Solution Manual For Financial Accounting 16th Edition Carl Warren Christine Jonick Jennifer Schneide by welldoneassistant

SOLUTIONS MANUAL Financial Accounting 16th Edition by Carl S. Warren, Christine Jonick, Jennifer Schneider

TABLE OF CONTENTS CHAPTER 2: Analyzing Transactions CHAPTER 3: The Adjusting Process CHAPTER 4: Completing The Accounting Cycle CHAPTER 5: Accounting Systems CHAPTER 6: Accounting For Merchandising Businesses CHAPTER 7: Inventories CHAPTER 8: Internal Control and Cash CHAPTER 9: Receivables CHAPTER 10: Long-Term Assets: Fixed and Intangible CHAPTER 11: Current Liabilities and Payroll CHAPTER 12: Accounting For Partnerships and Limited Liability Companies CHAPTER 13: Corporations: Organization, Stock Transactions, and Dividends CHAPTER 14: Long-Term Liabilities: Bonds And NOTES CHAPTER 15: Investments CHAPTER 16: Statement Of Cash Flows CHAPTER 17: Financial Statement Analysis

CHAPTER 2 ANALYZING TRANSACTIONS DISCUSSION QUESTIONS 1.

An account is a form designed to record changes in a particular asset, liability, owner’s equity, revenue, or expense. A ledger is a group of related accounts.

The terms debit and credit may signify either an increase or a decrease, depending upon the nature of the account. For example, debits signify an increase in asset and expense accounts but a decrease in liability, owner’s equity, and revenue accounts.

a. b.

Assuming that no errors have occurred, the credit balance in the cash account resulted from drawing checks for $1,850 in excess of the amount of cash on deposit. The $1,850 credit balance in the cash account as of December 31 is a liability owed to the bank. It is usually referred to as an “overdraft.”

a. b.

No. Errors may have been made that had the same erroneous effect on both debits and credits, such as failing to record and/or post a transaction, recording the same transaction more than once, and posting a transaction correctly but to the wrong account.

Recording $9,800 instead of the correct amount of $8,900 is a transposition. Recording $100 instead of the correct amount of $1,000 is a slide.

a. b.

The revenue was earned in October. (1) Debit Accounts Receivable and credit Fees Earned or another appropriately titled revenue account in October. (2) Debit Cash and credit Accounts Receivable in November.

No. Because the same error occurred on both the debit side and the credit side of the trial balance, the trial balance would not be out of balance. Yes. The trial balance would not balance. The error would cause the debit total of the trial balance to exceed the credit total by $90.

a. b.

The equality of the trial balance would not be affected. On the income statement, total operating expenses (salary expense) would be overstated by $7,500, and net income would be understated by $7,500. On the statement of owner’s equity, the beginning and ending owner’s capital would be correct. The understatement of net income understates owner’s equity by $7,500, while the understatement of withdrawals overstates owner’s equity by $7,500. Thus, ending owner’s equity is correct. The balance sheet is not affected by the error.

a. b.

The equality of the trial balance would not be affected. On the income statement, revenues (fees earned) would be overstated by $300,000, and net income would be overstated by $300,000. On the statement of owner’s equity, the beginning capital would be correct. However, net income and ending capital would be overstated by $300,000. The balance sheet total assets is correct. However, liabilities (notes payable) is understated by $300,000, and owner’s equity is overstated by $300,000. The understatement of liabilities is offset by the overstatement of owner’s equity, and thus, total liabilities and owner’s equity is correct.

10.

a. b.

From the viewpoint of Surety Storage, the balance of the checking account represents an asset. From the viewpoint of Ada Savings Bank, the balance of the checking account represents a liability.

CHAPTER 2

Analyzing Transactions

PRACTICE EXERCISES PE 2-1A 1. 2. 3. 4. 5. 6.

Debit and credit entries (c), normal debit balance Credit entries only (b), normal credit balance Credit entries only (b), normal credit balance Debit entries only (a), normal debit balance Credit entries only (b), normal credit balance Debit and credit entries (c), normal credit balance

PE 2-1B 1. 2. 3. 4. 5. 6.

Debit and credit entries (c), normal credit balance Debit and credit entries (c), normal debit balance Debit entries only (a), normal debit balance Debit entries only (a), normal debit balance Debit entries only (a), normal debit balance Credit entries only (b), normal credit balance

PE 2-2A Feb.

19 Office Equipment Cash Accounts Payable

14,800

30 Office Supplies Cash Accounts Payable

1,900

3,600 11,200

PE 2-2B Sept.

600 1,300

CHAPTER 2

Analyzing Transactions

PE 2-3A Apr.

30 Accounts Receivable Fees Earned

12,980

13 Cash Fees Earned

7,480

23 Graeme Schneider, Drawing Cash

27,000

30 Claire Hope, Drawing Cash

9,500

12,980

PE 2-3B Aug.

7,480

PE 2-4A Dec.

27,000

PE 2-4B June

9,500

PE 2-5A Using the following T account, solve for the amount of cash receipts (indicated by ? below). Cash July 1 Bal. Cash receipts July 31 Bal.

42,830 ? 33,850

132,500

Cash payments

$33,850 = $42,830 + Cash receipts – $132,500 Cash receipts = $33,850 + $132,500 – $42,830 = $123,520

PE 2-5B Using the following T account, solve for the amount of supplies expense (indicated by ? below). Supplies Aug. 1 Bal. Supplies purchased Aug. 31 Bal.

1,240 3,760 1,600

Supplies expense

$1,600 = $1,240 + $3,760 – Supplies expense Supplies expense = $1,240 + $3,760 – $1,600 = $3,400

CHAPTER 2

Analyzing Transactions

PE 2-6A a.

The trial balance totals are unequal. The debit total is higher by $900 ($9,800 – $8,900).

The trial balance totals are equal because both the debit and credit entries were journalized and posted for $530.

The trial balance totals are unequal. The debit total is higher by $5,800 ($2,900 + $2,900).

PE 2-6B a.

The trial balance totals are equal because both the debit and credit entries were journalized and posted for $14,200.

The trial balance totals are unequal. The credit total is higher by $360 ($1,730 – $1,370).

The trial balance totals are unequal. The debit total is higher by $4,500 ($7,250 – $2,750).

CHAPTER 2

Analyzing Transactions

PE 2-7A a.

Journal Entry That Was Made in Error Miscellaneous Expense 3,220 Rent Expense 3,220

Journal Entry That Should Have Been Made Rent Expense 3,220 Cash

3,220

Comparison Rent Expense instead of Miscellaneous Expense should have been debited. Cash instead of Rent Expense should have been credited. The debit and credit amount of $3,220 is correct.

Correcting Journal Entries Rent Expense Miscellaneous Expense Rent Expense Cash

3,220 3,220 3,220 3,220

Journal Entry That Was Made in Error Cash 5,080 Accounts Payable 5,080

Journal Entry That Should Have Been Made Cash 5,080 Accounts Receivable

5,080

Comparison Accounts Receivable instead of Accounts Payable should have been credited.

Correcting Journal Entry Accounts Payable Accounts Receivable

5,080 5,080

CHAPTER 2

Analyzing Transactions

PE 2-7B a.

Journal Entry That Was Made in Error Accounts Receivable 10,700 Fees Earned 10,700

Journal Entry That Should Have Been Made Cash 10,700 Fees Earned 10,700

Comparison Cash instead of Accounts Receivable should have been debited.

Correcting Journal Entry Cash Accounts Receivable

10,700 10,700

Journal Entry That Was Made in Error Office Equipment 4,300 Supplies

4,300

Journal Entry That Should Have Been Made Supplies 4,300 Accounts Payable

4,300

Comparison Supplies instead of Office Equipment should have been debited. Accounts Payable instead of Supplies should have been credited. The debit and credit amount of $4,300 is correct.

Correcting Journal Entries Supplies Office Equipment Supplies Accounts Payable

4,300 4,300 4,300 4,300

CHAPTER 2

Analyzing Transactions

PE 2-8A Vaughn Company Income Statements For the Years Ended December 31

Fees earned Operating expenses Net income

20Y1

20Y0

Increase/(Decrease) Amount Percent

$716,800 557,760 $159,040

$896,000 672,000 $224,000

$(179,200) (114,240) $ (64,960)

(20%) (17%) (29%)

PE 2-8B Satterfield Company Income Statements For the Years Ended December 31

Fees earned Operating expenses Net income

20Y1

20Y0

$3,068,200 2,281,600 $ 786,600

$2,645,000 1,984,000 $ 661,000

Increase/(Decrease) Amount Percent

$423,200 297,600 $125,600

16.0% 15.0% 19.0%

CHAPTER 2

Analyzing Transactions

EXERCISES Ex. 2-1 Balance Sheet Accounts

Income Statement Accounts

Assets

Revenues

Cash Accounts Receivable Property and Equipment Fuel Inventory Parts and Supplies Prepaid Expenses

Cargo Revenue Passenger Revenue

Liabilities Accounts Payable a Air Traffic Liability Loyalty Program (Obligations)b Accrued Salaries (Obligations)

Expenses Aircraft Fuel (Expense) Aircraft Maintenance (Expense) Aircraft Rent (Expense) c Regional Carriers Expense Landing Fees (Expense)d e Passenger Commissions (Expense)

Owner’s Equity None a b c d e

Passenger ticket sales for future flights Obligations to provide frequent flyers future travel and other benefits Payments to other airlines for passenger travel under Delta tickets Fees paid to airports for landing rights Commissions paid to travel agents for passenger bookings

Ex. 2-2 Account

Account Number

Accounts Payable Accounts Receivable Cash Fees Earned Fred Biggs, Capital Fred Biggs, Drawing Land Miscellaneous Expense Supplies Expense Wages Expense

21 12 11 41 31 32 13 53 52 51

Note: Expense accounts are normally listed in order of magnitude from largest to smallest with Miscellaneous Expense always listed last. Since Wages Expense is normally larger than Supplies Expense, Wages Expense is listed as account number 51 and Supplies Expense as account number 52.

CHAPTER 2

Analyzing Transactions

Ex. 2-3 Balance Sheet Accounts 11 12 13 14 15

Income Statement Accounts

1. Assets Cash Accounts Receivable Supplies Prepaid Insurance Equipment

4. Revenue 41 Fees Earned

51 52 53 59

2. Liabilities 21 Accounts Payable 22 Unearned Rent

5. Expenses Wages Expense Rent Expense Supplies Expense Miscellaneous Expense

3. Owner’s Equity 31 Lorri Ross, Capital 32 Lorri Ross, Drawing Note: The order of some of the accounts within the major classifications is somewhat arbitrary, as in accounts 13–14, accounts 21–22, and accounts 51–53. In a new business, the order of magnitude of balances in such accounts is not determinable in advance. The magnitude may also vary from period to period.

