Chapter 4 Self Test Questions - Answers THE ACCOUNTING CYCLE: ACCRUALS AND DEFERRALS 1.

The purpose of adjusting entries is to (a) recognize revenue earned but not yet recorded. (b) recognize expenses incurred but not yet recorded. (c) recognize the earned portion of services paid for in advance. (d) recognize all of the above. Every adjusting entry involves the recognition of either revenue or expense. Which of the following is also true? (a) There also must be a corresponding change in capital stock. (b) There also must be a corresponding change in either assets or liabilities. (c) There also must be a corresponding change in the cash account. (d) Both (A) and (B). When (a) (b) (c) (d) accruing unpaid expenses, the required adjusting entry will require a debit an expense account and credit a liability account. debit an expense account and credit an owners' equity account. debit an expense and credit cash. debit an expense and credit Retained Earnings.

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When accruing earned income, the required adjusting entry will consist of a debit to an asset account and a credit to owners' equity. debit to an asset account and a credit to a revenue account. debit to an asset account and a credit to a liability account. none of the above.

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In a prior period cash was paid in advance for an incurring expense. The required adjusting entry recognizes the (a) portion of the asset consumed or expensed, and reduces the balance of an asset account. (b) portion earned as revenue, and reduces the balance of a liability account. (c) expense incurred, and records a liability for future payment. (d) revenue earned but not yet received, and records a receivable. In the current period, services were performed and delivered but the customer was not billed. The required adjusting recognizes the (a) portion of the asset consumed or expensed, and reduces the balance of an asset account. (b) portion earned as revenue, and reduces the balance of a liability account. (c) expense incurred, and records a liability for future payment. (d) revenue earned but not yet received, and records a receivable. In the current period, wages were incurred that will be paid in the next period. The required adjusting entry recognizes the (a) portion of the asset consumed or expensed, and reduces the balance of an asset account. (b) portion earned as revenue, and reduces the balance of a liability account. (c) expense incurred, and records a liability for future payment. (d) revenue earned but not yet received, and records a receivable. In the past period, customers paid for operas that were performed in the current period. The required adjusting entry recognizes the (a) portion of the asset consumed or expensed, and reduces the balance of an asset account. (b) portion earned as revenue, and reduces the balance of a liability account. (c) expense incurred, and records a liability for future payment. (d) revenue earned but not yet received, and records a receivable.

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Chapter 4 Self Test Questions - Answers THE ACCOUNTING CYCLE: ACCRUALS AND DEFERRALS 9.
When (a) (b) (c) (d) adjusting a prepaid expense account, a portion of an asset is recognized as An expense. revenue. a liability. Another asset.

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Which of the following is TRUE about recording prepayments directly to an expense account? (a) It is an acceptable practice. (b) It is rarely, if ever, done. (c) It should never be done. (d) It will have an adverse effect on net income. The original cost of a physical asset was $45,000. It was purchased on January 5, 1995. It has an estimated useful life of 10 years and has been depreciated under the straight-line method for 5 years. At the end of the 6th year, after adjusting entries have been recorded and posted, the book value of the physical asset is which of the following? (a) $22,500 (b) $27,000 (c) $18,000 (d) $40,500 The original cost of a physical asset was $45,000. It was purchased on July 5, 1995. It has an estimated useful life of 10 years and has been depreciated under the straightline method for 5 years. At the end of the 6th year, after adjusting entries have been recorded and posted, the book value of the physical asset is which of the following? (a) $20,250 (b) $27,000 (c) $18,000 (d) $40,500 Depreciation (a) is an accurate measure of the allocation of the cost of an asset over its useful life. (b) is an estimated measure of the allocation of the cost of an asset over its useful life. (c) provides for an accumulation of cash to replace the asset at the end of its useful life. (d) effects the cash flow of the entity. On November 1, a building with an estimated life of 15 years and no estimated salvage value was purchased for $180,000. The adjusting entry on November 30 will include (a) a debit to Depreciation Expense for $12,000. (b) a debit to Depreciation Expense for $1,000. (c) a credit to Accumulated Depreciation: Building for $12,000. (d) both (A) and (C). When (a) (b) (c) (d) adjusting an unearned revenue account, which of the following should occur? a debit to Depreciation Expense for $12,000. A portion of a liability is recognized as an expense. A portion of a liability is recognized as revenue. A portion of a revenue account is recognized as a liability.

