Adjusting Entries (Quiz)

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  1. Use the following information to answer questions 1 - 6:
    A company borrowed $100,000 on December 1 by signing a six-month note that specifies interest at an annual percentage rate (APR) of 12%. No interest or principal payment is due until the note matures on May 31. The company prepares financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that should be entered in the company's records.

  2. 1.

    What date should be used to record the December adjusting entry?

    Answer
    December 31 (the last day of the accounting period)

  3. 2.

    How many accounts are involved in the adjusting entry?

    Answer
    Two

  4. 3.

    What is the name of the account that will be debited?

    Answer
    Interest Expense (an income statement account)

  5. 4.

    What is the name of the account that will be credited?

    Answer
    Interest Payable (a balance sheet account)

  6. 5.

    What is the amount of the debit and the credit?

    Answer
    $1,000.
    Computation:
    12% per year is 1% per month X $100,000 = $1,000 per month.

    Another method is Principal X Rate X Time = $100,000 X .12 X 1/12 = $1,000.

    As of December 31 the company owes just one month of interest. When the note becomes due, the company will have to remit six months of interest for a total of $6,000 ($100,000 X .12 X 6/12).

  7. 6.

    What would be the effect on the financial statements if the company fails to make the adjusting entry on December 31?

    Answer
    If the company fails to make the December 31 adjusting entry there will be four consequences:

    1) Interest Expense will be understated (too little expense being reported) by $1,000.
    2) Net Income will be overstated (too much net income being reported) by $1,000.
    3) Owner's equity will be overstated by $1,000.
    4) Interest Payable will be understated by $1,000.

    The accounting equation and balance sheet will show liabilities (Interest Payable) understated by $1,000 and owner's equity overstated by $1,000.

  8. Use the following information to answer questions 7 - 12:
    A bank lent $100,000 to a customer on December 1 that required the customer to pay an annual percentage rate (APR) of 12% on the amount of the loan. The loan is due in six months and no payment of interest or principal is to be made until the note is due on May 31. The bank prepares monthly financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that the bank will be making for its accounting records.

  9. 7.

    What date should be used to record the December adjusting entry?

    Answer
    December 31

  10. 8.

    How many accounts are involved in the adjusting entry?

    Answer
    Two

  11. 9.

    What is the name of the account that should be debited?

    Answer
    Interest Receivable (a balance sheet account)

  12. 10.

    What is the name of the account that should be credited?

    Answer
    Interest Revenue or Interest Income (an income statement account)

  13. 11.

    What is the amount of the debit and the credit?

    Answer
    $1,000.
    Computation:
    12% per year is 1% per month X $100,000 = $1,000 per month.

    Another method is Principal X Rate X Time = $100,000 X .12 X 1/12 = $1,000.

    As of December 31 the bank has earned just one month of interest. When the note becomes due, the bank will collect six months of interest for a total of $6,000 ($100,000 X .12 X 6/12).

  14. 12.

    What would be the effect on the financial statements if the company fails to make the adjusting entry on December 31?

    Answer
    If the bank fails to make the December 31 adjusting entry there will be four consequences:

    1) Interest Revenue or Interest Income will be understated by $1,000.
    2) Net Income will be understated by $1,000.
    3) Owner's equity will be understated by $1,000.
    4) Interest Receivable will be understated by $1,000.

    The accounting equation and balance sheet will show assets (Interest Receivable) understated by $1,000 and owner's equity understated by $1,000.

  15. Use the following information to answer questions 13 - 18:
    On December 1, your company paid its insurance agent $2,400 for the annual insurance premium covering the twelve-month period beginning on December 1. The $2,400 payment was recorded on December 1 with a debit to the current asset Prepaid Insurance and a credit to the current asset Cash. Your company prepares monthly financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that will be written by the company.

  16. 13.

    What date should be used to record the December adjusting entry?

    Answer
    December 31

  17. 14.

    How many accounts are involved in the adjusting entry?

    Answer
    Two

  18. 15.

    What is the name of the account that will be debited?

    Answer
    Insurance Expense (an income statement account)

  19. 16.

    What is the name of the account that will be credited?

    Answer
    Prepaid Insurance (a balance sheet account)

  20. 17.

    What is the amount of the debit and the credit?

    Answer
    $200.
    Calculation:
    $2,400 divided by the 12 months of coverage = $200 per month. As of December 31 one month has gone by, so one month of insurance has expired and belongs in expense. (This means that the Prepaid Insurance account should have a balance of $2,200—11 months still prepaid or unexpired X $200 per month.)

  21. 18.

    What would be the effect on the financial statements if the company fails to make the adjusting entry on December 31?

    Answer
    If the company fails to make the December 31 adjusting entry there will be four consequences:

    1) Prepaid Insurance will be overstated by $200.
    2) Insurance Expense will be understated by $200.
    3) Net Income will be overstated by $200.
    4) Owner's equity will be overstated by $200.

