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Exam 3: Adjusting Accounts for Financial Statements

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Question 51

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A company records the fees for legal services paid in advance by its clients in an account called Unearned Legal Fees.If the company fails to make the end-of-period adjusting entry to move the portion of these fees that has been earned to a revenue account,one effect will be:

A) An overstatement of equity.
B) An understatement of equity.
C) An understatement of assets.
D) An understatement of liabilities.
E) An overstatement of assets.

F) A) and C)
G) A) and D)

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Question 52

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The system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid is called:

A) Accrual basis accounting.
B) Operating cycle accounting.
C) Cash basis accounting.
D) Revenue recognition accounting.
E) Current basis accounting.

F) All of the above
G) A) and C)

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Question 53

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On December 31,Winters Company's Prepaid Rent account had a balance before adjustment of $6,000.Three months' rent was paid in advance on December 1,the first day of the lease term.The adjusting entry needed on December 31 is:

An adjusting entry often includes an entry to Cash.

The Income Summary account is used to:

Adjustments must be entered in the journal and posted to the ledger after the work sheet is prepared.

If a company mistakenly forgot to record depreciation on office equipment at the end of an accounting period,the financial statements prepared at that time would show:

Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related asset.

Match the following terms with the appropriate definition. -Obligations due to be paid or settled within one year or the operating cycle of a business,whichever is longer.

Prepare adjusting entries for the year ended December 31,for each of these separate situations.Assume that prepaid expenses are initially recorded in asset accounts and that fees collected in advance are initially recorded as liabilities. a.The Prepaid Rent account has a debit balance of $8,000 before adjustment,representing a prepayment for four months' rent made on December 1 of the current year. b.One-third of the work related to $18,000 of cash received in advance was performed during this period. c.Unpaid accrued salaries at December 31 amounts to $15,000 d.Work was completed for a client on December 31 in the amount of $21,000,but was not previously billed or recorded. e.Estimated depreciation on office equipment is $27,000.

On December 14,Branch Company received $3,000 cash for 30 days of consulting services that will be completed on January 13.Branch records all such prepayments by customers in a liability account.Prepare the December 31 adjusting entry.

Classified balance sheets commonly include the following categories: A. Current assets B. Long-term investments C. Plant assets D. Intangible assets E. Current liabilities F. Long-term liabilities G. Equity. Match the typical classification of each item below with its correct balance sheet category (A through G) . -Current portion of long-term debt

Canopy Services paid K.Canopy,the sole shareholder of Canopy Services,$5,700 in dividends during the current year.The entry to close the dividends account at the end of the year is:

A company owes its employees $5,000 for the year ended December 31.It will pay employees on January 6 for the previous two weeks' salaries.The year-end adjusting entry on December 31 will include a debit to Salaries Expense and a credit to Cash.

Adjusting entries result in a better matching of revenues and expenses for the period.

A classified balance sheet organizes assets and liabilities into important subgroups that provide more information to decision makers.

________ refer to costs incurred in a period that are both unpaid and unrecorded.________ refer to revenues earned in a period that are both unrecorded and not yet received in cash (or other assets).

Match the following types of adjustments with the appropriate transactions. -Accrued expense

The accrual basis of accounting recognizes expenses when cash is paid.

Under the accrual basis of accounting,adjustments are often made for prepaid expenses and unearned revenues.