Solutions for Financial Accounting 16th Us Edition by Warren by 6alsm

CHAPTER2 ANALYZINGTRANSACTIONS

DISCUSSIONQUESTIONS

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.

2. 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.

3.a. 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.

b. 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.”

4.a. The revenue was earned in October.

b. (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.

5. 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.

6. 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.

7.a. 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.

b. 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.

8.a. The equality of the trial balance would not be affected.

b. 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.

9.a. The equality of the trial balance would not be affected.

b. 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. From the viewpoint of Surety Storage, the balance of the checking account represents an asset.

b. From the viewpoint of Ada Savings Bank, the balance of the checking account represents a liability.

PE2-1A

PRACTICEEXERCISES

1.Debitandcreditentries(c),normaldebitbalance

2.Creditentriesonly(b),normalcreditbalance

3.Creditentriesonly(b),normalcreditbalance

4.Debitentriesonly(a),normaldebitbalance

5.Creditentriesonly(b),normalcreditbalance

6.Debitandcreditentries(c),normalcreditbalance`

PE2-1B

1.Debitandcreditentries(c),normalcreditbalance

2.Debitandcreditentries(c),normaldebitbalance

3.Debitentriesonly(a),normaldebitbalance

4.Debitentriesonly(a),normaldebitbalance

5.Debitentriesonly(a),normaldebitbalance

6.Creditentriesonly(b),normalcreditbalance

PE2-3A Apr.30AccountsReceivable12,980 FeesEarned12,980

PE2-3B Aug.13Cash7,480 FeesEarned7,480

PE2-4A Dec.23GraemeSchneider,Drawing27,000 Cash27,000

PE2-4B

PE2-5A

UsingthefollowingTaccount,solvefortheamountofcashreceipts(indicated by?below).

July1Bal.42,830132,500Cashpayments Cashreceipts? July31Bal.33,850

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

PE2-5B

UsingthefollowingTaccount,solvefortheamountofsuppliesexpense (indicatedby?below).

Aug.1Bal.1,240?Suppliesexpense Suppliespurchased3,760 Aug.31Bal.1,600

$1,600=$1,240+$3,760–Suppliesexpense Suppliesexpense=$1,240+$3,760–$1,600=$3,400

PE2-6A

a.Thetrialbalancetotalsareunequal.Thedebittotalishigherby$900($9,800–$8,900).

b.Thetrialbalancetotalsareequalbecauseboththedebitandcreditentrieswere journalizedandpostedfor$530.

c.Thetrialbalancetotalsareunequal.Thedebittotalishigherby$5,800($2,900+ $2,900).

PE2-6B

a.Thetrialbalancetotalsareequalbecauseboththedebitandcreditentrieswere journalizedandpostedfor$14,200.

b.Thetrialbalancetotalsareunequal.Thecredittotalishigherby$360($1,730–$1,370).

c.Thetrialbalancetotalsareunequal.Thedebittotalishigherby$4,500($7,250–$2,750).

PE2-7A

a. MiscellaneousExpense3,220RentExpense3,220 RentExpense3,220Cash3,220 RentExpenseinsteadofMiscellaneousExpenseshouldhavebeendebited. CashinsteadofRentExpenseshouldhavebeencredited.Thedebitandcredit amountof$3,220iscorrect.

RentExpense3,220 MiscellaneousExpense3,220 RentExpense3,220 Cash3,220

Note: Thefirstentryreversestheincorrectentry,andthesecondentryiswhatshouldhave beenrecordedinitially.Thesetwoentriescouldhavebeencombinedintooneentry; however,preparingtwoentriesmakesiteasierforsomeonelatertounderstandwhat happenedandwhytheentrieswerenecessary.

a. AccountsReceivable10,700Cash10,700 FeesEarned10,700FeesEarned10,700 CashinsteadofAccountsReceivableshouldhavebeendebited.

JournalEntryThatWasJournalEntryThatShould MadeinErrorHaveBeenMade Comparison

SuppliesinsteadofOfficeEquipmentshouldhavebeendebited. AccountsPayableinsteadofSuppliesshouldhavebeencredited. Thedebitandcreditamountof$4,300iscorrect.

