-end, and overstates retained earnings at year-end
E) None of the above

Question 55

In preparing its adjusting entries at the end of this year, Southwestern Company neglected to accrue commissions earned but not yet received or recorded. This error:

A) Understates this year's net income and overstates both assets and retained earnings at year-end
B) Overstates this year's net income and overstates both assets and retained earnings at year-end
C) Understates this year's net income and understates both assets and retained earnings at year-end
D) Overstates this year's net income and understates both assets and retained earnings at year-end
E) None of the above

Question 56

Which of the following adjustments is an example of a deferral?

A) The recording of wages earned by employees but not yet paid
B) The recording of periodic depreciation expense on equipment
C) The recording of fees earned but not yet billed or received
D) The recording of interest income earned but not yet received
E) None of the above

Question 57

Which of the following adjustments is an example of an accrual?

A) The recording of wages earned by employees but not yet paid
B) The recording of periodic depreciation expense on equipment
C) The recording of service fees earned that had been received in cash at an earlier time
D) The recording of supplies expense for the period
E) None of the above

Question 58

The unique characteristic of an accrual adjustment is that the adjusting entry

A) Decreases a balance sheet account and increases an income statement account
B) Increases both a balance sheet account and an income statement account
C) Decreases both a balance sheet account and an income statement account
D) Increases a balance sheet account and decreases an income statement account
E) None of the above

Question 59

On the last day of December 2018, Smith & Sons entered into a transaction that resulted in a receipt of $54,000 cash in advance related to services that will be provided during January 2019. During December of 2018, the company also performed $32,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company had recorded service revenue of $800,000 for the year. There are no other prepaid services yet to be delivered.
If Smith & Sons makes the appropriate adjusting entry, how much will service revenue will be reflected on the December 31, 2018 income statement?

A) $725,500
B) $757,500
C) $811,500
D) $832,000

Question 60

On the last day of December 2018, Scottsdale Aviators entered into a transaction that resulted in a receipt of $54,000 cash in advance related to services that will be provided during January 2019. During December of 2018, the company also performed $32,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company had recorded service revenue of $800,000 for the year. There are no other prepaid services yet to be delivered.
If Scottsdale Aviators makes the appropriate adjusting entry, how much will be reported on the December 31, 2018 balance sheet as unearned revenue?

A) $54,000
B) $22,000
C) $32,000
D) $76,000

Question 61

On the last day of December 2018, Billings Inc. entered into a transaction that resulted in a receipt of $54,000 cash in advance related to services that will be provided during January 2019. During December of 2018, the company also performed $34,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company had recorded service revenue of $800,000 for the year. There are no other prepaid services yet to be delivered, and during the month all outstanding accounts receivable from prior months were collected.
If Billings Inc. makes the appropriate adjusting entry, how much will be reported on the December 31, 2018 balance sheet as accounts receivable?

A) $54,000
B) $22,000
C) $34,000
D) $76,000

Question 62

On April 1, Lightpath Technologies paid $40,000 for rent on warehouse space one year in advance. If Lightpath makes the appropriate adjusting entry, how much will be reported on the December 31 income statement for rent expense?

A) $22,500
B) $30,000
C) $ 7,500
D) $25,000

Question 63

On April 1, Smith & Sons paid $30,000 for rent on warehouse space one year in advance. If Smith & Sons makes the appropriate adjusting entry, how much will be reported on the December 31 balance sheet as prepaid rent?

A) $22,500
B) $30,000
C) $ 0
D) $ 7,500

Question 64

On October 1, Tanaka entered into a lease agreement to rent out its old warehouse space it was no longer using. This agreement calls for Tanaka to receive $3,000 per month from the lessee, due and payable at the end of the 4-month lease term. At December 31, none of the rental payments from the lessee had yet been received.
If Tanaka makes the appropriate adjusting entry, how much will be reported on the December 31 balance sheet as rent receivable?

