Question 1

Assume Minor Company recorded the following adjusting entry at year-end: $$\begin{array} { | c | r | r | } 
\hline \text { Dr Insurance expense } & \$ 800 & \
\hline \text { Cr Prepaid insurance } & & \$ 800 \
\hline
\end{array}$$ If the beginning balance in prepaid insurance was $700 and $1,500 was paid for an insurance premium during the year, the ending balance in the prepaid insurance account (after the above adjusting entry) would be which of the following?

Accepted Answer

The beginning balance in Prepaid Insurance was $700. During the year, $1,500 was paid for an insurance premium, increasing the Prepaid Insurance account to $2,200 ($700 + $1,500). After the adjusting entry of $800 (to record the expense for the period), the ending balance in Prepaid Insurance is $1,400 ($2,200 - $800).

Question 2

On January 1, 20X1, Thomas Company paid $1,000 for a two-year insurance policy on the building. The accounting period ends December 31. At the end of 20X1, the financial statements should report which of the following?
 $\begin{array} { l ll l  } 
 & \text { On the Statement of Financial Position } & \text { On the Statement of Earnings } \\end{array}$
a) $\begin{array} { l ll l  } & \text { Prepaid insurance, } \$ 0&&&&&&& & \text { Insurance expense, } \$ 1,000 \\end{array}$
b) $\begin{array} { l ll l  } & \text { Prepaid insurance, } \$ 250 &&&&&&& \text { Insurance expense, } \$ 250 \\end{array}$
c)$\begin{array} { l ll l  } & \text { Prepaid insurance, } \$ 500 &&&&&&& \text { Insurance expense, } \$ 500 \\end{array}$
d)$\begin{array} { l ll l  } & \text { Prepaid insurance, } \$ 1,000 &&&&&& \text { Insurance expense, } \$ 0 \
\end{array}$

Accepted Answer

The insurance policy covers two years for a total cost of $1,000, so $500 (half of the total cost) would be expensed in the first year (20X1), and the remaining $500 would be reported as prepaid insurance on the statement of financial position.

Question 3

An adjusted trial balance shows that

Accepted Answer

An adjusted trial balance is prepared after adjusting entries are made and posted to the ledger, to ensure that total debits still equal total credits. It does not guarantee that all journal entries have been made, that all accounts have the correct balance, or that no posting errors have been made.

Question 4

On July 1, Rawling Store paid $6,000 to Iceberg Realty for six months' rent, starting July 1. Prepaid rent was debited for the full amount. If ﬁnancial statements are prepared on July 31, the adjusting entry to be made by Rawling Store is

Accepted Answer

The correct adjusting entry is to recognize one month of rent expense ($1,000) from the prepaid rent account, reflecting the rent expense for July.

Question 5

On October 1, 20X1, Ethan Company borrowed $10,000 on a 4-month note with an annual interest rate of 9 percent. How much interest expense should be reported for 20X1, assuming that the note is paid on time and Ethan Company's accounting year coincides with the calendar year?

Accepted Answer

The interest expense for 20X1 can be calculated as follows: $10,000 * 9% * (4/12) = $300. Since the note is for 4 months within the same year, the entire $300 is recognized in 20X1.

Question 6

On March 1, 20X1, the premium on a two-year insurance policy on equipment was paid amounting to $1,800. At the end of 20X1 (end of the accounting period), the ﬁnancial statements for 20X1, would report which of the following?

Accepted Answer

Insurance expense is recognized over the life of the policy. Since the policy is for two years and the premium was paid on March 1, 20X1, 10 months of insurance coverage is provided in 20X1. Therefore, insurance expense for 20X1 is $1,800 x 10/24 = $750. Prepaid insurance is the remaining amount of the premium that has not yet been recognized as expense, which is $1,800 - $750 = $1,050.

Question 7

The balance in the Prepaid Rent account before adjustment at the end of the year is $12,000 and represents three months' rent starting on November 1. The adjusting entry required on December 31 is

Accepted Answer

The rent for November and December (2 months) has been used, so $8,000 should be expensed. The adjusting entry is to debit rent expense and credit prepaid rent for $8,000.

Question 8

The process that begins with analyzing transactions and ends with the preparation of a post-closing trial balance is called

Accepted Answer

The accounting cycle is the process that starts with analyzing and recording transactions and ends with the preparation of financial statements and a post-closing trial balance.

