Financial Accouting Midterm Practice Part 2

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Financial Accouting Midterm Practice Part 2 - Quiz


Financial Accouting Midterm Practice Part 2
Questons 1-36 from Quiz 3


Questions and Answers
  • 1. 

    Which of the following best represents the expanded accounting equation?

    • A.

      Assets = Liabilities + Common Stock - Revenues - Expenses + Dividends

    • B.

      Assets - Liabilities - Common Stock = Revenues - Expenses - Dividends

    • C.

      Assets - Liabilities = Revenues - Exports - Dividends

    • D.

      Assets - Liabilities = Revenues - Expenses + Dividends

    Correct Answer
    B. Assets - Liabilities - Common Stock = Revenues - Expenses - Dividends
    Explanation
    The correct answer represents the expanded accounting equation because it includes all the necessary components. The equation states that the assets of a company minus its liabilities and common stock equals the sum of its revenues, expenses, and dividends. This equation reflects the fundamental principle of accounting that the total value of a company's assets must be equal to the sum of its liabilities and equity.

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  • 2. 

    A trial balance will not balance if

    • A.

      A $500 payment on accounts payable is debited to Accounts Payable for $50 and credited to Cash for $50

    • B.

      A $350 payment of rent is debited to Rent Expense for $350 and credited to Cash for $35

    • C.

      A transaction is not posted at all

    • D.

      A journal entry is posted twice

    Correct Answer
    B. A $350 payment of rent is debited to Rent Expense for $350 and credited to Cash for $35
  • 3. 

    Recognizing expense results in a(n)

    • A.

      Decrease to the expense account

    • B.

      Increase to the expense account

    • C.

      Increase in retained earnings

    • D.

      Decrease to the revenue account

    Correct Answer
    B. Increase to the expense account
    Explanation
    Recognizing an expense means recording the occurrence of an expense in the financial records. This involves increasing the expense account because expenses are debited. When an expense is recognized, it leads to a higher total expense amount, which is reflected by an increase in the expense account. Therefore, the correct answer is "increase to the expense account".

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  • 4. 

    The current ratio and the quick ratio are both relative measures of a compnay's liquidity. They differ in how they are computed because

    • A.

      The current ratio is considered to be a more conservative measure of a company's liquidity

    • B.

      The quick ratio is considered to be a more conservative measure of a company's liquidity

    • C.

      The current ratio is considered to be a more accurate measure of a company's liquidity

    • D.

      The quick ratio also measures profitability

    Correct Answer
    B. The quick ratio is considered to be a more conservative measure of a company's liquidity
    Explanation
    The quick ratio is considered to be a more conservative measure of a company's liquidity because it only includes the most liquid assets (such as cash and cash equivalents) in its calculation, excluding inventory and other less liquid assets. This provides a more stringent assessment of a company's ability to meet its short-term obligations without relying on the sale of inventory. In contrast, the current ratio includes all current assets in its calculation, which may overstate a company's liquidity position if a significant portion of its current assets are tied up in inventory.

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  • 5. 

    In a T-account, the left side is called the

    • A.

      Increase side

    • B.

      Decrease side

    • C.

      Credit side

    • D.

      Debit side

    Correct Answer
    D. Debit side
    Explanation
    In a T-account, the left side is called the debit side because it represents the increase in assets or expenses. The debit side is used to record transactions that result in a decrease in liabilities, equity, or revenue. It is the side where debits are recorded, and it is essential for maintaining the balance between debits and credits in accounting.

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  • 6. 

    All of the following are components of a journal entry except

    • A.

      Trial balance

    • B.

      Explanation

    • C.

      Debit entry

    • D.

      Credit entry

    Correct Answer
    A. Trial balance
    Explanation
    A journal entry is a record of a business transaction that includes the date, accounts involved, and the amounts debited and credited. The components of a journal entry are the explanation of the transaction, the debit entry (which increases an asset or expense account), and the credit entry (which increases a liability, equity, or revenue account). However, a trial balance is not a component of a journal entry. A trial balance is a list of all the accounts and their balances, used to ensure that debits and credits are equal and to prepare financial statements.

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  • 7. 

    The Dividends account is increased with a debit because dividends

    • A.

