Accounting 201 - Chapter 3 Quiz Questions

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  • 1/40 Questions

    The book value of an asset that cost $20,000 and has accumulated depreciation of $6,000 is

    • $20,000
    • $ 6,000
    • $26,000
    • $14,000
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Accounting 201 - Chapter 3 Quiz Questions - Quiz
About This Quiz

This quiz for 'Accounting 201 - Chapter 3' assesses knowledge on accrual accounting principles, such as revenue recognition and expense reporting. It evaluates understanding of adjusting entries, asset valuation, and the impact of promotional campaigns on financial statements, crucial for accounting professionals.

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  • 2. 

    An expense that is paid in advance is a(n):

    • Unearned expense

    • Prepaid expense

    • Liability

    • Unearned asset

    Correct Answer
    A. Prepaid expense
    Explanation
    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.

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  • 3. 

    A company using the accrual basis of accounting pays $15,000 for a television advertising campaign.  Commercials will run evenly in December, January, and February. How much expense will be reported on an income statement prepared for the month of December?

    • $0

    • $5,000

    • $10,000

    • $15,000

    Correct Answer
    A. $5,000
    Explanation
    Calculations: 15,000/3=5,000

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  • 4. 

    Under accrual accounting, revenue is recorded

    • When the cash is collected, regardless of when the services are performed

    • When the services are performed, regardless of when the cash is received

    • Either when the cash is received or the sale is made

    Correct Answer
    A. When the services are performed, regardless of when the cash is received
    Explanation
    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.

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  • 5. 

    Prepaid insurance is reported on the balance sheet as a(n):

    • Expense

    • Liability

    • Asset

    • Contra asset

    Correct Answer
    A. Asset
    Explanation
    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.

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  • 6. 

    To obtain a new customer, a business sells merchandise to the customer for $65. Normally, the merchandise sells for $85. For this sale, the business should record revenue of

    • $85

    • $65

    • Neither amount

    Correct Answer
    A. $65
    Explanation
    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.

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  • 7. 

    Adjusting entries are:

    • Not needed under the accrual basis of accounting

    • Prepared at the option of the accountant

    • Prepared at the beginning of the accounting period to update all accounts.

    • Prepared at the end of the accounting period to update certain accounts.

    Correct Answer
    A. Prepared at the end of the accounting period to update certain accounts.
    Explanation
    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.

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  • 8. 

    A company has $800 in beginning supplies and $150 of supplies on hand at the end of the month.  The adjusting entry for this company is:

    • Debit supplies of $150 and a credit of $150 to Supplies Expense

    • Debit supplies Expense of $150 and a credit of $150 to Supplies

    • Debit supplies Expense of $650 and a credit of $650 to Supplies

    • There is not enough information given to prepare the entry

    Correct Answer
    A. Debit supplies Expense of $650 and a credit of $650 to Supplies
    Explanation
    Calculations: 800-150=650

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  • 9. 

    Which of the following financial statements is prepared using the adjusted trial balance?

    • Both the balance sheet and the income statement

    • Neither the balance sheet nor the income statement

    • The balance sheet only

    • The income statement only

    Correct Answer
    A. Both the balance sheet and the income statement
    Explanation
    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.

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  • 10. 

    Current assets include

    • Cash and receivables

    • Cash and payables

    • Land and Building

    • Retained earnings

    Correct Answer
    A. Cash and receivables
    Explanation
    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.

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  • 11. 

    An accrual refers to an event where the

    • Expense or revenue is not recorded after the cash settlement

    • Liability is recorded after the cash settlement

    • Expense or revenue is recorded before the cash settlement

    • Asset is recorded only after the cash settlement

    Correct Answer
    A. Expense or revenue is recorded before the cash settlement
    Explanation
    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.

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  • 12. 

    Accounts that relate to a limited period are called:

    • Asset and liability accounts

    • Permanent accounts

    • Real accounts

    • Temporary accounts

    Correct Answer
    A. Temporary accounts
    Explanation
    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.

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  • 13. 

    Which of the following accurately describes the normal balance of the Accumulated Depreciation account?