JournalEntryThatWasJournalEntryThatShould MadeinErrorHaveBeenMade Comparison CorrectingJournalEntries

PE2-8A

VaughnCompany IncomeStatements

FortheYearsEndedDecember31

SatterfieldCompany IncomeStatements

FortheYearsEndedDecember31

Ex.2-1

CashCargoRevenue

AccountsReceivablePassengerRevenue

PropertyandEquipment

FuelInventory

PartsandSupplies

PrepaidExpenses

AccountsPayableAircraftFuel(Expense)

AirTrafficLiabilityaAircraftMaintenance(Expense)

LoyaltyProgram(Obligations)bAircraftRent(Expense)

AccruedSalaries(Obligations)RegionalCarriersExpensec LandingFees(Expense)d PassengerCommissions(Expense)e

None

aPassengerticketsalesforfutureflights bObligationstoprovidefrequentflyersfuturetravelandotherbenefits cPaymentstootherairlinesforpassengertravelunderDeltatickets dFeespaidtoairportsforlandingrights eCommissionspaidtotravelagentsforpassengerbookings

Note: Expenseaccountsarenormallylistedinorderofmagnitudefromlargestto smallestwithMiscellaneousExpensealwayslistedlast.SinceWagesExpenseis normallylargerthanSuppliesExpense,WagesExpenseislistedasaccount number51andSuppliesExpenseasaccountnumber52.

Ex.2-3

11Cash41FeesEarned

12AccountsReceivable

13Supplies

14PrepaidInsurance51WagesExpense

15Equipment52RentExpense

53SuppliesExpense

59MiscellaneousExpense

21AccountsPayable

22UnearnedRent

31LorriRoss,Capital

32LorriRoss,Drawing

Note: Theorderofsomeoftheaccountswithinthemajorclassificationsis somewhatarbitrary,asinaccounts13–14,accounts21–22,andaccounts51–53. Inanewbusiness,theorderofmagnitudeofbalancesinsuchaccountsisnot determinableinadvance.Themagnitudemayalsovaryfromperiodtoperiod.

Ex.2-4

a.debitg.debit

b.credith.credit

c.debiti.debit

d.creditj.credit

e.creditk.debit

f.debitl.debit

Ex.2-5

1.debitandcreditentries(c)

2.debitandcreditentries(c)

3.debitandcreditentries(c)

4.creditentriesonly(b)

5.debitentriesonly(a)

6.debitentriesonly(a)

7.debitentriesonly(a)

Ex.2-6

a.Liability—credite.Asset—debit

b.Asset—debitf.Revenue—credit c.Owner’sequityg.Asset—debit (AshleyGriffin,Capital)—credith.Expense—debit

d.Owner’sequityi.Asset—debit (AshleyGriffin,Drawing)—debitj.Expense—debit

Ex.2-9(Concluded)

b. (3)62,770(4)820(4)820(2)1,960 (2)1,960(1)73,900 (1)73,900(3)62,770

c.No.Anerrormaynothavenecessarilyoccurred.AcreditbalanceinAccounts Receivablecouldoccurifacustomeroverpaidhisorheraccount.Regardless, thecreditbalanceshouldbeinvestigatedtoverifythatanerrorhasnotoccurred.

Ex.2-10

a.Theincreaseof$140,000($515,000–$375,000)inthecashaccountdoesnot indicatenetincomeofthatamount.Netincomeistheexcessofrevenues overexpensesandisnormallynotthesameasthechangeinthecashaccount.

b.$60,000($200,000–$140,000) or X375,000 515,000 200,000

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

X=$60,000

CHAPTER 2 Analyzing Transactions

Ex.2-11

a. Feb.1X 194,500210,400 Feb.2862,500

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

b. Oct.1121,100470,500 X Oct.31136,800

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

c. Apr.148,350X

$48,350+$260,060–X=$59,390 X=$48,350+$260,060–$59,390 X=$249,020

Ex.2-12

a.Creditbalanceof$170,000($500,000–$10,000–$320,000).

b.Yes.ThebalancesheetpreparedatDecember31willbalance,withTerrace Waters,Capital,beingreportedintheowner’sequitysectionas$170,000.

Ex.2-17

Inequalityoftrialbalancetotalswouldbecausedbyerrorsdescribedin(c)and (e).For(c),thedebittotalwouldexceedthecredittotalby$9,900($4,950+$4,950). For(e),thecredittotalwouldexceedthedebittotalby$17,100($19,000–$1,900).

Errors(b),(c),(d),and(e)wouldrequirecorrectingentries.Althoughitisnota correctingentry,theentrythatwasnotmadein(a)shouldalsobeenteredinthe journal.

Ex.2-20

1.TheDebitcolumntotalisaddedincorrectly.Thesumis$890,700ratherthan $1,189,300.