      Are declared an asset

    • B.

      Reduce liabilities

    • C.

      Result in a decrease in equity, so debiting Dividends would have the effect of decreasing Owner's Equity

    • D.

      Are an expense

    Correct Answer
    C. Result in a decrease in equity, so debiting Dividends would have the effect of decreasing Owner's Equity
    Explanation
    Dividends are payments made to shareholders out of a company's profits. When dividends are declared, it reduces the company's equity, specifically the owner's equity. Owner's equity represents the owner's share of the company's assets after deducting liabilities. Therefore, debiting the Dividends account would decrease the owner's equity, as it represents a distribution of profits to shareholders.

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  • 8. 

    A company purchases a piece of equipment for $8,000 in exchange for $4,000 cash and a $4,000 note payable. Which of the following journal entries represents the appropriate method for recording this transaction?

    • A.

      Cash $4,000 Note Payable $4,000 Equipment $8,000

    • B.

      Equipment $8,000 Cash $4,000 Accounts Payable $4,000

    • C.

      Equipment $8,000 Cash $4,000 Note Payable $4,000

    • D.

      Equipment $8,000 Cash $8,000

    Correct Answer
    C. Equipment $8,000 Cash $4,000 Note Payable $4,000
    Explanation
    The company purchased a piece of equipment for $8,000, paying $4,000 in cash and issuing a $4,000 note payable. This transaction involves both an increase in assets (equipment) and a decrease in assets (cash) as well as an increase in liabilities (note payable). Therefore, the appropriate journal entry to record this transaction is to debit Equipment for $8,000, credit Cash for $4,000, and credit Note Payable for $4,000.

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  • 9. 

    In recording accounting transactions, evidence that a transaction has taken place is obtained from

    • A.

      The Internal Revenue Service

    • B.

      The Securities and Exchange Commission

    • C.

      Source documents

    • D.

      The Board of Directors

    Correct Answer
    C. Source documents
    Explanation
    In recording accounting transactions, evidence that a transaction has taken place is obtained from source documents. Source documents are the original records that provide proof of a transaction, such as invoices, receipts, bank statements, and purchase orders. These documents contain important information about the transaction, including the date, amount, parties involved, and nature of the transaction. They serve as a reliable and verifiable source of evidence for recording and verifying accounting transactions.

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  • 10. 

    Which of the following accounts is an asset?

    • A.

      Supplies

    • B.

      Dividends

    • C.

      Accounts Payable

    • D.

      Service Revenue

    Correct Answer
    A. Supplies
    Explanation
    Supplies is considered an asset because it represents tangible items that a company owns and can use in its operations. These items have economic value and are expected to provide future benefits. Supplies are typically classified as current assets on a company's balance sheet, as they are expected to be used or consumed within one year.

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  • 11. 

    The usual sequence in the steps in the accounting cycle is

    • A.

      Posting - journalize - analyze - trial balance

    • B.

      Journalize - analyze - posting - closing

    • C.

      Journalize - posting - analyze - closing

    • D.

      Analyze - journalize - posting - trial balance

    Correct Answer
    D. Analyze - journalize - posting - trial balance
    Explanation
    The accounting cycle typically begins with analyzing the transactions and events that have occurred. This involves examining the source documents and determining the appropriate accounts to record the transactions. Once the analysis is complete, the next step is to journalize the transactions by recording them in the general journal. After journalizing, the transactions are then posted to the respective accounts in the general ledger. Finally, a trial balance is prepared to ensure that the debits and credits in the ledger accounts are equal, thus completing the accounting cycle.

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  • 12. 

    When a company prepares its trial balance, which sequence of accounts below represents the proper order in which the accounts should be listed?

    • A.

      Assets Expenses Liabilities Revenues Equity Dividends

    • B.

      Assets Liabilities Equity Dividends Revenues Expenses

    • C.

      Assets Dividends Equity Expenses Liabilities Revenues

    • D.

      Assets Revenues Equity Liabilities Expenses Dividends

    Correct Answer
    B. Assets Liabilities Equity Dividends Revenues Expenses
    Explanation
    The proper order in which accounts should be listed in a trial balance is Assets, Liabilities, Equity, Dividends, Revenues, and Expenses. This order follows the standard accounting equation (Assets = Liabilities + Equity) and ensures that the balance sheet accounts (Assets, Liabilities, and Equity) are listed before the income statement accounts (Revenues and Expenses). Dividends, which are a distribution of profits to shareholders, are typically listed after Equity.

