CH 03

Chapter 3
The Adjusting Process
OBJECTIVES
Obj 1 Describe the nature of the adjusting process.

Obj 2 Journalize entries for accounts requiring adjustment.
Obj 3 Summarize the adjustment process.
Obj 4 Prepare an adjusted trial balance.
QUESTION GRID
True / False
No. Objective Difficulty No. Objective Difficulty No. Objective Difficulty
1 03-01 Moderate 18 03-02 Moderate 35 03-02 Difficult
2 03-01 Easy 19 03-02 Moderate 36 03-02 Difficult
6 03-01 Moderate 23 03-02 Easy 40 03-02 Difficult
7 03-01 Easy 24 03-02 Moderate 41 03-02 Easy
8 03-01 Easy 25 03-02 Moderate 42 03-03 Difficult
12 03-01 Moderate 29 03-02 Easy 46 03-03 Easy
13 03-01 Moderate 30 03-02 Easy 47 03-03 Moderate
15 03-01 Moderate 32 03-02 Moderate 49 03-04 Easy
16 03-01 Easy 33 03-02 Easy
17 03-02 Moderate 34 03-02 Difficult
Matching
3 03-01 Moderate 6 03-01 Moderate
119
120  Chapter 3/The Adjusting Process
Multiple Choice
1 03-01 Moderate 29 03-02 Difficult 57 03-02 Easy
2 03-01 Moderate 30 03-02 Difficult 58 03-02 Moderate
4 03-01 Moderate 32 03-02 Moderate 60 03-02 Moderate
6 03-01 Difficult 34 03-02 Difficult 62 03-02 Moderate
7 03-01 Difficult 35 03-02 Easy 63 03-02 Moderate
8 03-01 Difficult 36 03-02 Moderate 64 03-02 Easy
9 03-01 Difficult 37 03-02 Easy 65 03-02 Easy
10 03-01 Difficult 38 03-02 Moderate 66 03-02 Moderate
11 03-01 Difficult 39 03-02 Moderate 67 03-02 Easy
12 03-01 Difficult 40 03-02 Difficult 68 03-02 Difficult
13 03-01 Moderate 41 03-02 Moderate 69 03-02 Easy
15 03-01 Easy 43 03-02 Easy 71 03-02 Difficult
17 03-01 Easy 45 03-02 Moderate 73 03-02 Moderate
20 03-01 Easy 48 03-02 Easy 76 03-03 Difficult
27 03-02 Moderate 55 03-02 Easy
28 03-02 Moderate 56 03-02 Easy
Exercise/Other
1 03-01 Easy 11 03-02 Easy 21 03-02 Easy
4 03-02 Moderate 14 03-02 Moderate 24 03-03 Moderate
6 03-02 Easy 16 03-02 Moderate 26 03-03 Moderate
10 03-02 Easy 20 03-02 Easy 30 03-04 Easy
Chapter 3/The Adjusting Process  121
Problem
1 03-01 Moderate 5 03-02 Difficult 9 03-02 Difficult
2 03-02 Difficult 6 03-02 Moderate 10 03-03 Difficult
3 03-02 Difficult 7 03-02 Moderate 11 03-03 Moderate
4 03-02 Difficult 8 03-02 Moderate 12 03-02|03-04 Difficult
Chapter 3—The Adjusting Process
TRUE/FALSE
1. The system of accounting where revenues are recorded when they are earned and expenses
are recorded when they are incurred is called the cash basis of accounting.
ANS: F DIF: Moderate OBJ: 03-01
NAT: AACSB Analytic | AICPA FN-Measurement
2. The accrual basis of accounting requires revenue be recorded when cash is received from
customers.
ANS: F DIF: Easy OBJ: 03-01
3. Generally accepted accounting principles require accrual-basis accounting.

ANS: T DIF: Moderate OBJ: 03-01
4. The revenue recognition concept states that revenue should be recorded in the same period
as the cash is received.
5. The matching concept requires expenses be recorded in the same period that the related
revenue is recorded.
6. The financial statements measure precisely the financial condition and results of operations
of a business.
7. Prepaid Rent is a deferred expense.

ANS: T DIF: Easy OBJ: 03-01
8. An example of deferred revenue is Unearned Rent.

9. Accruals are needed when an unrecorded expense has been incurred or an unrecorded
revenue has been earned.
10. If the debit portion of an adjusting entry is to an asset account, then the credit portion must
be to a liability account.
11. Proper reporting of revenues and expenses in a period is due to the accounting period
concept.
12. Revenue recognition concept requires that the reporting of revenue be included in the period
when cash for the service is received.
13. Revenues and expenses should be recorded in the same period in which they relate.
14. The matching concept supports matching expenses with the related revenues.
15. Even though GAAP requires the accrual basis of accounting, some businesses prefer using
the cash basis of accounting.
16. The updating of accounts is called the adjusting process.

17. Adjusting entries are made at the end of an accounting period to adjust accounts on the
balance sheet.
18. Adjusting entries affect only expense and asset accounts.

19. An adjusting entry would adjust revenue so it is reported when earned and not when cash is
received.
20. An adjusting entry would adjust an expense account so the expense is reported when
incurred.
21. An adjusting entry to accrue an incurred expense will affect total liabilities.
22. The difference between deferred revenue and accrued revenue is that accrued revenue has
been recorded and needs adjusting and deferred revenue has never been recorded.
23. Deferrals are recorded transactions that delay the recognition of an expense or revenue.
24. Adjustments for accruals are needed to record a revenue that has been earned or an expense
that has been incurred but not recorded.
25. An unearned revenue is a liability.

26. The systematic allocation of land's cost to expense is called depreciation.

27. The difference between the balance of a fixed asset account and the balance of its related
accumulated depreciation account is termed the book value of the asset.
28. The Accumulated Depreciation's account balance is the sum of depreciation expense
recorded in past periods.
29. Accumulated Depreciation accounts are liability accounts.

