Deck 4: The Accounting Cycle: Accruals and Deferrals

Question 1

Adjusting entries are only required when errors are made.

Answer 1

False

Question 2

Adjusting entries are needed whenever transactions affect the revenue or expenses of more than one accounting period.

Answer 2

True

Question 3

Prepaid expenses are assets that should appear on the balance sheet.

Answer 3

True

Question 4

The need for adjusting entries results from timing differences between the receipt or disbursement of cash and the dates on the financial statements.

Question 5

The period of time over which the cost of an asset is allocated to depreciation expense is called its useful life.

Question 6

One of the purposes of adjusting entries is to convert assets to expenses.

Question 7

The book value of a depreciable asset can be determined by its market value at a particular time.

Question 8

Unearned revenue is a liability and should be reported on the income statement.

Question 9

Avalon Company paid $4,400 cash for an insurance policy providing three years protection against fire loss. This transaction could properly be recorded by a $4,400 debit to Unexpired Insurance and a $4,400 credit to Cash.

Question 10

The failure to record an adjusting entry for depreciation would cause assets to be overstated and profit to be understated.

Question 11

Every adjusting entry involves the recognition of either revenue or equity.

Question 12

Unpaid expenses may be included as an expense on the income statement.

Question 13

An adjusting entry to recognize that a fee received in advance has now been earned will cause an increase in total liabilities.

Question 14

The adjusted trial balance may be used in place of the income statement.

Question 15

The Cash account is usually affected by adjusting entries.

Question 16

The adjusted trial balance combines the trial balance items with the adjusting entries to determine the adjusted balances.

Question 17

The adjusting entry to record estimated income taxes in a profitable period consists of a credit to Income Tax Expense and a debit to Income Tax Payable.

Question 18

The book value of an asset may also be called the market value of the asset.

Question 19

When a company receives cash in advance and it is obligated to provide a service or a product in the future, the entry would be a credit to a liability account and a debit to revenue.

Question 20

Omission of the adjusting entry needed to accrue an expense at the end of the period would cause liabilities to be understated.

Question 21

Wages are an expense to the employer when earned rather than when paid.

Question 22

Accumulated Depreciation is

A) An asset account
B) A revenue account
C) A contra-asset account
D) An expense account.

Question 23

An expenditure that benefits year one but is paid for in year two should not be capitalized until year two.

Question 24

Depreciation is:

A) An exact calculation of the decline in value of an asset.
B) Only an estimate of the decline in value of an asset.
C) Only recorded at the end of a year and never over a shorter time period.
D) Management must know the exact life of an asset in order to calculate an acceptable depreciation expense.

Question 25

If Hot Bagel Co. estimates depreciation on an automobile to be $578 for the year they should make the following adjusting entry:

A) Debit Accumulated Depreciation $578 and credit Depreciation Expense $578.
B) Debit Depreciation Expense $578 and credit Automobile $578.
C) Credit Accumulated Depreciation $578 and debit Depreciation Expense $578.
D) Debit Automobile $578 and credit Depreciation Expense $578.

Question 26

Companies that engage in fraud will often capitalize an asset rather than an expense account.

Question 27

The adjusting entry to record income taxes at the end of an unprofitable accounting period consists of a

A) Debit to Income Tax Expense and a credit to Income Tax Payable
B) Credit to Income Tax Expense and a debit to Income Tax Payable
C) Credit to Income Tax Receivable and a debit to Income Tax Expense
D) No adjusting entry is required for income taxes if there are no profits

Question 28

Materiality is a matter of professional judgment.

Question 29

An expenditure that benefits the year in which it is made should be deducted from revenue in the same year.

Question 30

Which of the following is not considered a basic type of adjusting entry?

A) An entry to convert a liability to a revenue
B) An entry to accrue unpaid expenses
C) An entry to convert an asset to an expense
D) An entry to convert an asset to a liability

Question 31

Unearned revenue may also be called

A) Profit
B) Deferred revenue
C) Unexpired revenue
D) Services rendered

Question 32

We can compare income of the current period with income of a previous period to determine whether the operating results are improving or declining:

A) Only if each accounting period covered is a full year.
B) Only if the same accountant prepares the income statement each period.
C) Only if the accounting periods are equal in length.
D) Only if a manual accounting system is used in both periods.

Question 33

Adjusting entries are prepared

A) Before financial statements and after a trial balance has been prepared.
B) After a trial balance has been prepared and after financial statements are prepared
C) After posting but before a trial balance is prepared.
D) Anytime an accountant sees fit to prepare the entries.

