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Exam 3: Adjusting Accounts and Preparing Financial Statements

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Question 31

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Before an adjusting entry is made to recognize the cost of expired insurance for the period, Prepaid Insurance and Insurance Expense are both overstated.

A) True
B) False

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Question 32

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Recording expenses early overstates current-period income; recording expenses late understates current period income.

A) True
B) False

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Question 33

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Costs incurred during an accounting period but unpaid and unrecorded are accrued expenses.

The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is:

A salary owed to employees is an example of an accrued expense.

Using the information given below, prepare a balance sheet for Rapid Car Services from the adjusted trial balance. Owner Stella Grafton did not make any additional investments in the company during the year. Rapid Car Services Adjusted Trial Balance For the year ended December 31 $\begin{array}{l}\text { Cash } & \$ 33,000 \\\text { Accounts receivable } & 14,200 \\\text { Office supplies } & 1,700 \\\text { Vehides } & 100,000\\\text { Accumulated depreciation - Vehicles }&&45,000\\\text { Accounts payable}&&11,500\\\text { Stella Grafton, Capital}&&71,000\\\text { Stella Grafton, Withdrawals } & 40,000 \\\text { Fees earned } &&155,000 \\\text { Rent expense } & 13,000\\\text { Office supplies expense } & 2,000 \\\text { Utilities expense } & 2,500 \\\text { Depreciation Expense - Vehicles } & 15,000 \\\text { Salary expense } & 50,000 \\\text { Fuel expense } & 12,000\end{array}$ $\text {Totals}\quad\quad\quad\quad\quad\quad\$ 283,400 \quad \$ 283,400$

Wilson Company paid $4,800 for a 4-month insurance premium in advance on November 1, with coverage beginning on that date. The balance in the prepaid insurance account before adjustment at the end of the year is $4,800 and no adjustments had been made previously. The adjusting entry required on December 31 is:

Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related asset.

A company made no adjusting entry for accrued and unpaid employee salaries of $9,000 on December 31. Which of the following statements is true?

Profit margin measures the relation of debt to assets.

Adjustments are necessary to bring an asset or liability account to its proper amount and also update a related expense or revenue account.

Describe the adjusting entries, including the accounts used, for 1) prepaid expenses, 2) depreciation and 3) unearned revenues.

Two main accounting principles used in accrual accounting are expense recognition and full closure.

Adjusting entries always affect the cash account.

A company's employees earn a total of $10,000 per week for a 5-day week that begins on Monday. December 31 of Year 1 is a Monday, and all employees worked that day. a) Prepare the required adjusting journal entry to record accrued salaries on December 31, Year 1. b) Prepare the journal entry to record the payment of salaries on January 4, Year 2. (Assume no reversing entries were made).

Profit margin is defined as:

A company earned $3,000 in net income for October. Its net sales for October were $10,000. Its profit margin is:

For each of the following two separate situations, present both the April 30 adjusting entry and the subsequent entry during May to record the payment of the accrued expenses or receipt of the accrued revenue. Assume the company does not prepare reversing entries. a. Nicolas Company has 5 employees, who earn a total of $2,900 in salaries each working day. They are paid on Monday for the five-day workweek ending on the previous Friday. Assume that fiscal year ended April 30, is a Thursday and all employees worked each day and will be paid salaries for five full days on the following Monday. b. Services of $3,000 have been performed for Clevenger Company through April 30. The client will pay the entire amount of the contract when services are completed on May 23. c. Paid the employees' salaries on May 4. d. Received payment from Clevenger Company for services that are now completed on May 23.

Financial statements are typically prepared in the following order:

On November 1, Jovel Company loaned another company $100,000 at a 6.0% interest rate. The note receivable plus interest will not be collected until March 1 of the following year. The company's annual accounting period ends on December 31. The amount of interest revenue that should be reported in the first year is: