ACBU 2111, Midterm Exam A
Name _____________________________________________________________________________
1. What are the two main principles underlying accrual basis accounting?
2. According to the Revenue Recognition Principle, what is the main determinant(s) of whether a revenue
is recognized or not?
3. Assume ABC Corp has an unadjusted balance in their Unearned Revenue account of $100. At the end
of the year, an adjusting entry for this unearned revenue account of $10 was supposed to be made, but was
forgotten/omitted. What is the effect of this omission on the following accounts? Write either Overstated,
Understated, or No Effect.
Revenues
Expenses
Net income
Assets
Liabilities
Owners equity
4. Fill in numbers to show the proper order of the accounting cycle.
create adjusted trial balance
create unadjusted trial balance
post to t-accounts or general ledger
perform closing entries
create financial statements
journalize transactions
perform adjusting entries
1
5. What is the main purpose(s) of the closing entry? (you may choose more than one answer)
a. to close the adjusting entries to prepare for the new quarter
b. to ultimately transfer all net income to retained earnings
c. to zero out temporary accounts
d. to reduce retained earnings
e. none of the above
6. The difference between cash basis and accrual basis accounting is that cash basis does not have (you
may choose more than one answer):
a) Journal entries
b) Retained earnings
c) Net income
d) Deferrals and accruals
e) Debits and credits
f) T-accounts
7. Which of the following commonly results in a deferred (or unearned) revenue? (you may choose more
than one answer):
a) Sale of gift card
b) Sale of airline ticket
c) Sale of insurance policy
d) None of the above
8. For each account below, state (a) whether it is a temporary or permanent account, and (b) whether it is
an asset, liability, owners equity, revenue or expense account. The first examples has been filled out for
you.
Asset/Liability/Owners Equity
Temporary or permanent?
Revenue/Expense?
Cash
permanent
asset
Service revenue
Prepaid rent expense
Unearned revenue
Accounts receivable
Notes payable
Salary payable
Insurance expense
2
You are the accountant for ABC Corp. The following events occur. Show the journal entry (if any) for
each event.
9a. We perform $400 of consulting services for Client A. The client immediately pays us $300 in cash;
the remaining balance is due within 3 weeks.
9b. A week later, Client A pays $30 of the balance that is owed.
10a. Client B prepays us $1,200 for consulting services that we promise to perform over the next few
months.
10b. A few weeks later, we have performed $500 of the services we promised to perform for Client B.
Show the journal entry to reflect this performance (if any).
3
11a. Client C signs a contract with us. The contract states that we will perform approximately $3,000 of
consulting services for the client over the next few months. The client promises to pay the full balance
once the services are complete.
11b. At year end, it is determined that we have performed $1,300 of the promised services to Client C.
12a. We hire a new employee, Jane, on Monday morning (Dec 29). She is paid $500/day. Payday is every
Friday.
12b. The year end is three days later, on Wednesday (Dec 31). So Jane has worked exactly three days.
Show the adjusting journal entry related to Jane’s employment (if any).
12c. Jane is paid for the full week’s work on Friday (Jan 2).
4
13a. At the beginning of the month (January), we pay our landlord $400 for January rent.
13b. Show the adjusting journal entry that is made at the end of January related to rent (if any).
14a. On Feb 14, we borrow $10,000 from the bank as a short term loan. (Other details: The annual interest
rate is 12%. We will pay the loan back in exactly one month, on March 14. The month’s worth of interest
will also be paid on March 14.)
14b. On Feb 28, show any required adjusting journal entry related to this short-term loan.
14c. Show the journal entries related to the payback of the loan, as well as the payment of interest. You
may show each payment in a separate journal entry.
5
15. XYZ has the following information. Please pay attention to the dates.
Total revenues for the 3 months ended 12/31/2014 = 4,300
Total expenses for the 3 months ended 12/31/2014 = -2,100
Total dividends for the 3 months ended 12/31/2014 = 0
Retained earnings balance at 10/1/2014 (beginning of the quarter) = 9,340
Net income for the 3 months ended 9/30/2014 = 3,100
Cash payments from customers for the 3 months ended 12/31/2014 = 1,200
Cash payments to suppliers for the 3 months ended 12/31/2014 = -800
What is the ending balance in retained earnings that XYZ will report on its 12/31/2014 balance sheet?
6
SOLUTIONS
1. Revenue recognition principle and expense recognition principle (also called the matching
principle)
2. The revenue must be earned – which means goods must be delivered or services performed
3. Revenues
Expenses
Net income
Assets
Liabilities
Owners equity
4. 5
3
2
6 or 7
7 or 6
1
4
understated
no effect
understated
no effect
overstated
understated
create adjusted trial balance
create unadjusted trial balance
post to t-accounts or general ledger
perform closing entries
create financial statements
journalize transactions
perform adjusting entries
5. b, c
6. d
7. a, b, c
8.
Temporary or permanent?
Cash
permanent
Service revenue
temporary
Prepaid rent expense
permanent
Unearned revenue
permanent
Accounts receivable
permanent
Notes payable
permanent
Salary payable
permanent
Insurance expense
temporary
9a.
Cash
300
Accounts receivable 100
Revenue
9b.
Cash
400
30
Accounts receivable 30
7
Asset/Liability/Owners Equity
Revenue/Expense?
asset
revenue (owners equity)
asset
liability
asset
liability
liability
expense (owners equity)
10a.
Cash
1200
Unearned revenue
10b.
Unearned revenue
Revenue
1200
500
500
11a.
No journal entry
11b.
Accounts receivable
Revenue
1300
1300
12a.
No journal entry
12b.
Salary expense
Salary payable
1500
12c.
Salary expense
Salary payable
Cash
1000
1500
13a.
Prepaid rent expense
Cash
400
1500
2500
400
13b.
Rent expense
400
Prepaid rent expense
14a.
Cash
400
10000
Notes payable
14b.
Interest expense
Interest payable
10000
50
50
8
14c.
Note payable
Cash
and
Interest expense
Interest payable
Cash
10000
10000
50
50
100
OR this compound entry instead:
Note payable
10000
Interest expense
50
Interest payable
50
Cash
10100
15.
9340+(4300-2100)=11540
Point distribution
1: 5 points
2: 5 points
3: 4
4: 4
5: 4
6: 4
7: 4
8: 7
9a: 4
9b: 4
10a: 4
10b: 4
11a: 2
11b: 4
12a: 2
12b: 5
12c: 7
13a: 4
13b: 4
14a: 4
14b: 4
14c: 7
15: 4
9