2.Thetrialbalanceshouldbedated“July31,20Y3,”not“FortheMonth EndingJuly31,20Y3.”

3.TheAccountsReceivablebalanceshouldbeintheDebitcolumn.

4.TheAccountsPayablebalanceshouldbeintheCreditcolumn.

5.TheSamuelParson,Drawing,balanceshouldbeintheDebitcolumn.

6.TheAdvertisingExpensebalanceshouldbeintheDebitcolumn. Acorrectedtrialbalancewouldbeasfollows:

Ex.2-21

JournalEntryThatWasJournalEntryThatShould MadeinErrorHaveBeenMade

a. InsuranceExpense18,000PrepaidInsurance18,000 PrepaidInsurance18,000Cash18,000 PrepaidInsuranceinsteadofInsuranceExpenseshouldhavebeendebited. CashinsteadofPrepaidInsuranceshouldhavebeencredited.Thedebitand creditamountof$18,000iscorrect.

Comparison

CorrectingJournalEntries

PrepaidInsurance18,000 InsuranceExpense18,000 PrepaidInsurance18,000 Cash18,000

JournalEntryThatWasJournalEntryThatShould MadeinErrorHaveBeenMade

b. WagesExpense10,000BrianPhillips,Drawing10,000 Cash10,000Cash10,000 BrianPhillips,DrawinginsteadofWagesExpenseshouldhavebeendebited.

Comparison 2-19

CorrectingJournalEntry

Ex.2-22

JournalEntryThatWasJournalEntryThatShould MadeinErrorHaveBeenMade

a. FeesEarned8,800Cash8,800 Cash8,800AccountsReceivable8,800 CashinsteadofFeesEarnedshouldhavebeendebited.AccountsReceivable insteadofCashshouldhavebeencredited.Thedebitandcreditamountof $8,800iscorrect. Cash8,800 FeesEarned8,800 Cash8,800 AccountsReceivable8,800

Comparison

CorrectingJournalEntries

JournalEntryThatWasJournalEntryThatShould MadeinErrorHaveBeenMade

b. SuppliesExpense1,760Supplies1,760 AccountsPayable1,760Cash1,760 SuppliesinsteadofSuppliesExpenseshouldhavebeendebited.Cashinsteadof AccountsPayableshouldhavebeencredited.Thedebitandcreditamountof $1,760iscorrect. AccountsPayable1,760 SuppliesExpense1,760 Supplies1,760 Cash1,760

Comparison

CorrectingJournalEntries

Ex.2-23

a.1.Revenue:

CHAPTER 2 Analyzing Transactions

$2,642millionincrease($75,356–$72,714)

3.6%increase($2,642÷$72,714)

2.Operatingexpenses:

$2,756millionincrease($71,246–$68,490)

4.0%increase($2,756÷$68,490)

3.Operatingincome:

$114milliondecrease($4,110–$4,224)

2.7%decrease(–$114÷$4,224)

b.Duringtherecentyear,revenueincreasedby3.6%,whileoperatingexpenses increasedby4.0%.Asaresult,operatingincomedecreasedby2.7%,fromthe prioryear.

Ex.2-24

a.1.Revenue:

$12,551millionincrease($141,576–$129,025)

9.7%increase($12,551÷$129,025)

2.Operatingexpenses:

$12,182millionincrease($137,096–$124,914)

9.8%increase($12,182÷$124,914)

3.Operatingincome:

$369millionincrease($4,480–$4,111)

9.0%increase($369÷$4,111)

b.Duringtherecentyear,revenueincreasedby9.7%,whileoperatingexpenses increasedby9.8%.Asaresult,operatingincomeincreasedby9.0%fromthe prioryear.

c.BecauseofthesizedifferencesbetweenTargetandCostco(Costcohasmore than1.8timestherevenue),itisbesttocomparethetwocompaniesonthebasis ofpercentchangesfromtheprioryear.Costco’srevenuesincreasedby9.7%, whileTarget’srevenueincreasedby3.6%.TheexpensesofCostcoincreasedby 9.8%,whichisslightlymorethanthepercentageincreaseinrevenues.Asaresult, Costco’soperatingincomeincreasedby9.0%.Target’sexpensesincreasedby 4.0%,whichislessthanthepercentageincreaseinrevenues.Asaresult,Target’s operatingincomedecreasedby2.7%.Overall,Costcohadabetteroperating performancethanTarget.

Prob.2-1A 1.and2.

