Adjusting Entries

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Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. The purpose of making adjusting journal entries is to

a. make revenues equal what is earned and expenses equal what is incurred during this period
b. make assets equal what you owe and liabilities equal what you have
c. get the cash account to be correct
d. all of the above

Check Your Answer
A. Transactions are recorded during the period as cash is received and paid, along with automatic entries for goods provided to the customer. Other economic events that occur during the period that do not impact cash do not get recorded. These events typically impact revenues and expenses. Adjusting journal entries must be made to get revenues to be what is earned during the period and expenses to be what is incurred during the period. (b.) is stated opposite. (c.) adjusting journal entries never impact cash.
2. When adjusting revenue you may also adjust

a. a liability
b. an asset
c. an expense
d. either a & b

Check Your Answer
D. A revenue is something provided to the customer in exchange for an asset. Revenues will also impact an asset. When an unearned revenue is earned and adjustment must also be made. This entry decreases (debit) the liability unearned revenue and increases revenue (credit).
3. When adjusting an expense you may also adjust

a. a liability
b. a revenue
c. owner’s equity
d. both a & b

Check Your Answer
A. An expense is something provided to the company that the company must pay for or an asset being used. The other account adjusted with the expense will be an asset decrease (credit) or a liability increase (credit). Asset is not one of the choices listed. You never adjust an expense and a revenue in the same transaction.
4. Expenses require adjusting entries when

a. the expense is incurred in the same period it is paid
b. the expense is incurred before it is paid
c. the expense is incurred after it is paid
d. both b. & c.

Check Your Answer
D. Expenses are adjusted when they are not paid in the period they are incurred. An expense that is paid before or after it is incurred (provided to the company or an asset is used) will require an adjustment.
5. Revenues are adjusted when

a. the revenue is earned in the same period it is collected
b. the revenue is earned before it is collected
c. the revenue is earned after it is collected
d. both b. & c.

Check Your Answer
D. Revenues are adjusted when they are collected before or after the service is provided to the customer. A revenue is not adjusted when the service is provided and the cash is collected in the same period.
6. An adjusting entry is not necessary when

a. the expense is incurred before it is paid
b. the revenue is earned after it is collected
c. the revenue is earned during the period it is collected
d. the cash is paid after the expense is incurred

Check Your Answer
C. An adjusting entry is not required when the cash is received or paid in the same period as the revenue is earned or expense is incurred. When cash is received or paid in a different period an adjusting entry is required.
7. The final balance in an expense account must be equal to

a. the amount incurred last period
b. the amount incurred this period
c. the amount earned last period
d. the amount earned this period

Check Your Answer
B. Expenses must be equal the amount incurred this period. Incurred means a service was provided to the company or an asset was used.
8. The final balance in an asset account must be equal to

a. the amount the company actually owns at the end of the period
b. the amount the company actually owns at the beginning of the period
c. the amount the company actually owes at the end of the period
d. the amount the company incurred this period

Check Your Answer
A. Assets must be equal to what the company actually owns/controls. The final balance is at the end of the period. This balance is reported on the balance sheet. Supplies and prepaid expenses are assets that typically require an adjusting entry to get the asset balance correct.
9. Unearned revenue is adjusted with a debit when

a. the amount is paid
b. the amount is earned this period
c. the amount is incurred this period
d. the amount is collected this period

Check Your Answer
B. A debit to the liability unearned revenue is recorded when the liability decreases. Unearned revenues decrease when earned. The credit is to revenue (increased, credit.)
10. Prepaid expenses are adjusted with a credit for

a. the amount paid
b. the amount used up this period
c. the amount incurred before payment is made
d. the amount that is the future benefit at the end of the period

