Ch04 TB Hoggetta8e

Testbank
to accompany
Accounting
8th Edition
by
John Hoggett, Lew Edwards,
John Medlin, Matthew Tilling
& Evelyn Hogg
Prepared by
Barbara Burns
John Wiley & Sons Australia, Ltd 2012

Testbank to accompany Accounting 8e
Chapter 4: Adjusting the accounts and preparing financial

statements
Multiple Choice
1. The statement concerning accrual accounting that is true is:

a. Profit is the excess of cash inflows from income over cash outflows for expenses
b. Income is recognised in the period when the flow of economic benefits can be reliably
measured
c. For most businesses the cash approach gives a better measure of economic performance
than does the accrual approach
d. Income from sales is recognised in the period when the cheque is cashed
ANSWER B
Section 4.1
2. The cash approach to profit measurement will not give a reliable profit figure for an entity
that conducts a significant portion of its business:
a. Overseas
b. With subsidiaries
c. With borrowed money
d. On credit
ANSWER D
Section 4.1
3. Under the cash approach to profit measurement income is recorded in the accounting period
when:
a. Cash is received
b. Goods are sold or services performed
c. A contract is signed
d. An order is placed
ANSWER A
Section 4.1
4. Harry Company uses cleaning supplies on a daily basis. Under the accrual basis of
accounting these supplies would be an expense of the period in which they are:
a. Ordered
b. Received
c. Paid for
d. Used
John Wiley & Sons Australia, Ltd 2012 4.2

Chapter 4: Adjusting the accounts and preparing financial statements
ANSWER D
Section 4.1
5. It is correct that each balance day adjustment
a. Affect either the income statement or the balance sheet
b. Has one effect on the income statement and one effect on the balance sheet
c. Only affect the income statement
d. Always have an effect on the bank account
ANSWER B
Section 4.2
6. During 2011 The Style Hairdressing Salon paid out $41 000 in wages from its bank
account. At year-end 2011 wages owing but unpaid were $2 400. The salon uses accrual
accounting. How much would be reported as wages expense for 2011?
a. $38 600
b. $41 000
c. $43 400
d. $42 600
ANSWER C
Section 4.5
7. The Prepaid Insurance account of PQR Traders shows a balance of $900 (net of GST)
representing a payment on 1 July 2011 of a three-year insurance premium. The correct
adjusting entry on 31 December 2011, the close of the annual accounting period, is:
$ $
a. Insurance Expense 150
Prepaid Insurance 150
b. Insurance Expense 300

Prepaid Insurance 300
c. Prepaid Insurance 150

Insurance Expense 150
d. Prepaid Insurance 750

Insurance Expense 750
ANSWER A
Section 4.4

8. Which statement relating to the Accumulated Depreciation account is correct?

a. It normally has a debit balance
b. It reflects the portion of the cost of the asset that has been assigned as an expense since
purchase
c. It provides information on the market value of the asset
d. It is classified as a liability in the balance sheet
ANSWER B
Section 4.4
9. Michael purchased two vehicles for his business on 1 January 2011. These vehicles cost
$50,000 each and have a useful life of 5 years with an expected residual of $20,000 each.
The adjusting entry for depreciation on 31 December 2011, using the straight-line
method, is:
a. Dr Accumulated Depreciation $6000; Cr Depreciation Expense $6000
b. Dr Depreciation Expense $6000; Cr Accumulated Depreciation $6000
c. Dr Accumulated Depreciation $12 000; Cr Depreciation Expense $12 000
d. Dr Depreciation Expense $12 000 Cr Accumulated Depreciation $12 000
ANSWER D
Section 4.4
10. Tan Traders received a $750 advance payment from a customer for work to be carried out in
the next accounting period. The accounting entry to initially record the $750 is:
a. Debit unearned income $750; credit bank $750
b. Debit bank $750; credit unearned income $750
c. Debit bank $750; credit creditor $750
d. Debit income earned $750; credit bank $750
ANSWER B
Section 4.4.
11. The office supplies inventory account of Tan Traders shows a balance of $1 600 on 31
December 2011. The adjusting entry to record office supplies of $550 issued to staff in the
12 months up to 31 December 2011 is:
a. Debit office supplies inventory $550; credit office supplies expense $550
b. Debit office supplies inventory $1 050; credit office supplies expense $1 050
c. Debit office supplies expense $550; credit office supplies inventory $550
d. Debit office supplies expense $1 600; credit office supplies inventory $1 600
ANSWER C
Section 4.4

