Adjusting Journal Entries

Question 1

Explicit transactions =

Answer 1

those that are triggered by a specific event, often an exchange of resources between two parties.

Question 2

Implicit transactions =

Answer 2

do not have a specific trigger, but instead often involve some degree of judgment in determining the timing and amount of the journal entries.

Question 3

Implicit transactions often lead to what are known as adjusting entries, which are …

Answer 3

journal entries made at the end of a given accounting period (month, quarter, or year) to record necessary adjustments. The goal is generally to conform to the revenue recognition and matching principles.

Question 4

Accruals are __

Answer 4

transactions where cash changes hands after revenue or expense is recognized and deferrals are transactions where cash changes hands before revenue or expense is recorded.

Question 5

Accruals and deferrals always involve revenues or expenses and are the essence of two important concepts

Answer 5

revenue recognition and the matching principle.

Under this method, revenue should be recognized in the period in which it is earned and realizable, not necessarily when the cash is received. Expenses should be recognized in the period in which the related revenue is recognized rather than when the related cash is paid. In order to do this we must make adjusting journal entries, which are implicit transactions.

Question 6

Long-lived physical assets, such as machinery and buildings, will often help produce revenues for many years to come. To reflect this, w …

Answer 6

we record adjusting journal entries to recognize depreciation expense related to the assets over multiple periods, which is an implicit transaction.

Question 7

Straight-line depreciation is calculated by

Answer 7

dividing the gross book value by the estimated useful life of the asset.

Question 8

A deferred tax liability arises when

Answer 8

there is an amount of tax that is going to be due in the future, related to income that is reported in the current period. A deferred tax asset reflects a prepayment of some amount of tax on an amount that has not yet been reported as income on the income statement.

Question 9

There are four basic types of adjusting journal entries:

Answer 9

(1) Recognizing expenses related to a prepaid asset

Suppose a company pays cash for one year’s worth of rent. They will now have an asset account, prepaid rent, on their books. As each month passes, that asset is worth less and less, and it will need to be reduced or expensed accordingly.

(2) Recognizing revenues related to deferred revenue (also called unearned revenue)

Suppose a company receives cash from a customer for a year-long, monthly magazine subscription. The company will now have an obligation to provide magazines to their customer. They will record a liability, deferred revenue, on their books. As each month passes, and the magazines are provided, the liability account needs to be reduced and revenue needs to be recognized as earned.

(3) Accruing of unrecorded expenses

Entries related to unrecorded expenses usually occur at the end of the accounting period, during the closing process. The purpose of this type of entry is to account for any expenses that weren’t recorded throughout the year because there was insufficient information. Some examples would be accruing for property tax or interest expense, or accounting for inventory shrinkage.

(4) Accruing of unrecorded revenues

Similar to the accrual for unrecorded expenses, unrecorded revenues are usually accounted for at the end of the accounting period. This type of entry reflects revenues that have been earned but not yet billed. For example, suppose a firm provides consulting services for a client in December. At year end, the firm has yet to send the client a bill for those services. Since the service has been provided, and the client will be billed eventually, revenue must be recorded.

Question 10

The accrual method of accounting means that

Answer 10

companies record both explicit and implicit transactions in the period in which they are incurred, which is not necessarily the same period in which cash was paid or received.

Question 11

Accruals related to revenue arise when a company

Answer 11

delivers goods or performs a service before receiving payment.

Question 12

Accruals related to expenses arise when a company

Answer 12

uses resources before paying for them.

Question 13

Deferrals related to revenue arise when a company

Answer 13

receives cash before delivering goods or performing a service.

Question 14

Deferrals related to expenses arise when a company

Answer 14

pays for resources before receiving the benefit from them.

Question 15

Record this transaction:
Apple decides to allocate $950 of the purchase price toward the phone itself, and $50 toward the software updates they will provide over the next year. Before the sale, the phone was in Apple’s inventory valued at $500.

Answer 15

Create a journal entry for the date of the sale, October 1, 2018.

In this case,
Apple needs to first note the receipt of cash and the loss of inventory by debiting Cash for $1000 and crediting Inventory for $500.
Then they need to record the revenue: debit Cost of Goods sold by $500, credit Revenue for $950, and then credit Deferred Revenue (the software updates) for $50.

Question 16

the expense for long lived physical assets =

Answer 16

depreciation

Question 17

The useful life of an asset is the business’ estimate of

Answer 17

how long the asset will provide a benefit.

Question 18

The salvage value is the amount the business expects

Answer 18

to receive after the asset’s useful life is over. In practice, even after an asset is completely used up, it can still be sold as scrap.

