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Exam 3: Adjusting Accounts and Preparing Financial Statements

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Question 71

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A company's fiscal year must correspond with the calendar year.

A) True
B) False

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Question 72

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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, and adjustments are only made at year-end. The adjusting entry needed on December 31 is:

A) Debit Interest Receivable, $500; credit Interest Revenue, $500.
B) Debit Interest Receivable, $1,000; credit Interest Revenue, $1,000.
C) No entry required.
D) Debit Interest Expense, $1,000; credit Note Payable, $1,000.
E) Debit Interest Expense, $5,000; credit Interest Payable, $5,000.

F) A) and D)
G) C) and E)

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Question 73

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On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The subscriptions started immediately. -What is the amount of revenue that should be recorded by Griffith Publishing Company for the second year of the subscription assuming the company uses a calendar-year reporting period?

The accrual basis of accounting reflects the principle that revenue is recorded when it is earned, not when cash is received.

A company's Office Supplies account shows a beginning balance of $600 and an ending balance of $400. If office supplies expense for the year is $3,100, what amount of office supplies was purchased during the period?

On October 1, Goodwell Company rented warehouse space to a tenant for $2,500 per month. The tenant paid five months' rent in advance on that date, with the lease beginning immediately. The cash receipt was credited to the Unearned Rent account. The company's annual accounting period ends on December 31. The adjusting entry needed on December 31 is:

On December 31, the year end, a company forgot to record $6,000 of depreciation on machinery. In the current year financial statements, what is the effect of this error on assets, net income, and equity?

Under the alternative method for recording prepaid expenses, which is the correct set of journal entries?

An adjusting entry often includes an entry to Cash.

On November 1 of the current year, Salinger Company paid $9,600 cash for a one-year insurance policy that took effect on that day. On the date of the payment, Salinger recorded the following entry: $\begin{array}{lll}\text { Nov. } 01 & \text { Insurance Expense } &9,600\\&\text { Cash }&&9,600\end{array}$ Assuming Salinger only prepares adjustments at year-end, prepare the required adjusting entry at December 31 of the current year.

On July 1 of the current calendar year, Plum Co. paid $7,500 cash for management services to be performed over a two-year period beginning July 1. Plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 of the current year for Plum would include:

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The subscriptions started immediately. - What is the amount of revenue that should be recorded by Griffith Publishing Company for the first year of the subscription assuming the company uses a calendar-year reporting period?

Accrued expenses at the end of one accounting period are expected to result in cash payments in a future period.

Match the following terms with the appropriate definition. A. Accrual basis accounting B. Cash basis accounting C. Fiscal year D. Interim financial statements E. Depreciation F. Straight-line depreciation G. Time period assumption H. Expense recognition (matching) principle I. Accrued revenues _____ 1. Any 12 consecutive months or 52-week period that a company adopts for its annual reporting period. 2. A method that allocates equal amounts of an asset's cost (less any salvage value) to depreciation expense during its useful life. _____ 3. Assumes that an organization's activities can be divided into specific time periods such as months, quarters, or years. _____ 4. Aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses. _____ 5. The accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred. _____ 6. The process of allocating the costs of long-term assets to the income statement over their expected useful lives. _____ 7. Revenues earned in a period that are both unrecorded and not yet received in cash or other assets. _____ 8. The accounting system that recognizes revenue when cash is received and records expenses when cash is paid. _____ 9. A set of financial statements that covers less than one year, typically one, three, or six months of activity.

Sanborn Company rents space to a tenant for $2,200 per month. The tenant currently owes rent for November and December. The tenant has agreed to pay the November, December, and January rents in full on January 15 and has agreed not to fall behind again. The adjusting entry needed on December 31 is:

The entry to record a cash receipt from a customer when the service is to be provided in a future period involves a debit to an unearned revenue account.

Holman Company owns equipment with an original cost of $95,000 and an estimated salvage value of $5,000 that is being depreciated at $15,000 per year using the straight-line depreciation method, and only prepares adjustments at year-end. The adjusting entry needed to record annual depreciation is:

The adjusting entry to record an accrued revenue is:

On December 31, Winters Company received a $385 bill for the purchase of supplies in December that it will not pay for until January 15. Winters follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry needed on December 31 to accrue this cost is:

Why are financial statements prepared in a specific order? What is the usual order in which financial statements are prepared from the adjusted trial balance?