Q: A company pays $1,800 for a one-year insurance policy on July 1. Using accrual basis accounting, how much insurance expense should be recorded on December 31 of the same year?

$$900 \text{ (6 months} \times \frac{1,800}{12})$$

Q: Which of the following is the correct formula for straight-line depreciation?

$$\text{Straight-line depreciation} = \frac{\text{Cost} - \text{Residual value}}{\text{Useful life}}$$

Q: A company receives $1,200 cash on May 1 for services to be performed over the next six months. Under accrual accounting, how much revenue should be recognized by July 31?

$$600 \text{ (3 months} \times \frac{1,200}{6})$$

Question 1

Which of the following best describes the main difference between cash basis accounting and accrual basis accounting?

Accepted Answer

Cash basis accounting records revenues and expenses only when cash is received or paid, while accrual basis accounting records revenues when earned and expenses when incurred.

Question 2

A company pays $1,800 for a one-year insurance policy on July 1. Using accrual basis accounting, how much insurance expense should be recorded on December 31 of the same year?

Accepted Answer

$$900 	ext{ (6 months} 	imes \frac{1,800}{12})$$

Question 3

Which of the following is the correct formula for straight-line depreciation?

Accepted Answer

$$	ext{Straight-line depreciation} = \frac{	ext{Cost} - 	ext{Residual value}}{	ext{Useful life}}$$

Question 4

Smart Touch Learning purchased $$500 of office supplies on November 3. At year-end, 100 of $$supplies remain. What is the correct adjusting entry on December 31?

Accepted Answer

Debit Supplies Expense $$400; Credit Office Supplies 400$$

Question 5

Which of the following best describes the matching principle?

Accepted Answer

Expenses are recorded when incurred and matched against the revenues of the period.

Question 6

A company receives $1,200 cash on May 1 for services to be performed over the next six months. Under accrual accounting, how much revenue should be recognized by July 31?

Accepted Answer

$$600 	ext{ (3 months} 	imes \frac{1,200}{6})$$

Question 7

Which of the following is a correct adjusting entry for accrued salaries of $1,200 at year-end?

Accepted Answer

Debit Salaries Expense $$1,200; Credit Salaries Payable 1$$,200

Question 8

If a company fails to record an adjusting entry for accrued interest expense, what is the impact on the financial statements?

Accepted Answer

Expenses are understated and net income is overstated.

Question 9

Which account is a contra asset account?

Accepted Answer

Accumulated Depreciation—Furniture

Question 10

A company performs services worth $800 in December but will not receive payment until January. What is the correct adjusting entry at December 31?

Accepted Answer

Debit Accounts Receivable $$800; Credit Service Revenue 800$$

Question 11

Which of the following is NOT a purpose of preparing an adjusted trial balance?

Accepted Answer

To confirm all transactions have been posted to the ledger

Question 12

What is the book value of an asset?

Accepted Answer

$$	ext{Book value} = 	ext{Cost} - 	ext{Accumulated Depreciation}$$

Question 13

Which of the following is an example of a deferred revenue?

Accepted Answer

A customer pays in advance for services to be performed in the future.

Question 14

Which of the following is the correct formula for calculating interest expense for one month on a $60,000 loan at 2% annual interest?

Accepted Answer

$$	ext{Interest} = 60,000 	imes 0.02 	imes \frac{1}{12} = 100$$

Question 15

Which of the following best describes the purpose of a worksheet in accounting?

Accepted Answer

It is an internal document used to summarize data for preparing financial statements.

Question 16

If a company fails to adjust for used office supplies at year-end, what is the effect on the financial statements?

Accepted Answer

Expenses are understated and assets are overstated.

Question 17

Which of the following is the correct sequence of steps in the accounting cycle up to the adjusted trial balance?

Accepted Answer

Analyze transactions, journalize, post to ledger, prepare unadjusted trial balance, journalize and post adjusting entries, prepare adjusted trial balance.

Question 18

A company collected $600 in advance for services to be performed over 30 days. At the end of 10 days, what is the correct adjusting entry?

Accepted Answer

Debit Unearned Revenue $$200; Credit Service Revenue 200$$

Question 19

Which of the following is true regarding the impact of failing to record an adjusting entry for accrued revenue?

Accepted Answer

Assets and revenues are understated.

Chapter 3: The Adjusting Process – Financial Accounting Study Notes

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