Learning Objective 4.3 Questions
1) Which of the following situations involves a deferral?
A) Recording accrued interest
B) Recording accrued wages
C) Recording revenue earned but not yet received
D) Recording revenue earned that was collected in advance
E) None of the above are deferrals.
2) The adjustment for revenue received in advance, which has been earned in the current period, involves a
A) debit to unearned revenue.
B) debit to accrued revenue.
C) credit to accrued revenue.
D) debit to cash.
E) credit to cash.
3) The adjustment for revenue received in advance that has now been earned involves a debit to
A) Cash and a credit to Prepaid Revenue.
B) Unearned Revenue and a credit to Revenue.
C) Prepaid Revenue and a credit to Unearned Revenue.
D) Revenue and a credit to Unearned Revenue.
E) Prepaid Revenue and a credit to Cash.
4) What effect does the earning of revenue previously collected have on the basic accounting equation? Assume Unearned Revenue had been increased when the cash was collected in advance.
A) Increase in assets, decrease in liabilities
B) Decrease in assets, decrease in liabilities
C) Decrease in liabilities, increase in stockholders' equity
D) Decrease in assets, decrease in stockholders' equity
E) Increase in assets, increase in stockholders' equity
5) Scrumptious Donuts sold $2,000 worth of gift certificates in December. As of December 31, $500 worth of the $2,000 gift certificates had been redeemed. All gift certificates sold use the Deferred Revenue account. The balance in the Deferred Revenue account as of December 31 is
E) not enough information to answer
6) The adjusting entry to record $675 of earned revenue received in advance would include a debit to Unearned Revenue.
7) Circle Knitting, Inc. recorded $4,000 of unearned revenue being earned and the collection of $1,500 cash for services previously accrued. The impact of these two entries on total revenue is an increase of $5,500.
8) Module Accounting Services receives $8,000 cash for service revenue to be earned in the future. The company credits Service Revenue upon receipt of the cash.
9) Auto Detailing, Inc. had the following transactions on August 1:
a. The company sold $2,100 of inventory costing $1,400. The customer will not be billed until September. As of August 31, no entries have been made with respect to the inventory that has been sold or the sale.
b. The company received a $2,000 payment from a customer for services to be performed during August and September. On August 1, the entire $2,000 was placed in the Unearned Revenue account. As of August 31, 40% of the work had been completed.
c. The company paid $7,200 for 4 months' rent in advance. The entire amount was placed into Prepaid Rent.
d. The company sold equipment costing $2,400 for $5,400 to a customer in return for a 3-month note. The sale was properly recorded on August 1. Auto Detailing, Inc. is charging 12% interest on the note. The customer will pay the note and all interest after 3 months.
Prepare the appropriate journal entries for Auto Detailing, Inc. as of August 31, for each of the above transactions.
10) Chordall Authors Company circulates a monthly magazine, charging $36 to subscribers for a month subscription. Subscribers are required to forward the entire $36 yearly subscription fee before Chordall Authors Company will furnish the subscriber with the magazine. Chordall Authors Company sold 300 magazine subscriptions in the month of March, while the balance in the Unearned Subscription Revenue account was $20,000 on March 1, 2009. After the necessary adjusting entry for March, the balance in the Unearned Subscription Revenue account was $25,200.
1. Prepare the appropriate journal entry for Chordall Authors Company as of March 31.
2. How would net income be affected for the month ending March 31 if Chordall Authors Company did not record the above entry?