ADJUSTING ENTRIES:

Circle the letter of the best answer in each of the following items.
1. Adjusting entries are necessary because
a. They remove understatements from the financial statements.
b. Some revenue and expense activities are only partially complete at the end of the
accounting period
c. They remove overstatements from the financial statements.
d. Accrual accounting reflects the accomplishments of the business rather than merely cash
receipts and payments.
e. All of the above.
2. Why is it necessary to make adjustments?
a. The accountant has made errors in recording transactions.
b. Certain facts about the affairs of the business are not included in the accounts before the
adjustments are made.
c. The accountant wants to show the largest possible net income for the period.
d. The accountant wants to show the net cash flow for the period
e. None of the above is the case.
3. An adjusting entry:
a. Involves parties external to the entity. c. Is not recorded in any journal
b. Is an external transaction. d. Is an internal transaction
e. None of the above.
4. The broad classification of adjusting entries are:
a. Accruals and closing d. Closing and trials
b. Accrual and deferrals e. None of the above
c. Trials and deferrals
5. A prepaid expense is not an:
a. Asset c. Expired Cost e. None of the above
b. Unexpired Cost d. Economic Resource
6. The following account will have a normal debit balance:
a. Accumulated Depreciation d. Equipment
b. Depreciation Expense e. None of the above
c. Unearned Revenue
7. The following account will most likely require an accrual type of adjustment entry:
a. Prepaid Insurance d. Equipment
b. Unearned Revenue e. None of the Above
c. Office Supplies on Hand
8. Adjusting entries are entries:
a. that bring accounts up-to-date so as to reflect the correct account balances at a designated
time
b. prepare at the end of each accounting period to zero out nominal accounts and carry their
balances to capital
c. prepared at the beginning of each accounting period and that refer to certain adjustments.
d. Prepared at any time during the accounting period to correct errors.
e. Answer not given
9. The purpose of adjusting entries is to:
a. prepare revenue and expense accounts for recording the transaction of the next accounting
period.
b. Apply the realization principle and the matching principle to transactions affecting two or
more accounting periods.
c. Adjust daily the balances in asset, liability, revenue, and expense accounts for the effects of
business transactions.
d. Adjust the owner’s capital account for the revenue, expense and withdrawal transactions
which occurs during the year
10. The purpose of adjusting entries is to:
a. Correct errors made in the accounting records
b. Update the balance of the owner’s capital account for changes in owner’s equity temporarily
recorded in revenue and expense accounts.
c. Prepare the revenue and expense accounts for recording the transactions of the next
accounting period.
d. Allocate revenue and expenses among accounting periods when the related business
transactions affect more than one period.
B. PREPARING ADJUSTING ENTRIES AT YEAR-END
The MJ Pedernal Company presented the following information pertaining to accounts that will need
adjustments for its Nov. 30, 2009 year-end financial statements:
a. On Oct.1, 2009, MJ Pedernal Company paid P10,800 for 6-months’ insurance premiums.
b. The balance in the ledger account Office Supplies amounted to P32,000. A count of the office
supplies on Nov. 30, 2009 totaled P12,800.
c. MJ Pedernal Company received P22,800 on Nov. 1, 2009 from a customer for services to be rendered
during the months of November, December, January and February.
d. MJ Pedernal Acquired Office Equipment costing P352,800 on April 1, 2009. The equipment is
expected to last 5 years after which it will be worthless.
e. Nov. 30, 2009 is a Saturday and that MJ Pedernal pays its employees a total of P87,500 on Fridays.