Chapter 4 Income Measurement and Accrual Accounting-1

Chapter 4: Income Measurement and Accrual Accounting
True / False
1. Recognition is the process of formally recording or incorporating an item into the financial statements.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.04-01 - LO: 04-01
KEYWORDS: Bloom's: Remembering
2. When initially recording the cost of land purchased, most companies use the current value.
a. True
b. False
ANSWER: True
DIFFICULTY: Moderate
3. The process of recording an item in the financial statements is called measurement.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
4. The amount of cash that could be received by selling an asset currently is called historical cost.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
5. Under the accrual method, expenses are recognized when revenue is earned.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
6. When a company recognizes the portion of supplies used during a year, the effect is to decrease net income.
a. True
b. False
ANSWER: True
7. All financial statements are prepared using the accrual basis of accounting.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
8. Most companies use the cash basis of accounting.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
9. Revenue is always earned continuously over time.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
10. An asset is always involved when revenue is recognized.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
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11. The recognition of revenue may result from the settlement of a liability rather than from the acquisition of an asset.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
12. Expired costs are called assets.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
13. Three months before year-end, Billings Company signed a $100,000, 12%, 6-month note. Principal and interest will
be paid at maturity. No interest should be accrued at year-end because the company has no obligation to pay the interest
until the note matures.
a. True
b. False
ANSWER: False
KEYWORDS: Bloom's: Applying
14. Matching can occur directly (like cost of goods sold), indirectly (like plant assets), or immediately when no future
benefits from the cost are expected.
a. True
b. False
ANSWER: True
15. A cost can be an asset or expense depending on whether the future economic benefits have expired or not.
a. True
b. False
ANSWER: True
16. One effect of recognizing depreciation is to decrease net income.
a. True
b. False
ANSWER: True
17. A company that forgets to recognize depreciation for the year overstates its income and assets.
a. True
b. False
ANSWER: True
18. An entry that includes the Cash account is probably an adjustment.

a. True
b. False
ANSWER: False
19. Every company prepares only four adjustments—one for each of the four types of adjustments.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
20. When cash is paid before an expense is incurred, an accrual is necessary.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
21. The amount of interest accrued is added to the note payable account and reported in the liabilities section of the
balance sheet.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
22. Accumulated depreciation is increased when depreciation is recognized.

a. True
b. False
ANSWER: True
DIFFICULTY: Easy
23. Adjustments are recorded for all transactions involving outside entities.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
24. When revenue is earned before the receipt of cash, an adjustment that increases a receivable and decreases a liability
account is recorded.
a. True
b. False
ANSWER: False
25. Every adjustment involves at least one income statement and one balance sheet account.
a. True
b. False
ANSWER: True
26. When an expense is incurred prior to the payment of cash for that expense, an adjustment that increases an expense
account and decreases an asset is prepared.
a. True
b. False
ANSWER: False
27. The balance in the account, Rent Collected in Advance, is reported as an asset on the balance sheet of the landlord.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
28. While most companies make adjustments and prepare statements monthly, many companies complete the accounting
cycle only once per year.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
29. Accountants often prepare work sheets at the end of an accounting period in place of financial statements.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
30. Financial statements should be prepared before any adjustments are made.
a. True
b. False
ANSWER: False
31. Interim financial statements are prepared annually.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
32. Adjusting entries are recorded at the end of each accounting period so that net income is accurately reflected in the
financial statements for the period.
a. True
b. False
ANSWER: True
33. Income summary does not appear on the income statement.

a. True
b. False
ANSWER: True
DIFFICULTY: Easy
34. Balance sheet accounts are called real accounts.

a. True
b. False
ANSWER: True
DIFFICULTY: Easy
35. Expense accounts are debited in the closing process.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
36. Closing entries serve two important purposes: (1) to return the balances in all temporary or nominal accounts to zero
to start the next accounting period and (2) to transfer the net income (or net loss) and the dividends of the period to the
Retained Earnings account.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
37. There is one single format for a work sheet.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
38. According to the text, the income statement is in fact a subset of the balance sheet, because information from the
income statement columns flows into the balance sheet columns.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
39. The unit of measure in Japan is the U.S. dollar.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
40. The accounting profession is currently experimenting with financial statements adjusted for the changing value of the
dollar since inflation is increasing.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
41. Because of its objective nature, historical cost is the attribute used to measure many of the assets recognized on the
balance sheet.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
42. The income statement tells the reader about the actual cash inflows during a period of time.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
43. The statement of cash flows reflects the revenues actually earned by the business, regardless of whether cash has been
collected.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
44. The justification for the accrual basis of accounting lies in the needs of financial statement users for periodic
information on the financial position and the profitability of the entity.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
45. The revenue recognition principle involves two factors: paid and incurred.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
46. The revenue recognition principle does not pertain to long-term contracts, franchises, commodities, and installment
sales.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
47. Conceptually, anytime a cost is incurred, an asset is acquired.

a. True
b. False
ANSWER: True
48. Costs incurred for purchases of merchandise result in an asset, Merchandise Inventory, and are eventually matched
with revenue at the time the product is sold.
a. True
b. False
ANSWER: True
Multiple Choice
49. Measurement of the economic effects on an entity involves each of the following except
a. Quantification of effects
b. Identification of the attribute to be measured
c. Selection of an appropriate unit of measure
d. Recording the economic effects in the financial
statements
ANSWER: d
DIFFICULTY: Easy
KEYWORDS: Bloom's: Understanding
50. The selection of historical cost over current value as the attribute to be measured for assets is an example of the trade-
off of
a. Reliability over relevance
b. Costs over benefit
c. Comparability over consistency
d. Understandability over verifiability
ANSWER: a
51. An accountant describes the effects of an economic event on an entity by recording the transaction and reporting the
amount on the financial statements. What is this called?
a. Measurement
b. Recognition
c. Disclosure
d. Matching
ANSWER: b
DIFFICULTY: Easy
52. Which of the following is the attribute used to measure many assets that are recognized on a balance sheet, because it
is more objective and verifiable?
a. Market value
b. Historical cost
c. Liquidation value
d. Current replacement cost
ANSWER: b
DIFFICULTY: Easy
53. Why is the use of the U.S. dollar as a unit of measure for financial statement data in the U.S. widely accepted?
a. U.S. dollar remains stable over a long period of time.
b. U.S. dollar is universally recognized as a reliable financial measure.
c. U.S. dollar is the medium of monetary exchange in the U.S.
d. U.S. dollar is required for financial statement presentation by the FASB and
SEC.
ANSWER: c
54. Which one of the following statements is true?
a. Recognition is concerned with the dollar amount of each economic effect that should be reported in the
financial statements.
b. Measurement is concerned with how economic effects should be quantified.
c. The stability concept is concerned with identification of the specific entity for which economic effects are to
be recognized and measured.
d. The monetary unit assumption is concerned with the valuation of economic effects in terms of current
purchasing power.
ANSWER: b
55. Sally's Choice sells season memberships for $200 each. During January of 2016, 60 season memberships were sold.
As of March 31, 2016, only $3,000 of season membership fees had been collected from customers. The season runs for 4
months starting May 15, 2016. Which one of the following is an amount reported on the financial statements for the
period ending March 31, 2016?
a. Unearned membership revenue of $3,000
b. Unearned membership revenue of $9,000
c. Accounts receivable of $3,000
d. Membership revenue of $9,000
ANSWER: a
56. Dom's Motor Mart sold merchandise to a customer for $3,000 on credit on March 10. The customer paid Fox Auto the
amount due on March 31. Under the accrual basis of accounting, which of the following statements is true?
a. Fox Auto will recognize the revenue on March 31.
b. The March 10th transaction increases revenue, but has no effect on assets because cash has not been
received.
c. Revenue is recognized after the cost of the merchandise sold has been paid by Fox Auto.
d. The March 31st transaction has no effect on total assets under the accrual basis.
ANSWER: d
57. Alexander City Consultants started business on January 1, 2016, and immediately purchased $1,000 of supplies to use
in the business. At the end of the month, 25 percent of the supplies remains unpaid and 20% are still on hand. What
amounts should appear on the financial statements for January, 2016?
Income Statement Statement of Cash Flows
a.
($ 1,000) ($ 1,000)
b.
($ 1,000) ($ 750)
c.
($ 800) ($ 25)
d.
($ 800) ($ 750)
ANSWER: d
RATIONALE: $1,000 (Immediate Purchase) – $200 (or 20% of $1,000) = $800 $1,000 (Immediate
Purchase) – $250 (or 25% of $1,000) = $750
DIFFICULTY: Hard
KEYWORDS: Bloom's: Analyzing
58. During December, Horn Inc. purchased $800 of supplies for use in its business. At the end of December, 20% of the
supplies were still on hand, but only 75% had been paid. What amounts will appear on the company’s balance sheet on
December 31?
Supplies on Hand Accounts Payable

a.
$800 $600
b.
$160 $200
c.
$640 $200
d.
$160 $800
ANSWER: b
RATIONALE: $800 (December purchase) × 20% = $160 $800 (December purchase) × (100% – 75% or
25%) = $200
DIFFICULTY: Hard
59. Camp Consulting Services started business on January 1, 2016. Camp performed services for customers totaling
$100,000 of which 40% remain uncollected at the end of December. Under the accrual basis, what amounts would appear
on Camp Consulting's financial statements for 2016?

a.
$100,000 $ 60,000
b.
$100,000 $100,000
c.
$ 60,000 $ 60,000
d.
$ 60,000 $100,000
ANSWER: a
60. Hensley Painting Company painted four houses in June at $500 each. At the end of June, three homeowners had paid
Hensley cash for the jobs. Under the accrual basis, what amounts will be reported on the income statement and the
statement of cash flows for June?

a.
$2,000 $2,000
b.
$2,000 $1,500
c.
$1,500 $1,500
d.
$ 500 $ 500
ANSWER: b
61. Holten Farm sells new tractors and pays each salesperson a commission of $1,000 for each tractor sold. During the
month of August, a salesperson, Fred, sold 3 new tractors. Jacob pays Jason on the 10th day of the month following the
sale. Fred operates on the cash basis; the tractor dealer operates on the accrual basis. Which of the following statements is
true?
a. Fred will recognize commission revenue earned in the amount of $3,000 in August.
b. Jacob will recognize commission expense in the amount of $3,000 in August.
c. Fred will recognize commission expense in the amount of $3,000 in September.
d. Fred will recognize revenue in the same month that the tractor dealer recognizes
expense.
ANSWER: b
62. A pool cleaning service signs a contract with a new customer on May 1. The pool is vacuumed and “shocked” for the
customer on June 1, and the bill for the services is paid on July 1. Under the accrual basis, the business should recognize
revenue on:
a. December 31
b. July 1
c. June 1
d. May 1
ANSWER: c
DIFFICULTY: Easy
63. When are revenues and expenses recognized in the same accounting period that cash receipts and payments occur?
a. Under the cash basis of accounting
b. Under the accrual basis of accounting
c. Under the adjusting method of accounting
d. Under both the cash and accrual bases of accounting
ANSWER: a
DIFFICULTY: Easy
64. On January 1, 2016, ABC, Inc. purchased a copier for $9,000 cash and decided to depreciate it over 5 years. What
amounts associated with the copier will appear on ABC’s financial statements for the year ending December 31, 2016?
a.
($1,800) ($9,000)
b.
($1,800) $ 0
c.
($9,000) $ 0
d.
None of these choices.
ANSWER: a
65. Which of the following concepts is important to accrual accounting?

a. Time period, because accrual accounting divides earnings into time periods
b. Monetary unit, because inflation is a big factor in the environment
c. Cash basis, because if cash is not received, revenue is not accrued
d. Entity concept, because personal transactions must be separated from business
transactions
ANSWER: a
66. Which of the following statements does not present financial information based on the accrual basis of accounting?
a. Balance Sheet
b. Income Statement
c. Statement of Retained Earnings
d. Statement of Cash Flows
ANSWER: d
DIFFICULTY: Easy
67. Harvest Catering is a local catering service. Conceptually, when should Harvest recognize revenue from its catering
service?
a. At the date the customer places the order
b. At the date the meals are served
c. At the date the invoice is mailed to the customer
d. At the date the customer's payment is received
ANSWER: b
DIFFICULTY: Easy
68. When is revenue from the sale of merchandise normally recognized?

