Chapter 4 Completing the Accounting Cycle

D
In the process of completing a work sheet, you determine that the Income Statement debit
column totals $83,000, while the Income Statement credit column totals $65,000. To enter net
income (or net loss) for the period into the work sheet would require an entry to
A. the Adjustments debit column and the Adjustments credit column.
B. the Unadjusted Trial Balance debit column and the Adjustments credit column.
C. it is not practical to enter Net Income (or Net Loss) on the work sheet.
D. the Balance Sheet & Statement of Owner's Equity debit column and the Income Statement
credit column.
E. the Income Statement debit column and the Balance Sheet & Statement of Owner's Equity
credit column.

A
The special account used only in the closing process to temporarily hold the amounts of
revenues and expenses before the net difference is added to (or subtracted from) the owner's
capital account is the:
A. Income Summary account.
B. Closing account.
C. Balance column account.
D. Contra account.
E. Nominal account.

B
J. Awn, the proprietor of Awn Services, withdrew $8,700 from the business during the current
year. The entry to close the withdrawals account at the end of the year, is:

A.
J. Awn, Withdrawals...............8,700
..........Cash.................................................8,700

B.
J. Awn, Capital..........................8,700
..........J. Awn, Withdrawals...................8,700

C.
J. Awn, Withdrawals...................8,700
..........J. Awn, Capital...............................8,700

D.
J. Awn, Capital..............................8,700
..........Salary Expense...............................8,700
E.
Income Summary........................8,700
..........J. Awn, Capital..................................8,700

B
A company had revenues of $75,000 and expenses of $62,000 for the accounting period. Which
of the following entries could not be a closing entry?

A.
Income Summary.....................13,000
...............Owner's Capital......................13,000

B.
Income Summary.....................75,000
.............Revenue.......................................75,000

C.
Revenue.......................................75,000
..............Income Summary.....................75,000

D.
Income Summary.....................62,000
.............Expense.........................................62,000

E. All of these are possible closing entries.

C
. The following information is available for the Travis Travel Agency. After these closing entries
what will be the balance in the Jay Travis, Capital account?
Total revenues .....................$125,000
Total Expense.........................$60,000
Jay Travis, Capital..................80,000
Jay Travis, With drawals......15,000

A. $ 65,000.
B. $ 80,000.
C. $130,000.
D. $145,000.
E. $280,000.

C
The J. Godfrey, Capital account has a credit balance of $17,000 before closing entries are
made. If total revenues for the period are $55,200, total expenses are $39,800, and withdrawals
are $9,000, what is the ending balance in the J. Godfrey, Capital account after all closing entries
are made?
A. $ 8,000.
B. $15,400.
C. $23,400.
D. $17,000.
E. $32,400.

B
The Income Summary account is used:
A. To adjust and update asset and liability accounts.
B. To close the revenue and expense accounts.
C. To determine the appropriate withdrawal amount.
D. To replace the income statement under certain circumstances.
E. To replace the capital account in some businesses.

D
Dina Kader withdrew a total of $35,000 from her business during the current year. The entry
needed to close the withdrawals account is:
A. Debit Income Summary and credit Cash for $35,000.
B. Debit Dina Kader, Withdrawals and credit Cash for $35,000.
C. Debit Income Summary and credit Dina Kader, Withdrawals for $35,000.
D. Debit Dina Kader, Capital and credit Dina Kader, Withdrawals for $35,000.
E. Debit Dina Kader, Withdrawals and credit Dina Kader, Capital for $35,000.

C
A company's ledger accounts and their end-of-period balances before closing entries are posted
are shown below. What amount will be posted to Tricia DeBarre, Capital in the process of
closing the Income Summary account? (Assume all accounts have normal balances.)
Tricia De Barre, Capital............7,000
Tricia De Barre, Withdrawals..9,600
revenue.............................................29,000
Rent expense.................................3,600
Salaries expense..........................7,200
Insurance expense......................920
Depr. Expense-equipment......500
Accum depr.-equipment..........15,00

A. $16,780 debit.
B. $ 7,180 credit.
C. $16,780 credit.
D. $18,280 credit.
E. $23,780 credit.

D
It is obvious that an error occurred in the preparation and/or posting of closing entries if:
A. all revenue and expense accounts have zero balances.
B. the owner's capital account is debited for the amount of the net loss for the period.
C. the income summary account is debited for the amount of net income for the period.
D. all balance sheet accounts have zero balances.
E. only permanent accounts appear on the post-closing trial balance.

