Deck 3: Accounting for Deferrals

Question 1

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?

A) Expenses will increase and assets will decrease by $1,475.
B) Assets and expenses will both increase by $825.
C) Expenses and assets will both increase by $1,475.
D) The related adjusting entry has no effect on net income or the accounting equation.

Answer 1

Expenses will increase and assets will decrease by $1,475.

Question 2

Which of the following is a claims exchange transaction?

A) Recognized revenue earned on a contract where the cash had been collected at an earlier date
B) Issued common stock
C) Provided services on account
D) Purchased land for cash

Answer 2

Recognized revenue earned on a contract where the cash had been collected at an earlier date

Question 3

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?

A) Total assets will increase by $2,000.
B) Equity will increase by $2,000.
C) Total liabilities will increase by $2,000.
D) Total assets will increase by $2,000 and equity will increase by $2,000.

Answer 3

Equity will increase by $2,000.

Question 4

Which of the following events would require a year-end adjusting entry?

A) Purchasing supplies for cash during the year
B) Purchasing land for cash during the year
C) Providing services on account during the year
D) Each of these events would require a year-end adjusting entry.

Question 5

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?

A) Increase assets and decrease liabilities
B) Increase assets and increase revenues
C) Decrease liabilities and increase revenues
D) No effect

Question 6

Which of the following statements is true regarding accrual accounting?

A) Revenue is recorded only when cash is collected.
B) Expenses are recorded when they are incurred.
C) Revenue is recorded in the period when it is earned.
D) Revenue is recorded in the period when it is earned and expenses are recorded when they are incurred.

Question 7

How would a payment for rent paid in advance be classified?

A) Asset source transaction
B) Asset use transaction
C) Asset exchange transaction
D) Claims exchange transaction

Question 8

Recognizing an expense may be accompanied by which of the following?

A) A decrease in liabilities
B) An increase in assets
C) A decrease in revenue
D) A decrease in assets

Question 9

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?

A) $6,000
B) $7,000
C) $30,000
D) $5,000

Question 10

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?

A) $1,600 of supplies; $200 of supplies expense
B) $1,400 of supplies; $2,000 of supplies expense
C) $1,400 of supplies; $3,200 of supplies expense
D) $1,600 of supplies; $3,400 of supplies expense

Question 11

When a revenue or an expense event is recognized after cash has been exchanged it is referred to as

A) an accrual
B) a deferral
C) either an accrual or deferral
D) neither of these terms describe this event

Question 12

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?

A) An increase in assets and a decrease in liabilities.
B) An increase in liabilities and a decrease in equity.
C) A decrease in liabilities and an increase in equity.
D) A decrease in assets and a decrease in liabilities.

Question 13

Which of the following accounts would not appear on a balance sheet?

A) Service Revenue
B) Supplies
C) Unearned Revenue
D) Prepaid Rent

Question 14

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?

A) Purchased land for cash
B) Purchased supplies for cash
C) Paid advertising expense
D) Paid dividends to stockholder

Question 15

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.)

A) Account numbers 2, 4, and 5 will appear on the income statement.
B) Account numbers 1, 3, and 8 will appear on the balance sheet.
C) Account numbers 2, 5, and 8 will appear on the statement of cash flows.
D) Account numbers 4, 5, and 6 will appear on the statement of changes in stockholders' equity.

Question 16

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?

A) $3,000; $3,000
B) $9,000; $9,000
C) $3,000; $9,000
D) $0; $9,000

Question 17

Which of the following is an asset use transaction?

A) Purchased land for cash
B) Recorded rent expense at the end of the period
C) Borrowed cash from the bank
D) Accrued salary expense at the end of the period

Question 18

Recognition of revenue may be accompanied by which of the following?

A) A decrease in a liability
B) An increase in a liability
C) An increase in an asset
D) An increase in an asset or a decrease in a liability

Question 19

What is the purpose of the accrual basis of accounting?

A) Recognize revenue when it is collected from customers.
B) Match assets with liabilities during the proper accounting period.
C) Recognize expenses when cash disbursements are made.
D) Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands.

