126 ♦ Chapter 3
16. Northeast Publishing recorded the following transactions in spreadsheet format:
ASSETS =
LIABILITIES
+ OWNERS’ EQUITY
Accounts
Cash
Accounts
Payable
Contributed
Capital
Retained
Earnings
a.
Cash
48,000
Contributed Capital
48,000
b.
Accounts Receivable
Sales Revenue
14,000
COGS
-6,400
Merchandise Inventory
c.
Supplies
Accounts Payable
4,000
d.
Equipment
Cash
-8,000
Loan Payable
28,000
e.
Wages Expense
-10,000
Cash
-10,000
Ending Amounts
30,000 + 47,600 = 32,000 + 48,000 – 2,400
Required:
Identify the specific event that produced each entry.
17. For each of the following transactions, indicate whether the balance of the listed account would
increase or decrease:
Transaction
Account
Increase or Decrease
Profits were paid to owners
Owner’s Equity
?
Equipment purchased for cash
Equipment
?
Vendor balances were paid
Accounts Payable
?
Vendor balances were paid
Cash
?
Product was sold on account
Sales Revenue
?
Bank note was paid
Notes Payable
?
Wages were earned but not paid
Wages Expense
?
Measuring Revenues and Expenses ♦ 127
18. Veggie Delights Restaurant completed the following transactions. Record them in spreadsheet
format.
a.
The owners invested $80,000 in the business.
b.
Paid first month’s rent on restaurant building, $2,800.
c.
Purchased $10,000 of equipment on credit.
d.
Services totaling $8,000 were performed for credit customers.
e.
Paid first month’s utility bill, $500.
f.
Services totaling $4,000 were performed for cash customers.
g.
Collected $7,000 from amounts owed by customers.
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19. Abbott & Company completed the following transactions. Record them in spreadsheet format.
a.
The owners invested $100,000 in the business.
b.
Paid first month’s rent on building, $2,000.
c.
Purchased $14,000 of equipment on credit and signed a note.
d.
Services totaling $16,000 were performed for credit customers.
e.
Paid first month’s utility bill, $900.
f.
Services totaling $6,000 were performed for cash customers.
g.
Collected $10,000 from amounts owed by customers.
20. Solomon Enterprises had the following account balances at August 31, 2007:
Accounts payable
$ 18,000
Accounts receivable
20,000
Accumulated depreciation
8,000
Cash
12,000
Cost of goods sold
300,000
Equipment
44,000
Inventory
28,000
Owners’ equity
52,000
Rent expense
6,000
Sales revenue
380,000
Wages expense
48,000
Required:
Prepare (a) an income statement for the year ended August 31, 2007, (b) a balance sheet as of
August 31, 2007.
Measuring Revenues and Expenses ♦ 129
21. Spiritlight Ventures had the following account balances at December 31, 2004:
Accounts payable
$ 27,000
Accounts receivable
30,000
Accumulated depreciation
12,000
Cash
18,000
Cost of goods sold
450,000
Equipment
66,000
Inventory
42,000
Owners’ equity
78,000
Rent expense
9,000
Sales revenue
570,000
Wages expense
72,000
Required:
Prepare closing entries in spreadsheet format.
Sales revenue
Expenses:
Cost of goods sold
Wages expense
Rent expense
Total expenses
Net income
Assets:
Cash
Accounts receivable
Inventory
Equipment
Less: Accumulated depreciation
Total assets
Liabilities:
Accounts payable
Equity:
Owners’ equity
130 ♦ Chapter 3
22. Dylan’s Diner completed the following transactions. Record them in spreadsheet format.
a.
The owners invested $120,000 in the business.
b.
Paid first month’s rent on restaurant building, $2,000.
c.
Purchased $16,000 of equipment on credit.and signed a note.
d.
Services totaling $14,000 were performed for credit customers.
e.
Paid first month’s utility bill, $700.
f.
Services totaling $6,000 were performed for cash customers.
g.
Collected $9,000 from amounts owed by customers.
Measuring Revenues and Expenses ♦ 131
23. Sumarian Company completed the following transactions. Record them in spreadsheet format.
a.
The owners invested $160,000 in the business.
b.
Paid first month’s rent on building, $1,400.
c.
Purchased $34,000 of equipment on credit and signed a note.
d.
Services totaling $18,000 were performed for credit customers.
e.
Paid first month’s utility bill, $600.
f.
Services totaling $8,000 were performed for cash customers.
g.
Collected $16,000 from amounts owed by customers.
24. Montague Corporation had the following account balances at August 31, 2007:
Accounts payable
$ 20,000
Accounts receivable
40,000
Accumulated depreciation
14,000
Cash
32,000
Cost of goods sold
280,000
Equipment
38,000
Inventory
30,000
Owners’ equity
36,000
Rent expense
10,000
Sales revenue
420,000
Wages expense
60,000
Required:
Prepare (a) an income statement for the year ended August 31, 2007, (b) a balance sheet as of
August 31, 2007.
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25. American Steel had the following account balances at December 31, 2007:
Accounts payable
$ 30,000
Accounts receivable
60,000
Accumulated depreciation
21,000
Cash
48,000
Cost of goods sold
420,000
Equipment
57,000
Inventory
45,000
Owners’ equity
54,000
Rent expense
15,000
Sales revenue
630,000
Wages expense
90,000
Required:
Prepare closing entries in spreadsheet format.
Sales revenue
Expenses:
Cost of goods sold
Wages expense
Rent expense
Total expenses
Net income
Assets
Cash
Accounts receivable
Inventory
Equipment
Less: Accumulated depreciation
Total assets
Liabilities:
Accounts payable
Equity:
Owners’ equity
Measuring Revenues and Expenses ♦ 133
26. Record each transaction of Henry’s Bike Shop using the spreadsheet format.
a.
