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Quiz about Generally Accepted Accounting Principles

Generally Accepted Accounting Principles Quiz

This quiz tests your knowledge of generally accepted accounting principles, also known as GAAP, that are sometimes twisted and kneaded by companies trying to mislead. Please note, the name used is purely fictitious.

A multiple-choice quiz by Akhnaten. Estimated time: 6 mins.

Author
Akhnaten

Time
6 mins

Type
Multiple Choice

Quiz #
88,165

Updated
Dec 03 21

# Qns
10

Difficulty
Tough

Avg Score
6 / 10

Plays
3611

One at a Time - Single Page - Timed Game

1. Julia Child goes to the grocery store to buy some lamb chops, lettuce, tomatoes, and various herbs and spices which are used on her cooking show. How should she record this purchase? Hint

As an investment to appear on her balance sheet

Not record at all since the items are immaterial

As an extraordinary expense on her income statement

As an expenditure on the income statement

NEXT>

2. Julia Childs buys a new stove for $12,000 to use on her cooking show by writing a check for the full amount. How should she record the purchase? Hint

As a normal operating expense on her income statement

As a fixed asset on her balance sheet

As an extraordinary expense on her income statement

As an investment on her balance sheet

3. Julia Childs sells a one year $120,000 advertising sponsorship of her cooking show in December for the following year. What is the most appropriate way to record this transaction in December when the cash is received? Hint

Debit Cash for $120,000 and Credit Revenue for $120,000

Debit Cash for $10,000 and Credit Deferred Revenue for $10,000

Do not record the transaction until the following year

Debit Cash for $120,000 and Credit Deferred Revenue for $120,000

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4. If Julia Childs forms a new company called Julia's Women's Wear, what is the most appropriate way to record on the financial statement the $50,000 she pays to her lawyers for drawing up the incorporation documents for the new company? Hint

Record as organization costs on her balance sheet

Record as legal expense on her income statement

She is not required to list the payment on her financial statement

Record as an extraordinary expense

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5. If Julia Childs is using accrual accounting and she pays $1000.00 to the contracted maid service for the show in February, for work done in January, what entry should she make on her books in January? Hint

No entry is required in January

Debit Maid Expense for $1,000, Credit Deferred Maid Expense for $1,000

Debit Accrued Maid Expense for $1,000, Credit Maid Expense for $1,000

Debit Maid Expense for $1,000, Credit Accrued Maid Expense for $1,000

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6. What entry should Julia make in February when she issues a check for maid expense that was accrued for in January? Hint

Debit Deferred Maid Expense for $1,000, Credit Maid Expense for $1,000

No entry is required in February

Debit Accrued Maid Expense for $1,000, Credit Cash for $1,000

Debit Maid Expense for $1,000, Credit Cash for $1,000

NEXT>

7. Assume Julia Childs was using the cash method of accounting and the maid performed work in January for which she received $1,000 in February. What journal entry should be made in January? Hint

Debit Maid Expense for $1,000, Credit Accrued Maid Expense for $1,000

No entry is required in January

Debit Maid Expense for $1,000, Credit Cash for $1,000

Debit Cash for $1,000, Credit Accrued Maid Expense for $1,000

NEXT>

8. If Julia Childs wanted to inflate January earnings, how should she "cook" the books? Hint

Classify normal operating expenses as assets on the balance sheet

Record January revenue in February

Accrue February expenses in January

Reclassify intangible assets as fixed assets

NEXT>

9. Julia Childs received $240,000 in January 2001 for a twenty-four month advertising sponsorship. Ignoring GAAP, how would she record the transaction to show maximum revenue for January 2001? Hint

Debit Revenue for $240,000, Credit Cash for $240,000

Debit Cash for $240,000, Credit Deferred Revenue for $240,000

Do not record the transaction

Debit Cash for $240,000, Credit Revenue for $240,000

NEXT>

10. Julia Childs received $240,000 in January 2001 for a twenty-four month advertising sponsorship. What is the PROPER entry to make in January for this transaction? Hint

Debit Cash for $240,000, Credit Revenue for $10,000, Credit Deferred Revenue for $230,000

Debit Deferred Revenue for $240,000, Credit Cash for $240,000

Do not record sponsorship until the 24th month

Debit Cash for $10,000, Credit Revenue for $10,000

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Quiz Answer Key and Fun Facts

1. Julia Child goes to the grocery store to buy some lamb chops, lettuce, tomatoes, and various herbs and spices which are used on her cooking show. How should she record this purchase?

Answer: As an expenditure on the income statement

The supplies would be expensed when actually used.

2. Julia Childs buys a new stove for $12,000 to use on her cooking show by writing a check for the full amount. How should she record the purchase?

Answer: As a fixed asset on her balance sheet

Equipment used for the production of goods and services should be recorded as a fixed asset on the balance sheet. Each month a portion of the cost should be recorded as depreciation expense over the useful life of the asset.

Answer: Debit Cash for $120,000 and Credit Deferred Revenue for $120,000

Although cash is received in December, Julia will not be providing services until the following year. Thus, it is most appropriate to record a liability on the balance sheet for deferred revenue instead of actual revenue in December. This revenue will be recorded the following year.

Answer: Record as legal expense on her income statement

According to Statement of Position 98-5 (AICPA) these costs should be expensed.

Answer: Debit Maid Expense for $1,000, Credit Accrued Maid Expense for $1,000

Since the maid's work was done in January, Julia must record the expense in January even if no payment has been made. The $1,000 in Maid Expense would appear on the income statement and a liability for $1,000 in Accrued Maid Expense would be recorded on the balance sheet.

6. What entry should Julia make in February when she issues a check for maid expense that was accrued for in January?

Answer: Debit Accrued Maid Expense for $1,000, Credit Cash for $1,000

In February, Julia would debit the Accrued Maid Expense for $1,000, which would have a $1,000 credit balance from the transaction recorded in January.

7. Assume Julia Childs was using the cash method of accounting and the maid performed work in January for which she received $1,000 in February. What journal entry should be made in January?

Answer: No entry is required in January

When using the cash accounting method, transactions are not recorded until cash is exchanged. Virtually all business use the accrual method in which expenses are booked in the period in which goods or services received and revenues are booked in the period when goods or services are provided.

8. If Julia Childs wanted to inflate January earnings, how should she "cook" the books?

Answer: Classify normal operating expenses as assets on the balance sheet

Classifying normal operating expenses as assets on the balance sheet is a common method of "cooking the books" to artificially reduce reported expenses. In 2002, WorldCom financial managers were arrested for misclassifying over $3.8 billion in normal operating expenses. Reclassifying intangible assets as fixed assets would have no effect on income and the other two actions would decrease income.

9. Julia Childs received $240,000 in January 2001 for a twenty-four month advertising sponsorship. Ignoring GAAP, how would she record the transaction to show maximum revenue for January 2001?

Answer: Debit Cash for $240,000, Credit Revenue for $240,000

Recognizing the full amount of the sale in the month the sale is made would show the maximum revenue but would grossly overstate earnings since only 1/24 of the revenue was actually earned in January.

10. Julia Childs received $240,000 in January 2001 for a twenty-four month advertising sponsorship. What is the PROPER entry to make in January for this transaction?

Answer: Debit Cash for $240,000, Credit Revenue for $10,000, Credit Deferred Revenue for $230,000

The correct method for booking this sponsorship is to record the full $240,000 cash in January as received, book 1/24 as revenue in January, and place the other 23/24 on the balance sheet as deferred revenue to be recognized when the services are provided.

Source: Author Akhnaten

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