1) In 2011, Company Y has received a prepayment of $2,000 for the service to be done in 2012. In 2012, Company Y has rendered the service for an amount of $1,500 but failed to record any adjusting entry. What happens to Company Y's net income in 2012?

a) Net income would be overstated by $1,500.

b) Net income would be overstated by $500.

c) Net income would be understated by $500.

d) Net income would be understated by $1,500.

e) None of the choices listed.

2) On January 1, a company received advanced membership payments of $300 from a customer for the next 6 months. The membership is in effect immediately. By how much would the company's equity have changed by March 31?

a) $50

b) $300

c) $0

d) $150

e) None of the choices listed

3) Revenue recoginition results in:

a) an increase in loans.

b) an increase in capital assets.

c) an increase in equity.

d) a decrease in expenses.

e) None of the choices listed.

4) Which of the following is the correct journal entey to record one month of expired prepaid insurance?

a) Increase prepaid insurance and decrease cash

b) Increase insurance expense and decrease cash

c) Increase prepaid insurance and decrease insurance expense

d) Increase insurance expense and decrease prepaid insurance

e) None of the choices listed

5) When prepaid rent is recognized as an expense, which of the following is true?

a) Prepaid rent decrease, rent expense on the income statement increases and equity increases

b) Cash decreases and equity decreases

c) Prepaid rent decrease, rent expense of the balance sheet increases and equity decreases.

d) Prepaid rent decrease, rent expense on the income statement increases and equity decreases

e) None of the choices listed

6) Recognizing prepaid expense would cause equity to:

a) increase

b) decrease

c) no effect

d) not enough information

e) None of the choices listed

7) Extreme Cruise Inc. prepaid $4,500 for 3 months rent on July 1, 2010. What would be the balance of the Prepaid Rent account on September 1, 2010?

a) $4,500

b) $3,000

c) $1,500

d) $0

e) None of the choices listed

8) Which of the following statements is correct regarding adjustments?

a) Adjustments are optional

b) All adjustments are made at the beginning of the accounting period

c) Adjustments will correctly allocate cash to revenue or expenses

d) Adjustments update assets, liabilities, and owner's equity

e) None of the choices listed

9) A trial balance proves that:

a) each journal entry has been posted only once

b) all transactions have been recorded

c) toal debits equals total credits

d) there are no errors in the accounting records

e) None of the choices listed

10) Which of the following statements about posting to the general ledger is true?

a) It normally occurs before entering transactions into a journal

b) It involves the transfer of journal entries to the ledger accounts

c) It involves the transfer of transactions from the trial balance to the general ledger

d) All of the choices

e) None of the choices listed