30. Accumulated Depreciation is reported on the income sheet.

31. A building was purchased for $75,000. Assuming annual depreciation of $2,500, the book
value of the building one year later is $77,500.
32. A contra asset account for Land will normally appear in the balance sheet.
33. Depreciation Expense is reported on the balance sheet as an addition to the related asset.
34. A company pays $12,000 for twelve month's rent on October 1. The adjusting entry on
December 31 is debit Rent Expense, $4,000 and credit Prepaid Rent, $4,000.
ANS: F DIF: Difficult OBJ: 03-02
35. A company pays $240 for a yearly trade magazine on August 1. The adjusting entry on
December 31 is debit Unearned Subscription Revenue, $100 and credit Subscription
Revenue, $100.
36. A company depreciates its equipment $350 a year. The adjusting entry for December 31 is
debit Depreciation Expense, $350 and credit Equipment, $350.
37. A company pays an employee $1,000 for a five day work week, Monday - Friday. The
adjusting entry on December 31, which is a Wednesday, is debit Wages Expense, $200 and
credit Wages Payable, $200.
38. A company pays $5,600 for two season tickets on September 1. If $1,400 is earned by
December 31, the adjusting entry made at that time is debit Cash, $1,400 and credit Ticket
Revenue, $1,400.
39. A company does not realize that the last two day's revenue for the month was not recorded.
The adjusting entry on December 31 is debit Accounts Receivable and credit Fees Earned.
ANS: T DIF: Difficult OBJ: 03-02
40. The balance in the prepaid insurance account before adjustment at the end of the year is
$4,000. The amount of the journal entry required to record insurance expense will be $2,500
if the amount of unexpired insurance applicable to future periods is $1,500.
ANS: T DIF: Difficult OBJ: 03-02
41. The market value of a fixed asset is reflected in the Balance Sheet after the proper
adjustment is made.
42. If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both
liabilities and owner's equity will be overstated for the period.
43. If the adjustment to recognize expired insurance at the end of the period is inadvertently
omitted, the assets at the end of the period will be understated.
44. If the adjustment of the unearned rent account at the end of the period to recognize the
amount of rent earned is inadvertently omitted, the net income for the period will be
overstated.
45. If the adjustment for depreciation for the year is inadvertently omitted, the assets on the
balance sheet at the end of the period will be understated.
46. Adjusting journal entries are dated on the last day of the period.
47. By ignoring and not posting the adjusting journal entries to the appropriate accounts, net
income will always be overstated.
48. The financial statements are prepared from the unadjusted trial balance.
49. The heading of an adjusted trial balance contains the heading "For the Month Ended
December 31, 2008."
MATCHING
Match these type of accounts with the following business transactions.

a. Prepaid expense
b. Accrued expense
c. Unearned revenue
d. Accrued revenue
1. Services provided by an attorney that have not been recorded.

2. Paid for one year’s insurance policy
3. Retainage received by the client for future legal representation.
4. Annual property taxes that are paid at the end of the year
5. Electric bill to be paid next month
6. Paid for a magazine subscription for the next 6 months
7. Received payment for a magazine subscription for the next 6 months
8. Provided tutoring for a student, invoice to be sent at the beginning of the next month to the
parent for payment.
1. ANS: D DIF: Moderate OBJ: 03-01

2. ANS: A DIF: Moderate OBJ: 03-01

3. ANS: C DIF: Moderate OBJ: 03-01

4. ANS: B DIF: Moderate OBJ: 03-01

5. ANS: B DIF: Moderate OBJ: 03-01

6. ANS: A DIF: Moderate OBJ: 03-01

7. ANS: C DIF: Moderate OBJ: 03-01

8. ANS: D DIF: Moderate OBJ: 03-01

MULTIPLE CHOICE
1. The revenue recognition concept

a. is in not in conflict with the cash method of accounting
b. determines when revenue is credited to a revenue account
c. states that revenue is not recorded until the cash is received
d. controls all revenue reporting for the cash basis of accounting
ANS: B DIF: Moderate OBJ: 03-01
2. The matching concept

a. addresses the relationship between the journal and the balance sheet
b. determines whether the normal balance of an account is a debit or credit
c. requires that the dollar amount of debits equal the dollar amount of credits on a trial
balance
d. determines that expenses related to revenue be reported at the same time the revenue is
reported
ANS: D DIF: Moderate OBJ: 03-01
3. Using accrual accounting, revenue is recorded and reported only

a. when cash is received without regard to when the services are rendered
b. when the services are rendered without regard to when cash is received
c. when cash is received at the time services are rendered
d. if cash is received after the services are rendered
4. Using accrual accounting, expenses are recorded and reported only

a. when they are incurred, whether or not cash is paid
b. when they are incurred and paid at the same time
c. if they are paid before they are incurred
d. if they are paid after they are incurred
ANS: A DIF: Moderate OBJ: 03-01
5. One of the accounting concepts upon which deferrals and accruals are based is
a. matching
b. cost
c. price-level adjustment
d. conservatism
6. If the effect of the debit portion of an adjusting entry is to increase the balance of an expense
account, which of the following describes the effect of the credit portion of the entry?
a. decreases the balance of an stockholders’ equity account
b. increases the balance of an liability account
c. increases the balance of an asset account
d. decreases the balance of an expense account
ANS: B DIF: Difficult OBJ: 03-01
7. If the effect of the credit portion of an adjusting entry is to increase the balance of a liability
account, which of the following describes the effect of the debit portion of the entry?
a. increases the balance of a contra asset account
b. increases the balance of an asset account
c. decreases the balance of an stockholders’ equity account
d. increases the balance of an expense account
ANS: D DIF: Difficult OBJ: 03-01
8. The primary difference between deferred and accrued expenses is that deferred expenses
have
a. been incurred and accrued expenses have not
b. not been incurred and accrued expenses have been incurred
c. been recorded and accrued expenses have not been incurred
d. not been recorded and accrued expenses have been incurred
9. Prior to the adjusting process, accrued expenses have

a. not yet been incurred, paid, or recorded
b. been incurred, not paid, but have been recorded
c. been incurred, not paid, and not recorded
d. been paid but have not yet been incurred
ANS: C DIF: Difficult OBJ: 03-01
10. Prior to the adjusting process, accrued revenue has

a. been earned and cash received
b. been earned and not recorded as revenue
c. not been earned but recorded as revenue
d. not been recorded as revenue but cash has been received
11. Deferred expenses have

a. not yet been recorded as expenses or paid
b. been recorded as expenses and paid
c. been incurred and paid
d. not yet been recorded as expenses
12. Deferred revenue is revenue that is

a. earned and the cash has been received
b. earned but the cash has not been received
c. not earned and the cash has not been received
d. not earned but the cash has been received
13. Adjusting entries are

a. the same as correcting entries
b. needed to bring accounts up to date and match revenue and expense
c. optional under generally accepted accounting principles
d. rarely needed in large companies
14. Adjusting entries affect at least one

a. income statement account and one balance sheet account
b. revenue and the dividend account
c. asset and one stockholders’ equity account
d. revenue and one capital stock account
15. The general term employed to indicate an expense that has not been paid and has not yet
been recognized in the accounts by a routine entry is
a. capital
b. deferral
c. accrual
d. inventory
ANS: C DIF: Easy OBJ: 03-01
16. Which of the following is not a characteristic of accrual basis of accounting?

a. Revenues and expenses are reported in the period in which cash is received or paid
b. Revenues are reported in the income statement in the period in which they are earned
c. Supports the matching concept
d. All are correct.
ANS: A DIF: Difficult OBJ: 03-01
17. Generally accepted accounting principles requires that companies use the ____ of
accounting.
a. cash basis
b. deferral basis
c. accrual basis
d. account basis
18. Which of the following supports the accrual basis of accounting?

