Kimmel Chapter 4 (Accrual Accounting Concepts)

Question 1

Entry during the period:

Deferred Revenue

Answer 1

• DR Cash
• CR Unearned Revenue

Question 2

Adjusting Entry:

Deferred Revenue

Answer 2

• DR Unearned Revenue
• CR Revenue

Question 3

Entry during the period:

Deferred Expense

Answer 3

• DR Asset
• CR Cash or A/P

Question 4

Adjusting Entry:

Deferred Expense

Answer 4

• DR Expense
• CR Asset

Question 5

Entry during the period:

Accrued Revenue

Answer 5

No Entry

Question 6

Adjusting Entry:

Accrued Revenue

Answer 6

• DR Asset
• CR Revenue

Question 7

Entry during the period:

Accrued Expense

Answer 7

No Entry

Question 8

Adjusting Entry:

Accrued Expense

Answer 8

• DR Expense
• CR Liability

Question 9

Describe:

Accrual Basis of Accounting

Answer 9

Revenues are recognized when they are earned and expenses are recognized when they are incurred

Question 10

Describe:

Cash Basis of Accounting

Answer 10

Revenues are recognized when cash is received and expenses are recognized when cash is paid

Question 11

Under ASPE:

Revenue Recognition

Answer 11

1. The services have been provided or the risks and erwards of ownership of the goods have been transferred to the buyer
2. The amount of revenue must be able to be reliably measured
3. Collection is reasonably assured

Question 12

Why are adjusting entries necessary?

Answer 12

1. Events may not be recorded daily (ex. Use of supplies, earning of salaries)
2. Costs that are incurred with passage of time (ex. Rent, insurance, depreciation)
3. Not recorded due to unknown amounts (ex. Utility service bill)

Question 13

Define:

Prepaid Expenses

Answer 13

Expenses paid in cash and recorded as assets before they are used

Question 14

Define:

Deferred Revenues

Answer 14

Cash received and recorded as liabilities before revenue is earned

Question 15

Define:

Accrued Expenses

Answer 15

Expenses incurred for which cash has yet to be paid and that have yet to be recorded through journal entries

Question 16

Define:

Accrued Revenues

Answer 16

Revenues earned for which cash has yet to be received and that have yet to be recorded through journal entries

Question 17

What are the two categories that adjusting entries can be classified into?

Answer 17

1. Prepayments (prepaid expenses, deferred revenues)
2. Accruals (accrued expenses, accrued revenues)

Question 18

What are examples of prepaid expenses?

Answer 18

• Insurance
• Supplies
• Depreciation
• Advertising
• Rent

Question 19

What are examples of deferred revenues?

Answer 19

• Rent
• Magazine subscriptions
• Customer deposits for future service
• Gift cards

All received in advance

Question 20

What are accrued expenses also known as?

Answer 20

Accrued payables or Accrued liabilities

Question 21

What are examples of accrued expenses?

Answer 21

• Interest
• Salaries
• Income tax

Incurred, but not recorded or paid for

Question 22

What are examples of accrued revenues?

Answer 22

• Interest and services performed

Not yet billed and for which no cash has been received

Question 23

Describe:

Assets, Liabilites, and SE
before adjustment for:
* Prepaid expenses

Answer 23

• Assets: Overstated
• Liabilities: Normal
• SE: Overstated

Question 24

Describe:

Assets, Liabilites, and SE
before adjustment for:
* Deferred revenues

Answer 24

• Assets: Normal
• Liabilities: Overstated
• SE: Understated

Question 25

Describe:

Assets, Liabilites, and SE
before adjustment for:
* Accrued expenses

Answer 25

• Assets: Normal
• Liabilities: Understated
• SE: Overstated

Question 26

Describe:

Assets, Liabilites, and SE
before adjustment for:
* Accrued revenues

Answer 26

• Assets: Understated
• Liabilities: Normal
• SE: Understated

Question 27

In the Closing Process:

Which accounts are temporary?

Answer 27

Revenues and Expenses

Question 28

In the Closing Process:

What happens to the revenues and expenses accounts?

Answer 28

Get combined into the Income Summary account

Question 29

In the Closing Process:

What is the Retained Earnings account comprised of?

Answer 29

Dividends Declared and Income Summary

Question 30

In the Closing Process:

What is Shareholder’s Equity account comprised of?

Answer 30

Common Shares and Retained Earnings

Question 31

What are the 4 closing entries required?

Answer 31

1. Close revenue accounts to income summary
2. Close expense accounts to income summary
3. Close income summary to retained earnings
4. Close dividends declared to rateined earnings