WALL STREET PREP PREMIUM EXAM 2026/2027 | 100
Questions and Correct Answers 100% Verified | Graded A+ |
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Domain 1: Accounting Fundamentals (12 Questions)
Q1: A company issues $1,000,000 of common stock for cash. What is the correct
journal entry using DEAD/CLERK methodology?
A. Debit Cash $1,000,000; Credit Accounts Payable $1,000,000
B. Debit Common Stock $1,000,000; Credit Cash $1,000,000
C. Debit Cash $1,000,000; Credit Common Stock $1,000,000 [CORRECT]
D. Debit Retained Earnings $1,000,000; Credit Cash $1,000,000
Correct Answer: C
Rationale: Using DEAD (Debits increase Expenses, Assets, Dividends) and CLERK
(Credits increase Liabilities, Equity, Revenue, contra-K assets), Cash is an Asset
(increase = Debit) and Common Stock is Equity (increase = Credit). Option A incorrectly
credits a liability. Option B reverses the debit/credit logic. Option D uses the wrong
accounts entirely—issuing stock does not affect retained earnings or reduce cash. This
transaction increases both assets (cash) and equity (common stock), maintaining the
accounting equation A = L + E.
Q2: Under accrual accounting, when should revenue be recognized?
A. When cash is received from customers
B. When the performance obligation is satisfied, regardless of cash timing [CORRECT]
C. When the invoice is sent to the customer
D. When the contract is signed
Correct Answer: B
,Rationale: Revenue recognition under ASC 606 (and IFRS 15) occurs when control of
goods/services transfers to the customer—when the performance obligation is
satisfied. This is the accrual concept (revenue earned, not cash received). Option A
describes cash basis accounting. Option C is incorrect—invoicing creates a receivable
but doesn't determine timing. Option D is premature—contract signing creates
performance obligations but doesn't satisfy them. This principle ensures revenue
matches the period in which value is delivered, providing better economic insight than
cash flows.
Q3: A company prepays $12,000 for 12 months of insurance on January 1. What
adjusting entry is required on January 31?
A. Debit Prepaid Insurance $1,000; Credit Cash $1,000
B. Debit Insurance Expense $1,000; Credit Prepaid Insurance $1,000 [CORRECT]
C. Debit Insurance Expense $12,000; Credit Prepaid Insurance $12,000
D. No entry required until the policy expires
Correct Answer: B
Rationale: The deferral adjusting entry recognizes one month of expense ($12,000/12 =
$1,000) and reduces the prepaid asset. This follows the matching principle—expenses
recognized when incurred. Option A incorrectly records another payment. Option C
recognizes the full amount immediately, violating matching. Option D is cash basis, not
accrual. Prepaid expenses are assets (future economic benefit); as time passes, they
become expenses. This adjustment ensures accurate monthly financial reporting.
Q4: Which of the following transactions would decrease both assets and liabilities by
equal amounts?
A. Paying off accounts payable with cash [CORRECT]
,B. Collecting accounts receivable
C. Issuing long-term debt for equipment
D. Recording depreciation expense
Correct Answer: A
Rationale: Paying A/P decreases Cash (asset) and Accounts Payable (liability). The
accounting equation (A = L + E) remains balanced with equal reductions on both sides.
Option B exchanges one asset for another (A/R to Cash), no net asset change. Option C
increases both asset (Equipment) and liability (Debt). Option D decreases assets
(accumulated depreciation) and equity (retained earnings via expense), not liabilities.
Understanding these effects is critical for financial modeling—each transaction must
maintain equation balance.
Q5: At year-end, a company has earned $5,000 of interest revenue that has not been
received or recorded. What is the adjusting entry?
