Adjusting Entries
Medium Test
Medium Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
a. make debits equal to credits
b. ensure the financial statements reflect all economic events that happened during the period
c. make expenses equal revenues in the same period
d. make sure all cash paid or collected is recorded
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a. selling inventory on account
b. having supplies on hand
c. paying for rent prior to use
d. paying an expense in the period following the period incurred
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a. increase a revenue
b. increase a liability
c. increase an asset
d. increase owner’s equity
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a. decrease an expense
b. increase a liability
c. increase an asset
d. decrease owner’s equity
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a. debit supplies for $615
b. debit supplies expense for $615
c. credit supplies for $295
d. credit supplies expense for $295
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a. debit sales and credit allowance for uncollectible accounts
b. debit bad debt expense and credit accounts receivable
c. debit bad debt expense and credit allowance for uncollectible accounts
d. debit allowance for uncollectible accounts and credit bad debt expense
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a. the service paid for in the previous period is used
b. the service is paid for
c. the service is provided to the customer
d. never
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a. debit to a revenue
b. debit to an expense
c. credit to a revenue
d. debit to an asset
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a. a credit to revenue
b. a debit to unearned revenue
c. a credit to unearned revenue
d. a credit to prepaid asset
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a. a debit to supplies
b. a credit to supplies
c. a credit to supplies expense
d. no adjustment is necessary
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a. Interest receivable
b. Interest expense
c. Depreciation expense
d. Supplies
e. Bad debt expense
f. Sales
g. Prepaid rent
h. Insurance expense
i. Salaries expense
j. Taxes payable
k. Unearned revenue
l. Cash
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b. interest payable – used when interest has been incurred and not yet paid
c. accumulated depreciation – used when a long term asset has been used
d. supplies expense – used when the asset supplies is used up and you have less than is currently recorded the supplies account
e. allowance for uncollectible accounts – used when the company expects that not all amounts owed from customers will be collected.
f. accounts receivable – used when goods are provided and not yet recorded
g. rent expense – used when time goes by and the service of using the facility has been provided
h. prepaid insurance – used when time goes by and the service of insurance coverage has been provided
i. salaries payable – use when the employees work and have not yet been paid
j. tax expense – use when you compute the amount you owe the government for taxes
k. revenue – use when the amount collected from the customer is more than the amount earned
l. never use the cash account in an adjusting journal entry. Adjustments are made to revenue or expense accounts when cash collected or paid occurs in a different period than the current period.
a. On June 1, of the current year a cash payment of $4,200 was paid for a two-year policy for insurance coverage. The account “insurance expense” was debited when the payment was made.
b. The “supplies” account had a balance of $3,400 at the beginning of the period. Supplies in the amount of $6,500 were purchased and recorded in the “supplies expense” account. At the end of the year a count was done and it was determined that $2,200 of supplies remained on hand.
c. The company has a balance of $45,800 in the “accounts receivable” account on December 31st. Work was performed this period and the customer has not been invoiced for $13,000.
d. The company borrowed $200,000, 9% interest, on April 1st, of the current year. Interest is paid each January 1st .
e. Three years ago the company purchased a building for $100,000. The unadjusted balance in the accumulated depreciation account is $8,000.
f. The company received $12,000 from a customer as payment for services that will be provided equally over one year beginning June 1st. The cash was received on May 1st of the current year and was recorded as unearned revenue.
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a. On June 1, of the current year a cash payment of $4,200 was paid for a two-year policy for insurance coverage. The account “insurance expense” was debited when the payment was made.
Paying for two years ahead of time is a prepaid expense. The prepaid expense account was not used and has a 0 balance. The prepaid expense account must have the balance of what is left on December 31st. The insurance expense account must be equal to the amount that was used/provided this period.
$4,200 / 24 months = $175 per month
Provided from June 1 to December 31 = 7 months provided x $175 = $1,225 provided = expense so insurance expense must be $1,225.