(a)36,000(b)2,400(d)9,000 (g)12,200(c)7,800 (e)2,150 (f)4,000(i)4,500(d)9,000 (h)815(k)2,890 (i)4,500Bal.7,390 (j)5,000 (m)6,450 (n)1,020(j)5,000(c)25,000

CHAPTER 2 Analyzing Transactions

Prob.2-2A(Continued) 2.

(a)53,000(b)7,950(e)24,180 (e)24,180(d)2,320 (f)3,050

RentExpense

(g)6,630(b)7,950 (i)2,600 Bal.54,630

SuppliesOfficeSalariesExpense

AutomobileExpense

(d)2,320(c)4,240(f)2,490 Bal.1,920

(i)2,600(f)560 CashFeesEarned

FahadAli,DrawingMiscellaneousExpense AccountsPayable FahadAli,Capital

SuppliesExpense

(a)53,000(h)1,860

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

5.Thereisa$2,090increaseinowner’sequityforJanuary,whichisnetincomeof $4,690minuswithdrawalsof$2,600.

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

5.SomesuppliesmayhavebeenusedduringJune,butnosuppliesexpensehas beenrecorded.

AswillbediscussedinChapter3,adjustmentsarenecessaryattheendofthe accountingperiodtobringtheaccountsuptodate.Forexample,adjustments forsuppliesused,insuranceexpired,anddepreciationwouldprobablybe requiredbyWhitworthDesigns.

Note to Instructors: Atthispoint,studentshavenotbeenexposedtodepreciation, butsomeinsightfulstudentsmightrecognizetheneedforrecordingsuppliesused andinsuranceexpired.Youmightusethisasanopportunitytodiscusswhatis cominginChapter3.

Prob.2-4A(Concluded)

5.(a)Theunadjustedtrialbalancein(4)stillbalancesbecausethedebitsequaled thecreditsintheoriginaljournalentry.

(b)Thecorrectingentryfor$7,200($19,100–$11,900)wouldbeasfollows:

JOURNAL

Date

(c)Transposition

$17,300+$6,000(a)–$900(b)

$7,400+$1,500–$150

2.No.Thetrialbalanceindicatesonlythatthedebitsandcreditsareequal.Anyerrors thathavethesameeffectondebitsandcreditswillnotaffectthebalancingofthe trialbalance.

Prob.2-1B 1.and2.

(a)18,000(b)2,500(n)300(b)17,000 (g)12,000(c)3,150Bal.16,700

CHAPTER 2 Analyzing Transactions

Prob.2-2B(Continued) 2.

(a)17,500(d)3,000(c)13,300 (c)13,300(e)1,150 (f)1,800 (g)1,900(d)3,000 (h)2,800 Bal.20,150

(b)2,300(i)1,050(h)2,800 Bal.1,250

AutomobileExpense

(e)1,150(b)2,300(g)1,500 Bal.1,150

SuppliesExpense

(a)17,500(i)1,050

RafaelMasey,DrawingMiscellaneousExpense AccountsPayable RafaelMasey,Capital

(f)1,800(g)400 CashFeesEarned SuppliesOfficeSalariesExpense RentExpense

4.a.$13,300

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

5.Thereisa$2,750increaseinowner’sequityforAugust,whichisnetincomeof $4,550minuswithdrawalsof$1,800.

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

5.SomesuppliesmayhavebeenusedduringOctober,butnosuppliesexpense hasbeenrecorded.

AswillbediscussedinChapter3,adjustmentsarenecessaryattheendofthe accountingperiodtobringtheaccountsuptodate.Forexample,adjustmentsfor suppliesused,insuranceexpired,anddepreciationwouldprobablyberequired byPioneerDesigns.

Prob.2-4B(Concluded)

CHAPTER 2 Analyzing Transactions

5.(a)Theunadjustedtrialbalancein(4)stillbalancesbecausethedebitsequaled thecreditsintheoriginaljournalentry.

(b)Thecorrectingentryfor$9,000($10,000–$1,000)wouldbeasfollows:

JOURNAL

20Y7

Aug.31CindyGetman,Drawing329,000 Cash119,000

(c)Slide Date

2.No.Thetrialbalanceindicatesonlythatthedebitsandcreditsareequal. Anyerrorsthathavethesameeffectondebitsandcreditswillnotaffectthe balancingofthetrialbalance.

