Question 1

If an entity purchases a new delivery vehicle it doesn't make sense to expense the full cost of the vehicle at the time it is purchased because:

Accepted Answer

The benefits from using the vehicle would be consumed by the business over many accounting periods. The cost of the vehicle (less final sale proceeds) should be spread over the periods when the benefits are consumed.

Question 2

Which statement is false?

Accepted Answer

Accrual based accounting, where transactions are recorded when they occur, results in an improved measure of profit and it is therefore the required method of financial reporting under GAAP.

Question 3

Which statement/s is/are false?

Accepted Answer

The revenue recognition criteria states that revenue should be recognised when (a) it is probable that future economic benefits associated with the revenue will flow to the entity, and (b) it can be measured reliably.

Question 4

When wages are incurred in one period and paid in the next period, this leads to which of the following accounts appearing in the statement of financial position?

Accepted Answer

When wages are earned in one period and paid in the next period, the unpaid wages are a liability in the statement of financial position.

Question 5

Which statement about adjusting entries is false?

Accepted Answer

Adjusting entries are required before financial statements are prepared because of timing differences between when revenues are earned and the related cash is received and when expenses are incurred and the related cash is paid.

Question 6

Which statement about accrual accounting is true?

Accepted Answer

Adjusting entries are required before financial statements are prepared because of timing differences between when revenues are earned and the related cash is received and when expenses are incurred and the related cash is paid.

Question 7

Reese Ltd purchased office supplies costing $4,000 and debited Office supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,600 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be:

Accepted Answer

The purchase of supplies is an example of a prepaid expense. An adjusting entry is required to recognise the cost of supplies consumed (debit Supplies expense) during the period the reduction in the asset (credit Supplies).

Question 8

On 1 July the Winter Shoe Store paid $6,000 to Ace Realty for 6 month's rent beginning 1 July. Prepaid Rent was debited for the full amount. If financial statements are prepared on 31 July, the adjusting entry to be made by the Winter Shoe Store is:

Accepted Answer

If financial statements are prepared on 31 July, the adjusting entry to be made by the Winter Shoe Store is debit Rent expense, $1,000; credit Prepaid rent, $1,000. This is the amount of the benefit that has been consumed at 31 July ($6,000/6).

Question 9

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

Accepted Answer

The adjusting entry required on 31 December is Debit Rent Expense, $4,000; Credit Prepaid Rent, $4,000. This is the amount of the benefit that has been consumed at 31 December ($12,000/3).

Question 10

Revenues received in advance is classified as an:

Accepted Answer

When cash is received for services to be provided in the future a liability (revenues received in advance or unearned revenues) is credited. An obligation exists to provide the service or goods in the future.

Question 11

The Harris Company Ltd purchased a computer for $3,000 on 1 December. It is estimated that annual depreciation on the computer will be $600. If financial statements are to be prepared on 31 December, the company should make the following adjusting entry:

Accepted Answer

The adjusting entry required on 31 December is Debit Depreciation expense, $50; Credit Accumulated depreciation, $50. This is the amount of the benefit from the use of the computer that has been consumed at 31 December ($600/12).

Question 12

Which statement about depreciating non-current assets with a limited useful life is true?

Accepted Answer

Depreciation is the process of allocating the cost of an asset (less final sale proceeds) to expense over its useful life. From an accounting point of view, the acquisition of depreciable non-current assets is essentially a long term prepayment for economic benefits. Therefore, there is a need to make adjusting entries for depreciation expense periodically.

Question 13

McCloud Realty Company Ltd received a cheque for $21,000 on 1 July, which represents six months' rent received in advance. Revenue received in advance account was credited with $21,000. Financial statements will be prepared on 31 July. McCloud Realty Company Ltd should make the following adjusting entry on 31 July:

Accepted Answer

The adjusting entry required on 31 July is Debit Revenue Received in Advance, $3,500; credit Rental Revenue, $3,500. This entry records the amount of rental revenue earned in July ($21,000/6).

Question 14

At 31 December 2018, before any year-end adjustments, Hart Company's Insurance Expense account had a balance of $725 and its Prepaid Insurance account had a balance of $1,900. It was determined that $1,500 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be:

Accepted Answer

The adjusted balance to Insurance Expense for the year would be $2,225 ($725 + $1,500).

Question 15

A new accountant working for Metcalf Ltd records $800 Depreciation expense on store equipment by debiting Depreciation expense $800 and crediting Cash $800. The effect of this entry is to:

Accepted Answer

The adjusting entry to record depreciation expense requires a credit entry to the Accumulated depreciation account. One effect of this error is to overstate the carrying amount of the depreciable asset.

Question 16

On 1 September Carlson Ltd borrowed $10,000 from the bank for three months at the annual interest rate of 9%. Principal and interest are payable to the bank on 1 December. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on 30 September, would be:

Accepted Answer

The adjusting entry that the company should make for interest on 30 September, would be Debit Interest expense, $75; Credit Interest payable, $75 ($10,000 x 9% x 1/12).

Question 17

On Friday 26 January Snell Tables paid employee wages up to the end of that day. The next payroll will be paid in February. There are three more working days in January (29-31). Employees work 5 days a week and the business pays $800 a day in wages. The adjusting entry to accrue wages expense at the end of January is:

Accepted Answer

The adjusting entry for an accrued expense increases an expense account and increases a liability account. The amount of this adjustment is $800 x 3.

Question 18

A business shows a balance in Salaries payable of $40,000 at the end of the month. The next payroll amounting to $50,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries?

Accepted Answer

If the adjusting entries are not reversed the payment in the next accounting period must be split between the current period expense and the extinguishing the liability from the previous period.

Question 19

After all adjusting entries have been journalised and posted another trial balance is prepared from the ledger accounts. This later trial balance is known as the:

Accepted Answer

An adjusted trial balance proves the equality of total debit balances and total credit balances of ledger accounts after all adjustments have been made. It is also the main basis for the preparation of the financial statements.

Question 20

When a business closes its accounts at the end of a financial period, the only accounts remaining open are:

Accepted Answer

When a business closes its accounts at the end of a financial period, the only accounts remaining open are permanent accounts. Permanent accounts are all statement of financial position accounts (asset, liability and equity accounts).

Quiz 3: Accrual Accounting Concepts