1.Making insurance payments in advance is an example of: An accrued revenue transaction. An accrued expense transaction. A deferred revenue transaction. A deferred expense transaction. Question 2. 2.In its 2004 annual report, Apple Computer reported the following in one of its disclosure notes: “Warranty Expense: The Company provides currently for theestimated cost for product warranties at the time the related revenue is
recognized.” This note exemplifies Apple’s use of:n Conservatism The matching principle Realization principle Full disclosure principle Question 3. 3.The purpose of closing entries is to transfer: Accounts receivable to retained earnings when an account is fully paid. Balances in temporary accounts to a permanent account. Inventory to cost of goods sold when merchandise is sold. Assets and liabilities when operations are discontinued. Question 4. 4.The best argument in support of historical cost information is: Relevance. Predictive quality for future cash flows. Materiality. Verifiability. Question 5. 5.Rent collected in
advance is: An asset account in the balance sheet. A liability account in the balance sheet. A shareholders’ equity account in the balance sheet. A temporary account, not in the balance sheet at all. Question 6. 6.Which of the following accounts are closed at the end of the accounting period? Allowance for uncollectibles Unearned revenuen Retained earnings Provision for income taxes Question 7. 7.The principal concern with accounting for related party transactions is: The size of the transactions. Differences between economic substance and legal form. The absence of legally binding contracts. The lack of accurate data to record transactions. Question 8. 8.The adjusting entry required to record accrued expenses includes: A credit to cash. A debit to an asset. A credit to an asset. A credit to liability. Question 9. 9.When converting an income statement from a cash basis to an accrual basis, cash received for services: Exceed service revenue. May exceed or be less than service revenue. Is less than service revenue. Equals service revenue. Question 10. 10.Accrued expenses: Are generally paid in services rather than cash. Result from payment before services are received. Result from services received before payment. Are deferred charges to expense.
The correct answer and explanation is:
Here are the correct answers to the questions along with explanations:
Question 1:
Correct Answer: A deferred expense transaction.
Explanation:
When insurance payments are made in advance, the payment creates a deferred expense, as the benefit of the insurance coverage will be received in the future. The expense is initially recorded as a prepaid asset and then expensed over time as the insurance period progresses.
Question 2:
Correct Answer: The matching principle.
Explanation:
Apple’s disclosure about estimating warranty expenses at the time the related revenue is recognized demonstrates the matching principle, which ensures that expenses are recognized in the same period as the revenues they help to generate. This aligns costs with benefits, providing accurate financial performance measurement.
Question 3:
Correct Answer: Balances in temporary accounts to a permanent account.
Explanation:
Closing entries are used to transfer the balances of temporary accounts (e.g., revenues, expenses, and dividends) to a permanent account like retained earnings. This ensures the temporary accounts have zero balances for the next accounting period, maintaining the separation of financial periods.
Question 4:
Correct Answer: Verifiability.
Explanation:
Historical cost is valued for its verifiability because it is based on original transaction amounts, which can be confirmed through documentation. While historical cost may not always be the most relevant for decision-making, it provides reliability and reduces the potential for manipulation.
Question 5:
Correct Answer: A liability account in the balance sheet.
Explanation:
Rent collected in advance is classified as a liability (unearned revenue) because the company has an obligation to provide services or allow the use of the rented asset in the future. It represents revenue that is not yet earned.
Question 6:
Correct Answer: Provision for income taxes.
Explanation:
Temporary accounts like the provision for income taxes are closed at the end of the accounting period to retained earnings or other permanent accounts. Allowance for uncollectibles and unearned revenue are permanent accounts, while retained earnings is already a permanent account.
Question 7:
Correct Answer: Differences between economic substance and legal form.
Explanation:
The principal concern with related party transactions is that their economic substance may differ from their legal form due to the potential for favoritism or manipulation. Financial statement users need transparent disclosures to evaluate such transactions accurately.
Question 8:
Correct Answer: A credit to liability.
Explanation:
The adjusting entry for accrued expenses involves recognizing an expense incurred but not yet paid, creating a liability. The entry includes a debit to the relevant expense account and a credit to a liability account (e.g., accrued expenses payable).
Question 9:
Correct Answer: May exceed or be less than service revenue.
Explanation:
When converting from cash basis to accrual basis, cash received for services may differ from service revenue due to timing differences. For example, cash collected in advance or not yet collected could affect the amounts.
Question 10:
Correct Answer: Result from services received before payment.
Explanation:
Accrued expenses occur when a company has incurred costs (e.g., wages or utilities) but has not yet paid them. These are recorded as liabilities until the payment is made, reflecting the obligation to settle the expense in the future.
These answers provide clarity on key accounting concepts, demonstrating the importance of proper classification, recognition, and adherence to accounting principles in financial reporting.