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CHAPTER 3
The Accounting Information System
ASSIGNMENT CLASSIFICATION TABLE
Topics Questions
Brief
Exercises Exercises Problems
1. Transaction identification. 1, 2, 3, 5 1, 2 1, 2, 3, 4, 21 13
2. Nominal accounts. 4, 7
3. Trial balance. 6, 13 2, 3, 4 1, 2, 7
4. Adjusting entries. 8, 14, 16, 17 3, 4, 5, 6, 7,
8, 9, 10
5, 6, 7, 8, 9,
10
1, 2, 3, 4, 5,
6, 7, 8, 9, 10,
11, 12
5. Closing. 15 12 11, 12, 17 1, 3, 5, 6, 7,
8, 9, 10, 12
6. Inventory and cost of
goods sold.
9, 10, 11, 12 11 12, 14, 15,
16
7. Work sheet and/or
financial statements.
18 13, 18, 19,
20
1, 2, 4, 5, 9,
11, 12
8. Comprehensive
accounting cycle.
1, 2, 7, 9
* 9. Reversing entries. 19 13 22, 23
*These topics are dealt with in the Appendix to the Chapter.
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ASSIGNMENT CHARACTERISTICS TABLE
Item Description
Level of
Difficulty
Time
(minutes)
E3-1 Transaction analysis–service company. Simple 15-20
E3-2 Corrected trial balance. Simple 10-15
E3-3 Corrected trial balance. Simple 15-20
E3-4 Corrected trial balance. Simple 15-20
E3-5 Adjusting entries. Moderate 15-20
E3-6 Adjusting entries. Moderate 15-20
E3-7 Analyze adjusted data. Complex 15-20
E3-8 Adjusting entries. Moderate 10-15
E3-9 Adjusting entries. Moderate 15-20
E3-10 Adjusting entries and trial balance. Complex 25-30
E3-11 Closing entries. Simple 10-15
E3-12 Closing entries. Moderate 10-15
E3-13 Completing work sheet. Simple 10-15
E3-14 Compute missing amounts. Simple 10-15
E3-15 Find missing amounts–periodic. Moderate 15-20
E3-16 Prepare cost of goods sold–periodic. Moderate 10-15
E3-17 Closing entries for a corporation. Moderate 15-20
E3-18 Work sheet preparation. Moderate 15-20
E3-19 Work sheet and balance sheet presentation. Moderate 20-25
E3-20 Partial work sheet preparation. Moderate 15-20
E3-21 Transactions of a corporation including investment and
dividend.
Moderate 20-25
*E3-22 Closing and reversing entries. Complex 15-20
*E3-23 Adjusting and reversing entries. Complex 15-20
P3-1 Transactions, financial statements–service company. Moderate 25-35
P3-2 Adjusting entries and financial statements. Moderate 35-40
P3-3 Prepare adjusting entries. Moderate 25-30
P3-4 Prepare financial statements and closing entries. Moderate 35-40
P3-5
P3-6 Prepare financial statements, adjusting and closing
entries.
Moderate 40-50
P3-7
P3-8 Adjusting entries. Moderate 15-20
P3-9 Adjusting entries and financial statements. Moderate 25-30
P3-10 Adjusting entries and financial statements. Moderate 25-35
P3-11 Adjusting entries. Moderate 25-30
P3-12 Adjusting and closing. Moderate 30-40
P3-13 Adjusting and closing. Moderate 30-35
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ANSWERS TO QUESTIONS
1. Examples are:
(a) Payment of an accounts payable.
(b) Collection of an accounts receivable from a customer.
(c) Transfer of an accounts payable to a note payable.
2. Transactions (a), (b), (d) are considered business transactions and are recorded in the accounting
records because a change in assets, liabilities, or equities has been effected as a result of a
transfer of values from one party to another. Transactions (c) and (e) are not business
transactions because a transfer of values has not resulted, nor can the event be considered
financial in nature and capable of being expressed in terms of money.
3. Transaction (a): Accounts Receivable (debit), Fees Earned (credit).
Transaction (b): Cash (debit), Accounts Receivable (credit).
Transaction (c): Office Supplies (debit), Accounts Payable (credit).
Transaction (d): Delivery Expense (debit), Cash (credit).
4. Revenue and expense accounts are referred to as temporary or nominal accounts because each
period they are closed out to Income Summary in the closing process. Their balances are reduced
to zero at the end of the accounting period; therefore, the term temporary or nominal is sometimes
given to these accounts.
5. The double-entry system means that for every debit there must be a credit and vice-versa. It does
not mean that each transaction must be recorded twice.
6. Although it is not absolutely necessary that a trial balance be taken periodically, it is customary
and desirable. The trial balance accomplishes two principal purposes:
(1) It tests the accuracy of the entries in that it proves that debits and credits of an equal amount
are in the ledger.
