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Chapter 2

The Accounting Information System QUESTIONS External   transactions  are   transactions   between   the   company   and   a   separate economic entity.  Internal transactions  do not include an exchange with a separate economic entity. Purchasing supplies from a local vendor is classified as an external transaction.

Question 2-1

Question 2-2 1. Use source documents to identify accounts affected by external transactions. 2. Analyze the impact of the transaction on the accounting equation. 3. Assess whether the transaction results in a debit or a credit to the account  balance.  4. Record the transaction. 5. Post the transaction to the T­accounts in the general ledger. 6. Prepare a trial balance. Dual effect refers to each transaction having at least two effects on the accounting Question 2­3equation. If an economic event increases (decreases) one side of the equation, then it also increases (decreases) the other side of the equation by the same amount.

Question 2­4 Assets

=

Liabilities

+

Stockholders’ equity

(a)

Increase

=

Increase

+

No change

(b)

Decrease

=

No change

+

Decrease

(c)

Increase

=

No change

+

Increase

(d) No change* =

No change

+

No change

Jerry is not correct. * One asset (equipment) increases while another asset (cash) decreases.While it is possible for a transaction to increase one account and decrease Question 2­5 another, dual effect simply indicates that at least two accounts will always be affected. However, the accounting equation must always remain in balance. It is not possible for one side of the equation to increase while the other side decreases.

Solutions Manual, Chapter 2

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Jenny is not correct. Any account can be debited or credited. Since an asset has a normal answers to Questions (continued) debit balance, it would be debited when it increases and credited when it decreases. Similarly, Question 2­6 since a liability has a normal credit balance, it Accounts Normal balance would be credited when it increases and debited when it decreases. Assets Debit Liabilities

Credit

Stockholders’ equity

Credit

Revenues

Credit

Expenses

Debit

Question 2­7 Question 2­8 Accounts

Increase

(a) Cash

Debit

(b) Salaries payable

Credit

(c) Utilities expense

Debit

(d) Service revenue

Credit

Question 2­9 Accounts

Decrease*

(a) Cash

Credit

(b) Salaries payable

Debit

(c) Utilities expense

Credit

(d) Service revenue

Debit

* Answers are opposite of those in Question 2­8

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Date

Debit

answers to Questions (continued) Account Name . . . . . . . . . . . . . . . . . . . . . Amount

Credit

.

Question 2­10 Account

Amount These Retained earnings has three components – revenues, expenses, Namestatements . . . . . . . .are . . .consistent. .... and dividends.(Description Changing the balance of any of these components changes the balance of retained of transaction) Question 2­13 earnings. Since expenses are negative components of retained earnings, an increase to an expense In eachretained journal earnings. entry, the sum of all amounts debited equals the sum of all amounts credited. decreases

Question 2­14 Question 2­11 A journal provides a chronological record of all transactions affecting a firm. A journal entry is used to describe the format for recording a transaction.

Question 2­12 (a)

Debit

Cash

Credit

1,200 Service Revenue (Receive cash from providing services)

(b)

1,200 Debit

Rent Expense Cash (Pay rent for the current month) (c)

Credit

500 500 Debit

Credit

Building 10,000 Notes Payable (Purchase building with note payable)

10,000

answers to Questions (continued)

(a) Purchase office supplies by paying cash of $20,000.

Question 2­15 (b) Provide services to customer on account for $30,000. (c) Pay cash on accounts payable of $10,000. A T-account is an informal means to show the balance in an account. The left Question 2­16side is referred to as a debit and the right side is referred to as a credit. Posting is the process of transferring the debit and credit information from the Question 2­17journal to individual accounts in the general ledger. (a)

Office Supplies

Solutions Manual, Chapter 2

Cash © The McGraw­Hill Companies, Inc., 2009 2­3


20,000 (b) Accounts Receivable

20,000 Service Revenue

30,000 (c)

Accounts Payable 10,000

30,000 Cash 10,000

The general   ledger  is   the   collection   of   all   accounts   used   to   record   the

Question 2­18company’s transactions. A chart of accounts is a listing of all account names. Question 2­19

A trial balance is a list of all accounts and their balances at a particular date. Balance refers to the fact that the sum of the accounts with debit balances should equal the sum of the accounts with credit balances.

Question 2­20

Not necessarily. While total debits equaling total credits is a good indication that all accounts have been appropriately accounted for, the accounts could contain offsetting errors. For example, if one account with a debit (credit) balance is understated by the same amount that another account with a debit (credit) balance is overstated, the trial balance will show equal debit and credit totals. 

BRIEF EXERCISES Brief Exercise 2­1 Proper order: (c) Use source documents to identify accounts affected by external  transactions. (d) Analyze the impact of the transaction on the accounting equation. (b) Assess whether the impact of the transaction results in a debit or  credit to the account balance. (f) Record transactions using debits and credits. (a) Post the transaction to the T­account in the general ledger. (e) Prepare a trial balance.

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Brief Exercise 2­2 Assets

=

(a)

Increase (Cash ↑)

(b)

No change

=

(c)

Decrease (Cash ↓)

=

Liabilities

+ Stockholders’ Equity

= Decrease + (Accounts Payable ↓)

Possible (Yes/No)

No change

No

Increase + Increase (Salaries Payable ↑) (Service Revenues ↑) No Change

+ Decrease (Advertising Expense ↑)

No

Yes

Brief Exercise 2­3

Cash Supplies Prepaid Rent Land Equipment

Total Assets $ 6,200 1,600 2,200 8,000 12,000 $30,000

Total Liabilities and Stockholders’ Equity Accounts Payable $ 1,200 Wages Payable 3,300 Bank Loan Payable 13,000 Stockholders’ Equity 12,500 $30,000

Brief Exercise 2-4 (a)

Debit

Credit

Delivery Truck 14,000 Notes Payable 14,000 (Purchase delivery truck with note payable) (b) Office Supplies Cash (Purchase office supplies for cash)

Solutions Manual, Chapter 2

500 500

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(c) Rent Expense Cash (Pay rent for the current month)

700 700

Brief Exercise 2-5 Assets

=

Liabilities

+

(a)

+$40,000

=

$0

+

+$40,000

(b)

+$32,000 −$32,000

=

$0

+

$0

(c)

+$25,000

=

+$25,000

+

$0

(d)

−$4,000

=

$0

+

−$4,000

Brief Exercise 2-6

Stockholders’ Equity

(a)

Debit

Cash

12,000 Service Revenue (Provide services for cash)

Credit 12,000

(b) Prepaid Insurance 3,600 Cash (Purchase prepaid insurance with cash)

3,600

(c) Musical Equipment Cash (Purchase equipment with cash)

15,000 15,000

(d) Cash

20,000 Bank Loan Payable

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(Obtain bank loan)

Brief Exercise 2-7 1.

Cash 12,000 7,200 3,400 1,400 2,500 4,500 4,800

2. Postings on the left side (or debit side) of the cash T-account represent increases to cash, such as receiving cash from customers, selling assets, borrowing money, and issuing stock. 3. Postings on the right side (or credit side) of the cash T-account represent decreases to cash, such as paying cash for rent, office supplies, equipment, workers, utilities, repayment of debt, and dividends.

