Question 1

The earnings statement of Waylon Taylor Textiles Ltd. for $20 \times 7$ included the following items:

$\begin{array}{|l|r|}
\hline \text { Interest revenue } & \$ 75,500 \
\hline \text { Salaries expense } & \$ 65,000 \
\hline \text { Insurance expense } & \$ 9,600 \
\hline
\end{array}$

The following balances have been excerpted from the company's Statement of Financial Position:

$\begin{array}{|l|r|r|}
\hline & \text { December 31, 20X7 } & \text { December 31, 20X6 } \
\hline \text { Accrued interest receivable } & \$ 9,100 & \$ 7,500 \
\hline \text { Accrued salaries payable } & \$ 8,900 & \$ 4,200 \
\hline \text { Prepaid insurance } & \$ 1,100 & \$ 1,500 \
\hline
\end{array}$
-How much cash did WTT pay out for salaries during 20X7?
A) $69,700
B) $60,300
C) $73,900
D) $60,800

Accepted Answer

Salaries expense for 20X7 = $65,000Add: Decrease in accrued salaries payable = $8,900 - $4,200 = $4,700Less: Decrease in prepaid insurance = $1,100 - $1,500 = $400Cash paid for salaries = $65,000 + $4,700 - $400 = $69,300

Question 2

The earnings statement of Waylon Taylor Textiles Ltd. for $20 \times 7$ included the following items:

$\begin{array}{|l|r|}
\hline \text { Interest revenue } & \$ 75,500 \
\hline \text { Salaries expense } & \$ 65,000 \
\hline \text { Insurance expense } & \$ 9,600 \
\hline
\end{array}$

The following balances have been excerpted from the company's Statement of Financial Position:

$\begin{array}{|l|r|r|}
\hline & \text { December 31, 20X7 } & \text { December 31, 20X6 } \
\hline \text { Accrued interest receivable } & \$ 9,100 & \$ 7,500 \
\hline \text { Accrued salaries payable } & \$ 8,900 & \$ 4,200 \
\hline \text { Prepaid insurance } & \$ 1,100 & \$ 1,500 \
\hline
\end{array}$
-How much cash did WTT receive for interest during 20X7?
A) $75,500
B) $77,100
C) $73,900
D) $66,400

Accepted Answer

To calculate the cash received for interest during 20X7, we adjust the interest revenue by the change in accrued interest receivable. The interest revenue is $75,500. The accrued interest receivable increased from $7,500 at the beginning of the year to $9,100 at the end of the year, an increase of $1,600. This means that not all of the interest revenue was received in cash. To find the cash received, subtract the increase in accrued interest receivable from the interest revenue: $75,500 - $1,600 = $73,900.

Question 3

An accountant has billed her clients for services performed in October. In November, she receives payments from her clients. What entry will she make upon receipt of the payments?
A) debit unearned revenue and credit service revenue.
B) debit cash and credit accounts receivable.
C) debit accounts receivable and credit service revenue.
D) debit cash and credit service revenue.

Accepted Answer

When the accountant receives payments from her clients, it means that the clients are paying off their outstanding balances. Therefore, the accountant will debit cash (to increase the cash account since cash is coming in) and credit accounts receivable (to decrease the accounts receivable since the clients' debts are being paid off). This entry reflects the receipt of cash in exchange for the services previously billed, not the earning of new revenue or the adjustment of previously recognized revenue.

Question 4

The difference between the equipment account balance and the accumulated amortization equipment account balance is called which of the following?
A) market value
B) acquisition cost
C) net realizable value
D) net book value

Accepted Answer

The difference between the equipment account balance and the accumulated amortization (or depreciation for tangible assets) is referred to as the net book value. This value represents the asset's carrying amount on the balance sheet after accounting for depreciation or amortization.

Question 5

The earnings statement of Waylon Taylor Textiles Ltd. for $20 \times 7$ included the following items:

$\begin{array}{|l|r|}
\hline \text { Interest revenue } & \$ 75,500 \
\hline \text { Salaries expense } & \$ 65,000 \
\hline \text { Insurance expense } & \$ 9,600 \
\hline
\end{array}$

The following balances have been excerpted from the company's Statement of Financial Position:

$\begin{array}{|l|r|r|}
\hline & \text { December 31, 20X7 } & \text { December 31, 20X6 } \
\hline \text { Accrued interest receivable } & \$ 9,100 & \$ 7,500 \
\hline \text { Accrued salaries payable } & \$ 8,900 & \$ 4,200 \
\hline \text { Prepaid insurance } & \$ 1,100 & \$ 1,500 \
\hline
\end{array}$
-How much cash did WTT pay out for insurance during 20X7?
A) $8,500
B) $8,100
C) $10,000
D) $9,200

Accepted Answer

The cash paid out for insurance is calculated by adjusting the insurance expense for the change in prepaid insurance. The insurance expense for the year was $9,600. The prepaid insurance decreased from $1,500 at the beginning of the year to $1,100 at the end of the year, indicating that the actual cash paid for insurance was more than the expense recognized. The decrease in prepaid insurance ($1,500 - $1,100 = $400) is added to the insurance expense to find the cash paid out for insurance: $9,600 + $400 = $10,000.

