PRACTICE QUESTIONS CHAPTER 3

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1. Under the accrual basis of accounting:

A. cash must be received before revenue is recognized.
B. net income is calculated by matching cash outflows against cash inflows.
C. events that change a company's financial statements are recognized in the period they
occur rather than in the period in which cash is paid or received.
D. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial
statements are prepared under generally accepted accounting principles.

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2. Which of the following reflect the balances of unearned revenue prior to adjustment?
A. Balance sheet accounts are understated and income statement accounts are understated.
B. Balance sheet accounts are overstated and income statement accounts are overstated.
C. Balance sheet accounts are overstated and income statement accounts are understated.
D. Balance sheet accounts are understated and income statement accounts are overstated.

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3. On March 1, Retro Inc. reported a balance in Supplies of $200. During March, the company purchased
supplies for $950 and consumed supplies of $800. If no adjusting entry is made for supplies:
A. stockholders' equity will be overstated by $800.
B. expenses will be understated by $950.
C. assets will be understated by $350.
D. net income will be understated by $800.

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4. Green Realty Company received a check for $24,000 on July 1 which represents a 6 month advance payment
of rent on a building it rents to a client. Unearned Rent was credited for the full $24,000. Financial statements
will be prepared on July 31. Green Realty should make the following adjusting entry on July 31:
A. debit Unearned Rent, $4,000; credit Rental Revenue, $4,000.
B. debit Rental Revenue, $4,000; credit Unearned Rent, $4,000.
C. debit Unearned Rent, $24,000; credit Rental Revenue, $24,000.
D. debit Cash, $24,000; credit Rental Revenue, $24,000.

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5. Draxon Company borrowed $30,000 from the bank signing a 6%, 3-month note on September 1. Principal
and interest are payable to the bank on December 1. If the company prepares monthly financial statements,
the adjusting entry that the company should make for interest on September 30, would be:
A. debit Interest Expense, $1,800; credit Interest Payable, $1,800.
B. debit Interest Expense, $150; credit Interest Payable, $150.
C. debit Note Payable, $1,800; credit Cash, $1,800.
D. debit Interest Expense, $450; credit Interest Payable, $450.

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6. Mary Richards has performed $500 of CPA services for a client but has not billed the client as of the end of
the accounting period. What adjusting entry must Mary make?
A. Debit Cash and credit Unearned Revenue
B. Debit Accounts Receivable and credit Unearned Revenue
C. Debit Accounts Receivable and credit Service Revenue
D. Debit Unearned Revenue and credit Service Revenue

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7. What effect does an accrued expense adjustment have on a companys net income?
A. The adjustment increases net income for the period.
B. The adjustment decreases net income for the period.
C. The adjustment has no effect on net income.
D. The effect of the adjustment cannot be determined with the information given.

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8. What is the liability called that arises from an expense that the business has incurred but has not yet paid?
A. It is known as an unearned expense.
B. It is known as a deferred expense.
C. It is known as a prepaid expense.
D. It is known as an accrued expense.

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9. Mason Company always collects rent in advance from its customers. The 2011 income
statement for Mason reports rent revenue of $18,000. The related balance sheet
accounts for the beginning and end of the year were:
Jan. 1, 2011
Dec. 31, 2011
Unearned Rent
$3,750
$6,500
Based on this information, the amount of cash collected during 2011 from Mason's customers was:
A. $28,250
B. $26,500
C. $20,750
D. $7,750

____ 10. At the beginning of the period, Stanger Corporation had $400 of supplies on hand. During the period, it
purchased $900 of supplies and at the end of the period, Stanger determined that only $800 of supplies were
still on hand. What adjusting entry should Stanger Corporation make at the end of the period?
A. Supplies
1,300
Supplies Expense
1,300
B. Supplies
500
Supplies Expense
500
C. Supplies Expense 1,300
Supplies
1,300
D. Supplies Expense 500
Supplies
500
____ 11. Mathis Company always pays for rent in advance, and reported the following balances
in the Prepaid Rent account at the beginning and end of 2011:
Jan. 1, 2011
Dec. 31, 2011
Prepaid
$600
$3,200
Rent
If rent expense reported on the 2011 income statement was $29,300, how much cash was paid for prepaid rent
during 2011?
A. $26,700
B. $33,100
C. $31,900
D. $25,500
____ 12. On June 1, 2012, Marino Corporation received $1,800 as advance payment for 12 months' advertising. The
receipt was recorded as a credit to Unearned Fees. What adjusting entry is required on December 31, 2012?
A. Unearned Fees
1,050
Advertising Revenue
1,050
B. Advertising Revenue
1,050
Unearned Fees
1,050
C. Unearned Fees
900
Advertising Revenue
900
D. Unearned Fees
750
Advertising Revenue
750

____ 13. On June 1, 2011, Allnut Landscaping Service received cash of $1,800 in advance for an agreement to provide
service to a client for three months, starting that day. As of June 30, 2011, Allnut:
A. would have a $1,200 liability to its client under accrual accounting, and would have a
$1,800 liability to its client under cash-basis accounting
B. would have recognized $600 revenue under accrual accounting, and would have
recognized $1,800 revenue under cash-basis accounting
C. would have a $0 liability to its client under accrual accounting, and would have a $1,200
liability to its client under cash-basis accounting
D. would have recognized $1,800 revenue under accrual accounting, and would have
recognized 600 revenue under cash-basis accounting
____ 14. Cheng Company obtained a $25,000, one-year, 12 percent bank loan on November 1 of the current year.
Interest is payable at the end of the loan term. The companys adjusting entry needed on December 31 is:
A. A debit to Interest Expense of $500 and a credit to Interest Payable of $500
B. A debit to Interest Expense of $3,000 and a credit to Interest Payable of $3,000
C. A debit to Interest Receivable of $500 and a credit to Interest Revenue of $500
D. A debit to Interest Expense of $250 and a credit to Interest Payable of $250
____ 15. Which of the following is an example of an adjusting entry?
A. Recording the purchase of supplies on account
B. Recording depreciation on a truck
C. Recording the payment of interest to a bank
D. Recording the payment of wages to employees
____ 16. Joshua Company sent a check for $36 to Readers Digest magazine on May 1 toward a one year subscription,
starting on the same day. If the companys financial year ends on September 30, their financial statements will
report:
A. Prepaid Subscription of $12, and Subscription Expense of $24
B. Prepaid Subscription of $18, and Subscription Expense of $18
C. Prepaid Subscription of $24, and Subscription Expense of $12
D. Prepaid Subscription of $21, and Subscription Expense of $15
____ 17. Collegiate Fitness Centers have 15,000 members whose monthly dues are $30 each. The company does not
send individual bills to customers, who have until the 10th day of the month following the month of service to
pay their monthly dues. On December 31, 2011, the companys records show that 7,000 customers have
already paid their December dues, and the payments were properly recorded. The adjusting entry to be
recorded on December 31 will include:
A. A credit to Membership Revenue of $210,000
B. A credit to Membership Revenue of $450,000
C. A debit to Accounts Receivable of $240,000
D. A debit to Accounts Receivable of $210,000