Brief Exercise 2-8 Assets

=

Liabilities

+

Stockholders’ Equity

(a)

+$25,000

=

$0

+

+$25,000

(b)

+$15,000

=

+$15,000

+

$0

(c)

−$6,000

=

$0

+

−$6,000

(a)

Debit

Credit

Cash

25,000 Service Revenue (Provide services for cash)

25,000

(b) Office Supplies 15,000 Accounts Payable 15,000 (Purchase office supplies on account)

Solutions Manual, Chapter 2

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(c) Salaries Expense 6,000 Cash (Pay salaries for the current month)

6,000

Cash Service Revenue 0 0 (a) 25,000 25,000 (a) 6,000 (c) 19,000 25,000 Office Supplies 0 (b) 15,000 15,000

Accounts Payable 0 15,000 (b) 15,000

Supplies Expense 0 (c) 6,000 6,000

Brief Exercise 2­9 Account

Debit

Credit

Asset

+

Liability

+

Common Stock

+

Retained Earnings

+

Dividend

+

Revenue

+

Expense

+

(a) The balance of an asset account increases with a  debit and decreases with a credit.

Brief Exercise 2­10 (b) The balance of a liability account increases with a credit and decreases with a  debit. © The McGraw­Hill Companies, Inc., 2009 2-8

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(c) The balance of a stockholders’ equity account increases with a credit and  decreases with a debit. (d) The balance of a revenue account increases with a credit and decreases with a  debit. (e) The balance of an expense account increases with a debit and decreases with a  credit.

Brief Exercise 2-11 Trial Balance Account Title Cash Accounts receivable Prepaid rent Accounts payable Salaries payable Common stock Retained earnings Dividends Service revenue Salaries expense Rent expense Advertising expense Totals

Solutions Manual, Chapter 2

Debit $ 5,600 3,400 800

Credit

$ 1,500 600 5,200 1,300 400 6,100 2,000 1,500 1,000 $14,700

$14,700

© The McGraw­Hill Companies, Inc., 2009 2­9


Brief Exercise 2­12 Trial Balance Account Title Cash Accounts receivable Office equipment Accounts payable Unearned revenue Common stock Retained earnings Dividends Service revenue Salaries expense Utilities expense Totals

Debit $ 6,300 1,600 9,400

Credit

$ 2,900 1,200 10,000 3,200 700 3,500 2,200 600 $20,800

$20,800

+

Stockholders’ Equity

EXERCISES Exercise 2-1 1. d. 2. b. 3. a. 4. e. 5. c.

Exercise 2-2 Assets

=

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Liabilities

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1.

Increase

=

No effect

+

Increase

2.

Increase

=

Increase

+

No effect

3.

Increase

=

No effect

+

Increase

4.

Decrease

=

No effect

+

Decrease

5.

Decrease

=

No effect

+

Decrease

 No effect* =

No effect

+

No effect

6.

* One asset (cash) increases while another asset (accounts receivable) decreases.

Exercise 2-3

Transaction

Balance

Retained earnings, April 1

$12,000

1. Issue common stock for cash, $10,000

0

2. Provide services to customers on account, $7,500.

+7,500

3. Provide services to customers in exchange for cash, $2,200.

+2,200

4. Purchase equipment and pay cash, $6,600.

0

5. Pay rent for April, $1,200.

−1,200

6. Pay workers’ salaries for April, $2,500.

−2,500

7. Pay dividends to stockholders, $1,500.

−1,500

Retained earnings, April 30

Solutions Manual, Chapter 2

$16,500

© The McGraw­Hill Companies, Inc., 2009 2­11


Exercise 2-4

Debit or Credit

Account

1.

Debit

Cash

2.

Credit

Service Revenue

3.

Debit

Salaries Expense

4.

Credit

Accounts Payable

5.

Debit

Office Equipment

6.

Credit

Retained Earnings

7.

Debit

Utilities Expense

8.

Debit

Accounts Receivable

9.

Debit

Dividends

10.

Credit

Common Stock

Exercise 2-5

Account Debited

Account Credited

Example: Purchase equipment in exchange for cash.

Equipment

Cash

1. Pay a cash dividend.

Dividend

Cash

2. Pay rent in advance for the next three months.

Prepaid Rent

Cash

Accounts Receivable

Service Revenue

Office Supplies

Accounts Payable

3. Provide services to customers on account. 4. Purchase office supplies on account.

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Salaries Expense

Cash

6. Issue common stock in exchange for cash.

Cash

Common Stock

7. Collect cash from customers for services provided  in (3) above.

Cash

Accounts Receivable

8. Borrow cash from the bank and signed a note.

Cash

Notes Payable

9. Pay for the current month’s utilities.

Utilities Expense

Cash

10. Pay for office supplies purchased in (4) above.

Accounts Payable

Cash

5. Pay salaries for the current month.

Exercise 2-6 (1)

Debit

Machinery Cash (Purchase machinery with cash)

22,400

Credit 22,400

(2) Cash

5,800 Service Revenue (Provide services for cash)

5,800

(3) Rent Expense Cash (Pay current month’s rent)

1,100 1,100

(4) Office Supplies Accounts Payable (Purchase office suppliers on account) Solutions Manual, Chapter 2

900 900 © The McGraw­Hill Companies, Inc., 2009 2­13


(5) Salaries Expense Cash (Pay current month’s salaries)

1,600 1,600

Exercise 2-7 1. Purchase furniture and fixtures with cash, $8,800. 2. Provide services to customers on account, $3,200. 3. Pay current month’s salaries, $1,900. 4. Receive cash from customers in advance of services, $1,500. 5. Pay dividends to stockholders, $900.

Exercise 2­8

Dual Effect

1. Issue 10,000 shares of common stock  in exchange for $32,000 in cash.

Assets increase

Stockholders’ equity increases

2. Purchase land for $19,000. A note  payable is signed for the full amount.

Assets increase

Liabilities increase

3. Purchase storage containers for  $8,000. © The McGraw­Hill Companies, Inc., 2009 2-14

One asset (containers) increases and another asset (cash) decreases Financial Accounting, 1e


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4. Hire three employees for $2,000 per  month.

