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Recording Journal Entries - Financial Accounting

  1. On January 1, Year 1, a company acquired machinery for $200,000. The machinery has a 5-year useful life and a $20,000 salvage value. The company uses the double-declining-balance method of depreciation. What is the journal entry to record depreciation for the fiscal year ended December 31, Year 2?
    Answer: Debit Depreciation Expense $48,000; Credit Accumulated Depreciation $48,000. First, calculate the double-declining rate: (1 / 5 years) * 2 = 40%. For Year 1, depreciation is $200,000 (initial cost) × 40% = $80,000. Salvage value is ignored in the initial calculation. The book value at the beginning of Year 2 is $200,000 - $80,000 = $120,000. For Year 2, depreciation is the book value × the rate: $120,000 × 40% = $48,000. The journal entry is a debit to Depreciation Expense and a credit to Accumulated Depreciation for $48,000.
  2. A corporation issues $2,000,000 of 8% bonds for total proceeds of $2,050,000. Each $1,000 bond includes 20 detachable stock warrants. Immediately after issuance, the bonds were trading ex-warrants at 99, and each warrant had a fair market value of $2. What amount should be credited to Additional Paid-in Capital—Stock Warrants upon issuance?
    Answer: $40,396 The proceeds must be allocated between the bonds and the warrants based on their relative fair market values. Fair value of bonds = $2,000,000 0.99 = $1,980,000. Number of warrants = (2,000,000 / 1,000) 20 = 40,000 warrants. Fair value of warrants = 40,000 $2 = $80,000. Total fair value = $1,980,000 + $80,000 = $2,060,000. The portion of the proceeds allocated to warrants is ($80,000 / $2,060,000) $2,050,000 = $40,396 (rounded). This amount is credited to Additional Paid-in Capital—Stock Warrants.
  3. On May 1, Year 1, a company paid $4,800 for a 12-month general liability insurance policy. The company's fiscal year ends on December 31. What is the required adjusting journal entry on December 31, Year 1?
    Answer: Debit Insurance Expense $3,200; Credit Prepaid Insurance $3,200. The initial payment creates an asset, Prepaid Insurance. The adjusting entry must recognize the portion of the insurance that has expired. The monthly cost is $4,800 / 12 months = $400. From May 1 to December 31, 8 months have passed. The amount of insurance expense to be recognized is $400/month × 8 months = $3,200. The entry is a debit to Insurance Expense and a credit to the asset account, Prepaid Insurance, to reduce its balance.
  4. What journal entry should Quantum Enterprises record for this stock issuance?
    Answer: Debit Cash $18,000; Credit Common Stock $10,000, Credit Additional Paid-in Capital $8,000 The correct answer is B. Net cash received = $18,000 - $800 = $17,200. Common Stock = 1,000 × $10 = $10,000. Additional Paid-in Capital = $17,200 - $10,000 = $7,200. Transaction costs reduce the net proceeds. Choice A ignores transaction costs. Choice C incorrectly capitalizes stock issue costs as an asset. Choice D shows paying transaction costs separately, overstating both cash and additional paid-in capital.
  5. A corporation repurchased 5,000 shares of its own $10 par value common stock for $22 per share. The company uses the cost method to account for treasury stock. Immediately prior to the repurchase, the company's equity section included Common Stock of $500,000 and Additional Paid-in Capital of $800,000. Which journal entry correctly records the repurchase?
    Answer: Debit Treasury Stock $110,000; Credit Cash $110,000. Under the cost method, treasury stock is recorded at the price paid to reacquire the shares. The total cost is 5,000 shares * $22/share = $110,000. The journal entry is a debit to Treasury Stock (a contra-equity account) and a credit to Cash for this amount. Par value and the original issue price are ignored at the time of repurchase under the cost method.
  6. A company owns equipment that originally cost $90,000. As of January 1, its accumulated depreciation was $60,000. The equipment is being depreciated using the straight-line method over 9 years with no salvage value. On September 30, the company sold the equipment for $25,000 cash. Which of the following is part of the correct compound journal entry to record the sale?
    Answer: A credit to Gain on Sale of Equipment for $2,500. First, update depreciation to the date of sale. Annual depreciation is $90,000 / 9 years = $10,000. Depreciation for 9 months (Jan 1 to Sep 30) is $10,000 × (9/12) = $7,500. Total accumulated depreciation at sale is $60,000 + $7,500 = $67,500. The book value is $90,000 (cost) - $67,500 (accumulated depreciation) = $22,500. The gain is the cash received minus the book value: $25,000 - $22,500 = $2,500. The complete entry would be: Debit Cash $25,000; Debit Accumulated Depreciation $67,500; Credit Equipment $90,000; Credit Gain on Sale $2,500.
  7. On January 1, Year 1, a company issued $1,000,000 of 10-year, 7% bonds when the market interest rate was 6%. As a result, the bonds were issued for total proceeds of $1,073,601. Which journal entry correctly records the issuance of these bonds?