Question 9

Ultra Realty received a cheque for $21,000 on July 1, which represents a 6-month advance payment of rent on a building it rents to a client. Unearned Rental Revenue was credited for the full $21,000. Financial statements will be prepared on July 31. Ultra Realty should make the following adjusting entry on July 31:

Accepted Answer

The correct adjusting entry is to debit Unearned Rental Revenue and credit Rental Revenue for $3,500. This is because $21,000 represents 6 months of rent, so one month's rent is $3,500 ($21,000 / 6 months). By July 31, one month has passed, so $3,500 of the unearned revenue has now been earned.

Question 10

An adjusted trial balance

Accepted Answer

An adjusted trial balance is prepared after adjusting entries are made and posted to the ledger, to prove the equality of the total debit balances and total credit balances. This ensures that the books are still in balance after adjustments. It is used as the basis for preparing financial statements, but it is not itself a financial statement nor specifically required under international financial reporting standards.

Question 11

A legal ﬁrm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to Unearned Service Revenue. If the legal services have been provided at the end of the accounting period and no adjusting entry is made, this would cause

Accepted Answer

When the legal services are provided, the amount should be recognized as revenue. Without the adjusting entry to move the $2,000 from Unearned Service Revenue (a liability account) to a revenue account, revenues will be understated because the earned revenue has not been recorded in the income statement.

Question 12

On April 1, 20X1, Allen Company signed a $12,000, one-year, 10 percent note payable. At due date, April 1, 20X2, the principal and interest will be paid. Interest expense should be reported on the statement of earnings (for the year ended December 31, 20X1) as which of the following?

Accepted Answer

The answer of On April 1, 20X1, Allen Company signed...

Question 13

Which is the correct order of the steps in the accounting cycle during the accounting period?

Accepted Answer

The correct order of steps in the accounting cycle during the accounting period starts with transaction analysis, followed by making journal entries to record those transactions, and then posting those entries to the ledger accounts.

Question 14

The primary difference between prepaid and accrued expenses is that prepaid expenses have

Accepted Answer

Prepaid expenses are costs that have been paid but not yet incurred, reflecting a future expense, whereas accrued expenses are costs that have been incurred but not yet paid, reflecting an obligation to pay in the future.

Question 15

On January 1, 20X2, the ledger of Global Corporation correctly showed supplies inventory of $500. During 20X2, supplies purchases amounted to $700. A count (inventory) of supplies on hand at December 31, 20X2, showed $400. The 20X2 statement of earnings should report supplies expense amounting to which of the following?

Accepted Answer

The supplies expense for the year is calculated as the beginning inventory plus purchases minus the ending inventory. Therefore, the calculation is $500 (beginning inventory) + $700 (purchases) - $400 (ending inventory) = $800.

Question 16

The Pitter Corporation purchased a notebook computer for $3,000 on December 1. The useful life of the notebook computer is estimated to be 5 years. If ﬁnancial statements are to be prepared on December 31, the company should make the following adjusting entry:

Accepted Answer

The annual depreciation is $3,000 / 5 years = $600 per year. Since the computer was purchased on December 1 and financial statements are prepared on December 31, only one month of depreciation needs to be accounted for. Therefore, the monthly depreciation is $600 / 12 months = $50. The correct adjusting entry is to debit depreciation expense and credit accumulated depreciation for $50.

Question 17

The Town Laundry purchased $5,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $3,000 on hand. The adjusting entry that should be made by the company on June 30 is

Accepted Answer

The correct adjusting entry is to debit Laundry Supplies Expense for $2,500 and credit Laundry Supplies for $2,500. This reflects the use of $2,500 worth of supplies during the period, reducing the asset (Laundry Supplies) and recognizing the expense (Laundry Supplies Expense).

Question 18

At the end of its accounting period, December 31, 20X2, May Corporation owed $1,000 for property taxes which had not been recorded nor paid. Therefore, the 20X2 adjusting entry should be which of the following?

Accepted Answer

The correct adjusting entry for owing property taxes is to debit an expense account to recognize the expense and credit a liability account to recognize the obligation. This follows the matching principle, matching expenses with the period in which they are incurred.

Question 19

Joe Company purchased supplies inventory for $5,000. Due to an error in posting, the inventory account was debited for only $500 when trade payables were credited for $5,000. During which phase of the accounting information cycle, would this error be discovered?

Accepted Answer

The error would likely be discovered during the preparation of the trial balance, as this phase involves listing all account balances to ensure that debits equal credits. The discrepancy between the inventory account and trade payables would be evident here.

Question 20

Prepaid expenses are

Accepted Answer

Prepaid expenses are payments made for goods or services to be received in the future. They are recorded as assets on the balance sheet because they represent future economic benefits to the company. As these goods or services are used or consumed, the prepaid amount is gradually expensed.

Quiz 4: Adjustments, Financial Statements, and Financial Results