No effect on the accounting equation

5. Receive cash of $12,000 in rental fees for the current month.

Assets increase

Stockholders’ equity increases

6. Purchase office supplies for $2,000 on account.

Assets increase

Liabilities increase

7. Pay employees $6,000 for the first  month’s salaries.

Assets decrease

Stockholders’ equity decreases

Exercise 2­9

Dual Effect

1. Paint houses in the current month for  $15,000 on account. 2. Purchase painting equipment for  $16,000 cash.

Assets increase

Stockholders’ equity increases

One asset (equipment) increases and another asset (cash) decreases

3. Purchase office supplies on account  for $2,500.

Assets increase

Liabilities increase

4. Pay workers’ salaries of $3,200 for  the current month.

Assets decrease

Stockholders’ equity decreases

5. Purchase advertising to appear in the  current month, $1,200.

Assets decrease

Stockholders’ equity decreases

Solutions Manual, Chapter 2

© The McGraw­Hill Companies, Inc., 2009 2­15


Assets decrease

6. Pay office rent of $4,400 for the  current month. 7. Receive $10,000 from customers  in (1) above.

Stockholders’ equity decreases

One asset (cash) increases and another asset (accounts receivable) decreases

8. Receive cash of $5,000 in advance  from a customer that plans to have his house painted in the following month.

Assets increase

Liabilities increase

Exercise 2-10 February 2 Advertising Expense Cash (Pay advertising for current month)

Debit

Credit

600 600

February 7 Beauty Supplies 1,200 Accounts Payable (Purchase beauty supplies on account)

1,200

February 14 Cash

2,400 Beauty Service Revenue (Provide beauty services)

2,400

February 15 Salaries Expense Cash (Pay salaries for current month)

800 800

February 25 Accounts Receivable 900 Beauty Service Revenue (Provide beauty services on account) © The McGraw­Hill Companies, Inc., 2009 2-16

900

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February 28 Utilities Expense Cash (Pay utilities for current month)

200 200

Exercise 2-11 March 1

Debit

Cash

16,000 Common Stock (Issue common stock)

Credit 16,000

March 5 Cash

8,000 Bank Loan Payable (Obtain bank loan)

8,000

March 10 Construction Equipment 20,000 Cash (Purchase construction equipment for cash)

20,000

March 15 Advertising Expense 1,000 Cash (Purchase advertising for current month)

1,000

March 22 Accounts Receivable 17,000 Construction Service Revenue (Provide construction services on account)

17,000

March 27 Cash

12,000 Accounts Receivable (Receive cash on account)

Solutions Manual, Chapter 2

12,000

© The McGraw­Hill Companies, Inc., 2009 2­17


March 28 Salaries Expense Cash (Pay salaries for current month)

5,000 5,000

Exercise 2-12 Cash 2,400 9,200 1,200 (4) 1,000 2,700 (5) 8,700

(3) (6)

(2)

Office Supplies 300 1,800 2,100 Unearned Revenue 200 1,000 (6) 1,200

Accounts Receivable 3,200 (1) 7,400 9,200 (3) 1,400

(5)

Accounts Payable 2,500 2,700 1,800 1,600 Service Revenue 0 7,400 7,400

(2)

(1)

Advertising Expense 0 (4) 1,200 1,200

Exercise 2-13

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O’Brien Company Trial Balance April 30 Account Title Debit Cash $ 2,900 Accounts receivable 5,100 Prepaid rent 6,400 Land 50,000 Accounts payable Unearned revenue Common stock Retained earnings Service revenue Maintenance expense 8,400 Salaries expense 7,200 Totals $80,000

Credit

$ 3,300 1,800 30,000 20,500 24,400 $80,000

Exercise 2-14 Schmidt Incorporated Trial Balance March 31 Account Title Debit Cash $ 2,500 Accounts receivable 3,200 Supplies 1,200 Prepaid insurance 1,300 Building 45,000 Accounts payable Salaries payable Common stock Retained earnings Service revenue Salaries expense 5,400 Utilities expense 2,700 Totals $61,300

Credit

$ 1,700 400 25,000 15,700 18,500 $61,300

Exercise 2-15 Requirement 1 Solutions Manual, Chapter 2

© The McGraw­Hill Companies, Inc., 2009 2­19


(1)

Debit

Cash

32,000 Common Stock (Issue common stock)

Credit 32,000

(2) Land

19,000 Notes Payable (Purchase land with note payable)

19,000

(3) Storage Containers Cash (Purchase storage containers)

8,000 8,000

(4) No entry (5) Cash

12,000 Rental Revenue (Receive cash for current month’s rent)

12,000

(6) Office Supplies 2,000 Accounts Payable (Purchase office supplies on account)

2,000

(7) Salaries Expense Cash (Pay salaries for the current month)

Exercise 2-15 (continued) Requirement 2 Cash © The McGraw­Hill Companies, Inc., 2009 2-20

6,000 6,000

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(1)

0 32,000

(5)

12,000

0 32,000

(1)

8,000 (3) 6,000 (7) 30,000

32,000

Land 0 19,000 19,000

Notes Payable

Storage Containers 0 (3) 8,000 8,000

Rental Revenue 0 12,000 12,000

(2)

(6)

(7)

Office Supplies 0 2,000 2,000

0 19,000 19,000

Accounts Payable 0 2,000 2,000

(2)

(5)

(6)

Salaries Expense 0 6,000 6,000

Exercise 2-15 (concluded) Requirement 3

Solutions Manual, Chapter 2

© The McGraw­Hill Companies, Inc., 2009 2­21


Trial Balance Account Title Cash Office supplies Land Storage containers Accounts payable Notes payable Common stock Rental revenue Salaries expense Totals

Debit $30,000 2,000 19,000 8,000

Credit

$ 2,000 19,000 32,000 12,000 6,000 $65,000

$65,000

Exercise 2-16 Requirement 1 (1)

Debit

Accounts Receivable Painting Revenue (Provide painting on account) (2)

15,000

Painting Equipment Cash (Purchase painting equipment) (3)

16,000

15,000

16,000

Office Supplies 2,500 Accounts Payable (Purchase office supplies on account) (4) Salaries Expense Cash (Pay salaries for the current month) (5)

2,500

3,200

Advertising Expense 1,200 Cash (Pay advertising for the current month) © The McGraw­Hill Companies, Inc., 2009 2-22

Credit

3,200

1,200

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(6) Rent Expense Cash (Pay rent for the current month) (7) Cash

4,400 4,400

10,000 Accounts Receivable (Receive cash on account)

10,000

(8) Cash

5,000 Unearned Revenue (Receive cash in advance for painting)

Exercise 2-16 (continued) Requirement 2 Accounts Receivable Beg. 1,200 (1) 15,000 10,000 (7) 6,200 Painting Equipment Beg. 6,400 (2) 16,000

Beg.

(7) (8) 22,400 Beg. (3)

Office Supplies 400 2,500 2,900 Salaries Expense

Solutions Manual, Chapter 2

5,000

Painting Revenue 0 Beg. 15,000 (1) 15,000 Cash 21,100 16,000 3,200 1,200 4,400 10,000 5,000 11,300

(2) (4) (5) (6)

Accounts Payable 1,100 Beg. 2,500 (3) 3,600 Advertising Expense © The McGraw­Hill Companies, Inc., 2009 2­23


Beg. (4)

Beg. (6)

0 3,200 3,200

Beg. 0 (5) 1,200 1,200

Rent Expense 0 4,400 4,400

Unearned Revenue 0 Beg. 5,000 (8) 5,000

Common Stock 20,000 Beg.

Retained Earnings 8,000

20,000

Beg.

