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ch02answers - CHAPTER 2 The Recording Process ASSIGNMENT...

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Unformatted text preview: CHAPTER 2 The Recording Process ASSIGNMENT CLASSIFICATION TABLE Study Objectives 1. Explain what an account is and how it helps in the recording process. Define debits and credits and explain how they are used to record business transactions. Identify the basic steps in the recording process. Explain what a journal is and how it helps in the recording process. Explain what a ledger is and how it helps in the recording process. Explain what posting is and how it helps in the recording process. Prepare a trial balance and explain its purposes. Questions 1 Brief Exercises Exercises A Problems B Problems 2. 2, 3, 4, 5, 6, 7, 8, 9, 14 1, 2, 5 1, 3, 10 1A, 2A, 3A, 5A 1B, 2B, 3B, 5B 3. 10, 19 4 4. 11, 12, 13, 14, 16 3, 6 2, 4, 6, 7, 8 1A, 2A, 3A, 5A 1B, 2B, 3B, 5B 5. 17 6. 15, 17 7, 8 5, 8 2A, 3A, 5A 2B, 3B, 5B 7. 18, 20 9, 10 5, 6, 7, 9, 10 2A, 3A, 4A, 5A 2B, 3B, 4B, 5B 2-1 ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A 2A 3A Difficulty Level Simple Simple Moderate Time Allotted (min.) 20-30 30-40 40-50 Description Journalize a series of transactions. Journalize transactions, post, and prepare a trial balance. Journalize transactions, post, and prepare a trial balance and financial statements. Prepare a correct trial balance. Journalize transactions, post, and prepare a trial balance. Journalize a series of transactions. Journalize transactions, post, and prepare a trial balance. Journalize and post transactions, prepare a trial balance, and determine the elements of financial statements. Prepare a correct trial balance. Journalize transactions, post, and prepare a trial balance. 4A 5A 1B 2B 3B Moderate Moderate Simple Simple Moderate 30-40 40-50 20-30 30-40 40-50 4B 5B Moderate Moderate 30-40 40-50 2-2 Correlation Chart between Bloom's Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems Knowledge Q2-1 Comprehension Application Analysis Synthesis Evaluation Study Objective 1. Explain what an account is and how it helps in the recording process. Q2-2 Q2-3 Q2-4 Q2-5 Q2-6 Q2-7 Q2-8 Q2-10 Q2-19 BE2-4 Q2-12 Q2-11 Q2-13 Q2-14 Q2-16 BE2-3 BE2-6 E2-2 E2-4 E2-6 E2-7 E2-8 P2-1A P2-2A P2-3A P2-5A P2-1B P2-2B P2-3B P2-5B Q2-9 E2-10 P2-3A P2-2B Q2-14 P2-1A P2-5A P2-3B BE2-1 P2-2A P2-1B P2-5B BE2-2 BE2-5 E2-1 E2-3 2. Define debits and credits and explain how they are used to record business transactions. BLOOM'S TAXONOMY TABLE 3. Identify the basic steps in the recording process. 4. 2-3 Q2-17 Q2-15 Q2-17 BE2-7 BE2-8 E2-5 E2-8 BE2-9 E2-5 E2-6 E2-7 Q2-18 E2-10 P2-2A P2-3A P2-4A Explain what a journal is and how it helps in the recording process. 5. Explain what a ledger is and how it helps in the recording process. 6. Explain what posting is and how it helps in the recording process. P2-2A P2-3B P2-3A P2-5B P2-5A P2-2B P2-5A P2-2B P2-3B P2-5B Q2-20 BE2-10 E2-9 P2-4A P2-4B 7. Prepare a trial balance and explain its purposes. Broadening Your Perspective Financial Reporting Group Decision Case Comparative Analysis Communication Ethics Case Exploring the Web Interpreting Financial Group Decision Interpreting Case Statements Financial Statements ANSWERS TO QUESTIONS 1. A T ac c ount has the following part s : (a) the tit le, (b) the left or debit side, and (c ) the right or c redit side. Disagree. The terms debit and credit mean left and right res pect iv ely. John is incorrect. The double-entry system merely records the dual effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect. Kathy is incorrect. A debit balance only means that debits amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable nor unfavorable. (a) As set ac count s are inc reas ed by debit s and dec reas ed by credit s. (b) Liabilit y ac c ount s are dec reas ed by debit s and inc reas ed by credit s . (c ) Revenues and owner's capit al are inc reas ed by credit and dec reas ed by debits . Ex pens es and owner's drawing are inc reas ed by debits and dec reas ed by credit s . (a) (b) (c) (d) (e) (f) (g) (a) (b) (c ) (d) (e) Accounts Receivable--debits balance. Cash--debits balance. Owner's Drawing--debit balance. Accounts Payable--credit balance. Service Revenue--credit balance. Salaries Expense--debit balance. Owner's Capital--credit balance. Ac count s Rec eivable--as s et --debit balanc e. Ac count s Pay able--liabilit y --c redit balanc e Equipment--as s et--debit balanc e. Owner's Drawing--owner's equit y --debit balanc e. Supplies --as s et --debit balance. 2. 3. 4. 5. 6. 7. 8. (a) Debit Supplies and credit Ac c ount s Pay able. (b) Debit Cash and credit Not es Pay able. (c) Debit Salaries Ex pense and credit Cas h. (1) (2) (3) (4) (5) (6) Th e (1) (2) (3) Cash--bot h debit and credit ent ries . Ac count s Rec eivable--bot h debit and credit entries . Owner's Drawing--debit ent ries only . Ac count s Pay able--bot h debit and credit ent ries . Salaries Ex pense--debit s entries only . Serv ic e Rev enue--c redit ent ries only . bas ic st eps in the rec ording proc ess are: Analy z e eac h trans ac tion for it s ef f ec t on the ac c ount s . Enter the transac t ion inf ormat ion in a journal (book of original ent ry ). Trans f er the journal inf ormat ion to the appropriat e ac c ount s in the ledger (book of a c c o u n t s ). 9. 10. 2-4 Questions Chapter 2 (Continued) 11. Th e (1) (2) (3) adv ant ages of us ing the journal in the rec ording proces s are: I t dis c los es in one plac e the complet e ef f ec ts of a transac t ion. I t prov ides a chronologic al rec ord of all trans ac t ions . I t helps to prev ent or loc at e errors bec aus e the debit and credit amount s for each ent ry c an be readily compared. The debit should be entered first. The credit should be indented. 12. (a) (b) 13. When three or more acc ount s are required in one journal ent ry , the ent ry is ref erred to as a c ompound ent ry . An example of a compound ent ry is the purc has e of equipment, part of whic h is paid for with cas h and the remainder is on ac c ount . (a) (b) No, debits and credits should not be recorded directly in the ledger. The advantages of using the journal are: 1. It discloses in on place the complete effects of a transaction. 2. It provides a chronological record of all transaction. 3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared. 14. 15. The adv ant age to the las t st ep in the pos t ing proc es s is to indic at e that the it em has been p o st e d . (a) Cash ............................................................................................ Alberto Rivera, Capital ......................................................... (Invested cash in the business) Prepaid Insurance ........................................................................ Cash.................................................................................... (Paid one-year insurance policy) Supplies ....................................................................................... Accounts Payable ................................................................ (Purchased supplies on account) Cash ............................................................................................ Service Revenue ................................................................. (Received cash for services rendered) 7,000 7,000 16. (b) 800 800 (c) 1,000 1,000 (d) 7,500 7,500 17. (a) The entire group of accounts maintained by a company, including all the asset, liability, and owner's equity accounts, is referred to collectively as the ledger. (b) The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and identify their location in the ledger. The numbering system used to identify the accounts usually starts with the balance sheet accounts and follows with the income statement accounts. 2-5 Questions Chapter 2 (Continued) 18. A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after all journalized transactions have been posted. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements. No , (b) (c ) (a) (e) (d) Joe is not correct . The proper sequenc e is as follows: Busines s trans ac t ion oc c urs. I nformat ion is ent ered in the journal. Debit s and credit s are pos ted to the ledger. Trial balanc e is prepared. Financ ial st at ement s are prepared. 19. 20. (a) The trial balanc e would balanc e. (b) The trial balanc e would not balance. 2-6 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2-1 (a) Debit Effect Decrease Increase Decrease Increase Decrease Increase (b) Credit Effect Increase Decrease Increase Decrease Increase Decrease (c) Normal Balance Credit Debit Credit Debit Credit Debit 1. 2. 3. 4. 5. 6. Accounts Payable Advertising Expense Service Revenue Accounts Receivable B. C. King, Capital B. C. King, Drawing BRIEF EXERCISE 2-2 Account Debited Cash Equipment Rent Expense Accounts Receivable Account Credited Kaustav Sen, Capital Accounts Payable Cash Service Revenue June 1 2 3 12 BRIEF EXERCISE 2-3 June 1Cash ................................................................ 4,000 Kaustav Sen, Capital..................................... 900 900 800 800 300 300 4,000 2 Equipment.............................................................. Accounts Payable ......................................... Rent Expense ........................................................ Cash................................................................ Accounts Receivable............................................ Service Revenue............................................ 3 12 2-7 BRIEF EXERCISE 2-4 The basic steps in the recording process are: 1. Analyze each transaction. In this step, business documents are examined to determine the effects of the transaction on the accounts. Enter each transaction in a journal. This step is called journalizing and it results in making a chronological record of the transactions. Transfer journal information to ledger accounts. This step is called posting. Posting makes it possible to accumulate the effects of journalized transactions on individual accounts. 2. 3. BRIEF EXERCISE 2-5 (a) Effect on Accounting Equation (b) Debit-Credit Analysis Aug. 1 The asset Cash is increased; the owner's equity account J.A. Motzek, Capital is increased. Debits increase assets: debit Cash $5,000. Credits increase owner's equity: credit J.A. Motzek, Capital $5,000. Debits increase assets: debit Prepaid Insurance $1,800. Credits decrease assets: credit Cash $1,800. Debits increase assets: debit Cash $800. Credits increase revenues: credit Service Revenue $800. Debits increase expenses: debit Salaries Expense $1,000. Credits decrease assets: credit Cash $1,000. 4 The asset Prepaid Insurance is increased; the asset Cash is decreased. 16 The asset Cash is increased; the revenue Service Revenue is increased. 27 The expense Salaries Expense is increased; the asset Cash is decreased. 2-8 BRIEF EXERCISE 2-6 Aug. 1 Cash ........................................................................ J. A. Motzek, Capital ...................................... Prepaid Insurance.................................................. Cash ................................................................ Cash ........................................................................ Service Revenue ............................................ Salaries Expense ................................................... Cash ................................................................ 5,000 5,000 1,800 1,800 800 800 1,000 1,000 4 16 27 BRIEF EXERCISE 2-7 Cash 5/12 2,400 5/15 3,000 Ending bal. 5,400 Accounts Receivable 6,000 5/12 Service Revenue 5/5 6,000 5/15 3,000 Ending bal. 9,000 5/5 2,400 Ending bal. 3,600 BRIEF EXERCISE 2-8 Cash Date May 12 15 Explanation Ref. J1 J1 Debit 2,400 3,000 Credit Balance 2,400 5,400 2-9 BRIEF EXERCISE 2-8 (Continued) Accounts Receivable Date Explanation May 5 12 Service Revenue Date Explanation May 5 15 Ref. J1 J1 Debit 6,000 Credit 2,400 Balance 6,000 3,600 Ref. J1 J1 Debit Credit 6,000 3,000 Balance 6,000 9,000 BRIEF EXERCISE 2-9 P. J. FARVE COMPANY Trial Balance June 30, 2005 Cash .............................................................................. Accounts Receivable .................................................. Equipment .................................................................... Accounts Payable........................................................ P. J. Farve, Capital....................................................... P. J. Farve, Drawing .................................................... Service Revenue.......................................................... Salaries Expense ......................................................... Rent Expense............................................................... Debit $ 6,800 3,000 17,000 Credit $ 9,000 20,000 1,200 6,000 6,000 1,000 $35,000 $35,000 2-10 BRIEF EXERCISE 2-10 CHENG COMPANY Trial Balance December 31, 2005 Cash .............................................................................. Prepaid Insurance........................................................ Accounts Payable........................................................ Unearned Revenue ...................................................... P. Cheng, Capital ......................................................... P. Cheng, Drawing ....................................................... Service Revenue .......................................................... Salaries Expense ......................................................... Rent Expense ............................................................... Debit $16,800 3,500 Credit $ 3,000 4,200 13,000 4,500 25,600 18,600 2,400 $45,800 $45,800 2-11 Account Debited (c) Effect Increase Debit Owner's Equity Asset Liability Accounts Payable Service Revenue Cash Cash Decrease Increase H. Burns, Capital Increase Effect (c) (b) Specific Account Cash Credit (d) Normal Balance (a) Basic Type (b) Specific Account (d) Normal Balance EXERCISE 2-1 Account Credited Transaction (a) Basic Type Jan. 2 Asset 3 Supplies Increase Debit Asset Equipment Increase Debit Debit Credit 9 Asset 11 Asset Accounts Receivable Advertising Expense Cash Increase Debit Asset Increase Debit Asset Increase Debit Owner's Equity Increase Credit SOLUTIONS TO EXERCISES 2-12 16 Owner's Equity Decrease Debit 20 Asset Accounts Receivable Asset Cash Decrease Debit 23 Liability Accounts Payable H. Burns, Drawing Increase Debit Decrease Credit Decrease Debit 28 Owner's Equity Asset Cash Decrease Debit EXERCISE 2-2 General Journal Date Jan. 2 Account Titles and Explanation Cash H. Burns, Capital Equipment Cash Supplies Accounts Payable Accounts Receivable Service Revenue Advertising Expense Cash Cash Accounts Receivable Accounts Payable Cash H. Burns, Drawing Cash Ref. Debit 15,000 15,000 4,000 4,000 500 500 1,800 1,800 200 200 700 700 300 300 2,000 2,000 J1 Credit 3 9 11 16 20 23 28 EXERCISE 2-3 Oct. 1 Debits increase assets: debit Cash $20,000. Credits increase owner's equity: credit Lynn Robbins, Capital $20,000. No transaction. Debits increase assets: debit Office Furniture $1,900. Credits increase liabilities: credit Accounts Payable $1,900. 2 3 2-13 EXERCISE 2-3 (Continued) Oct. 6 Debits increase assets: debit Accounts Receivable $3,200. Credits increase revenues: credit Service Revenue $3,200. Debits decrease liabilities: debit Accounts Payable $700. Credits decrease assets: credit Cash $700. Debits increase expenses: debit Salaries Expense $2,000. Credits decrease assets: credit Cash $2,000. 27 30 EXERCISE 2-4 General Journal Date Oct. 1 Accounts Titles and Explanation Cash Lynn Robbins, Capital No entry. Office Furniture Accounts Payable Accounts Receivable Service Revenue Accounts Payable Cash Salaries Expense Cash 1,900 1,900 3,200 3,200 700 700 2,000 2,000 Ref. Debits 20,000 Credit 20,000 2 3 6 27 30 2-14 EXERCISE 2-5 (a) Aug. 1 10 31 Bal. Cash 3,000 Aug. 12 2,400 900 5,300 1,000 Notes Payable Aug. 12 4,000 Roberta Mendez, Capital Aug. 1 3,000 900 Accounts Receivable Aug. 25 1,600 Aug. 31 Bal. 700 Office Equipment Aug. 12 5,000 Service Revenue Aug. 10 25 Bal. 2,400 1,600 4,000 (b) ROBERTA MENDEZ, INVESTMENT BROKER Trial Balance August 31, 2005 Cash .......................................................................... Accounts Receivable............................................... Office Equipment ..................................................... Notes Payable .......................................................... Roberta Mendez, Capital ......................................... Service Revenue ...................................................... _______ $11,000 Debit $5,300 700 5,000 Credit $4,000 3,000 4,000 $11,000 2-15 EXERCISE 2-6 (a) Date Apr. 1 General Journal Accounts Titles and Explanation Cash L. Padre, Capital (Owner's investment of cash in business) Cash Service Revenue (Received cash for services provided) 15 Salaries Expense Cash (Paid salaries to date) Accounts Payable Cash (Paid creditors on account) Cash Accounts Receivable (Received cash in payment of account) 30 Cash Unearned Revenue (Received cash for future services) 1,000 1,000 400 400 900 900 Ref. Debits 10,000 Credit 10,000 12 600 600 25 1,500 1,500 29 2-16 EXERCISE 2-6 (Continued) (b) PADRE LANDSCAPING COMPANY Trial Balance April 30, 2005 Cash ...................................................................... Accounts Receivable .......................................... Supplies................................................................ Accounts Payable................................................ Unearned Revenue .............................................. J. Padre, Capital................................................... Service Revenue.................................................. Salaries Expense ................................................. EXERCISE 2-7 (a) Oct. 1 Cash................................................................. Maxim, Capital......................................... (Owner's investment of cash in business) Cash................................................................. Service Revenue..................................... (Received cash for services provided) Cash................................................................. Notes Payable ......................................... (Obtained loan from bank) Cash................................................................. Accounts Receivable ............................. (Received cash in payment of account) Accounts Receivable ..................................... Service Revenue..................................... (Billed clients for services provided) 2-17 Debit $10,200 2,800 1,800 Credit 600 $15,400 300 1,000 10,000 4,100 _______ $15,400 $ 5,000 5,000 10 650 650 10 3,000 3,000 20 500 500 20 940 940 EXERCISE 2-7 (Continued) (b) MAXIM CO. Trial Balance October 31, 2005 Cash....................................................................... Accounts Receivable ........................................... Supplies ................................................................ Furniture................................................................ Notes Payable....................................................... Accounts Payable ................................................ Maxim, Capital ...................................................... Maxim, Drawing .................................................... Service Revenue................................................... Store Wages Expense.......................................... Rent Expense Debit $8,200 1,240 400 2,000 Credit $ 3,000 500 7,000 300 2,390 500 250 $12,890 _______ $12,890 EXERCISE 2-8 (a) Date Sept. 1 General Journal Accounts Titles and Explanation Cash Neve Campbell, Capital Equipment Cash Accounts Payable Accounts Payable Cash Neve Campbell, Drawing Cash Ref. 101 301 157 101 201 201 101 306 101 Debit 10,000 J1 Credit 10,000 12,000 6,000 6,000 3,000 3,000 500 500 5 25 30 2-18 EXERCISE 2-8 (Continued) (b) Cash Date Sept. 1 Sept. 5 Sept. 25 Sept. 30 No. 101 Balance 10,000 4,000 1,000 500 Explanation Ref. J1 J1 J1 J1 Debit 10,000 Credit 6,000 3,000 500 Equipment Date Explanation Sept. 5 Ref. J1 Debit 12,000 Credit No. 157 Balance 12,000 Accounts Payable Date Explanation Sept. 5 25 Ref. J1 J1 Debit 3,000 Credit 6,000 No. 201 Balance 6,000 3,000 Neve Campbell, Capital Date Explanation Sept. 1 Ref. J1 Debit Credit 10,000 No. 301 Balance 10,000 Neve Campbell, Drawing Date Explanation Sept. 30 Ref. J1 Debit 500 Credit No. 306 Balance 500 2-19 EXERCISE 2-9 (a) In Balance No Yes Yes No Yes No (b) Difference $400 -- -- 300 -- 36 (c) Larger Column Debit -- -- Credit -- Credit Error 1. 2. 3. 4. 5. 6. EXERCISE 2-10 SPEEDY DELIVERY SERVICE Trial Balance July 31, 2005 Debit Cash ($90,907 Debit total without Cash $69,340) ..................................................................... Accounts Receivable ................................................... Prepaid Insurance ........................................................ Delivery Equipment...................................................... Notes Payable............................................................... Accounts Payable ........................................................ Salaries Payable........................................................... I. M. Speedy, Capital .................................................... I. M. Speedy, Drawing .................................................. Service Revenue .......................................................... Salaries Expense.......................................................... Gas and Oil Expense ................................................... Repair Expense ............................................................ Insurance Expense ...................................................... $21,567 10,642 1,968 49,360 $26,450 8,396 815 44,636 700 10,610 4,428 758 961 523 $90,907 Credit $90,907 2-20 SOLUTIONS TO PROBLEMS PROBLEM 2-1A J1 Credit 60,000 Date Mar. 1 Account Titles and Explanation Cash Bill Affleck, Capital (Owner's investment of cash in business) Land Buildings Equipment Cash (Purchased Lee's Golf Land) Advertising Expense Cash (Paid for advertising) Prepaid Insurance Cash (Paid for one-year insurance policy) Equipment Accounts Payable (Purchased equipment on account) Cash Golf Revenue (Received cash for services provided) Ref. Debit 60,000 3 23,000 9,000 6,000 38,000 5 1,600 1,600 6 1,480 1,480 10 2,600 2,600 18 800 800 19 Cash Unearned Revenue (Received cash for coupon books sold) 1,500 1,500 2-21 PROBLEM 2-1A (Continued) Date Mar. 1 Accounts Titles and Explanation Bill Affleck, Drawing Cash (Withdrew cash for personal use) Salaries Expense Cash (Paid salaries) Accounts Payable Cash (Paid creditor on account) Cash Gold Revenue (Received cash for services provided) Ref. Debit 1,000 Credit 1,000 30 600 600 30 2,600 2,600 31 500 500 2-22 PROBLEM 2-2A (a) Date Apr. 1 Account Titles and Explanation Cash Judi Dench, Capital (Owner's investment of cash in business) No entry--not a transaction. Rent Expense Cash (Paid monthly office rent) Supplies Accounts Payable (Purchased supplies on account from Halo Company) Accounts Receivable Service Revenue (Billed clients for services provided) Cash Unearned Revenue (Received cash for future service) 20 Cash Service Revenue (Received cash for services provided) 30 Salaries Expense Cash (Paid monthly salary) 729 101 800 800 Ref. 101 301 Debit 25,000 J1 Credit 25,000 1 2 3 126 201 1,500 1,500 10 112 400 900 900 11 101 205 500 500 101 400 1,500 1,500 726 101 1,500 1,500 2-23 PROBLEM 2-2A (Continued) Date Apr. 30 Accounts Titles and Explanation Accounts Payable Cash (Paid Halo Company on account) Ref. 201 101 Debits 600 Credit 600 (b) Cash Date Apr. 1 2 11 20 30 30 No. 101 Balance 25,000 24,200 24,700 26,200 24,700 24,100 No. 112 Balance 900 No. 126 Balance 1,500 No. 201 Balance 1,500 900 No. 205 Balance 500 Explanation Ref. J1 J1 J1 J1 J1 J1 Debit 25,000 500 1,500 Credit 800 1,500 600 Accounts Receivable Date Explanation Apr. 10 Supplies Date Apr. 3 Ref. J1 Debit 900 Credit Explanation Ref. J1 Debit 1,500 Credit Accounts Payable Date Explanation Apr. 3 30 Unearned Revenue Date Explanation Apr. 11 Ref. J1 J1 Debit 600 Credit 1,500 Ref. J1 Debit Credit 500 2-24 PROBLEM 2-2A (Continued) Judi Dench, Capital Date Explanation Apr. 1 No. 301 Balance 25,000 Ref. J1 Debit Credit 25,000 Service Revenue Date Explanation Apr. 10 20 Ref. J1 J1 Debit Credit 900 1,500 No. 400 Balance 900 2,400 Salaries Expense Date Explanation Apr. 30 Ref. J1 Debit 1,500 Credit No. 726 Balance 1,500 Rent Expense Date Explanation Apr. 2 Ref. J1 Debit 800 Credit No. 729 Balance 800 (c) JUDI DENCH, ARCHITECT Trial Balance April 30, 2005 Cash ...................................................................... Accounts Receivable .......................................... Supplies................................................................ Accounts Payable................................................ Unearned Revenue .............................................. Judi Dench, Capital ............................................. Service Revenue.................................................. Salaries Expense ................................................. Rent Expense....................................................... Debit $24,100 900 1,500 Credit $ 900 500 25,000 2,400 1,500 800 $28,800 _______ $28,800 2-25 PROBLEM 2-3A (a) Trans. 1. Account Titles and Explanation Cash Dennis Chambers, Capital No entry. Prepaid Rent Rent Expense Cash Furniture & Equipment Cash Accounts Payable Prepaid Insurance Insurance Expense Cash Office Supplies Cash Office Supplies Accounts Payable Cash Accounts Receivable Brokerage Revenue Accounts Payable Cash Cash Accounts Receivable 11. Utility Expense Accounts Payable 400 400 33,000 3,000 36,000 70,000 20,000 50,000 2,750 250 3,000 1,000 1,000 3,000 3,000 10,000 20,000 30,000 800 800 5,000 5,000 Debit 120,000 Credit 120,000 2. 3. 4. 5. 6. 7. 8. 9. 10. 2-26 PROBLEM 2-3A (Continued) Trans. 