MASTERING ADJUSTING ENTRIES
TESTBANK
Section 1WHY WE USE ACCRUALS, DEFERRALS AND OTHER ADJUSTMENTS
1.
In accrual accounting, an expense is recognized when it is:
a. paid
b. posted to the general ledger
c. incurred
d. either b or c
2.
In cash basis accounting, an expense is recognized when it is:
a. paid
b. posted to the general ledger
c. incurred
d. either b or c
3.
In accrual basis accounting, revenue is recognized when it is:
a. received
b. earned
c. posted to the general ledger
d. either b or c
4.
In cash basis accounting, revenue is recognized when it is:
a. received
b. earned
c. posted to the general ledger
d. either b or c
5.
On December 1, 20X1, your calendar year firm receives $12,000 in
advance for work to be performed evenly over the next 12 months.
Under the cash and accrual methods, respectively, this revenue will be
reported on the 20X1 income statement as:
a. $1,000 and $1,000
b. $12,000 and $12,000
c. $1,000 and $12,000
d. $12,000 and $1,000
6.
The two types of adjusting entries are:
a. cash and revenue
b. debit and credit
c. accrual and deferral
d. deferral and prepayment
7.
Adjusting entries:
a. never include a cash account
b. are made when there have been prepayments during the year
c. may be necessary when revenue has been earned in one period but
received in another
d. all of the above
© American Institute of Professional Bookkeepers, 2010
Testbank
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Mastering Adjusting Entries
Section 2ACCRUED REVENUE
1.
Accrued revenue is:
a. payment received for work completed
b. revenue earned but not received
c. a debit to cash
d. a credit to cash
2.
The journal entry to accrue $500 commissions’ revenue is:
a. Cash
500
Commissions Revenue
500
b. Commissions Revenue
500
Cash
500
c. Commissions Revenue
500
Accounts Receivable
500
d. Accounts Receivable
500
Commissions Revenue
500
3.
Several years ago, your calendar year company issued a $15,000 note at
8% a year interest due each July 31. If no interest is received this year,
what journal entry do you record at year end?
a. Interest Receivable
500
Deferred Revenue
500
b. Interest Receivable
1,200
Deferred Revenue
1,200
c. Interest Receivable
1,200
Interest Revenue
1,200
d. Interest Receivable
500
Interest Revenue
500
4.
As of year end, your firm was owed $4,000 for work completed, but had
received only $1,500, that you debited to Revenue. By what amount must
the balance in Revenue be adjusted at year end?
a. $4,000
b. $1,500
c. $2,500
d. $0
5.
Your company performs work for a customer, but as of year end, has
received no payment. If you do not record an adjusting entry at year end,
how will the financial statements be affected?
a.
b.
c.
d.
Testbank
Net income
overstated
overstated
understated
understated
Assets
not affected
overstated
not affected
understated
Liabilities
understated
not affected
overstated
not affected
2
Mastering Adjusting Entries
Section 3ACCRUED EXPENSES (ACCRUED LIABILITIES)
1.
Your company has a 5-day workweek with a weekly payroll of $20,000
distributed each Friday. If an accounting period ends on a Tuesday, the
adjusting journal entry is:
a. Salary Expense
4,000
Salary Payable
4,000
b. Salary Expense
8,000
Salary Payable
8,000
c. Accrued Salary
8,000
Salary Payable
8,000
d. Deferred Salary
4,000
Salary Payable
4,000
2.
If a company receives a December electric bill for $1,000 and decides to
pay it in January:
a. no adjustment is required
b. the company must record a journal entry that debits Utilities
Expense and credits Utilities Expense Payable
c. the company must record a journal entry that debits an asset
account and credits an expense account
d. none of the above
3.
Your company has a 5-day workweek and a weekly payroll of $35,000
that it distributes each Friday. When an accounting period ends on a
Thursday, which of the following entries will you record?
a. Salary Payable
14,000
Salary Expense
14,000
b. Salary Expense
14,000
Salary Payable
14,000
c. Salary Payable
28,000
Salary Expense
28,000
d. Salary Expense
28,000
Salary Payable
28,000
4.
