Adjusting Entries Quiz PDF

Adjusting Entries
(Practice Quiz)
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Answers on page 7
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1. What type of entry will increase the normal balance of the general ledger account Service Revenues?
Debit Credit
2. What type of entry will increase the normal balance of the general ledger account that reports the
amount owed as of the balance sheet date for a company’s accrued expenses?
Debit Credit
3. What type of entry will increase the normal balances of the general ledger accounts Electricity
Expense, Insurance Expense, Interest Expense, and Repairs Expense?
Debit Credit
4. What type of accounts are Interest Receivable and Fees Receivable?

Asset Liability Equity Revenue Expense
5. What type of entry will decrease the normal balances of the general ledger accounts Interest
Receivable and Fees Receivable?
Debit Credit
6. What type of accounts are Deferred Revenues and Unearned Revenues?

Asset Liability Equity Revenue
7. What type of entry will decrease the normal balances of the accounts Deferred Revenues and
Unearned Revenues?
Debit Credit
8. What type of accounts are Prepaid Insurance, Prepaid Advertising, and Prepaid Expenses?
Asset Liability Equity Revenue Expense
9. What type of entry will decrease the normal balances of the accounts Prepaid Insurance and Prepaid
Expenses, and Insurance Expense?
Debit Credit
10. What type of accounts are Accumulated Depreciation and Allowance for Doubtful Accounts?
Contra asset Equity Expense Liability Revenue
11. What type of entry will increase the balances that are normally found in the accounts Accumulated
Depreciation and Allowance for Doubtful Accounts?
Debit Credit
12. In the case of a company’s accrued interest expense, which of the following occurs first?
Incurring the interest expense Paying the interest to the lender
13. In the case of a bank’s accrued interest revenues, which occurs first?
Earning the interest revenues Receiving the interest from the borrower
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14. In the case of a company deferring insurance expense, which occurs first?
Incurring the insurance expense Paying the insurance company
15. In the case of a company’s deferred revenues, which occurs first?

Earning the revenues Receiving the money from the customer
16. Which of the following will be included in the adjusting entry to accrue interest expense?
A debit to Cash
A credit to Interest Payable
A debit to Interest Payable
A debit to Prepaid Interest
17. Which of the following will be included in the adjusting entry to accrue interest income or interest
revenues?
A debit to Cash
A debit to Interest Income
A credit to Interest Receivable
A debit to Interest Receivable
18. The adjusting entry that reduces the balance in Prepaid Insurance will also include which of the
following?
A credit to Cash
A credit to Insurance Expense
A debit to Insurance Expense
A debit to Insurance Payable
19. The adjusting entry that reduces the balance in Deferred Revenues or Unearned Revenues will also
include which of the following?
A debit to Cash
A credit to Fees Earned
A debit to Fees Earned
A credit to Fees Receivable
20. The ending balance in the account Prepaid Insurance is expected to report which of the following?
The accrued amount of insurance expense
The original amount of the insurance premiums paid
The expired portion of the insurance premiums paid
The unexpired portion of the insurance premiums paid
21. The ending balance in the account Deferred Revenues (or Unearned Fees) should report which of the
following?
The accrued amount of fees that have been earned
The original amount of fees received in advance from a customer
The fees received in advance which are not yet earned
The amount of fees received in advance and which are now earned
22. Which type of adjusting entry is often reversed on the first day of the next accounting period?
Accrual Deferral Depreciation

23. Typically an adjusting entry will include which of the following?
One balance sheet account and one income statement account
Two balance sheet accounts
Two income statement accounts
Use the following information to answer questions 24 - 29:

A company borrowed $100,000 on December 1 by signing a six-month note that specifies interest
at an annual percentage rate (APR) of 12%. No interest or principal payment is due until the note
matures on May 31. The company prepares financial statements at the end of each calendar month.
The following questions pertain to the adjusting entry that should be entered in the company’s
records.
24. What date should be used to record the December adjusting entry?
25. How many accounts are involved in the adjusting entry?
26. What is the name of the account that will be debited?
27. What is the name of the account that will be credited?
28. What is the amount of the debit and the credit?
29. What would be the effect on the financial statements if the company fails to make the adjusting
entry on December 31?

