22 Adjusting Entries & the Close Practice Questions & Answers

1. 1. A consulting firm collected $18,000 in cash on November 1 for a service contract running from November 1 through April 30 at $3,000 per month. For the calendar year ending December 31, how much revenue does the firm report under the cash basis and under the accrual basis, respectively?

   • A.$6,000 under both the cash basis and the accrual basis
   • B.$18,000 under the cash basis and $6,000 under the accrual basis✓ Answer
   • C.$18,000 under both the cash basis and the accrual basis
   • D.$6,000 under the cash basis and $18,000 under the accrual basis

   The cash basis recognizes revenue when cash is received, so the entire $18,000 falls in the year of collection. The accrual basis recognizes revenue when it is earned, and only November and December service has been performed by December 31, so 2 months at $3,000 equals $6,000. This gap between cash received and revenue earned is exactly why period-end adjusting entries exist.

   Source: US GAAP revenue recognition (revenue recognized when earned); accrual vs. cash basis, AIPB Certified Bookkeeper adjusting-entries subject areaReport a problem with this question

2. 2. Which statement is true of every adjusting entry?

   • A.It affects only income statement accounts.
   • B.It affects only balance sheet accounts.
   • C.It affects at least one income statement account and at least one balance sheet account, and it never affects Cash.✓ Answer
   • D.It always includes a debit or a credit to Cash.

   Adjusting entries move revenue or expense into the correct period, so each one records an amount earned or incurred (an income statement account) against the related receivable, payable, prepaid asset, or unearned liability (a balance sheet account). Cash is never involved, because the cash movement either already happened or has not happened yet; that is what makes the adjustment necessary.

   Source: Structure of adjusting entries under US GAAP accrual accounting (matching and revenue recognition)Report a problem with this question

3. 3. On September 1 a company lent $24,000 under a note bearing 9% annual interest, with interest collected every August 31. The company's fiscal year ends December 31 and no interest has been received or recorded. What is the required adjusting entry?

   • A.Debit Cash $720; credit Interest Revenue $720
   • B.Debit Interest Revenue $720; credit Interest Receivable $720
   • C.Debit Interest Receivable $720; credit Interest Revenue $720✓ Answer
   • D.Debit Interest Receivable $2,160; credit Interest Revenue $2,160

   Accrued revenue is earned but not yet received, so the entry debits a receivable and credits the revenue account. Interest equals principal times the annual rate times months elapsed since the last payment date divided by 12: $24,000 x 9% = $2,160 per year, or $180 per month, and September through December is 4 months, giving $720.

   Source: Accrued revenue adjusting entry, US GAAP revenue recognition; simple interest computationReport a problem with this question

4. 4. A firm performed $5,400 of services in December that were neither billed nor collected, and it made no adjusting entry before preparing its December 31 financial statements. What is the effect of that omission?

   • A.Liabilities are overstated $5,400 and net income is understated $5,400.
   • B.Assets, revenue, net income and owner's equity are each understated $5,400, and liabilities are unaffected.✓ Answer
   • C.Assets are overstated $5,400 and expenses are understated $5,400.
   • D.Revenue is overstated $5,400 and owner's equity is overstated $5,400.

   The missing entry would have debited a receivable and credited revenue. Leaving it out means the receivable is never recorded (assets understated) and the revenue is never recognized (revenue and net income understated), and because net income closes to the owner's capital account, equity is understated by the same $5,400. No liability account is involved, so liabilities are correct and the balance sheet still balances.

   Source: Effect of omitting an accrued-revenue adjustment; US GAAP accrual accountingReport a problem with this question

5. 5. A business pays its crew $8,400 for a six-day workweek that runs Tuesday through Sunday, with the same amount earned each day. Its fiscal year ends on a Thursday. What amount of wages must be accrued at year end?

   • A.$5,040
   • B.$8,400
   • C.$1,400
   • D.$4,200✓ Answer

   Only the days actually worked before the cutoff are accrued, and the daily rate must use the correct divisor: this week has six workdays, so the daily rate is $8,400 divided by 6, or $1,400. Tuesday, Wednesday and Thursday fall in the old year, so 3 days times $1,400 equals $4,200, recorded as a debit to Wages Expense and a credit to Wages Payable.