a. On the date the sale is made.
b. When the customer pays for the merchandise.
c. Either on the date on which the sale occurs, or the date on which the customer pays
d. When the merchandise is sold, if sold for cash, or when payment is received, if sold on
credit
ANSWER: a
DIFFICULTY: Easy
69. Sun Corp. sells merchandise to customers. Sun should normally recognize
a. Cash revenue only and the related expenses in the same accounting period as earned whether payment is
received or not
b. Revenue when the cash is collected and the expenses when Mendes pays its creditor for the merchandise
c. Revenue and expenses after all payments are collected
d. Cash and credit revenue and the related expenses in the same accounting period as earned whether payment is
received or not
ANSWER: d
FACC.PONO.13.04-04 - LO: 04-04
70. As a general rule, revenue is recognized at the point of sale. Which one of the following situations illustrates this rule?
a. Products are sold to customers on credit with payment due in 30
days.
b. Employees are paid wages the week after the wages are earned.
c. Products are purchased for resale purposes.
d. Interest is collected from amounts loaned to employees.
ANSWER: a
71. What does the phrase, "Revenue is recognized at the point of sale" mean?
a. Revenue is recorded in the accounting records when the goods are received from a supplier, and reported on
the income statement when sold to the customer.
b. Revenue is recorded in the accounting records and reported on the income statement when the cash is received
from the customer.
c. Revenue is recorded in the accounting records when the goods are sold to a customer, and reported on the
income statement when the cash payment is received from the customer.
d. Revenue is recorded in the accounting records and reported on the income statement when goods are sold and
delivered to a customer.
ANSWER: d
72. On October 31, Michael Corporation signed a one-year contract to provide services to Love Company for $80,000.
Love will pay for the services on November 1. Using the accrual basis of accounting, when should Michael Corporation
recognize revenue?
a. November 1 of the current year when the cash is received from
Harris
b. On October 31 of the next year when all services have been provided
c. Throughout the year as the revenue is earned
d. At December 31 of the current year, and October 31 of the next year
ANSWER: c
73. Expenses originate from

a. using an asset or recognizing liabilities.
b. incurring liabilities or providing services to
customers.
c. collecting cash from customers.
d. paying off liabilities.
ANSWER: a
74. Which one of the following is not a recognized method of recognizing assets as expenses in a particular accounting
period?
a. Customers’ account balances in accounts receivable are assigned to expense in the period in which each
customer pays.
b. Prepaid insurance is assigned to expense as the insurance expires.
c. A building is depreciated and its cost is assigned to the current and future accounting periods in which the
building is expected to be used.
d. Merchandise inventory is assigned to cost of goods sold in the period the goods are sold.
ANSWER: a
75. Expenses can be matched against revenue

a. if the earnings process is not complete.
b. when cash is collected from the sale of products.
c. through allocation to the accounting periods in which the benefits are
recognized.
d. when payment is made for costs related to revenue.
ANSWER: c
76. Remaz Corp. purchased equipment at a cost of $220,000 in January, 2015. As of January 1, 2016, depreciation of
$160,000 had been recorded on this asset. Depreciation expense for 2014 is $50,000. After the adjustments are recorded
and posted at December 31, 2016, what are the balances for the Equipment and Accumulated Depreciation?
Equipment Accumulated Depreciation

a.
$220,000 $210,000
b.
$220,000 $ 0
c.
$160,000 $ 50,000
d.
$120,000 $210,000
ANSWER: a
RATIONALE: $160,000 (Accumulated Depreciation at Jan. 1, 2016) + $40,000 (Depreciation Expense for
2016) = $210,000 (Accumulated Depreciation at Dec. 31, 2016)
FACC.PONO.13.04-05 - LO: 04-05
77. Grove Corp. purchased equipment at a cost of $260,000 in January, 2012. As of January 1, 2016, depreciation of
$88,000 had been recorded on this asset. Depreciation expense for 2016 is $22,000. After the adjustments are recorded
and posted at December 31, 2016. What are the balances for the Depreciation Expense and Accumulated Depreciation?
Depreciation Expense Accumulated Depreciation

a.
$ 22,000 $110,000
b.
$ 22,000 $ 88,000
c.
$110,000 $110,000
d.
$110,000 $ 88,000
ANSWER: a
RATIONALE: $88,000 (Accumulated Depreciation at Jan. 1, 2016) + $22,000 (Depreciation Expense for
2016) = $110,000 (Accumulated Depreciation at Dec. 31, 2016)
FACC.PONO.13.04-05 - LO: 04-05
78. Which of the following statements is true concerning assets?

a. Assets represent future economic sacrifices.
b. Assets are expired costs.
c. Assets become expenses at the time they are paid in cash.
d. Assets become expenses when their economic benefits
expire.
ANSWER: d
DIFFICULTY: Easy
79. Which one of the following is an example of a deferred revenue?

a. Sales are made to customers on credit.
b. Interest has been earned by a bank deposit, but it has not been recorded.
c. Cash is received prior to providing the services to customers.
d. Cash sales are made to customers.
ANSWER: c
DIFFICULTY: Easy
80. What effect does “recognizing an accrued liability for utilities at the end of the accounting period” have on the
accounting equation?
a. Assets decrease and stockholders’ equity decreases.
b. Liabilities increase and stockholders’ equity increases.
c. Assets decrease and liabilities decrease.
d. Liabilities increase and stockholders’ equity decreases.
ANSWER: d
81. What effect does “recognizing revenue at the end of the accounting period for rent previously received in advance”
have on the accounting equation for an insurance company?
a. Stockholders’ equity increases and liabilities increase.
b. Assets increase and stockholders’ equity increases.
d. Liabilities decrease and stockholders’ equity increases.
ANSWER: d
82. Lincoln Corp. received advance payments from customers during 2016 of $10,000. At December 31, 2016, $1,000 of
the advance payments still had not been earned. After the adjustments are recorded and posted at December 31, 2016, the
balances in the Unearned Service Revenue and Service Revenue accounts will be
Unearned Service Revenue Service Revenue

a.
$ 1,000 $ 9,000
b.
$ 1,000 $10,000
c.
$11,000 $ 1,000
d.
$ 9,000 $10,000
ANSWER: a
83. Stockton Co. received advance payments from customers during 2017 of $6,000. At December 31, 2016, $1,300 of the
advance payments still had not been earned. After the adjustments are recorded and posted at December 31, 2016, what
will the balances be in the Unearned Book Revenue and Book Revenue accounts?
Unearned Book Revenue Book Revenue

a.
$1,300 $6,000
b.
$1,300 $4,700
c.
$6,000 $1,300
d.
None of these choices
ANSWER: b
84. Cuisine Company received a 6-month, 6% note for $10,000 from its president on October 1, 2016. The note is due on
March 31, 2017. If Cuisine’s accounting period ends on December 31, how much interest revenue should Cuisine
recognize during 2016 and 2017?
2016 2017
a.
$450 $150
b.
$600 $ 0
c.
$300 $300
d.
$150 $150
ANSWER: d
RATIONALE: $10,000 (Principal) × 6% (Interest) × 3/12 (Time) = $150 (This calculation is good for both
years.)
85. Vivo Co. received an 8-month, 9% note for $100,000 from its agent on October 1, 2016. The note is due on May 30,
2017. If Vivo accounting period ends on December 31, 2016, how much interest revenue should Vivo recognize during
2016 and 2017?
2016 2017
a.
$3,750 $2,250
b.
$2,250 $3,750
c.
$9,000 $ 0
d.
$3,375 $5,625
ANSWER: b
RATIONALE: $100,000 (Principal) × 9% (Interest) × (3/12) = $2,250 (Interest for 2016) $100,000
(Principal) × 9% (Interest) × (5/12) = $3,750 (Interest for 2017)
86. Which one of the following is an example of an accrued liability?

a. Wages have been earned by employees, but have not been paid at the end of the
period.
b. Equipment that will benefit several periods has been purchased.
c. An insurance policy that expires in a future period has been acquired.
d. Supplies are purchased and used over several months.
ANSWER: a
DIFFICULTY: Easy
87. Adjustments are necessary only if

a. the cash basis of accounting is used for all accounting periods.
b. cash receipts and payments occur before or after the point in time when revenues and expenses should be
recognized under the accrual basis of accounting.
c. management reports its adjustments on the statement of cash flows.
d. the company reports revenue in the same period cash is collected.
ANSWER: b
88. What happens to the accounting equation when the adjustment for depreciation expense for the accounting period is
recorded?
a. Assets decrease and stockholders’ equity decreases.
d. Liabilities increase and stockholders’ equity decreases.
ANSWER: a
DIFFICULTY: Easy
89. What happens to the accounting equation when the adjustment that recognizes accrued interest revenue is recorded?
a. Assets increase and liabilities increase.
d. Stockholders’ equity increases and decreases by the same amount.
ANSWER: b
DIFFICULTY: Easy
90. Charlie Company had $1,800 of supplies on hand at January 1. During the year, supplies with a cost of $4,000 were
purchased. At December 31, the actual supplies on hand amount to $1,300. After the adjustments are recorded and posted
at December 31, determine the balances in the Supplies and Supplies Expense accounts.
Supplies Supplies Expense

a.
$1,800 $4,000
b.
$1,300 $4,500
c.
$5,300 $5,800
d.
$1,300 $5,800
ANSWER: b
RATIONALE: $1,800 (Supplies at Jan. 1) + $4,000 (Amount purchased) – $1,300 (Supplies at Dec. 31) =
$4,500 (Supplies Expense)
91. Lucky Company purchased a truck at a cost of $12,000 in 2011. As of January 1, 2016, depreciation of $10,000 had
been recorded on this asset. Depreciation expense for 2016 is $2,000. After the adjustments are recorded and posted at
December 31, 2016, what is the carrying value of the truck?
a. $2,000
b. $5,500
c. $12,000
d. $0
ANSWER: d
92. Starlight Associates, Inc. recorded salary expense of $100,000 in 2016. However, additional salaries of $5,000 had
been earned, but not paid or recorded at December 31, 2016. After the adjustments are recorded and posted at December
31, 2016, the balances in the Salaries Expense and Salaries Payable accounts will be:
Salaries Expense Salaries Payable

a.
$105,000 $5,000
b.
$100,000 $ 0
c.
$100,000 $5,000
d.
$105,000 $ 0
ANSWER: a
RATIONALE: $5,000 (Adjustment at Dec. 31) + $100,000 (Expenses for the year) = $105,000
93. On December 1, 2016, Vonn Corporation paid $8,000 rent in advance. The rent per month is $1,000. If Hazel’s
accounting period ends on December 31, 2016, what will be reported on the financial statements?
a. Prepaid Rent of $7,000 on its balance sheet at December 31, 2016
b. Prepaid Rent of $8,000 on its balance sheet at December 31, 2016
c. Rent Expense of $8,000 on its 2016 income statement
d. Rent Revenue of $7,000 on its 2016 income statement
ANSWER: a
94. Frank Corporation purchased supplies at a cost of $15,000 during 2016. At January 1, 2016, supplies on hand were
$2,000. At December 31, 2016, supplies on hand are $2,500. Calculate supplies expense for 2016.
a. $ 15,500
b. $ 14,500
c. $ 15,000
d. $ 17,000
ANSWER: b
RATIONALE: $2,000 (Amount on hand at Jan. 1) + $15,000 (Purchases) – $2,500 (Amount on hand at Dec.
31) = $14,500
95. Place Corp. purchased supplies at a cost of $12,000 during the year. At January 1, supplies on hand were $2,000. At
December 31, supplies on hand are $1,000. Determine the amount of supplies expense for the year.
a. $ 10,000
b. $ 12,000
c. $ 13,000
d. $ 14,000
ANSWER: c
RATIONALE: $2,000 (Amount on hand at Jan. 1) + $12,000 (Purchases) – $1,000 (Amount on hand at Dec.
31) = $13,000
96. Windstar Corp. purchased supplies at a cost of $6,000 during the year. At December 31, supplies on hand are $1,400.
Supplies expense for the year was $5,200. How much were supplies on hand at January 1?
a. $ 2,200
b. $ 11,200
c. $ 1,400
d. $ 600
ANSWER: d
RATIONALE: X + $6,000 (Purchases) – $5,200 (Expenses) = $1,400 (Amount at Dec. 31)
X = $600
97. Gear Shop purchased supplies at a cost of $1,000 during the year. At January 1, the beginning balance in the supplies
account was $300. At December 31, supplies on hand are $100. Determine supplies expense for the year.
a. $ 1,300
b. $ 1,200
c. $ 1,100
d. $ 1,400
ANSWER: b
RATIONALE: $300 (Beginning Balance) + $1,000 (Purchases) – $100 (Ending Balance) = $1,200
98. Vake purchased supplies at a cost of $18,000 during 2016. At January 1, 2016, the beginning balance in the supplies
account was $1,000. For 2016, supplies expense was $16,000. How much "Supplies" are on hand as of December 31,
2016?
a. $ 1,000
b. $ 3,000
c. $16,000
d. $17,000
ANSWER: b
RATIONALE: $1,000 (Beginning Balance) + $18,000 (Purchases) – $16,000 (Expensed) =
$3,000
DIFFICULTY: Easy
99. Which one of the following adjustments will increase assets?

