# Method Of Accounting Chapter 3

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• 1.

### On November 1, Rosebriar Apartments received \$3,600 from a tenant for four months rent. The receipt was credited to Unearned Rent Revenue. What adjusting entry is needed on Dec 31?

• A.

Debit unearned rent revenue 1800, credit rent revenue 1800

• B.

Debit cash 900, credit rent revenue 900

• C.

Debit unearned rent revenue 900, credit rent revenue 900

• D.

Debit rent revenue 900, credit unearned rent revenue 900

A. Debit unearned rent revenue 1800, credit rent revenue 1800
Explanation
The adjusting entry on December 31 is needed to recognize the portion of the rent that has been earned during the current month. Since the tenant paid for four months of rent in advance, only one month's worth of rent has been earned by December 31. Therefore, the unearned rent revenue account needs to be reduced by the amount of rent that has been earned, which is \$1,800. At the same time, the rent revenue account needs to be credited with the same amount to reflect the revenue that has been earned.

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• 2.

### Sullivan, Inc. purchased supplies for \$1,500 during 2012. At year end, Sullivan had \$400 of supplies left. The adjusting entry would be

• A.

Debit supplies expense 1,100

• B.

Credit supplies 400

• C.

Debit supplies 400

• D.

Debit supplies 1,100

A. Debit supplies expense 1,100
Explanation
The adjusting entry would be to debit supplies expense for \$1,100. This is because the supplies expense account needs to be adjusted to reflect the amount of supplies that were used up during the year. Since Sullivan had \$400 of supplies left at year end, it means that \$1,100 worth of supplies were used up (\$1,500 - \$400 = \$1,100). Therefore, the supplies expense account needs to be debited by \$1,100 to accurately reflect the amount of supplies that were used.

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• 3.

### The accountant for Zero failed to make the adjusting entry to record depreciation for the current year. The effect of this error is which of the following?

• A.

Assets and expenses are understated; net income is understated

• B.

Net income is overstated and liabilities are understated

• C.

Assets, net income, and stockholders' equity are overstated

• D.

Assets are overstated; stockholders' equity and net income are understated

C. Assets, net income, and stockholders' equity are overstated
Explanation
The correct answer is "Assets, net income, and stockholders' equity are overstated." This is because depreciation expense is an expense that should be recognized to allocate the cost of an asset over its useful life. By failing to record depreciation, the accountant is not accurately reflecting the decrease in the value of the asset over time. As a result, assets, net income, and stockholders' equity are all overstated because the value of the asset is not being properly reduced.

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• 4.

### Interest earned on a note receivable equals \$225. What adjusting entry is required to accrue this interest?

• A.

Debit interest receivable, credit interest revenue

• B.

Debit interest payable, credit interest expense

• C.

Debit interest expense, credit cash

• D.

Debit interest expense, credit interest payable

A. Debit interest receivable, credit interest revenue
Explanation
To accrue the interest earned on a note receivable, the adjusting entry should debit interest receivable and credit interest revenue. This entry recognizes the interest that has been earned but not yet received in cash. By debiting interest receivable, it increases the amount owed to the company for the interest, and by crediting interest revenue, it increases the revenue account to reflect the earned interest.

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• 5.

### IF a real estate company fails to accrue commission revenue,

• A.

Liabilities are overstated, and owners' equity is understated

• B.

Assets are understated, and net income is understated

• C.

Net income is understated, stockholders equity is overstated

• D.

Revenues are understated, and net income is overstated

B. Assets are understated, and net income is understated
Explanation
If a real estate company fails to accrue commission revenue, it means that the company has not recorded the revenue it has earned from commissions. This will result in the company's assets being understated because the revenue has not been recognized and added to the company's accounts. Additionally, since the revenue has not been recorded, the net income of the company will also be understated because the revenue is a part of the company's earnings. Therefore, the correct answer is that assets are understated, and net income is understated.

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• 6.

### Which statement is false?

• A.

The expense recognition principle directs accountants to identify and measure all expenses incurred and deduct them from revenues earned during the same period

• B.

Accrual accounting produces better information than cash-basis accounting

• C.

A fiscal year ends on some date other than Dec 31

• D.

D. Adjusting entries are required for a business that uses cash basis
Explanation
The statement "Adjusting entries are required for a business that uses cash basis" is false. Adjusting entries are not required for a business that uses cash basis accounting because cash basis accounting only recognizes revenue and expenses when cash is received or paid. Adjusting entries are used in accrual accounting to ensure that revenue and expenses are recorded in the correct accounting period, regardless of when cash is exchanged.

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• 7.

### The account Unearned Revenue is a(n)

• A.

Revenue

• B.

Asset

• C.

Liability

• D.

Expense

C. Liability
Explanation
The account Unearned Revenue is classified as a liability because it represents money that has been received by a company in advance for goods or services that have not yet been provided. This liability is created because the company has an obligation to fulfill the promised goods or services in the future. Once the goods or services are delivered, the unearned revenue is recognized as revenue and moved from the liability section to the revenue section of the balance sheet.

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• 8.

### An adjusting entry that debits an expense and credits a liability is which type?

• A.

