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Adjusting Entries (Practice Quiz)

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Author:
Harold Averkamp, CPA, MBA

For multiple-choice and true/false questions, simply press or click on what you think is the correct answer. For fill-in-the-blank questions, press or click on the blank space provided.

If you have difficulty answering the following questions, learn more about this topic by reading our Adjusting Entries (Explanation).


1.
What type of entry will increase the normal balance of the general ledger account Service Revenues?

Debit

Wrong.

Credit

Right!
Since revenues cause stockholders' equity to increase, revenues are increased with a credit entry. [Stockholders' equity appears on the right side of the accounting equation. Credit entries appear on the right side of a T-account.]
2.
What type of entry will increase the normal balance of the general ledger account that reports the amount owed as of the balance sheet date for a company's accrued expenses?

Debit

Wrong.

Credit

Right!
The amount owed for accrued expenses is reported in a liability account such as Accrued Expenses Payable. Since a liability account is expected to have a credit balance, a credit entry will increase the normal balance. [Recall that liabilities are on the right side of the accounting equation. Credit entries appear on the right side of a T-account.]
3.
What type of entry will increase the normal balances of the general ledger accounts Electricity Expense, Insurance Expense, Interest Expense, and Repairs Expense?

Debit

Right!
Expenses are recorded in expense accounts with a debit entry. The reason is that expenses will cause a decrease in stockholders' (or owner's) equity.

Credit

Wrong.
4.
What type of accounts are Interest Receivable and Fees Receivable?

Asset

Right!
Receivables are asset accounts. Assets appear on the left side of the accounting equation and asset accounts will normally have debit balances.

Liability

Wrong.

Equity

Wrong.

Revenue

Wrong.

Expense

Wrong.
5.
What type of entry will decrease the normal balances of the general ledger accounts Interest Receivable and Fees Receivable?

Debit

Wrong.

Credit

Right!
Receivables normally have debit balances. Therefore, to decrease the debit balance in a receivable account you will need to credit the account.
6.
What type of accounts are Deferred Revenues and Unearned Revenues?

Asset

Wrong.

Liability

Right!
Accounts such as Deferred Revenues, Unearned Revenues, and Customer Deposits are liability accounts. As with liability accounts, the normal balance will be a credit balance.

Under the accrual method of accounting, the accounts such as Unearned Revenues are necessary when a company receives money from a customer in advance of the company earning the money. (Since the money has not yet been earned, it cannot be reported as revenues on the income statement.) The liability account communicates that a company has an obligation to provide its customers with goods or services or return the money to the customers.

Equity

Wrong.

Revenue

Wrong.
7.
What type of entry will decrease the normal balances of the accounts Deferred Revenues and Unearned Revenues?

Debit

Right!
Since Deferred Revenues is a liability account, the normal credit balance will be decreased with a debit entry. For example, when some of the deferred revenues become earned, the company will debit the Deferred Revenues and will credit a revenue account such as Service Revenues.

Credit

Wrong.
8.
What type of accounts are Prepaid Insurance, Prepaid Advertising, and Prepaid Expenses?

Asset

Right!
Prepaid expenses that have not been used up or have not yet expired are reported as assets. In other words, prepaid expenses are unexpired costs. When the costs expire (or are used up) they become expenses.

Liability

Wrong.

Equity

Wrong.

Revenue

Wrong.

Expense

Wrong.
9.
What type of entry will decrease the normal balances of the accounts Prepaid Insurance and Prepaid Expenses, and Insurance Expense?

Debit

Wrong.

Credit

Right!
Since Prepaid Insurance and Prepaid Expenses are asset accounts, their normal debit balance will be decreased with a credit entry.

Since expenses usually have debit balances, Insurance Expense will be decreased with a credit entry.
10.
What type of accounts are Accumulated Depreciation and Allowance for Doubtful Accounts?

Contra Asset

Right!
Contra asset accounts will have credit balances. The word contra indicates the balances in these two accounts will be contrary to the debit balances that are expected in asset accounts.

Equity

Wrong.

Expense

Wrong.

Liability

Wrong.

Revenue

Wrong.
11.
What type of entry will increase the balances that are normally found in the accounts Accumulated Depreciation and Allowance for Doubtful Accounts?

