Chapter 03

Chapter 003 Adjusting Accounts and Preparing Financial Statements
Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)

True/False
Item DL LO Item DL LO Item DL LO
1. Easy C1 23. Hard C2 46. Easy P1
2. Easy C1 24. Hard C2 47. Easy P1
3. Med C1 25. Hard C2 48. Easy P1
4. Med C1 26. Easy C3 49. Easy P1
5. Easy C2 27. Easy C3 50. Easy P1
6. Easy C2 28. Easy C3 51. Easy P1
7. Easy C2 29. Easy C3 52. Med P1
8. Med C2 30. Easy C3 53. Med P1
9. Med C2 31. Med C3 54. Med P1
10. Med C2 32. Med C3 55. Med P1
11. Med C2 33. Med C3 56. Med P1
12. Med C2 34. Med C3 57. Hard P1
13. Med C2 35. Med C3 58. Hard P1
14. Med C2 36. Hard C3 59. Hard P1
15. Med C2 37. Med A1 60. Hard P1
16. Med C2 38. Med A1 61. Easy P2
17. Med C2 39. Hard A1 62. Easy P2
18. Med C2 40. Hard A1 63. Easy P3
19. Med C2 41. Easy A2 64. Easy P3
20. Med C2 42. Easy A2 65. Med P3
21. Hard C2 43. Med A2 66. Med P3
22. Hard C2 44. Med A2 67. Easy P4
45. Hard A2 68. Easy P4
3-1
Multiple Choice
69. Easy C1 93. Easy P1 117. Hard P1
70. Med C1 94. Easy P1 118. Hard P1
71. Med C1 95. Med P1 119. Hard P1
72. Med C1 96. Med P1 120. Hard P1
73. Med C1 97. Med P1 121. Hard P1
74. Easy C2 98. Med P1 122. Hard P1
75. Easy C2 99. Med P1 123. Hard P1
76. Med C2 100. Med P1 124. Hard P1
77. Med C2 101. Med P1 125. Hard P1
78. Med C2 102. Med P1 126. Hard P1
79. Med C2 103. Med P1 127. Hard P1
80. Med C2 104. Med P1 128. Hard P1
81. Med C2 105. Med P1 129. Hard P1
82. Hard C2 106. Med P1 130. Hard P1
83. Hard C2 107. Med P1 131. Easy P2
84. Med C3 108. Med P1 132. Easy P2
85. Med A1 109. Med P1 133. Med P2
86. Hard A1 110. Med P1 134. Med P2
87. Hard A1 111. Med P1 135. Easy P3
88. Hard A1 112. Med P1 136. Med P3
89. Easy A2 113. Med P1 137. Med P3
90. Easy A2 114. Med P1 138. Med P4
91. Med A2 115. Med P1 139. Med P4
92. Med A2 116. Hard P1
Matching
140. Med C1,C2 141. Med C1-C3 142. Med P1
P1,P2,A2 P2,P3
3-2
Short Essay
143. Med C1 148. Hard C3 153. Hard P1
144. Med C2 149. Hard A1 154. Hard P1,P4
145. Med C2 150. Hard A2 155. Easy P2
146. Med C3 151. Easy P1 156. Easy P3
147. Med C3 152. Hard P1 157. Med
Problems
158. Hard A1 169. Med P1 180. Med P1
159. Hard A1 170. Med P1 181. Hard P2
160. Hard A1 171. Med P1 182. Med P3
161. Hard A1 172. Med P1 183. Med P3
162. Med A2 173. Med P1 184. Med P3
163. Med A2 174. Med P1 185. Med P3
164. Med A2 175. Med P1 186. Med P3
165. Easy P1 176. Med P1 187. Med P3
166. Easy P1 177. Hard P1,P2 188. Med P4
167. Med P1 178. Hard P1,P2 189. Med P4
168. Med P1 179. Hard P1,P4
Completion Problems
190. Med C1 196. Med C3 202. Easy P1
191. Med C2 197. Med C3 203. Easy P1
192. Med C2 198. Med C3 204. Easy P1
193. Hard C2 199. Med C3 205. Easy P1
194. Med C3 200. Hard A1 206. Med P2
195. Med C3 201. Easy A2 207. Med P3
3-3
Problems
208. Med C2, A1 210 Hard C2,P1, 212. Hard C2, P1,
P3 P3
209. Med A2 211. Hard A2
3-4
True / False Questions
1. A company's fiscal year must correspond with the calendar year.

FALSE
AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: C1
2. The time period principle assumes that an organization's activities can be divided into
specific time periods.
TRUE
AICPA BB: Industry
Difficulty: Easy
3. Interim statements report a company's business activities for a 1-year period.

FALSE
AICPA BB: Industry
Difficulty: Medium
4. A fiscal year refers to an organization's accounting period that spans twelve consecutive
months or 52 weeks.
TRUE
AICPA BB: Industry
Difficulty: Medium
3-5
5. Adjusting entries are made after the preparation of financial statements.

FALSE
AICPA BB: Industry
Difficulty: Easy
6. Adjusting entries result in a better matching of revenues and expenses for the period.
TRUE
AICPA BB: Industry
Difficulty: Easy
7. Two main accounting principles used in accrual accounting are matching and full closure.
FALSE
AICPA BB: Industry
Difficulty: Easy
8. Adjusting entries are used to bring asset or liability accounts to their proper amount and
update the related expense or revenue account.
TRUE
AICPA BB: Industry
Difficulty: Medium
3-6
9. The matching principle requires that revenue not be assigned to the accounting period in
which it is earned.
FALSE
AICPA BB: Industry
Difficulty: Medium
10. The revenue recognition principle is the basis for making adjusting entries that pertain to
unearned and accrued revenues.
TRUE
AICPA BB: Industry
Difficulty: Medium
11. The cash basis of accounting commonly results in financial statements that are not
comparable from period to period.
TRUE
AICPA BB: Industry
Difficulty: Medium
12. Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and
accrued items.
TRUE
AICPA BB: Industry
Difficulty: Medium
3-7
13. Since the revenue recognition principle requires that revenues be earned, there are no
unearned revenues in accrual accounting.
FALSE
AICPA BB: Industry
Difficulty: Medium
14. The matching principle requires that expenses get recorded in the same accounting period
as the revenues that are earned as a result of the expenses, not when cash is paid.
TRUE
AICPA BB: Industry
Difficulty: Medium
15. The cash basis of accounting is an accounting system in which revenues are reported
when cash is received and expenses are reported when cash is paid.
TRUE
AICPA BB: Industry
Difficulty: Medium
16. The cash basis of accounting recognizes revenues when cash payments from customers
are received.
TRUE
AICPA BB: Industry
Difficulty: Medium
3-8
17. The accrual basis of accounting recognizes revenues when cash is received from
customers.
FALSE
AICPA BB: Industry
Difficulty: Medium
18. The accrual basis of accounting recognized expenses when cash is paid.
FALSE
AICPA BB: Industry
Difficulty: Medium
19. Recording revenues early overstates current-period income; recording revenues late
understates current period income.
TRUE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
20. Recording expenses early overstates current-period income; recording expenses late
understates current period income.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-9
21. Prior to recording adjusting entries at the end of an accounting period, some accounts may
not show proper financial statement amounts even though all transactions were correctly
recorded.
TRUE
AICPA BB: Industry
Difficulty: Hard
22. A company paid $9,000 for a six-month insurance policy. The policy coverage began on
February 1. On February 28, $150 of insurance expense must be recorded.
FALSE
Expense = $9,000/6 = $1,500
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Hard
23. On October 15, a company received $15,000 cash as a down payment on a consulting
contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of
the services required by the contract were completed. The company will record consulting
revenue of $1,500 from this contract for October.
TRUE
Revenue = $15,000 x 10% = $1,500
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-10
24. The accrual basis of accounting reflects the principle that revenue is recorded when it is
earned, not when cash is received.
TRUE
AICPA BB: Industry
Difficulty: Hard
25. The accrual basis of accounting requires adjustments to recognize revenues in the periods
they are earned and to match expenses with revenues.
TRUE
AICPA BB: Industry
Difficulty: Hard
26. Adjusting entries are designed primarily to correct accounting errors.