    The accounting equation and balance sheet will show assets (Prepaid Insurance overstated by $200 and owner's equity overstated by $200).

  22. Use the following information to answer questions 19 - 24:
    On December 1, your company paid its insurance agent $2,400 for the annual insurance premium covering the twelve-month period beginning on December 1. The $2,400 payment was recorded on December 1 with a debit to the income statement account Insurance Expense and a credit to the current asset Cash. Your company prepares monthly financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that will be written by the company.

  23. 19.

    What date should be used to record the December adjusting entry?

    Answer
    December 31

  24. 20.

    How many accounts are involved in the adjusting entry?

    Answer
    Two

  25. 21.

    What is the name of the account that will be debited?

    Answer
    Prepaid Insurance (a balance sheet account)

  26. 22.

    What is the name of the account that will be credited?

    Answer
    Insurance Expense (an income statement account)

  27. 23.

    What is the amount of the debit and the credit?

    Answer
    $2,200.
    Calculation:
    $2,400 divided by the 12 months of coverage = $200 per month. As of December 31 one month has gone by, so one month of insurance has expired and belongs in Insurance Expense. Presently there is a $2,400 debit balance in Insurance Expense. To reduce the Insurance Expense to $200 you need to credit Insurance Expense for $2,200. Prepaid Insurance should have a balance of $2,200 because 11 months of insurance is still prepaid or unexpired X $200 per month.

  28. 24.

    What would be the effect on the financial statements if the company fails to make the adjusting entry on December 31?

    Answer
    If the company fails to make the December 31 adjusting entry there will be four consequences:

    1) Prepaid Insurance will be understated by $2,200.
    2) Insurance Expense will be overstated by $2,200.
    3) Net Income will be understated by $2,200.
    4) Owner's Equity will be understated by $2,200.

    The accounting equation and balance sheet will show assets (Prepaid Insurance) understated by $2,200 and owner's equity understated by $2,200.

  29. Use the following information to answer questions 25 - 30:
    On December 1, XYZ Insurance Co. received $2,400 from your company for the annual insurance premium covering the twelve-month period beginning on December 1. XYZ Insurance Co. recorded the $2,400 receipt as of December 1 with a debit to the current asset Cash and a credit to the current liability Unearned Revenues. XYZ Insurance Co. prepares monthly financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that will be written by the XYZ Insurance Co.

  30. 25.

    What date should be used to record the December adjusting entry?

    Answer
    December 31

  31. 26.

    How many accounts are involved in the adjusting entry?

    Answer
    Two

  32. 27.

    What is the name of the account that will be debited?

    Answer
    Unearned Revenue (a balance sheet account)

  33. 28.

    What is the name of the account that will be credited?

    Answer
    Service Revenue (an income statement account)

  34. 29.

    What is the amount of the debit and the credit?

    Answer
    $200.
    Calculation:
    $2,400 divided by the 12 months of coverage = $200 per month. As of December 31 one month has gone by, so one month of insurance has been earned and belongs in revenue. (This means that the Unearned Revenue account should have a balance of $2,200—11 months still unearned X $200 per month.)

  35. 30.

    What would be the effect on the financial statements if the company fails to make the adjusting entry on December 31?

    Answer
    If XYZ Insurance Co. fails to make the December 31 adjusting entry there will be four consequences:

    1) Unearned Revenue will be overstated by $200.
    2) Service Revenue will be understated by $200.
    3) Net Income will be understated by $200.
    4) Owner's equity will be understated by $200.

    The accounting equation and balance sheet will show liabilities (Unearned Revenue) overstated by $200 and owner's equity understated by $200.

  36. Use the following information to answer questions 31 - 36:
    On December 1, your company began operations. On December 3 it purchased $1,500 of supplies and recorded the transaction with a debit to the current asset Supplies and a credit to the current liability Accounts Payable. Your company prepares monthly financial statements at the end of each calendar month. At the end of the day on December 31, your company estimated that $700 of the supplies were still on hand in the supply room. The following questions pertain to the adjusting entry that should be entered by your company.

  37. 31.

    What date should be used to record the December adjusting entry?

    Answer
    December 31

  38. 32.

    How many accounts are involved in the adjusting entry?

    Answer
    Two

  39. 33.

    What is the name of the account that will be debited?

    Answer
    Supplies Expense (an income statement account)

  40. 34.

    What is the name of the account that will be credited?

    Answer
    Supplies (a balance sheet account)

  41. 35.

    What is the amount of the debit and the credit?

    Answer
    $800.
    Calculation:
    The balance in the current asset account Supplies before any adjustment is a debit balance of $1,500. The actual amount of supplies on hand (unused) was determined to be $700. Therefore, the balance in the current asset account Supplies should be a debit balance of $700, not the present balance of $1,500. To reduce the Supplies account from a debit balance of $1,500 to become a debit balance of $700, you will need to credit Supplies for $800. The other half of the entry needs to be a debit of $800 to Supplies Expense. Since expenses are costs that have been used up, the $800 debit balance in Supplies Expense is proper. (Your company bought $1,500 and has $700 on hand/unused. Therefore, $800 must have been used up.)

  42. 36.

    What would be the effect on the financial statements if the company fails to make the adjusting entry on December 31?

    Answer
    If your company fails to make the December 31 adjusting entry there will be four consequences:

    1) Supplies will be overstated by $800.
    2) Supplies Expense will be understated by $800.
    3) Net Income will be overstated by $800.
    4) Owner's equity will be overstated by $800.

    The accounting equation and balance sheet will show assets (Supplies) overstated by $800 and owner's equity overstated by $800.

  43. Use the following information to answer questions 37 - 42:
    On December 1, your company began operations. On December 4 it purchased $1,500 of supplies and recorded the transaction with a debit to the income statement account Supplies Expense and a credit to the current liability Accounts Payable. Your company prepares monthly financial statements at the end of each calendar month. At the end of the day on December 31, your company estimated that $700 of the supplies were still on hand in the supply room. The following questions pertain to the adjusting entry that should be entered by your company.

  44. 37.

    What date should be used to record the December adjusting entry?

    Answer
    December 31

  45. 38.

    How many accounts are involved in the adjusting entry?

    Answer
    Two

  46. 39.

    What is the name of the account that will be debited?

    Answer
    Supplies (a balance sheet account)

  47. 40.

    What is the name of the account that will be credited?

    Answer
    Supplies Expense (an income statement account)

  48. 41.

    What is the amount of the debit and the credit?

    Answer
    $700.
    Calculation:
    Account balances before adjustment: Supplies $0; Supplies Expense $1,500.
    Since there are $700 of supplies on hand, the balance in the current asset account Supplies must be increased from $0 to $700. Hence a debit to Supplies for $700. The present balance of $1,500 in the Supplies Expense account must be reduced, because not all $1,500 of supplies have been used. Since $700 of supplies are on hand the company is assumed to have used only $800 of supplies. ($1,500 minus $700 on hand.) To report Supplies Expense of $800, we need to credit Supplies Expense for $700.

  49. 42.

    What would be the effect on the financial statements if the company fails to make the adjusting entry on December 31?

    Answer
    If your company fails to make the December 31 adjusting entry there will be four consequences:

    1) Supplies Expense will be overstated by $700.
    2) Supplies will be understated by $700.
    3) Net Income will be understated by $700.
    4) Owner's equity will be understated by $700.

    The accounting equation and balance sheet will show assets (Supplies) understated by $700 and owner's equity understated by $700.

  50. 43. A common characteristic of an adjusting entry is that it involves a balance sheet account and an
    __________
    Income Statement
    Nearly all adjusting entries involve one balance sheet account and one income statement account.
    account.
  51. 44. Adjusting entries are usually dated the last day of the accounting period and they convert accounts from the cash basis of accounting to the
    __________
    accrual
    basis of accounting.
  52. 45.

    Company S received money in advance of providing services to Company P. The money received before it is earned is an increase to Company S's asset account Cash. The amount unearned should also be reported as

    Another Asset
    Wrong.
    A Liability
    Right!
    The specific account might be entitled Unearned Revenues, Unearned Fees, or Customer Deposits.
    Revenues
    Wrong.
    This account is used for the amounts that have been earned.
  53. 46.

    It is acceptable that some adjusting entries contain estimated amounts.

    True
    Right!
    Depreciation, utilities, wages, and unearned revenues are just a few examples of adjusting entries that will require some estimating.
    False
    Wrong.
  54. 47. Adjusting entries are often categorized into two groups:
    __________
    accruals
    and deferrals.
  55. 48.

    An adjusting entry to record interest expense incurred by a company but not yet included in its accounting records is categorized as a(n).

    Accrual
    Right!
    It is an accrual because the expense has occurred but it is not yet recorded in the company's accounting records.
    Deferral
    Wrong.
  56. 49.

    An adjusting entry to adjust the amounts already recorded in the asset account Supplies and in the income statement account Supplies Expense is categorized as a(n).

    Accrual
    Wrong.
    Deferral
    Right!
    The amounts are already in the accounting records and they need to be adjusted. Not all of the amounts for supplies are to be expensed—some need to be deferred to the next accounting period when they will be used.
  57. 50.

    A law firm has received $10,000 for services to be performed in the future. In which category would you put the entry to adjust the accounts involved (Service Revenues and Unearned Revenues)?

    Accrual
    Wrong.
    Deferral
    Right!
    The amount is already in the accounting records. However, the amount that has not yet been earned needs to be deferred to a later accounting period.

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