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  • 13. 

    The trial balance does all of the following except

    • A.

      Help identify which accounts need to be closed

    • B.

      Verify that accounts with debit balances equal accounts with credit balances

    • C.

      Verify all of the accounts that will be used in the financial statements

    • D.

      Ensure there are no errors in the accounting records

    Correct Answer
    D. Ensure there are no errors in the accounting records
    Explanation
    The trial balance helps identify which accounts need to be closed at the end of an accounting period. It also verifies that accounts with debit balances equal accounts with credit balances, ensuring that the accounting equation is in balance. Additionally, the trial balance verifies all of the accounts that will be used in the financial statements. However, it does not ensure that there are no errors in the accounting records. Errors can still exist even if the trial balance balances.

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  • 14. 

    If a journal entry has been posted, the accounting equation is out of balance, then one might conclude that

    • A.

      The transaction was a bad business decision for the company

    • B.

      The company owes a tax liability

    • C.

      The transaction was posted to the wrong accounts

    • D.

      The income statement will show a net loss

    Correct Answer
    C. The transaction was posted to the wrong accounts
    Explanation
    If a journal entry has been posted and the accounting equation is out of balance, it suggests that the transaction was posted to the wrong accounts. This means that the debits and credits were not correctly recorded, resulting in an imbalance in the accounting equation. This could occur due to human error or a lack of understanding of the proper account classification. To rectify this, the transaction needs to be reevaluated and correctly posted to the appropriate accounts to bring the accounting equation back into balance.

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  • 15. 

    ___________ refers to the process of transferring amounts from the journal entries to general ledger accounts.

    • A.

      Balancing

    • B.

      Journalizing

    • C.

      Analyzing

    • D.

      Posting

    Correct Answer
    D. Posting
    Explanation
    Posting refers to the process of transferring amounts from the journal entries to general ledger accounts. This is done to ensure that all transactions are properly recorded in the general ledger, which is the main record of a company's financial transactions. By posting the journal entries to the general ledger accounts, the company can keep track of its financial activities and prepare accurate financial statements.

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  • 16. 

    Recognizing an expense results in a(n)

    • A.

      Decrease to the expense account

    • B.

      Increase to the expense account

    • C.

      Increase in retained earnings

    • D.

      Decrease to the revenue account

    Correct Answer
    B. Increase to the expense account
    Explanation
    When an expense is recognized, it means that the company acknowledges and records the occurrence of the expense in its financial records. This recognition leads to an increase in the expense account because the expense is being added to the company's expenses. Therefore, the correct answer is "increase to the expense account".

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  • 17. 

    If a company manager wants to determine the amount that the company owes to suppliers, to which account would the manager look to determine the amounts owed?

    • A.

      Accounts Payable

    • B.

      Unearned Revenue

    • C.

      Supplies Expense

    • D.

      Accounts Receivable

    Correct Answer
    A. Accounts Payable
    Explanation
    The company manager would look at the Accounts Payable account to determine the amounts owed to suppliers. This account records the outstanding balances that the company owes to its suppliers for goods or services received but not yet paid for. It represents the company's short-term liabilities and is an important component of the company's overall financial position.

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  • 18. 

    The normal balance of an asset account is

    • A.

      A credit balance

    • B.

      Always the same as the normal balance of the equity accounts

    • C.

      A debit balance

    • D.

      Dependent upon the financial condition of the entity

    Correct Answer
    C. A debit balance
    Explanation
    The normal balance of an asset account is a debit balance. This means that the account typically has a positive balance, representing the value of assets owned by the entity. Debit balances are the standard for asset accounts because they reflect increases in assets and decreases in liabilities or equity. Conversely, credit balances are typically associated with liability and equity accounts. Therefore, the correct answer is a debit balance.

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  • 19. 

    Which of the following entries shows revenues earned and billed but not yet collected?

    • A.

      Accounts Receivable XXX Revenue XXX

    • B.