FALSE
AICPA BB: Industry
Difficulty: Easy
27. Adjustments are necessary to bring an asset or liability account to its proper amount and
also update a related expense or revenue account.
TRUE
AICPA BB: Industry
Difficulty: Easy
3-11
28. Each adjusting entry can only affect a balance sheet account.
FALSE
AICPA BB: Industry
Difficulty: Easy
29. Accrued expenses at the end of one accounting period are expected to result in cash
payments in a future period.
TRUE
AICPA BB: Industry
Difficulty: Easy
30. Accrued revenues at the end of one accounting period are expected to result in cash
payments in a future period.
FALSE
AICPA BB: Industry
Difficulty: Easy
31. Each adjusting entry affects only one or more income statement account and never cash.
FALSE
AICPA BB: Industry
Difficulty: Medium
3-12
32. Accrued expenses reflect transactions where cash is paid before a related expense is
recognized.
FALSE
AICPA BB: Industry
Difficulty: Medium
33. Under the accrual basis of accounting, adjustments are often made for prepaid expenses
and unearned revenues.
TRUE
AICPA BB: Industry
Difficulty: Medium
34. The entry to record a cash receipt from a customer when the service to be provided has not
yet been performed involves a debit to an unearned revenue account.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
35. Costs incurred during an accounting period but that are unpaid and unrecorded are accrued
expenses.
TRUE
AICPA BB: Industry
Difficulty: Medium
3-13
36. An adjusting entry often includes an entry to Cash.

FALSE
AICPA BB: Industry
Difficulty: Hard
37. Before an adjusting entry is made to recognize the cost of expired insurance for the
period, Prepaid Insurance and Insurance Expense are both overstated.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
Learning Objective: A1
38. Before an adjusting entry is made to accrue employee salaries, Salaries Expense and
Salaries Payable are both understated.
TRUE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
39. Failure to record depreciation expense will overstate the asset and understate the expense.
TRUE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-14
40. A company's month-end adjusting entry for Insurance Expense is $1,000. If this entry is
not made then expenses are understated by $1,000 and net income is overstated by $1,000.
TRUE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
41. Profit margin can also be called return on sales.

TRUE
AICPA BB: Industry
Difficulty: Easy
42. Profit margin measures the relation of debt to assets.

FALSE
AICPA BB: Industry
Difficulty: Easy
43. Profit margin reflects the percent of profit in each dollar of revenue.
TRUE
AICPA BB: Industry
Difficulty: Medium
3-15
44. Profit margin is calculated by dividing net sales by net income.

FALSE
AICPA BB: Industry
Difficulty: Medium
45. Ben and Jerry's had total assets of $149,501,000, net income of $6,242,000, and net sales
of $209,203,000. Its profit margin was 2.98%.
TRUE
$6,242,000/$209,203,000 = 2.98%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
46. A contra account is an account linked with another account; it is added to that account to
show the proper amount for the item recorded in the associated account.
FALSE
AICPA BB: Industry
Difficulty: Easy
Learning Objective: P1
3-16
47. If on January 1, 2009 a company paid $18,000 cash for one year of rent in advance and
adjusting entries are made at the end of each month, the balance of Prepaid Rent as of
December 1, 2009 should be $1,500.
TRUE
$18,000 x 1/12 = $1,500
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
48. Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of
its related asset.
TRUE
AICPA BB: Industry
Difficulty: Easy
49. A salary owed to employees is an example of an accrued expense.

TRUE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
50. In accrual accounting, accrued revenues are recorded as liabilities.

FALSE
AICPA BB: Industry
Difficulty: Easy
3-17
51. Depreciation expense is an example of an accrued expense.

FALSE
AICPA BB: Industry
Difficulty: Easy
52. Earned but uncollected revenues are recorded during the adjusting process with a credit to
a revenue and a debit to an expense.
FALSE
AICPA BB: Industry
Difficulty: Medium
53. Depreciation expense for a period is the portion of a plant asset's cost that is allocated to
that period.
TRUE
AICPA BB: Industry
Difficulty: Medium
54. All plant assets, including land, eventually wear out or decline in usefulness.
FALSE
AICPA BB: Industry
Difficulty: Medium
3-18
55. Net income for a period will be overstated if accrued salaries are not recorded at the end
of the accounting period.
TRUE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
56. Depreciation measures the decline in market value of an asset.

FALSE
AICPA BB: Industry
Difficulty: Medium
57. A company owes its employees $5,000 for the year ended December 31. It will pay
employees on January 6 for the previous two weeks' salaries. The year-end adjusting on entry
on December 31 will include a debit to Salaries Expense and a credit to Cash.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
58. A company purchased $6,000 worth of supplies in August and recorded the purchase in
the Supplies account. On August 31, the fiscal year-end, the supplies count equaled $3,200.
The adjusting entry would include a $2,800 debit to Supplies.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-19
59. A company performs 20 days work on a 30-day contract before the end of the year. The
total contract is valued at $6,000 and payment is not due until the contract is fully completed.
The adjusting entry includes a $4,000 credit to unearned revenue.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
60. A company entered into a 2-month contract for $50,000 on April 1. It earned $25,000 of
the contract services in April and billed the customer. The company should recognize the
revenue when it receives the customer's check.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
61. The adjusted trial balance must be prepared before the adjusting entries are made.
FALSE
AICPA BB: Industry
Difficulty: Easy
62. An unadjusted trial balance is a list of accounts and balances prepared before adjustments
are recorded and posted.
TRUE
AICPA BB: Industry
Difficulty: Easy
3-20
63. Financial statements can be prepared directly from the information in the adjusted trial
balance.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
64. The report form is considered to be the only correct format for the balance sheet.
FALSE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
65. The account form of the balance sheet matches the accounting equation. That is, assets are
on the left side of the statement, and liabilities and equity are on the right side of the
statement.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
66. In preparing statements from the adjusted trial balance, the balance sheet must be prepared
first.
FALSE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
3-21
67. It is acceptable to record prepayment of expenses as debits to expense accounts.

TRUE
AICPA BB: Industry
Difficulty: Easy
68. It is acceptable to record cash received in advance of providing products or services to

revenue accounts.
TRUE
AICPA BB: Industry
Difficulty: Easy
Multiple Choice Questions
69. The time period principle assumes that an organization's activities can be divided into
specific time periods including:
A. Months.
B. Quarters.
C. Fiscal years.
D. Calendar years.
E. All of these.
AICPA BB: Industry
Difficulty: Easy
3-22
70. A broad principle that requires identifying the activities of a business with specific time
periods such as months, quarters, or years is the:
A. Operating cycle of a business.
B. Time period principle.
C. Going-concern principle.
D. Matching principle.
E. Accrual basis of accounting.
AICPA BB: Industry
Difficulty: Medium
71. Interim financial statements refer to financial reports:

A. That cover less than one year, usually spanning one, three, or six-month periods.
B. That are prepared before any adjustments have been recorded.
C. That show the assets above the liabilities and the liabilities above the equity.
D. Where revenues are reported on the income statement when cash is received and expenses
are reported when cash is paid.
E. Where the adjustment process is used to assign revenues to the periods in which they are
earned and to match expenses with revenues.
AICPA BB: Industry
Difficulty: Medium
72. The 12-month period that ends when a company's activities are at their lowest point is
called the:
A. Fiscal year.
B. Calendar year.
C. Natural business year.
D. Accounting period.
E. Interim period.
AICPA BB: Industry
Difficulty: Medium
3-23
73. The length of time covered by a set of periodic financial statements is referred to as the:
A. Fiscal cycle.
B. Natural business year.
C. Accounting period.
D. Business cycle.
E. Operating cycle.
AICPA BB: Industry
Difficulty: Medium
74. The accounting principle that requires revenue to be reported when earned is the:
A. Matching principle.
B. Revenue recognition principle.
C. Time period principle.
D. Accrual reporting principle.
E. Going-concern principle.
AICPA BB: Industry
Difficulty: Easy
75. Adjusting entries:

A. Affect only income statement accounts.
B. Affect only balance sheet accounts.
C. Affect both income statement and balance sheet accounts.
D. Affect only cash flow statement accounts.
E. Affect only equity accounts.
AICPA BB: Industry
Difficulty: Easy
3-24
76. The main purpose of adjusting entries is to:

