Question 1

The normal balance of the Accumulated Depreciation account is:
A) A debit balance.
B) A credit balance.
C) Either a debit balance or a credit balance.
D) There is no normal balance for this account.

Accepted Answer

The normal balance of the Accumulated Depreciation account is a credit balance. This is because it is a contra asset account and is used to offset the balance in the related asset account. As the asset account has a debit balance, the accumulated depreciation account will have a credit balance.

Question 2

We can compare income of the current period with income of a previous period to determine whether the operating results are improving or declining:
A) Only if each accounting period covered is a full year.
B) Only if the same accountant prepares the income statement each period.
C) Only if the accounting periods are equal in length.
D) Only if a manual accounting system is used in both periods.

Accepted Answer

In order to accurately compare the operating results of two periods based on income, the periods should be equal in length. This allows for a fair and accurate comparison of revenue and expenses. The other options provided are not relevant to determining whether the operating results are improving or declining.

Question 3

The United Shipping Co. made an adjusting entry accruing interest for $800 on a note payable for the month of January. The note required 12% per annum on the principal. The principal amount of the note payable must have been:
A) $7,000.
B) $9,600.
C) $80,000.
D) $10,800.

Accepted Answer

The interest for one month is $800. The annual interest rate is 12%, so the monthly rate is 1% (12%/12 months). Therefore, the principal amount is $800 / 0.01 = $80,000.

Question 4

Which of the following is not considered a basic type of adjusting entry?
A) An entry to convert a liability to a revenue.
B) An entry to accrue unpaid expenses.
C) An entry to convert an asset to an expense.
D) An entry to convert an asset to a liability.

Accepted Answer

Adjusting entries are made in the accounting records at the end of an accounting period to allocate income and expenditures to the period in which they actually occurred. The basic types of adjusting entries include deferrals (prepaid expenses, unearned revenues) and accruals (accrued revenues, accrued expenses). An entry to convert an asset to a liability does not fit into these categories, making it not a basic type of adjusting entry.

Question 5

All assets should be depreciated.

Accepted Answer

Not all assets are required to be depreciated. For example, land is considered a non-depreciable asset because it does not wear out or become obsolete over time.

Question 6

An expenditure that benefits the year in which it is made should be deducted from revenue in the same year.

Accepted Answer

This statement is in accordance with the matching principle of accounting, which requires that expenses be recognized in the same period as the revenue they help to generate. This concept ensures that financial statements provide a clear and accurate picture of a company's performance for a given period.

Question 7

Unearned revenue may also be called:
A) Net income.
B) Deferred revenue.
C) Unexpired revenue.
D) Services rendered.

Accepted Answer

Unearned revenue is also called deferred revenue because it refers to payments received for goods or services that have not yet been provided. The revenue is deferred until the goods or services have been delivered, at which point it can be recognized as earned revenue.

Question 8

Companies that engage in fraud will often capitalize an asset rather than an expense account.

Accepted Answer

Capitalizing an asset allows the cost to be spread out over multiple periods, making it easier to conceal fraudulent activity. Expensing the cost would have an immediate impact on the company's financial statements, making it more difficult to hide irregularities.

Question 9

The adjusting entry to record income taxes at the end of an unprofitable accounting period consists of a:
A) Debit to Income Tax Expense and a credit to Income Tax Payable.
B) Credit to Income Tax Expense and a debit to Income Tax Payable.
C) Credit to Income Tax Receivable and a debit to Income Tax Expense.
D) No adjusting entry is required for income taxes if there are no profits.

Accepted Answer

The answer of The adjusting entry to record income taxes...

Question 10

Wages are an expense to the employer when earned, rather than when paid.

Accepted Answer

According to accrual accounting principles, wages are recognized as an expense in the period in which they are earned, even if they are not paid until a later date. This is because employees have provided their services and earned their wages in the current period, and therefore they need to be recognized as an expense in that period. This applies to both salaries and hourly wages.

Question 11

Which of the following activities is least likely to be limited to "year-end"?
A) Closing the accounts.
B) Drafting notes to accompany statements.
C) Recording routine transactions.
D) Undergoing an audit.

Accepted Answer

Recording routine transactions is something that occurs throughout the year and is not limited to year-end. Closing the accounts, drafting notes, and undergoing an audit are all activities that typically occur at year-end.

Question 12

Rose Corp. has a note receivable from Jewel Co for $80,000. The note matures in 5 years and bears interest of 6%. Rose is preparing financial statements for the month of June. Rose should make an adjusting entry:
A) Debiting Interest Revenue for $400 and crediting Interest Receivable for $400.
B) Debiting Interest Receivable for $400 and crediting Interest Revenue for $400.
C) Debiting Interest Revenue for $4,800 and crediting Interest Receivable for $4,800.
D) Crediting Interest Payable for $400 and debiting Interest Expense for $400.

Accepted Answer

Since the financial statements are being prepared for the month of June, an adjusting entry is required to record the interest earned and accrued on the note receivable from Jewel Co for that month. The adjusting entry would involve debiting Interest Receivable (an asset account) for the amount of interest earned but not yet received ($400), and crediting Interest Revenue (a revenue account) for the same amount. Therefore, option B is the correct choice. The other options involve incorrect accounts or amounts.

Question 13

Materiality is a matter of professional judgment.

