Chapter 3-solutions of assigned problems

# Chapter 3-solutions of assigned problems - Chapter 3...

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Chapter 3 EXERCISES E3–1 TERM F (1) Expenses E (2) Gains G (3) Revenue principle I (4) Cash basis accounting D (5) Unearned revenue C (6) Operating cycle M (7) Accrual basis accounting K (8) Prepaid expenses J (9) Revenues - Expenses = Net income L (10) Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends H (11) Losses M (12) Matching principle E3–7 Activity Accounts Affected and Type of Account Amount of Revenue Earned in September OR Revenue Criteria Not Met a. Accounts receivable (+A) Sales revenue (+R) \$20,000 b. Cash (+A) Sales revenue (+R) \$21,000 c. None No transaction has occurred, exchange of promises only. d. Accounts receivable (+A) Sales revenue (+R) \$18,000 e. Cash (+A) Accounts receivable ( - A) Payment related to revenue previously recorded in (d). f. Cash (+A) Unearned revenue (+L) No revenue earned in September; earnings process is not yet complete. g. Cash (+A) Share capital (+SE) No revenue is earned as the issuance of shares is a financing activity. h. Cash (+A) No revenue earned in September;

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Unearned revenue (+L) earnings process is not yet complete. i. Cash ( - A) Customer loans receivable (+A) Interest revenue (+R) Interest receivable (+A) \$100 = (\$10,000 x 12% ÷ 12 months) times one month j. Cash (+A) Unearned revenue (+L) No revenue earned in September; earnings process is not yet complete. k. Accounts receivable (+A) Sales revenue (+R) \$100 Note: an increase in revenue (transactions (a), (b), (d), (i) and (k) also results in an increase in shareholders’ equity. E3–8 Activity Accounts Affected and Type of Account Amount of Expense Incurred in January OR Why an Expense is Not Recognized a. Salary payable ( - L) Salary expense (+E - SE) Cash ( - A) \$42,500 incurred in January. The remaining half was incurred in December. b. Cash ( - A) Prepaid insurance (+A) Insurance expense (+E - SE) \$1,500 incurred in January. The remainder is not incurred until February and March. c. Utilities expense (+E - SE) Utilities payable (+L) \$1,200 d. Inventory ( - A) Cost of goods sold (+E - SE) \$4,500 e. Inventory (+A) Accounts payable (+L) Expense will be recorded in the future when the related revenue has been earned, i.e., when the books are sold. f. Cash (+A) Sales revenue (+R +SE) Inventory ( - A) Cost of goods sold (+E - SE) \$31,500 = 450 books x \$70 per book g. Cash ( - A) Commissions payable ( - L) December expense, but only paid in January. h. Commissions payable (+L) Commission expense (+E - SE) \$4,200 i. Cash ( - A) Expense will be recorded as “amortization”
Equipment (+A) over the useful life of the equipment. j. Cash ( - A) Supplies (+A) when purchased Supplies ( - A) when used Supplies expense (+E - SE) \$700 (this represents the amount of supplies used during January, i.e., \$700 = \$1,000 + \$600 - \$900). k.

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Chapter 3-solutions of assigned problems - Chapter 3...

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