Mastering Adjusting Entries
MASTERING ADJUSTING ENTRIES
TESTBANK
Section 1WHY WE USE ACCRUALS, DEFERRALS AND OTHER ADJUSTMENTS
1. In accrual accounting, an expense is recognized when it is:
a. paid
b. posted to the general ledger
c. incurred
d. either b or c
2. In cash basis accounting, an expense is recognized when it is:
a. paid
b. posted to the general ledger
c. incurred
d. either b or c
3. In accrual basis accounting, revenue is recognized when it is:
a. received
b. earned
c. posted to the general ledger
d. either b or c
4. In cash basis accounting, revenue is recognized when it is:
a. received
b. earned
c. posted to the general ledger
d. either b or c
5. On December 1, 20X1, your calendaryear firm receives $12,000 in advance for work to be performed evenly over the next 12 months. Under the cash and accrual methods,respectively, this revenue will be reported on the 20X1 income statement as:
a. $1,000 and $1,000
b. $12,000 and $12,000
c. $1,000 and $12,000
d. $12,000 and $1,000
6.The two types of adjusting entries are:
a.cash and revenue
b.debit and credit
c.accrual and deferral
d.deferral and prepayment
7.Adjusting entries:
a.never include a cash account
b.are made when there have been prepayments during the year
c.may be necessary when revenue has been earned in one period but received in another
d.all of the above
© American Institute of Professional Bookkeepers, 2010
Section 2ACCRUED REVENUE
1.Accrued revenue is:
a.payment received for work completed
b.revenueearned but not received
c.a debit to cash
d.a credit to cash
2.The journal entry to accrue $500 commissions’ revenue is:
a.Cash500
Commissions Revenue500
b.Commissions Revenue500
Cash500
c.Commissions Revenue500
Accounts Receivable 500
d.Accounts Receivable500
Commissions Revenue500
3.Several years ago, yourcalendar yearcompany issued a $15,000note at 8% a year interestdue each July 31. If no interest is received this year,what journal entrydo you record at year end?
a.Interest Receivable500
Deferred Revenue500
b.Interest Receivable1,200
Deferred Revenue1,200
c.Interest Receivable1,200
Interest Revenue1,200
d.Interest Receivable500
Interest Revenue500
4.As of yearend,your firmwas owed $4,000 for work completed, but had received only $1,500, that you debited to Revenue. By what amount must the balance in Revenue be adjusted at year end?
a.$4,000
b.$1,500
c.$2,500
d.$0
5.Your company performs work for a customer, butas of year end,has received no payment. If you do notrecord an adjusting entry at year end, how will the financial statements be affected?
Net incomeAssetsLiabilities
a.overstatednot affectedunderstated
b.overstatedoverstatednot affected
c.understatednot affectedoverstated
d.understatedunderstatednot affected
Section 3ACCRUED EXPENSES (ACCRUED LIABILITIES)
1.Your company has a 5-day workweek with a weekly payroll of$20,000 distributed each Friday.If an accounting period ends on a Tuesday, the adjusting journal entry is:
a.Salary Expense4,000
Salary Payable4,000
b.Salary Expense8,000
Salary Payable8,000
c.Accrued Salary8,000
Salary Payable8,000
d.Deferred Salary4,000
Salary Payable4,000
2.If a company receives a December electric bill for $1,000 and decides to pay it in January:
a.no adjustment is required
b.the company must record a journal entry that debits Utilities Expense and credits Utilities Expense Payable
c. the company must record a journal entry that debits an asset account and credits an expense account
d. none of the above
3.Your company has a 5-day workweek and a weekly payroll of$35,000 that it distributes each Friday. When an accounting period ends on a Thursday, which of the following entries will you record?
a.Salary Payable14,000
Salary Expense14,000
b.Salary Expense14,000
Salary Payable14,000
c.Salary Payable28,000
Salary Expense28,000
d.Salary Expense28,000
Salary Payable28,000
4.On November 1, your calendar year firm receives a $5,000 invoicefor magazine adsthat will run for the next 5 months. If you remit $1,000 on November 1 anddebitAdvertising Expense, thenpay the remainderin January, which of the following entries will you record at year end?
a.Advertising Expense1,000
Cash1,000
b.Advertising Expense2,000
Advertising Payable2,000
c.Advertising Expense1,000
Advertising Payable1,000
d.Advertising Expense5,000
Advertising Payable5,000
5.A company pays its employees every Friday. This year, the company’s year ends on a Wednesday. If it does not to accrue salaries for the week,how will the financial statements be affected?
Net incomeAssetsLiabilities
a.overstatednot affectedunderstated
b.overstatedoverstatednot affected
c.understatednot affectedoverstated
d.understatedunderstatednot affected
6.On August 1, your company takes a$10,000 note that requiresyour firm to repayprincipal and accrued interest of 8%a year at the end of 4 years.Which entry shouldyou record at the end of this year?
a.Interest Expense800
Cash800
b.Interest Expense333
Interest Payable333
c.Interest Expense800
Interest Payable800
d.Interest Expense467
Interest Payable467
7.On November 1, 20X4, you record a $20,000note receivable,debitingCash and crediting Notes Payable. The note matures on May 1, 20X5 when principal and accrued interest of 6% a year is due. On December 31, 20X4, your adjusting entry for accrued interest willinclude:
a.a debit to Interest Payable for $400
b.a debit to Interest Expense for $200
c.a credit to Interest Payable for $400
d.none of the above
Section 4REVENUE COLLECTED IN ADVANCE (UNEARNED REVENUE)
1.A companycollects payment in advance, debitingCash and creditingRevenue.At year end, an adjusting entry:
a. is not required if all the advance payment has been earned
b. may need to debit Revenue
c. may need to debit Unearned Revenue
d. both a and b
2.On September 1, your calendar year company rents a machine to another firm for $24,000 ayear.As of December 31,$17,000 has been received andrecorded in Rent Revenue.What adjusting entry do you record at year end?
a.Rent Revenue9,000
Unearned Rent Revenue9,000
b.Rent Revenue8,000
Unearned Rent Revenue8,000
c.Rent Revenue9,000
Accounts Receivable9,000
d.Unearned Rent Revenue8,000
Rent Revenue8,000
3.On September 1, your calendar year company rents a machine to another firm for $24,000 a year. If, at year end, $15,000 has been received and recorded in Rent Revenue, what adjusting entry do you record at year end?
a.Rent Revenue8,000
Unearned Rent Revenue8,000
b.Unearned Rent Revenue7,000
Rent Revenue7,000
c.Unearned Rent Revenue8,000
Rent Revenue8,000
d.Rent Revenue7,000
Unearned Rent Revenue7,000
4.Your company receives a $40,000 advance for a $125,000 painting job and you credit Painting Revenue. If, at yearend, 14% of the job has been completed, what adjusting entry will you record?
a.Painting Revenue22,500
Cash22,500
b.Unearned Painting Revenue22,500
Cash22,500
c.Painting Revenue22,500
Unearned Painting Revenue22,500
d.Unearned Painting Revenue22,500
Painting Revenue22,500
5.Your company receives a $75,000 advance for 1 year's rent that you record inRent Received In Advance. If, at year end, 3 months have elapsed, what adjusting entry will you record?
a.Rent Revenue18,750
Rent Received in Advance18,750
b.Rent Revenue56.250
Rent Received in Advance56.250
c.Rent Received in Advance18,750
Rent Revenue18,750
d.Rent Received in Advance56,250
Rent Revenue56,250
6.On October 11, your firmreceives a $7,500 down-payment toward a $15,000 video your firm will produce, and you book it in Unearned Revenue. If, at year end, 20% of the work is completed,what adjusting entry will you record?
a.Unearned Revenue3,000
Revenue3,000
b.Cash3,000
Revenue3,000
c.Revenue3,000
Unearned Revenue3,000
d.Unearned Revenue1,500
Revenue1,500
7.On April 1, a company takes on an 18-month job and receives a $10,000 advancethat is recorded in Revenue. If no adjusting entryis made at year end, how will the financial statements be affected?
Net incomeAssetsLiabilities
a.overstatednot affectedunderstated
b.overstatedoverstatednot affected
c.understatednot affectedoverstated
d.understatedunderstatednot affected
8.On April 1, a company takes on an 18-month job and receives a $10,000 advancethat is recorded in Unearned Revenue. If no adjusting entry is made at year end, how will the financial statements be affected?