On November 1, your calendar year firm receives a $5,000 invoice for
magazine ads that will run for the next 5 months. If you remit $1,000 on
November 1 and debit Advertising Expense, then pay the remainder in
January, which of the following entries will you record at year end?
a. Advertising Expense
1,000
Cash
1,000
b. Advertising Expense
2,000
Advertising Payable
2,000
c. Advertising Expense
1,000
Advertising Payable
1,000
d. Advertising Expense
5,000
Advertising Payable
5,000
Testbank
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Mastering Adjusting Entries
5. A company pays its employees every Friday. This year, the
company’s year ends on a Wednesday. If it does not to accrue salaries for
the week, how will the financial statements be affected?
a.
b.
c.
d.
Net income
overstated
overstated
understated
understated
Assets
not affected
overstated
not affected
understated
Liabilities
understated
not affected
overstated
not affected
6.
On August 1, your company takes a $10,000 note that requires your firm
to repay principal and accrued interest of 8% a year at the end of 4
years. Which entry should you record at the end of this year?
a. Interest Expense
800
Cash
800
b. Interest Expense
333
Interest Payable
333
c. Interest Expense
800
Interest Payable
800
d. Interest Expense
467
Interest Payable
467
7.
On November 1, 20X4, you record a $20,000 note receivable, debiting
Cash and crediting Notes Payable. The note matures on May 1, 20X5
when principal and accrued interest of 6% a year is due. On December 31,
20X4, your adjusting entry for accrued interest will include:
a. a debit to Interest Payable for $400
b. a debit to Interest Expense for $200
c. a credit to Interest Payable for $400
d. none of the above
Section 4REVENUE COLLECTED IN ADVANCE (UNEARNED REVENUE)
1.
A company collects payment in advance, debiting Cash and crediting
Revenue. At year end, an adjusting entry:
a. is not required if all the advance payment has been earned
b. may need to debit Revenue
c. may need to debit Unearned Revenue
d. both a and b
2.
On September 1, your calendar year company rents a machine to another
firm for $24,000 a year. As of December 31, $17,000 has been received and
recorded in Rent Revenue. What adjusting entry do you record at year end?
a. Rent Revenue
9,000
Unearned Rent Revenue
9,000
b. Rent Revenue
8,000
Unearned Rent Revenue
8,000
c. Rent Revenue
9,000
Accounts Receivable
9,000
d. Unearned Rent Revenue
8,000
Rent Revenue
8,000
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Mastering Adjusting Entries
3.
On September 1, your calendar year company rents a machine to
another firm for $24,000 a year. If, at year end, $15,000 has been
received and recorded in Rent Revenue, what adjusting entry do you
record at year end?
a. Rent Revenue
8,000
Unearned Rent Revenue
8,000
b. Unearned Rent Revenue
7,000
Rent Revenue
7,000
c. Unearned Rent Revenue
8,000
Rent Revenue
8,000
d. Rent Revenue
7,000
Unearned Rent Revenue
7,000
4.
Your company receives a $40,000 advance for a $125,000 painting job
and you credit Painting Revenue. If, at year end, 14% of the job has been
completed, what adjusting entry will you record?
a. Painting Revenue
22,500
Cash
22,500
b. Unearned Painting Revenue
22,500
Cash
22,500
c. Painting Revenue
22,500
Unearned Painting Revenue
22,500
d. Unearned Painting Revenue
22,500
Painting Revenue
22,500
5.
Your company receives a $75,000 advance for 1 year's rent that you
record in Rent Received In Advance. If, at year end, 3 months have
elapsed, what adjusting entry will you record?
a. Rent Revenue
18,750
Rent Received in Advance
18,750
b. Rent Revenue
56.250
Rent Received in Advance
56.250
c. Rent Received in Advance
18,750
Rent Revenue
18,750
d. Rent Received in Advance
56,250
Rent Revenue
56,250
6.
