Question

1. During June, the Grass Is Greener Company mows 100 lawns a week; the company bills customers and full payment is due by July 15. The company uses the accrual basis of accounting. How will these events affect the company's financial statements?

A) In June, an asset and a liability account will both increase.

B) In June, an asset and a revenue account will both increase.

C) In July, an asset account will increase and a liability account will decrease.

D) In July, a liability account will decrease and a revenue account will increase.

2. Deferred Revenue is a(n):
   1. expense.
   2. asset.
   3. revenue.
   4. liability.

3. In November, Ellie Company bought supplies on account for $480, with payment due to the supplier in 90 days. The supplies were used for products made and delivered in November. In which month should Ellie Company record the cost of the supplies as an expense?
   1. One-third should be expensed in each month from November through the January payment date.
   2. January.
   3. November.
   4. December

4. The prepayment of rent for the next three months (not including this month):
   1. reduces total assets.
   2. has no effect on total assets.
   3. increases expenses.
   4. decreases stockholders' equity.

Answer 1

1.

During June, the Grass Is Greener Company mows 100 lawns a week; the company bills customers and full payment is due by July 15. The company uses the accrual basis of accounting. It will have the following effect on the company's financial statements:

B) In June, an asset and a revenue account will both increase.

Assets will increase in the form of accounts receivables and revenue will increase since under accrual system, revenue is recognized when goods are delivered or services are performed.

Correct option is (B)

2.

Deferred Revenue is a liability.

Correct option is (D)

Deferred Revenue is the revenue received in advance from the customers for goods to be delivered or services to be provided in future, hence it is a current liability.

3.

In November, Ellie Company bought supplies on account for $480, with payment due to the supplier in 90 days. The supplies were used for products made and delivered in November. Ellie Company record the cost of the supplies as an expense in November.

Correct option is (C)

Since the products were sold in November itself, hence supplies expense should be recorded in the month of November.

4.

The prepayment of rent for the next three months (not including this month) has no effect on total assets.

One asset will increase in the form of Prepaid rent and other asset will decrease in the form of cash, hence total assets would not be effected.

Correct option is (B)

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