Purchased merchandise for sale on October 1, for $10,800 to be paid by
October 30.
b.
Sold merchandise for $2,700 cash on October 3. The merchandise cost Henry’s $800.
c.
Sold merchandise on account for $5,400 October 6. The merchandise cost Henry’s
$1,700.
d.
Ordered $6,400 of merchandise on October 7 from a supplier.
e.
Paid $5,400 on October 10 to suppliers for merchandise purchased on
October 1.
f.
Received $3,600 on October 16 from customers for sales of October 6.
g.
Owed $2,000 in wages, as of October 31, to workers for the last week of October.
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27. Each of the following independent situations relates to information available on the last day of the
year. Each involves an adjustment that must be made to the accounting system before financial
statements can be prepared. Show the effects of each adjusting entry on the accounting system
using the spreadsheet format.
a.
A $45,000 note payable, incurring $3,600 annual interest, has been outstanding the
entire year. The note payable was properly recorded when funds were borrowed.
b.
A $9,000 check was received one month ago from a tenant that subleases part of a
building. The amount was for six months’ rent beginning the day the check was
received. When received, the entire amount of the check was recorded in a liability
account titled Unearned Rent.
c.
Exactly halfway through the year just ended, the company purchased a two-year fire
insurance policy for $24,000. When the policy was purchased, the entire amount was
recorded in the Prepaid Insurance account.
d.
Depreciation on the buildings and machinery for the year is estimated to be
$105,000.
e.
Another tenant, renting for the same cost as in b., has been using his part of the
building for two months but will make his first rent payment in January.
Measuring Revenues and Expenses ♦ 135
28. On March 1, 2007, Janet and Joleen started the Doctor Decor Company. They offer a complete
line of decorative items and decorating services. Following are the transactions occurring during
the first month of business:
1.
The business was started by each partner contributing $9,000.
2.
Each partner also contributed $6,000 worth of antique items from their own
collections to the business.
3.
The annual business license and permits totaled $1,500 and were paid in cash. (Hint:
Use the asset account titled Prepaid Business Fees.)
4.
A used delivery van was purchased by paying $3,000 down and signing a three-year,
note payable for the $15,000 balance. Interest on the note is $150 per month. The
first interest payment is due April 15.
5.
An inventory of accessories was purchased on credit for $4,500.
6.
A shop was rented for $500 monthly, and the first month’s rent was paid.
7.
Advertising costing $700 was run in the newspaper. The bill had not yet come by the
end of the month and had not been paid.
8.
Services totaling $6,000 were performed during the month for cash.
9.
Services totaling $10,000 were performed during the month on credit.
10.
Accessories costing a total of $5,000 were sold to customers for $8,000 cash.
11.
Gas, oil, and maintenance on the delivery van totaling $300 were paid for.
12.
At the end of the month, Janet and Joleen each withdrew $1,000 from the business
for personal expenses.
13.
Also at the end of the month, Janet and Joleen prepared the necessary adjusting
entries.
Required
a.
Record each transaction using the spreadsheet format.
b.
Prepare an income statement for the month of March.
136 ♦ Chapter 3
Measuring Revenues and Expenses ♦ 137
29. Before Steel Frame Builders, Inc. can prepare its financial statements at year-end 2007, it must
account for the two transactions below.
Required:
Record the adjustment that is called for by the data provided in spreadsheet format.
a.
A $4,800 two-year insurance policy was purchased August 1, 2007 and recorded as
Prepaid Insurance.
b.
At year end, the ledger balance of Office Supplies Inventory is $2,400. A physical
count of supplies, however, shows $1,900 worth on hand.
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30. The Eastland Shopping Mall has the following information available at December 31, 2007
regarding two of its tenants.
a.
The Bubbler Shoppe has paid its rent through October of 2007 but has not paid the
$1,800 per month rent since. The unpaid rent has not yet been recorded at year-end.
b.
Get Thin On Us has already paid its rent of $1,500 per month for the first two
months of 2008 It is currently recorded in the rent revenue account.
Required:
Prepare the entry that should be made to Eastland Shopping Mall’s accounting system for each of
the items above. If no entry is necessary, indicate why this is so.
31. For each of the situations below, record the necessary adjusting entry. If no entry is necessary,
explain why.
a.
At year end, Purple Company had neither collected nor recorded $2,000 of rent
revenue that had been earned by renting out part of the store basement.
b.
On November 1, 2007, The Alchemist Bookstore received a tax bill of $3,000 for
2007 property taxes that are to be paid on March 1, 2008 This event was recorded by
increasing Property Tax Expense and increasing Property Taxes Payable. Prepare
any new entry necessary at December 31, 2007.
Measuring Revenues and Expenses ♦ 139
ESSAY
1. Clearly distinguish between the cash basis of accounting measurement and the accrual basis of
accounting measurement.
2. Ernesto obtained a contract to wash all the windows at Lynfield College at a price of $1,000 per
month. During April, Ernesto washed all the windows but had collected only $800 by the end of
the month. Also during April, Ernesto incurred $300 of expenses but had only paid $200 of these
by month end.
If Ernesto uses accrual-basis accounting, what is net income for April? Carefully specify how you
computed that amount and why.
140 ♦ Chapter 3
3. What is depreciation and how is it accounted for on the accrual basis?
4. Various formats are used to record and/or report accounting information. Briefly explain each of
the following formats: journal, ledger.
5. What is meant by the term “subsidiary accounts” and how are they used?
6. What is meant by the expression “closing the books“?
Measuring Revenues and Expenses ♦ 141
7. What would be the affect on the balance sheet and income statements if a business owner
instructed the bookkeeper to omit the year-end depreciation expense accounting entry?