On October 11, your firm receives a $7,500 down-payment toward a
$15,000 video your firm will produce, and you book it in Unearned
Revenue. If, at year end, 20% of the work is completed, what adjusting
entry will you record?
a. Unearned Revenue
3,000
Revenue
3,000
b. Cash
3,000
Revenue
3,000
c. Revenue
3,000
Unearned Revenue
3,000
d. Unearned Revenue
1,500
Revenue
1,500
Testbank
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Mastering Adjusting Entries
7.
On April 1, a company takes on an 18-month job and receives a $10,000
advance that is recorded in Revenue. If no adjusting entry is made at
year end, how will the financial statements be affected?
a.
b.
c.
d.
8.
Net income
overstated
overstated
understated
understated
Assets
not affected
overstated
not affected
understated
Liabilities
understated
not affected
overstated
not affected
On April 1, a company takes on an 18-month job and receives a $10,000
advance that is recorded in Unearned Revenue. If no adjusting entry is
made at year end, how will the financial statements be affected?
a.
b.
c.
d.
Net income
overstated
overstated
understated
understated
Assets
not affected
overstated
not affected
understated
Liabilities
understated
not affected
overstated
not affected
Section 5PREPAID (DEFERRED) EXPENSES
1.
Your firm buys $27,000 of office supplies and debits Supplies Expense.
If, at year end, $6,000 of supplies are on hand, what adjusting entry will
you record?
a. Supplies On Hand
6,000
Supplies Expense
6,000
b. Supplies On Hand
21,000
Supplies Expense
21,000
c. Supplies Expense
21,000
Supplies On Hand
21,000
d. Supplies Expense
6,000
Supplies On Hand
6,000
2.
Your company prepays $15,000 for a 1-year insurance policy that you
recorded in Prepaid Insurance. When the fiscal year ends 3 months later,
what adjusting entry will you record?
a. Prepaid Insurance
11,250
Insurance Expense
11,250
b. Prepaid Insuranc1e
3,750
Insurance Expense
3,750
c. Insurance Expense
11,250
Prepaid Insurance
11,250
d. Insurance Expense
3,750
Prepaid Insurance
3,750
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Mastering Adjusting Entries
3.
On October 1, your calendar year company signs a $20,000 contract to
have its offices painted and makes a down-payment of $14,000 that you
recorded in Painting Expense. If, on December 31, management informs
you that 25% of the work has been completed, what adjusting entry will
you record?
a. a debit to Painting Expense for $5,000
b. a credit to Painting Expense for $9,000
c. a debit to Painting Expense for $9,000
d. a credit to Painting Expense for $5,000
4.
Your calendar year company pays $12,000 a year for security services.
On November 1, you remit payment for the next 3 months' service and
record it in Prepaid Security Expense. At year end, what adjusting entry
will you record?
a. Prepaid Security Expense
1,000
Security Expense
1,000
b. Security Expense
2,000
Prepaid Security Expense
2,000
c. Security Expense
3,000
Prepaid Security Expense
3,000
d. Prepaid Security Expense
1,000
Cash
1,000
5.
On September 1, your calendar year company pays $12,000 for 1 year’s
rent that you debit to Prepaid Rent. At year end, what adjusting entry
will you record?
a. Prepaid Rent
4,000
Rent Expense
4,000
b. Rent Expense
4,000
Cash
4,000
c. Rent Expense
4,000
Prepaid Rent
4,000
d. Prepaid Rent
8,000
Rent Expense
8,000
6.
In June, your calendar year company pays $1,200 for a 1-year insurance
policy that you recorded in Prepaid Insurance. If you do not record an
adjusting entry at year end, how will the financial statements be
affected?
a.
b.
c.
d.
Testbank
Net income
overstated
overstated
understated
understated
Assets
not affected
overstated
not affected
understated
Liabilities
understated
not affected
overstated
not affected
7
Mastering Adjusting Entries
7.
In October, your calendar year company pays $1,200 for 1 year’s rent
that you recorded in Rent Expense. If you do not record an adjusting
entry at year end, how will the financial statements be affected?
a.
b.
c.
d.
