Question 1

Contra asset accounts, such as Accumulated Depreciation, always have normal debit balances.

Accepted Answer

Contra asset accounts, including Accumulated Depreciation, have normal credit balances, not debit balances.

Question 2

On January 1, 2018, the Prepaid Insurance account of Dogwood, Inc. had a beginning balance of $2,700. Three months of insurance premiums remain in this beginning balance. On February 21, 2018, the company paid an annual insurance premium in the amount of $4,300 for the period beginning March 1. On February 28, 2018, the balance in Prepaid Insurance is $1,800.

Accepted Answer

The balance in Prepaid Insurance on February 28, 2018, should be $6,000. This is because the beginning balance of $2,700 would be reduced by one month's worth of insurance ($2,700 / 3 months = $900 per month), leaving $1,800. Then, adding the annual premium paid on February 21, 2018, for $4,300, gives a total of $1,800 + $4,300 = $6,100. However, considering the question might have a typo and meant to imply the calculation before the new premium is fully accounted for, the intended calculation would simply add the remaining beginning balance ($1,800 after one month's reduction) to the new premium, which indeed results in $6,100, not $1,800.

Question 3

A contra account's normal balance is the opposite of the normal balance of the related account.

Accepted Answer

This is true. The contra account is meant to offset the balance of the related account, so its normal balance is the opposite of the related account's normal balance. For example, the contra account for an asset account (which has a normal debit balance) is a contra asset account (with a normal credit balance).

Question 4

A contra account's normal balance (debit or credit) is the opposite of the normal balance of the related account.

Accepted Answer

This is true for all contra accounts, as their purpose is to offset the balance of the related account. For example, the contra account "Allowance for Doubtful Accounts" has a normal credit balance, which is the opposite of the normal debit balance for the related account "Accounts Receivable."

Question 5

An adjusting entry is completed ________.

Accepted Answer

Adjusting entries are completed at the end of the accounting period to update accounts and ensure that the financial statements reflect the correct financial position of the company. They are necessary to account for items such as accrued income, prepaid expenses, depreciation, and unearned revenue.

Question 6

An accrual adjusting entry records an expense after the cash is paid, or it records revenue before the cash is received.

Accepted Answer

An accrual adjusting entry records an expense or revenue before the cash is received or paid, respectively.

Question 7

On January 1, Nash, Inc. had $2,000 of supplies on hand. During January, Nash purchased $5,500 worth of new supplies. At the end of the month, a count revealed $700 worth of supplies remaining on the shelves. The adjusting entry needed will include a debit to Supplies Expense of $6,800. The supplies were initially recorded as an asset.

Accepted Answer

The supplies used during January are calculated as the beginning balance ($2,000) plus purchases ($5,500) minus the ending balance ($700), which equals $6,800. This amount should be debited to Supplies Expense.

Question 8

The depreciation method that allocates an equal amount of depreciation to each year is called the straight-line method.

Accepted Answer

The straight-line method is a depreciation method in which an equal amount of depreciation is allocated to each year.

Question 9

Stallings, Inc. purchased manufacturing equipment for $8,400. It has an estimated useful life of seven years and no residual value. The company should record depreciation expense of $50 per month. (Assume that the company uses the straight-line method.)

Accepted Answer

Using the straight-line method, the annual depreciation expense is calculated as the cost of the asset minus its residual value, divided by its useful life. Given the cost of $8,400, a useful life of 7 years, and no residual value, the annual depreciation would be $8,400 / 7 = $1,200 per year, or $100 per month ($1,200 / 12 months).

Question 10

In the case of a deferred expense, the adjusting entry required at the end of a period will consist of a credit to the Prepaid Expense account. Assume the deferred expense was initially recorded as an asset.

Accepted Answer

This is correct. At the end of the period, the adjusting entry for a deferred expense involves reducing the asset account (Prepaid Expense) with a credit to reflect the portion of the expense that has been used or consumed during the period.

Question 11

The asset account, Office Supplies had a beginning balance of $5,300. During the accounting period, office supplies were purchased, on account, for $5,500. A physical count, on the last day of the accounting period, shows $2,800 of office supplies on hand. What is the amount of Supplies Expense for the accounting period?

Accepted Answer

The Supplies Expense is calculated as the beginning balance plus purchases minus the ending balance: $5,300 + $5,500 - $2,800 = $8,000.

Question 12

Princeton Financial Services, Inc. purchased computers that are to be used in its consulting services. Based on the matching principle, what account, other than Computers, should appear on the balance sheet as of December 31, 2018?

Accepted Answer

The matching principle requires that expenses be matched with the revenue they generate. Since the computers are expected to be used over several periods, their cost must be allocated over the periods they are used, as depreciation expense. As of December 31, 2018, some of the computers' cost has already been allocated to the current period, and the other portion is still to be allocated. Thus, the balance sheet should show a contra-asset account called Accumulated Depreciation - Equipment, which represents the total amount of depreciation expense recognized on the computers since their purchase. This account is subtracted from the Computers account to derive the net book value of the equipment. The other choices are not relevant in this context.

Question 13

The following Office Supplies account information is available for Nabors, Inc. $$\begin{array} { | l | r| } 
\hline \text { Beginning balance } & \$ 1,100 \
\hline \text { Office Supplies expensed } & 7,000 \
\hline \text { Ending balance } & 2,000 \
\hline
\end{array}$$ From the above information, calculate the amount of office supplies purchased.

Accepted Answer

The amount of office supplies purchased can be calculated by adding the office supplies expensed to the ending balance and then subtracting the beginning balance: $7,000 + $2,000 - $1,100 = $7,900.

Question 14

Which of the following is NOT a type of adjusting entry?

Accepted Answer

The other three options (deferred expenses, accrued revenues, and deferred revenues) are all types of adjusting entries. Unearned expenses are not a common type of adjusting entry.

Question 15

Prepaid Insurance is an asset account that appears on the balance sheet.

Accepted Answer

Prepaid Insurance is an asset account that represents the amount paid in advance for insurance coverage that has not yet been used. It appears on the balance sheet as an asset because it represents a potential financial benefit to the company in the future.

Question 16

Prepaid Rent is an expense account that appears on the income statement.

Accepted Answer

Prepaid rent is not an expense account but rather a current asset account that appears on the balance sheet. The expense for prepaid rent is recognized when the rent is actually utilized or when the time period for which the rent was prepaid expires.

Question 17

Adjusting entries are needed to correctly measure the ________.

Accepted Answer

Adjusting entries are made to ensure that the net income (loss) reported on the income statement is accurate. The other options (ending/beginning balance in the Cash account) may require adjustments, but not necessarily as a result of adjusting entries.

Question 18

The sum of all the depreciation expenses recorded to date for a depreciable asset is called residual value.

Accepted Answer

The sum of all the depreciation expenses recorded to date for a depreciable asset is called accumulated depreciation. Residual value is an estimate of the asset's value at the end of its useful life.

Question 19

Dynamic Services, Inc. purchased computers that are to be used in its consulting services. Based on the matching principle, the related account that should appear on the income statement for the year ended December 31, 2018 is ________.

Accepted Answer

According to the matching principle, expenses should be matched with the revenues they help to generate. Since the computers are used in the consulting services provided by Dynamic Services, the related expense should be reflected on the income statement. Depreciation expense - equipment is the account that represents the assignment of the cost of the computers over their useful life, and it should be recognized as an expense on the income statement for the year ended December 31, 2018. Therefore, (A) is the correct answer.

(B) Service revenue represents the revenues generated by consulting services, which are related to the use of the computers, but it does not represent the related expense. 
(C) Accumulated depreciation - equipment is a contra asset account that represents the total depreciation assigned to the equipment since its acquisition, but it is not an expense account. 
(D) Equipment expense is not a recognized accounting term; the correct account is depreciation expense - equipment.

Question 20

In the case of a deferred expense, the adjusting entry required at the end of a period will consist of a debit to the Prepaid Expense account. Assume the deferred expense was initially recorded as an asset.

Accepted Answer

The adjusting entry for a deferred expense involves a debit to an expense account (reflecting the expense recognition) and a credit to the Prepaid Expense account (to reduce the asset as it is used up).

Quiz 3: The Adjusting Process