Question 1

The total amount of depreciation recorded against an asset or group of assets during the entire time the asset or assets have been owned:

Accepted Answer

The total amount of depreciation recorded against an asset or group of assets during the entire time the asset or assets have been owned is referred to as accumulated depreciation. It is a contra-asset account and it appears on the balance sheet as a deduction from the original cost of the asset.

Question 2

If a company failed to make the end-of-period adjustment to remove from the Unearned Management Fees account the amount of management fees that were earned, this omission would cause:

Accepted Answer

The omission would cause an overstatement of liabilities because the Unearned Management Fees account, a liability, would still include amounts that have already been earned and should have been recognized as revenue.

Question 3

Profit margin is defined as:

Accepted Answer

Profit margin is calculated as the ratio of net income to net sales, which gives us an indication of how much profit is generated for each dollar of sales made. A higher profit margin indicates that the company is more efficient at generating profits from its sales. Revenues and assets are not directly involved in calculating profit margin.

Question 4

Accrued revenues:

Accepted Answer

Accrued revenues are revenues that have been earned but not yet received in cash. They are recorded at the end of one accounting period even though the cash will not be received until the next accounting period. Therefore, accrued revenues at the end of one accounting period often result in cash receipts from customers in the next period.

Question 5

A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on December 31. This oversight would:

Accepted Answer

Accrued wages are an expense that should be recorded to accurately reflect the company's liabilities and expenses. Not recording them understates expenses, thus overstating net income.

Question 6

A company earned $2,000 in net income for October. Its net sales for October were $10,000. Its profit margin is:

Accepted Answer

Profit margin is calculated by dividing net income by net sales and multiplying by 100.
Profit margin = (Net Income/Net Sales) × 100
In this case, the profit margin is:
(2000/10000) × 100 = 20%
Therefore, the correct answer is B.

Question 7

Which of the following statements is incorrect?

Accepted Answer

Adjusting entries do not directly affect the cash account. They only affect the income statement and balance sheet accounts.

Question 8

An account linked with another account that has an opposite normal balance and that is subtracted from the balance of the related account is a(n):

Accepted Answer

This is describing a contra account, which is an account linked with another account that has an opposite normal balance and is subtracted from the related account's balance. None of the other options fit this description.

Question 9

Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued revenues are all examples of:

Accepted Answer

Prepaid expenses, unearned revenues, accrued expenses, accrued revenues, and depreciation are all examples of items that require adjusting entries at the end of the accounting period to ensure the accurate reporting of financial information. These items are not recorded or recognized at the time of the initial transaction but impact the financial statements over a period of time.

Question 10

The periodic expense created by allocating the cost of plant and equipment to the periods in which they are used, representing the expense of using the assets, is called:

Accepted Answer

Depreciation expense is the periodic expense created by allocating the cost of plant and equipment to the periods in which they are used.

Question 11

The accrual basis of accounting:

Accepted Answer

The accrual basis of accounting is generally accepted for external reporting because it provides a more accurate and reliable picture of a company's financial performance and position. This is because it recognizes revenues when they are earned (and not just when cash is received) and recognizes expenses when they are incurred (and not just when cash is paid out). This information is useful for most business decisions, which is why the accrual basis is preferred over the cash basis. The accrual basis does require adjusting entries at the end of each period to ensure that all revenues and expenses are properly recognized.

Question 12

On June 30 of the current calendar year, Apricot Co. paid $7,500 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 for Apricot would include:

Accepted Answer

The total cost of the management services is $7,500 for a two-year period, which equals $3,750 per year. Since the services were paid for on June 30 and the adjustment is being made on December 31, only 6 months of the service has been used. Therefore, the expense for 6 months is $3,750 / 2 = $1,875. This amount should be recognized as an expense for the current period, hence a debit to an expense account.

Question 13

All of the following statements regarding profit margin are except:

Accepted Answer

The answer of All of the following statements regarding profit...

Question 14

A company had $9,000,000 in net income for the year. Its net sales were $13,200,000 for the same period. Calculate its profit margin.

Accepted Answer

The answer of A company had $9,000,000 in net income...

Question 15

On June 30 Apricot Co. paid $7,500 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. On June 30 Apricot should record:

Accepted Answer

According to the policy of Apricot, all prepaid expenses are recorded as an asset at the time of cash payment. Therefore, on June 30, Apricot should record a debit to a prepaid expense (an asset account) for $7,500.

Question 16

An adjusting entry could be made for each of the following except:

Accepted Answer

Owner withdrawals are not an expense or revenue account, but rather a reduction of the owner's equity. Adjusting entries are made for accounts that affect the income statement or balance sheet, but owner withdrawals only affect the owner's equity section of the balance sheet.

Question 17

If a company mistakenly forgot to record depreciation on office equipment at the end of an accounting period, the financial statements prepared at that time would show:

Accepted Answer

If depreciation is not recorded, assets are overstated because the accumulated depreciation is not deducted. Net income and equity are also overstated because expenses are understated, leading to higher reported profits.

Question 18

A company records the fees for legal services paid in advance by its clients in an account called Unearned Legal Fees. If the company fails to make the end-of-period adjusting entry to record the portion of these fees that has been earned, one effect will be:

Accepted Answer

If the company does not adjust for the earned portion of unearned fees, revenue will be understated, leading to an understatement of equity since revenue increases equity.

Question 19

Prior to recording adjusting entries, the Office Supplies account had a $359 debit balance. A physical count of the supplies showed $105 of unused supplies available. The required adjusting entry is:

Accepted Answer

The correct adjusting entry is to debit Office Supplies Expense for $254 and credit Office Supplies for $254. This adjusts the Office Supplies account to its actual ending balance of $105 by recognizing the $254 of supplies used.

Question 20

If throughout an accounting period the fees for legal services paid in advance by clients are recorded in an account called Unearned Legal Fees, the end-of-period adjusting entry to record the portion of those fees that has been earned is:

Accepted Answer

The adjusting entry to record the portion of unearned legal fees that has been earned during the accounting period is to debit the unearned legal fees account and credit the legal fees earned account. This is because the unearned legal fees account represents a liability that has not yet been earned, while the legal fees earned account represents revenue that has been earned during the accounting period. Therefore, the correct option is to debit Unearned Legal Fees and credit Legal Fees Earned.

Quiz 3: Adjusting Accounts and Preparing Financial Statements