Question 1

On July 1, 2021, JazzE Ltd. purchased a 3-year insurance policy and paid a premium of $60,000. JazzE has a December 31 year end. Under accrual accounting, which of the following statements best describes the effect of this transaction?

Accepted Answer

When JazzE purchased the 3-year insurance policy, they paid $60,000 upfront. Since they have a December 31 year end, this means that they will have coverage for the period from July 1, 2021, to December 31, 2024. 
In accrual accounting, the expense should be recognized in the period when it is incurred, i.e., when the insurance coverage is used. Only the portion of the insurance premium that has been used during the year should be recognized as an expense, and the remaining should be recorded as an asset. 
Since the insurance policy covers a period of 3 years and JazzE has already used it for 6 months in 2021, the amount of insurance expense for 2021 would be $10,000 (=$60,000/3 *6/12). 
At the end of 2021, the balance in the prepaid insurance account would be $50,000 ($60,000 - $10,000). 
Similarly, for 2022, the insurance expense would be $20,000 (=$60,000/3), and the balance in the prepaid insurance account on December 31, 2022, would be $30,000 ($50,000 - $20,000). Therefore, choice C is the best answer.

Question 2

On May 1, 2020. Bee Advertising Company received $2,500 from Julie Cee for advertising services to be completed by April 30, 2021. Assume the receipt was recorded as unearned revenue and that at December 31, 2020, $1,000 of the fees had been earned. The adjusting entry prepared by Bee on December 31, 2020, should include

Accepted Answer

The adjusting entry should recognize the portion of the revenue that has been earned as of December 31, 2020. Since $1,000 of the $2,500 fee has been earned, the entry should credit Revenue for $1,000. The unearned portion of the fee as of December 31, 2020 is $1,500 ($2,500 - $1,000 earned) so there is no need for a debit or credit to Unearned Revenue. Therefore, option C is the correct answer.

Question 3

Before recording adjusting entries, the Office Supplies account had a $359 debit balance while a physical count of the supplies showed $105 of unused supplies on hand. Thus, the required adjusting entry is

Accepted Answer

The correct adjusting entry is to debit Office Supplies Expense for $254 and credit Office Supplies for $254. This adjusts the Office Supplies account to the actual unused supplies value of $105 by recognizing the $254 ($359 - $105) of supplies used as an expense.

Question 4

The expense created by allocating the cost of plant and equipment to the periods in which they are used, representing the expense of using the assets, is called

Accepted Answer

Depreciation is the accounting process of allocating the cost of tangible assets over their useful lives, representing the expense of using these assets.

Question 5

If throughout an accounting period the fees for legal services paid in advance by clients are recorded in an account called Unearned Legal Services Revenue, the end-of-period adjusting entry to record the portion of these fees that has been earned is

Accepted Answer

The correct adjusting entry to record the portion of the fees that has been earned is to debit Unearned Legal Service Revenue and credit Legal Service Revenue. This moves the amount from a liability account (unearned revenue) to an income account (revenue), reflecting that the service has now been provided.

Question 6

The premium on a three-year insurance policy purchased on June 30, 2020, was $36,000. What is the amount of insurance expense that should be presented on the company's income statement for the year ended December 31, 2020?

Accepted Answer

The insurance policy covers 36 months (3 years). The monthly expense is $36,000 / 36 = $1,000. For the period from June 30 to December 31, 2020, which is 6 months, the expense is 6 x $1,000 = $6,000.

Question 7

Which of the following accounts is most likely associated with an accrued expense?

Accepted Answer

An accrued expense is an expense incurred but not yet paid. Salaries Payable is a liability account that records wages owed to employees but not yet paid. Hence, it is the most likely account associated with an accrued expense. The other options listed are not associated with accrued expenses - Depreciation expense is a non-cash expense, Unearned revenue is a liability account that records revenue received but not yet earned, Accounts Receivable is an asset account that records money owed to the business by customers, and Service revenue is a revenue account that records income from services rendered.

Question 8

On July 1, 2020, Nuby Trucking Company purchased a new truck for $52,000. The truck is estimated to have a useful life of six years and a residual value of $10,000. How much depreciation expense will be recorded for the truck during the year ended December 31, 2020?

Accepted Answer

The depreciation expense for the year can be calculated using the straight-line method: (Cost - Residual Value) / Useful Life. This equals ($52,000 - $10,000) / 6 = $7,000 per year. Since the truck was purchased on July 1, only 6 months of depreciation applies for 2020, so $7,000 / 2 = $3,500.

Question 9

An adjusting entry could be made for all the following except

Accepted Answer

Adjusting entries are made for transactions that have been recorded but have not yet been recognized or recorded properly in the accounting system. Owner withdrawals are not a type of transaction that requires an adjusting entry as they are typically recorded as a decrease to the owner's equity account as they happen. Prepaid expenses, depreciation expense, unearned revenues, and accrued revenues are all types of transactions that require adjusting entries to properly record and recognize them in the accounting system.

Question 10

The Office Supplies account shows a beginning balance of $600 and an ending balance of $400. If office supplies expense for the year is $3,100, what amount of office supplies was purchased during the year?