D
At the beginning of 2009, a company's balance sheet reported the following balances: Total
Assets = $125,000; Total Liabilities = $75,000; and Owner's Capital = $50,000. During 2009, the
company reported revenues of $46,000 and expenses of $30,000. In addition, owner's
withdrawals for the year totaled $20,000. Assuming no other changes to owner's capital, the
balance in the owner's capital account at the end of 2009 would be:
A. $66,000.
B. $86,000.
C. $(4,000).
D. $46,000.
E. cannot be determined from the information provided.

E
At the beginning of 2009, Beta Company's balance sheet reported Total Assets of $195,000 and
Total Liabilities of $75,000. During 2009, the company reported total revenues of $226,000 and
expenses of $175,000. Also, owner withdrawals during 2009 totaled $48,000. Assuming no
other changes to owner's capital, the balance in the owner's capital account at the end of 2009
would be:
A. $174,000.
B. $78,000.
C. cannot be determined from the information provided.
D. $120,000.
E. $123,000.

D
After preparing and posting the closing entries to close revenues (and gains) and expenses
(and losses) into the income summary, the income summary account has a debit balance of
$33,000. The entry to close the income summary account will include:
A. a debit of $33,000 to owner withdrawals.
B. a credit of $33,000 to owner withdrawals.
C. a debit of $33,000 to income summary.
D. a debit of $33,000 to owner capital.
E. a credit of $33,000 to owner capital.

B
A trial balance prepared after the closing entries have been journalized and posted is the:
A. Unadjusted trial balance.
B. Post-closing trial balance.
C. General ledger.
D. Adjusted trial balance.
E. Work sheet.

C
An error is indicated if the following account has a balance appearing on the post-closing trial
balance:
A. Office Equipment.
B. Accumulated Depreciation-Office Equipment.
C. Depreciation Expense-Office Equipment.
D. Ted Nash, Capital.
E. Salaries Payable.

A
A post-closing trial balance reports:
A. All ledger accounts with balances, none of which can be temporary accounts.
B. All ledger accounts with balances, none of which can be permanent accounts.
C. All ledger accounts with balances, which include some temporary and some permanent
accounts.
D. Only revenue and expense accounts.
E. Only asset accounts.

B
Which of the following statements is true?
A. Owner's capital must be closed each accounting period.
B. A post-closing trial balance should include only permanent accounts.
C. Information on the work sheet can be used in place of preparing financial statements.
D. By using a work sheet to prepare adjusting entries you need not post these entries to the
ledger accounts.
E. Closing entries are only necessary if errors have been made.

A
Reversing entries:
A. Are optional.
B. Are mandatory.
C. Correct errors in journal entries.
D. Are required by GAAP.
E. Are prepared on the worksheet.

E
Reversing entries:
A. Are optional.
B. Are linked to accrued assets and liabilities that were created by adjusting entries at the end of
the previous accounting period.
C. Are used to simplify a company's recordkeeping.
D. Are dated the first day of the new accounting period.
E. All of these.

C
Reversing entries:
A. are necessary when journal entries have been incorrectly recorded.
B. are a required step in the accounting cycle.
C. will often result in abnormal account balances in some accounts.
D. are required only if the company uses accounting software to record journal entries.
E. must be made before preparing the post-closing trial balance.

A
The purpose of reversing entries is to:
A. simplify the recording of certain journal entries in the future.
B. correct an error made in a previous journal entry.
C. ensure that closing entries have been properly posted to the ledger accounts.
D. make certain that only permanent accounts are carried forward into the next accounting
period.
E. complete a required step in the accounting cycle.