A. Record external transactions and events.
B. Record internal transactions and events.
C. Recognize assets purchased during the period.
D. Recognize debts paid during the period.
E. Correct errors.
AICPA BB: Industry
Difficulty: Medium
77. The broad principle that requires expenses to be reported in the same period as the
revenues that were earned as a result of the expenses is the:
A. Recognition principle.
B. Cost principle.
C. Cash basis of accounting.
D. Matching principle.
E. Time period principle.
AICPA BB: Industry
Difficulty: Medium
78. The system of preparing financial statements based on recognizing revenues when the
cash is received and reporting expenses when the cash is paid is called:
A. Accrual basis accounting.
B. Operating cycle accounting.
C. Cash basis accounting.
D. Revenue recognition accounting.
E. Current basis accounting.
AICPA BB: Industry
Difficulty: Medium
3-25
79. Adjusting entries are journal entries made at the end of an accounting period for the
purpose of:
A. Updating liability and asset accounts to their proper balances.
B. Assigning revenues to the periods in which they are earned.
C. Assigning expenses to the periods in which they are incurred.
D. Assuring that financial statements reflect the revenues earned and the expenses incurred.
E. All of these.
AICPA BB: Industry
Difficulty: Medium
80. The approach to preparing financial statements based on recognizing revenues when they
are earned and matching expenses to those revenues is:
A. Cash basis accounting.
B. The matching principle.
C. The time period principle.
D. Accrual basis accounting.
E. Revenue basis accounting.
AICPA BB: Industry
Difficulty: Medium
81. Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued
revenues are all examples of:
A. Items that require contra accounts.
B. Items that require adjusting entries.
C. Asset and equity.
D. Asset accounts.
E. Income statement accounts.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-26
82. The accrual basis of accounting:

A. Is generally accepted for external reporting because it is more useful than cash basis for
most business decisions.
B. Is flawed because it gives complete information about cash flows.
C. Recognizes revenues when received in cash.
D. Recognizes expenses when paid in cash.
E. Eliminates the need for adjusting entries at the end of each period.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
83. Which of the following statements is incorrect?

A. Adjustments to prepaid expenses, depreciation, and unearned revenues involve previously
recorded assets and liabilities.
B. Accrued expenses and accrued revenues involve assets and liabilities that had not
previously been recorded.
C. Adjusting entries can be used to record both accrued expenses and accrued revenues.
D. Prepaid expenses, depreciation, and unearned revenues often require adjusting entries to
record the effects of the passage of time.
E. Adjusting entries affect the cash account.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
84. An adjusting entry could be made for each of the following except:
A. Prepaid expenses.
B. Depreciation.
C. Owner withdrawals.
D. Unearned revenues.
E. Accrued revenues.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-27
85. A company made no adjusting entry for accrued and unpaid employee wages of $28,000
on December 31. This oversight would:
A. Understate net income by $28,000.
B. Overstate net income by $28,000.
C. Have no effect on net income.
D. Overstate assets by $28,000.
E. Understate assets by $28,000.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
86. 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:
A. Assets overstated and equity understated.
B. Assets and equity both understated.
C. Assets overstated, net income understated, and equity overstated.
D. Assets, net income, and equity understated.
E. Assets, net income, and equity overstated.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
87. 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:
A. An overstatement of net income.
B. An overstatement of assets.
C. An overstatement of liabilities.
D. An overstatement of equity.
E. An understatement of liabilities.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-28
88. 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:
A. An overstatement of equity.
B. An understatement of equity.
C. An understatement of assets.
D. An understatement of liabilities.
E. An overstatement of assets.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
89. Profit margin is defined as:

A. Revenues divided by net sales.
B. Net sales divided by assets.
C. Net income divided by net sales.
D. Net income divided by assets.
E. Net sales divided by net income.
AICPA BB: Industry
Difficulty: Easy
3-29
90. A company earned $2,000 in net income for October. Its net sales for October were
$10,000. Its profit margin is:
A. 2%.
B. 20%.
C. 200%.
D. 500%.
E. $8,000.
$2,000/$10,000 = 20%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
91. The profit margin:

A. Reflects the percent of profit in each dollar of revenue.
B. Is also called return on sales.
C. Can be used to compare a firm's performance to its competitors.
D. Is calculated by dividing net income by net sales.
E. All of these.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-30
92. 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.
A. 17.5%.
B. 28.0%.
C. 62.5%.
D. 160.0%.
E. 68.2%
$9,000,000/$13,200,000 = 68.2%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
On June 30, 2009, 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.
93. On June 30, 2009 Apricot should record:

A. A credit to an expense for $7,500.
B. A debit to an expense for $7,500.
C. A debit to a prepaid expense for $7,500.
D. A credit to a prepaid expense for $7,500.
E. A debit to Cash for $7,500.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
3-31
94. The adjusting entry on December 31, 2009 for Apricot would include:
A. A debit to an expense for $5,625.
B. A debit to a prepaid expense for $5,625.
C. A debit to an expense for $1,875.
D. A debit to a prepaid expense for $1,875.
E. A credit to a liability for $1,875.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
95. Accrued revenues:

A. At the end of one accounting period often result in cash receipts from customers in the next
period.
B. At the end of one accounting period often result in cash payments in the next period.
C. Are also called unearned revenues.
D. Are listed on the balance sheet as liabilities.
E. Are recorded at the end of an accounting period because cash has already been received for
revenues earned.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
96. 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):
A. Accrued expense.
B. Contra account.
C. Accrued revenue.
D. Intangible asset.
E. Adjunct account.
AICPA BB: Industry
Difficulty: Medium
3-32
97. The total amount of depreciation recorded against an asset or group of assets during the
entire time the asset or assets have been owned:
A. Is referred to as depreciation expense.
B. Is referred to as accumulated depreciation.
C. Is shown on the income statement of the final period.
D. Is only recorded when the asset is disposed of.
E. Is referred to as an accrued asset.
AICPA BB: Industry
Difficulty: Medium
98. 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:
A. Accumulated depreciation.
B. A contra account.
C. The matching principle.
D. Depreciation expense.
E. An accrued account.
AICPA BB: Industry
Difficulty: Medium
99. 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:
A. Debit Office Supplies $105 and credit Office Supplies Expense $105.
B. Debit Office Supplies Expense $105 and credit Office Supplies $105.
C. Debit Office Supplies Expense $254 and credit Office Supplies $254.
D. Debit Office Supplies $254 and credit Office Supplies Expense $254.
E. Debit Office Supplies $105 and credit Supplies Expense $254.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-33
100. 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:
A. Debit Cash and credit Legal Fees Earned.
B. Debit Cash and credit Unearned Legal Fees.
C. Debit Unearned Legal Fees and credit Legal Fees Earned.
D. Debit Legal Fees Earned and credit Unearned Legal Fees.
E. Debit Unearned Legal Fees and credit Accounts Receivable.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
101. On April 1, 2009, a company paid the $1,350 premium on a three-year insurance policy
with benefits beginning on that date. What will be the insurance expense on the annual
income statement for the year ended December 31, 2009?
A. $1,350.
B. $450.
C. $1,012.50.
D. $337.50.
E. $37.50.
$1,350 x 9/36 = $337.50
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-34
102. A company had no office supplies available at the beginning of the year. During the year,
the company purchased $250 worth of office supplies. On December 31, $75 worth of office
supplies remained. How much should the company report as office supplies expense for the
year?
A. $75.
B. $125.
C. $175.
D. $250.
E. $325.
$250 - $75 = $175
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
103. On January 1 a company purchased a five-year insurance policy for $1,800 with
coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account,
and the company records adjustments only at year-end, the adjusting entry at the end of the
first year is:
A. Debit Prepaid Insurance, $1,800; credit Cash, $1,800.
B. Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440.
C. Debit Prepaid Insurance, $360; credit Insurance Expense, $360.
D. Debit Insurance Expense, $360; credit Prepaid Insurance, $360.
E. Debit Insurance Expense, $360; credit Prepaid Insurance, $1,440.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-35
104. Unearned revenue is reported in the financial statements as:

A. A revenue on the balance sheet.
B. A liability on the balance sheet.
C. An unearned revenue on the income statement.
D. An asset on the balance sheet.
E. An operating activity on the statement of cash flows.
AICPA BB: Industry
Difficulty: Medium
105. Which of the following assets is not depreciated?