      Revenue XXX Accounts Receivable XXX

    • C.

      Accounts Receivable XXX Cash XXX

    • D.

      Cash XXX Accounts Receivable XXX

    Correct Answer
    A. Accounts Receivable XXX Revenue XXX
    Explanation
    The correct answer is Accounts Receivable XXX. This entry shows revenues earned and billed but not yet collected. Accounts Receivable represents the amount of money that a company is owed by its customers for goods or services provided on credit. Revenue represents the income earned by a company from its normal business activities. When revenue is recognized but payment has not yet been received, it is recorded as an increase in Accounts Receivable and an increase in Revenue.

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  • 20. 

    One way to compute the quick ratio is

    • A.

      (Current Assets - Inventory) / Current Liabilities

    • B.

      Net Income / Net Sales

    • C.

      Current Inventory / Current Liabilities

    • D.

      Current Assets / Current Liabilities

    Correct Answer
    A. (Current Assets - Inventory) / Current Liabilities
    Explanation
    The quick ratio is a measure of a company's ability to pay off its current liabilities using its most liquid assets. It excludes inventory from current assets because inventory may not be easily convertible to cash. By subtracting inventory from current assets and dividing the result by current liabilities, we get a ratio that reflects the company's ability to meet its short-term obligations without relying on inventory sales.

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  • 21. 

    If Jennings Corporation has Net Sales of $15,750, Interest income of $675, Research and Development Expenses of $4,125, Selling Expenses of $3,246, Interest Expense of $438, and Office Expenses of $975, what is Jennings Corporation's Operating Income (Loss)?

    • A.

      $7,641

    • B.

      $10,651

    • C.

      $7,404

    • D.

      $6,291

    Correct Answer
    C. $7,404
    Explanation
    Jennings Corporation's Operating Income (Loss) can be calculated by subtracting the total operating expenses from the net sales. In this case, the total operating expenses include research and development expenses, selling expenses, and office expenses. Therefore, the calculation would be: $15,750 (Net Sales) - $4,125 (Research and Development Expenses) - $3,246 (Selling Expenses) - $975 (Office Expenses) = $7,404.

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  • 22. 

    The record of a single transaction that is entered into a company's journal is known as

    • A.

      Credit

    • B.

      T-account posting

    • C.

      Debit

    • D.

      Journal entry

    Correct Answer
    D. Journal entry
    Explanation
    A journal entry is the record of a single transaction that is entered into a company's journal. It includes the date, accounts debited and credited, and the corresponding amounts. This entry serves as a chronological record of all financial transactions and is used as the basis for creating financial statements. It helps in tracking and analyzing the company's financial activities and is an essential part of the accounting process.

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  • 23. 

    If liabilities are paid in cash, then

    • A.

      Assets will increase

    • B.

      Liabilities will increase

    • C.

      Owner's equity will decrease

    • D.

      Assets will decrease

    Correct Answer
    D. Assets will decrease
    Explanation
    When liabilities are paid in cash, it means that the company is using its cash reserves to settle its debts. This will result in a decrease in the company's assets, as cash is considered an asset. By using the cash to pay off liabilities, the company's cash balance will decrease, leading to a decrease in overall assets.

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  • 24. 

    The quick ratio measures the company's

    • A.

      Short-term profits

    • B.

      Ability to cover its long-term obligations

    • C.

      Ability to meet its short-term debts with its most liquid assets

    • D.

      Ability to meet all of its short-term obligations

    Correct Answer
    C. Ability to meet its short-term debts with its most liquid assets
    Explanation
    The quick ratio measures a company's ability to meet its short-term debts with its most liquid assets. This ratio excludes inventory from the calculation, focusing only on assets that can be quickly converted into cash. By comparing these liquid assets to the short-term debts, the quick ratio provides insight into the company's ability to pay off its immediate obligations without relying on inventory sales.

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  • 25. 

    Which of the following entries represents payment for wages?

    • A.

      Cash XXX Salaries Expense XXX

    • B.

      Accounts Payable XXX Cash XXX

    • C.

      Wages Expense XXX Cash XXX

    • D.

      Cash XXX Salaries Payable XXX

    Correct Answer
    C. Wages Expense XXX Cash XXX
    Explanation
    The entry "Wages Expense XXX Cash XXX" represents payment for wages. This entry shows that an expense has been incurred for wages and cash has been used to make the payment.

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  • 26. 

    Owner's Equity is increased by

    • A.

      Expenses

    • B.

      Liabilities

    • C.

      Dividends

    • D.

      Revenues

    Correct Answer
    D. Revenues
    Explanation
    Revenues are the income generated by a business through its primary activities, such as sales of goods or services. When revenues are earned, they increase the owner's equity of a business. This is because revenues contribute to the overall profitability and value of the business, which ultimately belongs to the owner. Therefore, revenues directly impact and increase the owner's equity.

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  • 27. 

    Which of the following accounts would not be increased by debiting the account?

    • A.

      Revenues

    • B.

      Assets

    • C.

      Expenses

    • D.

      Dividends

    Correct Answer
    A. Revenues
    Explanation
    Revenues are a type of income generated by a company through its business activities. Debiting an account means increasing its balance. Since revenues represent income, debiting the revenues account would increase its balance. Therefore, the answer is incorrect.

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  • 28. 

    In accounting, when a compnay makes a purchase "on account," it is the equivalent of

    • A.

      Purchasing with a sales tax exemption

    • B.

      Purchasing in bulk

    • C.

      Purchasing with a discount

    • D.

      Purchasing on credit

    Correct Answer
    D. Purchasing on credit
    Explanation
    When a company makes a purchase "on account," it means that they are purchasing on credit. This means that the company is buying goods or services and agreeing to pay for them at a later date, usually within an agreed-upon timeframe. Purchasing on credit allows companies to acquire the necessary items they need for their operations without having to make an immediate payment. Instead, they can pay for the purchase at a later date, usually when they have generated revenue from their business activities.

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  • 29. 

    How is working capital computed?

    • A.

      Assets - Liabilities

    • B.

      Current Assets + Current Liabilities

    • C.

      Current Assets - Current Liabilities

    • D.

      Current Assets - Liabilities

    Correct Answer
    C. Current Assets - Current Liabilities
    Explanation
    Working capital is a measure of a company's liquidity and ability to meet short-term obligations. It represents the amount of funds available to cover day-to-day operations. The correct answer, "Current Assets - Current Liabilities," is the formula used to compute working capital. Current assets include cash, accounts receivable, and inventory, while current liabilities include accounts payable and short-term debt. By subtracting current liabilities from current assets, the formula calculates the net amount of funds available for the company's operations.

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  • 30. 

    If the total of the debt column equals the total of the credit column in the trial balance, it indicates that

    • A.

      All accounts reflect correct balances

    • B.

      No errors can be found

    • C.

      No errors have been made

    • D.

      The accounting equation has remained in balance

    Correct Answer
    D. The accounting equation has remained in balance
    Explanation
    If the total of the debt column equals the total of the credit column in the trial balance, it indicates that the accounting equation has remained in balance. The accounting equation states that assets equal liabilities plus equity. The trial balance is a statement that lists all the debit and credit balances of accounts in a company's general ledger. If the total of the debt column equals the total of the credit column, it means that the total assets (represented by the debits) are equal to the total liabilities and equity (represented by the credits), thus ensuring that the accounting equation is in balance.

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  • 31. 

    An accountant has recorded a journal entry in which she has debited a liability account for $750 and credited an asset account for $750. What type of transaction do you think this is?

    • A.

      Receipt of revenue

    • B.

      Payment of an account payable

    • C.

      Payment of an expense

    • D.

      Receipt of an account receivable

    Correct Answer
    B. Payment of an account payable
    Explanation
    The journal entry recorded by the accountant indicates that a liability account has been debited and an asset account has been credited. This suggests that the company has made a payment towards an account payable, which is a liability. Therefore, the correct answer is "Payment of an account payable."

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  • 32. 

    Which of the following accounts would not be increased by crediting the account?

    • A.

      Assets

    • B.

      Revenues

    • C.

      Liabilities

    • D.

      Owner's Equity

    Correct Answer
    A. Assets
    Explanation
    Crediting an account means recording an increase in that account. Assets are accounts that represent the resources owned by a company, such as cash, inventory, or property. When an asset is credited, it means there is an increase in the value of that asset. Therefore, crediting an asset account would increase the balance of the account.