Question 20

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?

A) $7,200; $7,200
B) $1,800; $1,800
C) $1,800; $7,200
D) $1,200; $7,200

Question 21

When a company purchases supplies on account

A) Cash flow from financing activities decreases
B) Total assets decrease
C) Expenses increase
D) Liabilities increase

Question 22

Which of the following shows how paying cash to lease an office building for the upcoming year affects a company's financial statements?

A)
B)
C)
D)

Question 23

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?

A) $26,000
B) $19,500
C) $21,000
D) $15,000

Question 24

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

A) $600
B) $750
C) $800
D) $850

Question 25

Pizitz Company experienced a business event that affected its financial statements as indicated below.

Which of the following events could have caused these effects?

A) Paid cash to reduce supplies payable
B) Recognized supplies expense
C) Paid cash to purchase supplies
D) Purchased supplies on account

Question 26

Which of the following events involves a deferral?

A) Recording interest that has been earned but not received.
B) Recording revenue that has been earned but not yet collected in cash.
C) Recording supplies that have been purchased with cash but not yet used.
D) Recording salaries owed to employees at the end of the year that will be paid during the following year.

Question 27

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?

A) Option A
B) Option B
C) Option C
D) Option D

Question 28

The following accounts and balances were drawn from the records of Barnes Company:

Based on this information alone the amount of Barnes's retained earnings is:

A) $11,600.
B) $17,200.
C) $5,200.
D) None of these answers is correct.

Question 29

Hawk Company purchased $300 of supplies on account.Which of the following shows how this purchase will affect Hawk's ledger accounts?

A) Option A
B) Option B
C) Option C
D) Option D

Question 30

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?

A) Recognized depreciation expense on equipment
B) Incurred operating expenses on account
C) Paid interest that was accrued in a prior year
D) All of these answer choices would affect the income statement in a different period from the statement of cash flows

Question 31

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

A) increases the amount of supplies expense recognized in Year 2
B) decreases the amount of liabilities shown on the Year 2 balance sheet
C) increases the amount of liabilities shown on the Year 2 balance sheet
D) decreases the amount of supplies expense recognized in Year 2

Question 32

The entry to recognize depreciation expense incurred on equipment involves which of the following?

A) A decrease in assets
B) An increase in liabilities
C) An increase in assets
D) A decrease in liabilities

Question 33

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?

A) Option A
B) Option B
C) Option C
D) Option D

Question 34

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?

A) Option A
B) Option B
C) Option C
D) Option D

Question 35

Which of the following shows how adjusting the accounts to recognize supplies expense will affect a company's financial statements?

A)
B)
C)
D)

Question 36

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)
B)
C)
D)

Question 37

Which of the following statements is false?

A) Prepaid insurance is a liability reported on the balance sheet.
B) Prepaid insurance indicates that a company has already paid cash for insurance coverage that protects the company for some future time period.
C) Prepaid insurance is a deferred expense.
D) Prepaid insurance represents a future economic benefit.

Question 38

Which of the following shows how paying cash to purchase supplies will affect a company's financial statements?

A)
B)
C)
D)

Question 39

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

A) $200
B) $500
C) $1,000
D) $1,200

Question 40

A deferral

A) exists when a company pays cash at the same time the associated expense is recognized.
B) exists when a company pays cash after recognizing the associated expense.
C) exists when a company pays cash before recognizing the associated expense.

