Exam 1 Review

1.Which amount is least likely to appear in an adjusting journal entry?

  1. Cash
  2. Interest Receivable
  3. Income tax Expense
  4. Salaries Payable

2.On December 31, an adjustment is made to reduce unearned revenue and report (earned) revenue. How many accounts will be included in this adjusting entry?

  1. None
  2. One
  3. Two
  4. Three

3.An adjusting journal entry to recognize accrued salaries payable would cause which of the following?

  1. A decrease in assets and stockholder’s equity
  2. A decrease in assets and liabilities
  3. An increase in expenses, liabilities, and stockholder’s equity
  4. An increase in expenses and liabilities and a decrease in stockholder’s equity

4.Assume the balance in Prepaid Insurance is $2,500 but it should be $1,500. The adjusting journal entry should include which of the following?

  1. Debit to Prepaid Insurance for $1,000
  2. Credit to insurance expense for $1,000
  3. Debit to Insurance expense for $1,000
  4. Debit to insurance expense for $1,500

5.Assume a company receives a bill for $10,000 for advertising done during the current year. If this bill is not yet recorded at the end of the year, what will the adjusting journal entry include?

  1. Debit to Advertising expense of $10,000
  2. Credit to advertising expense of $10,000
  3. Debit to accrued liabilities of $10,000
  4. Need more information to determine

6.Northwest Airlines provided flights this month for customer who paid cash last month for tickets.

  1. Revenue has been earned, asset has been used up
  2. Revenue has been earned, liability has been fulfilled
  3. Expense has been incurred, liability has been fulfilled
  4. Expense has been incurred, asset has been acquired

7.Abercrombie received telephone bill for services this month, which must be paid next month.

  1. Expense has been incurred, liability has been incurred
  2. Expense has been incurred, asset has been used up
  3. Revenue has been earned, liability has been incurred
  4. Revenue has been earned, asset has been acquired

8.GSD+M completed work on an advertising campaign that will be collected next month.

  1. Revenue has been earned, asset has been used up
  2. Expense has been incurred, liability as been fulfilled
  3. Revenue has been earned, asset has been acquired
  4. Revenue has been earned, liability has been fulfilled

9.Which of the following is true?

  1. FASB creates SEC
  2. GAAP creates FASB
  3. SEC creates CPA
  4. FASB creates GAAP

10.As a rule accounting rules are called?

  1. FASB
  2. SEC
  3. GAAP
  4. CPA

11.Contributed Capital is

  1. An asset reported on the balance sheet
  2. Revenue reported on the income statement
  3. Stockholder’s equity reported on the balance sheet
  4. Liability reported on the balance sheet

12.What is the government agency that supervises the work of the FASB and PCAOB?

  1. SEC
  2. GAAP
  3. CPA
  4. SOX

13.Buying and selling productive resources with long lives is a(n)

  1. Operating activity
  2. Investing activity
  3. Financing activity
  4. Selling activity

14.A company was recently formed with $60,000 cash contributed to the company by stockholders. The company then borrowed $20,000 from a bank and bought $5,000 supplies on account. The company also purchased $30,000 of equipment by paying $10,000 and issuing a note for the remainder. What is the amount of total assets to be report on the balance sheet?

  1. $95,000
  2. $105,000
  3. $110,000
  4. None of the above

15.Which account does not have a normal credit balance?

  1. Wages Payable
  2. Notes Payable
  3. Unearned Revenue
  4. Prepaid Insurance

16.At the beginning of June, Florida Flippers paid a total of $6,000 cash for insurance for the months of June, July, and August. What amount of expense should be recognized at the end of June?

  1. $6000
  2. $4000
  3. $2000
  4. None

17.In June, Florida Flippers paid $4,000 in wages to employees who worked in June. What amount of expense should be recognized at the end of June?

  1. $2000
  2. $4000
  3. $0
  4. $1000

18.Which of the following accounts is least likely to be debited when revenue is recorded?

  1. Accounts Payable
  2. Accounts Receivable
  3. Cash
  4. Unearned Revenue

19.During 2006, PacSun, incurred expenses of $250,000. $50,000 was paid in cash and the balance will be paid Jan 2007. In addition PacSun signed a $50,000 note payable on December 31 to be paid in Feb 2007. What would be the effect on the accounting equation?

