ACC 240 Fundamentals of Accounting
Finals Mock Exam Review
(Questions & Solutions)
2025
©2025
, Question 1:
A technology firm purchased a one‑year insurance policy on January 1 for
$12,000 and recorded the entire amount as a prepaid expense. By
December 31, which adjusting entry correctly reflects accrual accounting
principles?
- A. Debit Insurance Expense $12,000; credit Prepaid Insurance $12,000
- B. Debit Prepaid Insurance $12,000; credit Cash $12,000
- C. Debit Insurance Expense $6,000; credit Prepaid Insurance $6,000
- D. No adjusting entry is necessary
ANS: A. Debit Insurance Expense $12,000; credit Prepaid Insurance
$12,000
Rationale: Under the accrual basis, the prepaid expense must be
expensed over the policy’s term. Since the entire year has elapsed, the
full $12,000 is transferred to Insurance Expense.
---
Question 2:
A partnership firm originally split profits equally between two partners.
When a new partner is admitted and receives a 20% profit share, the
sacrifice ratio of the existing partners is calculated based on:
- A. The change in their profit-sharing percentages before and after
admission
- B. The difference in capital contributions
- C. The new partner’s investment amount
- D. The total firm profit
ANS: A. The change in their profit-sharing percentages before and
after admission
Rationale: The sacrifice ratio quantifies the reduction in profit share
that existing partners experience following a change in the partnership
structure. It is calculated by comparing pre-admission and post-admission
percentages.
©2025
, ---
Question 3:
Under accrual accounting, when services are performed but not yet
invoiced, the adjusting entry would typically involve:
- A. Debiting Cash and crediting Revenue
- B. Debiting Accounts Receivable and crediting Revenue
- C. Debiting Service Expense and crediting Unearned Revenue
- D. Debiting Revenue and crediting Accounts Receivable
ANS: B. Debiting Accounts Receivable and crediting Revenue
Rationale: Accrual accounting requires revenue recognition when
earned. When services are performed but not invoiced, an adjusting
entry debits Accounts Receivable (reflecting the claim) and credits
Revenue.
---
Question 4:
A manufacturing firm purchases machinery for $100,000 with an
estimated salvage value of $10,000 and a useful life of 9 years. Using the
straight‑line method, what is the annual depreciation expense?
- A. $10,000
- B. $9,000
- C. $11,000
- D. $12,000
ANS: A. $10,000
Rationale: The straight‑line depreciation expense is calculated as (Cost
– Salvage Value) / Useful Life = ($100,000 – $10,000) / 9 = $90, =
$10,000 per year.
---
©2025
Finals Mock Exam Review
(Questions & Solutions)
2025
©2025
, Question 1:
A technology firm purchased a one‑year insurance policy on January 1 for
$12,000 and recorded the entire amount as a prepaid expense. By
December 31, which adjusting entry correctly reflects accrual accounting
principles?
- A. Debit Insurance Expense $12,000; credit Prepaid Insurance $12,000
- B. Debit Prepaid Insurance $12,000; credit Cash $12,000
- C. Debit Insurance Expense $6,000; credit Prepaid Insurance $6,000
- D. No adjusting entry is necessary
ANS: A. Debit Insurance Expense $12,000; credit Prepaid Insurance
$12,000
Rationale: Under the accrual basis, the prepaid expense must be
expensed over the policy’s term. Since the entire year has elapsed, the
full $12,000 is transferred to Insurance Expense.
---
Question 2:
A partnership firm originally split profits equally between two partners.
When a new partner is admitted and receives a 20% profit share, the
sacrifice ratio of the existing partners is calculated based on:
- A. The change in their profit-sharing percentages before and after
admission
- B. The difference in capital contributions
- C. The new partner’s investment amount
- D. The total firm profit
ANS: A. The change in their profit-sharing percentages before and
after admission
Rationale: The sacrifice ratio quantifies the reduction in profit share
that existing partners experience following a change in the partnership
structure. It is calculated by comparing pre-admission and post-admission
percentages.
©2025
, ---
Question 3:
Under accrual accounting, when services are performed but not yet
invoiced, the adjusting entry would typically involve:
- A. Debiting Cash and crediting Revenue
- B. Debiting Accounts Receivable and crediting Revenue
- C. Debiting Service Expense and crediting Unearned Revenue
- D. Debiting Revenue and crediting Accounts Receivable
ANS: B. Debiting Accounts Receivable and crediting Revenue
Rationale: Accrual accounting requires revenue recognition when
earned. When services are performed but not invoiced, an adjusting
entry debits Accounts Receivable (reflecting the claim) and credits
Revenue.
---
Question 4:
A manufacturing firm purchases machinery for $100,000 with an
estimated salvage value of $10,000 and a useful life of 9 years. Using the
straight‑line method, what is the annual depreciation expense?
- A. $10,000
- B. $9,000
- C. $11,000
- D. $12,000
ANS: A. $10,000
Rationale: The straight‑line depreciation expense is calculated as (Cost
– Salvage Value) / Useful Life = ($100,000 – $10,000) / 9 = $90, =
$10,000 per year.
---
©2025