Question 34

Which of the following activities is least likely to be limited to "year-end"?

A) Closing the accounts.
B) Drafting notes to accompany statements.
C) Recording transactions.
D) Undergoing an audit.

Question 35

Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts.

Question 36

The normal balance of the Accumulated Depreciation account is

A) A debit balance
B) A credit balance
C) Either a debit balance or a credit balance.
D) There is no normal balance for this account.

Question 37

Rose Corp. has a note receivable from Jewel Co for $80,000. The note matures in 5 years and bears interest of 6%. Rose is preparing financial statements for the month of June. Rose should make an adjusting entry

A) Debiting Interest Revenue for $400 and crediting Interest Receivable for $400.
B) Debiting Interest Receivable for $400 and crediting Interest Revenue for $400
C) Debiting Interest Revenue for $4,800 and crediting Interest Receivable for $4,800.
D) Crediting Interest Payable for $400 and debiting Interest Expense for $400.

Question 38

All assets should be depreciated.

Question 39

Hahn Corp. has three employees. Each earns $600 per week for a five day work week ending on Friday. This month the last day of the month falls on a Wednesday. The company should make an adjusting entry

A) Debiting Wage Expense for $1,080 and crediting Wages Payable for $1,080
B) Debiting Wage Expense for $360 and crediting Wages Payable for $360
C) Crediting Wage Expense for $1,080 and debiting Wages Payable for $1,080
D) Crediting Wage Expense for $360 and debiting Wages Payable for $360

Question 40

The United Shipping Co. made an adjusting entry accruing interest on a note payable for the month of January for $800. The note required 12% per annum on the principal. The principal amount of the note payable must have been

A) $7,000
B) $9,600
C) $80,000
D) $10,800

Question 41

In which of the following situations would an adjusting entry be made at the end of January to record an accrued expense?

A) Ramona's Nursery purchased playground equipment on January 1 with an estimated useful life of six years.
B) On January 25, Ramona's Nursery hired a college student to drive the minibus; the new employee is to begin work in February.
C) January 31 falls on a Tuesday; salaries are paid on Friday of each week.
D) On January 31, Ramona's Nursery paid the interest owed on a note payable for January.

Question 42

Which of the following statements is not true regarding prepaid expenses?

A) Prepaid expenses represent assets.
B) Prepaid expenses are shown in a special section of the income statement.
C) Prepaid expenses become expenses only as goods or services are used up.
D) Prepaid expenses appear in the balance sheet.

Question 43

Unearned revenue is:

A) An asset.
B) Income.
C) A liability.
D) An expense.

Question 44

The balance of an unearned revenue account:

A) Appears in the balance sheet as a component of equity.
B) Appears in the income statement along with other revenue accounts.
C) Appears in a separate section of the income statement for revenue not yet earned.
D) Appears in the liability section of the balance sheet.

Question 45

During the last month of its fiscal year, Echo Lake Resort accepted numerous deposits from customers. By the end of the month many, but not all, of these guests had completed their stays. The entry to record this event is an example of an adjusting entry

A) To apportion a recorded cost.
B) To apportion unearned revenue.
C) To record unrecorded expenses.
D) To record unearned revenue.

Question 46

The purpose of adjusting entries is to:

A) Prepare the revenue and expense accounts for recording the revenue and expenses of the next accounting period.
B) Record certain revenue and expenses that are not properly measured in the course of recording daily routine transactions.
C) Correct errors made during the accounting period.
D) Update the equity account for the changes in equity that had been recorded in revenue and expense accounts throughout the period.

Question 47

Adjusting entries are needed:

A) Whenever revenue is not received in cash.
B) Whenever expenses are not paid in cash.
C) Only to correct errors in the initial recording of business transactions.
D) Whenever transactions affect the revenue or expenses of more than one accounting period.

Question 48

Colonial Systems prepares monthly financial statements. Colonial would record a prepaid expense in each of the following situations except:

A) Colonial Systems purchased a two-year fire insurance policy.
B) Colonial Systems paid for six months' gardening services in advance.
C) A tenant paid Colonial Systems three months' rent in advance.
D) Colonial Systems purchased enough office supplies to last several months.

Question 49

The entry to record depreciation is an example of an adjusting entry:

A) To apportion a recorded cost.
B) To apportion unearned revenue.
C) To convert a liability to revenue.
D) To record unrecorded revenue.

Question 50

Interest that has accrued during the accounting period on a note payable to the bank calls for an adjusting entry consisting of:

A) A debit to Interest Expense and a credit to Cash.
B) A debit to Notes Payable and a credit to Interest Payable.
C) A debit to an asset and a credit to a liability.
D) A debit to Interest Expense and a credit to Interest Payable.