12. Account Titles and Explanation Salaries Expense Cash Debit 4,000 Credit 4,000 (b) (1) Cash 120,000 (3) (4) (5) (6) 10,000 (9) 5,000 (12) 70,200 (4) 36,000 20,000 3,000 1,000 800 (9) 4,000 Furniture & Equipment 70,000 70,000 (8) (10) Accounts Payable (4) 50,000 (7) 3,000 800 (11) 400 52,600 (8) Accounts Receivable 20,000 (10) 5,000 15,000 Dennis Chambers, Capital (1) 120,000 120,000 (6) (7) Office Supplies 1,000 3,000 4,000 (12) Brokerage Revenue (8) 30,000 30,000 (5) Prepaid Insurance 2,750 2,750 Salaries Expense 4,000 4,000 (3) Prepaid Rent 33,000 33,000 (3) Rent Expense 3,000 3,000 2-27 PROBLEM 2-3A (Continued) Utility Expense 400 400 Insurance Expense 250 250 (11) (5) (c) CHAMBERS BROKERAGE SERVICES Trial Balance May 31, 2005 Cash................................................................... Accounts Receivable ....................................... Office Supplies ................................................. Prepaid Insurance ............................................ Prepaid Rent ..................................................... Furniture & Equipment .................................... Accounts Payable ............................................ Dennis Chambers, Capital............................... Brokerage Revenue.......................................... Salaries Expense.............................................. Rent Expense.................................................... Utility Expense.................................................. Insurance Expense........................................... Debit $ 70,200 15,000 4,000 2,750 33,000 70,000 Credit $ 52,600 120,000 30,000 4,000 3,000 400 250 $202,600 ________ $202,600 2-28 PROBLEM 2-3A (Continued) (d) CHAMBERS BROKERAGE SERVICES Income Statement For the Month Ended May 31, 2005 Revenues Brokerage Revenue ........................................ Expenses Salaries expense............................................. Rent expense .................................................. Utility expense ................................................ Insurance expense ......................................... Total expenses ........................................ Net income .............................................................. $30,000 $4,000 3,000 400 250 7,650 $22,350 CHAMBERS BROKERAGE SERVICES Statement of Owner's Equity For the Month Ended May 31, 2005 Capital, May 1, 2005................................................................. Add: Net income .................................................................... Capital, May 31, 2005............................................................... ALTERNATIVE PRESENTATION: $120,000 22,350 $142,350 Beginning Capital .................................................................... Add: Investment .................................................................... Add: Net income .................................................................... Ending Capital ......................................................................... 0 120,000 22,350 $142,350 $ 2-29 PROBLEM 2-3A (Continued) CHAMBERS BROKERAGE SERVICES Balance Sheet May 31, 2005 Assets Cash.......................................................................................... Accounts receivable ............................................................... Office supplies......................................................................... Prepaid insurance ................................................................... Prepaid rent ............................................................................. Furniture & equipment............................................................ Total assets...................................................................... Liabilities and Owner's Equity Liabilities Accounts payable............................................................ Owner's equity Dennis Chambers, Capital.............................................. Total liabilities and owner's equity ........................ $ 52,600 142,350 $194,950 $ 70,200 15,000 4,000 2,750 33,000 70,000 $194,950 2-30 PROBLEM 2-4A RON SALEM CO. Trial Balance June 30, 2005 Cash ($3,840 + $180) ................................................... Accounts Receivable ($3,231 $180)........................ Supplies ($800 $340) ................................................ Equipment ($3,000 + $340) ......................................... Accounts Payable ($2,666 $309 $390)................. Unearned Revenue...................................................... R. Salem, Capital ......................................................... R. Salem, Drawing ($800 + $500) ............................... Service Revenue ($2,380 + $801) ............................... Salaries Expense ($3,400 + $367 $500) .................. Office Expense ............................................................ Debit $ 4,020 3,051 460 3,340 Credit $ 1,967 2,200 9,000 1,300 3,181 3,267 910 $16,348 _______ $16,348 2-31 PROBLEM 2-5A (a) & (c) Cash Date Mar. 1 2 9 10 12 20 20 31 31 31 No. 101 Balance 16,000 13,000 19,500 10,500 9,700 16,900 13,900 9,100 9,500 21,500 Explanation Balance Ref. J1 J1 J1 J1 J1 J1 J1 J1 J1 Debit Credit 3,000 6,500 9,000 800 7,200 3,000 4,800 400 12,000 Accounts Receivable Date Explanation Mar. 31 Ref. J1 Debit 400 Credit No. 112 Balance 400 Land Date Mar. 1 Explanation Balance Ref. Debit Credit No. 140 Balance 42,000 Buildings Date Explanation Mar. 1 Balance Ref. Debit Credit No. 145 Balance 18,000 Equipment Date Explanation Mar. 1 Balance Ref. Debit Credit No. 157 Balance 16,000 2-32 PROBLEM 2-5A (Continued) Accounts Payable Date Explanation Mar. 1 Balance 2 10 No. 201 Balance 12,000 18,000 9,000 Ref. J1 J1 Debit Credit 6,000 9,000 A. Russo, Capital Date Explanation Mar. 1 Balance Ref. Debit Credit No. 301 Balance 80,000 Admission Revenue Date Explanation Mar. 9 20 31 Ref. J1 J1 J1 Debit Credit 6,500 7,200 12,000 No. 405 Balance 6,500 13,700 25,700 Concession Revenue Date Explanation Mar. 31 Ref. J1 Debit Credit 800 No. 406 Balance 800 Advertising Expense Date Explanation Mar. 12 Ref. J1 Debit 800 Credit No. 610 Balance 800 Film Rental Expense Date Explanation Mar. 2 20 Ref. J1 J1 Debit 9,000 3,000 Credit No. 632 Balance 9,000 12,000 2-33 PROBLEM 2-5A (Continued) Salaries Expense Date Explanation Mar. 31 (b) Date Mar. 2 Account Titles and Explanation Film Rental Expense Accounts Payable Cash (Rented films for cash and on account) No entry. Cash Admission Revenue (Received cash for services provided) 10 Accounts Payable ($6,000 + $3,000) Cash (Paid creditors on account) No entry. Advertising Expense Cash (Paid advertising expense) Cash Admission Revenue (Received cash for services provided) 20 Film Rental Expense Cash (Paid film rental) 610 101 800 800 101 405 6,500 6,500 Ref. 632 201 101 Debit 9,000 J1 Credit 6,000 3,000 No. 726 Balance 4,800 Ref. J1 Debit 4,800 Credit 3 9 201 101 9,000 9,000 11 12 20 101 405 7,200 7,200 632 101 3,000 3,000 2-34 PROBLEM 2-5A (Continued) Account Titles and Explanation Date Mar. 31 Salaries Expense Cash (Paid salaries expense) 31 Cash Accounts Receivable Concession Revenue (10% X $8,000) (Received cash and balance on account for concession revenue) 31 Cash Admission Revenue (Received cash for services provided) Ref. 726 101 Debit 4,800 Credit 4,800 101 112 406 400 400 800 101 405 12,000 12,000 (d) RUSSO THEATER Trial Balance March 31, 2005 Cash.................................................................... Accounts Receivable ........................................ Land.................................................................... Buildings ............................................................ Equipment.......................................................... Accounts Payable ............................................. A. Russo, Capital............................................... Admission Revenue.......................................... Concession Revenue........................................ Advertising Expense......................................... Film Rental Expense ......................................... Salaries Expense.............................................. Debit $ 21,500 400 42,000 18,000 16,000 $ Credit 9,000 80,000 25,700 800 800 12,000 4,800 $115,500 _______ $115,500 2-35 PROBLEM 2-1B J1 Credit 50,000 Date Apr. 1 Account Titles and Explanation Cash C. J. Amaro, Capital (Owner's investment of cash in business) Land Cash (Purchased land for cash) Ref. Debit 50,000 4 30,000 30,000 8 Advertising Expense Accounts Payable (Incurred advertising expense on account) Salaries Expense Cash (Paid salaries) No entry. Prepaid Insurance Cash (Paid for one-year insurance policy) C. J. Amaro, Drawing Cash (Withdrew cash for personal use) Cash Admission Revenue (Received cash for services provided) 1,800 1,800 11 1,500 1,500 12 13 1,500 1,500 17 600 600 20 5,700 5,700 2-36 PROBLEM 2-1B (Continued) Date Apr. 25 Account Titles and Explanation Cash Unearned Admission Revenue (Received cash for future services) Cash Admission Revenue (Received cash for services provided) 30 Accounts Payable Cash (Paid creditor on account) 900 900 Ref. Debit 2,500 2,500 Credit 30 8,900 8,900 2-37 PROBLEM 2-2B (a) Date May 1 Account Titles and Explanation Cash Kara Shin, Capital (Owner's investment of cash in business) No entry--not a transaction. Supplies Accounts Payable (Purchased supplies on account) Rent Expense Cash (Paid office rent) Accounts Receivable Service Revenue (Billed client for services provided) Cash Unearned Revenue (Received cash for future services) 17 Cash Service Revenue (Received cash for services provided) 31 Salaries Expense Cash (Paid salaries) 126 201 1,500 1,500 Ref. 101 301 Debit 20,000 J1 Credit 20,000 2 3 7 729 101 900 900 11 112 400 2,100 2,100 12 101 205 3,500 3,500 101 400 1,200 1,200 726 101 1,000 1,000 2-38 PROBLEM 2-2B (Continued) Date May 31 Account Titles and Explanation Accounts Payable ($1,500 X 40%) Cash (Paid creditor on account) Ref. 201 101 Debit 600 Credit 600 (b) Cash Date May 1 7 12 17 31 31 No. 101 Balance 20,000 19,100 22,600 23,800 22,800 22,200 No. 112 Balance 2,100 Explanation Ref. J1 J1 J1 J1 J1 J1 Debit 20,000 3,500 1,200 Credit 900 1,000 600 Accounts Receivable Date Explanation May 11 Ref. J1 Debit 2,100 Credit Supplies Date Explanation May 3 Ref. J1 Debit 1,500 Credit No. 126 Balance 1,500 Accounts Payable Date Explanation May 3 31 Ref. J1 J1 Debit 600 Credit 1,500 No. 201 Balance 900 Unearned Revenue Date Explanation May 12 Ref. J1 Debit Credit 3,500 No. 205 Balance 3,500 2-39 PROBLEM 2-2B (Continued) Kara Shin, Capital Date Explanation May 1 No. 301 Balance 20,000 Ref. J1 Debit Credit 20,000 Service Revenue Date Explanation May 11 17 Ref. J1 J1 Debit Credit 2,100 1,200 No. 400 Balance 2,100 3,300 Salaries Expense Date Explanation May 31 Ref. J1 Debit 1,000 Credit No. 726 Balance 1,000 Rent Expense Date Explanation May 7 Ref. J1 Debit 900 Credit No. 729 Balance 900 (c) KARA SHIN, CPA Trial Balance May 31, 2005 Debit Cash....................................................................... $22,200 Accounts Receivable ........................................... 2,100 Supplies ................................................................ 1,500 Accounts Payable ................................................ Unearned Revenue............................................... Kara Shin, Capital................................................. Service Revenue................................................... Salaries Expense.................................................. 1,000 900 Rent Expense........................................................ $27,700 Credit $ 900 3,500 20,000 3,300 $27,700 2-40 PROBLEM 2-3B (a) As indicated in item (9), $4,000 was paid for four months in advance on December 1. One month has passed, so 1/4 X $4,000 = $1,000 of rent has expired and become an expense. Three months are still to come, so 3/4 X $4,000 = $3,000 remains in the prepaid rent account as an asset. (b) & (d) Cash Balance 8,000 (1) (3) (4) (7) 13,000 (5) 5,000 (8) (10) 3,000 2,000 Repair Services Revenue (7) 14,000 15,000 (10) 1,000 2,000 Mark Hockenberry, Drawings 2,000 Mark Hockenberry, Capital Balance 41,000 Accounts Receivable Balance15,000 (4) 13,000 (7) 9,000 Parts Inventory Balance13,000 (2) 4,000 (6) Prepaid Rent Balance 3,000 (9) Shop Equipment Balance21,000 Accounts Payable Balance (2) 15,000 (1) Advertising Expense 1,000 4,000 (3) Miscellaneous Expense 2,000 1,000 (6) Repair Parts Expense 4,000 (9) 19,000 4,000 (8) Rent Expense 1,000 (5) Wage Expense 3,000 2-41 PROBLEM 2-3B (Continued) (c) Trans. 1. Account Titles and Explanation Advertising Expense Cash Parts Inventory Accounts Payable Miscellaneous Expense Cash Cash Accounts Receivable 5. Accounts Payable Cash Repair Parts Expense Parts Inventory Cash Accounts Receivable Repair Services Revenue Wage Expense Cash Rent Expense Prepaid Rent Mark Hockenberry, Drawings Cash 15,000 15,000 4,000 4,000 5,000 9,000 14,000 3,000 3,000 1,000 1,000 2,000 2,000 Debit 1,000 Credit 1,000 4,000 4,000 2,000 2,000 13,000 13,000 2. 3. 4. 6. 7. 8. 9. 10. 2-42 PROBLEM 2-3B (Continued) (e) BYTE REPAIR SERVICE Trial Balance January 31, 2005 Cash....................................................................... Accounts Receivable ........................................... Parts Inventory ..................................................... Prepaid Rent ......................................................... Shop Equipment................................................... Accounts Payable ................................................ Mark Hockenberry, Capital.................................. Mark Hockenberry, Drawings ............................. Repair Services Revenue .................................... Advertising Expense............................................ Miscellaneous Expense....................................... Repair Parts Expense .......................................... Rent Expense ....................................................... Wage Expense...................................................... Debit $ 3,000 11,000 13,000 2,000 21,000 Credit $ 8,000 41,000 2,000 14,000 1,000 2,000 4,000 1,000 3,000 $63,000 $63,000 (f) Cash.................................................... Accounts Receivable ........................ Parts Inventory .................................. Prepaid Rent ...................................... Shop Equipment................................ Total Assets....................................... $ 3,000 11,000 13,000 2,000 21,000 $50,000 (g) Repair Services Revenue ................. Advertising Expense......................... Miscellaneous Expense.................... Repair Parts Expense ....................... Rent Expense .................................... Wage Expense................................... Net Income......................................... $14,000 (1,000) (2,000) (4,000) (1,000) (3,000) $ 3,000 2-43 PROBLEM 2-4B GARLAND COMPANY Trial Balance May 31, 2005 Cash ($3,850 + $520 $405) ......................................... Accounts Receivable ($2,570 $420) .......................... Prepaid Insurance ($700 + $100).................................. Supplies ($0 + $520) ...................................................... Equipment ($12,000 $520).......................................... Accounts Payable ($4,500 $100 + $520 $420)....... Property Taxes Payable ................................................ M. Garland, Capital ($11,700 + $1,000) ........................ M. Garland, Drawing ($0 + $1,000) ............................... Service Revenue ............................................................ Salaries Expense ($4,200 + $200) ................................ Advertising Expense ($1,100 + $405) .......................... Property Tax Expense ($800 + $100) ........................... Debit $ 3,965 2,150 800 520 11,480 Credit $ 4,500 560 12,700 1,000 8,960 4,400 1,505 900 $26,720 $26,720 2-44 PROBLEM 2-5B (a) & (c) Cash Date Apr. 1 2 9 10 12 25 29 30 30 No. 101 Balance 6,000 5,200 7,000 4,000 3,700 8,900 7,300 7,385 6,485 Explanation Balance Ref. J1 J1 J1 J1 J1 J1 J1 J1 Debit Credit 800 1,800 3,000 300 5,200 1,600 85 900 Accounts Receivable Date Explanation Apr. 30 Ref. J1 Debit 85 Credit No. 112 Balance 85 Prepaid Rentals Date Explanation Apr. 30 Ref. J1 Debit 900 Credit No. 136 Balance 900 Land Date Apr. 1 Explanation Balance Ref. Debit Credit No. 140 Balance 10,000 Buildings Date Explanation Apr. 1 Balance Ref. Debit Credit No. 145 Balance 8,000 2-45 PROBLEM 2-5B (Continued) Equipment Date Explanation Apr. 1 Balance No. 157 Balance 6,000 Ref. Debit Credit Accounts Payable Date Explanation Apr. 1 Balance 10 20 Ref. J1 J1 Debit 1,000 Credit 1,000 No. 201 Balance 2,000 1,000 2,000 Mortgage Payable Date Explanation Apr. 1 Balance 10 Ref. J1 Debit 2,000 Credit No. 275 Balance 8,000 6,000 Alvin Wasicko, Capital Date Explanation Apr. 1 Balance Ref. Debit Credit No. 301 Balance 20,000 Admission Revenue Date Explanation Apr. 9 25 Ref. J1 J1 Debit Credit 1,800 5,200 No. 405 Balance 1,800 7,000 Concession Revenue Date Explanation Apr. 30 Ref. J1 Debit Credit 170 No. 406 Balance 170 2-46 PROBLEM 2-5B (Continued) Advertising Expense Date Explanation Apr. 12 Film Rental Expense Date Explanation Apr. 2 20 Salaries Expense Date Explanation Apr. 29 (b) Date Apr. 2 Account Titles and Explanation Film Rental Expense Cash (Paid film rental) No entry--not a transaction. Cash Admission Revenue (Received cash for services provided) 10 Mortgage Payable Accounts Payable Cash (Made payments on mortgage and accounts payable) 101 405 1,800 1,800 Ref. 632 101 Debit 800 J1 Credit 800 No. 610 Balance 300 No. 632 Balance 800 1,800 No. 726 Balance 1,600 Ref. J1 Debit 300 Credit Ref. J1 J1 Debit 800 1,000 Credit Ref. J1 Debit 1,600 Credit 3 9 275 201 101 2,000 1,000 3,000 2-47 PROBLEM 2-5B (Continued) Date Apr. 11 12 Account Titles and Explanation No entry--not a transaction. Advertising Expense Cash (Paid advertising expenses) Film Rental Expense Accounts Payable (Rented film on account) Cash Admission Revenue (Received cash for services provided) 29 Salaries Expense Cash (Paid salaries expense) Cash Accounts Receivable Concession Revenue (17% X $1,000) (Received cash and balance on account for concession revenue) 610 101 300 300 Ref. Debit Credit 20 632 201 1,000 1,000 25 101 405 5,200 5,200 726 101 1,600 1,600 30 101 112 406 85 85 170 30 Prepaid Rentals Cash (Paid cash for future film rentals) 136 101 900 900 2-48 PROBLEM 2-5B (Continued) (d) LAKE THEATER Trial Balance April 30, 2005 Cash....................................................................... Accounts Receivable ........................................... Prepaid Rentals .................................................... Land....................................................................... Buildings............................................................... Equipment............................................................. Accounts Payable ................................................ Mortgage Payable ................................................ Alvin Wasicko, Capital......................................... Admission Revenue............................................. Concession Revenue........................................... Advertising Expense............................................ Film Rental Expense ............................................ Salaries Expense.................................................. Debit $ 6,485 85 900 10,000 8,000 6,000 Credit $ 2,000 6,000 20,000 7,000 170 300 1,800 1,600 $35,170 $35,170 2-49 BYP 2-1 FINANCIAL REPORTING PROBLEM (a) Account Accounts Payable Accounts Receivable Property, Plant, and Equipment Income Taxes Payable Interest Expense Inventory (1) Increase Side Right Left Left Right Left Left (1) Decrease Side Left Right Right Left Right Right (2) Normal Balance Credit Debit Debit Credit Debit Debit (b) (1) Cash is increased. (2) Cash is decreased. (3) Cash is decreased or Accounts Payable is increased. (c) (1) Cash is decreased. (2) Cash is decreased or Notes or Mortgage Payable is increased. 2-50 BYP 2-2 COMPARATIVE ANALYSIS PROBLEM (a) 1. 2. 3. 4. Inventory: PepsiCo debit debit credit debit 1. 2. 3. 