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KIMMEL.FASM.ch03.vpdf - CHAPTER 3 The Accounting...

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Unformatted text preview: CHAPTER 3 The Accounting Information System Study Objectives 1. 2. 3. 4. 5. 6. 7. 8. Analyze the effect of business transactions on the basic accounting equation. 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. Explain the purpose of a trail balance. Summary of Questions by Study Objectives and Bloom's Taxonomy Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT Questions 1. 2. 3. 4. 5. 1. 2. 3. 1. 2. 3. 4. 1. 2. 3. 4. 1. 2. 3. 4. 4 1 1 1 2 1 1 1 1 1 1 1 1 1 1 3, 5 1 1 1 3, 5 C C C K K C AP AP C AP AP AP AP AP AP AP Problems: Set B AP AP AP AP 3-1 6. 7. 8. 9. 3 3 3 3 C C C K 10. 11. 12. 13. 3 3 3 3 K K K K 14. 15. 16. 17. 4 5 5 5 K K K AP 18. 19. 20. 21. 6 8 7 8 C C K AN Brief Exercises 4. 5. 6. 5. 6. 7. 3 3 5 1 3, 5 3 K C AP AP AP C 7. 8. 4 4 Exercises 8. 9. 10. 5 7, 8 1, 5, 7 AP AP AP 11. 12. 13. 5, 8 7, 8 5, 8 AP AP AP 14. 15. 16. 8 8 3 AN AP K C C 9. 10. 5 7 AP AP 11. 12. 8 8 AP AP Problems: Set A 5. 3, 5, 6, 7, 8 6. AP 3, 5, 6, 7, 8 7. AP 8. 8 3, 5, 6, 7, 8 AN 9. 8 AN AP 5. 3, 5, 6, 7, 8 6. AP 3, 5, 6, 7, 8 7. AP 8. 8 3, 5, 6, 7, 8 AN 9. 8 AN AP ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A 2A 3A Description Analyze transactions and compute net income. Analyze transactions and prepare financial statements. Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet. Journalize a series of transactions. Journalize transactions, post, and prepare a trial balance. Journalize transactions, post, and prepare a trial balance. Prepare a correct trial balance. Journalize transactions, post, and prepare a trial balance. Analyze errors and their effects on the trial balance Analyze transactions and compute net income. Analyze transactions and prepare financial statements. Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet. Journalize a series of transactions. Journalize transactions, post, and prepare a trial balance. Journalize transactions, post, and prepare a trial balance. Prepare a correct trial balance. Journalize transactions, post, and prepare a trial balance. Analyze errors and their effects on the trial balance. Difficulty Level Moderate Moderate Moderate Time Allotted (min.) 4050 4050 5060 4A 5A 6A 7A 8A 9A 1B 2B 3B Simple Simple Moderate Moderate Moderate Moderate Moderate Moderate Moderate 2030 3040 4050 3040 4050 3040 4050 4050 5060 4B 5B 6B 7B 8B 9B Simple Simple Moderate Moderate Moderate Moderate 2030 3040 4050 3040 4050 3040 3-2 ANSWERS TO QUESTIONS 1. The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system. The basic steps in the recording process are: (1) Analyze each transaction in terms of its effect on the accounts (2) Enter the transaction information in a journal (book of original entry) (3) Transfer the information to the appropriate accounts in the ledger (book of accounts). Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset. An increase in the equipment account which is offset by a decrease in the cash account is a specific example. Accounting transactions are the economic events of the enterprise recorded by accountants because they affect the basic accounting equation. (a) (b) (c) (d) The death of a major stockholder of the company is not an accounting transaction as it does not affect the basic accounting equation. Supplies purchased on account is an accounting transaction because it affects the basic accounting equation. An employee being fired is not an accounting transaction as it does not affect the basic accounting equation. Paying a cash dividend to stockholders is an accounting transaction as it does affect the basic accounting equation. 2. 3. 4. (a) Decrease assets and decrease stockholders' equity. (b) Increase assets and decrease assets. (c) Increase assets and increase stockholders' equity. (d) Decrease assets and decrease liabilities. An account consists of three parts: (a) the title, (b) the left or debit side, and (c) the right or credit side. Because the alignment of these parts resembles the letter T, it is referred to as a T account. Disagree. The terms debit and credit are synonymous with left and right, respectively. Frank is incorrect. The double-entry system merely records the dual (two-sided) effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect. In other words, for each transaction, debits must equal credits. Emily is incorrect. A debit balance only means that debit 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 or unfavorable. (a) Asset accounts are increased by debits and decreased by credits. (b) Liability accounts are decreased by debits and increased by credits. (c) The common stock account is decreased by debits and increased by credits. 5. 6. 7. 8. 9. 3-3 Questions Chapter 3 (Continued) 10. (a) Accounts Receivable--debit balance. (b) Cash--debit balance. (c) Dividends--debit balance. (d) Accounts Payable--credit balance. (e) Service Revenue--credit balance. (f) Salaries Expense--debit balance. (g) Common Stock--credit balance. (a) Accounts Receivable--asset--debit balance. (b) Accounts Payable--liability--credit balance. (c) Equipment--asset--debit balance. (d) Dividends--stockholders' equity--debit balance. (e) Supplies--asset--debit balance. (a) Debit Supplies and credit Accounts Payable. (b) Debit Cash and credit Notes Payable. (c) Debit Salaries Expense and credit Cash. (a) Cash--both debit and credit entries. (b) Accounts Receivable--both debit and credit entries. (c) Dividends--debit entries only. (d) Accounts Payable--both debit and credit entries. (e) Salaries Expense--debit entries only. (f) Service Revenue--credit entries only. The basic steps in the recording process are: (1) Analyze each transaction in terms of its effect on the accounts. (2) Enter the transaction information in a journal (book of original entry). (3) Transfer the journal information to the appropriate accounts in the ledger (book of accounts). (a) The debit should be entered first. (b) The credit should be indented. (a) Yes, debits and credits could be recorded directly in the ledger. (b) The advantages of using the journal are: (1) It discloses in one place the complete effect of a transaction. (2) It provides a chronological record of all transactions. (3) It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared. (a) Cash ............................................................................................................................ 12,000 Common Stock ................................................................................................ (Issued stock for cash) (b) Prepaid Insurance .................................................................................................... Cash................................................................................................................... (Paid one-year insurance policy) Supplies...................................................................................................................... Accounts Payable............................................................................................ (Purchased supplies on account) 3-4 11. 12. 13. 14. 15. 16. 17. 12,000 800 800 (c) 1,500 1,500 Questions Chapter 3 (Continued) (d) Cash............................................................................................................................ Service Revenue ............................................................................................. (Received cash for services rendered) 7,500 7,500 18. (a) The entire group of accounts maintained by a company, including all the asset, liability, and stockholders' 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. 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. The proper sequence is as follows: (b) Accounting transaction occurs. (c) Information is entered in the journal. (a) Debits and credits are posted to the ledger. (e) Trial balance is prepared. (d) Financial statements are prepared. (a) The trial balance would balance. (b) The trial balance would not balance since the debits would be $810 higher than the credits. 19. 20. 21. 3-5 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3-1 Assets + + Liabilities + NE NE Stockholders' Equity NE + (a) (b) (c) BRIEF EXERCISE 3-2 Assets Cash (1) (2) (3) (4) +$80,000 9,000 +17,000 $17,000 +$3,100 +$3,100 + Accounts Receivable = Liabilities Bonds Payable +$80,000 $9,000 Dividends Payable + Stock Stockholders' Equity Earnings + Supplies = Accounts + + Common + Retained BRIEF EXERCISE 3-3 Assets Cash + Inventory = + Property, Plant, = and Equipment (1) (2) (3) $386,176,000 +137,590,000 +$77,662,000 +$77,662,000 +$386,176,000 +$137,590,000 Issued stock Liabilities Accounts Payable + Stockholders' Equity Retained Earnings + Common Stock + BRIEF EXERCISE 3-4 Debit Effect Decrease Increase Decrease Increase Decrease Increase 3-6 (a) (b) (c) (d) (e) (f) Accounts Payable Advertising Expense Service Revenue Accounts Receivable Retained Earnings Dividends Credit Effect Increase Decrease Increase Decrease Increase Decrease Normal Balance Credit Debit Credit Debit Credit Debit BRIEF EXERCISE 3-5 Account Debited Cash Equipment Rent Expense Accounts Receivable Account Credited Common Stock Accounts Payable Cash Service Revenue June 1 2 3 12 BRIEF EXERCISE 3-6 June 1 Cash.................................................................................. Common Stock .................................................... Equipment ...................................................................... Accounts Payable ............................................... Rent Expense ................................................................ Cash......................................................................... Accounts Receivable .................................................. Service Revenue.................................................. 2,500 2,500 1,100 1,100 500 500 700 700 2 3 12 BRIEF EXERCISE 3-7 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. 