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Chapter 4 Self Test Questions - Answers THE ACCOUNTING CYCLE: ACCRUALS AND DEFERRALS 16.
On November 18, the company received $24,000 for services to be performed over the following three months. Cash was debited for $24,000 and Unearned Services Revenue was credited for $24,000. None of the services were provided in November. One-third of the services were completed by December 31. The adjusting entry for December 31 would include which of the following? (a) A debit to Unearned Services Revenue of $8,000 and a credit to Accounts Receivable. (b) A credit to Services Revenue of $16,000 and a debit to Cash. (c) A credit to Services Revenue of $8,000 and a debit to Accounts Receivable. (d) A debit to Unearned Services Revenues and a credit to Services Revenue. On November 16, the company borrowed $24,000 for 90 days at 6% interest. Interest expense was not adjusted at the end of November. The adjusting entry made on December 31 would include a (a) debit to Interest Expense of $360. (b) debit to Interest Expense of $120. (c) credit to Interest Payable of $180. (d) credit to Interest Payable of $480. On November 16, the company borrowed $24,000 for 60 days at 8% interest. An adjusting entry for accrued interest payable was made on December 31, the end of the fiscal year. When the note is paid on January 15, the debit to Interest Expense will be for (a) $320. (b) $160. (c) $240. (d) $80. The final adjusting entry usually involves which of the following? (a) unearned revenues (b) accrued revenues (c) accrued income taxes (d) prepaid expenses In unprofitable periods, if the Income Taxes Payable has an ending debit balance it is classified on the balance sheet as (a) a contra-liability account. (b) a reduction from retained earnings. (c) an asset. (d) an accrued liability. In unprofitable periods, if the Income Taxes Payable has an ending debit balance it is reclassified as (a) an increase to the loss before income taxes. (b) an expense. (c) revenue. (d) an asset The realization principle requires (a) that revenues earned but not yet received be recognized through an adjusting entry. (b) that unearned revenues originally recorded as earned be converted to a liability through an adjusting entry. (c) that the consumption of assets originally recorded as assets be recognized as expenses through an adjusting entry. (d) both (A) and (B).

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Chapter 4 Self Test Questions - Answers THE ACCOUNTING CYCLE: ACCRUALS AND DEFERRALS 23.
The matching principle requires (a) that revenues earned but not yet received be recognized through an adjusting entry. (b) that unearned revenues originally recorded as earned be converted to a liability through an adjusting entry. (c) that the consumption of assets originally recorded as assets be recognized as expenses through an adjusting entry. (d) both (A) and (B). Your company has a policy of recording all consumable assets costing $200 or less as an expense, rather than as a prepaid expense (asset). This policy is based on the (a) materiality concept. (b) realization principle. (c) matching principle. (d) going-concern concept. After the end-of-period adjusting entries are recorded and posted, the next step in the end-of-period procedures is (a) recording business transactions of the subsequent period. (b) preparing an adjusted trial balance. (c) preparing financial statements. (d) determining which adjusting entries to erase to reduce the income tax burden. An adjusting entry in which Unearned Services Revenue was debited for $4,000 and Services Revenue was credited for $4,000 was posted to the Unearned Services Revenue account as a debit and to the Office Supplies Expense account as a credit. As a consequence of this error, the (a) trial balance will have a credit balance $4,000 greater than the debit balance. (b) trial balance will have equal totals of debit and credit balances. (c) trial balance will have a debit balance $4,000 greater than the credit balance. (d) net income will be overstated $4,000. Only the $2,000 debit portion was posted of an adjusting entry in which Insurance Expense was debited and Unexpired Insurance was credited. As a consequence of this error, (a) trial balance will have a credit balance $2,000 greater than the debit balance. (b) trial balance will have equal totals of debit and credit balances. (c) trial balance will have a debit balance $2,000 greater than the credit balance. (d) assets will be understated $2,000.

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