E
Another name for temporary accounts is:
A. Real accounts.
B. Contra accounts.
C. Accrued accounts.
D. Balance column accounts.
E. Nominal accounts.

B
When closing entries are made:
A. All ledger accounts are closed to start the new accounting period.
B. All temporary accounts are closed but not the permanent accounts.
C. All real accounts are closed but not the nominal accounts.
D. All permanent accounts are closed but not the nominal accounts.
E. All balance sheet accounts are closed

B
Revenues, expenses, and withdrawals accounts, which are closed at the end of each
accounting period are:
A. Real accounts.
B. Temporary accounts.
C. Closing accounts.
D. Permanent accounts.
E. Balance sheet accounts.

A
Which of the following statements is incorrect?
A. Permanent accounts is another name for nominal accounts.
B. Temporary accounts carry a zero balance at the beginning of each accounting period.
C. The Income Summary account is a temporary account.
D. Real accounts remain open as long as the asset, liability, or equity items recorded in the
accounts continue in existence.
E. The closing process applies only to temporary accounts.

C
Assets, liabilities, and equity accounts are not closed; these accounts are called:
A. Nominal accounts.
B. Temporary accounts.
C. Permanent accounts.
D. Contra accounts.
E. Accrued accounts.

E
Closing the temporary accounts at the end of each accounting period:
A. Serves to transfer the effects of these accounts to the owner's capital account on the balance
sheet.
B. Prepares the withdrawals account for use in the next period.
C. Gives the revenue and expense accounts zero balances.
D. Causes owner's capital to reflect increases from revenues and decreases from expenses and
withdrawals.
E. All of these.

B
Journal entries recorded at the end of each accounting period to prepare the revenue, expense,
and withdrawals accounts for the upcoming period and to update the owner's capital account for
the events of the period just finished are referred to as:
A. Adjusting entries.
B. Closing entries.
C. Final entries.
D. Work sheet entries.
E. Updating entries.

D
The closing process is necessary in order to:
A. calculate net income or net loss for an accounting period.
B. ensure that all permanent accounts are closed to zero at the end of each accounting period.
C. ensure that the company complies with state laws.
D. ensure that net income or net loss and owner withdrawals for the period are closed into the
owner's capital account.
E. ensure that management is aware of how well the company is operating.

D
Closing entries are required:
A. if management has decided to cease operating the business.
B. only if the company adheres to the accrual method of accounting.
C. if a company's bookkeeper forgets to prepare reversing entries.
D. if the temporary accounts are to reflect correct amounts for each accounting period.
E. in order to satisfy the Internal Revenue Service.

C
The recurring steps performed each reporting period, starting with analyzing and recording
transactions in the journal and continuing through the post-closing trial balance, is referred to as
the:
A. Accounting period.
B. Operating cycle.
C. Accounting cycle.
D. Closing cycle.
E. Natural business year.

C
Which of the following is the usual final step in the accounting cycle?
A. Journalizing transactions.
B. Preparing an adjusted trial balance.
C. Preparing a post-closing trial balance.
D. Preparing the financial statements.
E. Preparing a work sheet.

B
A classified balance sheet:
A. Measures a company's ability to pay its bills on time.
B. Organizes assets and liabilities into important subgroups.
C. Presents revenues, expenses, and net income.
D. Reports operating, investing, and financing activities.
E. Reports the effect of profit and withdrawals on owner's capital.

A
The assets section of a classified balance sheet usually includes:
A. Current assets, long-term investments, plant assets, and intangible assets.
B. Current assets, long-term assets, revenues, and intangible assets.
C. Current assets, long-term investments, plant assets, and equity.
D. Current liabilities, long-term investments, plant assets, and intangible assets.
E. Current assets, liabilities, plant assets, and intangible assets.