a. revenue recognition concept
b. cash concept
c. matching concept
d. revenue recognition and matching concepts
19. The cash basis of accounting records revenues and expenses when the cash is exchanged
while the accrual basis of accounting
a. records revenues when they are earned and expenses when they are paid
b. records revenues and expenses when they are incurred.
c. records revenues when cash is received and expenses when they are incurred.
d. records revenues and expenses when the company needs to apply for a loan.
20. By matching revenues and expenses in the same period in which they incur
a. net income or loss will always be underestimated.
b. net income or loss will always be overestimated.
c. net income or loss will be properly reported on the income statement
d. net income or loss will not be determined.
21. All adjusting entries always involve

a. only income statement accounts.
b. only balance sheet accounts.
c. the cash account.
d. at least one income statement account and one balance sheet account.
22. Prepaid expenses are eventually expected to

a. become expenses when their future economic value expires.
b. become revenues when services are performed.
c. become expenses in the period when they are paid.
d. become revenues when the liability is no longer owed.
23. Which of the following is considered to be unearned revenue?

a. Concert tickets sold for tonight’s performance.
b. Concert tickets sold yesterday on credit.
c. Concert tickets that were not sold for the current performance.
d. Concert tickets sold for next month’s performance.
24. Which of the following is an example of accrued revenue?

a. Swimming pool cleaning that has been for three months in advance.
b. Swimming pool cleaning that has been provided but has not been billed or paid.
c. An agreement has been signed for swimming pool cleaning for the next three months.
d. Swimming pool cleaning that has been provided and paid on the same day.
25. Which of the following is considered to be an accrued expense?

a. A computer technician has installed the latest software updates and was paid on the same
day.
b. A computer technician has been paid in advance to install software updates as they
become available.
c. A computer technician has just signed an agreement with you regarding pricing for future
work.
d. A computer technician has installed the latest software updates, but you have not received
their invoice for payment.
26. Which account would normally not require an adjusting entry?

a. Wages Expense
b. Accounts Receivable
c. Accumulated Depreciation
d. Capital Stock
27. Which one of the accounts below would likely be included in an accrual adjusting entry?
a. Insurance Expense
b. Prepaid Rent
c. Interest Expense
d. Unearned Rent
ANS: C DIF: Moderate OBJ: 03-02
28. Which one of the following accounts below would likely be included in a deferral adjusting
entry?
a. Interest Revenue
b. Unearned Revenue
c. Salaries Payable
d. Accounts Receivable
29. The balance in the prepaid rent account before adjustment at the end of the year is $15,000,
which represents three months' rent paid on December 1. The adjusting entry required on
December 31 is
a. debit Rent Expense, $5,000; credit Prepaid Rent, $5,000
b. debit Prepaid Rent, $10,000; credit Rent Expense, $5,000
c. debit Rent Expense, $10,000; credit Prepaid Rent, $5,000
d. debit Prepaid Rent, $5,000; credit Rent Expense, $5,000
30. The balance in the office supplies account on June 1 was $5,200, supplies purchased during
June were $2,500, and the supplies on hand at June 30 were $2,000. The amount to be used
for the appropriate adjusting entry is
a. $4,500
b. $2,500
c. $9,700
d. $5,700
31. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid
insurance account balance before adjustment, $15,500, and unexpired amounts per analysis
of policies, $4,500?
a. debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500
b. debit Insurance Expense, $15,500; credit Prepaid Insurance, $15,500
c. debit Prepaid Insurance, $11,500; credit Insurance Expense, $11,500
d. debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,000
32. The entry to adjust for the cost of supplies used during the accounting period is
a. Supplies Expense, debit; Supplies, credit
b. Capital Stock, debit; Supplies, credit
c. Accounts Payable, debit; Supplies, credit
d. Supplies, debit; credit Capital Stock
33. A business pays weekly salaries of $20,000 on Friday for a five-day week ending on that
day. The adjusting entry necessary at the end of the fiscal period ending on Thursday is
a. debit Salaries Payable, $16,000; credit Cash, $16,000
b. debit Salary Expense, $16,000; credit Dividends, $16,000
c. debit Salary Expense, $16,000; credit Salaries Payable, $16,000
d. debit Drawing, $16,000; credit Cash, $16,000
34. The balance in the prepaid insurance account before adjustment at the end of the year is
$10,000. If the additional data for the adjusting entry is (1) "the amount of insurance expired
during the year is $8,500," as compared to additional data stating (2) "the amount of
unexpired insurance applicable to a future period is $1,500," for the adjusting entry:
a. the debit and credit amount for (1) would be the same as (2) but the accounts would be
different
b. the accounts for (1) would be the same as the accounts for (2) but the amounts would be
different
c. the accounts and amounts would be the same for both (1) and (2)
d. there is not enough information given to determine the correct accounts and amounts
35. The difference between the balance of a fixed asset account and the related accumulated
depreciation account is termed
a. historical cost
b. contra asset
c. book value
d. market value
36. The adjusting entry to record the depreciation of equipment for the fiscal period is
a. debit Depreciation Expense; credit Equipment
b. debit Depreciation Expense; credit Accumulated Depreciation
c. debit Accumulated Depreciation; credit Depreciation Expense
d. debit Equipment; credit Depreciation Expense
37. As time passes, fixed assets other than land lose their capacity to provide useful services. To
account for this decrease in usefulness, the cost of fixed assets is systematically allocated to
expense through a process called
a. equipment allocation
b. depreciation
c. accumulation
d. matching
ANS: B DIF: Easy OBJ: 03-02
38. The entry to adjust the accounts for wages accrued at the end of the accounting period is
a. Wages Payable, debit; Wages Income, credit
b. Wages Income, debit; Wages Payable, credit
c. Wages Payable, debit; Wages Expense, credit
d. Wages Expense, debit; Wages Payable, credit
39. The supplies account has a balance of $1,000 at the beginning of the year and was debited
during the year for $2,800, representing the total of supplies purchased during the year. If
$750 of supplies are on hand at the end of the year, the supplies expense to be reported on
the income statement for the year is
a. $750
b. $3,550
c. $3,800
d. $3,050
40. A company purchases a one-year insurance policy on June 1 for $840. The adjusting entry
on December 31 is
a. debit Insurance Expense, $350 and credit Prepaid Insurance, $350
b. debit Insurance Expense, $280 and credit Prepaid Insurance, $280
c. debit Insurance Expense, $490, and credit Prepaid Insurance, $490.
d. debit Prepaid Insurance, $720, and credit Cash, $720
41. If the prepaid rent account before adjustment at the end of the month has a debit balance of
$1,600, representing a payment made on the first day of the month, and if the monthly rent
was $800, the amount of prepaid rent that would appear on the balance sheet at the end of
the month, after adjustment, is
a. $800
b. $400
c. $2,400
d. $1,600
42. Depreciation Expense and Accumulated Depreciation are classified, respectively, as