A. Store fixtures.
B. Computers.
C. Land.
D. Buildings.
E. All of these are depreciated.
AICPA BB: Industry
Difficulty: Medium
106. Which of the following does not require an adjusting entry at year-end?
A. Accrued interest on notes payable.
B. Supplies used during the period.
C. Cash invested by owner.
D. Accrued wages.
E. Expired portion of prepaid insurance.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-36
107. On April 30, 2009, a three-year insurance policy was purchased for $18,000 with
coverage to begin immediately. What is the amount of insurance expense that would appear
on the company's income statement for the year ended December 31, 2009?
A. $500.
B. $4,000.
C. $6,000.
D. $14,000.
E. $18,000.
$18,000 x 8/36 = $4,000
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
108. PPW Co. leased a portion of its store to another company for eight months beginning on
October 1, 2009, at a monthly rate of $800. This other company paid the entire $6,400 cash on
October 1, which PPW Co. recorded as unearned revenue. The journal entry made by PPW
Co. at year- end on December 31, 2009 would include:
A. A debit to Rent Earned for $2,400.
B. A credit to Unearned Rent for $2,400.
C. A debit to Cash for $6,400.
D. A credit to Rent Earned for $2,400.
E. A debit to Unearned Rent for $4,000.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-37
109. On May 1, 2009 Giltus Advertising Company received $1,500 from Julie Bee for
advertising services to be completed April 30, 2010. The Cash receipt was recorded as
unearned fees and at December 31, 2009, $1,000 of the fees had been earned. The adjusting
entry on December 31 Year 1 should include:
A. A debit to Unearned Fees for $500.
B. A credit to Unearned Fees for $500.
C. A credit to Earned Fees for $1,000.
D. A debit to Earned Fees for $1,000.
E. A debit to Earned Fees for $500.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
110. Incurred but unpaid expenses that are recorded during the adjusting process with a debit
to an expense and a credit to a liability are:
A. Intangible expenses.
B. Prepaid expenses.
C. Unearned expenses.
D. Net expenses.
E. Accrued expenses.
AICPA BB: Industry
Difficulty: Medium
3-38
111. The adjusting entry to record the earned but unpaid salaries of employees at the end of an
accounting period is:
A. Debit Unpaid Salaries and credit Salaries Payable.
B. Debit Salaries Payable and credit Salaries Expense.
C. Debit Salaries Expense and credit Cash.
D. Debit Salaries Expense and credit Salaries Payable.
E. Debit Cash and credit Salaries Expense.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
112. A company pays each of its two office employees each Friday at the rate of $100 per day
for a five-day week that begins on Monday. If the monthly accounting period ends on Tuesday
and the employees worked on both Monday and Tuesday, the month-end adjusting entry to
record the salaries earned but unpaid is:
A. Debit Unpaid Salaries $600 and credit Salaries Payable $600.
B. Debit Salaries Expense $400 and credit Salaries Payable $400.
C. Debit Salaries Expense $600 and credit Salaries Payable $600.
D. Debit Salaries Payable $400 and credit Salaries Expense $400.
E. Debit Salaries Expense $400 and credit Cash $400.
2 employees x 2 days x $100/employee/day = $400
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-39
113. On January 1, Southwest College received $1,200,000 in Unearned Tuition Revenue

from its students for the spring semester, which spans four months beginning on January 2.
What amount of tuition revenue should the college recognize on January 31?
A. $300,000.
B. $600,000.
C. $800,000.
D. $900,000.
E. $1,200,000.
$1,200,000/4 = $300,000
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
114. An adjusting entry was made on December 31, 2009 to accrue salary expense of $1,200.
Which of the following entries would be prepared to record the next payment of salaries, on
January, 2010 in the amount of $3,000?
A.
B.
C.
D.
E.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-40
115. The difference between the cost of an asset and the accumulated depreciation for that
asset is called
A. Depreciation Expense.
B. Unearned Depreciation.
C. Prepaid Depreciation.
D. Depreciation Value.
E. Book Value.
AICPA BB: Industry
Difficulty: Medium
116. A company purchased a new truck at a cost of $42,000 on July 1, 2009. The truck is
estimated to have a useful life of 6 years and a salvage value of $3,000. The company uses the
straight-line method of depreciation. How much depreciation expense will be recorded for the
truck for the year ended December 31, 2009?
A. $3,250.
B. $3,500.
C. $4,000.
D. $6,500.
E. $7,000.
[$42,000 - $3,000/6] x 1/2 = $3,250
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-41
117. A company's Office Supplies account shows a beginning balance of $600 and an ending
balance of $400. If office supplies expense for the year is $3,100, what amount of office
supplies was purchased during the period?
A. $2,700.
B. $2,900.
C. $3,300.
D. $3,500.
E. $3,700.
$600 + Supplies Purchased - $3,100 = $400

Supplies Purchased = $2,900
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
118. If a company records prepayment of expenses in an asset account, the adjusting entry
would:
A. Result in a debit to an expense and a credit to an asset account.
B. Cause an adjustment to prior expense to be overstated and assets to be understated.
C. Cause an accrued liability account to exist.
D. Result in a debit to a liability and a credit to an asset account.
E. Decrease cash.
AICPA BB: Industry
Difficulty: Hard
3-42
119. A company recorded 2 days of accrued salaries of $1,400 for its employees on January
31. On February 9, it paid its employees $7,000 for these accrued salaries and for other
salaries earned through February 9. The January 31 and February 9 journal entries are:
A.
B.
C.
D.
E.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-43
120. If accrued salaries were recorded on December 31 with a credit to Salaries Payable, the
entry to record payment of these wages on the following January 5 would include:
A. A debit to Cash and a credit to Salaries Payable.
B. A debit to Cash and a credit to Prepaid Salaries.
C. A debit to Salaries Payable and a credit to Cash.
D. A debit to Salaries Payable and a credit to Salaries Expense.
E. No entry would be necessary on January 5.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
121. On May 1, 2009, Carter Advertising Company received $3,600 from Kaitlyn Breanna for
advertising services to be completed April 30, 2010. The Cash receipt was recorded as
unearned fees. The adjusting entry on December 31, 2010 should include:
A. a debit to Earned Fees for $3,600.
B. a debit to Unearned Fees for $1,200.
C. a credit to Unearned Fees for $1,200.
D. a debit to Earned Fees for $2,400.
E. a credit Earned Fees for $2,400.
Year 2009 = $3,600/12 = $300 per month x 8 = $2,400

Year 2010 = $3,600 - $2,400 = $1,200.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-44
122. The balance in the prepaid insurance account before adjustment at the end of the year is
$4,800, which represents the insurance premiums for four months. The premiums were paid
on November 1. The adjusting entry required on December 31 is:
A. Debit Insurance Expense, $2,400; credit Prepaid Insurance, $2,400.
B. Debit Prepaid Insurance, $2,400; credit Insurance Expense, $2,400.
C. Debit Insurance Expense, $1,200; credit Prepaid Insurance, $1,200.
D. Debit Prepaid Insurance, $1,200; credit Insurance Expense, $1,200
E. Debit Cash, $4,800; Credit Prepaid Insurance, $4,800.
$4,800/4 = $1,200 x 2 = $2,400
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
123. What is the proper adjusting entry at December 31, the end of the accounting period, if
the balance in the prepaid insurance account is $7,750 before adjustment, and the unexpired
amount per analysis of policies is, $3,250?
A. Debit Insurance Expense, $3,250; credit Prepaid Insurance, $3,250.
B. Debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500.
C. Debit Prepaid Insurance, $4,500; credit Insurance Expense, $4,500.
D. Debit Insurance Expense, $7,750; credit Prepaid Insurance, $7,750.
E. Debit Cash, $7,750; Credit Prepaid Insurance, $7,750.
$7,750 - $3,250 = $4,500
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-45
124. On March 31, 2009, Phoenix, Inc. paid Melanie Publishing Company $15,480 for a 3-
year subscription for five different magazines. The subscriptions started immediately. What is
the amount of revenue that should be recorded by Melanie Publishing Company for each year
of the subscription?
A. 2009, $15,480; 2010, $0; 2011, $0; 2010, $0.
B. 2009, $5,160; 2010, $5,160; 2011, $5,160.
C. 2009, $3,870; 2010, $5,160; 2011, $5,160; 2012, $1,290.
D. 2009, $0; 2010, $0; 2011, $0; 2012, $15,480.
E. The answer cannot be determined based on the information given.
$15,480/36 = $430
2009 $430 x 9 = $3,870
2010 $430 x 12 = $5,160
2011 $430 x 12 = $5,160
2012 $430 x 3 = $1,290
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
year subscription for five different magazines. The subscriptions started immediately. What is
the adjusting entry that should be recorded by Melanie Publishing Company on December 31,
2009 if the credit to record the collection was made to Unearned Fees?
A. debit Unearned Fees, $15,480; credit Fees Earned, $15,480.
B. debit Unearned Fees, $5,160; credit Fees Earned, $5,160.
C. debit Unearned Fees, $11,610; credit Fees Earned, $11,610
D. debit Unearned Fees, $1,290; credit Fees Earned, $1,290
E. debit Unearned Fees, $3,870; credit Fees Earned, $3,870
$15,480/36 = $430 x 9 = $3,870
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-46
year subscription for five different magazines. The subscriptions started immediately. What
amount should appear in the Prepaid Subscription account for Phoenix Company after
adjustments on December 31 each year?
A. 2009, $15,480; 2010, $11,610; 2011, $6,540; 2012, $1,290.
B. 2009, $3,870; 2010, $5,160; 2011, $5,160; 2012, $1,290.
C. 2009, $5,160; 2010, $5,160; 2011, $5,160.
D. 2009, $11,610; 2010, $6,450; 2011, $1,290; 2012, $0.
E. The answer cannot be determined based on the information given.
$15,480/36 = $430 per month

