CPB / BookKeeping Adjusting Entries and Reconciliations 3 — Questions and Answers
Question 1: A company collected $6,000 in advance for services to be performed over 6 months. After 2 months, what adjusting entry is required?
- Debit Unearned Revenue $2,000; Credit Service Revenue $2,000 (Correct answer)
- Debit Service Revenue $2,000; Credit Unearned Revenue $2,000
- Debit Cash $2,000; Credit Unearned Revenue $2,000
- Debit Unearned Revenue $6,000; Credit Service Revenue $6,000
Correct answer: Debit Unearned Revenue $2,000; Credit Service Revenue $2,000
After 2 months, $6,000 × 2/6 = $2,000 of revenue has been earned, shifting it from Unearned Revenue to Service Revenue.
Question 2: An outstanding check on a bank reconciliation should be:
- Added to the bank balance
- Subtracted from the book balance
- Subtracted from the bank balance (Correct answer)
- Added to the book balance
Correct answer: Subtracted from the bank balance
Outstanding checks have been deducted in the books but not yet cleared the bank, so they are subtracted from the bank balance.
Question 3: What is the purpose of the adjusted trial balance?
- To detect errors before posting to the general ledger
- To verify that debits equal credits after adjusting entries are posted (Correct answer)
- To replace the unadjusted trial balance each period
- To summarize only balance sheet accounts
Correct answer: To verify that debits equal credits after adjusting entries are posted
The adjusted trial balance confirms that total debits still equal total credits after all adjusting entries have been recorded.
Question 4: Which of the following would NOT require an adjusting entry at period end?
- Accrued wages
- Prepaid insurance partially expired
- Cash paid for a current-period utility bill (Correct answer)
- Depreciation on a building
Correct answer: Cash paid for a current-period utility bill
A cash payment for a current-period bill is already recorded in full and requires no adjustment.
Question 5: If a bookkeeper fails to record an accrued expense adjusting entry, what is the effect on the financial statements?
- Expenses overstated; liabilities overstated
- Expenses understated; net income overstated; liabilities understated (Correct answer)
- Expenses understated; net income understated
- No effect on net income
Correct answer: Expenses understated; net income overstated; liabilities understated
Omitting an accrued expense understates expenses, overstates net income, and understates liabilities.
Question 6: A bookkeeper discovers a $500 check returned NSF (non-sufficient funds) on the bank statement. What is the correct journal entry?
- Debit Cash $500; Credit Accounts Receivable $500
- Debit Accounts Receivable $500; Credit Cash $500 (Correct answer)
- Debit Bad Debt Expense $500; Credit Cash $500
- No entry; adjust only the bank balance
Correct answer: Debit Accounts Receivable $500; Credit Cash $500
An NSF check reduces the bank and book cash balances, so Cash is credited and Accounts Receivable is reinstated.
Question 7: Which statement best describes a deferral-type adjusting entry?
- Recording revenue or expense before cash is exchanged
- Allocating previously recorded cash transactions to the correct period (Correct answer)
- Correcting an error made in a prior period
- Closing temporary accounts at year-end
Correct answer: Allocating previously recorded cash transactions to the correct period
Deferrals adjust items already recorded as assets or liabilities (from cash receipts or payments) to recognize the appropriate revenue or expense in the current period.
CPB / BookKeeping Adjusting Entries and Reconciliations 3
A company collected $6,000 in advance for services to be performed over 6 months.
After 2 months, what adjusting entry is required?