A. Debit Interest Revenue $5,000; Credit Cash $5,000
B. Debit Interest Receivable $5,000; Credit Interest Revenue $5,000 [CORRECT]
C. Debit Cash $5,000; Credit Interest Revenue $5,000
D. No entry required until cash is received
Correct Answer: B
Rationale: Accrued revenue requires recognizing revenue earned but not yet
billed/collected. Debit Interest Receivable (asset, revenue earned but not received) and
Credit Interest Revenue (equity increase via revenue). Option A reverses the accounts
and implies revenue decrease. Option C incorrectly assumes cash receipt. Option D
violates accrual accounting. This adjustment ensures the income statement reflects all
revenue earned in the period, regardless of cash timing—critical for accurate valuation
and performance measurement.
, Q6: Which account is classified as a temporary (nominal) account that is closed to
retained earnings at year-end?
A. Cash
B. Accounts Receivable
C. Cost of Goods Sold [CORRECT]
D. Accumulated Depreciation
Correct Answer: C
Rationale: Temporary accounts (revenues, expenses, dividends) are reset to zero via
closing entries, with net amounts transferred to Retained Earnings. COGS is an expense
account. Options A, B, and D are permanent (real) accounts that carry forward to the
next period. The closing process: (1) Close revenues to Income Summary, (2) Close
expenses to Income Summary, (3) Close Income Summary to Retained Earnings, (4)
Close Dividends to Retained Earnings. This distinguishes operating performance
(income statement) from financial position (balance sheet).
Q7: A company purchases equipment for $50,000 with a $10,000 down payment and
the remainder on a note payable. What is the effect on the accounting equation?
A. Assets increase $50,000; Liabilities increase $40,000; Equity unchanged [CORRECT]
B. Assets increase $40,000; Liabilities increase $40,000; Equity unchanged
C. Assets increase $50,000; Liabilities increase $50,000; Equity unchanged
D. Assets increase $40,000; Liabilities increase $50,000; Equity decreases $10,000
Correct Answer: A
Rationale: Equipment (asset) increases $50,000. Cash (asset) decreases $10,000. Net
asset increase = $40,000. Notes Payable (liability) increases $40,000. The $10,000
down payment is an asset exchange (Cash for Equipment), not affecting total assets.
Questions and Correct Answers 100% Verified | Graded A+ |
Latest New Edition | Pass Guaranteed
Domain 1: Accounting Fundamentals (12 Questions)
Q1: A company issues $1,000,000 of common stock for cash. What is the correct
journal entry using DEAD/CLERK methodology?
A. Debit Cash $1,000,000; Credit Accounts Payable $1,000,000
B. Debit Common Stock $1,000,000; Credit Cash $1,000,000
C. Debit Cash $1,000,000; Credit Common Stock $1,000,000 [CORRECT]
D. Debit Retained Earnings $1,000,000; Credit Cash $1,000,000
Correct Answer: C
Rationale: Using DEAD (Debits increase Expenses, Assets, Dividends) and CLERK
(Credits increase Liabilities, Equity, Revenue, contra-K assets), Cash is an Asset
(increase = Debit) and Common Stock is Equity (increase = Credit). Option A incorrectly
credits a liability. Option B reverses the debit/credit logic. Option D uses the wrong
accounts entirely—issuing stock does not affect retained earnings or reduce cash. This
transaction increases both assets (cash) and equity (common stock), maintaining the
accounting equation A = L + E.
Q2: Under accrual accounting, when should revenue be recognized?
A. When cash is received from customers
B. When the performance obligation is satisfied, regardless of cash timing [CORRECT]
C. When the invoice is sent to the customer
D. When the contract is signed
Correct Answer: B
,Rationale: Revenue recognition under ASC 606 (and IFRS 15) occurs when control of
goods/services transfers to the customer—when the performance obligation is
satisfied. This is the accrual concept (revenue earned, not cash received). Option A
describes cash basis accounting. Option C is incorrect—invoicing creates a receivable
but doesn't determine timing. Option D is premature—contract signing creates
performance obligations but doesn't satisfy them. This principle ensures revenue
matches the period in which value is delivered, providing better economic insight than
cash flows.