a. Interest incurred on money borrowed during the period but not yet paid to the bank is
accrued.
b. Rent revenue is recorded for amounts owed by a tenant but not yet paid.
c. The use of supplies is recorded.
d. Depreciation for the period is recorded.
ANSWER: b
100. A company forgot to record four adjustments during 2016. Which one of the following omissions of adjustments will
understate net income?
a. Sales made during the last week of the period are not recorded.
b. Interest on monies borrowed has not yet been recorded.
c. Prepaid insurance is not reduced for the portion of the policy that has expired during the
period.
d. Income taxes owed but not yet paid are ignored.
ANSWER: a
101. A company forgot to record four adjustments during 2016. Which one of the following omissions of adjustments will
overstate assets?
a. Sales made during the last week of the period are not recorded.
b. Interest on monies borrowed has not yet been recorded.
c. Prepaid insurance is not reduced for the portion of the policy that has expired during the
period.
d. Income taxes owed but not yet paid are ignored.
ANSWER: c
102. CBA Corp. has grown significantly over the past year. One area that has plagued the Controller of CBA is the
reconciliation of supplies expense. The end-of-year supplies on hand totaled $20, and purchases totaled $500, and supplies
on hand at the beginning of the year amounted to $300. How much will CBA report as supplies expense for the current
year?
a. $ 20
b. $ 780
c. $ 300
d. $ 500
ANSWER: b
RATIONALE: $200 (Beginning Balance) + $500 (Purchases) – $20 (Ending Balance) = $680
103. Longitude Company borrowed on a two-year, 10%, $150,000 note on May 1, with interest and principal to be paid at
maturity. How much interest will Longitude report on its income statement for the year ending December 31?
a. $ 10,000
b. $ 15,000
c. $ 30,000
d. $ 5,000
ANSWER: a
RATIONALE: $150,000 (Principal) × 10% (Rate) × 8/12 (Time) = $10,000
104. Innovate Company borrowed on a one-year, 10%, $150,000 note on May 1, 2015 with interest and principal to be
paid at maturity. How much interest should Innovate Company report on its income statement for the year ending
December 31, 2016?
a. $ 10,000
b. $ 15,000
c. $ 30,000
d. $ 5,000
ANSWER: d
105. Masters Company borrowed on a one-year, 10%, $150,000 note on May 1, with interest and principal to be paid at
maturity. How much interest payable will be reported on Masters’ balance sheet as of November 30 of the same year?
a. $ 7,500
b. $ 8,750
c. $ 15,000
d. $ 30,000
ANSWER: b
106. Emory Co. operates five days per week with a daily payroll of $4,000. Employees are paid every Saturday for the
workweek just completed (Monday through Friday). The last day of the month is Wednesday, March 31. What is the
effect of the correct adjustment at March 31?
a. Increases stockholders’ equity and Wages Payable by $8,000
b. Increases Wages Payable and decreases Cash by $12,000
c. Decreases stockholders’ equity and increases Wages Payable by $12,000
d. Increases Wages Payable and increases Wages Expense by $8,000
ANSWER: c
107. Based on its income for the month, Reel Company estimates that federal income taxes for the month of May will be
$11,000. What is the effect of the adjustment on the financial statements?
a. Increase retained earnings
b. Increase income taxes expense
c. Increase net income
d. Decrease income taxes payable
ANSWER: b
DIFFICULTY: Easy
108. Which one of the following adjustments increases net income for the period?
a. Recognition of the amount of supplies used
b. Recognition of interest on a note receivable
c. Recognition of wages earned, but not paid to employees
d. Recognition of rent costs that had been paid to the landlord in
advance
ANSWER: b
109. Jogg Corp. plant operates five days per week with a daily payroll of $50,000. Employees are paid every Tuesday for
the prior week's work (Monday through Friday). The last day of the month is Tuesday, April 30. What effect does the
accrual at April 30 have on Pub’s net income?
a. Increase by $250,000
b. Decrease by
$150,000
c. Decrease by
$100,000
d. Increase by $150,000
ANSWER: c
RATIONALE: $50,000 (Daily Payroll) × 2 (Days) = $100,000
110. Roman Industries' plant operates five days per week with a daily payroll of $6,000. Employees are paid every
Saturday for the workweek just completed (Monday through Friday). The last day of the month is Wednesday, March 31.
What is the amount of Wages Expense recorded on the next payday, Saturday, April 3?
a. $ -0-
b. $ 30,000
c. $ 12,000
d. $ 18,000
ANSWER: c
RATIONALE: $6,000 (Daily Payroll) × 2 (Days) = $12,000
111. Carrington & Co. rented office space to a tenant on January 31 and received a total of $9,000 for the first three
months of rent. The amount was recorded as Rent Collected in Advance when received. Adjustments are recorded only at
the end of every quarter. What effect does the adjustment at March 31 have on Carrington’s net income for the quarter
ending March 31?
a. Increase by $9,000
b. Decrease by $6,000
c. Decrease by $3,000
d. Increase by $6,000
ANSWER: d
RATIONALE: $9,000 (Amount Received) × 2/3 (February/March rent) = $6,000
112. The asset account, Supplies, has a balance of $700 on January 1. During January, the company purchased $16,000 of
supplies on account and the liability was appropriately recorded. A count of supplies at the end of January indicates a
balance of $900. Which one of the following is a correct amount to be reported on the company's financial statements for
the month ending January 31?
a. Supplies Expense—$15,800
b. Supplies on Hand—$700
c. Accounts Payable—$15,800
d. Supplies Expense—$16,700
ANSWER: a
RATIONALE: $700 (Beginning Balance) + $16,000 (Purchases) – $900 (Ending Balance) = $15,800
113. Which of the following adjusting entries involves the cash account?
a. Deferred Revenue
b. Accrued Asset
c. Deferred Liability
d. None of the Above
ANSWER: d
114. Which one of the following adjustments decreases net income for the period?
a. Recognition of depreciation on plant assets
b. Recognition of interest on a note receivable
c. Recognition of services that had been provided to customers but the cash has not yet been
received
d. Recognition of rent as earned that had been received in advance from customers
ANSWER: a
115. What is the effect on the accounting equation when a company recognizes rent as earned that had previously been
received in advance from customers?
a. Expenses increase
b. Revenues decrease
c. Liabilities increase
d. Net income increases
ANSWER: d
116. Failure to record accrued interest expense would result in which of the following?
a. Assets being overstated
b. Assets being understated
c. Liabilities being overstated
d. Liabilities being
understated
ANSWER: d
117. Failure to record the earned portion of unearned revenue would result in which of the following?
a. Net income being understated
b. No effect on total liabilities
c. Stockholders’ equity being overstated
d. Total assets being understated
ANSWER: a
118. Failure to record dividends paid would result in which of the following?
b. An increase in total liabilities
ANSWER: c
119. Failure to record the supplies used during the year would result in which of the following?
b. An overstatement of liabilities
ANSWER: c
120. Failure to record amounts earned for services provided to customers but not yet paid results in which of the
following
a. Net income being overstated
b. No effect on total assets
ANSWER: d
121. Failure to record depreciation expense for the period results in which of the following?
a. Net income being overstated
b. No effect on total assets
d. Both a and c above
ANSWER: d
122. Davis 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 which of the following adjusting entries?
a. Credit Wage Expense for $360 and debit Wages Payable for $360
b. Debit Wage Expense for $1,080 and credit Wages Payable for
$1,080
c. Credit Wage Expense for $1,080 and debit Wages Payable for
$1,080
d. Debit Wage Expense for $360 and credit Wages Payable for $360
ANSWER: b
123. Which of the following situations does not require an adjusting entry at the end of May?
a. At the end of May, Bolton Industries pays the custodian for May office cleaning services.
b. On May 1, Bolton Industries paid rent for six months on its office building.
c. On May 1, Bolton Industries began delivery service to a client who will pay at the end of a three-month
period.
d. On May 1, Bolton Industries purchased delivery equipment with an estimated useful life of six years.
ANSWER: a
124. Mitchell Company prepares monthly financial statements and will record.a prepaid account for each of the following
except:
a. Mitchell paid for three months of window washing services in
advance.
b. Mitchell purchases a four-year casualty insurance policy.
c. A tenant that pays Mitchell for six months of rent in advance.
d. Mitchell purchases office supplies to last for several months.
ANSWER: c
125. An adjusting entry could not consist of:

a. A debit to a liability and a credit to revenue.
b. A debit to an expense and a credit to a
liability.
c. A debit to an expense and a credit to an asset.
d. A debit to an expense and a credit to revenue.
ANSWER: d
Jenning Co.
Jenning Co. adjusts its books each month but closes its books at the end of the year. The trial balance at July 31 before
adjustments is as follows:
Debit Credit
Cash $12,920
Accounts Receivable 9,620
Supplies 1,400
Prepaid Insurance 3,120
Equipment 26,000
Accumulated Depreciation—Equipment $10,400
Unearned Service Revenue 6,500
Capital Stock 7,190
Retained Earnings 23,500
Dividends 1,560
Service Revenue 16,510
Wages and Salaries Expense 7,800
Utilities Expense 380
Rent Expense 1,300
$64,100 $64,100
126. Refer to the trial balance for Jenning Co.
On July 31, the amount of supplies on hand is $520. What amount is reported in the July income statement for supplies
expense?
a. $520
b. $1,400
c. $1,920
d. $880
ANSWER: d
RATIONALE: $1,400 – $520 = $880
Employees are owed $750 for services since the last payday in July, to be paid the first week in August. The amount to be
reported in the July income statement for salaries expense is:
a. $750
b. $8,550
c. $7,050
d. $7,800
ANSWER: b
RATIONALE: $7,800 + $750 = $8,550
128. Refer to the trial balance of Jenning Co. (Round calculations to the nearest dollar.)
If the equipment had an estimated useful life of five years and no salvage value, what is its book value at July 31, after the
proper monthly July adjustment is recorded?
a. $10,400
b. $25,567
c. $15,167
d. $10,833
ANSWER: c
RATIONALE: $26,000 / 60 months = $433 depreciation per month; Accumulated deprec. after adjustment =
$10,400 + $433 = 10,833; Book value = $26,000 – 10,833 = $15,167
129. Refer to the trial balance of Jenning Co.
On July 1, Tracy paid four months in advance for insurance. Which of the following is included in the adjusting entry at
July 31?
a. A debit to Prepaid Insurance for $780
b. A credit to Prepaid Insurance for
$2,340
c. A debit to Prepaid Insurance for $2,340
d. A credit to Prepaid Insurance for $780
ANSWER: d
According to contracts, $4,810 of Unearned Service Revenue has been earned in July. Which of the following is the
correct amount of Service Revenue to be reported in the July income statement?
a. $20,410
b. $11,700
c. $21,320
d. $16,510
ANSWER: c
131. Autumn Resorts purchased guest room furniture on January 1, 2015 for $120,000. The furniture has an estimated
useful life of ten years. What amount will appear on Autumn’s income statement for depreciation expense for the year
ending June 30, 2016?
a. $1,000
b. $6,000
c. $10,000
d. $12,000
ANSWER: d
RATIONALE: $120,000/10 = $12,000 per year
132. Deacon Company purchased equipment last year for $30,000. The equipment has an estimated useful life of five
years. What amount will appear on the income statement for depreciation expense for the month of March 2016?
a. $0
b. $500
c. $6,000
d. $30,000
ANSWER: b
RATIONALE: $30,000/5 × 1/12 = $500
133. Hsu Company purchased a truck on May 31, 2013 for $70,000. The equipment has an estimated useful life of five
years. What amount will appear on Hsu Company's balance sheet for total accumulated depreciation at May 31, 2016?
a. $14,000
b. $35,000
c. $42,000
d. $28,000
ANSWER: c
RATIONALE: $70,000/5 × 3 = $42,000
134. Accumulated Depreciation

a. increases when the monthly adjustment for depreciation is recognized.
b. decreases when the monthly adjustment for depreciation is recognized.
c. is reported on the income statement with the expense accounts.
d. is allocated as an expense during future periods.
ANSWER: a
DIFFICULTY: Easy
135. Accumulated Depreciation

a. increases assets.
b. decreases assets.
c. increases liabilities.
d. decreases
liabilities.
ANSWER: b
DIFFICULTY: Easy
136. Which of the following transactions involves an accrued asset?

a. Wages earned by employees but not yet paid
b. Rent collected in advance from a tenant
c. Rent owed by a tenant but not yet collected
d. One year’s premium on life insurance policy paid in advance
ANSWER: c
137. Which one of the following is the last step in the accounting cycle?
a. Journalizing business transactions
b. Recording and posting
adjustments
c. Closing the accounts
d. Preparing financial statements
ANSWER: c
DIFFICULTY: Easy
138. Which one of the following steps in the accounting cycle is optional rather than required?
a. Business transactions are recorded
b. Adjustments are recorded
c. The accounts are closed
d. Work sheets are prepared
ANSWER: d
DIFFICULTY: Easy
139. Which one of the following steps in the accounting cycle is completed only at the end of an accounting period?
a. Business transactions are recorded.
b. Adjustments are recorded.
c. Transactions are journalized.
d. Journal entries are posted to the ledger.
ANSWER: b
140. Some of the steps in the accounting cycle are listed below. Select the choice that places these steps in the correct
order.
1. Close the accounts.