Accrued expense

• B.

Prepaid expense

• C.

Depreciation expense

• D.

Cash expense

A. Accrued expense
Explanation
An adjusting entry that debits an expense and credits a liability is classified as an accrued expense. This type of entry is made to recognize an expense that has been incurred but not yet paid or recorded. By debiting the expense account, it reflects the increase in expenses, and by crediting the liability account, it acknowledges the obligation to pay the expense in the future. This entry ensures that the financial statements accurately reflect the expenses incurred during the accounting period.

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• 9.

### On a trial balance, which of the following would indicate that an error has been made?

• A.

Service revenue has a debit balance

• B.

Accumulated depreciation has a credit balance

• C.

Salary expense has a debit balance

• D.

All of the above are correct

A. Service revenue has a debit balance
Explanation
If service revenue has a debit balance on a trial balance, it indicates that an error has been made. Service revenue should normally have a credit balance, as it represents income earned by providing services. A debit balance suggests that the revenue has been understated or that a transaction has been recorded incorrectly. This error should be identified and corrected to ensure the accuracy of the financial statements.

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• 10.

### The entry to close Management Fee Revenue would be which of the following?

• A.

Debit Management Fee Revenue, credit retained earnings

• B.

Management Fee Revenue does not need to be closed

• C.

Debit retained earnings, credit management fee revenue

• D.

Debit management fee revenue, credit service revenue

A. Debit Management Fee Revenue, credit retained earnings
Explanation
The entry to close Management Fee Revenue would be to debit Management Fee Revenue and credit retained earnings. This is because Management Fee Revenue is a revenue account, and at the end of the accounting period, revenue accounts are closed by transferring their balances to the retained earnings account. By debiting Management Fee Revenue and crediting retained earnings, we are reducing the revenue account and increasing the retained earnings account, effectively closing the revenue account and transferring its balance to retained earnings.

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• 11.

### Which of the following accounts is not closed?

• A.

Dividend

• B.

Interest revenue

• C.

Accumulated depreciation

• D.

Depreciation expense

C. Accumulated depreciation
Explanation
Accumulated depreciation is not closed because it is a contra-asset account that is used to track the total depreciation expense of an asset over its useful life. Unlike other accounts such as dividend, interest revenue, and depreciation expense, which are closed at the end of an accounting period, accumulated depreciation carries a running balance that continues to accumulate over time as assets depreciate. This balance is then used to calculate the net book value of the asset on the balance sheet.

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• 12.

### FedEx earns service revenue of \$750,000. How does this transaction affect FedEx's transactions?

• A.

Improves the current ratio and hurts the debt ratio

• B.

Hurts the current ratio and improves the debt ratio

• C.

Improves both

• D.

Hurts both

A. Improves the current ratio and hurts the debt ratio
Explanation
When FedEx earns service revenue of \$750,000, it increases their current assets, which in turn improves their current ratio. The current ratio measures a company's ability to pay off its short-term liabilities using its short-term assets, so an improvement in this ratio indicates better liquidity. However, this transaction does not affect the company's debt, so the debt ratio remains the same. Therefore, the correct answer is that it improves the current ratio and hurts the debt ratio.

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• 13.

### A company makes a \$200 sale on account. It later collects \$200 in cash. Under the accrual method of accounting, revenue is recognized:

• A.

When the cash is collected

• B.

• C.

• D.

At a time that cannot be determined from the facts

B. When the sale is made
Explanation
Under the accrual method of accounting, revenue is recognized when the sale is made. This means that the company recognizes the revenue as soon as it makes the sale, regardless of when the cash is collected. This method allows the company to match the revenue with the expenses incurred to generate that revenue, providing a more accurate representation of the company's financial performance.

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• 14.

### An expense incurred in 2010 is not paid until 2011. Using the accrual basis of accounting, the expense should appear on

• A.

The 2010 income statement

• B.

The 2011 income statement

• C.

Neither the 2010 nor 2011 income statement

• D.

Both statements

A. The 2010 income statement
Explanation
Using the accrual basis of accounting, expenses are recognized when they are incurred, regardless of when they are paid. Therefore, the expense incurred in 2010 should appear on the 2010 income statement, even if it is not paid until 2011. This is because the accrual basis of accounting focuses on matching expenses with the period in which they are incurred, rather than when they are actually paid.

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• 15.

### A company using accrual basis accounting pays \$15,000 on Dec. 1 for a television campaign. Commercials will run every Dec, Jan, and Feb. How much expense will be reported on an income statement prepared for the month of Dec?

• A.

0

• B.

5,000

• C.

10,000

• D.

15,000

B. 5,000
Explanation
The expense reported on the income statement for the month of December will be \$5,000. This is because accrual basis accounting recognizes expenses when they are incurred, not when they are paid. Since the company paid \$15,000 on December 1 for a television campaign that will run over the next three months, only one-third of the total expense (\$15,000/3 = \$5,000) will be reported on the income statement for the month of December.

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• Current Version
• Mar 21, 2023
Quiz Edited by
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• Dec 13, 2012
Quiz Created by
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