Question 1

If an adjustment for prepaid insurance is not made at year end, net income will be:

Accepted Answer

If an adjustment for prepaid insurance is not made at year end, expenses will be understated, and net income will be overstated because the insurance expense that should have been recognized is not accounted for.

Question 2

At the end of the fiscal period, Wilf Carter Services omitted the adjusting entry for accrued salaries. The effect of this error on the financial statements is to:

Accepted Answer

Omitting the adjusting entry for accrued salaries results in expenses being understated, which causes net income to be overstated.

Question 3

On September 1, 2019, a company paid $8,400 in advance for two years insurance and debited prepaid insurance. The December 31, 2019, adjusting entry should include a debit to:

Accepted Answer

The insurance cost for two years is $8,400, so the monthly cost is $8,400 / 24 = $350. From September 1 to December 31 is 4 months, so the expense for 4 months is $350 * 4 = $1,400. This amount should be recognized as an expense, hence debited to insurance expense.

Question 4

Nuyen Services Company records the payment of $500 cash for a previously accrued expense and the accrual of $325 for another expense. The impact of these two entries on total expenses and net income is:

Accepted Answer

The payment of $500 cash for a previously accrued expense does not affect total expenses or net income because the expense was already recognized when it was accrued. The accrual of $325 for another expense increases total expenses by $325, which decreases net income by the same amount.

Question 5

A company began operations and purchased $5,000 of supplies. By year end, $2,700 was still on hand. The adjusting entry at year end would include a:

Accepted Answer

DThe correct adjusting entry at year end would include a credit to supplies for $2,300, which represents the amount of supplies used ($5,000 initial purchase - $2,700 still on hand). Additionally, there should be a debit to supplies expense for $2,300 (not $2,700 as stated in the options), reflecting the expense of the supplies used during the period. However, given the options provided, D is chosen over the exact amount because it aligns with the need to recognize the expense, despite the numerical discrepancy.

Question 6

If the adjusting entry to record the current periods prepaid rent expired is omitted:

Accepted Answer

When the adjusting entry for expired prepaid rent is omitted, the prepaid rent account (a current asset) is not reduced to reflect the amount that has expired. As a result, current assets will be overstated because the expense has not been recognized, and the asset account remains higher than it should be.

Question 7

Unearned revenue shows a beginning balance of $4,700 and an ending balance of $3,400. The adjusting entry shows a credit to service revenue for $10,200. How much cash was received in advance during the year?

Accepted Answer

Unearned revenue decreased by $1,300 ($4,700 - $3,400), which means that $1,300 of services were performed during the year. The adjusting entry shows a credit to service revenue for $10,200, which means that $10,200 of cash was received in advance during the year.

Question 8

Equipment with a cost of $103,000 has a useful life of four years. Using straight-line amortization, what is the book value after three years?

Accepted Answer

The straight-line amortization method divides the total cost by the useful life to find the annual depreciation. Here, $103,000 / 4 = $25,750 per year. After three years, the total depreciation is $25,750 * 3 = $77,250. The book value is the original cost minus the accumulated depreciation: $103,000 - $77,250 = $25,750.

Question 9

Prepaid rent shows a beginning balance of $500 and an ending balance of $600. During the year, prepaid rent was debited for $2,200. What is the amount of rent expense shown on the current year's income statement?

Accepted Answer

Prepaid rent is an asset account. When prepaid rent is used, it is debited to increase the expense and credited to decrease the asset. The beginning balance of prepaid rent is $500, and the ending balance is $600. During the year, prepaid rent was debited for $2,200. This means that the rent expense for the year is $2,200 - ($600 - $500) = $2,100.

Question 10

Accumulated amortization shows a beginning balance of $9,300 and an ending balance of $10,700. How much amortization expense was reported on the current year's income statement?

Accepted Answer

The amortization expense for the current year is the difference between the ending balance and the beginning balance of accumulated amortization, which is $10,700 - $9,300 = $1,400.

Question 11

If a required accrued expense adjustment had not been made, the financial statements would have been affected as follows:

Accepted Answer

If an accrued expense adjustment is not made, expenses are understated, leading to overstated net income and owner's equity. Liabilities are also understated as the expense has not been recorded. Assets are unaffected.

Question 12

Prepaid insurance shows a beginning balance of $500 and an ending balance of $2,800. The insurance expense account was debited during the adjusting process for $1,800. How much cash was spent for insurance?

Accepted Answer

The cash spent on insurance can be calculated by adding the insurance expense and the increase in prepaid insurance. The increase in prepaid insurance is the ending balance ($2,800) minus the beginning balance ($500), which equals $2,300. Adding this to the insurance expense of $1,800 gives a total of $4,100 spent on insurance.

Question 13

At the end of the fiscal period, Wilf Carter Services omitted the adjusting entry for amortization on equipment. The effect of this error on the financial statements is to:

Accepted Answer

Amortization is an expense that reduces the book value of an asset. Omitting the amortization entry results in assets being overstated because the accumulated amortization is not deducted from the asset's value.

Question 14

An accrued expense adjustment entry has the following effect on the balance sheet:

Accepted Answer

An accrued expense adjustment entry increases liabilities on the balance sheet because it recognizes expenses that have been incurred but not yet paid, thus increasing the amount owed.

Question 15

If a required unearned revenue adjustment had not been made, the financial statements would have been affected as follows:

Accepted Answer

The answer of If a required unearned revenue adjustment had...

Question 16

Prepaid rent shows a beginning balance of $3,600 and an ending balance of $2,900. The income statement for the current period reports rent expense of $3,200. What was the amount of rent purchased during the year?

Accepted Answer

The answer of Prepaid rent shows a beginning balance of...

Question 17

Accumulated amortization on an asset plus its book value equals:

Accepted Answer

Accumulated amortization represents the total amount of amortization expense that has been recorded against an asset over its life. When you add this to the asset's current book value (cost minus accumulated amortization), you get the original cost of the asset.

Question 18

Stan's Shoe Repairs recorded $2,000 of unearned service revenue being earned and the collection of $4,000 cash for service revenue previously accrued. The impact of these two entries on total service revenue is:

Accepted Answer

The answer of Stan's Shoe Repairs recorded $2,000 of unearned...

Question 19

If a required prepaid adjustment had not been made, the financial statements would have been affected as follows:

Accepted Answer

If a prepaid expense adjustment is not made, expenses are understated, leading to an overstatement of net income and owner's equity. Assets are also overstated because the prepaid expense is not properly reduced. Liabilities remain unaffected as this adjustment does not involve them.

Question 20

The entry for amortization has what effect on the financial statements?

Accepted Answer

Amortization typically involves spreading the cost of an intangible asset over its useful life, which increases expenses (reducing net income) and decreases the asset's book value on the balance sheet.

Quiz 3: Measuring Business Income: The Adjusting Process