Introductory Financial Accounting for Business Thomas Edmonds 1st Edition- Test Bank

Introductory Financial Accounting for Business, 1e (Edmonds) Chapter3 AccountingforDeferrals Indicate how each event affects the financial statements model. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. Increase = I Decrease = D Not Affected = NA (Note that "Not Affected" means that the event does not affect that element of the financial statements or that the event causes an increase in that element, which is offset by a decrease in that same element.) 1) Green Company paid $900 cash to purchase supplies. Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D) Paying cash to purchase supplies decreases one asset account (cash) and increases asset account (supplies). The total amount of assets is not affected. It does not affect the income statement. Even though cash has been paid, expense recognition is deferred until the supplies are used. It will be reported as a cash outflow from operating activities on the statement of cash flows. Difficulty: 1 Easy Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 2) Nickle Company performed a physical count of supplies and determined that the company used $600 of supplies during the year. Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows Answer: (D) (NA) (D) (NA) (I) (D) (NA) Recognizing supplies expense is an asset use transaction. Assets (supplies) decrease and stockholder's equity (retained earnings) decreases. The recognition of supplies expense would cause the amount of net income shown on the income statement to decrease. There is no cash payment associated with the use of supplies. Because the expense recognition did not involve the payment of cash, there is no effect on the statement of cash flows. Difficulty: 2 Medium Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3) On February 1, Year 1, Owen Company paid $24,000 cash to lease office space for one year beginning immediately. Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D) The cost of the office space is recognized as an asset. The asset account, Prepaid Rent, increases and the asset account, Cash, decreases. Expense recognition is deferred until Owen Company uses the office space to help generate revenue. Since the expense is deferred, there is no impact on stockholders' equity (retained earnings) nor on the income statement. There is a cash outflow for operating activities on the statement of cash flows. Difficulty: 2 Medium Topic: Accounting for Prepaid Items Learning Objective: 03-02 Show how accounting for prepaid items affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 4) Owen Company recognizes rent expense for the period from February 1, Year 1, to December 31, Year 1. Assume the company paid $24,000 cash to lease the office space on February 1, Year 1. Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows Answer: (D) (NA) (D) (NA) (I) (D) (NA) At the end of Year 1, Owen is required to expense the amount of office space that has been used. Since Owen paid $24,000 on February 1, Year 1, to rent office space for one year, the portion of the lease cost that represents the office use from February 1 to December 31 is 11 months and $22,000. Recognizing rent expense will decrease assets, Prepaid Rent, and stockholders' equity (retained earnings). Rent expense will decrease net income. There is no effect on the statement of cash flows because the cash was paid on February 1, Year 1. Difficulty: 2 Medium Topic: Accounting for Prepaid Items Learning Objective: 03-02 Show how accounting for prepaid items affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 5) Calloway Company collected $750 from a customer for services that Calloway agrees to perform in the future. Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows Answer: (I) (I) (NA) (NA) (NA) (NA) (I) 2 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Collecting a payment in advance from a customer increases assets (cash) and increases liabilities (unearned revenue). It does not affect the income statement. Revenue will not be recognized until the services are provided. It will be reported as a cash inflow from operating activities on the statement of cash flows. Difficulty: 1 Easy Topic: Accounting for Unearned Revenue Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 6) Jennings Company makes an adjusting entry to recognize $500 of the previously unearned revenue earned that it has now earned by providing services to its client during the period. Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows Answer: (NA) (D) (I) (I) (NA) (I) (NA) The year-end adjustment moves $500 from the Unearned Revenue account to the Revenue account. This adjustment is a claims exchange transaction. Assets are not affected. On the balance sheet, liabilities (Unearned Revenue) decrease and stockholders' equity (Retained Earnings) increases. On the income statement, revenue and net income increase. The statement of cash flows is not affected. Difficulty: 1 Easy Topic: Accounting for Unearned Revenue Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 7) On January 1, Year 1, Monica Company paid $41,000 cash to purchase a truck. Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D) Purchasing a truck for cash is an asset exchange transaction. The asset account, Cash, decreases and the asset account, Truck, increases. The purchase does not affect the income statement. Because the asset has a long term useful life the cash outflow is categorized as an investing activity on the statement of cash flows. Difficulty: 1 Easy Topic: Accounting for Depreciation Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 3 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8) Cason Company recorded $2,000 of depreciation expense on a delivery van. Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows Answer: (D) (NA) (D) (NA) (I) (D) (NA) Recording depreciation expense decreases assets (increases the contra-asset accumulated depreciation) and decreases equity (depreciation expense decreases retained earnings). It increases expenses and decreases net income. It does not affect cash flows. Difficulty: 1 Easy Topic: Accounting for Depreciation Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 9) Cornelius Company purchased supplies on account. Would the business event be classified as an asset source, asset use or asset exchange transaction? Answer: Accounts Payable Purchasing supplies on account is an asset source transaction. The asset account, Supplies, increases and the liability account, Accounts payable, increases. Difficulty: 1 Easy Topic: Debit/Credit Terminology Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 10) What effect does being paid cash for services to be provided in the future normally have on the accounting equation? Answer: When a company is paid cash for services to be provided in the future, it is considered unearned revenue. The asset account, Cash, increases and the liability account, Unearned Revenue increases. There is no effect on stockholders' equity. The cash inflow is reported on the statement of cash flows as an operating activity. Difficulty: 1 Easy Topic: Accounting for Unearned Revenue Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 11) What is the formula for calculating depreciation expense using the straight-line method? Answer: (Asset Cost - Salvage value) / Useful life = Depreciation expense Difficulty: 2 Medium 4 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Topic: Accounting for Depreciation Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements. Bloom's: Understand AACSB: Reflective Thinking; Communication AICPA: BB Critical Thinking; FN Risk Analysis 12) What type of assets would a company depreciate? Answer: Companies depreciate long-term assets that it plans to use over multiple accounting cycles. Difficulty: 2 Medium Topic: Accounting for Depreciation Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements. Bloom's: Understand AACSB: Reflective Thinking; Communication AICPA: BB Critical Thinking; FN Risk Analysis 13) Depreciation expense is reported on which financial statement? Answer: Income Statement Difficulty: 2 Medium Topic: Accounting for Depreciation Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements. Bloom's: Understand AACSB: Reflective Thinking; Communication AICPA: BB Critical Thinking; FN Risk Analysis 14) Explain the significance of the return-on-assets ratio. Who (what category or type of financial statement users) would normally be most interested in this ratio, and why? Answer: The return-on-assets ratio measures the relationship between the level of income and the size of the investment. The stockholders would normally be interested in this ratio to assess how effectively a company is using its assets to generate income. Investors would prefer a company to have a higher return-on-assets ratio. Difficulty: 2 Medium Topic: The Financial Analyst Learning Objective: 03-06 Use a return-on-assets ratio, a debt-to-assets ratio, and a return-on-equity ratio to analyze financial statements. Bloom's: Understand AACSB: Reflective Thinking; Communication AICPA: BB Critical Thinking; FN Risk Analysis 15) Explain the significance of the return-on-equity ratio. Who (what category or type of financial statement users) would normally be most interested in this ratio, and why? Answer: The return-on-equity ratio measures the relationship between net income and stockholders' equity. The stockholders would normally be most interested in this ratio because it measures how well the company is using their investment to earn income. 