TRUE/FALSE

1. A ledger is where the company initially records transactions and selected other events.

2. Nominal (temporary) accounts are revenue, expense, and dividend accounts and are periodically

closed.

3. Real (permanent) accounts are revenue, expense, and dividend accounts and are periodically

closed.

4. An example of an internal event would be a flood that destroyed a portion of a company's

inventory.

5. All liability and stockholders' equity accounts are increased on the credit side and decreased on the

debit side.

6. In general, debits refer to increases in account balances, and credits refer to decreases.

7. The first step in the accounting cycle is the journalizing of transactions and selected other events.

8. One purpose of a trial balance is to prove that debits and credits of an equal amount are in the

general ledger.

9. A general journal chronologically lists transactions and other events, expressed in terms of debits

and credits to accounts.

10. If a company fails to post one of its journal entries to its general ledger, the trial balance will not

show an equal amount of debit and credit balance accounts.

11. Adjusting entries for prepayments record the portion of the prepayment that represents the expense

incurred or the revenue earned in the current accounting period.

12. An adjustment for wages expense, earned but unpaid at year end, is an example of an accrued

expense.

13. The book value of any depreciable asset is the difference between its cost and its salvage value.

14. The ending retained earnings balance is reported on both the retained earnings statement and the

balance sheet.

15. The post-closing trial balance consists of asset, liability, owners' equity, revenue and expense

accounts.

16. All revenues, expenses, and the dividends account are closed through the Income Summary

account.

17. It is not necessary to post the closing entries to the ledger accounts because new revenue and

expense accounts will be opened in the subsequent accounting period.

18. The accrual basis recognizes revenue when earned and expenses in the period when cash is paid.

19. Reversing entries are made at the end of the accounting cycle to correct errors in the original

recording of transactions.

20. An adjusted trial balance that shows equal debit and credit columnar totals proves the accuracy of

the adjusting entries.

MULTIPLE CHOICEConceptual

1. Debit always means

a. right side of an account.

b. increase.

c. decrease.

d. none of these.

2. A trial balance

a. proves that debits and credits are equal in the ledger.

b. supplies a listing of open accounts and their balances that are used in preparing financial

statements.

c. is normally prepared three times in the accounting cycle.

d. all of these.

4. Which of the following is a nominal (temporary) account?

a. Unearned Revenue

b. Salary Expense

c. Inventory

d. Retained Earnings

5. Nominal accounts are also called

a. temporary accounts.

b. permanent accounts.

c. real accounts.

d. none of these.

6. The double-entry accounting system means

a. Each transaction is recorded with two journal entries.

b. Each item is recorded in a journal entry, then in a general ledger account.

c. The dual effect of each transaction is recorded with a debit and a credit.

d. More than one of the above.

7. When a corporation pays a note payable and interest,

a. the account notes payable will be increased.

b. the account interest expense will be decreased.

c. they will debit notes payable and interest expense.

d. they will debit cash.

8. Stockholders' equity is not affected by all

a. cash receipts.

b. dividends.

c. revenues.

d. expenses.

9. The debit and credit analysis of a transaction normally takes place

a. before an entry is recorded in a journal.

b. when the entry is posted to the ledger.

c. when the trial balance is prepared.

d. at some other point in the accounting cycle.

10. The accounting equation must remain in balance

a. throughout each step in the accounting cycle.

b. only when journal entries are recorded.

c. only at the time the trial balance is prepared.

d. only when formal financial statements are prepared.

11. An optional step in the accounting cycle is the preparation of

a. adjusting entries.

b. closing entries.

c. a statement of cash flows.

d. a post-closing trial balance.

12. A trial balance may prove that debits and credits are equal, but

a. an amount could be entered in the wrong account.

b. a transaction could have been entered twice.

c. a transaction could have been omitted.

d. all of these.

13. A general journal

a. chronologically lists transactions and other events, expressed in terms of debits and credits.

b. contains one record for each of the asset, liability, stockholders' equity, revenue, and expense

accounts.

c. lists all the increases and decreases in each account in one place.

d. contains only adjusting entries.

14. A journal entry to record the sale of inventory on account will include a

a. debit to inventory.

b. debit to accounts receivable.

c. debit to sales.

d. credit to cost of goods sold.

15. A journal entry to record a payment on account will include a

a. debit to accounts receivable.

b. credit to accounts receivable.

c. debit to accounts payable.

d. credit to accounts payable.

