Question

1. A company makes a deferral adjustment that decreased a liability. This must

mean that a(n):

A expense account was decreased by the same amount.

B expense account was increased by the same amount.

C revenue account was increased by the same amount.

D revenue account was decreased by the same amount.

2. When a deferral adjustment is made to an asset account, that asset becomes

a(n):

A liability.

B other asset.

C revenue

D expense.

3. At the end of the year, accrual adjustments could include a:

A debit to an expense and a credit to an asset.

B credit to a revenue and a debit to an expense.

C debit to cash and a credit to Common Stock.

D debit to an expense and a credit to a liability.

4. One major difference between deferral and accrual adjustments is that

A accrual adjustments affect income statement accounts and deferral adjustments affect balance

sheet accounts.

B deferral adjustments increase net income and accrual adjustments decrease net income.

C deferral adjustments are made under the cash basis of accounting and accrual adjustments are

made under the accrual basis of accounting.

D accounts affected by an accrual adjustment always go in the same direction (i.e., both accounts are

increased or both accounts are decreased) and accounts affected by a deferral adjustment always

go in opposite directions (one account is increased and one account is decreased).

Answer 1

1. Option (C) is correct

When there is a deferral adjustment and decrease in liability, then revenue account was increased by the same amount.

Before this adjustment, there was a liability suppose unearned revenue. The revenue recognition was deferred as revenue belong to future period. Now, when the revenue is earned, there will be an adjustment entry to recognize the earned revenue (by increasing the revenue) and reduce this amount from the liability.

2. Option (D) is correct

When a deferral adjustment is made to an asset account, that asset becomes an expense.

Before this adjustment, there was a asset account suppose prepaid expenses. The expense recognition was deferred as expense belong to future period. Now, when the expense is incurred, there will be an adjustment entry to recognize the expense incurred (by increasing the expenses) and reduce the prepaid expense by the amount of expense from the assets.

3. Option (D) is correct

At the end of the year, accrual adjustments could include a debit to an expense and a credit to a liability.

This would mean that the current years' expenses that are incurred but not paid, are being recognized.

4. Option (D) is correct