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Exam 4: Income Measurement and Accrual Accounting

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Question 101

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Which of the following situations does not require an adjusting entry at the end of May?

A) At the end of May, Bolton Industries pays the custodian for May office cleaning services.
B) On May 1, Bolton Industries paid rent for six months on its office building.
C) On May 1, Bolton Industries began delivery service to a client who will pay at the end of a three-month period.
D) On May 1, Bolton Industries purchased delivery equipment with an estimated useful life of six years.

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Question 102

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What happens to the accounting equation when the adjustment for depreciation expense for the accounting period is recorded?

A) Assets decrease and stockholders' equity decreases
B) Assets increase and stockholders' equity increases
C) Assets decrease and liabilities decrease
D) Liabilities increase and stockholders' equity decreases

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Question 103

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All financial statements are prepared using the accrual basis of accounting.

Grove Corp. purchased equipment at a cost of $260,000 in January, 2010. As of January 1, 2014, depreciation of $88,000 had been recorded on this asset. Depreciation expense for 2014 is $22,000. After the adjustments are recorded and posted at December 31, 2014, what are the balances for the Depreciation Expense and Accumulated Depreciation?

From the list of accounts below, determine whether the account would be a nominal account or a real account. -Unearned Revenue

--------- is the name given to balance sheet accounts because they are permanent in nature.

Matching can occur directly like cost of goods sold, indirectly like plant assets, or immediately when no future benefits from the cost are expected.

Windstar Corp. purchased supplies at a cost of $6,000 during the year. At December 31, supplies on hand are $1,400. Supplies expense for the year was $5,200. How much were supplies on hand at January 1?

While most companies make adjustments and prepare statements monthly, many companies complete the accounting cycle only once per year.

Explain the differences between the cash and accrual basis of accounting and how the adjusting process fits in.

An accountant describes the effects of an economic event on an entity by recording the transaction and reporting the amount on the financial statements. What is this called?

--------- is the association of the costs incurred with the associated revenue of a period.

The---------of accounting is a system in which revenues are recognized when payments are received and expenses are recognized when payments are made.

The amount of interest accrued is added to the note payable account and reported in the liabilities section of the balance sheet.

The Diva Design Group was organized on July 1, 2014 when the two principal owners each contributed $50,000 and received shares of stock in exchange. Their year-end is December 31. The following events occurred during Diva Design Group's first year of operations. 1. On July 1, acquired a building by paying $50,000 in cash and borrowing $250,000 from the Flores Bank. Information regarding the building: The building has a useful life of 30 years and no salvage value. Diva Design uses straight line depreciation. Information regarding the note payable: The note payable will be due in full in five years. Interest is payable annually. The interest rate on the note is 5%. 2. On July 1, paid cash in the amount of $1,200 for a one-year property insurance policy. 3. On August 1, purchased two computers for $4,000 cash each. The computers have a useful life of 5 years and a $100 salvage value. The computers will be depreciated using the straight line method. 4. On October 1, receives $120,000 in cash for services to be provided evenly during the next six months. Required: I.A Determine the effect of each of the transactions on the accounting equation. I.B Determine the effect on the accounting equation of the necessary adjustments at December 31 for each of the following: 1 Depreciation on the building 2 Interest on the promissory note 3 Recognition of the expired portion of the insurance 4 Depreciation on the computers 5 Cash received in advance of services provided II. For each of the adjusting entries, indicate which of the following type of entry was recorded: a. Accrued liability b. Accrued asset c. Deferred expense d. Deferred revenue III. Prepare an income statement at December 31, 2014. Diva Design has a tax rate of 30%.

The Dividend account is known as which of the following?

Which of the following adjusting entries involves the cash account?

The revenue recognition principle involves two factors: paid and incurred.

When a company recognizes the portion of supplies used during a year, the effect is to decrease net income.

Accumulated Depreciation