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Difficulty: 2 Medium Topic: The Financial Analyst Learning Objective: 03-06 Use a return-on-assets ratio, a debt-to-assets ratio, and a return-on-equity ratio to analyze financial statements. Bloom's: Understand AACSB: Reflective Thinking; Communication AICPA: BB Critical Thinking; FN Risk Analysis 16) What does the debt-to-assets ratio indicate about the level of a company's debt risk? Who would normally be most interested in this ratio? Answer: The relationship between total debt and total assets can be measured by the debt-to-assets ratio. With a high debt-to-assets ratio, a company experiences a great degree of debt risk. A company with a high debt-to-assets ratio may be forced into bankruptcy if it is unable to meet the required payments on its outstanding debt. The company's creditors would likely be most interested in this ratio. Difficulty: 1 Easy Topic: The Financial Analyst Learning Objective: 03-06 Use a return-on-assets ratio, a debt-to-assets ratio, and a return-on-equity ratio to analyze financial statements. Bloom's: Understand AACSB: Reflective Thinking; Communication AICPA: BB Critical Thinking; FN Risk Analysis 17) What is financial leverage? What financial ratio can be increased by using financial leverage? Answer: Financial leverage is the use of borrowed money to increase return on stockholders' investment. If a company can borrow money at 8% and invest it at 10%, it can increase its return-on- equity ratio. Difficulty: 1 Easy Topic: The Financial Analyst Learning Objective: 03-06 Use a return-on-assets ratio, a debt-to-assets ratio, and a return-on-equity ratio to analyze financial statements. Bloom's: Understand AACSB: Reflective Thinking; Communication AICPA: BB Critical Thinking; FN Risk Analysis 18) Account No. Account Title (1) Cash (2) Service Revenue (3) Accounts Receivable (4) Salaries Expense (5) Dividends (6) Common Stock (7) Salaries Payable (8) Retained Earnings 6 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Which of the following is a true statement? (Note: A statement may be true even if it does not identify all accounts that appear on that particular financial statement.) A) Account numbers 2, 4, and 5 will appear on the income statement. B) Account numbers 1, 3, and 8 will appear on the balance sheet. C) Account numbers 2, 5, and 8 will appear on the statement of cash flows. D) Account numbers 4, 5, and 6 will appear on the statement of changes in stockholders' equity. Answer: B Explanation: A balance sheet reports assets, liabilities, and stockholders' equity as of a selected date (usually the end of an accounting period). Cash and accounts receivable are asset accounts. Retained earnings is a stockholders' equity account. Difficulty: 2 Medium Topic: Prepare Financial Statements Learning Objective: 03-04 Use a list of accounts to prepare financial statements containing deferrals. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 19) During Bruce Company's first year of operations, the company purchased $2,300 of supplies. At year-end, a physical count of the supplies on hand revealed that $825 of unused supplies were available for future use. How will the related adjusting entry affect the company's financial statements? A) Expenses will increase and assets will decrease by $1,475. B) Assets and expenses will both increase by $825. C) Expenses and assets will both increase by $1,475. D) The related adjusting entry has no effect on net income or the accounting equation. Answer: A Explanation: The company used $1,475 ($2,300 − $825) of supplies during its first year of operations. The adjusting entry to recognize supplies expense will decrease stockholders' equity (retained earnings) and decrease assets (supplies) by $1,475. It will increase expenses and decrease net income. Difficulty: 3 Hard Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 20) Recognizing an expense may be accompanied by which of the following? A) A decrease in liabilities B) An increase in assets C) A decrease in revenue D) A decrease in assets Answer: D Explanation: Recognizing an expense may be accompanied by a decrease in assets (i.e. cash, prepaid rent or insurance) or an in increase in liabilities (i.e. accounts payable, salaries payable). 7 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Difficulty: 2 Medium Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 21) Which of the following statements is true regarding accrual accounting? A) Revenue is recorded only when cash is collected. B) Expenses are recorded when they are incurred. C) Revenue is recorded in the period when it is earned. D) Revenue is recorded in the period when it is earned and expenses are recorded when they are incurred. Answer: D Explanation: Revenue is recognized when earned and expenses are recognized when incurred, regardless of when cash is exchanged. Difficulty: 2 Medium Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 22) Recognition of revenue may be accompanied by which of the following? A) A decrease in a liability B) An increase in a liability C) An increase in an asset D) An increase in an asset or a decrease in a liability Answer: D Explanation: Recognizing revenue may be accompanied by either an increase in assets (cash or accounts receivable) or a decrease in liabilities (unearned revenue). Difficulty: 2 Medium Topic: Accounting for Unearned Revenue Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 23) Which of the following events would require a year-end adjusting entry? A) Purchasing supplies for cash during the year B) Purchasing land for cash during the year C) Providing services on account during the year D) Each of these events would require a year-end adjusting entry. 