Ex. 2-4 a. b. c. d. e. f.

debit credit debit credit credit debit

g. h. i. j. k. l.

debit credit debit credit debit debit

Ex. 2-5 1. 2. 3. 4. 5. 6. 7.

debit and credit entries (c) debit and credit entries (c) debit and credit entries (c) credit entries only (b) debit entries only (a) debit entries only (a) debit entries only (a)

CHAPTER 2

Analyzing Transactions

Ex. 2-6 a. b. c. d.

Liability—credit Asset—debit Owner’s equity (Ashley Griffin, Capital)—credit Owner’s equity (Ashley Griffin, Drawing)—debit

e. f. g. h. i. j.

Asset—debit Revenue—credit Asset—debit Expense—debit Asset—debit Expense—debit

Ex. 2-7 20Y3 Oct.

1 Rent Expense Cash

4,800

3 Advertising Expense Cash

2,500

5 Supplies Cash

1,390

6 Office Equipment Accounts Payable

10,670

10 Cash Accounts Receivable

19,730

15 Accounts Payable Cash

9,480

4,800

2,500

1,390

10,670

19,730

9,480

27 Miscellaneous Expense Cash

530

30 Utilities Expense Cash

220

530

220

31 Accounts Receivable Fees Earned

38,620

31 Utilities Expense Cash

1,540

31 Michael Short, Drawing Cash

6,700

38,620

1,540

6,700

CHAPTER 2

Analyzing Transactions

Ex. 2-8 a. JOURNAL Date

20Y4 Sept.

Post. Ref.

Description

18 Supplies Accounts Payable Purchased supplies on account.

Page

15 21

Debit

Credit

8,710 8,710

b., c., d. Account:

Supplies

Date

20Y4 Sept.

Item

1 Balance 18

Account:

20Y4 Sept. e.

Post. Ref.

Debit

 87

Credit

Item

1 Balance 18

Debit

Balance Credit

2,960 11,670

8,710

Accounts Payable

Date

Account No.

Post. Ref.

Debit

 87

Credit

Debit

Balance Credit

38,400 47,110

8,710

Yes. The rules of debit and credit apply to all companies.

Ex. 2-9 a. (1) (2) (3) (4)

Accounts Receivable Fees Earned

73,900

Supplies Accounts Payable

1,960

Cash Accounts Receivable

62,770

73,900 1,960 62,770

Accounts Payable Cash

820 820

CHAPTER 2

Analyzing Transactions

Ex. 2-9 (Concluded) b. (3)

Cash 62,770 (4)

(2)

Supplies 1,960 Accounts Receivable 73,900 (3)

(1) c.

820

(4)

Accounts Payable 820 (2)

1,960

Fees Earned (1)

73,900

62,770

No. An error may not have necessarily occurred. A credit balance in Accounts Receivable could occur if a customer overpaid his or her account. Regardless, the credit balance should be investigated to verify that an error has not occurred.

Ex. 2-10 a.

The increase of $140,000 ($515,000 – $375,000) in the cash account does not indicate net income of that amount. Net income is the excess of revenues over expenses and is normally not the same as the change in the cash account.

$60,000 ($200,000 – $140,000) or Cash X 515,000 200,000

375,000

X + $515,000 – $375,000 = $200,000 X = $200,000 – $515,000 + $375,000 X = $60,000

CHAPTER 2

Analyzing Transactions

Ex. 2-11 Accounts Payable Feb. 1 194,500 Feb. 28

X 210,400 62,500

X + $210,400 – $194,500 = $62,500 X = $62,500 + $194,500 – $210,400 X = $46,600 b. Oct.

Oct.

Accounts Receivable 121,100 X 136,800

470,500

$121,100 + X – $470,500 = $136,800 X = $136,800 + $470,500 – $121,100 X = $486,200 c. Apr.

Apr.

Cash 48,350 260,060 59,390

$48,350 + $260,060 – X = $59,390 X = $48,350 + $260,060 – $59,390 X = $249,020 Ex. 2-12 a.

Credit balance of $170,000 ($500,000 – $10,000 – $320,000).

Yes. The balance sheet prepared at December 31 will balance, with Terrace Waters, Capital, being reported in the owner’s equity section as $170,000.

CHAPTER 2

Analyzing Transactions

Ex. 2-13 a. and b. Account Debited Transaction

Type

Account Credited

Effect

Type

Effect

owner’s equity asset asset liability asset revenue asset asset asset asset

+ – – + – + – – – –

(1) (2) (3)

asset asset asset

+ + +

(4) (5) (6) (7) (8) (9)

expense asset liability asset expense drawing

+ + – + + +

Ex. 2-14 (1) Cash Mary Silva, Capital

97,000

(2) Supplies Cash

1,160

(3) Equipment Accounts Payable Cash

10,350

(4) Operating Expenses Cash

8,120

(5) Accounts Receivable Fees Earned

15,910

(6) Accounts Payable Cash

3,490

(7) Cash Accounts Receivable

10,540

97,000 1,160 8,280 2,070 8,120 15,910 3,490 10,540

(8) Operating Expenses Supplies

850

(9) Mary Silva, Drawing Cash

3,200

850 3,200

CHAPTER 2

Analyzing Transactions

Ex. 2-15 a.

Emerald Tours Co. Unadjusted Trial Balance May 31, 20Y5 Debit Balances

Cash Accounts Receivable Supplies Equipment Accounts Payable Mary Silva, Capital Mary Silva, Drawing Fees Earned Operating Expenses

Credit Balances

89,500 5,370 310 10,350 4,790 97,000 3,200 15,910 8,970 117,700

117,700

Net income, $6,940 ($15,910 – $8,970)

CHAPTER 2

Analyzing Transactions

Ex. 2-16 Hickory Furniture Company Unadjusted Trial Balance December 31, 20Y6 Debit Balances

Credit Balances

33,320* 116,900 4,275 21,600 50,000

Cash Accounts Receivable Supplies Prepaid Insurance Land Accounts Payable Unearned Rent Notes Payable Elaine Wells, Capital Elaine Wells, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Expense

42,770 12,000 50,000 75,000 24,000 745,230 580,700 48,000 26,850 6,255 3,600 9,500 925,000

925,000

* $33,320 = $925,000 – $9,500 – $3,600 – $6,255 – $26,850 – $48,000 – $580,700 – $24,000 – $50,000 – $21,600 – $4,275 – $116,900

Ex. 2-17 Inequality of trial balance totals would be caused by errors described in (c) and (e). For (c), the debit total would exceed the credit total by $9,900 ($4,950 + $4,950). For (e), the credit total would exceed the debit total by $17,100 ($19,000 – $1,900). Errors (b), (c), (d), and (e) would require correcting entries. Although it is not a correcting entry, the entry that was not made in (a) should also be entered in the journal.

CHAPTER 2

Analyzing Transactions

Ex. 2-18 Ranger Co. Unadjusted Trial Balance August 31, 20Y7 Debit Balances

Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Unearned Rent Carmen Meeks, Capital Carmen Meeks, Drawing Fees Earned Wages Expense Advertising Expense Miscellaneous Expense

Credit Balances

15,500 46,750 12,000 190,000 24,600 5,400 110,000 13,000 385,000 213,000 16,350 18,400 525,000

525,000

Ex. 2-19 Error

(a) Out of Balance

(b) Difference

1. 2. 3. 4. 5. 6. 7.

yes no yes yes no yes yes

$6,000 — 5,400 480 — 90 360

debit — credit debit — credit credit

CHAPTER 2

Analyzing Transactions

Ex. 2-20 1. 2. 3. 4. 5. 6.

The Debit column total is added incorrectly. The sum is $890,700 rather than $1,189,300. The trial balance should be dated “July 31, 20Y3,” not “For the Month Ending July 31, 20Y3.” The Accounts Receivable balance should be in the Debit column. The Accounts Payable balance should be in the Credit column. The Samuel Parson, Drawing, balance should be in the Debit column. The Advertising Expense balance should be in the Debit column. A corrected trial balance would be as follows: Mascot Co. Unadjusted Trial Balance July 31, 20Y3 Account No.

Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Salaries Payable Samuel Parson, Capital Samuel Parson, Drawing Fees Earned Salary Expense Advertising Expense Miscellaneous Expense

11 12 13 14 21 22 31 32 41 51 52 59

Debit Balances

Credit Balances

36,000 112,600 18,000 375,000 53,300 7,500 297,200 17,000 682,000 396,800 73,000 11,600 1,040,000

1,040,000

CHAPTER 2

Analyzing Transactions

Ex. 2-21 a.

Journal Entry That Was Made in Error Insurance Expense 18,000 Prepaid Insurance 18,000

Journal Entry That Should Have Been Made Prepaid Insurance 18,000 Cash

18,000

Comparison Prepaid Insurance instead of Insurance Expense should have been debited. Cash instead of Prepaid Insurance should have been credited. The debit and credit amount of $18,000 is correct.

Correcting Journal Entries Prepaid Insurance Insurance Expense Prepaid Insurance Cash

18,000 18,000 18,000 18,000

Journal Entry That Was Made in Error Wages Expense 10,000 Cash 10,000

Journal Entry That Should Have Been Made Brian Phillips, Drawing 10,000 Cash

10,000

Comparison Brian Phillips, Drawing instead of Wages Expense should have been debited.

Correcting Journal Entry Brian Phillips, Drawing Wages Expense

10,000 10,000

CHAPTER 2

Analyzing Transactions

Ex. 2-22 a.

Journal Entry That Was Made in Error Fees Earned 8,800 Cash 8,800

Journal Entry That Should Have Been Made Cash 8,800 Accounts Receivable

8,800

Comparison Cash instead of Fees Earned should have been debited. Accounts Receivable instead of Cash should have been credited. The debit and credit amount of $8,800 is correct.

Correcting Journal Entries Cash Fees Earned Cash Accounts Receivable

8,800 8,800 8,800 8,800

Journal Entry That Was Made in Error Supplies Expense 1,760 Accounts Payable 1,760

Journal Entry That Should Have Been Made Supplies 1,760 Cash

1,760

Comparison Supplies instead of Supplies Expense should have been debited. Cash instead of Accounts Payable should have been credited. The debit and credit amount of $1,760 is correct.

Correcting Journal Entries Accounts Payable Supplies Expense Supplies Cash

1,760 1,760 1,760 1,760

Note: The first entry reverses the incorrect entry, and the second entry is what should have been recorded initially. These two entries could have been combined into one entry; however, preparing two entries makes it easier for someone later to understand what happened and why the entries were necessary. 2-20 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 2

Analyzing Transactions

Ex. 2-23 a.

Revenue: $2,642 million increase ($75,356 – $72,714) 3.6% increase ($2,642 ÷ $72,714)

Operating expenses: $2,756 million increase ($71,246 – $68,490) 4.0% increase ($2,756 ÷ $68,490)

Operating income: $114 million decrease ($4,110 – $4,224) 2.7% decrease (–$114 ÷ $4,224)

During the recent year, revenue increased by 3.6%, while operating expenses increased by 4.0%. As a result, operating income decreased by 2.7%, from the prior year.

