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Testbank to accompany

Accounting 8th Edition by John Hoggett, Lew Edwards, John Medlin, Matthew Tilling & Evelyn Hogg Prepared by

Barbara Burns

© John Wiley & Sons Australia, Ltd 2012

Testbank to accompany Accounting 8e

Chapter 4: Adjusting the accounts and preparing financial statements Multiple Choice 1. The statement concerning accrual accounting that is true is: a. Profit is the excess of cash inflows from income over cash outflows for expenses b. Income is recognised in the period when the flow of economic benefits can be reliably measured c. For most businesses the cash approach gives a better measure of economic performance than does the accrual approach d. Income from sales is recognised in the period when the cheque is cashed ANSWER B Section 4.1 2. The cash approach to profit measurement will not give a reliable profit figure for an entity that conducts a significant portion of its business: a. Overseas b. With subsidiaries c. With borrowed money d. On credit ANSWER D Section 4.1 3. Under the cash approach to profit measurement income is recorded in the accounting period when: a. Cash is received b. Goods are sold or services performed c. A contract is signed d. An order is placed ANSWER A Section 4.1

4. Harry Company uses cleaning supplies on a daily basis. Under the accrual basis of accounting these supplies would be an expense of the period in which they are: a. Ordered b. Received c. Paid for d. Used © John Wiley & Sons Australia, Ltd 2012

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Chapter 4: Adjusting the accounts and preparing financial statements

ANSWER D Section 4.1 5. It is correct that each balance day adjustment a. Affect either the income statement or the balance sheet b. Has one effect on the income statement and one effect on the balance sheet c. Only affect the income statement d. Always have an effect on the bank account ANSWER B Section 4.2 6. During 2011 The Style Hairdressing Salon paid out $41 000 in wages from its bank account. At year-end 2011 wages owing but unpaid were $2 400. The salon uses accrual accounting. How much would be reported as wages expense for 2011? a. $38 600 b. $41 000 c. $43 400 d. $42 600 ANSWER C Section 4.5 7. The Prepaid Insurance account of PQR Traders shows a balance of $900 (net of GST) representing a payment on 1 July 2011 of a three-year insurance premium. The correct adjusting entry on 31 December 2011, the close of the annual accounting period, is: $ 150

a. Insurance Expense Prepaid Insurance

$ 150

b. Insurance Expense Prepaid Insurance

300

c. Prepaid Insurance Insurance Expense

150

d. Prepaid Insurance Insurance Expense

750

300

150 750

ANSWER A Section 4.4

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Testbank to accompany Accounting 8e

8. Which statement relating to the Accumulated Depreciation account is correct? a. It normally has a debit balance b. It reflects the portion of the cost of the asset that has been assigned as an expense since purchase c. It provides information on the market value of the asset d. It is classified as a liability in the balance sheet ANSWER B Section 4.4 9. Michael purchased two vehicles for his business on 1 January 2011. These vehicles cost $50,000 each and have a useful life of 5 years with an expected residual of $20,000 each. The adjusting entry for depreciation on 31 December 2011, using the straight-line method, is: a. Dr Accumulated Depreciation $6000; Cr Depreciation Expense $6000 b. Dr Depreciation Expense $6000; Cr Accumulated Depreciation $6000 c. Dr Accumulated Depreciation $12 000; Cr Depreciation Expense $12 000 d. Dr Depreciation Expense $12 000 Cr Accumulated Depreciation $12 000 ANSWER D Section 4.4

10. Tan Traders received a $750 advance payment from a customer for work to be carried out in the next accounting period. The accounting entry to initially record the $750 is: a. Debit unearned income $750; credit bank $750 b. Debit bank $750; credit unearned income $750 c. Debit bank $750; credit creditor $750 d. Debit income earned $750; credit bank $750 ANSWER B Section 4.4. 11. The office supplies inventory account of Tan Traders shows a balance of $1 600 on 31 December 2011. The adjusting entry to record office supplies of $550 issued to staff in the 12 months up to 31 December 2011 is: a. Debit office supplies inventory $550; credit office supplies expense $550 b. Debit office supplies inventory $1 050; credit office supplies expense $1 050 c. Debit office supplies expense $550; credit office supplies inventory $550 d. Debit office supplies expense $1 600; credit office supplies inventory $1 600 ANSWER C Section 4.4

© John Wiley & Sons Australia, Ltd 2012

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Chapter 4: Adjusting the accounts and preparing financial statements