C
The usual order for the asset section of a classified balance sheet is:
A. Current assets, prepaid expenses, long-term investments, intangible assets.
B. Long-term investments, current assets, plant assets, intangible assets.
C. Current assets, long-term investments, plant assets, intangible assets.
D. Intangible assets, current assets, long-term investments, plant assets.
E. Plant assets, intangible assets, long-term investments, current assets.

C
A classified balance sheet differs from an unclassified balance sheet in that
A. a unclassified balance sheet is never used by large companies.
B. a classified balance sheet normally includes only three subgroups.
C. a classified balance sheet presents information in a manner that makes it easier to calculate
a company's current ratio.
D. a classified balance sheet will include more accounts than an unclassified balance sheet for
the same company on the same date.
E. a classified balance sheet cannot be provided to outside parties.

E
Two common subgroups for liabilities on a classified balance sheet are:
A. current liabilities and intangible liabilities.
B. present liabilities and operating liabilities.
C. general liabilities and specific liabilities.
D. intangible liabilities and long-term liabilities.
E. current liabilities and long-term liabilities.

D
The current ratio:
A. Is used to measure a company's profitability.
B. Is used to measure the relation between assets and long-term debt.
C. Measures the effect of operating income on profit.
D. Is used to help evaluate a company's ability to pay its debts in the near future.
E. Is calculated by dividing current assets by equity.

E
The current ratio:
A. Is calculated by dividing current assets by current liabilities.
B. Helps to assess a company's ability to pay its debts in the near future.
C. Can reveal problems in a company if it is less than 1.
D. Can affect a creditor's decision about whether to lend money to a company.
E. All of these.

A
The Unadjusted Trial Balance columns of a company's work sheet show the balance in the
Office Supplies account as $750. The Adjustments columns show that $425 of these supplies
were used during the period. The amount shown as Office Supplies in the Balance Sheet
columns of the work sheet is:
A. $325 debit.
B. $325 credit.
C. $425 debit.
D. $750 debit.
E. $750 credit.

B
A 10-column spreadsheet used to draft a company's unadjusted trial balance, adjusting entries,
adjusted trial balance, and financial statements, and which is an optional tool in the accounting
process is a(n) :
A. Adjusted trial balance.
B. Work sheet.
C. Post-closing trial balance.
D. Unadjusted trial balance.
E. General ledger.

A
Accumulated Depreciation, Accounts Receivable, and Service Fees Earned would be sorted to
which respective columns in completing a work sheet?
A. Balance Sheet or Statement of Owner's Equity-Credit; Balance Sheet or Statement of
Owner's Equity Debit; and Income Statement-Credit.
B. Balance Sheet or Statement of Owner's Equity-Debit; Balance Sheet or Statement of Owner's
Equity-Credit; and Income Statement-Credit.
C. Income Statement-Debit; Balance Sheet or Statement of Owner's Equity-Debit; and Income
Statement-Credit.
D. Income Statement-Debit; Income Statement-Debit; and Balance Sheet or Statement of
Owner's Equity-Credit.
E. Balance Sheet or Statement of Owner's Equity-Credit; Income Statement-Debit; and Income
Statement-Credit.

D
Which of the following statements is incorrect?
A. Working papers are useful aids in the accounting process.
B. On the work sheet, the effects of the accounting adjustments are shown on the account
balances.
C. After the work sheet is completed, it can be used to help prepare the financial statements.
D. On the work sheet, the adjusted amounts are sorted into columns according to whether the
accounts are used in preparing the unadjusted trial balance or the adjusted trial balance.
E. A worksheet is not a substitute for financial statements.

A
A company shows a $600 balance in Prepaid Insurance in the Unadjusted Trial Balance
columns of the work sheet. The Adjustments columns show expired insurance of $200. This
adjusting entry results in:
A. $200 decrease in net income.
B. $200 increase in net income.
C. $200 difference between the debit and credit columns of the Unadjusted Trial Balance.
D. $200 of prepaid insurance.
E. An error in the financial statements.

A
Statements that show the effects of proposed transactions as if the transactions had already
occurred are called:
A. Pro forma statements.
B. Professional statements.
C. Simplified statements.
D. Temporary statements.
E. Interim statements.