Question 51

Prepaid expenses are:

A) Assets.
B) Income.
C) Liabilities.
D) Expenses.

Question 52

As of January 31, Princess Company owes $500 to Butler Co. for equipment rented during January. If no adjustment is made for this item at January 31, how will Princess's financial statements be affected?

A) Cash will be overstated at January 31.
B) Profit for January will be overstated.
C) Equity will be understated.
D) The financial statements will be accurate since the $500 does not have to be paid yet.

Question 53

In which of the following situations would Daystar Company record unearned revenue in May?

A) In April, Daystar Company received payment from a customer for services that are performed in May.
B) Daystar Company completes a job for a customer in May; payment will be received in June.
C) Daystar Company is paid on May 25 for work done in the first two weeks of May.
D) Daystar Company receives payment in May for work to be performed in June and July.

Question 54

No adjusting entry should consist of:

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

Question 55

Which of the following would not be considered an adjusting entry? $$\begin{array} { | l | c | r | r | } \hline \text { A) } & \text { Supplies expense } & 400 & \\\hline & \text { Supplies } & & 400 \\\hline & & & \\\hline \text { B) } & \text { Depreciation expense } & 400 & \\\hline & \text { Accumulated depreciation } & & 400 \\\hline & & & \\\hline \text { C) } & \text { Wage expense } & 400 & \\\hline & \text { Cash } & & 400 \\\hline & & & \\\hline \text { D) } & \text { Insurance expense } & 400 & \\\hline & \text { Prepaid insurance } & & 400 \\\hline\end{array}$$

A) A Above.
B) B Above.
C) C Above.
D) D Above.

Question 56

Which of the following is not a purpose of adjusting entries?

A) To prepare the revenue and expense accounts for recording transactions of the following period.
B) To apportion the proper amounts of revenue and expense to the current accounting period.
C) To establish the proper amounts of assets and liabilities in the balance sheet.
D) To accomplish the objective of offsetting the revenue of the period with all the expenses incurred in generating that revenue.

Question 57

The concept of materiality:

A) Involves only tangible assets and not intangible assets.
B) Relates only to the income statement and not the balance sheet.
C) Is always an exact percentage of a financial account balance.
D) Is measured by an items influence on the economic decisions of users of financial statements.

Question 58

Adjusting entries help achieve the goals of accrual accounting by applying the following two accounting principles:

A) Business entity concept and recognition principle.
B) Cost principle and the accounting equation.
C) Recognition principle and matching principle.
D) Matching principle and safety principle.

Question 59

Which of the following situations does not require an adjusting entry at the end of January?

A) On January 1, Empire Company purchased delivery equipment with an estimated useful life of five years.
B) On January 1, Empire Company began delivery service for a large client who will pay at the end of a three-month period.
C) At the end of January, Empire Company pays the custodian for January office cleaning services.
D) On January 1, Empire Company paid rent for six months on its office building.

Question 60

The adjusting entry to record interest that has accrued on a note payable to the bank will cause an immediate:

A) Increase in liabilities and reduction in profit.
B) Decrease in liabilities and reduction in profit.
C) Decrease in assets and reduction in profit.
D) Increase in assets and increase in profit.

Question 61

Which statement is true about an adjusted trial balance?

A) It is prepared before adjusting entries.
B) Revenue accounts and expense accounts should not appear on the adjusted trial balance.
C) Balance sheet items are presented before income statement items.
D) Accumulated depreciation should equal depreciation expense.

Question 62

After preparing the financial statements for the current year, the accountant for Barbara's Jewel Co closed the dividends account at year-end by debiting Retained Earnings and crediting the dividends account. What is the effect of this entry on current-year profit and the balance in the equity account(s) at year-end?

A) Profit is overstated; balance in the retained earnings account is correct.
B) Profit is correct; balance in the share capital account is correct.
C) Profit is understated; balance in the share capital account is correct.
D) Profit is understated; balance in the retained earnings account is understated.

Question 63

Recently, The Bon Appetite Café contracted and paid for a relatively expensive advertisement in Haute Cuisine magazine. Despite the fact that the ad will appear in Haute Cuisine three months after the end of Bon Appetite Café's current fiscal year, the Cafe's accountant recorded the advertising expense when the payment was made. If no adjusting entry is made, how will this year's financial statements of Bon Appetite Café be affected?