2. Post transactions to accounts in the ledger.
3. Journalize daily transactions.
4. Record and post adjustments.
5. Prepare financial statements.
a. 2, 3, 4, 5, 1
b. 3, 2, 4, 5, 1
c. 3, 2, 4, 1, 5
d. 3, 2, 5, 4, 1
ANSWER: b
DIFFICULTY: Easy
141. Balance sheet accounts are also known as which of the following?
a. Nominal accounts
b. Real accounts
c. Temporary accounts
d. Closing accounts
ANSWER: b
DIFFICULTY: Easy
142. Income statement accounts are also known as which of the following?
a. Nominal accounts
b. Real accounts
c. Closing accounts
d. Both a and c
ANSWER: a
DIFFICULTY: Easy
143. The Dividend account is known as which of the following?
a. Nominal
account
b. Closing account
c. Real account
d. both b and c
ANSWER: a
DIFFICULTY: Easy
144. Which of the following accounts is not closed to Income Summary at the end of the accounting period?
a. Rent Expense
b. Service Revenue
c. Unearned Revenue
d. Supplies Expense
ANSWER: c
DIFFICULTY: Easy
145. Which of the following journal entries is required to close the Income Summary account of a company with a net
loss?
a. Debit Income Summary, credit Capital Stock.
b. Debit Income Summary, credit Retained earnings.
c. Credit Income Summary, debit Retained earnings.
d. Credit Income Summary, debit Dividends.
ANSWER: c
146. When using a work sheet:

a. an equal number of account titles are applicable to the Income Statement columns and the Balance Sheet
columns.
b. adjusting entries are not made since they appear on the work sheet.
c. net income appears in both the Income Statement debit column and the Balance Sheet credit column.
d. the Income Statement column and Balance Sheet column of the work sheet eliminate the need to prepare
formal financial statements.
ANSWER: c
FACC.PONO.13.04-08 - LO: 04-08
147.
Oregon Company
Adjusted Trial Balance
For the Year ended December 31, 2016
Cash $ 6,030
Prepaid Expenses 700
Equipment 13,700
Accumulated Depreciation $ 1,100
Accounts Payable 1,900
Notes Payable 4,200
Capital Stock 12,940
Dividends 790
Fees Earned 8,750
Wages Expense 2,500
Rent Expense 1,960
Depreciation Expense 250
Miscellaneous Expense 85 ______
Totals $28,890 $28,890
Determine the net income (loss) for the period.

a. Net Loss $5,570
b. Net Income $3,180
c. Net Loss $790
d. Net Income $2,390
ANSWER: b
FACC.PONO.13.04-07 - LO: 04-07
FACC.PONO.13.04-08 - LO: 04-08
148. After all of the account balances have been extended to the Balance Sheet columns of the work sheet, the totals of the
debit and credit columns are $37,875 and $32,735, respectively. What is the amount of net income or net loss for the
period?
a. $5,140 net income
b. $37,875 net loss
c. $5,140 net loss
d. $32,735 net income
ANSWER: a
FACC.PONO.13.04-07 - LO: 04-07
FACC.PONO.13.04-08 - LO: 04-08
149. All of the following statements are true regarding the use of a work sheet at the end of an accounting period except:
a. all companies use a ten-column work sheet.
b. the net income of the period is extended from the income statement debit column to the balance sheet credit
column.
c. the beginning balance in the Retained Earnings account is entered initially on the work sheet on the unadjusted
trial balance.
d. cash is always carried over from the unadjusted trial balance columns of the work sheet to the balance sheet
columns without any adjustment.
ANSWER: a
150. Which account is always carried over from the unadjusted trial balance columns of a work sheet to the balance sheet
columns of the work sheet without any adjustment?
a. Accumulated depreciation
b. Depreciation expense
c. Cash
d. All of these are adjusted.
ANSWER: c
DIFFICULTY: Easy
151. The amount in the Subscriptions Sold in Advance account should be carried over from the adjusted trial balance of
the 10-column work sheet to which of the following columns?
a. Income statement as a debit
b. Income statement as a
credit
c. Balance sheet as a debit
d. Balance sheet as a credit
ANSWER: d
DIFFICULTY: Easy
152. The amount in the Dividends account should be carried over from the adjusted trial balance of the 10-column work
sheet to which of the following columns?
a. Income statement as a debit
b. Income statement as a
credit
c. Balance sheet as a debit
d. Balance sheet as a credit
ANSWER: c
DIFFICULTY: Easy
153. A decline in purchasing power is evidenced by all of the following except:
a. inflation.
b. a continuing rise in the general level of prices in an economy.
c. buying the same amount of goods or services for a higher price a year later.
d. current value is equal to historical cost.
ANSWER: d
154. All of the following describe a revenue except:

a. A revenue can result in the inflow of assets.
b. A revenue can result in the settlement of liabilities from the delivery or distribution of goods.
c. A revenue can result in the settlement of liabilities from rendering services.
d. A revenue must involve an inflow of assets.
ANSWER: d
155. Which of the following statements is true concerning the matching principle?
a. All costs can be directly matched with revenue.
b. All costs can be indirectly matched with periods in which they provide a benefit.
c. The association of assets for a period with the liabilities necessary to generate the assets is known as the
matching principle.
d. Cost of goods sold matched with sales revenue is a classic example of direct matching under the matching
principle.
ANSWER: d
DIFFICULTY: Easy
Completion
156. Measurement in accounting requires choosing an attribute and a unit of measure. _________________________ is
the attribute used for many of the assets included in the financial statements.
ANSWER: Historical cost
157. ____________________ is a rise in the general level of prices in the economy and results in a decrease in purchasing
power.
ANSWER: Inflation
For each of the following sentences 145-152, select the word or group of words that best completes the statement.
Matching Cash basis Measurement
Deferred revenue Adjustments Deferred expense
Accrual basis Recognition Accrued asset
158. The success of accounting as a form of communication depends on two concepts, ____________________ and
____________________.
ANSWER: recognition, measurement
measurement, recognition
FACC.PONO.13.04-02 - LO: 04-02
FACC.PONO.13.04-04 - LO: 04-04
FACC.PONO.13.04-05 - LO: 04-05
159. The _________________________ of accounting necessitates a number of adjustments at the end of an accounting
period.
ANSWER: accrual basis
FACC.PONO.13.04-02 - LO: 04-02
FACC.PONO.13.04-04 - LO: 04-04
FACC.PONO.13.04-05 - LO: 04-05
160. The ____________________ of accounting is a system in which revenues are recognized when payments are
received and expenses are recognized when payments are made.
ANSWER: cash basis
FACC.PONO.13.04-02 - LO: 04-02
FACC.PONO.13.04-04 - LO: 04-04
FACC.PONO.13.04-05 - LO: 04-05
161. ____________________ is the association of the costs incurred with the associated revenue of a period.
ANSWER: Matching
FACC.PONO.13.04-02 - LO: 04-02
FACC.PONO.13.04-04 - LO: 04-04
FACC.PONO.13.04-05 - LO: 04-05
162. A(n) ____________________ creates an increase in income for the period.

ANSWER: accrued asset
FACC.PONO.13.04-02 - LO: 04-02
FACC.PONO.13.04-04 - LO: 04-04
FACC.PONO.13.04-05 - LO: 04-05
163. A(n) _________________________ results when cash is paid before the related amount is reported on the income
statement.
ANSWER: deferred expense
FACC.PONO.13.04-02 - LO: 04-02
FACC.PONO.13.04-04 - LO: 04-04
FACC.PONO.13.04-05 - LO: 04-05
164. A(n) _________________________ results when cash is received before the related amount is reported on the
income statement.
ANSWER: deferred revenue
FACC.PONO.13.04-02 - LO: 04-02
FACC.PONO.13.04-04 - LO: 04-04
FACC.PONO.13.04-05 - LO: 04-05
165. The basis of accounting that fails to take into consideration amounts earned that are not collected and expenses
incurred but are not paid is the _________________________.
ANSWER: cash basis
166. The difference between accrual-based revenue and accrual-based expenses is called _________________________.
ANSWER: net income
DIFFICULTY: Easy
167. Under the ____________________ basis of accounting, revenues are recognized when earned and expenses when
incurred.
ANSWER: accrual
DIFFICULTY: Easy
168. According to the revenue recognition principle, revenues are recognized when they are
_________________________.
ANSWER: realized and earned
169. Under the accrual basis of accounting, at what point in time should a fast food restaurant recognize revenue?
_________________________
ANSWER: At the point the food is sold
170. Under the accrual basis of accounting, at what point in time should a publisher of magazines record revenue?
______________________________
ANSWER: As revenue is earned throughout the time period by delivery of magazines
171. The ____________________ principle attempts to associate with the revenue of the period, all costs necessary to
generate that revenue.
ANSWER: matching
DIFFICULTY: Easy
172. ____________________ is the allocation of the cost of a tangible, long-term asset over its useful life.
ANSWER: Depreciation
DIFFICULTY: Easy
173. The names of the four major types of adjusting entries are _________________________,
_________________________, _________________________, and _________________________.
ANSWER: accrued liability, accrued assets, deferred revenue, deferred
expense
174. The one asset account that never requires adjustment at the end of the period is ____________________.
ANSWER: Cash
175. ____________________ is the name given to revenue, expense, and dividend accounts because they are closed at the
end of the period.
ANSWER: Nominal
Temporary
DIFFICULTY: Easy
176. ____________________ is the name given to balance sheet accounts because they are permanent in nature.
ANSWER: Real
DIFFICULTY: Easy
177. Statements prepared monthly, quarterly, or at other intervals less than a year in duration are called
_____________________.
ANSWER: interim statements.
DIFFICULTY: Easy
178. Temporary accounts are also known as _________________ accounts.

ANSWER: nominal
DIFFICULTY: Easy
Matching
Select the correct revenue recognition principle for each of the following.
a. Recognize revenue over the passage of time.
b. Recognize revenue when the customer takes possession of the
product.
c. Recognize revenue when cash is collected.
d. Recognize revenue when service is performed.
179. Interest
ANSWER: a
180. Rent
ANSWER: a
181. Subscription to a magazine

ANSWER: a
182. Merchandise
ANSWER: b
183. Carpet cleaning

ANSWER: d
Match the most probable matching method to the costs listed below.
a. Directly match a specific revenue.
b. Indirectly match with the period during which it will provide revenue.
c. Immediately recognize because no future benefits are expected.
DIFFICULTY: Easy
184. Warehouse used for storing inventory goods

ANSWER: b
185. Commissions earned by sales people

ANSWER: a
186. Cost of two-year insurance policy

ANSWER: b
187. Taxes owed on income earned during the current period
ANSWER: c
Match the following choices to the listed situation.
a. a deferred expense
b. a deferred revenue
c. an accrued liability
d. an accrued asset
188. One year's premium on truck insurance was paid in advance

ANSWER: a
189. Cash was collected from customers for rental of tents for next year
ANSWER: b
190. A warehouse building was acquired for cash

ANSWER: a
191. Income taxes are owed to the federal government at year end
ANSWER: c
192. Rent is owed by a tenant but not yet collected

ANSWER: d
For each transaction select the letter of the type of adjustment that would be required
a. Deferred expense
b. Deferred revenue
c. Accrued liability
d. Accrued asset
193. Depreciation on a delivery truck is recorded

ANSWER: a
194. Revenue is earned during the current period, although customers had paid in a previous period
ANSWER: b
195. Interest earned on notes receivable, but not yet received is recorded
ANSWER: d
196. The cost of supplies used during the current year is determined and recorded
ANSWER: a
197. The cost of salaries earned by employees, but not paid at the end of the accounting period is recorded
ANSWER: c
For each transaction select the letter of the type of adjustment that would be required.
a. Deferred expense
b. Deferred revenue
c. Accrued liability
d. Accrued asset
198. Amounts earned, not received from customers are recorded

ANSWER: d
199. Magazine subscriptions are delivered during the current period, although customers had paid in a previous period
ANSWER: b
200. Interest is incurred on money borrowed from the bank, but not yet paid
ANSWER: c
201. The depreciation on office equipment used during the current year is recorded
ANSWER: a
202. The cost of commissions to salesmen that has been earned, but not paid at the end of the accounting period is
recorded
ANSWER: c
From the list of accounts below, determine whether the account would be a nominal account or a real account.
a. nominal account
b. real account
DIFFICULTY: Easy
203. Cash
ANSWER: b
204. Sales Revenue

ANSWER: a
205. Office Equipment

ANSWER: b
206. Depreciation Expense

ANSWER: a
207. Prepaid Rent

ANSWER: b
208. Unearned Revenue

ANSWER: b
209. Utilities Expense

ANSWER: a
210. Interest Payable

ANSWER: b
Subjective Short Answer
211. On January 1, 2016, Blankenship Solutions began business. The company offers scalable cloud computing to small
businesses for a monthly fee of $0.25 per gigabyte, $0.05 per hour for public IP addresses, and $0.01 per hour for Internet
services. During January, 150 companies signed up for the service, and each will have until the fifth of the following
month to pay the monthly fee. By the end of January, 120 companies had paid the monthly fee for an average company
usage of 100 gigabytes. In addition, IP addresses were accessed for an average of 680 hours per company and Internet
services averaged 600 hours per company during January. Assume that Blankenship Solutions uses the accrual basis of
accounting.
Required:
1. Prepare the Revenues section of Blankenship Solutions’ income statement for the month of January.
2. Prepare the Cash Receipts section of Blankenship Solutions’ statement of cash flows for the month of January.
3. In addition to the Cash account, what other account will appear on Blankenship Solutions’ balance sheet at the end of
January? What amount will be in this account?
ANSWER:
1. The income statement for Blankenship Solutions would show the following:
Blankenship Solutions
Income Statement
For the Month Ended January 31, 2016
Revenues
Scalable monthly fees (150 × 100 GB × $0.25) $3,750
IP Address hourly fees (680 × $0.05 × 150) 5,100
Internet services hourly fees (600 × $0.01 × 150) 900
Total revenue $9,750
2. A partial statement of cash flows for Blankenship Solutions would show the following:
Cash received from:

Scalable monthly fees (120 × 100 GB × $0.25) $3,000
3. On Blankenship Solutions’ balance sheet at the end of January, two accounts will
appear:
Cash $3,000 (120 × 100 GB × $.025)

