CPB / BookKeeping Adjusting Entries and Reconciliations 2 — Questions and Answers
Question 1: A company pays $12,000 for a 12-month insurance policy on October 1. What is the adjusting entry on December 31?
- Debit Insurance Expense $3,000; Credit Prepaid Insurance $3,000 (Correct answer)
- Debit Prepaid Insurance $3,000; Credit Insurance Expense $3,000
- Debit Insurance Expense $12,000; Credit Cash $12,000
- Debit Insurance Expense $9,000; Credit Prepaid Insurance $9,000
Correct answer: Debit Insurance Expense $3,000; Credit Prepaid Insurance $3,000
Three months (Oct, Nov, Dec) of the 12-month policy have expired, so $12,000 × 3/12 = $3,000 must be recognized as expense.
Question 2: Which of the following is an example of an accrued liability requiring an adjusting entry?
- Unearned revenue received in advance
- Wages earned by employees but not yet paid (Correct answer)
- Prepaid rent paid at the start of the period
- Depreciation on office equipment
Correct answer: Wages earned by employees but not yet paid
Accrued liabilities are expenses incurred but not yet paid, such as wages owed to employees at period end.
Question 3: At year-end, $500 of interest has accrued on a note receivable. What is the correct adjusting entry?
- Debit Interest Revenue $500; Credit Notes Receivable $500
- Debit Interest Receivable $500; Credit Interest Revenue $500 (Correct answer)
- Debit Cash $500; Credit Interest Revenue $500
- Debit Interest Expense $500; Credit Interest Payable $500
Correct answer: Debit Interest Receivable $500; Credit Interest Revenue $500
Accrued interest earned is recorded by debiting Interest Receivable (asset) and crediting Interest Revenue.
Question 4: When reconciling a bank statement, a deposit in transit should be:
- Subtracted from the book balance
- Added to the bank balance (Correct answer)
- Subtracted from the bank balance
- Added to the book balance
Correct answer: Added to the bank balance
Deposits in transit have been recorded in the books but not yet processed by the bank, so they are added to the bank balance in the reconciliation.
Question 5: A bank reconciliation shows a bank service charge of $25 not yet recorded in the books. What entry should the bookkeeper make?
- Debit Bank Charges Expense $25; Credit Cash $25 (Correct answer)
- Debit Cash $25; Credit Bank Charges Expense $25
- No entry needed; adjust only the bank balance
- Debit Accounts Payable $25; Credit Cash $25
Correct answer: Debit Bank Charges Expense $25; Credit Cash $25
Bank service charges reduce the account balance and must be recorded as an expense with a credit to Cash.
Question 6: Straight-line depreciation on equipment costing $10,000 with a $1,000 salvage value over 5 years results in what annual adjusting entry amount?
- $2,000
- $1,800 (Correct answer)
- $1,000
- $2,500
Correct answer: $1,800
Annual depreciation = ($10,000 − $1,000) / 5 = $1,800 per year.
Question 7: Which account is credited when recording the adjusting entry for depreciation?
- Depreciation Expense
- Equipment
- Accumulated Depreciation (Correct answer)
- Cash
Correct answer: Accumulated Depreciation
Depreciation is recorded by debiting Depreciation Expense and crediting Accumulated Depreciation, a contra-asset account.
CPB / BookKeeping Adjusting Entries and Reconciliations 2
A company pays $12,000 for a 12-month insurance policy on October 1.
What is the adjusting entry on December 31?