a. expense, contra asset
b. asset, contra liability
c. revenue, asset
d. contra asset, expense
ANS: A DIF: Easy OBJ: 03-02
43. The type of account and normal balance of Accumulated Depreciation is

a. asset, credit
b. asset, debit
c. contra asset, credit
d. contra asset, debit
44. The type of account and normal balance of Unearned Rent is

a. revenue, credit
b. expense, debit
c. liability, credit
d. liability, debit
45. Data for an adjusting entry described as "accrued wages, $2,020" means to debit
a. Wages Expense and credit Wages Payable
b. Wages Payable and credit Wages Expense
c. Accounts Receivable and credit Wages Expense
d. Drawing and credit Wages Payable
46. Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the
adjusting entry is for the amount of supplies
a. that are in the ending balance
b. purchased
c. used
d. either used or remaining
47. If there is a balance in the prepaid rent account after adjusting entries are made, it represents
a(n)
a. deferral
b. accrual
c. revenue
d. liability
48. If there is a balance in the unearned subscriptions account after adjusting entries are made, it
represents a(n)
a. deferral
b. accrual
c. expense
d. revenue
49. The cost of office supplies to be used in future periods is ordinarily shown on the balance
sheet as a(n)
a. stockholders’ equity
b. asset
c. contra asset
d. liability
50. Which of the following is an example of a prepaid expense?

a. Supplies
c. Unearned Subscriptions
d. Unearned Fees
51. The unexpired insurance at the end of the fiscal period represents
a. an accrued asset
b. an accrued liability
c. an accrued expense
d. a deferred expense
ANS: D DIF: Easy OBJ: 03-02
52. Accrued revenues would appear on the balance sheet as

a. assets
b. liabilities
c. stockholders’ equity
d. prepaid expenses
53. Prepaid advertising, representing payment for the next quarter, would be reported on the
balance sheet as a(n)
a. asset
b. liability
c. contra asset
d. expense
54. Unearned rent, representing rent for the next six months' occupancy, would be reported on
the landlord's balance sheet as a(n)
a. asset
b. liability
c. capital stock
d. revenue
55. Accrued expenses are ordinarily reported on the balance sheet as

a. assets
b. liabilities
c. fixed assets
d. prepaid expenses
56. Fees receivable would appear on the balance sheet as a(n)

a. asset
b. liability
c. fixed asset
d. unearned revenue
57. The general term employed to indicate a delay of the recognition of an expense already paid
or of a revenue already received is
a. depreciation
b. deferral
c. accrual
d. inventory
58. The adjusting entry for rent earned that is currently recorded in the unearned rent account is
a. Unearned Rent, debit; Rent Revenue, credit
b. Rent Revenue, debit; Unearned Rent, credit
c. Unearned Rent, debit; Prepaid Rent, credit
d. Rent Expense, debit; Unearned Rent, credit
59. Which of the following pairs of accounts could not appear in the same adjusting entry?
a. Service Revenue and Unearned Revenue
b. Interest Income and Interest Expense
c. Rent Expense and Prepaid Rent
d. Salaries Payable and Salaries Expense
60. The unearned rent account has a balance of $40,000. If $3,000 of the $40,000 is unearned at
the end of the accounting period, the amount of the adjusting entry is
a. $3,000
b. $40,000
c. $37,000
d. $43,000
61. The following adjusting journal entry was found on page 4 of the journal. Select the best
explanation for the entry.
Unearned Revenue 4,500

Fees earned 4,500
????????????????
a. Record payment of fees earned

b. Record fees earned at the end of the month
c. Record fees that have not been earned at the end of the month
d. Record the payment of fees to be earned.
Supplies Expense 360

Supplies 360
????????????????
a. Adjust supplies inventory to actual

b. Record purchase of supplies
c. Adjust supplies expense
d. Record sale of supplies
Wages Expense 2,555

Wages Payable 2,555
????????????????
a. Record the payment of wages

b. Record wages to be paid this month
c. Record wages paid in advance
d. Record wages expense incurred and to be paid next month
64. What affect will this adjustment have on the accounting records?
Unearned Revenue 4,500

Fees earned 4,500
a. Increase net income

b. Increase revenues reported for the period
c. Decrease liabilities
d. All are true.
65. What affect will this adjusting journal entry have on the accounting records?
Supplies Expense 678

Supplies 678
a. Increase income
b. Decrease net income
c. Decrease expenses
d. Increase assets
66. What affect will the following adjusting journal entry have on the accounting records?
Depreciation Expense 1,500

Accumulated Depreciation 1,500
a. Increase net income

b. Increase revenues
c. Decrease expenses
d. Decrease net book value
67. How will the following adjusting journal entry affect the accounting equation?.
Unearned Subscriptions 12,000

Subscriptions earned 12,000
a. Increase assets, increase revenues

b. Increase liabilities, increase revenues
c. Decrease liabilities, increase revenues
d. Decrease liabilities, decrease revenues
68. Which of the following is not true regarding Depreciation?

a. Depreciation allocates the cost of a fixed asset over its estimated life.
b. Depreciation expense reflects the decrease in market value each year.
c. Depreciation is an allocation not a valuation method.
d. Depreciation expense does not measure changes in market value.
69. The account type and normal balance of Prepaid Expense is

a. revenue, credit
b. expense, debit
c. liability, credit
d. asset, debit
70. The account type and normal balance of Accumulated Depreciation is

a. revenue, credit
b. expense, debit
c. asset, credit
d. asset, debit
71. Which of the following is an example of an accrued expense?