8 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Answer: A Explanation: Purchasing supplies requires a year-end adjusting entry to recognize the expense associated with the amount of supplies used during the year. Purchasing land for cash does not require an adjusting entry and providing services on account does not require an adjusting entry at the end of the accounting period. Difficulty: 3 Hard Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 24) How does the adjusting entry to recognize the portion of the unearned revenue that a company earned during the accounting period affect the elements of the financial statements? A) An increase in assets and a decrease in liabilities. B) An increase in liabilities and a decrease in equity. C) A decrease in liabilities and an increase in equity. D) A decrease in assets and a decrease in liabilities. Answer: C Explanation: Recognizing the portion of the unearned revenue that a company earned during the accounting period involves a decrease in liabilities (unearned revenue) and an increase in equity (retained earnings as a result of revenue). Difficulty: 2 Medium Topic: Accounting for Unearned Revenue Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 25) On December 1, Year 1, Jack's Snow Removal Company received $6,000 of cash in advance from a customer and promised to provide services for that customer during the months of December, January, and February. How will the Year 1 year-end adjustment to recognize the partial expiration of the contract impact the elements of the financial statements model? A) Total assets will increase by $2,000. B) Equity will increase by $2,000. C) Total liabilities will increase by $2,000. D) Total assets will increase by $2,000 and equity will increase by $2,000. Answer: B Explanation: The year-end adjustment to recognize one month's work on the three-month contract results in a $2,000 decrease in liabilities (unearned revenue) and a $2,000 increase in equity (retained earnings due to recognizing revenue). Difficulty: 2 Medium Topic: Accounting for Unearned Revenue Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements. Bloom's: Apply 9 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 26) On January 1, Year 2, the Supplies account of Sheldon Company had a balance of $1,200. During the year, the company purchased $3,400 of supplies on account and made partial payments totaling $3,000 on those accounts. On December 31, Year 2, Sheldon determined that there were $1,400 of supplies on hand. Which of the following would be reported on Sheldon's Year 2 financial statements? A) $1,600 of supplies; $200 of supplies expense B) $1,400 of supplies; $2,000 of supplies expense C) $1,400 of supplies; $3,200 of supplies expense D) $1,600 of supplies; $3,400 of supplies expense Answer: C Explanation: Supplies = Amount on hand at end of year of $1,400 Supplies expense = Beginning balance of Supplies account of $1,200 + Supplies purchased of $3,400 − Ending balance of Supplies account of $1,400 = $3,200 Difficulty: 2 Medium Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 27) On October 1, Year 1, Jason Company paid $7,200 to lease office space for one year beginning immediately. What is the amount of rent expense that will be reported on the Year 1 income statement and what is the cash outflow for rent that would be reported on the Year 1 statement of cash flows? A) $7,200; $7,200 B) $1,800; $1,800 C) $1,800; $7,200 D) $1,200; $7,200 Answer: C Explanation: Monthly rent expense = Payment of $7,200 ÷ 12 months = $600 per month Rent expense (on the income statement) = $600 per month × 3 months = $1,800 The $7,200 payment is the cash outflow for rent that will be reported on the statement of cash flows. Difficulty: 3 Hard Topic: Accounting for Prepaid Items Learning Objective: 03-02 Show how accounting for prepaid items affects financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 28) When a revenue or an expense event is recognized after cash has been exchanged it is referred to as A) an accrual B) a deferral C) either an accrual or deferral D) neither of these terms describe this event 10 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Answer: B Explanation: A deferral occurs when a company postpones, delays or otherwise puts off the recognition of a revenue or an expense. The revenue