Chp 3

Question 1

Formula for recording interest

Answer 1

Face value * annual interest rate * 1/12 (time in terms of one year)

Question 2

2 types of adjusting entries and their types

Answer 2

deferrals (cash before performance)

• pp expenses
• unearned revenue

accruals (performance before cash)

• accrued revenues (accts rec)
• accrued expenses (accts payable - interest, taxes)

Question 3

expense recognition principle

Answer 3

=matching principle = expenses recorded in the same period as the matching revenue. Key question: When does the expense make its contribution to the revenue?

Question 4

depreciation

Answer 4

Process of allocating the cost of an asset to expense over its useful life (the period during which it is used).

Question 5

revenue recognition principle

Answer 5

Must recognize revenue during the period when the company meets its performance obligation.

Question 6

contra asset account

Answer 6

Is an offset against an asset account on the balance sheet (ex: accumulated depreciation)

Question 7

book value

Answer 7

Difference between the cost of a depreciable asset and its related accumulated depreciation. Is shown on balance sheet.

Question 8

What depreciation expense identifies

Answer 8

The portion of an asset’s cost that expired during the period.

Question 9

Term for the period of service for an asset that gets depreciated

Answer 9

useful life

Question 10

Normal balance on a contra asset account

Answer 10

credit

Question 11

How a contra asset account is handled on the balance sheet

Answer 11

Subtracted from the associated asset account (= book value)

Question 12

What is a prepaid expense?

Answer 12

Payment of an expense that will benefit more than one accounting period. It expires with the passage of time or through use. Examples: insurance, supplies, advertising, rent, buildings (not land), equipment.