12. Sampras Company purchased a machine for $30 000 on 1 January 2010 with an estimated life of 5 years and a residual value of zero. The straight-line method of depreciation is used. What is the carrying value of the machine on the 31 December 2011 in the balance sheet of Sampras Company? a. $30 000 b. $24 000 c. $18 000 d. $12 000 ANSWER C Section 4.7 13. On July 1 2011 the Pepper Diner rented out part of its property and collected $9000 in advance for a nine-month period. The receipt was credited to a liability account. At 31 December 2011, Pepper Diner's year-end, which of the following adjusting journal entries should be made? a. Dr. Cash, $6000; Cr. Rent Income, $6000 b. Dr. Rent Income, $3000; Cr Unearned Rent Income, $3000 c. Dr. Unearned Rent Income, $6000; Cr. Rent Income, $6000 d. Dr. Rent Receivable, $6000; Cr. Rent Income, $6000 ANSWER C Section 4.4 14. If an adjustment for depreciation is omitted from the financial reports the affect is: a. Assets are understated; profit is understated b. Assets are overstated; profit is understated c. Assets are understated; profit is overstated d. Assets are overstated; profit is overstated ANSWER D Section 4.10 15. On 1 July 2011 Tan Traders paid $600, representing a two-year insurance premium. The $600 was initially recorded in the Insurance expense account. After adjustment at 31 December 2012, the close of the annual accounting period: a. Insurance expense in the income statement is $600 and prepaid insurance in the balance sheet is $0 b. Insurance expense in the income statement is $150 and prepaid insurance in the balance sheet is $450 c. Insurance expense in the income statement is $450 and prepaid insurance in the balance sheet is $0 d. Insurance expense in the income statement is $300 and prepaid insurance in the balance sheet is $150 ANSWER D © John Wiley & Sons Australia, Ltd 2012

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Testbank to accompany Accounting 8e

Section 4.7 16. Tan Traders paid salaries of $130 000 during the year and owes $2 100 for three days work carried out before the 31 December 2011 which will not be paid until January 3 2012. After the adjusting entry for the year ended 31 December 2011: a. Salaries in the income statement are $132 100 and accrued salaries in the balance sheet are $2 100 b. Salaries in the income statement are $130 000 and accrued salaries in the balance sheet are $2 100 c. Salaries in the income statement are $127 900 and accrued salaries in the balance sheet are $2 100 d. Salaries in the income statement are $132 100 and accrued salaries in the balance sheet are $132 100 ANSWER A Section 4.7.

17. X Co’s employees carry out work to the value of $7 500. They are paid $4 500 immediately with the balance to be settled in the next accounting period. Under the accrual approach to profit measurement the amount of wages expense that will be recorded in the current period is: a. Nil b. $4 500 c. $3 000 d. $7 500 ANSWER D Section 4.7

18. At year-end it was forgotten to accrue an income item. This will result in an: a. Understatement of assets and an overstatement of profit and equity b. Overstatement of liabilities and an understatement of profit and equity c. Overstatement of assets, profit, and equity d. Understatement of assets, profit, and equity ANSWER D Section 4.10

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Chapter 4: Adjusting the accounts and preparing financial statements

19. Deferral type adjustments occur when cash for expenses is paid in advance or cash from incomes is pre-collected. How many of the following will require a deferral type adjustment?  Rent paid for in advance  Buildings to be depreciated  Rent collected in advance from tenants  Stationery used by the office staff during the period a. 1 b. 2 c. 3 d. 4 ANSWER D Section 4.3 20. On the first day of the year Tan Traders purchased a forklift truck for $12 000 which is to be depreciated by 25% a year. At the end of the first year: a. Depreciation in the income statement is $3 000 and the carrying value of the forklift in the balance sheet is $12 000 b. Depreciation in the income statement is $3 000 and the carrying value of the forklift in the balance sheet is $15 000 c. Depreciation in the income statement is $3 000 and the carrying value of the forklift in the balance sheet is $9 000 d. Depreciation in the income statement is $0 and the carrying value of the forklift in the balance sheet is $12 000 ANSWER C Section 4.7.