A) Profit will be overstated and total assets will be understated.
B) Profit will be overstated and total assets will be overstated.
C) Profit will be understated and total assets will be understated
D) Profit will be understated and total assets will be overstated.

Question 64

Which of the following entries causes an immediate decrease in assets and in profit?

A) The entry to record depreciation expense.
B) The entry to record revenue earned but not yet received.
C) The entry to record the earned portion of rent received in advance.
D) The entry to record accrued wages payable.

Question 65

Which of the following accounting principles is concerned with offsetting revenue with the expenses incurred in producing that revenue?

A) Recognition principle.
B) Materiality.
C) Matching.
D) Depreciation.

Question 66

An example of a contra-asset account is:

A) Depreciation Expense.
B) Accumulated Depreciation.
C) Prepaid expenses.
D) Unearned revenue.

Question 67

Which of the following is not an example of an adjusting entry?

A) The entry to record unpaid expenses.
B) The entry to record uncollected revenues.
C) The entry to convert liabilities to revenue.
D) The entry to pay outstanding bills.

Question 68

The accountant for the Grassroots Company forgot to make an adjusting entry to record revenue earned but not yet billed to customers. The effect of this error is:

A) An overstatement of assets and of profit offset by an understatement of equity.
B) An overstatement of profit and an understatement of assets.
C) An understatement of assets, profit, and equity.
D) An overstatement of liabilities offset by an understatement of equity.

Question 69

Which of the following is considered an adjusting entry?

A) The entry to record depreciation.
B) The entry to pay salaries.
C) The entry to pay outstanding bills.
D) The entry to declare a dividend distribution.

Question 70

Which of the following is considered a contra-asset account?

A) Prepaid expenses.
B) Unearned revenue.
C) Accumulated depreciation.
D) All of the above.

Question 71

Which statement is true about land?

A) Land should be depreciated over the same period as the building located on it.
B) Land cannot be depreciated for greater than a 40-year period.
C) Land should not be depreciated.
D) The straight line method should be used to depreciate land.

Question 72

An adjusting entry involving recognition of accrued revenue is necessary at the end of March in which of the following situations?

A) Midwood Consultants received payment in February for consulting services rendered in March.
B) Midwood Consultants began working for a client on March 15; bills will be sent monthly beginning April 15.
C) Midwood Consultants made payment in January for office rent for the first three months of the year.
D) On March 31, a major customer paid his bill for a consulting job completed in February.

Question 73

Prepaid expenses appear:

A) As an expense on the income statement.
B) As an asset on the balance sheet.
C) As a liability on the balance sheet.
D) As a reduction to retained earnings.

Question 74

Which of the following is not considered an end-of-period adjusting entry?

A) The entry to record the portion of unexpired insurance which has become expense during the period.
B) An entry to record revenue which has been earned but has not yet been billed to customers.
C) The entry to record depreciation expense.
D) An entry to record repayment of a bank loan and to recognize related interest expense.

Question 75

On the adjusted trial balance, retained earnings is:

A) Stated at the period-end amount.
B) Stated at the period-beginning amount.
C) Adjusted for all revenues and expenses for the period.
D) Adjusted for the period's dividends.

Question 76

The concept of materiality:

A) Treats as material only those items that are greater than 2% or 3% of profit.
B) Justifies ignoring the matching principle or the recognition principle in certain circumstances.
C) Affects only items reported in the income statement.
D) Results in financial statements that are less useful to decision makers because many details have been omitted.

Question 77

Which of the following would not be a proper application of the concept of materiality by Millridge Corporation?

A) Transactions involving small dollar amounts are not recorded in Millridge's accounting records.
B) Estimates of supplies on hand are used to determine the supplies expense for the period.
C) On a monthly basis, utility bills are expensed in the month paid, rather than in the month in which services are used.
D) Immaterial items are ignored in making end-of-period adjusting entries.

Question 78

Which of the following is the accounting principle that governs the timing of revenue recognition?

A) Recognition principle
B) Materiality.
C) Matching.
D) Depreciation.

Question 79

Unearned revenue appears:

A) As income on the income statement.
B) As an asset on the balance sheet.
C) As a liability on the balance sheet.
D) As a part of the retained earnings.

Question 80

Which of the following statements concerning materiality is true?

A) Generally accepted accounting principles are violated if estimates are used in end-of-period adjustments.
B) Each year the Financial Accounting Standards Board (FASB) publishes the dollar amount considered "material" for each industry.
C) Immaterial items should be handled in the most expedient manner, even if resulting financial statements are not completely precise.
D) Accountants should not waste time and money in recording transactions involving small dollar amounts.