Chapter 3: Adjusting the Accounts

Question 1

1. The revenue recognition principle states that:

(a) revenue should be recognized in the accounting
period in which a performance obligation is
satisfi ed.
(b) expenses should be matched with revenues.
(c) the economic life of a business can be divided into
artifi cial time periods.
(d) the fiscal year should correspond with the calendar year.

Answer 1

1. (a) Revenue should be recognized in the accounting period in which a performance obligation is satisfied

Question 2

2. The time period assumption states that:

(a) companies must wait until the calendar year is
completed to prepare financial statements.
(b) companies use the fiscal year to report financial
information.
(c) the economic life of a business can be divided into
artifi cial time periods.
(d) companies record information in the time period
in which the events occur

Answer 2

2. (c) The economic life of a business can be divided into artificial time periods.

Question 3

3. Which of the following statements about the accrual
   basis of accounting is false?

(a) Events that change a company’s financial statements are recorded in the periods in which the
events occur.
(b) Revenue is recognized in the period in which services are performed.
(c) This basis is in accord with generally accepted
accounting principles.
(d) Revenue is recorded only when cash is received,
and expense is recorded only when cash is paid

Answer 3

3. (d) Under the accrual basis of accounting, revenue is recognized when the performance obligation is satisfied, not when cash is
   received, and expense is recognized when incurred, not when cash is paid. The other choices are all true statements.

Question 4

4. The principle or assumption dictating that efforts
   (expenses) be matched with accomplishments (revenues) is the:

(a) expense recognition principle.
(b) cost assumption.
(c) time period assumption.
(d) revenue recognition principle.

Answer 4

4. (a) The expense recognition principle dictates that expenses be matched with revenues.

Question 5

5. Adjusting entries are made to ensure that:

(a) expenses are recognized in the period in which
they are incurred.
(b) revenues are recorded in the period in which services are performed.
(c) balance sheet and income statement accounts
have correct balances at the end of an accounting
period.
(d) All the responses above are correct.

Answer 5

5. (d) Adjusting entries are made for the reasons noted in choices (a), (b), and (c). The other choices are true statements, but (d) is the better answer

Question 6

6. Each of the following is a major type (or category) of
   adjusting entries except:

(a) prepaid expenses.
(b) accrued revenues.
(c) accrued expenses.
(d) recognized revenues.

Answer 6

6. (d) Unearned revenues, not recognized revenues, are one of the major categories of adjusting entries. The other choices all list
   one of the major categories of adjusting entries.

Question 7

. The trial balance shows Supplies $1,350 and Supplies
Expense $0. If $600 of supplies are on hand at the end
of the period, the adjusting entry is:
(a) Supplies 600
          Supplies Expense 600
(b) Supplies 750
           Supplies Expense 750
(c) Supplies Expense 750
           Supplies 750
(d) Supplies Expense 600
           Supplies 600

Answer 7

7. (c) Debiting Supplies Expense for $750 and crediting Supplies for $750 will decrease Supplies and increase Supplies Expense.

Question 8

8. Adjustments for prepaid expenses:

(a) decrease assets and increase revenues.
(b) decrease expenses and increase assets.
(c) decrease assets and increase expenses.
(d) decrease revenues and increase assets.

Answer 8

8. (c) Adjustments for prepaid expenses decrease assets and increase expenses.

Question 9

9. Accumulated Depreciation is:

(a) a contra asset account.
(b) an expense account.
(c) an owner’s equity account.
(d) a liability account.

Answer 9

9. (a) Accumulated Depreciation is a contra asset account; it is offset against an asset account on the balance sheet.

Question 10

10. Rivera Company computes depreciation on delivery equipment at $1,000 for the month of June. The adjusting entry to record this depreciation is as
    follows.

(a) Depreciation Expense 1,000
Accumulated Depreciation— Rivera C. 1,000
(b) Depreciation Expense 1,000
Equipment 1,000
(c) Depreciation Expense 1,000
Accumulated Depreciation— Equipment 1,000
(d) Equipment Expense 1,000
Accumulated Depreciation— Equipment 1,000

Answer 10

10. (c) The adjusting entry is to debit Depreciation Expense and credit Accumulated Depreciation—Equipment.

Question 11

11. Adjustments for unearned revenues:

(a) decrease liabilities and increase revenues.
(b) have an assets-and-revenues-account relationship.
(c) increase assets and increase revenues.
(d) decrease revenues and decrease assets.

Answer 11

11. (a) Adjustments for unearned revenues will consist of a debit (decrease) to unearned revenues (a liability) and a credit (increase)
    to a revenue account.

Question 12

12. Adjustments for accrued revenues:

(a) have a liabilities-and-revenues-account relationship.
(b) have an assets-and-revenues-account relationship.
(c) decrease assets and revenues.
(d) decrease liabilities and increase revenues.

Answer 12

12. (b) Adjustments for accrued revenues will have an assets-and-revenues-account relationship

Question 13

13. Anika Wilson earned a salary of $400 for the last week of September. She will be paid on October 1. The
    adjusting entry for Anika’s employer at September 30
    is:
    (a) No entry is required.
    (b) Salaries and Wages Expense 400
    Salaries and Wages Payable 400
    (c) Salaries and Wages Expense 400
    Cash 400
    (d) Salaries and Wages Payable 400
    Cash 400

Answer 13

13. (b) The adjusting entry should be to debit Salaries and Wages Expense for $400 and credit Salaries and Wages Payable for $400

Question 14

14. Which of the following statements is incorrect concerning the adjusted trial balance?

(a) An adjusted trial balance proves the equality of
the total debit balances and the total credit balances in the ledger after all adjustments are made.
(b) The adjusted trial balance provides the primary
basis for the preparation of fi nancial statements.
(c) The adjusted trial balance lists the account balances segregated by assets and liabilities.
(d) The adjusted trial balance is prepared after the
adjusting entries have been journalized and posted.

Answer 14

14. (c) The accounts on the trial balance can be segregated by the balance in the account—either debit or credit—not whether they
    are assets or liabilities. All accounts in the ledger are included in the adjusted trial balance, not just assets and liabilities. The other
    choices are all true statements.

Question 15

15. The trial balance shows Supplies $0 and Supplies
    Expense $1,500. If $800 of supplies are on hand at the
    end of the period, the adjusting entry is:

(a) debit Supplies $800 and credit Supplies Expense
$800.
(b) debit Supplies Expense $800 and credit Supplies
$800.
(c) debit Supplies $700 and credit Supplies Expense
$700.
(d) debit Supplies Expense $700 and credit Supplies
$700.

Answer 15

15. (a) This adjusting entry correctly states the Supplies account at $800 ($0 + $800) and the Supplies Expense account at $700
    ($1,500 - $800).

Question 16

16. Neutrality is an ingredient of:
Faithful Representation / Relevance
(a) Yes / Yes
(b) No / No
(c) Yes / No
(d) No / Yes

Answer 16

16. (c) Neutrality is one of the enhancing qualities that makes information more representationally faithful, not relevant.

Question 17

17. Which item is a constraint in fi nancial accounting?

(a) Comparability. (c) Cost.
(b) Materiality. (d) Consistency

Answer 17

17. (c) Cost is a constraint in fi nancial accounting. The other choices are all enhancing qualities of useful information.