8.
Assets
not affected
overstated
not affected
understated
Liabilities
understated
not affected
overstated
not affected
In July, your calendar year company pays $1,200 for 1 year’s insurance
that you recorded in Prepaid Insurance. If you do not record an adjusting
entry at year end, how will the financial statements be affected?
a.
b.
c.
d.
9.
Net income
overstated
overstated
understated
understated
Net income
overstated
overstated
understated
understated
Assets
overstated
understated
overstated
understated
In April, your calendar year company pays $1,200 for 1 year’s rent that
you recorded in Prepaid Rent. If you do not record an adjusting entry at
year end, how will the financial statements be affected?
a.
b.
c.
d.
Net income
overstated
overstated
understated
understated
Assets
overstated
understated
overstated
understated
10. On August 1, 20X8, your calendar year firm takes out a 3-year insurance
policy at a total cost of $3,600 that requires a 50% down-payment and
the remainder after 6 months. Insurance expense for 20X8 is:
a. $500
b. $600
c. $1,200
d. $1,800
Section 6OTHER END-OF-PERIOD ENTRIES
1.
A plant asset with an original cost of $121,875 and a residual value of
$15,000 has a useful life of 9 years. Under the straight-line method, the
journal entry to record the annual depreciation expense is:
a. Depreciation Expense
13,542
Accumulated Depreciation
13,542
b. Depreciation Expense
11,875
Accumulated Depreciation
11,875
c. Depreciation Expense
10,250
Fixed Asset
10,250
d. Depreciation Expense
1,625
Accumulated Depreciation
1,625
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Mastering Adjusting Entries
2.
Company A has a fixed asset with an original cost of $300,000, a residual
value of $25,000 and a useful life of 10 years. The company also has land
with an original cost of $1,000,000. Under the straight-line method, the
journal entry to record the annual depreciation expense is:
a. Depreciation Expense
27,500
Accumulated Depreciation
27,500
b. Depreciation Expense
30,000
Fixed Asset
30,000
c. Depreciation Expense
26,000
Accumulated Depreciation
26,000
d. Depreciation Expense
5,000
Accumulated Depreciation
5,000
3.
Company B estimates bad debt expense at 2% of credit sales, which were
$610,000 for the year. The journal entry to record bad debt expense is:
a. Bad Debt Expense
8,580
Allowance for Doubtful Accounts
8,580
b. Allowance for Doubtful Accounts
8,580
Bad Debt Expense
8,580
c. Bad Debt Expense
12,200
Allowance for Doubtful Accounts
12,200
d. Allowance for Doubtful Accounts
5,720
Bad Debt Expense
5,720
4.
If, at year end, the balance in A/R is $920,000, of which 5% is estimated
to be uncollectible, and the Allowance for Doubtful Accounts has a credit
balance of $34,000, the journal entry to record bad debt expense is:
a. Bad Debt Expense
46,000
Allowance for Doubtful Accounts
46,000
b. Allowance for Doubtful Accounts
46,000
Bad Debt Expense
46,000
c. Bad Debt Expense
12,000
Allowance for Doubtful Accounts
12,000
d. Allowance for Doubtful Accounts
12,000
Bad Debt Expense
12,000
5.
If, at year end, the balance in A/R is $525,000, of which 4% is estimated
to be uncollectible, and the Allowance for Doubtful Accounts has a debit
balance of $7,000, the journal entry to record bad debt expense is:
a. Bad Debt Expense
28,000
Allowance for Doubtful Accounts
28,000
b. Allowance for Doubtful Accounts
21,000
Bad Debt Expense
21,000
c. Bad Debt Expense
7,000
Allowance for Doubtful Accounts
7,000
d. Allowance for Doubtful Accounts
28,000
Bad Debt Expense
28,000
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Mastering Adjusting Entries
6.
Your company estimates bad debt expense as a percentage of Accounts
Receivable that will be uncollectible, which comes to $18,000 for the
current year. The Allowance for Doubtful Accounts has a credit balance
of $15,000. If no adjusting entry is recoded at year end, how will the
financial statements be affected?
a.
b.
c.
d.
