Deferrals Quiz: 50 Multiple-Choice Questions with Answers and Explanations

Below are 50 professional, exam-style multiple-choice questions about Deferrals in Accounting, covering deferred revenues, prepaid expenses, adjusting entries, recognition, financial statement effects, and common accounting scenarios. Each answer includes a 50–100 word explanation suitable for an Accounting Quiz article.

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Question 1

What is the primary purpose of a deferral in accounting?

A. To recognize revenue before it is earned
B. To postpone the recognition of an expense or revenue until the appropriate accounting period
C. To eliminate all adjusting entries
D. To increase cash flows from operations

Correct Answer: B. To postpone the recognition of an expense or revenue until the appropriate accounting period

Explanation:
A deferral occurs when cash is received or paid before the related revenue or expense is recognized. The recognition is postponed until the economic activity actually occurs. Common examples include prepaid insurance, prepaid rent, and unearned revenue. Deferrals help ensure that revenues and expenses are reported in the correct accounting period under the accrual basis of accounting. This supports the matching principle and provides financial statements that more accurately reflect the company’s economic performance.

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Question 2

Which of the following is an example of a prepaid expense?

A. Unearned revenue
B. Accounts payable
C. Prepaid insurance
D. Service revenue

Correct Answer: C. Prepaid insurance

Explanation:
Prepaid insurance is a classic example of a deferred expense. The company pays cash before receiving the insurance coverage. Initially, the payment is recorded as an asset because the company has a future economic benefit from the coverage. As time passes and the insurance coverage is consumed, the appropriate portion is recognized as insurance expense. The adjusting entry reduces the prepaid insurance asset and increases insurance expense, ensuring that expenses are reported in the periods in which the benefit is used.

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Question 3

Which account is normally credited when a company initially receives cash for services that have not yet been performed?

A. Service Revenue
B. Unearned Revenue
C. Accounts Receivable
D. Supplies Expense

Correct Answer: B. Unearned Revenue

Explanation:
When a company receives cash before providing the related service, it has an obligation to perform the service in the future. Therefore, the initial transaction is recorded by debiting Cash and crediting Unearned Revenue. Unearned Revenue is a liability because the company owes goods or services to the customer. As the company performs the services, the liability decreases and revenue is recognized through an adjusting or subsequent journal entry.

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Question 4

What type of account is Prepaid Rent?

A. Liability
B. Revenue
C. Asset
D. Expense

Correct Answer: C. Asset

Explanation:
Prepaid Rent is classified as an asset because it represents a future economic benefit. When rent is paid in advance, the company has not yet consumed the rental benefit. Therefore, the payment is initially recorded as an asset rather than an expense. As the rental period passes, the benefit is consumed and the appropriate amount is transferred from Prepaid Rent to Rent Expense. The adjustment reduces the asset and recognizes the expense in the correct accounting period.

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Question 5

Unearned Revenue is classified as which type of account?

A. Asset
B. Liability
C. Expense
D. Equity

Correct Answer: B. Liability

Explanation:
Unearned Revenue is a liability because the company has received cash from a customer but has not yet earned the related revenue. The company has an obligation to provide goods or services in the future. As the company fulfills that obligation, Unearned Revenue decreases and Revenue increases. This treatment follows accrual accounting because revenue is recognized when it is earned rather than simply when cash is received.

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Question 6

A company pays $12,000 for one year of insurance coverage in advance. What is the initial accounting entry?

A. Debit Insurance Expense $12,000; Credit Cash $12,000
B. Debit Prepaid Insurance $12,000; Credit Cash $12,000
C. Debit Cash $12,000; Credit Insurance Expense $12,000
D. Debit Insurance Expense $12,000; Credit Accounts Payable $12,000

Correct Answer: B. Debit Prepaid Insurance $12,000; Credit Cash $12,000

Explanation:
Because the insurance coverage relates to future periods, the $12,000 payment initially creates an asset called Prepaid Insurance. The company has purchased a future benefit that will be consumed over the next 12 months. Therefore, Cash is credited and Prepaid Insurance is debited. Assuming equal monthly coverage, $1,000 would be recognized as Insurance Expense each month. The monthly adjustment would debit Insurance Expense and credit Prepaid Insurance.

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Question 7

If $12,000 of prepaid insurance covers 12 months, how much insurance expense should be recognized each month?

A. $500
B. $750
C. $1,000
D. $12,000

Correct Answer: C. $1,000

Explanation:
The monthly insurance expense is calculated by dividing the total prepaid amount by the number of months of coverage: $12,000 ÷ 12 = $1,000 per month. Each month, the company consumes one month of insurance protection. Therefore, $1,000 should be transferred from Prepaid Insurance to Insurance Expense. After 12 months, the entire $12,000 will have been recognized as expense, assuming the policy provides equal coverage throughout the year.

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Question 8

Which journal entry records the expiration of prepaid insurance?

A. Debit Prepaid Insurance; Credit Insurance Expense
B. Debit Insurance Expense; Credit Prepaid Insurance
C. Debit Cash; Credit Insurance Expense
D. Debit Insurance Expense; Credit Cash

Correct Answer: B. Debit Insurance Expense; Credit Prepaid Insurance

Explanation:
When prepaid insurance coverage expires, the company has consumed part of the future benefit. Therefore, Insurance Expense must increase, which requires a debit. Prepaid Insurance must decrease because the remaining future benefit is smaller, requiring a credit. The adjusting entry is Debit Insurance Expense and Credit Prepaid Insurance. This entry converts the appropriate portion of the original asset into an expense and ensures that the financial statements report the insurance cost in the period in which coverage was used.

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Question 9

A company receives $20,000 in advance for services to be provided over four months. What is the initial effect?

A. Increase assets and increase liabilities
B. Increase expenses and decrease assets
C. Increase revenue and increase equity immediately
D. Increase expenses and increase liabilities

Correct Answer: A. Increase assets and increase liabilities

Explanation:
When the company receives $20,000 before providing the services, Cash increases by $20,000. At the same time, the company incurs an obligation to provide services, so Unearned Revenue, a liability, increases by $20,000. Revenue is not recognized immediately because the company has not yet earned it. As services are performed, the liability is reduced and revenue is recognized. This treatment prevents premature revenue recognition and follows accrual accounting principles.

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Question 10

If a company receives $20,000 in advance for four months of equal service, how much revenue should be recognized each month?

A. $2,500
B. $4,000
C. $5,000
D. $20,000

Correct Answer: C. $5,000

Explanation:
The total amount received is $20,000, and the company will provide equal services over four months. Therefore, monthly revenue is $20,000 ÷ 4 = $5,000. Each month, the company should debit Unearned Revenue for $5,000 and credit Service Revenue for $5,000. After four months, the entire $20,000 liability will have been converted into earned revenue, assuming all services are performed as expected.

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Question 11

Which financial statement is directly affected when a prepaid expense is initially recorded?

A. Balance sheet
B. Income statement only
C. Statement of cash flows only
D. Statement of retained earnings only

Correct Answer: A. Balance sheet

Explanation:
When a prepaid expense is initially recorded, the transaction affects two balance sheet accounts: Cash decreases and a prepaid asset increases. There is no immediate effect on net income because no expense has yet been recognized. For example, paying insurance in advance results in a decrease in Cash and an increase in Prepaid Insurance. Expense recognition occurs later as the benefit is consumed. This illustrates why deferrals can initially affect the balance sheet without affecting income.

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Question 12

When deferred revenue is initially recorded, which account increases?

A. Revenue
B. Unearned Revenue
C. Expense
D. Retained Earnings

Correct Answer: B. Unearned Revenue

Explanation:
Deferred revenue, also called unearned revenue, increases when a company receives payment before earning the revenue. The company records a debit to Cash and a credit to Unearned Revenue. The liability represents the company’s obligation to deliver goods or services in the future. Revenue is recognized only when the performance obligation has been satisfied. Consequently, the initial receipt increases both assets and liabilities without immediately increasing net income.

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Question 13

Which of the following best describes a deferred expense?

A. An expense incurred but not yet paid
B. A cash payment made before the related expense is incurred
C. Revenue earned but not collected
D. Cash received after revenue is earned

Correct Answer: B. A cash payment made before the related expense is incurred

Explanation:
A deferred expense occurs when a company pays cash before receiving or consuming the related benefit. The payment is initially recorded as an asset, such as Prepaid Insurance or Prepaid Rent. As the benefit is consumed, the asset is reduced and an expense is recognized. This differs from an accrued expense, where the company recognizes an expense before paying cash. Understanding this distinction is essential for correctly preparing adjusting entries.

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Question 14

Which of the following is a deferred revenue?

A. Salaries payable
B. Accounts receivable
C. Customer deposits for future services
D. Interest expense

Correct Answer: C. Customer deposits for future services

Explanation:
Customer deposits received before goods or services are delivered are normally recorded as deferred or unearned revenue. The company has received cash but has not yet earned the associated revenue. Therefore, the amount is recorded as a liability. Once the company satisfies its obligation by delivering the goods or services, the liability is reduced and revenue is recognized. This approach prevents revenue from being reported before it has actually been earned.

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Question 15

Which accounting principle is most closely associated with recognizing deferred expenses in the appropriate period?

A. Matching principle
B. Historical cost principle
C. Monetary unit assumption
D. Going concern assumption

Correct Answer: A. Matching principle

Explanation:
The matching principle requires expenses to be recognized in the accounting period in which the related revenue or economic benefit is recognized. For prepaid expenses, the company initially records an asset because the benefit belongs to future periods. As the benefit is consumed, the appropriate portion becomes an expense. This process prevents expenses from being recognized too early and helps produce a more accurate measure of periodic profitability.