Net incomeAssetsLiabilities
a.overstatednot affectedunderstated
b.overstatedoverstatednot affected
c.understatednot affectedoverstated
d.understatedunderstatednot affected
Section 5PREPAID (DEFERRED) EXPENSES
1.Your firm buys $27,000 of office supplies and debits Supplies Expense. If, at yearend, $6,000 of supplies are on hand,what adjusting entry will you record?
a.Supplies OnHand6,000
Supplies Expense6,000
b.Supplies OnHand21,000
Supplies Expense21,000
c.Supplies Expense21,000
Supplies OnHand21,000
d.Supplies Expense6,000
Supplies OnHand6,000
2.Your company prepays $15,000 for a 1-year insurance policythat you recordedinPrepaid Insurance. When the fiscal year ends 3 months later, what adjusting entry will you record?
a.Prepaid Insurance11,250
Insurance Expense11,250
b.Prepaid Insuranc1e3,750
Insurance Expense3,750
c.Insurance Expense11,250
Prepaid Insurance11,250
d.Insurance Expense3,750
Prepaid Insurance3,750
3.On October 1, your calendar year company signs a $20,000 contract to have its offices painted and makes a down-payment of $14,000 that you recorded in Painting Expense. If, on December 31, management informs you that 25% of the work has been completed, what adjusting entry will you record?
a.a debit to Painting Expense for $5,000
b.a credit to Painting Expense for $9,000
c.a debit to Painting Expense for $9,000
d.a credit to Painting Expense for $5,000
4.Your calendar year company pays $12,000 a year forsecurity services. On November 1, you remit payment for the next 3 months' service and record it in Prepaid Security Expense. At year end,what adjusting entry will you record?
a.Prepaid Security Expense1,000
Security Expense1,000
b.Security Expense2,000
Prepaid Security Expense2,000
c.Security Expense3,000
Prepaid Security Expense3,000
d.Prepaid Security Expense1,000
Cash1,000
5.On September 1, your calendar year company pays $12,000 for 1 year’s rentthat you debit toPrepaid Rent. At year end, what adjusting entry will you record?
a.Prepaid Rent4,000
Rent Expense4,000
b.Rent Expense4,000
Cash4,000
c.Rent Expense4,000
Prepaid Rent4,000
d.Prepaid Rent8,000
Rent Expense8,000
6.In June, your calendar year companypays $1,200 for a 1-year insurance policy that you recorded in Prepaid Insurance. If you do notrecord an adjusting entry at year end, how will the financial statements be affected?
Net incomeAssetsLiabilities
a.overstatednot affectedunderstated
b.overstatedoverstatednot affected
c.understatednot affectedoverstated
d.understatedunderstatednot affected
7.In October, your calendar year companypays $1,200 for 1 year’s rent that you recorded in Rent Expense. If you do notrecord an adjusting entry at year end, how will the financial statements be affected?
Net incomeAssetsLiabilities
a.overstatednot affectedunderstated
b.overstatedoverstatednot affected
c.understatednot affectedoverstated
d.understatedunderstatednot affected
8.In July,your calendar year companypays $1,200 for 1 year’s insurance that you recorded inPrepaid Insurance. If you do notrecord an adjusting entry at year end, how will the financial statements be affected?
Net incomeAssets
a.overstatedoverstated
b.overstatedunderstated
c.understatedoverstated
d.understatedunderstated
9.In April, your calendaryear company pays $1,200 for 1 year’s rent that you recorded inPrepaid Rent.If you do notrecord an adjusting entry at year end, how will the financial statements be affected?
Net incomeAssets
a.overstatedoverstated
b.overstatedunderstated
c.understatedoverstated
d.understatedunderstated
10.On August 1, 20X8, your calendar yearfirm takes out a 3-year insurance policy at a total cost of $3,600 that requires a 50% down-payment and the remainder after 6 months. Insurance expense for 20X8 is:
a.$500
b.$600
c.$1,200
d.$1,800
Section 6OTHER END-OF-PERIOD ENTRIES
1.A plant asset with anoriginal cost of $121,875 and a residual value of $15,000has a useful life of 9 years. Under the straight-line method, the journal entry to record the annual depreciation expense is:
a.Depreciation Expense13,542
Accumulated Depreciation13,542
b.Depreciation Expense11,875
Accumulated Depreciation11,875
c.Depreciation Expense10,250
Fixed Asset10,250
d.Depreciation Expense1,625
Accumulated Depreciation1,625
2.Company A has a fixed asset with an original cost of $300,000, a residual value of $25,000 anda useful life of 10 years. The company also has land with an original cost of $1,000,000. Under the straight-line method, the journal entry to record the annual depreciation expense is:
a.Depreciation Expense27,500
Accumulated Depreciation27,500
b.Depreciation Expense30,000
Fixed Asset30,000
c.Depreciation Expense26,000
Accumulated Depreciation26,000
d.Depreciation Expense5,000
Accumulated Depreciation5,000
3.Company B estimates bad debt expense at2% of credit sales, which were $610,000 for the year. The journal entry to record bad debt expense is:
a.Bad Debt Expense8,580
