Ch.2 Review Of The Accounting Process

Question 1

If the required adjusting entry for accrued salaries is omitted:

A) liabilities will be overstated and net income understated.
B) liabilities will be understated and net income overstated.
C) assets will be overstated and net income understated.
D) assets will be overstated and net income overstated.

Answer 1

B

The adjusting entry for accrued salaries includes a debit to salaries expense and a credit to salaries payable. By not recording the expense, net income will be overstated. By not recording the increase in salaries payable, the liability will be understated.

Question 2

The correct amount of prepaid insurance shown in a company’s December 31, 2023, balance sheet was $900. On July 1, 2024, the company paid an additional insurance premium of $600. In the December 31, 2024, balance sheet, the amount of prepaid insurance was correctly shown as $500. The amount of insurance expense that should appear in the company’s 2024 income statement is:

Answer 2

$1,000

[$900 (beginning balance) + $600 (additional payment) - $500
(ending balance)]=1,000

Question 3

The Esquire Clothing Company borrowed a sum of cash on October 1, 2024, and signed a note payable. The annual interest rate was
12%. The company’s December 31, 2024, income statement reported interest expense of $1,260 related to this note. What was the amount borrowed?

Answer 3

$42,000

Amount borrowed × 12% × 3 ÷ 12 = $1,260. Amount borrowed × 0.03 =
$1,260. $1,260 ÷ 0.03 = $42,000.

Question 4

The journal entry to record the purchase of supplies for cash involves:

A) a debit to supplies and a credit to cash.
B) a debit to supplies expense and a credit to cash
C) a debit to cash and a credit to supplies expense.
D) a debit to cash and a credit to supplies.

Answer 4

A

Supplies are an asset, so the balance increases with a debit. The supplies will not be recorded as an expense until they are used. Cash is an asset, so the balance decreases with a credit.

Question 5

A prepaid expense:

A) occurs when an expense is recorded in the current period but not paid until a future period.
B) occurs when a company receives cash from customers prior to providing goods and services to those customers.
C) occurs when an asset is acquired in the current period but not expensed until a future period.
D) All of these answer choices are incorrect.

Answer 5

C

Question 6

Which of the following adjusting entries causes a decrease in assets?

A) Recognizing the portion of revenue collected in advance
B) Recording depreciation expense
C) Accruing unrecorded salaries expense
D) Accruing unrecorded interest revenue

Answer 6

B

The adjusting entry for depreciation includes a debit to depreciation expense and a credit to accumulated depreciation (a contra-asset account, which reduces the associated asset balance).

Question 7

Yummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2024, and charged the $4,800 premium to Insurance expense. At its December 31, 2024, year-end, Yummy Foods would record which of the following adjusting entries?

A) Prepaid