a. Salary owed but not yet paid
b. Fees received but not yet earned
c. Supplies on hand
d. A two-year premium paid on a fire insurance policy
72. The net book value of a fixed asset is determined by

a. Original cost less accumulated depreciation
b. Original cost less depreciation expense
c. Original cost less accumulated depreciation plus depreciation expense
d. Original cost plus accumulated depreciation
73. The balance in the supplies account, before adjustment at the end of the year is $625. The
proper adjusting entry if the amount of supplies on hand at the end of the year is $325 would
be
a. debit Cash $325, credit Supplies $325
b. debit Supplies Expense $300, credit Supplies $300
c. debit Supplies Expense$325, credit Supplies $325
d. debit Supplies $300, credit Supplies Expense $300
74. The net income reported on the income statement is $90,000. However, adjusting entries
have not been made at the end of the period for supplies expense of $2,700 and accrued
salaries of $1,300. Net income, as corrected, is
a. $87,300
b. $90,000
c. $88,700
d. $86,000
75. At the end of the fiscal year, the usual adjusting entry to Prepaid Insurance to record expired
insurance was omitted. Which of the following statements is true?
a. Total assets at the end of the year will be understated.
b. Stockholders’ equity at the end of the year will be understated.
c. Net income for the year will be overstated.
d. Insurance Expense will be overstated.
76. At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was
omitted. Which of the following statements is true?
a. Total assets will be understated at the end of the current year.
b. The balance sheet and income statement will be misstated but the statement of retained
earnings will be correct for the current year.
c. Net income will be overstated for the current year.
d. Total liabilities and total assets will be understated.
77. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to
employees was omitted. Which of the following statements is true?
a. Salary Expense for the year was understated.
b. The total of the liabilities at the end of the year was overstated.
c. Net income for the year was understated.
d. Stockholders’ equity at the end of the year was understated.
78. The adjusting entry to adjust supplies was omitted at the end of the year. This would effect
the income statements by having
a. expenses understated and therefore net income overstated
b. revenues understated and therefore net income understated
c. expenses understated and therefore net income understated
d. expenses overstated and therefore net income understated
79. Which of the accounts below would appear on an adjusted trial balance but probably would
not appear on the trial balance?
a. Fees Earned
c. Unearned Fees
d. Depreciation Expense
80. Which of the accounting steps in the accounting process below would be completed last?
a. preparing the adjusted trial balance
b. posting
c. preparing the financial statements
d. journalizing
81. When is the adjusted trial balance prepared?

a. Before adjusting journal entries are posted
b. After adjusting journal entries are posted.
c. After the adjusting journal entries are journalized
d. Before the adjusting journal entries are journalized.
82. What is the purpose of the adjusted trial balance?

a. to verify that all of the adjusting entries have been posted
b. to verify that the net income <loss> is correctly reported
c. to verify that no adjusting journal entry has been omitted.
d. to verify that the debits and credits balance
EXERCISE/OTHER
1. Explain the difference between accrual basis accounting and cash basis accounting.
ANS:
Accrual basis accounting reports revenues and expenses in the period in which the event
happened regardless is cash was exchanged at the time. Cash basis accounting reports revenues
and expenses when cash is received or paid.
DIF: Easy OBJ: 03-01
2. Indicate with a Yes or No whether or not each of the following accounts normally requires
an adjusting entry.
1. Cash
2. Prepaid Expenses
3. Depreciation Expense
4. Accounts Payable
5. Accumulated Depreciation
6. Equipment
ANS:
1. No
2. Yes
3. Yes
4. Yes
5. Yes
6. No
NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 3-1
3. Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued
expense, or (4) accrued revenue.
(a) Fees received but not yet earned.

(b) Fees earned but not yet received.
(c) Accumulated depreciation.
(d) Property tax accrual
ANS:
(a) unearned revenue
(b) accrued revenue
(c) prepaid expense
(d) accrued expense
4. Employees at M-Corp earn $500 per day. They are paid each Friday for a five-day
workweek. The adjusting entry on December 31, 2007 assuming the year ends on Monday
would be:
Date Description Post Debit Credit
Ref
ANS:

Ref
12/31/05 Wages Expense 500.00
Wages Payable 500.00
DIF: Moderate OBJ: 03-02

5. An insurance policy was purchased on April 1, 2007 for $2,400.00. At the end of the year,
$800 was deemed expired. The adjusting entry on December 31, 2007 would be:

Ref
ANS:

Ref
12/31/05 Insurance Expense 800.00
Prepaid Insurance 800.00

6. Depreciation on Office Equipment is $4,700.00. The adjusting entry on December 31, 2007
would be:

Ref
ANS:

Ref
12/31/05 Depreciation Expense 4,700.00
Accumulated
Depreciation-
Office Equipment 4,700.00

7. A one-year insurance policy was purchased on April 1, 2007 for $2,400.00. The adjusting
entry on December 31, 2007 would be:
Ref
ANS:

Ref
12/31/07 Insurance Expense 1,800.00
Prepaid Insurance 1,800.00

8. There was a $1,500 balance in the supplies account at the beginning of the period. During
the period, the supplies account was increased by $3,000 for supplies purchased. At the end
of the period before adjustment, $550 of supplies were on hand. Journalize the necessary
adjusting entry.
ANS:
Supplies Expense 3,950
Supplies 3,950

9. On January 1st NetSolutions purchased two year liability insurance policy for $30,000.00
paying cash at the time of purchase. This value was recorded to Prepaid Insurance. In the
space below write the adjusting entry for January 31st.
ANS:
Jan 31 Insurance Expense 1,250.00
Prepaid Insurance 1,250.00
Adjusting entry - Insurance exp ($30,000.00 / 24
months)

10. The company records depreciation to Office Equipment and Production Equipment.
Depreciation for the period ending December 31st are $2,100.00 for Office Equipment and
$3,950.00 for Production Equipment. Record these declarations to separate expense and
accumulated depreciation accounts for maximum detail.
ANS:
Dec 31st Depreciation Expense - Office Equipment 2,100.00
Accumulated Depreciation - Office Equipment 2,100.00
Dec 31st Depreciation Expense - Production Equipment 3,950.00

Accumulated Depreciation - Production Equipment 3,950.00
By utilizing separate expense accounts greater analysis can be accomplished on the cost of
production and the cost of general and administrative issues.
11. On May 1 a business paid $4,800 for twelve month liability insurance policy. Then, on June
1 the same business entered into a two year rental contract for equipment for $12,000.
Determine the following amounts:
(a) prepaid insurance as of May 31
(b) insurance expense for the month of June
(c) prepaid equipment rental as of June 30
(d) equipment rent expense for the month of June
ANS:
(a) $4,400
(b) $400
(c) $11,500
(d) $500

12. In the year 2007, the company is estimating its property tax to be $3,600 for the year.
(a) How much should the company accrue each month for property taxes?
(b) What is the amount that the Property Tax Accrual account will have at the end
of July 2007?
(c) Prepare the adjusting journal entry for the month of October 2007.
ANS:
(a) $300
(b) $2,100
(c) Property Tax Expense 300
Property Tax Accrual 300
Record Property Tax Accrual for the month of October

13. On January 1st NetSolutions prepays the year’s rent, $18,000.00 to its landlord. In the space
below write the journal entry for the payment of the annual rent utilizing a asset account.
ANS:
Jan 1 Prepaid Rent 18,000.00
Cash 18,000.00
Prepaid annual rent and capitalized the value.

