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Exam 3: Adjusting Accounts and Preparing Financial Statements

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Question 21

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On January 1, Fashion Forward Magazine received $15,000 from subscribers for the annual subscriptions that it recorded in Unearned Subscription Revenue. The issues of the magazine are mailed to subscribers quarterly. What amount of subscription revenue should the magazine recognize on March 31 when the first issue is sent in March?

A) $1,250.
B) $3,750.
C) $15,000.
D) $7,500.
E) $0.

F) C) and E)
G) B) and C)

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Question 22

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Unearned revenue is reported in the financial statements as:

A) A liability on the balance sheet.
B) A financing activity on the statement of cash flows.
C) A revenue on the balance sheet.
D) An asset on the balance sheet.
E) An unearned revenue on the income statement.

F) B) and D)
G) A) and C)

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Question 23

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If Regent Tax Services' office supplies account balance on March 1 was $1,400, the company purchased $675 of supplies during the month, and a physical count of supplies on hand at the end of March indicated $1,250 unused, what is the amount of the adjusting entry for office supplies on March 31?

On October 15, a company received $15,000 cash as a down payment on a consulting contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of the services required by the contract were completed. The company will record consulting revenue of $1,500 from this contract for October.

The broad principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses is the:

Companies experiencing seasonal variations in sales often choose a fiscal year corresponding to their ________ year.

Prepare adjusting entries for the year ended December 31, for each of these separate situations. Assume that prepaid expenses are initially recorded in asset accounts and that fees collected in advance are initially recorded as liabilities. a. The Prepaid Rent account has a debit balance of $8,000 before adjustment, representing a prepayment for four months' rent made on December 1 of the current year. b. One-third of the work related to $18,000 of cash received in advance was performed during this period. c. Unpaid accrued salaries at December 31 amounts to $15,000 d. Work was completed for a client on December 31 in the amount of $21,000, but was not previously billed or recorded. e. Estimated depreciation on office equipment is $27,000.

Using the selected information given below for Luk Company, calculate the return on assets, debt ratio, and profit margin. Comment on the results of operations and the financial position of the company for the year. $\begin{array} { | l | l | } \hline \text { Sales } & 1,050,000 \\\hline \text { Expenses } & 795,000 \\\hline \text { Assets (begining of the year) } & 1,500,000 \\\hline \text { Assets (end of the year) } & 1,900,000 \\\hline \text { Labilities } & 850,000 \\\hline\end{array}$

Discuss the importance of periodic reporting and the time period assumption.

Profit margin can also be called return on sales.

The ________ depreciation method allocates equal amounts of an asset's cost to depreciation during its useful life.

Which of the following statements is incorrect?

The cash basis of accounting is a system in which revenues are recorded when earned and expenses are recorded when incurred.

In its first year of operations, Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers) ; Incurred expenses of $35,000 ($31,000 cash paid toward them) ; Prepaid $8,000 cash for costs that will not be expensed until next year. Net income under the cash basis of accounting is:

The accrual basis of accounting recognizes revenues when cash is received from customers.

On May 1, a two-year insurance policy was purchased for $18,000 with coverage to begin immediately. What is the amount of insurance expense that would appear on the company's income statement for the first year ended December 31?

Depreciation expense is an example of an accrued expense.

On December 31, Chu Company had performed $3,000 of management services for clients that had not yet been billed. Prepare Chu's adjusting entry to record these fees earned.

The adjusting entry at the end of an accounting period to record the unpaid salaries of employees for work provided is:

The periodic expense created by allocating the cost of plant and equipment to the periods in which they are used, representing the expense of using the assets, is called: