Question

A CPA has performed $500 of CPA services for a client but has not billed the client as of the end of the accounting period. If the CPA does not make the proper adjusting entry for this transaction at the end of the accounting period, which of the following is correct?

A. Net income will be correct because no cash has been received.

B. Net income will understated.

C. Net income will be overstated.

D. Accounts Receivable will be overstated.

Entity I collected $800 on account from its credit customers. The entry to record this transaction will include:

A. a debit to Accounts Receivable credit to Service Revenue

B. a debit to Cash and a credit to Service Revenue

C. a debit to Accounts Receivable and a credit Cash.

D. a debit to Cash and a credit to Accounts Receivable

Entity L purchased equipment for $12,000 on January 1, 2022. The company expects to use the equipment for 5 years and uses straight-line depreciation. The equipment has no salvage value. The entry to record depreciation expense on December 31, 2022 will include:

		a credit to Equipment for $2,400
		a credit to Depreciation Expense – Equipment for $2,400
		a debit to Accumulated Depreciation – Equipment $2,400.
		a debit to Depreciation Expense – Equipment for $2,400

All of the following would be classified as internal users of financial statements except:

		Marketing managers
		Investors
		Finance directors
		Company officers

All of the following accounts must be closed at the end of the accounting period except:

		Dividends
		Accounts Payable
		Service Revenue
		Interest Expense

Entity G received cash of $1,400 for services rendered. The entry to record this transaction will include

		a credit to Accounts Payable of $1,400.
		a debit to Cash of $1,400.
		a credit to Accounts Receivable of $1,400.
		a debit to Service Revenue of $1,400.

Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?

		Most common form of organization
		Lower taxes
		Harder to transfer ownership
		Reduced legal liability for investors

Adjusting entries to recognize unearned revenue that has now been earned (hint: think of the journal entry):

		increase liabilities and increase revenues.
		decrease revenues and decrease assets.
		increase assets and increase revenues.
		decrease liabilities and increase revenues.

Answer 1

1. Option (B) is correct

When the CPA has not made the adjusting entry then it would mean that revenue for the period is not booked. It will understate the net income for the period.

2. Option (D) is correct

Required journal entry will be:

Debit Cash $800

Credit Accounts receivable $800

3. Option (d) is correct

Under the straight line method, depreciation is calculated by the following formula:

Depreciation = Cost - Residual value / Useful life

Cost = $12000, Residual value = $0, useful life = 5

Depreciation = ($12000 - $0) / 5 = $2400

Under straight line method, depreciation remains the same for every year.

Required journal entry is:

Debit Depreciation expense $2400

Credit Accumulated Depreciation $2400

4. Option (b) is correct

Investors are not internal users rather they are external users of financial information.

5. Option (b) is correct

Accounts payable is a balance sheet account. It is not closed at year end.

6. Option (b) is correct

A debit to cash of $1400

7. Option (d) is correct

Corporations have reduced legal liability for investors.

8. Option (d) is correct

Unearned revenues now earned will decrease liabilities and increase revenues.