Deck 4: Income Measurement and Accrual Accounting

Question 1

Measurement of the economic effects on an entity involves each of the following except

A) Quantification of effects
B) Identification of the attribute to be measured
C) Selection of an appropriate unit of measure
D) Recording the economic effects in the financial statements

Answer 1

D

Question 2

The selection of historical cost over current value as the attribute to be measured for assets is an example of the trade-off of

A) Reliability over relevance
B) Costs over benefit
C) Comparability over consistency
D) Understandability over verifiability

Answer 2

A

Question 3

Stanfield Equipment sells new tractors and pays each salesperson a commission of $1,000 for each tractor sold. During the month of August, a salesperson, Jason, sold 3 new tractors. Stanfield pays Jason on the 10th day of the month following the sale. Jason operates on the cash basis; the tractor dealer operates on the accrual basis. Which of the following statements is true?

A) Stanfield will recognize commission revenue earned in the amount of $3,000 in August.
B) Stanfield will recognize commission expense in the amount of $3,000 in August.
C) Jason will recognize commission expense in the amount of $3,000 in September.
D) Jason will recognize revenue in the same month that the tractor dealer recognizes expense.

Answer 3

B

Question 4

Why is the use of the U.S. dollar as a unit of measure for financial statement data in the U.S. widely accepted?

A) U.S. dollar remains stable over a long period of time
B) U.S. dollar is universally recognized as a reliable financial measure
C) U.S. dollar is the medium of monetary exchange in the U.S.
D) U.S. dollar is required for financial statement presentation by the FASB and SEC

Question 5

When is revenue from the sale of merchandise normally recognized?

A) On the date the sale is made.
B) When the customer pays for the merchandise.
C) Either on the date on which the sale occurs, or the date on which the customer pays.
D) When the merchandise is sold, if sold for cash, or when payment is received, if sold on credit.

Question 6

Hensley Painting Company painted four houses in June at $500 each. At the end of June, three homeowners had paid Hensley cash for the jobs. Under the accrual basis, what amounts will be reported on the income statement and the statement of cash flows for June?

Question 7

Fox Auto sold merchandise to a customer for $3,000 on credit on March 10. The customer paid Fox Auto the amount due on March 31. Under the accrual basis of accounting, which of the following statements is true?

A) Fox Auto will recognize the revenue on March 31.
B) The March 10th transaction increases revenue, but has no effect on assets because cash has not been received.
C) Revenue is recognized after the cost of the merchandise sold has been paid by Fox Auto.
D) The March 31st transaction has no effect on total assets under the accrual basis.

Question 8

A pool cleaning service signs a contract with a new customer on May 1. The pool is vacuumed and "shocked" for the customer on June 1, and the bill for the services is paid on July 1. Under the accrual basis, the business should recognize revenue on:

A) December 31
B) July 1
C) June 1
D) May 1

Question 9

During December, Filmore Inc. purchased $800 of supplies for use in its business. At the end of December, 20% of the supplies were still on hand, but only 75% had been paid. What amounts will appear on the company's balance sheet on December 31?

Question 10

Which of the following is the attribute used to measure many assets that are recognized on a balance sheet, because it is more objective and verifiable?

A) Market value
B) Historical cost
C) Liquidation value
D) Current replacement cost

Question 11

Which one of the following statements is true?

A) Recognition is concerned with the dollar amount of each economic effect that should be reported in the financial statements.
B) Measurement is concerned with how economic effects should be quantified.
C) The stability concept is concerned with identification of the specific entity for which economic effects are to be recognized and measured.
D) The monetary unit assumption is concerned with the valuation of economic effects in terms of current purchasing power.

Question 12

Which of the following concepts is important to accrual accounting?

A) Time period, because accrual accounting divides earnings into time periods
B) Monetary unit, because inflation is a big factor in the environment
C) Cash basis, because if cash is not received, revenue is not accrued
D) Entity concept, because personal transactions must be separated from business transactions

Question 13

Harvest Catering is a local catering service. Conceptually, when should Harvest recognize revenue from its catering service?