Debit

Wrong.

Credit

Right!
Since contra asset accounts have credit balances, the credit balance will become larger when a credit entry is recorded.
12.
In the case of a company's accrued interest expense, which of the following occurs first?

Incurring the interest expense

Right!
An accrued expense is an expense (and a liability) which was incurred by a borrower but the interest has not been recorded.

Paying the interest to the lender

Wrong.
13.
In the case of a bank's accrued interest revenues, which occurs first?

Earning the interest revenues

Right!
Accrued revenues are recorded because the bank has earned both the interest revenue and a related receivable and neither has yet been recorded by the bank.

Receiving the interest from the borrower

Wrong.
14.
In the case of a company deferring insurance expense, which occurs first?

Incurring the insurance expense

Wrong.

Paying the insurance company

Right!
Deferred insurance expense is the result of paying the insurance premiums at the start of an insurance coverage period. The amount of insurance premiums that have not expired as of the balance sheet date should be reported in an asset account such as Prepaid Insurance. [As the prepaid insurance premiums expire an adjusting entry should be written to credit the asset Prepaid Insurance and debit Insurance Expense.]
15.
In the case of a company's deferred revenues, which occurs first?

Earning the revenues

Wrong.

Receiving the money from the customer

Right!
Deferred revenues indicate that a company has received money from a customer before it has been earned.
16.
Which of the following will be included in the adjusting entry to accrue interest expense?

A debit to Cash

Wrong.

A credit to Interest Payable

Right!
When interest expense has been incurred by a company but no payment has been made and no related paperwork has been processed, the company will need to accrue the interest with a debit to Interest Expense and a credit to Interest Payable.

A debit to Interest Payable

Wrong.

A debit to Prepaid Interest

Wrong.
17.
Which of the following will be included in the adjusting entry to accrue interest income or interest revenues?

A debit to Cash

Wrong.

A debit to Interest Income

Wrong.

A credit to Interest Receivable

Wrong.

A debit to Interest Receivable

Right!
When interest has been earned but no cash has been received and no billing paperwork has been processed in the accounting records, a company will need to accrue 1) interest revenue or interest income, and 2) an asset such as Interest Receivable. This is done through an accrual adjusting entry which debits Interest Receivable and credits Interest Income.
18.
The adjusting entry that reduces the balance in Prepaid Insurance will also include which of the following?

A credit to Cash

Wrong.

A credit to Insurance Expense

Wrong.

A debit to Insurance Expense

Right!
As the debit balance in the asset account Prepaid Insurance expires, there will need to be an adjusting entry to 1) debit Insurance Expense, and 2) credit Prepaid Insurance.

A debit to Insurance Payable

Wrong.
19.
The adjusting entry that reduces the balance in Deferred Revenues or Unearned Revenues will also include which of the following?

A debit to Cash

Wrong.

A credit to Fees Earned

Right!
As the deferred or unearned revenues become earned, the credit balance in the liability account such as Deferred Revenues needs to be reduced. Hence, the adjusting entry to record these earned revenues will include 1) a debit to Deferred Revenues, and 2) a credit to Fees Earned.

A debit to Fees Earned

Wrong.

A credit to Fees Receivable

Wrong.
20.
The ending balance in the account Prepaid Insurance is expected to report which of the following?

The accrued amount of insurance expense

Wrong.

The original amount of the insurance premiums paid

Wrong.

The expired portion of the insurance premiums paid

Wrong.

The unexpired portion of the insurance premiums paid

Right!
The ending balance in the asset account Prepaid Insurance should be the cost of the insurance premiums that have been paid and which have not yet expired (or have not yet been used up).
21.
The ending balance in the account Deferred Revenues (or Unearned Fees) should report which of the following?

The accrued amount of fees that have been earned

Wrong.

The original amount of fees received in advance from a customer

Wrong.

The fees received in advance which are not yet earned

Right!
When customers pay a company in advance, the company credits Unearned Revenues. Then as the company earns some of the revenues, the account Unearned Revenues will be debited and an income statement account such as Service Revenues or Fees Earned will be credited. Thus, the remaining credit balance in Unearned Revenues is the amount received but not yet earned.

The amount of fees received in advance and which are now earned

Wrong.
22.
Which type of adjusting entry is often reversed on the first day of the next accounting period?