Net income
overstated
overstated
understated
understated
Assets
overstated
understated
overstated
understated
7.
If Company E has a fixed asset with an original cost of $95,000, a useful
life of 8 years and a residual value of $13,000, the journal entry for
annual depreciation under the straight-line method is:
a. Depreciation Expense
10,250
Accumulated Depreciation
10,250
b. Depreciation Expense
11,875
Accumulated Depreciation
11,875
c. Accumulated Depreciation
11,875
Depreciation Expense
11,875
d. Accumulated Depreciation
10,250
Depreciation Expense
10.250
8.
Company F has a fixed asset with a useful life of 5 years and a residual
value of $22,000. The asset had an original cost of $152,000 and the
company’s land had an original cost of $750,000. What is the adjusting
entry to record annual depreciation under the straight-line method?
a. Depreciation Expense
30,400
Fixed Asset
30,400
b. Depreciation Expense
180,400
Accumulated Depreciation
180,400
c. Depreciation Expense
26,000
Accumulated Depreciation
26,000
d. Accumulated Depreciation
176,000
Depreciation Expense
176,000
9.
Company G has a fixed asset with an original cost of $73,000, a useful
life of 6 years and a residual value of $8,000. The journal entry to record
Company G’s annual depreciation under the straight-line method is:
a. Depreciation Expense
12,167
Accumulated Depreciation
12,167
b. Accumulated Depreciation
12,167
Depreciation Expense
12,167
c. Accumulated Depreciation
10,833
Depreciation Expense
10.833
d. Depreciation Expense
10,833
Accumulated Depreciation
10,833
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Mastering Adjusting Entries
10. You are given the following data for a fixed asset:
Original cost
Useful life
Residual value
$31,000
9 years
$4,000
How do you record annual depreciation for the asset under the straightline method?
a. Depreciation Expense
444
Fixed Asset
444
b. Depreciation Expense
3,000
Accumulated Depreciation
3,000
c. Accumulated Depreciation
3,444
Depreciation Expense
3,444
d. Depreciation Expense
3,444
Accumulated Depreciation
3,444
11. The data for a fixed asset owned by Company H is as follows:
Original cost
Useful life
Residual value
$223,000
7 years
$40,000
The journal entry to record the asset’s annual depreciation under the
straight-line method is:
a. Depreciation Expense
26,143
Accumulated Depreciation
26,143
b. Accumulated Depreciation
26,143
Depreciation Expense
26,143
c. Depreciation Expense
31,857
Accumulated Depreciation
31,857
d. Accumulated Depreciation
5,714
Depreciation Expense
5,714
12. If your firm estimates bad debt expense as 2% of credit sales, which are
$286,000 for the year, and the Allowance for Doubtful Accounts has a
debit balance of $2,860, how do you record bad debt expense?
a. Bad Debt Expense
8,580
Allowance for Doubtful Accounts
8,580
b. Allowance for Doubtful Accounts
8,580
Bad Debt Expense
8,580
c. Bad Debt Expense
5,720
Allowance for Doubtful Accounts
5,720
d. Allowance for Doubtful Accounts
5,720
Bad Debt Expense
5,720
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Mastering Adjusting Entries
13. If CheapCo estimates bad debt expense as a percentage of its $159,000
credit sales, estimates 3% for this year and has an Allowance for
Doubtful Accounts with a credit balance of $1,230, how does it record
bad debt expense?
a. Bad Debt Expense
4,770
Allowance for Doubtful Accounts
4,770
b. Bad Debt Expense
3,540
Allowance for Doubtful Accounts
3,540
c. Allowance for Doubtful Accounts
4,770
Bad Debt Expense
4,770
d. Allowance for Doubtful Accounts
3,540
Bad Debt Expense
3,540
14. If a company fails to record an adjusting entry for depreciation expense
at year end, how will the financial statements be affected?
a.
b.
c.
d.