8,000

Exercise 2-16 (concluded) Requirement 3 Trial Balance Account Title Cash Accounts receivable Office supplies Painting equipment Accounts payable Unearned revenue Common stock Retained earnings Painting revenue Salaries expense Advertising expense Rent expense Totals

© The McGraw­Hill Companies, Inc., 2009 2-24

Debit $11,300 6,200 2,900 22,400

Credit

$ 3,600 5,000 20,000 8,000 15,000 3,200 1,200 4,400 $51,600

$51,600

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PROBLEMS: SET A Problem 2­1A Assets

=

Liabilities

+

Stockholders’ Equity

1. Issue common stock in exchange for cash.

Increase

=

No effect

+

Increase

2. Purchase business supplies on account.

Increase =

Increase

+

No effect

3. Pay for legal services for the current month.

Decrease =

No effect

+

Decrease

4. Provide services to customers on account.

Increase =

No effect

+

Increase

5. Pay employee salaries for the current month.

Decrease =

No effect

+

Decrease

6. Provide services to customers for cash.

Increase =

No effect

+

Increase

7. Pay for advertising for the current month.

Decrease =

No effect

+

Decrease

8. Repay loan from the bank.

Decrease =

Decrease

+

No effect

9. Pay dividends to stockholders.

Decrease =

No effect

+

Decrease

10. Receive cash from customers in (4) above.

No effect* =

No effect

+

No effect

Decrease =

Decrease

+

No effect

Transaction

11. Pay for supplies purchased in (2) above.

*One asset (cash) increases and another asset (accounts receivable) decreases

Problem 2­2A Stockholders’ Solutions Manual, Chapter 2

© The McGraw­Hill Companies, Inc., 2009 2­25


Transaction

Assets

=

Liabilities

+

Equity

+$1,600

=

$0

+

+$1,600

−$400

=

$0

+

−$400

3. Hire a new employee, who  will be paid $500 at the end  of each month.

$0

=

$0

+

$0

4. Pay $100 for advertising on  a radio station that will be  aired in the current period.

−$100

=

$0

+

−$100

5. Purchase office supplies for  cash.

+$400 −$400

=

$0

+

$0

6. Receive cash of $1,000 from +$1,000 −$1,000 customers in (1) above.

=

$0

+

$0

7. Obtain a loan from the bank  for $7,000.

+$7,000

=

+$7,000

+

$0

$0

=

+$200

+

−$200

+$10,000 =

$0

+

+$10,000

−$500

=

$0

+

−$500

$17,600

=

$7,200

+

$10,400

1. Provide services to  customers on account,  $1,600. 2. Pay $400 for current  month’s rent. 

8. Receive a bill of $200 for  utility costs of the current  period. 9.  Issue common stock for  $10,000 cash. 10. Pay $500 to employee in (3)  above. Totals

Problem 2­3A Type of Account

Normal Balance (Debit or Credit)

 1. Salaries Payable

Liability

Credit

 2. Common Stock

Stockholders’ equity

Credit

Asset

Debit

Account Title

 3. Prepaid Rent © The McGraw­Hill Companies, Inc., 2009 2-26

Financial Accounting, 1e


Full file at http://testbank360.eu/solution­manual­financial­accounting­1st­spicelan

Asset

Debit

Expense

Debit

Asset

Debit

 7. Rent Expense

Expense

Debit

 8. Notes Payable

Liability

Credit

 9. Salaries Expense

Expense

Debit

10. Research Expense

Expense

Debit

Asset

Debit

Revenue

Credit

 4. Buildings   5. Utilities Expense   6. Equipment

11. Cash 12. Service Revenue

Problem 2­4A Corrections 1.

2. 3. 4. 5.

External Transaction Account Titles Owners invest $10,000 in the company Cash and receive common stock. Common Stock

Debit 10,000

10,000

Receive cash of $3,000 for services provided in the current period.

Cash Service Revenue

Purchase office supplies on account, $200.

Office Supplies Accounts Payable

200

Pay $500 for next month’s rent.

Prepaid Rent Cash

500

Purchase office equipment with cash of Office Equipment $1,700. Cash

Credit

3,000 3,000 200 500 1,700

Solutions Manual, Chapter 2

© The McGraw­Hill Companies, Inc., 2009 2­27

1,700


Problem 2­5A Transactions for Jake’s Lawn Maintenance Company July 3

Debit

Accounts Receivable Service Revenue (Provide services on account) July 6

400

Maintenance Expense Accounts Payable (Receive maintenance on account) July 9

350

Cash

400

400

350

Accounts Receivable (Receive cash on account) July 14 Notes Receivable Cash (Loan cash by issuing note receivable) July 18

400

500 500

Advertising Expense 100 Cash (Pay advertising for the current month) July 20 Accounts Payable Cash (Pay cash on account) July 27

Credit

100

350 350

No entry for Jake. July 30 No entry for Jake. July 31 Cash

500 Notes Receivable (Receive cash on note receivable)

© The McGraw­Hill Companies, Inc., 2009 2-28

500

Financial Accounting, 1e


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Problem 2­6A Transactions for Lucy’s Repair Shop July 3 Lawn Expense Accounts Payable (Receive services on account) July 6 Accounts Receivable Service Revenue (Provide services on account) July 9 Accounts Payable Cash (Pay cash on account) July 14 Cash Notes Payable (Borrow by signing note payable) July 18 No entry for Lucy. July 20 Cash Accounts Receivable (Receive cash on account) July 27 Cash Service Revenue (Provide services for cash) July 30 Salaries Expense Cash (Pay employees for current month) July 31 Notes Payable Cash (Pay note payable)

Solutions Manual, Chapter 2

Debit 400

Credit 400

350 350 400 400 500 500

350 350 700 700 200 200 500 500

© The McGraw­Hill Companies, Inc., 2009 2­29


Problem 2­6A (concluded) Jakes Lawn Maintenance Company

Lucy’s Repair Shop

Stockholders’ Stockholders’ Assets = Liabilities + Equity Assets = Liabilities + Equity July 3 +$400 = 6

$0

=

$0

+

+$400

$0

= +$400

+$350

+

−$350

+$350 =

+

−$400

$0

+

+$350

9

+$400 = −$400

$0

+

$0

−$400 =

−$400

+

$0

14

+$500 = −$500

$0

+

$0

+$500 =

+$500

+

$0

18

−$100 =

$0

+

−$100

=

$0

+

$0

−$350 =

−$350

+

$0

+$350 = −$350

$0

+

$0

20

$0

27

$0

=

$0

+

$0

+$700 =

$0

+

+$700

30

$0

=

$0

+

$0

−$200 =

$0

+

−$200

+$500 = −$500

$0

+

$0

−$500 =

−$500

+

$0

31

Problem 2­7A Requirement 1 March 1 Debit Cash 2,000 Common Stock (Issue common stock) March 3 Sewing Equipment 1,700 Notes Payable (Purchase sewing equipment with note payable) March 5 Rent Expense 500 Cash © The McGraw­Hill Companies, Inc., 2009 2-30

Credit 2,000

1,700

500 Financial Accounting, 1e


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(Pay rent for current month) March 7 No entry March 12 Sewing Supplies 120 Accounts Payable (Purchase sewing supplies on account) March 15 Cash 700 Sewing Revenue (Provide services for cash) March 19 Cash 600 Unearned Revenue (Receive cash in advance from customer) March 25 Unearned Revenue 600 Sewing Revenue (Provide services to customer) March 30 Utilities Expense 85 Cash (Pay utilities for current month) March 31 Dividends 100 Cash (Pay dividends)