21. The wages expense account for Gerry Mander, political consultants, showed the following entries for 2011. What was the portion of wages that was treated as an expense in 2010 but was not paid until 2011? Wages Expense Date Particulars Debit Credit Balance $ $ $ 2011 1 200 Cr 1 200 Jan 1 Accrued expenses 49 800 Dr Year Various cash payments 51 000 52 000 Dr Dec Accrued expenses 2 200 31 a. $49 800 b. $51 000 c. $1 200 d. $2 200 ANSWER C Section 4.5 © John Wiley & Sons Australia, Ltd 2012

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Testbank to accompany Accounting 8e

22. If a company has earned income which has not been received in cash at the end of the accounting period an adjustment should be made which will: a. Debit an asset account and credit an income account b. Debit an expense account and credit cash c. Debit an income account and credit an asset account d. Debit an asset account and credit an expense account ANSWER A Section 4.5 23. ABC collects rents from several properties. Prior to recording adjusting entries, assume the Rent Income account has a credit balance of $8000. Two adjustments are to be made at the end of the financial year (1) an accrual for accrued rent income of $600 (2) the Unearned Rent Income account is to be decreased by $200. After processing these adjusting entries the amount of Rent Income to be shown in the income statement is: a. $8800 b. $8400 c. $7600 d. $7200 ANSWER A Section 4.7

24. The publishers of ‘Guide to the Stock Market’, a magazine published monthly, received $121 in advance, including $11 GST on 1 March, for a 1 year’s subscription (11 issues) beginning with the March issue. On receipt of the subscription which entry will the company make? a. Debit Cash $121; credit Subscriptions Income $121 b. Debit Cash $121; credit GST Collections $11, credit Unearned Subscriptions (liability) $110 c. Debit Cash $121; credit GST Collections $11, credit Subscriptions Received in Advance (asset) $110 d. Debit Cash $110; credit Subscriptions Income $110 ANSWER B Section 4.4

© John Wiley & Sons Australia, Ltd 2012

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Chapter 4: Adjusting the accounts and preparing financial statements

25. The publishers of ‘Guide to the Stock Market’, a magazine published monthly, received $121 in advance, including $11 GST on 1 March, for a 1 year’s subscription (11 issues) beginning with the March issue. At the end of the financial year on 30 June what entry will the company make? a. Debit Unearned Subscriptions (liability) $40; credit Subscriptions Income $40 b. Debit Cash $40; credit Subscriptions Income $40 c. Debit Cash $121; credit GST Collections $11, credit Unearned Subscriptions (liability) $110 d. Debit Unearned Subscriptions (liability) $40; credit Subscriptions Income $36; credit GST Collections $4. ANSWER A Section 4.4

26. In preparing its 2011 adjusting entries, the Philippoussis Company neglected to adjust the Office Supplies (asset) account for the amount of supplies used up during the year. As a result of this error: a. 2011 profit is understated, the balance of equity is understated, and assets are understated b. 2011 profit is overstated, the balance of equity is overstated, and assets are correctly stated c. 2011 profit is overstated, the balance of equity is overstated, and assets are overstated d. Liabilities are understated ANSWER C Section 4.7 27. Determine the cash payments made during the year for insurance premiums from the following information: $ Insurance expense (income statement) 475 Prepaid Insurance: Beginning Balance 220 Ending Balance 195 Assume all insurance premiums are paid in cash. a. $475 b. $195 c. $695 d. $450 ANSWER D Section 4.4

© John Wiley & Sons Australia, Ltd 2012

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Testbank to accompany Accounting 8e

28. The primary basis for the classification of assets and liabilities in the balance sheet is: a. Profitability b. Tangibility c. Liquidity d. Degree of risk ANSWER C Section 4.8

29. The capital account of a sole trader was credited with $5000. Which of these items would not give rise to such a credit? a. The business earned a profit of $5000 b. The owner brought in a private car valued at $5000 for business use c. The owner introduced $5000 new capital d. The owner paid an outstanding private gambling debt of $5000 from the business bank account ANSWER D Section 4.7 30. Current assets may be listed in the balance sheet in the order of their liquidity. Liquidity is: a. Another name for the operating cycle b. A measure of how many buyers there are for the asset c. Whether the asset is secured over a liability d. The average length of time it takes to convert an asset into cash ANSWER D Section 4.8 31. The current liability is: a. Accrued Delivery Expenses b. Accounts Receivable c. Electricity Expense d. Long-term Loan ANSWER A Section 4.8

© John Wiley & Sons Australia, Ltd 2012

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Chapter 4: Adjusting the accounts and preparing financial statements

32. The excess of current assets over current liabilities is known as: a. Equity b. Working capital c. Intangible assets d. Net assets ANSWER B Section 4.8

