Accounting 201 - Chapter 3 Review Test Quiz

Calculations: 20,000-6,000=14,000

In this scenario, the business is selling merchandise to a new customer at a discounted price of $65, while the normal selling price is $85. Since the business is making the sale at $65, it should record revenue of $65, as that is the actual amount of money received from the customer. The normal selling price of $85 is not relevant in this case as the business is offering a special discount to attract new customers.

Temporary accounts are accounts that relate to a limited period, typically a fiscal year. These accounts include revenue, expense, and dividend accounts. They are temporary because their balances are closed at the end of the accounting period and transferred to the retained earnings or owner's equity account. In contrast, permanent accounts, also known as real accounts, are accounts that are not closed at the end of the period and their balances are carried forward to the next accounting period. Asset and liability accounts are types of permanent accounts.

A prepaid expense refers to an expense that has been paid in advance but has not yet been used or consumed. It is considered an asset because it represents a future benefit for the company. The company will recognize the expense gradually over time as it is used or consumed. Therefore, prepaid expense is the correct answer.

Calculations: 15,000/3=5,000

Adjusting entries are prepared at the end of the accounting period to update certain accounts. These entries are necessary to ensure that the financial statements accurately reflect the company's financial position and performance. They are used to record transactions or events that have occurred but have not yet been recorded, such as accrued expenses or revenue, prepaid expenses, depreciation, and unearned revenue. By making these adjustments, the accountant can ensure that the financial statements provide a true and fair view of the company's financial position and comply with the accrual basis of accounting.

The Accumulated Depreciation account is used to record the cumulative depreciation of an asset over its useful life. Depreciation is an expense that reduces the value of an asset, so it is recorded as a credit entry in the account. Therefore, the normal balance of the Accumulated Depreciation account is a credit balance. This means that the total amount of accumulated depreciation is shown as a positive value on the balance sheet, indicating the total amount of depreciation that has been recorded for the asset.

Current assets are assets that can be easily converted into cash or used up within a year. Cash and receivables are both examples of current assets. Cash refers to the physical currency and cash equivalents that a company holds, while receivables represent the amounts owed to the company by its customers or clients. Both of these assets are considered current because they are expected to be converted into cash within a relatively short period of time.

Calculations: 800-150=650

Under accrual accounting, revenue is recorded when the services are performed, regardless of when the cash is received. This means that revenue is recognized when the company has fulfilled its obligations to provide goods or services to the customer, even if the customer has not yet paid for them. This allows for a more accurate reflection of the company's financial performance, as it matches revenue with the period in which it was earned, rather than when the cash is received.

Revenue is earned when the goods or services have been delivered to the customer because this is when the transaction is considered complete and the customer has received the value they paid for. At this point, the company can recognize the revenue and record it in their financial statements. Receiving cash, placing an order, or receiving a check from the customer are all steps that may occur before or after the delivery of goods or services, but they do not necessarily indicate that revenue has been earned.

The adjusted trial balance is used to prepare both the balance sheet and the income statement. The adjusted trial balance includes all the accounts and their balances after adjusting entries have been made at the end of the accounting period. These adjusted balances are then used to prepare the financial statements. The balance sheet presents the financial position of a company at a specific point in time, while the income statement shows the company's revenues, expenses, and net income over a period of time. Therefore, both the balance sheet and the income statement are prepared using the adjusted trial balance.

Calculations: 5,400/3= 1,800 rent per month. 1,800 *2 months used =3,600

Prepaid insurance is reported on the balance sheet as an asset because it represents the amount paid in advance for insurance coverage that has not yet been utilized. As the coverage period progresses, the prepaid insurance is gradually expensed and recorded as an expense on the income statement. Until then, it is considered an asset because it represents a future economic benefit to the company.

In accrual accounting, expenses and revenues are recorded when they are incurred, regardless of when the cash settlement occurs. This means that the correct answer is "expense or revenue is recorded before the cash settlement". This method allows for a more accurate representation of a company's financial position and performance, as it recognizes transactions as they happen, rather than waiting for the cash to be received or paid.

Calculations: 6,000/6=1,000 revenue per month*4months =4,000 earned

After the adjustments are journalized and posted, a(n) adjusted trial balance can be prepared to aid in the preparation of the financial statements. This is because the adjusted trial balance includes all the accounts with their updated balances after the adjustments have been made. It serves as a summary of all the accounts and their balances, making it easier to transfer the information to the financial statements such as the balance sheet and income statement. The adjusted trial balance ensures that all the accounts have been properly adjusted and provides a reliable basis for preparing accurate financial statements.

An accrued expense is a liability that arises from an expense that has been incurred but has not yet been paid. This means that the expense has been recorded in the accounting records, but the payment for it has not been made. Accrued expenses are typically recorded at the end of an accounting period to ensure that all expenses are properly accounted for, even if they have not been paid yet. This helps to provide a more accurate picture of the company's financial position and performance.

According to the revenue principle, revenue should be recorded when it has been earned. This means that revenue should only be recognized and recorded in the financial statements when the company has completed the earnings process, which typically occurs when goods or services have been delivered to the customer. This principle ensures that revenue is reported accurately and reflects the actual economic value generated by the company's operations. Recognizing revenue before it has been earned or when cash is received would not adhere to the revenue recognition principle.

The correct answer is to debit wages expense and credit wages payable. This is because when wages have been earned but not yet paid, it is necessary to record the expense in the wages expense account to reflect the cost incurred by the company. At the same time, the company also has a liability to pay these wages, which is recorded in the wages payable account.

