Question 1

The cost of insurance is considered an expense:

Accepted Answer

A)  Only when the entire policy period has passed. 
B)  Only when the policy is purchased. 
C)  Only when the premium is paid. 
D)  Evenly over the term of the policy.

Question 2

The concept of materiality:

Accepted Answer

A)  Treats as material only those items that are greater than 2% or 3% of net income. 
B)  Justifies ignoring the matching principle or the realization principle in certain circumstances. 
C)  Affects only items reported in the income statement. 
D)  Results in financial statements that are less useful to decision makers because many details have been omitted.

Question 3

The adjusting entry to record interest that has accrued on a note payable to the bank will cause an immediate:

Accepted Answer

A)  Increase in liabilities and reduction in net income. 
B)  Decrease in liabilities and reduction in net income. 
C)  Decrease in assets and reduction in net income. 
D)  Increase in assets and increase in net income.

Question 4

Assume Fisher Company usually earns taxable income, but sustains a loss in the current period. The entry to record income taxes expense in the current period will most likely: (indicate all correct answers.)

Accepted Answer

A)  Increase the amount of that loss. 
B)  Include a credit to the Income Taxes Expense account. 
C)  Be an adjusting entry, rather than an entry to record a transaction completed during the period. 
D)  Include a credit to Income Taxes Payable.

Question 5

The accountant for Perfect Painting forgot the following two adjustments at the end of 2010: (a) The entry to record depreciation: $3,000.
(b) The entry to record the portion of fees received in advance which have now been earned: $3,000.
As a result of these two omissions:

Accepted Answer

A)  Net income for Perfect Painting for 2010 is overstated. 
B)  Net income for Perfect Painting for 2010 is understated. 
C)  Assets of Perfect Painting are overstated at December 31, 2010. 
D)  Liabilities of Perfect Painting are understated at December 31, 2010.

Question 6

Murphy's Auto Co. purchased a large piece of equipment on January 1, 1998. The equipment is being depreciated, using the Straight-Line method, at the rate of $16,000 per year. On January 5, 2009 the book value of the machine was $190,000.
(a) What was the original cost of the machine?
(b) What will the book value be on December 31, 2010?

Accepted Answer

The answer of Murphy's Auto Co. purchased a large piece...

Question 7

After preparing the financial statements for the current year, the accountant for Barbara's Jewel Co closed the dividends account at year-end by debiting Retained Earnings and crediting the dividends account. What is the effect of this entry on current-year net income and the balance in the owners' equity account(s) at year-end?

Accepted Answer

A)  Net income is overstated; balance in the retained earnings account is correct. 
B)  Net income is correct; balance in the capital stock account is correct. 
C)  Net income is understated; balance in the capital stock account is correct. 
D)  Net income is understated; balance in the retained earnings account is understated.

Question 8

Which of the following would not be considered an adjusting entry?

Accepted Answer

A)  A Above. 
B)  B Above. 
C)  C Above. 
D)  D Above.

Question 9

Effects of errors on financial statements
Indicate the immediate effect of the following errors on each of the accounting elements described in the column headings below, using the following code: O = Overstated; U = Understated; NE = No Effect.

Accepted Answer

The answer of Effects of errors on financial statements
Indicate the...

Question 10

Adequate disclosure
(A.) Briefly explain what is meant by the principle of adequate disclosure.
(B.) How does professional judgment enter into the application of the principle of adequate disclosure?
(C.) List 5 types of information that a publicly-held corporation generally would be required to provide according to the concept of adequate disclosure.

Accepted Answer

The answer of Adequate disclosure
(A.) Briefly explain what is meant...

Question 11

Videobusters, Inc. offered books of video rental coupons to its patrons at $40 per book. Each book contained a certain number of coupons for video rentals. During the current period 500 books were sold for $20,000, and this amount was credited to Unearned Rental Revenue. At the end of the period, it was determined that $15,000 worth of book coupons had been used by customers to rent videos. The appropriate adjusting entry at the end of the period would be:

Accepted Answer

A)  Debit Rental Revenue $5,000 and credit Unearned Rental Revenue $5,000. 
B)  Debit Rental Revenue $15,000 and credit Unearned Rental Revenue $15,000. 
C)  Debit Unearned Rental Revenue $5,000 and credit Rental Revenue $5,000. 
D)  Debit Unearned Rental Revenue $15,000 and credit Rental Revenue $15,000.

Question 12

Which of the following situations does not require Empire Company to record an adjusting entry at the end of January?

Accepted Answer

A)  On January 1, Empire Company purchased delivery equipment with an estimated useful life of five years. 
B)  On January 1, Empire Company began delivery service for a large client who will pay at the end of a three-month period. 
C)  At the end of January, Empire Company pays the custodian for January office cleaning services. 
D)  On January 1, Empire Company paid rent for six months on its office building.

Question 13

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:

Accepted Answer

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.

Question 14

Accumulated Depreciation is:

Accepted Answer

A)  An asset account. 
B)  A revenue account. 
C)  A contra-asset account. 
D)  An expense account.

Question 15

Which statement is true about land?

Accepted Answer

A)  Land should be depreciated over the same period as the building located on it. 
B)  Land cannot be depreciated for greater than a 40-year period. 
C)  Land should not be depreciated. 
D)  The straight line method should be used to depreciate land.

Question 16

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

Accepted Answer

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.

Question 17

Leland Corp. has a note receivable from Jewel Co for $50,000. The note matures in 2 years and bears interest of 3%. Leland is preparing financial statements for the quarter ending June 30. Leland should make an adjusting entry:

Accepted Answer

A)  Debiting Interest Revenue for $375 and crediting Interest Receivable for $375. 
B)  Debiting Interest Receivable for $375 and crediting Interest Revenue for $375. 
C)  Debiting Interest Revenue for $1,500 and crediting Interest Receivable for $1,500. 
D)  Crediting Interest Payable for $375 and debiting Interest Expense for $375.

Question 18

Under accrual accounting, fees received in advance from customers should be shown as being earned:

Accepted Answer

A)  When cash is collected. 
B)  When services are performed or goods delivered. 
C)  When tax rates are low. 
D)  When tax rates are high.

Question 19

End-of-period adjustments
West Laboratory adjusts and closes its accounts at the end of each month. The trial balance at September 30, 2010, before adjustments, is as follows:
 
The following information relates to month end adjustments:
(a) Office supplies on hand September 30 amounted to $500.
(b) The useful life of the medical equipment was estimated to be 20 years with no residual
value.
(c) Many patients pay in advance for major medical procedures. Fees of $6,000 were earned during the month by performing procedures on patients who had paid in advance.
(d) Salaries earned by employees during the month but not yet recorded amounted to $2,300.
(e) On September 1, West Laboratory had moved and paid 2 month's rent in advance.
(f) Medical procedures performed during the month but not yet billed or recorded amounted to $4,600.
Prepare the adjusting entries required at September 30.

Accepted Answer

The answer of End-of-period adjustments
West Laboratory adjusts and closes its...

Question 20

In which of the following situations would the largest amount be recorded as an expense of the current year? (Assume accrual basis accounting.)

Accepted Answer

A)  $4,000 is paid in January for equipment with a useful life of four years. 
B)  $1,800 is paid in January for a two-year fire insurance policy. 
C)  $10,000 cash is withdrawn by the owner for personal use. 
D)  $900 is paid to an attorney for legal services rendered during the current year.

Exam 4: The Accounting Cycle: Accruals and Deferrals