Accepted Answer

Materiality, in the context of auditing and accounting, is subjective and requires professional judgment to determine what information is important enough to influence a user's decision-making process.

Question 14

An expenditure that benefits year one but is paid for in year two should not be capitalized until year two.

Accepted Answer

An expenditure that benefits year one should be capitalized in year one regardless of when it is paid. This is because the benefit of the expenditure is realized in year one.

Question 15

Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts.

Accepted Answer

Immaterial items, such as intellectual property or goodwill, are not physical in nature and can be difficult to quantify or measure. Therefore, they can be accounted for in the most convenient manner available without being restricted by other theoretical concepts.

Question 16

Hahn Corp. has three employees. Each earns $600 per week for a five day work week ending on Friday. This month the last day of the month falls on a Wednesday. The company should make an adjusting entry:
A) Debiting Wage Expense for $1,080 and crediting Wages Payable for $1,080.
B) Debiting Wage Expense for $360 and crediting Wages Payable for $360.
C) Crediting Wage Expense for $1,080 and debiting Wages Payable for $1,080.
D) Crediting Wage Expense for $360 and debiting Wages Payable for $360.

Accepted Answer

Since the last day of the month falls on a Wednesday, the employees will only have worked three days in the last week of the month. Therefore, they will only have earned 3/5 of their usual weekly salary, or $360 each. However, since the pay period includes days that fall in the next month, the company needs to accrue the remaining $360 per employee ($600 - $360) as a liability, or Wages Payable. The adjusting entry will therefore be to debit Wage Expense for the amount earned ($360 x 3 employees x 2 weeks = $2,160) and credit Wages Payable for the same amount ($2,160). Dividing this amount by 2, since the pay period is biweekly, gives us $1,080 for both accounts.

Question 17

Accumulated Depreciation is:
A) An asset account.
B) A revenue account.
C) A contra-asset account.
D) An expense account.

Accepted Answer

Accumulated Depreciation is a contra-asset account that offsets the balance of the related asset account. It represents the total amount of depreciation that has been charged to an asset over its useful life. It is not an asset account because it has a credit balance and reduces the value of the related asset account. It is not a revenue or expense account because it is not related to the company's income or expenses.

Question 18

Depreciation is:
A) An exact calculation of the decline in value of an asset.
B) Only an estimate of the decline in value of an asset.
C) Only recorded at the end of a year and never over a shorter time period.
D) Management must know the exact life of an asset in order to calculate an acceptable depreciation expense.

Accepted Answer

Depreciation is an estimate of the decline in value of an asset over time. While management may have an expected life for an asset, actual usage and market conditions can vary. Depreciation is recorded over the useful life of an asset, and can be calculated annually, quarterly, or even monthly depending on accounting policies.

Question 19

Adjusting entries are prepared:
A) Before financial statements and after a trial balance has been prepared.
B) After a trial balance has been prepared and after financial statements are prepared.
C) After posting but before a trial balance is prepared.
D) Anytime an accountant sees fit to prepare the entries.

Accepted Answer

Adjusting entries are prepared before financial statements are prepared and after a trial balance has been prepared to ensure that the financial statements reflect the correct balances and are in accordance with the accounting principles.

Question 20

If Hot Bagel Co. estimates depreciation on an automobile to be $578 for the year, the company should make the following adjusting entry:
A) Debit Accumulated Depreciation $578 and credit Depreciation Expense $578.
B) Debit Depreciation Expense $578 and credit Automobile $578.
C) Debit Depreciation Expense $578 and credit Accumulated Depreciation $578.
D) Debit Automobile $578 and credit Depreciation Expense $578.

Accepted Answer

This entry accurately reflects the recognition of the expense and reduction in the carrying value of the asset. The debit to Depreciation Expense increases the expense account (as well as reducing net income), while the credit to Accumulated Depreciation increases the contra asset account, which reduces the carrying value of the asset on the balance sheet.

Quiz 4: The Accounting Cycle: Accruals and Deferrals

The normal balance of the Accumulated Depreciation account is:

We can compare income of the current period with income of a previous period to determine whether the operating results are improving or declining:

The United Shipping Co. made an adjusting entry accruing interest for $800 on a note payable for the month of January. The note required 12% per annum on the principal. The principal amount of the note payable must have been:

Which of the following is not considered a basic type of adjusting entry?

All assets should be depreciated.

An expenditure that benefits the year in which it is made should be deducted from revenue in the same year.

Unearned revenue may also be called:

Companies that engage in fraud will often capitalize an asset rather than an expense account.

The adjusting entry to record income taxes at the end of an unprofitable accounting period consists of a:

Wages are an expense to the employer when earned, rather than when paid.

Which of the following activities is least likely to be limited to "year-end"?

Rose Corp. has a note receivable from Jewel Co for $80,000. The note matures in 5 years and bears interest of 6%. Rose is preparing financial statements for the month of June. Rose should make an adjusting entry:

Materiality is a matter of professional judgment.

An expenditure that benefits year one but is paid for in year two should not be capitalized until year two.

Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts.

Hahn Corp. has three employees. Each earns $600 per week for a five day work week ending on Friday. This month the last day of the month falls on a Wednesday. The company should make an adjusting entry:

Accumulated Depreciation is:

Depreciation is:

Adjusting entries are prepared:

If Hot Bagel Co. estimates depreciation on an automobile to be $578 for the year, the company should make the following adjusting entry: