1. For purposes of measuring business income, the life of a business is:

a. divided into specific points in time.

b. divided into irregular cycles.

c. divided into discrete accounting periods.

d. considered to be a continuous cycle.

Answerc. Accountants divide time into specific intervals for measurement purposes. These periods may be a month, quarter, or year. This concept is highlighted by noting the date on an income statement: "For the Year Ending December 31, 20XX."

 

2. Adjusting entries at the end of an accounting period would not be required for which of the following

a. Multiperiod costs that must be split among two or more accounting periods.

b. Multiperiod revenues that must be split among two or more accounting periods.

c. Expenses that have been incurred in a given period but not as yet recorded in the accounts.

d. Revenue that has been earned and recorded in the accounting records.

Answerd. The accounting for revenue that has been earned and recorded is complete; no adjustment is needed. Multiperiod costs and revenues must be adjusted to reflect the amount consumed or generated in a given period, and the amount prepaid or unearned at the end of the period. Expenses incurred but not recorded (accrued) must be recorded via adjusting entries.

 

3. Blankenship Company pays its employees every Friday for work rendered that week. The payroll is typically $10,000 per week. Which of the following journal entries would Blankenship ordinarily record on the Friday payday?

a.	Salary Expense			10,000
		Salary Payable				10,000
b.	Salary Expense			10,000
		Cash				10,000
c.	Salary Payable			10,000
		Cash				10,000
d.	Salary Payable			10,000
		Salary Expense				10,000

Answerb. The amount paid on a normal payday should also be expensed. The expense and related payable would not have been previously recorded.

 

4. Blankenship Company pays its employees every Friday for work rendered that week. The payroll is typically $10,000 per week. What journal entry would be recorded (on Wednesday) if the end of the accounting period occurred on a Wednesday?

a.	Salary Expense			6,000
		Salary Payable				6,000
b.	Salary Expense			6,000
		Cash				6,000
c.	Salary Payable			6,000
		Cash				6,000
d.	Salary Payable			6,000
		Salary Expense				6,000

Answera. The $6,000 amount ($2,000 per day times 3 days) needs to be expensed for the work rendered. This amount should be recorded as a liability -- it will be paid on Friday. No cash is disbursed on Wednesday.

 

5. Blankenship Company pays its employees every Friday for work rendered that week. The payroll is typically $10,000 per week. Blankenship's year-end occurred on Wednesday, at which time a correct adjusting entry was recorded. On the following Friday, which of the following payroll journal entries should be recorded?

a.	Salary Expense			10,000
		Cash				10,000
b.	Salary Expense			4,000
	Salary Payable			6,000
		Cash				10,000
c.	Salary Expense			6,000
	Salary Payable			4,000
		Cash				10,000
d.	Salary Payable			10,000
		Cash				10,000

Answerb. This entry reflects that the $10,000 cash disbursement is recorded as $4,000 of expense (for Thursday and Friday) and a $6,000 payment of the payable that was established on Wednesday.

 

6. The appropriate journal entry to record equipment depreciation expense would consist of a debit to Depreciation Expense and a credit to which of the following accounts?

a. Equipment

b. Accumulated Depreciation: Equipment

c. Retained Earnings

d. Cash

Answerb. The Accumulated Depreciation account is for exactly this purpose. Note that the Equipment account is not directly credited.

 

7. At the end of the current accounting period, Johnson Company failed to record utilities consumed during the period. Johnson will be billed for the utilities during the next accounting period. As a result, current period assets, liabilities, equity, and income, respectively, are:

a. Overstated, overstated, correct, correct

b. Correct, understated, overstated, overstated

c. Overstated, understated, overstated, overstated

d. Overstated, understated, correct, correct

Answer b. The correct entry to record utilities consumed is to debit Utilities Expense and credit Utilities Payable. Because this was not done, liabilities and expenses are understated. The understatement of expense causes income and equity to be overstated. Assets are not impacted.

 

8. On November 1, 20X1, Limit Company purchased a one-year insurance policy for $12,000. Limit Company debited Cash and credited Prepaid Insurance for $12,000. At the end of December, 20X1, $2,000 of insurance had expired. The journal entry to properly state all accounts involved on December 31, 20X1, would be:

a.	Insurance Expense			2,000
	Prepaid Insurance			22,000
		Cash				24,000
b.	Insurance Expense			2,000
		Prepaid Insurance				2,000
c.	Insurance Expense			2,000
		Cash				2,000
d.	Prepaid Insurance			2,000
		Insurance Expense				2,000

Answera. Notice that the original entry is backwards. That is, Cash was debited and Prepaid Expense credited. To correct and adjust the accounts first requires a debit to Insurance Expense for $2,000 (to reflect the expired amount). Next, Prepaid Insurance is debited for $22,000; to establish the correct ending debit balance of $10,000, one must record a $22,000 debit (the existing balance is a $12,000 credit). Finally, Cash is credited for $24,000 (to correct the error which showed cash increasing by $12,000 when it really decreased by $12,000).

 

9. Under the the income statement approach to adjusting entries, the receipt of $5,000 of unearned revenue would be recorded by debiting Cash. What account should be credited?

a. Cash

b. Revenue

c. Unearned Revenue

d. Prepaid Revenue

Answerb. With the income statement approach, prepaid expenses and unearned revenues are initially recorded to expense and revenue; subsequent year-end adjustments update balance sheet accounts and reduce expense and revenue accounts as needed.

 

10. Simmons Company received and recorded a $5,000 payment for services to be rendered in the future. If the income statement approach to adjusting entries is used, the appropriate adjusting entry at the end of the accounting period for $3,000 of revenue not yet earned would be:

a.	Service Revenue			3,000
		Unearned Service Revenue				3,000
b.	Service Revenue			2,000
		Unearned Service Revenue				2,000
c.	Accounts Receivable			3,000
		Unearned Service Revenue				3,000
d.	No entry would be needed.

Answera. The $3,000 must be removed from the Revenue account (debited) because it has not yet been earned. This amount needs to be recorded into the Unearned Revenue account (credited).