1. Which of the following groups of accounts, with normal balances, would appear in the credit column of an unadjusted trial balance?
A) Accounts Payable, Unearned Revenues, Cost of Sales, and Investment Income.
B) Unearned Revenues, Accumulated Depreciation, and Prepaid Expenses.
C) Accounts Payable, Unearned Revenues, and Accumulated Depreciation.
D) Contributed Capital, Retained Earnings, and Cost of Sales.
2. How is net book value calculated?
A) acquisition cost of the asset minus its accumulated depreciation
B) acquisition cost of the asset minus its depreciation expense
C) estimated value of the asset minus its accumulated depreciation
D) acquisition cost of the asset plus it accumulated depreciation
Feedback: Net book value (or book value or carrying value) is equal the acquisition cost of the asset minus the accumulated depreciation of the asset which is maintained in a contra asset account titled Accumulated Depreciation. Learning Objective 1, Page 164.
3. Consider the following:Item Being Adjusted / Balance Sheet Item / Income Statement Item
Deferred revenue / Unearned Rent Revenues / Rent Revenue
Deferred expenses / Prepaid Expenses / Appropriate expense account
Accrued revenue / Accounts Payable / Appropriate revenue account
Accrued expenses / Appropriate liability / Appropriate expense account
Which line is incorrect with regard to the balance sheet account and the income statement account that is affected by the item being adjusted?
A) Deferred revenue
B) Deferred expenses
C) Accrued revenue
D) Accrued expenses
Feedback: Accrued revenue requires a debit to a "receivable" account and a credit to an appropriate revenue account; in other words, a debit to an asset account and a credit to a revenue account. Example: the accrual of interest earned but not yet received requires a debit to Interest Receivable and a credit to Interest IncomLearning Objective 2, Page 166.
4. During the adjustment process, Property and Equipment is considered to be and is treated as:
A) a deferred expense
B) an accrued expense
C) deferred revenue
D) accrued revenue
Feedback: Property and Equipment is a deferred expense account, but rather than credit the account directly for the used up or expired portion of the asset, a credit is made to a contra asset account titled Accumulated Depreciation. This effectively reduces the book value of the property and equipment. Learning Objective 2, Page 168.
5. Olivehurst Incorporated has made three quarterly prepaid income tax payments of $4,500 each. On December 31, it is determined that the income tax for the year is $15,000. What is the correct journal entry to adjust the Income Tax Expense account?
A) Income Tax Expense, debit, $1,500; Cash, credit, $1,500
B) Income Taxes Payable, debit, $1,500; Income Tax Expense, credit $1,500
C) Income Taxes Receivable, debit, $1,500; Income Tax Expense, credit , $1,500
D) Income Tax Expense, debit, $1,500; Income Taxes Payable, credit, $1,500
Feedback: The income tax prepaid to date was $13,500 ($4,500 x 3). The balance of income tax payable is $1,500 ($15,000 - $13,500). The income tax expense is an accrued expensAccrued expenses are previously unrecorded expenses that need to be adjusted at the end of the accounting period to reflect the amount incurred and its related payable account. Learning Objective 2, Page 171.
6. If the accountant forgets to adjust the Prepaid Expenses account, there will be:
A) an understatement of net income.
B) an overstatement of net income.
C) an overstatement of expense.
D) no under- or overstatement of net income
Feedback: The failure to adjust the Prepaid Expenses account will understate expenses by the amount not deducted from the Prepaid Expenses account and will, therefore, overstate net incomLearning Objective 2, Page 165
7. Employees are paid $2,400 on every Friday for a five-day workweek. The accounting period ends on Wednesday, December 31. Adjusting for the salaries and benefits expense for the last three days of the accounting period involves:
A) a deferred expense.
B) an accrued expense.
C) an accrued liability.
D) both (B) and (C).
Feedback: The adjusting entry is:Salaries and Benefits Expense (the accrued expense) / 1,440
Accrued Expenses Payable (the accrued liability) / 1,400
8. Which is the normal sequence in preparing the financial statements?
A) income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows
B) balance sheet, income statement, statement of cash flows, and statement of stockholders’ equity
C) income statement, statement of stockholders’ equity, balance sheet, and statement of cash flows
D) income statement, balance sheet, statement of cash flows, and statement of stockholders’ equity.
9. The changes in the Retained Earnings account are disclosed in which of the following financial statements?
A) income statement
B) statement of stockholders’ equity
C) balance sheet
D) statement of cash flows
10. Consider the following:Lumber Revenues / $120,000
Hardware Revenues / $90,000
Cost of Sales / $130,000
All other costs and expenses / $35,000
Investment Income / $8,000
Income Tax Expense / $13,000
Net income / $40,000
What is the net profit margin?
Feedback: Net Profit Margin = Net Income/Net Sales (or Operating Revenues). Net profit margin ratio is 0.1905 ($40,000/($120,000 + $90,000)), or 19.05%. Learning Objective 4, Page 178