16. A journal entry to record a receipt of rent revenue in advance will include a

a. debit to rent revenue.

b. credit to rent revenue.

c. credit to cash.

d. credit to unearned rent.

17. Which of the following errors will cause an imbalance in the trial balance?

a. Omission of a transaction in the journal.

b. Posting an entire journal entry twice to the ledger.

c. Posting a credit of $720 to Accounts Payable as a credit of $720 to Accounts Receivable.

d. Listing the balance of an account with a debit balance in the credit column of the trial balance.

18. Which of the following is not a principal purpose of an unadjusted trial balance?

a. It proves that debits and credits of equal amounts are in the ledger.

b. It is the basis for any adjustments to the account balances.

c. It supplies a listing of open accounts and their balances.

d. It proves that debits and credits were properly entered in the ledger accounts.

19. An adjusting entry should never include

a. a debit to an expense account and a credit to a liability account.

b. a debit to an expense account and a credit to a revenue account.

c. a debit to a liability account and a credit to revenue account.

d. a debit to a revenue account and a credit to a liability account.

20. Which of the following is an example of an accrued expense?

a. Office supplies purchased at the beginning of the year and debited to an expense account.

b. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year.

c. Depreciation expense

d. Rent earned during the period, to be received at the end of the year

21. Which of the following statements is associated with the accrual basis of accounting?

a. The timing of cash receipts and disbursements is emphasized.

b. A minimum amount of record keeping is required.

c. This method is used less frequently by businesses than the cash method of accounting.

d. Revenues are recognized in the period they are earned, regardless of the time period the cash is

received.

22. An adjusting entry to record an accrued expense involves a debit to a(an):

a. expense account and a credit to a prepaid account.

b. expense account and a credit to Cash.

c. expense account and a credit to a liability account.

d. liability account and a credit to an expense account.

23. Which of the following properly describes a deferral?

a. Cash is received after revenue is earned.

b. Cash is received before revenue is earned.

c. Cash is paid after expense is incurred.

d. Cash is paid in the same time period that an expense is incurred.

24. Recording the adjusting entry for depreciation has the same effect as recording the adjusting entry

for

a. an unearned revenue.

b. a prepaid expense.

c. an accrued revenue.

d. an accrued expense.

25. Unearned revenue on the books of one company is likely to be

a. a prepaid expense on the books of the company that made the advance payment.

b. an unearned revenue on the books of the company that made the advance payment.

c. an accrued expense on the books of the company that made the advance payment.

d. an accrued revenue on the books of the company that made the advance payment.

26. When an item of expense is paid and recorded in advance, it is normally called a(n)

a. prepaid expense.

b. accrued expense.

c. estimated expense.

d. cash expense.

27. When an item of revenue or expense has been earned or incurred but not yet collected or paid, it is

normally called a(n) ____________ revenue or expense.

a. prepaid

b. adjusted

c. estimated

d. none of these

28. When an item of revenue is collected and recorded in advance, it is normally called a(n)

___________ revenue.

a. accrued

b. prepaid

c. unearned

d. cash

29. An accrued expense can best be described as an amount

a. paid and currently matched with earnings.

b. paid and not currently matched with earnings.

c. not paid and not currently matched with earnings.

d. not paid and currently matched with earnings.

30. Which of the following must be considered in estimating depreciation on an asset for an accounting

period?

a. The original cost of the asset

b. Its useful life

c. The decline of its fair market value

d. Both the original cost of the asset and its useful life.

31. Which of the following would not be a correct form for an adjusting entry?

a. A debit to a revenue and a credit to a liability

b. A debit to an expense and a credit to a liability

c. A debit to a liability and a credit to a revenue

d. A debit to an asset and a credit to a liability

32. A prepaid expense can best be described as an amount

a. paid and currently matched with revenues.

b. paid and not currently matched with revenues.

c. not paid and currently matched with revenues.

d. not paid and not currently matched with revenues.

33. An accrued revenue can best be described as an amount

a. collected and currently matched with expenses.

b. collected and not currently matched with expenses.

c. not collected and currently matched with expenses.

d. not collected and not currently matched with expenses.

34. An unearned revenue can best be described as an amount

a. collected and currently matched with expenses.

b. collected and not currently matched with expenses.

c. not collected and currently matched with expenses.

d. not collected and not currently matched with expenses.