A bank lent $100,000 to a customer on December 1 that required the customer to pay an annual
percentage rate (APR) of 12% on the amount of the loan. The loan is due in six months and no
payment of interest or principal is to be made until the note is due on May 31. The bank prepares
monthly financial statements at the end of each calendar month. The following questions pertain to
the adjusting entry that the bank will be making for its accounting records.
32. What is the name of the account that should be debited?
33. What is the name of the account that should be credited?

On December 1, your company paid its insurance agent $2,400 for the annual insurance premium
covering the twelve-month period beginning on December 1. The $2,400 payment was recorded on
December 1 with a debit to the current asset Prepaid Insurance and a credit to the current asset
Cash. Your company prepares monthly financial statements at the end of each calendar month. The
following questions pertain to the adjusting entry that should be written by the company.


On December 1, your company paid its insurance agent $2,400 for the annual insurance premium
covering the twelve-month period beginning on December 1. The $2,400 payment was recorded
on December 1 with a debit to the income statement account Insurance Expense and a credit to
the current asset Cash. Your company prepares monthly financial statements at the end of each
calendar month. The following questions pertain to the adjusting entry that should be written by the
company.

On December 1, XYZ Insurance Co. received $2,400 from your company for the annual insurance
premium covering the twelve-month period beginning on December 1. XYZ Insurance Co. recorded
the $2,400 receipt as of December 1 with a debit to the current asset Cash and a credit to the current
liability Unearned Revenues. XYZ Insurance Co. prepares monthly financial statements at the end of
each calendar month. The following questions pertain to the adjusting entry that should be written by
the XYZ Insurance Co.

On December 1, your company began operations. On December 3 it purchased $1,500 of supplies
on credit and recorded the transaction with a debit to the current asset Supplies and a credit to the
current liability Accounts Payable. Your company prepares monthly financial statements at the end
of each calendar month. At the end of the day on December 31, your company estimated that $700
of the supplies were still on hand in the supply room. The following questions pertain to the adjusting
entry that should be entered by your company.

On December 1, your company began operations. On December 4 it purchased $1,500 of supplies on
credit and recorded the transaction with a debit to the income statement account Supplies Expense
and a credit to the current liability Accounts Payable. Your company prepares monthly financial
statements at the end of each calendar month. At the end of the day on December 31, your company
estimated that $700 of the supplies were still on hand in the supply room. The following questions
pertain to the adjusting entry that should be entered by your company.
65. What would be the effect on the financial statements if the company fails to make the adjusting entry
on December 31?

Answers
1. Credit
Since revenues cause stockholders’ equity to increase, revenues are increased with a credit entry.
[Stockholders’ equity appears on the right side of the accounting equation. Credit entries appear on
the right side of a T-account.]
2. Credit
The amount owed for accrued expenses is reported in a liability account such as Accrued Expenses
Payable. Since a liability account is expected to have a credit balance, a credit entry will increase
the normal balance. [Recall that liabilities are on the right side of the accounting equation. Credit
entries appear on the right side of a T-account.]
3. Debit
Expenses are recorded in expense accounts with a debit entry. The reason is that expenses will
cause a decrease in stockholders’ (or owner’s) equity.
4. Asset
Receivables are asset accounts. Assets appear on the left side of the accounting equation and
asset accounts will normally have debit balances.
5. Credit
Receivables normally have debit balances. Therefore to decrease the debit balance in a receivable
account you will need to credit the account.
6. Liability
Accounts such as Deferred Revenues, Unearned Revenues, and Customer Deposits are liability
accounts. As with liability accounts, the normal balance will be a credit balance.
Under the accrual method of accounting, the accounts such as Unearned Revenues are necessary
when a company receives money from a customer in advance of the company earning the money.
(Since the money has not yet been earned, it cannot be reported as revenues on the income
statement.) The liability account communicates that a company has an obligation to provide its
customers with goods or services or return the money to the customers.
7. Debit
Since Deferred Revenues is a liability account, the normal credit balance will be decreased with a
debit entry. For example, when some of the deferred revenues become earned, the company will
debit the Deferred Revenues and will credit a revenue account such as Service Revenues.
8. Asset
Prepaid expenses that have not been used up or have not yet expired are reported as assets. In
other words, prepaid expenses are unexpired costs. When the costs expire (or are used up) they
become expenses.

