CPB / BookKeeping Adjusting Entries and Reconciliations Questions and Answers — Questions and Answers
Question 1: A company performs a bank reconciliation and finds that a check for $450 written to a supplier was incorrectly recorded in the company's cash book as $540. How should this error be treated during the reconciliation?
- Add $90 to the cash book balance. (Correct answer)
- Subtract $90 from the bank statement balance.
- Add $90 to the bank statement balance.
- Subtract $90 from the cash book balance.
Correct answer: Add $90 to the cash book balance.
The cash book shows a larger cash disbursement ($540) than what actually occurred ($450). This means the cash book balance is understated by $90. To correct this, $90 must be added back to the cash book balance. The bank statement is correct and should not be adjusted.
Question 2: On December 1st, a company pays $6,000 for a six-month insurance policy. If the company prepares financial statements on December 31st, what is the correct adjusting entry to record insurance expense?
- Debit Insurance Expense $6,000, Credit Prepaid Insurance $6,000
- Debit Prepaid Insurance $1,000, Credit Insurance Expense $1,000
- Debit Insurance Expense $1,000, Credit Prepaid Insurance $1,000 (Correct answer)
- Debit Insurance Expense $1,000, Credit Cash $1,000
Correct answer: Debit Insurance Expense $1,000, Credit Prepaid Insurance $1,000
The $6,000 payment covers six months, so the monthly insurance expense is $1,000 ($6,000 / 6). By December 31st, one month of insurance has been used. The adjusting entry must recognize this expense and reduce the prepaid asset. Therefore, Insurance Expense is debited for $1,000, and the asset account, Prepaid Insurance, is credited for $1,000.
Question 3: Which of the following is the primary purpose of making adjusting entries?
- To correct errors made in the general ledger during the period.
- To prepare the cash book for the bank reconciliation.
- To ensure that all cash transactions are recorded before closing the books.
- To apply the matching principle by recording revenues when earned and expenses when incurred. (Correct answer)
Correct answer: To apply the matching principle by recording revenues when earned and expenses when incurred.
Adjusting entries are crucial for accrual basis accounting. Their main purpose is to ensure that revenues are recognized in the period they are earned and expenses are matched to the revenues they helped generate, regardless of when cash is exchanged.
Question 4: A business receives a $1,200 payment from a customer on March 15 for services to be provided evenly over the next three months (April, May, and June). What is the adjusting entry required on April 30?
- Debit Cash $400, Credit Service Revenue $400
- Debit Unearned Revenue $400, Credit Service Revenue $400 (Correct answer)
- Debit Service Revenue $400, Credit Unearned Revenue $400
- Debit Unearned Revenue $1,200, Credit Service Revenue $1,200
Correct answer: Debit Unearned Revenue $400, Credit Service Revenue $400
Initially, the $1,200 is recorded as a liability (Unearned Revenue). By the end of April, one-third of the service has been provided ($1,200 / 3 = $400). The adjusting entry must recognize the earned portion by decreasing the liability (debit Unearned Revenue) and increasing revenue (credit Service Revenue).
Question 5: During a bank reconciliation, which of the following items would require an adjustment to the company's cash account records?
- Outstanding checks
- Deposits in transit
- Bank service charges (Correct answer)
- Errors made by the bank
Correct answer: Bank service charges
Bank service charges are fees deducted by the bank directly from the account. The company is often unaware of the exact amount until they see the bank statement. Therefore, an adjusting entry is needed to record this expense and reduce the cash balance in the company's books. Outstanding checks and deposits in transit are timing differences that are accounted for in the reconciliation but don't require an adjustment to the cash account itself.
Question 6: A company purchased a machine for $50,000 with an estimated useful life of 10 years and no salvage value. Using the straight-line method, what is the annual adjusting entry for depreciation?
- Debit Depreciation Expense $5,000, Credit Cash $5,000
- Debit Accumulated Depreciation $5,000, Credit Depreciation Expense $5,000
- Debit Machine $5,000, Credit Accumulated Depreciation $5,000
- Debit Depreciation Expense $5,000, Credit Accumulated Depreciation $5,000 (Correct answer)
Correct answer: Debit Depreciation Expense $5,000, Credit Accumulated Depreciation $5,000
Straight-line depreciation is calculated as (Cost - Salvage Value) / Useful Life. In this case, ($50,000 - $0) / 10 years = $5,000 per year. The adjusting entry to record depreciation involves debiting Depreciation Expense and crediting Accumulated Depreciation, which is a contra-asset account that reduces the book value of the machine.
CPB / BookKeeping Adjusting Entries and Reconciliations Questions and Answers
A company performs a bank reconciliation and finds that a check for $450 written to a supplier was incorrectly recorded in the company's cash book as $540.
How should this error be treated during the reconciliation?