Chapter 2 practice

The service and utility consumption belong in December even though neither related cash settlement has occurred.

The facts state that no collection or payment occurred by December 31, so neither adjustment can use Cash.

Netting erases the separate $3,600 customer claim, $1,200 utility obligation, revenue, and expense balances.

This reverses every account effect: the customer claim and utility expense increase with debits, while revenue and the payable increase with credits.

Answer: A

December includes $3,600 of performance and $1,200 of utility service consumed. The entries debit Accounts Receivable and credit Service Revenue $3,600, then debit Utilities Expense and credit Utilities Payable $1,200. With the $8,000 opening Cash and equity balances, adjusted debits are $8,000 Cash plus $3,600 Receivable plus $1,200 Expense, or $12,800; adjusted credits are $8,000 Equity plus $3,600 Revenue plus $1,200 Payable, also $12,800.

The facts already supply December performance, consumption, a customer claim, and an employee obligation; waiting for cash misstates both periods.

The December entries recognize economic activity and positions; the January entries settle the resulting asset and liability.

The cash events are new transactions, but their effects settle accounts created for the already recognized December activity rather than duplicating it.

Net income does not replace the separate customer claim, employee obligation, revenue, and expense accounts needed for reporting and settlement.

Answer: B

December performance creates $5,400 of Accounts Receivable and Service Revenue. December employee service creates $1,900 of Wages Expense and Wages Payable. Neither adjustment uses Cash. January collection debits Cash and credits Accounts Receivable; January payment debits Wages Payable and credits Cash. The same December revenue and expense are not recognized again.

One-sixth of the prepayment is consumed and one-fourth of the advance is earned; the remaining asset and liability carry the other portions forward.

This treats all cash as current-period expense and revenue despite five months of coverage and three milestones remaining.

The cash-date balances are recorded, but this omits the month-end consumption and performance adjustments.

This reverses the month-end account effects: consumption reduces the prepaid asset with a credit, and performance reduces the advance liability with a debit.

Answer: A

The $6,000 payment debits Prepaid Insurance and credits Cash; one of six months transfers $1,000 to Insurance Expense, leaving $5,000 prepaid. The $8,000 receipt debits Cash and credits Customer Advance; one of four milestones transfers $2,000 to Service Revenue, leaving a $6,000 liability. Cash is $15,000 minus $6,000 plus $8,000, or $17,000. Adjusted debit balances are $17,000 Cash, $5,000 Prepaid Insurance, and $1,000 Insurance Expense; credits are $15,000 Owners' Equity, $6,000 Customer Advance, and $2,000 Service Revenue. Each side totals $23,000.

The adjustments changed asset, liability, revenue, expense, and income amounts even though each moved value within one trial-balance side.

$3,000 revenue less $1,000 expense produces a $2,000 income effect while preserving debit-credit equality.

Control of Cash does not satisfy the stated remaining customer performance obligation; $6,000 remains a liability.

The cash events and initial asset or liability are real July changes; the later entries update, rather than replace, them.

Answer: B

One month of insurance moves $1,000 from Prepaid Insurance to Insurance Expense. One completed milestone moves $3,000 from Customer Advance to Service Revenue. Because each adjustment transfers an amount between accounts on the same normal side, the $29,000 debit and credit totals do not change. Account composition changes and July income increases $2,000.

Cost less residual value is $48,000, allocated over eight years at $6,000 per year; the schedule contains no market-value input.

This divides full cost by eight, ignores the $4,000 residual value, and then treats carrying amount as an unsupported appraisal.

This computes one year's expense but ignores that three full years have elapsed in the cumulative balance and carrying amount.

The useful-life estimate is eight years, not the three years elapsed; elapsed time determines cumulative allocation, not the denominator.

Answer: A

Depreciable amount is $52,000 minus $4,000, or $48,000. Dividing by eight years gives $6,000 annual depreciation. After three full years, accumulated depreciation is $18,000, carrying amount is $52,000 minus $18,000, or $34,000, and remaining depreciable amount is $48,000 minus $18,000, or $30,000. The schedule does not compute market value.

The contra credit preserves $28,000 gross cost, produces a $22,000 carrying amount, and records no cash or appraisal.

Directly crediting Equipment erases gross-cost history, and the allocation supplies no market evidence.

Depreciation is a noncash allocation in this period; the contra credit does not generate or reserve Cash.

A contra-asset ordinarily has the opposite normal side: accumulated depreciation increases with a credit while expense increases with a debit.

Answer: A

One year allocates ($28,000 − $4,000) ÷ 4, or $6,000. Debit Depreciation Expense and credit the credit-normal contra-asset Accumulated Depreciation. Gross Equipment remains $28,000 and carrying amount becomes $22,000. The entry changes neither Cash nor demonstrated market value.