Journal Entry Review Questions 2



Q47. Review questions 2
(1) On May 2, 20×1, Entity A purchased 600 units of merchandise at $9 per unit and paid $5,400 in cash.
(2) On May 10, 20×1, Entity A sold 200 units of merchandise at $12 per unit and received $2,400 in cash.
Prepare journal entries to record these transactions.

A47. Cash purchase and cash sale

(1) May 2, 20×1: to record the purchase of merchandise

  Debit Credit
Merchandise 5,400  
     Cash   5,400

[Note]
600 units x $9 per unit = $5,400

(2) Entity A sold 200 units of merchandise at $12 per unit and received $2,400 in cash.

(2a) May 10, 20×1: to record sales revenue

  Debit Credit
Cash 2,400  
     Sales revenue   2,400

[Note]
Sales revenue = 200 units x $12 per unit = $2,400

(2b) May 10, 20×1: to record the cost of goods sold

  Debit Credit
Cost of goods sold 1,800  
     Merchandise   1,800

[Note]
Cost of goods sold = 200 units x $9 per unit = $1,800

 

 

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Journal Entry Review Questions 1



Section 8. Review

Q46. Review questions 1
(1) What are the examples of transactions recorded on the debit side of a journal entry?
(2) What are the examples of transactions recorded on the credit side of a journal entry?

A46. Assets + Expenses = Liabilities + Equity + Revenues

(1) Examples of transactions recorded on the debit side.
a. Increase in cash
b. Increase in accounts receivable
c. Increase in prepaid insurance expense
d. Increase in building
e. Increase in goodwill
f. Increase in cost of goods sold
g. Decrease in accounts payable
h. Decrease in retained earnings
i. Decrease in unearned revenue
j. Decrease in notes payable

(2) Examples of transactions recorded on the credit side.
a. Increase in salaries payable
b. Increase in common stock
c. Increase in additional paid-in capital
d. Increase in retained earnings
e. Increase in sales revenue
f. Increase in accounts payable
g. Decrease in equipment
h. Decrease in goodwill
i. Decrease in prepaid rent expense
j. Decrease in notes receivable

 

 

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Cash dividend



Q45. Cash dividend
(1) On January 10, 20×1, Entity A declared a $1.50 per share cash dividend on 500,000 shares of common stock.
(2) On February 10, 20×1, Entity A paid $750,000 cash dividend declared on January 10, 20×1.
Prepare journal entries to record these transactions.

A45. Cash dividend decreases retained earnings.

(1) January 10, 20×1: to record the cash dividend declared

  Debit Credit
Retained earnings (or cash dividend) 750,000  
     Dividends payable   750,000

[Note]
500,000 shares x $1.50 = $750,000

(2) February 10, 20×1: to record the payment of cash dividend

  Debit Credit
Dividends payable 750,000  
     Cash   750,000

[Note]
Decrease in dividends payable (liability): debit

 

 

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Common stock



Q44. Common stock
Entity A issued 20,000 shares of common stock at $14 per share. The par value of common stock is $1 per share.
Prepare a journal entry to record this transaction.

A44. Issue price over the par value portion is recorded in the additional paid-in capital account.

  Debit Credit
Cash 280,000  
     Common stock, par value   20,000
     Additional paid-in capital   260,000

[Note]
1. Increase in common stock (equity): credit
2. Increase in additional paid-in capital (equity): credit
3. Common stock, par value = 20,000 shares x $1 = $20,000
4. Additional paid-in capital = $280,000 – $20,000 = $260,000
5.” Paid-in capital in excess of par value” can be used in the place of “Additional paid-in capital.”

[Exercise]
Entity B repurchased 10,000 shares of its own common stock at $7 per share. The common stock has $1 par value.

  Debit Credit
Treasury stock 70,000  
     Cash   70,000

[Note]
1. Increase in treasury stock (contra-equity): debit
2. Treasury stock = 10,000 shares x $7 = $70,000
3. When an entity purchases its own stock, it is recorded as an increase in treasury stock.
4. Treasury stock is a contra-equity account that is subtracted from stockholders’ equity.

 

 

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Borrowings



Q43. Borrowings
Entity A borrowed $20,000 from a bank and received the full amount in cash. The loan is due in 6 months.
Prepare a journal entry to record this transaction.

A43. Increases in borrowings are recorded on the credit side.

  Debit Credit
Cash 20,000  
     Short-term borrowings   20,000

[Exercise]
$60,000 borrowed from a bank was deposited in a checking account of Entity B. The loan is due 3 years later.

  Debit Credit
Bank deposits 60,000  
     Long-term borrowings   60,000

[Note]
Borrowings due after 3 years are recorded as long-term borrowings.

 

 

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Sale of noncurrent assets



Q42. Sale of noncurrent assets
Entity A sold equipment with the following information.
(a) Cost of equipment = $200,000
(b) Accumulated depreciation = $180,000
(c) The equipment was sold at $23,000 in cash.
Prepare a journal entry to record this transaction.

A42. Gain on sale of equipment = cash receipt – book value of equipment

  Debit Credit
Cash 23,000  
Accumulated depreciation 180,000  
     Equipment   200,000
     Gain on sale of equipment   3,000

[Note]
1. Decrease in accumulated depreciation (contra-asset): debit
2. Decrease in equipment (asset): credit
3. Increase in the gain on sale of equipment (gain): credit
4. Book value of equipment = cost – accumulated depreciation
= $200,000 – $180,000 = $20,000
5. Gain on sale of equipment = cash receipt – book value of equipment
= $23,000 – $20,000 = $3,000

[Exercise]
Entity B sold equipment with the following information.
(a) Cost of equipment= $300,000
(b) Accumulated depreciation = $270,000
(c) The equipment was sold at $28,000 in cash.

  Debit Credit
Cash 28,000  
Accumulated depreciation 270,000  
Loss on sale of equipment 2,000  
     Equipment   300,000

[Note]
1. Increase in the loss on sale of equipment (loss): debit
2. Book value of equipment = cost – accumulated depreciation
= $300,000 – $270,000 = $30,000
3. Loss on sale of equipment = book value of equipment – cash receipt
= $30,000 – $28,000 = $2,000

 

 

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