3-7 BRIEF EXERCISE 3-8 (a) Basic Analysis Aug. 1 The asset Cash is increased; the stockholders' equity account Common Stock is increased. (b) Debit-Credit Analysis Debits increase assets: debit Cash $5,000. Credits increase stockholders' equity: credit Common Stock $5,000. Debits increase assets: debit Prepaid Insurance $1,500. Credits decrease assets: credit Cash $1,500. Debits increase assets: debit Cash $900. Credits increase revenues: credit Service Revenue $900. Debits increase expenses: debit Salaries Expense $500. Credits decrease assets: credit Cash $500. 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. BRIEF EXERCISE 3-9 Aug. 1 Cash................................................................................... Common Stock...................................................... Prepaid Insurance......................................................... Cash.......................................................................... Cash................................................................................... Service Revenue................................................... Salaries Expense........................................................... Cash.......................................................................... 5,000 5,000 1,500 1,500 900 900 500 500 4 16 27 3-8 BRIEF EXERCISE 3-10 Cash 1,900 2,000 Service Revenue 5/5 5/15 5/12 5/15 2,800 2,000 5/5 Accounts Receivable 2,800 5/12 1,900 BRIEF EXERCISE 3-11 SHUMWAY COMPANY Trial Balance June 30, 2007 Cash ......................................................................................... Accounts Receivable.......................................................... Equipment.............................................................................. Accounts Payable................................................................ Common Stock..................................................................... Dividends ............................................................................... Service Revenue .................................................................. Salaries Expense ................................................................. Rent Expense........................................................................ Debit $ 3,400 3,000 15,000 Credit $ 3,000 18,000 1,200 6,600 4,000 1,000 $27,600 $27,600 3-9 BRIEF EXERCISE 3-12 RICHARDSON COMPANY Trial Balance December 31, 2007 Cash.......................................................................................... Prepaid Insurance................................................................ Accounts Payable ................................................................ Unearned Revenue .............................................................. Common Stock ..................................................................... Retained Earnings ............................................................... Dividends................................................................................ Service Revenue................................................................... Salaries Expense.................................................................. Rent Expense ........................................................................ Debit $18,800 3,500 Credit $ 2,500 1,800 10,000 6,400 5,000 25,600 16,600 2,400 $46,300 $46,300 3-10 SOLUTIONS TO EXERCISES EXERCISE 3-1 1. 2. 3. 4. 5. 6. 7. 8. 9. Increase in assets and increase in stockholders' equity. Decrease in assets and decrease in stockholders' equity. Increase in assets and increase in stockholders' equity. Increase in assets and increase in stockholders' equity. Decrease in assets and decrease in stockholders' equity. Increase in liabilities and decrease in stockholders' equity. Increase in assets and decrease in assets. Increase in assets and decrease in assets. Increase in assets and increase in liabilities. EXERCISE 3-2 Assets Cash (1) (2) (3) (4) (5) (6) (7) (8) $3,000 $12,000 $20,000 +$35,000 = $4,000 +12,000 +5,000 11,000 +30,000 35,000 35,000 +1,000 +$ 1,000 +$30,000 $20,000 1,000 $11,000 Advertising Expense +$30,000 $12,000 +5,000 11,000 Service Revenue Utilities Expense Issued Stock + Accounts + Receivable Office Equipment +$35,000 = Liabilities + Payable +$35,000 $4,000 Rent Expense Stock Stockholders' Equity Earnings = Accounts + Common + Retained 3-11 Assets = Liabilities + Stockholders' Equity Cash + Accounts + Supplies + Property, = Accounts + Bonds + Common + Retained Receivable Plant, and Payable Payable Stock Earnings Equipment +$110,000 Issued Stock (1) +$110,000 EXERCISE 3-4 (a) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Stockholders invested $15,000 cash in the business. Purchased office equipment for $5,000, paying $1,000 in cash and the balance of $4,000 on account. Paid $750 cash for supplies. Earned $7,800 in revenue, receiving $4,400 cash and $3,400 on account. Paid $1,500 cash on accounts payable. Paid $2,000 cash dividends to stockholders. Paid $800 cash for rent. Collected $450 cash from customers on account. Paid salaries of $3,000. Incurred $500 of utilities expense on account. $15,000 7,800 (2,000) (800) (3,000) (500) $16,500 $ 7,800 (800) (3,000) (500) $ 3,500 (b) Issued common stock........................................................................ Service revenue ................................................................................... Dividends ............................................................................................... Rent expense ........................................................................................ Salaries expense.................................................................................. Utilities expense.................................................................................. Increase in stockholders' equity .................................................... (c) Service revenue ................................................................................... Rent expense ........................................................................................ Salaries expense.................................................................................. Utilities expense................................................................................... Net income............................................................................................. 3-13 EXERCISE 3-5 VERBOS COMPANY Income Statement For the Month Ended August 31, 2007 Revenues Service revenue.................................................................. Expenses Salaries expense ................................................................ Rent expense....................................................................... Utilities expense................................................................. Total expenses........................................................... Net income .................................................................................... VERBOS COMPANY Retained Earnings Statement For the Month Ended August 31, 2007 Retained earnings, August 1........................................................................ Add: Net income ............................................................................................ Less: Dividends............................................................................................... Retained earnings, August 31 ..................................................................... VERBOS COMPANY Balance Sheet August 31, 2007 Assets Current Assets: Cash ............................................................................................ Accounts receivable .............................................................. Supplies ..................................................................................... Total current assets ...................................................... Office equipment..................................................................... Total assets...................................................................... Liabilities and Stockholders' Equity Current Liabilities Accounts payable .......................................................... Stockholders' equity Common stock................................................................ Retained earnings.......................................................... Total liabilities and stockholders' equity ...... 3-14 $7,800 $3,000 800 500 4,300 $3,500 $ 0 3,500 3,500 2,000 $1,500 $10,800 2,950 750 14,500 5,000 $19,500 $ 3,000 $15,000 1,500 16,500 $19,500 EXERCISE 3-6 (a) (d) Normal Balance Debit Stockholders' Equity Asset Liability Cash Accounts Payable Service Revenue Asset Cash Common Stock Transaction Cash Increase (a) Basic Type Account Debited (b) (c) Specific Account Effect (a) Basic Type Increase Account Credited (b) (c) Specific Account Effect (d) Normal Balance Credit 1. Asset 2. Supplies Increase Debit Asset Equipment Increase Debit Decrease Increase Debit Credit 3. Asset 4. Accounts Receivable Advertising Expense Cash Increase Debit Increase Debit Asset Increase Debit Stockholders' Equity Increase Credit 3-15 5. Stockholder's Equity Decrease Debit 6. Asset Asset Accounts Receivable Credit Asset Cash Decrease Debit 7. Accounts Payable Dividends Increase Liability Decrease Decrease Debit 8. Stockholders' Equity Debit Asset Cash Decrease Debit EXERCISE 3-6 (Continued) (b) Trans. 1. General Journal Account Titles Cash .............................................................................. Common Stock ................................................. Equipment................................................................... Cash ..................................................................... Supplies ....................................................................... Accounts Payable............................................ Accounts Receivable............................................... Service Revenue .............................................. Advertising Expense ............................................... Cash ..................................................................... Cash .............................................................................. Accounts Receivable...................................... Accounts Payable..................................................... Cash ..................................................................... Dividends..................................................................... Cash ..................................................................... Debit 12,000 Credit 12,000 8,000 8,000 300 300 2,600 2,600 200 200 1,100 1,100 300 300 400 400 2. 