Accounts Receivable 6,750 (Remainder monthly $750 + $6,000 hourly fees)
212. A hospital corporation contracted with a private company to collect fees and maintain health facilities that adjoin
their property. Users of the health facility can pay cash of $10 for a daily visit or they can purchase a pass. The pass has a
magnetic strip that is swiped through the entrance device each time an individual enters the facility. This subtracts daily
fee from the pass balance for each day used. The passes are issued for a fee of $365, which are good for 365 days.
Refunds are not issued on the pass. Last year $18,650 was collected for daily visits, $438,000 of annual passes were
issued, and $206,225 of pass usage was registered on the scanning equipment. How much should the company recognize
as revenue for the year? Explain how the revenue recognition rule should be applied in this case.
ANSWER: Cash collected for daily visits $ 18,650
Passes usage redeemed 206, 225
Revenue recognized $ 224,875
Only the amount of passes that have been used should be recognized as revenue. The
difference between the $438,000 of passes issued and the $206,225 of passes used is
unearned revenue at this point. That means that $231,775 will appear on the balance sheet as
a current liability until earned, unless there is some type of time limit on the 365 day passes.
213. On July 1, 2016, Crouch Corporation takes out a 12%, two-month, $50,000 loan at Cocoa National Bank. Principal
and interest are to be repaid on August 31.
Required:
1. Prepare the journal entries for July 1 to record the borrowing, for July 31 to record the accrual of interest, and for
August 31 to record repayment of the principal and interest.
2. Evaluate the following statement: It would be much easier not to bother with an adjusting entry on July 31 and simply
record interest expense on August 31 when the loan is repaid.
ANSWER: 1.
July 1 Cash 50,000
Notes Payable 50,000
To record two-month, 12% bank loan
Balance Sheet Income Statement
Stockholder Net
s’ Revenu Expens Incom
Assets = Liabilities + Equity es – es = e
Cash Notes
Payable
50,000 50,000
July 31 Interest Expense 500

Interest Payable 500
To accrue one-month interest on bank
loan: $50,000 × 12% × 1/12.
Stockholder Net
Asset s’ Revenu Incom
s = Liabilities + Equity es – Expenses = e
Interest Interest
Payable Expense
500 (500) 500 (500)
Aug. 31 Interest Payable 500

Notes Payable 50,000
Interest Expense 500
Cash 51,000
To record repayment of principal and interest on bank
loan.
Stockholde Net
rs’ Revenu Inco
Assets = Liabilities + Equity es – Expenses = me
Cash Interest
Payable
(51,00 (500) Interest
0) Notes Expense
Payable (500) 500 (500)
(50,000)
2. It would save the time and cost in making a journal entry to skip an adjusting entry on
July 31 and simply record interest when the loan is repaid on August 31. However, to do so
214. Carpenter Transport Company purchased a truck at a cost of $60,000 on January 1, 2012. The truck has an estimated
useful life of 9 years and a $15,000 residual value.
A. How much depreciation expense should be reported for the year 2016?
B. What is the total amount of accumulated depreciation at December 31, 2016?
C. Show how the truck and the related accumulated depreciation would appear on
Carpenter’s December 31, 2016, balance sheet immediately after the adjustments are
recorded and posted.
D. Is the amount on the balance sheet what the truck could probably be sold for on
December 31, 2016? What principle governs?
E. How much depreciation expense should be reported for the year 2017?
ANSWER: A. ($60,000 – $15,000)/9 years = $5,000
B. 5 years × $5,000 = $25,000
C. Long-term Assets:
Truck $60,000
Less Accumulated depreciation (25,000)
$35,000
D. Probably not. This is due to the cost principle. The balance sheet does not present
the assets at their current market price. Assets such as operational assets are
recorded at historical cost and then adjusted for accumulated depreciation.
E. $5,000
215. Carter, Inc. paid salaries expense of $292,000 during 2016. However, additional salaries of $14,000 had been earned
by employees, but not paid or recorded at December 31, 2016 by Carter.
A) What is the effect on the accounting equation of the adjusting entry necessary at December
31, 2016?
B) Under which basis, cash, accrual, or both, would the adjustment in part A be prepared?
Explain.
C) Under the accrual basis of accounting, what is the total amount of salaries expense for the
year ended December 31, 2016?
D) Under the accrual basis of accounting, what is the total amount of salaries payable to be
reported at December 31, 2016?
E) Under the cash basis of accounting, what is the total amount of salaries expense for the year
ending December 31, 2016?
F) Under the cash basis of accounting, what is the total amount of salaries payable at December
31, 2016?
ANSWER: A)
Stockholders’ Net
Assets = Liabilities + Equity Revenues – Expenses = Income
Salaries Salaries
Payable Expense
14,000 (14,000) 14,000 (14,000)
B) Only the accrual basis requires adjustments. Adjustments are necessary

under the accrual basis because income represents amounts earned
during the period, not just collected in cash. Accrual basis also includes
expenses that have been incurred regardless of whether payment has
been made. Net income under the accrual basis represents the net effect
of amounts earned less amounts incurred.
C) $292,000 + $14,000 = $306,000

D) $14,000
E) $292,000
F) $0
FACC.PONO.13.04-05 - LO: 04-05
216. Becca Corp. purchased supplies at a cost of $5,200 during 2015. At January 1, 2016, supplies on hand were $1,600.
During the year, the company used $4,000 of supplies. Becca’s accounting year ends on December 31.
A) What is the effect on the accounting equation of the adjusting entry that is prepared at
December 31, 2016?
B) Under the accrual basis of accounting, how much is Supplies Expense for 2016?
C) How much should be reported on the December 31, 2016, balance sheet for Supplies?
D) What type of adjustment was made in part A?
ANSWER: A)
Stockholders’
Assets = Liabilities + Equity Revenues – Expenses = Net Income
Supplies
Supplies Expense
(4,000) (4,000) 4,000 (4,000)
B) $4,000
C) $1,600 + $5,200 – $4,000 = $2,800
D) Deferred expense
FACC.PONO.13.04-05 - LO: 04-05
217. Dino’s Pizza employs 10 workers in its plant. Each employee is paid $8 per hour and works 8 hours per day, Monday
through Friday. Employees are paid every Wednesday for the previous Monday through Friday workweek. The last
payday was Wednesday, May 28.
A) Compute the dollar amount of the weekly payroll.
B) What is the effect on the accounting equation of the adjusting entry required on Friday, May
30, the last day of Dino’s Pizza fiscal period?
C) What special precautions are necessary upon recording the payment of wages to employees
on the next payday, June 4?
ANSWER: A) 8 hours × $8.00 per hour × 5 days × 10 workers = $3,200
B)
Stockholders’
Wages Wages
Payable Expense
3,200 (3,200) 3,200 (3,200)
(8 hours × $8.00 per hour × 5 days × 10 workers)
If an adjusting entry is made on May 30, a liability, Wages Payable, is

C) created, which is reported on the balance sheet account that does not get
closed, so the $3,200 will remain in this account on June 1. When the entry is
made to record the payment of the wages on June 4, the liability must be
reduced.
218. Barker Corp. began operations on November 30, 2016, and immediately paid $48,000 for 6 months rent in advance
for rental of a parking lot for the period beginning December 1, 2016. Barker’s accounting period ends on December 31,
2016. Indicate how much will be reported for each of the following accounts on Barker’s financial statements for the
period ending December 31, 2016. If the amount reported is zero, indicate so by writing $0, and explain why zero is the
appropriate amount.
A) Rent Expense
B) Rent Payable
C) Rent revenue
D) Prepaid Rent
ANSWER: A) $8,000 ($48,000 Prepaid Rent/6 Months)
B) $ -0- Rent was paid in advance which means that no amount is owed at the end of the
year
C) $ -0- Rent is an expense, or a cost to the company. It does not create revenue since no
amounts are earned for rent.
D) $40,000 ($48,000 – $8,000 = $40,000)
219. Ramos Corporation employs 14 workers in its retail service center. Each employee is paid $10 per hour and works 6
hours per day, Monday through Friday. Employees are paid every Friday for the workweek just ending. The last payday
was Friday, December 26, on which day the employees were paid through that date.
A) Compute the dollar amount of the weekly payroll.
B) Determine the effect on the accounting equation of the adjusting entry needed on
Wednesday, December 31, the last day of Ramos Corporation’s fiscal period.
ANSWER: A) 6 hours × $10 per hour × 14 workers × 5 days = $4,200
B)
Stockholders’
Wages Wage
Payable Expense
2,520 (2,520) 2,520 (2,520)
6 hours × $10 per hour × 14 workers × 3 days = $2,520
220. Calzone, Inc. signs a 9% 4-month $50,000 loan with Reliable Bank on October 1, 2016. Determine the effects on the
accounting equation for the following items:
A. The signing of the loan on October 1, 2016 by Calzone, Inc.

B. The recording of the interest on December 31, 2016 by Calzone, Inc.
ANSWER: A)
Stockholders’
Notes
Cash Payable
50,000 50,000
B)
Stockholders’
Interest Interest
Payable Expense
1,125 (1,125) 1,125 (1,125)
($50,000 × .09 × 3/12)
FACC.PONO.13.04-05 - LO: 04-05
221. Lowen Homes, Inc. pays its sales personnel 6% commission of the selling price of each home. During November of
2016, sales people sold $18,400,000 of homes. During December, 2016, sales people sold $20,050,000 of homes. Because
its policy is to pay commissions only in the month after the sales, Lowen paid commissions during December for
November, 2016. During January of 2017, Stitt paid its sales people commissions for December, 2016.
A) If the cash basis of accounting is used, how much is reported commission expense on Lowen
Homes' income statement for December of 2016?
B) If the accrual basis of accounting is used, how much is reported as commission expense on
Lowen Homes' December income statement for 2016?
ANSWER: A) $18,400,000 × 6% = $1,104,000 November commissions paid
B) $20,050,000 × 6% = $1,203,000 December commissions accrued
FACC.PONO.13.04-05 - LO: 04-05
222. Martinez Produce sells fresh vegetables and fruits in Sutton County. The following unadjusted amounts were taken
from the company's accounting records at December 31, 2016:
Note Payable, 12%, 4-month, dated December 1, 2016, for $20,000

Note Receivable, 10%, 6-month, dated October 1, 2016, for $12,000
A) Determine the effects on the accounting equation of any adjusting entries that would be
necessary at December 31, 2016, for the notes.

Stockholders’
B) Fill in the partial balance sheet below by showing the notes and the effects of any
adjustments related to the notes.
Current Assets Current Liabilities
ANSWER: A)
Stockholder Net
Liabiliti s’ Revenu Expens Incom
Assets = es + Equity es – es = e
Interest
Interest Payable* Interest Interest
Receivabl * Revenue Expense
e* 300 200 100 300 200 100
* ($12,000 × .10 × 3/12)
** ($20,000 ×.12×1/12)
B)
Current Assets Current Liabilities
Note receivable $12,000Note payable $20,000
Interest receivable 300Interest payable 200
223. The following unadjusted amounts were taken from Ruben Gifts' accounting records at December 31, 2016:
Rent Collected in Advance $ 1,000
Office Supplies 740
A) Determine the effects on the accounting equation of any adjusting entries necessary for
Ruben Gifts at December 31, 2016, for both of the following transactions:
1) During December of 2016, Ruben Gifts had received payments from tenants that
were renting storage space in its warehouse. The payments received by Ruben
Gifts were for the period December, 2016, and January, 2017.
2) At the end of the year, Ruben Gifts determined that $240 of office supplies
remained on hand.