Question 6

At the end of 20X4, Dallas Company made the following adjusting entry to record $10,000 accrued (unpaid) wages: $$\begin{array} { | l | r | r | } 
\hline \text { Dr Wage expense } & 10,000 & \
\hline \text { Cr Wages payable } & & 10,000 \
\hline
\end{array}$$ A payroll of $40,000 (including the $10,000 accrued wages) was paid during the first week of January, 20X5. The entry to record the payment of this payroll should include a
A) $10,000 debit to wages expense and a $30,000 debit to wages payable.
B) $30,000 debit to wages expense and a $10,000 debit to wages payable.
C) $40,000 debit to wages expense and a $10,000 debit to wages payable.
D) $50,000 debit to wages expense and a $10,000 debit to wages payable.

Accepted Answer

The correct entry involves debiting wages expense for the $30,000 of wages incurred in the new period (20X5) and debiting wages payable for the $10,000 of accrued wages from the previous period (20X4) that are now being paid. This correctly reflects paying off the accrued liability and recording new wage expenses.

Question 7

Which of the following statements about materiality is not correct?
A) An item is material if its inclusion or omission would inﬂuence or change the judgement of a reasonable person.
B) The amount involved must make a difference or it should not be disclosed.
C) Materiality is a matter of both its nature and relative size.
D) A traditional guideline for auditors is 5 to 10 percent of net earnings.

Accepted Answer

The answer of Which of the following statements about materiality...

Question 8

Auto Kool has implemented a policy that requires all tools expenditures below $100 to be expensed. This is an application of
A) the matching principle.
B) the materiality constraint.
C) the full disclosure principle.
D) representational faithfulness.

Accepted Answer

The materiality constraint allows for the expensing of small amounts that would not significantly impact financial statements, to simplify accounting processes. Auto Kool's policy reflects this by not capitalizing small tool expenditures.

Question 9

Which of the following statements is true about earnings per share?
A) It is the only ratio required to be disclosed on the statement of earnings.
B) It assesses the ability of the ﬁrm to pay their bills as they come due.
C) It evaluates the eﬃciency with which the company uses their assets to generate sales revenue.
D) It represents the proﬁt available to the preferred shareholders.

Accepted Answer

Earnings per share (EPS) is a unique financial metric because it is the only ratio that is required to be disclosed on the income statement (statement of earnings) by generally accepted accounting principles (GAAP). EPS measures the amount of profit that is available to the equity shareholders of the company on a per share basis, making it a critical metric for investors.

Question 10

Which of the following is the essential difference between an unadjusted trial balance and an adjusted trial balance?
A) An unadjusted trial balance is prepared at the start of the accounting year, while an adjusted trial balance is prepared at the end of the year.
B) An unadjusted trial balance is prepared by companies which make adjusting entries, while an adjusted trial balance is prepared by companies that do not make adjusting entries.
C) An unadjusted trial balance is prepared before the adjusting entries are reﬂected, while an adjusted trial balance is prepared after the adjusting entries are reﬂected.
D) An unadjusted trial balance is prepared after the post-closing trial balance.

Accepted Answer

The essential difference lies in the timing of their preparation in relation to adjusting entries. An unadjusted trial balance is prepared before adjusting entries are made to account for accruals, deferrals, and other adjustments. An adjusted trial balance is prepared after these entries have been made, reflecting the true financial position of the company at the end of the accounting period.

Question 11

Manfretti Corporation received cash of $12,000 on August 1, 20X7 for one year's rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 20X7 adjusting entry is
A) debit rent revenue and credit unearned rent, $5,000.
B) debit rent revenue and credit unearned rent, $7,000.
C) debit unearned rent and credit rent revenue, $5,000.
D) debit cash and credit unearned rent, $7,000.

Accepted Answer

The correct adjusting entry is to debit Rent Revenue and credit Unearned Rent for $7,000. This is because from August 1 to December 31, 20X7, 5 months have passed, leaving 7 months' worth of the rent (from the total 12 months) unearned as of December 31, 20X7. The $12,000 received in advance needs to be allocated proportionally to reflect the amount earned by year-end and the amount still unearned.

Question 12

Which of the following is not an example of an adjusting entry?
A) Recording unpaid interest at year end relating to an outstanding loan balance.
B) Recording amortization on oﬃce computers purchased during the year.
C) Recording the loss on the sale of equipment made during the year.
D) Reducing the prepaid rent account for the portion of rent consumed.

Accepted Answer

Adjusting entries are made in the accounting records at the end of an accounting period to allocate income and expenditures to the period in which they actually occurred. The entry for recording the loss on the sale of equipment (C) is not an adjusting entry but rather a transaction entry that reflects a specific event (the sale of equipment) occurring during the year. Adjusting entries typically involve accruals (A), deferrals (D), and depreciation or amortization (B), but not the recording of specific transaction events like sales of assets.

Question 13

Which of the following accounts would most likely lead to a deferred adjustment?
A) Prepaid expenses
B) Wages payable
C) Subscriptions revenue receivable
D) Rent receivable

Accepted Answer

Prepaid expenses are costs that have been paid but not yet incurred, leading to a deferred adjustment as the expense is recognized over time.