or expense event is recognized after cash has been exchanged. Difficulty: 2 Medium Topic: Accounting for Supplies; Accounting for Unearned Revenue; Accounting for Prepaid Items Learning Objective: 03-01 Show how accounting for supplies affects financial statements.; 03-03 Show how accounting for unearned revenues affects financial statements.; 03-02 Show how accounting for prepaid items affects financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Decision Making 29) How would a payment for rent paid in advance be classified? A) Asset source transaction B) Asset use transaction C) Asset exchange transaction D) Claims exchange transaction Answer: C Explanation: Purchasing prepaid rent increases one asset (prepaid rent) and decreases another asset (cash). Therefore, it is classified as an asset exchange transaction. Difficulty: 1 Easy Topic: Accounting for Prepaid Items Learning Objective: 03-02 Show how accounting for prepaid items affects financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 30) Which of the following accounts would not appear on a balance sheet? A) Service Revenue B) Supplies C) Unearned Revenue D) Prepaid Rent Answer: A Explanation: Service Revenue is an income statement account and, as such, it does not appear on the balance sheet. Unearned Revenue, despite having the word "revenue" in its title, is a liability account that appears on the balance sheet. Supplies and prepaid rent are both assets that appear on the balance sheet. Difficulty: 2 Medium Topic: Prepare Financial Statements Learning Objective: 03-04 Use a list of accounts to prepare financial statements containing deferrals. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 11 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 31) Which of the following would cause net income on the accrual basis to be different from (either higher or lower than) "cash provided by operating activities" on the statement of cash flows? A) Purchased land for cash B) Purchased supplies for cash C) Paid advertising expense D) Paid dividends to stockholder Answer: B Explanation: Purchasing supplies for cash is a cash outflow for operating activities, but will not be reported as an expense until the supplies are used. Purchasing land is a cash outflow for investing activities and does not affect net income. Paying advertising expense causes equal decreases in net income and cash flows from operating activities. Paying dividends to stockholders is a cash outflow for financing activities and does not affect net income. Difficulty: 3 Hard Topic: Prepare Financial Statements; Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements.; 03-04 Use a list of accounts to prepare financial statements containing deferrals. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 32) Duluth Co. collected a $6,000 cash advance from a customer on November 1, Year 1 for services to be provided over a six-month period beginning on that date. If the year-end adjustment is properly recorded, what will be the effect of the adjusting entry on Duluth's Year 1 financial statements? A) Increase assets and decrease liabilities B) Increase assets and increase revenues C) Decrease liabilities and increase revenues D) No effect Answer: C Explanation: The adjusting entry to recognize revenue earned on the contract will increase revenues and decrease liabilities (unearned revenue). Difficulty: 2 Medium Topic: Accounting for Unearned Revenue Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 33) On September 1, Year 1, Gomez Company collected $9,000 in advance from a customer for services to be provided over a one-year period beginning on that date. How much revenue would Gomez Company report related to this contract on its income statement for the year ended December 31, Year 1? How much would the company report as net cash flows from operating activities for Year 1? A) $3,000; $3,000 B) $9,000; $9,000 C) $3,000; $9,000 12 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. D) $0; $9,000 Answer: C Explanation: Monthly revenue = Receipt of $9,000 ÷ 12 months = $750 per month Revenue (on the income statement) = $750 per month × 4 months (September through December) = $3,000 The company will recognize the $9,000 received as a cash inflow for operating activities in Year 1. Difficulty: 2 Medium Topic: Accounting for Unearned Revenue Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 34) What is the purpose of the accrual basis of accounting? A) Recognize revenue when it is collected from customers. B) Match assets with liabilities during the proper accounting period. C) Recognize expenses when cash disbursements are made. D) Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands. Answer: D Explanation: Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called accrual accounting. Difficulty: 2 Medium Topic: Accounting for Supplies; Accounting for Unearned Revenue; Accounting for Prepaid Items Learning