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Question 16

A company pays $6,000 for six months of rent in advance. After two months, what amount should remain in Prepaid Rent?

A. $1,000
B. $2,000
C. $4,000
D. $6,000

Correct Answer: C. $4,000

Explanation:
The total prepaid rent is $6,000 for six months, so the monthly rent expense is $1,000. After two months, $2,000 has been consumed and recognized as Rent Expense. Therefore, the remaining Prepaid Rent asset is $6,000 − $2,000 = $4,000. The remaining balance represents the future rental benefit that the company has already paid for but has not yet consumed.

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Question 17

What happens to a prepaid expense as the related benefit is consumed?

A. It increases
B. It remains unchanged
C. It decreases while expense increases
D. It becomes a liability

Correct Answer: C. It decreases while expense increases

Explanation:
A prepaid expense begins as an asset because it represents a future economic benefit. As the company consumes that benefit, the asset must be reduced and an expense recognized. For example, as prepaid insurance coverage expires, Prepaid Insurance decreases while Insurance Expense increases. This systematic transfer ensures that the financial statements reflect the cost of resources consumed during the reporting period rather than the timing of the original cash payment.

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Question 18

What happens to unearned revenue when the company earns part of it?

A. It increases
B. It decreases while revenue increases
C. It decreases while expenses increase
D. It becomes an asset

Correct Answer: B. It decreases while revenue increases

Explanation:
Unearned Revenue represents a liability because the company owes goods or services to customers. When the company fulfills part of its obligation, the corresponding portion of the liability is no longer owed and can be recognized as revenue. The adjusting entry typically debits Unearned Revenue and credits Revenue. This decreases liabilities and increases revenue, which ultimately increases net income and equity, assuming there are no offsetting effects.

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Question 19

Which of the following is NOT normally a deferral?

A. Prepaid insurance
B. Unearned revenue
C. Prepaid rent
D. Salaries payable

Correct Answer: D. Salaries payable

Explanation:
Salaries payable is normally an accrued expense rather than a deferral. An accrued expense occurs when an expense has been incurred but cash has not yet been paid. In contrast, a prepaid expense involves cash being paid before the expense is incurred. Unearned revenue is also a deferral because cash is received before revenue is earned. Distinguishing accruals from deferrals is essential when preparing adjusting entries and analyzing financial statements.

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Question 20

Which situation represents a deferral of revenue?

A. Revenue earned but not yet collected
B. Cash received before revenue is earned
C. Expense incurred but not paid
D. Cash paid after an expense is incurred

Correct Answer: B. Cash received before revenue is earned

Explanation:
A revenue deferral occurs when cash is collected before the company earns the related revenue. The initial receipt creates a liability because the company has an obligation to provide goods or services. As the company performs its obligations, the liability is reduced and revenue is recognized. This treatment is important because recording the entire cash receipt as revenue immediately would overstate current-period revenue and net income.

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Question 21

A company initially records prepaid insurance as an expense instead of an asset. What adjusting approach is needed at period-end?

A. Increase the expense further
B. Reclassify the unused portion as an asset
C. Record the entire amount as revenue
D. Increase accounts payable

Correct Answer: B. Reclassify the unused portion as an asset

Explanation:
If the entire insurance payment was incorrectly recorded as Insurance Expense, the portion related to future coverage is still an asset. At period-end, the company should identify the unused coverage and transfer that amount from Insurance Expense to Prepaid Insurance. This reduces current-period expense and increases assets. The adjustment corrects the financial statements by ensuring that only the insurance benefit consumed during the current period is reported as an expense.

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Question 22

If a company initially records a customer advance entirely as revenue, what adjustment may be necessary?

A. Record the unearned portion as a liability
B. Record the entire amount as an expense
C. Increase accounts receivable
D. Increase prepaid expenses

Correct Answer: A. Record the unearned portion as a liability

Explanation:
Revenue should generally be recognized when it is earned, not simply when cash is received. If a customer advance was incorrectly recorded entirely as revenue, any portion relating to services or goods not yet delivered should be transferred to Unearned Revenue. This adjustment decreases revenue and increases liabilities. Correcting the entry prevents the company from overstating current-period revenue and net income while ensuring that future obligations are properly presented on the balance sheet.

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Question 23

Which account normally has a debit balance before a prepaid expense is consumed?

A. Prepaid Insurance
B. Unearned Revenue
C. Service Revenue
D. Accounts Payable

Correct Answer: A. Prepaid Insurance

Explanation:
Prepaid Insurance is an asset and therefore normally has a debit balance. When insurance is paid in advance, the company debits Prepaid Insurance and credits Cash. As coverage is consumed, the company debits Insurance Expense and credits Prepaid Insurance. The asset’s debit balance decreases over time as the prepaid benefit is used. This is a fundamental example of how deferrals move amounts from the balance sheet to the income statement.

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Question 24

Which account normally has a credit balance when a company receives payment before providing services?

A. Cash
B. Prepaid Expense
C. Unearned Revenue
D. Service Expense

Correct Answer: C. Unearned Revenue

Explanation:
Unearned Revenue is a liability, and liabilities normally have credit balances. When cash is received before services are performed, the company debits Cash and credits Unearned Revenue. The credit balance represents the amount of the company’s remaining obligation to customers. As services are provided, Unearned Revenue is debited and Service Revenue is credited. This gradually removes the liability while recognizing revenue in the appropriate accounting periods.

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Question 25

Which transaction initially increases both an asset and a liability?

A. Paying an employee for work already performed
B. Receiving cash in advance from a customer
C. Recording depreciation expense
D. Paying an existing accounts payable

Correct Answer: B. Receiving cash in advance from a customer

Explanation:
When a company receives cash before providing goods or services, Cash increases, creating an increase in assets. At the same time, Unearned Revenue increases because the company has an obligation to perform in the future. Therefore, both assets and liabilities increase. No revenue is initially recognized because the company has not yet earned the amount. As the obligation is satisfied, the liability decreases and revenue is recognized.

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Question 26

Which transaction initially increases one asset and decreases another asset?

A. Paying an existing liability
B. Purchasing prepaid insurance for cash
C. Receiving unearned revenue
D. Recording earned revenue on account

Correct Answer: B. Purchasing prepaid insurance for cash

Explanation:
When a company purchases prepaid insurance for cash, Cash decreases while Prepaid Insurance increases. Both accounts are assets, so the transaction represents an exchange of one asset for another. Total assets may remain unchanged at the transaction date, although the composition of assets changes. Later, as the insurance coverage is consumed, Prepaid Insurance decreases and Insurance Expense increases, affecting net income and equity.

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Question 27

A company pays $24,000 for 12 months of insurance on October 1. What insurance expense should be recognized by December 31?

A. $2,000
B. $4,000
C. $6,000
D. $24,000

Correct Answer: C. $6,000

Explanation:
The annual insurance cost is $24,000, giving a monthly cost of $2,000. Coverage is used for three months during the current year: October, November, and December. Therefore, insurance expense is $2,000 × 3 = $6,000. The remaining $18,000 remains as Prepaid Insurance on December 31. This illustrates how a prepaid expense is gradually recognized as an expense as the underlying benefit is consumed.

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Question 28

Using the information in Question 27, what is the Prepaid Insurance balance on December 31?

A. $6,000
B. $12,000
C. $18,000
D. $24,000

Correct Answer: C. $18,000

Explanation:
The company paid $24,000 for 12 months of insurance. By December 31, three months have expired, resulting in $6,000 of Insurance Expense. The remaining nine months represent a future benefit. Therefore, Prepaid Insurance equals $24,000 − $6,000 = $18,000. This amount is reported as an asset on the balance sheet because the company is still entitled to insurance coverage during the remaining nine months.

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Question 29

A company receives $36,000 on December 1 for six months of services. Assuming equal service each month, how much revenue should be recognized in December?

A. $3,000
B. $6,000
C. $18,000
D. $36,000

Correct Answer: B. $6,000

Explanation:
The company receives $36,000 for six months of service, so the revenue attributable to each month is $36,000 ÷ 6 = $6,000. Since one month of service is provided in December, $6,000 should be recognized as revenue during December. The remaining $30,000 remains in Unearned Revenue as a liability. This treatment ensures that revenue is recognized as the company performs its contractual obligations.

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Question 30

Using the information in Question 29, what is the Unearned Revenue balance after December service is provided?

A. $0
B. $6,000
C. $30,000
D. $36,000

Correct Answer: C. $30,000

Explanation:
The company initially records a $36,000 liability because the entire amount was received before the services were performed. After providing one month of service, $6,000 is earned and transferred from Unearned Revenue to Service Revenue. Therefore, the remaining liability is $36,000 − $6,000 = $30,000. The remaining balance represents services that the company still owes to the customer in future months.

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Question 31

Which adjusting entry is required when previously unearned revenue becomes earned?

A. Debit Revenue; Credit Unearned Revenue
B. Debit Unearned Revenue; Credit Revenue
C. Debit Cash; Credit Revenue
D. Debit Revenue; Credit Cash

Correct Answer: B. Debit Unearned Revenue; Credit Revenue

Explanation:
When previously unearned revenue becomes earned, the liability must decrease and revenue must increase. Because Unearned Revenue is a liability with a credit balance, it is debited to reduce the balance. Revenue has a normal credit balance, so it is credited. This adjustment recognizes the amount earned during the period without recording additional cash. The entry is fundamental to accounting for deferred revenue under the accrual basis.

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Question 32

Which adjusting entry is required when a prepaid expense has been consumed?

