Q1 Answer:
B. When incurred
Explanation: The matching principle requires that expenses be recognized when incurred, not necessarily when paid. This ensures that expenses are aligned with the revenues they help generate.
Q2 Answer:
B. Salaries payable
Explanation: Accrued expenses represent expenses that have been incurred but not yet paid. Salaries payable is a typical example, as employees earn wages during the period but are paid later.
Q3 Answer:
B. ₹6,00,000
Explanation: The revenue earned is based on the time the service was performed, not when payment was made. Since ₹1,00,000 per month is earned, by the end of March, ₹6,00,000 (3 months) should be recognized.
Q4 Answer:
B. ₹60,000
Explanation: The insurance expense is recognized over the policy term. For the 6 months from July to December, the expense is ₹1,20,000 × 6/12 = ₹60,000.
Q5 Answer:
B. Dr. Accounts Receivable Cr. Revenue
Explanation: When revenue is earned but not yet billed, an adjusting entry is made to recognize the receivable and corresponding revenue.
Q6 Answer:
B. Record revenue and accounts receivable in December
Explanation: According to the accrual basis of accounting, revenue should be recognized when it is earned, not when it is billed or paid. Therefore, the revenue should be recorded in December when the service was performed.
Q7 Answer:
A. Balance Sheet – Liability
Explanation: Unearned revenue represents cash received in advance of providing goods or services and is reported as a liability until the revenue is earned.
Q8 Answer:
B. Wages earned by employees not yet paid
Explanation: Accrued expenses are expenses incurred but not yet paid. Unpaid wages are a typical accrued expense.
Q9 Answer:
A. Understated assets; overstated expenses
Explanation: Failure to record prepaid insurance as an asset leads to the underreporting of assets and overreporting of expenses.
Q10 Answer:
C. Through amortization or usage over time
Explanation: Deferred expenses (e.g., prepaid rent or insurance) are gradually recognized as expenses over time, following the matching principle.
Q11 Answer:
B. Revenue recognition
Explanation: According to the revenue recognition principle, revenue should be recognized when earned, regardless of when payment is received.
Q12 Answer:
B. Dr. Depreciation Expense; Cr. Accumulated Depreciation
Explanation: Depreciation is recognized by debiting Depreciation Expense and crediting Accumulated Depreciation, which is a contra-asset account.
Q13 Answer:
D. Interest earned but not received
Explanation: Adjusting journal entries are needed for revenues earned but not yet received, such as interest income that has been earned but not yet received in cash.
Q14 Answer:
A. Assets understated; Net income understated
Explanation: If accrued revenue is not recognized, assets (accounts receivable) and net income will be understated because the revenue earned has not been recorded.
Q15 Answer:
C. Overstatement of expenses and understatement of net income
Explanation: When a capital asset is expensed, expenses are overstated (because they include the cost of the asset), and net income is understated (because depreciation or asset capitalizing would have spread the expense over several years).
Q16 Answer:
B. Record revenue and accounts receivable in December
Explanation: Revenue should be recognized when it is earned, regardless of when the invoice is issued or payment is received. Therefore, revenue is recorded in December when the service was performed.
Q17 Answer:
A. Balance Sheet – Liability
Explanation: Unearned revenue is a liability on the balance sheet because the company owes goods or services to the customer.
Q18 Answer:
B. Wages earned by employees not yet paid
Explanation: Wages earned but not yet paid are an example of accrued expenses because they represent expenses that have been incurred but not yet paid.
Q19 Answer:
A. Understated assets; overstated expenses
Explanation: If prepaid insurance is not recorded, assets (prepaid insurance) will be understated, and expenses will be overstated as if the entire amount has been expensed.
Q20 Answer:
C. Through amortization or usage over time
Explanation: Deferred expenses are gradually expensed over time, typically through amortization, as the benefits are consumed or the service is used.
Q21 Answer:
D. At period-end to apply accrual accounting
Explanation: Adjusting journal entries are typically made at the end of a period to apply accrual accounting rules, ensuring that revenue and expenses are recognized in the correct period.
Q22 Answer:
A. December
Explanation: Under accrual accounting, revenue is recognized when earned, not when payment is received. Therefore, the revenue should be recognized in December when the service was performed.
Q23 Answer:
B. Restate prior period and adjust Retained Earnings
Explanation: If depreciation was not recorded in December, the prior period's financial statements need to be restated, and Retained Earnings should be adjusted accordingly.
Q24 Answer:
A. Understated expenses and liabilities
Explanation: Failing to record an accrued expense results in an understatement of liabilities (because the expense is not yet paid) and expenses (because the incurred expense is not recorded).
Q25 Answer:
A. Depreciation
Explanation: Depreciation affects both the income statement (as an expense) and the balance sheet (as accumulated depreciation, a contra-asset).
Q26 Answer:
B. Balance Sheet as an asset
Explanation: Prepaid expenses are recognized as assets on the balance sheet because the company has paid for goods or services to be received in the future.
Q27 Answer:
B. When a product is sold
Explanation: Warranty expense should be recognized when the sale occurs, as it is related to the product sold, not when the actual warranty service is performed.
Q28 Answer:
B. ₹40,000
Explanation: The advance payment is ₹60,000 for 6 months, so the unearned portion for the remaining 4 months is ₹40,000 (₹60,000 × 4/6).
Q29 Answer:
B. Matching principle
Explanation: The matching principle requires the recognition of expenses in the same period as the related revenues, which is the basis for year-end adjusting entries.
Q30 Answer:
B. Dr. Rent Expense; Cr. Prepaid Rent
Explanation: For prepaid expenses, an adjusting entry is made to reduce the prepaid account (asset) and recognize the portion of the prepaid expense that has been incurred.
Here are quick notes and key points to remember on exam day for the Matching of Revenues and Expenses concept:
1. Matching Principle Basics
2. Revenue Recognition
3. Expense Recognition
4. Accrual vs Cash Basis
5. Journal Entries for Adjustments
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Accrued Revenue:
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Accrued Expense:
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Deferred Revenue:
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Prepaid Expense:
6. Adjusting Journal Entries (AJE)
7. Impact of Matching on Financial Statements
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Income Statement:
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Accrued Revenue: Increases revenue.
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Accrued Expenses: Increases expenses.
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Prepaid Expenses: Reduces expenses when adjusted.
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Deferred Revenue: Increases revenue when earned.
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Balance Sheet:
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Accrued Revenue: Increases Assets (e.g., accounts receivable).
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Accrued Expenses: Increases Liabilities (e.g., accounts payable).
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Prepaid Expenses: Increases Assets (e.g., prepaid rent).
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Deferred Revenue: Increases Liabilities (e.g., unearned revenue).
8. Quick Tips for the Exam
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Match Expenses with Revenues: Expenses must be matched to the period in which the related revenue is earned, not when cash changes hands.
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Use of Prepaid & Accrued Accounts: Be familiar with adjusting entries for prepaid and accrued items.
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Don’t Confuse Cash vs. Accrual: Always consider the timing of recognition under accrual accounting.
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Know Common Adjusting Entries: Practice entries for deferred revenue, accrued expenses, and prepaid expenses.
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Key Terms to Remember:
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Accrued: Earned/incurred but not received/paid.
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Deferred: Received/paid but not yet earned/incurred.
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Prepaid: Paid in advance, to be used over time.
9. Exam Strategy
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Read Carefully: Questions will often test your understanding of when to recognize revenue or expenses.
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Practice Adjusting Entries: Focus on how to transition between cash and accrual methods.
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Understand Corporate Examples: Real-life examples like Netflix and Amazon can help solidify your understanding of when revenue and expenses are recognized.
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Check for Common CPA Traps: Prepaid expenses vs. accrued expenses and deferred revenue vs. earned revenue.
10. Important Points on Journal Entries
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Accrued Revenue:
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Accrued Expense:
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Deferred Revenue:
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Prepaid Expense:
Bonus Tips
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Use Memory Aids: Create mnemonics like "Accrual = Earned, Cash = Paid" to remember distinctions between accrual and cash accounting.
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Think of Expense Matching as "Sidekick to Revenue": They must appear together in the same period.
Conclusion
With these key points, you'll be able to nail the Matching Principle questions on exam day! Focus on practicing your adjusting journal entries and understanding the real-world examples of revenue and expense recognition. Keep your calm, and remember to match expenses to revenues correctly for a strong performance!
Good luck with your CPA exam preparation!
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