A) $2,000
B) $8,000
C) $4,000
D) $9,000

Question 65

Mrs. Beard's Bagels has 6 employees who are paid $12 per hour. At December 31 each of Mrs. Beard's employees had worked 18 hours which had not been paid or recorded. Prior to adjustments, the company had recorded $85,700 in wages expense for the year.
If Mrs. Beard makes the appropriate adjusting entry, how much will be reported on the December 31 income statement as wage expense?

A) $85,700
B) $84,404
C) $ 1,296
D) $86,996

Question 66

Mrs. Beard's Bagels purchases its inventory, on account, daily. At December 31 the company had taken receipt of $40,000 of inventory from its suppliers which had not been recorded in the accounts.
If Mrs. Beard makes the appropriate adjusting entry, how much will be reported on the December 31 balance sheet as accounts payable?

A) $0
B) $40,000
C) $32,496
D) $29,904

Question 67

Which of the following is a permanent account category?

A) Revenues
B) Dividends
C) Expenses
D) Liabilities
E) None of the above

Question 68

Which of the following is a permanent account?

A) Accounts Receivable
B) Professional Fees Earned
C) Advertising Expense
D) Cash Dividends
E) None of the above

Question 69

Which of the following is a permanent account?

A) Supplies Expense
B) Cash Dividends
C) Retained Earnings
D) Service Fees Earned
E) None of the above

Question 70

Which of the following is a temporary account?

A) Subscriptions Received in Advance
B) Cash
C) Accounts Payable
D) Cash Dividends
E) None of the above

Question 71

Which of the following is a temporary account?

A) Notes Payable
B) Land
C) Wages Expense
D) Common Stock
E) None of the above

Question 72

The distinguishing feature of a permanent account is that any balance in the account at the end of an accounting period is:

A) Carried forward to the next accounting period
B) Transferred to a temporary account
C) Transferred to the Cash account
D) Transferred to a permanent stockholders' equity account
E) None of the above

Question 73

The distinguishing feature of a temporary account is that any balance in the account at the end of an accounting period is:

A) Carried forward to the next accounting period
B) Reported in the balance sheet
C) Transferred to the Cash account
D) Transferred to a permanent stockholders' equity account
E) None of the above

Question 74

Corporation revenue and expense accounts are considered temporary subdivisions of the corporation's:

A) Common stock
B) Cash dividends
C) Cash
D) Retained earnings
E) None of the above

Question 75

A complete accounting cycle occurs once every:

A) Week
B) Month
C) Quarter
D) Fiscal year
E) None of the above

Question 76

Which of the following accounting cycle steps occurs only at the end of the accounting year?

A) Analyze transactions from source documents
B) Prepare financial statements
C) Prepare a post-closing trial balance
D) Record transactions in journals
E) None of the above

Question 77

On December 15, 2018, a company receives an order from a customer for services to be performed on December 28, 2018. Due to a backlog of orders, the company does not perform the services until January 3, 2019. The customer pays for the services on January 16, 2019.
The revenue recognition principle requires the revenue to be recorded by the company on:

A) January 3, 2019
B) January 16, 2019
C) December 28, 2018
D) December 15, 2018

Question 78

Under the accrual basis of accounting:

A) Cash must be received before revenue is recognized.
B) Net income is calculated by matching cash outflows against cash inflows.
C) Events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
D) The ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

Question 79

Which of the following reflect the impact on liabilities and revenues, if unearned revenue is not adjusted when the revenue is earned?

A) Liabilities are understated and revenue is understated.
B) Liabilities are overstated and revenue is overstated.
C) Liabilities are overstated and revenue is understated.
D) Liabilities are understated and revenue is overstated.

Question 80

On March 1, Roberts & Sons reported a balance in Supplies of $250. During March, the company purchased supplies (properly recorded) for $950 and consumed supplies of $800.
If no adjusting entry is made for supplies at the end of the month:

A) Stockholders' equity will be overstated by $800.
B) Expenses will be understated by $950.
C) Assets will be understated by $350.
D) Net income will be understated by $800.