CHAPTER 2

Analyzing Transactions

Ex. 2-24 a.

Revenue: $12,551 million increase ($141,576 – $129,025) 9.7% increase ($12,551 ÷ $129,025)

Operating expenses: $12,182 million increase ($137,096 – $124,914) 9.8% increase ($12,182 ÷ $124,914)

Operating income: $369 million increase ($4,480 – $4,111) 9.0% increase ($369 ÷ $4,111)

During the recent year, revenue increased by 9.7%, while operating expenses increased by 9.8%. As a result, operating income increased by 9.0% from the prior year.

Because of the size differences between Target and Costco (Costco has more than 1.8 times the revenue), it is best to compare the two companies on the basis of percent changes from the prior year. Costco’s revenues increased by 9.7%, while Target’s revenue increased by 3.6%. The expenses of Costco increased by 9.8%, which is slightly more than the percentage increase in revenues. As a result, Costco’s operating income increased by 9.0%. Target’s expenses increased by 4.0%, which is less than the percentage increase in revenues. As a result, Target’s operating income decreased by 2.7%. Overall, Costco had a better operating performance than Target.

CHAPTER 2

Analyzing Transactions

PROBLEMS Prob. 2-1A 1. and 2. (a) (g)

Cash 36,000 (b) 12,200 (c) (e) (f) (h) (i) (j) (m) (n) 14,065

2,400 7,800 2,150 4,000 815 4,500 5,000 6,450 1,020

(d)

Equipment 9,000 Accounts Payable 4,500 (d) (k) Bal.

9,000 2,890 7,390

Notes Payable 5,000 (c) Bal.

25,000 20,000

(l)

Accounts Receivable 18,300

Connie Young, Capital (a)

36,000

(e)

Supplies 2,150

Professional Fees (g) (l) Bal.

12,200 18,300 30,500

(f)

Prepaid Insurance 4,000

(m)

Salary Expense 6,450

(c)

Automobiles 32,800

(k)

Blueprint Expense 2,890

(b)

Rent Expense 2,400

(n)

Automobile Expense 1,020

(h)

Miscellaneous Expense 815

Bal.

(i)

(j)

CHAPTER 2

Analyzing Transactions

Prob. 2-1A (Concluded) 3.

Connie Young, Architect Unadjusted Trial Balance October 31, 20Y4 Debit Balances

Cash Accounts Receivable Supplies Prepaid Insurance Automobiles Equipment Accounts Payable Notes Payable Connie Young, Capital Professional Fees Salary Expense Blueprint Expense Rent Expense Automobile Expense Miscellaneous Expense

Credit Balances

14,065 18,300 2,150 4,000 32,800 9,000 7,390 20,000 36,000 30,500 6,450 2,890 2,400 1,020 815 93,890

93,890

Net income, $16,925 ($30,500 – $6,450 – $2,890 – $2,400 – $1,020 – $815)

CHAPTER 2

Analyzing Transactions

Prob. 2-2A 1.

(a) (b) (c) (d) (e) (f)

(g) (h) (i)

Cash Fahad Ali, Capital

53,000

Rent Expense Cash

7,950

Supplies Accounts Payable

4,240

Accounts Payable Cash

2,320

Cash Fees Earned

24,180

Automobile Expense Miscellaneous Expense Cash

2,490 560

Office Salaries Expense Cash

6,630

Supplies Expense Supplies

1,860

Fahad Ali, Drawing Cash

2,600

53,000 7,950 4,240 2,320 24,180

3,050 6,630 1,860 2,600

CHAPTER 2

Analyzing Transactions

Prob. 2-2A (Continued) 2. 7,950 2,320 3,050 6,630 2,600

Bal.

Cash 53,000 (b) 24,180 (d) (f) (g) (i) 54,630

Supplies 4,240 (h) 2,380

1,860

(a) (e)

(d)

Accounts Payable 2,320 (c) Bal. Fahad Ali, Capital (a)

(i)

4,240 1,920

53,000

Fahad Ali, Drawing 2,600

Fees Earned (e)

(b)

Rent Expense 7,950

(g)

Office Salaries Expense 6,630

(f)

Automobile Expense 2,490

(h)

Supplies Expense 1,860

(f)

Miscellaneous Expense 560

24,180

CHAPTER 2

Analyzing Transactions

Prob. 2-2A (Concluded) 3.

Mountain Top Realty Unadjusted Trial Balance January 31, 20Y5 Debit Balances

Cash Supplies Accounts Payable Fahad Ali, Capital Fahad Ali, Drawing Fees Earned Rent Expense Office Salaries Expense Automobile Expense Supplies Expense Miscellaneous Expense

Credit Balances

54,630 2,380 1,920 53,000 2,600 24,180 7,950 6,630 2,490 1,860 560 79,100

79,100

a. $24,180 b. $19,490 ($7,950 + $6,630 + $2,490 + $1,860 + $560) c. $4,690 ($24,180 – $19,490)

There is a $2,090 increase in owner’s equity for January, which is net income of $4,690 minus withdrawals of $2,600.

CHAPTER 2

Analyzing Transactions

Prob. 2-3A 1. JOURNAL

20Y6 June

Post. Ref.

Description

Date

11 31

48,000

1 Rent Expense Cash

53 11

6,510

6 Equipment Accounts Payable

16 22

19,340

8 Van Cash Notes Payable

18 11 21

39,100

10 Supplies Cash

13 11

3,260

12 Cash Fees Earned

11 41

16,730

15 Prepaid Insurance Cash

14 11

4,940

23 Accounts Receivable Fees Earned

12 41

16,320

24 Van Expense Accounts Payable

55 22

2,060

JOURNAL

20Y6 June

Debit

1 Cash Hannah Ellis, Capital

Credit

48,000

6,510

19,340

6,200 32,900

3,260

16,730

4,940

16,320

2,060 2

Page

Post. Ref.

Description

Date

Page

Debit

29 Utilities Expense Cash

54 11

4,250

29 Miscellaneous Expense Cash

59 11

1,300

Credit

4,250

1,300

CHAPTER 2

Analyzing Transactions

Prob. 2-3A (Continued) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 30 Cash 11 10,050 Accounts Receivable 12 10,050 30 Wages Expense Cash

51 11

6,950

30 Accounts Payable Cash

22 11

9,360

30 Hannah Ellis, Drawing Cash

32 11

2,200

6,950

9,360

2,200

2. GENERAL LEDGER Cash

Account:

Item

Date

20Y6 June

Post. Ref.

1 1 8 10 12 15 29 29 30 30 30 30

1 1 1 1 1 1 2 2 2 2 2 2

Debit

Credit

48,000 6,510 6,200 3,260 16,730 4,940 4,250 1,300 10,050 6,950 9,360 2,200

Accounts Receivable

Account:

Item

Date

20Y6 June

Account No.

23 30

Balance Debit Credit

48,000 41,490 35,290 32,030 48,760 43,820 39,570 38,270 48,320 41,370 32,010 29,810 Account No.

Post. Ref.

1 2

Debit

Balance Credit

Credit

Debit

10,050

16,320 6,270

16,320

CHAPTER 2

Analyzing Transactions

Prob. 2-3A (Continued) Supplies

Account:

Item

Date

20Y6 June

Item

Date

20Y6 June

15 Equipment

Date

Item

Date

3,260

Debit

Credit

4,940

Post. Ref.

Debit

Credit

19,340

Post. Ref.

Debit

Credit

39,100

Balance Credit

Balance Debit Credit

39,100 21

Account No.

Post. Ref.

Debit

Item

6 24 30

Debit

19,340

Credit

Debit

Balance Credit

32,900

Accounts Payable

Date

Account No.

Item

Account:

Balance Debit Credit

4,940

Notes Payable

Date

Account No.

Item

Account:

20Y6 June

Post. Ref.

20Y6 June

Credit

Van

Account:

20Y6 June

Debit

Balance Debit Credit

Account No.

Account:

20Y6 June

Post. Ref.

Prepaid Insurance

Account:

Account No.

32,900 22

Account No.

Post. Ref.

1 1 2

Debit

Credit

19,340 2,060 9,360

Balance Debit Credit

19,340 21,400 12,040

CHAPTER 2

Analyzing Transactions

Prob. 2-3A (Continued) Hannah Ellis, Capital

Account:

Date

20Y6 June

Item

Date

20Y6 June

12 23

Debit

Credit

2,200

Date

Post. Ref.

Debit

Credit

Date

Balance Credit

16,730 33,050 Account No.

Post. Ref.

Debit

Credit

6,950

Post. Ref.

Debit

6,950

Credit

6,510

Debit

4,250

Balance Debit Credit

6,510 Account No.

Post. Ref.

Balance Debit Credit

Account No.

Item

Debit

16,730 16,320

Utilities Expense

Account:

Balance Debit Credit

Account No.

Item

2,200

Rent Expense

Account:

48,000 Account No.

1 1

Item

Balance Debit Credit

48,000

Wages Expense

Date

20Y6 June

Post. Ref.

Item

Account:

20Y6 June

Credit

Fees Earned

Date

20Y6 June

Debit

Item

Account:

20Y6 June

Post. Ref.

Hannah Ellis, Drawing

Account:

Account No.

Credit

Debit

Balance Credit

4,250

CHAPTER 2

Analyzing Transactions

Prob. 2-3A (Continued) Van Expense

Account:

Date

20Y6 June

Item

Date

20Y6 June

Post. Ref.

Balance Debit

Credit

2,060

Post. Ref.

Debit

Credit

2,060

Miscellaneous Expense

Account:

Account No.

Balance Debit

1,300

Credit

Debit

Credit

1,300

CHAPTER 2

Analyzing Transactions

Prob. 2-3A (Concluded) 3.

Whitworth Designs Unadjusted Trial Balance June 30, 20Y6 Account No.

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Van Notes Payable Accounts Payable Hannah Ellis, Capital Hannah Ellis, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Van Expense Miscellaneous Expense

11 12 13 14 16 18 21 22 31 32 41 51 53 54 55 59

Debit Balances

Credit Balances

29,810 6,270 3,260 4,940 19,340 39,100 32,900 12,040 48,000 2,200 33,050 6,950 6,510 4,250 2,060 1,300 125,990

125,990

$11,980 ($33,050 – $6,950 – $6,510 – $4,250 – $2,060 – $1,300)

Some supplies may have been used during June, but no supplies expense has been recorded. As will be discussed in Chapter 3, adjustments are necessary at the end of the accounting period to bring the accounts up to date. For example, adjustments for supplies used, insurance expired, and depreciation would probably be required by Whitworth Designs. Note to Instructors: At this point, students have not been exposed to depreciation, but some insightful students might recognize the need for recording supplies used and insurance expired. You might use this as an opportunity to discuss what is coming in Chapter 3.