Accepted Answer

The amount of office supplies purchased during the year can be calculated using the formula: Beginning balance + Purchases - Ending balance = Expense
Plugging in the given values, we get:
$600 + Purchases - $400 = $3,100
Solving for Purchases, we get: Purchases = $2,900
Therefore, the best choice is B, with the explanation that the amount of office supplies purchased during the year is $2,900.

Question 11

On January 1, 2020, Peach Company purchased a five-year insurance policy for $5,000. If the cost was debited to Prepaid Insurance, the adjusting entry at the end of 2020 is

Accepted Answer

The correct answer is E because the insurance policy costs $5,000 for five years, which means the annual expense is $1,000 ($5,000 / 5 years). At the end of 2020, an adjusting entry is needed to recognize the insurance expense for one year. This entry debits Insurance Expense and credits Prepaid Insurance for $1,000, reflecting the expense for the year and reducing the prepaid insurance asset accordingly.

Question 12

Which of the following does not require an adjusting entry at year-end?

Accepted Answer

Cash invested by owner does not require an adjusting entry because it does not affect the current period's financial statements. It will be reflected in equity on the balance sheet.

Question 13

Which of the following assets is not depreciated?

Accepted Answer

Land is not a depreciating asset because it is assumed to have an unlimited useful life and is not subject to wear and tear.

Question 14

For a prepaid expense, the adjusting entry would

Accepted Answer

Adjusting entries for prepaid expenses involve debiting the relevant expense account to recognize the expense incurred during the period and crediting the prepaid expense asset account to reduce its balance, reflecting the portion of the prepaid amount that has been used up.

Question 15

Zang Company had no office supplies on hand at the beginning of the year. During the year, the company purchased $250 worth of office supplies. At the end of the year, $50 worth of office supplies were on hand. How much should Zang Company report as office supplies expense for the year?

Accepted Answer

The office supplies expense for the year is calculated by subtracting the value of supplies on hand at the end of the year ($50) from the total supplies purchased during the year ($250). This gives $250 - $50 = $200.

Question 16

Which of the following would be the effect of a transaction to expense Supplies for the period?

Accepted Answer

Expensing supplies for the period means recognizing the cost of supplies used during the period as an expense. This decreases the Supplies account (as the supplies are no longer available for future use) and increases the Supplies Expense account (reflecting the cost of supplies used in generating revenue).

Question 17

The purpose of depreciation is to

Accepted Answer

The purpose of depreciation is to allocate the cost of an asset over its useful life to the periods in which it provides benefit. This is done by recognizing the reduction in usefulness of the asset over time. Options A, B, D, and E are not the primary purpose of depreciation.

Question 18

On Oct. 1, 2021 Bianca Inc. signed a 1-year $75,000 note payable from Prime National Bank. The loan plus 4% interest is to be repaid on Sept. 30, 2022. Bianca's year-end is December 31. In its 2021 financial statements, Bianca will record an interest expense of

Accepted Answer

Bianca Inc. signed the note payable on Oct. 1, 2021, and since the loan is for a year, it will be paid back on Sept. 30, 2022, which is 12 months later.

The formula to calculate the interest expense for a note payable is:

Interest Expense = Principal x Interest Rate x Time

Where Principal is the amount of the loan, Interest Rate is the annual rate expressed as a decimal, and Time is the time period in years.

In this case, the Principal is $75,000, the Interest Rate is 4% or 0.04, and the Time is only 3 months since the loan was signed on Oct. 1, 2021, and Bianca's year-end is on Dec. 31, 2021. Thus, we have:

Interest Expense = $75,000 x 0.04 x 3/12 = $750

Therefore, the interest expense that Bianca will record in its 2021 financial statements is $750.

Question 19

A company paid the $1,350 premium on a three-year insurance policy on April 1, 2020. The policy gave protection beginning on that date. How many dollars of the premium will appear as an expense on the calendar year 2020 income statement assuming the accrual basis of accounting? Assuming the cash basis of accounting?

Accepted Answer

Under the accrual basis of accounting, expenses are recognized when they are incurred, not necessarily when they are paid. The $1,350 premium covers three years, so for one year (2020), the expense is $1,350 divided by 3, which equals $450. However, the correct choice mentions $337.50 for the accrual basis, which appears to be an error in the question's choices as none match the correct calculation. For the cash basis of accounting, the entire payment is recognized as an expense in the year it is paid, so $1,350 for 2020.

Question 20

Lang leased a portion of its store to Pang for 12 months beginning on November 1, at a monthly rate of $400. Pang paid the entire $4,800 on November 1, which Lang recorded as unearned revenue. The journal entry made by Lang at year-end, December 31, would include

Accepted Answer

At year-end, Lang needs to recognize the earned revenue for the month of November and December. Lang will debit Rent Earned for 2 months x $400= $800, to recognize its revenue. The unearned rent of $4,800 has already been recorded as a liability at the time of receipt of cash, and it will not be recorded again in the year-end entry.

Quiz 3: Adjusting Accounts for Financial Statements