Accounting 201 - Chapter 3 Quiz Questions

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

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 the payment made will provide future economic benefits to the company. This expense is recorded on the balance sheet as a current asset and is gradually recognized as an expense over time as it is used or consumed.

Calculations: 15,000/3=5,000

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, regardless of whether the customer has paid for them yet. This method ensures that revenue is matched with the expenses incurred to generate that revenue, providing a more accurate representation of the company's financial performance.

Calculations: 800-150=650

The adjusted trial balance is prepared after making adjustments for any errors or omissions in the trial balance. It includes all the necessary adjustments for accruals, deferrals, and other adjustments. The balance sheet is prepared using the adjusted trial balance to show the financial position of the company at a specific point in time, while the income statement is also prepared using the adjusted trial balance to show the company's financial performance over a specific period. Therefore, both the balance sheet and the income statement are prepared using the adjusted trial balance.

Current assets are assets that are expected to be converted into cash or used up within one year or the operating cycle of a business. Cash and receivables are examples of current assets because they are expected to be converted into cash within a short period of time. Cash represents the actual money on hand, while receivables are amounts owed to the company by its customers or clients. Including these items in the current assets category helps provide a snapshot of the company's liquidity and ability to meet short-term obligations.

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 reflect the accurate and up-to-date financial position of the company. Adjusting entries are used to record transactions or events that have occurred but have not yet been recorded in the general ledger. They help to properly allocate revenues and expenses to the correct accounting period, adjust for prepaid or accrued expenses, and update asset and liability accounts. By making these adjustments, the financial statements provide a more accurate representation of the company's financial performance and position.

Prepaid insurance is reported as an asset on the balance sheet because it represents an amount paid in advance for insurance coverage that has not yet been used. It is considered an asset because it has future economic benefits and can be used to offset future expenses. As the insurance coverage is utilized over time, it is gradually expensed and deducted from the prepaid insurance account.

The business should record revenue of $65 because that is the amount they received from selling the merchandise to the new customer. The fact that the merchandise normally sells for $85 is irrelevant in this case, as the business made a special offer to attract new customers by selling it for a lower price. Therefore, the revenue recorded should reflect the actual amount received from the sale, which is $65.

In accrual accounting, expenses or revenues are recorded before the cash settlement takes place. This means that even if the cash has not been received or paid, the expense or revenue is still recognized in the financial statements. Accrual accounting aims to match expenses and revenues with the period in which they are incurred or earned, rather than when the cash is actually received or paid. This ensures that the financial statements provide a more accurate representation of the company's financial performance and position.

Temporary accounts are accounts that relate to a limited period, such as a specific accounting period. These accounts are used to track revenues, expenses, and withdrawals, and they are closed at the end of each accounting period. Temporary accounts include income statement accounts like revenue and expense accounts, as well as the owner's withdrawals account. By closing these accounts, their balances are transferred to the owner's equity account, and they are reset to zero for the next accounting period.

The Accumulated Depreciation account is used to record the cumulative depreciation of an asset over its useful life. Depreciation is an expense, and expenses are typically recorded as debits. However, in the case of Accumulated Depreciation, it is a contra-asset account, meaning it offsets the value of the asset. Since assets have a normal debit balance, the Accumulated Depreciation account will have a normal credit balance to show the reduction in the value of the asset over time.

The correct answer is to debit wages expense and credit wages payable. This entry is made to recognize the wages that have been earned by employees but have not yet been paid. By debiting wages expense, we increase the expense on the income statement, reflecting the cost of the wages. By crediting wages payable, we record the liability on the balance sheet, indicating the amount owed to employees for their wages.

Unearned revenue is a liability account because it represents the amount of money received by a company in advance for goods or services that have not yet been delivered or earned. 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.

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 and their updated balances after the adjusting entries have been made. It serves as a summary of all the accounts and their balances, providing a clear picture of the company's financial position. This information is crucial for preparing accurate financial statements such as the balance sheet and income statement.

The financial statements are prepared from the adjusted trial balance because it reflects all the necessary adjustments made to the accounts after the unadjusted trial balance. These adjustments include correcting errors, allocating expenses, recognizing revenues, and adjusting for accruals and prepayments. The adjusted trial balance ensures that the financial statements provide an accurate representation of the company's financial position and performance.

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

According to the revenue principle, revenue should be recorded when it has been earned. This means that revenue should be recognized and recorded in the accounting records when the goods or services have been delivered or completed, and the company has the right to receive payment for them. This principle ensures that revenue is accurately reported in the period in which it is earned, providing a more accurate representation of the company's financial performance.

The correct answer is Depreciation Expense. Depreciation expense is a non-cash expense that represents the reduction in value of an asset over time. In the adjusting entry, the Depreciation Expense account is debited to recognize the expense for the current period. This entry reduces the net income and the value of the asset on the balance sheet.