CHAPTER 2

Analyzing Transactions

Prob. 2-4A 2. and 3. JOURNAL

20Y7 Apr.

Post. Ref.

Description

Date

20Y7 Apr.

Debit

1 Rent Expense Cash

52 11

6,500

2 Office Supplies Accounts Payable

14 21

2,300

5 Prepaid Insurance Cash

13 11

6,000

10 Cash Accounts Receivable

11 12

52,300

15 Land Cash Notes Payable

16 11 23

200,000

17 Accounts Payable Cash

21 11

6,450

20 Accounts Payable Office Supplies

21 14

325

23 Advertising Expense Cash

53 11

4,300

JOURNAL Date

Credit

6,500

2,300

6,000

52,300

30,000 170,000

6,450

325

4,300 19

Page

Post. Ref.

Description

Page

Debit

27 Cash Salary and Commission Expense

11 51

2,500

28 Automobile Expense Cash

54 11

1,500

29 Miscellaneous Expense Cash

59 11

1,400

Credit

2,500

1,500

1,400

CHAPTER 2

Analyzing Transactions

Prob. 2-4A (Continued) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 30 Accounts Receivable 12 57,000 Fees Earned 41 57,000 30 Salary and Commission Expense Cash

51 11

11,900

30 Lester Wagner, Drawing Cash

32 11

4,000

30 Cash Unearned Rent

11 22

10,000

11,900

4,000

10,000

1. and 3. GENERAL LEDGER Account:

Cash Item

Date

20Y7 Apr.

1 Balance 1 5 10 15 17 23 27 28 29 30 30 30

Account:

Post. Ref.

 18 18 18 18 18 18 19 19 19 19 19 19

Debit

Credit

6,500 6,000 52,300 30,000 6,450 4,300 2,500 1,500 1,400 11,900 4,000 10,000

Accounts Receivable Item

Date

20Y7 Apr.

Account No.

1 Balance 10 30

Debit

Balance Credit

26,300 19,800 13,800 66,100 36,100 29,650 25,350 27,850 26,350 24,950 13,050 9,050 19,050 Account No.

Post. Ref.

 18 19

Debit

57,000

Balance Credit

Credit

Debit

52,300

61,500 9,200 66,200

CHAPTER 2

Analyzing Transactions

Prob. 2-4A (Continued) Prepaid Insurance

Account:

Item

Date

20Y7 Apr.

1 Balance 5

Date

20Y7 Apr.

Item

3,000 9,000

6,000

Post. Ref.

Debit

Credit

2,300 325

Post. Ref.

Debit

200,000

Credit

Item

Date

1 Balance 2 17 20

Post. Ref.

 18 18 18

Item

Date

Debit

Credit

Balance Credit

Balance Debit Credit

14,000 16,300 9,850 9,525

6,450 325

Account No.

Post. Ref.

Debit

Item

Date

Debit

2,300

Credit

Debit

Balance Credit

10,000

Notes Payable

Account:

1,800 4,100 3,775

Account No.

Unearned Rent

Account:

Balance Debit Credit

200,000

Accounts Payable

Account:

Account No.

20Y7 Apr.

Credit

Balance Debit Credit

Account No.

 18 18

Item

Date

20Y7 Apr.

Debit

Land

Account:

20Y7 Apr.

 18

1 Balance 2 20

20Y7 Apr.

Post. Ref.

Office Supplies

Account:

Account No.

10,000 23

Account No.

Post. Ref.

Debit

Credit

170,000

Balance Debit Credit

170,000

CHAPTER 2

Analyzing Transactions

Prob. 2-4A (Continued) Account:

Lester Wagner, Capital

Date

20Y7 Apr. Account:

Item

1 Balance

Account:

 19

Item

Debit

Credit

Post. Ref.

Debit

Credit

Post. Ref.

1 Balance 27 30

 19 19

Debit

Credit

2,500 11,900

Debit

Post. Ref.

 18

Debit

Credit

148,200 145,700 157,600

6,500

Balance Debit Credit

Account No.

 18

Debit

4,300

30,000 36,500

Advertising Expense Post. Ref.

Balance Credit

Account No.

1 Balance 1

1 Balance 23

240,000 297,000 Account No.

Rent Expense

Item

Balance Debit Credit

57,000

Salary and Commission Expense

Item

Balance Debit Credit

2,000 6,000

4,000

 19

Item

Account No.

1 Balance 30

Date

20Y7 Apr.

46,000

Fees Earned

Date

20Y7 Apr.

Post. Ref.

1 Balance 30

Date

20Y7 Apr.

Credit

Balance Debit Credit



Item

Date

20Y7 Apr.

Debit

Lester Wagner, Drawing

Date

20Y7 Apr.

Post. Ref.

Account No.

Credit

Balance Debit Credit

17,800 22,100

CHAPTER 2

Analyzing Transactions

Prob. 2-4A (Continued) Account:

Automobile Expense

Account:

1 Balance 28

 19

Debit

Credit

Post. Ref.

Item

1 Balance 29

 19

Balance Debit Credit

5,500 7,000

1,500

Miscellaneous Expense

Date

20Y7 Apr.

Post. Ref.

Item

Date

20Y7 Apr.

Account No.

Debit

Credit

Balance Debit Credit

3,900 5,300

1,400

4. Elite Realty Unadjusted Trial Balance April 30, 20Y7

Cash Accounts Receivable Prepaid Insurance Office Supplies Land Accounts Payable Unearned Rent Notes Payable Lester Wagner, Capital Lester Wagner, Drawing Fees Earned Salary and Commission Expense Rent Expense Advertising Expense Automobile Expense Miscellaneous Expense

Account No.

Debit Balances

11 12 13 14 16 21 22 23 31 32 41 51 52 53 54 59

19,050 66,200 9,000 3,775 200,000

Credit Balances

9,525 10,000 170,000 46,000 6,000 297,000 157,600 36,500 22,100 7,000 5,300 532,525

532,525

CHAPTER 2

Analyzing Transactions

Prob. 2-4A (Concluded) 5.

(a) The unadjusted trial balance in (4) still balances because the debits equaled the credits in the original journal entry. (b) The correcting entry for $7,200 ($19,100 – $11,900) would be as follows: JOURNAL Date

20Y7 Apr.

Post. Ref.

Description

30 Salary and Commission Expense Cash

Page

51 11

Debit

Credit

7,200 7,200

CHAPTER 2

Analyzing Transactions

Prob. 2-5A The Colby Group Unadjusted Trial Balance August 31, 20Y8

Debit Balances

Cash* Accounts Receivable Supplies** Prepaid Insurance Equipment Notes Payable Accounts Payable Terry Colby, Capital Terry Colby, Drawing Fees Earned Wages Expense Rent Expense Advertising Expense Gas, Electricity, and Water Expense Miscellaneous Expense

Credit Balances

22,400 48,000 8,750 4,300 196,000 117,600 30,800 122,150 63,000 454,450 270,000 58,100 25,200 24,150 5,100 725,000

725,000

* $17,300 + $6,000 (a) – $900 (b) ** $7,400 + $1,500 – $150 2.

No. The trial balance indicates only that the debits and credits are equal. Any errors that have the same effect on debits and credits will not affect the balancing of the trial balance.

CHAPTER 2

Analyzing Transactions

Prob. 2-1B 1. and 2. (a) (g)

Bal.

Cash 18,000 (b) 12,000 (c) (d) (f) (h) (i) (l) (m) (n) (o) 14,475

(k)

Accounts Receivable 15,650

(d)

Supplies 1,450

2,500 3,150 1,450 2,400 1,800 375 2,800 200 300 550

(n)

Notes Payable 300 (b) Bal.

17,000 16,700

Ken Jones, Capital (a)

18,000

Professional Fees (g) (k) Bal.

12,000 15,650 27,650

(c)

Rent Expense 3,150

(l)

Salary Expense 2,800

(f)

Prepaid Insurance 2,400

(j)

Blueprint Expense 2,500

(b)

Automobiles 19,500

(o)

Automobile Expense 550

(e)

Equipment 6,500

(i) (m) Bal.

Miscellaneous Expense 375 200 575

(h)

Accounts Payable 1,800 (e) (j) Bal.

6,500 2,500 7,200

CHAPTER 2

Analyzing Transactions

Prob. 2-1B (Concluded) 3.

Ken Jones, Architect Unadjusted Trial Balance April 30, 20Y4 Debit Balances

Cash Accounts Receivable Supplies Prepaid Insurance Automobiles Equipment Accounts Payable Notes Payable Ken Jones, Capital Professional Fees Rent Expense Salary Expense Blueprint Expense Automobile Expense Miscellaneous Expense

Credit Balances

14,475 15,650 1,450 2,400 19,500 6,500 7,200 16,700 18,000 27,650 3,150 2,800 2,500 550 575 69,550

69,550

Net income, $18,075 ($27,650 – $3,150 – $2,800 – $2,500 – $550 – $575)

CHAPTER 2

Analyzing Transactions

Prob. 2-2B 1.

(a) (b) (c) (d) (e) (f) (g)

(h) (i)

Cash Rafael Masey, Capital

17,500

Supplies Accounts Payable

2,300

Cash Fees Earned

13,300

Rent Expense Cash

3,000

Accounts Payable Cash

1,150

Rafael Masey, Drawing Cash

1,800

Automobile Expense Miscellaneous Expense Cash

1,500 400

Office Salaries Expense Cash

2,800

Supplies Expense Supplies

1,050

17,500 2,300 13,300 3,000 1,150 1,800

1,900 2,800 1,050

CHAPTER 2

Analyzing Transactions

Prob. 2-2B (Continued) 2. 3,000 1,150 1,800 1,900 2,800

Bal.

Cash 17,500 (d) 13,300 (e) (f) (g) (h) 20,150

(b) Bal.

Supplies 2,300 (i) 1,250

1,050

(a) (c)

(e)

Accounts Payable 1,150 (b) Bal. Rafael Masey, Capital (a)

(f)

Rafael Masey, Drawing 1,800

2,300 1,150

17,500

Fees Earned (c)

(d)

Rent Expense 3,000

(h)

Office Salaries Expense 2,800

(g)

Automobile Expense 1,500

(i)

Supplies Expense 1,050

(g)

Miscellaneous Expense 400

13,300

CHAPTER 2

Analyzing Transactions

Prob. 2-2B (Concluded) 3.

Planet Realty Unadjusted Trial Balance August 31, 20Y5 Debit Balances

Cash Supplies Accounts Payable Rafael Masey, Capital Rafael Masey, Drawing Fees Earned Rent Expense Office Salaries Expense Automobile Expense Supplies Expense Miscellaneous Expense

Credit Balances

20,150 1,250 1,150 17,500 1,800 13,300 3,000 2,800 1,500 1,050 400 31,950

31,950

a. $13,300 b. $8,750 ($3,000 + $2,800 + $1,500 + $1,050 + $400) c. $4,550 ($13,300 – $8,750)

There is a $2,750 increase in owner’s equity for August, which is net income of $4,550 minus withdrawals of $1,800.

