Adjusting Entries
Hard Test
Hard Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
a. Interest earned and collected
b. Wages incurred and not yet paid
c. Insurance paid before use
d. Rent paid during the period it is used
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a. interest receivable
b. prepaid rent
c. sales
d. wages payable
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equal
a. the adjustment made to property expense
b. the book value of property, plant & equipment
c. depreciation expense for the current year
d. depreciation expense at the beginning of the year
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a. $18,000
b. $19,000
c. $ 21,000
d. $16,000
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a. revenues are earned and collected
b. revenues are collected prior to being earned
c. wages are incurred and not paid
d. a long-term asset is used
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accounting equation as follows:
Assets Liabilities Owner’s Equity
a. no effect increase decrease
b. increase no effect increase
c. decrease increase no effect
d. increase decrease no effect
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a. deferral
b. accrual
c. payable
d. receivable
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a. only include the cost of the current period
b. include the cost incurred since the prepayment was made
c. increase an asset and decrease an expense
d. both a. & c.
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a. the company paid for the service incurred this period in the prior period
b. the company paid for the service in the current period and has not been provided the service
c. the company used the asset in the period payment was made
d. the company will use the asset beginning next period
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a. assets will be understated and expenses will be understated
b. assets will be overstated and expenses will be overstated
c. assets will be overstated and expenses will be understated
d. expenses will be understated and liabilities will be understated
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a. Prepaid Insurance
b. Notes Receivable
c. Notes Payable
d. Property, Plant, & Equipment
e. Accounts Receivable
f. Supplies
g. Government tax
h. Investment in Bonds
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Using an asset is an expense. The expense must be recorded in the period it is used not the period it is paid.
b. Interest receivable – debit and Interest revenue – credit
Notes receivable is recorded when the company provides money in exchange for earning interest. A receivable is recorded if the cash for interest has not yet been collected. If cash is collected, not adjustment is necessary because the revenue is recorded when the cash is collected.
You must use the account interest receivable because notes receivable is for the principle only
c. Interest expense – debit and Interest payable – credit
Notes payable is recorded when the company borrows money in exchange for paying interest. The service provided is the use of the money which is an expense called interest expense. When the expense has not yet been paid, it is owed, and the liability must also be recorded.
d. Depreciation expense – debit and Accumulated Depreciation – credit
Using a long-term asset is an expense called depreciation expense. Any time a company is using long term assets to produce revenue they must make the adjustment to record depreciation expense. Accumulated depreciation is always the credit.
e. Sales or Service Revenue – credit
This adjustment must be made when the company has provided the goods or services and it has not yet recorded this in the accounting records. The entry to record the revenue is usually recorded automatically in the accounting records when the goods are shipped, however, if it does not get recorded for some reason, you must make an adjustment. The credit to service revenue usually must be made because you forgot to invoice a customer for services performed.
f. Supplies expense
Using an asset is an expense. As supplies are used during the period nothing is recorded because cash is not paid as they are used. An adjustment must be made to show what is used during this period.
g. Income Tax expense – debit and
Income Tax payable – credit
Taxes are accessed as income is earned and paid at a later date.
The expense must be recorded in the same period the revenues are earned.
h. Interest receivable – debit and
Interest Revenue – credit
Investments in bonds are made for the purpose of earning interest from excess cash. The earnings process is revenue. If the revenue has not yet been collected an entry to record the revenue must be made and a receivable is also recorded.
a. Rent Expense
Prepaid Rent Expense
b. Supplies
Supplies Expense
c. Revenue
Unearned Revenue
d. Interest Expense
Interest Payable
e. Depreciation Expense
Accumulated Depreciation
f. Accounts Receivable
Service Fees
g. Interest Receivable
Interest Revenue
h. Rent Receivable
Rent Revenue
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Prepaid Rent Expense
Rent was paid for prior to using the facility or equipment. As time passes and the service is provided an expense must be recorded and the asset decreased because future benefit is less.