14. On December 1, 2007, $7,500 was received for services to be performed from December 1,
2007 until May 31, 2008. Make the December 31, 2007 adjusting journal entry if the
Unearned Fees at the end of December 2007 was $4,200.
ANS:
Unearned Fees 3,300
Fees Earned 3,300

15. On December 31st the accounts of NetSolutions show $1,850.00 in the Office Supplies
account. An inspection of the supplies locker shows only $340.00 worth of supplies. Write
the adjusting entry.
ANS:
Dec 31st Office Supplies Expense 1,510.00
Office Supplies 1,510.00

16. Depreciation on equipment for the year is $2400.

(a) Record the journal entry if the company adjusts its account once a year.
(b) Record the journal entry if the company adjusts its account on a monthly basis.
ANS:
(a)
Depreciation Expense 2400
Accumulated Depreciation-Equipment 2400
(b)
Depreciation Expense 200
Accumulated Depreciation-Equipment 200

17. The company determines that the interest expense on a note payable for period ending
December 31st is $655.00. This amount is payable on January 1st. Write the two journal
entries associated with this information.
ANS:
Dec 31st Interest Expense 655.00
Interest Payable 655.00
Jan 1st Interest Payable 655.00

Cash 655.00

18. On January 2nd NetSolutions prepaid $18,000.00 rent for the year. Write the adjusting entry
for rent expense on January 31st in the space below.
ANS:
Jan 31 Rent Expense 1,500.00
Prepaid Rent 1,500.00
Adjusting entry - Rent - $18,000.00 / 12 months.

19. The prepaid insurance account had a beginning balance of $7,900 and was debited for
$4,900 of premiums paid during the year. Journalize the adjusting entry required at the end
of the year assuming the amount of unexpired insurance related to future periods is $5,600.
ANS:
Insurance Expense 7,200
Prepaid Insurance 7,200
Insurance expired.

20. The balance in the unearned fees account, before adjustment at the end of the year, is
$12,300. Journalize the adjusting entry required if the amount of unearned fees at the end of
the year is $3,800.
ANS:
Unearned Fees 8,500
Fees Earned 8,500

21. At the end of the current year, $8,800 fees have been earned but have not been billed to
clients. Journalize the adjusting entry to record the accrued fees.
ANS:
Accounts Receivable 8,800
Fees Earned 8,800

22. Roller Skates Company pays weekly salaries of $15,000 on Friday for a five-day week
ending on that day. Journalize the necessary adjusting entry at the end of the accounting
period, assuming that the period ends on Tuesday.
ANS:
Salaries Expense 6,000
Salaries Payable 6,000

23. The estimated amount of depreciation on equipment for the current year is $6,700.
Journalize the adjusting entry to record the depreciation.
ANS:
Depreciation on equipment

24. At January 31, the end of the first month of the year, the usual adjusting entry transferring
expired insurance to an expense account is omitted. Which items will be incorrectly stated,
because of the error, on (a) the income statement for January and (b) the balance sheet as of
January 31? Also indicate whether the items in error will be overstated or understated.
ANS:
(a) Insurance expense (or expenses) will be understated. Net income will be
overstated.
(b) Prepaid insurance (or assets) will be overstated. Stockholders’ equity will be
overstated.

25. At the end of June, the first month of the year, the usual adjusting entry transferring rent
earned to a revenue account from the unearned rent account was omitted. Indicate which
items will be incorrectly stated, because of the error, on (a) the income statement for June
and (b) the balance sheet as of June 30. Also indicate whether the items in error will be
overstated or understated.
ANS:
(a) Rent revenue (or revenues) will be understated. Net income will be understated.
(b) Retained earnings at the end of the period will be understated. Unearned rent (or
liabilities) will be overstated.
DIF: Difficult OBJ: 03-03

26. Salaries of $3,500 are paid for a five-day week on Friday. The month ended on Tuesday.
Prepare the adjusting journal entry.
ANS:
Salaries Expense 1,400

27. Accrued salaries of $825 owed to employees for December 29, 30, and 31 are not taken into
consideration in preparing the financial statements for the year ended December 31. Indicate
which items will be erroneously stated, because of the error, on (a) the income statement for
the year and (b) the balance sheet as of December 31. Also indicate whether the items in
error will be overstated or understated.
ANS:
(a) Salary expense (or expenses) will be understated. Net income will be
overstated.
(b) Salaries payable (or liabilities) will be understated. Retained earnings will be
overstated.

28. On January 1st, NetSolutions had a debit balance of $1,250.00 in the Office Supplies
account. During the month, NetSolutions purchased $245.00 and $610.00 of office supplies
and journalized them to the Office Supplies asset account upon purchasing. On January 31st
an inspection of the office supplies cabinet shows that only $810.00 of Office Supplies
remains in the locker. Write the January 31st adjusting entry for Office Supplies in the space
below.
ANS:
Jan 31 Office Supplies Expense 1,295.00
Adjusting entry - Office Supplies
Beginning balance $1,250.00

Plus purchases $245.00
610.00 855.00
Available 2,105.00
Less ending balance 810.00
Period expense $1,295.00

29. For the year ending December 31, 2008, Medical Co. mistakenly omitted adjusting entries
for (1) $7,800 of unearned revenue that was earned, (2) earned revenue that was not billed of
$9,500, and (3) accrued wages of $5,000. Indicate the combined effect of the errors on (a)
revenues, (b) expenses, and (c) net income for 2008.
ANS:
(a) Revenues were understated by $17,300.
(b) Expenses were understated by $5,000
(c) Net income was understated by $12,300.
30. For each of the following errors, considered individually, indicate whether the error would
cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted
trial balance total to be unequal, indicate whether the debit or credit total is higher and by
how much.
(a) The adjustment for unearned fees of $2,560 was journalized as a debit to
Accounts Payable for $2,560 and a credit to Fees earned of $2,560.
(b) The adjustment for supplies expense of $476 was journalized as a debit to
Supplies Expense for $746 and a credit to Supplies for $476.
ANS:
(a) The totals are equal even though the debit should have been made to Unearned
Fees instead of Accounts Payable.
(b) The debit total exceeds the credit total by $270.

PROBLEM
1. Explain the difference between
(a) Accrued revenues and unearned revenues.