(2) It supplies a list of open accounts and their balances which may be used in preparing the
financial statements and in supplying financial data about the concern.
7. (a) Real account; balance sheet.
(b) Real account; balance sheet.
(c) Merchandise inventory is generally considered a real account appearing on the balance sheet.
It has the elements of a nominal account when the periodic inventory system is used. It
appears on the income statement when the multiple step format is used.
(d) Real account; balance sheet.
(e) Real account; balance sheet.
(f) Nominal account; income statement.
(g) Nominal account; income statement.
(h) Real account; balance sheet.
8. At December 31, the three days’ wages due to the employees represent a current liability. The
related expense must be recorded in this period to properly reflect the expense incurred.
9. (a) In a service company, revenues are service revenues and expenses are operating expenses.
In a merchandising company, revenues are sales revenues and expenses consist of cost of
goods sold plus operating expenses.
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Questions Chapter 3 (Continued)
(b) The measurement process in a merchandising company consists of comparing the sales price
of the merchandise inventory to the cost of goods sold and operating expense.
10. The purpose of the Cost of Goods Sold account is to act as a clearing account for bringing
together those items directly affecting the Cost of Goods Sold for this period. Example of items
that would appear in this account are: (1) Purchases, (2) Purchase Discounts, (3) Purchase
Returns, (4) Purchase Allowances, (5) Transportation-in, (6) Inventory (beginning), and (7)
Inventory (ending). The ending balance represents the cost of goods sold.
11. In a perpetual inventory system, when inventory is sold, Cost of Goods Sold is debited and
Inventory is credited. At the end of the period, Cost of Goods Sold is closed to Income Summary.
12. On the balance sheet, the effect of the error is (1) the equipment account is understated, and (2)
the Capital account (Retained Earnings) is understated. On the income statement, (1) purchases
and cost of goods sold are overstated and (2) net income is understated. (Note to instructor: The
instructor should also be ready to discuss the effect that the omission of the depreciation charge
on the computer might have.)
13. (a) No change.
(b) Before closing, balances exist in these accounts; after closing, no balances exist.
(c) Before closing, balances exist in these accounts; after closing, no balances exist.
(d) Before closing, a balance exists in this account exclusive of the income or loss for the period;
during the period the balance is decreased by dividends declared; after closing, the balance is
increased or decreased by the amount of income or loss.
(e) No change.
14. Adjusting entries are prepared prior to the preparation of financial statements in order to bring the
accounts up to date and are necessary (1) to achieve a proper matching of revenues and
expenses in measuring income and (2) to achieve an accurate presentation of assets and equities.
15. Closing entries are prepared to transfer the effect of nominal accounts to capital after the adjusting
entries have been recorded and the financial statements prepared. Closing entries are necessary
to reduce the balances in nominal accounts to zero in order to prepare the accounts for the next
period’s transactions.
16. Cost – Salvage Value = Depreciable Cost: $3,000 – $0 = $3,000. Depreciable Cost ÷ Useful Life =
Depreciation Expense For One Year $3,000 ÷ 5 years = $600 per year. The asset was used for 6
months (7/1 – 12/31), therefore 1/2-year depreciation expense should be reported. Annual
depreciation x 6/12 = amount to be reported on 2003 income statement: $600 x 6/12 = $300.
17.
December 31
Interest Receivable………………………………………………………………………………… 10,000
Interest Revenue ……………………………………………………………………………. 10,000
(To record accrued interest revenue on loan)
Accrued expenses result from the same causes as accrued revenues. In fact, an accrued
expense on the books of one company is an accrued revenue to another company.
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Questions Chapter 3 (Continued)
18. A work sheet is not a permanent accounting record and its use is not required in the accounting
cycle. The work sheet is an informal device for accumulating and sorting information needed for
the financial statements. Its use is optional in helping to prepare financial statements.
*19. Reversing entries are made at the beginning of the period to reverse the accrued items and some
prepaid items. Reversing entries are not necessary. They are made to simplify the recording of
certain transactions that will occur later in the period. The same results will be attained whether or
not reversing entries are recorded.