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  • 33. 

    If Hayes Company has working capital of $75,000 and current liabilities of $35,000, what are its current assets?

    • A.

      $120,000

    • B.

      $45,000

    • C.

      $110,000

    • D.

      $50,000

    Correct Answer
    C. $110,000
  • 34. 

    What do the accounting terms "debit" and "credit" mean?

    • A.

      "Debit means decrease, and "credit" means increase.

    • B.

      "Debit" adjusts assets, and "credit" adjusts liabilities and equity.

    • C.

      "Debit" means increase, and "credit" means decrease.

    • D.

      "Debit" means left, and "credit" means right.

    Correct Answer
    D. "Debit" means left, and "credit" means right.
    Explanation
    The answer "Debit" means left, and "credit" means right is correct because in accounting, the terms "debit" and "credit" are used to record transactions and keep track of financial information. The left side of an account is the debit side, and the right side is the credit side. Debit entries are used to record increases in assets and expenses, while credit entries are used to record increases in liabilities, equity, and revenue. This system of recording transactions is known as double-entry accounting, where every transaction has both a debit and credit entry to maintain the balance in the accounting equation.

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  • 35. 

    If a not receivable with a principal amount of $400,000 has an interest rate of 8%, what is the amount of interest that will accrue over nine months?

    • A.

      $2,700

    • B.

      $32,000

    • C.

      $16,000

    • D.

      $24,000

    Correct Answer
    D. $24,000
    Explanation
    The amount of interest that will accrue over nine months can be calculated by multiplying the principal amount ($400,000) by the interest rate (8%) and then multiplying it by the time period (9/12). This gives us $24,000, which is the correct answer.

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  • 36. 

    Journal entries that transfer the balances in the revenue, expense and dividends accounts to retained earnings at the end of the accounting period are

    • A.

      Closing entries

    • B.

      Transfer entries

    • C.

      Adjusting entries

    • D.

      Posting entries

    Correct Answer
    A. Closing entries
    Explanation
    Closing entries are journal entries made at the end of an accounting period to transfer the balances of revenue, expense, and dividends accounts to the retained earnings account. These entries help in resetting the temporary accounts to zero and updating the retained earnings account with the net income or loss for the period. By closing these accounts, the company prepares for the next accounting period and ensures that the financial statements accurately reflect the company's financial position.

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  • 37. 

    Net income is

    • A.

      Retained earnings less dividends paid

    • B.

      The difference between assets and liabilities

    • C.

      The difference between sales and cost of goods sold

    • D.

      The difference between all of the revenues earned and all of the expenses incurred during an accounting period

    Correct Answer
    D. The difference between all of the revenues earned and all of the expenses incurred during an accounting period
    Explanation
    Net income is the amount of money that a company has earned after deducting all of its expenses from its total revenues during a specific accounting period. It represents the profitability of the company and is calculated by subtracting all expenses, including cost of goods sold, from the total revenues earned. This measure is important for assessing the financial performance of a company and is often used to determine the amount of dividends that can be paid to shareholders or reinvested in the business.

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  • 38. 

    Which of the following journal entries shows sales revenue being closed into the Retained Earnings account?

    • A.

      Retained Earnings XXX Sales Revenue XXX

    • B.

      Sales Revenue XXX Retained Earnings XXX

    • C.

      Owner's Equity XXX Sales Revenue XXX

    • D.

      Sales Revenue XXX Owner's Equity XXX

    Correct Answer
    B. Sales Revenue XXX Retained Earnings XXX
    Explanation
    This journal entry shows sales revenue being closed into the Retained Earnings account. By debiting the Sales Revenue account and crediting the Retained Earnings account, the company is transferring the revenue earned from sales to the Retained Earnings account, which is a component of Owner's Equity. This entry reflects the process of closing the revenue account at the end of the accounting period and transferring the balance to the Retained Earnings account.

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  • 39. 

    The McBain Company performs services for the Buchanan Company. Once McBain finishes its work, McBain sends Buchanan a bill and records revenue on its books, despite having received no cash from Buchanan. For the McBain Company, this is an example of

    • A.

