CAP Practice Test Video Answers

1. B
Accrued revenue that has been earned but not yet billed or collected requires a debit to Accounts Receivable (an asset) and a credit to Service Revenue. Cash is not debited because no cash has been received yet.

2. B
Four months of coverage have expired (September through December), leaving 8 months remaining. Prepaid Insurance = $3,600 x (8/12) = $2,400.

3. B
Adjusting entries are made to apply the accrual basis of accounting, ensuring that revenues are recognized when earned and expenses are recognized when incurred, regardless of when cash is exchanged.

4. A
Two months of services have been provided (November and December). Unearned Revenue decreases by $2,000 ($12,000 x 2/12), and Service Revenue is recognized for the same amount.

5. A
Three days of wages have been earned (Monday, Tuesday, Wednesday) out of a 5-day work week. Accrued wages = $8,000 x (3/5) = $4,800.

6. B
Accounts Payable is recorded when bills are received, so it typically does not require adjustment. Prepaid accounts, unearned revenues, and depreciation-related accounts commonly require adjusting entries.

7. B
Annual depreciation = (Cost – Salvage Value) / Useful Life = ($50,000 – $5,000) / 10 = $4,500.

8. A
Book value = $80,000 – $32,000 = $48,000. Sale price $55,000 – Book value $48,000 = $7,000 gain.

9. C
Double-declining rate = (1/5) x 2 = 40%. First-year depreciation = $60,000 x 40% = $24,000. Salvage value is not considered in the calculation until the final years.

10. C
The double-declining balance method is an accelerated depreciation method that records higher depreciation in early years and lower depreciation in later years.

11. A
Depreciation per unit = ($100,000 – $10,000) / 180,000 units = $0.50 per unit. Year 1 depreciation = 25,000 units x $0.50 = $12,500.

12. B
Accumulated Depreciation is a contra asset account that is subtracted from the related asset account to show the net book value on the balance sheet.

13. A
FICA taxes = $5,000 x (6.2% + 1.45%) = $382.50. Net pay = $5,000 – $382.50 – $600 – $150 = $3,867.50.

14. D
Both employers and employees pay equal amounts of Social Security (6.2%) and Medicare (1.45%) taxes. FUTA and SUTA are paid only by employers.

15. D
Federal income tax withholding is an employee tax that is withheld from the employee’s pay. It is not an employer expense.

16. B
Only earnings up to the wage base are subject to Social Security tax. Taxable wages = $168,600 – $165,000 = $3,600. Social Security tax = $3,600 x 6.2% = $223.20.

17. B
Form W-4 (Employee’s Withholding Certificate) is completed by employees to indicate their filing status and withholding information for federal income tax purposes.

18. C
When an employer accumulates $100,000 or more in payroll tax liability on any day during a deposit period, the taxes must be deposited by the next banking day.

19. B
Form 941 (Employer’s Quarterly Federal Tax Return) is filed quarterly to report wages paid, tips received, and taxes withheld and deposited.

20. A
Under FIFO, the first units purchased are assumed to be sold first. COGS = (100 units x $10) + (80 units x $12) = $1,000 + $960 = $1,960.

21. B
Under LIFO (Last-In, First-Out), the most recently purchased items are assumed to be sold first, assigning the newest (typically higher) costs to cost of goods sold.

22. B
The shortage of $3,000 ($48,000 – $45,000) must be recorded by debiting Cost of Goods Sold (or Inventory Shortage) and crediting Inventory to reduce it to the actual count.

23. B
Under the lower of cost or net realizable value rule, inventory must be written down to the lower amount. Since NRV ($22,000) is less than cost ($25,000), inventory is reported at $22,000.

24. B
The periodic inventory system updates inventory only at the end of the period after a physical count. The perpetual system updates inventory continuously with each transaction.

25. A
Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory = $30,000 + $120,000 – $35,000 = $115,000.

26. C
External audit procedures are not a component of internal control. The five COSO components are: Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring Activities.

27. B
Separation of duties requires that authorization, record-keeping, and custody functions be assigned to different individuals to reduce the risk of errors and fraud.

28. C
The shortage is $500 – $423 – $72 = $5. The entry debits expense accounts for receipts ($423), debits Cash Short and Over for the shortage ($5), and credits Cash for the total replenishment ($428).

29. C
Independent verification involves comparing recorded information with actual assets or third-party data to ensure accuracy, such as reconciling bank statements or taking physical inventory counts.

30. B
A bank reconciliation is a detective control because it identifies errors or irregularities after they have occurred, rather than preventing them from happening.

31. A
To correct the error, debit Supplies (the correct account) and credit Equipment (the incorrect account that was originally debited) for $2,400.

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