Objective: 03-01 Show how accounting for supplies affects financial statements.; 03-03 Show how accounting for unearned revenues affects financial statements.; 03-02 Show how accounting for prepaid items affects financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 35) Which of the following is an asset use transaction? A) Purchased land for cash B) Recorded rent expense at the end of the period C) Borrowed cash from the bank D) Accrued salary expense at the end of the period Answer: B Explanation: Recording rent expense at the end of the period is an asset use transaction that decreases assets (prepaid rent) and decreases equity (retained earnings). Purchasing land for cash is an asset exchange transaction. Borrowing cash from a bank is an asset source transaction. Accruing salary expense is a claims exchange transaction. Difficulty: 2 Medium Topic: Accounting for Prepaid Items Learning Objective: 03-02 Show how accounting for prepaid items affects financial statements. 13 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 36) Which of the following is a claims exchange transaction? A) Recognized revenue earned on a contract where the cash had been collected at an earlier date B) Issued common stock C) Provided services on account D) Purchased land for cash Answer: A Explanation: Recognizing revenue earned on a contract where the cash had been collected at an earlier date is a claims exchange transaction that decreases liabilities (unearned revenue) and increases equity (retained earnings). Purchasing land for cash is an asset exchange transactions. Issuing common stock is an asset source transaction. Providing services on account is an asset source transaction. Difficulty: 2 Medium Topic: Accounting for Unearned Revenue Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 37) Joseph Company purchased a delivery van on January 1, Year 1 for $35,000. The van is estimated to have a 5-year useful life and a $5,000 salvage value. How much expense should Joseph recognize in Year 1 related to the use of the van? A) $6,000 B) $7,000 C) $30,000 D) $5,000 Answer: A Explanation: Depreciation expense = (Cost of $35,000 − Salvage value of $5,000) ÷ Useful life of five years = $6,000 Difficulty: 1 Easy Topic: Accounting for Depreciation Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 38) Which of the following events involves a deferral? A) Recording interest that has been earned but not received. B) Recording revenue that has been earned but not yet collected in cash. C) Recording supplies that have been purchased with cash but not yet used. D) Recording salaries owed to employees at the end of the year that will be paid during the following year. 14 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Answer: C Explanation: Recording the purchase of supplies constitutes a deferral because it involves the payment of cash before an expense (in this case, supplies expense) is recognized. Difficulty: 2 Medium Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 39) The entry to recognize depreciation expense incurred on equipment involves which of the following? A) A decrease in assets B) An increase in liabilities C) An increase in assets D) A decrease in liabilities Answer: A Explanation: Recognizing depreciation expense involves a decrease in assets due to an increase in the contra-asset accumulated depreciation and a decrease in equity due to recognizing depreciation expense. Difficulty: 2 Medium Topic: Accounting for Depreciation Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 40) The following accounts and balances were drawn from the records of Barnes Company: Cash $ 4,500 Accounts receivable $ 2,700 Equipment $ 10,000 Accumulated depreciation $ Accounts payable $ 2,800 Common stock $ 6,000 3,200 Based on this information alone the amount of Barnes's retained earnings is: A) $11,600. B) $17,200. C) $5,200. D) None of these answers is correct. Answer: C Explanation: Assets = $4,500 + $2,700 + $10,000 − $3,200 = $14,000 Assets of $14,000 = Liabilities of $2,800 + Equity Equity = $11,200 15 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Equity = Common stock of $6,000 + Retained earnings $11,200 = $6,000 + Retained earnings Retained Earnings = $5,200 Difficulty: 2 Medium Topic: Accounting for Depreciation Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 41) Consider how each of the transactions listed below affect net income reported on the income statement and the net cash flows from operating activities reported on the statement of cash flows. Which transaction(s) would affect the income statement in a different period from the statement of cash flows? A) Recognized depreciation expense on equipment B) Incurred operating expenses on account C) Paid interest that was accrued in a prior year D) All of these answer choices would affect the income statement in a different period from the statement of cash flows Answer: D Explanation: Recognizing depreciation expense reduces net income, but does not affect cash flows from operating activities. Incurring operating expenses on account also reduces net income, but does not affect cash flows from operating activities. Paying interest that was accrued in a prior year will reduce cash flows from operating activities, but will not affect net income. Difficulty: 2 Medium Topic: Prepare Financial Statements; Accounting for Depreciation Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements.; 03-04 Use a list of accounts to prepare financial statements containing deferrals. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 42) On January 1, Year 1, Alabama Company purchased a machine for $26,000. The machine has an estimated useful life of 4 years and an estimated salvage value of $6,000. What is the book value of the machine reported on Alabama's balance sheet as of December 31, Year 1? A) $26,000 B) $19,500 C) $21,000 D) $15,000 Answer: C Explanation: Accumulated depreciation at end of Year 1 = (Cost of $26,000 − Salvage value of $6,000) ÷ 4 years = $5,000 Book value = Cost of $26,000 cost − Accumulated depreciation of $5,000 = $21,000 Difficulty: 2 Medium Topic: Computing Depreciation Expense; Accounting for Depreciation 16 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 43) On May 1, Year 2, Cole Company paid $12,000 cash for supplies. The Year 2 adjusting entry to recognize the amount of supplies used during Year 2 A) increases the amount of supplies expense recognized in Year 2 B) decreases the amount of liabilities shown on the Year 2 balance sheet C) increases the amount of liabilities shown on the Year 2 balance sheet D) decreases the amount of supplies expense recognized in Year 2 Answer: A Explanation: The adjusting entry at the end of year 2 to recognize supplies expense causes assets (supplies) to decrease and stockholders' equity (retained earnings) to decrease. Supplies expense decreases net income. Difficulty: 2 Medium Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 44) When a company purchases supplies on account A) Cash flow from financing activities decreases B) Total assets decrease C) Expenses increase D) Liabilities increase Answer: D Explanation: Purchasing on account means that the buyer does not pay cash at the time of purchase. Instead the buyer incurs an obligation (accounts payable) to pay cash in the future. When supplies are purchased on account, assets (supplies) and liabilities (accounts payable) increase. The cash flow associated with the purchase of supplies is an operating activity not a financing activity. Difficulty: 2 Medium Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 45) Hawk Company purchased $300 of supplies on account. Which of the following shows how this purchase will affect Hawk's ledger accounts? Assets = Liabilities + Stockholders'Equity Cash Supplies Accounts 17 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Payable Common Stock Retained Earnings A. 800 800 B. (800) C. (800) 800 D. A) B) C) D) (800) 800 (800) Option A Option B Option C Option D Answer: A Explanation: Purchasing on account means that the buyer does not pay cash at the time of purchase. Instead the buyer incurs an obligation (accounts payable) to pay cash in the future. When supplies are purchased on account, assets (supplies) and liabilities (accounts payable) increase. Difficulty: 2 Medium Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 46) Knoll Company started Year 2 with a $1,000 balance in its Cash account, a $200 balance in its Supplies account and a $1,200 balance in its common stock account. During Year 2, the company experienced the following events: (1) Paid $600 cash to purchase supplies. (2) Physical count revealed $50 of supplies on hand at the end of Year 2. Based on this information the amount of supplies expense reported on the Year 2 income statement is A) $600 B) $750 C) $800 D) $850 Answer: B Explanation: Since the Company started the accounting period with $200 of supplies and then purchased an additional $600 of supplies during the accounting period, there was a total amount of $800 ($200 + $600) of supplies that were available to be used during the accounting period. Since there were only $50 of supplies on hand at the end of the accounting period, $750 ($800 − $50) had to have been used. Assets, in this case supplies, used in the process of producing revenue are called expenses. Difficulty: 2 Medium Topic: Accounting for Supplies Learning Objective: 03-01 Show how accounting for supplies affects financial statements. Bloom's: Apply intermediate accounting - test bank, wileyplus intermediate accounting test bank, intermediate accounting test bank chapter 4, intermediate accounting test bank chapter 7, intermediate accounting test bank chapter 5, intermediate accounting 2 test bank, intermediate accounting 2 millan test bank, intermediate accounting 3 test bank,