ch4

ch4Student: ___________________________________________________________________________

1. The trial balance is similar to the balance sheet in that it is a listing of assets, liabilities, and stockholders' equity and is provided to external decision makers. True False

2. The trial balance is a listing of account balances that are found in the general ledger.

True False

3. An objective of preparing the trial balance is to test the equality of debits and credits.

True False

4. Prepaid expenses are reported as assets at the time of the initial cash flow and when they are consumed in

the future, both expenses and liabilities increase. True False

5. Income taxes incurred but not yet paid at the end of the accounting period is an example of an accrued

expense. True False

6. Cash collected from customers in advance of providing the goods or services creates a liability which is

reduced when the goods or services are later provided. True False

7. Accrued revenues are revenues that have been earned, but the customer has not yet paid for the goods or

services. True False

8. An accrued expense has been both incurred and paid for using cash.

True False

9. A deferred expense such as prepaid insurance is created when cash is paid in advance of the expense

incurrence and is reduced when the expense is actually incurred. True False

10. The adjusting entry to record an accrued expense increases liabilities.

True False

11. The adjusting entry to adjust the unearned revenue account for revenues earned results in an increase in assets and a decrease in liabilities. True False

12. The adjusting entry to adjust the prepaid rent account for rent expired during the period results in an

increase in expenses and a decrease in stockholders' equity. True False

13. The adjusting entry to record accrued revenues results in an increase in assets and stockholders' equity.

True False

14. The adjusting entry to record an accrued expense results in a decrease in both assets and stockholders'

equity. True False

15. Rent of $4,000 collected in advance was recorded as unearned rent revenue. At the end of the accounting

period, half the rent was earned. The related adjusting entry should be a credit to rent revenue for $2,000 and a debit to unearned rent revenue for $2,000. True False

16. Depreciation expense is an estimated allocation of the cost of long-term assets and is recorded in a contra-

asset called accumulated depreciation. True False

17. Accounts which retain their balance from one period to the next are referred to as permanent accounts and

include balance sheet accounts. True False

18. Accounts which start a new accounting period with zero balances are referred to as temporary accounts and

include both balance sheet and income statement accounts. True False

19. Earnings per share are calculated by dividing net income minus preferred dividends by the average number

of shares of common stock outstanding. True False

20. Adjusting entries do not involve a cash flow and therefore do not impact the cash flow statement.

True False

21. The net profit margin ratio is calculated by dividing net sales by net income.

True False

22. The net profit margin ratio is a measure of how much profit was created per sales dollar. True False

23. Income statement accounts often are called temporary accounts because their balances are closed out at the

end of the accounting year. True False

24. At the end of the accounting period, the balances in the nominal accounts are closed while the balances in

the real accounts are carried forward to the next accounting period. True False

25. Closing the revenue and gain accounts at year-end requires that these accounts be debited.

True False

26. The year-end closing process transfers net income to retained earnings.

True False

27. Closing the expense and loss accounts at year-end requires that these accounts be debited.

True False

28. Which of the following is a false statement about the unadjusted trial balance?

A. It is not a financial statement for external reporting purposes.B. It provides data in a convenient form for preparing the adjusting entries and financial statements.C. It provides a check of the equality of the debits and credits of the ledger accounts after transactions have

been journalized and posted.D. It provides a listing of balance sheet accounts only.

29. Morgan Company purchased supplies inventory for $2,000. Due to an error in posting to the general ledger,

the inventory account was debited for only $200 while accounts payable was credited for $2,000. During which phase of the accounting cycle would this error be first discovered? A. Recording the transaction in the general journal.B. Preparation of the financial statements.C. Preparation of the trial balance.D. Preparation of the income statement.

30. Which is the correct sequential order of the following steps in the accounting cycle?

A. Transaction analysis, journal entries, trial balanceB. Transaction analysis, posting to the ledger, journal entriesC. Transaction analysis, posting to the ledger, adjusting the accountsD. Transaction analysis, journal entries, posting to the ledger

31. Which is the correct order of the following steps in the accounting cycle? A.

Prepare financial statements, journalize and post adjusting entries, journalize and post the closing entries, and prepare a post-closing trial balance.

B.

Prepare an unadjusted trial balance, journalize and post adjusting entries, journalize and post the closing entries, and prepare financial statements.

C.

Journalize and post adjusting entries, journalize and post the closing entries, prepare financial statements, and prepare an adjusted trial balance.

D.

Prepare an unadjusted trial balance, journalize and post adjusting entries, prepare financial statements, and journalize and post the closing entries.

32. On October 1, 2010, Adams Company paid $4,000 for a two-year insurance policy with the insurance

coverage beginning on that date. As of December 31, 2010, which of the following account balances are correct after adjusting entries have been made? A. Prepaid insurance, $4,000 and Insurance expense, $0.B. Prepaid insurance, $0 and Insurance expense, $4,000.C. Prepaid insurance, $2,000 and Insurance expense, $2,000.D. Prepaid insurance, $3,500 and Insurance expense, $500.

33. On April 1, 2011, the premium on a one-year insurance policy was purchased for $3,000 cash with the

insurance coverage beginning on that date. Which of the following correctly describes the effect of the December 31, 2011 adjusting entry on the financial statements? A. (Assume that no adjusting entries have been made during the year.)B. Prepaid insurance will decrease $750.C. Insurance expense will increase $750.D. Insurance expense will increase $2,250.E. Prepaid insurance will increase $2,250.

34. The CHS Company paid $30,000 cash to its landlord on November 1, 2011 for rent covering the six-month

period from November 1, 2011 through April 30, 2012. Which of the following doesn't correctly describe the effect of the December 31, 2011 adjusting entry on CHS Company's financial statements? (Assume that no adjusting entries have been made during the year.) A. Net income decreases $10,000.B. Prepaid rent decreases $10,000.C. Rent expense increases $10,000.D. Stockholders' equity increases $10,000.

35. Which of the following journal entries was created as the result of an accrual?

A. Option AB. Option BC. Option CD. Option D

36. Which of the following journal entries was created as the result of a deferral?






39. On July 1, 2011, Allen Company signed a $100,000, one-year, 6 percent note payable. The principal and

interest will be paid on June 30, 2012. How much interest expense should be reported on the income statement for the year ended December 31, 2011? A. $6,000B. $3,000C. $1,500D. $0

40. Which of the following doesn't correctly describe a journal entry which debits interest expense and credits interest payable? A. It increases expenses and decreases retained earnings.B. It decreases net income and decreases stockholders' equity.C. It increases expenses and increases liabilities.D. It decreases assets and decreases stockholders' equity.

41. Which of the following doesn't correctly describe a journal entry which debits rent expense and credits

prepaid rent? A. It increases expenses and decreases retained earnings.B. It decreases net income and decreases assets.C. It increases expenses and decreases assets.D. It decreases net income and decreases liabilities.

42. Which of the following doesn't correctly describe a journal entry which debits supplies expense and credits

supplies? A. It increases expenses and decreases assets.B. It decreases net income and decreases assets.C. It increases expenses and increases retained earnings.D. It decreases net income and decreases stockholders' equity.

43. Which of the following doesn't correctly describe a journal entry which debits depreciation expense and

credits accumulated depreciation? A. It increases expenses and does not affect assets.B. It decreases net income and decreases assets.C. It increases expenses and decreases retained earnings.D. It decreases assets and decreases net income.

44. Which of the following correctly describes the effects of accruing income tax expense at year-end?

A. A cash payment is made to pay the taxes due.B. Liabilities are not affected.C. Retained earnings decreases.D. Net income is not affected.

45. Which of the following correctly describes the effects of recording deferred revenues when cash is received

from a customer? A. Revenues are increased.B. Liabilities are not affected.C. Retained earnings increases.D. Net income is not affected.

46. Which of the following correctly describes the effects of recording prepaid insurance when cash is paid to

purchase an insurance policy? A. Total assets do not change.B. Net income decreases.C. Liabilities are decreased.D. Stockholders' equity decreases.

47. Which of the following does not correctly describe the following journal entry? SuppliesCash A. Total assets do not change.B. The transaction is an example of a deferral.C. Stockholders' equity decreases.D. Net income is not affected.

48. Which of the following does not correctly describe the following journal entry?

Salaries expenseSalaries payable A. Total assets do not change.B. The transaction is an example of an accrual.C. Stockholders' equity decreases.D. Net income is not affected.


A. Total assets increase.B. The transaction is an example of an accrual.C. Stockholders' equity is not affected.D. Net income increases.

50. Which of the following correctly describes the following journal entry?

A. Total assets do not change.B. The transaction is an example of an accrual.C. Stockholders' equity is not affected.D. Net income is not affected.


A. Total assets decrease.B. Retained earnings are not affected.C. Stockholders' equity decreases.D. Net income decreases.


A. Total assets decrease.B. Liabilities will increase.C. Stockholders' equity is not affected.D. Net income is not affected.


A. Total assets decrease and net income decreases.B. Stockholders' equity decreases and liabilities increase.C. The transaction is an example of a deferral.D. Net income decreases and stockholders' equity doesn't change.

54. On January 1, 2011, the general ledger of Global Corporation included supplies inventory of $1,000.

During 2011, supplies purchases amounted to $5,000. A physical count of inventory on hand at December 31, 2011 determined that the supplies inventory was $1,200. How much is the 2011 supplies expense? A. $6,000B. $5,200C. $4,800D. $1,000



56. Which of the following journal entries was not created as the result of an accrual?


57. Which of the following accounts was created as the result of an accrual for expenses?

A. Prepaid rentB. Unearned revenuesC. Accounts receivableD. Interest payable



59. Which of the following journal entries was not created as the result of a deferral?


60. Which of the following accounts was created as the result of a deferral?

A. Interest payableB. Interest revenueC. Supplies inventoryD. Accounts receivable

61. Which of the following transactions results in a decrease in both total assets and net income?

A. The accrual of salaries expense at year-end.B. Collecting cash from an account receivable.C. Recognizing revenue which was previously recorded as unearned revenue.D. Adjustment of the prepaid rent account for rent which expired during the period.

62. Which of the following transactions results in an increase in liabilities and a decrease in net income?

A. The accrual of salaries expense at year-end.B. Collecting cash from a customer for services to be provided in the future.C. The accrual of revenue earned at year-end.D. Adjustment of the unearned revenue account for revenue earned during the period.

63. Which of the following transactions results in an increase in both net income and stockholders' equity?

A. Paying cash to acquire a six-month insurance policy.B. Collecting cash from a customer for services to be provided in the future.C. The accrual of interest expense year-end.D. Adjustment of the unearned revenue account for revenue earned during the period.