Solutions Manual, Chapter 2

120

700

600

600

85

100

© The McGraw­Hill Companies, Inc., 2009 2­31


Problem 2­7A (continued) Requirements 2 and 3 Cash

Sewing Supplies

2,000 700 600 2,615

500 85 100

120 120

1,700 1,700

Accounts Payable 120 120

Notes Payable

Common Stock

1,700 1,700 Sewing Revenue 700 600 1,300

Sewing Equipment

2,000 2,000 Rent Expense

Unearned Revenue 600

600 0

Dividends 100 100 Utilities Expense

500

85

500

85

Problem 2­7A (concluded) Requirement 4

© The McGraw­Hill Companies, Inc., 2009 2-32

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Stitch’s Sewing Shop Trial Balance March 31 Account Title Cash Sewing supplies Sewing equipment Accounts payable Unearned revenue Notes payable Common stock Dividends Sewing revenue Rent expense Utilities expense Totals

Debit $2,615 120 1,700

Credit

$ 120 0 1,700 2,000 100 1,300 500 85 $5,120

$5,120

Problem 2­8A Bruins Company Income Statement For the month of November Service revenue Expenses: Salaries Rent Interest Supplies Depreciation Utilities Total expenses Net income

Solutions Manual, Chapter 2

$85,000 $20,000 11,000 2,000 6,000 7,000 5,000 51,000 $34,000

© The McGraw­Hill Companies, Inc., 2009 2­33


Bruins Company Statement of Stockholders’ Equity For the month of November Common Stock Balance at November 1 Issuance of common stock Net income for November Less: Dividends Balance at November 30

Retained Earnings

$30,000 10,000 * $40,000

$25,000 34,000 (1,000) $58,000

Total Stockholders’ Equity $55,000 10,000 34,000 (1,000) $98,000

* The amount of stock issued is the difference between the ending and beginning balance ($10,000 = $40,000 − $30,000).

Problem 2­8A (concluded)

Bruins Company Balance Sheet November 30 Assets Cash Accounts receivable Supplies Prepaid rent Equipment, net

Total assets

$30,000 40,000 1,000 2,000 75,000

$148,000

Liabilities Accounts payable Salaries payable Interest payable Unearned revenue Notes payable Total liabilities

$ 16,000 4,000 2,000 8,000 20,000 50,000

Stockholders’ Equity Common stock 40,000 Retained earnings 58,000 Total stockholders’ equity 98,000 Total liabilities and stockholders’ equity $148,000

Problem 2­9A  Requirement 1 © The McGraw­Hill Companies, Inc., 2009 2-34

Financial Accounting, 1e


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Sep. 1 Cash

Debit 3,700 Service Revenue (Provide services for cash)

Sep. 2 Land

Credit 3,700

5,400 Notes Payable (Purchase land with note payable)

5,400

Sep. 4 Advertising Expense 400 Accounts Payable (Receive invoice for current advertising) Sep. 8 Accounts Receivable 5,000 Service Revenue (Provide services on account) Sep. 10 Supplies 1,000 Accounts Payable (Purchase supplies on account) Sep. 13 Notes Payable 3,000 Cash (Pay note payable) Sep. 18 Cash 4,000 Accounts Receivable (Receive cash on account) Sep. 20 Rent Expense 800 Cash (Pay rent for current month) Sep. 30 Utilities Expense 1,500 Cash (Pay utilities for current month)

Problem 2­9A (continued) Sep. 30 Salaries Expense Cash Solutions Manual, Chapter 2

400

5,000

1,000

3,000

4,000

800

1,500

3,000 3,000 © The McGraw­Hill Companies, Inc., 2009 2­35


(Pay salaries for current month) Sep. 30 Dividends Cash (Pay dividends)

© The McGraw­Hill Companies, Inc., 2009 2-36

1,000 1,000

Financial Accounting, 1e


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Problem 2­9A (continued) Requirements 2 and 3 Cash 5,500 3,000 3,700 800 4,000 1,500 3,000 1,000 3,900 Land 10,200 5,400

Accounts Receivable 1,500 4,000 5,000

2,500

7,600

15,600

Accounts Payable 6,500 400 1,000 7,900

Common Stock

Retained Earnings

8,000 8,000

7,300 7,300

Service Revenue 3,700 5,000 8,700

Salaries Expense

Advertising Expense

Utilities Expense

400 400

Supplies 6,600 1,000

Notes Payable 3,000 2,000 5,400 4,400 Dividends 1,000 1,000 Rent Expense

3,000

800

3,000

800

1,500 1,500

Problem 2­9A (continued) Solutions Manual, Chapter 2

Requirement 4

© The McGraw­Hill Companies, Inc., 2009 2­37


Lighting Incorporated Trial Balance September 30 Account Title Cash Accounts receivable Supplies Land Accounts payable Notes payable Common stock Retained earnings Dividends Service revenue Salaries expense Rent expense Advertising expense Utilities expense Totals

Debit $ 3,900 2,500 7,600 15,600

Credit

$ 7,900 4,400 8,000 7,300 1,000 8,700 3,000 800 400 1,500 $36,300

$36,300

Problem 2­9A (continued)

Lighting Incorporated Income Statement For the month of September Service revenue Expenses: Salaries Rent Advertising Utilities Total expenses Net income

© The McGraw­Hill Companies, Inc., 2009 2-38

$8,700 $3,000 800 400 1,500 5,700 $3,000

Financial Accounting, 1e


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Lighting Incorporated Statement of Stockholders’ Equity For the month of September

Balance at September 1 Issuance of common stock Net income for September Less: Dividends Balance at September 30

Common Stock

Retained Earnings

$8,000 0

$7,300

Total Stockholders’ Equity $15,300 0 3,000 (1,000) $17,300

3,000 (1,000) $9,300

$8,000

Problem 2­9A (concluded)

Lighting Incorporated Balance Sheet September 30 Assets Cash Accounts receivable Supplies Land

$ 3,900 2,500 7,600 15,600

Total assets

$29,600

Liabilities Accounts payable Notes payable Total liabilities

$ 7,900 4,400 12,300

Stockholders’ Equity Common stock 8,000 Retained earnings 9,300 Total stockholders’ equity 17,300 Total liabilities and stockholders’ equity $29,600

PROBLEMS: SET B Problem 2­1B Transaction 1. Obtain a loan at the  bank Solutions Manual, Chapter 2

Assets

=

Liabilities

+

Stockholders’ Equity

Increase

=

Increase

+

No effect

© The McGraw­Hill Companies, Inc., 2009 2­39


2. Purchase a machine to  use in operations for  No effect* = cash.

No effect

+

No effect

3. Provide services to  customers for cash.

Increase =

No effect

+

Increase

4. Pay workers’ salaries  for the current month.

Decrease =

No effect

+

Decrease

5. Repay loan from the  bank in (1) above.

Decrease =

Decrease

+

No effect

6. Customers pay cash in  advance of services.

Increase =

Increase

+

No effect

7. Pay for research costs  in the current month.

Decrease =

No effect

+

Decrease

8. Pay for advertising in  the current month.

Decrease =

No effect

+

Decrease

9. Purchase office  supplies on account.

Increase =

Increase

+

No effect

10. Provide services to  customers on account.

Increase =

No effect

+

Increase

11. Pay dividends to  stockholders.

Decrease =

No effect

+

Decrease

*One asset (machine) increases and another asset (cash) decreases

Problem 2­2B Transaction 1. Issue common stock in  exchange for cash, $15,000.