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

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 coverage that has been used up or expired during the period. By debiting Insurance Expense, we are recognizing the expense and reducing the prepaid insurance asset account.

Revenue is earned when the goods or services have been delivered to the customer because at this point, the transaction is considered complete and the customer has received the value they paid for. This aligns with the accrual accounting principle, which recognizes revenue when it is earned, regardless of when the cash is actually received. It is important to note that revenue is not earned when the order is placed, when the customer mails the check, or when the cash is received, as these events do not signify the completion of the transaction or the delivery of the goods or services.

The book value of a plant asset is calculated by subtracting the accumulated depreciation from the cost of the asset. This is because the accumulated depreciation represents the total amount of depreciation expense that has been recorded for the asset over its useful life, and subtracting it from the cost of the asset gives us the net value of the asset that is currently recorded on the company's books.

Prepaid expenses are expenses that have been paid in advance but have not yet been incurred. As time passes and the future benefits of these prepaid expenses are consumed or used up, they are no longer considered as assets and are instead recognized as expenses in the income statement. Therefore, the correct answer is that prepaid expenses will become expenses when their future benefits expire.

Using the accrual basis of accounting, expenses should be 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 recognizes expenses when they are earned or consumed, rather than when the cash is actually paid out.

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 an asset. As a contra-asset account, it has a credit balance and is subtracted from the corresponding asset account to calculate the net value of the asset.

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 company has received the goods or services, but has not yet made the payment for them. It is recorded as a liability on the balance sheet until the payment is made. This is different from prepaid expenses, which are expenses that have been paid in advance, and unearned expenses, which are liabilities that arise from receiving payment for goods or services that have not yet been provided. Accrued revenue, on the other hand, is revenue that has been earned but not yet received.

An accrued revenue adjustment increases net income for the period because it recognizes revenue that has been earned but not yet received. This adjustment increases the company's revenue and therefore increases its net income.

Rent Expense is considered a "temporary" account because it is an expense account that is used to record the cost of renting or leasing a property for a specific period of time. Expenses are temporary accounts because they are closed at the end of each accounting period and their balances are transferred to the retained earnings or income statement. This allows for the accurate calculation of net income or loss for the period. In contrast, inventory, accounts payable, and common stock are considered permanent accounts as they are not closed at the end of the accounting period and their balances are carried forward to the next period.

Calculations: 900-200=700

The correct answer is to credit retained earnings. This is because retained earnings represent the accumulated profits of a company that have not been distributed to shareholders as dividends. Closing the revenue account involves transferring the revenue earned during a specific period to retained earnings, which is done by crediting retained earnings. This helps in accurately reflecting the company's financial position and ensuring that the revenue is properly accounted for.

An accrued expense adjustment increases expenses and increases liabilities. This means that the company recognizes an expense that has been incurred but has not yet been paid. By increasing expenses, the company's net income decreases. Additionally, by increasing liabilities, the company acknowledges that it has an obligation to pay for the expense in the future. This adjustment affects the balance sheet by increasing both the expense and liability accounts, ultimately impacting the financial position of the company.

The adjusting process updates the balance sheet by making necessary adjustments to ensure that all accounts are accurately reflected. Every adjusting entry affects both the balance sheet and the income statement as they are used to record revenues and expenses that have been incurred but not yet recorded. The main types of adjusting entries include deferrals (prepaid expenses and unearned revenues), depreciation (allocating the cost of an asset over its useful life), and accruals (revenues and expenses that have been earned or incurred but not yet recorded). Therefore, the statement "Adjustments are made during the month" is not true, as adjustments are typically made at the end of an accounting period.

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 correct answer is Salary Expense. In the adjusting entry to record salaries owed to employees, but not paid until the next accounting period, Salary Expense account is debited. This is because the company has incurred the expense of the salaries owed to employees in the current period, even though the payment will be made in the next period. By debiting Salary Expense, the company recognizes the expense in the appropriate period and ensures accurate financial reporting.

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 forward the net income or loss to the retained earnings account, which is a permanent account on the balance sheet. This ensures that the company's financial statements accurately reflect the current period's performance and maintains the continuity of the retained earnings account for future periods.

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

The expense of the advertising campaign should be recognized when the commercials are broadcast because that is when the company is actually incurring the cost of running the advertisements. Planning for the campaign being complete does not necessarily mean that any costs have been incurred yet. Cash being paid to the television stations is a separate event that may happen before or after the commercials are broadcast, and filming the commercials is a necessary step in the process but does not represent the actual expense.

Debiting retained earnings is the correct answer because closing expense accounts involves transferring their balances to the retained earnings account. Retained earnings is a component of stockholders' equity that represents the accumulated profits of a company. By debiting retained earnings, the expense accounts are effectively closed and their balances are added to the retained earnings account, reflecting the reduction in the company's net income for the period. This ensures that the income statement is reset for the next accounting period and the retained earnings account accurately represents the company's cumulative earnings.