Accounting principles (1) 2023

Revision on CH 3 : Adjusting entries (Part 3)

Accrued expenses
Expenses incurred but not paid yet Recorded as : liability
 Accrued salaries expense
Examples :  Accrued interest expense
Adjusting entry for accrued expenses  increase liability in credit
 Increase expense in debit
First : accrued salaries expense :

Salaries expense ( not paid) : it recorded as liability called : salaries payable

Adjusting entry :
Increase salaries expense in(Dr.) Increase salaries payable in (Cr.)

Second : accrued interest expense :

interest expense ( not paid) : it recorded as liability called : interest payable

Adjusting entry :
Increase interest expense in(Dr.) Increase interest payable in (Cr.)

Accrued revenues
Revenues earned but not collected yet Recorded as : asset
 Accrued interest revenue
Examples :  Accrued service revenue
Adjusting entry for accrued expenses  increase asset in debit
 Increase revenue in credit
accrued interest:

interest revenues ( not collected) : it recorded as asset called : interest receivable

Adjusting entry :
Increase interest receivable in(Dr.) Increase interest revenue in (Cr.)
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Accounting principles (1) 2023

adjusted trial balance :

 Prepared after adjusting entries
 Primary basis of preparation of financial statement.
 Calendar year : starts from 1 January : 31 December
 Fiscal year: any twelve month in length
 Interim periods : monthly and quarterly and semi - annually periods

Important notes :
 Both GAAP and IFRS use accrual-basis
 Both GAAP and IFRS is not in accordance with cash basis

Q1: choose the correct answer :

1. Monthly and quarterly time periods are called
A. calender periods.
B. fiscal periods.
C. interim periods.
D. quarterly periods
2. The time period assumption states that
A. a transaction can only affect one period of time.
B. estimates should not be made if a transaction affects more than one time period.
C. adjustments to the enterprise's accounts can only be made in the time period when the
business terminates its operations.
D. the economic life of a business can be divided into artificial time periods.
3. An accounting time period that is one year in length, but does not begin on January 1, is
referred to as
A. a fiscal year.
B. an interim period.
C. the time period assumption.
D. a reporting period

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4. The time period assumption is also referred to as the
A. calendar assumption.
B. cyclicity assumption.
C. periodicity assumption.
D. fiscal assumption.
5. Which of the following is not a common time period chosen by businesses as their
accounting period?
A. Daily
B. Monthly
C. Quarterly
D. Annually
6. Which of the following is a common time period chosen by businesses as their accounting
period?
A. Daily
B. Monthly
C. Quarterly
D. Annually
7. Which of the following time periods would not be referred to as an interim period?
A. Monthly
B. Quarterly
C. Semi-annually
D. Annually
8. Which of the following are in accordance with generally accepted accounting principles?
A. Accrual basis accounting
B. Cash basis accounting
C. Both accrual basis and cash basis accounting
D. Neither accrual basis nor cash basis accounting
9. The revenue recognition principle dictates that revenue should be recognized in the
accounting records
A. when cash is received.
B. when it is earned.
C. at the end of the month.
D. in the period that income taxes are paid

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Accounting principles (1) 2023
10. In a service-type business, revenue is considered earned
A. at the end of the month.
B. at the end of the year.
C. when the service is performed.
D. when cash is received
11. Expenses incurred but not yet paid or recorded are called
A. prepaid expenses.
B. accrued expenses.
C. interim expenses.
D. unearned expenses.
12. Accrued revenues are
A. received and recorded as liabilities before they are earned.
B. earned and recorded as liabilities before they are received.
C. earned but not yet received or recorded.
D. earned and already received and recorded.
13. Accrued expenses are
A. paid and recorded in an asset account before they are used or consumed.
B. paid and recorded in an asset account after they are used or consumed.
C. incurred but not yet paid or recorded.
D. incurred and already paid or recorded.
14. The adjusted trial balance is prepared
A. after financial statements are prepared.
B. before the trial balance.
C. to prove the equality of total assets and total liabilities.
D. after adjusting entries have been journalized and posted.
15. 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.
16. An expense is recorded under the cash basis only when
A. services are performed.
B. it is earned.
C. cash is paid.
D. it is incurred.
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17. Financial statements are prepared directly from the
A. general journal.
B. ledger.
C. trial balance.
D. adjusted trial balance.
18. Which of the following statements is false?
A. IFRS employs the periodicity assumption.
B. IFRS employs accrual accounting.
C. IFRS requires that revenues and costs must be capable of being measured reliably.
D. IFRS uses the cash basis of accounting.
19. Failure to prepare an adjusting entry at the end of the period to record an accrued
expense would cause
A. net income to be understated.
B. an overstatement of assets and an overstatement of liabilities.
C. an understatement of expenses and an understatement of liabilities.
D. an overstatement of expenses and an overstatement of liabilities.
20. Jill Roberts has performed $500 of CPA services for a client but has not billed the
client as of the end of the accounting period. What adjusting entry must Jill make?
A. Debit Cash and credit Unearned Revenue
B. Debit Accounts Receivable and credit Unearned Revenue
C. Debit Accounts Receivable and credit Service Revenue
D. Debit Unearned Revenue and credit Service Revenue