____ 18. Spagnola Company's weekly payroll of $25,000 is paid every Friday for a 5-day workweek. Assume that the
last day of the fiscal year falls on Wednesday. Which of the following journal entries would be made on the
first Friday following the year-end?
A. Salaries Expense 15,000
Salaries Payable
10,000
Cash
25,000
B. Salaries Expense 10,000
Salaries Payable
15,000
Cash
25,000
C. Salaries Expense 15,000
Salaries Payable
15,000
D. Salaries Expense 10,000
Cash
10,000
____ 19. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was erroneously
omitted. Which of the following statements is true?
A. The total of the liabilities at the end of the year was overstated.
B. Owner's equity at the end of the year was understated.
C. Net income for the year was understated.
D. Net income for the year was overstated.
____ 20. Bank of Maryland received a 7-month, 9% note for $13,000 from a customer on October 1, 2011. The note is
due on April 30, 2012. If the banks accounting period ends on December 31, 2011, how much interest
revenue from this note should be recognized by the bank in the years 2011 and 2012?
2011
2012
A. $292.50
$390
B. $292.50
$682.50
C. $390
$292.50
D. $292.50
$1,170
____ 21. Nikhil Company showed the following balances at the end of its first year:
Cash
$5,000
Prepaid insurance
?
Accounts receivable
2,500
Accounts payable
2,000
Notes payable
3,000
Common stock
1,000
Dividends
500
Revenues
15,000
Expenses
11,500
What amount did Nikhil Company report for Prepaid Insurance on its trial balance?
A. $1,500
B. $2,000
C. $2,500
D. $500

____ 22. In applying the revenue recognition principle to a given transaction, the most important moment or period in
time is when the
A. related cash inflows occur.
B. related expenses are incurred.
C. related sales transaction is completed.
D. related customer is billed.
____ 23. Which of the following would not be a correct form for an adjusting entry?
A. A debit to an expense and a credit to a liability
B. A debit to an asset and a credit to a revenue
C. A debit to a liability and a credit to a revenue
D. A debit to an asset and a credit to a liability
____ 24. Regan Corporation received cash of $13,500 on September 1, 2012 for one years rent in advance and
recorded the transaction with a credit to Unearned Rent. The December 31, 2012 adjusting entry is
A. debit Rent Revenue and credit Unearned Rent, $4,500.
B. debit Unearned Rent and credit Rent Revenue, $4,500.
C. debit Rent Revenue and credit Unearned Rent, $9,000.
D. debit Unearned Rent and credit Rent Revenue, $3,375.
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25. Gradone Company borrowed $9,000 from Bank of College Park on March 1, 2012 and signed a 3-year, 8%
interest-bearing note, requiring interest payments on March 1 every year. What journal entry should Gradone
Company make on March 1, 2013? Assume Gradone Companys accounting period ends on December 31.
A. Debit Interest Payable $540, Debit Interest Expense $180 and credit Cash $720
B. Debit Interest Payable $720, Debit Interest Expense $1,440 and credit Cash $2,160
C. Debit Interest Payable $600, Debit Interest Expense $120 and credit Cash $720
D. Debit Interest Payable $1,440, Debit Interest Expense $720 and credit Cash $2,160

____ 26. Eckard Company records wages expense one week before it actually pays its employees. The companys
Wages Expense account had a $510,000 balance at the end of the year. The Wages Payable account had a
$23,000 balance at the beginning of the year and a $45,000 balance at the end of the year. How much cash
was paid for wages during the year?
A. $488,000
B. $510,000
C. $532,000
D. $555,000
____ 27. Forakis Company's Insurance Expense account had a $10,000 balance at the end of the year. The Prepaid
Insurance account had a $3,000 balance at the beginning of the year and a $5,000 balance at the end of the
year. How much cash was paid by Forakis Company for insurance during the year?
A. $ 8,000
B. $10,000
C. $15,000
D. $12,000
____ 28. A companys accountant forgot to record four adjustments during 2012. Which one of the following
omissions of adjustments will overstate assets?
A. Consulting service provided during the last week of the period are not recorded
B. Interest on monies borrowed has not yet been recorded
C. The portion of an auto insurance policy that has expired during the period is not
recognized

D. Income taxes owed but not yet paid are ignored

____ 29. Which one of the following adjustments decreases net income for the period?
A. Recognition of rent as earned that had been received in advance from customers
B. Recognition of interest on a note receivable
C. Recognition of services that had been provided to customers but the cash has not yet been
received
D. Recognition of depreciation on plant assets

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C
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D
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