Assets

=

+$15,000 =

Liabilities

Stockholders’ + Equity

$0

+

+$15,000

2. Obtain a loan from the bank  for $9,000.

+$9,000

=

+$9,000

+

$0

3. Receive cash of $1,200 in  advance from customers.

+$1,200

=

+$1,200

+

$0

© The McGraw­Hill Companies, Inc., 2009 2-40

Financial Accounting, 1e


Full file at http://testbank360.eu/solution­manual­financial­accounting­1st­spicelan

4. Purchase supplies on account, $2,400.

+$2,400 +$12,000

5. Pay one year of rent in  advance, $12,000.

−$12,000

=

+$2,400

+

$0

=

$0

+

$0

6. Provide services to customers  on account, $3,000.

+$3,000

=

$0

+

+$3,000

7. Repay $4,000 of the loan in  (2) above.

−$4,000

=

−$4,000

+

$0

8. Pay full amount for supplies  purchased in (4) above.

−$2,400

=

−$2,400

+

$0

9. Provide services to customers  in (3) above.

$0

=

−$1,200

+

+$1,200

−$1,000

=

$0

+

−$1,000

$23,200

=

$5,000

+

$18,200

10. Pay cash dividends of  $1,000 to stockholders. Totals

Problem 2­3B Type of Account

Normal Balance (Debit or Credit)

Asset

Debit

Expense

Debit

3. Prepaid Insurance

Asset

Debit

4. Supplies Expense

Expense

Debit

5. Accounts Payable

Liability

Credit

6. Equipment

Asset

Debit

7. Dividends

Dividends

Debit

Asset

Debit

9. Retained Earnings

Stockholders’ equity

Credit

10. Unearned Revenue

Liability

Credit

11. Service Revenue

Revenue

Credit

Account Title 1. Supplies 2. Advertising Expense

8. Accounts Receivable

Solutions Manual, Chapter 2

© The McGraw­Hill Companies, Inc., 2009 2­41


12. Utilities Payable

Liability

Credit

Problem 2­4B Corrections 1.

2. 3. 4. 5.

External Transaction Pay cash dividends of $700 to  stockholders.

Account Titles Dividends Cash

Debit 700

Provide services on account for  customers, $2,400

Accounts Receivable Service Revenue

2,400

Pay a $400 utilities bill for the current  period.

Utilities Expense Cash

400

Receive cash of $300 from previously  billed customers.

Cash Accounts Receivable

300

Pay for supplies previously purchased  on account, $1,100.

Accounts Payable Cash

Credit 700

2,400

400 300 1,100

Problem 2­5B Transactions for Eli’s Tax Services May 2

Debit

Cash

Credit

200 Unearned Revenue (Receive cash in advance from customer)

200

May 5 Cleaning Expense 375 Accounts Payable (Receive cleaning services on account) May 7 Cash © The McGraw­Hill Companies, Inc., 2009 2-42

375

400 Financial Accounting, 1e

1,100


Full file at http://testbank360.eu/solution­manual­financial­accounting­1st­spicelan

Notes Payable (Receive cash and sign note payable) May 14

400

No entry for Eli. May 19 Accounts Payable Cash (Pay cash on account) May 25

375

Utilities Expense Cash (Pay utilities for the current month) May 28

125

Unearned Revenue Service Revenue (Provide service previously paid) May 31

200

Notes Payable Cash (Pay cash on note payable)

400

375

125

200

400

Problem 2­6B Transactions for Olivia’s Cleanings Services May 2

Debit

Prepaid Tax Service Cash (Pay for tax services in advance) May 5

200

Accounts Receivable Service Revenue (Provide services on account) May 7

375

Notes Receivable Cash (Loan cash and issue note receivable)

400

Solutions Manual, Chapter 2

Credit 200

375

400

© The McGraw­Hill Companies, Inc., 2009 2­43


May 14 Cleanings Supplies 150 Cash (Purchase cleaning supplies with cash) May 19 Cash

150

375

Accounts Receivable (Receive cash on account) May 25

375

No entry for Olivia. May 28 Tax Service Expense Prepaid Tax Service (Received services paid in advance) May 31

200

Cash

400

200

Notes Receivable (Receive cash on note receivable)

400

Problem 2­6B (concluded) Eli’s Tax Services

Olivia’s Cleaning Services

Stockholders’ Stockholders’ Assets = Liabilities + Equity Assets = Liabilities + Equity May 2 +$200 = +$200 5 7 14

$0

=

+$400 =

$0

=

+$375

+

$0

+$200 = −$200

$0

+

$0

+

−$375

+$375 =

$0

+

+$375

$0

+

$0

$0

+

$0

+$400

+

$0

+ $400− = $400

$0

+

$0

+$150 = −$150

© The McGraw­Hill Companies, Inc., 2009 2-44

Financial Accounting, 1e


Full file at http://testbank360.eu/solution­manual­financial­accounting­1st­spicelan

19

−$375 =

−$375

+

$0

25

−$125 =

$0

+

−$125

−$200

+

28 31

$0

=

−$400 =

−$400

+

+$375 = −$375

$0

+

$0

=

$0

+

$0

+$200

−$200 =

$0

+

−$200

$0

+ $400− = $400

$0

+

$0

$0

Problem 2­7B  Requirement 1 June 1 Cash

Debit 60,000 Loan Payable (Obtain loan from bank)

June 2 Cash

Credit 60,000

30,000 Common Stock (Issue common stock)

30,000

June 7 Equipment 65,000 Cash (Purchase equipment) June 10 Cleanings Supplies 7,000 Accounts Payable (Purchase cleaning supplies on account) June 12 Cash 4,000 Car Wash Revenue (Provide car washes for cash) June 16 Salaries Expense 800 Cash (Pay cash for employee salary) June 19 Advertising Expense 400 Solutions Manual, Chapter 2

65,000

7,000

4,000

800

© The McGraw­Hill Companies, Inc., 2009 2­45


Cash (Pay for current advertising) June 23 Accounts Receivable Car Wash Revenue (Provide car washes on account) Problem 2­7B (continued) June 29 Salaries Expense Cash (Pay employee salary) June 30 Utilities Expense Cash (Pay current utility bill) June 30 Dividends Cash (Pay dividends to stockholders)

© The McGraw­Hill Companies, Inc., 2009 2-46

400 5,000 5,000

850 850 1,300 1,300 500 500

Financial Accounting, 1e


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Problem 2­7B (continued) Requirements 2 and 3 Cash 60,000 30,000 4,000