CHAPTER 2

Analyzing Transactions

Prob. 2-3B 1. JOURNAL Date

20Y6 Oct.

Post. Ref.

Description

11 31

18,000

4 Rent Expense Cash

53 11

3,000

10 Truck Cash Notes Payable

18 11 21

23,750

13 Equipment Accounts Payable

16 22

10,500

14 Supplies Cash

13 11

2,100

15 Prepaid Insurance Cash

14 11

3,600

15 Cash Fees Earned

11 41

8,950

JOURNAL

20Y6 Oct.

Debit

1 Cash Jay Pryor, Capital

Date

Credit

18,000

3,000

3,750 20,000

10,500

2,100

3,600

8,950 2

Page

Post. Ref.

Description

Page

Debit

21 Accounts Payable Cash

22 11

2,000

24 Accounts Receivable Fees Earned

12 41

14,150

26 Truck Expense Accounts Payable

55 22

700

27 Utilities Expense Cash

54 11

2,240

Credit

2,000

14,150

700

2,240

CHAPTER 2

Analyzing Transactions

Prob. 2-3B (Continued) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 27 Miscellaneous Expense 59 1,100 Cash 11 1,100 29 Cash Accounts Receivable

11 12

7,600

30 Wages Expense Cash

51 11

4,800

31 Jay Pryor, Drawing Cash

32 11

3,500

7,600

4,800

3,500

2. GENERAL LEDGER Cash

Account:

Date

20Y6 Oct.

Item

1 4 10 14 15 15 21 27 27 29 30 31

Post. Ref.

1 1 1 1 1 1 2 2 2 2 2 2

Debit

Credit

18,000 3,000 3,750 2,100 3,600 8,950 2,000 2,240 1,100 7,600 4,800 3,500

Accounts Receivable

Account:

Item

Date

20Y6 Oct.

Account No.

24 29

Debit

Balance Credit

18,000 15,000 11,250 9,150 5,550 14,500 12,500 10,260 9,160 16,760 11,960 8,460 Account No.

Post. Ref.

2 2

Debit

Credit

14,150 7,600

Balance Debit Credit

14,150 6,550

CHAPTER 2

Analyzing Transactions

Prob. 2-3B (Continued) Supplies

Account:

Item

Date

20Y6 Oct.

Item

15 Equipment

Date

Item

Credit

3,600

Post. Ref.

Debit

Credit

10,500

Post. Ref.

Debit

Credit

23,750

Debit

Balance Credit

Balance Debit Credit

23,750 21

Account No.

Post. Ref.

Debit

Item

13 21 26

10,500

Credit

Debit

Balance Credit

20,000

Accounts Payable

Date

Balance Debit Credit

Account No.

Item

Account:

20Y6 Oct.

Debit

Notes Payable

Date

20Y6 Oct.

Post. Ref.

Account No.

Account:

Account No.

Item

Date

Balance Debit Credit

2,100

Truck

Account:

20Y6 Oct.

Credit

2,100

Account:

20Y6 Oct.

Debit

Date

20Y6 Oct.

Post. Ref.

Prepaid Insurance

Account:

Account No.

20,000 22

Account No.

Post. Ref.

Debit

1 2 2

Credit

10,500 2,000 700

Balance Debit Credit

10,500 8,500 9,200

CHAPTER 2

Analyzing Transactions

Prob. 2-3B (Continued) Jay Pryor, Capital

Account:

Date

20Y6 Oct.

Item

31 Fees Earned

Date

Item

15 24

Date

Post. Ref.

Debit

Credit

3,500

Debit

Credit

3,500 41

Balance Debit

Credit

Debit

Credit

8,950 14,150

8,950 23,100 51

Account No.

Post. Ref.

Balance Debit

Credit

4,800

Debit

Credit

4,800 53

Account No.

Post. Ref.

Item

18,000

Balance

Balance Debit

Credit

3,000

Debit

Credit

3,000

Utilities Expense

Date

Credit

Account No.

Item

Account:

20Y6 Oct.

Post. Ref.

Rent Expense

Account:

Debit

18,000

1 2

Item

Date

20Y6 Oct.

Credit

Wages Expense

Account:

20Y6 Oct.

Debit

Account No.

Account:

20Y6 Oct.

Balance

Item

Date

20Y6 Oct.

Post. Ref.

Jay Pryor, Drawing

Account:

Account No.

Post. Ref.

Balance Debit

2,240

Credit

Debit

Credit

2,240

CHAPTER 2

Analyzing Transactions

Prob. 2-3B (Continued) Truck Expense

Account:

Date

20Y6 Oct.

Item

Post. Ref.

Debit

Credit

700

Date

Item

Balance Debit Credit

Account No.

Post. Ref.

Debit

1,100

700

Miscellaneous Expense

Account:

20Y6 Oct.

Account No.

Credit

Balance Debit Credit

1,100

CHAPTER 2

Analyzing Transactions

Prob. 2-3B (Concluded) 3.

Pioneer Designs Unadjusted Trial Balance October 31, 20Y6 Account No.

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Notes Payable Accounts Payable Jay Pryor, Capital Jay Pryor, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Truck Expense Miscellaneous Expense

Debit Balances

11 12 13 14 16 18 21 22 31 32 41 51 53 54 55 59

Credit Balances

8,460 6,550 2,100 3,600 10,500 23,750 20,000 9,200 18,000 3,500 23,100 4,800 3,000 2,240 700 1,100 70,300

70,300

$11,260 ($23,100 – $4,800 – $3,000 – $2,240 – $700 – $1,100)

Some supplies may have been used during October, but no supplies expense has been recorded. As will be discussed in Chapter 3, adjustments are necessary at the end of the accounting period to bring the accounts up to date. For example, adjustments for supplies used, insurance expired, and depreciation would probably be required by Pioneer Designs. Note to Instructors: At this point, students have not been exposed to depreciation, but some insightful students might recognize the need for recording supplies used and insurance expired. You might use this as an opportunity to discuss what is coming in Chapter 3.

CHAPTER 2

Analyzing Transactions

Prob. 2-4B 2. and 3. JOURNAL

20Y7 Aug.

Post. Ref.

Description

Date

20Y7 Aug.

Debit

1 Office Supplies Accounts Payable

14 21

3,150

2 Rent Expense Cash

52 11

7,200

3 Cash Accounts Receivable

11 12

83,900

5 Prepaid Insurance Cash

13 11

12,000

9 Accounts Payable Office Supplies

21 14

400

17 Advertising Expense Cash

53 11

8,000

23 Accounts Payable Cash

21 11

13,750

JOURNAL Date

Credit

3,150

7,200

83,900

12,000

400

8,000

13,750 19

Page

Post. Ref.

Description

Page

Debit

29 Miscellaneous Expense Cash

59 11

1,700

30 Automobile Expense Cash

54 11

2,500

31 Cash Salary and Commission Expense

11 51

2,000

31 Salary and Commission Expense Cash

51 11

53,000

Credit

1,700

2,500

2,000

53,000

CHAPTER 2

Analyzing Transactions

Prob. 2-4B (Continued) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 31 Accounts Receivable 12 183,500 Fees Earned 41 183,500 31 Land Cash Notes Payable

16 11 23

75,000

31 Cindy Getman, Drawing Cash

32 11

1,000

31 Cash Unearned Rent

11 22

5,000

7,500 67,500

1,000

5,000

1. and 3. GENERAL LEDGER Account:

Cash Item

Date

20Y7 Aug.

Post. Ref.

1 Balance 2 3 5 17 23 29 30 31 31 31 31 31

Account:

 18 18 18 18 18 19 19 19 19 19 19 19

Debit

Credit

7,200 83,900 12,000 8,000 13,750 1,700 2,500 2,000 53,000 7,500 1,000 5,000

Accounts Receivable Item

Date

20Y7 Aug.

Account No.

1 Balance 3 31

Debit

Balance Credit

52,500 45,300 129,200 117,200 109,200 95,450 93,750 91,250 93,250 40,250 32,750 31,750 36,750 Account No.

Post. Ref.

 18 19

Debit

Credit

83,900 183,500

Balance Debit Credit

100,100 16,200 199,700

CHAPTER 2

Analyzing Transactions

Prob. 2-4B (Continued) Prepaid Insurance

Account:

Item

Date

20Y7 Aug.

1 Balance 5

Date

20Y7 Aug.

Item

12,600 24,600

12,000

Post. Ref.

Debit

Credit

3,150 400

Post. Ref.

Debit

75,000

Credit

Date

Item

1 Balance 1 9 23

Post. Ref.

 18 18 18

Item

Date

Debit

Credit

Balance Credit

Balance Debit Credit

21,000 24,150 23,750 10,000

400 13,750

Account No.

Post. Ref.

Debit

Item

Date

Debit

3,150

Credit

Debit

Balance Credit

5,000

Notes Payable

Account:

2,800 5,950 5,550

Account No.

Unearned Rent

Account:

Balance Debit Credit

75,000

Accounts Payable

Account:

Account No.

20Y7 Aug.

Credit

Balance Debit Credit

Account No.

 18 18

Item

Date

20Y7 Aug.

Debit

Land

Account:

20Y7 Aug.

 18

1 Balance 1 9

20Y7 Aug.

Post. Ref.

Office Supplies

Account:

Account No.

5,000 23

Account No.

Post. Ref.

Debit

Credit

67,500

Balance Debit Credit

67,500

CHAPTER 2

Analyzing Transactions

Prob. 2-4B (Continued) Account:

Cindy Getman, Capital

Date

20Y7 Aug.

Item

1 Balance

Account:

20Y7 Aug.

Item

20Y7 Aug.

Item

44,800 45,800

1,000

Post. Ref.

Debit

Credit

Post. Ref.

1 Balance 17

591,500 775,000

Debit

Account No.

Credit

2,000 53,000

Debit

Post. Ref.

Debit

Credit

385,000 383,000 436,000

49,000 56,200

7,200

 18

Debit

8,000

Balance Debit Credit

Account No.

Post. Ref.

Balance Credit

Account No.

 18

Item

Balance Debit Credit

183,500

Advertising Expense

Date

20Y7 Aug.

Credit

Balance Debit Credit

Account No.

 19 19

1 Balance 2

Account:

Debit

Rent Expense

Date

Account No.

 19

1 Balance 31 31

Account:

87,500

Salary and Commission Expense

Date

20Y7 Aug.

Post. Ref.

 19

1 Balance 31

Account:

Credit

Fees Earned

Date

20Y7 Aug.