A. Debit Prepaid Expense; Credit Expense
B. Debit Expense; Credit Prepaid Expense
C. Debit Cash; Credit Expense
D. Debit Expense; Credit Cash

Correct Answer: B. Debit Expense; Credit Prepaid Expense

Explanation:
When a prepaid benefit is consumed, the related expense must be recognized. Expenses increase with debits, so the expense account is debited. The prepaid asset decreases because part of the future benefit has been used, so the prepaid account is credited. For example, if $2,000 of prepaid insurance expires, the company records Debit Insurance Expense $2,000 and Credit Prepaid Insurance $2,000.

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Question 33

What is the effect of recognizing a deferred expense on net income?

A. Net income increases
B. Net income decreases
C. Net income is unaffected
D. Net income becomes zero

Correct Answer: B. Net income decreases

Explanation:
When a deferred expense is recognized, an expense is recorded in the income statement. Expenses reduce net income. For example, when $1,000 of Prepaid Insurance is consumed, Insurance Expense increases by $1,000, reducing net income by $1,000, assuming no other effects. At the same time, the Prepaid Insurance asset decreases. The adjustment therefore affects both the income statement and balance sheet.

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Question 34

What is the effect of recognizing previously unearned revenue on net income?

A. Net income decreases
B. Net income increases
C. Net income remains unchanged
D. Assets automatically decrease

Correct Answer: B. Net income increases

Explanation:
When previously unearned revenue becomes earned, revenue is recognized. Revenue increases net income, assuming no related expense offsets the increase. The company debits Unearned Revenue to reduce the liability and credits Revenue to recognize the earned amount. Although cash was received earlier, the income statement effect occurs when the company satisfies its obligation and earns the revenue. This distinction is central to accrual accounting.

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Question 35

Which of the following best distinguishes a deferral from an accrual?

A. Deferrals involve cash after recognition; accruals involve cash before recognition
B. Deferrals generally involve cash before recognition; accruals generally involve recognition before cash
C. They are exactly the same
D. Deferrals never require adjusting entries

Correct Answer: B. Deferrals generally involve cash before recognition; accruals generally involve recognition before cash

Explanation:
The timing of cash relative to recognition is the key distinction. With deferrals, cash is generally received or paid first, while revenue or expense recognition occurs later. Examples include prepaid expenses and unearned revenue. With accruals, the revenue or expense is recognized before the related cash transaction occurs. Examples include accrued salaries and accrued revenue. Both categories require adjustments to apply accrual accounting correctly.

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Question 36

Which of the following is an example of an expense deferral?

A. Accrued wages
B. Interest payable
C. Prepaid advertising
D. Accounts receivable

Correct Answer: C. Prepaid advertising

Explanation:
Prepaid advertising represents an expense deferral because cash is paid before the advertising benefit is consumed. Initially, the payment is recorded as a prepaid asset. As the advertising service is received or the benefit is consumed, the appropriate amount is recognized as Advertising Expense. Accrued wages and interest payable are accruals because the expenses have already been incurred but have not yet been paid. Correct classification helps ensure accurate adjusting entries.

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Question 37

Which account would normally appear on the balance sheet after a company receives cash for services not yet performed?

A. Service Revenue
B. Unearned Revenue
C. Service Expense
D. Advertising Expense

Correct Answer: B. Unearned Revenue

Explanation:
Cash received for services not yet performed creates a liability called Unearned Revenue. This account appears on the balance sheet because the company has an outstanding obligation to provide services to the customer. The liability remains until the services are performed. As the company earns the revenue, the liability decreases and Service Revenue increases. Therefore, deferred revenue initially affects the balance sheet rather than immediately affecting the income statement.

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Question 38

If a prepaid expense is not adjusted at the end of the accounting period, what is likely to happen?

A. Expenses are overstated and assets are understated
B. Expenses are understated and assets are overstated
C. Liabilities are always overstated
D. Revenue is automatically understated

Correct Answer: B. Expenses are understated and assets are overstated

Explanation:
If the company fails to recognize the portion of a prepaid expense that has been consumed, the expense remains too low. At the same time, the prepaid asset remains too high because the company has not reduced it for the benefit already used. Therefore, both expenses and assets are misstated. Because expenses are understated, net income is also overstated. This demonstrates why adjusting entries are essential at the end of an accounting period.

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Question 39

If earned revenue is not transferred from Unearned Revenue to Revenue, what is the likely effect?

A. Revenue is overstated
B. Revenue and net income are understated
C. Assets are always understated
D. Expenses are overstated

Correct Answer: B. Revenue and net income are understated

Explanation:
When services have been performed but the related amount remains in Unearned Revenue, the company has failed to recognize revenue that has already been earned. As a result, revenue is understated and net income is also understated. Meanwhile, the Unearned Revenue liability remains overstated because the company no longer owes the portion already earned. The required adjustment debits Unearned Revenue and credits Revenue.

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Question 40

Which financial statement account represents the remaining future benefit from a prepaid expense?

A. Expense
B. Revenue
C. Asset
D. Liability

Correct Answer: C. Asset

Explanation:
The unused portion of a prepaid expense represents a future economic benefit and therefore qualifies as an asset. For example, if a company has prepaid insurance and several months of coverage remain, the unused coverage is reported as Prepaid Insurance on the balance sheet. As time passes, the asset is reduced and converted into Insurance Expense. Properly identifying the remaining asset prevents expenses from being recognized prematurely.

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Question 41

A company pays $9,000 for three months of rent in advance. What is the monthly rent expense?

A. $1,500
B. $2,000
C. $3,000
D. $9,000

Correct Answer: C. $3,000

Explanation:
The prepaid rent covers three months and totals $9,000. Assuming equal rent expense each month, the monthly amount is $9,000 ÷ 3 = $3,000. Each month, the company should recognize $3,000 of Rent Expense and reduce Prepaid Rent by the same amount. At the end of the three-month period, the entire prepaid balance will have been recognized as expense, assuming there are no changes to the arrangement.

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Question 42

A company receives $15,000 in advance for five months of equal services. What amount remains deferred after three months?

A. $3,000
B. $6,000
C. $9,000
D. $12,000

Correct Answer: B. $6,000

Explanation:
The total advance is $15,000 for five months, giving monthly revenue of $3,000. After three months, the company has earned $9,000. Therefore, the remaining deferred revenue is $15,000 − $9,000 = $6,000. The $6,000 balance remains a liability because the company still owes two months of services. This example demonstrates how deferred revenue decreases as performance obligations are satisfied.

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Question 43

Which account is reduced when a prepaid expense is recognized as an expense?

A. Cash
B. Prepaid asset
C. Revenue
D. Accounts payable

Correct Answer: B. Prepaid asset

Explanation:
The prepaid asset is reduced as the related benefit is consumed. For example, when prepaid rent becomes rent expense, Prepaid Rent decreases. The adjusting entry debits Rent Expense and credits Prepaid Rent. Cash is not affected because the cash payment occurred when the prepaid asset was initially created. This distinction is important: the adjusting entry recognizes the economic consumption of the benefit rather than creating another cash transaction.

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Question 44

Which account is reduced when deferred revenue becomes earned?

A. Cash
B. Revenue
C. Unearned Revenue
D. Accounts Receivable

Correct Answer: C. Unearned Revenue

Explanation:
Unearned Revenue is a liability that represents the company’s obligation to provide goods or services. When the obligation is satisfied, the liability is reduced. The company debits Unearned Revenue and credits the appropriate Revenue account. Cash is not affected because the customer paid in advance. The adjustment simply changes the classification of the amount from a liability to earned revenue as the company completes its performance obligation.

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Question 45

What is the primary purpose of adjusting entries for deferrals?

A. To record every cash transaction twice
B. To update accounts so revenues and expenses are reported in the correct period
C. To eliminate liabilities
D. To increase the cash balance

Correct Answer: B. To update accounts so revenues and expenses are reported in the correct period

Explanation:
Adjusting entries for deferrals ensure that financial statements reflect the economic activity that actually occurred during the accounting period. For prepaid expenses, the consumed portion is transferred from an asset to an expense. For deferred revenue, the earned portion is transferred from a liability to revenue. These adjustments support accrual accounting and improve the accuracy of net income, assets, liabilities, and equity reported in the financial statements.

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Question 46

Which of the following accounts would normally be classified as a current asset when its benefit will be consumed within one year?

A. Unearned Revenue
B. Prepaid Insurance
C. Service Revenue
D. Salaries Payable

Correct Answer: B. Prepaid Insurance

Explanation:
Prepaid Insurance is normally classified as a current asset when the related insurance coverage will be consumed within one year. It represents a future economic benefit controlled by the company. Unearned Revenue is a liability, while Service Revenue is an income statement account. Salaries Payable is also a liability. Correct classification is important because balance sheet users rely on current assets and current liabilities to assess short-term liquidity.

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Question 47

A company has $8,000 of Unearned Revenue at the beginning of the period and earns $3,000 during the period. What is the ending Unearned Revenue balance, assuming no additional advances?

A. $3,000
B. $5,000
C. $8,000
D. $11,000

Correct Answer: B. $5,000

Explanation:
The company begins with an $8,000 Unearned Revenue liability. During the period, it earns $3,000, so that portion is transferred from Unearned Revenue to Revenue. The ending liability is therefore $8,000 − $3,000 = $5,000. The remaining $5,000 represents services or goods that the company still owes to customers. This calculation demonstrates the roll-forward of a deferred revenue account.

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Question 48

A company begins the period with $10,000 of Prepaid Insurance and uses $4,000 during the period. What is the ending prepaid balance?