Question 41

On January 1,Year 1,Martin Mowing Company paid $64,000 to purchase a truck.The truck was expected to have a six-year useful life and a $4,000 salvage value.If Margin uses the straight-line method,the amount of depreciation expense recognized on the Year 2 income statement is

A) $10,000
B) $20,000
C) $21,333
D) $30,000

Question 42

On January 1,Year 1 Marrow Moving Company paid $35,000 to purchase a truck.The truck was expected to have a four-year useful life and an $8,000 salvage value.If Marrow uses the straight-line method,the amount of accumulated depreciation shown on the Year 2 balance sheet is

A) $7,000
B) $13,500
C) $17,500
D) $35,000

Question 43

Betsy Company's December 31,Year 1,balance sheet showed $1,900 cash,$500 accounts payable,$400 common stock and $1,000 retained earnings.The company experienced the following events during Year 2.
(1)On April 1,Year 2 the company paid $2,400 cash to rent office space for the coming year starting immediately
(2)Earned $3,600 cash revenue
(3)Paid a $200 cash dividend
Based on this information,the company would report

A) a $1,200 net cash inflow from operating activities on the Year 2 statement of cash flows
B) a $2,600 balance in retained earnings on the Year 2 balance sheet
C) a $600 balance in a prepaid rent account on the Year 2 balance sheet
D) All of the answers are correct.

Question 44

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)
B)
C)
D)

Question 45

Tammy Company paid cash to purchase a long-term operational asset.The cost of the asset will be expensed (depreciated)

A) on the day it is purchased.
B) at the end of its useful life.
C) over the useful life of the asset.
D) when the asset is sold.

Question 46

Langley Inc.accepted a $24,000 retainer for which the company agreed to provide services in the future.Recognizing this event would

A) defer the recognition of revenue.
B) increase the balance in the company's cash account.
C) cause the company's liabilities to increase.
D) All of the answers are correct.

Question 47

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

A) $30,000
B) $40,000
C) $80,000
D) $120,000

Question 48

On January 1,Year 1,Melon Moving Company paid $60,000 to purchase a truck.The truck was expected to have a five-year useful life and a $5,000 salvage value.If Melon uses the straight-line method,the amount of book value shown on the Year 4 balance sheet is

A) $27,000
B) $16,000
C) $5,000
D) zero

Question 49

On January 1,Year 1,Melon Moving Company paid $55,000 to purchase a truck.The truck was expected to have a four-year useful life and a $5,000 salvage value.If Melon uses the straight-line method,the amount of book value shown on the Year 2 balance sheet is

A) $42,500
B) $30,000
C) $25,000
D) $12,500

Question 50

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

A) a $200 balance in the accounts payable account on the Year 2 balance sheet.
B) a $800 net cash inflow from operating activities on the Year 2 statement of cash flows.
C) a $1,200 supplies expense on the Year 2 income statement.
D) All of the answers are correct.

Question 51

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) $$\begin{array} { | c | c | } \hline \text { Service Revenue } & \text { Cash Flow } \\\hline 35,000 & 84,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | c | } \hline \text { Service Revenue } & \text { Cash Flow } \\\hline 42,000 & 84,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | c | } \hline \text { Service Revenue } & \text { Cash Flow } \\\hline 35,000 & 35,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | c | } \hline \text { Service Revenue } & \text { Cash Flnw } \\\hline 84,000 & 49,000 \\\hline\end{array}$$

Question 52

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?

A) Option A
B) Option B
C) Option C
D) Option D

Question 53

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) $$\begin{array} { | c | c | } \hline \text { Insurance Expense } & \text { Cash Flow } \\\hline 500 & 1,200 \\\hline\end{array}$$
B) $$\begin{array} { | c | c | } \hline \text { Insurance Expense } & \text { Cash Flow } \\\hline 700 & 1,200 \\\hline\end{array}$$
C) $$\begin{array} { | c | c | } \hline \text { Insurance Expense } & \text { Cash Flow } \\\hline 1,200 & 1,200 \\\hline\end{array}$$
D) $$\begin{array} { | c | c | } \hline \text { Insurance Expense } & \text { Cash Flow } \\\hline 700 & 500 \\\hline\end{array}$$

Question 54

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

A) $60,000
B) $55,000
C) $5,000
D) zero

Question 55

On December 31,Year 3,Supplies,Inc.adjusted its records to recognize $10,000 of accrued salaries.Based on this information alone,the

A) balance sheet at the beginning of Year 4 would show $10,000 of accrued salaries expense.
B) balance sheet at the beginning of Year 4 would show $10,000 of accrued salaries payable.
C) income statement for Year 3 would show $10,000 of accrued salaries payable.
D) income statement for Year 4 would show $10,000 of accrued salaries expense.