Debit

Balance Debit Credit



1 Balance 31

Account:

Post. Ref.

Cindy Getman, Drawing

Date

Account No.

Credit

Balance Debit Credit

32,200 40,200

CHAPTER 2

Analyzing Transactions

Prob. 2-4B (Continued) Account:

Automobile Expense Item

Date

20Y7 Aug.

Account:

20Y7 Aug.

Post. Ref.

1 Balance 30

 19

Debit

Credit

Item

Post. Ref.

1 Balance 29

 19

Balance Debit Credit

15,750 18,250

2,500

Miscellaneous Expense

Date

Account No.

Debit

Credit

Balance Debit Credit

5,250 6,950

1,700

4. Valley Realty Unadjusted Trial Balance August 31, 20Y7

Cash Accounts Receivable Prepaid Insurance Office Supplies Land Accounts Payable Unearned Rent Notes Payable Cindy Getman, Capital Cindy Getman, Drawing Fees Earned Salary and Commission Expense Rent Expense Advertising Expense Automobile Expense Miscellaneous Expense

Account No.

Debit Balances

11 12 13 14 16 21 22 23 31 32 41 51 52 53 54 59

36,750 199,700 24,600 5,550 75,000

Credit Balances

10,000 5,000 67,500 87,500 45,800 775,000 436,000 56,200 40,200 18,250 6,950 945,000

945,000

CHAPTER 2

Analyzing Transactions

Prob. 2-4B (Concluded) 5.

(a) The unadjusted trial balance in (4) still balances because the debits equaled the credits in the original journal entry. (b) The correcting entry for $9,000 ($10,000 – $1,000) would be as follows: JOURNAL Date

20Y7 Aug.

Post. Ref.

Description

31 Cindy Getman, Drawing Cash

Page

32 11

Debit

Credit

9,000 9,000

CHAPTER 2

Analyzing Transactions

Prob. 2-5B 1.

Tech Support Services Unadjusted Trial Balance January 31, 20Y8 Debit Balances

Cash* Accounts Receivable Supplies Prepaid Insurance Equipment Notes Payable Accounts Payable Thad Engelberg, Capital Thad Engelberg, Drawing Fees Earned Wages Expense Rent Expense Advertising Expense Gas, Electricity, and Water Expense Miscellaneous Expense

Credit Balances

20,250 56,400 6,750 9,600 162,000 54,000 16,650 107,850 39,000 534,000 306,000 62,550 28,350 17,000 4,600 712,500

712,500

* $25,550 – $8,000 (a) + $2,700 (b) 2.

No. The trial balance indicates only that the debits and credits are equal. Any errors that have the same effect on debits and credits will not affect the balancing of the trial balance.

CHAPTER 2

Analyzing Transactions

CONTINUING PROBLEM 2. and 3. JOURNAL Date

20Y9 July

Post. Ref.

Description

Page

Debit

1 Cash Peyton Smith, Capital

11 31

5,000

1 Office Rent Expense Cash

51 11

1,750

1 Prepaid Insurance Cash

15 11

2,700

2 Cash Accounts Receivable

11 12

1,000

3 Cash Unearned Revenue

11 23

7,200

3 Accounts Payable Cash

21 11

250

4 Miscellaneous Expense Cash

59 11

900

5 Office Equipment Accounts Payable

17 21

7,500

8 Advertising Expense Cash

55 11

200

11 Cash Fees Earned

11 41

1,000

13 Equipment Rent Expense Cash

52 11

700

14 Wages Expense Cash

50 11

1,200

Credit

5,000

1,750

2,700

1,000

7,200

250

900

7,500

200

1,000

700

1,200

CHAPTER 2

Analyzing Transactions

Continuing Problem (Continued) 2. and 3. JOURNAL Date

20Y9 July

Post. Ref.

Description

Page

Debit

16 Cash Fees Earned

11 41

2,000

18 Supplies Accounts Payable

14 21

850

21 Music Expense Cash

54 11

620

22 Advertising Expense Cash

55 11

800

23 Cash Accounts Receivable Fees Earned

11 12 41

750 1,750

27 Utilities Expense Cash

53 11

915

28 Wages Expense Cash

50 11

1,200

29 Miscellaneous Expense Cash

59 11

540

30 Cash Accounts Receivable Fees Earned

11 12 41

500 1,000

31 Cash Fees Earned

11 41

3,000

31 Music Expense Cash

54 11

1,400

31 Peyton Smith, Drawing Cash

32 11

1,250

Credit

2,000

850

620

800

2,500

915

1,200

540

1,500

3,000

1,400

1,250

CHAPTER 2

Analyzing Transactions

Continuing Problem (Continued) 1. and 3. Cash

Account:

Item

Date

20Y9 July

1 1 1 1 2 3 3 4 8 11 13 14 16 21 22 23 27 28 29 30 31 31 31

Item

Date

20Y9 July

Balance

Post. Ref.

 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2

Debit

Credit

5,000 1,750 2,700 1,000 7,200 250 900 200 1,000 700 1,200 2,000 620 800 750 915 1,200 540 500 3,000 1,400 1,250

Accounts Receivable

Account:

1 2 23 30

Account No.

Balance

Balance Debit Credit

3,920 8,920 7,170 4,470 5,470 12,670 12,420 11,520 11,320 12,320 11,620 10,420 12,420 11,800 11,000 11,750 10,835 9,635 9,095 9,595 12,595 11,195 9,945 12

Account No.

Post. Ref.

 1 2 2

Debit

Credit

1,000 1,750 1,000

Balance Debit Credit

1,000 — 1,750 2,750

—

CHAPTER 2

Analyzing Transactions

Continuing Problem (Continued) Supplies

Account:

Item

Date

20Y9 July

1 18

Balance

Item

Date

20Y9 July

Item

850

Debit

Credit

2,700

1 3 5 18

Post. Ref.

Debit

Credit

7,500

Post. Ref.

Debit

 1 1 2

Credit

250

250 — 7,500 8,350

—

Post. Ref.

Debit

Credit

Balance Debit Credit

7,200

Peyton Smith, Capital

1 Balance 1

Balance Debit Credit

7,500 850

Item

Account No.

Date

Balance Debit Credit

7,500

Unearned Revenue Item

Account No.

Balance

Date

Balance Debit Credit

Account No.

Item

2,700

Accounts Payable

Account:

20Y9 July

Post. Ref.

Date

Account:

170 1,020

Office Equipment

Account:

20Y9 July

Credit

Balance Debit Credit

Account No.

Date

20Y9 July

Debit

 2

Account:

20Y9 July

Post. Ref.

Prepaid Insurance

Account:

Account No.

7,200 31

Account No.

Post. Ref.

Debit

 1

Credit

5,000

Debit

Balance Credit

4,000 9,000

CHAPTER 2

Analyzing Transactions

Continuing Problem (Continued) Peyton Smith, Drawing

Account:

Item

Date

20Y9 July

1 31

Date

Item

1 11 16 23 30 31

Date

Balance

Date

Item

1 1

Balance

1,250

Date

Item

1 13

Balance

Account No.

Post. Ref.

Debit

 1 2 2 2 2

Credit

Balance Debit Credit

6,200 7,200 9,200 11,700 13,200 16,200

1,000 2,000 2,500 1,500 3,000 Account No.

Post. Ref.

 1 2

Debit

Credit

Debit

Balance Credit

1,200 1,200

Account No.

Post. Ref.

 1

Debit

Post. Ref.

Credit

Balance Debit Credit

Account No.

 1

700

800 2,550

1,750

Debit

400 1,600 2,800

Equipment Rent Expense

Account:

Balance Debit Credit

500 1,750

Office Rent Expense

Account:

20Y9 July

Balance

Item

1 14 28

20Y9 July

Credit

Wages Expense

Account:

20Y9 July

 2

Debit

Fees Earned

Account:

20Y9 July

Balance

Post. Ref.

Account No.

Credit

Debit

Balance Credit

675 1,375

CHAPTER 2

Analyzing Transactions

Continuing Problem (Continued) Utilities Expense

Account:

Date

20Y9 July

Item

1 27

Date

Item

1 21 31

1 8 22

 2

Credit

Balance

Date

Item

Account:

Balance

915

 2 2

Debit

Credit

1,590 2,210 3,610

620 1,400

Account No.

Post. Ref.

Debit

 1 2

Credit

1 4 29

Debit

500 700 1,500

200 800

Debit

Credit

Debit

Miscellaneous Expense

Account No.

Balance

Debit

 1 2

900 540

Credit

Balance Credit

180

Post. Ref.

Balance Credit

Account No.

Post. Ref.

Balance Debit Credit



Item

Date

Balance Debit Credit

Account No.

Post. Ref.

300 1,215

Supplies Expense

Account:

20Y9 July

Balance

Item

Date

20Y9 July

Debit

Advertising Expense

Account:

20Y9 July

Post. Ref.

Music Expense

Account:

20Y9 July

Balance

Account No.

Balance Debit Credit

415 1,315 1,855

CHAPTER 2

Analyzing Transactions

Continuing Problem (Concluded) 4.

PS Music Unadjusted Trial Balance July 31, 20Y9 Account No.

Cash Accounts Receivable Supplies Prepaid Insurance Office Equipment Accounts Payable Unearned Revenue Peyton Smith, Capital Peyton Smith, Drawing Fees Earned Wages Expense Office Rent Expense Equipment Rent Expense Utilities Expense Music Expense Advertising Expense Supplies Expense Miscellaneous Expense

11 12 14 15 17 21 23 31 32 41 50 51 52 53 54 55 56 59

Debit Balances

Credit Balances

9,945 2,750 1,020 2,700 7,500 8,350 7,200 9,000 1,750 16,200 2,800 2,550 1,375 1,215 3,610 1,500 180 1,855 40,750

40,750

CHAPTER 2

Analyzing Transactions

CASES & PROJECTS CP 2-1 1.

No. For financial accounting information to be useful, it must accurately reflect an entity’s business transactions and economic activity. For this to happen, each account must reflect the increases or decreases that result from each transaction. If the trial balance does not balance, it means that a transaction has not been accurately recorded in the accounts. By knowingly submitting a trial balance that does not accurately reflect the transactions in the accounts, Buddy is demonstrating a failure of individual character and is acting unethically.

The users of the financial information who rely on this information will be affected, as the information will not be a faithful representation of the entity’s economic activity.

Buddy should have discussed the issue with his supervisor and asked for more time to find the error.

CP 2-2 A sample solution based on Nike Inc.’s Form 10-K for the fiscal year ended May 31, 2018, follows: 1. 2. 3. 4. 5. 6.

$22,536 million $12,724 million ($6,040 + $3,468 + $3,216) $9,812 million ($22,536 million on total assets – $12,724 million total liabilities) 3 2 The income statement reports a summary of revenues and expenses for a specific period of time, such as a month or a year. The balance sheet reports a list of assets, liabilities, and stockholders’ equity as of a specific date, usually at the close of the last day of a month or a year.