Accounts Receivable 65,000 800 400 850 1,300 500

5,000 5,000

Cleaning Supplies 7,000 7,000

Equipment

Accounts Payable

65,000

7,000

25,150

65,000

7,000

Loan Payable

Common Stock

60,000 60,000 Car Wash Revenue 4,000 5,000 9,000

30,000 30,000 Salaries Expense 800 850 1,650

Dividends 500 500 Advertising Expense 400 400

Utilities Expense 1,300 1,300

Problem 2­7B (concluded) Requirement 4

Solutions Manual, Chapter 2

© The McGraw­Hill Companies, Inc., 2009 2­47


Speedy Car Cleaning Trial Balance June 30 Account Title Cash Accounts receivable Cleaning supplies Equipment Accounts payable Loan payable Common stock Dividends Car Wash revenue Salaries expense Advertising expense Utilities expense Totals

© The McGraw­Hill Companies, Inc., 2009 2-48

Debit $ 25,150 5,000 7,000 65,000

Credit

$

7,000 60,000 30,000

500 9,000 1,650 400 1,300 $106,000

$106,000

Financial Accounting, 1e


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Problem 2­8B Ducks Company Income Statement For the month of September Service revenue Expenses:

Salaries Insurance Advertising Supplies Depreciation Legal Utilities

Total expenses Net income

Solutions Manual, Chapter 2

$46,000

$8,000 7,000 1,000 9,000 2,000 5,000  1,000

33,000 $13,000

© The McGraw­Hill Companies, Inc., 2009 2­49


Ducks Company Statement of Stockholders’ Equity For the month of September Common Stock Balance at September 1 Issuance of common stock Net income for September Less: Dividends Balance at September 30

Retained Earnings

$20,000 4,000 * $24,000

$12,000 13,000 (3,000) $22,000

Total Stockholders’ Equity $32,000 4,000 13,000 (3,000) $46,000

* The amount of stock issued is the difference between the ending and beginning balance ($4,000 = $24,000 − $20,000).

Problem 2­8B (concluded)

Ducks Company Balance Sheet September 30 Assets Cash Accounts receivable Supplies Prepaid insurance Machinery, net

Total assets

$20,000 13,000 6,000 4,000 21,000

Liabilities Accounts payable Income taxes payable Utilities payable Unearned revenue Total liabilities

$64,000

Stockholders’ Equity Common stock 24,000 Retained earnings 22,000 Total stockholders’ equity 46,000 Total liabilities and stockholders’ equity $64,000

$  6,000 3,000 1,000 8,000 18,000

Problem 2­9B Requirement 1 © The McGraw­Hill Companies, Inc., 2009 2-50

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Nov. 1 Cash

Debit 12,000 Common Stock (Issue common stock)

12,000

Nov. 2 Equipment 2,500 Notes Payable (Purchase equipment with note payable) Nov. 4 Supplies 1,200 Accounts Payable (Purchase supplies on account) Nov. 10 Accounts Receivable 8,000 Service Revenue (Provide services on account) Nov. 15 Accounts Payable 1,000 Cash (Pay cash on account) Nov. 20 Salaries Expense 2,000 Cash (Pay current salaries) Nov. 22 Cash 10,000 Service Revenue (Provide services for cash) Nov. 24 Notes Payable 1,000 Cash (Pay note payable) Nov. 26 Cash 6,000 Accounts receivable (Receive cash on account)

Problem 2­9B (continued) Nov. 28 Utilities Expense Cash Solutions Manual, Chapter 2

Credit

2,500

1,200

8,000

1,000

2,000

10,000

1,000

6,000

1,000 1,000 © The McGraw­Hill Companies, Inc., 2009 2­51


(Pay utilities for current month) Nov. 30 Rent Expense Cash

4,000 4,000

(Pay rent for current month)

Problem 2­9B (continued) Requirements 2 and 3 Cash 2,200 12,000 10,000 6,000

1,000 2,000 1,000 1,000 4,000

21,200

Accounts Receivable 500 6,000 8,000

2,500

Supplies 600 1,200

1,800

Equipment 8,400 2,500 10,900

Accounts Payable 1,000 1,500 1,200 1,700

Notes Payable 1,000 3,000 2,500 4,500

Common Stock 6,000 12,000 18,000

Retained Earnings 1,200

Service Revenue 8,000 10,000 18,000

Salaries Expense 2,000 2,000

1,200 Utilities Expense 1,000 1,000

Rent Expense 4,000 4,000

Problem 2­9B (continued) Requirement 4 © The McGraw­Hill Companies, Inc., 2009 2-52

Financial Accounting, 1e


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Buckeye Incorporated Trial Balance November 30 Account Title Cash Accounts receivable Supplies Equipment Accounts payable Notes payable Common stock Retained earnings Service revenue Salaries expense Utilities expense Rent expense Totals

Debit $21,200 2,500 1,800 10,900

Credit

$ 1,700 4,500 18,000 1,200 18,000 2,000 1,000 4,000 $43,400

$43,400

Problem 2­9B (continued)

Buckeye Incorporated Income Statement For the month of November Service revenue Expenses: Salaries Utilities Rent Total expenses Net income

Solutions Manual, Chapter 2

$18,000 $2,000 1,000 4,000 7,000 $11,000

© The McGraw­Hill Companies, Inc., 2009 2­53


Buckeye Incorporated Statement of Stockholders’ Equity For the month of November

Balance at November 1 Issuance of common stock Net income for November Less: Dividends Balance at November 30

Common Stock

Retained Earnings

$ 6,000 12,000

$ 1,200

$18,000

Total Stockholders’ Equity $ 7,200 12,000 11,000 (0) $30,200

11,000 (0) $12,200

Problem 2­9B (concluded)

Buckeye Incorporated Balance Sheet November 30 Assets Cash Accounts receivable Supplies Equipment

$21,200 2,500 1,800 10,900

Total assets

$36,400

Liabilities Accounts payable Notes payable Total liabilities

$ 1,700 4,500 6,200

Stockholders’ Equity Common stock 18,000 Retained earnings 12,200 Total stockholders’ equity 30,200 Total liabilities and stockholders’ equity $36,400

ADDITIONAL PERSPECTIVES Additional Perspective 2­1 Requirement 1 July 1, 2010 Cash © The McGraw­Hill Companies, Inc., 2009 2-54

Debit 10,000

Credit

Financial Accounting, 1e


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Common Stock (Issue common stock to Suzie) July 1, 2010 Cash 10,000 Common Stock (Issue common stock to Tony) July 1, 2010 Prepaid Insurance 4,800 Cash (Purchase one-year insurance policy) July 2, 2010 Legal Fees Expense 1,500 Cash (Pay legal fees for incorporation) July 4, 2010 Office Supplies 1,800 Accounts Payable (Purchase office supplies on account) July 7, 2010 Advertising Expense 300 Cash (Pay cash for advertising) July 8, 2010 Mountain Bikes 12,000 Cash (Pay cash for mountain bikes) July 15, 2010 Cash 2,000 Clinic Revenue (Receive cash for mountain bike clinic) Additional Perspective 2­1 (continued) Requirement 1 (concluded) July 22, 2010 Cash 2,300 Clinic Revenue (Receive cash for mountain bike clinic) July 24, 2010 Advertising Expense 700 Cash Solutions Manual, Chapter 2

