Question 1

Which of the following is not one of the three basic categories of adjusting entries?

Accepted Answer

The three basic categories of adjusting entries are accruals, deferrals and depreciation. "Expiration" is not a term commonly used in accounting and is not one of the basic categories of adjusting entries.

Question 2

On October 31 of the current year,a contract was signed and a cheque received for services to be performed by October 31 of the following year.The Unearned Service Revenue account was credited for $4,800.Assuming services were performed evenly during the remainder of the year,the adjusting entry on December 31 will involve a:

Accepted Answer

The services are performed evenly over 12 months, so by December 31, 2 months of services have been performed. Therefore, $800 ($4,800/12 months * 2 months) should be recognized as earned revenue, requiring a credit to Service Revenue for $800.

Question 3

A company using the accrual basis of accounting receives its utility bill which will be paid in two weeks.The entry will involve a debit to:

Accepted Answer

Under the accrual basis of accounting, expenses are recorded when they are incurred, not when they are paid. Therefore, the utility bill would be recorded as a debit to Utilities Expense to recognize the expense incurred.

Question 4

An accountant recognizes the impact of a business event as it occurs and accounts for it appropriately in which basis of accounting?

Accepted Answer

The accrual basis of accounting recognizes revenue and expenses as they are earned or incurred, regardless of when the cash is actually received or paid. This allows for a more accurate representation of a business's financial position and performance.

Question 5

An adjustment of an asset for which the business paid cash in advance is:

Accepted Answer

When a business pays cash for an asset in advance, it is considered a deferral because the expense has not yet been incurred. The adjustment is made to recognize the expense over time as it is used or consumed. This type of adjustment is also known as a prepaid expense.

Question 6

On December 31,2017,salaries owed to employees total $5,650 and will be paid on January 4,2014.The adjusting entry prepared on December 31,2017,includes a:

Accepted Answer

The adjusting entry should recognize the expense incurred during the period, so Salary Expense is debited, and Salary Payable is credited to record the liability.

Question 7

Adjusting entries:

Accepted Answer

Adjusting entries are prepared at the end of the accounting period to update certain accounts. These entries are necessary to ensure that all revenue and expenses are recognized in the proper accounting period, in accordance with the accrual basis of accounting. Adjusting entries are a crucial step in the accounting cycle and are necessary to ensure accurate financial statements.

Question 8

To obtain a new customer,a business sells merchandise to the customer for $100.Normally,the merchandise sells for $120.For this sale,the business should record revenue of $100,not $120.

Accepted Answer

The sale price for the merchandise is $100, therefore the revenue recorded should be $100, not the normal selling price of $120.

Question 9

The adjusting entry for supplies used during the current period will involve a credit to:

Accepted Answer

The adjusting entry for supplies used involves crediting the Supplies account to decrease its balance, reflecting the amount of supplies that have been used up during the period.

Question 10

On December 1,2017,Cream Ale Ltd.receives $1,800 in advance for an agreement to brew beer during the months of December,January,and February.As of December 31,2017,Cream Ale Ltd:

Accepted Answer

Under accrual accounting, revenue is recognized when it is earned, regardless of when payment is received. In this case, Cream Ale Ltd. has earned $600 in revenue for the month of December (1/3 of the total $1,800 agreement).

Under cash-basis accounting, revenue is recognized only when payment is received. As Cream Ale Ltd. has received full payment of $1,800 in advance, all of it would be recognized as revenue.

Therefore, the best choice is B.

Question 11

The adjusting entry to record salaries owed to employees but not paid until the next accounting period involves a credit to:

Accepted Answer

The adjusting entry to record salaries owed to employees but not paid until the next accounting period involves a credit to Salary Payable. This entry recognizes the amount owed to employees for services already provided but not yet paid for, and increases the liability on the balance sheet. The other options are not appropriate for this scenario: A) Salary Expense is already recorded when the services are provided, B) Unearned Salaries refers to prepayments from customers, not amounts owed to employees, and D) Deferred Salary is not a commonly used account in financial accounting.

