Page 139 - Accounting Principles (A Business Perspective)

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The accrual basis of accounting:
(a) Recognizes revenues only when cash is received.
(b)Is used by almost all companies.

(c) Recognizes expenses only when cash is paid out.
(d)Recognizes revenues when sales are made or services are performed and recognizes expenses only
when cash is paid out.
Exercise B Select the correct response for each of the following multiple-choice questions:
The least common accounting period among the following is:
(a) One month.
(b)Two months.

(c) Three months.
(d)Twelve months.
The need for adjusting entries is based on:
(a) The matching principle.
(b)Source documents.
(c) The cash basis of accounting.
(d)Activity that has already been recorded in the proper accounts.
Exercise C Select the correct response for each of the following multiple-choice questions:
Which of the following types of adjustments belongs to the deferred items class?

(a) Asset/revenue adjustments.
(b)Liability/expense adjustments.
(c) Asset/expense adjustments.
(d)Asset/liability adjustments.
Which of the following types of adjustments belongs to the accrued items class?
(a) Asset/expense adjustments.
(b)Liability/revenue adjustments.

(c) Asset/liability adjustments.
(d)Liability/expense adjustments.
Exercise D A one-year insurance policy was purchased on August 1 for USD 2,400, and the following entry was
made at that time:
Prepaid Insurance 2,400
Cash 2,400
What adjusting entry is necessary at December 31, the end of the accounting year?
Show how the T-accounts for Prepaid Insurance and Insurance Expense would appear after the entries are
posted.
Exercise E Assume that rent of USD 12,000 was paid on 2010 September 1, to cover a one-year period from

that date. Prepaid Rent was debited. If financial statements are prepared only on December 31 of each year, what
adjusting entry is necessary on 2010 December 31, to bring the accounts involved to their proper balances?
Exercise F At 2010 December 31, an adjusting entry was made as follows:
Rent Expense 1,500

Accounting Principles: A Business Perspective 140 A Global Text