b. Supplies
Supplies Expense
Supplies were purchased during the period and recorded as an expense assuming all supplies would be used during the period. At the end of the period it was determined some supplies were still left. The expense must be reduced for the supplies not yet used and the additional asset the company still has must be recorded. In this case, the company recorded too much expense and must take some back for the asset not yet used.
c. Revenue
Unearned Revenue
Revenues were recorded when cash was received assuming the revenues would be earned by the end of the period. Some were not yet earned this period and must be taken out of revenues and recorded as unearned revenues.
d. Interest Expense
Interest Payable
The company has a note payable that incurs interest. The amount incurred during this period that has not been paid must be recorded. The amount is determined by principle x rate x time.
e. Depreciation Expense
Accumulated Depreciation
The company is using long term assets (P/P/E) to produce revenue. The expense must be recorded in the same period the revenue is recorded (matching).
f. Accounts Receivable
Service Fees
A service was provided to a customer and the company forgot to invoice the customer. This adjustment is recorded when it is discovered that a service was provided and not yet recorded.
g. Interest Receivable
Interest Revenue
The company loaned money to another party and is charging interest for the use of the money. Interest is earned which is a revenue that must be recorded and a receivable is recorded when the cash has not yet been collected.
h. Rent Receivable
Rent Revenue
The company is providing the use of an asset to another company and the service has been provided and the other company has not yet paid.
Accounts | Debit | Credit |
Cash | 15,000 | |
Accounts Receivable | 35,000 | |
Supplies | 12,000 | |
Prepaid Insurance | 8,000 | |
Equipment | 82,000 | |
Accumulated Deprec. | 20,000 | |
Note Payable | 10,000 | |
Unearned Revenues | 6,000 | |
Capital Stock | 1,000 | |
Retained Earnings (1/1) | 94,000 | |
Sales | 42,000 | |
Salary Expense | 4,000 | |
Supplies Expense | 12,000 | |
Loss on Sales of Equipment | 10,000 | |
Gain on Sale of Investments | 5,000 |
Additional Information, not yet recorded:
a. Supplies on hand at year end totaled $18,000
b. Unexpired prepaid insurance at the end of the year totaled $4,000.
c. The cost of using the equipment totaled $10,000 for year.
d. The note payable has an interest rate of 8%. The note was signed on September 1st of the current year
e. Salaries expense, unpaid and unrecorded, totaled $3,000.
f. Revenues unearned total $1,000 at year end.
Prepare all required adjusting journal entries for this year.
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Supplies Expense 6,000
The asset supplies must equal what the company really has. The account shows $12,000 so another $6,000 must be added to get to the $18,000 the company really has. Not enough assets means too much expense was recorded and the expense must be decreased.
b. Insurance Expense 4,000
Prepaid Insurance 4,000
The balance in the asset prepaid insurance must be the amount that the company still has paid ahead of time. This is $4,000, so the balance of $8,000 must be decreased by $4,000 to get to the $4,000 left. The amount used this period is also an expense. Using an asset always is an expense.
c. Depreciation Expense 10,000
Accumulated Depreciation 10,000
There is not amount for depreciation expense yet so this must be recorded.
The company has P/P/E so they will have an adjustment for depreciation.
d. Interest Expense 267
Interest Payable 267
interest incurred is calculated: principle x rate x time = interest expense
10,000 x .08 x 4/12 = $266.67 round to $267
You know no interest has been paid this period yet because there is no balance for interest expense yet. You must record the entire amount incurred this period.
e. Salaries Expense 3,000
Salaries Payable 3,000
Incurred means an expense occurred when the service was provided to the company. This expense must be recorded in the period incurred; you can not wait to record the expense when it is paid later. The unadjusted salary expense amount of $4,000 has been incurred and paid and you will must add to the expense the other $3,000 incurred that has not yet been paid.
f. Unearned revenues 5,000
Revenues 5,000
The current balance in unearned revenues is 6,000 and this must be 1,000, the amount that is still owed. To get the balance in unearned revenue to $1,000 that you now owe you must decrease unearned revenues by $5,000. Revenue that is no longer unearned is earned and revenue must also be increased.