A) At the date the customer places the order
B) At the date the meals are served
C) At the date the invoice is mailed to the customer
D) At the date the customer's payment is received

Question 14

An accountant describes the effects of an economic event on an entity by recording the transaction and reporting the amount on the financial statements. What is this called?

A) Measurement
B) Recognition
C) Disclosure
D) Matching

Question 15

On January 1, 2015, Davin Avenue Associates, Inc. purchased a copier for $6,000 cash and decided to depreciate it over 5 years. What amounts associated with the copier will appear on Davin's financial statements for the year ending December 31, 2015?

Question 16

When are revenues and expenses recognized in the same accounting period that cash receipts and payments occur?

A) Under the cash basis of accounting
B) Under the accrual basis of accounting
C) Under the adjusting method of accounting
D) Under both the cash and accrual bases of accounting

Question 17

Country Club Center sells season memberships for $200 each. During January of 2015, 60 season memberships were sold. As of March 31, 2015, only $3,000 of season membership fees had been collected from customers. The season runs for 4 months starting May 15, 2015. Which one of the following is an amount reported on the financial statements for the period ending March 31, 2015?

A) Unearned membership revenue of $3,000
B) Unearned membership revenue of $9,000
C) Accounts receivable of $3,000
D) Membership revenue of $9,000

Question 18

Camp Consulting Services started business on January 1, 2015. Camp performed services for customers totaling $100,000 of which 40% remain uncollected at the end of December. Under the accrual basis, what amounts would appear on Camp Consulting's financial statements for 2015?

Question 19

Which of the following statements does not present financial information based on the accrual basis of accounting?

A) Balance Sheet
B) Income Statement
C) Statement of Retained Earnings
D) Statement of Cash Flows

Question 20

Cumberland City Consultants started business on January 1, 2015, and immediately purchased $1,000 of supplies to use in the business. At the end of the month, 25 percent of the supplies remains unpaid and 20% are still on hand. What amounts should appear on the financial statements for January, 2015?

Question 21

Cuisine Company received a 6-month, 6% note for $10,000 from its president on October 1, 2014. The note is due on March 31, 2015. If Cuisine's accounting period ends on December 31, how much interest revenue should Cuisine recognize during 2014 and 2015?

Question 22

Expenses can be matched against revenue

A) If the earnings process is not complete
B) When cash is collected from the sale of products
C) Through allocation to the accounting periods in which the benefits are recognized
D) When payment is made for costs related to revenue

Question 23

Expenses originate from

A) Using an asset or recognizing liabilities
B) Incurring liabilities or providing services to customers
C) Collecting cash from customers
D) Paying off liabilities

Question 24

Mendes Company sells merchandise to customers. Mendes should normally recognize

A) Revenue and the related expenses in the same accounting period as earned whether payment is received or not
B) Revenue when the cash is collected and the expenses when Mendes pays its creditor for the merchandise
C) Revenue and expenses after all payments are collected
D) Expenses in the period the merchandise is sold and defer revenue until the customer pays for the merchandise

Question 25

Grove Corp. purchased equipment at a cost of $260,000 in January, 2010. As of January 1, 2014, depreciation of $88,000 had been recorded on this asset. Depreciation expense for 2014 is $22,000. After the adjustments are recorded and posted at December 31, 2014, what are the balances for the Depreciation Expense and Accumulated Depreciation?

Question 26

What effect does "recognizing an accrued liability for utilities at the end of the accounting period" have on the accounting equation?

A) Assets decrease and stockholders' equity decreases
B) Liabilities increase and stockholders' equity increases
C) Assets decrease and liabilities decrease
D) Liabilities increase and stockholders' equity decreases

Question 27

Wentworth Company received advance payments from customers during 2015 of $10,000. At December 31, 2015, $1,000 of the advance payments still had not been earned. After the adjustments are recorded and posted at December 31, 2015, the balances in the Unearned Service Revenue and Service Revenue accounts will be:

Question 28

On August 31, Farrell Corporation signed a one-year contract to provide services to Harris Company for $30,000. Harris will pay for the services on September 1. Using the accrual basis of accounting, when should Farrell Corporation recognize revenue?

