Q: Which formula correctly calculates straight-line depreciation expense per year?

$$\frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$$

Question 1

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

Accepted Answer

Accrual basis recognizes revenues and expenses when they are earned or incurred, regardless of when cash is received or paid.

Question 2

According to the revenue recognition principle under accrual accounting, when should revenue from a sale of goods be recognized?

Accepted Answer

When the goods are delivered to the customer and the risks and rewards of ownership have transferred.

Question 3

A company receives $12,000 in advance for a one-year magazine subscription. According to accrual accounting, how much revenue should be recognized at the end of the first month?

Accepted Answer

$1,000

Question 4

Which of the following is an example of a deferral adjusting entry?

Accepted Answer

Recording prepaid insurance as an expense as it is used up.

Question 5

A company pays $2,400 for a one-year insurance policy on October 1. What is the adjusting entry on December 31?

Accepted Answer

Debit Insurance Expense $$600; Credit Prepaid Insurance 600$$

Question 6

Which formula correctly calculates straight-line depreciation expense per year?

Accepted Answer

$$\frac{	ext{Cost} - 	ext{Residual Value}}{	ext{Useful Life}}$$

Question 7

If a company fails to record an adjusting entry for accrued salaries at year-end, what is the effect on the financial statements?

Accepted Answer

Expenses are understated and net income is overstated.

Question 8

Which of the following accounts is NOT closed at the end of the accounting period?

Accepted Answer

Retained Earnings

Question 9

A company purchased equipment for $24,000 with a useful life of 5 years and no residual value. What is the monthly depreciation expense using the straight-line method?

Accepted Answer

$400

Question 10

Which of the following best describes a contra asset account?

Accepted Answer

An account with a normal credit balance that reduces a related asset account.

Question 11

On December 31, a company has earned $2,000 in interest revenue that will not be received until January 15. What is the appropriate adjusting entry at year-end?

Accepted Answer

Debit Interest Receivable $$2,000; Credit Interest Revenue 2$$,000

Question 12

Which of the following is an example of an accrued expense?

Accepted Answer

Salaries payable

Question 13

If a company receives cash in advance for services to be performed in the future, which account is credited at the time of receipt?

Accepted Answer

Unearned Revenue

Question 14

Which of the following statements about closing entries is TRUE?

Accepted Answer

Closing entries transfer balances from temporary accounts to retained earnings.

Question 15

A company earned $5,000 in service revenue on account in December, but did not receive payment until January. Under accrual accounting, when should the revenue be recognized?

Accepted Answer

In December, when the service was performed.

Question 16

Which of the following is the correct journal entry to record depreciation expense for the period?

Accepted Answer

Debit Depreciation Expense; Credit Accumulated Depreciation

Question 17

If a company fails to record the adjusting entry for unearned revenue that has now been earned, what is the effect on the financial statements?

Accepted Answer

Liabilities are overstated and revenues are understated.

Question 18

Which of the following best describes the purpose of adjusting entries?

Accepted Answer

To ensure that revenues and expenses are recorded in the correct accounting period.

Question 19

A company paid $3,600 for a two-year insurance policy on July 1. What is the balance in Prepaid Insurance on December 31 of the same year?

Accepted Answer

$2,700

Question 20

Which of the following is NOT a characteristic of a contra account?

Accepted Answer

It is closed at the end of the period.

Accrual Accounting and End-of-Period Adjustments: Study Notes

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