CP 2-3 1.

The rules of debit and credit must be memorized. Dot is correct in that the rules of debit and credit could be reversed as long as everyone accepted and abided by the rules. However, the important point is that everyone accepts the rules as the way in which transactions should be recorded. This generates uniformity across the accounting profession and reduces errors and confusion. Because the current rules of debit and credit have been used for centuries, Dot should adapt to the current rules of debit and credit, rather than devise her own. The primary reason that all accounts do not have the same rules for increases and decreases is for control of the recording process. The double-entry accounting system, which includes (1) the rules of debit and credit and (2) the accounting equation, guarantees that (1) debits always equal credits and (2) assets always equal liabilities plus owner’s equity. If all increases in the account were recorded by debits, then the control that debits always equal credits would be removed. In addition, the control that the normal balance of 2-66 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 2

Analyzing Transactions

CP 2-3 (Concluded) assets is a debit would also be removed. The accounting equation would still hold, but the control over recording transactions would be weakened. Dot is correct that we could call the left and right sides of an account different terms, such as “LE” and “RE.” Again, centuries of tradition dictate the current terminology used. One might note, however, that in Latin, debere (debit) means “left” and credere (credit) means “right.” 2.

The accounting system may be designed to capture information about the buying habits of various customers or vendors, such as the quantity normally ordered, average amount ordered, and number of returns. Thus, in a sense, there can be other “sides” of (information about) a transaction that are recorded by the accounting system. Such information would be viewed as supplemental to the basic double-entry accounting system.

CP 2-4 Note to Instructors: The purpose of this activity is to familiarize students with the job opportunities available in accounting and allow them to demonstrate their ability to communicate the role of accounting in the context of a specific position that requires knowledge of accounting. An example of an advertisement for such a position is shown below. Individual student answers will vary depending on the specific scenario they select. ABOUT THE COMPANY Our client is looking to add a Financial Analyst. With a large and growing finance team, there is significant opportunity for growth and advancement within the department. The company boasts a team-oriented culture and provides its employees with the tools and training necessary to perform. Our client is looking to bring on more of a junior-level candidate who wants to gain experience in his or her field of study. There will be hands-on training for the role that will evolve from a data analyst into a financial analyst and will be reporting to the director of finance. Our client is in the consumer goods industry and is an international company that has multiple opportunities for growth. RESPONSIBILITIES OF THE FINANCIAL ANALYST The Financial Analyst will: • Conduct special studies to analyze complex financial actions and prepare recommendations for policy, procedure, control, or action. • Analyze financial information to determine present and future financial performance. • Evaluate complex profit plans, operating records, and financial statements. • Direct preparation of studies, reports, analyses, and recommendations in areas such as budgets, forecasts, financial plans, statistical reports, and business forecasts. • Coordinate with all levels of management to gather, analyze, summarize, and prepare recommendations regarding financial plans, trended future requirements, and operating forecasts. Source: CareerBuilder.com

CHAPTER 2

Analyzing Transactions

CP 2-5 The following general journal entry should be used to record the receipt of tuition payments received in advance of classes: Cash…………………………………………………………………… Unearned Tuition Deposits……………………………………

XXX XXX

Cash is an asset account, and Unearned Tuition Deposits is a liability account. As the classes are taught throughout the term, the unearned tuition deposits become earned revenue. The entry to record the earned portion of tuition will be: Unearned Tuition Deposits………………………………………… Earned Tuition Deposits…………………………………………

XXX XXX

CP 2-6 The journal is called the book of original entry. It provides a time-ordered history of the transactions that have occurred for the firm. This time-ordered history is very important because it allows one to trace ledger account balances back to the original transactions that created those balances. This is called an “audit trail.” If the firm recorded transactions by posting to ledgers directly, it would be nearly impossible to reconstruct actual transactions. The debits and credits would all be separated and accumulated into the ledger balances. Once the transactions become part of the ledger balances, the original transactions would be lost. That is, there would be no audit trail, and any errors that might occur in recording transactions would be almost impossible to trace. Thus, firms first record transaction debits and credits in a journal. These transactions are then posted to the ledger to update the account balances. The journal and ledger are linked using posting references. This allows an analyst to trace the transaction flow forward or backward, depending on the need.

CHAPTER 2

Analyzing Transactions

CP 2-7 a.

Although the titles and numbers of accounts may differ, depending on how expenses are classified, the following accounts would be adequate for recording transaction data for Eagle Caddy Service:

11 12 13

Balance Sheet Accounts

Income Statement Accounts

1. Assets

4. Revenue

Cash Accounts Receivable Supplies

2. Liabilities Accounts Payable

31 32

3. Owner’s Equity Cory Neece, Capital Cory Neece, Drawing

Fees Earned

51 52 53 54 55

5. Expenses Rent Expense Supplies Expense Wages Expense Utilities Expense Miscellaneous Expense

Eagle Caddy Service Income Statement For the Month Ended June 30, 20Y9 Fees earned Expenses: Rent expense Supplies expense Wages expense Utilities expense Miscellaneous expense Total expenses Net income

$11,400 $3,500 1,925 850 340 395 7,010 $ 4,390

Note to Instructors: Students may have prepared slightly different income statements, depending upon the titles of the major expense classifications chosen. Regardless of the classification of expenses, however, the total sales, total expenses, and net income should be as presented above. T accounts are not required for the preparation of the income statement of Eagle Caddy Service. The following presentation illustrates one solution using T accounts. Alternative solutions are possible if students used different accounts. In presenting the following T account solution, instructors may wish to emphasize the advantages of using T accounts (or a journal and four-column accounts) when a large number of transactions must be recorded.

CHAPTER 2

Analyzing Transactions

CP 2-7 (Continued) Cash 20Y9 June

1 15 30 30

Bal.

2,000 5,400 4,200 1,500

20Y9 June

Fees Earned

11 1 2 3 17 20 28 30 30

500 750 600 1,000 2,400 395 340 850

6,265

20Y9 June 15 25 30 Bal.

20Y9 June

Accounts Receivable 20Y9 25 1,800 June 30 300

20Y9 June

1 3

2 7 22

Bal.

20Y9 June

17 20

Supplies 20Y9 750 June 30 1,000 850 675

Accounts Payable 20Y9 1,000 June 3 2,400 7 22 Bal.

Cory Neece, Capital 20Y9 June 1

20Y9 June

1,925

20Y9 June

2,400 1,000 850 850

20Y9 June

340

Miscellaneous Expense

31 2,000

850

Utilities Expense

1,925

Wages Expense

500 3,000 3,500

Supplies Expense

12 1,500

5,400 1,800 4,200 11,400

Rent Expense

Bal.

20Y9 June Bal.

395

CHAPTER 2

Analyzing Transactions

CP 2-7 (Concluded) c.

$6,265, computed in the following manner: Cash receipts: Initial investment…………………………………………………… $2,000 Cash sales ($5,400 + $4,200)……………………………………… 9,600 Collections on accounts…………………………………………… 1,500 Total cash receipts during June………………………………

$13,100

Cash disbursements: Rent expense ($500 + $3,000)…………………………………… $3,500 Supplies purchased for cash……………………………………… 750 Wages expense……………………………………………………… 850 Payment for supplies on account……………………………… 1,000 Utilities expense…………………………………………………… 340 395 Miscellaneous expense…………………………………………… Total cash disbursements during June…………………… Cash on hand according to records*………………………………

6,835 $ 6,265

* If the student used T accounts in completing part (b), or this part, this amount ($6,265) should agree with the balance of the cash account.

d. The difference of $90 ($6,265 – $6,175) between the cash on hand according to records ($6,265) and the cash on hand according to the count ($6,175) could be due to many factors, including errors in the record keeping and withdrawals made by Cory.

CHAPTER 3 THE ADJUSTING PROCESS DISCUSSION QUESTIONS 1.

Under cash-basis accounting, revenues are reported in the period in which cash is received and expenses are reported in the period in which cash is paid.

Under accrual-basis accounting, revenues are reported in the period in which they are earned and expenses are reported in the same period as the revenues to which they relate.

The matching concept is related to the accrual basis of accounting.

Adjusting entries are needed at the end of an accounting period to bring the ledger up to date.

Adjusting entries bring the ledger up to date as a normal part of the accounting cycle. Correcting entries correct errors in the ledger.

Four different categories of adjusting entries include prepaid expenses (deferred expenses), unearned revenues (deferred revenues), accrued expenses (accrued liabilities), and accrued revenues (accrued assets).

Statement (a): Increases the balance of a revenue account.

Statement (b): Increases the balance of an expense account.

Yes, because every adjusting entry affects expenses or revenues.

The rights acquired represent an asset.

The justification for debiting Rent Expense is that when the ledger is summarized in a trial balance at the end of the month and statements are prepared, the rent will have become an expense. Hence, no adjusting entry will be necessary.

The portion of the cost of a fixed asset deducted from revenue of the period is debited to Depreciation Expense. It represents the cost of the fixed asset that has been expensed in generating revenue during the period. The reduction in the fixed asset account is recorded by a credit to Accumulated Depreciation rather than to the fixed asset account. The use of the contra asset account facilitates the presentation of original cost and accumulated depreciation on the balance sheet.

Depreciation Expense—debit balance; Accumulated Depreciation—credit balance.

No. It is not customary for the balances of the two accounts to be equal in amount.

Depreciation Expense appears on the income statement; Accumulated Depreciation appears on the balance sheet.

10.

CHAPTER 3

The Adjusting Process

PRACTICE EXERCISES PE 3-1A a. No b. No

c. d.

Yes No

e. f.

No Yes

PE 3-1B a. Yes b. No

c. d.

No Yes

e. f.

Yes Yes

PE 3-2A a. (2) Unearned revenue b. (3) Accrued revenue

c. d.

(4) Accrued expense (1) Prepaid expense

PE 3-2B a. (2) Unearned revenue b. (1) Prepaid expense

c. d.

(3) Accrued revenue (4) Accrued expense

PE 3-3A Accounts Receivable Fees Earned Accrued fees.

18,540 18,540

PE 3-3B Accounts Receivable Fees Earned Accrued fees.

27,480 27,480

PE 3-4A Salaries Expense Salaries Payable Accrued salaries [($33,300 ÷ 6 days) × 4 days].

22,200 22,200

PE 3-4B Salaries Expense Salaries Payable Accrued salaries [($16,200 ÷ 5 days) × 2 days].

6,480 6,480

CHAPTER 3

The Adjusting Process

PE 3-5A Dec. 31 Unearned Rent Rent Revenue Rent Earned [($13,200 ÷ 12 months) × 5 months].

5,500 5,500

PE 3-5B Dec. 31 Unearned Fees Fees Earned Fees Earned ($316,290 – $220,240).