3. 4. 5. 6. 7. 8. EXERCISE 3-7 Oct. 1 Debits increase assets: debit Cash $25,000. Credits increase stockholders' equity: credit Common Stock $25,000. No accounting transaction. Debits increase assets: debit Office Furniture $3,600. Credits increase liabilities: credit Accounts Payable $3,600. 2 3 3-16 EXERCISE 3-7 (Continued) Oct. 6 Debits increase assets: debit Accounts Receivable $10,800. Credits increase revenues: credit Service Revenue $10,800. Debits increase assets: debit Cash $140. Credits increase revenues: credit Service Revenue $140. Debits decrease liabilities: debit Accounts Payable $700. Credits decrease assets: credit Cash $700. Debits increase expenses: debit Salaries Expense $3,500. Credits decrease assets: credit Cash $3,500. 10 27 30 EXERCISE 3-8 General Journal Date Oct. 1 Account Titles Cash ............................................................................ Common Stock ............................................... No entry. Office Furniture ....................................................... Accounts Payable.......................................... Accounts Receivable............................................. Service Revenue ............................................ Cash ............................................................................ Service Revenue ............................................ Accounts Payable................................................... Cash ................................................................... Salaries Expense .................................................... Cash ................................................................... 3,600 3,600 10,800 10,800 140 140 700 700 3,500 3,500 Debit 25,000 Credit 25,000 2 3 6 10 27 30 3-17 EXERCISE 3-9 (a) Oct. 1 10 Bal. Cash 25,000 Oct. 27 140 30 20,940 700 3,500 Accounts Payable Oct. 27 700 Oct. 3 Bal. Common Stock Oct. 1 Bal. 3,600 2,900 Accounts Receivable Oct. 6 10,800 Bal. 10,800 Office Furniture 3,600 3,600 25,000 25,000 Oct. 3 Bal. Service Revenue Oct. 6 10,800 10 140 Bal. 10,940 Salaries Expense Oct. 30 3,500 Bal. 3,500 (b) MATTHEWS REAL ESTATE AGENCY Trial Balance October 31, 2007 Cash................................................................................. Accounts Receivable ................................................. Office Furniture............................................................ Accounts Payable ....................................................... Common Stock ............................................................ Service Revenue.......................................................... Salaries Expense......................................................... Debit $20,940 10,800 3,600 Credit $ 2,900 25,000 10,940 3,500 $38,840 $38,840 3-18 EXERCISE 3-10 (a) = Liabilities + Stockholders' Equity Accounts Stockholders' Cash + Equipment = Payable + Equity +$15,000 +$15,000 Issued stock 2,000 +$12,000 +$10,000 5,000 5,000 500 Dividends 500 $ 7,500 + $12,000 = $ 5,000 + $14,500 $19,500.. $19,500 Assets Sept. 1 5 25 30 (b) Date Sept. 1 General Journal Account Titles Cash........................................................................... Common Stock.............................................. Equipment................................................................ Cash.................................................................. Accounts Payable ........................................ Accounts Payable ................................................. Cash.................................................................. Dividends ................................................................. Cash.................................................................. Debit 15,000 J1 Credit 15,000 12,000 2,000 10,000 5,000 5,000 500 500 5 25 30 3-19 EXERCISE 3-10 (Continued) (c) 9/1 Cash 15,000 9/5 9/25 9/30 7,500 2,000 5,000 500 Common Stock 9/1 Bal. 15,000 15,000 Bal. 9/5 Bal. Equipment 12,000 12,000 9/30 Bal. Dividends 500 500 9/25 Accounts Payable 5,000 9/5 10,000 Bal. 5,000 3-20 EXERCISE 3-11 (a) Date Apr. 1 General Journal Account Titles and Explanation Debit Cash ............................................................................ 12,000 Common Stock ............................................... (Issued stock for cash) Supplies ..................................................................... Accounts Payable.......................................... (Purchased supplies on account) Accounts Receivable............................................. Service Revenue ............................................ (Billed clients for services rendered) Cash ............................................................................ Service Revenue ............................................ (Received cash for revenue earned) Salaries Expense .................................................... Cash ................................................................... (Paid salaries) Accounts Payable................................................... Cash ................................................................... (Paid creditors on account) Cash ............................................................................ Accounts Receivable.................................... (Received cash in payment of account) Cash ............................................................................ Unearned Revenue ........................................ (Received cash for future services) 5,200 5,200 Credit 12,000 4 7 2,400 2,400 12 700 700 15 900 900 25 3,500 3,500 29 800 800 30 600 600 3-21 EXERCISE 3-11 (Continued) (b) HAYLEY'S GARDENING COMPANY, INC. Trial Balance April 30, 2007 Cash................................................................................. Accounts Receivable ................................................. Supplies ......................................................................... Accounts Payable ....................................................... Unearned Revenue ..................................................... Common Stock ............................................................ Service Revenue.......................................................... Salaries Expense......................................................... Debit $ 9,700 1,600 5,200 Credit $ 1,700 600 12,000 3,100 900 $17,400 $17,400 3-22 EXERCISE 3-12 (a) Aug. 1 10 31 Bal. Cash 3,000 Aug. 12 1,700 600 4,100 1,200 Notes Payable Aug. 12 Bal. 5,000 5,000 Accounts Receivable Aug. 25 3,100 Aug. 31 Bal. 2,500 Common Stock Aug. 1 Bal. 600 Service Revenue Aug. 10 25 Bal. 3,000 3,000 Office Equipment Aug. 12 6,200 Bal. 6,200 1,700 3,100 4,800 (b) DEWITT INC. Trial Balance August 31, 2007 Cash ................................................................................ Accounts Receivable................................................. Office Equipment ........................................................ Notes Payable .............................................................. Common Stock............................................................ Service Revenue ......................................................... Debit $ 4,100 2,500 6,200 Credit $12,800 $ 5,000 3,000 4,800 $12,800 3-23 EXERCISE 3-13 (a) Oct. 1 Cash........................................................................... Common Stock.............................................. (Issued stock for cash) 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) 4,800 4,800 10 750 750 10 8,000 8,000 20 800 800 20 920 920 3-24 EXERCISE 3-13 (Continued) (b) ARSENEAULT CO. Trial Balance October 31, 2007 Cash ................................................................................ Accounts Receivable................................................. Supplies ......................................................................... Furniture ........................................................................ Notes Payable .............................................................. Accounts Payable....................................................... Common Stock............................................................ Dividends....................................................................... Service Revenue ......................................................... Store Wages Expense ............................................... Supplies Expense....................................................... Rent Expense............................................................... Debit $13,400 920 220 3,000 Credit $ 8,000 1,500 6,800 300 2,470 500 180 250 $18,770 $18,770 EXERCISE 3-14 (a) In Balance No Yes Yes No Yes No (b) Difference $400 -- -- 300 -- 18 (c) Larger Column Debit -- -- Credit -- Credit Error 1. 2. 3. 4. 5. 6. 3-25 EXERCISE 3-15 DEPENDABLE DELIVERY SERVICE Trial Balance July 31, 2007 (a) Debit Cash ($97,450 Debit total without Cash $82,246)............................................................................... Accounts Receivable .......................................................... Prepaid Insurance................................................................ Delivery Equipment ............................................................. Accounts Payable ................................................................ Salaries Payable ................................................................... Notes Payable due 2010 .................................................... Common Stock ..................................................................... Retained Earnings ............................................................... Dividends................................................................................ Service Revenue................................................................... Salaries Expense.................................................................. Gas and Oil Expense .......................................................... Repair Expense..................................................................... Insurance Expense.............................................................. $15,204 13,400 1,800 59,360 $ 7,400 900 28,450 40,000 5,200 700 15,500 4,428 758 1,200 600 $97,450 Credit $97,450 3-26 EXERCISE 3-15 (Continued) (b) DEPENDABLE DELIVERY SERVICE Income Statement For the Month Ended July 31, 2007 Revenues Service revenue ................................................................... Expenses Salaries expense ................................................................. Repair expense .................................................................... Gas and oil expense ........................................................... Insurance expense.............................................................. Total expenses ................................................................. Net income................................................................................. $15,500 $4,428 1,200 758 600 6,986 $ 8,514 DEPENDABLE DELIVERY SERVICE Retained Earnings Statement For the Month Ended July 31, 2007 Retained earnings, July 1 ..................................................... Add: Net income ...................................................................... Less: Dividends ....................................................................... Retained earnings, July 31................................................... $ 5,200 8,514 13,714 700 $13,014 3-27 EXERCISE 3-15 (Continued) DEPENDABLE DELIVERY SERVICE Balance Sheet July 31, 2007 Assets Current Assets Cash ........................................................................................ Accounts receivable .......................................................... Prepaid insurance............................................................... Total current assets ....................................................... Delivery equipment ................................................................ Total assets ...................................................................... $15,204 13,400 1,800 $30,404 59,360 $89,764 Liabilities and Stockholders' Equity Current Liabilities Accounts payable ............................................................... Salaries payable .................................................................. Total current liabilities .................................................. Notes payable .......................................................................... Total liabilities.................................................................. Stockholders' Equity Common stock......................................................................... Retained earnings................................................................... Total stockholders' equity ........................................... Total liabilities and stockholders' equity................ $ 7,400 900 $ 8,300 28,450 36,750 40,000 13,014 53,014 $89,764 3-28 EXERCISE 3-16 (a) Normal Balance Debit or Credit Credit Debit Credit Debit Debit Credit Debit Debit Debit Credit (b) Balance Sheet or Income Statement Balance sheet Balance sheet Balance sheet Income statement Income statement Income statement Balance sheet Balance sheet Balance sheet Income statement Account Accounts payable Accounts receivable Common stock Depreciation expense Interest expense Interest income Inventories Prepaid expenses Property and equipment Revenues 3-29 (a) FAR AND WIDE TRAVEL AGENCY INC. 1. Cash +$20,000 Assets Liabilities Stockholders' Equity Office Accounts Common Retained Accounts + Receivable + Supplies + Equipment = Payable + Stock + Earnings +$20,000 2. 900 $900 Rent Expense 3. 2,800 +$2,800 4. +$200 200 Advertising Expense 5. 500 +$500 PROBLEM 3-1A SOLUTIONS TO PROBLEM 3-30 +$8,000 200 8,000 $ 0 + $ 500 + $ 2,800 = $ 0 + $20,000 + $26,300 $26,300 6. +1,000 +9,000 Service Revenue 7. 400 400 Dividends 8. 200 9. 1,200 1,200 Salaries Expense 10. +8,000 $23,000 + $6,300 PROBLEM 3-1A (Continued) (b) Service Revenue ................................................................ Expenses Salaries Expense ...................................................... Rent Expense............................................................. Advertising Expense ............................................... Net income ......................................................... OR Increase in retained earnings ($6,300 $0) .............. Add: Dividends................................................................. Net income........................................................................... $6,300 400 $6,700 $9,000 $1,200 900 200 2,300 $6,700 3-31 BLAESING CONSULTING INC. Assets Accounts Receivable Retained Earnings (a) Liabilities Stockholders' Equity Date Cash + May 1 $ 700 $500 150 1,000 200 $3,200 3,200 2,500 500 1,500 $5,000 $2,400 2,200 150 $1,700 + $500 $2,400 + = $5,000 + $2,200 + $12,000 + $ 500 $ 500 $12,000 Office Notes Accounts Common Supplies + Equipment = Payable + Payable + Stock + + $12,000 Rent Expense 2 700 3 5 150 Advertising Expense Service Revenue Dividends Service Revenue Salaries Expense 9 1,000 12 200 PROBLEM 3-2A 3-32 $19,700 $19,700 15 17 2,500 20 500 23 1,500 26 5,000 29 200 30 150 Utilities Expense $15,100 + PROBLEM 3-2A (Continued) (b) BLAESING CONSULTING INC. Income Statement For the Month Ended May 31, 2007 Revenues Service revenue ($1,000 + $3,200).................... Expenses Salaries expense.................................................... Rent expense .......................................................... Utilities expense..................................................... Advertising expense............................................. Total expenses .............................................. Net income........................................................................ $4,200 $2,500 700 150 150 3,500 $ 700 (c) BLAESING CONSULTING INC. Balance Sheet May 31, 2007 Assets Current assets Cash .................................................................................... Accounts receivable...................................................... Supplies ............................................................................ Total current assets.............................................. Office equipment ............................................................ Total assets ............................................................. $15,100 1,700 500 $17,300 2,400 $19,700 Liabilities and Stockholders' Equity Current liabilities Notes payable .................................................................. Accounts payable........................................................... Total current liabilities ......................................... Stockholders' Equity Common stock ................................................................ Retained earnings ($0 + $700 $200) ...................... Total liabilities and stockholders' equity .................................................................... $ 5,000 2,200 $ 7,200 12,000 500 12,500 $19,700 3-33 (a) MARK MADER INC. Cash $2,500 1,500 + $500 + $5,000 = $4,200 + $6,200 + $1,600 Assets Liabilities Stockholders' Equity Office Notes Accounts Common Retained Accounts + Receivable + Supplies + Equipment = Payable + Payable + Stock + Earnings July 31 Bal. 1. $4,000 + +1,500 2. 2,700 2,700 3. +3,000 +3,400 +6,400 Service Revenue 4. 400 +2,000 +1,600 PROBLEM 3-3A 3-34 +$2,000 +450 $4,400 + $500 $7,000 + = $2,000 + $3,550 + $15,950 $15,950 5. 2,650 1,400 Salaries Expense 900 Rent Expense 350 Advertising Expense 6. 700 700 Dividends 7. +2,000 8. 450 Utilities Expense $6,200 + $4,200 $4,050 + PROBLEM 3-3A (Continued) (b) MARK MADER INC. Income Statement For the Month Ended August 31, 2007 Revenues Service revenue ........................................................ Expenses Salaries expense....................................................... Rent expense ............................................................. Utilities expense........................................................ Advertising expense................................................ Total expenses ................................................. Net income........................................................................... $6,400 $1,400 900 450 350 3,100 $3,300 MARK MADER INC. Retained Earnings Statement For the Month Ended August 31, 2007 Retained earnings, August 1 ............................................................... Add: Net income.................................................................................... Less: Dividends ...................................................................................... Retained earnings, August 31 ............................................................. $1,600 3,300 4,900 700 $4,200 3-35 PROBLEM 3-3A (Continued) MARK MADER INC. Balance Sheet August 31, 2007 Assets Current assets Cash............................................................................. Accounts receivable .............................................. Supplies ..................................................................... Total current assets ...................................... Office equipment..................................................... Total assets...................................................... $4,050 4,400 500 $ 8,950 7,000 $15,950 Liabilities and Stockholders' Equity Current liabilities Notes payable........................................................... Accounts payable ................................................... Total current liabilities.................................. Stockholders' equity Common stock......................................................... Retained earnings................................................... Total liabilities and stockholders' equity ............................................................. $2,000 3,550 $ 5,550 6,200 4,200 10,400 $15,950 3-36 PROBLEM 3-4A Date Mar. 1 Account Titles and Explanation Cash ............................................................................ Common Stock ............................................... (Issued stock for cash) Land............................................................................. Buildings.................................................................... Equipment ................................................................. Cash ................................................................... (Purchased Arnie'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 revenue earned) Cash (100 X $20)...................................................... Unearned Golf Revenue............................... (Received cash for coupon books sold) Dividends................................................................... Cash ................................................................... (Payment of cash dividend) Debit 60,000 Credit 60,000 3 23,000 9,000 6,000 38,000 5 1,600 1,600 6 2,400 2,400 10 3,700 3,700 18 1,200 1,200 19 2,000 2,000 25 500 500 3-37 PROBLEM 3-4A (Continued) Date Mar. 30 Account Titles and Explanation Salaries Expense.................................................... Cash................................................................... (Paid salaries expense) Accounts Payable .................................................. Cash................................................................... (Paid creditor on account) Cash............................................................................ Golf Revenue .................................................. (Received cash for revenue earned) Debit 700 Credit 700 3,700 3,700 30 31 800 800 3-38 PROBLEM 3-5A (a) Date Apr. 1 Account Titles and Explanation Cash ............................................................................ Common Stock ............................................... (Issued shares of stock for cash) No entry--not a transaction. Rent Expense ........................................................... Cash ................................................................... (Paid monthly office rent) Supplies ..................................................................... Accounts Payable.......................................... (Purchased supplies on account from Spring Green Company) Accounts Receivable............................................. Service Revenue ............................................ (Billed clients for services rendered) Cash ............................................................................ Unearned Revenue ........................................ (Received cash advance for future service) Cash ............................................................................ Service Revenue ............................................ (Received cash for revenue earned) Salaries Expense .................................................... Cash ................................................................... (Paid monthly salary) Accounts Payable................................................... Cash ................................................................... (Paid Spring Green Company on account) 900 900 1,000 1,000 Debit 14,000 Credit 14,000 1 2 3 10 1,100 1,100 500 500 11 20 2,300 2,300 1,500 1,500 100 100 30 30 3-39 PROBLEM 3-5A (Continued) (b) 4/1 4/11 4/20 Bal. Cash 14,000 4/2 500 4/30 2,300 4/30 14,300 Accounts Receivable 1,100 1,100 Supplies 1,000 1,000 Accounts Payable 100 4/3 Bal. Unearned Revenue 4/11 Bal. Common Stock 4/1 Bal. Service Revenue 4/10 4/20 Bal. 900 1,500 100 4/30 Bal. Salaries Expense 1,500 1,500 Rent Expense 900 900 4/2 Bal. 4/10 Bal. 4/3 Bal. 4/30 1,000 900 500 500 14,000 14,000 1,100 2,300 3,400 3-40 PROBLEM 3-5A (Continued) (c) F. L. WRIGHT ARCHITECTS INC. Trial Balance April 30, 2007 Cash ................................................................................ Accounts Receivable................................................. Supplies ......................................................................... Accounts Payable....................................................... Unearned Revenue..................................................... Common Stock............................................................ Service Revenue ......................................................... Salaries Expense ........................................................ Rent Expense............................................................... Debit $14,300 1,100 1,000 Credit $ 900 500 14,000 3,400 1,500 900 $18,800 $18,800 3-41 PROBLEM 3-6A (a) & (c) 10/1 Bal. 10/5 Cash 8,300 10/15 1,300 10/20 10/29 10/31 6,100 1,400 1,100 300 700 10/29 Bal. Accounts Receivable 10/1 Bal. 2,600 10/5 1,300 10/10 4,100 Bal. 5,400 Common Stock 10/1 Bal. 15,000 Bal. 15,000 Dividends 300 300 Service Revenue 10/10 10/17 Bal. Bal. 4,100 600 4,700 10/1 Bal. Bal. Supplies 2,100 2,100 10/15 Bal. Salaries Expense 1,400 1,400 10/1 Bal. Bal. Equipment 8,000 8,000 10/31 Bal. Utilities Expense 700 700 10/20 Accounts Payable 1,100 10/1 Bal. Bal. 5,100 4,000 10/17 Unearned Revenue 600 10/1 Bal. Bal. 900 300 3-42 PROBLEM 3-6A (Continued) (b) Date Oct. 5 Account Titles and Explanation Cash ............................................................................ Accounts Receivable.................................... (Received collections from customers on account) Accounts Receivable............................................. Service Revenue ............................................ (Billed customers for services performed) Salaries Expense .................................................... Cash ................................................................... (Paid employee salaries) Unearned Revenue ................................................. Service Revenue ............................................ (Performed services for customers who paid in advance) Accounts Payable................................................... Cash ................................................................... (Paid creditors on account) Dividends................................................................... Cash ................................................................... (Payment of cash dividend) Utilities Expense ..................................................... Cash ................................................................... (Paid utilities) Debit 1,300 Credit 1,300 10 4,100 4,100 15 1,400 1,400 17 600 600 20 1,100 1,100 29 300 300 31 700 700 3-43 PROBLEM 3-7A IZO CO. Trial Balance June 30, 2007 Cash ($2,180 $690 + $960).................................... Accounts Receivable* ............................................... Supplies ($800 $340) .............................................. Equipment ($3,000 + $340) ...................................... Accounts Payable ($2,666 $206 $260) .......... Unearned Revenue..................................................... Common Stock............................................................ Dividends ($800 + $600) ........................................... Service Revenue ......................................................... Salaries Expense ($3,600 + $500 $600)............ Office Expense ............................................................ Debit $ 2,450 3,820 460 3,340 Credit $ 2,200 1,200 9,000 1,400 3,480 3,500 910 $15,880 $15,880 *$3,370 + $690 $960 $80 + $800 3-45 PROBLEM 3-8A (a) & (c) 3/1 Bal. 3/9 3/20 3/31 3/31 Bal. Cash 16,000 3/2 9,200 3/10 7,100 3/12 675 3/20 20,000 3/31 29,675 2,000 12,600 900 4,000 3,800 Common Stock 3/1 Bal. Bal. 80,000 80,000 3/31 Bal. Accounts Receivable 675 675 Admission Revenue 3/9 3/20 3/31 Bal. 9,200 7,100 20,000 36,300 3/1 Bal. Bal. Land 38,000 38,000 3/12 Bal. Concession Revenue 3/31 1,350 Bal. 1,350 3/1 Bal. Bal. Buildings 22,000 22,000 Advertising Expense 900 900 3/1 Bal. Bal. Equipment 16,000 16,000 3/2 3/20 Bal. Film Rental Expense 12,000 4,000 16,000 3/10 Accounts Payable 12,600 3/1 Bal. 12,000 3/2 10,000 Bal. 9,400 3/31 Bal. Salaries Expense 3,800 3,800 3-46 PROBLEM 3-8A (Continued) (b) Date Mar. 2 Account Titles and Explanation Film Rental Expense.............................................. Accounts Payable ......................................... Cash ................................................................... (Rented films for cash and on account) No entry--not a transaction. Cash............................................................................ Admission Revenue...................................... (Received cash for admissions) Accounts Payable ($10,000 + $2,600) .............. Cash ................................................................... (Paid creditors on account) No entry--not a transaction. Advertising Expense ............................................. Cash ................................................................... (Paid advertising expenses) Cash............................................................................ Admission Revenue...................................... (Received cash for admissions) Film Rental Expense.............................................. Cash ................................................................... (Paid film rental) Salaries Expense .................................................... Cash ................................................................... (Paid salaries expense) 900 900 9,200 9,200 Debit 12,000 Credit 10,000 2,000 3 9 10 12,600 12,600 11 12 20 7,100 7,100 20 4,000 4,000 31 3,800 3,800 3-47 PROBLEM 3-8A (Continued) Date Mar. 31 Account Titles and Explanation Cash ........................................................................... Accounts Receivable............................................ Concession Revenue (15% X $9,000) ........ (Received cash and balance on account for concession revenue) Cash ........................................................................... Admission Revenue ..................................... (Received cash for admissions) Debit 675 675 Credit 1,350 31 20,000 20,000 (d) THREE-PEAT THEATER INC. Trial Balance March 31, 2007 Cash............................................................................. Accounts Receivable ............................................. Land............................................................................. Buildings.................................................................... Equipment ................................................................. Accounts Payable ................................................... Common Stock ........................................................ Admission Revenue ............................................... Concession Revenue............................................. Advertising Expense.............................................. Film Rental Expense .............................................. Salaries Expense..................................................... Debit $ 29,675 675 38,000 22,000 16,000 $ Credit 9,400 80,000 36,300 1,350 900 16,000 3,800 $127,050 $127,050 3-48 PROBLEM 3-9A Error 1. 2. 3. 4. 5. 6. 7. 8. (a) In Balance No Yes Yes No Yes Yes No Yes (b) Difference $600 None None $250 None None $700 None (c) Larger Column Debit N/A N/A Credit N/A N/A Debit N/A 3-49 BLUE SKY WINDOW WASHING INC. (a) 1. Cash +$16,000 Assets Liabilities Stockholders' Equity Accounts Accounts Common Retained + Receivable + Supplies + Equipment = Payable + Stock + Earnings +$16,000 2. 7,000 +$7,000 3. 700 $700 Rent Expense 4. 400 +$400 5. +$550 550 Advertising Expense PROBLEM 3-1B 3-50 +$500 240 + $260 + $400 + $7,000 = $550 + $16,000 $19,260 $19,260 6. +5,800 +5,800 Service Revenue 7. 500 500 Dividends 8. 1,700 1,700 Salaries Expense 9. 140 140 Utilities Expense 10. +500 Service Revenue 11. +240 $11,600 $2,710 PROBLEM 3-1B (Continued) (b) Service Revenue ($5,800 + $500).................................. Expenses Salaries Expense ...................................................... Rent Expense............................................................. Advertising Expense ............................................... Utilities Expense ....................................................... Net income ......................................................... OR Increase in retained earnings ($2,710 $0) .............. Add: Dividends................................................................. Net income........................................................................... $2,710 500 $3,210 $6,300 $1,700 700 550 140 3,090 $3,210 3-51 AT YOUR SERVICE INC. (a) Date June 1 $10,000 $ 500 $1,900 300 $150 750 200 200 1,500 800 250 150 750 + $1,150 $7,200 + $150 + $10,000 = + $200 + $16,000 + $1,400 $150 1,900 $8,000 Cash $16,000 Assets Liabilities Stockholders' Equity Accounts Delivery Notes Accounts Common Retained + Receivable + Supplies + Van = Payable + Payable + Stock + Earnings $16,000 2 2,000 3 500 Rent Expense Service Revenue Dividends 5 9 300 12 15 750 PROBLEM 3-2B 3-52 $24,800 $24,800 17 Gasoline Expense Service Revenue 20 1,500 23 800 26 250 Utilities Expense 29 150 30 750 Salaries Expense $13,500 PROBLEM 3-2B (Continued) (b) AT YOUR SERVICE INC. Income Statement For the Month Ended June 30, 2007 Revenues Service revenue ($1,900 + $1,500).................... Expenses Salaries expense.................................................... Rent expense .......................................................... Utilities expense..................................................... Gasoline expense .................................................. Total expenses .............................................. Net income........................................................................ $3,400 $750 500 250 200 1,700 $1,700 (c) AT YOUR SERVICE INC. Balance Sheet June 30, 2007 Assets Current Assets Cash ........................................................................... Accounts receivable ............................................. Supplies .................................................................... Total current assets ..................................... Delivery van...................................................................... Total assets ............................................................. $13,500 1,150 150 $14,800 10,000 $24,800 Liabilities and Stockholders' Equity Current Liabilities Notes payable ......................................................... $ 7,200 Accounts payable.................................................. 200 Total liabilities................................................ Stockholders' equity Common stock ....................................................... 16,000 Retained earnings*................................................ 1,400 Total liabilities and stockholders' equity............................................................ *($0 + $1,700 $300) 3-53 $ 7,400 17,400 $24,800 (a) REED COMPANY Bal. Cash $ 9,000 Assets Liabilities Stockholders' Equity Notes Accounts Common Retained Accounts Office + Receivable + Supplies + Equipment = Payable + Payable + Stock + Earnings + $1,700 + $600 + $5,000 = $3,600 + $12,000 + $ 700 1. 3,400 3,400 2. +1,600 1,600 3. 1,000 +4,100 +3,100 4. +2,300 +6,200 +8,500 Service Revenue PROBLEM 3-3B 3-54 +170 +$7,000 $6,300 + $600 + $9,100 = $7,000 + $3,470 + $28,950 $28,950 5. 600 600 Dividends 6. 1,950 900 Salaries Expense 800 Rent Expense 250 Advertising Expense 7. 170 Utilities Expense 8. +7,000 $12,950 + $12,000 + $6,480 PROBLEM 3-3B (Continued) (b) REED COMPANY Income Statement For the Month Ended September 30, 2007 Revenues Service revenue ............................................................ Expenses Salaries expense........................................................... Rent expense ................................................................. Advertising expense.................................................... Utilities expense............................................................ Total expenses ..................................................... Net income............................................................................... $8,500 $900 800 250 170 2,120 $6,380 REED COMPANY Retained Earnings Statement For the Month Ended September 30, 2007 Retained earnings, September 1 ........................................................ Add: Net income.................................................................................... Less: Dividends ...................................................................................... Retained earnings, September 30...................................................... $ 700 6,380 7,080 600 $6,480 3-55 PROBLEM 3-3B (Continued) REED COMPANY Balance Sheet September 30, 2007 3-56 PROBLEM 3-4B Date Apr. 1 Account Titles and Explanation Cash ............................................................................ Common Stock............................................... (Issued stock for cash) Land ............................................................................ Cash ................................................................... (Purchased land for cash) Advertising Expense ............................................. Accounts Payable.......................................... (Incurred advertising expense on account) Salaries Expense .................................................... Cash ................................................................... (Paid salaries) No entry--not a transaction. Prepaid Insurance .................................................. Cash ................................................................... (Paid for one-year insurance policy) Dividends .................................................................. Cash ................................................................... (Payment of cash dividend) Cash ............................................................................ Admission Revenue...................................... (Received cash for services rendered) Cash (100 X $70) ..................................................... Unearned Admissions.................................. (Received advance for future services) Debit 75,000 Credit 75,000 4 50,000 50,000 8 1,200 1,200 11 1,700 1,700 12 13 6,000 6,000 17 600 600 20 5,000 5,000 25 7,000 7,000 3-57 PROBLEM 3-4B (Continued) Date Apr. 30 Account Titles and Explanation Cash ........................................................................... Admission Revenue ..................................... (Received cash for services provided) Accounts Payable.................................................. Cash................................................................... (Paid creditor on account) Debit 7,900 Credit 7,900 30 500 500 3-58 PROBLEM 3-5B (a) Date May 1 Account Titles and Explanation Cash ............................................................................ Common Stock ............................................... (Issued stock for cash) 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 an advance for future services) Cash ............................................................................ Service Revenue ............................................ (Received cash for revenue earned) Salaries Expense .................................................... Cash ................................................................... (Paid salaries) Accounts Payable ($800 X 40%) ........................ Cash ................................................................... (Paid creditor on account) 800 800 Debit 52,000 Credit 52,000 2 3 7 1,100 1,100 11 1,500 1,500 12 4,200 4,200 17 3,600 3,600 31 2,000 2,000 31 320 320 3-59 PROBLEM 3-5B (Continued) (b) 5/1 5/12 5/17 Bal. Cash 52,000 5/7 4,200 5/31 3,600 5/31 56,380 Accounts Receivable 1,500 1,500 Supplies 800 800 Accounts Payable 320 5/3 Bal. Unearned Revenue 5/12 Bal. Common Stock 5/1 Bal. Service Revenue 5/11 5/17 Bal. 1,100 2,000 320 5/31 Bal. Salaries Expense 2,000 2,000 Rent Expense 1,100 1,100 5/7 Bal. 5/11 Bal. 5/3 Bal. 5/31 800 480 4,200 4,200 52,000 52,000 1,500 3,600 5,100 3-60 PROBLEM 3-5B (Continued) (c) KNAPP CONSULTING Trial Balance May 31, 2007 Cash ................................................................................ Accounts Receivable................................................. Supplies ......................................................................... Accounts Payable....................................................... Unearned Revenue..................................................... Common Stock............................................................ Service Revenue ......................................................... Salaries Expense ........................................................ Rent Expense............................................................... Debit $56,380 1,500 800 Credit $ 480 4,200 52,000 5,100 2,000 1,100 $61,780 $61,780 3-61 PROBLEM 3-6B (a) & (c) 7/1 Bal. 7/8 7/11 Bal. Cash 12,532 7/9 5,189 7/14 5,100 7/30 7/31 4,498 2,100 10,750 5,073 400 7/31 Bal. Accounts Receivable 7/1 Bal. 10,536 7/8 5,189 7/22 4,700 Bal. 10,047 Common Stock 7/1 Bal. Bal. Dividends 400 400 Dry Cleaning Revenue 7/11 5,100 7/22 4,700 Bal. 9,800 35,000 35,000 7/1 Bal. 7/17 Bal. Supplies 3,512 520 4,032 7/30 Bal. Repair Expense 492 492 7/1 Bal. Bal. Equipment 25,950 25,950 7/9 7/30 Bal. Salaries Expense 2,100 3,114 5,214 7/14 Accounts Payable 10,750 7/1 Bal. 15,800 7/17 520 Bal. 5,570 7/30 Bal. Utilities Expense 1,467 1,467 Unearned Revenue 7/1 Bal. Bal. 1,730 1,730 3-62 PROBLEM 3-6B (Continued) (b) Date July 8 Account Titles and Explanation Cash ............................................................................ Accounts Receivable.................................... (Received cash on account) Salaries Expense .................................................... Cash ................................................................... (Paid salaries) Cash ............................................................................ Dry Cleaning Revenue ................................. (Received cash for services provided) Accounts Payable................................................... Cash ................................................................... (Paid creditors) Supplies..................................................................... Accounts Payable.......................................... (Purchased supplies on account) Accounts Receivable............................................. Dry Cleaning Revenue ................................. (Billed for services provided) Salaries Expense .................................................... Utilities Expense ..................................................... Repair Expense ....................................................... Cash ................................................................... (Paid for various expenses) Dividends .................................................................. Cash ................................................................... (Payment of cash dividend) Debit 5,189 Credit 5,189 9 2,100 2,100 11 5,100 5,100 14 10,750 10,750 17 520 520 22 4,700 4,700 30 3,114 1,467 492 5,073 31 400 400 3-63 PROBLEM 3-6B (Continued) (d) ARTISTIC DRY CLEANERS Trial Balance July 31, 2007 Cash................................................................................. Accounts Receivable ................................................. Supplies ......................................................................... Equipment ..................................................................... Accounts Payable ....................................................... Unearned Revenue ..................................................... Common Stock ............................................................ Dividends ....................................................................... Dry Cleaning Revenue............................................... Repair Expense............................................................ Salaries Expense......................................................... Utilities Expense.......................................................... Debit $ 4,498 10,047 4,032 25,950 Credit $ 5,570 1,730 35,000 400 9,800 492 5,214 1,467 $52,100 $52,100 3-64 PROBLEM 3-7B ROSENBERGER COMPANY Trial Balance May 31, 2007 Cash ($5,340 + $350 $225)............................................. Accounts Receivable ($2,750 $180 $240) ............. Prepaid Insurance ($700 + $100) .................................... Supplies ($0 + $350)............................................................ Equipment ($8,000 $350) ............................................... Accounts Payable ($4,100 $100 + $350 $240) ..... Property Taxes Payable..................................................... Common Stock ($5,700 + $800) ...................................... Retained Earnings............................................................... Dividends ($0 + $800) ......................................................... Service Revenue ($6,690 + $270).................................... Salaries Expense ($4,200 + $400)................................... Advertising Expense ($1,100 + $225)............................ Property Tax Expense ($900 + $100)............................. Debit $ 5,465 2,330 800 350 7,650 Credit $ 4,110 750 6,500 6,000 800 6,960 4,600 1,325 1,000 $24,320 $24,320 3-65 PROBLEM 3-8B (a) & (c) 4/1 Bal. 4/9 4/25 4/30 Bal. Cash 6,300 4/2 3,900 4/10 3,000 4/12 85 4/29 4/30 6,125 800 3,000 460 1,900 1,000 4/10 Accounts Payable 1,000 4/1 Bal. 4/20 Bal. 2,300 900 2,200 4/10 Accounts Receivable 85 85 Mortgage Payable 2,000 4/1 Bal. Bal. 8,000 6,000 4/30 Bal. Common Stock 4/1 Bal. Bal. 20,000 20,000 4/30 Bal. Prepaid Rentals 1,000 1,000 4/1 Bal. Bal. Land 10,000 10,000 Admission Revenue 4/9 3,900 4/25 3,000 Bal. 6,900 4/1 Bal. Bal. Buildings 8,000 8,000 4/12 Bal. Concession Revenue 4/30 Bal. 170 170 4/1 Bal. Bal. Equipment 6,000 6,000 Advertising Expense 460 460 3-66 PROBLEM 3-8B (Continued) Film Rental Expense 800 900 1,700 Salaries Expense 1,900 1,900 4/2 4/20 Bal. 4/29 Bal. (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 admissions) Mortgage Payable................................................... Accounts Payable .................................................. Cash ................................................................... (Made payments on mortgage and accounts payable) 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 admissions) 460 460 3,900 3,900 Debit 800 Credit 800 3 9 10 2,000 1,000 3,000 11 12 20 900 900 25 3,000 3,000 3-67 PROBLEM 3-8B (Continued) Date Apr. 29 Account Titles and Explanation Salaries Expense ................................................... Cash .................................................................. (Paid salaries expense) Cash ........................................................................... Accounts Receivable............................................ Concession Revenue (17% X $1,000) ........ (Received cash and balance on account for concession revenue) Prepaid Rentals ...................................................... Cash .................................................................. (Paid cash for future film rental) Debit 1,900 Credit 1,900 30 85 85 170 30 1,000 1,000 (d) CLASSIC THEATER INC. Trial Balance April 30, 2007 Cash............................................................................. Accounts Receivable ............................................. Prepaid Rentals ....................................................... Land............................................................................. Buildings.................................................................... Equipment ................................................................. Accounts Payable ................................................... Mortgage Payable ................................................... Common Stock ........................................................ Admission Revenue ............................................... Concession Revenue............................................. Advertising Expense.............................................. Film Rental Expense .............................................. Salaries Expense..................................................... Debit $ 6,125 85 1,000 10,000 8,000 6,000 Credit $ 2,200 6,000 20,000 6,900 170 460 1,700 1,900 $35,270 $35,270 3-68 PROBLEM 3-9B (a) Correct: 2, 7 Incorrect: 1, 3, 4, 5, 6, 8 (b) Error (1) In Balance 1. 3. 4. 5. 6. 8. No No Yes Yes Yes No (2) Difference $90 $880 None None None $7,000 (3) Larger Column Credit Credit N/A N/A N/A Credit 3-69 CONTINUING COOKIE CHRONICLE (a) Date Nov. 8 8 8 General Journal Account Titles No journal entry required. No journal entry required. Cash.......................................................................... Common Stock............................................. No journal entry required. Advertising Supplies........................................... Cash................................................................. Baking Supplies.................................................... Cash................................................................. Baking Equipment................................................ Common Stock............................................. Cash.......................................................................... Note Payable ................................................. Baking Equipment................................................ Cash................................................................. No journal entry required. Cash.......................................................................... Unearned Revenue ..................................... Cash.......................................................................... Teaching Revenue ...................................... 50 50 100 100 95 95 125 125 300 300 2,000 2,000 900 900 500 500 Debit Credit 11 11 14 15 16 17 18 25 29 3-70 CONTINUING COOKIE CHRONICLE (Continued) Date Nov. 30 Account Titles Website..................................................................... Accounts Payable........................................ Prepaid Insurance................................................. Cash ................................................................. Accounts Receivable........................................... Teaching Revenue....................................... Telephone Expense.............................................. Accounts Payable........................................ Debit 600 Credit 600 30 1,200 1,200 250 250 50 50 30 30 (b) Cash Nov. 8 500 Nov. 11 Nov. 16 2,000 Nov. 14 Nov. 25 50 Nov. 17 Nov. 29 100 Nov. 30 Nov. 30 Bal. 330 Accounts Receivable Nov. 30 250 Nov. 30 Bal. 250 Advertising Supplies Nov. 11 95 Nov. 30 Bal. 95 Baking Supplies Nov. 14 125 Nov. 30 Bal. 125 Prepaid Insurance Nov. 30 1,200 Nov. 30 Bal. 1,200 3-71 95 125 900 1,200 Baking Equipment Nov. 15 300 Nov. 17 900 Nov. 30 Bal. 1,200 Website Nov. 30 600 Nov. 30 Bal. 600 Accounts Payable Nov. 30 Nov. 30 Nov. 30 Bal. Unearned Revenue Nov. 25 Nov. 30 Bal. 600 50 650 50 50 Notes Payable Nov. 16 2,000 Nov. 30 Bal. 2,000 CONTINUING COOKIE CHRONICLE (Continued) Common Stock Nov. 8 Nov. 15 Nov. 30 Bal. Teaching Revenue Nov. 29 Nov. 30 Nov. 30 Bal. Telephone Expense Nov. 30 50 Nov. 30 Bal. 50 500 300 800 100 250 350 (c) COOKIE CREATIONS INC. Trial Balance November 30, 2006 Cash............................................................................. Accounts Receivable ............................................. Advertising Supplies.............................................. Baking Supplies....................................................... Prepaid Insurance................................................... Baking Equipment .................................................. Website....................................................................... Accounts Payable ................................................... Unearned Revenue ................................................. Note Payable............................................................. Common Stock ........................................................ Teaching Revenue .................................................. Telephone Expense................................................ Debit $ 330 250 95 125 1,200 1,200 600 Credit $ 650 50 2,000 800 350 50 $3,850 $3,850 3-72 BYP 3-1 FINANCIAL REPORTING PROBLEM (a) Account Common Stock Accounts Payable Accounts Receivable Selling, Marketing, and Administrative Expenses Prepaid Expenses Property, Plant, and Equipment Net Sales 1. Increase 2. Decrease 3. Normal Side Side Balance Credit Right/Credit Left/Debit Credit Right/Credit Left/Debit Debit Right/Credit Left/Debit Left/Debit Left/Debit Left/Debit Right/Credit Right/Credit Right/Credit Right/Credit Left/Debit Debit Debit Debit Credit (b) 1. 2. 3. (c) 1. 2. Cash is increased. Cash is decreased. Cash is decreased or accounts payable is increased. Cash is decreased or Interest Payable is increased. Cash is decreased or Notes (or Mortgage) Payable is increased. 3-73 BYP 3-2 COMPARATIVE ANALYSIS PROBLEM (a) 1. 2. 3. 4. 5. Tootsie Roll Accounts Receivable: Property, Plant, and Equipment: Accounts Payable: Retained Earnings: Net Sales: debit debit credit credit credit 1. 2. 3. 4. 5. Hershey Foods Inventories: Provision for Income Taxes: Accrued Liabilities: Common Stock: Interest Expense: debit debit credit credit debit (b) The following other accounts are ordinarily involved: 1. Increase in Accounts Receivable: Service Revenue or Sales Revenue is increased (credited). Decrease in Notes Payable: Cash is decreased (credited). Increase in Machinery: Notes Payable is increased (credited) or Cash is decreased (credited). Increase in Interest Income: Cash or Interest Receivable is increased (debited). 2. 3. 4. 3-74 BYP 3-3 RESEARCH CASE (a) Sherry Colby decided to send the company some excess funds of nearly $35,000 to pay off the remaining balance on her home mortgage. However, Washington Mutual's records did not reflect receipt of these funds. As a consequence, they sent her notices, and made phone calls saying that she was behind on her mortgage payments. (b) The company has received a wide variety of complaints from customers including lost mortgage payments, improper home foreclosures, illegal prepayment penalty fees, late posting of mortgage payments, mishandled property tax payments, and inaccurate reports filed with credit agencies. (c) Since 1991 the company has been rapidly acquiring other mortgage companies. The accounting software of companies is often incompatible. As a consequence, it is often very difficult to incorporate accounting information from newly acquired companies. Given the very large number of acquisitions that the company has engaged in, it is not surprising that it is having accounting problems. (d) As a result of the apparently poor state of its accounting systems the company has been the subject of thousands of customer complaints and many lawsuits. Besides the obvious legal costs incurred to defend itself against these complaints, its accounting system has also created a tremendous amount of ill will with its customers. 3-75 BYP 3-4 INTERPRETING FINANCIAL STATEMENTS CHIEFTAIN INTERNATIONAL, INC. (a) One of the primary advantages to Chieftain of having no long-term debt is that there is room for growth through the use of debt and the company's financial risk is greatly reduced. Another advantage is that profitability is enhanced when there is no interest expense. A possible disadvantage is that the company could expand more and earn a greater return if the growth had been financed with long-term debt. (b) An advantage to Chieftain from having a large cash balance is that cash is available to finance such things as the drilling of new wells and the investment in new technology. New opportunities may be seized and expansions may be undertaken at the time most advantageous for the business. A disadvantage is that cash earns little or no interest. A higher rate of return might be generated on excess cash by some other type of investment. (c) Accounts payable, as purchases on credit, represent interest-free loans. Business enterprises don't pay cash unless the supplier requires immediate payment. Nearly all exchange transactions are conducted on 30-day or more credit. 3-76 BYP 3-5 (a) One advantage of 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 for a foreign company is that converting to U.S. GAAP 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 financial information 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. 3-77 BYP 3-6 FINANCIAL ANALYSIS ON THE WEB (a) CPA stands for Certified Public Accountant. CPAs work in public accounting, business and industry, government, and education. (b) "Public accounting" is a term that describes accountants who provide audit services. Auditors' review company financial records for accuracy and accountability. Public accountants also provide advice to clients regarding taxation laws, computer technology, and management operations. (c) A CPA needs: strong communication and leadership skills, critical thinking and big-picture perspectives, strong analytical and computer skills, well-rounded academic background that combines liberal arts & science courses with accounting and business curriculum, strong sense of ethics and integrity, a professional manner to interact well with a variety of people. (d) Salary ranges are: $47,000 $55,000 during the first three years for a CPA at a large firm; $244,500 $347,000 for Chief Financial Officer (CFO) & Treasurer at a large corporation. 3-78 BYP 3-7 GROUP DECISION CASE (a) May 1 Cash .......................................................................... Common Stock ............................................. Correct. Cash .......................................................................... Unearned Revenue ...................................... Hay and Feed Supplies ....................................... Accounts Payable........................................ Office Equipment .................................................. Cash ................................................................. Dividends................................................................. Cash ................................................................. Cash .......................................................................... Riding Revenue ............................................ Veterinary Expense .............................................. Accounts Payable........................................ 15,000 15,000 5 7 500 500 1,700 1,700 800 800 400 400 154 154 75 75 9 14 15 20 31 (b) The error in the entries of May 14 and May 20 would prevent the trial balance from balancing. (c) Net income as reported ................................................. Add: 5/9, Hay and feed expense............................... 5/15, Salaries expense (Dividends declared and paid) ......................................... Less: 5/7, Boarding revenue unearned ................... Correct net income ......................................................... (d) Cash as reported ............................................................. Add: 5/9, Purchase on account ................................ 5/20, Transposition error.................................. $4,500 $1,700 400 2,100 6,600 500 $6,100 $12,475 $1,700 9 1,709 $14,184 3-79 BYP 3-8 COMMUNICATION ACTIVITY To: From: Re: Accounting Instructor Accounting Student Steps in Recording Process In the first transaction, bills totaling $6,000 were sent to customers for services provided. Therefore, the asset Accounts Receivable is increased $6,000 and the revenue Service Revenue is increased $6,000. Debits increase assets and credits increase revenues, so the journal entry is: Accounts Receivable........................................................................ Service Revenue ....................................................................... (Billed customers for services provided) 6,000 6,000 The $6,000 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. 3-80 BYP 3-9 ETHICS CASE (a) The stakeholders in this situation are: Rachel McGaver, assistant chief accountant. Users of the company's financial statements. A2Z 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), Rachel's action might not be considered unethical in the preparation of interim financial statements. However, if Rachel is violating a company accounting policy by her action, then she is acting unethically. (c) Rachel's alternatives are: 1. 2. 3. Miss the deadline but find the error causing the imbalance. Tell her supervisor of the imbalance and suffer the consequences. Do as she did and locate the error later, making the adjustment in the next quarter. 3-81 ...
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This note was uploaded on 02/05/2012 for the course ACC 211 taught by Professor Stoney during the Fall '09 term at Delta MI.

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