Deck 3: The Accounting Information System

Question 1

Double-entry accounting is the process that leads to the basic equality in accounting expressed by the formula: assets = liabilities + owners' equity.

Answer 1

True

Question 2

A general journal may be used by any entity in recording its transactions, whereas special journals may be used only by entities whose transactions meet certain requirements.

Answer 2

False

Question 3

Adjusting entries are used to correct errors that occur during the posting process.

Answer 3

False

Question 4

Adjusting entries result from compliance with the accrual basis of accounting.

Question 5

Proper matching of revenues and expenses requires that bad debts be recorded as an expense of the period in which the sale was made.

Question 6

The Income Summary account used during the closing process is shown in the owners' equity section of the balance sheet.

Question 7

When inventory records are maintained using a periodic inventory system, a purchases account is used and the inventory is unchanged during the period.

Question 8

The computation of Cost of Goods Sold under a periodic inventory system has the characteristics of both an adjusting entry and a closing entry.

Question 9

In general, all adjusting entries for prepaid items for which the original amount was entered in a revenue or expense account and for all accrued items should be reversed.

Question 10

The use of a worksheet at the end of each month or quarter permits the preparation of interim financial statements even though the books are closed only at the end of each year.

Question 11

Maintaining an accounting system that ensures reliable information is reported in the financial statements is

A) optional.
B) required by the Internal Revenue Service.
C) required by the Sarbanes-Oxley Act.
D) required by the Internal Revenue Service and the Sarbanes-Oxley Act.

Question 12

Which of the following statements is not true as it pertains to the accounting process?

A) The established system for recording transactions and other events as they occur is referred to as double-entry accounting.
B) Events are of two types: (1) external and (2) internal. Accountants record events that affect the financial position of the company.
C) Adjustments are necessary to achieve a proper matching of revenues and expenses to determine net income for the current period and to achieve an accurate statement of the assets and equities existing at the end of the period.
D) Posting is the initial recording of all transactions in chronological order.

Question 13

Which of the following journal entries is appropriate when a company receives payment in advance for goods or services?

A) Debit Cash and credit an expense account
B) Credit Cash and debit a revenue account
C) Debit Cash and credit a liability account or a revenue account
D) Credit Cash and debit a liability or revenue account

Question 14

Rent collected in advance by a landlord is a(n)

A) accrued liability.
B) deferred asset.
C) accrued revenue.
D) unearned revenue.

Question 15

How do these prepaid expenses expire?

Question 16

Which of the following would not be a correct form for an adjusting entry?

A) A debit to a revenue account and a credit to a liability account
B) A debit to an expense account and a credit to a liability account
C) A debit to a liability account and a credit to a revenue account
D) A debit to an asset account and a credit to a liability account

Question 17

If expenses are greater than revenues, the Income Summary account will be closed by a debit to

A) Income Summary and a credit to Cash.
B) Income Summary and a credit to Retained Earnings.
C) Cash and a credit to Income Summary.
D) Retained Earnings and a credit to Income Summary.

Question 18

When a company uses a periodic inventory system, the year-end entry to adjust the inventory account will debit and credit inventory as follows:

Question 19

Murphy Company sublet a portion of its warehouse for five years at an annual rental of $24,000, beginning on May 1, 2008. The tenant, Sheri Charter, paid one year's rent in advance, which Murphy recorded as a credit to Unearned Rental Income. Murphy reports on a calendar-year basis. The adjustment on December 31, 2008 for Murphy should be

A) No entry
B)
C)
D)

Question 20

Pappy Corporation received cash of $13,500 on September 1, 2008 for one year's rent in advance and recorded the transaction with a credit to Unearned Rent. The December 31, 2008 adjusting entry is

A) debit Rent Revenue and credit Unearned Rent, $4,500.
B) debit Rent Revenue and credit Unearned Rent, $9,000.
C) debit Unearned Rent and credit Rent Revenue, $4,500.
D) debit Cash and credit Unearned Rent, $9,000.

Question 21

Tate Company purchased equipment on November 1, 2008 and gave a 3-month, 9% note with a face value of $20,000. The December 31, 2008 adjusting entry is

A) debit Interest Expense and credit Interest Payable, $1,800.
B) debit Interest Expense and credit Interest Payable, $450.
C) debit Interest Expense and credit Cash, $300.
D) debit Interest Expense and credit Interest Payable, $300.

Question 22

During the first year of Wisnewski Co.'s operations, all purchases were recorded as assets. Store supplies in the amount of $6,450 were purchased. Actual year-end store supplies inventory amounted to $2,150. The adjusting entry for store supplies will

A) increase net income by $4,390.
B) increase expenses by $4,390.
C) decrease store supplies by $6,450.
D) debit Accounts Payable for $2,150.