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-1
May 1 Cash …………………………………………………………… 3,000
Common Stock…………………………………….. 3,000
3 Equipment ………………………………………………….. 1,100
Accounts Payable ………………………………… 1,100
13 Rent Expense ……………………………………………… 400
Cash…………………………………………………….. 400
21 Accounts Receivable…………………………………… 500
Service Revenue ………………………………….. 500
BRIEF EXERCISE 3-2
Aug. 2 Cash ……………………………………………………………. 12,000
Equipment …………………………………………………… 2,500
Brett Favre, Capital ……………………………….. 14,500
7 Supplies ………………………………………………………. 400
Accounts Payable …………………………………. 400
12 Cash ……………………………………………………………. 1,300
Accounts Receivable……………………………………. 670
Service Revenue……………………………………. 1,970
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BRIEF EXERCISE 3-2 (Continued)
15 Rent Expense ………………………………………………. 600
Cash……………………………………………………… 600
19 Supplies Expense ………………………………………… 130
Supplies………………………………………………… 130
BRIEF EXERCISE 3-3
July 1 Prepaid Insurance………………………………………… 18,000
Cash……………………………………………………… 18,000
Dec. 31 Insurance Expense ………………………………………. 3,000
Prepaid Insurance …………………………………. 3,000
($18,000 x 1/2 x 1/3)
BRIEF EXERCISE 3-4
July 1 Cash ……………………………………………………………. 18,000
Unearned Insurance Revenue………………… 18,000
Dec. 31 Unearned Insurance Revenue ………………………. 3,000
Insurance Revenue ……………………………….. 3,000
($18,000 x 1/2 x 1/3)
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BRIEF EXERCISE 3-5
Aug. 1 Prepaid Insurance………………………………………… 8,400
Cash……………………………………………………… 8,400
Dec. 31 Insurance Expense ………………………………………. 1,750
Prepaid Insurance …………………………………. 1,750
($8,400 x 5/24)
BRIEF EXERCISE 3-6
Nov. 1 Cash ……………………………………………………………. 2,700
Unearned Rent Revenue………………………… 2,700
Dec. 31 Unearned Rent Revenue ………………………………. 1,800
Rent Revenue ……………………………………….. 1,800
($2,700 x 2/3)
BRIEF EXERCISE 3-7
Dec. 31 Salaries Expense …………………………………………. 3,600
Salaries Payable ……………………………………. 3,600
($6,000 x 3/5)
Jan. 2 Salaries Payable…………………………………………… 3,600
Salaries Expense …………………………………………. 2,400
Cash……………………………………………………… 6,000
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BRIEF EXERCISE 3-8
Dec. 31 Interest Receivable ………………………………………. 300
Interest Revenue……………………………………. 300
Feb. 1 Cash ……………………………………………………………. 10,400
Notes Receivable…………………………………… 10,000
Interest Receivable………………………………… 300
Interest Revenue……………………………………. 100
BRIEF EXERCISE 3-9
Dec. 31 Interest Expense ………………………………………….. 400
Interest Payable…………………………………….. 400
31 Accounts Receivable……………………………………. 1,400
Service Revenue……………………………………. 1,400
31 Salaries Expense …………………………………………. 700
Salaries Payable ……………………………………. 700
31 Bad Debt Expense ……………………………………….. 900
Allowance for Doubtful Accounts…………… 900
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BRIEF EXERCISE 3-10
Depreciation Expense ………………………………………………….. 3,000
Accumulated Depreciation – Equipment ………………… 3,000
Equipment……………………………………………………………………. $30,000
Less: Accumulated Depreciation – Equipment ……………… 3,000 $27,000
BRIEF EXERCISE 3-11
Beginning inventory $ 81,000
Purchases $540,000
Less: Purchase returns $5,800
Purchase discounts 5,000 10,800
Net purchases 529,200
Add: Freight-in 16,200
Cost of goods purchased 545,400
Cost of goods available for sale 626,400
Ending inventory 70,200
Cost of goods sold $556,200
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BRIEF EXERCISE 3-12
Sales……………………………………………………………………………. 828,900
Interest Revenue ………………………………………………………….. 13,500
Income Summary…………………………………………………… 842,400
Income Summary …………………………………………………………. 780,300
Cost of Goods Sold ……………………………………………….. 556,200
Operating Expenses………………………………………………. 189,000
Income Tax Expense ……………………………………………… 35,100
Income Summary …………………………………………………………. 62,100
Retained Earnings …………………………………………………. 62,100
Retained Earnings………………………………………………………… 18,900
Dividends………………………………………………………………. 18,900
*BRIEF EXERCISE 3-13
(a) Salaries Payable ………………………………………………… 3,600
Salaries Expense…………………………………………. 3,600
(b) Salaries Expense ……………………………………………….. 6,000
Cash……………………………………………………………. 6,000
(c) Salaries Payable ………………………………………………… 3,600
Salaries Expense ……………………………………………….. 2,400
Cash……………………………………………………………. 6,000
SOLUTIONS TO EXERCISES
EXERCISE 3-1 (15-20 minutes)
Apr. 1 Cash ……………………………………………………………. 32,000
Equipment …………………………………………………… 14,000
Beverly Crusher, Capital………………………… 46,000
2 No entry—not a transaction.
3 Supplies ………………………………………………………. 700
Accounts Payable …………………………………. 700
7 Rent Expense ………………………………………………. 600
Cash……………………………………………………… 600