1 C 5 A 9 B 13 C 17 D
2 D 6 D 10 C 14 D 18 D
3 A 7 D 11 B 15 B 19 C
4 C 8 A 12 C 16 C 20 C

Q2: choose the correct answer :

Carter Guitar Company borrowed $12,000 from the bank signing a 9%, 3-month note on
September 1. Principal and interest are payable to the bank on December 1. If the
company prepares monthly financial statements, the adjusting entry that the company
should make for interest on September 30, would be

A. Debit Interest Expense, $1,080; Credit Interest Payable, $1,080.

B. Debit Interest Expense, $90; Credit Interest Payable, $90.
C. Debit Note Payable, $1,080; Credit Cash, $1,080.
D. Debit Cash, $270; Credit Interest Payable, $270.

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Accounting principles (1) 2023
SOLUTION

Interest expense = P *R* T =12000*9%*1/12= 90

interest expense is not paid , it will be recorded as a liability called : interest payable SO
adjusting entry will include:

Increasing interest expense in debit side by 90

Increasing liability interest payable in credit side by 90

interest expenses 90

interest payable 90

Q3: choose the correct answer :

A gift shop signs a three-month note payable to help finance increases in inventory for the
Christmas shopping season. The note is signed on November 1 in the amount of $50,000
with annual interest of 12%. What is the adjusting entry to be made on December 31
for the interest expense accrued ?

SOLUTION

Interest expense = P *R* T =50,000*12%*2/12= 1000

interest expense is not paid , it will be recorded as a liability called : interest payable SO
adjusting entry will include:

Increasing interest expense in debit side by 1000

Increasing liability interest payable in credit side by 1000

interest expenses 1000

interest payable 1000
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Accounting principles (1) 2023

Q4: choose the correct answer :

Clark Real Estate signed a four-month note payable in the amount of $4,000 on
September 1. The note requires interest at an annual rate of 12%. The amount of interest to
be accrued at the end of September is

A. $160.
B. $40.
C. $480.
D. $120

SOLUTION

Interest expense = P *R* T =4,000*12%*1/12= 40

Q5: choose the correct answer :

On November 1,2023 Salma company paid 100,000 to rent a building for 10 months in
advance .
1. journal entry on November 1, 2023 must show prepaid rent with amount :
A. 100,000 Dr.
B. 10,000 Cr.
C. 100,000 Cr.
D. 10,000 Dr.
2. journal entry on November 1, 2023 must show cash with amount :
A. 100,000 Dr.
B. 10,000 Cr.
C. 100,000 Cr.
D. 10,000 Dr.
3. journal entry on December 31 ,2023 must be shown prepaid rent with amount :
A. 20,000 Dr.
B. 10,000 Cr.
C. 20,000 Cr.
D. 10,000 Dr.

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Accounting principles (1) 2023
4. journal entry on December 31 ,2023 must be show rent expense with amount
A. 20,000 Dr.
B. 10,000 Cr.
C. 20,000 Cr.
D. 10,000 Dr.
5. At end of December 31 , the balance of prepaid rent was
A. 80,000 Cr.
B. 70,000 Dr.
C. 60,000 Dr.
D. 80,000 Dr.

SOLUTION

November 1:

Prepaid rent 100,000

Cash 100,000

Adjusting entry at December 31 2023 :

Monthly rent expense = 100,000/10 month = 10,000$

 Decreasing prepaid rent by 10,000* 2 month=20,000

 Increasing rent expense by 10,000*2 month = 20,000

Insurance expense 20,000

Prepaid insurance 20,000

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Revision on CH 3 : Adjusting entries (Part 4)

 All fixed assets are depreciated except Land.

Depreciation :
 Depreciation is an Allocation process of asset Cost over its Useful Life in a
Systematic and Rational manner .

How to calculate depreciation expense?

Annual depreciation expense =

How to Record depreciation expense?

Depreciation expense XXXX

Accumulated depreciation-…… XXXX

Accumulated depreciation is contra Asset and its Normal Balance is credit.