33. Obligations of the entity that do not require payment within one year of the balance sheet date are classified as: a. Current liabilities b. Non-current assets c. Current assets d. Non-current liabilities ANSWER D Section 4.8 34. Which of these is not an advantage of using a worksheet to assist in preparing the financial statements? a. All the information is assembled in one place b. It aids in the preparation of interim financial statements for internal use c. Reports can be prepared before making closing entries d. It means that the ledger can be dispensed with ANSWER D Section 4.9 35. Which of the following is not an advantage of preparing an adjusted trial balance? a. It verifies that the debits equal the credits in the ledger after the preparation of the adjusting entries b. It reduces the possibility of errors being carried forward from the ledger into the accounting reports c. It is a shortcut which means that the adjusting entries do not have to be entered into the ledger d. It assists in the preparation of the financial statements ANSWER C Section 4.6

© John Wiley & Sons Australia, Ltd 2012

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Testbank to accompany Accounting 8e

Fill in the blanks 1. Under the ______________ basis of accounting, income is recognised when earned and expenses when incurred. ANSWER accrual Section 4.1

2. The c____________ basis of accounting is not a generally accepted method of determining profit for businesses that have significant credit transactions. ANSWER cash Section 4.1 3. The o_____________ cycle is the average time it takes for a firm to acquire and sell inventory and collect the cash from the sale. ANSWER operating Section 4.8 4. Unearned income is classified as a l______________ in the balance sheet as, if the income is not earned, it may need to be repaid. ANSWER liability Section 4.4

5. Accumulated depreciation is referred to as a c ___________ asset account because it offsets a related asset account. ANSWER contra Section 4.7 6. The c_____________ v____________ of an asset is its original cost less accumulated depreciation. ANSWER carrying value Section 4.4

7. Goodwill is classified in the balance sheet as an i_____________ asset. ANSWER intangible Section 4.8 © John Wiley & Sons Australia, Ltd 2012

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Chapter 4: Adjusting the accounts and preparing financial statements

8. C_____________ l______________ are obligations of the firm that are expected, in the normal course of business, to be settled in the next twelve months. ANSWER Current liabilities Section 4.8 9. A spreadsheet, prepared either manually or electronically and used by accountants to organise information, is known as a w____________. ANSWER worksheet Section 4.9 10. Because income and expense accounts are reduced to zero at the end of the year they are known as t ____________ accounts. ANSWER temporary Section 4.1

© John Wiley & Sons Australia, Ltd 2012

4.13

Testbank to accompany Accounting 8e

Exam type questions QUESTION 4.1 The following trial balance was prepared from the ledger accounts of Singapore Enterprises, a service business. Trial Balance as at 31 December 2011 Debit $ Bank overdraft Prepaid rent Office equipment and fittings Accumulated depreciation, office equipment Accounts payable GST collections GST outlays Accounts receivable Income earned Salaries Internet service provider Utilities expenses Administrative expenses Interest expense Capital – L. Tan 1 January 2011 Drawings – L. Tan

Credit $ 5,100

4,500 187,000 30,000 19,600 3,700 2,800 33,000 245,000 95,000 500 18,000 15,000 12,000 94,400 30,000 $397,800

$397,800

Adjustments:   

Rent expired for the year was $2,500. Depreciation of office equipment is at 15% per annum using the straight line method. Salaries owing at 31 December 2011 were $3,000.

REQUIRED: a) Prepare general journal entries for the balance day adjustments. Narrations are not required. b) Prepare an Income Statement for the year ended 30 December 2011. c) Prepare a classified Balance Sheet as at 31 December 2011.

QUESTION 4.2 © John Wiley & Sons Australia, Ltd 2012

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Chapter 4: Adjusting the accounts and preparing financial statements

The following trial balance was prepared from the ledger accounts of Taiwan Consultants a firm of management consultants. Taiwan Consultants

Unadjusted Trial Balance as at 30 June 2011

Debit Bank Stock office supplies on hand Office equipment Accumulated depreciation, office equipment Premises Accumulated depreciation, premises Accounts payable GST collections GST outlays Accounts receivable Fees revenue Rent revenue Advertising expense Administrative expenses Salaries Internet service provider Interest expense Telephone expense Loan (due 1 Sept 2015) Capital – L. Lee Drawings – L. Lee

$ 41,520 11,890 152,000

Credit $

24,400 800,000 64,000 33,000 5,500 3,500 46,000 880,600 16,000 25,000 30,000 390,000 2,000 19,000 8,000 200,000 345,410 40,000 $1,568,910

$1,568,910

Adjustments:       

Salaries are $1500 per day. They are paid weekly in arrears. The next pay day is July 3 which is a Wednesday. Depreciation on premises is 2% pa, on a straight-line basis. Depreciation of office equipment is 10% of the equipment’s...