64. Which of the following transactions does not create a deferral? A. Paying cash to purchase a three-month insurance policy.B. Receiving cash from a customer for services to be provided in the future.C. Paying cash to employees for wages they have earned.D. Paying cash to purchase a two-month supply of office supplies.

65. Which of the following is not an accrual?

A. Crediting salaries payable for salaries earned to date.B. Debiting interest receivable for interest earned to date.C. Debiting interest expense for interest incurred to date.D. Debiting depreciation expense for depreciation incurred during the period.

66. What is the effect on the financial statements when a company fails to accrue salaries expense at year-end?

A. Net income is overstated and liabilities are understated.B. Expenses are understated and stockholders' equity is understated.C. Expenses and liabilities are both overstated.D. Net income is overstated and liabilities are not affected.

67. What is the effect on the financial statements when a company fails to record depreciation expense at year-

end? A. Net income is overstated and stockholders' equity is understated.B. Expenses are understated and stockholders' equity is understated.C. Expenses are understated and liabilities are overstated.D. Net income is overstated and assets are overstated.

68. What is the effect on the financial statements when a company fails to adjust the prepaid insurance account

at year-end for insurance coverage which has expired? A. Net income is overstated and stockholders' equity is understated.B. Expenses are understated and stockholders' equity is understated.C. Expenses are understated and net income is understated.D. Net income is overstated and assets are overstated.

69. What is the effect on the financial statements when a company fails to adjust the unearned revenue account

for revenues earned at year-end? A. Net income is understated and assets are understated.B. Revenues are understated and liabilities are understated.C. Revenues are understated and stockholders' equity is overstated.D. Net income is understated and liabilities are overstated.

70. What is the effect on the financial statements when a company fails to accrue interest expense at year-end?

A. Net income is overstated and assets are overstated.B. Expenses are understated and liabilities are understated.C. Expenses are understated and stockholders' equity is understated.D. Net income is overstated and liabilities are overstated.

71. What is the effect on the financial statements when a company fails to accrue revenue earned at year-end? A. Net income is understated and assets are understated.B. Revenue is understated and stockholders' equity is overstated.C. Revenue is understated and assets aren't affected.D. Net income is understated and liabilities are overstated.

72. On December 31, 2011, Krug Company reported pretax income of $120,000 prior to the following

adjusting entries: • Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rent revenue.How much is Krug's pretax income after adjusting entries? A. $113,000B. $104,000C. $106,000D. $128,000

73. On December 31, 2011, Krug Company reported total assets of $390,000 prior to the following adjusting

entries: • Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rent revenue.How much are Krug's total assets after adjusting entries? A. $350,000B. $386,000C. $379,000D. $374,000

74. On December 31, 2011, Krug Company reported total liabilities of $110,000 prior to the following

adjusting entries: • Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rent revenue.How much are Krug's total liabilities after adjusting entries? A. $115,000B. $141,000C. $86,000D. $110,000

75. On December 31, 2011, Krug Company reported stockholders' equity of $280,000 prior to the following adjusting entries: • Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rent revenue.How much is Krug's stockholders' equity after adjusting entries? A. $280,000B. $262,000C. $295,000D. $264,000

76. On July 1, 2011, Goode Company borrowed $100,000. The company signed a note payable with interest

at 6 percent per year. The note and interest are due on December 31, 2011. On December 31, 2011, Goode paid $103,000 to settle the debt in full. Assuming no accruals for interest have been made during the year, transaction analysis of the $103,000 cash payment on December 31, 2011 should reflect which of the following? A. A decrease in assets of $103,000 and a decrease in liabilities of $103,000.B. A decrease in assets of $100,000, a decrease in stockholders' equity of $3,000, and a decrease in

liabilities of $103,000.C. A decrease in stockholders' equity of $100,000, a decrease in liabilities of $3,000, and a decrease in

assets of $103,000.D. A decrease in liabilities of $100,000, a decrease in stockholders' equity of $3,000 and a decrease in

assets of $103,000. 77. On January 1, 2011, Ryan Company paid the premium on a three-year insurance policy in the amount of

$6,000. At that time, the full amount paid was recorded as prepaid insurance. After recording the adjusting entry for the insurance policy on December 31, 2011, Ryan Company's records would reflect what balance in the prepaid insurance account? A. $6,000B. $2,000C. $3,000D. $4,000

78. Assume Idaho Company recorded the following adjusting journal entry at year-end:

If the beginning balance in prepaid insurance was $500 and $2,500 was paid for an insurance premium during the year, what is the ending balance in the prepaid insurance account after the above adjusting entry? A. $1,200B. $700C. $2,200D. $1,000

79. Failure to make an adjusting entry to recognize rent revenue receivable would cause which of the following? A. An understatement of assets, net income, and stockholders' equity.B. An overstatement of assets and stockholders' equity and an understatement of net income.C. No effect on assets, liabilities, net income, or stockholders' equity.D. An overstatement of assets, net income, and stockholders' equity.

80. Which of the following best describes the difference between an unadjusted trial balance and an adjusted

trial balance? A.

An unadjusted trial balance is prepared at the start of the accounting period and is not provided to external decision makers, while an adjusted trial balance is prepared at the end of the period and is provided to external decision makers.

B.

An unadjusted trial balance is prepared by companies that make adjusting entries, while an adjusted trial balance is prepared by companies that do not make adjusting entries.

C.

An unadjusted trial balance is prepared before the adjusting entries have been made, while an adjusted trial balance is prepared after the adjusting entries have been made.

D. An unadjusted trial balance is prepared after the post-closing trial balance. 81. Which of the following accounts would most likely not require an adjusting entry in the future?

A. Unearned subscriptions revenueB. Office suppliesC. Utilities payableD. Prepaid rent

82. On December 31, 2011, The Bates Company's revenues total $300,000 and expenses total $160,000 before

consideration of the following: • Accrued wages total $11,000;• Accrued revenues total $36,000;• Depreciation expense is $17,000;• Rental revenue of $9,000 was earned; the rent was prepaid by a tenant and was recorded by Bates as unearned rent revenue;• The income tax rate is 40%.What is Bates' net income after consideration of the above information? A. $94,200B. $157,000C. $140,000D. $88,800

83. Which of the following statements is correct?

A. Balance sheet accounts are permanent accounts and do not retain their balances from one period to the

next.B. Balance sheet accounts are temporary accounts and do retain their balances from one period to the next.C. Income statement accounts are permanent accounts and do retain their balances from one period to the

next.D. Income statement accounts are temporary accounts and do not retain their balances from one period to

the next.

84. Which of the following will result in an increase in earnings per share? A. Accruing expenses at year-end.B. Selling additional shares of common stock during the year.C. Accruing revenue at year-end.D. Receiving cash from a tenant which was recorded as unearned revenue.

85. Which of the following statements regarding earnings per share is not correct?

A. It can be reported on the income statement.B. The numerator is net income.C. The denominator is the average number of shares of common stock outstanding.D. It doesn't have to be disclosed on the income statement or the notes to the financial statements.

86. Which of the following statements does not correctly describe the relationship between the income

statement and the ending retained earnings balance? A. Net income increases the ending balance of retained earnings.B. A net loss decreases the ending retained earnings balance.C. A net loss does not affect the ending retained earnings balance.D. Net income and net loss both affect the ending retained earnings balance.

87. Which of the following statements regarding the balance sheet is false?

A. Property and equipment is reported at book value.B. Assets are reported in the order of liquidity.C. Current liabilities are obligations to be paid with current assets.D. It is a period of time financial statement.

88. A calendar year reporting company preparing its annual financial statements should use the phrase "As of

December 31, 2011" in the heading of which financial statements? A. On all of the required financial statements.B. On only the income statement.C. On the income statement and balance sheet, but not the statement of cash flows.D. On the balance sheet only.

89. The declaration and payment of a $5,000 dividend by JLH Company would be reported on which of JLH's

financial statements? A. The income statement only.B. The statement of stockholders' equity and statement of cash flows.C. The balance sheet only.D. The statement of stockholders' equity only.

90. Which of the following transactions will not decrease the net profit margin ratio?

A. Accruing interest expense at year-end.B. The recording of depreciation expense.C. Using cash to pay for previously accrued salaries.D. Accruing utilities expense at year-end.

91. Which of the following statements regarding the net profit margin ratio is false? A. The numerator is net income.B. The denominator is net sales or operating revenues.C. It measures how much of every sales dollar is gross profit.D. Financial analysts expect well-run businesses to maintain or improve their profit margin over time.

92. Which of the following correctly describes the closing entry process?

A. The closing process reduces the balances in the permanent accounts to zero at the end of each period.B. The closing entries are usually prepared prior to adjusting entries.C. The closing process creates a zero balance in all temporary accounts at the end of each period.D. The closing process creates a zero balance at the end of each period for all accounts on the year-end trial

balance. 93. Which of the following account balances would not be affected by closing journal entries?

A. Interest expenseB. Accumulated depreciationC. DividendsD. Retained earnings

94. Which of the following account balances would be closed at year-end?

A. Interest expenseB. Accumulated depreciationC. Retained earningsD. Unearned revenues

95. Which of the following account balances would not be closed at year-end by debiting the account?

A. Interest revenueB. Gain on sale of buildingC. Sales revenuesD. Unearned revenues

96. Which of the following account balances would be closed at year-end by crediting the account?

A. Investment revenueB. Loss on sale of buildingC. Sales revenuesD. Unearned revenues

97. Which one of the following accounts would not be closed at the end of the accounting year?

A. Utilities expenseB. Sales revenueC. Prepaid rent expenseD. Wages expense

98. A trial balance prepared after the closing entries have been posted would show a zero balance in which one of the following accounts? A. InventoryB. Accounts receivableC. Accumulated depreciationD. Income tax expense

99. Which of the following correctly describes the accounts reported on the post-closing trial balance?

A. It includes permanent and temporary accounts with non-zero balances.B. The ending retained earnings balance includes the current period net income.C. It includes only temporary account balances.D. It doesn't include stockholders' equity account balances.

100.Which of the following isn't a correct closing entry?


101.Describe the adjusted trial balance.

102.What is the purpose of adjusting entries? Give two examples of accruals and deferrals.

103.What are the purposes of closing entries? Describe permanent and temporary accounts.

104.On November 1, 2011, Bug Busters collected $6,000 in advance for three months of service to be provided

beginning on that date. Bug credited unearned rent revenue for $6,000. Prepare the adjusting entry required on December 31, 2011 (assuming that no adjusting entries have been made during the year).

105.Below are two related transactions for Golden Corporation. The annual accounting period ends December

31. Prepare the journal entry for each of the following transactions. No adjusting entries have been made during the year.A. October 1, 2011--Golden Corporation borrowed $100,000 and signed a note providing for 8% interest. The principal and interest are due in one year (on September 30, 2012).B. December 31, 2011--end of the annual accounting period. (If no entry is required, explain why).

106.Bridge Company keeps a small inventory of supplies used for cleaning and maintenance purposes. On January 1, 2011, the inventory of supplies on hand was $2,000. During the year, supplies purchased were debited to the supplies inventory account in the amount of $6,500. On December 31, 2011, the inventory count of supplies in the storeroom was $1,750. Give the adjusting entry required at December 31, 2011, assuming that no adjusting entries were made during the year.

107.On November 1, 2010, Bruce Company leased some of its office space to Fairlane Company and

immediately collected twelve months rent in advance of $600,000. Bruce debited cash and credited unearned rent revenue for $600,000. Prepare the December 31, 2010 adjusting entry Bruce should make in respect to the rent, assuming no adjusting entries have been made during the year.

108.On December 1, 2011, Fleet Company paid $30,000 for three months rent and debited prepaid rent for

$30,000; the rent payment was for three was for three months beginning December 1, 2011. Prepare Fleet's adjusting entry required on December 31, 2011.

109.Center Company is completing the accounting cycle at the end of the annual accounting period, December 31, 2011. No adjusting entries have been made during the year so three adjusting entries must be made at this date to update the accounts. The following accounts, selected from Center Company's chart of accounts, are to be used for this purpose. They are coded to the left for easy reference.

110.Lane Company is completing the accounting cycle at the end of its annual accounting period, December 31, 2011. No adjusting entries have been made during the year so three adjusting entries must be made to update the accounts. The following accounts, selected from the company's chart of accounts, are to be used for this purpose. They are coded to the left for easy reference.

111.Below are four transactions that were completed during 2011 by Timber Lodge. The annual accounting period ends on December 31. Each transaction will require an adjusting entry at December 31, 2011. You are to provide the 2011 adjusting entries required for Timber Lodge.A. On July 1, 2011, Timber Lodge paid a two-year insurance premium for a policy on its facilities. This transaction was recorded as follows:

B. On December 31, 2011 a tenant renting some storage space from Timber Lodge had not paid the rent of $750 for December 2011.C. On September 1, 2011, Timber Lodge borrowed $25,000 cash and gave a one-year, 10 percent, note payable. The interest is payable on the due date, August 31, 2012. The September 1, 2011 transaction was recorded as follows:

D. On October 1, 2011, Timber Lodge collected $3,600 from a tenant for two years rent beginning October 1, 2011. The $3,600 collection was recorded as follows:

112.Four transactions are given below that were completed during 2011 by Russell Company. You are to provide the adjusting entries required for Russell Company on December 31, 2011. No adjusting entries were made during the year.A. On December 31, 2011, Russell Company owed employees $3,750 for wages that were earned by them during December and were not recorded.B. During 2011, Russell Company purchased office supplies that cost $1,000 which were placed in the supplies room for use as needed. The purchase was recorded as follows:

At January 1, 2011, the inventory of unused office supplies was $300. At December 31, 2011, a physical count showed unused office supplies in the supply room amounting to $100.C. On December 1, 2011, Russell Company rented some office space to another party. Russell Company collected $900 rent for the period December 1, 2011, to March 1, 2012. The December 1 transaction was recorded as follows:

D. On July 1, 2011, Russell Company borrowed $2,000 cash on a one-year, 8% interest-bearing, note payable. The interest is payable on the due date, June 30, 2012. The borrowing was recorded as follows on July 1, 2011:

113.Three transactions are given below that were completed during 2011 by Story Company. Prepare the adjusting entries as of December 31, 2011, assuming no adjusting entries have been made during the year. A. On June 1, 2011, Story Company paid $12,600 for one year's rent beginning on that date. The rent payment was recorded as follows:

B. On February 1, 2011, Story Company purchased office supplies during the year that cost $700 and placed the supplies in a storeroom for use as needed. The purchase was recorded as follows:

At December 31, 2011, a count showed unused office supplies of $200 in the storeroom. There was no beginning inventory of supplies on hand.C. On December 31, 2011, Story Company owed employees $2,000 for wages earned during December. These wages had not been paid nor recorded.

114.For each of the following accounts you are to enter one capital letter in each cell which indicates for each account its normal characteristics.

115.A list of the accounts of Medford Corporation is given below, followed by some selected transactions. Indicate the accounts that should be debited and credited for each transaction closing entry by placing the appropriate account codes in the debit and credit columns provided.

116.On December 31, 2010, Madison Company prepared an income statement and a balance sheet. In making the adjusting entries at year-end, Madison failed to record the adjusting entry for wages earned by employees, but not yet paid, amounting to $5,000 for the last four days of the year. The income statement reported net income of $52,000. The balance sheet reported total assets of $254,000, total liabilities of $170,000 and stockholders' equity of $84,000.Complete the following tabulation to show the correct amounts for the financial statements (ignore income taxes).

117.Johnson Corporation is completing the accounting information processing cycle at the end of the fiscal

year, June 30, 2010. Johnson has provided the following trial balances as of June 30, 2010:

Requirements:A. Reconstruct the adjusting entries and give a brief explanation of each.B. What is the amount of net income?C. Calculate earnings per share (EPS) assuming 1,000 shares of common stock are outstanding.

118.The comparative balance sheets of Titan Company for the years ended December 31, 2010 and 2011, reported the following selected amounts:

Requirements:A. Calculate the total amount of office supplies purchased during 2011.B. Calculate the total amount of rent collected during 2011.C. In what section of the statement of cash flows would the payments for office supplies appear?D. In what section of the statement of cash flows would the collection for rents appear?

119.On January 1, 2011 the balance in the prepaid insurance account was $2,500. On December 31, 2011, after

the 2011 adjusting entries were made, the balance of the prepaid insurance account was $1,200. During 2011, cash payments for insurance premiums amounted to $5,000, which was debited to the prepaid insurance account. Prepare the adjusting entry which must have been made at December 31, 2011.

120.On December 31, 2010, the manager of Jordan Creek Apartments noticed that four tenants had not paid

their December rent amounting to $500 each. What is the adjusting entry required on December 31, 2010?

121.On July 1, 2011, Bass Company paid a two-year insurance premium. On that date the following journal entry was made:

The annual accounting period ends on December 31, 2011.A. How much of the premium should be reported as expense on the 2011 income statement?B. What is the amount of prepaid insurance which should be reported on the balance sheet at December 31, 2011?C. Prepare the adjusting entry that should be made on December 31, 2011, assuming no adjusting entries have been made during the year.

122.For each of the following transactions, indicate the amounts and direction of effects of the adjusting entry

on the elements of the balance sheet and income statement. Using the following format, indicate + for increase, and - for decrease, and NE for no effect.Transactions:A. Wages of $5,800 have been earned, but not paid to employees at the end of the year.B. Supplies in the amount of $2,000 were used during the year, which are currently recorded in the office supplies inventory account.C. Interest has accrued on a bank loan.

123.Explain how adjusting entries provide for potential manipulation by managers. In addition, discuss how compensation arrangements may result in incentives for such manipulation to occur.

124.On September 1, 2011, Fast Track, Inc. was started with $30,000 invested by the owners as contributed

capital. On September 30, 2011, the accounting records contained the following amounts:

Prepare an income statement for September for the first month of Fast Track's operation. Ignore income taxes.

125.On September 1, 2011, Fast Track, Inc. was started with $30,000 invested by the owners as contributed

capital. On September 30, 2011, the accounting records contained the following amounts:

Prepare a statement of stockholders' equity for September, the first month of operation. Ignore income taxes.

126.On September 1, 2011, Fast Track, Inc. was started with $30,000 invested by the owners as contributed capital. On September 30, 2011, the accounting records contained the following amounts:

Prepare a balance sheet for Fast Track, Inc. as of September 30, 2011.

127.A. Describe how the income statement is related to the statement of stockholders' equity.

B. Describe how the statement of stockholders' equity is related to the balance sheet.C. Describe how the statement of cash flows is related to the balance sheet.

128.Modern Mother Magazine has received cash subscriptions on April 1, 2011 in the amount of $3,600,000 for

the next three years. Their year-end is December 31, 2011. Magazine delivery occurs monthly and started on April 1, 2011. These were the only subscription sales for the year.Answer the following questions for the year ended December 31, 2011:a. What amount of cash should be reported for the year on the statement of cash flows?b. What amount of subscriptions revenue should be reported on the income statement?c. What amount would be reported as unearned subscriptions revenue on the balance sheet as of December 31, 2011?

129.Toy Shop Inc. has provided the following income statements:

Requirements:Compute net profit margin for each year.Discuss some of the events which could have caused the changes to the net profit margin based on the income statement information above.

130.The following income statement was reported for Bauer Inc. for the first year of operations ending

December 31, 2010 reported (in thousands of dollars):

Requirements:A. Calculate net profit marginB. Calculate earnings per share if there are 200,000 shares of common stock outstanding

131.The adjusted trial balance of Tahoe Company at the end of the accounting year, December 31, 2010, showed the following:

132.Air Cargo Company recorded the following adjusting entries at the end of the accounting year, December

31, 2010:

Before these adjusting entries were recorded, a partial unadjusted trial balance reflected the following:

Prepare the closing entries for Air Cargo Company at December 31, 2010.

133.At December 31, 2010, the following adjusting entries were recorded in the accounts of CPA Company:

There were no other accrued receivables or payables on CPA's books in 2010.Calculate the balances in the following accounts immediately after the closing entries were posted.

134.Determine the effect of the following errors on the financial statements. Code your answers as follows:

A. If the error results in an overstatement of the financial statement component.B. If the error results in an understatement of the financial statement component.C. If the error does not affect the financial statement component.

135.Determine the effect of the following errors on the financial statements. Code your answers as follows:

A. If the error results in an overstatement of the financial statement component.B. If the error results in an understatement of the financial statement component.C. If the error does not affect the financial statement component.

ch4 Key

1. The trial balance is similar to the balance sheet in that it is a listing of assets, liabilities, and stockholders' equity and is provided to external decision makers. FALSEA trial balance is a list of all accounts with their balances to provide a check on the equality of the debits and credits and is not provided to external users.

AACSB: Reflective Thinking

AICPA BB: Critical ThinkingAICPA FN: Reporting

Bloom's: RememberDifficulty: Easy

Learning Objective: 04-01 Explain the purpose of a trial balance.Libby - Chapter 04 #1

Topic Area: Unadjusted Trial Balance

2. The trial balance is a listing of account balances that are found in the general ledger. TRUEA trial balance is a list of all accounts with their balances to provide a check on the equality of the debits and credits.