Q3: A company prepays $12,000 for 12 months of insurance on January 1. What
adjusting entry is required on January 31?
A. Debit Prepaid Insurance $1,000; Credit Cash $1,000
B. Debit Insurance Expense $1,000; Credit Prepaid Insurance $1,000 [CORRECT]
C. Debit Insurance Expense $12,000; Credit Prepaid Insurance $12,000
D. No entry required until the policy expires
Correct Answer: B
Rationale: The deferral adjusting entry recognizes one month of expense ($12,000/12 =
$1,000) and reduces the prepaid asset. This follows the matching principle—expenses
recognized when incurred. Option A incorrectly records another payment. Option C
recognizes the full amount immediately, violating matching. Option D is cash basis, not
accrual. Prepaid expenses are assets (future economic benefit); as time passes, they
become expenses. This adjustment ensures accurate monthly financial reporting.
Q4: Which of the following transactions would decrease both assets and liabilities by
equal amounts?
A. Paying off accounts payable with cash [CORRECT]
,B. Collecting accounts receivable
C. Issuing long-term debt for equipment
D. Recording depreciation expense
Correct Answer: A
Rationale: Paying A/P decreases Cash (asset) and Accounts Payable (liability). The
accounting equation (A = L + E) remains balanced with equal reductions on both sides.
Option B exchanges one asset for another (A/R to Cash), no net asset change. Option C
increases both asset (Equipment) and liability (Debt). Option D decreases assets
(accumulated depreciation) and equity (retained earnings via expense), not liabilities.
Understanding these effects is critical for financial modeling—each transaction must
maintain equation balance.
Q5: At year-end, a company has earned $5,000 of interest revenue that has not been
received or recorded. What is the adjusting entry?
A. Debit Interest Revenue $5,000; Credit Cash $5,000
B. Debit Interest Receivable $5,000; Credit Interest Revenue $5,000 [CORRECT]
C. Debit Cash $5,000; Credit Interest Revenue $5,000
D. No entry required until cash is received
Correct Answer: B
Rationale: Accrued revenue requires recognizing revenue earned but not yet
billed/collected. Debit Interest Receivable (asset, revenue earned but not received) and
Credit Interest Revenue (equity increase via revenue). Option A reverses the accounts
and implies revenue decrease. Option C incorrectly assumes cash receipt. Option D
violates accrual accounting. This adjustment ensures the income statement reflects all
revenue earned in the period, regardless of cash timing—critical for accurate valuation
and performance measurement.
, Q6: Which account is classified as a temporary (nominal) account that is closed to
retained earnings at year-end?
A. Cash
B. Accounts Receivable
C. Cost of Goods Sold [CORRECT]
D. Accumulated Depreciation
Correct Answer: C
Rationale: Temporary accounts (revenues, expenses, dividends) are reset to zero via
closing entries, with net amounts transferred to Retained Earnings. COGS is an expense
account. Options A, B, and D are permanent (real) accounts that carry forward to the
next period. The closing process: (1) Close revenues to Income Summary, (2) Close
expenses to Income Summary, (3) Close Income Summary to Retained Earnings, (4)
Close Dividends to Retained Earnings. This distinguishes operating performance
(income statement) from financial position (balance sheet).
Q7: A company purchases equipment for $50,000 with a $10,000 down payment and
the remainder on a note payable. What is the effect on the accounting equation?
A. Assets increase $50,000; Liabilities increase $40,000; Equity unchanged [CORRECT]
B. Assets increase $40,000; Liabilities increase $40,000; Equity unchanged
C. Assets increase $50,000; Liabilities increase $50,000; Equity unchanged
D. Assets increase $40,000; Liabilities increase $50,000; Equity decreases $10,000
Correct Answer: A
Rationale: Equipment (asset) increases $50,000. Cash (asset) decreases $10,000. Net
asset increase = $40,000. Notes Payable (liability) increases $40,000. The $10,000
down payment is an asset exchange (Cash for Equipment), not affecting total assets.