   Source: Accrued expense (wages) adjusting entry under the US GAAP matching principleReport a problem with this question

6. 6. A company owes $40,000 on a note bearing interest at 1% per month. The last interest payment covered the period through June 30, and the company's fiscal year ends September 30. What adjusting entry is required at year end?

   • A.Debit Interest Expense $4,800; credit Interest Payable $4,800
   • B.Debit Interest Expense $1,200; credit Interest Payable $1,200✓ Answer
   • C.Debit Interest Payable $1,200; credit Interest Expense $1,200
   • D.Debit Interest Expense $400; credit Interest Payable $400

   An accrued expense is incurred but unpaid, so the entry debits the expense and credits the payable. The rate is stated per month, not per year: $40,000 times 1% equals $400 a month, and July, August and September are the three months elapsed since the last payment date, giving $1,200.

   Source: Accrued expense (interest) adjusting entry; simple interest at a stated monthly rateReport a problem with this question

7. 7. A $1,500 December utility bill arrived before year end but was neither paid nor recorded, and no adjusting entry was made. What are the effects on the income statement and the balance sheet, respectively?

   • A.Expenses are understated $1,500 and net income is overstated $1,500; liabilities are understated $1,500 and owner's equity is overstated $1,500.✓ Answer
   • B.Expenses are overstated $1,500 and liabilities are overstated $1,500.
   • C.Expenses are understated $1,500 and assets are understated $1,500.
   • D.There is no effect on either statement because the bill has not been paid.

   Under accrual accounting the utility service was consumed in December, so the expense belongs to that period whether or not the bill is paid. Omitting the debit to Utilities Expense and credit to Utilities Payable understates expenses and liabilities, which overstates net income and, because income closes to capital, overstates owner's equity by the same amount.

   Source: Effect of omitting an accrued-expense adjustment; US GAAP matching principleReport a problem with this question

8. 8. On October 1 a landscaping business collected $18,000 in advance for 12 months of service beginning that day and credited the full amount to Unearned Service Revenue. What is the December 31 adjusting entry?

   • A.Debit Service Revenue $4,500; credit Unearned Service Revenue $4,500
   • B.Debit Cash $4,500; credit Service Revenue $4,500
   • C.Debit Unearned Service Revenue $4,500; credit Service Revenue $4,500✓ Answer
   • D.Debit Unearned Service Revenue $13,500; credit Service Revenue $13,500

   When the advance was originally credited to a liability, the adjusting entry removes the portion now EARNED from the liability and records it as revenue. Three of the twelve months have passed, so $18,000 divided by 12 equals $1,500 per month times 3 equals $4,500: debit Unearned Service Revenue, credit Service Revenue.

   Source: Deferred revenue adjusting entry when cash was originally credited to a liability; US GAAP revenue recognitionReport a problem with this question

9. 9. On November 1 a company collected $9,600 covering eight months of rent at $1,200 per month and credited the entire amount to Rent Revenue. What is the December 31 adjusting entry?

   • A.Debit Unearned Rent Revenue $2,400; credit Rent Revenue $2,400
   • B.Debit Rent Revenue $7,200; credit Unearned Rent Revenue $7,200✓ Answer
   • C.Debit Rent Revenue $2,400; credit Unearned Rent Revenue $2,400
   • D.Debit Unearned Rent Revenue $7,200; credit Rent Revenue $7,200

   Because the cash was originally credited to a REVENUE account, the adjusting entry must remove the portion still UNEARNED. Two of the eight months have been earned, leaving six months times $1,200, or $7,200, unearned: debit Rent Revenue and credit Unearned Rent Revenue. This is the mirror image of the liability-method entry.

   Source: Deferred revenue adjusting entry when cash was originally credited to revenue; US GAAP revenue recognitionReport a problem with this question

10. 10. A year-end adjusting entry debits a revenue account and credits a liability account. What must the original entry made when the cash was received have looked like?