(b) Accrued expenses and prepaid expenses.
(c) Give an example of each.
ANS:
(a) Accrued revenues are services that have been provided but not yet billed and
the cash payment for these services has not been received. Unearned revenues
are payments have been received for services to be provided in the future.
(b) Accrued expenses are expenses that have incurred but have not been paid or
recorded in the accounting records. Prepaid expenses are expenses that have
been paid for and have economic benefits in future accounting periods.
(c) Accrued revenues - (Varied examples will be given by students)
Unearned revenues - (Varied examples will be given by students)
Accrued expenses - (Varied examples will be given by students)
Prepaid expenses - (Varied examples will be given by students)

2. For each of the following, journalize the necessary adjusting entry:
(a) A business pays weekly salaries of $15,000 on Friday for a five-day week
ending on that day. Journalize the necessary adjusting entry at the end of the
fiscal period, assuming that the fiscal period ends (1) on Wednesday, (2) on
Thursday.
(b) The balance in the prepaid insurance account before adjustment at the end of
the year is $14,000. Journalize the adjusting entry required under each of the
following alternatives: (1) the amount of insurance expired during the year is
$4,500, (2) the amount of unexpired insurance applicable to a future period is
$1,500.
(c) On July 1 of the current year, a business pays $36,000 to the city for license
taxes for the coming fiscal year. The same business is also required to pay an
annual property tax at the end of the year. The estimated amount of the current
year's property tax allocable to July is $3,200. (1) Journalize the two adjusting
entries required to bring the accounts affected by the taxes up to date as of
July 31. (2) What is the amount of tax expense for July?
(d) The estimated depreciation on equipment for the year is $24,000.
ANS:
(a) (1) Salary Expense 9,000
(2) Salary Expense 12,000

(b) (1) Insurance Expense 4,500

(2) Insurance Expense 12,500

(c) (1) Taxes Expense 3,000

Prepaid License Taxes 3,000
Taxes Expense 3,200

Property Taxes Payable 3,200
(2) $6,200 ($3,000 + $3,200)
(d) Depreciation Expense 24,000

Accumulated Depreciation - Equipment 24,000

3. On November 1st clients of NetSolutions prepaid $2,250.00 for services to be provided in

the future at a rate of $50.00 per hour.
(a) Journalize the receipt of this cash.
(b) As of November 30th NetSolutions shows that 15 hours of services have been
provided on this agreement. Journalize the recognition of this determination.
(c) Determine the value of unearned fees obligation in hours and dollars.
ANS:
(a) Nov 1st Cash 2,250.00
Unearned Service Fees 2,250.00
(b) Nov 30th Unearned Service Fees 750.00

Service Fees 750.00
(c) The original prepaid fees - $2,250.00 / $50.00 per hour = 45 hours
November service fees earned 750.00 15 hours
Balance of unearned service fees $1,500.00 30 hours

4. For each of the following, journalize the adjusting entry on January 31st.
(a) The company incurs a Payroll Payable of $450.00 per weekday of operations.
The Mondays of January are the 3rd, the 10th, the 17th, the 24th, and the 31st.
Paydays are every other Friday with paydays of January 7th & 21st and
February 4th for the two weeks ending that date. The Friday, January 21st
payday is complete and paid with no continuing forward payroll liability. Write
the adjusting entry for January 31st in the space below:
(b) The company pays payroll obligations on February 4th. No reversing entries
have been made. Record the payroll obligations of February and write the
journal entry to pay payroll on February 4th in the space below:
(c) The company has fixed assets that scheduled depreciation is $45,000 annually.
Write the adjusting entry to recognize the monthly depreciation for January in
the space below:
(d) The company’s Office Supplies account shows a debit balance of $2,625.00.
An inspection of the office supplies locker on January 31st reveals only
$965.00 worth of supplies. Write the adjusting entry for Office Supplies in the
space below:
ANS:
(a) Jan 31 Payroll Expense 2,700.00
Payroll Payable 2,700.00
Adjusting Entry - Payroll - $450.00  6 days
Monday, January 24th through Friday January 28th - 5 days  $450.00 =
$2,250.00
Monday, January 31st - 1 day  $450 = $450.00
Payroll Payable for January 24 through January 31 = $2,250.00 + $450.00 =
$2,700.00
(b) Feb 4 Payroll Expense 1,800.00

Payroll Payable 2,700.00
Cash 4,500.00
Payroll paid on Feb 4 with Jan
obligations
(c) Jan 31 Depreciation Expense 3,750.00

Accumulated Depreciation 3,750.00
Adjusting Entry - Depreciation
Annual depreciation $45,000.00

Months in a year 12
Monthly depreciation $3,750.00
(d) Jan 31 Office Supplies Expense 1,660.00

Adjusting Entry Office Supplies
Account debit balance $2,625.00
Less locker contents $965.00
Period expense $1,660.00

5. On December 15th NetSolutions contacts an independent contractor to help with a project.

The contractor completes the project on December 29th and submits an invoice for
$2,750.00 which requires payment on January 15th.
(a) Write all of the journal entries necessary for this series of events.
(b) Explain, briefly, why you wrote this/these journal entries.
ANS:
(a) Dec 29th Professional Services Expense 2,750.00
Accounts Payable 2,750.00
Jan 15th Accounts Payable 2,750.00

Cash 2,750.00
(b) The first journal entry is required to place the cost or expense of the
independent contractor to the correct period for which the services were
received. This journal entry created an expense in December’s Income
Statement and a liability on December’s Balance Sheet. The second was to pay
the contractor when the payment was due. This removed the liability by
resolving it with a cash payment. This journal entry did not affect January’s
income statement.

6. On November 15th NetSolutions purchases an advertising campaign for the month of

December. NetSolutions paid cash of $1,825.00 to attain the best pricing available.
(a) Write all necessary journal entries for this situation through December 31st.
(b) Explain, briefly, why you wrote this/these journal entries.
ANS:
(a) Nov 15th Prepaid Advertising 1,825.00
Cash 1,825.00
Dec 31st Advertising Expense 1,825.00

Prepaid Advertising 1,825.00
(b) Under the matching concept, charging the Advertising Expense account in
November would have placed that cost into the wrong period since the
campaign was to run in December. The correct journal entry creates an asset,
Prepaid Advertising, for November. The December 31st entry recognizes the
period expense and eliminates the prepaid asset.

7. On January 2nd Reading Delight Monthly receives a check for $24 from a subscriber that is
purchasing a 12 month subscription. The January issue will be mailed on January 15th.
Write the two January journal entries and (briefly) justify your use of dates.
ANS:
Jan 2nd Cash 24.00
Unearned Subscriptions 24.00
Jan 15th, date obligation is actually met or Jan 31st as an adjusting entry
Unearned Subscriptions 2.00
Subscriptions Revenues 2.00
The second entry can be accomplished at one of two points - as a recurring, adjusting entry dated
January 31st or on January 15th when the monthly obligation is made. Discipline must be
exercised to preclude making an entry on January 15th and January 31st.
8. Journalize in a two column journal the adjusting entries required at December 31, 2008.
Omit explanations.
1. Fees accrued but unbilled are $6,000.

