CPB / BookKeeping Adjusting Entries and Reconciliations 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?

Accepted Answer

Add $90 to the cash book balance.

Answer

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?

Accepted Answer

Debit Insurance Expense $1,000, Credit Prepaid Insurance $1,000

Answer

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?

Accepted Answer

To apply the matching principle by recording revenues when earned and expenses when incurred.

Answer

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?

Accepted Answer

Debit Unearned Revenue $400, Credit Service Revenue $400

Answer

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?

Accepted Answer

Bank service charges

Answer

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.

CPB / BookKeeping Practice Test

CPB / BookKeeping Practice Test

CPB / BookKeeping Adjusting Entries and Reconciliations Questions and Answers