Insurance expense currently has $4,200 so you must decrease this account by $2,975 to get to the amount of $1,225 that was provided.
Prepaid Insurance $2,975
Insurance Expense $2,975
When you reduce the expense, the same amount goes to the asset prepaid, because this is the part that has not yet been used.
17 months not used x $175 = $2,975 prepaid
The adjusting entry you make must make the balance in the expense account what was provided and the balance in the asset account the future benefit.
b. The “supplies” account had a balance of $3,400 at the beginning of the period. Supplies in the amount of $6,500 were purchased and recorded in the “supplies expense” account. At the end of the year a count was done and it was determined that $2,200 of supplies remained on hand.
First – record what is currently in the two accounts. The company recorded the purchase of supplies as an expense assuming it would all be used this period.
If it is not the amount that was used, an adjustment must be made.
The asset supplies is what the company has. The company really has 2,200 so the balance in supplies must be 2,200. To get supplies to 2,200 you must decrease it by 1,200 which is done with a credit.
Supplies Expense 1,200
Supplies 1,200
When supplies are used up, this is an expense. You must also increase the expense with a debit.
c. The company has a balance of $45,800 in the “accounts receivable” account on December 31st. Work was performed this period and the customer has not been invoiced for $13,000.
If the company has not invoiced the customer, the company has not yet recorded the revenue. Work has been performed this period so revenue must be recorded this period. The balance in the accounts receivable account is for other work performed and you must add this amount to it, since it is also owed.
Accounts Receivable 13,000
Service Revenue 13,000
d. The company borrowed $200,000, 9% interest, on April 1st, of the current year. Interest is paid each January 1st.
Borrowing money and agreeing to pay interest causes interest expense to be incurred as time passes. The amount of interest is calculated by principle x rate x time
200,000 x .09 x 9 / 12 = $13,500
Interest Expense 13,500
Interest Payable 13,500
A liability must also be recorded since interest has not been paid as of 12/31 and is owed.
e. Three years ago the company purchased a building for $100,000. The unadjusted balance in the accumulated depreciation account is $8,000.
Using a long term asset to produce revenues requires depreciation expense to be recorded. An equal amount is recorded every year. Since the building has been used for 2 prior years, $4,000 per year was recorded. The 3rd year has not yet been recorded and an adjusting entry must be made.
Depreciation Expense 4,000
Accumulated Depreciation 4,000
Accumulated depreciation is always credited when depreciation expense is recorded.
f. The company received $12,000 from a customer as payment for services that will be provided equally over one year beginning June 1st. The cash was received on May 1st of the current year and was recorded as “unearned revenue”.
Only amounts not yet earned on 12/31 should be in unearned revenue.
Amounts earned this period must be recorded as revenue this period.
$12,000 / 12 months = $1,000 per month x 7 months earned = $7,000 earned
If $7,000 is earned, $7,000 must be recorded to revenue. The amount earned is no longer unearned, so unearned revenue must be decreased with a debit.
Unearned Revenue 7,000
Service Revenue 7,000
The debit to unearned revenue reduces the credit balance in this account to $5,000, which is equal to the 5 months (Jan 1 to May 31 of next year) service must be provided.
When cash is received does not matter. Revenue is recorded for the amount earned.
a. The prepaid insurance account shows a debit balance representing the cost of a 2-year fire insurance policy purchased on April 1st of the prior year for $8,800.
b. On October 1 st of the current year the “rent revenue” account was credited for $4,000 when cash was collected for rent revenue for a 4-month rental beginning November 1st.
c. The balance in the “prepaid advertising” account on January 1 of the current year was $2500. Purchase of advertising materials for $1,400 during the year was recorded
in the “advertising expense” account. On December 31, advertising materials that cost $1,250 are on hand.
d. Office supplies expense” was debited when office supplies of $1,250 were
purchased during the year. On December 31st, the balance in the account “office supplies” is $0 and office supplies of $320 are on hand.
e. The company signed a note receivable in the amount of $10,000 carrying 8% annual interest on May 1st. Principle and interest are to be paid on April 30th.
f. On March 1 st of the prior year the company loaned $50,000 to an officer of the company. The loan carries an interest rate of 7% and the loan and all interest must be repaid in 2 years.
