Question 1

The adjusting entry for uncollectible accounts requires a

Accepted Answer

The adjusting entry for uncollectible accounts requires a debit to Uncollectible Accounts Expense to recognize the expense and a credit to Allowance for Doubtful Accounts to increase the estimate of bad debts. This method is using the allowance method, which is the most conservative approach to estimating bad debts. Choice A is incorrect because it reduces the balance of Accounts Receivable instead of recognizing the bad debt as an expense. Choice B is incorrect because it reduces the balance of Allowance for Doubtful Accounts instead of recognizing the bad debt as an expense. Choice C is incorrect because it reverses the normal debit/credit relationship for recognizing expenses and reduces the balance of Accounts Receivable instead of Allowance for Doubtful Accounts.

Question 2

The adjusting entry to record accrued interest on a note payable requires a

Accepted Answer

When a company borrows money by issuing a note payable, it is common for the interest on the note to accrue over time. At the end of an accounting period, an adjusting entry must be made to record the accrued interest. This entry involves debiting Interest Expense and crediting Interest Payable. This is because the company owes the interest expense but has not yet paid it, so it is considered a liability (Interest Payable). Option A is incorrect because it erroneously credits Notes Payable instead of creating a liability account for interest. Option C is incorrect because it debits Interest Payable (a liability account) instead of Interest Expense (an operating expense). Option D is incorrect because it fails to account for the fact that the company has not yet paid the interest expense, so it would not credit Cash at this stage.

Question 3

Under the accrual basis of accounting, only income that has been earned is included in the revenue total on the income statement.

Accepted Answer

Under the accrual basis of accounting, revenue is recognized when it is earned, regardless of when payment is received. This means that only income that has been earned is included in the revenue total on the income statement.

Question 4

Under a periodic inventory system, the Merchandise Inventory account is debited when goods are purchased for resale and credited when goods are sold and delivered to customers.

Accepted Answer

Under a periodic inventory system, the Merchandise Inventory account is only updated at the end of the accounting period based on a physical count. Purchases are recorded in a Purchases account, not directly in the Merchandise Inventory account, and the inventory account is not adjusted at the time of each sale.

Question 5

When the accrual basis of accounting is used, expenses are recognized only in the period during which they are paid.

Accepted Answer

When the accrual basis of accounting is used, expenses are recognized when they are incurred, not necessarily when they are paid. This means that an expense can be recognized even if the payment for that expense has not yet been made.

Question 6

The debit and credit amounts for the Income Summary account are combined into one number in the Income Statement section of the worksheet.

Accepted Answer

The Income Summary account is used in the process of closing the books and does not appear on the Income Statement. The Income Statement reports revenues and expenses directly, not through the Income Summary account.

Question 7

The objective of matching revenues and expenses to specific fiscal periods is most nearly attained when revenues and expenses are recognized in the period during which cash related to the transactions is received or paid.

Accepted Answer

The objective of matching revenues and expenses to specific fiscal periods is not necessarily attained when revenues and expenses are recognized in the period during which cash related to the transactions is received or paid. This is because there may be timing differences between when cash is received or paid and when revenue and expenses are actually earned or incurred. To achieve the objective of matching, accrual accounting recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid.

Question 8

Under a periodic inventory system, Merchandise inventory is adjusted in two steps because both the beginning and ending inventory figures are needed to prepare the income statement.

Accepted Answer

In a periodic inventory system, inventory is not continuously updated. Instead, it is adjusted at the end of the period by counting the ending inventory and calculating the cost of goods sold using the beginning inventory, purchases, and ending inventory figures.

Question 9

During the year, Spirit Fun had net credit sales of $800,000. Past experience shows that 1.5 percent of the firm's net credit sales will be uncollectible. Determine the adjusting entry needed to recognize the estimated expense for these uncollectible accounts.

Accepted Answer

According to the percentage given in the question, the estimated expense for uncollectible accounts would be $12,000 (1.5% of net credit sales of $800,000). To recognize this expense, we need to debit Uncollectible Accounts Expense and credit Allowance for Doubtful Accounts, which is a contra asset account used to estimate the amount of uncollectible accounts. Option A and D do not consider the contra asset account, and option C overstates the estimated expense by using the full amount of net credit sales instead of the percentage. Therefore, option B is the best choice.

Question 10

On June 1, 2019, Mighty Fast Flooring issued a 10-month, 9 percent note for $5,000. The note was recorded in the Notes Payable-Trade account. The adjusting entry on December 31 to record the interest accrued (owed)on the note is:

Accepted Answer

The interest accrued on the note can be calculated as:

Interest = Principal x Rate x Time
Interest = $5,000 x 0.09 x (7/12)
Interest = $262.50

Therefore, the adjusting entry on December 31 will be:

Debit Interest Expense for $262.50 and Credit Interest Payable for $262.50 to record the interest owed but not yet paid.

Option A is incorrect because the interest accrued is $262.50, not $450.

Option C is incorrect because the company issued the note and owes interest to the holder, thus it cannot record interest income.

Option D is incorrect because it does not account for the accrued interest in the Interest Payable account, which will have to be paid in the future.

Question 11

The balance of the Merchandise Inventory account that appears in the Trial Balance section of the worksheet represents the stock of goods on hand at the beginning of the current period.

Accepted Answer

The Merchandise Inventory account in the Trial Balance reflects the beginning inventory, as it has not yet been adjusted for purchases or sales during the current period.

Question 12

On the financial statements prepared at the end of an accounting period, the merchandise inventory is shown as

Accepted Answer

Merchandise inventory represents goods that a company has on hand and intends to sell to customers. As such, it is considered an asset on the balance sheet as it has economic value and can generate future cash inflows.

Question 13

Which of the following statements is not correct?

Accepted Answer

Uncollectible Accounts Expense is not a contra asset account; it is an expense account. Contra asset accounts have credit balances and are used to reduce the balance of the related asset account. Uncollectible Accounts Expense is used to record the expense associated with accounts receivable that are no longer expected to be collected.

Question 14

Identify the statement below that is true regarding the Allowance for Doubtful Accounts account.

Accepted Answer

The Allowance for Doubtful Accounts is a contra asset account that offsets accounts receivable and has a normal credit balance. It is reported on the balance sheet as a reduction to accounts receivable to reflect the net realizable value of receivables.

Question 15

If a company uses the periodic inventory system, purchases of merchandise are

Accepted Answer

In the periodic inventory system, purchases of merchandise are not immediately recorded in the Merchandise Inventory account. Instead, the Purchases account is used to track the total cost of merchandise purchased during an accounting period. At the end of the period, the cost of goods sold is calculated by subtracting the ending inventory from the total cost of merchandise purchased. Therefore, purchases of merchandise are debited to the Purchases account.

Question 16

Allowance for Doubtful Accounts is

Accepted Answer

Allowance for Doubtful Accounts is a contra asset account that is subtracted from the Accounts Receivable in the Asset section of the balance sheet. This allowance is created to estimate the amount of accounts that are unlikely to be collected, and thus, reduce the value of accounts receivable. It is not included in the revenue section of the income statement or listed as an operating expense.

Question 17

The balance of the Merchandise Inventory account shown in the Adjusted Trial balance section of the worksheet is extended to the Balance Sheet Debit column of the worksheet.

Accepted Answer

This is true - the balance of the Merchandise Inventory account will be extended to the Balance Sheet Debit column of the worksheet as it is an asset account.

Question 18

Under the accrual basis of accounting, the expense for uncollectible accounts is estimated and recorded before specific accounts are actually written off.

Accepted Answer

This statement is true. Under the accrual basis of accounting, the expense for uncollectible accounts is estimated and recorded in the period when the related sales are made or services are provided, even if specific accounts may not yet be known to be uncollectible. This is done through an adjusting entry to record the estimated bad debt expense and create a contra-asset account called allowance for doubtful accounts. When specific accounts are identified as uncollectible, they are then written off against the allowance account.

Question 19

Under a periodic inventory system, to remove the beginning inventory from the books, the Income Summary account is credited for the amount of the beginning inventory.

Accepted Answer

Under a periodic inventory system, the beginning inventory is not recorded in the books as a separate account. Instead, the cost of goods sold is calculated by subtracting the ending inventory from the sum of purchases and freight-in. Therefore, the Income Summary account is not credited for the amount of beginning inventory.

Question 20

The journal entry to record interest that has been earned but not yet received includes a debit to Interest Receivable and a credit to Interest Income.

Accepted Answer

This is the correct accounting treatment for interest that has been earned but not yet received. Interest Receivable is debited to recognize the amount of interest owed to the company, while Interest Income is credited to record the revenue earned.

Quiz 12: Accruals, Deferrals, and the Worksheet