Accountancy MCQs
Topic Notes: Accountancy
General Description
Plato
- Biography: Ancient Greek philosopher (427–347 BCE), student of Socrates and teacher of Aristotle, founder of the Academy in Athens.
- Important Ideas:
- Theory of Forms
- Philosopher-King
- Ideal State
11
How is an advance subscription received from a member of a non-profit organization classified?
Answer:
Liability
An advance receipt of subscription represents an obligation for the organization to provide services or benefits in the future. Because the organization has received cash but has not yet fulfilled the performance obligation, it is recorded as a liability, specifically unearned revenue, until the subscription period expires.
12
How should commission received in advance be classified?
Answer:
Unearned income
Commission received in advance is classified as unearned income because the business has received cash for services that have not yet been performed. It represents a liability to the business until the service is rendered and the income is earned.
13
How is revenue that has been received by a business but not yet earned classified?
Answer:
Unearned Revenue
Unearned revenue, also known as deferred revenue, occurs when a business receives payment for goods or services that have not yet been delivered or performed. Under the accrual basis of accounting, this is recorded as a liability because the business has an obligation to provide the service or refund the money.
14
How should an advance subscription payment received from a member of a non-profit organization be classified?
Answer:
Liability
When a non-profit organization receives subscription fees in advance, it has an obligation to provide services or membership benefits in the future. Because the organization has not yet earned this revenue, it is classified as a liability (specifically, unearned income) on the balance sheet until the service period is fulfilled.
15
What is the accounting term for income that has been received in cash but has not yet been earned through the delivery of goods or services?
Answer:
Unearned income
Unearned income, also known as deferred revenue, occurs when a business receives payment before performing the related service or delivering the product. It is classified as a liability on the balance sheet until the revenue is earned.
16
A business receives $10,000 in annual rent. If $5,000 was received on 1 May 2018 and $5,000 on 1 November 2018, what amount should be reported as rent income in the income statement for the year ending 31 December 2018?
Answer:
$7,500 credit
The business earns rent from April to December (9 months). Monthly rent is $833.33. Total earned for 9 months is $7,500. Since this is income, it is credited to the income statement. The remaining $2,500 received is unearned income for the next year.
17
Which accounts are impacted when recording an adjusting entry for unearned income?
Answer:
Income and liabilities
Unearned income represents a liability because the service has not yet been performed. The adjusting entry reduces the liability account and increases the revenue account as the service is earned over time, adhering to the accrual basis of accounting.
18
What is the correct adjusting entry to record unearned income?
Answer:
Debit = Income, Credit = Unearned income
Unearned income represents revenue received in advance that has not yet been earned. To adjust, we debit the income account to reduce the recorded revenue and credit the unearned income liability account to reflect the obligation.
19
In the preparation of a balance sheet, where is pre-received (unearned) income reported?
Answer:
Liability side
Pre-received income represents an obligation for the business to provide goods or services in the future. Because it is an obligation arising from past transactions, it is classified as a current liability and is therefore reported on the liability side of the balance sheet.
20
A client paid $100,000 for construction services, but only 25% of the work was completed by the end of the period. What amount should be recognized as revenue?
Answer:
25000
According to the accrual basis of accounting and the revenue recognition principle, income should be recognized only when it is earned. Since only 25% of the work was completed, only 25% of the total payment ($100,000 * 0.25 = $25,000) is considered earned revenue for the current period.