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.

2. The accrual basis of accounting requires revenue be recorded when cash is received from customers.

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

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. Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has been
earned.

8. If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a liability
account.

9. Proper reporting of revenues and expenses in a period is due to the accounting period concept.

10. Revenue recognition concept requires that the reporting of revenue be included in the period when cash for
the service is received.

11. Revenues and expenses should be recorded in the same period in which they relate.

12. Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis of
accounting.

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

14. Adjusting entries are made at the end of an accounting period to adjust accounts on the balance sheet.

15. Adjusting entries affect only expense and asset accounts.

16. An adjusting entry to accrue an incurred expense will affect total liabilities.

17. 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.

18. Adjustments for accruals are needed to record a revenue that has been earned or an expense that has been
incurred but not recorded.

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

20. 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.

21. The Accumulated Depreciation's account balance is the sum of depreciation expense recorded in past periods.

22. 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.

23. A contra asset account for Land will normally appear in the balance sheet.

24. 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.

25. 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.

26. A company depreciates its equipment $350 a year. The adjusting entry for December 31 is debit Depreciation
Expense, $350 and credit Equipment, $350.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.

33. 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.

34. 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.

35. By ignoring and not posting the adjusting journal entries to the appropriate accounts, net income will always
be overstated.
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

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

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

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

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

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

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. 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.

16. 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.
17. 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.

18. 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.

19. 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.

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

a. Wages Expense
b. Accounts Receivable
c. Accumulated Depreciation
d. Capital Stock

21. 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

22. 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

23. 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

24. 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
25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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.

36. 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

37. 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.

38. 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

39. 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

40. 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.

EXERCISES
1. 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.
2. 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.

3. 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:

4. 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.
 5. 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
Accumulated Depreciation 1,500
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
Supplies Expense 1,600
Insurance Expense 1,600
Depreciation Expense 1,500
Total 88,000 88,000 94,000 94,000