A. $4,000
B. $6,000
C. $10,000
D. $14,000

Correct Answer: B. $6,000

Explanation:
The company starts with a $10,000 Prepaid Insurance asset. During the period, $4,000 of insurance coverage is consumed and recognized as Insurance Expense. Therefore, the remaining prepaid asset is $10,000 − $4,000 = $6,000. The $6,000 balance represents insurance coverage that provides future economic benefits. The adjusting entry reduces the asset by $4,000 and recognizes the same amount as expense.

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Question 49

Which statement about deferrals is correct?

A. Deferrals always increase net income
B. Deferrals always decrease net income
C. Deferrals postpone recognition until the related revenue is earned or expense is incurred
D. Deferrals eliminate the need for accrual accounting

Correct Answer: C. Deferrals postpone recognition until the related revenue is earned or expense is incurred

Explanation:
Deferrals involve postponing revenue or expense recognition because the cash transaction occurs before the related economic activity is recognized. A prepaid expense is initially recorded as an asset and later recognized as an expense. Deferred revenue is initially recorded as a liability and later recognized as revenue. Deferrals do not necessarily increase or decrease net income at the initial transaction date. Their purpose is to ensure proper timing of recognition.

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Question 50

Which statement best summarizes the accounting treatment of deferrals?

A. Cash timing determines when revenue and expenses must always be recognized
B. Deferrals move amounts from balance sheet accounts to income statement accounts as recognition occurs
C. Deferrals only apply to liabilities
D. Deferrals are never adjusted at period-end

Correct Answer: B. Deferrals move amounts from balance sheet accounts to income statement accounts as recognition occurs

Explanation:
Deferrals initially place amounts on the balance sheet because the related revenue or expense has not yet been earned or incurred. Over time, the appropriate amount moves to the income statement. A prepaid expense moves from an asset to an expense as the benefit is consumed. Deferred revenue moves from a liability to revenue as the company satisfies its obligation. This process ensures accurate period reporting and supports the principles of accrual accounting.

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Suggested Internal Links

For topical authority, link this article naturally to related quizzes such as:

• Accruals Quiz
• Adjusting Entries Quiz
• Prepaid Expenses Quiz
• Unearned Revenue Quiz
• Journal Entries Quiz
• Accounting Cycle Quiz
• Financial Statements Quiz
• Income Statement Quiz
• Balance Sheet Quiz

 

Deferrals Quiz: 50 Multiple-Choice Questions with Answers and Detailed Explanations

Deferrals in accounting involve cash transactions that occur before the related revenue is earned or expense is incurred. They consist of prepaid expenses (assets) and unearned revenues (liabilities). Adjusting entries reclassify portions of these items to the income statement at period-end to follow the matching and revenue recognition principles.

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1. What is a deferral in accounting?
A. Recognition of revenue or expense before cash is exchanged
B. Recognition of revenue or expense after cash is exchanged
C. An error that must be corrected retrospectively
D. A permanent difference between book and tax income

Answer: B
Explanation: A deferral occurs when cash is received or paid before the related revenue is earned or expense is incurred. The cash is initially recorded as a liability (unearned revenue) or asset (prepaid expense). Adjusting entries later move the appropriate amounts to the income statement so that revenues and expenses are recognized in the proper period under accrual accounting. This ensures the matching principle is followed and financial statements present an accurate picture of performance.

2. Which of the following is an example of a deferred expense?
A. Accrued salaries
B. Prepaid insurance
C. Accounts receivable
D. Interest payable

Answer: B
Explanation: Prepaid insurance is a classic deferred expense (prepaid asset). Cash is paid in advance for insurance coverage that will benefit future periods. At the time of payment the cost is recorded as an asset. As time passes, adjusting entries transfer portions of the prepaid balance to Insurance Expense so that the expense is matched with the periods that benefit from the coverage. Accrued salaries and interest payable are accruals, not deferrals.

3. Unearned revenue is classified as:
A. An asset
B. A liability
C. Equity
D. A contra-revenue

Answer: B
Explanation: Unearned revenue (also called deferred revenue) represents cash received from customers before goods or services have been delivered. Because the company has an obligation to provide those goods or services in the future, the amount is recorded as a liability. As the performance obligation is satisfied, the liability is reduced and revenue is recognized. This treatment upholds the revenue recognition principle under accrual accounting.

4. The adjusting entry for prepaid rent that has expired typically debits:
A. Prepaid Rent and credits Rent Expense
B. Rent Expense and credits Prepaid Rent
C. Cash and credits Rent Expense
D. Rent Expense and credits Cash

Answer: B
Explanation: When prepaid rent expires, the asset Prepaid Rent is reduced and Rent Expense is recognized. The adjusting entry debits Rent Expense (increasing expense) and credits Prepaid Rent (decreasing the asset). This reclassification moves the cost from the balance sheet to the income statement for the period that benefited from the use of the rented space, ensuring proper matching of expenses with revenues.

5. Which account is credited when a company records the receipt of cash for services to be performed in the future?
A. Service Revenue
B. Accounts Receivable
C. Unearned Service Revenue
D. Cash

Answer: C
Explanation: When cash is received in advance, the company has not yet earned the revenue. Therefore it credits Unearned Service Revenue (a liability) rather than Service Revenue. Cash is debited. Only after the services are performed does an adjusting entry transfer the amount from Unearned Service Revenue to Service Revenue. Recording revenue immediately would violate the revenue recognition principle.

6. Deferrals are adjusted at the end of the period primarily to:
A. Correct errors made during the period
B. Allocate revenues and expenses to the proper accounting periods
C. Convert cash-basis statements to tax-basis statements
D. Record transactions that were omitted

Answer: B
Explanation: The purpose of adjusting entries for deferrals is to allocate the prepaid costs or unearned amounts to the periods in which the benefits are received or the performance obligations are satisfied. Without these adjustments, assets would be overstated, liabilities understated (or vice versa), and net income would not reflect the matching principle. The adjustments therefore produce accurate financial statements under accrual accounting.

7. Supplies on hand at year-end are reported as:
A. An expense
B. A current asset
C. A current liability
D. Equity

Answer: B
Explanation: Unused supplies represent a future economic benefit and are therefore classified as a current asset (Supplies or Prepaid Supplies). Only the portion of supplies that has been consumed during the period is recognized as Supplies Expense through an adjusting entry. Leaving the unused portion as an asset correctly matches the expense with the period of consumption and presents a proper balance-sheet amount.

8. The normal balance of Unearned Revenue is:
A. Debit
B. Credit
C. Either debit or credit depending on the company
D. Zero after adjustment

Answer: B
Explanation: Unearned Revenue is a liability account and therefore has a normal credit balance. When cash is received in advance the account is credited; when revenue is later earned the account is debited. After the adjusting entry the remaining credit balance represents the still-unearned portion that will be recognized in future periods. A debit balance would indicate an error.

9. Which of the following is NOT a deferral?
A. Prepaid advertising
B. Accrued interest expense
C. Unearned rent revenue
D. Prepaid insurance

Answer: B
Explanation: Accrued interest expense is an accrual, not a deferral. Accruals involve recognition of revenue or expense before cash is exchanged. Deferrals involve cash exchanged before recognition. Prepaid advertising, unearned rent, and prepaid insurance are all classic deferrals that require adjusting entries to reclassify amounts from the balance sheet to the income statement.

10. When an adjusting entry is made for expired prepaid insurance, the effect on the financial statements is:
A. Assets increase, expenses decrease
B. Assets decrease, expenses increase
C. Liabilities increase, revenues increase
D. Liabilities decrease, expenses increase

Answer: B
Explanation: The adjusting entry debits Insurance Expense and credits Prepaid Insurance. This decreases the asset Prepaid Insurance and increases the expense. Net income therefore declines, and the balance sheet correctly shows a lower asset balance. The entry ensures that the cost of insurance coverage used during the period is matched with the revenues of that period.

11. A company receives $12,000 on December 1 for a one-year magazine subscription. The adjusting entry on December 31 (assuming calendar year) credits:
A. Cash $1,000
B. Subscription Revenue $1,000
C. Unearned Subscription Revenue $1,000
D. Accounts Receivable $1,000

Answer: B
Explanation: One-twelfth of the annual subscription has been earned by December 31. The adjusting entry debits Unearned Subscription Revenue $1,000 and credits Subscription Revenue $1,000. This recognizes one month of revenue and reduces the liability. The remaining $11,000 stays in Unearned Subscription Revenue as a liability for the unearned portion covering the next eleven months.

12. Prepaid expenses are initially recorded as:
A. Expenses
B. Assets
C. Liabilities
D. Revenues

Answer: B
Explanation: When cash is paid in advance for goods or services that will benefit future periods, the payment is recorded as an asset (prepaid expense). This reflects the future economic benefit. Only as the benefit is consumed is the asset reduced and an expense recognized. Recording the entire amount as an expense immediately would violate the matching principle and overstate current-period expenses.

13. The adjusting entry to recognize earned portion of unearned revenue:
A. Debits Unearned Revenue and credits Revenue
B. Debits Revenue and credits Unearned Revenue
C. Debits Cash and credits Revenue
D. Debits Accounts Receivable and credits Revenue

Answer: A
Explanation: As the company fulfills its performance obligation, the liability Unearned Revenue is reduced (debited) and Revenue is increased (credited). This entry moves the earned amount from the balance sheet to the income statement. It is the mechanism that applies the revenue recognition principle to amounts previously deferred.

14. Which financial statement is primarily affected by the expiration of a prepaid expense?
A. Statement of cash flows only
B. Income statement and balance sheet
C. Statement of retained earnings only
D. Balance sheet only

Answer: B
Explanation: Expiration of a prepaid expense increases an expense on the income statement (reducing net income) and decreases an asset on the balance sheet. Retained earnings are indirectly affected through net income, but the direct effects appear on both the income statement and the balance sheet. Cash flow is unaffected because the cash outflow occurred in a prior period.