96,050 96,050

PE 3-6A Insurance Expense Prepaid Insurance Insurance expired ($6,800 + $25,100 – $8,500).

23,400 23,400

PE 3-6B Supplies Expense Supplies Supplies used ($4,085 + $7,810 – $3,610).

8,285 8,285

PE 3-7A Depreciation Expense Accumulated Depreciation—Equipment Depreciation on equipment.

14,400 14,400

PE 3-7B Depreciation Expense Accumulated Depreciation—Building Depreciation on building.

8,120 8,120

CHAPTER 3

The Adjusting Process

PE 3-8A a. b. c.

Revenues were understated by $8,000. Expenses were understated by $12,600 ($1,700 + $10,900). Net income was overstated by $4,600 ($12,600 – $8,000).

PE 3-8B a. b. c.

Revenues were understated by $64,400. Expenses were understated by $19,000 ($8,400 + $10,600). Net income was understated by $45,400 ($64,400 – $19,000).

PE 3-9A a.

The totals are equal even though the credit should have been to Wages Payable instead of Accounts Payable.

The totals are unequal. The credit total is higher by $72 ($1,591 – $1,519).

PE 3-9B a.

The totals are unequal. The debit total is higher by $1,800 ($9,700 – $7,900).

The totals are equal because the adjusting entry was omitted.

PE 3-10A a.

Upward Company Income Statements For the Years Ended December 31 20Y5 Amount

Fees earned Operating expenses Income from operations b.

Percent

$924,000 545,160 $378,840

100% 59% 41%

20Y4 Amount Percent

$784,000 478,240 $305,760

100% 61% 39%

A favorable change of decreasing operating expenses and increasing income from operations as percentages of revenue is indicated.

PE 3-10B a.

Versatile Company Income Statements For the Years Ended December 31 20Y5

Fees earned Operating expenses Income from operations b.

Amount

Percent

$1,468,000 822,080 $ 645,920

100% 56% 44%

20Y4 Amount Percent

$1,164,000 628,560 $ 535,440

100% 54% 46%

An unfavorable change of increasing operating expenses and decreasing income from operations as percentages of revenue is indicated. 3-4 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 3

The Adjusting Process

EXERCISES Ex. 3-1 1. 2. 3. 4.

Accrued expense (b) Unearned revenue (c) Accrued revenue (a) Prepaid expense (d)

5. 6. 7. 8.

Unearned revenue (c) Prepaid expense (d) Prepaid expense (d) Accrued expense (b)

Ex. 3-2 Account

Answer

Accounts Receivable…………………… Normally requires adjustment (AR). Cash………………………………………… Does not normally require adjustment. Harriet Kasun, Capital…………………… Does not normally require adjustment. Interest Expense………………………… Normally requires adjustment (AE). Interest Receivable……………………… Normally requires adjustment (AR). Land………………………………………… Does not normally require adjustment. Office Equipment………………………… Does not normally require adjustment. Prepaid Rent……………………………… Normally requires adjustment (PE). Supplies…………………………………… Normally requires adjustment (PE). Unearned Fees…………………………… Normally requires adjustment (UR). Wages Expense…………………………… Normally requires adjustment (AE).

Ex. 3-3 a.

Accounts Receivable Fees Earned Accrued fees.

59,500 59,500

No. If the cash basis of accounting is used, revenues are recognized only when the cash is received. Therefore, earned but unbilled revenues would not be recognized in the accounts, and no adjusting entry would be necessary.

Ex. 3-4 a.

Fees earned (or revenues) will be understated. Net income will be understated.

Accounts receivable (or assets) will be understated. Owner’s equity (owner’s capital account) will be understated.

CHAPTER 3

The Adjusting Process

Ex. 3-5 a.

Salaries Expense Salaries Payable Accrued salaries [($14,800 ÷ 5 days) × 3 days].

8,880

Salaries Expense Salaries Payable Accrued salaries [($14,800 ÷ 5 days) × 4 days].

11,840

8,880

11,840

Ex. 3-6 $66,075 ($73,250 – $7,175)

Ex. 3-7 a.

Salary expense (or expenses) will be understated. Net income will be overstated.

Salaries payable (or liabilities) will be understated. Owner’s equity (owner’s capital account) will be overstated.

Ex. 3-8 a.

Salary expense (or expenses) will be overstated because two days of salaries that should have been included as October expenses are being recorded in November. Net income will be understated.

The balance sheet will be correct. This is because salaries payable has been paid, and the net income errors for October and November have offset each other. Thus, owner’s equity (owner’s capital account) is correct.

Ex. 3-9 Unearned Fees Fees Earned ($23,100 – $4,620).

18,480 18,480

Ex. 3-10 a.

Rent revenue (or revenues) will be understated. Net income will be understated.

Unearned rent (liabilities) will be overstated. Owner’s equity (owner’s capital account) at the end of the period will be understated.

CHAPTER 3

The Adjusting Process

Ex. 3-11 Supplies Expense Supplies Supplies used ($10,680 – $1,940).

8,740 8,740

Ex. 3-12 $9,110 ($1,310 + $7,800) Ex. 3-13 a.

Insurance expense (or expenses) will be understated. Net income will be overstated.

Prepaid insurance (or assets) will be overstated. Owner’s equity (Owner’s Capital) will be overstated.

Ex. 3-14 a.

Insurance Expense Prepaid Insurance Insurance expired.

20,250

Insurance Expense Prepaid Insurance Insurance expired ($27,000 – $6,750).

20,250

Ex. 3-15 a.

Insurance Expense Prepaid Insurance Insurance expired ($3,000 + $32,500 – $4,800).

30,700

Insurance Expense Prepaid Insurance Insurance expired.

30,700

Ex. 3-16 a.

Unearned Fees Fees Earned Unearned fees earned during year.

39,750

Accounts Receivable Fees Earned Accrued fees earned.

24,650

39,750

24,650

CHAPTER 3

The Adjusting Process

Ex. 3-17 a.

Dec.

31 Taxes Expense Prepaid Taxes Prepaid taxes expired [($18,480 ÷ 12 months) × 8 months].

12,320

31 Taxes Expense Taxes Payable Accrued taxes.

45,000

12,320

45,000

$57,320 ($12,320 + $45,000)

Ex. 3-18 Depreciation Expense Accumulated Depreciation—Equipment Depreciation on equipment.

8,200 8,200

Ex. 3-19 a.

$1,106,000 ($3,240,000 – $2,134,000)

No. Depreciation is an allocation of the cost of the equipment to the periods benefiting from its use. It does not necessarily relate to value or loss of value.

Ex. 3-20 a.

$29,460 million ($58,683 – $29,223)

No. Depreciation is an allocation method, not a valuation method. That is, depreciation allocates the cost of a fixed asset over its useful life. Depreciation does not attempt to measure market values, which may vary significantly from year to year.

Ex. 3-21 Income: $10,117 million ($4,442 + $5,675)

Ex. 3-22 a.

$676 million overstated

248.5% ($676 ÷ $272)

CHAPTER 3

The Adjusting Process

Ex. 3-23 Error (a) OverUnderstated stated $ 0 $34,900 0 0 0 34,900 0 0 34,900 0 0 34,900

1. Revenue for the year would be 2. Expenses for the year would be 3. Net income for the year would be 4. Assets at July 31 would be 5. Liabilities at July 31 would be 6. Owner’s equity at July 31 would be

Error (b) OverUnderstated stated $ 0 $ 0 0 12,770 12,770 0 0 0 0 12,770 12,770 0

Ex. 3-24 $218,530 ($196,400 + $34,900 – $12,770)

Ex. 3-25 a. Dec.

31 Depreciation Expense Accumulated Depreciation—Equipment Depreciation on equipment.

13,900 13,900

(1)

Depreciation expense would be understated. Net income would be overstated.

(2)

Accumulated depreciation would be understated, and total assets would be overstated. Owner’s equity (owner’s capital account) would be overstated.

CHAPTER 3

The Adjusting Process

Ex. 3-26 1.

Accounts Receivable Fees Earned Accrued fees earned.

Supplies Expense Supplies Supplies used.

Insurance Expense Prepaid Insurance Insurance expired.

Depreciation Expense Accumulated Depreciation—Equipment Equipment depreciation.

Wages Expense Wages Payable Accrued wages.

CHAPTER 3

The Adjusting Process

Ex. 3-27 1.

The accountant debited Accounts Receivable for $5,000 but did not credit Laundry Revenue. This adjusting entry represents accrued laundry revenue.

The accountant debited rather than credited Laundry Supplies for $3,000.

The accountant credited the prepaid insurance account for $3,600, but debited the insurance expense account for only $600.

The accountant credited Laundry Equipment for the depreciation expense of $13,000 instead of crediting the accumulated depreciation account.

The accountant did not debit Wages Expense for $1,000.

The corrected adjusted trial balance is shown below. Eva’s Laundry Adjusted Trial Balance May 31, 20Y3 Debit Balances

Cash Accounts Receivable Laundry Supplies Prepaid Insurance Laundry Equipment Accumulated Depreciation—Laundry Equipment Accounts Payable Wages Payable Eva Baldwin, Capital Eva Baldwin, Drawing Laundry Revenue Wages Expense Rent Expense Utilities Expense Depreciation Expense Laundry Supplies Expense Insurance Expense Miscellaneous Expense

Credit Balances

7,500 23,250 750 1,600 190,000 61,000 9,600 1,000 110,300 28,775 187,100 50,200 25,575 18,500 13,000 3,000 3,600 3,250 369,000

369,000

CHAPTER 3

The Adjusting Process

Ex. 3-28 a.

Amazon.com, Inc. Operating Income Statements For the Years Ended December 31 (in millions) Year 2 Amount Percent

Year 1 Amount Percent

Product sales Service sales Total sales

$141,915 90,972 $232,887

60.9% 39.1% 100.0%

$118,573 59,293 $177,866

66.7% 33.3% 100.0%

Cost of sales Fulfillment Marketing Technology and content General and administrative Other operating expense, net Total operating expenses Operating income

$139,156 34,027 13,814 28,837 4,336 296 $220,466 $ 12,421

59.8% 14.6% 5.9% 12.4% 1.9% 0.1% 94.7% 5.3%

$111,934 25,249 10,069 22,620 3,674 214 $173,760 $ 4,106

62.9% 14.2% 5.7% 12.7% 2.1% 0.1% 97.7% 2.3%

b. The vertical analysis indicates that operating income increased from 2.3% to 5.3% of total sales between the two years. Total expenses decreased from 97.7% to 94.7% of total sales. There was a sizable decrease in the cost of sales from 62.9% to 59.8% of total sales. There were also decreases in the other expenses; technology and content (12.7% to 12.4%) and general and administrative (2.1% to 1.9%) expenses. These decreases were sufficient to offset the slight increases in the other expenses; fulfillment (14.2% to 14.6%) and in marketing (5.7% to 5.9%).