A) September 1 of the current year when the cash is received from Harris.
B) On August 31 of the next year when all services have been provided.
C) Throughout the year as the revenue is earned.
D) At December 31 of the current year, and August 31 of the next year.

Question 29

Which one of the following is an example of an accrued liability?

A) Wages have been earned by employees, but have not been paid at the end of the period
B) Equipment that will benefit several periods has been purchased
C) An insurance policy that expires in a future period has been acquired
D) Supplies are purchased and used over several months

Question 30

Claxton Corp. purchased equipment at a cost of $320,000 in January, 2010. As of January 1, 2014, depreciation of $160,000 had been recorded on this asset. Depreciation expense for 2014 is $40,000. After the adjustments are recorded and posted at December 31, 2014, what are the balances for the Equipment and Accumulated Depreciation?

Question 31

What effect does "recognizing revenue at the end of the accounting period for rent previously received in advance" have on the accounting equation for an insurance company?

A) Stockholders' equity increases and liabilities increase
B) Assets increase and stockholders' equity increases
C) Assets decrease and liabilities decrease
D) Liabilities decrease and stockholders' equity increases

Question 32

Adjustments are necessary only if

A) The cash basis of accounting is used for all accounting periods
B) Cash receipts and payments occur before or after the point in time when revenues and expenses should be recognized under the accrual basis of accounting
C) Management reports its adjustments on the statement of cash flows
D) The company reports revenue in the same period cash is collected

Question 33

Mayfair Book Club Company received advance payments from customers during 2015 of $5,000. At December 31, 2015, $1,200 of the advance payments still had not been earned. After the adjustments are recorded and posted at December 31, 2015, what will the balances be in the Unearned Book Revenue and Book Revenue accounts?

Question 34

Which of the following statements is true concerning assets?

A) Assets represent future economic sacrifices
B) Assets are expired costs
C) Assets become expenses at the time they are paid in cash
D) Assets become expenses when their economic benefits expire

Question 35

Which one of the following is not a recognized method of recognizing assets as expenses in a particular accounting period?

A) Customers' account balances in accounts receivable are assigned to expense in the period in which each customer pays
B) Prepaid insurance is assigned to expense as the insurance expires
C) A building is depreciated and its cost is assigned to the current and future accounting periods in which the building is expected to be used
D) Merchandise inventory is assigned to cost of goods sold in the period the goods are sold

Question 36

What happens to the accounting equation when the adjustment for depreciation expense for the accounting period is recorded?

A) Assets decrease and stockholders' equity decreases
B) Assets increase and stockholders' equity increases
C) Assets decrease and liabilities decrease
D) Liabilities increase and stockholders' equity decreases

Question 37

Which one of the following is an example of a deferred revenue?

A) Sales are made to customers on credit
B) Interest has been earned by a bank deposit, but it has not been recorded
C) Cash is received prior to providing the services to customers
D) Cash sales are made to customers

Question 38

As a general rule, revenue is recognized at the point of sale. Which one of the following situations illustrates this rule?

A) Products are sold to customers on credit with payment due in 30 days
B) Employees are paid wages the week after the wages are earned
C) Products are purchased for resale purposes
D) Interest is collected from amounts loaned to employees

Question 39

What does the phrase, "Revenue is recognized at the point of sale" mean?

A) Revenue is recorded in the accounting records and reported on the income statement when goods are sold and delivered to a customer.
B) Revenue is recorded in the accounting records when the goods are received from a supplier, and reported on the income statement when sold to the customer.
C) Revenue is recorded in the accounting records and reported on the income statement when the cash is received from the customer.
D) Revenue is recorded in the accounting records when the goods are sold to a customer, and reported on the income statement when the cash payment is received from the customer.