Allowance for Doubtful Accounts8,580
b.Allowance for Doubtful Accounts8,580
Bad Debt Expense8,580
c.Bad Debt Expense12,200
Allowance for Doubtful Accounts12,200
d.Allowance for Doubtful Accounts5,720
Bad Debt Expense5,720
4.If, at year end, the balance in A/R is $920,000, of which5%is estimated to be uncollectible, and the Allowance for Doubtful Accounts has a credit balance of $34,000,the journal entry to record bad debt expense is:
a.Bad Debt Expense46,000
Allowance for Doubtful Accounts46,000
b.Allowance for Doubtful Accounts46,000
Bad Debt Expense46,000
c.Bad Debt Expense12,000
Allowance for Doubtful Accounts12,000
d.Allowance for Doubtful Accounts12,000
Bad Debt Expense12,000
5.If, at year end, the balance in A/R is $525,000, of which4% is estimated to be uncollectible, and the Allowance for Doubtful Accounts has a debit balance of $7,000,the journal entry to record bad debt expense is:
a.Bad Debt Expense28,000
Allowance for Doubtful Accounts28,000
b.Allowance for Doubtful Accounts21,000
Bad Debt Expense21,000
c.Bad Debt Expense7,000
Allowance for Doubtful Accounts7,000
d.Allowance for Doubtful Accounts28,000
Bad Debt Expense28,000
6.Your company estimates bad debt expense as a percentage of Accounts Receivable that will be uncollectible, which comes to $18,000 for the current year. The Allowance for Doubtful Accounts has a credit balance of $15,000. If noadjusting entryis recoded at year end, how will the financial statements be affected?
Net incomeAssets
a.overstatedoverstated
b.overstatedunderstated
c.understatedoverstated
d.understatedunderstated
7.If Company E has a fixed asset with an original cost of $95,000, auseful life of 8 yearsand a residual value of $13,000, the journal entry for annual depreciation under the straight-line method is:
a.Depreciation Expense10,250
Accumulated Depreciation10,250
b.Depreciation Expense11,875
Accumulated Depreciation11,875
c.Accumulated Depreciation11,875
Depreciation Expense11,875
d.Accumulated Depreciation10,250
Depreciation Expense10.250
8.Company F has a fixed asset with a useful life of 5 yearsand a residual value of $22,000. The asset had an original cost of $152,000 and the company’s land had an original cost of $750,000. What is the adjusting entry to record annual depreciationunder the straight-line method?
a.Depreciation Expense30,400
Fixed Asset30,400
b.Depreciation Expense180,400
Accumulated Depreciation180,400
c.Depreciation Expense26,000
Accumulated Depreciation26,000
d.Accumulated Depreciation176,000
Depreciation Expense176,000
9.Company G has a fixed asset with an original cost of $73,000,a useful life of 6 years and a residual value of $8,000. The journal entry to record Company G’s annual depreciation under the straight-line methodis:
a.Depreciation Expense12,167
Accumulated Depreciation12,167
b.Accumulated Depreciation12,167
Depreciation Expense12,167
c.Accumulated Depreciation10,833
Depreciation Expense10.833
d.Depreciation Expense10,833
Accumulated Depreciation10,833
10.You are given the following data for a fixed asset:
Original cost$31,000
Useful life9 years
Residual value$4,000
How do you record annual depreciation for the asset under the straight-line method?
a.Depreciation Expense444
Fixed Asset444
b.Depreciation Expense3,000
Accumulated Depreciation3,000
c.Accumulated Depreciation3,444
Depreciation Expense3,444
d.Depreciation Expense3,444
Accumulated Depreciation3,444
11.The data for a fixed asset owned by Company H is as follows:
Original cost$223,000
Useful life7 years
Residual value$40,000
The journal entry to record the asset’s annual depreciationunder the straight-line methodis:
a.Depreciation Expense26,143
Accumulated Depreciation26,143
b.Accumulated Depreciation26,143
Depreciation Expense26,143
c.Depreciation Expense31,857
Accumulated Depreciation31,857
d.Accumulated Depreciation5,714
Depreciation Expense5,714
12.If your firm estimates bad debt expense as2% of credit sales, which are $286,000 for the year, and the Allowance for Doubtful Accounts has a debit balance of $2,860, how do you record bad debt expense?
a.Bad Debt Expense8,580
Allowance for Doubtful Accounts8,580
b.Allowance for Doubtful Accounts8,580
Bad Debt Expense8,580
c.Bad Debt Expense5,720
Allowance for Doubtful Accounts5,720
d.Allowance for Doubtful Accounts5,720
Bad Debt Expense5,720
13.If CheapCo estimates bad debt expense as a percentage of its $159,000credit sales, estimates 3% for this year and has an Allowance for Doubtful Accounts with a credit balance of $1,230, how does it record bad debt expense?
a.Bad Debt Expense4,770
Allowance for Doubtful Accounts4,770
b.Bad Debt Expense3,540
Allowance for Doubtful Accounts3,540
c.Allowance for Doubtful Accounts4,770
Bad Debt Expense4,770
d.Allowance for Doubtful Accounts3,540
Bad Debt Expense3,540
14.If a company fails to record an adjusting entryfor depreciation expense at year end, how will the financial statements be affected?