Question 14

Which of the following statements about adjusting entries is true?
A) Adjusting entries always include at least one balance sheet account and one income statement account.
B) Adjusting entries may involve the cash account.
C) Adjusting entries always involve an expense account.
D) Adjusting entries are required whenever the accounting records are updated.

Accepted Answer

Adjusting entries are made to ensure that revenue and expense recognition principles are followed. They always include at least one balance sheet account (to adjust assets or liabilities) and one income statement account (to adjust revenues or expenses), ensuring that the accounting equation remains balanced and that the financial statements reflect the correct amounts.

Question 15

Which of the following would most likely lead to an accrued adjustment?
A) Interest revenue earned but not yet collected.
B) Prepaid insurance
C) Prepaid wages.
D) Rent received in advance.

Accepted Answer

Accrued adjustments are made for revenues that have been earned but not yet received in cash or recorded. Interest revenue earned but not yet collected fits this description, as it represents money that is owed to the company but has not yet been paid.

Question 16

Which of the following is an example of an adjusting entry?
A) Recording the payment of year-end dividends.
B) Recording the receipt of inventory in the last week of the year that will be paid next year.
C) Recording the salary expense earned in the last week of the year, to be paid next year.
D) Recording the increase in the market value of land.

Accepted Answer

Adjusting entries are made in the accounting records at the end of an accounting period to allocate income and expenditures to the period in which they actually occurred. The entry for recording salary expense earned in the last week of the year, to be paid next year (C), is an example of an adjusting entry because it allocates expenses to the period in which the salaries were earned, not when they were paid.

Question 17

Manitoba Metals Ltd lent $100,000 to Coltraine Ltd. at an interest rate of 5%. Both the loan and all the interest are to be repaid after two years. At the end of the ﬁrst year what is the entry required on Manitoba's books? (Dr.=Debit and Cr.=Credit)
A) Dr. Interest expense $5,000, Cr. Interest payable $5,000
B) Dr. Interest receivable $5,000, Cr. Interest revenue $5,000
C) Dr. Interest revenue $5,000, Cr. Interest payable $5,000
D) no entry is required until the amount becomes due.

Accepted Answer

Interest receivable and interest revenue are recorded at the end of the first year to recognize the interest earned on the loan, even though it has not yet been paid.

Question 18

Failure to make an adjusting entry to recognize service revenue receivable would cause which of the following?
A) an overstatement of assets, proﬁt, and shareholders' equity.
B) an overstatement of assets and shareholders' equity and an understatement of proﬁt.
C) no effect on assets, liabilities, proﬁt, nor shareholders' equity.
D) an understatement of assets, proﬁt, and shareholders' equity.

Accepted Answer

Failing to record service revenue receivable would result in an understatement of assets (because the receivable is not recognized), profit (because the revenue is not recognized), and shareholders' equity (because retained earnings, part of equity, would be understated due to the understated profit).

Question 19

Which of the following would normally be recorded with an adjusting entry?
A) Sales on credit
B) Payment for supplies bought on account
C) Depreciation expense
D) Salaries expense

Accepted Answer

Depreciation expense is typically recorded with an adjusting entry to allocate the cost of a tangible asset over its useful life.

Question 20

Charging the cost of a wastebasket with an estimated useful life of 10 years to an expense account when purchased is an example of the application of
A) the historical cost principle.
B) the matching principle.
C) the materiality constraint.
D) the full disclosure principle.

Accepted Answer

The materiality constraint allows for ignoring the matching principle for items of small value or short-term use, like a wastebasket, because they have an insignificant impact on financial statements. Charging it as an expense simplifies accounting without materially affecting the financial outcome.

Quiz 4: Adjustments, Financial Statements, and Financial Results

An accountant has billed her clients for services performed in October. In November, she receives payments from her clients. What entry will she make upon receipt of the payments?

The difference between the equipment account balance and the accumulated amortization equipment account balance is called which of the following?

Which of the following statements about materiality is not correct?

Auto Kool has implemented a policy that requires all tools expenditures below $100 to be expensed. This is an application of

Which of the following statements is true about earnings per share?

Which of the following is the essential difference between an unadjusted trial balance and an adjusted trial balance?

Manfretti Corporation received cash of $12,000 on August 1, 20X7 for one year's rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 20X7 adjusting entry is

Which of the following is not an example of an adjusting entry?

Which of the following accounts would most likely lead to a deferred adjustment?

Which of the following statements about adjusting entries is true?

Which of the following would most likely lead to an accrued adjustment?

Which of the following is an example of an adjusting entry?

Manitoba Metals Ltd lent $100,000 to Coltraine Ltd. at an interest rate of 5%. Both the loan and all the interest are to be repaid after two years. At the end of the ﬁrst year what is the entry required on Manitoba's books? (Dr.=Debit and Cr.=Credit)

Failure to make an adjusting entry to recognize service revenue receivable would cause which of the following?

Which of the following would normally be recorded with an adjusting entry?

Charging the cost of a wastebasket with an estimated useful life of 10 years to an expense account when purchased is an example of the application of