Ch 3 - Adjusting the Accounts

Question 1

The accrual basis of accounting is considered superior to the cash basis of accounting because it:

Answer 1

Provides better information about the activities of the business

Question 2

Accrual basis accounting - Revenue should be recognized when

Answer 2

The service has been preformed or the goods have been sold and delivered (when the performance obligation has been satisfied)

Question 3

Adjusting entries are made to ensure that:
A) Revenues and expenses are recorded in the correct accounting period
B) The accrual basis of accounting is used
C) Assets and liabilities have up to date balances at the end of the accouting period
D) All of the above

Answer 3

D) all of the above

Question 4

A Company pays $1140 for a one year insurance policy effective Apr 1, 2017. The payment is recorded as Prepaid Insurance. On April 30, 2017 an adjusting entry is required to:

A) Increase asset Prepaid Insurance by $95 and increase the expense Insurance expense by $95.
B) Decrease the asset Prepaid Insurance by $95 and increase the expense Insurance Expense by $95
C) Decrease the asset Prepaid Insurance by $1045 and increase the expense Insurance Expense by $1045
D) Increase the asset Prepaid Insurance by $1045 and increase the expense Insurance Expense by $1045

Answer 4

B

Question 5

The trial balance shows supplies $1350 and Supplies expense at $0. If $600 supplies are on hand at the end of the period, the adjusting entry would be:

Answer 5

Supplies expense 750

Supplies 750

Question 6

Accumulated Depreciation is what type of account:

Answer 6

A contra asset account

Question 7

Queenan Company calculated depreciation on its equipment of $1000 for the month of June. the adjusting JE to record this depreciation would be:

Answer 7

Depreciation expense 1000

Accumulated depreciation - equip 1000

Question 8

A company records all cash received in advance of providing a service as a liability. At the end of the accounting period, an adjustment for unearned revenue is required to:

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

Answer 8

A) Decrease liabilities and increase revenues

Question 9

A bank has a three month, 4%, $6000 note receivable issued on Nov 1. Interest is due at maturity. What adjusting entry should the bank record on Nov 30?

Answer 9

Interest receivable 20

Interest revenue 20

Question 10

Kathy earned a salary of $400 in the last week of September. She will be paid for this in October. The adjusting entry her employer will make Sept 30 is:

Answer 10

Salaries expense 400

Salaries payable 400

Question 11

Cash Basis Accounting - When to recognize or record revenue and expenses

Answer 11

Revenue is recorded when cash is received, and expenses are recorded when cash is paid.
Can lead to misleading financial statements

Question 12

When do you need to preform Adjusting Entries?

Answer 12

Every time financial statements are prepared.

Question 13

What are some common Adjusting entries that may be required to be made?

Answer 13

Prepaid expenses
Unearned revenue
Accrued expenses - exp. incurred but not yet paid or recorded
Accrued revenues - Rev earned but not yet received in cash or recorded
Depreciation

Question 14

What is another name for depreciation??

Answer 14

Amortization.

Question 15

What is the straight-line depreciation method?

Answer 15

Divide the cost of the asset by it’s useful life.

Cost / Useful life (in years)
= Annual depreciation expense

Question 16

What is the normal balance of a contra-asset account?

Answer 16

Credit. Offset against (deducted from) say, equipment on the balance sheet.

Question 17

What is the carrying amount

Answer 17

The difference between the cost of any depreciable asset and its accumulated depreciation. AKA Carrying value, book value

Question 18

What are unearned revenues?

Answer 18

When you receive cash for services before they are preformed.
Cash xxx
Unearned revenue xxx

Question 19

When do companies typically recognize unearned revenue?

Answer 19

End of accounting period. Impractical to do it daily when revenue is earned.
Adjusting entries are made to record the revenue that has been earned and to show the liability that remains that the end of the accounting period.

Question 20

If an adjustment is not made for unearned revenue, how does that effect revenue and profit, liabilities?

Answer 20

Revenue and profit will be understated. and liabilities will be overstated. Owner’s equity will be understated.

Question 21

Trial balance on Mar 31 shows:
Prepaid insurance $1200
Supplies 2800
Equipment 24,000
Accumulated dep - equip 2,200
Unearned revenue 9300

An analysis of the accounts shows the following:
1 a one year insurance policy for $1200 was purchased mar 1, 2017
2. supplies on hand at mar 31 was $800
3. equip was purchased on Apr 1 with an estimated 10 year lifespan
4. one third of unearned revenue was earned in Mar
Prepare the adjusting entries for March

Answer 21

Mar 31
Insurance Expense 100
Prepaid insurance 100

Supplies expense			2000
	Supplies				              2000

Depreciation expense 200

     Accumulated dep			  200

Unearned revenue			3100
    Service revenue				3100

Question 22

What are accrued revenues and some examples?

Answer 22

Revenues for services performed but not yet recorded. May accumulate with passage of time
Services,
Interest revenue, rent revenue
Commissions and fees

Question 23

Whats the adjusting entry for accrued revenue?

Answer 23

Increase (Debit) asset account; increase (Credit) revenue account.

Accounts receivable 200
Service revenue 200

Question 24

What are accrued expenses? Examples?

Answer 24

Expenses incurred but not yet paid or recorded.

Interest, rent, property taxes, salaries

Question 25

Formula to calculate interest?

ex: Loan is $5000 with 6% interest rate - calculate interest for one month

Answer 25

Principle amount x annual interest rate x time in terms of one year = interest.

$5000 x 6% x 1/12 = $25

Question 26

Amber Hobbs is the owner of Pioneer Advertising. At end of aug 2017, the first month of business, Amber is trying to prepare monthly financial statements. Info for Aug:

1. At aug 31, Pioneer owes employees $800 in salaries that will be paid sept 2.
2. On aug 1, Pioneer borrowed $30,000 form a local bank on a five-year term. Annual interest rate is 5% and interest is paid monthly on the first of each month.
3. Service revenue earned in Aug is not yet billed or recorded at Aug 31 totaled $1100.

Prepare adjusting entries needed at Aug 31

Answer 26

Aug 31
Salaries expense 800
Salaries payable 800

Interest expense 125
Interest payable 125

Accounts receivable 1100
Service revenue 1100

Question 27

What is the adjusted trial balance

Answer 27

A second trial balance done after all the adjusting entries have been journalized. Financial statements are then prepared from the adjusted trial balance