CASES&PROJECTS

CP2-1

1.No.Forfinancialaccountinginformationtobeuseful,itmustaccuratelyreflect anentity’sbusinesstransactionsandeconomicactivity.Forthistohappen, eachaccountmustreflecttheincreasesordecreasesthatresultfromeach transaction.Ifthetrialbalancedoesnotbalance,itmeansthatatransactionhas notbeenaccuratelyrecordedintheaccounts.Byknowinglysubmittingatrial balancethatdoesnotaccuratelyreflectthetransactionsintheaccounts,Buddy isdemonstratingafailureofindividualcharacterandisactingunethically.

2.Theusersofthefinancialinformationwhorelyonthisinformationwillbe affected,astheinformationwillnotbeafaithfulrepresentationoftheentity’s economicactivity.

3.Buddyshouldhavediscussedtheissuewithhissupervisorandaskedformore timetofindtheerror.

CP2-2

AsamplesolutionbasedonNikeInc.’sForm10-KforthefiscalyearendedMay31, 2018,follows:

1.$22,536million

2.$12,724million($6,040+$3,468+$3,216)

3.$9,812million($22,536millionontotalassets–$12,724milliontotalliabilities)

4.3

5.2

6.Theincomestatementreportsasummaryofrevenuesandexpensesfora specificperiodoftime,suchasamonthorayear.Thebalancesheetreportsa listofassets,liabilities,andstockholders’equityasofaspecificdate,usuallyat thecloseofthelastdayofamonthorayear.

CP2-3

1.Therulesofdebitandcreditmustbememorized.Dotiscorrectinthattherules ofdebitandcreditcouldbereversedaslongaseveryoneacceptedandabided bytherules.However,theimportantpointisthateveryoneacceptstherulesas thewayinwhichtransactionsshouldberecorded.Thisgeneratesuniformity acrosstheaccountingprofessionandreduceserrorsandconfusion.Becausethe currentrulesofdebitandcredithavebeenusedforcenturies,Dotshouldadapt tothecurrentrulesofdebitandcredit,ratherthandeviseherown. Theprimaryreasonthatallaccountsdonothavethesamerulesforincreases anddecreasesisforcontroloftherecordingprocess.Thedouble-entry accountingsystem,whichincludes(1)therulesofdebitandcreditand(2)the accountingequation,guaranteesthat(1)debitsalwaysequalcreditsand(2) assetsalwaysequalliabilitiesplusowner’sequity.Ifallincreasesintheaccount wererecordedbydebits,thenthecontrolthatdebitsalwaysequalcredits wouldberemoved.Inaddition,thecontrolthatthenormalbalanceof

CP2-3(Concluded) assetsisadebitwouldalsoberemoved.Theaccountingequationwouldstill hold,butthecontroloverrecordingtransactionswouldbeweakened. Dotiscorrectthatwecouldcalltheleftandrightsidesofanaccount differentterms,suchas“LE”and“RE.”Again,centuriesoftraditiondictate thecurrentterminologyused.Onemightnote,however,thatinLatin, debere (debit)means“left”and credere (credit)means“right.”

2.Theaccountingsystemmaybedesignedtocaptureinformationaboutthe buyinghabitsofvariouscustomersorvendors,suchasthequantity normallyordered,averageamountordered,andnumberofreturns.Thus,in asense,therecanbeother“sides”of(informationabout)atransactionthat arerecordedbytheaccountingsystem.Suchinformationwouldbeviewed assupplementaltothebasicdouble-entryaccountingsystem.

CP2-4

Note to Instructors: Thepurposeofthisactivityistofamiliarizestudentswiththejob opportunitiesavailableinaccountingandallowthemtodemonstratetheirabilityto communicatetheroleofaccountinginthecontextofaspecificpositionthatrequires knowledgeofaccounting.Anexampleofanadvertisementforsuchapositionis shownbelow.Individualstudentanswerswillvarydependingonthespecificscenario theyselect.

ABOUTTHECOMPANY

OurclientislookingtoaddaFinancialAnalyst.Withalargeandgrowingfinanceteam, thereissignificantopportunityforgrowthandadvancementwithinthedepartment. Thecompanyboastsateam-orientedcultureandprovidesitsemployeeswiththe toolsandtrainingnecessarytoperform.Ourclientislookingtobringonmoreofa junior-levelcandidatewhowantstogainexperienceinhisorherfieldofstudy.There willbehands-ontrainingfortherolethatwillevolvefromadataanalystintoa financialanalystandwillbereportingtothedirectoroffinance.Ourclientisinthe consumergoodsindustryandisaninternationalcompanythathasmultiple opportunitiesforgrowth.