Question 40

Norys Corp. received an 8-month, 9% note for $100,000 from its agent on October 1, 2014. The note is due on May 30, 2015. If Norys' accounting period ends on December 31, 2014, how much interest revenue should Norys recognize during 2014 and 2015?

Question 41

Masters Company borrowed on a one-year, 10%, $150,000 note on May 1, with interest and principal to be paid at maturity. How much interest payable will be reported on Masters' balance sheet as of November 30 of the same year?

A) $7,500
B) $8,750
C) $15,000
D) $30,000

Question 42

Innovate Company borrowed on a one-year, 10%, $150,000 note on May 1, 2014 with interest and principal to be paid at maturity. How much interest should Innovate Company report on its income statement for the year ending December 31, 2015?

A) $10,000
B) $15,000
C) $30,000
D) $5,000

Question 43

Winston Corp. had $1,800 of supplies on hand at January 1. During the year, supplies with a cost of $4,000 were purchased. At December 31, the actual supplies on hand amount to $1,300. After the adjustments are recorded and posted at December 31, determine the balances in the Supplies and Supplies Expense accounts.

Question 44

Gear Shop purchased supplies at a cost of $1,000 during the year. At January 1, the beginning balance in the supplies account was $300. At December 31, supplies on hand are $100. Determine supplies expense for the year.

A) $1,300
B) $1,200
C) $1,100
D) $1,400

Question 45

On December 1, 2015, Twilight Corporation paid $8,000 rent in advance. The rent per month is $1,000. If Twilight's accounting period ends on December 31, 2015, what will be reported on the financial statements?

A) Prepaid Rent of $7,000 on its balance sheet at December 31, 2015
B) Prepaid Rent of $8,000 on its balance sheet at December 31, 2015
C) Rent Expense of $8,000 on its 2015 income statement
D) Rent Revenue of $7,000 on its 2015 income statement

Question 46

Windstar Corp. purchased supplies at a cost of $6,000 during the year. At December 31, supplies on hand are $1,400. Supplies expense for the year was $5,200. How much were supplies on hand at January 1?

A) $2,200
B) $11,200
C) $1,400
D) $600

Question 47

Frank Corporation purchased supplies at a cost of $15,000 during 2015. At January 1, 2015, supplies on hand were $2,000. At December 31, 2015, supplies on hand are $2,500. Calculate supplies expense for 2015.

A) $15,500
B) $14,500
C) $15,000
D) $17,000

Question 48

Which one of the following adjustments will increase assets?

A) Interest incurred on money borrowed during the period but not yet paid to the bank is accrued
B) Rent revenue is recorded for amounts owed by a tenant but not yet paid
C) The use of supplies is recorded
D) Depreciation for the period is recorded

Question 49

A company forgot to record four adjustments during 2015. Which one of the following omissions of adjustments will understate net income?

A) Sales made during the last week of the period are not recorded
B) Interest on monies borrowed has not yet been recorded
C) Prepaid insurance is not reduced for the portion of the policy that has expired during the period
D) Income taxes owed but not yet paid are ignored

Question 50

Doran Systems Corp. has grown significantly over the past year. One area that has plagued the Controller of Doran is the reconciliation of supplies expense. The end-of-year supplies on hand totaled $20, and purchases totaled $500, and supplies on hand at the beginning of the year amounted to $200. How much will Doran Systems report as supplies expense for the current year?

A) $200
B) $680
C) $220
D) $700

Question 51

Based on its income for the month, Reel Company estimates that federal income taxes for the month of May will be $11,000. What is the effect of the adjustment on the financial statements?

A) Increase retained earnings
B) Increase income taxes expense
C) Increase net income
D) Decrease income taxes payable

Question 52

Starlight Associates, Inc. recorded salary expense of $100,000 in 2015. However, additional salaries of $5,000 had been earned, but not paid or recorded at December 31, 2015. After the adjustments are recorded and posted at December 31, 2015, the balances in the Salaries Expense and Salaries Payable accounts will be:

Question 53

Esquire Industrial plant operates five days per week with a daily payroll of $4,000. Employees are paid every Saturday for the workweek just completed Monday through Friday. The last day of the month is Wednesday, March 31. What is the effect of the correct adjustment at March 31?