4. Property, Plant, and Equipment: Accounts Payable: Interest Expense: Coca-Cola Accounts Receivable: Cash and Equivalents: Cost of Goods Sold: Sales (Revenue): debit debit debit credit (b) The following other accounts are ordinarily involved: (1) Increase in Accounts Receivable: Service Revenue or Sales is increased (credited). (2) Decrease in Accrued Payroll: Cash is decreased (credited). (3) Increase in Property, Plant, and Equipment: Notes Payable is increased (credited) or Cash is decreased (credited). (4) Increase in Interest Expense: Cash is decreased (credited). 2-51 BYP 2-3 INTERPRETING FINANCIAL STATEMENTS A Global Focus (a) One advantage of reporting using U.S. GAAP is that the U.S. financial markets are the largest in the world, and by reporting under U.S. GAAP a company is making it easier for these investors to evaluate the company. Also, U.S. GAAP is widely respected as being a well designed approach to financial reporting. A disadvantage of using U.S. GAAP if you are not a U.S. company is that converting will be costly. It will normally require that the company keep records using the standards of its home country, as well as U.S. GAAP. (b) While there are many similarities between U.S. and Canadian standards, some differences do exist. Sometimes these differences can result in materially different results. Often it is not possible for analysts to make adjustments to convert from one reporting model to another because financial reports don't typically provide enough detail to make such a conversion. Therefore, making comparisons of companies that use different reporting models can be time consuming, costly, and risky. (c) Even if companies report using the same GAAP, in this case Canadian, it is still possible that they will apply the rules differently. The application of GAAP in any country requires considerable judgment. One company might apply the rules in a way that tends to result in higher net income, while the other company might apply the rules in a way that results in lower net income. Thus, even if both companies use Canadian GAAP, significant problems can still arise when comparing the results of the two companies. (d) Despite the issues raised in part (c), the reality is that it is much easier to compare the results of companies that use GAAP of the same country; e.g., if both use U.S. standards or both use Canadian standards. For example, under U.S. GAAP companies can choose different ways to account for inventory, but U.S. GAAP also requires disclosures that make comparison of companies that choose different methods easier. 2-52 BYP 2-4 EXPLORING THE WEB The answer is dependent upon the company selected by the student. 2-53 BYP 2-5 GROUP DECISION CASE (a) May 1 5 7 14 15 20 30 31 Correct. Cash ................................................................. Lesson Revenue ..................................... Cash ................................................................. Unearned Boarding Revenue ................ Office Equipment............................................ Cash ......................................................... Amy Torbert, Drawing .................................... Cash ......................................................... Cash ................................................................. Riding Revenue....................................... Correct. Hay and Feed Supplies .................................. Accounts Payable................................... 1,500 1,500 250 250 500 500 800 800 400 400 184 184 (b) The errors in the entries of May 14 and 20 would prevent the trial balance from balancing. (c) Net income as reported........................................... Add: 5/15, Salaries expense (Amy Torbert, Drawing) .................................................... 5/31, Hay and feed expense (still on hand) .......................................................... Less: 5/7, Boarding revenue unearned................. Correct net income .................................................. (d) Cash as reported...................................................... Add: 5/20, Transposition error ............................. 5/31, Purchase on account .......................... $4,500 $ 400 1,500 1,900 6,400 500 $5,900 $12,475 $ 36 1,500 1,536 $14,011 2-54 BYP 2-6 COMMUNICATION ACTIVITY Date: To: From: May 25, 2005 Accounting Instructor Student In the first transaction, bills totaling $5,000 were sent to customers for services rendered. Therefore, the asset Accounts Receivable is increased $5,000 and the revenue Service Revenue is increased $5,000. Debits increase assets and credits increase revenues, so the journal entry is: Accounts Receivable............................................................... Service Revenue .............................................................. (Bill customers for services provided) 5,000 5,000 The $5,000 amount is then posted to the debit side of the general ledger account Accounts Receivable and to the credit side of the general ledger account Service Revenue. In the second transaction, $2,000 was paid in salaries to employees. Therefore, the expense Salaries Expense is increased $2,000 and the asset Cash is decreased $2,000. Debits increase expenses and credits decrease assets, so the journal entry is: Salaries Expense ..................................................................... Cash................................................................................... (Salaries paid) 2,000 2,000 The $2,000 amount is then posted to the debit side of the general ledger account Salaries Expense and to the credit side of the general ledger account Cash. 2-55 BYP 2-7 ETHICS CASE (a) The stakeholders in this situation are: Sara Rankin, assistant chief accountant. Users of the company's financial statements. The Hokey Company. (b) By adding $1,000 to the Equipment account, that account total is intentionally misstated. By not locating the error causing the imbalance, some other account may also be misstated by $1,000. If the amount of $1,000 is determined to be immaterial, and the intent is not to commit fraud (cover up an embezzlement or other misappropriation of assets), Sara's action might not be considered unethical in the preparation of interim financial statements. However, if Sara is violating a company accounting policy by her action, then she is acting unethically. (c) Sara's alternatives are: 1. Miss the deadline but find the error causing the imbalance. 2. Tell her supervisor of the imbalance and suffer the consequences. 3. Do as she did and locate the error later, making the adjustment in the next quarter. 2-56 ...
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