RESPONSIBILITIESOFTHEFINANCIALANALYST

TheFinancialAnalystwill:

• Conductspecialstudiestoanalyzecomplexfinancialactionsandprepare recommendationsforpolicy,procedure,control,oraction.

• Analyzefinancialinformationtodeterminepresentandfuturefinancialperformance.

• Evaluatecomplexprofitplans,operatingrecords,andfinancialstatements.

• Directpreparationofstudies,reports,analyses,andrecommendationsinareas suchasbudgets,forecasts,financialplans,statisticalreports,andbusiness forecasts.

• Coordinatewithalllevelsofmanagementtogather,analyze,summarize,and preparerecommendationsregardingfinancialplans,trendedfuturerequirements, andoperatingforecasts.

Source: CareerBuilder.com

CP2-5

Thefollowinggeneraljournalentryshouldbeusedtorecordthereceiptoftuition paymentsreceivedinadvanceofclasses:

Cashisanassetaccount,andUnearnedTuitionDepositsisaliabilityaccount.As theclassesaretaughtthroughouttheterm,theunearnedtuitiondepositsbecome earnedrevenue.Theentrytorecordtheearnedportionoftuitionwillbe:

CP2-6

Thejournaliscalledthebookoforiginalentry.Itprovidesatime-orderedhistory ofthetransactionsthathaveoccurredforthefirm.Thistime-orderedhistoryis veryimportantbecauseitallowsonetotraceledgeraccountbalancesbackto theoriginaltransactionsthatcreatedthosebalances.Thisiscalledan“audit trail.”Ifthefirmrecordedtransactionsbypostingtoledgersdirectly,itwouldbe nearlyimpossibletoreconstructactualtransactions.Thedebitsandcredits wouldallbeseparatedandaccumulatedintotheledgerbalances.Oncethe transactionsbecomepartoftheledgerbalances,theoriginaltransactionswould belost.Thatis,therewouldbenoaudittrail,andanyerrorsthatmightoccurin recordingtransactionswouldbealmostimpossibletotrace.Thus,firmsfirst recordtransactiondebitsandcreditsinajournal.Thesetransactionsarethen postedtotheledgertoupdatetheaccountbalances.Thejournalandledgerare linkedusingpostingreferences.Thisallowsananalysttotracethetransaction flowforwardorbackward,dependingontheneed.

CP2-7

a.Althoughthetitlesandnumbersofaccountsmaydiffer,dependingonhow expensesareclassified,thefollowingaccountswouldbeadequatefor recordingtransactiondataforEagleCaddyService: 11Cash41FeesEarned 12AccountsReceivable 13Supplies

31CoryNeece,Capital 32CoryNeece,Drawing

Note to Instructors: Studentsmayhavepreparedslightlydifferentincome statements,dependinguponthetitlesofthemajorexpenseclassifications chosen.Regardlessoftheclassificationofexpenses,however,thetotal sales,totalexpenses,andnetincomeshouldbeaspresentedabove. Taccountsarenotrequiredforthepreparationoftheincomestatementof EagleCaddyService.Thefollowingpresentationillustratesonesolutionusing Taccounts.Alternativesolutionsarepossibleifstudentsuseddifferent accounts.InpresentingthefollowingTaccountsolution,instructorsmay wishtoemphasizetheadvantagesofusingTaccounts(orajournaland four-columnaccounts)whenalargenumberoftransactionsmustbe recorded.

CP2-7(Concluded)

c.$6,265,computedinthefollowingmanner:

Cashreceipts:

Initialinvestment……………………………………………………$2,000

Cashsales($5,400+$4,200)………………………………………9,600

Collectionsonaccounts……………………………………………1,500

TotalcashreceiptsduringJune……………………………$13,100

Cashdisbursements:

Rentexpense($500+$3,000)……………………………………$3,500

Suppliespurchasedforcash………………………………………750

Wagesexpense………………………………………………………850

Paymentforsuppliesonaccount………………………………1,000

Utilitiesexpense……………………………………………………340

Miscellaneousexpense…………………………………………… 395

TotalcashdisbursementsduringJune……………………6,835

Cashonhandaccordingtorecords*………………………………$6,265

*IfthestudentusedTaccountsincompletingpart(b),orthispart,thisamount($6,265) shouldagreewiththebalanceofthecashaccount.

d.Thedifferenceof$90($6,265–$6,175)betweenthecashonhandaccording torecords($6,265)andthecashonhandaccordingtothecount($6,175) couldbeduetomanyfactors,includingerrorsintherecordkeepingand withdrawalsmadebyCory.