Stockholders
’
B) What is the effect of omitting these adjustments on the current year's net income?
ANSWER: A)
(1)
Stockholders’
Rent
collected in Rent
advance revenue
(500) 500 500 500
(2)
Stockholders’ Net
Office
Office Supplies
Supplies Expense
(500) (500) 500 (500)
B)
Revenue would be understated by $500 because of the omission of the first
transaction. Expenses would be understated in the amount of $500 if the
second transaction was omitted. The overstatement and understatement in the
same amount would result in a zero net effect.
224. The following unadjusted amount was reported on Rental Entertainment Corporation's accounting records at
December 31, 2016:
Unearned Subscription Revenue $ 36,000
A) Determine the effect on the accounting equation of any adjusting entries necessary at
December 31, 2016, for each of the following transactions:
1) During the year, Rental Entertainment sold 12-month subscriptions for its newly
developed Internet service. Half of the subscriptions began October 1, 2016, while
the other half began December 1, 2016.
2) Rental estimates its income taxes to be 30 percent of its estimated income of
$60,000

Stockholders’
B) Prepare the current liabilities section of Rental’s balance sheet by listing any current
liabilities and the related amounts as a result of the adjustments in Part A
ANSWER: A)
(1)
Stockholders’ Net
Unearned
Subscription Subscription
Revenue Revenue
(6,000) 6,000 6,000 6,000
$18,000 ×3/12 = $4,500) + ($18,000 × 1/12 = $1,500)
(2)
Stockholders’
Income Income
Taxes Taxes
Payable Expense
18,000 (18,000) 18,000 (18,000)
($60,000 × .30)
B)
Current Liabilities
Unearned subscription revenue $30,000
($36,000 – $6,000)
Income taxes payable 18,000
225. Motor Repair Shop uses the accrual basis of accounting, and had the following account balances on its financial
statements at December 31, 2016:
Rent Revenue $ 34,000
Utilities Payable 1,500
Rent Expense 2,100
Unearned Repair Revenue 700
Depreciation Expense 1,000
Salaries Expense 32,000
Salaries Payable 800
Retained Earnings, January 1 10,000
Dividends 500
Interest Revenue 4,000
On January 1, the Utilities Payable Account had a zero balance. Motor Repair paid cash for utilities totaling $45,000
during 2016. How much should Motor Repair report as utilities expense as of December 31, 2016?
ANSWER: $46,500
$45,000 (Cash paid) + $1,500 (Utilities payable) = $46,500
226. Motor Repair Shop uses the accrual basis of accounting, and had the following account balances on its financial
statements at December 31, 2016:
Rent Revenue $ 34,000
Utilities Payable 1,500
Rent Expense 2,100
Unearned Repair Revenue 700
Salaries Expense 32,000
Salaries Payable 800
Retained Earnings, January 1 10,000
Dividends 500
Interest Revenue 4,000
On January 1, there was a $0 balance in the salaries payable account. How much cash did Motor Repair pay for salaries
during the year?
ANSWER: $31,200
$32,000 (Salaries expense) – $800 (Salaries payable) = $31,200
Scenic View Foods Corporation
The following is the consolidated statements of income for Scenic View Foods Corporation for the years ending
December 31, 2016 and 2017
Years Ended December 31,
(in millions of dollars) 2017 2016

Revenues
Sales by company-operated restaurants $ 8,894.9 $ 8,136.5
Revenue from franchised restaurants 3,526.5 3,272.3
Total revenues 12,421.4 11,408.8
Operating costs and expenses
Company-operated restaurants
Food and packaging 2,997.4 2,772.6
Payroll and other employee benefits 2,220.3 2,025.1
Occupancy and other operating expenses 2,043.9 1,851.9
7,261.6 6,649.6
Franchised restaurants-occupancy expenses 678.0 613.9
General, administrative and selling expenses 1,458.5 1,450.5
Made for You and special charges 321.6
Other operating (income) expense (60.2) (113.5)
Total operating costs and expenses 9,659.5 8,600.5
Operating income 2,761.9 2,808.3
Interest expense 413.8 364.4
Nonoperating income (expense) 40.7 36.6
Income before provision for income taxes 2,307.9 2,407.3
Provision for income taxes 757.3 764.8
Net income $ 1,550.1 $ 1,642.5
227. Refer to the consolidated statements of income for Scenic View Foods Corporation.
REQUIRED: Identify three specific accounts of Scenic View Foods that might include expenses accrued as a result of
adjustments. Discuss the 'effects' of these on the accounting equation. Ignore amounts.
ANSWER: The accounts are: Wages expense, interest expense, and income taxes expense, as well as
their corresponding payables, Wages Payable, Interest Payable, and Income Tax Payable.
Other accounts that may be used are food, packaging, payroll, other benefits, etc. The effects
are:
Wages Expense – decrease stockholders’ equity and Wages Payable – increase liabilities;
Income Taxes Expense – decrease stockholders’ equity and Income Taxes Payable – increase
liabilities;
Interest Expense – decrease stockholders’ equity and Interest Payable – increase liabilities
Required:
(1) Notice that Scenic View Foods reported “Provision for income taxes.” What type of account is this? What adjustment
would have been made if this accrual were necessary at December 31, 2017?
(2) Scenic View Foods reported $3.1 million and $2.8 million of accrued interest in the liability section of its balance
sheet at December 31, 2017 and 2016, respectively. How much cash did it pay during 2016 for interest?
(3) Is Scenic View Foods income statement an "interim statement"? Explain.

ANSWER: (1) This account represents income taxes expense. The adjustment necessary would cause an
increase in taxes payable and a decrease in stockholders’ equity (by using tax expense).
(2) $413.5 [Calculation: $413.8 (Interest Expense for 2016) + $2.8 (Interest Payable, Jan. 1)
– $3.1 (Interest Payable, Dec. 31) = $413.5]
(3) No. Interim statements are for periods less than one year, such as monthly or quarterly.
This income statement includes a full reporting year for both 2016 and 2017.
FACC.PONO.13.04-06 - LO: 04-06
Required: Identify three specific accounts of Scenic View Foods that might include expenses accrued as a result of
adjusting journal entries. Show what these entries would look like in journal format. Ignore amounts.
ANSWER: The accounts are: Wages expense, interest expense, and income taxes expense. Other
accounts that may be used are food, packaging, payroll, other benefits, etc. The entries are:
Wages Expense xx
Wages Payable xx
Income Taxes Expense xx
Income Taxes Payable xx
Interest Expense xx
Interest Payable xx
230. Given below are the accounts from Surf Corporation's ledger accounts after adjustments have been posted at
December 31, 2016.
Sales Revenue $60,000 Accounts Receivable $ 8,200
Accounts Payable 1,500 Rent Expense 2,100
Cash 25,600 Prepaid Rent 1,500
Salaries Expense 2,900 Salaries Payable 800
Retained Earnings, Jan. 1 22,100 Dividends 5,000
Depreciation Expense 1,000 Supplies 900
Supplies Expense 2,200 Cost of Goods Sold 40,000
Notes Payable 3,000 Common Stock 2,000
A) Identify which adjustments that Surf Corporation most likely made that are:
1) Accrued assets
2) Accrued liabilities
B) Which accounts listed above would not be used in a cash basis system?
ANSWER:
A) 1) Accrued assets: Accounts Receivable
2) Accrued liabilities: Salaries Payable, Accounts Payable
B)
Accounts Payable, Accounts Receivable, Prepaid Rent, Salaries Payable, and perhaps
Depreciation Expense are accounts that would not be used in a true cash-basis system.
FACC.PONO.13.04-05 - LO: 04-05
231. At the end of 2016, the unadjusted accounting records for Coney Corporation contain the following selected accounts
and balances.
Interest Revenue $ 3,600 Wage and Salary Expense $15,600
Insurance Expense 6,500 Interest Expense 2,400
Depreciation Expense 12,000 Advertising Fees Earned 54,300
Utilities Expense 12,400 Income Tax Expense 5,800
Accounts Receivable 12,300 Dividends 3,000
A) Coney has not paid its employees for the final 3 days in 2016. The amount owed is $700.
How much wage and salary expense should Bacon report for its year ending December 31,
2016?
B) What adjustments would you expect Coney to make at year end that would result in
additional revenue as a result of the accounts listed?
ANSWER: A) $16,300
$15,600 + $700 = $16,300
B) Advertising fees earned, accounts receivable and interest revenue could all result in
additional revenues.
DIFFICULTY: Easy
232. Tiva Solutions’ accounting records reflect the following account balances at December 31, 2016:
Building $560,000 Accumulated Deprec.--Bldg $112,000
Cash 90,000 Capital Stock 343,000
Supplies 5,000 Retained Earnings 200,000
During 2016, the following transactions occurred:

1) On March 1, purchased a one-year insurance policy for $1,200 cash.
2) On April 1, borrowed $10,000 cash from Rock City Bank. The interest rate on the note payable is 6%.
Principal and interest is due in cash in one year.
3) Employee salaries in the amount of $20,000 were paid in cash.
4) At the end of the year, $400 of the supplies remained on hand.
5) Earned $45,000 in tax consulting revenue during 2016 in cash.
6) At December 31, $5,000 in employee salaries were accrued.
7) On December 31, received $2,000 in cash representing advance payment for services to be provided in
February of 2017.
8) The building has a useful life of 25 years and no salvage value.
Required:
A) Determine the effect on the accounting equation of the preceding transactions including
any related year-end adjusting entries that may be required. Create a table to reflect the
increases and decreases in accounts.

Stockholders’
B) Prepare an income statement for Tiva Solutions for 2016. Ignore income tax effects.
C) Prepare a classified balance sheet for Tiva Solutions at December 31, 2016.
ANSWER: A)
Notes Int. Sal. Unearned Capital Retained
Trans. Cash Supplies PP Ins Bldg A/D Bldg Rev. Exp.
Pay. Pay Pay Revenue Stock Earnings
Beg 90,000 5,000 0 560,000 -112,000 0 0 343,000 200,000
1 -1,200 1,200
2 10,000 10,000
3 -20,000 -20,000
4 -4,600 -4,600
5 45,000 45,000
6 5,000 -5,000
7 2,000 2,000
8 -22,400 -22,400
adj 1 -1,000 -1,000
adj 2 450 -450
125,800 400 200 560,000 -134,400 10,000 450 5,000 2,000 343,000 200,000 45,000 -53,450
B)
Tiva Solutions
Income Statement
For the Year Ending December 31, 2016
Sales revenue $ 45,000
Expenses
Salary expense $ 25,000
Supplies expense 4,600
Depreciation expense 22,400
Insurance expense 1,000
Interest expense 450 53,450
Net loss ($ 8,450)
C)
Tiva Solutions
Balance Sheet
December 31, 2016
LIABILITIES & STOCKHOLDERS’
ASSETS
EQUITY
Cash $ 125,800 Note payable $ 10,000
Supplies 400 Interest payable 450
Prepaid insurance 200 Salaries payable 5,000
$ 126,400 Unearned revenue 2,000
Noncurrent assets Total liabilities $ 17,450
Building $ 560,000 Capital stock $ 343,000
Less: Accumulated
( 134,400) Retained earnings 191,550
depreciation
Total noncurrent assets $ 425,600 Total equity $ 534,550
Total liab &
Total assets $ 552,000 $ 552,000
stockholders’ equity
233. Frannie's Dance Studio accounting records reflect the following account balances at January 1, 2016.
Cash $100,000 Supplies $ 4,000
Capital Stock 50,000 Retained Earnings 54,000
During 2016, the following transactions occurred:

1) On February 1, rented a small studio for a one year period of time. Paid $6,000 cash.
2) On November 1, received $1,200 cash for dance lessons to be provided evenly over
November, December, and January.
3) By December 31, used $3,000 of the supplies
4) At December 31, accrued $3,000 in wages and salaries.
5) During the year, paid cash for $20,000 in wages and salaries
6) During the year, earned $40,000 cash in dance lesson revenue.
Required:
A) Determine the effect on the accounting equation of the preceding transactions.
Create a table to reflect the increases and decreases in accounts.
Stockholders’
B) Prepare an income statement for Frannie's Dance Studio for 2016. Ignore income tax
effects.
C) Prepare a classified balance sheet for Frannie's Dance Studio at December 31, 2016.
ANSWER: A)
PP Sal Unearned Cap. Retained
Trans Cash Supplies Revenue Expense
Rent Pay Rev Stock Earnings
Beg 100,000 4,000 50,000 54,000
1 -6,000 6,000
2 1,200 1,200
3 -3,000 -3,000
4 3,000 -3,000
5 -20,000 -20,000
6 40,000 40,000
adj 1 -5,500 -5,500
adj 2 -800 800
115,200 1,000 500 3,000 400 50,000 54,000 40,800 -31,500
B)
Frannie's Dance Studio
Income Statement
For the Year ending December 31, 2016
Dancing lesson revenue $ 40,800
Expenses
Salary expense $ 23,000
Supplies expense 3,000
Rent expense 5,500 31,500
Net Income $ 9,300
C)
Frannie's Dance Studio
Balance Sheet
December 31, 2016
ASSETS LIABILITIES & OWNERS’ EQUITY
Cash $115,200 Salaries payable $ 3,000
Supplies 1,000 Unearned revenue 400
Prepaid insurance 500 Total liabilities $ 3,400
Capital stock $ 50,000
Retained earnings 63,300
______ Total owners’ equity $113,300
Total liab. & owner’s
Total assets $116,700 $116,700
equity
234. The Diva Design Group was organized on July 1, 2016 when the two principal owners each contributed $50,000 and
received shares of stock in exchange. Their year-end is December 31. The following events occurred during Diva Design
Group’s first year of operations.
1. On July 1, acquired a building by paying $50,000 in cash and borrowing $250,000 from
the Flores Bank.
Information regarding the building: The building has a useful life of 30 years and no
salvage value. Diva Design uses straight line depreciation.
Information regarding the note payable: The note payable will be due in full in five years.
Interest is payable annually. The interest rate on the note is 5%.
2. On July 1, paid cash in the amount of $1,200 for a one-year property insurance policy.
3. On August 1, purchased two computers for $4,000 cash each. The computers have a
useful life of 5 years and a $100 salvage value. The computers will be depreciated using
the straight line method.
4. On October 1, receives $120,000 in cash for services to be provided evenly during the
next six months.
Required:
I.(A) Determine the effect of each of the transactions on the accounting equation.
I.(B) Determine the effect on the accounting equation of the necessary adjustments at
December 31 for each of the following:
1) Depreciation on the building
2) Interest on the promissory note
3) Recognition of the expired portion of the insurance
4) Depreciation on the computers
5) Cash received in advance of services provided

Stockholders’
II. For each of the adjusting entries, indicate which of the following type of entry was
recorded:
a. Accrued liability
b. Accrued asset
c. Deferred expense
d. Deferred revenue
III. Prepare an income statement at December 31, 2016. Diva Design has a tax rate of 30%.
ANSWER: I. (A) 1.
Stockholders’
Cash
(50,000) Notes
Building Payable
300,000 250,000
Assets increase and liabilities increase
I. (A) 2.
Stockholders’ Net
Cash
(1,200)
Prepaid
Insurance
1,200
No net change in assets
I. (A) 3.
Stockholders
’ Net
Cash (8,000)
Computers,8,000
No net change in assets
I. (A) 4.
Stockholders’
Unearned
Cash Revenue
120,000 120,000
Assets increase and liabilities increase
I. (B) 1)
Stockholders’
Accum. Deprec.
Deprec. Expense (5,000)
(5,000) (5,000) 5,000
($300,000/30) ´ 6/12
Decrease assets, increase expenses
© 2017 Cengage Learning®. May not

I. be
(B)scanned,
2) copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Stockholders
’
235. Malco Tile Shop purchased insurance coverage for two years on July 1, 2016, for its retail shop for $3,600. Malco
recorded the prepayment as an asset. Malco prepares its adjusting entries at year end December 31.
A. What is the effect on the accounting equation of the adjusting journal entry necessary
at December 31, 2016?
Stockholders’
B) How much will be reported on the balance sheet at December 31, 2016 for prepaid
insurance?
C) How much will be reported on the income statement for the year ended
December 31, 2016, for insurance expense?
D) If the adjustment in part A is not recorded, by what amount will net income be
over or understated at December 31, 2016?
E) How much will be reported on the statement of cash flows for the year
ended December 31, 2016? In which activity? (operating, investing, financing)
F) What adjusting journal entry is necessary at December 31, 2016?
G) How much will be reported on the balance sheet at December 31, 2016 for prepaid
insurance?
ANSWER: A.
H) How much will be reported on the income statement for the year ended
December 31, 2016, for insurance expense?
Stockholders’
Assets = Liabilities + Equity
I) How much will be reported on the statement of cash flows for Revenues – Expenses = Net Income
the year ended
December 31, 2016? In which activity? (operating, investing, financing)
B) Prepaid Insurance = $2,700
C) Insurance Expense = $900

D) Overstated by $900
Insurance paid $3,600 in the operating activities
E)
section
F) Insurance Expense 1,800
Prepaid Insurance 1,800
G) Prepaid Insurance = $900

H) Insurance Expense = $1,800
I) Cash Flows = $0
236. Fennel Flooring purchased office supplies for its showroom during the month of April for $2,600. The supplies were
paid for during April. On April 1, the Supplies account had a balance of $350. On April 30, supplies on hand amounted to
$200.
A) What is the effect on the accounting equation of the adjusting journal entry necessary
at April 30th?

Assets = Liabilities + Stockholders Revenues – Expenses = Net Income
’
ANSWER: A.
Stockholders’
Supplies
Supplies Expense (2,750)
(2,750) (2,750) 2,750
($350 + $2,600 – $200 = $2,750)
B) Supplies = $200
C) Supplies Expense = $2,750
D) Overstated by $2,750
Equity
B) How much will be reported on the balance sheet at April 30 for Supplies?
C) How much will be reported on the income statement for the month of April for
supplies expense?
D) If the adjustment in part A is not recorded, by what amount will net income be over
or understated at April 30?
237. Super Clean operates an automatic car wash business, The Ultimate Shine. The following amounts were taken from
the company's unadjusted trial balance at December 31, 2016:
Wages Expense 82,000
Rent Collected in Advance 8,000
Determine the effect on the accounting equation of any adjusting entries necessary at December 31, 2016, for each of the
transactions that follow.
A) The rent collected in advance represents rent for the period December 1, 2016
through January 31, 2017.
B) In addition to the wages paid during the year, employees have not been paid for the
last week of December which amounts to $900.

Stockholders’
ANSWER: A)
Stockholders’
Rent
Collected
in Rent
Advance Revenue 4,000
(4,000) 4,000 4,000
B)
Stockholders’
Wages
Payable Wages
900 Expense
900 (900)
(900)
238. Agle Company purchased a dump truck at a cost of $48,000 on January 1, 2015. The truck has an estimated useful
life of 6 years and a $6,000 estimated residual value. Show how the truck and any related amounts would appear on the
December 31, 2016, balance sheet immediately after the adjustments are recorded and posted.
ANSWER: Accumulated depreciation = ($48,000 - $6,000)/6 = $7,000 × 2 years = $14,000
Long-term Assets:
Dump truck $ 48,000
Less Accumulated depreciation (14,000)
$ 34,000
239. Union Company purchased a delivery van at a cost of $30,000 cash on January 1, 2015. The van has an estimated
useful life of 6 years and a $6,000 estimated residual value.
A. What is the effect on the accounting equation of the purchase of the van?

Stockholders’
B. How much depreciation expense should be reported for 2016?

C. What is the total amount of accumulated depreciation at December 31, 2016?
ANSWER: A.
Stockholders’
Van
30,000
Cash
(30,000)
B. $30,000 – $6,000)/6 = $4,000
C. $4,000 × 2 = $8,000
DIFFICULTY: Easy
240. Marcus Roberts operates a small retail establishment. The following unadjusted amounts were taken from Roberts’
accounting records at December 31, 2016:
Accumulated Depreciation $ 5,000
Machinery 50,000
Prepaid Advertising 1,200
Determine the effect on the accounting equation of the adjusting entries at December 31, 2016, for each of the transactions
that follow:
A. The advertising costs are for television commercials to be aired equally throughout
December, 2016, and January and February, 2017.
B. The machinery had an original cost of $50,000 and was purchased during 2011. The
estimated useful life is 6 years with an estimated salvage value equal to $8,000. Roberts
uses the straight-line method of depreciation.

Stockholders’
ANSWER: Balance Sheet Income Statement

Stockholders Net
Liabilitie ’ Revenue Incom
Assets = s + Equity s – Expenses = e
A.
Prepaid Advertisin
Advertisin g Expense
g (400) (400) 400 (400)
B. Accum. Deprec.
Deprec. Expense
(7,000) (7,000) 7,000 (7,000)
($50,000 – $8,000)/6)
241. Quirin Corp. purchases office supplies once a month and prepares monthly financial statements. The asset account
Office Supplies on hand has a balance of $1,850 on March 1. Purchases of supplies during March amount to $1,500.
Supplies on hand at March 31 amount to $1,020. Prepare the necessary adjusting entry on Quirin’s books on March 31.
What will be the effect on net income for March if this entry is not recorded?
ANSWER:
March 31. Office Supplies Expense 2,330

Office Supplies on Hand 2,330
To record office supplies used:
$1,850 + $1,500 – $1,020.
Stockholders’ Net
Off.Supp
on Office
Hand Supplies
Expense
(2,330) (2,330) 2,330* (2,330)
Net income for the month of March would be overstated by $2,330 if this adjusting entry
were not recognized because expenses would be understated.
Supplies
March 1 Beg. Bal. 1,850

Purchased in March 1,500 X (amount of supplies
used)*
March 31 End. Bal. 1,020
*X = $1,850 + $1,500 – $1,020

= $2,330
242. On May 1, 2016, Meehan Inc. lends $125,000 to Solar Power Inc. The loan will be repaid in 90 days with interest at
12%.
Required:
1. Prepare the journal entry on Meehan’s books on May 1, 2016.
2. Assume that Meehan prepares quarterly statements on May 30, 2016. Prepare the adjusting entry on Meehan’s books on
May 30, 2016 regarding the loan.
3. Prepare the entry on Meehan’s books on July 29, 2016, when Solar Power repays the principal and interest.
ANSWER: 1.
May 1 Notes Receivable 125,000
Cash 125,000
To record 12%, 90-day loan to Solar Power Inc.
Stockholders
’ Net
Notes
Receivable
125,000
Cash
(125,000)
2.
May 30 Interest Receivable 1,250
Interest Income 1,250
To accrue interest due on note for one month:
$125,000 × 12% × 30/360.
Stockholders’ Net
Interest Interest
Receivable Income
1,250 1,250 1,250 1,250
3.
July 29 Cash 128,750
Notes Receivable 125,000
Interest Receivable 1,250
Interest Income 2,500
To record collection of note and interest at maturity date.
Stockholders Net
Liabilitie ’ Revenue Expense Incom
Assets = s + Equity s – s = e
Cash
128,750 Interest
Notes Receivable Income
(125,000) 2,500 2,500 2,500
Interest Receivable
(1,250)
243. Exclusive Builders owns property in Camden County. Exclusive’s 2016 property taxes amounted to $85,000.
Camden County will send out the 2017 property tax bills to property owners during April 2017. Taxes must be paid by
June 1, 2017. Assume that Exclusive prepares adjusting entries only once a year, on December 31 for the entire year’s
taxes, and that property taxes for 2017 are expected to increase by 9% over those for 2016.
Required:
1. Prepare the adjusting entry required to record the 2016 property taxes payable on December 31, 2016.
2. Prepare the journal entry to record the payment of the 2017 property taxes on June 1, 2017.
ANSWER: 1. Dec 31. 2016
Dec. 31 Property Tax Expense 92,650
Property Taxes Payable 92,650
To accrue 2016 property taxes: 109% × $85,000.
Stockholders’ Net
Property
Tax
Property Taxes Expense
Payable 92,650 (92,650) (92,650) (92,650)
2. June 1, 2017
June 1 Property Taxes Payable 92,650
Cash 92,650
To record payment of 2017 property taxes.
Stockholders’ Net
Cash Property Taxes

(92,650) Payable (92,650)
244. Brooke Accounting Services collected $15,000 from a customer on June 1 and agreed to provide accounting services
during the next six months. Brooke expects to provide an equal amount of services each month.
Required:
1. Prepare the journal entry for the receipt of the customer deposit on June 1.
2. Prepare the adjusting entry on June 30.
3. What will be the effect on net income for June if the entry in (2) is not recorded?
ANSWER: 1.
June 1 Cash 15,000
Customer Deposits 15,000
To record receipt of customer deposit for
six months of accounting service.
Stockholders’ Net
Cash Customer
15,000 Deposits
15,000
2.
June 30 Customer Deposits 2,500
Accounting Fees Earned 2,500
To record one month of accounting fees earned:
$15,000/6.
Stockholders’ Net
Accounting
Fees
Customer
Deposits Earned
(2,500) 2,500 2,500 2,500
3. If the June 30 adjusting entry is not recorded, net income will be understated by
$2,500.
245. On October 1, 2016, Winter Corp. buys a computer system for $270,000 in cash. Assume that the computer is
expected to have a five-year life and an estimated salvage value of $30,000 at the end of that time.
Required:
1. Prepare the journal entry to record the purchase of the computer on October 1, 2016.
2. Compute the depreciable cost of the computer.
3. Using the straight-line method, compute the monthly depreciation.
4. Prepare the adjusting entry to record depreciation at the end of October 2016.
5. Compute the computer’s carrying value that will be shown on Winter’s balance sheet prepared on December 31, 2016.
ANSWER: 1.
Oct. 1 Computer 270,000
Cash 270,000
To record purchase of computer.
Stockholders’ Net
Computer
270,000
Cash
(270,000)
2.
Purchase price $270,000
Less estimated salvage value (30,000)
Depreciable cost $240,000
3.
Monthly Depreciation = Depreciable Cost/Estimated Life
= $240,000/60 months
= $4,000/month
4.
Oct. 31 Depreciation Expense 4,000
Accumulated Depreciation—Computer System 4,000
To record one month’s depreciation expense.
Stockholders’ Net
Accumulated
Depreciation
—
Computer
System* Depreciation
Expense
(4,000) (4,000) (4,000) (4,000)
*The Accumulated Depreciation—Computer System account has increased. It is
shown as a decrease in the equation above because it is a contra account and causes
total assets to decrease.
5.
Computer $270,000
Less: Accumulated depreciation (3 months ×
(12,000)
$4,000/month)
Carrying value $258,000
246. Morgan Realty reported the following accounts on its income statement:
Commissions Earned $83,000
Travel and Entertainment 4,500
Real Estate Board Fees Paid 8,000
Insurance Expired 780
Computer Line Charge 765
Advertising Expense 1,460
Depreciation on Computer 450
Office Supplies Used 940
Car Expenses 2,200
Required:
1. Prepare the necessary entries to close the temporary accounts.
2. Explain why the closing entries are necessary and when they should be recorded.
ANSWER: 1.
Closing entries:
Commissions Earned 83,000
Income Summary 83,000
To close revenue account.
Travel and Entertainment 4,500
Real Estate Board Fees Paid 8,000
Insurance Expired 780
Computer Line Charge 765
Advertising Expense 1,460
Depreciation on Computer 450
Office Supplies Used 940
Car Expenses 2,200
To close expense accounts.
To close Income Summary to Retained Earnings.
2. Closing entries serve two purposes. First, the balances in revenue, expense, and dividend
accounts are returned to zero to start the following period. Second, the net income and the
dividends of the period are transferred to Retained Earnings. Closing entries are recorded at
the end of the period.
247. The following accounts appear on Treetop Inc. 2016 financial statements. The accounts are listed in alphabetical
order, and the balance in each account is the normal balance for that account. All amounts are in millions of dollars.
Prepare closing entries for Treetop for 2016.
Cash Dividends Paid $ 104
Cost of Sales and Related Buying and Occupancy Costs 4,317
Credit Card Revenues 325
Income Tax Expense 207
Interest Expense, net 126
Other Income and Expense, net 13
Net Sales 7,172
Selling, General and Administrative Expenses—Credit Segment 275
Selling, General and Administrative Expenses—Retail Stores,
2,228
Direct and Other Segments
ANSWER: Net Sales 7,172

Credit card Revenues 325
Other Income and Expense, net* 13
To close Net Sales and other income accounts.
*Assumes that the amount netted to income rather than expense.

