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

$$\text{Depreciation Expense} = \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Useful Life}}$$

Question 1

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

Accepted Answer

Accrual accounting records revenues and expenses when they are earned or incurred, regardless of when cash is exchanged.

Question 2

According to the revenue recognition principle, when should a company recognize revenue?

Accepted Answer

When the company delivers goods or performs services, regardless of when cash is received.

Question 3

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

Accepted Answer

Transferring a portion of prepaid rent to rent expense.

Question 4

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

Accepted Answer

Debit Insurance Expense $$200; Credit Prepaid Insurance 200$$

Question 5

Which formula correctly calculates straight-line depreciation expense?

Accepted Answer

$$	ext{Depreciation Expense} = \frac{	ext{Cost of Asset} - 	ext{Salvage Value}}{	ext{Useful Life}}$$

Question 6

Why is accumulated depreciation recorded in a separate contra asset account instead of reducing the asset account directly?

Accepted Answer

To allow users to see both the original cost and the amount of depreciation taken.

Question 7

If a company receives $1,200 cash in advance for services to be performed over 12 months, what is the adjusting entry at the end of the first month?

Accepted Answer

Debit Unearned Revenue $$100; Credit Service Revenue 100$$

Question 8

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

Accepted Answer

Salaries earned by employees but not yet paid at the end of the period.

Question 9

A company earned $500 in interest revenue that has not yet been received or recorded. What is the adjusting entry?

Accepted Answer

Debit Interest Receivable $$500; Credit Interest Revenue 500$$

Question 10

Which accounts are closed at the end of the accounting period?

Accepted Answer

Revenues, expenses, and dividends

Question 11

Given the following balances: Current Assets = $$120,000, Current Liabilities = 60$$,000, what is the current ratio?

Accepted Answer

$$	ext{Current Ratio} = \frac{120,000}{60,000} = 2.0$$

Question 12

A company has total assets of $$500,000 and total liabilities of 200$$,000. What is the debt ratio?

Accepted Answer

$$	ext{Debt Ratio} = \frac{200,000}{500,000} = 0.4$$

Question 13

Which of the following transactions would increase the current ratio and decrease the debt ratio?

Accepted Answer

Issuing stock and receiving cash

Question 14

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

Accepted Answer

To transfer the balances of temporary accounts to retained earnings

Question 15

Which of the following is NOT a current asset?

Accepted Answer

Equipment

Question 16

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

Accepted Answer

$400

Question 17

Which of the following best describes a bar chart in data visualization?

Accepted Answer

A chart that displays categorical data in a relative format.

Question 18

If a company fails to make an adjusting entry for accrued expenses, what is the effect on the financial statements?

Accepted Answer

Expenses are understated and net income is overstated.

Question 19

Which of the following is a characteristic of a contra asset account?

Accepted Answer

It has a normal credit balance and decreases the value of its source account.

Accrual Accounting and Income – Chapter 3 Study Notes

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