15. If a company fails to adjust for expired prepaid rent, the result is:
A. Overstated assets and overstated net income
B. Understated assets and understated net income
C. Overstated liabilities and understated net income
D. Understated liabilities and overstated net income

Answer: A
Explanation: Failure to record the adjusting entry leaves the full prepaid amount on the balance sheet (overstated assets) and fails to recognize the related Rent Expense (understated expenses, therefore overstated net income). Both the balance sheet and income statement are misstated, violating the matching principle and presenting an overly optimistic picture of financial position and performance.

16. Supplies Expense is calculated as:
A. Beginning supplies + purchases – ending supplies
B. Beginning supplies – purchases + ending supplies
C. Purchases only
D. Ending supplies only

Answer: A
Explanation: The amount of supplies consumed (Supplies Expense) equals beginning inventory plus purchases during the period minus the supplies still on hand at period-end. This calculation is the basis for the adjusting entry that debits Supplies Expense and credits the Supplies asset account, ensuring the expense is properly matched with the period of use.

17. Unearned rent revenue becomes earned when:
A. Cash is received
B. The rental period expires
C. An invoice is sent
D. The tenant moves in

Answer: B
Explanation: Revenue is recognized as the performance obligation is satisfied over time. For rent, this occurs as each day or month of the rental period passes. The adjusting entry therefore recognizes revenue in proportion to the time that has elapsed, regardless of when cash was received. Recognition is driven by the passage of time, not by cash receipt or tenant occupancy alone.

18. Which of the following accounts is increased by an adjusting entry for a deferral of expense?
A. Prepaid Insurance
B. Insurance Expense
C. Unearned Insurance Revenue
D. Cash

Answer: B
Explanation: The adjusting entry for a deferred expense debits the expense account (Insurance Expense) and credits the related prepaid asset. This increases the expense, which reduces net income, and decreases the asset. The entry does not affect cash or unearned revenue accounts; those are related to other types of transactions.

19. A company pays $6,000 for a two-year insurance policy on July 1. The adjusting entry on December 31 of the same year is for:
A. $6,000
B. $3,000
C. $1,500
D. $500

Answer: C
Explanation: The policy covers 24 months. From July 1 to December 31 is six months, so one-fourth of the cost ($6,000 × 6/24 = $1,500) has expired. The adjusting entry debits Insurance Expense $1,500 and credits Prepaid Insurance $1,500. The remaining $4,500 continues to be reported as a prepaid asset for the subsequent 18 months of coverage.

20. Deferred revenues are also known as:
A. Accrued revenues
B. Prepaid revenues
C. Unearned revenues
D. Accrued expenses

Answer: C
Explanation: Deferred revenues and unearned revenues are synonymous terms. Both describe cash received before the related performance obligation is satisfied. The amount is recorded as a liability until it is earned. Accrued revenues, by contrast, are revenues earned before cash is received and are recorded as assets (receivables).

21. The matching principle is most directly applied by adjusting entries for:
A. Accruals only
B. Deferrals only
C. Both accruals and deferrals
D. Neither accruals nor deferrals

Answer: C
Explanation: Both accruals and deferrals require adjusting entries to achieve proper matching. Deferrals allocate previously recorded assets or liabilities to the periods that benefit; accruals record revenues and expenses that have been earned or incurred but not yet recorded. Together they ensure that revenues and related expenses appear in the same accounting period on the income statement.

22. When prepaid advertising expires, the adjusting entry:
A. Increases assets and increases expenses
B. Decreases assets and increases expenses
C. Increases liabilities and decreases revenues
D. Decreases liabilities and increases revenues

Answer: B
Explanation: The entry debits Advertising Expense and credits Prepaid Advertising. Assets decline by the amount of the expired prepaid cost, and expenses increase by the same amount. Net income is reduced, and the balance sheet correctly reports only the remaining unexpired advertising as an asset. This treatment matches the advertising cost with the periods that benefited from the advertising.

23. Which of the following is a permanent account related to deferrals?
A. Rent Expense
B. Prepaid Rent
C. Service Revenue
D. Insurance Expense

Answer: B
Explanation: Prepaid Rent is a balance-sheet (permanent) account that carries its ending balance into the next accounting period. Expense and revenue accounts are temporary accounts that are closed at year-end. Permanent accounts related to deferrals (prepaid assets and unearned liabilities) remain open and continue to be adjusted in subsequent periods as the remaining amounts expire or are earned.

24. A company records $9,000 of unearned service revenue on October 1 for services to be performed evenly over the next nine months. The adjusting entry on December 31 recognizes:
A. $9,000 of revenue
B. $3,000 of revenue
C. $1,000 of revenue
D. $0 of revenue

Answer: B
Explanation: Three months of the nine-month period have elapsed by December 31 (October–December). Therefore one-third of the unearned amount ($9,000 × 3/9 = $3,000) has been earned. The adjusting entry debits Unearned Service Revenue $3,000 and credits Service Revenue $3,000. The remaining $6,000 continues as a liability for services still to be performed.

25. Failure to record the adjusting entry for unearned revenue that has been earned results in:
A. Overstated liabilities and understated revenues
B. Understated liabilities and overstated revenues
C. Overstated assets and overstated revenues
D. Understated assets and understated revenues

Answer: A
Explanation: Without the adjusting entry the full amount remains in the Unearned Revenue liability account (overstated liabilities) and none of the earned portion is recognized as revenue (understated revenues and understated net income). The balance sheet and income statement are both misstated, and the company understates its performance for the period.

26. Prepaid expenses appear on the balance sheet under:
A. Current liabilities
B. Current assets
C. Long-term liabilities
D. Stockholders’ equity

Answer: B
Explanation: Prepaid expenses represent resources that will be consumed within one year (or the operating cycle) and are therefore classified as current assets. Examples include prepaid insurance, prepaid rent, and supplies. Classification as current assets provides users with information about short-term resources that will become expenses in the near term.

27. The initial entry when a company pays for a three-year insurance policy is:
A. Debit Insurance Expense, credit Cash
B. Debit Prepaid Insurance, credit Cash
C. Debit Insurance Expense, credit Prepaid Insurance
D. Debit Cash, credit Prepaid Insurance

Answer: B
Explanation: Because the insurance coverage benefits future periods, the entire payment is recorded as an asset (Prepaid Insurance) rather than as an immediate expense. Cash is credited. Subsequent adjusting entries will systematically transfer portions of the prepaid balance to Insurance Expense as the coverage is used, thereby matching the cost with the periods benefited.

28. Which adjusting entry decreases both a liability and an asset?
A. Recognition of earned unearned revenue
B. Expiration of prepaid expense
C. Accrual of interest expense
D. None of the above

Answer: D
Explanation: Recognition of earned unearned revenue decreases a liability and increases a revenue (no asset is affected). Expiration of a prepaid expense decreases an asset and increases an expense. Accrual of interest expense increases a liability and an expense. No common adjusting entry for deferrals simultaneously decreases both a liability and an asset.

29. Supplies are an example of:
A. A deferred revenue
B. A deferred expense
C. An accrued revenue
D. An accrued expense

Answer: B
Explanation: Supplies purchased in advance are a deferred expense. The cost is initially capitalized as an asset. As supplies are used, an adjusting entry transfers the consumed cost to Supplies Expense. This is the classic prepaid-expense pattern that allocates the cost to the periods of consumption rather than to the period of purchase.

30. On the income statement, the effect of adjusting for deferred expenses is to:
A. Increase net income
B. Decrease net income
C. Have no effect on net income
D. Increase revenues only

Answer: B
Explanation: Adjusting entries for deferred expenses recognize previously deferred costs as expenses of the current period. The increase in expenses reduces net income. Although the related asset decreases on the balance sheet, the income-statement effect is solely an increase in expenses (and therefore a decrease in net income) for the period.

31. Unearned revenue is reported on the balance sheet as:
A. A current asset
B. A current liability (or long-term if applicable)
C. An equity account
D. A contra-asset

Answer: B
Explanation: Unearned revenue represents an obligation to deliver goods or services in the future and is therefore a liability. If the performance is expected within one year it is classified as current; otherwise a portion may be long-term. Proper classification informs users about the timing of the company’s future performance obligations.

32. The adjusting entry for deferred revenue that has been earned increases:
A. Assets and revenues
B. Liabilities and revenues
C. Revenues and decreases liabilities
D. Expenses and decreases assets

Answer: C
Explanation: The entry debits the liability Unearned Revenue (decreasing it) and credits the revenue account (increasing it). Assets are unaffected. The result is higher reported revenue and lower reported liabilities, correctly reflecting that the company has satisfied part of its performance obligation.

33. A company purchased supplies for $2,500. At year-end $800 of supplies remain. The adjusting entry is:
A. Debit Supplies Expense $2,500, credit Supplies $2,500
B. Debit Supplies Expense $1,700, credit Supplies $1,700
C. Debit Supplies $800, credit Supplies Expense $800
D. Debit Supplies Expense $800, credit Supplies $800

Answer: B
Explanation: Supplies used equal purchases minus ending inventory ($2,500 – $800 = $1,700). The adjusting entry therefore debits Supplies Expense $1,700 and credits the Supplies asset $1,700. This recognizes the cost of supplies consumed during the period and leaves the remaining $800 as an asset on the balance sheet.

34. Which principle is most closely associated with the need for deferral adjusting entries?
A. Historical cost principle
B. Matching principle
C. Conservatism principle
D. Full disclosure principle

Answer: B
Explanation: The matching principle requires that expenses be recognized in the same period as the related revenues. Deferral adjustments allocate prepaid costs to the periods that benefit from them and allocate unearned amounts to the periods in which they are earned. Without these adjustments, expenses and revenues would appear in the wrong periods, violating matching.

