Accounting Journal Entries and Adjustments

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Questions and Answers

What is the primary purpose of recording journal entries?

To simplify tax calculations

To determine the total worth of a business

To manage employee salaries

To capture financial activity in an organized way (correct)

Adjusting entries are used to record transactions that have not yet occurred.

False

What is an example of a long-term liability?

Bonds payable

The equation that must always balance in accounting is Assets = __________ + Equity.

Liabilities Signup and view all the answers

Match the following accounting terms with their definitions:

Unearned Revenue = A liability representing money received before services are performed Accrued Expenses = Costs that have been incurred but not yet paid Long-term Liabilities = Obligations expected to be settled in more than a year Matching Principle = The accounting concept of recognizing expenses in the period they are incurred Signup and view all the answers

When is adjusting entry required for accrued salaries?

At the end of an accounting period Signup and view all the answers

Adjusting entries help match income to the period in which it was earned.

True Signup and view all the answers

What is the adjusting entry for earned rent of $2,400 from unearned revenue?

Debit: Rent Earned $2,400; Credit: Unearned Revenue $2,400 Signup and view all the answers

What is the primary reason companies retire bonds early?

To save on future interest costs Signup and view all the answers

Common stockholders receive dividends before preferred stockholders.

False Signup and view all the answers

What is equity in a business context?

Equity represents the owners’ claim on the assets after liabilities are paid off. Signup and view all the answers

A company has a bond premium of $20,000 amortized over 5 years. The annual amortization is ______.

$4,000 Signup and view all the answers

Match the terms with their correct definitions:

Carrying Value = The value of bonds on the issuer's books Loss on Retirement = The decrease in value when bonds are repurchased for more than their carrying value Cumulative Dividends = Dividends owed to preferred stockholders for missed payments Equity = The owners' claim on company assets Signup and view all the answers

When a company retires a bond for $60,000 but has a carrying value of $57,000, what is the financial result?

A loss of $3,000 Signup and view all the answers

Bonds are amortized to increase the overall financial impact at year-end.

False Signup and view all the answers

What must preferred stockholders receive before common stockholders can be paid?

$12,000 in arrears Signup and view all the answers

To amortize the bond premium, the company transferred $4,000 each year to reduce ______.

interest expense Signup and view all the answers

Match the following bond terms with their respective definitions:

Premium = When bonds are sold for more than their face value Discount = When bonds are sold for less than their face value Face Value = The value stated on the bond certificate Amortization = The gradual reduction of the premium or discount over time Signup and view all the answers

Study Notes

Journal Entries and Adjusting Entries

Journal entries meticulously record all business transactions.
The double-entry system ensures debits equal credits, maintaining the balance sheet equation (Assets = Liabilities + Equity).
Adjusting entries ensure revenues and expenses are reported in the correct period.
Unearned Revenue: ABC Co. received rent in advance. Three months' worth of rent ($2,400) was earned by December 31, requiring an adjusting entry to shift this amount from Unearned Revenue to Rent Earned.
Accrued Salaries: Salaries for Monday and Tuesday of a month ending on a Tuesday must be accrued, even if not paid until later. A journal entry debits Salaries Expense and credits Salaries Payable for this unpaid but earned amount. This accurately reflects current expenses.

Long-Term Liabilities

Long-term liabilities are debts due in more than one year (e.g., bonds payable, long-term leases).
Analyzing long-term liabilities helps assess a company's ability to manage its debt. Transparent reporting is essential.
Bond Retirement (example): A company repurchased bonds at a price lower than their carrying value, generating a gain. Carrying Value ($1,008,000) > Buyback Price ($990,000) = Gain ($18,000).
Gain on retiring bonds occurs when the carrying value exceeds the buyback price.

Equity

Equity represents the owners' residual claim on assets after deducting liabilities.
Equity includes common stock, preferred stock, retained earnings, and additional paid-in capital.
Dividends: Dividends are distributed profits to shareholders. Preferred shareholders often receive distributions before common shareholders.
Cumulative Dividends (example): Missed preferred dividends from 2004 and 2005 must be paid prior to any common stock dividend.

Bonds and Amortization

Bond premium/discount amortization smooths the financial impact of bond sales over the bond's life.
Straight-Line Amortization (example): A $20,000 bond premium is amortized evenly over 5 years. This equates to an annual amortization of $4,000.

Retiring Bonds

Retirement of bonds occurs when a company pays off bonds before their maturity.
Loss on Bond Retirement (example): If a company repays bonds with a carrying value higher than the face value, there's often a loss. For example, a company retires a $50,000 bond with $57,000 carrying value but pays $60,000 to repurchase them: Loss = $3,000.

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Description

This quiz covers the essentials of journal entries and adjusting entries in accounting. You'll learn how to record transactions accurately using the double-entry system and understand the importance of adjusting entries for proper financial reporting. Test your knowledge on long-term liabilities and how they affect financial statements.