The financial statements are prepared from the adjusted trial balance because it provides an accurate and up-to-date record of all the accounts after adjusting entries have been made. Adjusting entries are necessary to ensure that revenues and expenses are properly recognized in the correct accounting period. Therefore, the adjusted trial balance reflects the true financial position of the company and is used as a basis for preparing the financial statements such as the income statement, balance sheet, and cash flow statement.

The book value of a plant asset is the cost of the asset less the accumulated depreciation. This is because the book value represents the net value of the asset after accounting for the depreciation that has been allocated over its useful life. By subtracting the accumulated depreciation from the cost of the asset, we can determine the remaining value of the asset on the company's books.

Unearned revenue is a liability account because it represents the money received by a company in advance for goods or services that have not yet been delivered or performed. It is considered a liability because the company has an obligation to provide the goods or services in the future. As the company fulfills its obligation, the unearned revenue is gradually recognized as revenue on the income statement.

In the adjusting entry to record insurance expired during the current period, the account that is debited is Insurance Expense. This is because insurance expense represents the cost of the insurance that has been used up or expired during the period. By debiting Insurance Expense, we are recognizing and recording the expense in the appropriate period, in accordance with the matching principle of accounting.

Closing entries transfer the revenue, expense, and dividends balances to retained earnings. This is done at the end of an accounting period to update the financial records and prepare for the next period. By transferring these balances to retained earnings, the company is effectively closing out the temporary accounts and carrying over the net income or loss to the retained earnings account. This ensures that the income statement accounts start fresh in the new period, while the retained earnings account reflects the cumulative profits or losses of the company over time.

According to the accrual basis of accounting, expenses should be recorded when they are incurred, regardless of when they are paid. Since the expense was incurred in 2010, it should appear on the 2010 income statement, even if it is not paid until 2011.

Calculations: 5,400/6= 900 revenue per month. 900 *5 months used =4,500 earned
Beg bal in unearned 5,400 less 4,500 earned = 900 ending balance

The given statement "Adjustments are made during the month" is NOT true regarding the adjusting process. The adjusting process involves making necessary adjustments to ensure that the financial statements accurately reflect the company's financial position and performance at the end of the accounting period. These adjustments are typically made at the end of the accounting period, such as monthly, quarterly, or annually, and not during the month.

Depreciation expense represents the allocation of the cost of an asset over its useful life. In the adjusting entry to record depreciation expense, the account that is debited is Depreciation Expense. This is because depreciation expense is an expense account that reflects the decrease in value of the asset over time. By debiting Depreciation Expense, the company recognizes the reduction in the asset's value and records the corresponding expense in the income statement.

Prepaid expenses are initially recorded as assets because they represent future benefits that have been paid for in advance. However, as time passes and the benefits are consumed or expire, they are no longer considered assets and are instead recognized as expenses. This is because the benefits have been used up and no longer provide any value to the company. Therefore, the correct answer is that prepaid expenses become expenses when their future benefits expire.

The correct answer is "Contra-asset account." Accumulated Depreciation is a contra-asset account because it is used to offset the value of an asset on the balance sheet. It represents the total depreciation expense that has been recorded over the life of the asset. As a contra-asset account, it has a credit balance and is subtracted from the related asset account to determine the net book value of the asset.

The correct answer is to credit retained earnings. When closing the revenue account, the revenue is transferred to the retained earnings account. This is done by crediting retained earnings, which increases the balance in the account. Debiting retained earnings would decrease the balance, and crediting revenue would not properly close the revenue account. Therefore, the correct action is to credit retained earnings.

An accrued revenue adjustment increases net income for the period because it recognizes revenue that has been earned but not yet received in cash. This adjustment increases both revenue and net income, as it reflects the company's ability to generate revenue even if the cash has not been received.

Rent Expense is considered a "temporary" account because it is an expense account that records the cost of renting a property for a specific period of time. Temporary accounts are used to track revenues, expenses, and withdrawals for a specific accounting period and are closed at the end of the period, transferring their balances to the retained earnings account. Rent Expense is closed at the end of each accounting period to accurately reflect the current period's expenses and to start the next period with a zero balance.

The correct answer is Salary Expense. In the adjusting entry to record salaries owed to employees but not paid until the next accounting period, the Salary Expense account is debited. This is because the company has incurred the expense of salaries owed to employees during the current accounting period, even though the payment will be made in the next period. By debiting the Salary Expense account, the company recognizes and records the expense in the current period's financial statements, reflecting the true financial position of the company.

An accrued expense adjustment increases expenses and increases liabilities. This means that an expense is recognized on the financial statements even though it has not yet been paid. This adjustment increases the amount of expenses reported on the income statement, which in turn increases the total liabilities reported on the balance sheet. This reflects the obligation of the company to pay the expense in the future.

Calculations: 9,000/6=1,500 insurance expense per month
1,500*2 months = 3,000 insurance expense Beg bal 9,000-3,000=6,000

Calculations: 900-200=700

Debiting retained earnings is the correct answer because closing expense accounts involves transferring their balances to the retained earnings account. Debiting retained earnings will decrease the account balance, reflecting the reduction in earnings due to the expenses incurred. This ensures that the income statement is reset for the next accounting period and the expenses are properly accounted for in the retained earnings account.

The expense of the advertising campaign should be recognized when the commercials are broadcast. This is because the cost of the campaign is incurred and the company starts to receive the benefits of the advertising when the commercials are actually aired on television. Until then, the planning, filming, and payment to the television stations are all part of the preparation process and do not represent the actual expense of the campaign.