    • A.It credited the owner's capital account for the full amount received.
    • B.It debited a prepaid asset account for the full amount received.
    • C.It credited a revenue account for the full amount received.✓ Answer
    • D.It credited a liability account such as Unearned Revenue for the full amount received.

    If the advance had first been credited to Unearned Revenue, the adjustment would DECREASE that liability and increase revenue. An adjustment that runs the other way, reducing revenue and creating a liability, can only be correcting an original entry that put the whole collection into revenue, leaving the still-unearned portion to be deferred at period end.

    Source: Reverse analysis of deferred revenue adjusting entries under the two original-recording methods; US GAAP revenue recognitionReport a problem with this question

11. 11. A publisher's Unearned Subscription Revenue account began the year with a $7,000 balance, $52,000 of subscriptions were collected in advance during the year, and the account's balance after the year-end adjustment is $12,500. How much subscription revenue was earned during the year?

    • A.$59,000
    • B.$57,500
    • C.$46,500✓ Answer
    • D.$52,000

    The unearned revenue account rolls forward as beginning balance plus collections minus revenue earned equals ending balance. Solving for the missing cell: $7,000 plus $52,000 equals $59,000 available to be earned, less the $12,500 still unearned at year end, gives $46,500 of revenue earned.

    Source: Unearned revenue roll-forward (beginning balance plus collections less revenue earned equals ending balance); US GAAP revenue recognitionReport a problem with this question

12. 12. At year end, $8,000 of amounts sitting in Unearned Service Revenue had actually been earned, but no adjusting entry was made. What is the effect on the financial statements?

    • A.There is no misstatement because the cash was already received and recorded.
    • B.Assets are understated $8,000 and expenses are overstated $8,000.
    • C.Liabilities are overstated $8,000, and revenue, net income and owner's equity are each understated $8,000.✓ Answer
    • D.Liabilities are understated $8,000 and net income is overstated $8,000.

    The missing entry would have debited Unearned Service Revenue and credited Service Revenue. Without it the obligation remains on the books even though the work is done, so liabilities are overstated, while the revenue never reaches the income statement, understating revenue, net income and the owner's capital that net income closes into.

    Source: Effect of omitting a deferred-revenue adjustment; US GAAP revenue recognitionReport a problem with this question

13. 13. On March 1 a business paid $14,400 for a 24-month insurance policy beginning that day and debited the full amount to Prepaid Insurance. Its fiscal year ends June 30. What is the adjusting entry at June 30?

    • A.Debit Insurance Expense $2,400; credit Prepaid Insurance $2,400✓ Answer
    • B.Debit Insurance Expense $7,200; credit Prepaid Insurance $7,200
    • C.Debit Prepaid Insurance $2,400; credit Insurance Expense $2,400
    • D.Debit Insurance Expense $12,000; credit Prepaid Insurance $12,000

    Because the payment was debited to an ASSET, the adjustment records the portion that has EXPIRED. The monthly cost is $14,400 divided by 24 months, or $600, and March through June is 4 months, so $2,400 of coverage has been used: debit Insurance Expense and credit Prepaid Insurance, leaving $12,000 as an asset.

    Source: Prepaid (deferred) expense adjusting entry when the payment was debited to an asset; US GAAP matching principleReport a problem with this question

14. 14. On November 1 a firm paid $9,000 for six months of rent beginning that day and debited the entire amount to Rent Expense. What is the December 31 adjusting entry?

    • A.Debit Rent Expense $3,000; credit Prepaid Rent $3,000
    • B.Debit Prepaid Rent $6,000; credit Rent Expense $6,000✓ Answer
    • C.Debit Prepaid Rent $3,000; credit Rent Expense $3,000
    • D.Debit Rent Expense $6,000; credit Prepaid Rent $6,000

    Because the payment was debited to an EXPENSE, the adjustment must move out the portion NOT yet used. The monthly rent is $9,000 divided by 6, or $1,500; November and December are used up, leaving four months, or $6,000, unexpired: debit Prepaid Rent and credit Rent Expense so that only $3,000 remains as this period's expense.