C
If in preparing a work sheet an adjusted trial balance amount is mistakenly sorted to the wrong
work sheet column. The Balance Sheet columns will balance on completing the work sheet but
with the wrong net income, if the amount sorted in error is:
A. An expense amount placed in the Balance Sheet Credit column.
B. A revenue amount placed in the Balance Sheet Debit column.
C. A liability amount placed in the Income Statement Credit column.
D. An asset amount placed in the Balance Sheet Credit column.
E. A liability amount placed in the Balance Sheet Debit column.
E
. If the Balance Sheet and Statement of Owner's Equity columns of a work sheet fail to balance
when the amount of the net income is added to the Balance Sheet and Statement of Owner's
Equity Credit column, the cause could be:
A. An expense amount entered in the Balance Sheet and Statement of Owner's Equity Debit
column.
B. A revenue amount entered in the Balance Sheet and Statement of Owner's Equity Credit
column.
C. An asset amount entered in the Income Statement and Statement of Owner's Equity Debit
column.
D. A liability amount entered in the Income Statement and Statement of Owner's Equity Credit
column.
E. An expense amount entered in the Balance Sheet and Statement of Owner's Equity Credit
column.

B
The following items appeared on a company's December 31 work sheet for the current period.
Based on the following information, what is net income for the current period?

A. $1,400.
B. $1,855.
C. $1,905.
D. $2,060.
E. $4,670.

D
Which of the following errors would cause the Balance Sheet and Statement of Owner's Equity
columns of a work sheet to be out of balance?
A. Entering an asset amount in the Income Statement Debit column.
B. Entering a liability amount in the Income Statement Credit column.
C. Entering an expense amount in the Balance Sheet and Statement of Owner's Equity Debit
column.
D. Entering a revenue amount in the Balance Sheet and Statement of Owner's Equity Debit
column.
E. Entering a liability amount in the Balance Sheet and Statement of Owner's Equity Credit
column.

C
The Unadjusted Trial Balance columns of a work sheet total $84,000. The Adjustments columns
contain entries for the following:
1. Office supplies used during the period, $1,200.
2. Expiration of prepaid rent, $700.
3. Accrued salaries expense, $500.
4. Depreciation expense, $800.
5. Accrued service fees receivable, $400.
The Adjusted Trial Balance columns total is:
A. $80,400.
B. $84,000.
C. $85,700.
D. $85,900.
E. $87,600.

B
The balances in the unadjusted columns of a work sheet will agree with:
A. the balances reflected in the company's financial statements.
B. the balances reflected in the company's unadjusted trial balance.
C. whatever balances management has decided to report.
D. the balances in the company's post-closing trial balance.
E. the balances management budgeted for the accounting period.

T
The expense recognition principle is frequently referred to as the matching principle.

B
Which is not an application of revenue recognition?
a. Recording revenue as an adjusting entry on the last day of the accounting period.
b. Accepting cash from an established customer for services to be performed over the next
three months.
c. Billing customers on June 30 for services completed during June.
d. Receiving cash for services performed.

D
On April 1, 2013, nPropel Corporation paid $48,000 cash for equipment that will be used in
business operations. The equipment will be used for four years. nPropel records depreciation
expense of $48,000 for the calendar year ending December 31, 2013. Which accounting
principle has been violated?
a. Depreciation principle.
b. No principle has been violated.
c. Cash principle.
d. Expense recognition principle.

Expenses with revenues

282. The expense recognition principle attempts to match ?
C
A small company may be able to justify using a cash basis of accounting if they have:
a. sales under $1,000,000.
b. no accountants on staff.
c. few receivables and payables.
d. all sales and purchases on account.

B
Which statement is correct?
a. As long as a company consistently uses the cash basis of accounting, generally accepted
accounting principles allow its use.
b. The use of the cash basis of accounting violates both the revenue recognition and expense
recognition principles.
c. The cash basis of accounting is objective because no one can be certain of the amount of
revenue until the cash is received.
d. As long as management is ethical, there are no problems with using the cash basis of
accounting.