9. Credit
Since Prepaid Insurance and Prepaid Expenses are asset accounts, their normal debit balance will
be decreased with a credit entry.
Since expenses usually have debit balances, Insurance Expense will be decreased with a credit
entry.
10. Contra asset

Contra asset accounts will have credit balances. The word contra indicates the balances in these
two accounts will be contrary to the debit balances that are expected in asset accounts.
11. Credit
Since contra asset accounts have credit balances, the credit balance will become larger when a
credit entry is recorded.
12. Incurring the interest expense

An accrued expense is an expense (and a liability) which was incurred by a borrower but the
interest has not been recorded.
13. Earning the interest revenues

Accrued revenues are recorded because the bank has earned both the interest revenue and a
related receivable and neither has yet been recorded by the bank.
14. Paying the insurance company

Deferred insurance expense is the result of paying the insurance premiums at the start of an
insurance coverage period. The amount of insurance premiums that have not expired as of the
balance sheet date should be reported in an asset account such as Prepaid Insurance. [As the
prepaid insurance premiums expire an adjusting entry should be written to credit the asset Prepaid
Insurance and debit Insurance Expense.]
15. Receiving the money from the customer

Deferred revenues indicate that a company has received money from a customer before it has been
earned.
16. A credit to Interest Payable

When interest expense has been incurred by a company but no payment has been made and no
related paperwork has been processed, the company will need to accrue the interest with a debit to
Interest Expense and a credit to Interest Payable.
17. A debit to Interest Receivable

When interest has been earned but no cash has been received and no billing paperwork has been
processed in the accounting records, a company will need to accrue 1) interest revenue or interest
income, and 2) an asset such as Interest Receivable. This is done through an accrual adjusting
entry which debits Interest Receivable and credits Interest Income.
18. A debit to Insurance Expense

As the debit balance in the asset account Prepaid Insurance expires, there will need to be an
adjusting entry to 1) debit Insurance Expense, and 2) credit Prepaid Insurance.

19. A credit to Fees Earned
As the deferred or unearned revenues become earned, the credit balance in the liability account
such as Deferred Revenues needs to be reduced. Hence, the adjusting entry to record these earned
revenues will include 1) a debit to Deferred Revenues, and 2) a credit to Fees Earned.
20. The unexpired portion of the insurance premiums paid

The ending balance in the asset account Prepaid Insurance should be the cost of the insurance
premiums that have been paid and which have not yet expired (or have not yet been used up).
21. The fees received in advance which are not yet earned
When customers pay a company in advance, the company credits Unearned Revenues. Then as
the company earns some of the revenues, the account Unearned Revenues will be debited and an
income statement account such as Service Revenues or Fees Earned will be credited. Thus, the
remaining credit balance in Unearned Revenues is the amount received but not yet earned.
22. Accrual
For example, if a company has incurred commissions expense on December’s sales, but will not
pay the commissions until January 25, the company will write an accrual type adjusting entry for
December’s financial statements. On January 25 the company will write a check to pay those
commissions. To avoid having two entries for December’s commissions, it is common practice on
the first day of the month following the accrual adjusting entry to record a reversing entry. (Deferrals
do not pose the risk of double counting expenses or revenues.)
23 One balance sheet account and one income statement account

Nearly all adjusting entries involve a minimum of one balance sheet account and a minimum of one
income statement account.
24. December 31 (the last day of the accounting period)

25. Two
26. Interest Expense (an income statement account)
27. Interest Payable (a balance sheet account)
28. $1,000.
Computation:
12% per year is 1% per month X $100,000 = $1,000 per month.
Another method is Principal X Rate X Time = $100,000 X .12 X 1/12 = $1,000.
As of December 31 the company owes just one month of interest. When the note becomes due, the
company will have to remit six months of interest for a total of $6,000 ($100,000 X .12 X 6/12).