Question 23

Brown Company's account balances at December 31, 2008 for Accounts Receivable and the related Allowance for Doubtful Accounts are $460,000 debit and $700 credit, respectively. From an aging of accounts receivable, it is estimated that $12,500 of the December 31 receivables will be uncollectible. The necessary adjusting entry would include a credit to the allowance account for

A) $12,500.
B) $13,200.
C) $11,800.
D) $700.

Question 24

Starr Corporation loaned $90,000 to another corporation on December 1, 2008 and received a 3-month, 8% interest-bearing note with a face value of $90,000. What adjusting entry should Starr make on December 31, 2008?

A) Debit Interest Receivable and credit Interest Revenue, $1,800
B) Debit Cash and credit Interest Revenue, $600
C) Debit Interest Receivable and credit Interest Revenue, $600
D) Debit Cash and credit Interest Receivable, $1,800

Question 25

A company receives interest on a $30,000, 8%, 5-year note receivable each April 1. At December 31, 2007, the following adjusting entry was made to accrue interest receivable:


-Assuming that the company does not use reversing entries, what entry should be made on April 1, 2008 when the annual interest payment is received?

A)
B)
C)
D)

Question 26

A company receives interest on a $30,000, 8%, 5-year note receivable each April 1. At December 31, 2007, the following adjusting entry was made to accrue interest receivable:


-Assuming that the company does use reversing entries, what entry should be made on April 1, 2008 when the annual interest payment is received?

A)
B)
C)
D)

Question 27

The following account balances (normal balances) were taken from the journal entry used to transfer various merchandise accounts under a periodic inventory system into the Cost of Goods Sold account:
Based on the above facts, what was ending inventory?

A) $21,000
B) $45,600
C) $38,000
D) $37,900

Question 28

The gross profit of Fordyce Company for 2008 is $75,000, cost of goods manufactured is $320,000, the beginning inventories of goods in process and finished goods are $22,000 and $25,000, respectively, and the ending inventories of goods in process and finished goods are $30,000 and $32,000, respectively. The sales of Fordyce Company for 2008 must have been

A) $378,000.
B) $385,000.
C) $388,000.
D) $398,000.

Question 29

Lopez Company received $6,400 on April 1, 2008 for one year's rent in advance and recorded the transaction with a credit to a nominal account. The December 31, 2008 adjusting entry is

A) debit Rent Revenue and credit Unearned Rent, $1,600.
B) debit Rent Revenue and credit Unearned Rent, $4,800.
C) debit Unearned Rent and credit Rent Revenue, $1,600.
D) debit Unearned Rent and credit Rent Revenue, $4,800.

Question 30

Garcia Corporation received cash of $18,000 on August 1, 2008 for one year's rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 2008 adjusting entry is

A) debit Rent Revenue and credit Unearned Rent, $7,500.
B) debit Rent Revenue and credit Unearned Rent, $10,500.
C) debit Unearned Rent and credit Rent Revenue, $7,500.
D) debit Cash and credit Unearned Rent, $10,500.

Question 31

Eaton Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Service Revenues. This account had a balance of $1,800,000 at December 31, 2008 before year-end adjustment. Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of $450,000 at December 31, 2008.
Service contracts still outstanding at December 31, 2008 expire as follows:
What amount should be reported as Unearned Service Revenues in Eaton's December 31, 2008 balance sheet?

A) $1,350,000
B) $1,300,000
C) $850,000
D) $500,000

Question 32

On June 1, 2008, Nott Corp. loaned Horn $400,000 on a 12% note, payable in five annual installments of $80,000 beginning January 2, 2009. In connection with this loan, Horn was required to deposit $5,000 in a noninterest-bearing escrow account. The amount held in escrow is to be returned to Horn after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2008. Horn made timely payments through November 1, 2008. On January 2, 2009, Nott received payment of the first principal installment plus all interest due. At December 31, 2008, Nott's interest receivable on the loan to Horn should be

A) $0.
B) $4,000.
C) $8,000.
D) $12,000.

Question 33

Colaw Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly period. Colaw accrues salaries expense only at its December 31 year end. Data relating to salaries earned in December 2008 are as follows:
Last payroll was paid on 12/26/08, for the 2-week period ended 12/26/08. Overtime pay earned in the 2-week period ended 12/26/08 was $10,000.
Remaining work days in 2008 were December 29, 30, 31, on which days there was no overtime. The recurring biweekly salaries total $180,000.
Assuming a five-day work week, Colaw should record a liability at December 31, 2008 for accrued salaries of

A) $54,000.
B) $64,000.
C) $108,000.
D) $118,000.

Question 34

Tolan Corp.'s trademark was licensed to Eddy Co. for royalties of 15% of sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year. Tolan received the following royalties from Eddy:
Eddy estimated that sales of the trademarked items would total $40,000 for July through December 2008. In Tolan's 2008 income statement, the royalty revenue should be

A) $14,500.
B) $16,000.
C) $20,500.
D) $22,000.