      Revenue earned on account

    • B.

      Unearned revenue

    • C.

      A cash sale

    • D.

      A cash expenditure

    Correct Answer
    A. Revenue earned on account
    Explanation
    The correct answer is revenue earned on account. This is because the McBain Company has provided services to the Buchanan Company and has the right to receive payment for those services. Even though they have not received cash yet, they have earned revenue by completing the work. This revenue is recorded on McBain's books as an account receivable, indicating that they expect to receive payment in the future.

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  • 40. 

    Kurth Corporation prepaid rent for one year in the amount of $24,000 on August 31 of Year 1, for the period beginning September 1. When the company prepared its financial statements on December 31, what adjusting entry would Kurth need to reflect the expired rent?

    • A.

      Rent Expense 24,000 Cash 23,000

    • B.

      Rent Revenue 24,000 Rent Expense 24,000

    • C.

      Prepaid Rent 8,000 Rent Expense 8,000

    • D.

      Rent Expense 8,000 Prepaid rent 8,000

    Correct Answer
    D. Rent Expense 8,000 Prepaid rent 8,000
    Explanation
    The correct answer is Rent Expense 8,000 and Prepaid Rent 8,000. This adjusting entry is necessary because the company prepaid rent for one year, but only a portion of that time period has expired by December 31. Therefore, the amount of rent that has expired needs to be recognized as an expense (Rent Expense) and deducted from the prepaid rent account (Prepaid Rent). This adjustment ensures that the financial statements accurately reflect the portion of rent that has been used up during the period.

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  • 41. 

    All of the following are permanent accounts except

    • A.

      Prepaid expenses

    • B.

      Interest income

    • C.

      Unearned revenue

    • D.

      Retained earnings

    Correct Answer
    B. Interest income
    Explanation
    Interest income is not a permanent account because it represents revenue earned from interest on investments or loans, which is considered a temporary or non-operating income. Permanent accounts, on the other hand, are those that are not closed at the end of an accounting period and carry over their balances to the next period. Prepaid expenses, unearned revenue, and retained earnings are all examples of permanent accounts as they represent assets, liabilities, and equity that are carried forward.

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  • 42. 

    If Portico Company determines that it has accrued interest on a note receivable in the amount of $825, what journal entry will it need to make to record this accrual?

    • A.

      Interest Receivable 825 Interest Revenue 825

    • B.

      Interest Revenue 825 Interest Receivable 825

    • C.

      Interest Income 825 Interest Revenue 825

    • D.

      Note Receivable 825 Interest Revenue 825

    Correct Answer
    A. Interest Receivable 825 Interest Revenue 825
    Explanation
    The journal entry to record the accrual of interest on a note receivable would be to debit Interest Receivable for $825 and credit Interest Revenue for $825. This entry recognizes the amount of interest that has been earned but not yet received, increasing the interest receivable account and recognizing the revenue.

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  • 43. 

    The Accumulated Depreciation account is a(n)

    • A.

      Asset account

    • B.

      Expense account

    • C.

      Liability account

    • D.

      Contra-asset account

    Correct Answer
    D. Contra-asset account
    Explanation
    The Accumulated Depreciation account is a contra-asset account. This means that it is a negative asset account that offsets the value of the related asset account. Accumulated Depreciation is used to track the total amount of depreciation that has been recorded for an asset over its useful life. By subtracting the Accumulated Depreciation from the original cost of the asset, the net book value of the asset can be determined.

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  • 44. 

    If the Wittker Law Firm seeks to make an adjusting entry for $8,350 of previously unearned revenue that has now been earned, what account will be credited in the adjusting entry?

    • A.

      Unearned Revenue

    • B.

      Service Revenue

    • C.

      Accounts Receivable

    • D.

      Cash

    Correct Answer
    B. Service Revenue
    Explanation
    When previously unearned revenue is earned, it needs to be adjusted in the accounting records. In this case, the Wittker Law Firm has earned $8,350 of previously unearned revenue. To reflect this, the firm will credit the Service Revenue account in the adjusting entry. This entry will increase the Service Revenue account, which represents the income earned by the firm for providing services.

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  • 45. 

