Tag: adjustments in preparation of financial statements

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Questions Related to adjustments in preparation of financial statements

Multiple choice book keeping and accountancy adjustments in preparation of financial statements outstanding and prepaid expenses outstanding expenses need for adjustment, closing stock and outstanding expenses

'A three years premium paid on a fire insurance policy' should be classified as _______________.

  1. Accrued asset

  2. Accrued liability

  3. Unearned revenue

  4. Prepaid expense
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

A prepaid expense refers to an amount that a company has paid and a portion or all of it will be an expense in a later accounting period.

A prepaid expense can be recorded initially as an expense or as a current asset. 

Multiple choice book keeping and accountancy adjustments in preparation of financial statements outstanding and prepaid expenses outstanding expenses need for adjustment, closing stock and outstanding expenses

Expenses Paid in advance are called ________. 

  1. Prepaid Expense

  2. O/s Expense

  3. Asset

  4. Liability
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Prepaid expenses are future expenses that have been paid in advance. In other words, prepaid expenses are costs that have been paid but are not yet used up or have not yet expired.

Multiple choice book keeping and accountancy adjustments in preparation of financial statements outstanding and prepaid expenses outstanding expenses need for adjustment, closing stock and outstanding expenses

Ascertain the amount of prepaid expense if insurance of Rs. 10000 paid for one year ending on 30.06.2018 and firm closes the books on 31.03.2018.

  1. 5000

  2. 4500

  3. 2500

  4. 2000
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Amount of Prepaid expense for year ending 30th june ,2018 

 =  10000 * 3 / 6
= 5000

Multiple choice book keeping and accountancy adjustments in preparation of financial statements outstanding and prepaid expenses outstanding expenses need for adjustment, closing stock and outstanding expenses

Prepaid expenses is shown under ___________ side of balance side.

  1. Asset

  2. Liability

  3. Debit

  4. Credit
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Generally, the amount of prepaid expenses that will be used up within one year are reported on a company's balance sheet as a current asset. As the amount expires, the current asset is reduced and the amount of the reduction is reported as an expense on the income statement.


Multiple choice book keeping and accountancy adjustments in preparation of financial statements outstanding and prepaid expenses outstanding expenses need for adjustment, closing stock and outstanding expenses

Amount of prepaid expense is _______ from particular expense.

  1. Added

  2. Deducted

  3. Depreciated

  4. None
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

When expenses are paid they are deducted. However, because of the general rule regarding prepaid expenses, simply prepaying an expense does not make it immediately deductible (barring an exception due to the 12-month rule).

Multiple choice book keeping and accountancy adjustments in preparation of financial statements outstanding and prepaid expenses outstanding expenses need for adjustment, closing stock and outstanding expenses

Income received in advance is _______.

  1. A liability

  2. An asset

  3. An income

  4. An expense
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Under the accrual method of accounting, income that is received in advance is a liability because the company that received the money has not yet earned it and it has an obligation (a liability) to deliver the related goods or services in the future.

Multiple choice book keeping and accountancy adjustments in preparation of financial statements outstanding and prepaid expenses outstanding expenses need for adjustment, closing stock and outstanding expenses

Rent prepaid a/c appearing in the trial balance is ___________.

  1. shown on the liability side of balance sheet

  2. shown on the assets side of the balance sheet

  3. shown on debit side of profit and loss A/c

  4. credited to profit and loss A/c
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Prepaid rent is an asset because it is a payment for future benefits. Therefore, it is shown on the asset side of the balance sheet.

Multiple choice book keeping and accountancy adjustments in preparation of financial statements outstanding and prepaid expenses outstanding expenses need for adjustment, closing stock and outstanding expenses

A club paid subscription fees of Rs. 1,400, out of which Rs. 200 is prepaid. In such case _________________.

  1. P & L A/c is debited with Rs.1,400

  2. P & L A/c is debited with Rs. 1,200

  3. Rs. 200 is shown as current asset

  4. Both (B) and (C)

  5. Both (A) and (C)
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Subscription fees prepaid is a current asset as its benefit will be received within a period of one year. 

Also, we debit expenses only related to the current financial year to the Profit and loss account.
Thus, the journal entry will be:
Profit and Loss A/c   .....Dr.                1200
Prepaid Subscription fees A/c ......Dr. 200
To Subscription fees A/c                               1400
Thus, option D is correct.

Multiple choice book keeping and accountancy adjustments in preparation of financial statements outstanding and prepaid expenses outstanding expenses need for adjustment, closing stock and outstanding expenses

Prepaid insurance has an opening balance of Rs. 2,300. During the period, insurance of Rs. 1,200 expired. The adjusting entry would contain a credit _____________.

  1. to prepaid insurance for Rs. 1,200

  2. to insurance expenses for Rs. 1,200

  3. to unexpired insurance for Rs. 1,100

  4. to insurance expense for Rs. 1,100
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

To record the expiration of prepaid insurance, you must reduce the asset (Prepaid Insurance) and recognize the expense (Insurance Expense). Therefore, you credit Prepaid Insurance for the amount that expired (1,200).

Multiple choice book keeping and accountancy adjustments in preparation of financial statements outstanding and prepaid expenses outstanding expenses need for adjustment, closing stock and outstanding expenses

If prepaid rent appears in trial balance, while preparing the final accounts it will be shown in.

  1. Profit & Loss A/c and asset side of balance sheet

  2. Profit & Loss A/c and liability side of balance sheet

  3. Asset side of balance sheet

  4. Liability side of balance sheet
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

If a prepaid expense appears in the trial balance, it has already been adjusted or recorded as an asset. It is shown on the asset side of the balance sheet.