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The prepaid insurance account is the asset and it should have a balance of what the company has paid ahead of time on December 31st the year.
$8,800 / 24 months = $366.67 per month x 9 months used = $3,300 used is the expense this year
24 months – 9 months used last year – 12 months used this year = 3 months left x $366.67 = $1,100 left = the balance of prepaid insurance must be on 12/31
12 months has been used this year and you must reduce the prepaid account for 12 months x $366.67 = $4,400. An asset used is also an expense
Insurance Expense $4,400
Prepaid Insurance $4,400
b. On October 1st of the current year the “rent revenue” account was credited for $4,000 when cash was collected for rent revenue for a 4 month rental beginning November 1st.
Rent revenue must only have the amount earned this period. The company has earned from November 1 to December 31st = 2 months.
$4,000 / 4 months = $1,000 per month x 2 months earned = $2,000 earned = revenue
Revenue currently has $4,000 and must be reduced by $2,000 to get to the $2,000 earned. Revenue is decreased with a debit.
Revenue 2,000
Unearned revenue 2,000
The amount that is not earned is unearned revenue and this must be recorded with a credit to the liability.
c. The balance in the “prepaid advertising” account on January 1 of the current year was $2500. Purchase of advertising materials for $1,400 during the year was recorded in the “advertising expense” account. On December 31, advertising materials that cost $1,250 are on hand.
Begin by putting the amounts given in the accounts.
The company recorded amounts paid to advertising expense assuming this was the amount that would be used this period. If it is not, an adjusting entry must be made. You really have $1,250 so the prepaid advertising account must also have a balance of 1,250. Reduce prepaid advertising (credit) to get it to be what you really have (2,500 – 1,250 = 1,250 adjustment).
Advertising Expense 1,250
Prepaid Advertising 1,250
Since you do not have as much as you had recorded, you have used more.
The amount that you have used must be recorded as an expense.
d. “Office supplies expense” was debited when office supplies of $1,250 were purchased during the year. On December 31st, the balance in the account “office supplies” is $0 and office supplies of $320 are on hand.
The company recorded purchases to office supplies assuming all supplies purchased would be used. If this is not true, an adjusting entry must be made.
The amount on hand of $320 must be the balance in the asset account supplies. The current balance is $0, so you must increase this account by $320 to get it to be what you really have on 12/31.
Supplies 320
Supplies Expense 320
The supplies account is reduced with a credit because you did not use as much as you had originally recorded, so you must reduce some of the expense.
e. The company signed a note receivable in the amount of $10,000 carrying 8% annual interest on May 1st. Principle and interest is to be paid on April 30th.
A note receivable means the company loaned money in return for earning interest. The company earns interest as time passes. Interest will be collected on April 30th next year and has not yet been collected (a receivable). Interest has been earned and must be recorded.
$10,000 x .08 x 8/12 (May to Dec) = $533 amount earned, not yet collected
Interest Receivable 533
Interest Revenue 533
f. On March 1st of the prior year the company loaned $50,000 to an officer of the company. The loan carries an interest rate of 7% and the loan and all interest must be repaid in 2 years.
This is a note receivable and the company earns interest as time passes.
Principle x Rate x Time
$50,000 x 7% x 12/12 (Jan to Dec) = $3,500 earned this year, not yet collected
Important: You record the amount earned this year only. They have used your money for the entire year this year. The adjustment made last year would be for the partial year amount. You are adjusting for this year, not last year and not both years, since you made last years adjustment last year.
Interest Receivable 3,500
Interest Revenue 3,500