10,000

10,000

4,800

1,500

1,800

300

12,000

2,000

2,300

700

© The McGraw­Hill Companies, Inc., 2009 2­55


(Pay cash for advertising) July 30, 2010 Cash 4,000 Unearned Revenue (Receive cash in advance for kayak clinic)

4,000

Additional Perspective P2­1 (continued) Requirement 2 Cash10,000 10,000 2,000 2,300 4,0004,800 1,500 300 12,000 7009,000

Prepaid Insurance4,8004,800

Unearned Revenue4,0004,000

Common Stock10,000 10,00020,000

Advertising Expense300 7001,000

Mountain Bikes12,00012,000

Office Supplies1,8001,800

Accounts Payable1,8001,800

Clinic Revenue2,000 2,3004,300

Legal Fees Expense1,5001,500

Additional Perspective 2­1 (concluded) Requirement 3

© The McGraw­Hill Companies, Inc., 2009 2-56

Financial Accounting, 1e


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Great Adventures, Inc. Trial Balance July 31, 2010 Account Title Cash Prepaid insurance Office supplies Mountain bikes Accounts payable Unearned revenue Common stock Clinic revenue Advertising expense Legal Fees expense Totals

Debit $ 9,000 4,800 1,800 12,000

Credit

$ 1,800 4,000 20,000 4,300 1,000 1,500 $30,100

$30,100

Additional Perspective 2­2 Requirement 1 Percentage change in total assets = ($1,867,680 − $1,979,558) / $1,979,558 = −5.65% Percentage change in net sales = ($3,055,419 − $2,794,409) / $2,794,409 = 9.34% Requirement 2 Percentage change in net income = ($400,019 − $387,359) / = $387,359 = 3.27% Requirement 3

Based on the statement of stockholders’ equity, American Eagle did not issue common stock in the  most recent year.

Requirement 4 The terms “debit” and “credit” are not shown in the balance sheet. Asset accounts,  such as cash, merchandise inventory, accounts receivable, and property and  equipment, increase with a debit. Liability accounts, such as accounts payable, accrued rent, and other liabilities, increase with a credit. Stockholders’ equity accounts, such as common stock and retained earnings, also increase with a credit. Requirement 5 Solutions Manual, Chapter 2

© The McGraw­Hill Companies, Inc., 2009 2­57


The terms “debit” and “credit” are not shown in the income statement. Expense accounts, such as cost of sales and selling, general, and administrative expenses, increase with a debit. Revenue accounts, such as net sales, increase with a credit.

Additional Perspective 2­3 Requirement 1 Percentage change in total assets = ($450,657 − $368,198) / $368,198 = 22.40% Percentage change in net sales = ($619,888 − $530,074) / $530,074 = 16.94% Requirement 2 Percentage change in net income = ($75,247 − $55,726) / $55,726 = 35.03% Requirement 3 Based on the statement of stockholders’ equity, The Buckle did issue common stock in the most  recent year.

Requirement 4 The terms “debit” and “credit” are not shown in the balance sheet. Asset accounts,  such as cash, inventory, accounts receivable, and property and equipment, increase  with a debit. Liability accounts, such as accounts payable, accrued employee  compensation, and income taxes payable, increase with a credit. Stockholders’ equity  accounts, such as common stock and retained earnings, also increase with a credit. Requirement 5 The terms “debit” and “credit” are not shown in the income statement. Expense accounts, such as cost of sales and selling, general, and administrative expenses, increase with a debit. Revenue accounts, such as net sales, increase with a credit. The Buckle has a higher growth rate in terms of total  Additional Perspective 2­4assets (22.40% versus −5.65%), net sales (16.94% versus  9.34%), and net income (35.03% versus 3.27%). One  reason for the higher growth rate is that the Buckle is a smaller company and it’s easier for smaller  companies to have a higher sales growth and asset growth. Another reason for The Buckle’s higher  growth could relate to the products being offered. The Buckle made have found a better niche in the  market for its products, allowing the company to expand operations at a greater rate. This could  certainly explain the much higher growth in net income. 

Additional Perspective 2­5 © The McGraw­Hill Companies, Inc., 2009 2-58

Financial Accounting, 1e


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As the accountant, Larry should understand that his responsibilities are to accurately  record and report the company’s activities. Larry should understand that if he reports  the additional $75,000 of revenue, the company will no longer report a loss, but a  profit of $25,000 (ignoring any tax effects). At the same time, Larry must be aware  that Robert, the company’s president, may have incentives for falsely reporting to  Larry about the additional revenue. The incentives could be income bonus plans,  pleasing stockholders, meeting analysts’ earnings forecasts for the company, or  maintaining good standing with creditors. To ensure his trust, Robert reminds Larry  that they have been friends for a lot of years, and then offers to buy him dinner.  Without source documents, an important step in the measurement process, Larry  should not record any transactions. (Note to instructor: Answers are based off Apple’s Additional Perspective 2­6September 2007 annual report, and dollar amounts are in millions) Requirement 1 Accounts receivable = $1,637. The accounts receivable account represents the amount owed to the company by its customers. Requirement 2 Accounts payable = $4,970. The accounts payable account represents the amount owed by the company to its suppliers. Requirement 3 Accrued expenses could include income taxes payable, salaries payable, interest payable, and rent payable. Requirement 4 Common stock = $5,368. The common stock account represents capital contributed to the company by stockholders. Requirement 5 Assets ($25,347) = Liabilities ($10,815) + Stockholders’ equity ($14,532) Requirement 6 Net sales = $24,006. The period of net sales is for the year ended September 29, 2007. Requirement 7 Expenses include cost of sales; research and development; selling, general, and administrative; and provision for income taxes. Solutions Manual, Chapter 2

© The McGraw­Hill Companies, Inc., 2009 2­59


Requirement 7 Yes, the company’s revenues exceed expenses. The difference is net income ($3,496). For transaction (a):

Additional Perspective 2­7

Step 1. Analyze customer invoice. Step 2. Determine assets increase and stockholders’ equity increases (and revenues increase). Step 3. Increase assets with a debit and increase revenues with a credit. Step 4. Accounts Receivable 500 Service Revenue 500 (Provide services on account) For transaction (b): Step 1. Analyze employee paycheck. Step 2. Determine assets decrease and stockholders’ equity decreases (and expenses increase). Step 3. Decrease assets with a credit and increase expenses with a debit. Step 4. Salaries Expense 1,200 Cash 1,200 (Pay salary for the current month) For transaction (c): Step 1. Analyze purchase receipt for equipment. Step 2. Determine one asset increases and another asset decreases. Step 3. Increase assets with a debit and decrease assets with a credit. Step 4. Office Equipment 2,700 Cash 2,700 (Purchase office equipment) Step 5. All transactions are posted to the general ledger accounts. Step 6. A trial balance is prepared using the balance of each general ledger account. Total debits should equal total credits in the trial balance.

© The McGraw­Hill Companies, Inc., 2009 2-60

Financial Accounting, 1e

Solution manual financial accounting 1st spiceland  

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