Book value = cost – accumulated depreciation

 If a business has several types of long-term assets such as equipment,

buildings, and trucks, there should be separate accumulated
depreciation accounts for each type of asset.

Factor Affecting Depreciation:

Cost : value of asset at purchasing date.

Salvage value : value of asset at end of its useful life.
Useful life : asset life.
All factors affecting depreciation are estimates except Cost

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Q6: choose the correct answer :

1. Depreciation expense for a period is computed by taking the

A. original cost of an asset – accumulated depreciation.
B. depreciable cost ÷ depreciation rate.
C. cost of the asset ÷ useful life.
D. market value of the asset ÷ useful life.
2. Accumulated Depreciation is
A. an expense account.
B. an owner's equity account.
C. a liability account.
D. a contra asset account.
3. Depreciation is the process of
A. valuing an asset at its fair market value.
B. increasing the value of an asset over its useful life in a rational and systematic manner.
C. allocating the cost of an asset to expense over its useful life in a rational and
systematic manner.
D. writing down an asset to its real value each accounting period
4. In computing depreciation, the number of years of useful life of the asset is
A. known with certainty.
B. an estimate.
C. always fixed at 5 years.
D. always fixed at 3 years.
5. An accumulated depreciation account
A. is a contra-liability account.
B. increases on the debit side.
C. is offset against total assets on the balance sheet.
D. has a normal credit balance.
6. The difference between the cost of a depreciable asset and its related accumulated
depreciation is referred to as the
A. market value of the asset.
B. blue book value of the asset.
C. book value of the asset.
D. depreciated difference of the asset.

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7. If a business has several types of long-term assets such as equipment, buildings, and trucks,
A. there should be only one accumulated depreciation account.
B. there should be separate accumulated depreciation accounts for each type of asset.
C. all the long-term asset accounts will be recorded in one general ledger account.
D. there won't be a need for an accumulated depreciation account.

1 C 2 D 3 C 4 B 5 D
6 C 7 B

Q7: choose the correct answer :

On july 1 ,the company purchased equipment for 30,000 cash , it’s estimated useful life
10 years ( no salvage )

1. the journal entry on July 1 , 2023 must show equipment account with amount ?
A. 30,000 credit
B. 30,000 debit
C. 10,000 credit
D. 3000 debit
2. the journal entry on July 1 , 2023 must show cash account with amount ?
A. 30,000 credit
B. 30,000 debit
C. 10,000 credit
D. 3000 debit
3. the journal entry on December 31 , 2023 must show accumulated depreciation -
equipment with amount ?
A. 3000 credit
B. 3000 debit
C. 1500 credit
D. 1500 debit
4. the journal entry on December 31 , 2023 must show depreciation expense -equipment
with amount ?
A. 3000 credit
B. 3000 debit
C. 1500 credit
D. 1500 debit

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Accounting principles (1) 2023
5. At end of December 31,2023 , the equipment book value …..
A. 28500 credit
B. 27000 debit
C. 27000 credit
D. 28500 debit

SOLUTION

July 1:

Equipment 30,000
Cash 30,000

Adjusting entry to record depreciation expense at December 31 ,2023 :

 Annual depreciation expense =

 Annual depreciation expense = =3000*6/12=1500

Depreciation expense 1,500

Accumulated depreciation-building 1500

Book value at December 31 , 2023 :

Book value = cost – accumulated depreciation

Book value = 30,000 – 1500 = 28,500 (Dr.)

Q8: choose the correct answer :

ABC Company purchased a delivery truck on June 1 for $36,000, paying $20,000 cash
and signing a note for the remaining balance,(interest rate 12% yearly). The truck is
expected to depreciate $12,000 each year. Company prepares monthly financial
statements.

1. the journal entry on June 1 must show truck account with amount ?
A. 36,000 credit
B. 36,000 debit
C. 20,000 credit
D. 16000 credit

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Accounting principles (1) 2023
2. the journal entry on June 1 must show cash account with amount ?
A. 36,000 credit
B. 36,000 debit
C. 20,000 credit
D. 16000 credit
3. the journal entry on December 31 , 2023 must show accumulated depreciation -truck
with amount ?
A. 12000 credit
B. 12000 debit
C. 7000 credit
D. 7000 debit
6. the journal entry on December 31 , 2023 must show depreciation expense – truck with
amount ?
A. 12000 credit
B. 12000 debit
C. 7000 credit
D. 7000 debit
7. At end of December 31,2023 , the equipment book value …..
A. 24000 credit
B. 24000 debit
C. 29000 credit
D. 29000 debit
8. the journal entry on December 31 , must show interest expense with amount
A. 1120 Dr.
B. 1120 Cr.
C. 13,440 Dr.
D. 13,440 Cr.