35. If a prepaid expense is recorded initially as an expense rather than as an asset, the year-end adjusting entry (assuming some remains unexpired) would:
A. Debit the expense and credit the asset
B. Debit the asset and credit the expense
C. Debit the liability and credit the revenue
D. Not be necessary

Answer: B
Explanation: When the entire payment was originally debited to an expense account, the adjusting entry must reclassify the still-unexpired portion from the expense account to a prepaid asset account. This is accomplished by debiting Prepaid Expense and crediting the expense account, restoring the correct asset balance and reducing the overstated expense.

36. The balance in Unearned Revenue after adjustment represents:
A. Revenue earned during the period
B. Revenue that will be earned in future periods
C. Cash that has not yet been received
D. An asset to be collected

Answer: B
Explanation: After the adjusting entry has recognized the portion earned in the current period, any remaining credit balance in Unearned Revenue represents the amount still owed to customers in the form of future goods or services. It is a liability reflecting future performance obligations, not current-period revenue or a receivable.

37. Which of the following transactions creates a deferred expense?
A. Receiving cash for future services
B. Paying cash for future insurance coverage
C. Performing services on account
D. Incurring interest that will be paid later

Answer: B
Explanation: Paying cash in advance for insurance creates a prepaid asset (deferred expense). The cash outflow precedes the expense recognition. Receiving cash for future services creates deferred revenue. Performing services on account or accruing interest creates accruals, not deferrals.

38. Adjusting entries for deferrals never involve:
A. The Cash account
B. Expense accounts
C. Revenue accounts
D. Asset accounts

Answer: A
Explanation: Because the cash transaction already occurred in a prior period (or earlier in the current period), the adjusting entry for a deferral reallocates amounts already recorded. Cash is not debited or credited again. The entries affect only prepaid assets, unearned liabilities, and the related expense or revenue accounts.

39. A one-year prepaid insurance policy is purchased on April 1 for $3,600. The monthly adjusting entry is:
A. $3,600
B. $300
C. $900
D. $0 until year-end

Answer: B
Explanation: Annual cost of $3,600 divided by 12 months equals $300 per month. Each month the company debits Insurance Expense $300 and credits Prepaid Insurance $300. Monthly adjustments keep the accounts current and avoid a large year-end adjustment. The remaining prepaid balance declines by $300 each month.

40. When unearned revenue is earned, the effect on the accounting equation is:
A. Assets increase, equity increases
B. Liabilities decrease, equity increases
C. Assets decrease, liabilities decrease
D. Liabilities increase, equity decreases

Answer: B
Explanation: The adjusting entry reduces the liability (Unearned Revenue) and increases revenue, which increases equity through net income. Assets remain unchanged because cash was received earlier. The net effect is a decrease in liabilities and an increase in equity, reflecting the fulfillment of the performance obligation.

41. Supplies Expense appears on which financial statement?
A. Balance sheet
B. Income statement
C. Statement of cash flows
D. Statement of retained earnings only

Answer: B
Explanation: Supplies Expense is a temporary account that measures the cost of supplies consumed during the period. It appears on the income statement as part of operating expenses. The related Supplies asset account appears on the balance sheet. Cash flows related to the purchase of supplies appear in the operating section of the statement of cash flows, but the expense itself is an income-statement item.

42. The process of transferring a portion of a prepaid asset to expense is called:
A. Accrual
B. Deferral adjustment
C. Closing entry
D. Reversing entry

Answer: B
Explanation: The systematic transfer of prepaid costs to expense accounts through adjusting entries is the deferral-adjustment process. It is distinct from accruals (which record amounts before cash is exchanged), closing entries (which zero temporary accounts), and reversing entries (optional entries made at the beginning of the next period).

43. If a company receives cash for a two-year service contract on January 1, the amount initially recorded as a liability is:
A. The full cash amount received
B. One-half of the cash amount
C. Zero, because it is revenue
D. The present value of the contract

Answer: A
Explanation: The entire cash receipt is initially credited to Unearned Revenue because none of the performance obligation has yet been satisfied. Over the two-year period, revenue is recognized ratably (or according to the pattern of performance). Recording only part of the cash as a liability at inception would understate the company’s obligation.

44. Which of the following best describes the relationship between deferrals and the cash basis of accounting?
A. Deferrals are required only under the cash basis
B. Deferrals convert cash-basis amounts to accrual-basis amounts
C. Deferrals are irrelevant under both bases
D. Deferrals are used only for tax purposes

Answer: B
Explanation: Under the pure cash basis, revenues and expenses are recognized when cash is received or paid. Accrual accounting requires that those cash flows be deferred (or accrued) so that recognition occurs in the proper period. Adjusting entries for deferrals are therefore the mechanism that converts the cash-basis effects into the correct accrual-basis amounts for the financial statements.

45. An adjusting entry that debits Unearned Rent and credits Rent Revenue indicates that:
A. Rent has been paid in advance by the company
B. Rent previously received has now been earned
C. Rent expense has been incurred
D. Cash has been received for future rent

Answer: B
Explanation: The debit to Unearned Rent reduces the liability that was created when cash was received earlier. The credit to Rent Revenue recognizes that the company has provided the use of the property for the period just ended. The entry therefore records the earning of previously deferred rent revenue.

46. Prepaid expenses are most similar in nature to:
A. Accounts payable
B. Inventory
C. Accrued revenues
D. Notes payable

Answer: B
Explanation: Both prepaid expenses and inventory are assets that will become expenses when consumed or sold. Prepaid expenses represent future benefits from services or rights already paid for; inventory represents future benefits from goods that will be sold. Both require allocation to expense in the periods of consumption or sale under the matching principle.

47. The primary purpose of recording deferrals is to:
A. Accelerate the recognition of cash flows
B. Ensure proper timing of revenue and expense recognition
C. Reduce taxable income
D. Simplify the accounting records

Answer: B
Explanation: Deferrals exist so that the recognition of revenues and expenses occurs in the periods in which the underlying economic events take place, not merely when cash changes hands. This timing discipline produces financial statements that faithfully represent performance and position under accrual accounting and the matching and revenue-recognition principles.

48. At the end of the first month of a six-month insurance policy purchased for $1,800, the balance in Prepaid Insurance should be:
A. $1,800
B. $1,500
C. $300
D. $0

Answer: B
Explanation: One-sixth of the policy has expired ($1,800 × 1/6 = $300). After the adjusting entry that transfers $300 to Insurance Expense, the Prepaid Insurance account retains a balance of $1,500, representing the five remaining months of coverage. This remaining balance continues as a current asset until further adjustments are made.

49. Which of the following is an example of a deferred revenue for a magazine publisher?
A. Advertising costs paid in advance
B. Subscriptions collected in advance
C. Salaries owed to employees
D. Paper inventory on hand

Answer: B
Explanation: Cash collected from subscribers before the magazines are delivered creates unearned subscription revenue—a deferred revenue liability. As each issue is mailed, a portion of the liability is recognized as revenue. Advertising costs paid in advance and paper inventory are deferred expenses (assets); salaries owed are accruals.

50. After all adjusting entries for deferrals have been recorded, the remaining balances in prepaid and unearned accounts represent:
A. Amounts that will never be recognized
B. Future benefits or obligations still outstanding
C. Errors that must be corrected
D. Cash that has not yet been received or paid

Answer: B
Explanation: The remaining debit balance in prepaid accounts represents unexpired future economic benefits that will become expenses in subsequent periods. The remaining credit balance in unearned accounts represents performance obligations that will be satisfied (and recognized as revenue) in subsequent periods. These residual balances are therefore legitimate assets and liabilities that properly appear on the post-adjustment balance sheet.

 

 

Deferrals Quiz: 50 Multiple-Choice Questions

 

Questions 21–30: Deferrals Quiz

Q21. On October 1, a software company receives $18,000 upfront for a 12-month software license subscription. If financial statements are prepared on December 31, what is the balance of Unearned Service Revenue on the balance sheet? A) $18,000 B) $4,500 C) $13,500 D) $9,000

Correct Answer: C Explanation: The monthly subscription rate is $1,500 ($18,000 / 12 months). By December 31, three months of service (October, November, and December) have elapsed, earning $4,500 in revenue ($1,500 × 3). The remaining unearned balance for the remaining 9 months is $13,500 ($1,500 × 9). Option A represents the initial liability before adjustments. Option B represents the earned portion transferred to the income statement. Option D incorrectly assumes half of the term has expired.

Q22. A business pays $6,000 for a 1-year advertising package starting on May 1. If the company fails to make an adjusting entry on December 31, how are total assets impacted at year-end? A) Overstated by $2,000 B) Understated by $4,000 C) Overstated by $4,000 D) Understated by $2,000

Correct Answer: C Explanation: Monthly advertising expense is $500 ($6,000 / 12 months). From May 1 to December 31, 8 months of advertising have been consumed, totaling $4,000 ($500 × 8). The adjusting entry should debit Advertising Expense for $4,000 and credit Prepaid Advertising for $4,000, leaving an asset balance of $2,000. Omitting this entry leaves Prepaid Advertising recorded at the full $6,000, overstating total assets by $4,000. Option A uses the remaining asset balance instead of the expired amount. Options B and D confuse understated with overstated asset positions.