35. 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 generally accepted accounting principles.

d. cannot be used to prepare financial statements.

36. Which type of account is always debited during the closing process?

a. Dividends.

b. Expense.

c. Revenue.

d. Retained earnings.

37. Which of the following statements best describes the purpose of closing entries?

a. To faciliate posting and taking a trial balance.

b. To determine the amount of net income or net loss for the period.

c. To reduce the balances of revenue and expense accounts to zero so that they may be used to

accumulate the revenues and expenses of the next period.

d. To complete the record of various transactions that were started in a prior period.

38. Under the cash basis of accounting, revenues are recorded

a. when they are earned and realized.

b. when they are earned and realizable.

c. when they are earned.

d. when they are realized.

39. The worksheet for Sharko Co. consisted of five pairs of debit and credit columns. The dollar amount

of one item appeared in both the credit column of the income statement section and the debit column

of the balance sheet section. That item is

a. net income for the period.

b. beginning inventory.

c. cost of goods sold.

d. Net loss for the period.

40. On September 1, 2010, Lowe Co. issued a note payable to National Bank in the amount of $600,000,

bearing interest at 12%, and payable in three equal annual principal payments of $200,000. On this

date, the bank's prime rate was 11%. The first payment for interest and principal was made on

September 1, 2011. At December 31, 2011, Lowe should record accrued interest payable of

a. $24,000.

b. $22,000.

c. $16,000.

d. $14,667.

41. Eaton Co. sells major household appliance service contracts for cash. The service contracts are for a

one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned

Service Revenues. This account had a balance of $1,800,000 at December 31, 2010 before year-end

adjustment. Service contract costs are charged as incurred to the Service Contract Expense account,

which had a balance of $450,000 at December 31, 2010.

Service contracts still outstanding at December 31, 2010 expire as follows:

During 2011 $380,000

During 2012 570,000

During 2013 350,000

What amount should be reported as Unearned Service Revenues in Eaton's December 31, 2010

balance sheet?

a. $1,350,000.

b. $1,300,000.

c. $850,000.

d. $500,000.

42. On June 1, 2010, Nott Corp. loaned Horn $400,000 on a 12% note, payable in five annual

installments of $80,000 beginning January 2, 2011. In connection with this loan, Horn was required

to deposit $5,000 in a noninterest-bearing escrow account. The amount held in escrow is to be

returned to Horn after all principal and interest payments have been made. Interest on the note is

payable on the first day of each month beginning July 1, 2010. Horn made timely payments through

November 1, 2010. On January 2, 2011, Nott received payment of the first principal installment plus

all interest due. At December 31, 2010, Nott's interest receivable on the loan to Horn should be

a. $0.

b. $4,000.

c. $8,000.

d. $12,000.

43. Allen Corp.'s liability account balances at June 30, 2011 included a 10% note payable in the amount

of $2,400,000. The note is dated October 1, 2009 and is payable in three equal annual payments of

$800,000 plus interest. The first interest and principal payment was made on October 1, 2010. In

Allen's June 30, 2011 balance sheet, what amount should be reported as accrued interest payable for

this note?

a. $180,000.

b. $120,000.

c. $60,000.

d. $40,000.

44. Colaw Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the

next biweekly period. Colaw accrues salaries expense only at its December 31 year end. Data

relating to salaries earned in December 2010 are as follows:

Last payroll was paid on 12/26/10, for the 2-week period ended 12/26/10.

Overtime pay earned in the 2-week period ended 12/26/10 was $10,000.

Remaining work days in 2010 were December 29, 30, 31, on which days there was no overtime.

The recurring biweekly salaries total $180,000.

Assuming a five-day work week, Colaw should record a liability at December 31, 2010 for accrued

salaries of

a. $54,000.

b. $64,000.

c. $108,000.

d. $118,000.

45. Tolan Corp.'s trademark was licensed to Eddy Co. for royalties of 15% of sales of the trademarked

items. Royalties are payable semiannually on March 15 for sales in July through December of the

prior year, and on September 15 for sales in January through June of the same year. Tolan received

the following royalties from Eddy:

March 15 September 15

2009 $5,000 $7,500

2010 6,000 8,500

Eddy estimated that sales of the trademarked items would total $40,000 for July through December

2010. In Tolan's 2010 income statement, the royalty revenue should be

a. $14,500.

b. $16,000.

c. $20,500.

d. $22,000.