3. An objective of preparing the trial balance is to test the equality of debits and credits. TRUEA trial balance is a list of all accounts with their balances to provide a check on the equality of the debits and credits.






4. Prepaid expenses are reported as assets at the time of the initial cash flow and when they are consumed in the future, both expenses and liabilities increase. FALSEPrepaid expenses are initially recorded as assets. When they are consumed in the future, expenses increase and assets decrease.



Bloom's: RememberDifficulty: Medium

Learning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and income statement accounts.

Libby - Chapter 04 #4Topic Area: Purpose of Adjustments

5. Income taxes incurred but not yet paid at the end of the accounting period is an example of an accrued expense. TRUEAccrued expenses are previously unrecorded expenses that need to be adjusted at the end of the accounting period to reflect the amount incurred and the related payable.






6. Cash collected from customers in advance of providing the goods or services creates a liability which is reduced when the goods or services are later provided. TRUECash collected in advance of goods or services being provided create an unearned revenue account. Unearned revenue is classified as a liability account that is only reduced once the goods or services have been provided.






7. Accrued revenues are revenues that have been earned, but the customer has not yet paid for the goods or services. TRUEAccrued revenues are revenues that have been earned but because the customer has not been billed and has not paid for the goods or services. This revenue has however been recorded because it has been earned.






8. An accrued expense has been both incurred and paid for using cash. FALSEAccrued Expenses are previously unrecorded expenses that have been incurred without being paid.






9. A deferred expense such as prepaid insurance is created when cash is paid in advance of the expense incurrence and is reduced when the expense is actually incurred. TRUEDeferred expenses are previously acquired assets that need to be adjusted to reflect the amount of expense incurred in using the asset to generate revenue.






10. The adjusting entry to record an accrued expense increases liabilities. TRUEAccrued expenses have yet to be paid; therefore when the adjusting entry is recorded, a payable is created.


AICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: Understand

Difficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and income

statement accounts.Libby - Chapter 04 #10

Topic Area: Purpose of Adjustments

11. The adjusting entry to adjust the unearned revenue account for revenues earned results in an increase in assets and a decrease in liabilities. FALSEThe adjusting entry to recognize revenue previously recorded as unearned revenue results in a decrease in liabilities and an increase in stockholders' equity (revenue).






12. The adjusting entry to adjust the prepaid rent account for rent expired during the period results in an increase in expenses and a decrease in stockholders' equity. TRUEThe adjusting entry to recognize an expense previously recorded as prepaid results in assets decreasing, expenses increasing, and as a result of expenses increasing, stockholders' equity also decreases.






13. The adjusting entry to record accrued revenues results in an increase in assets and stockholders' equity. TRUEThe adjusting entry to record accrued revenues recognizes revenues that are earned but not yet paid for. The result of this is an increase in assets (accounts receivable) and an increase in revenue; the increase in revenue results in an increase to stockholders' equity.






14. The adjusting entry to record an accrued expense results in a decrease in both assets and stockholders' equity. FALSEThe adjusting entry to record an accrued expense results in a decrease to stockholders' equity and an increase in liabilities.






15. Rent of $4,000 collected in advance was recorded as unearned rent revenue. At the end of the accounting period, half the rent was earned. The related adjusting entry should be a credit to rent revenue for $2,000 and a debit to unearned rent revenue for $2,000. TRUEThe adjusting entry to recognize unearned rent revenue results in revenue being recognized and the resulting liability being decreased. This is done with a debit to unearned rent revenue for $2,000 and a credit to rent revenue for $2,000.






16. Depreciation expense is an estimated allocation of the cost of long-term assets and is recorded in a contra-asset called accumulated depreciation. TRUEDepreciation expense, the basis of which is the matching principle, is an allocation of an asset's cost over its estimated useful life. Depreciation expense is recorded in accumulated depreciation, a contra-asset account.






17. Accounts which retain their balance from one period to the next are referred to as permanent accounts and include balance sheet accounts. TRUEBalance sheet accounts retain their balances from one accounting period to the next, these are considered permanent accounts.




Learning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.

Libby - Chapter 04 #17Topic Area: Preparing Financial Statements

18. Accounts which start a new accounting period with zero balances are referred to as temporary accounts and include both balance sheet and income statement accounts. FALSETemporary accounts accumulate their balance for a period, but begin new accounting periods with a zero balance. These types of accounts are found on the income statement.






19. Earnings per share are calculated by dividing net income minus preferred dividends by the average number of shares of common stock outstanding. TRUEEarnings per share = (Net Income - Preferred Dividends) ÷ Average number of shares of common stock outstanding during the period.






20. Adjusting entries do not involve a cash flow and therefore do not impact the cash flow statement. TRUEThe statement of cash flows is unaffected by adjusting entries because the adjusting entries do not involve the cash account.






21. The net profit margin ratio is calculated by dividing net sales by net income. FALSENet Profit Margin = Net Income/Net Sales


AICPA BB: Critical ThinkingAICPA FN: Measurement


Learning Objective: 04-05 Explain the closing process. Explain the closing process. Compute and interpret the net profit margin.Libby - Chapter 04 #21

Topic Area: Key Ratio Analysis

22. The net profit margin ratio is a measure of how much profit was created per sales dollar. TRUEIn general, the net profit margin measures how much of every sales dollar generated during the period is profit.


AICPA BB: Critical ThinkingAICPA FN: Measurement



Topic Area: Key Ratio Analysis

23. Income statement accounts often are called temporary accounts because their balances are closed out at the end of the accounting year. TRUERevenue, expense, gain, and loss accounts are used to accumulate data for the current accounting period only; these accounts are closed out at the end of the accounting period and are found on the income statement.




Learning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #23

Topic Area: End of the Accounting Cycle

24. At the end of the accounting period, the balances in the nominal accounts are closed while the balances in the real accounts are carried forward to the next accounting period. TRUENominal (temporary) accounts, found on the income statement, are closed at the end of accounting periods. Real (permanent) accounts, found on the balance sheet, are carried forward to the next accounting period.






25. Closing the revenue and gain accounts at year-end requires that these accounts be debited. TRUERevenue and gain accounts have credit balances; closing accounts at year-end with credit balances requires a debit.






26. The year-end closing process transfers net income to retained earnings. TRUEThe balances in temporary accounts, income statement accounts, are transferred to retained earnings at the end of the period. Net income is a summed figure of these accounts, so in effect net income is transferred to retained earnings.






27. Closing the expense and loss accounts at year-end requires that these accounts be debited. FALSEExpense and loss accounts have debit balances, therefore to close these accounts a credit is required.






28. Which of the following is a false statement about the unadjusted trial balance? A. It is not a financial statement for external reporting purposes.B. It provides data in a convenient form for preparing the adjusting entries and financial statements.C. It provides a check of the equality of the debits and credits of the ledger accounts after transactions

have been journalized and posted.D. It provides a listing of balance sheet accounts only.

An unadjusted trial balance is a list of all accounts with their balances, including income statement accounts, to provide a check on the equality of the debits and credits and determine what adjusting entries need to be made.






29. Morgan Company purchased supplies inventory for $2,000. Due to an error in posting to the general ledger, the inventory account was debited for only $200 while accounts payable was credited for $2,000. During which phase of the accounting cycle would this error be first discovered? A. Recording the transaction in the general journal.B. Preparation of the financial statements.C. Preparation of the trial balance.D. Preparation of the income statement.

The trial balance is a list of all accounts with their balances to provide a check on the equality of the debit and credits.






30. Which is the correct sequential order of the following steps in the accounting cycle? A. Transaction analysis, journal entries, trial balanceB. Transaction analysis, posting to the ledger, journal entriesC. Transaction analysis, posting to the ledger, adjusting the accountsD. Transaction analysis, journal entries, posting to the ledger

The accounting cycle starts with analyzing transactions, recording journal entries in the general ledger, and posting amounts to the general ledger.






31. Which is the correct order of the following steps in the accounting cycle? A.

Prepare financial statements, journalize and post adjusting entries, journalize and post the closing entries, and prepare a post-closing trial balance.

B.

Prepare an unadjusted trial balance, journalize and post adjusting entries, journalize and post the closing entries, and prepare financial statements.

C. Journalize and post adjusting entries, journalize and post the closing entries, prepare financial statements, and prepare an adjusted trial balance.

D.

Prepare an unadjusted trial balance, journalize and post adjusting entries, prepare financial statements, and journalize and post the closing entries.

At the end of the accounting period, the accounting cycle begins with preparing an unadjusted trial balance. The next step is to journalize and post adjusting entries for balance sheet and income statement accounts. The next step is to prepare financial statements, and finally journalize and post the closing entries for the income statement accounts.






32. On October 1, 2010, Adams Company paid $4,000 for a two-year insurance policy with the insurance coverage beginning on that date. As of December 31, 2010, which of the following account balances are correct after adjusting entries have been made? A. Prepaid insurance, $4,000 and Insurance expense, $0.B. Prepaid insurance, $0 and Insurance expense, $4,000.C. Prepaid insurance, $2,000 and Insurance expense, $2,000.D. Prepaid insurance, $3,500 and Insurance expense, $500.

$4,000/24 = $166.67 per month. Three months have been used (Oct, Nov, and Dec) so $166.67 * 3 = $500. This needs to be recorded as the expense and the balance in prepaid insurance is $4,000 - $500 = $3,500.

AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Reporting, Measurement

Bloom's: ApplyDifficulty: Medium



33. On April 1, 2011, the premium on a one-year insurance policy was purchased for $3,000 cash with the insurance coverage beginning on that date. Which of the following correctly describes the effect of the December 31, 2011 adjusting entry on the financial statements? A. (Assume that no adjusting entries have been made during the year.)B. Prepaid insurance will decrease $750.C. Insurance expense will increase $750.D. Insurance expense will increase $2,250.E. Prepaid insurance will increase $2,250.

$3,000/12 = $250 a month. 9 months of coverage has been consumed, $250 * 9 = $2,250.

AACSB: Analytic





34. The CHS Company paid $30,000 cash to its landlord on November 1, 2011 for rent covering the six-month period from November 1, 2011 through April 30, 2012. Which of the following doesn't correctly describe the effect of the December 31, 2011 adjusting entry on CHS Company's financial statements? (Assume that no adjusting entries have been made during the year.) A. Net income decreases $10,000.B. Prepaid rent decreases $10,000.C. Rent expense increases $10,000.D. Stockholders' equity increases $10,000.

The time period from November 1, 2011 to December 31, 2011 consumes two months of rent expense ($10,000) which results in a decrease to stockholders' equity.

AACSB: Analytic







Accruals recognize the expense (or revenue) and the resulting payable (or receivable).








