Question 1

Green Realty Company received a check for $30,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $30,000. Financial statements will be prepared on July 31. Green Realty should make the following adjusting entry on July 31:

Accepted Answer

The adjusting entry recognizes one month's worth of rent revenue earned from the advance payment. Since the payment covers 6 months, $30,000/6 = $5,000 is earned in July. Therefore, Unearned Rent Revenue is debited and Rent Revenue is credited for $5,000.

Question 2

Hoosher Enterprises purchased an 18-month insurance policy on May 31, 2014 for $7,200. The December 31, 2014 balance sheet would report Prepaid Insurance of:

Accepted Answer

The insurance policy covers 18 months, costing $7,200. By December 31, 2014, 7 months have passed, so the expense is (7/18) * $7,200 = $2,800. The remaining prepaid insurance is $7,200 - $2,800 = $4,400.

Question 3

Masterfalls Corporation purchased a one-year insurance policy in January 2013 for $30,000. The insurance policy is in effect from March 2013 through February 2014. If the company neglects to make the proper year-end adjustment for the expired insurance:

Accepted Answer

By the end of the year, 10 months of the insurance policy have expired (March to December), which amounts to $25,000. If no adjustment is made, expenses are understated, leading to an overstatement of net income and assets by $25,000.

Question 4

Darting Company purchased a computer system for $7,200 on January 1, 2014. The company expects to use the computer system for 3 years. It has no salvage value. Monthly depreciation expense on the asset is:

Accepted Answer

The total cost of the computer system is $7,200, and it is expected to be used for 3 years. Therefore, the annual depreciation expense is $7,200 / 3 = $2,400. The monthly depreciation expense is $2,400 / 12 = $200.

Question 5

The accounts of a business before an adjusting entry is made to record accrued revenue reflect an:

Accepted Answer

Before an adjusting entry is made to record accrued revenue, the business has not yet recognized the revenue earned. This means that the revenue and the corresponding asset (accounts receivable) are both understated. There is no liability or expense recorded at this point, so options A and C can be eliminated. Option B does not make sense in the context of accrued revenue.

Question 6

Oakville Inc. purchased a 12-month insurance policy on March 1, 2014 for $1,800. At March 31, 2014, the adjusting journal entry to record expiration of this asset will include:

Accepted Answer

The insurance expense for one month (March) is $150 ($1,800/12 months). The adjusting entry should debit Insurance Expense and credit Prepaid Insurance for $150 to reflect the expense incurred for March.

Question 7

At March 1, 2014, Candy Inc. had supplies on hand of $1,500. During the month, Candy purchased supplies of $2,900 and used supplies of $2,800. The March 31 balance sheet should report what balance in the supplies account?

Accepted Answer

The balance in the supplies account at March 31 is calculated as the beginning balance ($1,500) plus purchases ($2,900) minus supplies used ($2,800), resulting in $1,600.

Question 8

Skypress Company collected $8,400 in May of 2013 for 4 months of service which would take place from October of 2013 through January of 2014. The revenue reported from this transaction during 2013 would be:

Accepted Answer

The revenue should be recognized over the period of service, which is from October 2013 to January 2014. Since the service has not yet been performed in 2013, the revenue reported during 2013 would be $0.

Question 9

An adjusting entry made to record accrued interest on a note receivable due next year consists of a:

Accepted Answer

The answer of An adjusting entry made to record accrued...

Question 10

Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause:

Accepted Answer

Failing to record an adjusting entry for accrued revenue results in not recognizing revenue that has been earned but not yet billed, leading to an understatement of both assets (since the receivable is not recorded) and revenues (since the earned revenue is not recognized).

Question 11

James & Younger Corporation purchased a one-year insurance policy in January 2013 for $48,000. The insurance policy is in effect from March 2013 through February 2014. If the company neglects to make the proper year-end adjustment for the expired insurance:

Accepted Answer

The insurance expense for the year 2013 (March to December) is $40,000. If not adjusted, expenses are understated, leading to overstated net income and assets.

Question 12

Regions Inc. pays its rent of $48,000 annually on January 1 and makes monthly adjusting entries. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true?

Accepted Answer

If the adjusting entry is omitted, prepaid rent (an asset) will be overstated by $4,000, and since expenses are understated, net income and stockholders' equity will be overstated by $4,000.

Question 13

Adjustments for accrued revenues:

Accepted Answer

Accrued revenues are revenues that have been earned but not yet received or recorded. To recognize these revenues, an adjustment is made by increasing assets (such as accounts receivable) and increasing revenues. Therefore, the correct choice is A - increase assets and increase revenues.

Question 14

At March 1, I. Repo Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $950 and consumed supplies of $700. If no adjusting entry is made for supplies:

Accepted Answer

If no adjusting entry is made, the consumed supplies of $700 will not be recorded as an expense, causing stockholders' equity to be overstated by $700.

Question 15

Fleet Services Company purchased equipment for $9,000 on January 1, 2014. The company expects to use the equipment for 5 years. It has no salvage value. What balance would be reported on the December 31, 2014 balance sheet for Accumulated Depreciation?

Accepted Answer

The equipment is depreciated over 5 years with no salvage value, so the annual depreciation expense is $9,000 / 5 = $1,800. Therefore, the accumulated depreciation for the first year (2014) is $1,800.

Question 16

Raxon Company borrowed $40,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be:

Accepted Answer

The answer of Raxon Company borrowed $40,000 from the bank...

Question 17

An adjusting entry can include a:

Accepted Answer

The answer of An adjusting entry can include a:
...

Question 18

Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause:

Accepted Answer

Failure to prepare an adjusting entry for an accrued expense would result in an understatement of expenses and liabilities. The expense would not be recorded, causing the expenses and liabilities on the balance sheet to be lower than they actually are. This would also result in an overstatement of net income as expenses would be understated.

Question 19

A revenue-asset relationship exists with:

Accepted Answer

The revenue-asset relationship exists with accrued revenue adjusting entries, as these entries recognize revenue earned but not yet received in cash, resulting in an increase in assets (accounts receivable or unbilled services). Prepaid expense adjusting entries, accrued expense adjusting entries, and unearned revenue adjusting entries all involve changes in liabilities or expenses, rather than assets and revenues.

Question 20

Walton Company collected $9,600 in May of 2013 for 4 months of service which would take place from October of 2013 through January of 2014. The revenue reported from this transaction during 2013 would be:

Accepted Answer

The revenue should be recognized over the period of service, which is from October 2013 to January 2014. Since the service has not yet been performed in 2013, no revenue should be recognized in 2013. Therefore, the correct answer is B) $7,200, which represents 3 months of service (October, November, and December) in 2013.

Quiz 4: Accrual Accounting Concepts