  1. Decrease in assets $50,000, increase in liabilities $250,000 and decrease in SE $250,000
  2. No effect on assets; increase liabilities $250,000, decrease SE $250,000
  3. Decrease assets $100,000; increase liabilities $250,000; decrease equity $250,000
  4. Increase assets $100,000; increase liabilities $250,000; decrease equity $150,000

20.At the end of the accounting period Dec 31, 2009 PacSun had $3000 wages expense which had not been paid or recorded. Therefore, the ’09 adjusting entry should be

  1. $3,000 decrease to an expense account and decrease to a liability account
  2. $3,000 increase to an expense account and decrease to an asset account
  3. $3,000 increase to a liability account and increase to an expense account
  4. $1000 increase to a liability account and decrease to an asset account

21.The asset account has a beginning balance of $10,000 and PacSun purchased a new truck for $26,000. If the ending balance of assets was $31,000 much of the truck did they pay in cash?

  1. $10,000
  2. $5,000
  3. $26,000
  4. $36,000

22.Which group of accounts contains only those that normally have debit balance?

  1. Retained earnings, cost of sales, wages expense
  2. Prepaid expenses, wages payable, and contributed capital
  3. Cash, utilities expense, accounts receivable
  4. Utilities expense, unearned revenue, prepaid expenses

23.Which of the following transactions would cause retained earnings to increase?

  1. Collection of a customer’s account
  2. Loan from a bank
  3. Sale of service to a customer
  4. Wage costs owed to employees

24.Expenses are defined as

  1. Increases in net assets as a result of ongoing operations
  2. Increases in net assets as a result of peripheral transactions
  3. Decreases in net assets as a result of ongoing operations
  4. Decreases in net assets as a result of peripheral transactions

25.The assumption that the long life of a company can be reported in shorter time periods is

  1. Unit of Measure principle
  2. Continuity assumption
  3. Separate-entity assumption
  4. Time period assumption

26.Failure to make an adjusting entry to recognize wages expense would cause

  1. An understatement of liabilities, and overstatement of net income and stockholder’s equity
  2. An overstatement of liabilities and stockholder’s equity and an understatement of net income
  3. No effect on assets, liabilities, net income, or stockholder’s equity
  4. An overstatement of liabilities, net income, and stockholder’s equity
  5. None of the above

27.Which of the following is not a liability

  1. Accounts payable
  2. Retained earnings
  3. Notes payable
  4. Unearned revenue

28.Company A bought $200 worth of supplies on account. The effect on the fundamental accounting model was

  1. Assets and stockholder’s equity each increased by $200
  2. Assets increased by $200, and Liabilities decreased by $200
  3. Assets and Liabilities both increased by $200
  4. No effect

29.Company B received $100,000 cash invested by its owners. The effect on the accounting equation would be

  1. Assets and liabilities each increased by $100,000
  2. Assets and revenues each increased by $100,000
  3. Stockholder’s Equity and revenues each increased by $100,000
  4. Stockholder’s Equity and assets each increase by $100,000

30.Which of the following groups has primary responsibility for information contained in the financial statements?

  1. The company’s auditors
  2. The company’s investors
  3. The SEC
  4. The company’s management

31.One of the disadvantages of a corporation when compared to a partnership is that

  1. The stockholders’ have limited liability
  2. The stockholder’s are treated as separate legal entity from the corporation
  3. The corporation and its stockholder’s are subject to double taxation
  4. The corporation must account for the business’s transactions separate and apart from those of the owners.