A) Increases stockholders' equity and Wages Payable by $8,000
B) Increases Wages Payable and decreases Cash by $12,000
C) Decreases stockholders' equity and increases Wages Payable by $12,000
D) Increases Wages Payable and increases Wages Expense by $8,000

Question 54

Place Corp. purchased supplies at a cost of $12,000 during the year. At January 1, supplies on hand were $2,000. At December 31, supplies on hand are $1,000. Determine the amount of supplies expense for the year.

A) $10,000
B) $12,000
C) $13,000
D) $14,000

Question 55

What happens to the accounting equation when the adjustment that recognizes accrued interest revenue is recorded?

A) Assets increase and liabilities increase
B) Assets increase and stockholders' equity increases
C) Assets decrease and liabilities decrease
D) Stockholders' equity increases and decreases by the same amount

Question 56

Clarke Shop purchased supplies at a cost of $18,000 during 2015. At January 1, 2015, the beginning balance in the supplies account was $1,000. For 2015, supplies expense was $16,000. How much "Supplies" are on hand as of December 31, 2015?

A) $1,000
B) $3,000
C) $16,000
D) $17,000

Question 57

Lucky Company purchased a truck at a cost of $12,000 in 2010. As of January 1, 2015, depreciation of $10,000 had been recorded on this asset. Depreciation expense for 2015 is $2,000. After the adjustments are recorded and posted at December 31, 2015, what is the carrying value of the truck?

A) $ 2,000
B) $ 5,500
C) $12,000
D) $ -0-

Question 58

Longitude Company borrowed on a two-year, 10%, $150,000 note on May 1, with interest and principal to be paid at maturity. How much interest will Longitude report on its income statement for the year ending December 31?

A) $10,000
B) $15,000
C) $30,000
D) $5,000

Question 59

A company forgot to record four adjustments during 2015. Which one of the following omissions of adjustments will overstate assets?

A) Sales made during the last week of the period are not recorded
B) Interest on monies borrowed has not yet been recorded
C) Prepaid insurance is not reduced for the portion of the policy that has expired during the period
D) Income taxes owed but not yet paid are ignored

Question 60

Which one of the following adjustments increases net income for the period?

A) Recognition of the amount of supplies used.
B) Recognition of interest on a note receivable.
C) Recognition of wages earned, but not paid to employees.
D) Recognition of rent costs that had been paid to the landlord in advance.

Question 61

What is the effect on the accounting equation when a company recognizes rent as earned that had previously been received in advance from customers?

A) Expenses increase
B) Revenues decrease
C) Liabilities increase
D) Net income increases

Question 62

Tracy, Inc.
Tracy, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at July 31 before adjustments is as follows:

Refer to the trial balance for Tracy, Inc. Employees are owed $750 for services since the last payday in July, to be paid the first week in August. The amount to be reported in the July income statement for salaries expense is:

A) $750
B) $8,550
C) $7,050
D) $7,800

Question 63

Which of the following adjusting entries involves the cash account?

A) Deferred Revenue
B) Accrued Asset
C) Deferred Liability
D) None of the Above

Question 64

The asset account, Supplies, has a balance of $700 on January 1. During January, the company purchased $16,000 of supplies on account and the liability was appropriately recorded. A count of supplies at the end of January indicates a balance of $900. Which one of the following is a correct amount to be reported on the company's financial statements for the month ending January 31?

A) Supplies Expense - $15,800
B) Supplies on Hand - $700
C) Accounts Payable - $15,800
D) Supplies Expense - $16,700

Question 65

Which one of the following adjustments decreases net income for the period?

