CHAPTER 5: ADJUSTING THE ACCOUNTS (Solution)

TRUE-FALSE
1. The time period assumption states that the economic life of a business entity can be divided into
artificial time periods.
A. TRUE
B. FALSE

2. A company's calendar year and fiscal year are always the same.
A. TRUE
B. FALSE

3. Under International Financial Reporting Standards, the cash-basis of accounting requires companies
to record transactions in the period in which the events occur.
A. TRUE
B. FALSE

4. The cash basis of accounting is not in accordance with IFRS.

A. TRUE
B. FALSE

5. The revenue recognition principle dictates that revenue be recognized in the accounting period in
which cash is received.
A. TRUE
B. FALSE

6. The expense recognition principle requires that expenses be matched with revenues.
A. TRUE
B. FALSE

7. Adjusting entries impact at least one income statement and at least one statement of financial position
account.
A. TRUE
B. FALSE

8. Types of adjusting entries include unearned revenue, which requires the company to record a liability
on the statement of financial position.
A. TRUE
B. FALSE

9. Accrued revenues are revenues that have been received but not yet earned.
A. TRUE
B. FALSE

10. Accrued expenses result in an adjustment to both income statement and statement of financial
position accounts.
A. TRUE
B. FALSE

11. The Unearned Service Revenue account is for a prepayment and requires an adjusting entry when
services are performed.
C. TRUE
D. FALSE

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12. An example of an adjusting entry that increases an expense on the income statement and decreases an
asset on the statement of financial position is the expiration of prepaid expenses with the passage of
time.
A. TRUE
B. FALSE

13. An adjusting entry for accrued revenues increases an asset account reported on the statement of
financial position and increases a revenue account reported on the income statement.
A. TRUE
B. FALSE

14. The accounts in the adjusted trial balance contain all the data the company needs to prepare its
statement of financial position.
A. TRUE
B. FALSE

15. An adjusted trial balance should be prepared before the adjusting entries are made.
A. TRUE
B. FALSE

MULTIPLE CHOICE
Circle the right answer:
16. Monthly and quarterly time periods are called
a. calendar periods.
b. fiscal periods.
c. interim periods.
d. quarterly periods.

17. The time period assumption states that

a. a transaction can only affect one period of time.
b. estimates should not be made if a transaction affects more than one time period.
c. adjustments to the enterprise's accounts can only be made in the time period when the business
terminates its operations.
d. the economic life of a business can be divided into artificial time periods.

18. An accounting time period that is one year in length, but does not begin on January 1, is referred to as
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.

19. Which of the following is not a common time period chosen by businesses as their accounting period?
a. daily
b. monthly
c. quarterly
d. annually

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20. Which of the following is in accordance with IFRS?
a. Accrual basis accounting
b. Cash basis accounting
c. Both accrual basis and cash basis accounting
d. Neither accrual basis nor cash basis accounting

21. The revenue recognition principle dictates that revenue should be recognized in the accounting
records
a. when cash is received.
b. when the performance obligation is satisfied.
c. at the end of the month.
d. in the period that income taxes are paid.

22. The expense recognition principle matches

a. customers with businesses.
b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.

23. Adjusting entries are required

a. yearly.
b. quarterly.
c. monthly.
d. every time financial statements are prepared.

24. Adjusting entries

a. ensure that the revenue recognition and expense recognition principles are followed.
b. are necessary to enable the financial statements to conform to International Financial Reporting
Standards.
c. include both accruals and deferrals.
d. All of the answer choices are correct.

25. An adjusting entry

a. affects two statement of financial position accounts.
b. affects two income statement accounts.
c. affects a statement of financial position account and an income statement account.
d. is always a compound entry.

26. Expenses incurred but not yet paid or recorded are called
a. prepaid expenses.
b. accrued expenses.
c. interim expenses.
d. unearned expenses.

27. Prepaid expenses are

a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

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28. Bee-In-The-Bonnet Company purchased office supplies costing $8,000 and debited Supplies for the full
amount. At the end of the accounting period, a physical count of supplies revealed $2,200 still on hand.
The appropriate adjusting journal entry to be made at the end of the period would be
a. Debit Supplies Expense, $2,200; Credit Supplies, $2,200.
b. Debit Supplies, $5,800; Credit Supplies Expense, $5,800.
c. Debit Supplies Expense, $5,800; Credit Supplies, $5,800.
d. Debit Supplies, $2,200; Credit Supplies Expense, $2,200.
Solution : Supplies Expense = $8,000 - $2,200 = $5,800

29. Action Real Estate received a check for $24,000 on July 1 which represents a 6-month advance
payment of rent on a building it rents to a tenant. Unearned Rent Revenue was credited for the full
$24,000. Financial statements will be prepared on July 31. Action Real Estate should make the
following adjusting entry on July 31:
a. Debit Unearned Rent Revenue, $4,000; Credit Rent Revenue, $4,000.
b. Debit Rent Revenue, $4,000; Credit Unearned Rent Revenue, $4,000.
c. Debit Unearned Rent Revenue, $24,000; Credit Rent Revenue, $24,000.
d. Debit Cash, $24,000; Credit Rent Revenue, $24,000.
Solution : Rent revenue (1 month) = $24,000 ÷ 6-month = $4,000

30. If a company fails to make an adjusting entry to record supplies expense, then
a. equity will be understated.
b. expenses will be understated.
c. assets will be understated.
d. net income will be understated.

31. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would
cause
a. net income to be understated.
b. an overstatement of assets and an overstatement of liabilities.
c. an understatement of expenses and an understatement of liabilities.
d. an overstatement of expenses and an overstatement of liabilities.

32. Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause
a. net income to be overstated.
b. an understatement of assets and an understatement of revenues.
c. an understatement of revenues and an understatement of liabilities.
d. an understatement of revenues and an overstatement of liabilities.

33. Financial statements are prepared directly from the

a. general journal.
b. ledger.
c. trial balance.
d. adjusted trial balance.

34. An adjusted trial balance

a. is prepared after the financial statements are completed.
b. proves the equality of the total debit balances and total credit balances of ledger accounts after all
adjustments have been made.
c. is a required financial statement under IFRS.
d. cannot be used to prepare financial statements.