Question 12

An accountant who keeps his books using accrual accounting performs a service but does not receive payment at the time the service is performed.The entry made by the accountant will require a credit to:

Accepted Answer

The accountant performed a service, so it should be recorded as Service Revenue. Unearned Expense and Deferred Expense are both used for expenses, not revenue. Unearned Service Revenue would be used if the accountant had received payment in advance for services not yet provided.

Question 13

Accrual accounting provides some ethical challenges that cash accounting avoids.

Accepted Answer

Accrual accounting recognizes revenue and expenses when they are earned or incurred, regardless of when payment is actually received or made. This can create ethical challenges such as the temptation to manipulate earnings by recognizing revenue or deferring expenses, or to delay payment of expenses to boost short-term profits. Cash accounting, on the other hand, only recognizes revenue and expenses when cash is actually received or paid, which can reduce some of these ethical challenges.

Question 14

An accountant who uses the accrual basis of accounting receives cash in advance for services yet to be performed.The entry to record this transaction will include a credit to which of the following accounts?

Accepted Answer

When a customer pays in advance for services yet to be performed, it is considered unearned revenue. This means that the accountant has received money for services that have not yet been provided, and therefore cannot yet be recognized as revenue. The appropriate account to credit in this situation is therefore "Unearned Service Revenue."

Question 15

On September 1 of the current year,Prepaid Rent was debited for $3,000.This amount represents payment for one year of rent,paid in advance.The adjusting entry on December 31 will involve a:

Accepted Answer

When prepaid rent is initially recorded with a debit to Prepaid Rent, it is considered an asset because it represents a future benefit. However, as time passes, the portion of the prepaid rent that has expired becomes an expense, which should be recognized in the income statement. Therefore, on December 31, an adjusting entry should be made to recognize the portion of the prepaid rent that has expired.

Since the prepaid rent was for one year, and it was paid on September 1, only four months (September, October, November, and December) will have expired by December 31. Therefore, the amount that should be recognized as rent expense is $3,000/12 x 4 = $1,000.

The entry to recognize the expired portion of the prepaid rent should be a debit to Rent Expense (to increase the expense) and a credit to Prepaid Rent (to decrease the asset). Therefore, the answer is B) debit to Rent Expense for $1,000.

Question 16

The adjusting entry to allocate the cost of a plant asset such as equipment involves a credit to:

Accepted Answer

The adjusting entry to allocate the cost of a plant asset such as equipment is to record depreciation expense, which is the allocation of the cost of the asset over its useful life. The credit should be to Accumulated Depreciation, which is a contra asset account that is used to accumulate the depreciation recorded for the asset over time. This account appears on the balance sheet and reduces the value of the asset, reflecting the fact that the asset has been subject to wear and tear and is no longer worth its original cost.

Question 17

A deferral refers to an event:

Accepted Answer

A deferral involves postponing the recognition of an expense or revenue until after the cash has been paid or received, such as prepaid expenses or unearned revenue.

Question 18

A company using the cash basis of accounting pays for one year of rent in advance.The entry to record this transaction will involve a debit to:

Accepted Answer

The answer of A company using the cash basis of...

Question 19

Under the revenue recognition principle,businesses should record revenue when it is earned regardless of when payment is received from the customer.

Accepted Answer

The revenue recognition principle requires businesses to record revenue when it is earned, which means when the goods or services have been delivered to the customer and the company has a legally enforceable right to receive payment. The timing of payment does not impact the recognition of revenue.

Question 20

A company using the accrual basis of accounting pays for one year of rent in advance.The entry to record this payment will involve a debit to:

Accepted Answer

The entry to record the payment of rent in advance involves debiting the Prepaid Rent account, which is an asset account that represents the rent paid in advance. This asset account will be expensed over the course of the year as Rent Expense through the process of accrual accounting. Therefore, options A, B, and D are incorrect.

Quiz 3: Accrual Accounting and the Financial Statements