12. Sampras Company purchased a machine for $30 000 on 1 January 2010 with an estimated
life of 5 years and a residual value of zero. The straight-line method of depreciation is
used. What is the carrying value of the machine on the 31 December 2011 in the balance
sheet of Sampras Company?
a. $30 000
b. $24 000
c. $18 000
d. $12 000
ANSWER C
Section 4.7
13. On July 1 2011 the Pepper Diner rented out part of its property and collected $9000 in
advance for a nine-month period. The receipt was credited to a liability account. At 31
December 2011, Pepper Diner's year-end, which of the following adjusting journal entries
should be made?
a. Dr. Cash, $6000; Cr. Rent Income, $6000
b. Dr. Rent Income, $3000; Cr Unearned Rent Income, $3000
c. Dr. Unearned Rent Income, $6000; Cr. Rent Income, $6000
d. Dr. Rent Receivable, $6000; Cr. Rent Income, $6000
ANSWER C
Section 4.4
14. If an adjustment for depreciation is omitted from the financial reports the affect is:
a. Assets are understated; profit is understated
b. Assets are overstated; profit is understated
c. Assets are understated; profit is overstated
d. Assets are overstated; profit is overstated
ANSWER D
Section 4.10
15. On 1 July 2011 Tan Traders paid $600, representing a two-year insurance premium. The
$600 was initially recorded in the Insurance expense account. After adjustment at 31
December 2012, the close of the annual accounting period:
a. Insurance expense in the income statement is $600 and prepaid insurance in the balance
sheet is $0
b. Insurance expense in the income statement is $150 and prepaid insurance in the balance
sheet is $450
c. Insurance expense in the income statement is $450 and prepaid insurance in the balance
sheet is $0
d. Insurance expense in the income statement is $300 and prepaid insurance in the balance
sheet is $150
ANSWER D

Section 4.7
16. Tan Traders paid salaries of $130 000 during the year and owes $2 100 for three days
work carried out before the 31 December 2011 which will not be paid until January 3
2012. After the adjusting entry for the year ended 31 December 2011:
a. Salaries in the income statement are $132 100 and accrued salaries in the balance sheet
are $2 100
b. Salaries in the income statement are $130 000 and accrued salaries in the balance sheet
are $2 100
c. Salaries in the income statement are $127 900 and accrued salaries in the balance sheet
are $2 100
d. Salaries in the income statement are $132 100 and accrued salaries in the balance sheet
are $132 100
ANSWER A
Section 4.7.
17. X Cos employees carry out work to the value of $7 500. They are paid $4 500
immediately with the balance to be settled in the next accounting period. Under the
accrual approach to profit measurement the amount of wages expense that will be
recorded in the current period is:
a. Nil
b. $4 500
c. $3 000
d. $7 500
ANSWER D
Section 4.7
18. At year-end it was forgotten to accrue an income item. This will result in an:
a. Understatement of assets and an overstatement of profit and equity
b. Overstatement of liabilities and an understatement of profit and equity
c. Overstatement of assets, profit, and equity
d. Understatement of assets, profit, and equity
ANSWER D
Section 4.10

19. Deferral type adjustments occur when cash for expenses is paid in advance or cash from
incomes is pre-collected. How many of the following will require a deferral type
adjustment?
Rent paid for in advance
Buildings to be depreciated
Rent collected in advance from tenants
Stationery used by the office staff during the period
a. 1
b. 2
c. 3
d. 4
ANSWER D
Section 4.3
20. On the first day of the year Tan Traders purchased a forklift truck for $12 000 which is to be
depreciated by 25% a year. At the end of the first year:
a. Depreciation in the income statement is $3 000 and the carrying value of the forklift in
the balance sheet is $12 000
b. Depreciation in the income statement is $3 000 and the carrying value of the forklift in
c. Depreciation in the income statement is $3 000 and the carrying value of the forklift in
d. Depreciation in the income statement is $0 and the carrying value of the forklift in the
balance sheet is $12 000
ANSWER C
Section 4.7.
21. The wages expense account for Gerry Mander, political consultants, showed the
following entries for 2011. What was the portion of wages that was treated as an expense
in 2010 but was not paid until 2011?
Wages Expense
Date Particulars Debit Credit Balance
2011 $ $ $
Jan 1 Accrued expenses 1 200 1 200 Cr
Year Various cash payments 51 000 49 800 Dr
Dec Accrued expenses 2 200 52 000 Dr
31
a. $49 800
b. $51 000
c. $1 200
d. $2 200
ANSWER C
Section 4.5
22. If a company has earned income which has not been received in cash at the end of the
accounting period an adjustment should be made which will:
a. Debit an asset account and credit an income account
b. Debit an expense account and credit cash
c. Debit an income account and credit an asset account
d. Debit an asset account and credit an expense account
ANSWER A
Section 4.5
23. ABC collects rents from several properties. Prior to recording adjusting entries, assume
the Rent Income account has a credit balance of $8000. Two adjustments are to be made
at the end of the financial year (1) an accrual for accrued rent income of $600 (2) the
Unearned Rent Income account is to be decreased by $200. After processing these
adjusting entries the amount of Rent Income to be shown in the income statement is:
a. $8800
b. $8400
c. $7600
d. $7200
ANSWER A
Section 4.7
24. The publishers of Guide to the Stock Market, a magazine published monthly, received
$121 in advance, including $11 GST on 1 March, for a 1 years subscription (11 issues)
beginning with the March issue. On receipt of the subscription which entry will the
company make?
a. Debit Cash $121; credit Subscriptions Income $121
b. Debit Cash $121; credit GST Collections $11, credit Unearned Subscriptions (liability)
$110
c. Debit Cash $121; credit GST Collections $11, credit Subscriptions Received in Advance
(asset) $110
d. Debit Cash $110; credit Subscriptions Income $110
ANSWER B
Section 4.4