Accrual

Right!
For example, if a company has incurred commissions expense on December's sales, but will not pay the commissions until January 25, the company will write an accrual type adjusting entry for December’s financial statements. On January 25, the company will write a check to pay those commissions. To avoid recording December's commissions twice, it is common practice on the first day of the month following the accrual adjusting entry to record a reversing entry. (Deferrals do not pose the risk of double counting expenses or revenues.)

Deferral

Wrong.

Depreciation

Wrong.
23.
Typically an adjusting entry will include which of the following?

One balance sheet account and one income statement account

Right!
Nearly all adjusting entries involve a minimum of one balance sheet account and a minimum of one income statement account.

Two balance sheet accounts

Wrong.

Two income statement accounts

Wrong.

Use the following information to answer questions 24 – 29:
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.

24.
What date should be used to record the December adjusting entry?

Answer

December 31 (the last day of the accounting period)
25.
How many accounts are involved in the adjusting entry?

Answer

Two
26.
What is the name of the account that will be debited?

Answer

Interest Expense (an income statement account)
27.
What is the name of the account that will be credited?

Answer

Interest Payable (a balance sheet account)
28.
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).
29.
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.

Use the following information to answer questions 30 – 35:
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.

30.
What date should be used to record the December adjusting entry?

Answer

December 31
31.
How many accounts are involved in the adjusting entry?

Answer

Two
32.
What is the name of the account that should be debited?

Answer

Interest Receivable (a balance sheet account)
33.
What is the name of the account that should be credited?

Answer

Interest Revenue or Interest Income (an income statement account)
34.
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).
35.
What would be the effect on the financial statements if the bank 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.

Use the following information to answer questions 36 – 41:
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 should be written by the company.

36.
What date should be used to record the December adjusting entry?

Answer

December 31
37.
How many accounts are involved in the adjusting entry?

Answer

Two
38.
What is the name of the account that will be debited?

Answer

Insurance Expense (an income statement account)
39.
What is the name of the account that will be credited?

Answer

Prepaid Insurance (a balance sheet account)
40.
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).
41.
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).

Use the following information to answer questions 42 – 47:
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 should be written by the company.

42.
What date should be used to record the December adjusting entry?

Answer

December 31
43.
How many accounts are involved in the adjusting entry?

Answer

Two
44.
What is the name of the account that will be debited?

Answer

Prepaid Insurance (a balance sheet account)
45.
What is the name of the account that will be credited?

Answer

Insurance Expense (an income statement account)
46.
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.
47.
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.

Use the following information to answer questions 48 – 53:
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 should be written by the XYZ Insurance Co.

48.
What date should be used to record the December adjusting entry?

Answer

December 31
49.
How many accounts are involved in the adjusting entry?

Answer

Two
50.
What is the name of the account that will be debited?

Answer

Unearned Revenues (a balance sheet account)
51.
What is the name of the account that will be credited?

Answer

Service Revenues (an income statement account)
52.
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 Revenues account should have a balance of $2,200 (11 months still unearned X $200 per month).
53.
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 Revenues will be overstated by $200.
2) Service Revenues 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 Revenues) overstated by $200 and owner's equity understated by $200.

Use the following information to answer questions 54 – 59:
On December 1, your company began operations. On December 3 it purchased $1,500 of supplies on credit 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.

54.
What date should be used to record the December adjusting entry?

Answer

December 31
55.
How many accounts are involved in the adjusting entry?

Answer

Two
56.
What is the name of the account that will be debited?

Answer

Supplies Expense (an income statement account)
57.
What is the name of the account that will be credited?

Answer

Supplies (a balance sheet account)
58.
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.)
59.
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.

Use the following information to answer questions 60 – 65:
On December 1, your company began operations. On December 4 it purchased $1,500 of supplies on credit 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.

60.
What date should be used to record the December adjusting entry?

Answer

December 31
61.
How many accounts are involved in the adjusting entry?

Answer

Two
62.
What is the name of the account that will be debited?

Answer

Supplies (a balance sheet account)
63.
What is the name of the account that will be credited?

Answer

Supplies Expense (an income statement account)
64.
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. Therefore, 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.
65.
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.
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Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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