Question 1

Companies must record research and development costs as expenses immediately.

Accepted Answer

According to generally accepted accounting principles (GAAP), companies are required to expense research and development (R&D) costs as they are incurred rather than capitalizing them as assets. This reflects the uncertainty regarding the future benefits of these expenditures.

Question 2

The adjusting entry for wages earned but unpaid results in a(n)________.

Accepted Answer

The adjusting entry for wages earned but unpaid increases the expense account (wages expense) and increases the liability account (wages payable) to reflect the amount owed to employees for their work during the accounting period. Therefore, option A (increase in expenses and an increase in liabilities) is the correct choice.

Question 3

The adjusting entry for ________ increases expenses and decreases assets.

Accepted Answer

The adjusting entry for depreciation expense increases expenses and decreases assets.

Question 4

Unexpired costs are expenses.

Accepted Answer

Unexpired costs are not expenses; they are considered assets because they represent future economic benefits to the business, such as inventory or prepaid expenses, which will be recognized as expenses when they are actually incurred or used.

Question 5

Butters Company pays wages of $400 per day.The work week begins on Monday and ends on Friday.Wages are paid weekly on Friday.The current month ends on a Wednesday.The adjusting entry at the end of the month will ________.

Accepted Answer

The adjusting entry will account for the wages incurred from Monday to Wednesday, which is 3 days. Therefore, $400 per day for 3 days equals $1,200, increasing liabilities by this amount.

Question 6

Under accrual basis accounting,unexpired costs are considered to be ________.

Accepted Answer

Under accrual basis accounting, unexpired costs are considered as assets because they represent costs that have been paid for, but have not yet been used up or consumed. As time passes and the costs expire, they are gradually recognized as expenses through the process of depreciation, amortization, or other means. Therefore, unexpired costs do not become expenses until they have been consumed or become obsolete, regardless of whether cash has been paid or not.

Question 7

On January 1,2012,a company paid $3,000 for rent.The rent covers the period January 1,2012 through June 30,2012.On June 30,2012,the fiscal year end,the company prepares an adjusting entry.What is the effect of this adjusting entry on stockholders' equity?

Accepted Answer

The adjusting entry at June 30,2012 would involve recognizing rent expense for the period from January 1 to June 30, which means that expenses increase. Since expenses decrease stockholders' equity, the adjusting entry would result in decrease in stockholders' equity.

Question 8

Rent received in advance of the rental period would be considered to be a prepaid asset by the landlord.

Accepted Answer

Rent received in advance is considered unearned revenue or a liability for the landlord until the rental period occurs, as it is income received for services not yet provided.

Question 9

When depreciating a fixed asset,the residual value is not considered.

Accepted Answer

The residual value is considered when depreciating a fixed asset. It is the estimated value of an asset at the end of its useful life and is used in calculating the depreciation expense.

Question 10

In order for the board of directors of a corporation to declare a cash dividend,there must be sufficient ________ and ________.

Accepted Answer

A cash dividend can only be declared if the corporation has sufficient retained earnings (i.e., profits that have not been distributed as dividends) and cash on hand. Option A is incorrect because expenses are irrelevant to the declaration of a dividend. Option B is partially correct in that net income is a determinant of retained earnings, but it is not sufficient in and of itself for a dividend declaration. Option D is incorrect because revenues do not necessarily equate to profits or retained earnings.

Question 11

Radison Company owns a fixed asset with an original cost of $100,000.The company estimates it will use the fixed asset for 5 years,at which time the fixed asset will be sold for $5,000.The company uses straight-line depreciation.The annual depreciation expense is ________.

Accepted Answer

The annual depreciation expense is calculated by subtracting the salvage value ($5,000) from the original cost ($100,000) and then dividing by the useful life (5 years). This gives ($100,000 - $5,000) / 5 = $19,000.

Question 12

Depreciation expense is recorded for ________.

Accepted Answer

Depreciation expense is recorded for tangible assets with determinable useful lives, such as equipment and buildings. Land does not depreciate because it does not have a determinable useful life.

Question 13

A magazine publisher sells annual subscriptions for magazines.The publisher requires cash payment before the magazines are sent out.When the first monthly issue is sent out,the company will ________.

Accepted Answer

When the first monthly issue is sent out, the publisher will recognize revenue for a portion of the annual subscription due to the accrual accounting principle. This will result in an increase in revenues. Since cash was received earlier for the full subscription period, there will be a decrease in liabilities since the obligation to deliver the magazines has been partially fulfilled.

Question 14

Cash collected from customers before goods are delivered is known as ________.

Accepted Answer

All three options - unearned revenue, deferred revenue, and customer advances - refer to cash received from customers before goods or services are provided. Therefore, all of them are correct.

Question 15

Seavers Company paid $2,700 for 6 months' insurance,covering the period of April 1 to September 30.At the time of the payment,the entire amount was used to increase the balance in the Prepaid Insurance account.The balance in the Prepaid Insurance account on May 31 is ________.

Accepted Answer

The insurance coverage period is from April 1 to September 30, which is a total of 6 months. When the payment of $2,700 was made on April 1, the entire amount was used to increase the balance in the Prepaid Insurance account. Therefore, as of April 30, the prepaid insurance balance is $2,700. However, one month has passed by May 31, which means that one-sixth of the insurance coverage period has elapsed.
One-sixth of $2,700 is $450 (2,700/6 = 450). Therefore, the balance in the prepaid insurance account as of May 31 is $2,700 - $450 = $2,250. Since the question is asking for the balance as of May 31, the correct answer is D) $2,250.

Question 16

Under accrual basis accounting,research and development expenses for new products are recorded as ________.

Accepted Answer

Under accrual basis accounting, research and development expenses for new products are immediately recognized as expenses and are not capitalized as assets. This is because research and development expenses are considered to be an expense incurred to generate future revenues rather than an asset that will generate future economic benefits.

Question 17

Saint Paul Company owns a fixed asset with an original cost of $100,000.The company estimates it will use the fixed asset for four years,at which time it will be sold for $10,000.The company uses straight-line depreciation.The book value of the fixed asset after three years of use is ________.

Accepted Answer

The annual depreciation expense for the asset is ($100,000 - $10,000) / 4 = $22,500.
After three years of use, the accumulated depreciation is $22,500 * 3 = $67,500.
Therefore, the book value of the fixed asset after three years of use is $100,000 - $67,500 = $32,500.

Question 18

Cash collected from customers before goods are delivered will increase ________.

Accepted Answer

When cash is collected from customers before goods are delivered, it is recorded as a liability (unearned revenue) because the company owes either the goods or services or a refund to the customer until the goods or services are delivered. At the same time, the cash account, an asset, increases because the company has received cash.

Question 19

The adjusting entry that recognizes revenue earned on deferred revenues results in a(n)________.

Accepted Answer

The adjusting entry to recognize revenue earned on deferred revenues will decrease the liability account and increase the revenue account, which in turn will increase the stockholders' equity. Therefore, the correct answer is D, i.e., decrease in liabilities and an increase in stockholders' equity.

Question 20

On January 1,2015,Arizona Company acquired a machine for $33,000.Annual depreciation expense equals $3,000.The residual value of the machine is $3,000.What is the book value of the machine on December 31,2016?

Accepted Answer

The annual depreciation for the machine is $3,000. Therefore, the accumulated depreciation for the machine by December 31, 2016, would be $6,000 ($3,000 from 2015 and $3,000 from 2016).
Book value = Cost of Asset - Accumulated Depreciation
Book value = $33,000 - $6,000
Book value = $27,000

Quiz 15: Basic Accounting: Concepts, techniques, and Conventions