    Source: Prepaid (deferred) expense adjusting entry when the payment was debited to expense; US GAAP matching principleReport a problem with this question

15. 15. The Office Supplies asset account began the year at $340, purchases of $1,150 during the year were debited to that same account, and a physical count at year end shows $260 of supplies on hand. What is the adjusting entry?

    • A.Debit Supplies Expense $1,150; credit Office Supplies $1,150
    • B.Debit Supplies Expense $260; credit Office Supplies $260
    • C.Debit Supplies Expense $1,230; credit Office Supplies $1,230✓ Answer
    • D.Debit Office Supplies $1,230; credit Supplies Expense $1,230

    Supplies expense is not computed by a time formula but by physical count: beginning balance plus purchases minus the amount still on hand equals the amount used. Here $340 plus $1,150 equals $1,490 available, minus the $260 counted, gives $1,230 consumed, debited to Supplies Expense and credited to the Office Supplies asset.

    Source: Supplies adjusting entry determined by physical count; US GAAP matching principleReport a problem with this question

16. 16. A company failed to record the expiration of $2,700 of prepaid insurance that had been debited to Prepaid Insurance when paid. What is the effect on its year-end financial statements?

    • A.Expenses are overstated $2,700 and owner's equity is understated $2,700.
    • B.Assets are understated $2,700 and net income is understated $2,700.
    • C.Liabilities are overstated $2,700 and net income is understated $2,700.
    • D.Assets are overstated $2,700, expenses are understated $2,700, and net income and owner's equity are overstated $2,700.✓ Answer

    The omitted entry would have debited Insurance Expense and credited Prepaid Insurance. Leaving the used-up coverage in the asset account overstates assets and understates expenses, and understated expenses overstate net income, which in turn overstates the owner's capital balance the income closes into.

    Source: Effect of omitting a prepaid-expense adjustment; US GAAP matching principleReport a problem with this question

17. 17. Equipment carried at a cost of $60,000 requires annual depreciation of $7,200. Which statement correctly describes the adjusting entry and its effect?

    • A.Debit Depreciation Expense $7,200 and credit Equipment $7,200, reducing the Equipment account to $52,800.
    • B.Debit Accumulated Depreciation $7,200 and credit Depreciation Expense $7,200; book value is unchanged.
    • C.Debit Depreciation Expense $7,200 and credit Accumulated Depreciation $7,200; Equipment still shows $60,000 and book value falls by $7,200.✓ Answer
    • D.Debit Depreciation Expense $7,200 and credit Cash $7,200; book value falls by $7,200.

    Depreciation is credited to Accumulated Depreciation, a contra-asset account, so the asset's original cost stays visible in the ledger and book value equals cost minus accumulated depreciation. Crediting the asset directly would destroy the cost record, and no adjusting entry may credit Cash.

    Source: Depreciation adjusting entry and the accumulated depreciation contra-asset account; US GAAPReport a problem with this question

18. 18. A company estimates bad debts at 1.5% of credit sales. Credit sales for the year were $480,000, and Allowance for Doubtful Accounts has a $1,100 credit balance before adjustment. What is bad debt expense for the year?

    • A.$1,100
    • B.$6,100
    • C.$8,300
    • D.$7,200✓ Answer

    The percentage-of-credit-sales method is an income statement approach: it measures the expense directly as a percentage of the period's credit sales, so the existing balance in the allowance is ignored. $480,000 times 1.5% equals $7,200, debited to Bad Debt Expense and credited to Allowance for Doubtful Accounts.

    Source: Allowance method, percentage-of-credit-sales (income statement) approach; US GAAPReport a problem with this question

19. 19. An aging of accounts receivable indicates that $9,300 of the ending balance will prove uncollectible. Allowance for Doubtful Accounts currently has a $2,150 DEBIT balance. What is the bad debt expense for the period?

