AccHor 7e CH 03

The
The Adjusting
Adjusting Process
Process
Chapter 3
1
Copyright © 2007 Prentice-Hall. All rights reserved
Tom owns a tree trimming service. During
October, he did $700 worth of work. Of that
amount, customers paid $400 in cash when the
work was done. Tom billed the rest of the
customers. How much revenue would Tom
recognize in October using the cash basis of
accounting?
2
Answer: $400
Revenue is recognized when cash is received
under the cash basis of accounting.
3
Tom owns a tree trimming service. During
October, he did $700 worth of work. Of that
amount, customers paid $400 in cash when the
work was done. Tom billed the rest of the
customers for the rest. How much revenue would
Tom recognize in October using the accrual basis
of accounting?
4
Answer: $700
Revenue is recognized when it is earned under the
accrual basis of accounting.
5
An interim accounting period can be all of the
following except:
1. Monthly
2. Quarterly
3. Semiannually
4. Annually
6
Answer: 4
Interim reports are reports issued between the
annual reports.
7
Which accounting principle tells accountants when
to record revenues?
1. Matching
2. Revenue
3. Cost
4. Entity
8
Answer: 2
The revenue principle requires that a revenue be
recorded when it has been earned.
9
Which accounting principle tells accountants when
to record expenses?
1. Matching
2. Revenue
3. Cost
4. Entity
10
Answer: 1
The matching principle require that a company
record all the expenses incurred during the period,
and to match the expenses against the revenues
of the period.
11
Which of the following is not a purpose of adjusting
entries?
1. Assign revenues to the period when they are
earned
2. Properly determine net income on the income
statement
3. Update the asset accounts
4. Update the capital account
12
Answer: 4
Adjusting entries assign revenues to the period
when they are earned and expenses to the
period when they are incurred. Adjusting entries
also update the asset and liability accounts.
Adjustments are needed to properly measure two
things:
• Net income on the income statement and
• Assets and liabilities on the balance sheet.
13
What type of account is prepaid insurance?
1. Asset
2. Liability
3. Revenue
4. Expense
14
Answer: 1
Prepaid expenses are advance payments of
expenses. Since the expense has not been
incurred, they represent future economic benefits.
15
On December 1, Elba Company paid $600 for
three month’s rent in advance. What adjusting
entry would be prepared on December 31?
1. Debit prepaid rent and credit cash, $600

2. Debit rent expense and credit prepaid rent, $600
3. Debit rent expense and credit prepaid rent, $200
4. Debit prepaid rent and credit rent expense, $200
16
Answer: 3
At December 31, one month’s rent, $200, has
expired. The debit to rent expense recognizes that
some of the prepaid has expired and the credit
reduces the prepaid for the same amount.
17
The December 31 unadjusted trial balance lists
Supplies with a $200 debit balance. On December
31, a physical count of supplies show that $50 of
supplies are still on hand. What adjusting entry
should be prepared on December 31?
1. Debit Supplies Expense; credit Supplies for $150
2. Debit Supplies Expense; credit Cash for $50
3. Debit Supplies Expense; credit Supplies for $50
4. Debit Supplies Expense; credit Cash for $150
18
Answer: 1
The amount of supplies used is $150 ($200 – 50).
Supplies expense is debited for the used portion.
The credit to supplies reduces the balance in the
supplies account to $50, or the amount actually on
hand.
Supplies
200 150
Bal 50
19
What type of account is unearned revenue?
1. Asset
2. Liability
3. Revenue
4. Expense
20
Answer: 2
When a company collects cash in advance from
customers, a liability is created. By accepting the
cash, the company has created an obligation to
render a service or deliver goods.
21
Oak Company rents part of its office building for $200
a month. On May 1, Oak Company received four
month’s rent in advance, which was credited to
Unearned Rent Revenue. What entry should be
prepared on May 31?
1. Debit unearned rent revenue; credit rent revenue, $200
2. Debit unearned revenue; credit rent revenue, $800
3. Debit cash; credit rent revenue, $800
4. Debit cash; credit rent revenue, $200
22
Answer: 1
At the end of May, the company has earned $200
rent. The debit to Unearned Rent Revenue
decreases the liability, and the credit increases
revenues. The balance in the unearned revenue
account represents three months’ rent not yet
earned. Unearned Rent Revenue
200 800
Bal 600
23
An expense that is expensed first and paid later is
called
1. An unearned revenue
2. Depreciation expense
3. An accrued expense
4. A prepaid expense
24
Answer: 3
An accrued expense is one that the business has
incurred but not yet paid.
25
Elm Company has a five-day work week that ends on
Friday. It’s total payroll for the week is $500. If the
end of the accounting period falls on a Wednesday,
what adjusting entry should be prepared?
1. Debit salary expense; credit cash, $300

2. Debit salary expense; credit cash, $500
3. Debit salary expense; credit salary payable, $300
4. Debit salary expense; credit salary payable, $500
26
Answer: 3
The payroll is $100 per day. As of the end of the
accounting period, three days’ salaries have been
incurred, but not yet paid. The debit recognizes
that expense and the credit recognizes that the
company owes its employees for three days work.
27
Maple Company holds a note receivable of $5,000.
The note is due to be paid in January. As of the end
of the accounting period, Maple has earned $200
interest. What adjusting entry should be prepared?
1. Debit interest expense; credit interest revenue, $200
2. Debit interest expense; credit interest payable, $200
3. Debit interest receivable; credit interest payable, $200
4. Debit interest receivable; credit interest revenue, $200
28
Answer: 4
Interest has been earned, but not yet received.
The debit to interest receivable recognizes that
interest is to be received in the future. The credit
recognizes the revenue earned this accounting
period.
29
Which of the following assets is depreciated?
1. Land
2. Inventory
3. Building
4. Supplies
30
Answer: 3
Long-lived, tangible assets are depreciated. The
only exception is land.
31
On January 1, 2005, Ash Company purchased a
truck that cost $30,000. The company depreciates
the asset $3,000 per year. What is the truck’s book
value at December 31, 2006?
1. $24,000
2. $21,000
3. $30,000
4. $27,000
32
Answer: 1
An asset’s book value is its cost minus
accumulated depreciation. As of December 31,
2006, two years of depreciation has been
recognized. $30,000 – 6,000 = $24,000
33
Which of the following is most helpful in preparing
the financial statements?
1. Trial balance
2. Adjusted trial balance
3. Journal
4. Chart of accounts
34
Answer: 2
The adjusted trial balance is a list of all the
accounts with their adjusted balances. The
adjusted balances are the numbers that should be
reported in the financial statements.
35
36

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1. Debit prepaid rent and credit cash, $600

1. Debit salary expense; credit cash, $300

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