Check Your Answer
B. A credit to an asset means the asset decreased. Assets decrease when they are used up. An amount paid for an asset will result in a debit to the asset (a.). (c) is not a prepaid, it is an expense. (d.) is the ending balance.
11. The account that is never used in an adjusting journal entry is

a. accrued expenses
b. accounts payable
c. cash
d. accounts receivable

Check Your Answer
C. Cash is never used in an adjusting journal entry. Cash is recorded as it is received and paid and does not require an adjustment. Adjustments are required because the cash was not paid/received in the same period as incurred/earned.
12. An adjusting entry is made to debit revenue when

a. the company earned more than is currently recorded as revenue
b. the company earned less than is currently recorded as revenue
c. the company is paid more than is recorded as revenue
d. the company is owed more than is recorded as revenue

Check Your Answer
B. Debit to revenue is a decrease. Revenues are only decreased when too much was recorded to revenue before. Too much recorded to revenues happens when the company did not earn as much as it recorded. In this case, the company must take back the revenue that is not earned and increase unearned revenue (credit).
13. An adjusting entry is made to credit an expense when

a. the company incurred more than is currently recorded to expense
b. the company incurred less than is currently recorded to expense
c. the company paid less than is recorded to expense
d. none of the above

Check Your Answer
B. Credit to an expense is a decrease. Expenses are only decreased when too much was previously recorded to expense. In this case, the company did not incur as much as was recorded and the company must decrease the expense. The debit in the adjustment is prepaid expense. (a) requires a debit to expense and credit to payable. Paying cash is a regular transaction and is not an adjustment (c.).
14. An adjusting entry is made to credit an asset when

a. the asset is a prepaid and time has passed
b. the company provided a service that needs to be recorded
c. the company provided goods and it has been recorded
d. the company pays for inventory

Check Your Answer
A. Credit to an asset is a decrease. Assets are decreased when the records have a higher amount than what the company actually has. Some of the asset was used up which occurred as time passed and this has not yet been recorded. The asset credited is typically prepaid or supplies. (b.) is a revenue. (c) has been recorded and no adjustment is required. (d) involves cash and is not an adjustment.
15. Interest expense is computed

a. principle x rate x time
b. principle x percentage
c. percentage x time
d. rate x time

Check Your Answer
A. The amount of interest incurred is always: principle (amount owed) x rate (annual percentage) x time (#months/12)
16. How is depreciation expense computed using the straight-line method

a. cost divided by estimated rate
b. cost divided by estimated useful life
c. cost divided by life
d. estimated useful life divided by cost

Check Your Answer
B. Depreciation expense is computed as cost divided by useful life. This records the cost of the asset over the time the asset is used to produce revenues (matching). Some books use cost less residual value divided by useful life.
17. Adjusting journal entries are made

a. during the period a transaction occurs
b. at the beginning of the period
c. at the end of the period before preparing financial statements
d. when the cash account does not balance

Check Your Answer
C. Adjusting journal entries are made at the end of the period before preparing financial statements to record economic events that did not impact cash. Adjusting entries are made to adjust the incorrect balances in revenue/expense accounts. The balances are incorrect because they do not reflect what was earned and incurred during this period only. (d) an adjusting entry does not correct an out of balance account.
18. The account that is also used when adjusting interest revenue is

a. interest expense
b. interest payable
c. interest receivable
d. cash

Check Your Answer
C. When interest revenue is earned (credit) cash is collected or a receivable occurs. When cash is collected, no adjustment is necessary. When cash has not been collected, interest receivable is debited.
19. The account that is also used when adjusting depreciation expense is

a. accumulated depreciation
b. total depreciation
c. depreciation revenue
d. contra depreciation

Check Your Answer
A. Accumulated depreciation is always recorded with a credit when recording depreciation expense for the period. This is always an adjusting entry because it does not impact cash.
20. A common reason that an adjustment must be made is

a. property, plant, equipment is purchased
b. insurance is paid for ahead of time
c. rent paid in the prior period is incurred this period
d. the company collects from a customer this period

Check Your Answer
C. A common reason for an adjustment is that revenue has been earned or an expense has been incurred that did not impact cash and has not been recorded. Using up prepaid rent is one of these situations. The cash was paid in the prior period and a prepaid would have been recorded. Now that the prepaid asset has been used an adjustment to record the expense must be made. All other choices involve cash which does not require an adjustment.