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Chapter 3 MCB

Financial Rptg Theory I (AC 320)

Chapter 3 MCB Quiz- Multiple Choice Questions

Question. 1

Which of the following is an economic resource that should be depreciated over the accounting periods estimated to be benefited?

a. Salaries incurred but unpaid at year-end

b. Rent collected in advance for a three-year rental period

c. Equipment purchased for use in the business operations

d. Interest revenue accrued on investment in bonds

Question. 2

Rental receipts for the period July 1, Year 1, through June 30, Year 2, were collected on June 30, Year 1. The effects of these economic events on the Year 1 financial statements for unearned revenue and rent revenue are:

Unearned RevenueRent Revenue
I.IncreaseIncrease
II.IncreaseDecrease
III.DecreaseNo effect
IV.DecreaseIncrease

a. I

b. IV

c. III

d. II

Question. 3

The balances in deferred (unearned) revenue accounts represent amounts that are

EarnedCollected
I.YesNo
II.YesYes
III.NoNo
IV.NoYes

a. IV

b. I

c. II

d. III

Question. 4

Which of the following adjusting entries involves the recognition of an accrued expense?

a. Recording depreciation on a long-lived asset

b. Recognition of interest revenue to be received in the next period

c. Writing off the portion of an insurance policy that has expired

d. Recognition of salaries owed to employees for work done during the current period that will be paid during the next accounting period

Question. 5

On June 1, Year 1, Little Corporation received $5,320 in advance for a two-year rental of some land and properly credited Unearned Rent. In the adjusting entry on December 31, Year 1, there would be a

a. credit to Unearned Rent for $1,552.

b. debit to Unearned Rent for $1,108.

c. credit to Rent Revenue for $1,552.

d. debit to Unearned Rent for $5,320.

Calculation:
Rent Per month = $5,320/24 = $221.67
Rent Revenue recognized for 7 months = $221.67 x 7 = $1,552 (Credit)

Question. 6

The Samuel Company uses the straight-line method to depreciate its equipment. On May 1, Year 1, the company purchased some equipment for $224,000. The equipment is estimated to have a useful life of ten years and a salvage value of $20,000. On December 31, Year 1, how much depreciation expense should Samuel record for the equipment in the adjusting entry?

a. $20,400

b. $18,500

c. $8,500

d. $13,600

Calculation:
Depreciation = ($224,000 - 20,000)/10 = $20,400
Depreciation for the year = $20,400 x 8/12 = $13,600

Question. 7

The accountant failed to make the adjusting entry to record the depreciation for the year. This error would cause an

a. understatement of liabilities.

b. understatement of shareholders’ equity.

c. overstatement of assets.

d. overstatement of expenses.

Question. 8

A prepaid expense is

a. an item that has been earned by the company during the accounting period but has been neither received nor recorded.

b. an expense that has been incurred during the accounting period but has been neither paid nor recorded.

c. an item of goods or services purchased by the company for use in its operations but not fully consumed by the end of the accounting period.

d. a payment received by the company in advance for the future sale of inventory or performance of services.

Question. 9

With closing entries, you would expect to find all of the following except

a. debit Unearned Rent; credit Income Summary.

b. debit Income Summary; credit Loss on Sale of Land.

c. debit Sales Revenue; credit Income Summary.

d. debit Retained Earnings; credit Dividends.

Question. 10

On March 31, Year 1, the Champion Company paid rent for two years on a parking lot for employees. Champion recorded the transaction by debiting Prepaid Rent and crediting Cash for $20,000. Which of the following adjusting entries should Champion prepare at the end of Year 1?

a. Prepaid Rent 10,000
Rent Expense 10,000

b. Rent Expense 7,500
Prepaid Rent 7,500

c. Rent Expense 2,500
Prepaid Rent 2,500

d. Prepaid Rent 12,500
Rent Expense 12,500

Question. 11

On May 1, Year 1, Alang Corporation borrowed $3,600 on a two-year, 6% note payable. Interest is due and payable at the end of each six months. Alang makes all interest payments on schedule. The correct December 31, Year 2, adjusting entry would be:

a. Interest Expense 108
Cash 108

b. Interest Expense  144
Interest Payable  144

c. Interest Payable  144
Cash  144

d. Interest Expense 36
Interest Payable 36

Calculation:
Annual Interest = $3,600 x 6% = $216
Interest For Year 2 (2 Months) = $216 x 2/12 = $36


Question. 12

On February 1, Year 1, Apollo Company received $24,000 in advance for a three-year rental of land and credited Rent Revenue for the entire amount. The correct December 31, Year 1 adjusting entry would be:

a. Rent Revenue 16,667
Unearned Rent 16,667

b. Rent Revenue 7,333
Unearned Rent 7,333

c. Unearned Rent 16,667
Rent Revenue 16,667

d. Unearned Rent 7,333
Rent Revenue 7,333

Calculation
Per Month Rent = 24,000/36 = $667
Rent Revenue (11 Months) = $667 x 11 = $7,333

Question. 13

On August 1, Year 1, Yellow Company paid $6,320 for a three-year insurance policy. On that date, an expense account was charged. In the adjusting entry on December 31, Year 1, there would be a

a. credit to Prepaid Insurance for $2,107.

b. debit to Insurance Expense for $175.

c. credit to Insurance Expense for $5,442.

d. credit to Prepaid Insurance for $527.

Calculation:
Insurance Expense for Year 1 = $6,320 x 11/36 = $878
Credit to Insurance Expense = $6,320 - 878 = $5,442

Question. 14

On November 1, Year 1, the Morrison Company purchased a two-year umbrella insurance policy for $3,600 and recorded the transaction by debiting Prepaid Insurance and crediting Cash. Which of the following adjusting entries would be used by Morrison to properly account for prepaid insurance on December 31, Year 1?

a. Prepaid Insurance 3,600
Insurance Expense 3,600

b. Insurance Expense 300
Prepaid Insurance 300

c. Prepaid Insurance 1,800
Cash 1,800

d. Insurance Expense 300
Accumulated Amortization-Insurance 300

Calculation:
Insurance Expense (2 months) = $3,600 x 2/24 = $300

Question. 15

The Douglas Property Management Company received $15,000 for three months rental income in advance on November 1, Year 1, and credited the Rental Revenue account. The required adjusting entry on December 31, Year 1, would include a

a. credit to Rental Receivable for $15,000.

b. debit to Rental Revenue for $10,000.

c. debit to Rental Revenue for $5,000.

d. credit to Rental Revenue for $10,000.

Calculation:
Rent consumed of two months so one month is in Prepaid Rent which is $15,000/3 = $5,000

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