Q: Which formula correctly calculates straight-line depreciation for a plant asset?

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

Q: What is the book value of a plant asset?

$$\$$\text{Book Value} = \text{Cost of Asset} - \text{Accumulated Depreciation}$

Q: A company has total current assets of $$50,000 and total current liabilities of 40$$,000. What is its current ratio?

$$\$$\text{Current Ratio} = \frac{50,000}{40,000} = 1.25$

Q: If a company has total liabilities of $$80,000 and total assets of 200$$,000, what is its debt ratio?

$$\$$\text{Debt Ratio} = \frac{80,000}{200,000} = 0.40$

Question 1

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

Accepted Answer

Accrual accounting records the impact of transactions when they occur, regardless of cash flow, while cash-basis accounting records only cash transactions.

Question 2

According to the revenue recognition principle, when should revenue be recognized?

Accepted Answer

When goods are delivered or services are performed for the amount expected to be received.

Question 3

Which of the following is an example of a noncash transaction recorded under accrual accounting?

Accepted Answer

Accruing expenses incurred but not yet paid.

Question 4

A company pays $3,000 for three months’ rent in advance on June 1. What adjusting entry is required on June 30?

Accepted Answer

Debit Rent Expense $$1,000; Credit Prepaid Rent 1$$,000

Question 5

Which formula correctly calculates straight-line depreciation for a plant asset?

Accepted Answer

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

Question 6

If a company earned $300 in service revenue in June but will not receive payment until July, what adjusting entry should be made at the end of June?

Accepted Answer

Debit Accounts Receivable $$300; Credit Service Revenue 300$$

Question 7

Which account is a contra asset and has a normal credit balance?

Accepted Answer

Accumulated Depreciation

Question 8

What is the book value of a plant asset?

Accepted Answer

$$\$$	ext{Book Value} = 	ext{Cost of Asset} - 	ext{Accumulated Depreciation}$

Question 9

Which of the following is classified as a current asset?

Accepted Answer

Accounts Receivable

Question 10

A company has total current assets of $$50,000 and total current liabilities of 40$$,000. What is its current ratio?

Accepted Answer

$$\$$	ext{Current Ratio} = \frac{50,000}{40,000} = 1.25$

Question 11

Which of the following transactions would NOT affect the debt ratio?

Accepted Answer

Collecting accounts receivable

Question 12

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

Accepted Answer

Revenues, Expenses, Dividends

Question 13

If a company has total liabilities of $$80,000 and total assets of 200$$,000, what is its debt ratio?

Accepted Answer

$$\$$	ext{Debt Ratio} = \frac{80,000}{200,000} = 0.40$

Question 14

Which adjusting entry is required for supplies if $$700 was purchased and only 400 $$remains at month-end?

Accepted Answer

Debit Supplies Expense $$300; Credit Supplies 300$$

Question 15

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

Accepted Answer

Salary payable at month-end for work already performed

Question 16

Which financial statement reports assets, liabilities, and stockholders’ equity at a specific point in time?

Accepted Answer

Balance Sheet

Question 17

A company receives $400 cash in advance for services to be performed next month. What is the correct initial entry?

Accepted Answer

Debit Cash $$400; Credit Unearned Service Revenue 400$$

Question 18

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

Accepted Answer

To measure income and update the balance sheet by affecting both a revenue/expense and an asset/liability account.

Question 19

If a company’s current ratio is below 1.0, what does this indicate about its liquidity?

Accepted Answer

The company may have difficulty paying its short-term obligations.

Accrual Accounting and Income: Chapter 3 Study Notes

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