32.On November 1, 2006 PacSun paid $6000 for a two-year insurance policy on the building. The accounting period ends December 31. At the end of 2006, the financial statements should report

  1. Prepaid insurance $6,000, Insurance Expense, $0
  2. Prepaid Insurance $0, Insurance Expense $6000
  3. Prepaid Insurance $21, Insurance Expense $5979
  4. Prepaid Insurance $5500, Insurance Expense $500

33.An example of an investing transaction would be

  1. Purchasing equipment for cash
  2. Buying inventory from a supplier on credit
  3. Selling stock to investors for cash
  4. All of the above

34.Revenue is always recognized when

  1. Expenses are paid
  2. Cash is collected
  3. It is earned
  4. The end of the period arrives

35.Accumulated Depreciation is a(n)

  1. Liability
  2. Asset
  3. Contra-asset
  4. Revenue

Analyzing and Recording Adjusting Journal Entries

36. Brokeback Towing Company is at the end of its accounting year, December 31, 2008. The following data that must be considered were developed from the company’s records and related documents:

  1. On July 1, 2008 a three year insurance premium on equipment in the amount of $600 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1
  2. At the end of 2008, the unadjusted balance in the Office Supplies account was $1000. A physical count of supplies on December 31, 2008 indicated supplies costing $300 were still on hand.
  3. On December 31, 2008, YY’s Garage completed repairs on one of Brokeback’s trucks at a cost of $800. The amount is not yet recorded. It will be paid during January 2009.
  4. In December the 2008 property tax bill for $1600 was received from the city. The taxes, which have not been recorded, will be paid on February 15, 2009.
  5. On December 31, 2008 the company completed a contract for an out-of-state company for $7,900 payable by the customer within 30 days. No cash has been collected and no journal entry has been made for this transaction.
  6. On July 1, 2008 the company purchased a new hauling van. Depreciation for July-December 2008, estimated to total $2,750 has not been recorded.
  7. As of December 31, the company owes interest of $500 on a bank loan taken out on October 1, 2008. The interest will be paid when the loan is repaid on September 30, 2009. No interest has been recorded yet.

Indicate the financial statement effects (amount and direction) of each adjusting entry. Use + for increase, - for decrease, and NE for no effect. Provide an appropriate account name for any revenue and expense effects. (In would be a good idea to write out the adjusting entries first on the back of the sheet)

Transaction / Assets / Liabilities / Stockholders’ Equity
a. / 100 / NE / Insurance expense (+E)100
b.
c.
d.
e.
f.
g.
h.

PA4-2

Req. 1

Assets / = / Liabilities / + / Stockholders’ Equity
a. / Prepaid insurance / 100 / = / Insurance expense (+E) / 100
b. / Supplies / 700 / = / Supplies expense (+E) / 700
c. / = / Accrued liabilities / +800 / Repairs and maintenance expense (+E) / 800
d. / = / Property tax payable / +1,600 / Property tax expense (+E) / 1,600
e. / Accounts receivable / +7,900 / = / Service revenue (+R) / +7,900
f. / Accumulated depreciation (+xA) / 2,750 / = / Depreciation expense (+E) / 2,750
g. / = / Interest payable / +500 / Interest expense (+E) / 500

Req. 2

a. / dr. Insurance expense (+E, SE)...... / 100
cr. Prepaid insurance (A)...... / 100
$600 ÷ 36 months x 6 months of coverage. This entry reduces the asset (prepaid insurance) because part of it has been used and only $500 represents future benefits (an asset) to the company.
b. / dr. Supplies expense (+E, SE)...... / 700
cr. Supplies (A)...... / 700
The supplies account is decreased (credited) to record the use of supplies during the year because this expense was incurred in 2008, calculated as
Unadjustedbalance of $1,000– Ending balance of $300.
c. / dr. Repairs and maintenance expense (+E, SE)...... / 800
cr. Accrued liabilities (+L)...... / 800
Repairs and maintenance expense is increased (debited) because this expense was incurred in 2008. A liability (accrued liabilities) is credited because this amount is owed but will not be paid until 2009.
PA4-2 (continued)
d. / dr. Property tax expense (+E, SE)...... / 1,600
cr. Property tax payable (+L)...... / 1,600
Property tax expense is increased (debited) because this expense was incurred in 2008. A liability (property tax payable) is credited because this amount is owed but will not be paid until 2009.
e. / dr. Accounts receivable (+A)...... / 7,900
cr. Service revenue (+R, +SE)...... / 7,900
This entry records an asset for the amount due from customers and recognizes the revenue because it was earned in 2008.
f. / dr. Depreciation expense (+E, SE)...... / 2,750
cr. Accumulated depreciation (+xA, A) ...... / 2,750
To record depreciation on van for six months (amount is given).
g. / dr. Interest expense (+E, SE)...... / 500
cr. Interest payable (+L)...... / 500