Net income
overstated
overstated
understated
understated
Assets
overstated
understated
overstated
understated
15. ByCo estimates bad debt as a percentage of credit sales. If it fails to
record an adjusting entry at year end, how will it affect ByCo’s financial
statements?
a.
b.
c.
d.
Net income
overstated
overstated
understated
understated
Assets
overstated
understated
overstated
understated
16. This year, your company estimates that $18,000 of A/R will be
uncollectible. The Allowance for Doubtful Accounts has a credit balance of
$5,000. If no adjusting journal entry is recorded, how will the financial
statements be affected?
a.
b.
c.
d.
Testbank
Net income
overstated
overstated
understated
understated
Assets
overstated
understated
overstated
understated
12
Mastering Adjusting Entries
Section 7 FROM UNADJUSTED TRIAL BALANCE TO FINANCIAL STATEMENTS
and
Section 8  APPLYING YOUR KNOWLEDGE TO THE TRIAL BALANCE
1.
Adjusting entries:
a. always involve two income statement accounts
b. always involve a balance sheet account and an income statement
account
c. never involve cash
d. both b and c
2.
Interest Receivable and Interest Payable are:
a. balance sheet accounts
b. income statement accounts
c. liability accounts
d. asset accounts
3.
Which of the following accounts normally has a credit balance?
a. Prepaid Taxes
b. Interest Income
c. Rent Expense
d. Equipment
4.
Which of the following is not a liability account?
a. Prepaid Rent
b. Accrued Salaries
c. Payroll Taxes Payable
d. Unearned Revenue
5.
The chart of accounts is normally presented in the following sequence:
a. Income, Expense, Asset, Liability, Equity
b. Equity, Liability, Asset, Expense, Income
c. Asset, Liability, Equity, Revenue, Expenses
d. None of the above
6.
Numbering of accounts is generally in the following sequence:
a. Income, Expense, Asset, Liability, Equity
b. Equity, Liability, Asset, Expense, Income
c. established by GAAP
d. none of the above
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Mastering Adjusting Entries
7.
Which of the following accounts has a normal debit balance?
a. Rent Receivable
b. Interest Payable
c. Prepaid Legal Fees
d. both a and c
8.
Which of the following accounts has a normal credit balance?
a. Accumulated Depreciation
b. Unearned Revenue
c. Supplies On-Hand
d. both a and b
9.
Which of the following accounts has a normal debit balance?
a. Accumulated Depreciation
b. Allowance for Doubtful Accounts
c. Rent Revenue
d. none of the above
10. Which of the following accounts has a normal credit balance?
a. Unearned Subscription Revenue
b. Supplies On-Hand
c. Interest Receivable
d. none of the above
Testbank
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Mastering Adjusting Entries
Questions 11-14: MidCo is a calendar year company. Below is its partial
worksheet for, for the year ended December 31, 20X8. Use the data to answer
the next four questions.
Accounts Receivable
Allow. For Doubtful Accounts
Supplies On Hand
Wages Payable
Notes Payable
Bad Debt Expense
Supplies Expense
Wage Expense
Unadjusted
trial balance
Dr
Cr
50,000
2,000
1,500
Adjustments
Dr
Cr
Adjusted
trial balance
Dr
Cr
1,000
20,000
600
4,000
11. If the partial adjustment to Wages Payable is correct, what is the
adjusted balance in Wage Expense?
a. $4,000
b. $5,000
c. $3,000
d. $1,000
12. If the adjustment to Supplies Expense is correct, what is the adjusted
balance in Supplies On Hand?
a. $1,500
b. $2,100
c. $1,900
d. $900
13. If the company estimates 4% of Accounts Receivable to be uncollectible,
what is the debit to Bad Debt Expense in the adjustments column?
a. $0
b. $2,000
c. $4,000
d. $1,000
14. On July 1, 20X6, the company borrowed $20,000 and must repay
principal and accrued interest of 10% a year on July 1, 20X9. Based on
this information, the debit to Interest Expense in the Adjustments
column is:
a. $0
b. $1,000
c. $2,000
d. $4,000
Testbank
15