- In which type of business would accrual-basis accounting result in the same income measure as cash-basis accounting?
o Large manufacturing business in which orders are received now, cash advances are collected from customers now, and delivery of manufactured products occurs many years from now
o Medium-sized construction business in which most of the assets are long-term construction equipment items that last for up to 15 years
o Small business in which all sales amounts are collected in cash at the time of the sale and all expenses are paid in cash immediately
o Small manufacturing business in which routine inventory items are produced in bulk now, stored for two or three years, and then sold to customers
o
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Generally accepted accounting principles (GAAP) require that the financial statements of all publicly traded companies be reported using accrual-basis accounting. What is a correct description of accrual accounting?
o Recording the amount of revenues and the amount of expenses when cash is received or paid
o Recording the amount of revenues and the amount of expenses when budgets are approved and adopted
o Recording the amount of revenues and the amount of expenses when process cycles are complete
o Recording revenues and expenses when earned or incurred, not when cash is received or paid
o
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A fundamental principle in accounting is that expenses are recognized in the period in which those costs provide benefit to the business in the form of increased revenue. What name is given to this important principle?
o Revenue recognition principle
o Fiscal principle
o Measurement principle
o Matching principle
o Sorting principle
o
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On May 1, Clark Company paid cash for rent. This payment of the cash was recorded as an asset, Prepaid Rent. Which debit or credit is correctly included in the ADJUSTING journal entry necessary on December 31 with respect to this prepaid rent?
o DEBIT to Cash
o CREDIT to Rent Expense
o DEBIT to Rent Expense
o CREDIT to Cash
o
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On October 1 of Year 1, Della Company made a cash loan to another company. The interest rate on the loan is 13%. No cash payments will be collected on the loan until September 30 of Year 2. Which debit or credit is correctly included in the ADJUSTING journal entry necessary on Della’s books (the LENDER) on December 31 of Year 1 with respect to this loan?
o CREDIT to Cash
o CREDIT to Interest Expense
o DEBIT to Interest Expense
o CREDIT to Interest Revenue
o DEBIT to Interest Revenue
o
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On September 1 of Year 1, Dee Company received cash for rent in advance. This rental receipt covers the period from September 1 of Year 1 to August 31 of Year 2. This receipt of cash was recorded as a liability, Unearned Rent. Which debit or credit is correctly included in the ADJUSTING journal entry necessary on December 31 of Year 1 with respect to this rent received in advance?
o CREDIT to Rent Revenue
o CREDIT to Cash
o CREDIT to Rent Expense
o DEBIT to Rent Expense
o DEBIT to Rent Revenue
o
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A debate is raging inside the top management team of Millcreek Company. The chief executive officer (CEO) is preparing to take the company’s financial statements to a group of private investors in order to raise additional equity financing for the company. The CEO has prepared an income statement which the controller (the head accountant) says is wrong. The controller claims that the CEO has forgotten to report interest expense on a loan Millcreek got last year. The CEO claims that no interest expense should be reported because the interest won’t be paid in cash until next year.
To illustrate the concept of accrual accounting, which is the concept that must be used under Generally Accepted Accounting Principles (GAAP), the controller is preparing to show the CEO the ADJUSTING entries Millcreek is required to make under GAAP.
On May 1, Millcreek Company borrowed cash under a one-year loan agreement. The annual interest rate is 3%. As of the end of the year, no entry has yet been made to record the accrued interest on the loan. Which debit or credit is correctly included in the ADJUSTING journal entry necessary on December 31 on Millcreek’s books (the BORROWER) to record the unpaid interest?
o CREDIT to Interest Revenue
o CREDIT to Interest Expense
o DEBIT to Interest Payable
o CREDIT to Interest Payable
o DEBIT to Interest Revenue
o
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Logan Company pays its employees at the end of the day Friday for work done during that 5-day work week. In the current year, December 31 occurred on a Wednesday, so 3 days of wages were earned but not paid by the end of day on December 31. Which debit or credit is correctly included in the adjusting journal entry necessary on December 31 to record the wages that Logan Company has not yet paid?
o CREDIT to Retained Earnings
o CREDIT to Wages Payable
o CREDIT to Wages Expense
o DEBIT to Wages Payable
o
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On December 31, Morgan Company received a statement from its book distributor notifying Morgan that the company had earned $50,000 for its December royalties. This amount will be paid to Morgan next year in February. Because December 31 is the end of Morgan’s fiscal year, the company makes adjusting entries at that time. Which debit or credit is correctly included in the adjusting journal entry necessary on December 31 to record the royalty revenue that Morgan has earned but not yet received?
o CREDIT to Royalty Revenue
o CREDIT to Accounts Payable
o CREDIT to Accounts Receivable
o DEBIT to Accounts Payable
o DEBIT to Royalty Revenue
o
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On March 1 of Year 1, Murray Company paid cash for insurance. This insurance payment covers the period from March 1 of Year 1 to February 28 of Year 2. On March 1 of Year 1 this amount was recorded as an asset, Prepaid Insurance. Which debit or credit is correctly included in the adjusting journal entry necessary on December 31 with respect to this insurance paid in advance?
o CREDIT to Insurance Expense
o DEBIT to Cash
o DEBIT to Prepaid Insurance
o DEBIT to Insurance Expense
o