29. If the company fails to make the December 31 adjusting entry there will be four consequences:
1) Interest Expense will be understated (too little expense being reported) by $1,000.
2) Net Income will be overstated (too much net income being reported) by $1,000.
3) Owner’s Equity will be overstated by $1,000.
4) Interest Payable will be understated by $1,000.
The accounting equation and balance sheet will show liabilities (Interest Payable) understated by
$1,000 and owner’s equity overstated by $1,000.
30. December 31
31. Two
32. Interest Receivable (a balance sheet account)
33. Interest Revenue or Interest Income (an income statement account)

34. $1,000.
Computation:
12% per year is 1% per month X $100,000 = $1,000 per month.
Another method is Principal X Rate X Time = $100,000 X .12 X 1/12 = $1,000.
As of December 31 the bank has earned just one month of interest. When the note becomes due,
the bank will collect six months of interest for a total of $6,000 ($100,000 X .12 X 6/12).
35. If the bank fails to make the December 31 adjusting entry there will be four consequences:

1) Interest Revenue or Interest Income will be understated by $1,000.
2) Net Income will be understated by $1,000.
3) Owner’s Equity will be understated by $1,000.
4) Interest Receivable will be understated by $1,000.
The accounting equation and balance sheet will show assets (Interest Receivable) understated by
$1,000 and owner’s equity understated by $1,000.
36. December 31
37. Two
38. Insurance Expense (an income statement account)
39. Prepaid Insurance (a balance sheet account)
40. $200.
Calculation:
$2,400 divided by the 12 months of coverage = $200 per month. As of December 31 one month
has gone by, so one month of insurance has expired and belongs in expense. (This means that the
Prepaid Insurance account should have a balance of $2,200—11 months still prepaid or unexpired
X $200 per month.)

1) Prepaid Insurance will be overstated by $200.

2) Insurance Expense will be understated by $200.
3) Net Income will be overstated by $200.
4) Owner’s equity will be overstated by $200.
The accounting equation and balance sheet will show assets (Prepaid Insurance) overstated by
$200 and owner’s equity overstated by $200.
42. December 31
43. Two
44. Prepaid Insurance (a balance sheet account)
45. Insurance Expense (an income statement account)
46. $2,200.
Calculation:
$2,400 divided by the 12 months of coverage = $200 per month. As of December 31 one month has
gone by, so one month of insurance has expired and belongs in Insurance Expense. Presently there
is a $2,400 debit balance in Insurance Expense. To reduce the Insurance Expense to $200, you
need to credit Insurance Expense for $2,200. Prepaid Insurance should have a balance of $2,200
because 11 months of insurance is still prepaid or unexpired X $200 per month.
1) Prepaid Insurance will be understated by $2,200.

2) Insurance Expense will be overstated by $2,200.
3) Net Income will be understated by $2,200.
4) Owner’s equity will be understated by $2,200.
The accounting equation and balance sheet will show assets (Prepaid Insurance) understated by
$2,200 and owner’s equity understated by $2,200.
48. December 31
49. Two
50. Unearned Revenues (a balance sheet account)
51. Service Revenues (an income statement account)
52. $200.
Calculation:
$2,400 divided by the 12 months of coverage = $200 per month. As of December 31 one month has
gone by, so one month of insurance has been earned and belongs in revenue. (This means that the
Unearned Revenues account should have a balance of $2,200—11 months still unearned X $200
per month.)

53. If XYZ Insurance Co. fails to make the December 31 adjusting entry there will be four
consequences:
1) Unearned Revenues will be overstated by $200.