A) Recognition of depreciation on plant assets
B) Recognition of interest on a note receivable
C) Recognition of services that had been provided to customers but the cash has not yet been received
D) Recognition of rent as earned that had been received in advance from customers

Question 66

Mitchell Company prepares monthly financial statements and will record.a prepaid account for each of the following except:

A) Mitchell paid for three months of window washing services in advance.
B) Mitchell purchases a four-year casualty insurance policy.
C) A tenant that pays Mitchell for six months of rent in advance.
D) Mitchell purchases office supplies to last for several months.

Question 67

Tracy, Inc.
Tracy, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at July 31 before adjustments is as follows:

Refer to the trial balance for Tracy, Inc. On July 31, the amount of supplies on hand is $520. What amount is reported in the July income statement for supplies expense?

A) $520
B) $1,400
C) $1,920
D) $880

Question 68

Tracy, Inc.
Tracy, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at July 31 before adjustments is as follows:

Refer to the trial balance of Tracy, Inc. Round calculations to the nearest dollar. If the equipment had an estimated useful life of five years and no salvage value, what is its book value at July 31, after the proper monthly July adjustment is recorded?

A) $10,400
B) $25,567
C) $15,167
D) $10,833

Question 69

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

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

Question 70

Failure to record amounts earned for services provided to customers but not yet paid results in which of the following

A) Net income being overstated
B) No effect on total assets
C) Stockholders' equity being overstated
D) Total assets being understated

Question 71

Failure to record the supplies used during the year would result in which of the following?

A) Net income being understated
B) An overstatement of liabilities
C) Stockholders' equity being overstated
D) Total assets being understated

Question 72

Failure to record dividends paid would result in which of the following?

A) Net income being understated
B) An increase in total liabilities
C) Stockholders' equity being overstated
D) Total assets being understated

Question 73

An adjusting entry could not consist of:

A) A decrease to a liability and an increase to a revenue.
B) An increase to an expense and an increase to a liability.
C) An increase to an expense and a decrease to an asset.
D) An increase to an expense and an increase to a revenue.

Question 74

Carrington & Co. rented office space to a tenant on January 31 and received a total of $9,000 for the first three months of rent. The amount was recorded as Rent Collected in Advance when received. Adjustments are recorded only at the end of every quarter. What effect does the adjustment at March 31 have on Carrington's net income for the quarter ending March 31?

A) Increase by $9,000
B) Decrease by $6,000
C) Decrease by $3,000
D) Increase by $6,000

Question 75

Roman Industries' plant operates five days per week with a daily payroll of $6,000. Employees are paid every Saturday for the workweek just completed Monday through Friday. The last day of the month is Wednesday, March 31. What is the amount of Wages Expense recorded on the next payday, Saturday, April 3?

A) $-0-
B) $30,000
C) $12,000
D) $18,000

Question 76

Davis Corp. has three employees. Each earns $600 per week for a five day work week ending on Friday. This month the last day of the month falls on a Wednesday. The company should make which of the following adjusting entries?

A) Decrease Wage Expense by $360 and decrease Wages Payable by $360.
B) Increase Wage Expense by $1,080 and increase Wages Payable by $1,080.
C) Decrease Wage Expense by $1,080 and decrease Wages Payable by $1,080.
D) Increase Wage Expense by $360 and increase Wages Payable by $360.

Question 77

Failure to record the earned portion of unearned revenue would result in which of the following?

A) Net income being understated
B) No effect on total liabilities
C) Stockholders' equity being overstated
D) Total assets being understated

Question 78

Failure to record accrued interest expense would result in which of the following?

A) Assets being overstated
B) Assets being understated
C) Liabilities being overstated
D) Liabilities being understated

Question 79

Failure to record depreciation expense for the period results in which of the following?

A) Net income being overstated
B) No effect on total assets
C) Stockholders' equity being overstated
D) Both a and c above

Question 80

Nathan Company's plant operates five days per week with a daily payroll of $50,000. Employees are paid every Tuesday for the prior week's work Monday through Friday. The last day of the month is Tuesday, April 30. What effect does the accrual at April 30 have on Nathan's net income?

A) Increase by $250,000
B) Decrease by $150,000
C) Decrease by $100,000
D) Increase by $150,000