Question 19

Straight-line depreciation is calculated as follows:

Answer 19

Yearly Depreciation=(GrossBookValue−SalvageValue) / UsefulLife

Question 20

Difference between depreciation expense and accumulated depreciation.

Answer 20

Depreciation expense is a nominal, income statement expense account, which resets every period and simply shows the expense recognized in that period.

Accumulated depreciation is a real account that holds the cumulative balance of all depreciation expense recognized against the asset.

Question 21

contra account is an account

Answer 21

whose balance is opposite the normal account to which it relates. So, a contra asset account has a credit balance, since a normal asset account has a debit balance. A contra revenue account has a debit balance, since a normal revenue account has a credit balance.

Question 22

Amortization =

Answer 22

The expense for long-lived non-physical assets;

In the adjusting journal entry to record amortization, we will debit amortization expense and credit accumulated amortization, a contra-asset account that acts similarly to accumulated depreciation.

Question 23

Company A is a small candy store that sells a variety of candies, such as jelly beans, caramels, and taffies. In the store, most candies are stored in bulk containers, and customers can fill bags with candies and pay by the weight. Company A tracks its candy purchases and performs a monthly inventory count. Company A records an adjusting journal entry for Cost of Goods Sold at the end of the month after the inventory count reveals the ending inventory on hand.

Which type of inventory system does Company A utilize?

Answer 23

Under a periodic inventory system, a company only records Cost of Goods Sold periodically, in this case, once a month after the inventory count.

Question 24

Company B is a small toy retail chain and has invested in a linked inventory and accounting information system. When a toy is purchased and scanned at the cash register, the accounting information system automatically records the journal entry transferring the specific inventory item from inventory to cost of goods sold. Company B also performs a monthly inventory count and then records an adjusting journal entry to account for any shrinkage.

Which type of inventory system does Company B utilize?

Answer 24

Under a perpetual inventory system, a company continuously tracks the sales of inventory and records Cost of Goods Sold for each sale. Even companies with a perpetual inventory system may perform inventory counts periodically.

Question 25

Product costs are those

Answer 25

directly related to the production of a product or service intended for sale.

Question 26

Period costs are all

Answer 26

all other indirect costs that are incurred in production. Overhead and sales & marketing expenses are common examples of period costs

Question 27

Tax Expense =

Answer 27

Tax Expense = Income Before Taxes x Tax Rate

Question 28

Taxes Payable =

Answer 28

Taxable Income x Tax Rate

Question 29

The FIFO method bases its cost flow on

Answer 29

the chronological order purchases are made

Question 30

LIFO method bases it cost flow on

Answer 30

reverse chronological order

Question 31

Which of the following arises when Taxable Income exceeds Income Before Taxes due to a temporary timing difference?

Answer 31

Deferred Tax Asset

This is the amount that arises when Taxable Income exceeds Income Before Taxes due to a temporary timing difference.

Question 32

Which of the following is the amount of tax that relates to the Income Before Taxes for the year?

Answer 32

Deferred Tax Asset

This is the amount that arises when Taxable Income exceeds Income Before Taxes due to a temporary timing difference.

Question 33

Which of the following arises when Taxable Income is less than Income Before Taxes due to a temporary timing difference?

Answer 33

Deferred Tax Liability
This is the amount that arises when Taxable Income is less than Income Before Taxes due to a temporary timing difference.

Question 34

Whenever the net book value is greater than the amount of cash received from the sale of the asset,

Answer 34

a loss is recognized.

Question 35

Whenever a company disposes of an asset, the value of that asset account …

Answer 35

as well as the related contra-asset account, must both be removed from the books. The difference between the asset account and the contra-asset account is known as the net book value.

Question 36

Fresh Faces is a small cosmetics company. It has invested in a linked inventory and accounting information system. When a cosmetic item is purchased and scanned at the cash register, the accounting information system automatically records the journal entry transferring the specific inventory item from inventory to cost of goods sold. Fresh Faces also performs a monthly inventory count and then records an adjusting journal entry to account for any shrinkage.

Which type of inventory system does Fresh Faces utilize?

Answer 36

Perpetual

Question 37

Which of the following arises when Taxable Income exceeds Income Before Taxes due to a temporary timing difference?

Answer 37

Deferred Tax Asset

This is the amount that arises when Taxable Income exceeds Income Before Taxes due to a temporary timing difference.

Question 38

Which of the following is the amount of the tax liability that pertains to the current period and is payable in the next 12 months?

Answer 38

Taxes Payable

Taxes Payable is the tax liability due in the current period.