2. The supplies account balance on December 31 is $6,200. The supplies on hand are
$1,150.
3. Wages accrued but not paid are $4,600.
4. Depreciation of office equipment is $3,200.
5. Rent expired during year, $9,300.
Ref
ANS:
Ref
Dec 31 Accounts Receivable 6,000
Revenues 6,000
Dec 31 Supplies Expense 5,050

Supplies 5,050
Dec 31 Wages Expense 4,600

Wages Payable 4,600
Dec 31 Depreciation Expense 3,200

Dec 31 Rent Expense 9,300

Prepaid Rent 9,300
9. Prepare the following adjustments in good journal entry format.
(a) The beginning balance of the Supplies account was $315. During the month the
company bought additional supplies in the amount of $830. At the end of the
month a physical inventory showed $568 of unused supplies.
(b) The company has a Note Payable in the amount of $10,000 at an APR of 12%.
The note will be paid at the end of 6 months. The interest expense for the
month needs to be recorded.
(c) There are two employees at the North Park Store. One is a manager that gets
paid on the 15th of every month for his work during the first part of the month
and on the 1st of the following month for the second part of the month. His
monthly salary is $2,500. The other employee is an administrative assistant
who gets a week pay of $450. The last day of the month fell on Thursday.
(d) The unearned revenue account shows a balance of $35,000. According to the
manager 60% of that amount has been earned.
(e) At the end of the month $8,400 of services had been performed but not yet
billed.
ANS:
(a) Supplies Expense 577
Supplies 577
(b) Interest Expense 100
Interest Payable 100
(c) Wages and Salary Expense 1,610
Wages and Salary Payable 1,610
(($2,500 /2)+($450/5*4))
(d) Unearned Revenues 21,000
Fees Earned 21,000
($35,000 * 60%)
(e) Accounts Receivable 8,400
Fees Earned 8,400

10. At the end of the fiscal year, the following adjusting entries were omitted:
(a) No adjusting entry was made to transfer the $2,500 of prepaid insurance
from the asset account to the expense account.
(b) No adjusting entry was made to record accrued fees of $750 for services
provided to customers.
Assuming that financial statements are prepared before the errors are discovered, indicate
the effect of each error, considered individually, by inserting the dollar amount in the
appropriate spaces. Insert "0" if the error does not affect the item.
Error (a) Error (b)

Over- Under- Over- Under-
stated stated stated stated
(1) Assets at December 31
would be $ $ $ $
(2) Liabilities at Dec. 31

would be $ $ $ $
(3) Net income for the

year would be $ $ $ $
(4) Retained earnings at

Dec. 31 would be $ $ $ $
ANS:
Error (a) Error (b)
Over- Under- Over- Under-
stated stated stated stated
(1) Assets at December 31
would be $2,500 $ -0- $ -0- $750
(2) Liabilities at Dec. 31

would be $ -0- $ -0- $ -0- $ -0-
(3) Net income for the

year would be $2,500 $ -0- $ -0- $750
(4) Retained earnings at

Dec. 31 would be $2,500 $ -0- $ -0- $750

11. On June 30, a business estimates depreciation on equipment used during the first year of
operations to be $1,500. (a) Journalize the adjusting entry required as of June 30. (b) If the
adjusting entry in (a) were omitted, which items would be erroneously stated on (1) the
income statement for the year and (2) the balance sheet as of June 30?
ANS:
(a) Depreciation Expense 1,500
Accumulated Depreciation - Equipment 1,500
(b) (1) Depreciation expense would be understated. Net income would be

overstated.
(2) Accumulated depreciation would be understated, and total assets would be
overstated. Retained earnings would be overstated.

12. Journalize the six entries that adjust the accounts at December 31. One of the accounts was
affected by two different adjusting entries.
Unadjusted Adjusted
Trial Balance Trial Balance
Cash 3,000 3,000
Accounts Receivable 30,000 30,500
Supplies 1,700 100
Prepaid Insurance 2,000 400
Equipment 9,000 9,000
Wages Payable 4,000
Unearned Fees 6,000 1,500
Capital Stock 20,000 20,000
Fees Earned 62,000 67,000
Wages Expense 42,300 46,300
Total 88,000 88,000 94,000 94,000
ANS:
Accounts Receivable 500
Fees Earned 500

Supplies 1,600


Unearned Fees 4,500

Fees Earned 4,500
Wages Expense 4,000

Wages Payable 4,000
DIF: Difficult OBJ: 03-02 | 03-04


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Chapter 3

The Adjusting Process

Obj 1 Describe the nature of the adjusting process.

Chapter 3—The Adjusting Process

3. Generally accepted accounting principles require accrual-basis accounting.

7. Prepaid Rent is a deferred expense.

8. An example of deferred revenue is Unearned Rent.

16. The updating of accounts is called the adjusting process.

18. Adjusting entries affect only expense and asset accounts.

25. An unearned revenue is a liability.

26. The systematic allocation of land's cost to expense is called depreciation.

29. Accumulated Depreciation accounts are liability accounts.

30. Accumulated Depreciation is reported on the income sheet.

Match these type of accounts with the following business transactions.

1. Services provided by an attorney that have not been recorded.

1. ANS: D DIF: Moderate OBJ: 03-01

2. ANS: A DIF: Moderate OBJ: 03-01

3. ANS: C DIF: Moderate OBJ: 03-01

4. ANS: B DIF: Moderate OBJ: 03-01

5. ANS: B DIF: Moderate OBJ: 03-01

6. ANS: A DIF: Moderate OBJ: 03-01

7. ANS: C DIF: Moderate OBJ: 03-01

8. ANS: D DIF: Moderate OBJ: 03-01

1. The revenue recognition concept

2. The matching concept

3. Using accrual accounting, revenue is recorded and reported only

4. Using accrual accounting, expenses are recorded and reported only

9. Prior to the adjusting process, accrued expenses have

10. Prior to the adjusting process, accrued revenue has

11. Deferred expenses have

12. Deferred revenue is revenue that is

13. Adjusting entries are

14. Adjusting entries affect at least one

16. Which of the following is not a characteristic of accrual basis of accounting?

18. Which of the following supports the accrual basis of accounting?

21. All adjusting entries always involve

22. Prepaid expenses are eventually expected to

23. Which of the following is considered to be unearned revenue?

24. Which of the following is an example of accrued revenue?

25. Which of the following is considered to be an accrued expense?

26. Which account would normally not require an adjusting entry?

42. Depreciation Expense and Accumulated Depreciation are classified, respectively, as

43. The type of account and normal balance of Accumulated Depreciation is

44. The type of account and normal balance of Unearned Rent is

50. Which of the following is an example of a prepaid expense?

52. Accrued revenues would appear on the balance sheet as

55. Accrued expenses are ordinarily reported on the balance sheet as

56. Fees receivable would appear on the balance sheet as a(n)

Unearned Revenue 4,500

a. Record payment of fees earned

Supplies Expense 360

a. Adjust supplies inventory to actual

Wages Expense 2,555

a. Record the payment of wages

Unearned Revenue 4,500

a. Increase net income

Supplies Expense 678