Net incomeAssets
a.overstatedoverstated
b.overstatedunderstated
c.understatedoverstated
d.understatedunderstated
15.ByCoestimates bad debt as a percentage of credit sales. If it fails to record an adjusting entry at year end, how will it affect ByCo’s financial statements?
Net incomeAssets
a.overstatedoverstated
b.overstatedunderstated
c.understatedoverstated
d.understatedunderstated
16.This year, your companyestimatesthat $18,000 of A/R will be uncollectible. The Allowance for Doubtful Accounts has a credit balance of $5,000. If no adjusting journal entry is recorded, how will the financial statements be affected?
Net incomeAssets
a.overstatedoverstated
b.overstatedunderstated
c.understatedoverstated
d.understatedunderstated
Section 7FROM UNADJUSTED TRIAL BALANCE TO FINANCIAL STATEMENTS
and
Section 8APPLYING YOUR KNOWLEDGE TO THE TRIAL BALANCE
1.Adjusting entries:
a.always involve two income statement accounts
b. always involve a balance sheet account and an income statement account
c. never involve cash
d. both b and c
2.Interest Receivable and Interest Payable are:
a.balance sheet accounts
b.income statement accounts
c.liability accounts
d.asset accounts
3.Which of the following accounts normally has a credit balance?
a.Prepaid Taxes
b.Interest Income
c.Rent Expense
d.Equipment
4.Which of the following is not a liability account?
a.Prepaid Rent
b.Accrued Salaries
c.Payroll Taxes Payable
d.Unearned Revenue
5.The chart of accounts is normally presented in the following sequence:
a.Income, Expense, Asset, Liability, Equity
b.Equity, Liability, Asset, Expense, Income
c.Asset, Liability, Equity, Revenue, Expenses
d.None of the above
6.Numbering of accounts is generally in the following sequence:
a.Income, Expense, Asset, Liability, Equity
b.Equity, Liability, Asset, Expense, Income
c.established by GAAP
d.none of the above
7.Which of the following accounts has a normal debit balance?
a.Rent Receivable
b.Interest Payable
c.Prepaid Legal Fees
d.both a and c
8.Which of the following accounts has a normal credit balance?
a.Accumulated Depreciation
b.Unearned Revenue
c.Supplies On-Hand
d.both a and b
9.Which of the following accounts has a normal debit balance?
a.Accumulated Depreciation
b.Allowance for Doubtful Accounts
c.Rent Revenue
d.none of the above
10.Which of the following accounts has a normal credit balance?
a.Unearned Subscription Revenue
b.Supplies On-Hand
c.Interest Receivable
d.none of the above
Questions 11-14:MidCo is a calendar year company. Below is its partial worksheet for, for the year ended December 31, 20X8. Use the data to answer the next four questions.
Unadjustedtrial balance / Adjustments / Adjusted
trial balance
Dr / Cr / Dr / Cr / Dr / Cr
Accounts Receivable / 50,000
Allow. For Doubtful Accounts / 2,000
Supplies On Hand / 1,500
Wages Payable / 1,000
Notes Payable / 20,000
Bad Debt Expense
Supplies Expense / 600
Wage Expense / 4,000
11.If the partial adjustment to Wages Payable is correct, what is the adjusted balance in Wage Expense?
a.$4,000
b.$5,000
c.$3,000
d.$1,000
12.If the adjustment to Supplies Expense is correct, what is the adjusted balance in Supplies On Hand?
a.$1,500
b.$2,100
c.$1,900
d.$900
13.If the company estimates 4% of Accounts Receivable to be uncollectible, what is the debit toBad Debt Expense in the adjustments column?
a.$0
b.$2,000
c.$4,000
d.$1,000
14.On July 1, 20X6, the company borrowed $20,000 and must repay principal and accrued interest of 10%a year on July 1, 20X9. Based on this information, the debit to Interest Expense in the Adjustments column is:
a.$0
b.$1,000
c.$2,000
d.$4,000
Testbank1