Question 56

A deferral

A) exists when a company receives cash after recognizing the associated revenue.
B) exists when a company receives cash at the same time the associated revenue is recognized.
C) exists when a company receives cash before recognizing the associated revenue.

Question 57

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)
B)
C)
D)

Question 58

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?

A) Option A
B) Option B
C) Option C
D) Option D

Question 59

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,

A) the Year 3 income statement would show $9,000 of rent revenue.
B) the Year 3 balance sheet would show $9,000 of rent revenue.
C) the Year 2 income statement would show $3,000 of unearned rent revenue.
D) the Year 2 balance sheet would show $3,000 of unearned rent revenue.

Question 60

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

A) $2,100
B) $3,000
C) $3,300
D) $3,600

Question 61

[The following information applies to the questions displayed below.]
At the end of Year 1, the following information is available for Grumpy, Happy, and Doc Companies.


-Which company has the highest level of debt risk?

A) Grumpy
B) Happy
C) Doc
D) They all have equal debt risk.

Question 62

Chestnut,Inc.reported the following balances on its balance sheet at December 31,Year 1:

On January 1,Year 2,Chestnut purchased equipment for $40,000 on account.What is the company's debt-to-assets ratio immediately after the purchase of the equipment?

A) 0.42
B) 0.46
C) 0.37
D) 0.34

Question 64

Which of the following transactions would increase a company's return-on-assets ratio?

A) Received cash from customers for goods sold to them on account last month
B) Borrowed cash from a local bank
C) Incurred expenses on account
D) Paid cash to settle accounts payable

Question 66

An increase in revenue may be accompanied by a decrease in a liability.

Question 67

[The following information applies to the questions displayed below.]
At the end of Year 1, the following information is available for Grumpy, Happy, and Doc Companies.


-Which of the following ratios would be most useful in evaluating a company's performance from the owners' perspective?

A) Return-on-assets ratio
B) Debt-to-assets ratio
C) Return-on-equity ratio
D) Either the debt-to-assets ratio or the return-on-equity ratio

Question 68

Asset use transactions always involve the payment of cash.

Question 69

A company may recognize a revenue or expense without a corresponding cash collection or payment in the same accounting period.

Question 70

Companies that use accrual accounting recognize revenues and expenses at the time that cash is received or paid,respectively.

Question 72

[The following information applies to the questions displayed below.]
At the end of Year 1, the following information is available for Grumpy, Happy, and Doc Companies.


-Which company has the highest return-on-assets ratio?

A) Grumpy
B) Happy
C) Doc
D) They all have equal return-on-assets ratios.

Question 73

[The following information applies to the questions displayed below.]
Wichita, Inc. reported the following amounts on its financial statements prepared as of the end of the current accounting period:


-What is the company's return-on-assets ratio?

A) 5%
B) 10%
C) 20%
D) 50%

Question 74

[The following information applies to the questions displayed below.]
At the end of Year 1, the following information is available for Grumpy, Happy, and Doc Companies.


-Which company is the most profitable from the stockholders' perspective?

A) Grumpy
B) Happy
C) Doc
D) Cannot be determined

Question 75

An adjusting entry that decreases unearned revenue and increases service revenue is a claims exchange transaction.

Question 76

Purchasing supplies for cash is an asset exchange transaction.

Question 77

Unearned revenue is reported on the income statement by subtracting it from revenue.

Question 78

[The following information applies to the questions displayed below.]
Wichita, Inc. reported the following amounts on its financial statements prepared as of the end of the current accounting period:


-What is the company's return-on-equity ratio?

A) 5%
B) 10%
C) 20%
D) 50%

Question 79

[The following information applies to the questions displayed below.]
Wichita, Inc. reported the following amounts on its financial statements prepared as of the end of the current accounting period:


-What is the company's debt-to-assets ratio?

A) 5%
B) 10%
C) 45%
D) 50%