    Durant Company provided services to clients during the period but did not receive payment. At the end of the period when preparing its financial statements, Durant made an adjusting entry to recognize the effect of these services performed. What will the adjusting journal entry look like?

    • A.

      Accounts Receivable XXX Service Revenue XXX

    • B.

      Service Revenue XXX Unearned Revenue XXX

    • C.

      Cash XXX Accounts Receivable XXX

    • D.

      Service Revenue XXX Accounts Receivable XXX

    Correct Answer
    A. Accounts Receivable XXX Service Revenue XXX
    Explanation
    The adjusting journal entry will involve debiting the Accounts Receivable account to recognize the amount owed by the clients for the services provided. The Service Revenue account will be credited to recognize the revenue earned from the services. This entry reflects the recognition of the revenue and the corresponding increase in the accounts receivable balance.

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  • 46. 

    If Pascal Company has total revenues of $174,000, total expenses of $126,000, and dividends of $12,500, what will be the total change in retained earnings after all closing entries have been made?

    • A.

      $60,000

    • B.

      $48,000

    • C.

      $35,500

    • D.

      $312,500

    Correct Answer
    C. $35,500
    Explanation
    The total change in retained earnings can be calculated by subtracting total expenses and dividends from total revenues. In this case, $126,000 (total expenses) and $12,500 (dividends) are subtracted from $174,000 (total revenues). The result is $35,500, which represents the total change in retained earnings after all closing entries have been made.

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  • 47. 

    A company properly recognizes a supplies expense when the supplies are

    • A.

      Counted

    • B.

      Purchased

    • C.

      Recorded on the books

    • D.

      Are consumed or used

    Correct Answer
    D. Are consumed or used
    Explanation
    The correct answer is "are consumed or used." This means that a company recognizes a supplies expense when the supplies are actually used up or consumed in the course of business operations. This is because the supplies are considered as an expense only when they have been utilized and no longer have any economic value. Counting, purchasing, and recording on the books are important steps in the process, but the expense is recognized when the supplies are consumed or used.

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  • 48. 

    Depreciation is the process of

    • A.

      Allocating the cost of an asset to expense over the course of its estimated useful life

    • B.

      Decreasing the cost of an asset during each accounting period

    • C.

      Valuing an asset at its fair market value

    • D.

      Accounting for the change in value of an asset due to abandonment

    Correct Answer
    A. Allocating the cost of an asset to expense over the course of its estimated useful life
    Explanation
    Depreciation is the process of allocating the cost of an asset to expense over the course of its estimated useful life. This means that instead of recognizing the full cost of the asset in one accounting period, the cost is spread out over the asset's useful life. This is done to match the expense with the revenue generated by the asset, as the asset is expected to contribute to revenue generation over multiple periods. By allocating the cost over its useful life, the financial statements reflect a more accurate representation of the asset's value and the expenses incurred in using it.

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  • 49. 

    All of the following accounts are considered temporary except

    • A.

      Expenses

    • B.

      Retained earnings

    • C.

      Dividends

    • D.

      Revenues

    Correct Answer
    B. Retained earnings
    Explanation
    Retained earnings are not considered temporary accounts because they represent the accumulated profits or losses of a company over time. They are carried forward from one accounting period to another and are not closed out at the end of each period like temporary accounts such as expenses, dividends, and revenues. Temporary accounts are used to track the income and expenses of a specific period and are closed out at the end of that period to start fresh in the next accounting period.

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  • 50. 

    A company spends $500,000 for a building. The cost of this bulding should be deducted as an expense

    • A.

      All in the first year that the building is used

    • B.

      When the $500,000 is paid for the building

    • C.

      When $5000 in revenue is earned

    • D.

      Over the expected useful life of the building

    Correct Answer
    D. Over the expected useful life of the building
    Explanation
    The cost of the building should be deducted over the expected useful life of the building because it is a long-term asset that will provide economic benefits to the company over a period of time. Deducting the cost of the building over its useful life allows for a more accurate representation of the expenses incurred in generating revenue from the building. This method of depreciation matches the expense recognition with the revenue earned from the building over time.

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Quiz Review Timeline +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Apr 02, 2024
    Quiz Edited by
    ProProfs Editorial Team
  • May 28, 2009
    Quiz Created by
    Scott11686
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