Unearned or prepaid accounts are created with deferrals. Debiting cash and crediting unearned revenue is a result of receiving cash for goods or services to be provided in the future.








Unearned or prepaid accounts are created with deferrals. Debiting unearned revenue and crediting revenue recognizes deferred revenue when cash was previously received and recorded.








Accruals recognize either revenues or expenses that were previously unrecognized and the resulting receivable or payable.






39. On July 1, 2011, Allen Company signed a $100,000, one-year, 6 percent note payable. The principal and interest will be paid on June 30, 2012. How much interest expense should be reported on the income statement for the year ended December 31, 2011? A. $6,000B. $3,000C. $1,500D. $0

Interest expense = $3,000 = $100,000 × .06 × 6/12

AACSB: Analytic





40. Which of the following doesn't correctly describe a journal entry which debits interest expense and credits interest payable? A. It increases expenses and decreases retained earnings.B. It decreases net income and decreases stockholders' equity.C. It increases expenses and increases liabilities.D. It decreases assets and decreases stockholders' equity.

This journal entry increases expenses and increases liabilities; there is no impact on assets.






41. Which of the following doesn't correctly describe a journal entry which debits rent expense and credits prepaid rent? A. It increases expenses and decreases retained earnings.B. It decreases net income and decreases assets.C. It increases expenses and decreases assets.D. It decreases net income and decreases liabilities.

This journal entry increases expenses and decreases assets; there is no impact on liabilities.






42. Which of the following doesn't correctly describe a journal entry which debits supplies expense and credits supplies? A. It increases expenses and decreases assets.B. It decreases net income and decreases assets.C. It increases expenses and increases retained earnings.D. It decreases net income and decreases stockholders' equity.

This journal entry increases expenses and decreases assets; so retained earnings are decreased.






43. Which of the following doesn't correctly describe a journal entry which debits depreciation expense and credits accumulated depreciation? A. It increases expenses and does not affect assets.B. It decreases net income and decreases assets.C. It increases expenses and decreases retained earnings.D. It decreases assets and decreases net income.

This journal entry increases expenses and increases accumulated depreciation. Accumulated depreciation is a contra-asset account and thus decreases assets.






44. Which of the following correctly describes the effects of accruing income tax expense at year-end? A. A cash payment is made to pay the taxes due.B. Liabilities are not affected.C. Retained earnings decreases.D. Net income is not affected.

Accruing income tax expense increases expenses at year end and as a result decreases net income, thus decreasing retained earnings. The accrual also increases liabilities.






45. Which of the following correctly describes the effects of recording deferred revenues when cash is received from a customer? A. Revenues are increased.B. Liabilities are not affected.C. Retained earnings increases.D. Net income is not affected.

Deferred revenues recorded when cash is received from a customer increases the unearned revenue account and increases cash. These are balance sheet accounts that do not impact net income.






46. Which of the following correctly describes the effects of recording prepaid insurance when cash is paid to purchase an insurance policy? A. Total assets do not change.B. Net income decreases.C. Liabilities are decreased.D. Stockholders' equity decreases.

Prepaid insurance increases and cash decreases so total assets don't change.






47. Which of the following does not correctly describe the following journal entry? SuppliesCash A. Total assets do not change.B. The transaction is an example of a deferral.C. Stockholders' equity decreases.D. Net income is not affected.

This journal entry increases and decreases two different asset accounts; there is no impact on stockholders' equity.






48. Which of the following does not correctly describe the following journal entry? Salaries expenseSalaries payable A. Total assets do not change.B. The transaction is an example of an accrual.C. Stockholders' equity decreases.D. Net income is not affected.

This journal entry increases expenses and liabilities; the increase in expenses decreases net income.







A. Total assets increase.B. The transaction is an example of an accrual.C. Stockholders' equity is not affected.D. Net income increases.

The credit to interest income increases net income; thus increasing stockholders' equity.







A. Total assets do not change.B. The transaction is an example of an accrual.C. Stockholders' equity is not affected.D. Net income is not affected.

Accrued revenues are previously unrecorded revenues that need to be adjusted at the end of the accounting period to reflect the amount earned and the related receivable account.







A. Total assets decrease.B. Retained earnings are not affected.C. Stockholders' equity decreases.D. Net income decreases.

This journal entry increases expenses; resulting in a decrease in net income and a subsequent decrease in retained earnings.







A. Total assets decrease.B. Liabilities will increase.C. Stockholders' equity is not affected.D. Net income is not affected.

This journal entry increases accumulated depreciation, a contra-asset account, resulting in a decrease in total assets.







A. Total assets decrease and net income decreases.B. Stockholders' equity decreases and liabilities increase.C. The transaction is an example of a deferral.D. Net income decreases and stockholders' equity doesn't change.

This journal entry increases expenses and liabilities. The increase in expenses decreases net income, which results in a decrease in stockholders' equity.






54. On January 1, 2011, the general ledger of Global Corporation included supplies inventory of $1,000. During 2011, supplies purchases amounted to $5,000. A physical count of inventory on hand at December 31, 2011 determined that the supplies inventory was $1,200. How much is the 2011 supplies expense? A. $6,000B. $5,200C. $4,800D. $1,000

Supplies expense = $4,800 = $1,000 + $5,000 - $1,200

AACSB: Analytic







Accrual journal entries recognize expenses (revenues) that have been incurred (earned) and a subsequent payable (receivable) for the transaction.






56. Which of the following journal entries was not created as the result of an accrual?


Accrual journal entries recognize expenses (revenues) that have been incurred (earned) and a subsequent payable (receivable) for the transaction. Cash is not an aspect of journal entries created by accruals.






57. Which of the following accounts was created as the result of an accrual for expenses? A. Prepaid rentB. Unearned revenuesC. Accounts receivableD. Interest payable

Expense accrual journal entries recognize expenses that have been incurred but will be paid in the subsequent accounting period, with a credit to a liability.








Deferred revenue journal entries recognize cash received for goods or services before these goods or services have been provided, with a credit to a liability (unearned revenue).






59. Which of the following journal entries was not created as the result of a deferral?


Deferrals do not recognize revenues or expenses that have been earned or incurred. Deferrals are journal entries to record transactions for revenues or expenses that will occur in the future. Service revenue is not a deferred revenue account.






60. Which of the following accounts was created as the result of a deferral? A. Interest payableB. Interest revenueC. Supplies inventoryD. Accounts receivable

Deferrals are created for previously acquired assets or previously recorded liabilities that need to be adjusted at the end of the accounting period to reflect the amount of expense incurred or the amount of revenue earned.






61. Which of the following transactions results in a decrease in both total assets and net income? A. The accrual of salaries expense at year-end.B. Collecting cash from an account receivable.C. Recognizing revenue which was previously recorded as unearned revenue.D. Adjustment of the prepaid rent account for rent which expired during the period.

Adjusting prepaid rent for rent which expired during the period reduces the prepaid rent (asset) account and recognizes a rent expense. The rent expense decreases net income.





Topic Area: Purpose of Adjustment

62. Which of the following transactions results in an increase in liabilities and a decrease in net income? A. The accrual of salaries expense at year-end.B. Collecting cash from a customer for services to be provided in the future.C. The accrual of revenue earned at year-end.D. Adjustment of the unearned revenue account for revenue earned during the period.

The accrual of salaries expense at year-end recognizes an expense that decreases net income, and creates a salaries payable that increases liabilities.






63. Which of the following transactions results in an increase in both net income and stockholders' equity? A. Paying cash to acquire a six-month insurance policy.B. Collecting cash from a customer for services to be provided in the future.C. The accrual of interest expense year-end.D. Adjustment of the unearned revenue account for revenue earned during the period.

Adjusting unearned revenue for revenue earned results in a credit to revenue and a debit to unearned revenue. This decreases liabilities and increases net income and stockholders' equity.






64. Which of the following transactions does not create a deferral? A. Paying cash to purchase a three-month insurance policy.B. Receiving cash from a customer for services to be provided in the future.C. Paying cash to employees for wages they have earned.D. Paying cash to purchase a two-month supply of office supplies.

Paying cash to employees for earned wages is not an example of incurring an expense with the expectation of paying for the expense in a subsequent accounting period.






65. Which of the following is not an accrual? A. Crediting salaries payable for salaries earned to date.B. Debiting interest receivable for interest earned to date.C. Debiting interest expense for interest incurred to date.D. Debiting depreciation expense for depreciation incurred during the period.

Depreciation expense is classified as a deferred expense; it is the amount of expense incurred in using the asset to generate revenue.






66. What is the effect on the financial statements when a company fails to accrue salaries expense at year-end? A. Net income is overstated and liabilities are understated.B. Expenses are understated and stockholders' equity is understated.C. Expenses and liabilities are both overstated.D. Net income is overstated and liabilities are not affected.

Salary expenses that are not accrued result in expenses and liabilities being under reported. Under reported expenses result in overstated net income.



Bloom's: ApplyDifficulty: Hard



67. What is the effect on the financial statements when a company fails to record depreciation expense at year-end? A. Net income is overstated and stockholders' equity is understated.B. Expenses are understated and stockholders' equity is understated.C. Expenses are understated and liabilities are overstated.D. Net income is overstated and assets are overstated.

Failure to record depreciation results in expenses being too low, net income being overstated and assets being overstated. Not recording depreciations understates accumulated depreciation thus the impact on assets.






68. What is the effect on the financial statements when a company fails to adjust the prepaid insurance account at year-end for insurance coverage which has expired? A. Net income is overstated and stockholders' equity is understated.B. Expenses are understated and stockholders' equity is understated.C. Expenses are understated and net income is understated.D. Net income is overstated and assets are overstated.

Failure to reduce prepaid insurance to reflect insurance coverage that has expired results in the prepaid asset account being overstated and the insurance expense account being understated. The outcome is that net income and assets are overstated.






69. What is the effect on the financial statements when a company fails to adjust the unearned revenue account for revenues earned at year-end? A. Net income is understated and assets are understated.B. Revenues are understated and liabilities are understated.C. Revenues are understated and stockholders' equity is overstated.D. Net income is understated and liabilities are overstated.

Failure to recognize revenues that were previously reported as unearned results in lower revenues = lower net income figure, overstated unearned revenue = overstated liabilities.






70. What is the effect on the financial statements when a company fails to accrue interest expense at year-end? A. Net income is overstated and assets are overstated.B. Expenses are understated and liabilities are understated.C. Expenses are understated and stockholders' equity is understated.D. Net income is overstated and liabilities are overstated.

Failure to accrue interest expense results in expenses being understated and the resulting interest payable is not increased to reflect the obligation to pay this expense.