SOLUTION

June 1:

Equipment 36,000

Cash 20,000

Note payable 16,000

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Accounting principles (1) 2023
Adjusting entry to record depreciation expense at December 31 ,2023 :

Annual depreciation expense = 12000*7/12=7000

Depreciation expense 7000

Accumulated depreciation-building 7000

Book value at December 31 , 2023 :

Book value = cost – accumulated depreciation

Book value = 36,000 – 7000 = 29000 (Dr.)
Adjusting entry to record interest expense at December 31 ,2023

Interest expense = P *R* T

=16,000*12%*7/12= 1120

interest expense is not paid , it will be recorded as a liability called : interest payable SO
adjusting entry will include:

Increasing interest expense in debit side by 1120

Increasing liability interest payable in credit side by 1120

interest expenses 1120

interest payable 1120

Correction entries
Prepared whenever an error is discovered

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Q9: choose the correct answer :

On May 18, Beirut Co. purchased on account equipment costing $4500.

The transaction was journalized and posted as a debit to Equipment $450
and a credit to Accounts Payable $450.

Prepare Correcting Entry on June 3

SOLUTION

Wrong entry :

Equipment 450

Account payable 450

Correct entry :

Equipment 4500

Account payable 4500

Correction entry :

Equipment 4050

Account payable 4050

Q10: choose the correct answer :

On May 18, Tripoli Co. purchased on account equipment costing $5,000. The
transaction was journalized and posted as a debit to Equipment $50,000 and a credit to
Accounts Payable $50,000. The error was discovered on June 3,

Prepare Correcting Entry on June 3

SOLUTION

Wrong entry :

Equipment 50,000

Account payable 50,000

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Accounting principles (1) 2023
Correct entry :

Equipment 5000

Account payable 5000

Correction entry :

Account payable 45000

Equipment 45000

Q11: choose the correct answer :

On May 10, Rabie Co. journalized and posted a $50 cash collection on account from a
customer as a debit to Cash $50 and a credit to Service Revenue $50. The company
discovered the error on May 20, when the customer paid the remaining balance in full.

Prepare Correcting Entry on June 3

SOLUTION

Wrong entry :

Cash 50

Service revenue 50

Correct entry :

Cash 50

Account receivable 50

Correction entry :

Service revenue 50

Account receivable 50

Q: TRUE OR FALSE
1. Because accounting often requires estimates to be made to assess the effect of a
transaction, the shorter the time period, the easier it becomes to determine the proper
adjustments. (True )

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2. The time period assumption states that the economic life of a business entity can be
divided into artificial time periods. (True )
3. The time period assumption is often referred to as the matching principle. (False )
4. A company's calendar year and fiscal year are always the same. (False )
5. Accounting time periods that are one year in length are referred to as interim periods.
(False)
6. Expense recognition often follows revenue recognition. (True )
7. The revenue recognition principle and the matching principle are helpful guides used in
determining net income or net loss for a period. True
8. The matching principle requires that efforts be related to accomplishments. True
9. Adjusting entries are often made because some business events are not recorded as they
occur. True
10. Adjusting entries are recorded in the general journal but are not posted to the accounts
in the general ledger. False
11. Adjusting entries are not necessary if the trial balance debit and credits columns balances
are equal. False
12. An adjusting entry always involves two balance sheet accounts. False
13. Revenue received before it is earned and expenses paid before being used or consumed
are both initially recorded as liabilities. False
14. Accrued revenues are revenues which have been received but not yet earned. False
15. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in
the future. False
16. The cost of a depreciable asset less accumulated depreciation reflects the book value of
the asset. True
17. The book value of a depreciable asset is always equal to its market value because
depreciation is a valuation technique. False
18. Accumulated Depreciation is a liability account and has a credit normal account
balance. (False )
19. A liability—revenue account relationship exists with an unearned rent revenue adjusting
entry. (True )
20. The balances of the Depreciation Expense and the Accumulated Depreciation
accounts should always be the same. False
21. Unearned fees is a prepayment that requires an adjusting entry when services are
performed. (True )

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22. Asset prepayments become expenses when they expire.( True )

23. A contra asset account is subtracted from a related account in the balance sheet.
(True)
24. Accrued revenues are revenues that have been earned and received before financial
statements have been prepared.( False )
25. Financial statements can be prepared from the information provided by an adjusted
trial balance.( True)
26. If net sales are $1,000,000 and cost of goods sold is $700,000, the gross profit rate is
30%. True

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