Cost of Sales and Related Buying and Occupancy Costs 4,317
Selling, General and Administrative Expenses—Retail Stores,
Direct and Other Segment 2,228
Selling, General and Administrative Expenses—Credit Segment 275
Income Tax Expense 207
Interest Expense, net 126
To close expense accounts.
Income Summary 357

Retained Earnings 357
To close Net Income to Retained Earnings.
Retained Earnings 104

Cash Dividends Paid 104
To close Dividends to Retained Earnings.
248. Reconstruct the adjusting and closing entries from the following T-Accounts.
Prepaid Insurance Accounts Unearned Wages Payable

Receivable. Revenues
1,200 6,000 1,350 530
300 1,500 435 530
900 7,500 915
Retained Earnings Dividends Income Summary Fees Earned

12,280 2,100 9,935 8,000
2,100 5,180 2,100 4,655 1,500
15,360 0 5,280 435
0 9,935
0
Wages Expense Rent Expense Insurance Expense Utilities Expense

2,600 1,145 300 180
530 1,145 300 180
3,130 0 0 0
0
ANSWER: Adjusting Entries:
1) Insurance Expense 300

Prepaid Insurance 300
2) Accounts Receivable 1,500
Fees Earned 1,500
3) Unearned Revenue 435
Fees Earned 435
4) Wages Expense 530
Wages Payable 530
Closing Entries:
1) Fees Earned 9,935

2) Income Summary 4,755
Wages Expense 3,130
Rent Expense 1,145
Insurance Expense 300
3) Income Summary 5,180
4) Retained Earnings 2,100
Dividends 2,100
FACC.PONO.13.04-07 - LO: 04-07
249. Complete the following work sheet for Residential Enterprises.
Residential Enterprises
Work sheet
For the Year Ended December 31, 2016
Adjusted Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit
Cash 14,500
Supplies 500
Equipment 20,500
Accumulated Depr-Equip 15,000
Accounts Payable 9,500
Wages Payable 3,060
Capital Stock 13,240
Retained Earnings, 1/1/16 5,000
Dividends 1,000
Fees Earned 34,000
Wages Expense 18,000
Rent Expense 9,300
Totals 79,800 79,800
Net Income (Loss)
ANSWER: Residential Enterprises

Work sheet
For the Year Ended December 31, 2016

Adjusted Trial
Income Statement Balance Sheet
Balance
Account Title Debit Credit Debit Credit Debit Credit
Cash 14,500 14,500
Accounts Receivable 7,500 7,500
Supplies 500 500
Equipment 20,500 20,500
Accumulated Depr-
15,000 15,000
Equip
Accounts Payable 9,500 9,500
Wages Payable 3,060 3,060
Capital Stock 13,240 13,240
Retained Earnings,
5,000 5,000
1/1/16
Dividends 1,000 1,000
Fees Earned 34,000 34,000
Wages Expense 18,000 18,000
Rent Expense 9,300 9,300
Depreciation Expense 8,500 8,500
Totals 79,800 79,800 35,800 34,000 44,000 45,800
Net Loss 1,800 1,800
35,800 35,800 45,800 45,800
FACC.PONO.13.04-08 - LO: 04-08
Essay
250. What two choices must be made in the measurement process for a company that acquires a piece of equipment and
needs to record it in the accounting records? Explain.
ANSWER: The first choice is deciding the attribute to be measured. For the equipment, this attribute is
the historical cost because it is verifiable. The second choice that must be made is deciding
the unit of measure. For the equipment, the unit of measure is money. For companies in the
United States, this is the dollar. The equipment will be recorded in the amount of dollars that
were given up to acquire it.
251. Describe the benefit(s) of using the accrual process as compared to the cash basis.
ANSWER: Cash basis accounting is not conducive to a comprehensive view of a company's financial
health. The accrual process is designed to recognize revenue when actually earned and
expenses when actually incurred regardless of when cash changes hands. This is in keeping
with the matching principle and provides a better picture of a company’s true financial
health.
252. Why does the accrual basis of accounting require adjustments, while the cash basis does not?
ANSWER: Adjustments are necessary under the accrual basis because income represents the amounts
that are earned during the period, not just collected in cash. Accrual basis includes expenses
that have been incurred regardless of whether payment has been made. Net income under the
accrual basis represents the net effect of amounts earned, less amounts incurred, while under
the cash basis only receipts and payments of cash are recorded.
DIFFICULTY: Easy
253. Why is the cash basis of accounting too limited for proper financial reporting?
ANSWER: The limitations of cash basis accounting are very clear. Using this approach, too few financial
transactions that impact a company's financial health are shown for the reader, thus its
limitations. The cash basis does not accurately match revenue with related expenses or
accurately reflect the earnings of a business for a specific time period.
254. What is the revenue recognition principle? Are there any exceptions to this rule? If so, what are they? If not, explain
why
ANSWER: The revenue recognition principle requires that revenues are recognized when they are
realized or realizable and earned. Normally, this is when a product or service is delivered to
the customer. An exception that may apply to this rule is a company that has a very high rate
of product returns. In this case, it would be prudent to recognize revenue only after the return
period expires.
255. What is the matching principle? How does it relate to the revenue recognition process?
ANSWER: The matching principle is the association of costs in the accounting period with the related
revenue that was earned. The revenue recognition process determines when and how much
revenue should be recognized. Once revenue is determined, then the matching concept is
applied, i.e., the amount of expense to be allocated to that period is determined.
256. What role do accounting records play in the adjustment process?

ANSWER: The adjustments are made by examining the balances of the accounts that need to be adjusted
that appear in the general ledger.
257. What is the significance of the timing in which cash is paid or received as it relates to the adjusting process?
ANSWER: Cash paid before an expense is incurred results in a deferred expense, which is recognized as
an asset on the balance sheet. The adjusting entry reduces the asset and recognizes a
corresponding amount of expense. Cash received before revenue is earned requires the
recognition of a liability, a deferred revenue. The adjusting entry reduces the liability and
recognizes a corresponding amount of revenue. At the end of the period, if cash has not been
paid or received, amounts must be accrued for any assets expected to be received or any
liabilities owed.
258. Explain the differences between the cash and accrual basis of accounting and how the adjusting process fits in.
ANSWER: The cash basis of accounting assumes revenues are recognized when cash is received and
expenses are recognized when cash is paid. The accrual basis assumes revenues are
recognized when earned and expenses are recognized when incurred. The two approaches
differ in the timing of when revenues and expenses are recognized on the income statement.
The adjusting process is used for the accrual basis, but is unnecessary for the cash basis of
accounting.
FACC.PONO.13.04-05 - LO: 04-05
259. Explain the purpose of a work sheet.

ANSWER: A work sheet is not a financial statement, but is a useful device for organizing the
information needed to prepare the financial statements. It eliminates the immediate need to
record and post adjusting entries in the journal and ledger.
DIFFICULTY: Easy
260. Does the Retained Earnings account that appears in the balance sheet credit column of a work sheet reflect the
beginning or the ending balance in the account? Explain.
ANSWER: The beginning balance in the Retained Earnings account is entered initially on the work sheet
on the unadjusted trial balance and is spread to the balance sheet credit column of the work
sheet. The reason the unadjusted or beginning balance is entered in the balance sheet credit
column is that the net income of the period and any dividends declared are entered in the
balance sheet columns also. Thus, the balance sheet columns contain all three amounts: the
beginning retained earnings balance, the net income, and any dividends.
FACC.PONO.13.04-08 - LO: 04-08
261. Answer each of the following questions (a-c) with a separate short paragraph per question.
(a) What is the difference between a real account and a nominal account? Give an example of each type of account. Why
is this distinction important for the closing process?
(b) What two purposes are served in making closing entries?
(c) Why is the Dividends account closed directly to Retained Earnings rather than to the Income Summary account?
ANSWER: (a) Balance sheet accounts are called real accounts because they are permanent and are not
closed at the end of a period. Conversely, income statement accounts are called nominal or
temporary accounts because they are closed at the end of the period. For example, it would
not make sense to close the Equipment account at the end of the period. The account should
stay on the books as long as the company keeps the asset. On the other hand, Depreciation
Expense on the equipment is a temporary account that indicates the expense associated with
using the asset during the period and is therefore closed along with all other income
statement accounts at the end of the period.
(b) Closing entries are made at the end of an accounting period. They have two important
purposes: (1) to return the balance in all temporary or nominal accounts (revenues, expenses,
and dividends) to zero to start the next accounting period and (2) to transfer the net income
(or net loss) and the dividends of the period to Retained Earnings.
(c) The Dividends account is closed directly to Retained Earnings because it is not an
expense and therefore is not an income statement account. Because it does not appear on an
income statement, it is not closed through the Income Summary account, but instead directly
to Retained Earnings.
262. Assuming the use of a work sheet, are the formal adjusting entries recorded and posted to the accounts before or after
the financial statements are prepared? Explain your answer. Would your answer change if a work sheet was not prepared?
Explain.
ANSWER: When a work sheet is used, the formal adjusting entries are recorded after the financial
statements have been prepared. Instead of taking the time to formally journalize adjusting
entries and post them to the accounts, the accountant enters the adjusting entries directly on a
work sheet as a basis for preparing the financial statements. The actual recording and posting
of the adjusting entries can be done after the statements are released. Of course, if a work
sheet is not prepared, adjusting entries must be recorded before the statements can be
prepared.
263. The balance sheet columns of the work sheet for Barrows Corporation show total debits and total credits of $245,000
each. Dividends for the period are $5,000. Accumulated depreciation is $15,000 at the end of the period. Compute the
amount that should appear on the formal balance sheet for total assets. How do you explain the difference between this
amount and the amount that appears as the total debits and total credits on the work sheet?
ANSWER:
Total debits on the work sheet: $245,000
Less: Dividends (5,000)
Accumulated depreciation (15,000)
Total assets $225,000
Not all debits on the work sheet are assets. For example, Dividends are listed as a debit on the
work sheet, but they reduce retained earnings rather than increase assets. Also, some items in
the Asset section such as Accumulated Depreciation are not debits.

Chapter 4 Income Measurement and Accrual Accounting-1

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Chapter 4 Income Measurement and Accrual Accounting-1

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Chapter 4: Income Measurement and Accrual Accounting

3. The process of recording an item in the financial statements is called measurement.

8. Most companies use the cash basis of accounting.

9. Revenue is always earned continuously over time.

10. An asset is always involved when revenue is recognized.

12. Expired costs are called assets.

18. An entry that includes the Cash account is probably an adjustment.

20. When cash is paid before an expense is incurred, an accrual is necessary.

22. Accumulated depreciation is increased when depreciation is recognized.

33. Income summary does not appear on the income statement.

34. Balance sheet accounts are called real accounts.

35. Expense accounts are debited in the closing process.

37. There is one single format for a work sheet.

39. The unit of measure in Japan is the U.S. dollar.

47. Conceptually, anytime a cost is incurred, an asset is acquired.

Supplies on Hand Accounts Payable

Income Statement Statement of Cash Flows

Income Statement Statement of Cash Flows

65. Which of the following concepts is important to accrual accounting?

68. When is revenue from the sale of merchandise normally recognized?

73. Expenses originate from

75. Expenses can be matched against revenue

Equipment Accumulated Depreciation

Depreciation Expense Accumulated Depreciation

78. Which of the following statements is true concerning assets?

79. Which one of the following is an example of a deferred revenue?

Unearned Service Revenue Service Revenue

Unearned Book Revenue Book Revenue

86. Which one of the following is an example of an accrued liability?

87. Adjustments are necessary only if

Supplies Supplies Expense

Salaries Expense Salaries Payable

99. Which one of the following adjustments will increase assets?

125. An adjusting entry could not consist of:

127. Refer to the trial balance for Jenning Co.

130. Refer to the trial balance for Jenning Co.

134. Accumulated Depreciation

135. Accumulated Depreciation

136. Which of the following transactions involves an accrued asset?

1. Close the accounts.

146. When using a work sheet:

Determine the net income (loss) for the period.

154. All of the following describe a revenue except:

162. A(n) ____________________ creates an increase in income for the period.

178. Temporary accounts are also known as _________________ accounts.

181. Subscription to a magazine

183. Carpet cleaning

184. Warehouse used for storing inventory goods

185. Commissions earned by sales people

186. Cost of two-year insurance policy

188. One year's premium on truck insurance was paid in advance

190. A warehouse building was acquired for cash

192. Rent is owed by a tenant but not yet collected

193. Depreciation on a delivery truck is recorded

198. Amounts earned, not received from customers are recorded

204. Sales Revenue

205. Office Equipment

206. Depreciation Expense

207. Prepaid Rent

208. Unearned Revenue

209. Utilities Expense

210. Interest Payable

Cash received from: