Chapter 3 Question Review 1

Chapter 3 Questions
Multiple Choice
1. The revenue recognition principle state that:
a. Expenses should be matched with revenues
b. Revenue should be recognized in the accounting period in which a performance obligation is
satisfied
c. The fiscal year should correspond with the calendar year
d. The economic life of a business can be divided into artificial time periods.

2. Accumulated Depreciation is a(n):

a. expense account.
b. stockholders’ equity account.
c. liability account.
d. contra asset account.

3. If a business has received cash in advance of services performed and credits a liability account, the
adjusting entry needed after the services are performed will be: a. debit Unearned Service Revenue
and credit Cash.
b. debit Unearned Service Revenue and credit Service Revenue.
c. debit Unearned Service Revenue and credit Prepaid Expense.
d. debit Unearned Service Revenue and credit Accounts Receivable.

4. A law firm has billed their clients for services performed. They subsequently received payments from
their clients. What entry will the law firm make upon receipt of the payments? a. Debit Unearned
Service Revenue and credit Service Revenue
b. Debit Cash and credit Accounts Receivable
c. Debit Accounts Receivable and credit Service Revenue
d. Debit Cash and credit Service Revenue

5. The expense recognition principle matches:

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

6. Given the data below for a firm in its first year of operation, determine net income under the accrual
basis of accounting.
Revenue recognized $19,000
Accounts receivable 3,000
Expenses incurred 7,250
Accounts payable (related to expenses) 750
Supplies purchased with cash 1,800

a. $11,750
 Chapter 3 Question Review 2

b. $14,000
c. $9,500
d. $12,200
7. La More Company had the following transactions during 20X1.
• Sales of $9,000 on account
• Collected $4,000 for services to be performed in 20X2
• Paid $2,650 cash in salaries
• Purchased airline tickets for $500 in December for a trip to take place in 20X2

What is La More’s 20X1 net income using cash basis accounting?

a. $10,350
b. $1,350
c. $9,850
d. $850

8. The primary source used in the preparation of the financial statements is the: a.
trial balance.
b. post-closing trial balance.
c. general trial balance.
d. adjusted trial balance.

9. Which of the following statements about the accrual basis of accounting is False?
a. Events that change a company’s financial statements are recorded in the periods in which the
events occur.
b. Revenue is recorded only when cash is received, and expense is recorded only when cash is paid.
c. Revenue is recognized in the period in which services are performed
d. This basis is in accordance with GAAP (Generally accepted accounting principles)

10. On July 1 the Fisher Shoe Store paid $24,000 to Acme Realty for 6 months rent beginning July 1.
Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the
adjusting entry to be made by the Fisher Shoe Store is:
a. debit Rent Expense, $24,000; credit Prepaid Rent, $4,000.
b. debit Prepaid Rent, $4,000; credit Rent Expense, $4,000.
c. debit Rent Expense, $4,000; credit Prepaid Rent, $4,000.
d. debit Rent Expense, $24,000; credit Prepaid Rent, $20,000.

11. The Harris Company purchased equipment for $15,000 on December 1. It is estimated that annual
depreciation on the computer will be $3,000. If financial statements are to be prepared on December
31, the company should make the following adjusting entry:
a. debit Depreciation Expense, $3,000; credit Accumulated Depreciation, $3,000.
b. debit Depreciation Expense, $250; credit Accumulated Depreciation, $250.
c. debit Depreciation Expense, $12,000; credit Accumulated Depreciation, $12,000.
d. debit Equipment, $15,000; credit Accumulated Depreciation, $15,000.
 Chapter 3 Question Review 3

12. If a company fails to adjust an Unearned Rent Revenue account for rent that has been recognized,
what effect will this have on that month’s financial statements?
a. Assets will be understated and revenues will be understated.
b. Liabilities will be understated and revenues will be understated.
c. Liabilities will be overstated and revenues will be understated.
d. Assets will be overstated and revenues will be understated.

13. Adjustments for prepaid expenses:

a. decrease assets and increase revenues.
b. decrease expenses and increase assets
c. decrease revenues and increase assets
d. decrease assets and increase expenses

14. Adjusting entries are made to ensure that:

a. expense are recognized in the period in which they are incurred.
b. revenues are recorded in the period in which the performance obligation is satisfied.
c. balance sheet and income statement accounts have correct balances at the end of an accounting
period.
d. All of these answer choices are correct.