    Answer: Debit Cash $1,073,601; Credit Bonds Payable $1,000,000; Credit Premium on Bonds Payable $73,601. When the stated interest rate (7%) is higher than the market interest rate (6%), bonds are issued at a premium. The cash proceeds ($1,073,601) are debited. Bonds Payable is always credited for the face or par value of the bonds ($1,000,000). The excess of the proceeds over the face value is credited to a separate account, Premium on Bonds Payable ($1,073,601 - $1,000,000 = $73,601).
  8. Falcon Manufacturing purchased raw materials for $8,500 on account on March 10. On March 15, they returned $500 of defective materials and received a credit from the supplier. On March 20, they paid the remaining balance and received a 2% discount for early payment. What is the journal entry on March 20?
    Answer: Debit Accounts Payable $8,000; Credit Cash $7,840, Credit Purchase Discounts $160 The correct answer is A. The balance owed after the return is $8,000 ($8,500 - $500). The 2% discount applies to this balance: $8,000 × 2% = $160 discount. Cash paid = $8,000 - $160 = $7,840. Choice B incorrectly applies the discount to the original amount before the return. Choice C ignores the discount entirely. Choice D treats the discounted amount as the accounts payable balance, which understates the liability reduction.
  9. A company had credit sales of $1,200,000 for the year. The company uses the allowance method and estimates its bad debt expense at 2% of credit sales. The Allowance for Doubtful Accounts had a beginning credit balance of $5,000 and write-offs during the year totaled $12,000. What is the journal entry to record bad debt expense for the year?
    Answer: Debit Bad Debt Expense $24,000; Credit Allowance for Doubtful Accounts $24,000. When using the percentage-of-sales method, bad debt expense is calculated by applying the estimated percentage directly to the credit sales for the period. The existing balance in the Allowance for Doubtful Accounts is ignored when calculating the expense. The expense is $1,200,000 × 2% = $24,000. The journal entry is a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
  10. A company issued 10,000 shares of its $5 par value common stock in exchange for a parcel of land. The company's stock was actively trading at $18 per share on the date of the transaction. The land was recently appraised for $190,000 by an independent appraiser. What is the journal entry to record the acquisition of the land?
    Answer: Debit Land $180,000; Credit Common Stock $50,000; Credit Additional Paid-in Capital $130,000. When issuing stock for non-cash assets, the transaction is recorded at the fair value of the stock issued or the fair value of the asset received, whichever is more clearly determinable. The market price of the actively traded stock is the more reliable measure. The value of the transaction is 10,000 shares $18/share = $180,000. The journal entry debits Land for $180,000. Common Stock is credited for the par value (10,000 shares $5/share = $50,000), and the excess is credited to Additional Paid-in Capital ($180,000 - $50,000 = $130,000).
  11. On September 1, Year 1, a company borrowed $80,000 by signing a 9-month, 9% interest-bearing note. The entire principal and interest are due at maturity. The company's fiscal year ends on December 31. What is the adjusting journal entry required on December 31, Year 1?
    Answer: Debit Interest Expense $2,400; Credit Interest Payable $2,400. The adjusting entry must recognize the interest expense incurred but not yet paid as of the end of the fiscal year. The interest is for the period from September 1 to December 31, which is 4 months. The accrued interest is calculated as: Principal × Annual Rate × Time = $80,000 × 9% × (4/12) = $2,400. The entry is a debit to Interest Expense and a credit to the liability account, Interest Payable.
  12. A company pays its weekly payroll of $25,000 every Friday for a five-day work week ending on that day. If the fiscal year-end, December 31, falls on a Tuesday, what is the required adjusting journal entry for accrued wages?
    Answer: Debit Salaries and Wages Expense $10,000; Credit Salaries and Wages Payable $10,000. The adjusting entry must record the wages earned by employees but not yet paid as of year-end. The daily wage expense is $25,000 / 5 days = $5,000. By the end of Tuesday, employees have worked for two days (Monday and Tuesday) of the week. Therefore, the accrued wage expense is $5,000/day × 2 days = $10,000. The entry is a debit to Salaries and Wages Expense and a credit to the liability account, Salaries and Wages Payable.
  13. A company that uses the allowance method for uncollectible accounts determined that a $2,500 receivable from a customer, Beta Co., is uncollectible. Before the write-off, the balance in Accounts Receivable was $200,000 and the Allowance for Doubtful Accounts had a credit balance of $15,000. Which journal entry correctly records the write-off of the Beta Co. account?
    Answer: Debit Allowance for Doubtful Accounts $2,500; Credit Accounts Receivable $2,500. When a specific account is deemed uncollectible under the allowance method, the write-off is recorded by debiting the Allowance for Doubtful Accounts and crediting the specific customer's Accounts Receivable. This entry reduces both accounts, but it does not affect the net realizable value of accounts receivable ($200,000 - $15,000 = $185,000 before; ($200,000 - $2,500) - ($15,000 - $2,500) = $185,000 after). Bad Debt Expense is not debited at the time of write-off; the expense was already recognized when the allowance was established.