    • Credit balance

    • Debit balance

    Correct Answer
    A. Credit balance
    Explanation
    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.

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  • 14. 

    To record wages that have been earned but have not been paid:

    • Debit wages payable, credit cash

    • Debit wages expense, credit cash

    • Debit wages expense, credit wages payable

    • Debit cash, credit wages expense

    Correct Answer
    A. Debit wages expense, credit wages payable
    Explanation
    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.

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  • 15. 

    Unearned revenue is a(n):

    • Asset account

    • Liability account

    • Revenue account

    • Expense account

    Correct Answer
    A. Liability account
    Explanation
    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.

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  • 16. 

    After the adjustments are journalized and posted, a(n) _____________ can be prepared to aid in the preparation of the financial statements:

    • Balance sheet

    • Adjusted trial balance

    • Post-close trial balance

    • Income statement

    Correct Answer
    A. Adjusted trial balance
    Explanation
    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.

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  • 17. 

    The financial statements are prepared from the

    • Adjustments

    • Unadjusted trial balance

    • Ledger

    • Adjusted trial balance

    Correct Answer
    A. Adjusted trial balance
    Explanation
    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.

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  • 18. 

    On September 1, Boz sold to Skaggs prepaid maintenance for $6,000 for six months.  As of December 31, what is the amount that has been earned?

    • $0

    • $2000

    • $4000

    • $6000

    Correct Answer
    A. $4000
    Explanation
    Calculations: 6,000/6=1,000 revenue per month*4months =4,000 earned

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  • 19. 

    According to the revenue principle, revenue should be recorded

    • Before it has been earned

    • When the cash is received

    • When it has been earned

    • Whenever the company needs to record the revenue

    Correct Answer
    A. When it has been earned
    Explanation
    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.

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  • 20. 

    Which account is debited in the adjusting entry to record depreciation expense during the current period?

    • Accumulated Depreciation

    • Equipment

    • Depreciation Expense

    • Depreciation Payable

    Correct Answer
    A. Depreciation Expense
    Explanation
    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.

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  • 21. 

    On November 1 of the current year, Prepaid Rent was debited $5,400 for three months of rent, paid in advance. The amount of the adjusting entry on December 31 is (2 months):

    • $1800

    • $3600

    • $5400

    • $0

    Correct Answer
    A. $3600
    Explanation
    Calculations: 5,400/3= 1,800 rent per month. 1,800 *2 months used =3,600

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  • 22. 

    Which account is debited in the adjusting entry to record insurance expired during the current period?

    • Prepaid Insurance

    • Insurance Expense

    • Accrued Insurance

    • Insurance Payable

    Correct Answer
    A. Insurance Expense
    Explanation
    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.

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  • 23. 

    In most cases, revenue is earned

    • When the cash is received

    • When the order is placed

    • When the customer mails the check

    • When the goods or services have been delivered to the customer

    Correct Answer
    A. When the goods or services have been delivered to the customer
    Explanation
    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.

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  • 24. 

    The book value of a plant asset is the

    • Accumulated depreciation less the cost of the asset

    • Cost of the asset

    • Balance in the accumulated depreciation account

    • Cost of the asset less the accumulated depreciation

    Correct Answer
    A. Cost of the asset less the accumulated depreciation
    Explanation
    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.

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  • 25. 

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

    • ) the 2010 income statement

    • The 2011 income statement

    • Neither the 2010 nor the 2011 income statement

    • Both the 2010 and 2011 income statements

    Correct Answer
    A. ) the 2010 income statement
    Explanation
    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.

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  • 26. 

    Prepaid expenses will:

    • Become expenses when their future benefits expire

    • Become revenues when their future benefits expire

    • Become liabilities when their future benefits expire

    • Become none of the above

    Correct Answer
    A. Become expenses when their future benefits expire
    Explanation
    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.

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  • 27. 

    Which of the following accurately describes the account type of the Accumulated Depreciation account?

    • Contra-expense account

    • Liability account

    • Contra-asset account

    • Expense account

    Correct Answer
    A. Contra-asset account
    Explanation
    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.

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  • 28. 

    A liability that arises from an expense that has not yet been paid is a(n):

    • Unearned expense

    • Prepaid expense

    • Accrued expense

    • Accrued revenue

    Correct Answer
    A. Accrued expense
    Explanation
    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.

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  • 29. 

    What effect does an accrued revenue adjustment have on a company’s net income?

    • The adjustment has no effect on net income

    • The adjustment increases net income for the period

    • The adjustment decreases net income for the period

    • The effect of the adjustment cannot be determined with the information given

    Correct Answer
    A. The adjustment increases net income for the period
    Explanation
    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.

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  • 30. 

    Which of the following accounts is considered a "temporary" account?

    • Inventory

    • Rent Expense

    • Accounts Payable

    • Common Stock

    Correct Answer
    A. Rent Expense
    Explanation
    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.

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  • 31. 

    A company has $900 in beginning supplies and $700 of supplies used during the month.  The adjusting entry for this company is:

    • Debit supplies $700 and a credit supplies expense $700

    • Debit supplies expense $200 and a credit supplies $200

    • Debit supplies expense $700 and a credit supplies $700

    • There is not enough information given to prepare the entry

    Correct Answer
    A. Debit supplies expense $700 and a credit supplies $700
    Explanation
    Calculations: 900-200=700

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  • 32. 

    How does an accrued expense adjustment affect the financial statements?  The adjustment

    • Increases expenses and decreases assets

    • Increases expenses and increases liabilities

    • Decreases expenses and increases liabilities

    • Decreases expenses and increases assets

    Correct Answer
    A. Increases expenses and increases liabilities
    Explanation
    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.

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  • 33. 

    To close the revenue account:

    • Debit retained earnings

    • Credit revenue

    • Credit retained earnings

    Correct Answer
    A. Credit retained earnings
    Explanation
    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.

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  • 34. 

    Which of the following is NOT true regarding the adjusting process?

    • The adjusting process updates the balance sheet.

    • Every adjusting entry affects the balance sheet and the income statement.

    • Adjustments are made during the month.

    • The main adjusting entries are deferrals, depreciation and accruals.

    Correct Answer
    A. Adjustments are made during the month.
    Explanation
    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.

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  • 35. 

    On August 1 of the current year, Jamie Simmons received $5,400 for legal services to be performed  evenly throughout the next six months. An adjusted trial balance prepared on December 31 of the current year will show a credit balance in Unearned Revenue in the amount of:

    • $0

    • $900

    • $4500

    • $5400

    Correct Answer
    A. $900
    Explanation
    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

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  • 36. 

    Which account is debited in the adjusting entry to record salaries owed to employees, but not paid until next accounting period?

    • Salary Expense

    • Unearned Salaries

    • Salary Payable

    • Deferred Salary

    Correct Answer
    A. Salary Expense
    Explanation
    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.

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  • 37. 

    Closing entries transfer the revenue, expense, and dividends balances to:

    • Retained earnings

    • Permanent accounts

    • Temporary accounts

    • None of the above

    Correct Answer
    A. Retained earnings
    Explanation
    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.

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  • 38. 

    On November 1, Phillips Tool and Die Company paid six months’ insurance in advance totaling $9,000.  An adjusted trial balance prepared on December 31 would include a balance in the Prepaid Insurance account of:

    • $9000

    • $6000

    • $3000

    • $0

    Correct Answer
    A. $6000
    Explanation
    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

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  • 39. 

    Thompson Company executives are planning a $5 million advertising campaign. The expense of this advertising campaign should be recognized when

    • Planning for the campaign is complete

    • Cash is paid to the television stations which will run the commercials

    • Commercials are filmed

    • Commercials are broadcast

    Correct Answer
    A. Commercials are broadcast
    Explanation
    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.

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  • 40. 

    To close the expense accounts

    • Debit retained earnings

    • Debit expenses

    • Credit retained earnings

    Correct Answer
    A. Debit retained earnings
    Explanation
    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.

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  • Current Version
  • Mar 20, 2023
    Quiz Edited by
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  • Oct 09, 2014
    Quiz Created by
    Manoj Menon

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