2) Service Revenues will be understated by $200.
3) Net Income will be understated by $200.
4) Owner’s equity will be understated by $200.
The accounting equation and balance sheet will show liabilities (Unearned Revenues) overstated by
$200 and owner’s equity understated by $200.
54. December 31

55. Two
56. Supplies Expense (an income statement account)
57. Supplies (a balance sheet account)
58. $800.
Calculation:
The balance in the current asset account Supplies before any adjustment is a debit balance of $1,500.
The actual amount of supplies on hand (unused) was determined to be $700. Therefore, the balance
in the current asset account Supplies should be a debit balance of $700, not the present balance of
$1,500. To reduce the Supplies account from a debit balance of $1,500 to become a debit balance of
$700, you will need to credit Supplies for $800. The other half of the entry needs to be a debit of $800
to Supplies Expense. Since expenses are costs that have been used up, the $800 debit balance in
Supplies Expense is proper. (Your company bought $1,500 and has $700 on hand/unused. Therefore,
$800 must have been used up.)
59. If your company fails to make the December 31 adjusting entry there will be four consequences:
1) Supplies will be overstated by $800.

2) Supplies Expense will be understated by $800.
3) Net Income will be overstated by $800.
4) Owner’s equity will be overstated by $800.
The accounting equation and balance sheet will show assets (Supplies) overstated by $800 and
owner’s equity overstated by $800.
60. December 31
61. Two
62. Supplies (a balance sheet account)
63. Supplies Expense (an income statement account)

64. $700.
Calculation:
Account balances before adjustment: Supplies $0; Supplies Expense $1,500.
Since there are $700 of supplies on hand, the balance in the current asset account Supplies must
be increased from $0 to $700. Hence a debit to Supplies for $700.
The present balance of $1,500 in the Supplies Expense account must be reduced, because not all
$1,500 of supplies have been used. Since $700 of supplies are on hand, the company is assumed
to have used only $800 of supplies. ($1,500 minus $700 on hand.) To report Supplies Expense of
$800, we need to credit Supplies Expense for $700.
65. If your company fails to make the December 31 adjusting entry there will be four consequences:
1) Supplies Expense will be overstated by $700.

2) Supplies will be understated by $700.
3) Net Income will be understated by $700.
4) Owner’s equity will be understated by $700.
The accounting equation and balance sheet will show assets (Supplies) understated by $700 and
owner’s equity understated by $700.

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Adjusting Entries

4. What type of accounts are Interest Receivable and Fees Receivable?

6. What type of accounts are Deferred Revenues and Unearned Revenues?

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15. In the case of a company’s deferred revenues, which occurs first?

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Use the following information to answer questions 24 - 29:

Use the following information to answer questions 30 - 35:

Use the following information to answer questions 36 - 41:

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Use the following information to answer questions 42 - 47:

Use the following information to answer questions 48 - 53:

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Use the following information to answer questions 60 - 65:

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10. Contra asset

12. Incurring the interest expense

13. Earning the interest revenues

14. Paying the insurance company

15. Receiving the money from the customer

16. A credit to Interest Payable

17. A debit to Interest Receivable

18. A debit to Insurance Expense

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20. The unexpired portion of the insurance premiums paid

23 One balance sheet account and one income statement account

24. December 31 (the last day of the accounting period)

26. Interest Expense (an income statement account)

27. Interest Payable (a balance sheet account)

Another method is Principal X Rate X Time = $100,000 X .12 X 1/12 = $1,000.

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32. Interest Receivable (a balance sheet account)

33. Interest Revenue or Interest Income (an income statement account)

Another method is Principal X Rate X Time = $100,000 X .12 X 1/12 = $1,000.

38. Insurance Expense (an income statement account)

39. Prepaid Insurance (a balance sheet account)

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1) Prepaid Insurance will be overstated by $200.

44. Prepaid Insurance (a balance sheet account)

45. Insurance Expense (an income statement account)

1) Prepaid Insurance will be understated by $2,200.

50. Unearned Revenues (a balance sheet account)

51. Service Revenues (an income statement account)

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1) Unearned Revenues will be overstated by $200.

56. Supplies Expense (an income statement account)

57. Supplies (a balance sheet account)

1) Supplies will be overstated by $800.

62. Supplies (a balance sheet account)

63. Supplies Expense (an income statement account)

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1) Supplies Expense will be overstated by $700.

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