Fugly’s annual accounting year ends on June 30. It is June 30, 2008, and all of the 2008 entries except the following adjusting journal entries have been made:

  1. The company earned service revenue of $2000 on a special job that was completed June 29, 2008. Collection will be made during July 2008; no entry has been recorded
  2. On March 31, 2008, Fugly paid a six-month premium for property insurance in the amount of $3,200 for coverage starting on that date. Cash was credited and prepaid insurance was debited for this amount.
  3. At June 30, 2008 wages of $900 were earned by employees but not yet paid. The employees will be paid on the next payroll date, which is July 15, 2008
  4. On June 1, 2008, Fugly collected two months’ maintenance revenue of $450. At that date, Fugly debited Cash and credited unearned maintenance revenue for $450.
  5. Depreciation of $1500 must be recognized on a service truck purchased on July 1, 2007
  6. Cash of $4,200 was collected on May 1, 2008, for services to be rendered evenly over the next year beginning on May 1. Unearned service revenue was credited when the cash was received
  7. The company owes interest of $600 on a bank land taken out on February 1, 2008. The interest will be paid when the loan is repaid on January 31, 2009.

Indicate the financial statement effects (amount and direction) of each adjusting entry. Use + for increase, - for decrease, and NE for no effect. Provide an appropriate account name for any revenue and expense effects. (In would be a good idea to write out the adjusting entries first on the back of the sheet)

Transaction / Assets / Liabilities / Stockholders’ Equity
a.
b.
c.
d.
e.
f.
g.

PB4-2

Req. 1

Assets / = / Liabilities / + / Stockholders’ Equity
a. / Accounts receivable / +2,000 / = / Service revenue (+R) / +2,000
b. / Prepaid insurance / 1,600 / = / Insurance expense (+E) / 1,600
c. / = / Wages payable / +900 / Wages expense (+E) / 900
d. / = / Unearned maintenance revenue / 225 / Maintenance revenue (+R) / +225
e. / Accumulated depreciation (+xA) / 1,500 / = / Depreciation expense (+E) / 1,500
f. / = / Unearned service revenue / 700 / Service revenue (+R) / +700
g. / = / Interest payable / +600 / Interest expense (+E) / 600

Req. 2

a. / dr. Accounts receivable (+A)...... / 2,000
cr. Service revenue (+R, +SE)...... / 2,000
This entry records an asset for the amount due from customers and recognizes revenue because it was earned during the fiscal year.
b. / dr. Insurance expense (+E, SE)...... / 1,600
cr. Prepaid insurance (A)...... / 1,600
$3,200 ÷ 6 months x 3 months of coverage. This entry reduces the asset (prepaid insurance) because part of it has been used and the remaining $1,600 represents future benefits (an asset) to the company.
c. / dr. Wages expense (+E, SE)...... / 900
cr. Wages payable (+L)...... / 900
Wage expense is increased (debited) because this expense was incurred. A liability (wages payable) is credited because this amount is owed to the employees.
d. / dr. Unearned maintenance revenue (L)...... / 225
cr. Maintenance revenue (+R, +SE)...... / 225
$450 ÷ 2 months x 1 month. This entry reduces (debits) the liability for the amount earned and records the revenue.
e. / dr. Depreciation expense (+E, SE)...... / 1,500
cr. Accumulated depreciation (+xA, A)...... / 1,500
To record depreciation for the truck for the year (amount is given).
PB4-2 (continued)
f. / dr. Unearned service revenue (L)...... / 700
cr. Service revenue (+R, +SE)...... / 700
To recognize revenue earned during the year, $4,200 ÷ 12 months x 2 months.
g. / dr. Interest expense (+E, SE)...... / 600
cr. Interest payable (+L)...... / 600
To accrue interest expense incurred but not paid.
h. / dr. Income tax expense (+E, SE)...... / 9,000
cr. Income tax payable (+L)...... / 9,000