25. The publishers of Guide to the Stock Market, a magazine published monthly, received
$121 in advance, including $11 GST on 1 March, for a 1 years subscription (11 issues)
beginning with the March issue. At the end of the financial year on 30 June what entry
will the company make?
a. Debit Unearned Subscriptions (liability) $40; credit Subscriptions Income $40
b. Debit Cash $40; credit Subscriptions Income $40
c. Debit Cash $121; credit GST Collections $11, credit Unearned Subscriptions (liability)
$110
d. Debit Unearned Subscriptions (liability) $40; credit Subscriptions Income $36; credit
GST Collections $4.
ANSWER A
Section 4.4
26. In preparing its 2011 adjusting entries, the Philippoussis Company neglected to adjust the
Office Supplies (asset) account for the amount of supplies used up during the year. As a
result of this error:
a. 2011 profit is understated, the balance of equity is understated, and assets are understated
b. 2011 profit is overstated, the balance of equity is overstated, and assets are correctly
stated
c. 2011 profit is overstated, the balance of equity is overstated, and assets are overstated
d. Liabilities are understated
ANSWER C
Section 4.7
27. Determine the cash payments made during the year for insurance premiums from the
following information:
$
Insurance expense (income statement) 475
Prepaid Insurance:
Beginning Balance 220
Ending Balance 195
Assume all insurance premiums are paid in cash.
a. $475
b. $195
c. $695
d. $450
ANSWER D
Section 4.4

28. The primary basis for the classification of assets and liabilities in the balance sheet is:
a. Profitability
b. Tangibility
c. Liquidity
d. Degree of risk
ANSWER C
Section 4.8
29. The capital account of a sole trader was credited with $5000. Which of these items would
not give rise to such a credit?
a. The business earned a profit of $5000
b. The owner brought in a private car valued at $5000 for business use
c. The owner introduced $5000 new capital
d. The owner paid an outstanding private gambling debt of $5000 from the business bank
account
ANSWER D
Section 4.7
30. Current assets may be listed in the balance sheet in the order of their liquidity. Liquidity
is:
a. Another name for the operating cycle
b. A measure of how many buyers there are for the asset
c. Whether the asset is secured over a liability
d. The average length of time it takes to convert an asset into cash
ANSWER D
Section 4.8
31. The current liability is:

a. Accrued Delivery Expenses
b. Accounts Receivable
c. Electricity Expense
d. Long-term Loan
ANSWER A
Section 4.8

32. The excess of current assets over current liabilities is known as:
a. Equity
b. Working capital
c. Intangible assets
d. Net assets
ANSWER B
Section 4.8
33. Obligations of the entity that do not require payment within one year of the balance sheet
date are classified as:
a. Current liabilities
b. Non-current assets
c. Current assets
d. Non-current liabilities
ANSWER D
Section 4.8
34. Which of these is not an advantage of using a worksheet to assist in preparing the
financial statements?
a. All the information is assembled in one place
b. It aids in the preparation of interim financial statements for internal use
c. Reports can be prepared before making closing entries
d. It means that the ledger can be dispensed with
ANSWER D
Section 4.9
35. Which of the following is not an advantage of preparing an adjusted trial balance?
a. It verifies that the debits equal the credits in the ledger after the preparation of the
adjusting entries
b. It reduces the possibility of errors being carried forward from the ledger into the
accounting reports
c. It is a shortcut which means that the adjusting entries do not have to be entered into the
ledger
d. It assists in the preparation of the financial statements
ANSWER C
Section 4.6