2009 = $15,480 - 430 x 9 = $11,610
2010 = $11,610 - $430 x 12 = $6,450
2011 = $6,450 - $430 x 12 = $1,290
2012 = $430 x 0 = $-0-
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
127. A company made no adjusting entry for accrued and unpaid employee salaries of $9,000
on December 31. Which of the following statements is true?
A. It will have no effect on income.
B. It will overstate assets and liabilities by $9,000
C. It will understate net income by $9,000.
D. It will understate assets by $9,000.
E. It will understate expenses and overstate net income by $9,000.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-47
128. A company made no adjusting entry for accrued and unpaid employee salaries of $9,000
on December 31. The entry to record the adjusting entry should have been:
A. debit Salary Expense, $9,000; credit Cash, $9,000
B. debit Salary Expense, $9,000; credit Fees Earned, $9,000
C. debit Salary Expense, $9,000; credit Prepaid Salary, $9,000
D. debit Salary Expense, $9,000; credit Salaries Payable, $9,000
E. debit Salaries Payable, $9,000; credit Salary Expense
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
129. A company purchased new computers at a cost of $14,000 on September 30, 2010. The
computers are estimated to have a useful life of 4 years and a salvage value of $2,000. The
company uses the straight-line method of depreciation. How much depreciation expense will
be recorded for the computers for the year ended December 31, 2010?
A. $250
B. $750
C. $875
D. $1,000
E. $3,000
$14,000 - $2,000 = $12,000/48 = $250 x 3 = $750
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-48
130. The balance in Tee Tax Services' office supplies account on February 1 and February 28
was $1,200 and $375, respectively. If the office supplies expense for the month is $1,900,
what amount of office supplies was purchased during February?
A. $1,075
B. $1,500
C. $1,525
D. $2,325
E. $3,100
$1,200 + Supplies Purchased - $1,900 = $375

Supplies Purchased = $1,075
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
131. Which of the following statements is incorrect?

A. An income statement reports revenues earned less expenses incurred.
B. An unadjusted trial balance shows the account balances after they have been revised to
reflect the effects of end-of-period adjustments.
C. Interim financial reports can be based on one-month or three-month accounting periods.
D. The fiscal year is any 12 consecutive months (or 52 weeks) used by a business as its annual
accounting period.
E. Property, plant, and equipment are referred to as plant assets.
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
3-49
132. A trial balance prepared after adjustments have been recorded is called a(n) :
A. Balance sheet.
B. Adjusted trial balance.
C. Unadjusted trial balance.
D. Classified balance sheet.
E. Unclassified balance sheet.
AICPA BB: Industry
Difficulty: Easy
133. A trial balance prepared before any adjustments have been recorded is:
A. An adjusted trial balance.
B. Used to prepare financial statements.
C. An unadjusted trial balance.
D. Correct with respect to proper balance sheet and income statement amounts.
E. Only prepared once a year.
AICPA BB: Industry
Difficulty: Medium
134. The adjusted trial balance contains information pertaining to:

A. Asset accounts only.
B. Balance sheet accounts only.
C. Income statement accounts only.
D. All general ledger accounts.
E. Revenue accounts only.
AICPA BB: Industry
Difficulty: Medium
3-50
135. Financial statements are typically prepared in the following order:

A. Balance sheet, statement of owner's equity, income statement.
B. Statement of owner's equity, balance sheet, income statement.
C. Income statement, balance sheet, statement of owner's equity.
D. Income statement, statement of owner's equity, balance sheet.
E. Balance sheet, income statement, statement of owner's equity.
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
136. A balance sheet that places the assets above the liabilities and equity is called a(n):
A. Report form balance sheet.
B. Account form balance sheet.
C. Classified balance sheet.
D. Unadjusted balance sheet.
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
137. A balance sheet that places the liabilities and equity to the right of the assets is a(n):
A. Account form balance sheet.
B. Report form balance sheet.
C. Interim balance sheet.
D. Classified balance sheet.
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
3-51
138. Under the alternative method for accounting for unearned revenue, which of the
following pairs of journal entry formats is correct?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-52
139. Under the alternative method for recording prepaid expenses, which is the correct set of
journal entries?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-53
Matching Questions
140. Match the following terms the appropriate definition.
1. Depreciation The accounting system that recognizes revenues when

expense earned and expenses when incurred. 6
The accounting system where revenues are recognized
2. Time period when cash is received and expenses are recorded when
principle cash is paid. 7
3. Profit margin Items paid for in advance of receiving their benefits. 8
4. Matching
principle Net income divided by net sales. 3
5. Accrued The expense created by allocating the cost of plant and
revenues equipment to the periods in which they are used. 1
Allocates equal amounts of an asset's cost (less any
6. Accrual basis salvage value) to depreciation expense during its useful
accounting life. 9
A principle that assumes that an organization's activities
7. Cash basis can be divided into specific time periods such as months,
accounting quarters, or years. 2
The principle that requires expenses to be reported in
the same period as the revenues that were earned as a
8. Prepaid expenses result of the expenses. 4
9. Straight-line Revenues earned in a period that are both unrecorded
depreciation and not yet received in cash or other assets. 5
AICPA BB: Industry
Difficulty: Medium
3-54
141. Match the following terms with the appropriate definition.
1. Adjusted trial A balance sheet that lists assets on the left side and
balance liabilities and equity on the right. 3
A journal entry used at the end of an accounting period
to bring an asset or liability account balance to its proper
amount and update the related expense or revenue
2. Adjusting entry account. 2
3. Account form A listing of accounts and balances prepared before
balance sheet adjustments are recorded. 6
4. Accounting The consecutive 12 months (or 52 weeks) selected as
period the organization's annual accounting period. 8
A balance sheet that lists items vertically in the order:
5. Contra account assets, liabilities and equity. 9
6. Unadjusted trial
balance The length of time covered by financial statements. 4
7. Interim financial An account linked with another account and having an
reports opposite normal balance. 5
Financial reports covering less than one year, usually
8. Fiscal year one, three, or six-month periods. 7
9. Report form A listing of accounts and balances prepared after
balance sheet adjustments are recorded and posted to the ledger. 1
10. Natural A 12-month period that ends when a company's sales
business year activities are at their lowest point. 10
AICPA BB: Industry
Difficulty: Medium
Learning Objective: C1-C3
3-55
142. Match the following types of adjustments (a though d) with the transactions (1 through
4).
a. Prepaid expense
b. Unearned revenue
c. Accrued expense
d. Accrued revenue
1. Used to record revenue received in advance. c 4

2. Used to record expiration of prepaid insurance. d 3
3. Used to record revenue earned but not received. a 2
4. Used to record wages owed, but not paid. b 1
AICPA BB: Industry
Difficulty: Medium
Short Answer Questions
143. Discuss the importance of periodic reporting and the time period principle.
For information to be valuable to decision makers, it must be presented in a timely fashion. To

provide timely information for decision making, accounting systems are designed to prepare
periodic reports at regular intervals. The time period principle assumes that an organization's
activities can be divided into specific time periods such as months, quarters or years.
AICPA BB: Industry
Difficulty: Medium
3-56
144. Discuss how accrual accounting enhances the usefulness of financial statements.
The accrual accounting method recognizes revenue when earned and expenses when incurred.
In this way, accrual accounting better reflects business performance than information about
cash receipts and payments. Accrual accounting also increases the comparability of financial
statements from one period to another.
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
145. Identify the differences between accrual accounting and cash basis accounting.
Accrual accounting records revenues in the period earned, and expenses in the period
incurred. The cash basis, on the other hand records revenues when cash is received, and
expenses when cash is paid.
AICPA BB: Industry
Difficulty: Medium
146. Explain the purpose of adjusting entries at the end of a period.
Even though external transactions may be recorded promptly, internal transactions and events
may not be recorded. Adjusting entries are used to bring an asset or liability account balance
to its proper amount and to also update a related expense or revenue account. Examples of
internal events requiring adjusting entries would be the recognition of revenue earned or
expenses incurred during an accounting period when the corresponding cash received or cash
paid occurs in another period.
AICPA BB: Industry
Difficulty: Medium
3-57
147. List the three-steps of the adjusting process.
(1) Compute the current account balance.

(2) Compute what the current account balance should be.
(3) Record entry to get from step 1 to step 2.
AICPA BB: Industry
Difficulty: Medium
148. Identify the types of adjusting entries and explain the purpose of each type.
Adjusting entries can be grouped into two general categories: accruals and deferrals. Both of
these groups can be further subdivided into revenues and expenses. The purpose of accrual
adjusting entries is to recognize revenues that have been earned and not received and
expenses that have been incurred, but not yet paid. Deferrals, on the other hand, recognize that
cash has already been received or paid. The purpose of deferrals is to adjust for revenue that
has been received but not earned and expenses that have been paid but not incurred.
AICPA BB: Industry
Difficulty: Hard
149. Explain how accounting adjustments affect financial statements.
Without accounting adjustments many accounts would have balances that do not reflect the
proper financial performances and financial condition of the company. For example, a Prepaid
Insurance account that was unadjusted would include an amount covering the expired cost
(expense) plus an amount for the unexpired cost (asset). Adjusting entries thus enhance the
accuracy of financial statements so that the amounts on the statements better reflect the
financial condition and performance of the company.
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Hard
3-58
150. How is the profit margin calculated? Discuss its use in analyzing a company's
performance.
Profit margin is calculated by dividing net income by net sales. The resulting percent reflects
the percent of profit a company makes for every dollar in sales. The profit margin ratio is
useful in comparing a company's performance to that of its competitors, and as a relative
measure of the company's performance across periods.
AICPA BB: Industry
Difficulty: Hard
151. Describe the types of entries required in later periods that result from accruals.
Accrued revenues in one period result in cash received in later periods. Accrued expenses in
one period result in cash payments made in later periods. When the cash for these items is
received or paid, journal entries must be made to recognize receipt, payment, and the removal
of the accrued revenues or accrued expenses from the accounts.
AICPA BB: Industry
Difficulty: Easy
3-59
152. What are the types of adjusting entries used for prepaid expenses, depreciation and
unearned revenues?
Prepaid expenses are deferrals, or expenses paid for in advance. The purpose of the adjusting
entry for prepaid expenses is to recognize the using up of the asset paid for in advance.
Depreciation is the recognition of the decline in usefulness of plant and equipment assets. The
adjusting entry for depreciation recognizes this event and treats it as an expense. Unearned
revenues represent cash paid in advance for products or services. The adjusting entry for
unearned revenues recognizes that revenue has been earned through the delivery of a product
or service.
AICPA BB: Industry
Difficulty: Hard
153. What are the types of adjusting entries used for accrued expenses and accrued revenues?
Accrued expenses are expenses that have been incurred but not yet paid for. Adjusting entries
for accrued expenses increase expenses and also increase liabilities to recognize that an
expense has been incurred but not yet paid. Accrued revenues are revenues that have been
earned but not yet received in cash. The adjusting entry recognizes the revenue and also
establishes a receivable.
AICPA BB: Industry
Difficulty: Hard
3-60
154. Describe the two alternate methods used to account for prepaid expenses.
The first method places all prepaid expenses in the expense accounts when cash is paid.
Adjusting entries are used to place unexpired amounts into the asset accounts. The second
method places all prepaid expenses into asset accounts when cash is paid. Adjusting entries
are used to recognize expired amounts which are placed into expense accounts.
AICPA BB: Industry
Difficulty: Hard
155. What is an adjusted trial balance? Why is it prepared?
An adjusted trial balance is a list of accounts and balances prepared after adjusting entries are
recorded and posted to the ledger. The purpose of the adjusted trial balance is to ensure that
total debits equal total credits for all accounts in the ledger.
AICPA BB: Industry
Difficulty: Easy
156. What is the usual order in which financial statements are prepared from the adjusted trial
balance? Why are they prepared in that order?
The income statement is prepared first. The amount of net income is then used in the
statement of owner's equity to calculate the ending balance in the owner's capital account. The
ending balance in the owner's capital account is then transferred to the balance sheet. The
statement of cash flows is usually prepared last.
AACSB: Critical Thinking

AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
3-61
157. Explain how the owners of PopCap Games adapted to and used the accrual basis of
accounting.
The owners focused on the importance of revenue and expense recognition for proper
financial statement preparation. Even though they received cash in advance for sales; the
revenue recognition principle was important. They also recorded expenses and managed cash
payments effectively. Recognizing the importance of a good accounting information system is
the first step in a successful business.
AACSB: Critical Thinking

AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
Problems
158. On December 31, 2009, a company forgot to record $7,000 of depreciation on office
equipment. In the 2009 financial statements, what is the effect of this error on assets, net
income, and equity?
1.) Assets are overstated by $7,000.

2.) Net income is overstated by $7,000.
3.) Equity is overstated by $7,000.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-62
159. Given the table below, indicate the impact of the following errors made during the
adjusting entry process. Use a "+" followed by the amount for overstatements, a "-" followed
by the amount for understatements, and a "0" for no effect. The first one is done as an
example.
Ex. Failed to recognize that $600 of unearned revenues, previously recorded as liabilities, had
been earned by year-end.
1. Failed to accrue salaries expense of $1,200.

2. Forgot to record $2,700 of depreciation on office equipment.
3. Failed to accrue $300 of interest on a note receivable.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-63
160. A company issued financial statements for the year ended December 31, but failed to
include the following adjusting entries:
A. Accrued service fees earned of $2,200.
B. Depreciation expense of $8,000.
C. Portion of office supplies (an asset) used, $3,100.
D. Accrued salaries of $5,200.
E. Revenues of $7,200, originally recorded as unearned, have been earned by the end of the
year.
Determine the correct amounts for the December 31 financial statements by completing the
following table:
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-64
161. Using the table below, indicate the impact of the following errors made during the
adjusting entry process. Use a "+" for overstatements, a "-" for understatements, and a "0" for
no effect. The first one is provided as an example
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-65
162. Reebok's net income was $180,000; its total assets were $1,050,000; and its net sales
were $3,500,000. Calculate the company's profit margin ratio.
$180,000/$3,500,000 = 5.1%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
163. Nike's net income was $780,000; its net assets were $5,200,000; and its net sales were
$9,000,000. Calculate its profit margin ratio.
$780,000/$9,000,000 = 8.7%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-66
164. The following information is available to you for the Wooden Company:
From the information provided, calculate Wooden's profit margin ratio for each of the three
years. Comment on the results, assuming that the industry average for the profit margin ratio
is 6% for each of the three years.
Analysis comment: The profit margin has increased in all three years and has exceeded the
industry average in the last two years. These results reflect positively on Wooden and its trend
in profitability.
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Medium
165. On December 14 Bench Company received $3,700 cash for consulting services that will
be performed in January. Bench records all such prepayments in a liability account. Prepare a
general journal entry to record the $3,700 cash receipt.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
3-67
166. On December 31, Connelly Company had performed $5,000 of management services for
clients that had not yet been billed. Prepare Connelly's adjusting entry to record these fees
earned.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
167. A company has 20 employees who each earn $500 per week for a 5-day week that begins
on Monday. December 31 of Year 1 is a Monday, and all 20 employees worked that day.
a) Prepare the required adjusting journal entry to record accrued salaries on December 31,
2009.
b) Prepare the journal entry to record the payment of salaries on January 4, 2010.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-68
168. Pfister Co. leases an office to a tenant at the rate of $5,000 per month. The tenant
contacted Pfister and arranged to pay the rent for December 2009 on January 8, 2010. Pfister
agrees to this arrangement.
a.) Prepare the journal entry that Pfister must make at December 31, 2009 to record the
accrued rent revenue.
b.) Prepare the journal entry to record the receipt of the rent on January 8, 2010.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
169. Prior to recording adjusting entries on December 31, a company's Store Supplies account
had an $880 debit balance. A physical count of the supplies showed $325 of unused supplies
available as of December 31. Prepare the required adjusting entry.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-69
170. Complete the following by filling in the blanks:

(1) The Prepaid Insurance account had a $455 debit balance at the beginning of the current
year; $650 of insurance premiums were paid during the year; and the year-end balance sheet
showed $420 of prepaid insurance; consequently, the income statement for the year must have
shown $______________ of insurance expense.
(2) The Office Supplies account began the current year with a $235 debit balance; the income
statement for the year showed $475 of office supplies expense; and the year-end balance sheet
showed the current asset, office supplies, at $225; consequently, if all supplies were accounted
for, $____________ of office supplies must have been purchased during the year.
(1) $685 = $455 + $650 - $420

(2) $465 = $225 + $475 - $235
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
171. Topflight Company had $1,500 of store supplies at the beginning of the current year.
During this year, Topflight purchased $8,250 worth of store supplies. On December 31,
$1,125 worth of store supplies remained. Calculate the amount of Topflight Company's store
supplies expense for the current year.
$1,500 + $8,250 - $1,125 = $8,625
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-70
172. Prepare general journal entries on December 31 to record the following unrelated year-
end adjustments.
a. Estimated depreciation on office equipment for the year, $4,000.
b. The Prepaid Insurance account has a $3,680 debit balance before adjustment. An
examination of insurance policies shows $950 of insurance expired.
c. The Prepaid Insurance account has a $2,400 debit balance before adjustment. An
examination of insurance policies shows $600 of unexpired insurance.
d. The company has three office employees who each earn $100 per day for a five-day
workweek that ends on Friday. The employees were paid on Friday, December 26, and have
worked full days on Monday, Tuesday, and Wednesday, December 29, 30, and 31.
e. On November 1, the company received 6 months' rent in advance from a tenant whose rent
is $700 per month. The $4,200 was credited to the Unearned Rent account.
f. The company collects rent monthly from its tenants. One tenant whose rent is $750 per
month has not paid his rent for December.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-71
173. Barnes Company has 20 employees who are each paid $80 per day for a 5-day
workweek. The employees are paid each Friday. This year the accounting period ends on
Tuesday. Prepare the December 31 year-end adjusting journal entry Barnes Company should
make to accrue wages.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
174. Show the December 31 adjusting entry to record $750 of earned but unpaid salaries of
employees at the end of the current accounting period.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-72
175. Western Company had $500 of store supplies available at the beginning of the current
year. During the year Western Company purchased $2,750 worth of store supplies. On
December 31 of this year $375 worth of store supplies remained.
a. Calculate the amount of Western Company's store supplies expense for the current year.
(Show your calculations.)
b. Prepare the journal entry to adjust the supplies account.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
176. During the current year ended December 31, clients paid fees in advance for accounting
services amounting to $25,000. These fees were recorded in an account called Unearned
Accounting Fees. If $3,500 of these fees remain unearned on December 31 of this year
present the December 31 adjusting entry to bring the accounts up to date.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-73
177. The following unadjusted and adjusted trial balances were taken from the current year's
accounting system for High Point.
In general journal form, present the six adjusting entries that explain the changes in the
account balances from the unadjusted to the adjusted trial balance.
3-74
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-75
178. Black Company's unadjusted and adjusted trial balances on December 31 of the current
year are as follows
Present the four adjusting journal entries that were recorded by Black Company.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-76
179. In general journal form, record the December 31 adjusting entries for the following
transactions and events. Assume that December 31 is the end of the annual accounting period.
a. The Prepaid Insurance account shows a debit balance of $2,340, representing the cost of a
three-year fire insurance policy that was purchased on October 1 of the current year.
b. The Office Supplies account has a debit balance of $400; a year-end inventory count
reveals $80 of supplies still on hand.
c. On November 1 of the current year, Rent Earned was credited for $1,500. This amount
represented the rent earned for a three-month period beginning November 1.
d. Estimated depreciation on office equipment is $600.
e. Accrued salaries amount to $400.
(all entries dated December 31)
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-77
Bella Beauty Salon's unadjusted trial balance for the current year follows:
Additional information:
a. An insurance policy examination showed $1,240 of expired insurance.
b. An inventory count showed $210 of unused shop supplies still available.
c. Depreciation expense on shop equipment, $350.
d. Depreciation expense on the building, $2,220.
e. A beautician is behind on space rental payments, and this $200 of accrued revenues was
unrecorded at the time the trial balance was prepared.
f. $800 of the Unearned Rent account balance was earned by year-end.
g. The one employee, a receptionist, works a five-day workweek at $50 per day. The
employee was paid last week but has worked four days this week for which she has not been
paid.
h. Three months' property taxes, totaling $450, have accrued. This additional amount of
property taxes expense has not been recorded.
i. One month's interest on the note payable, $600, has accrued but is unrecorded.
3-78
180. Based on the above information, prepare the adjusting journal entries for Bella's Beauty
Salon.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-79
181. Use the above information to prepare the adjusted trial balance for Bella's Beauty Salon.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
3-80
3-81
182. Refer to the figure above. Prepare an income statement for the adjusted trial balance of
Hanson Storage.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
3-82
183. Refer to the figure above. Prepare a statement of owner's equity from the adjusted trial
balance of Hanson Storage. Ms. Hanson's capital account balance of $40,340 consists of a
$30,340 beginning-year balance plus a $10,000 investment during the current year.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
3-83
184. Refer to the figure above. Prepare a balance sheet from the adjusted trial balance of
Hanson Storage.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
3-84
3-85
185. Refer to the figure above. From the above adjusted trial balance, prepare an income
statement for Martin Sky Taxi Services.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
186. Refer to the figure above. Helena Martin did not invest anything in the company during
the year. Based the above adjusted trial balance, prepare a statement of owner's equity for
Martin Sky Taxi Services.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
3-86
187. Refer to the figure above. Based on the above adjusted trial balance, prepare a balance
sheet for Martin Sky Taxi Services.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
3-87
188. Manning, Co. collected 6-months' rent in advance from a tenant on November 1 of the
current year. When it collected the cash, it recorded the following entry:
Prepare the required adjusting entry at December 31 of the current year.
($15,000/6 mo. = $2,500/mo; 4 mo. unearned = 4 x $2,500 = $10,000)
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
189. On October 1 of the current year, Morton Company paid $9,600 cash for a one-year
insurance policy that took effect on that day. On the date of the payment, Morton recorded the
following entry:
Prepare the required adjusting entry at December 31 of the current year.
($9,600/12 mo. = $800/mo.; 9 mo. prepaid = 9 x $800 = $7,200)
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
3-88
Fill in the Blank Questions
190. Companies experiencing seasonal variations in sales often choose a fiscal year
corresponding to their ________________________ year.
Natural business
AICPA BB: Industry
Difficulty: Medium
191. ______________________ are required at the end of the accounting period because
certain internal transactions and events remain unrecorded.
Adjusting entries.
AICPA BB: Industry
Difficulty: Medium
192. Accrual accounting and the adjusting process rely on two principles: the
___________________ principle and the ________________________ principle.
Revenue recognition; matching
AICPA BB: Industry
Difficulty: Medium
3-89
193. ______________________ basis accounting means that revenues are recognized when
cash is received and that expenses are recorded when cash is paid.
______________________ basis accounting means that the financial effects of revenues and
expenses are recorded when earned or incurred.
Cash; accrual
AICPA BB: Industry
Difficulty: Hard
194. Accrued expenses and accrued revenues reflect transactions when cash is paid or
received __________ a related expense or revenue is recognized.
After
AICPA BB: Industry
Difficulty: Medium
195. Adjusting is a three-step process (1) _____________________________, (2)

___________________________, and (3) _____________________________.
1 Compute current account balance, (2) compute what the account balance should be,
(3) record entry to get from step 1 to step 2.
AICPA BB: Industry
Difficulty: Medium
3-90
196. __________________________ refer to costs incurred in a period that are both unpaid
and unrecorded. ______________________ refer to revenues earned in a period that are both
unrecorded and not yet received in cash (or other assets).
Accrued expenses; accrued revenues
AICPA BB: Industry
Difficulty: Medium
197. Accrued revenues at the end of one accounting period often result in cash
_______________________ in the next period.
Receipts (or inflows)
AICPA BB: Industry
Difficulty: Medium
198. ______________________ revenues are liabilities requiring delivery of products and for
services.
Unearned
AICPA BB: Industry
Difficulty: Medium
199. Prepaid expenses, depreciation, and unearned revenues each reflect transactions where
cash is received or paid ______________ a related expense or revenue is recognized.
Before
AICPA BB: Industry
Difficulty: Medium
3-91
200. If a prepaid expense account were not adjusted for the amount used, on the balance sheet
assets would be ___________________ and equity would be ___________________.
Overstated; understated
AICPA BB: Industry
Difficulty: Hard
201. Profit margin = ___________________ divided by net sales.

Net income
AICPA BB: Industry
Difficulty: Easy
202. The ________________________________ depreciation method allocates equal

amounts of an asset's cost to depreciation during its useful life.
Straight-line
AICPA BB: Industry
Difficulty: Easy
203. __________________________ is the process of allocating the cost of plant assets to

their expected useful lives.
Depreciation
AICPA BB: Industry
Difficulty: Easy
3-92
204. A _____________ account is an account linked with another account, having an opposite
normal balance, and reported as a subtraction from that other account's balance.
Contra
AICPA BB: Industry
Difficulty: Easy
205. __________________ expenses are those costs that are incurred in a period but are both
unpaid and unrecorded.
Accrued
AICPA BB: Industry
Difficulty: Easy
206. An _______________________ is a listing of all of the accounts in the ledger with their
account balances before adjustments are made.
Unadjusted trial balance.
AICPA BB: Industry
Difficulty: Medium
207. The _____________________ form of balance sheet lists the asset accounts on the left
side and the liabilities and equity accounts on the right side. The ______________________
form of balance sheet lists items vertically with assets followed by liabilities then equity
accounts.
Account; report
AICPA BB: Industry
AICPA FN: Reporting
3-93
Problems
208. Harrow Co. is a multi-million business. The business results for the year have been
seriously impacted by a slowing economy. The company wants to improve its net income. It
has incurred $2,500,000 in unpaid salaries at the end of the year and wants to leave those
amounts unrecorded at the end of the year. (a) How would this omission affect the financial
statements of Harrow? (b) Which accrual basis of accounting principles does this omission
violate? (c) Would this be considered an ethical problem?
a. The net income would be overstated because the expense was omitted. Liabilities would be
understated and owners' equity would be overstated.
b. Comparability and matching principles
c. Yes, it would be considered unethical and a violation of generally accepted accounting
principles. Financial statement users could be misled by the omission of the expense and the
overstatement of net income.
AACSB: Ethics
AICPA BB: Legal, Critical Thinking
AICPA FN: Measurement, Risk Analysis
Difficulty: Medium
3-94
209. The following information is available for Hughes Co.
From the information provided, calculate Hughes' profit margin ratio for each of the three
years. In 2009 economic conditions and a slowing economy impacted the results of
operations. Comment on the results, assuming that the industry average for the profit margin
ratio is 7% for each of the three years.
Hughes Co. did rebound from the slowing economy and increased the profit margin to 6.8%
in 2010, which is just short of the industry average of 7%. If Hughes' sales and profits
continue to increase at the same rate for next year, the company will exceed the 7% profit
margin ratio.
AACSB: Analytic
Difficulty: Medium
3-95
The unadjusted trial balance and the adjustment data is given below:
Additional information items:

a. The Prepaid Insurance account consists of a payment for a 1 year policy. An analysis of the
insurance invoice indicates that one half of the policy has expired by the end of the December
31 year-end.
b. A cash payment for space sublet for 8 months was received on July 1 and was credited to
Unearned Rent.
c. Accrued interest expense on the note payable of $1,000 has been incurred but not paid.
3-96
210. If these adjustments are not recorded, what is the impact on net income? Show
calculation for net income without the adjustments and net income with the adjustments.
Which one gives the most accurate net income?
AACSB: Analytic
Difficulty: Hard
211. The accrual basis gives the most accurate net income because it requires all revenues to
be recorded when earned and all expenses to be recorded when incurred. This follows the
matching principle which states that expenses of the period should be matched with revenues
of the period. There is a net increase of $5,000 in net income. Revenues increase by $12,000
to recognize the rent earned. Expenses increase by $7,000; a $6,000 increase in Insurance
Expense and a $1,000 increase in Interest Expense. Calculate the profit margin for net income
before adjustments and net income after adjustments. Comment on the change in profit
margin.
Profit Margin = Net Income/Net Revenues

Profit Margin before adjustments: 48,400/97,400 = 49.7%
Profit Margin after adjustments: 53,400/109,400 = 48.8%
Profit margin decreases because the net change to income and revenue results in a lower profit
margin. The increase in net income divided by the increase in revenues is only 41.7%
(5,000/12,000) so overall profit margin is reduced.
AACSB: Analytic
Difficulty: Hard
3-97
212. What is the impact of the adjusting entries on the balance sheet? Show calculation for
total assets, total liabilities, and owner's equity without the adjustments; show calculation for
total assets, total liabilities, and owner's equity with the adjustments. Which one gives the
most accurate presentation of the balance sheet?
The accrual basis gives the most accurate balance sheet presentation. Prepaid insurance has
been reduced to show the portion related to future periods. Liabilities now show the correct
balance in Unearned Rent and Interest Payable. Equity increased because of the increase in
Net Income.
AACSB: Analytic
Difficulty: Hard
3-98

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Chapter 003 Adjusting Accounts and Preparing Financial Statements

Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)

True / False Questions

1. A company's fiscal year must correspond with the calendar year.

3. Interim statements report a company's business activities for a 1-year period.

5. Adjusting entries are made after the preparation of financial statements.

Expense = $9,000/6 = $1,500

Revenue = $15,000 x 10% = $1,500

26. Adjusting entries are designed primarily to correct accounting errors.

36. An adjusting entry often includes an entry to Cash.

41. Profit margin can also be called return on sales.

42. Profit margin measures the relation of debt to assets.

44. Profit margin is calculated by dividing net sales by net income.

$18,000 x 1/12 = $1,500

49. A salary owed to employees is an example of an accrued expense.

50. In accrual accounting, accrued revenues are recorded as liabilities.

51. Depreciation expense is an example of an accrued expense.

56. Depreciation measures the decline in market value of an asset.

67. It is acceptable to record prepayment of expenses as debits to expense accounts.

68. It is acceptable to record cash received in advance of providing products or services to

Multiple Choice Questions

71. Interim financial statements refer to financial reports:

75. Adjusting entries:

76. The main purpose of adjusting entries is to:

82. The accrual basis of accounting:

83. Which of the following statements is incorrect?

89. Profit margin is defined as:

91. The profit margin:

93. On June 30, 2009 Apricot should record:

95. Accrued revenues:

$1,350 x 9/36 = $337.50

$250 - $75 = $175

104. Unearned revenue is reported in the financial statements as:

105. Which of the following assets is not depreciated?

$18,000 x 8/36 = $4,000

2 employees x 2 days x $100/employee/day = $400

113. On January 1, Southwest College received $1,200,000 in Unearned Tuition Revenue

[$42,000 - $3,000/6] x 1/2 = $3,250

$600 + Supplies Purchased - $3,100 = $400

Year 2009 = $3,600/12 = $300 per month x 8 = $2,400

$4,800/4 = $1,200 x 2 = $2,400

$7,750 - $3,250 = $4,500

$15,480/36 = $430 x 9 = $3,870

$15,480/36 = $430 per month

$14,000 - $2,000 = $12,000/48 = $250 x 3 = $750

$1,200 + Supplies Purchased - $1,900 = $375

131. Which of the following statements is incorrect?

134. The adjusted trial balance contains information pertaining to:

135. Financial statements are typically prepared in the following order:

140. Match the following terms the appropriate definition.

1. Depreciation The accounting system that recognizes revenues when

141. Match the following terms with the appropriate definition.

1. Used to record revenue received in advance. c 4

Short Answer Questions

For information to be valuable to decision makers, it must be presented in a timely fashion. To

146. Explain the purpose of adjusting entries at the end of a period.

147. List the three-steps of the adjusting process.

(1) Compute the current account balance.

149. Explain how accounting adjustments affect financial statements.

155. What is an adjusted trial balance? Why is it prepared?

AACSB: Critical Thinking

AACSB: Critical Thinking

1.) Assets are overstated by $7,000.

1. Failed to accrue salaries expense of $1,200.