    • A.$2,150
    • B.$9,300
    • C.$7,150
    • D.$11,450✓ Answer

    The aging (percentage-of-receivables) method is a balance sheet approach: it sets the allowance TO a target credit balance, so the existing balance matters. Starting from a $2,150 debit balance, the entry must add that $2,150 back plus the $9,300 target, giving $11,450 of expense. A debit balance means prior write-offs exceeded the earlier estimate.

    Source: Allowance method, aging/percentage-of-receivables (balance sheet) approach; US GAAPReport a problem with this question

20. 20. Under the allowance method, a company determines that a specific customer's $1,900 account is uncollectible and writes it off. What entry is made and what is the effect?

    • A.Debit Allowance for Doubtful Accounts $1,900 and credit Accounts Receivable $1,900, leaving Bad Debt Expense and the net realizable value of receivables unchanged.✓ Answer
    • B.Debit Bad Debt Expense $1,900 and credit Allowance for Doubtful Accounts $1,900, leaving Accounts Receivable unchanged.
    • C.Debit Bad Debt Expense $1,900 and credit Accounts Receivable $1,900, reducing net income.
    • D.Debit Accounts Receivable $1,900 and credit Allowance for Doubtful Accounts $1,900.

    Under the allowance method the expense was already recorded when the estimate was made, so the write-off simply removes the specific account against the allowance already set aside. Because Accounts Receivable and the allowance both decrease by the same $1,900, net realizable value (receivables minus allowance) is unchanged and no expense is recorded. US GAAP requires this allowance approach for financial reporting, while federal income tax rules generally require a direct write-off of specific accounts.

    Source: Allowance method write-off of a specific account; US GAAP requires the allowance method for financial reporting, federal tax law requires specific charge-offReport a problem with this question

21. 21. At the end of a sole proprietor's fiscal year, which statement about the closing process is correct?

    • A.Withdrawals is closed to Income Summary along with the expense accounts.
    • B.Income Summary is closed to the Withdrawals account.
    • C.The owner's Capital account is closed to Income Summary so that it starts the new year at zero.
    • D.Revenues and expenses are closed to Income Summary, the Income Summary balance is then closed to the owner's Capital account, and Withdrawals is closed directly to Capital.✓ Answer

    Closing zeroes out the temporary accounts. Revenues and expenses are funneled through Income Summary so that its balance equals net income or net loss, which is then transferred to Capital. Withdrawals is also temporary but is not an element of net income, so it bypasses Income Summary and reduces Capital directly. Adjusting entries are always completed before the closing entries are made.

    Source: Closing entries for a sole proprietorship; temporary versus permanent accounts under US GAAP bookkeeping practiceReport a problem with this question

22. 22. What appears on the post-closing trial balance?

    • A.Balance sheet accounts plus Income Summary, which carries net income into the new year.
    • B.Every account in the ledger, including revenue and expense accounts.
    • C.Assets and liabilities only, because Capital appears solely in the statement of owner's equity.
    • D.Only permanent accounts — assets, contra-asset accounts such as Accumulated Depreciation and Allowance for Doubtful Accounts, liabilities, and the updated owner's Capital balance — with total debits equal to total credits.✓ Answer

    The post-closing trial balance is prepared after the temporary accounts have been closed to zero, so only real (permanent) accounts remain: assets and their contra accounts, liabilities, and Capital already updated for net income and withdrawals. Income Summary is itself a temporary account and has been closed out, and like any trial balance the columns must foot to equal totals.

    Source: Post-closing trial balance contents; permanent versus temporary accounts under US GAAP bookkeeping practiceReport a problem with this question

Practice questions based on the subject areas of the AIPB Certified Bookkeeper designation, US GAAP, and federal payroll practice. Tax rates, wage bases, contribution limits and withholding tables are reset annually and unemployment and wage-and-hour rules differ by state, so no such figure is used as an answer here — where a calculation needs one, the question supplies it. Confirm the rates in effect for your payroll period and your state's requirements before applying anything here to real books. AIPB and Certified Bookkeeper are marks of the American Institute of Professional Bookkeepers; this site is not affiliated with or endorsed by the AIPB. About the Certified Bookkeeper exam →