71. What is the effect on the financial statements when a company fails to accrue revenue earned at year-end? A. Net income is understated and assets are understated.B. Revenue is understated and stockholders' equity is overstated.C. Revenue is understated and assets aren't affected.D. Net income is understated and liabilities are overstated.

Failure to accrue earned revenue results in revenues being understated and thus net income being understated. The resulting receivable is not increased to reflect the future payment for the earned revenue.






72. On December 31, 2011, Krug Company reported pretax income of $120,000 prior to the following adjusting entries: • Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rent revenue.How much is Krug's pretax income after adjusting entries? A. $113,000B. $104,000C. $106,000D. $128,000

Pretax income = $104,000 = $120,000 - $31,000 + $29,000 - $12,000 - $9,000 + $7,000

AACSB: Analytic





73. On December 31, 2011, Krug Company reported total assets of $390,000 prior to the following adjusting entries: • Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rent revenue.How much are Krug's total assets after adjusting entries? A. $350,000B. $386,000C. $379,000D. $374,000

Total assets = $379,000 = $390,000 - $31,000 + $29,000 - $9,000

AACSB: Analytic




Learning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: and statement of cash flows.

Learning Objective: balance sheetLearning Objective: statement of stockholders' equity

Libby - Chapter 04 #73Topic Area: Purpose of Adjustments, Preparing Financial Statements

74. On December 31, 2011, Krug Company reported total liabilities of $110,000 prior to the following adjusting entries: • Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rent revenue.How much are Krug's total liabilities after adjusting entries? A. $115,000B. $141,000C. $86,000D. $110,000

Total liabilities = $115,000 = $110,000 + $12,000 - $7,000

AACSB: Analytic







75. On December 31, 2011, Krug Company reported stockholders' equity of $280,000 prior to the following adjusting entries: • Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rent revenue.How much is Krug's stockholders' equity after adjusting entries? A. $280,000B. $262,000C. $295,000D. $264,000

Stockholders' equity = $264,000 = $280,000 - $31,000 + $29,000 - $12,000 - $9,000 + $7,000

AACSB: Analytic







76. On July 1, 2011, Goode Company borrowed $100,000. The company signed a note payable with interest at 6 percent per year. The note and interest are due on December 31, 2011. On December 31, 2011, Goode paid $103,000 to settle the debt in full. Assuming no accruals for interest have been made during the year, transaction analysis of the $103,000 cash payment on December 31, 2011 should reflect which of the following? A. A decrease in assets of $103,000 and a decrease in liabilities of $103,000.B. A decrease in assets of $100,000, a decrease in stockholders' equity of $3,000, and a decrease in

liabilities of $103,000.C. A decrease in stockholders' equity of $100,000, a decrease in liabilities of $3,000, and a decrease in

assets of $103,000.D. A decrease in liabilities of $100,000, a decrease in stockholders' equity of $3,000 and a decrease in

assets of $103,000.

Liabilities decrease by the face value of the loan, $100,000. Interest expense is $3,000 for the period, thus net income and stockholders' equity decreases by this amount. To recognize the payment of the loan and interest, assets must decrease by $103,000.

AACSB: Analytic







77. On January 1, 2011, Ryan Company paid the premium on a three-year insurance policy in the amount of $6,000. At that time, the full amount paid was recorded as prepaid insurance. After recording the adjusting entry for the insurance policy on December 31, 2011, Ryan Company's records would reflect what balance in the prepaid insurance account? A. $6,000B. $2,000C. $3,000D. $4,000

Prepaid insurance = $4,000 = $6,000 - $2,000 (insurance expense for 2011 = $6,000 ÷ 3)

AACSB: Analytic







78. Assume Idaho Company recorded the following adjusting journal entry at year-end:

If the beginning balance in prepaid insurance was $500 and $2,500 was paid for an insurance premium during the year, what is the ending balance in the prepaid insurance account after the above adjusting entry? A. $1,200B. $700C. $2,200D. $1,000

Prepaid insurance = $1,000 = $500 + $2,500 - $2,000

AACSB: Analytic







79. Failure to make an adjusting entry to recognize rent revenue receivable would cause which of the following? A. An understatement of assets, net income, and stockholders' equity.B. An overstatement of assets and stockholders' equity and an understatement of net income.C. No effect on assets, liabilities, net income, or stockholders' equity.D. An overstatement of assets, net income, and stockholders' equity.

Failure to recognize a receivable results in assets being understated. The corresponding effect of not recognizing rent revenue receivable is that rent revenue is not recognized; therefore net income and subsequently stockholders' equity are also understated.

AACSB: Analytic





80. Which of the following best describes the difference between an unadjusted trial balance and an adjusted trial balance? A.

An unadjusted trial balance is prepared at the start of the accounting period and is not provided to external decision makers, while an adjusted trial balance is prepared at the end of the period and is provided to external decision makers.

B.

An unadjusted trial balance is prepared by companies that make adjusting entries, while an adjusted trial balance is prepared by companies that do not make adjusting entries.

C.

An unadjusted trial balance is prepared before the adjusting entries have been made, while an adjusted trial balance is prepared after the adjusting entries have been made.

D. An unadjusted trial balance is prepared after the post-closing trial balance.

A trial balance is a list of all accounts with their balances to provide a check on the equality of the debits and credits. An unadjusted trial balance is prepared before adjusting entries while an adjusted trial balance is prepared after the adjusting entries.






81. Which of the following accounts would most likely not require an adjusting entry in the future? A. Unearned subscriptions revenueB. Office suppliesC. Utilities payableD. Prepaid rent

The utilities payable account was created by an accrual and doesn't require an adjusting entry at year-end.



Difficulty: EasyLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and income



82. On December 31, 2011, The Bates Company's revenues total $300,000 and expenses total $160,000 before consideration of the following: • Accrued wages total $11,000;• Accrued revenues total $36,000;• Depreciation expense is $17,000;• Rental revenue of $9,000 was earned; the rent was prepaid by a tenant and was recorded by Bates as unearned rent revenue;• The income tax rate is 40%.What is Bates' net income after consideration of the above information? A. $94,200B. $157,000C. $140,000D. $88,800

Revenues $345,000 = $300,000 + $36,000 + $9,000 Expenses 188,000 = $160,000 + $11,000 + $17,000 Income before taxes 157,000 Income tax expense 62,800 = $157,000 × .40 Net Income $94,200

AACSB: Analytic







83. Which of the following statements is correct? A. Balance sheet accounts are permanent accounts and do not retain their balances from one period to

the next.B. Balance sheet accounts are temporary accounts and do retain their balances from one period to the

next.C. Income statement accounts are permanent accounts and do retain their balances from one period to

the next.D. Income statement accounts are temporary accounts and do not retain their balances from one period

to the next.

Revenue, expense, gain, and loss accounts are temporary accounts that begin each accounting period with a zero balance. These are income statement accounts that are known as temporary accounts.






84. Which of the following will result in an increase in earnings per share? A. Accruing expenses at year-end.B. Selling additional shares of common stock during the year.C. Accruing revenue at year-end.D. Receiving cash from a tenant which was recorded as unearned revenue.

Earnings per share = Net income ÷ average number of shares of common stock outstanding. Accruing revenue at year-end increases both net income and earnings per share.



Difficulty: MediumLearning Objective: 04-03 Present an income statement with earnings per share

Learning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #84

Topic Area: Preparing Financial Statements

85. Which of the following statements regarding earnings per share is not correct? A. It can be reported on the income statement.B. The numerator is net income.C. The denominator is the average number of shares of common stock outstanding.D. It doesn't have to be disclosed on the income statement or the notes to the financial statements.

The only ratio required to be disclosed on the income statement or notes to the financial statements is earnings per share.






86. Which of the following statements does not correctly describe the relationship between the income statement and the ending retained earnings balance? A. Net income increases the ending balance of retained earnings.B. A net loss decreases the ending retained earnings balance.C. A net loss does not affect the ending retained earnings balance.D. Net income and net loss both affect the ending retained earnings balance.

Net income (loss) is added (subtracted) to the beginning retained earning balance as a step towards calculating ending retained earnings.



Difficulty: EasyLearning Objective: 04-03 Present an income statement with earnings per share



87. Which of the following statements regarding the balance sheet is false? A. Property and equipment is reported at book value.B. Assets are reported in the order of liquidity.C. Current liabilities are obligations to be paid with current assets.D. It is a period of time financial statement.

The balance sheet is a snap shot of a company's assets, liabilities, and stockholders' equity at a specific point in time.






88. A calendar year reporting company preparing its annual financial statements should use the phrase "As of December 31, 2011" in the heading of which financial statements? A. On all of the required financial statements.B. On only the income statement.C. On the income statement and balance sheet, but not the statement of cash flows.D. On the balance sheet only.

The balance sheet is a snap shot of a company's assets, liabilities, and stockholders' equity at a specific point in time.






89. The declaration and payment of a $5,000 dividend by JLH Company would be reported on which of JLH's financial statements? A. The income statement only.B. The statement of stockholders' equity and statement of cash flows.C. The balance sheet only.D. The statement of stockholders' equity only.

Dividends declared are reported on the statement of stockholders' equity, as a component of retained earnings, and the payment of dividends is reported under the financing section of the statement of cash flows.






90. Which of the following transactions will not decrease the net profit margin ratio? A. Accruing interest expense at year-end.B. The recording of depreciation expense.C. Using cash to pay for previously accrued salaries.D. Accruing utilities expense at year-end.

Net profit margin = Net income ÷ Net sales (operating revenues). Previously accrued expenses have already been recognized and factored into net income, paying for these expenses impacts the balance sheet and not the income statement.



Difficulty: MediumLearning Objective: 04-05 Explain the closing process. Explain the closing process. Compute and interpret the net profit margin.

Libby - Chapter 04 #90Topic Area: Net Profit Margin

91. Which of the following statements regarding the net profit margin ratio is false? A. The numerator is net income.B. The denominator is net sales or operating revenues.C. It measures how much of every sales dollar is gross profit.D. Financial analysts expect well-run businesses to maintain or improve their profit margin over time.

The numerator is net income not gross margin.





Topic Area: Net Profit Margin

92. Which of the following correctly describes the closing entry process? A. The closing process reduces the balances in the permanent accounts to zero at the end of each period.B. The closing entries are usually prepared prior to adjusting entries.C. The closing process creates a zero balance in all temporary accounts at the end of each period.D. The closing process creates a zero balance at the end of each period for all accounts on the year-end

trial balance.

Income statement (temporary) accounts begin each accounting cycle with a zero balance; therefore the final step of the accounting cycle is to close out these accounts and create a zero balance for the beginning of the next period.






