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
21
Under which classification is prepaid insurance reported in the financial statements?
Answer:
Current Asset
Prepaid insurance is an amount paid in advance for insurance coverage that has not yet expired. Because it represents a right to receive services in the future and is expected to be consumed within the normal operating cycle or one year, it is classified as a current asset on the balance sheet.
22
If a business pays $5,000 for services but only consumes $2,000 worth by the end of the period, how is the remaining $3,000 classified?
Answer:
Prepaid expenses
Prepaid expenses represent payments made in advance for goods or services that have not yet been consumed or received. Since the business paid for $5,000 but only used $2,000, the unused portion of $3,000 is an asset to the company because it provides a future economic benefit. This amount is recorded as a prepaid expense until the services are fully utilized.
23
How are expenses that have been paid in advance, before the service or benefit is received, classified?
Answer:
Prepaid expenses
Prepaid expenses are payments made for goods or services that will be consumed in future accounting periods. According to the matching principle, these are recorded as current assets on the balance sheet until the benefit is realized, at which point they are expensed.
24
How should prepaid expenses be classified in the financial statements of a business?
Answer:
Asset
Prepaid expenses are classified as assets because they represent payments made in advance for goods or services that have not yet been consumed or utilized. Since the business holds a future economic benefit from these payments, they are recorded as current assets until the expense is incurred.
25
A business pays $3,000 for three months of rent, where one month of the payment applies to the next accounting period. What is the amount of the prepaid expense?
Answer:
1000
The total rent paid is $3,000 for three months, resulting in a monthly cost of $1,000. Since one month of this rent relates to the next accounting period, that portion is considered a prepaid expense. Therefore, $1,000 is the correct amount to be deferred as a prepaid asset.
26
How should rent paid in advance by a non-profit organization be classified in the financial statements?
Answer:
Asset
Rent paid in advance is classified as a prepaid expense. Since the organization has paid for a service that will provide future economic benefits, it is recognized as an asset on the balance sheet until the service is consumed, at which point it is transferred to the income statement as an expense.
27
How should salaries paid in advance be reported in the financial statements?
Answer:
Asset side of the Balance sheet
Salaries paid in advance are classified as prepaid expenses. Because the business has paid for a service that has not yet been consumed or utilized, it represents a future economic benefit, which is recorded as a current asset on the balance sheet until the service is actually received.
28
How should an advance payment made by a business be classified in the accounts?
Answer:
Payable
An advance payment is typically treated as a prepaid expense or an asset because the business has paid for a service or good not yet received. The provided answer key 'B' (Payable) is generally incorrect in standard accounting, as payables represent obligations to pay, whereas advances represent rights to receive benefits.
29
The omission of which adjusting entry would result in an overstatement of assets?
Answer:
Expired Insurance
Prepaid insurance is recorded as an asset. If the portion of insurance that has expired is not adjusted (by debiting expense and crediting the asset), the asset account remains overstated on the balance sheet at the end of the period.
30
How should unexpired insurance, appearing in the Trial Balance, be treated in the final accounts?
Answer:
Shown on the assets side of the Balance Sheet
Unexpired insurance represents a prepaid expense, which is a payment made for a service that has not yet been consumed. Since it provides a future economic benefit to the business, it is treated as a current asset and recorded on the assets side of the Balance Sheet until the period of coverage expires.