Q23. When a company collects cash in advance and records it using the income statement approach (crediting Revenue directly), what is the required adjusting entry at period-end for the unearned portion? A) Debit Revenue; Credit Unearned Revenue B) Debit Unearned Revenue; Credit Revenue C) Debit Cash; Credit Revenue D) Debit Revenue; Credit Expense

Correct Answer: A Explanation: Under the alternative income statement method, the initial advance cash collection is credited directly to a Revenue account. At period-end, the portion that remains unearned must be removed from Revenue and recognized as a liability. The adjusting entry requires a debit to Revenue (reducing revenue) and a credit to Unearned Revenue (establishing the liability) for the unearned balance. Option B is the standard entry when cash was initially credited to a liability account. Option C repeats the initial cash entry. Option D creates an invalid expense credit.

Q24. An accounting firm purchases $2,400 of office supplies on account in January. During the year, $1,800 worth of supplies are consumed. What is the correct adjusting entry at year-end? A) Debit Supplies $1,800; Credit Supplies Expense $1,800 B) Debit Supplies Expense $1,800; Credit Supplies $1,800 C) Debit Supplies Expense $600; Credit Supplies $600 D) Debit Supplies Expense $1,800; Credit Accounts Payable $1,800

Correct Answer: B Explanation: Supplies are recorded as an asset when purchased. As supplies are consumed, their cost transforms into an expense. Since $1,800 of supplies were used, the period-end adjusting entry must debit Supplies Expense for $1,800 to recognize the operating cost and credit Supplies for $1,800 to reduce the asset account. Option A reverses the debit and credit accounts. Option C adjusts for the remaining unused supplies rather than the consumed amount. Option D incorrectly credits Accounts Payable, which was already credited during the initial purchase.

Q25. Why are deferred expenses initially classified as assets rather than expenses? A) Cash has not yet been paid to the vendor. B) They represent future economic benefits controlled by the entity. C) They generate immediate tax credits for the purchasing business. D) They represent obligations to perform services for external customers.

Correct Answer: B Explanation: Under financial accounting frameworks, an asset is a resource controlled by an entity that is expected to yield future economic benefits. A deferred expense (prepayment) involves paying cash today for goods or services to be consumed in future periods. Because the economic benefit spans future periods, it meets the definition of an asset until consumed. Option A is incorrect because cash has already been paid. Option C is factually incorrect regarding tax rules. Option D defines a liability, specifically deferred revenue.

Q26. On July 1, a landlord receives $24,000 representing one year’s rent in advance for an apartment building. What amount of rent revenue should be reported on the income statement for the year ended December 31? A) $24,000 B) $18,000 C) $12,000 D) $6,000

Correct Answer: C Explanation: The total prepayment covers 12 months, yielding a monthly rental revenue of $2,000 ($24,000 / 12 months). From July 1 to December 31, exactly 6 months of occupancy have occurred. The earned rent revenue for the current year’s income statement is $12,000 ($2,000 × 6 months). Option A recognizes the full cash payment immediately, violating accrual principles. Option B represents 9 months of revenue. Option D represents only 3 months of revenue.

Q27. A company records an adjusting entry debiting Unearned Legal Fees and crediting Legal Fees Revenue for $5,000. How does this entry affect the accounting equation? A) Increases Assets and increases Equity B) Decreases Liabilities and increases Equity C) Decreases Assets and decreases Liabilities D) Increases Liabilities and decreases Equity

Correct Answer: B Explanation: Debiting Unearned Legal Fees reduces a liability account because the firm fulfilled its obligation. Crediting Legal Fees Revenue increases revenue on the income statement, which subsequently increases Net Income and Retained Earnings (Equity). Therefore, the overall effect on the accounting equation is a decrease in liabilities balanced by an equal increase in equity, while total assets remain unaffected. Option A incorrectly claims assets increase. Option C incorrectly claims assets decrease. Option D describes the exact opposite financial impact.

Q28. A gym sells 2-year memberships. In 2025, it collects $120,000 in cash for memberships starting January 1, 2025. How much revenue is recognized in 2025, and what is the liability balance at the end of 2025? A) Revenue: $120,000; Liability: $0 B) Revenue: $60,000; Liability: $60,000 C) Revenue: $0; Liability: $120,000 D) Revenue: $30,000; Liability: $90,000

Correct Answer: B Explanation: The membership revenue must be recognized systematically over the 24-month coverage period, equal to $60,000 per year ($120,000 / 2 years). During 2025, one full year (12 months) of service is provided, earning $60,000 in revenue. The remaining 12 months of unearned service leave a balance of $60,000 in Unearned Membership Revenue at December 31, 2025. Option A uses cash-basis accounting. Option C defers all revenue to the end of the contract. Option D allocates revenue over a 4-year period instead of 2 years.

Q29. What type of account is Prepaid Rent, and what is its normal balance? A) Expense account; Normal Debit balance B) Asset account; Normal Credit balance C) Asset account; Normal Debit balance D) Liability account; Normal Credit balance

Correct Answer: C Explanation: Prepaid Rent represents cash paid for future rental coverage, making it a current asset account on the balance sheet. All asset accounts carry a normal debit balance because increases in assets are recorded as debits. Option A mistakes it for an expense, which it only becomes after expiring. Option B assigns an incorrect normal credit balance to an asset. Option D mistakes Prepaid Rent for a liability account like Unearned Rent.

Q30. If a company fails to adjust the Unearned Revenue account for services completed during the period, what is the effect on Net Income and Total Liabilities? A) Net Income is overstated; Total Liabilities are overstated. B) Net Income is understated; Total Liabilities are overstated. C) Net Income is understated; Total Liabilities are understated. D) Net Income is overstated; Total Liabilities are understated.

Correct Answer: B Explanation: Failing to record earned revenue keeps Revenue (and Net Income) artificially low, resulting in understated Net Income. At the same time, because the liability account (Unearned Revenue) was not reduced by a debit entry, Total Liabilities remain higher than they actually are (overstated). Option A incorrectly states Net Income is overstated. Option C incorrectly states liabilities are understated. Option D gets both financial statement impacts completely backward.

Questions 31–40: Deferrals Quiz

Q31. On September 1, a company pays $3,600 for a 1-year property insurance policy. What is the adjusting entry balance for Prepaid Insurance on the balance sheet at December 31?

A) $1,200

B) $2,400

C) $3,600

D) $900

Correct Answer: B

Explanation: The monthly insurance cost is $300 ($3,600 / 12 months). From September 1 to December 31, 4 months of coverage have expired, totaling $1,200 in Insurance Expense ($300 × 4). The remaining unexpired asset balance for Prepaid Insurance covering the remaining 8 months is $2,400 ($300 × 8). Option A represents the expense amount recognized on the income statement. Option C is the initial payment cost before adjustments. Option D calculates only 3 months of expired coverage instead of 4.

Q32. A newspaper publisher receives $12,000 for annual subscriptions on November 1. If subscriptions are delivered monthly starting in November, how much Subscription Revenue is recognized in the current year ending December 31?

A) $1,000

B) $2,000

C) $10,000

D) $12,000

Correct Answer: B

Explanation: Monthly delivery equals $1,000 ($12,000 / 12 months). During the current year, newspapers are delivered for 2 months (November and December). Therefore, Subscription Revenue recognized on the income statement is $2,000 ($1,000 × 2). Option A calculates only 1 month of delivery. Option C represents the remaining Unearned Subscription Revenue liability on the balance sheet. Option D recognizes all cash immediately, violating the accrual matching principle.

Q33. An adjusting entry for a deferred expense always results in:

A) An increase in assets and an increase in expenses.

B) A decrease in assets and an increase in expenses.

C) An increase in liabilities and a decrease in expenses.

D) A decrease in liabilities and an increase in revenue.

Correct Answer: B

Explanation: When adjusting a deferred expense (such as Prepaid Rent or Supplies), the consumed portion of the asset is converted into an expense. The journal entry debits an expense account (increasing expenses) and credits a prepaid asset account (decreasing assets). Option A incorrectly claims assets increase. Option C describes an accrued expense adjustment. Option D describes a deferred revenue adjustment.

Q34. On January 1, the Supplies account had a debit balance of $800. Supplies purchased during the year totaled $3,000. If a physical count shows $1,100 of supplies on hand at December 31, what is the Supplies Expense for the year?

A) $2,700

B) $1,900

C) $3,800

D) $1,100

Correct Answer: A

Explanation: Total supplies available for use equal $3,800 ($800 beginning balance + $3,000 purchases). Subtracting the ending inventory count of $1,100 yields $2,700 of supplies consumed ($3,800 − $1,100). The adjusting entry debits Supplies Expense for $2,700. Option B subtracts beginning inventory from purchases incorrectly. Option C represents total supplies available without subtracting ending inventory. Option D uses the remaining asset balance instead of the expensed amount.

Q35. Unearned Rent Revenue is reported on the balance sheet under which section?

A) Operating Expenses

B) Current Assets

C) Current Liabilities

D) Stockholders’ Equity

Correct Answer: C

Explanation: Unearned Rent Revenue represents cash collected in advance from tenants for future occupancy. Because the landlord has an ongoing obligation to provide property access or return the funds within the operating cycle, it is classified as a Current Liability. Option A places a balance sheet account on the income statement. Option B mistakes a performance liability for an economic asset. Option D treats unearned funds as earned equity prior to performance.

Q36. A company purchased equipment for $60,000 on January 1 with an estimated useful life of 5 years and no salvage value. What is the contra-asset balance for Accumulated Depreciation at December 31 of Year 2?

A) $12,000

B) $24,000

C) $48,000

D) $36,000

Correct Answer: B

Explanation: Straight-line annual depreciation expense is $12,000 ($60,000 / 5 years). By December 31 of Year 2, two full years of depreciation have accumulated. The contra-asset account Accumulated Depreciation has a credit balance of $24,000 ($12,000 × 2 years). Option A represents single-year depreciation expense. Option C represents the remaining book value of the equipment. Option D calculates 3 years of accumulated depreciation instead of 2.