93. Which of the following account balances would not be affected by closing journal entries? A. Interest expenseB. Accumulated depreciationC. DividendsD. Retained earnings

Closing journal entries impact income statement accounts, dividend accounts and retained earnings. Balance sheet accounts, other than retained earnings, are not affected by closing entries.






94. Which of the following account balances would be closed at year-end? A. Interest expenseB. Accumulated depreciationC. Retained earningsD. Unearned revenues

Income statement accounts are closed at the end of the accounting cycle, interest expense is an income statement account.






95. Which of the following account balances would not be closed at year-end by debiting the account? A. Interest revenueB. Gain on sale of buildingC. Sales revenuesD. Unearned revenues

Unearned revenues are a liability account that is not closed at year-end.






96. Which of the following account balances would be closed at year-end by crediting the account? A. Investment revenueB. Loss on sale of buildingC. Sales revenuesD. Unearned revenues

Loss accounts have a normal debit balance and are closed with credit entries at year-end.






97. Which one of the following accounts would not be closed at the end of the accounting year? A. Utilities expenseB. Sales revenueC. Prepaid rent expenseD. Wages expense

Prepaid rent expense is an asset account, only income statement accounts are closed at year-end.






98. A trial balance prepared after the closing entries have been posted would show a zero balance in which one of the following accounts? A. InventoryB. Accounts receivableC. Accumulated depreciationD. Income tax expense

Closing entries create zero balances in temporary accounts. Interest expense is a temporary account and therefore would show a zero balance after closing entries have been posted.






99. Which of the following correctly describes the accounts reported on the post-closing trial balance? A. It includes permanent and temporary accounts with non-zero balances.B. The ending retained earnings balance includes the current period net income.C. It includes only temporary account balances.D. It doesn't include stockholders' equity account balances.

After closing the temporary accounts, the ending retained earnings balance includes the current period's net income.






100. Which of the following isn't a correct closing entry?


Closing entries debit accounts that have normal credit balances and credit accounts that have normal debit balances. Loss and expense accounts are credited in closing entries. Revenues and retained earnings have credit balances and are debited in closing entries.



Difficulty: EasyLearning Objective: 04-05 Explain the closing process.

Libby - Chapter 04 #100Topic Area: End of the Accounting Cycle

101. Describe the adjusted trial balance. Answers will varyFeedback: The adjusted trial balance is not a financial statement which is used for external reporting purposes. It is a listing of all account balances by debit or credit balance after adjusting entries have been recorded. Its objectives are to test the equality of debits and credits and to organize the accounts to aid in the preparation of financial statements.



Difficulty: EasyLearning Objective: 04-01 Explain the purpose of a trial balance.

Libby - Chapter 04 #101Topic Area: Unadjusted Trial Balance

102. What is the purpose of adjusting entries? Give two examples of accruals and deferrals. Answers will varyFeedback: The purpose of adjusting entries is to correct the revenue and expense accounts at year-end for accruals, transactions which have occurred but haven't yet been recorded, and for deferrals, transactions which were recorded earlier and need to be adjusted at year-end. Accruals include adjustments such as interest incurred at year-end and revenue earned at year-end. Deferrals include transactions which create accounts such as prepaid insurance and unearned revenues, which need to be adjusted at year-end.






103. What are the purposes of closing entries? Describe permanent and temporary accounts. Answers will varyFeedback: Closing entries transfer the balances in the income statement (temporary) accounts to retained earnings. They also establish a zero balance in the income statement (temporary) accounts so that the next accounting period can begin accumulating revenue and expense transactions starting with zero balances. Permanent accounts are balance sheet accounts which accumulate balances and which carry forward from one period to the next. Temporary accounts are income statement accounts which accumulate balances during a period but are closed to a zero balance at the end of the period.



Difficulty: EasyLearning Objective: 04-03 Present an income statement with earnings per share



104. On November 1, 2011, Bug Busters collected $6,000 in advance for three months of service to be provided beginning on that date. Bug credited unearned rent revenue for $6,000. Prepare the adjusting entry required on December 31, 2011 (assuming that no adjusting entries have been made during the year). Answers will vary

Feedback:

AACSB: Analytic





105. Below are two related transactions for Golden Corporation. The annual accounting period ends December 31. Prepare the journal entry for each of the following transactions. No adjusting entries have been made during the year.A. October 1, 2011--Golden Corporation borrowed $100,000 and signed a note providing for 8% interest. The principal and interest are due in one year (on September 30, 2012).B. December 31, 2011--end of the annual accounting period. (If no entry is required, explain why). Answer will vary

Feedback:

AACSB: Analytic





106. Bridge Company keeps a small inventory of supplies used for cleaning and maintenance purposes. On January 1, 2011, the inventory of supplies on hand was $2,000. During the year, supplies purchased were debited to the supplies inventory account in the amount of $6,500. On December 31, 2011, the inventory count of supplies in the storeroom was $1,750. Give the adjusting entry required at December 31, 2011, assuming that no adjusting entries were made during the year. Answers will vary

Feedback:

AACSB: Analytic





107. On November 1, 2010, Bruce Company leased some of its office space to Fairlane Company and immediately collected twelve months rent in advance of $600,000. Bruce debited cash and credited unearned rent revenue for $600,000. Prepare the December 31, 2010 adjusting entry Bruce should make in respect to the rent, assuming no adjusting entries have been made during the year. Answers will vary

Feedback:

AACSB: Analytic





108. On December 1, 2011, Fleet Company paid $30,000 for three months rent and debited prepaid rent for $30,000; the rent payment was for three was for three months beginning December 1, 2011. Prepare Fleet's adjusting entry required on December 31, 2011. Answers will vary

Feedback:

AACSB: Analytic





109. Center Company is completing the accounting cycle at the end of the annual accounting period, December 31, 2011. No adjusting entries have been made during the year so three adjusting entries must be made at this date to update the accounts. The following accounts, selected from Center Company's chart of accounts, are to be used for this purpose. They are coded to the left for easy reference.

Answers will vary

Feedback: A. ($9,000 x 1/3) = $3,000.B. ($800 + 5,000 - 600) = $5,200.C. ($50,000 x 12% x 2/12) = $1,000.

AACSB: Analytic





110. Lane Company is completing the accounting cycle at the end of its annual accounting period, December 31, 2011. No adjusting entries have been made during the year so three adjusting entries must be made to update the accounts. The following accounts, selected from the company's chart of accounts, are to be used for this purpose. They are coded to the left for easy reference.

Answers will vary

Feedback: All $2,400.($5,000 x 14% x 3/12) = $175($1,800 x 1/6) = $300

AACSB: Analytic





111. Below are four transactions that were completed during 2011 by Timber Lodge. The annual accounting period ends on December 31. Each transaction will require an adjusting entry at December 31, 2011. You are to provide the 2011 adjusting entries required for Timber Lodge.A. On July 1, 2011, Timber Lodge paid a two-year insurance premium for a policy on its facilities. This transaction was recorded as follows:

B. On December 31, 2011 a tenant renting some storage space from Timber Lodge had not paid the rent of $750 for December 2011.C. On September 1, 2011, Timber Lodge borrowed $25,000 cash and gave a one-year, 10 percent, note payable. The interest is payable on the due date, August 31, 2012. The September 1, 2011 transaction was recorded as follows:

D. On October 1, 2011, Timber Lodge collected $3,600 from a tenant for two years rent beginning October 1, 2011. The $3,600 collection was recorded as follows:

Answers will vary

Feedback:

AACSB: Analytic





112. Four transactions are given below that were completed during 2011 by Russell Company. You are to provide the adjusting entries required for Russell Company on December 31, 2011. No adjusting entries were made during the year.A. On December 31, 2011, Russell Company owed employees $3,750 for wages that were earned by them during December and were not recorded.B. During 2011, Russell Company purchased office supplies that cost $1,000 which were placed in the supplies room for use as needed. The purchase was recorded as follows:

At January 1, 2011, the inventory of unused office supplies was $300. At December 31, 2011, a physical count showed unused office supplies in the supply room amounting to $100.C. On December 1, 2011, Russell Company rented some office space to another party. Russell Company collected $900 rent for the period December 1, 2011, to March 1, 2012. The December 1 transaction was recorded as follows:

D. On July 1, 2011, Russell Company borrowed $2,000 cash on a one-year, 8% interest-bearing, note payable. The interest is payable on the due date, June 30, 2012. The borrowing was recorded as follows on July 1, 2011:

Answers will vary

Feedback:

AACSB: Analytic





113. Three transactions are given below that were completed during 2011 by Story Company. Prepare the adjusting entries as of December 31, 2011, assuming no adjusting entries have been made during the year. A. On June 1, 2011, Story Company paid $12,600 for one year's rent beginning on that date. The rent payment was recorded as follows:

B. On February 1, 2011, Story Company purchased office supplies during the year that cost $700 and placed the supplies in a storeroom for use as needed. The purchase was recorded as follows:

At December 31, 2011, a count showed unused office supplies of $200 in the storeroom. There was no beginning inventory of supplies on hand.C. On December 31, 2011, Story Company owed employees $2,000 for wages earned during December. These wages had not been paid nor recorded. Answers will vary

Feedback:

AACSB: Analytic





114. For each of the following accounts you are to enter one capital letter in each cell which indicates for each account its normal characteristics.

Answers will vary

Feedback:




Learning Objective: 03-05 Prepare financial statements.Learning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and income


Topic Area: Purpose of Adjustments, End of the Accounting Cycle

115. A list of the accounts of Medford Corporation is given below, followed by some selected transactions. Indicate the accounts that should be debited and credited for each transaction closing entry by placing the appropriate account codes in the debit and credit columns provided.

Answers will vary

Feedback:

AACSB: Analytic



Learning Objective: 03-05 Prepare financial statements.Learning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and income


Topic Area: Purpose of Adjustments, End of the Accounting Cycle

116. On December 31, 2010, Madison Company prepared an income statement and a balance sheet. In making the adjusting entries at year-end, Madison failed to record the adjusting entry for wages earned by employees, but not yet paid, amounting to $5,000 for the last four days of the year. The income statement reported net income of $52,000. The balance sheet reported total assets of $254,000, total liabilities of $170,000 and stockholders' equity of $84,000.Complete the following tabulation to show the correct amounts for the financial statements (ignore income taxes).