Solution: $390,000 − $216,000 = $174,000

The following is selected information from L Corporation for the fiscal year ending October 31,
2014.

Cash received from customers

$300,000
Revenue earned
390,000
Cash paid for expenses
170,000
Cash paid for computers on November 1, 2013 that will
be used for 3 years
48,000
Expenses incurred including any depreciation
216,000
Proceeds from a bank loan, part of which was used to
pay for the computers
100,000

Based on the accrual basis of accounting, what is L Corporation's net income for the year
ending October 31, 2014?
a. $204,000
b. $174,000
c. $158,000
d. $220,000
76,000
The following is selected information from C Corporation for the fiscal year ending October 31,
2014.
Cash received from customers
$150,000
Revenue earned
195,000
Cash paid for expenses
85,000
Cash paid for computers on November 1, 2013 that
will be used for 3 years
24,000
Expenses incurred including any depreciation
119,000
Proceeds from a bank loan, part of which was used to
pay for the computers
50,000
Based on the accrual basis of accounting, what is C Corporation's net income for the year
ending October 31, 2014?
a. $102,000
b. $86,000
c. $76,000
d. $110,000

D
La More Company had the following transactions during 2013:
Sales of $4,500 on account
Collected $2,000 for services to be performed in 2014
Paid $1,875 cash in salaries for 2013
Purchased airline tickets for $250 in December for a trip to take place in 2014
What is La More's 2013 net income using accrual accounting?
a. $2,875
b. $4,875
c. $4,625
d. $2,625

D
La More Company had the following transactions during 2013.
Sales of $4,500 on account
Collected $2,000 for services to be performed in 2014
Paid $1,325 cash in salaries
Purchased airline tickets for $250 in December for a trip to take place in 2014
What is La More's 2013 net income using cash basis accounting?
a. $5,175
b. $675
c. $4,925
d. $425

D
Wang Company had the following transactions during 2013:
Sales of $10,800 on account
Collected $4,800 for services to be performed in 2014
Paid $3,100 cash in salaries for 2013
Purchased airline tickets for $600 in December for a trip to take place in 2014
What is Wang's 2013 net income using accrual accounting?
a. $8,300
b. $13,100
c. $12,500
d. $7,700

C
84. Given the data below for a firm in its first year of operation, determine net income under the
cash basis of accounting.
Revenue earned $16,000
Accounts receivable 3,000
Expenses incurred 7,250
Accounts payable (related to expenses) 750
Supplies purchased with cash 1,800
a. $6,500
b. $11,000
c. $4,700
d. $6,950

A
85. Given the data below for a firm in its first year of operation, determine net income under the
accrual basis of accounting.
Revenue earned $16,000
Accounts receivable 3,000
Expenses incurred 7,250
Accounts payable (related to expenses) 750
Supplies purchased with cash 1,800
a. $8,750
b. $11,000
c. $6,500
d. $9,200
D
86. Given the data below for a firm in its first year of operation, determine net income under the
cash basis of accounting.
Cash received from customers $48,000
Accounts receivable 12,000
Cash paid for expenses 26,000
Accounts payable (related to expenses) 3,000
Prepaid rent for next period 7,000
a. $22,000
b. $31,000
c. $24,000
d. $15,000

b
90. Why was Apple required to spread their iPhone revenues over a two year period?
a. Because of its newness, their returns might exceed the normal level of returns.
b. Because they were required to provide software updates over that two year period.
c. Because that was the estimated life of the iPhone.
d. Because they needed to defer revenue recognition since they had a swap program available
for future models.

T
15. An adjusting entry to a prepaid expense is required to recognize expired expense

F
16. An adjusting entry always involves two balance sheet accounts.

T
17. An adjusting entry always involves a balance sheet account and an income statement
account.

F
20. Accrued revenues are revenues that have been received but not yet recognized.

T
21. Accrued revenues are revenues that have been recognized but not yet recorded.