  14. On October 1, a company's board of directors declared a cash dividend of $1.25 per share on its 100,000 shares of common stock outstanding. The date of record was set for October 15, and the payment date was set for November 1. Which journal entry, if any, is required on October 15?
    Answer: No journal entry is required. There are three important dates for dividends: the declaration date, the date of record, and the payment date. A journal entry is required on the declaration date (October 1) to recognize the liability (debit Retained Earnings, credit Dividends Payable) and on the payment date (November 1) to record the cash payment (debit Dividends Payable, credit Cash). The date of record (October 15) is merely the date used to determine which shareholders are entitled to receive the dividend. It does not have a financial impact on the company, so no journal entry is recorded.
  15. A retail company using the perpetual inventory system purchased merchandise for $15,000 on account. The terms of shipping were FOB shipping point. The seller prepaid $500 in freight costs on behalf of the buyer and added the amount to the invoice. What is the journal entry the buyer should record for this transaction?
    Answer: Debit Inventory $15,500; Credit Accounts Payable $15,500. In a perpetual inventory system, freight costs incurred by the buyer (FOB shipping point) are considered a cost of acquiring the inventory and are added to the Inventory account. The cost of the inventory is the purchase price plus the freight, so Inventory should be debited for $15,000 + $500 = $15,500. Since the seller added the freight to the invoice, the entire amount is owed to the seller, so Accounts Payable is credited for $15,500.
  16. A corporation has 1,000,000 shares of $2 par value common stock outstanding. The stock has a current market value of $25 per share. The company's board of directors declares a 5% stock dividend. What is the journal entry to record the declaration of the stock dividend?
    Answer: Debit Retained Earnings $1,250,000; Credit Common Stock Dividend Distributable $100,000; Credit Additional Paid-in Capital $1,150,000. A stock dividend of less than 20-25% is considered a small stock dividend and is recorded at the fair market value of the shares issued. Number of new shares = 1,000,000 shares × 5% = 50,000 shares. The market value is 50,000 shares × $25/share = $1,250,000. Retained Earnings is debited for this amount. Common Stock Dividend Distributable is credited for the par value (50,000 shares × $2/share = $100,000), and the excess is credited to Additional Paid-in Capital ($1,250,000 - $100,000 = $1,150,000).
  17. On July 1, a consulting firm received a $30,000 cash advance from a client for services to be provided evenly over the next 12 months. What is the journal entry for the consulting firm to record the receipt of this cash advance on July 1?
    Answer: Debit Cash $30,000; Credit Unearned Revenue $30,000. When cash is received before the revenue is earned, the company has an obligation to provide services in the future. This obligation is recorded as a liability called Unearned Revenue (or Deferred Revenue). Therefore, the entry on July 1 is a debit to Cash for the amount received and a credit to Unearned Revenue for the same amount. Revenue will be recognized as it is earned over the 12-month service period.
  18. On January 1, Year 1, a company issued $400,000 face value, 6% bonds for $381,647, yielding a market interest rate of 7%. Interest is paid annually on December 31. The company uses the effective-interest method of amortization. What is the journal entry to record the interest payment on December 31, Year 1?
    Answer: Debit Interest Expense $26,715; Credit Discount on Bonds Payable $2,715; Credit Cash $24,000. Under the effective-interest method, interest expense is the carrying value of the bonds multiplied by the market interest rate. The cash payment is the face value multiplied by the stated rate. The difference is the amortization of the discount. Cash paid = $400,000 × 6% = $24,000. Interest expense = $381,647 (carrying value) × 7% = $26,715. Discount amortization = $26,715 - $24,000 = $2,715. The entry debits Interest Expense for $26,715, credits Cash for $24,000, and credits Discount on Bonds Payable for $2,715.
  19. On October 1, a company sold merchandise and accepted a 6-month, non-interest-bearing note with a face value of $30,000. The present value of the note, based on an appropriate market interest rate, was determined to be $29,126 on the date of sale. Which journal entry correctly records this transaction on October 1?
    Answer: Debit Notes Receivable $30,000; Credit Discount on Notes Receivable $874; Credit Sales Revenue $29,126. Revenue should be recognized at the fair value of the consideration received, which is the present value of the note, $29,126. The note itself must be recorded at its face value ($30,000). The difference between the face value and the present value represents the imputed interest and is recorded in a contra-asset account, Discount on Notes Receivable ($30,000 - $29,126 = $874). This discount will be amortized to interest revenue over the life of the note.
  20. What is the net effect on Meridian Corp.'s total assets from these March 15 transactions?
    Answer: Increase of $49,500 The correct answer is A. Assets increase by: Equipment $75,000 ($45,000 + $30,000) and Cash $4,500 ($8,000 collected - $45,000 paid for equipment - $3,500 for utilities) = net increase of $49,500. Choice B incorrectly adds the $30,000 note as an asset increase rather than recognizing it finances equipment already counted. Choice C counts only the equipment without considering the net cash effect. Choice D incorrectly subtracts the entire $75,000 equipment cost from the $8,000 collected, ignoring that $30,000 was financed.

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