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Exam 4: Adjustments,Financial Statements,and the Quality of Earnings

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Question 21

Multiple Choice

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What is the effect on the financial statements when a company fails to record depreciation expense at year-end?

A) Net income is overstated and stockholders' equity is understated.
B) Expenses are understated and stockholders' equity is understated.
C) Expenses are understated and liabilities are overstated.
D) Net income is overstated and assets are overstated.

E) A) and D)
F) None of the above

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Question 22

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At the end of the accounting period,the balances in the nominal accounts are closed while the balances in the real accounts are carried forward to the next accounting period.

A) True
B) False

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Question 23

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On July 1,2011,Allen Company signed a $100,000,one-year,6 percent note payable.The principal and interest will be paid on June 30,2012.How much interest expense should be reported on the income statement for the year ended December 31,2011?

On September 1,2011,Fast Track,Inc.was started with $30,000 invested by the owners as contributed capital.On September 30,2011,the accounting records contained the following amounts: $\begin{array}{lrlr}\text { Accounts payable } & \$ 2,200 & \text { Dividends declared and } & \$ 2,300 \\ & & \text { paid } & \\\text { Accounts receivable }&2,200 & \text { Office equipment } & 25,000 \\\text { Accumulated depreciation } & 500 & \text { Office supplies inventory } & 1,750 \\\text { Cash } & 10,000 & \text { Office supplies expense } & 600 \\\text { Consulting fees revenue } & 19,200 & \text { Rent expense } & 2,400 \\\text { Contributed capital } & 30,000 & \text { Salary expense } & 6,900 \\\text { Depreciation expense } & 500 & \text { Telephone expense } & 250\end{array}$ Prepare a balance sheet for Fast Track,Inc.as of September 30,2011.

Assume Idaho Company recorded the following adjusting journal entry at year-end: Insurance expense $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\$ 2000$ $\quad$ Insurance expense $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\$ 2000$ If the beginning balance in prepaid insurance was $500 and $2,500 was paid for an insurance premium during the year,what is the ending balance in the prepaid insurance account after the above adjusting entry?

On April 1,2011,the premium on a one-year insurance policy was purchased for $3,000 cash with the insurance coverage beginning on that date.Which of the following correctly describes the effect of the December 31,2011 adjusting entry on the financial statements? (Assume that no adjusting entries have been made during the year.)

The following income statement was reported for Bauer Inc.for the first year of operations ending December 31,2010 reported (in thousands of dollars): $\begin{array} { l r r } \text { Sales revenue } & & \$ 24,500 \\\text { Expenses: } & & \\\text { Cost of Sales } & \$ 12,100 & \\\text { Salaries and Wages } & 5,300 & \\\text { Rent } & 900 & \\\text { Utilities } & 500 & \\\text { Miscellaneous } & 600 & \\\text { Total Expenses } & & 19,400 \\\text { Income before taxes } & & 5,100 \\\text { Income tax expense } & & 1,785 \\\text { Net income } & & \$ 3,315\end{array}$ Requirements: A.Calculate net profit margin B.Calculate earnings per share if there are 200,000 shares of common stock outstanding

Which of the following does not correctly describe the following journal entry? Supplies Cash

Which of the following journal entries was created as the result of an accrual?

Income taxes incurred but not yet paid at the end of the accounting period is an example of an accrued expense.

For each of the following accounts you are to enter one capital letter in each cell which indicates for each account its normal characteristics. $\begin{array}{|l|l|l|l|l|}\hline{\text { USE THE LETTER CODE GIVEN }} \\\hline {\text { TYPE OF ACCOUNT }} && {\begin{array}{c}\text { CLOSING } \\\text { STATUS }\end{array}} & \begin{array}{l}\text { NORMAL } \\\text { BALANCE }\end{array} &{\begin{array}{c}\text { FINANCIAL } \\\text { STATEMENT }\end{array}} \\\hline \text { A=Assets } & \text { L=Liabilities } & \text { C=Closed } & \text { D=Debt } & \text { B=Balance Sheet } \\\hline \text { R=Revenue } & \text { E=Expenses } & \text { N=Not Closed } & \text { C=Credit } & \text { I=Income Statement } \\\hline \begin{array}{l}\text { C=Contra }\end{array} & \begin{array}{l}\text { SE=Stockholders' } \\\text { Equity }\end{array} & & & \begin{array}{l}\text { SE=Statement of } \\\text { Stockholders` Equity }\end{array} \\\hline \begin{array}{l}\text { N=Not } \\\text { Applicable }\end{array} & & && \begin{array}{l}\text { N=None of the } \\\text { above }\end{array} \\\hline\end{array}$

A deferred expense such as prepaid insurance is created when cash is paid in advance of the expense incurrence and is reduced when the expense is actually incurred.

Below are two related transactions for Golden Corporation.The annual accounting period ends December 31.Prepare the journal entry for each of the following transactions.No adjusting entries have been made during the year. A.October 1, 2011--Golden Corporation borrowed $100,000 and signed a note providing for 8% interest.The principal and interest are due in one year (on September 30, 2012). B.December 31, 2011--end of the annual accounting period.(If no entry is required, explain why).

What is the effect on the financial statements when a company fails to accrue revenue earned at year-end?

Which of the following transactions does not create a deferral?

What are the purposes of closing entries? Describe permanent and temporary accounts.

What is the effect on the financial statements when a company fails to adjust the unearned revenue account for revenues earned at year-end?

Which of the following does not correctly describe the following journal entry? Salaries expense Salaries payable

Closing the expense and loss accounts at year-end requires that these accounts be debited.

On October 1,2010,Adams Company paid $4,000 for a two-year insurance policy with the insurance coverage beginning on that date.As of December 31,2010,which of the following account balances are correct after adjusting entries have been made?