C
According to some U.S. companies what gives foreign firms a competitive advantage in the
capital market?
a. The foreign companies don't have standards similar to GAAP.
b. The foreign companies don't have strict ethical codes.
c. The Sarbanes-Oxley Act which requires more stringent internal controls on U.S. firms.
d. The foreign companies don't have to be audited.

C
92. The primary difference between prepaid and accrued expenses is that prepaid expenses
have:
a. been incurred and accrued expenses have not.
b. not been paid and accrued expenses have.
c. been recorded and accrued expenses have not.
d. not been recorded and accrued expenses have.

A
98. Each of the following is a major type (or category) of adjusting entry except:
a. earned expenses.
b. prepaid expenses.
c. accrued expenses.
d. accrued revenues.

d
Adjusting entries affect at least:
a.one revenue and one expense account.
b.one asset and one liability account.
c.one revenue and one balance sheet account.
d.one income statement and one balance sheet account

prepaid expenses
unearned Revenue
Expenses paid and recorded in an asset account before they are used or consumed are called
_______________. Revenue received and recorded as a liability before it is earned is referred
to as _________________.

F
Accumulated Depreciation is a liability account and has a credit normal account balance.

F
The balances of the Depreciation Expense and the Accumulated Depreciation accounts should
always be the same.

F
The adjusting entry for unearned revenue results in an increase (a debit) to an asset account
and an increase (a credit) to a revenue account.

F
Accrued revenues are revenues that have been recognized but cash has not been received
before financial statements have been prepared.

F
The adjusting entry for accrued salaries requires a debit to Salaries and Wages Payable.

$50 False
The accrued interest for a three month note payable of $10,000 dated December 1, 2013 at an
interest rate of 6% is $150 on December 31, 2013.

F
Without an adjusting entry for accrued interest expense, liabilities and interest expense are
understated, and net income and stockholders' equity are overstated.

F
An adjusted trial balance must be prepared before the adjusting entries can be recorded.

F
Closing entries deal primarily with the balances of permanent accounts.

T
Accounts receivable is a permanent account.

F
A revenue account is closed with a credit to the revenue account and a debit to Income
Summary

T
An expense account is closed with a credit to the expense account and a debit to the Income
Summary account.

D
The balance in the prepaid rent account before adjustment at the end of the year is $15,000 and
represents three months rent paid on December 1. The adjusting entry required on December
31 is:
a. debit Prepaid Rent, $5,000; credit Rent Expense $5,000.
b. debit Prepaid Rent, $10,000; credit Rent Expense, $10,000.
c. debit Rent Expense, $15,000; credit Prepaid Rent, $15,000.
d. debit Rent Expense, $5,000; credit Prepaid Rent, $5,000.

A
Leyland Realty Company received a check for $15,000 on July 1, which represents a 6-month
advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited
for the full $15,000. Financial statements will be prepared on July 31. Leyland Realty should
make the following adjusting entry on July 31:
a. debit Unearned Rent Revenue, $2,500; credit Rent Revenue, $2,500.
b. debit Rent Revenue, $2,500; credit Unearned Rent Revenue, $2,500.
c. debit Unearned Rent Revenue, $15,000; credit Rent Revenue, $15,000.
d. debit Cash, $15,000; credit Rent Revenue, $15,000.

B
As prepaid expenses expire with the passage of time, the correct adjusting entry will be a:
a. debit to an asset account and a credit to an expense account.
b. debit to an expense account and a credit to an asset account.
c. debit to an asset account and a credit to an asset account.
d. debit to an expense account and a credit to an expense account.

C
Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the
adjusting entry is for the amount of supplies:
a. remaining.
b. purchased.
c. used.
d. either used or remaining.

D
If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this
have on that month's financial statements?
a. Failure to make an adjustment does not affect the financial statements.
b. Expenses will be overstated and net income and stockholders' equity will be under- stated.
c. Assets will be overstated and net income and stockholders' equity will be understated.
d. Assets will be overstated and net income and stockholders' equity will be overstated.