Answers will vary

Feedback:

AACSB: Analytic





117. Johnson Corporation is completing the accounting information processing cycle at the end of the fiscal year, June 30, 2010. Johnson has provided the following trial balances as of June 30, 2010:

Requirements:A. Reconstruct the adjusting entries and give a brief explanation of each.B. What is the amount of net income?C. Calculate earnings per share (EPS) assuming 1,000 shares of common stock are outstanding. Answers will vary

Feedback: A. B. Net income = $16,300 = $38,300 - $16,100 - $5,500 - $400C. EPS = $16.30 = $16,300 ÷ 1,000

AACSB: Analytic







118. The comparative balance sheets of Titan Company for the years ended December 31, 2010 and 2011, reported the following selected amounts:

Requirements:A. Calculate the total amount of office supplies purchased during 2011.B. Calculate the total amount of rent collected during 2011.C. In what section of the statement of cash flows would the payments for office supplies appear?D. In what section of the statement of cash flows would the collection for rents appear? Answers will varyFeedback: A. $800 - $2,000 + $15,000 = $13,800B. $10,500 - $11,000 + $12,000 = $11,500C. Operating activitiesD. Operating activities

AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Reporting ,measurement






119. On January 1, 2011 the balance in the prepaid insurance account was $2,500. On December 31, 2011, after the 2011 adjusting entries were made, the balance of the prepaid insurance account was $1,200. During 2011, cash payments for insurance premiums amounted to $5,000, which was debited to the prepaid insurance account. Prepare the adjusting entry which must have been made at December 31, 2011. Answers will vary

Feedback:

AACSB: Analytic





120. On December 31, 2010, the manager of Jordan Creek Apartments noticed that four tenants had not paid their December rent amounting to $500 each. What is the adjusting entry required on December 31, 2010? Answers will vary

Feedback:

AACSB: Analytic


Bloom's: ApplyDifficulty: Easy



121. On July 1, 2011, Bass Company paid a two-year insurance premium. On that date the following journal entry was made:

The annual accounting period ends on December 31, 2011.A. How much of the premium should be reported as expense on the 2011 income statement?B. What is the amount of prepaid insurance which should be reported on the balance sheet at December 31, 2011?C. Prepare the adjusting entry that should be made on December 31, 2011, assuming no adjusting entries have been made during the year. Answers will vary

Feedback:

AACSB: Analytic





122. For each of the following transactions, indicate the amounts and direction of effects of the adjusting entry on the elements of the balance sheet and income statement. Using the following format, indicate + for increase, and - for decrease, and NE for no effect.Transactions:A. Wages of $5,800 have been earned, but not paid to employees at the end of the year.B. Supplies in the amount of $2,000 were used during the year, which are currently recorded in the office supplies inventory account.C. Interest has accrued on a bank loan.

Answers will vary

Feedback:






123. Explain how adjusting entries provide for potential manipulation by managers. In addition, discuss how compensation arrangements may result in incentives for such manipulation to occur. Answers will varyFeedback: Responses will vary to these questions. Managers often receive bonuses based on the strength of a company's financial performance. In addition, stock options are often used as a means of compensation. The higher the company's market value, the more compensation they earn. When actual performance lags behind expectations, managers may be tempted to manipulate accruals and deferrals to make up part or all of the difference. Evidence from academic research as well as SEC investigations indicates that some managers do engage in such behavior. In many of the SEC cases, the firms involved, their managers, and their auditors were penalized for such actions.






124. On September 1, 2011, Fast Track, Inc. was started with $30,000 invested by the owners as contributed capital. On September 30, 2011, the accounting records contained the following amounts:

Prepare an income statement for September for the first month of Fast Track's operation. Ignore income taxes. Answers will vary

Feedback:

AACSB: Analytic






Prepare a statement of stockholders' equity for September, the first month of operation. Ignore income taxes. Answers will vary

AACSB: Analytic






Prepare a balance sheet for Fast Track, Inc. as of September 30, 2011. Answers will vary

Feedback: * $6,250 = $19,200 - $2,400 - $6,900 - $600 - $250 - $500 - $2,300

AACSB: Analytic





127. A. Describe how the income statement is related to the statement of stockholders' equity. B. Describe how the statement of stockholders' equity is related to the balance sheet.C. Describe how the statement of cash flows is related to the balance sheet. Answers will varyFeedback: A. Net income from the income statement appears in the statement of stockholders' equity as an increase to retained earnings. A net loss decreases retained earnings.B. The ending balance for contributed capital and retained earnings appear on the balance sheet in the stockholders' equity section.C. The bottom line for the ending cash balance on the statement of cash flows is the same as the cash account balance on the balance sheet.



Difficulty: MediumLearning Objective: 04-03 Present an income statement with earnings per share



128. Modern Mother Magazine has received cash subscriptions on April 1, 2011 in the amount of $3,600,000 for the next three years. Their year-end is December 31, 2011. Magazine delivery occurs monthly and started on April 1, 2011. These were the only subscription sales for the year.Answer the following questions for the year ended December 31, 2011:a. What amount of cash should be reported for the year on the statement of cash flows?b. What amount of subscriptions revenue should be reported on the income statement?c. What amount would be reported as unearned subscriptions revenue on the balance sheet as of December 31, 2011? Answers will varyFeedback: a.$3,600,000b. $900,000 ($3,600,000 × 9/36)c. $2,700,000 ($3,600,000 - $900,00)

AACSB: Analytic





129. Toy Shop Inc. has provided the following income statements:

Requirements:Compute net profit margin for each year.Discuss some of the events which could have caused the changes to the net profit margin based on the income statement information above. Answers will varyFeedback: (1) In 2011, (3.8%); in 2010, 4.5%; and in 2009, 6.2%.(2) From 2009 to 2010 while sales increased 28.1% and cost of goods sold only increased at a lower rate of 24.3% leading to a higher gross profit margin, ToyShop's operating expenses and nonoperating losses increased 36.8% and 150.9% respectively causing net profit margin to drop from 6.2% to 4.5%. From 2010 to 2011, sales dropped by 10.5% while cost of goods sold decreased only 1.4%, which adversely impacted the gross profit margin. In addition, operating expenses actually increased .5% and nonoperating losses increased 126.6% leading to a negative net profit margin of (3.8%). ToyShop has been unable to control its operating expenses and reduce nonoperating losses. This was compounded in 2011 by the sharp drop in sales of 10.5% while cost of goods sold dropped by only 1.4%. There is indication that they had to discount their toys in order to sell inventory in 2011.

AACSB: Analytic





130. The following income statement was reported for Bauer Inc. for the first year of operations ending December 31, 2010 reported (in thousands of dollars):

Requirements:A. Calculate net profit marginB. Calculate earnings per share if there are 200,000 shares of common stock outstanding Answers will varyFeedback: A. 13.5%, (calculated by dividing net income $3,315 by sales revenue $24,500)B. $16.58 per share (calculated by taking net income $3,315,000 divided by common shares outstanding 200,000)

AACSB: Analytic





131. The adjusted trial balance of Tahoe Company at the end of the accounting year, December 31, 2010, showed the following: Answers will vary

Feedback: Requirements:A. Prepare all the required closing entries for Tahoe Company at December 31, 2010.B. Calculate the 2010 ending balance in retained earnings.

Feedback: B. $59,000 + $8,000* = $67,000 (balance of retained earnings at the end of 2010).* ($40,000 - $32,000)

AACSB: Analytic





132. Air Cargo Company recorded the following adjusting entries at the end of the accounting year, December 31, 2010:

Before these adjusting entries were recorded, a partial unadjusted trial balance reflected the following:

Prepare the closing entries for Air Cargo Company at December 31, 2010. Answers will vary

Feedback:

AACSB: Analytic





133. At December 31, 2010, the following adjusting entries were recorded in the accounts of CPA Company:

There were no other accrued receivables or payables on CPA's books in 2010.Calculate the balances in the following accounts immediately after the closing entries were posted.

Answers will vary

Feedback:

AACSB: Analytic





134. Determine the effect of the following errors on the financial statements. Code your answers as follows: A. If the error results in an overstatement of the financial statement component.B. If the error results in an understatement of the financial statement component.C. If the error does not affect the financial statement component. Error 1: A company failed to record accrued wage expense at year-end.Revenues ______ Expenses ______ Net income ______ Assets ______ Liabilities ______ Stockholders' equity ______ Error 2: A company failed to accrue revenue earned at year-end.Revenues ______ Expenses ______ Net income ______ Assets ______ Liabilities ______ Stockholders' equity ______ Error 3: A company recorded revenue when cash was received from a customer for services to be provided in the future.Revenues ______ Expenses ______ Net income ______ Assets ______ Liabilities ______ Stockholders' equity ______

AACSB: Analytic







135. Determine the effect of the following errors on the financial statements. Code your answers as follows: A. If the error results in an overstatement of the financial statement component.B. If the error results in an understatement of the financial statement component.C. If the error does not affect the financial statement component. Error 1: A company failed to adjust the prepaid insurance account for insurance which expired during the period.Revenues ______ Expenses ______ Net income ______ Assets ______ Liabilities ______ Stockholders' equity ______ Error 2: A company failed to record depreciation expense at year-end.Revenues ______ Expenses ______ Net income ______ Assets ______ Liabilities ______ Stockholders' equity ______ Error 3: A company did not adjust the unearned revenue account for revenue earned during the year.Revenues ______ Expenses ______ Net income ______ Assets ______ Liabilities ______ Stockholders' equity ______

AACSB: Analytic







ch4 Summary

Category # of Questions

AACSB: Analytic 42

AACSB: Reflective Thinking 93

AICPA BB: Critical Thinking 135

AICPA FN: Measurement 2

AICPA FN: Reporting 90

AICPA FN: Reporting ,measurement 1

AICPA FN: Reporting, Measurement 42

Bloom's: Apply 49

Bloom's: Remember 41

Bloom's: Understand 45

Difficulty: Easy 34

Difficulty: Hard 12

Difficulty: Medium 89

Learning Objective: 03-05 Prepare financial statements. 2

Learning Objective: 04-01 Explain the purpose of a trial balance. 8


88

Learning Objective: 04-03 Present an income statement with earnings per share 27

Learning Objective: 04-05 Explain the closing process. 17

Learning Objective: 04-05 Explain the closing process. Explain the closing process. Compute and interpret the net profit margin.

6

Learning Objective: and statement of cash flows. 11

Learning Objective: balance sheet 11

Learning Objective: statement of stockholders' equity 11

Learning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows. 16

Libby - Chapter 04 135

Topic Area: End of the Accounting Cycle 17

Topic Area: Key Ratio Analysis 2

Topic Area: Net Profit Margin 4

Topic Area: Preparing Financial Statements 16

Topic Area: Purpose of Adjustment 1

Topic Area: Purpose of Adjustments 74

Topic Area: Purpose of Adjustments, End of the Accounting Cycle 2

Topic Area: Purpose of Adjustments, Preparing Financial Statements 11

Topic Area: Unadjusted Trial Balance 8