Q37. If a company fails to make an adjusting entry for Unearned Service Revenue earned during the period, how are Stockholders’ Equity and Liabilities affected?

A) Equity is overstated; Liabilities are understated.

B) Equity is understated; Liabilities are overstated.

C) Equity is overstated; Liabilities are overstated.

D) Equity is understated; Liabilities are understated.

Correct Answer: B

Explanation: Omitting the earned revenue adjustment keeps Revenue and Net Income lower than actual, causing Stockholders’ Equity to be understated. Concurrently, Unearned Service Revenue is not reduced by a debit entry, leaving Liabilities overstated. Option A describes the opposite effect. Option C incorrectly states equity is overstated. Option D incorrectly states liabilities are understated.

Q38. On June 1, a firm pays $4,800 for a 2-year service contract starting immediately. What is the Rent Expense or Service Expense recognized for the year ending December 31?

A) $1,400

B) $2,400

C) $1,200

D) $3,400

Correct Answer: A

Explanation: The contract spans 24 months (2 years × 12 months), making the monthly expense $200 ($4,800 / 24 months). From June 1 to December 31, 7 months have elapsed. The expense recognized is $1,400 ($200 × 7 months). Option B calculates a full year’s expense (12 months). Option C calculates 6 months of elapsed time instead of 7. Option D calculates the remaining asset balance rather than the consumed portion.

Q39. When an adjusting entry is recorded for a deferred revenue item, which financial statement account is credited?

A) Cash

B) Unearned Revenue

C) A Revenue Account

D) An Asset Account

Correct Answer: C

Explanation: The adjusting entry for deferred revenue transfers earned amounts from a liability account to an income statement account. The journal entry debits Unearned Revenue (reducing the liability) and credits a Revenue account (increasing earned income). Option A is incorrect because cash is never involved in period-end adjusting entries. Option B is debited, not credited. Option D involves asset accounts which apply to deferred expenses, not deferred revenues.

Q40. Which of the following transactions represents a deferred revenue scenario?

A) Paying rent 3 months in advance.

B) Performing consulting services on account.

C) Receiving cash for season sports tickets prior to the season start.

D) Purchasing office equipment using a 90-day bank loan.

Correct Answer: C

Explanation: Receiving cash for season tickets before games take place is a classic deferred revenue scenario. Cash is collected upfront, but revenue recognition is deferred until performance obligations (the games) are delivered. Option A is a deferred expense (prepayment). Option B represents accrued revenue (receivable). Option D represents a borrowing transaction generating a note payable.

Questions 41–50: Deferrals Quiz

Q41. A company receives $15,000 upfront on April 1 for a 12-month consulting agreement. If the contract ends on March 31 of the following year, how much Service Revenue is recognized in the second fiscal year (Jan 1 to Mar 31)? A) $11,250 B) $3,750 C) $15,000 D) $5,000

Correct Answer: B Explanation: The monthly revenue is $1,250 ($15,000 / 12 months). In Year 1 (April 1 to December 31), 9 months of service are provided, earning $11,250. In Year 2 (January 1 to March 31), the remaining 3 months of service are completed, earning $3,750 ($1,250 × 3). Option A is the revenue recognized in Year 1. Option C is the total contract value. Option D calculates 4 months of service in Year 2 instead of 3.

Q42. On October 1, a tenant pays $12,000 for 6 months of rent in advance. The landlord credits Rent Revenue directly upon cash receipt. What adjusting entry must the landlord make on December 31? A) Debit Rent Revenue $6,000; Credit Unearned Rent Revenue $6,000 B) Debit Unearned Rent Revenue $6,000; Credit Rent Revenue $6,000 C) Debit Rent Revenue $12,000; Credit Unearned Rent Revenue $12,000 D) Debit Cash $6,000; Credit Rent Revenue $6,000

Correct Answer: A Explanation: Under the alternative method, the landlord credited the full $12,000 to Rent Revenue ($2,000/month). By December 31, 3 months have been earned ($6,000) and 3 months remain unearned ($6,000). The adjusting entry must remove the unearned $6,000 from Rent Revenue (debit) and establish the liability Unearned Rent Revenue (credit) for $6,000. Option B is used when cash is initially credited to a liability. Option C moves the entire contract value. Option D incorrectly includes cash.

Q43. On January 1, Prepaid Insurance had a balance of $3,000. On July 1, the company paid $6,000 for a new policy. On December 31, an audit reveals $4,000 of remaining prepaid coverage. What is the Insurance Expense for the year? A) $5,000 B) $4,000 C) $9,000 D) $2,000

Correct Answer: A Explanation: Insurance Expense is calculated using the formula: Beginning Balance ($3,000) + Additions ($6,000) − Ending Balance ($4,000) = Expense Incurred ($5,000). The adjusting entry debits Insurance Expense for $5,000 and credits Prepaid Insurance for $5,000. Option B uses the ending unexpired asset balance. Option C sums available coverage without subtracting ending inventory. Option D subtracts beginning balance from additions without accounting for ending coverage.

Q44. What happens to the Unearned Revenue account over time as performance obligations are satisfied? A) It increases with debit entries. B) It decreases with debit entries and transfers value to revenue accounts. C) It decreases with credit entries and transfers value to asset accounts. D) It remains unchanged until cash is refunded to the customer.

Correct Answer: B Explanation: Unearned Revenue is a liability account carrying a normal credit balance. As services or products are delivered, the performance obligation decreases. Debiting Unearned Revenue decreases the liability, while crediting a revenue account records the earned income on the income statement. Option A incorrectly claims debits increase liabilities. Option C claims credit entries decrease liabilities. Option D describes cash refunds rather than service delivery under accrual rules.

Q45. A business pays $12,000 for a 1-year liability insurance policy on March 1. If financial statements are prepared quarterly on March 31, what is the Prepaid Insurance balance on March 31? A) $1,000 B) $11,000 C) $12,000 D) $10,000

Correct Answer: B Explanation: The monthly insurance cost is $1,000 ($12,000 / 12 months). During March, 1 month of coverage expires ($1,000), leaving 11 months of unexpired coverage. On March 31, the remaining balance in Prepaid Insurance is $11,000 ($1,000 × 11). Option A is the Insurance Expense for March. Option C is the initial payment without adjustment. Option D calculates 2 months of expired coverage instead of 1.

Q46. Which of the following accounts is reduced by a credit entry during period-end deferral adjusting entries? A) Unearned Service Revenue B) Service Revenue C) Prepaid Rent D) Rent Expense

Correct Answer: C Explanation: Prepaid Rent is an asset account adjusted at period-end to reflect consumed rental coverage. Reducing an asset account requires a credit entry. Unearned Service Revenue (Option A) is reduced via a debit entry. Service Revenue (Option B) and Rent Expense (Option D) are increased during adjusting entries using credit and debit entries, respectively.

Q47. If an entity records deferred expenses initially as expenses, what type of adjusting entry is required at period-end for unused amounts? A) Reclassifying entry debiting an asset and crediting an expense. B) Reclassifying entry debiting an expense and crediting a liability. C) Closing entry debiting revenue and crediting equity. D) Accrual entry debiting cash and crediting an asset.

Correct Answer: A Explanation: Under the alternative expense-first method, cash payments were debited directly to an expense account. At year-end, any unused or unexpired portion must be removed from the expense account (credited) and recognized as an asset (debited). Option B creates an unnecessary liability. Option C describes period-end equity closing procedures. Option D incorrectly includes cash in an adjusting entry.

Q48. On November 1, an architectural firm receives an $18,000 retainer for a 6-month design project. By December 31, 1/3 of the project is completed. What is the balance of Unearned Retainer Fees on December 31? A) $6,000 B) $12,000 C) $18,000 D) $0

Correct Answer: B Explanation: Completing 1/3 of the project means $6,000 ($18,000 × 1/3) has been earned and transferred to Revenue. The remaining unearned portion is 2/3 of the contract, leaving an Unearned Retainer Fees liability balance of $12,000 ($18,000 × 2/3). Option A represents the earned revenue recognized in the income statement. Option C represents the starting liability. Option D assumes the entire project is completed.

Q49. Why does omitting a deferred expense adjusting entry cause Net Income to be overstated? A) Revenue is recorded twice. B) Expenses are understated because consumed assets were not expensed. C) Liabilities are recorded as assets on the balance sheet. D) Cash collections are omitted from operating cash flows.

Correct Answer: B Explanation: Net Income is calculated as Revenues minus Expenses. Omitting the adjusting entry for a consumed asset (like Prepaid Rent or Supplies) leaves expenses understated. Understating expenses mathematically causes Net Income to be overstated. Option A is incorrect because revenues are not impacted by prepaid expense adjustments. Option C misclassifies balance sheet elements. Option D refers to cash flow statements rather than income measurement.

Q50. A venue sells $300,000 in concert tickets in January for a show scheduled in April. What is the journal entry recorded in January? A) Debit Cash $300,000; Credit Concert Revenue $300,000 B) Debit Cash $300,000; Credit Unearned Concert Revenue $300,000 C) Debit Unearned Concert Revenue $300,000; Credit Concert Revenue $300,000 D) Debit Accounts Receivable $300,000; Credit Unearned Concert Revenue $300,000

Correct Answer: B Explanation: In January, cash is collected before the performance takes place. The entry increases the asset Cash with a $300,000 debit and records a performance liability with a $300,000 credit to Unearned Concert Revenue. Option A recognizes revenue before performance, violating accrual accounting. Option C is the adjusting entry made in April when the concert occurs. Option D records a receivable instead of actual cash received.