15, Chris Harper earned a salary of $550 for the last week of January. She will be paid on Feb 1. The
adjusting entry for Chris’ employer at Jan 31 is:
a. Dr. Salaries and Wages Expense $550
Cr. Salaries and Wages Payable $550
b. Dr Salaries and Wages Expense $550
Cr Cash $550
c. Dr Salaries and Wages Payable $550
Cr Cash $550
d. No entry is required
 Chapter 3 Question Review 4

EXERCISES
1. Match the statements below with the appropriate terms by entering the appropriate letter code
in the spaces provided.

TERMS:
A. Prepaid Expenses
B. Unearned Revenues
C. Accrued Revenues
D. Accrued Expenses

STATEMENTS:

___ 1. A revenue not yet recognized; collected in advance.

___ 2. Office supplies on hand that will be used in the next period.

___ 3. Subscription revenue collected; not yet recognized.

___ 4. Rent not yet collected; already recognized.

___ 5. An expense incurred; not yet paid or recorded.

___ 6. A revenue recognized; not yet collected or recorded.

___ 7. An expense not yet incurred; paid in advance.

___ 8. Interest expense incurred; not yet paid.

 Chapter 3 Question Review 5

2. Prepare adjusting entries on December 31 for the following transactions. Omit explanations.
(Lines provided below and on the next page)

a. Depreciation on equipment is $1,340 for the accounting period.

b. Interest owed on a loan but not paid or recorded is $275.
c. There was no beginning balance of supplies and $550 of office supplies were purchased during
the period. At the end of the period $100 of supplies were on hand.
d. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $700 had expired.
e. Accrued salaries at the end of the period amounted to $900.

Example: Bought supplies for $500 on Jan. Date Debit Credit

1.
Supplies Jan. 1 500
Cash 500
 Chapter 3 Question Review 6

3. Prepare adjusting entries on December 31 for the following transactions. Omit explanations.
(Lines provided below and on the next page)

a. Accrued interest on notes receivable is $30.

b. $1,000 of unearned service revenue has been recognized.
c. Three years’ rent, totaling $45,000, was paid in advance at the beginning of the year.
d. Services totaling $2,900 had been performed but not yet billed at the end of the year.
e. Depreciation on equipment totaled $6,500 for the year.
f. Supplies purchased totaled $850. By year end, only $250 of supplies remained.
g. Salaries owed to employees at the end of the year total $960

Example: Bought supplies for $500 on Jan. Date Debit Credit

1.
Supplies Jan. 1 500
Cash 500
 Chapter 3 Question Review 7

Chapter 3 Solutions Multiple Choice Solutions

1. B
2. D
3. B 4.
B
5. B
6. A
7. D
8. D
9. B
10. C
11. B
12. C
13. D
14. D
15. A
 Chapter 3 Question Review 8

Chapter 3 Solutions (Cont.)

Exercise Solutions
1. 1. B 2. A 3. B 4. C 5. D 6. C 7. A 8. D

2.

Example: Bought supplies for $500 on Jan. Date Debit Credit

1.
Supplies Jan. 1 500
Cash 500

a. Depreciation Expense Dec. 31 1,340

Accumulated Depreciation- Equipment 1,340

b. Interest Expense Dec. 31 275

Interest Payable 275

c. Supplies Expense Dec. 31 450

Supplies ($550 - $100) 450
 Chapter 3 Question Review 9

d. Rent Expense Dec. 31 700

Prepaid Rent 700

e. Salaries and Wages Expense Dec. 31 900

Salaries and Wages Payable 900

Chapter 3 Solutions (Cont.)

Exercise Solutions (Cont.)

3.

Example: Bought supplies for $500 on Jan. Date Debit Credit

1.
Supplies Jan. 1 500
Cash 500

a. Interest Receivable Dec. 31 30

Interest Revenue 30

b. Unearned Service Revenue Dec. 31 1,000

Service Revenue 1,000
 Chapter 3 Question Review 10

c. Rent Expense ($45,000 ÷ 3 years) Dec. 31 15,000

Prepaid Rent 15,000

d. Accounts Receivable Dec. 31 2,900

Service Revenue 2,900

e. Depreciation Expense Dec. 31 6,500

Accumulated Depreciation—Equipment 6,500

f. Supplies Expense ($850 – $250) Dec. 31 600

Supplies 600

g. Salaries and Wages Expense Dec. 31 960

Salaries and Wages Payable 960