Fill in the blanks
1. Under the ______________ basis of accounting, income is recognised when earned and
expenses when incurred.
ANSWER accrual
Section 4.1
2. The c____________ basis of accounting is not a generally accepted method of

determining profit for businesses that have significant credit transactions.
ANSWER cash
Section 4.1
3. The o_____________ cycle is the average time it takes for a firm to acquire and sell
inventory and collect the cash from the sale.
ANSWER operating
Section 4.8
4. Unearned income is classified as a l______________ in the balance sheet as, if the

income is not earned, it may need to be repaid.
ANSWER liability
Section 4.4
5. Accumulated depreciation is referred to as a c ___________ asset account because it

offsets a related asset account.
ANSWER contra
Section 4.7
6. The c_____________ v____________ of an asset is its original cost less accumulated

depreciation.
ANSWER carrying value

Section 4.4
7. Goodwill is classified in the balance sheet as an i_____________ asset.
ANSWER intangible
Section 4.8

8. C_____________ l______________ are obligations of the firm that are expected, in the
normal course of business, to be settled in the next twelve months.
ANSWER Current liabilities

Section 4.8
9. A spreadsheet, prepared either manually or electronically and used by accountants to

organise information, is known as a w____________.
ANSWER worksheet
Section 4.9
10. Because income and expense accounts are reduced to zero at the end of the year they are
known as t ____________ accounts.
ANSWER temporary
Section 4.1

Exam type questions
QUESTION 4.1
The following trial balance was prepared from the ledger accounts of Singapore Enterprises,
a service business.
Trial Balance as at 31 December 2011
Debit Credit
$ $
Bank overdraft 5,100
Prepaid rent 4,500
Office equipment and fittings 187,000
Accumulated depreciation, office equipment 30,000
Accounts payable 19,600
GST collections 3,700
GST outlays 2,800
Accounts receivable 33,000
Income earned 245,000
Salaries 95,000
Internet service provider 500
Utilities expenses 18,000
Administrative expenses 15,000
Interest expense 12,000
Capital L. Tan 1 January 2011 94,400
Drawings L. Tan 30,000
$397,800 $397,800
Adjustments:
Rent expired for the year was $2,500.

Depreciation of office equipment is at 15% per annum using the straight line method.
Salaries owing at 31 December 2011 were $3,000.
REQUIRED:
a) Prepare general journal entries for the balance day adjustments. Narrations are not
required.
b) Prepare an Income Statement for the year ended 30 December 2011.
c) Prepare a classified Balance Sheet as at 31 December 2011.

QUESTION 4.2
The following trial balance was prepared from the ledger accounts of Taiwan Consultants a
firm of management consultants.
Taiwan Consultants
Unadjusted Trial Balance as at 30 June 2011
Debit Credit
$ $
Bank 41,520
Stock office supplies on hand 11,890
Office equipment 152,000
Accumulated depreciation, office equipment 24,400
Premises 800,000
Accumulated depreciation, premises 64,000
GST collections 5,500
GST outlays 3,500
Fees revenue 880,600
Rent revenue 16,000
Advertising expense 25,000
Salaries 390,000
Internet service provider 2,000
Telephone expense 8,000
Loan (due 1 Sept 2015) 200,000
Capital L. Lee 345,410
Drawings L. Lee 40,000
$1,568,910 $1,568,910
Adjustments:
Salaries are $1500 per day. They are paid weekly in arrears. The next pay day is July 3
which is a Wednesday.
Depreciation on premises is 2% pa, on a straight-line basis.
Depreciation of office equipment is 10% of the equipments cost.
On 1 January, 2011. Taiwan Consultants rented part of its premises to T. Light for 12
months and received a cheque for $16,000 representing the whole years rental.
Office supplies of $6,390 had been used during the year. Office supplies of $5,500 were
on hand at the end of the period.
Advertising of $2,000 was prepaid for an advertising campaign starting in July 2011.
$6,000 is owing for consulting work completed but not yet billed to the client.
REQUIRED:
a) Prepare general journal entries for the balance day adjustments.
b) Prepare an Income Statement for the year ended 30 June 2011.
c) Prepare a classified Balance sheet as at 30 June 2011.

Solution Question 4.1
a) General Journal SINGAPORE ENTERPRISES

2011 $ $
Dec 31 Rent 2,500
Prepaid rent 2,500
Depreciation office equipment 28,050

Accumulated depreciation office equip & fittings 28,050
($187,000 x 15%)
Salaries 3,000
Salaries payable 3,000
b) Singapore Enterprises
Income Statement for the year ended 31 December 2011
$ $
Income earned 245,000
Less Expenses
Salaries 98,000
Rent 2,500
Internet service provider 500
Utilities expenses 18,000
Interest expense 12,000 174,050
PROFIT $ 70,950
c) Singapore Enterprises
Balance sheet as at 31 December 2011
$ $ $

CURRENT ASSETS
Prepaid rent 2,000
Accounts receivable 33,000 35,000
NON-CURRENT ASSETS
Office equipment & fittings 187,000
Less Accumulated depreciation 58,050 128,950
$163,950
CURRENT LIABILITIES
Bank overdraft 5,100
GST payable ($3,700 - $2800) 900 28,600
EQUITY
Capital, L. Tan 1 January 2011 94,400
+ Profit 70,950
165,350
- Drawings 30,000 135,350
$163,950
Solution 4.2
a) General Journal TAIWAN CONSULTANTS
2011 $ $
June 30 Salaries 3,000
$7,500/5 = $1,500 x 2 days.
Depreciation premises 16,000
Accumulated depreciation premises 16,000
$800,000 x 2% .
Accumulated depreciation office equip 15,200
$152,000 x 10%.
Rent revenue 8,000
Unearned rent revenue 8,000
$16,000/2.
Office supplies expense 6,390
Stock office supplies on hand 6,390
Office supplies used.
Prepaid advertising 2,000
Advertising expense 2,000
Fees revenue 6,000

TAIWAN CONSULTANTS
b) Income Statement for the year ended 30 June 2011
$ $
Fees revenue 886,600
Rent revenue 8,000
894,600
Less EXPENSES
Advertising 23,000
Salaries 393,000
Internet service provider 2,000
Telephone expense 8,000
Depreciation premises 16,000
Office supplies expense 6,390 512,590
PROFIT $382,010
c) TAIWAN CONSULTANTS
Balance sheet as at 30 June 2011
$ $ $
CURRENT ASSETS
Bank 41,520
Office supplies on hand 5,500
Prepaid advertising 2,000 101,020
NON-CURRENT ASSETS
Office equipment 152,000
Less Accumulated depreciation 39,600 112,400
Premises 800,000
Less accumulated depreciation 80,000 720,000 832,400
$933,420

CURRENT LIABILITIES
GST payable ($5,500- $3,500) 2,000
Unearned rent revenue 8,000 46,000
NON-CURRENT LIABILITIES
Loan 200,000
EQUITY
Capital, L. Lee 1 July 2010 345,410
+ Profit 382,010
727,420
- Drawings 40,000 $687,420
$933,420

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Testbank

John Wiley & Sons Australia, Ltd 2012

Chapter 4: Adjusting the accounts and preparing financial

1. The statement concerning accrual accounting that is true is:

John Wiley & Sons Australia, Ltd 2012 4.2

b. Insurance Expense 300

c. Prepaid Insurance 150

d. Prepaid Insurance 750

John Wiley & Sons Australia, Ltd 2012 4.3

8. Which statement relating to the Accumulated Depreciation account is correct?

John Wiley & Sons Australia, Ltd 2012 4.4

John Wiley & Sons Australia, Ltd 2012 4.5

John Wiley & Sons Australia, Ltd 2012 4.6

John Wiley & Sons Australia, Ltd 2012 4.8

John Wiley & Sons Australia, Ltd 2012 4.9

31. The current liability is:

John Wiley & Sons Australia, Ltd 2012 4.10

John Wiley & Sons Australia, Ltd 2012 4.11

Fill in the blanks

2. The c____________ basis of accounting is not a generally accepted method of

4. Unearned income is classified as a l______________ in the balance sheet as, if the

5. Accumulated depreciation is referred to as a c ___________ asset account because it

6. The c_____________ v____________ of an asset is its original cost less accumulated

ANSWER carrying value

7. Goodwill is classified in the balance sheet as an i_____________ asset.

John Wiley & Sons Australia, Ltd 2012 4.12

ANSWER Current liabilities

9. A spreadsheet, prepared either manually or electronically and used by accountants to

John Wiley & Sons Australia, Ltd 2012 4.13

Exam type questions

Rent expired for the year was $2,500.

John Wiley & Sons Australia, Ltd 2012 4.14

John Wiley & Sons Australia, Ltd 2012 4.15

Solution Question 4.1

a) General Journal SINGAPORE ENTERPRISES

Depreciation office equipment 28,050

John Wiley & Sons Australia, Ltd 2012 4.16

John Wiley & Sons Australia, Ltd 2012 4.17

John Wiley & Sons Australia, Ltd 2012 4.18

John Wiley & Sons Australia, Ltd 2012 4.19

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6. The c_ v of an asset is its original cost less accumulated