Q: A company pays $6,000 for a one-year insurance policy on January 1. What adjusting entry should be made on March 31?

$$\text{Insurance Expense} = \6$$,000 \times \frac{3}{12} = \$$1,500$$; Debit Insurance Expense $$1,500$$, Credit Prepaid Insurance $$1,500.$$

Q: What is the formula for calculating straight-line depreciation expense?

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

Q: Given the following data for Alladin Travel, Inc. at June 30: Cash $$36,800$$, Accounts Receivable $$2,000$$, Supplies $$400$$, Prepaid Rent $$2,000$$, Accounts Payable $$13,100$$, Salary Payable $$900$$, Unearned Service Revenue $$200$$, Income Tax Payable $$600. $$What is the current ratio?

$$\text{Current Ratio} = \frac{36,800 + 2,000 + 400 + 2,000}{13,100 + 900 + 200 + 600} = \frac{41,200}{14,800} \approx 2.78$$

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, and collection is reasonably assured.

Question 3

A company pays $6,000 for a one-year insurance policy on January 1. What adjusting entry should be made on March 31?

Accepted Answer

$$	ext{Insurance Expense} = \6$$,000 	imes \frac{3}{12} = \$$1,500$$; Debit Insurance Expense $$1,500$$, Credit Prepaid Insurance $$1,500.$$

Question 4

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

Accepted Answer

A company owes employees for work performed but not yet paid at month-end.

Question 5

What is the formula for calculating straight-line depreciation expense?

Accepted Answer

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

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 total depreciation taken to date.

Question 7

Which of the following transactions would require an adjusting entry at the end of the period?

Accepted Answer

Earning service revenue that has not yet been billed to the customer.

Question 8

A company collected $2,000 in advance for services to be performed next month. What is the correct journal entry at the time of collection?

Accepted Answer

Debit Cash $$2,000$$, Credit Unearned Service Revenue $$2,000.$$

Question 9

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

Accepted Answer

Accounts Receivable

Question 10

Given the following data for Alladin Travel, Inc. at June 30: Cash $$36,800$$, Accounts Receivable $$2,000$$, Supplies $$400$$, Prepaid Rent $$2,000$$, Accounts Payable $$13,100$$, Salary Payable $$900$$, Unearned Service Revenue $$200$$, Income Tax Payable $$600. $$What is the current ratio?

Accepted Answer

$$	ext{Current Ratio} = \frac{36,800 + 2,000 + 400 + 2,000}{13,100 + 900 + 200 + 600} = \frac{41,200}{14,800} \approx 2.78$$

Question 11

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

Accepted Answer

To transfer the balances of temporary accounts to Retained Earnings and reset them to zero.

Question 12

If a company records depreciation expense of $$400$$ for the month, what is the effect on the accounting equation?

Accepted Answer

Assets decrease by $$400$$, equity decreases by $$400.$$

Question 13

Which of the following is a correct formula for the debt ratio?

Accepted Answer

$$	ext{Debt Ratio} = \frac{	ext{Total Liabilities}}{	ext{Total Assets}}$$

Question 14

A company made a $$30,000$$ sale on account. How does this transaction affect the current ratio and debt ratio?

Accepted Answer

Current ratio increases, debt ratio decreases.

Question 15

Which of the following is NOT a current asset?

Accepted Answer

Equipment

Question 16

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 17

If a company accrues $$40,000 in $$expenses at year-end, what is the effect on the current ratio?

Accepted Answer

The current ratio decreases because current liabilities increase.

Question 18

Which of the following is true about the matching principle?

Accepted Answer

Expenses should be recognized in the same period as the revenues they help to generate.

Question 19

A company has total assets of $$100,000$$ and total liabilities of $$40,000. $$What is the debt ratio?

Accepted Answer

$$	ext{Debt Ratio} = \frac{40,000}{100,000} = 0.40$$

Chapter 3: Accrual Accounting and Income – Comprehensive Study Notes

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