Chapter 3: Processing Accounting Information
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
207. Presented below are several accounts from the financial statements of Eagle, Inc. for the year ended December 31,
2016:
1.
Cash
2.
Accounts Receivable
3.
Prepaid Expenses
4.
Accounts Payable
5.
Common Stock
6.
Sales
7.
Selling Expenses
8.
Administrative Expenses
9.
Interest Expense
10.
Income Taxes Expense
Each of these accounts has been assigned an identification number which you will use as answers for the transactions
described below. Enter the account number(s) in the blank spaces under the headings DEBIT and CREDIT to indicate the
accounts debited and credited when each transaction is recorded in a general journal.
DEBIT
CREDIT
A)
The company issues common stock at par value.
________
________
B)
A bill is received for advertising placed by the company’s ad
agency; payment is due in 30 days.
________
________
C)
Interest due on long-term debt is paid.
________
________
D)
Received an invoice from their insurance company for next
year’s coverage and payment was made.
________
________
ANSWER:
DEBIT
CREDIT
A)
The company issues common stock at par value.
1
5
B)
A bill is received for advertising placed by the
company’s ad agency; payment is due in 30 days.
7
4
C)
Interest due on long-term debt is paid.
9
1
D)
Received an invoice from their insurance company
for next year’s coverage and payment was made.
3
1
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
Chapter 3: Processing Accounting Information
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
208. Several accounts from the financial statements of Madison Company are listed below. In the two columns provided
for answers, indicate the type of account and the normal account balance. Use the following identification codes for your
answers:
Type of Account
Normal Balance
A = Asset
DR = Debit
L = Liability
CR = Credit
SE = Stockholders’ Equity
R = Revenue
E = Expense
Type of Account
Normal Balance
A)
Prepaid Insurance
_______
_______
B)
Retained Earnings
_______
_______
C)
Dividends
_______
_______
D)
Capital Stock
_______
_______
E)
Accounts Payable
_______
_______
F)
Wages and Salaries Expense
_______
_______
G)
Interest Income
_______
_______
H)
Wages and Salaries Payable
_______
_______
I)
Investments
_______
_______
J)
Decorating Fees Earned
_______
_______
Cash
2,900
Accounts Receivable
2,500
Sales of Flowers
Accounts Payable
3,000
Cash
3,000
Cash
1,900
Accounts Receivable
Salaries Expense
3,300
Cash
Moderate
Bloom’s: Analyzing
209. Karen’s Flower Shop began business as a corporation in 2016. Several transactions which occurred early in 2016 are
described below. Record each transaction in proper form, excluding written explanations, in the general journal provided.
A)
January 23, 2016: Stockholders invested cash of $70,000 in the business and received 7,000
shares common stock as evidence of their ownership interest.
B)
February 1, 2016: Rent of $1,600 was paid for the month of February.
C)
February 7, 2016: Equipment with a cost of $3,000 was purchased on credit; payment is due
within 30 days.
D)
February 14, 2016: Bills totaling $5,400 were presented to customers for flower
arrangements created and delivered; $2,900 was received in cash immediately; the balance
of $2,500 is due within 10 days.
E)
February 18, 2016: Full payment was made for the equipment purchased on February 7.
F)
February 22, 2016: Payment of $1,900 was received from customers with balances due from
February 14.
G)
February 28, 2016: Employee salaries of $3,300 were paid.
General Journal
Date
Account Titles and Explanations
Post Ref.
Debit
ANSWER:
Date
Account Titles and Explanations
Post Ref.
Debit
Credit
Jan. 23
Cash
70,000
Common Stock
70,000
Feb. 1
Rent Expense
1,600
Cash
1,600
7
Equipment
3,000
Accounts Payable
3,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
210. Four journal entries are presented below. Write an explanation for each entry in the space provided below the entry.
A)
Cash
12,200
Service Revenue
12,200
B)
Accounts Receivable
17,500
Service Revenue
17,500
C)
Cash
16,900
Accounts Receivable
16,900
D)
Cash
1,830
Deposits Received in Advance
1,830
ANSWER:
A)
Cash
12,200
Service Revenue
12,200
Cash of $12,200 received for services provided for
customers.
B)
Accounts Receivable
17,500
Service Revenue
17,500
Customers billed $17,500 for services provided.
C)
Cash
16,900
Accounts Receivable
16,900
Cash of $16,900 received from customers billed earlier
for services provided.
D)
Cash
1,830
Deposits Received in Advance
1,830
Advance payments (deposits) of $1,830 received from
customers for services to be provided later.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.03-06 – LO: 03-06
KEYWORDS:
Bloom’s: Analyzing
General and Administrative Expenses
Cash
D)
Musical Instruments
Accounts Payable
Cash
135,000
Accounts Receivable
135,000
Accounts Payable
Cash
FACC.PONO.13.03-06 – LO: 03-06
Bloom’s: Analyzing
211. Described below are several transactions which an organization like the Hummingbird Co. might record. Several
accounts from the organization’s financial statements also are listed below. Using these account titles, record each
transaction in proper journal entry format in the general journal provided. A written explanation for each journal entry is
not required.
Accounts:
Cash
Common Stock
Accounts Receivable
Sales Revenue
Musical Instruments
Selling Expenses
Accounts Payable
General & Administrative Expenses
Deposits Received in Advance
A)
Customers are mailed bills for tickets, $225,000.
B)
Customers pay for tickets in advance, $130,000.
C)
Administrative employees are paid their monthly salaries, $14,000.
D)
An invoice is received for new musical instruments, $15,200; payment is due in 30 days.
E)
Payments received from customers for amounts billed in a previous transaction amount to
$135,000.
F)
Payment is made for the instruments invoice received in a previous transaction.
General Journal
Account Titles and Explanations
Debit
Credit
ANSWER:
Account Titles and Explanations
Debit
Credit
A)
Accounts Receivable
225,000
Sales Revenue
225,000
B)
Cash
130,000
Deposits Received in Advance
130,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
212. The bookkeeper for B. Sebastian & Company, Inc. prepared the following journal entries and posted the entries to
the general ledger as indicated in the T accounts presented. Assume that the dollar amounts and the descriptions of the
entries are correct.
Journal entries:
October 5
Accounts Receivable
1,600
Service Revenue
1,600
Customers were billed for services completed.
11
Cash
500
Service Revenue
500
Payment is received from a customer billed for services on
October 1.
15
Office Supplies
700
Accounts Payable
700
Purchased office furniture on credit; payment is due in 30 days.
25
Office Furniture
700
Cash
700
Payment is made for the office furniture bill received on
October 15.
ACCOUNTS RECEIVABLE
SERVICE REVENUE
5/5
1,600
|
|
5/5
1,600
|
|
5/11
500
CASH
ACCOUNTS PAYABLE
5/11
500
|
5/25
700
|
5/15
700
OFFICE SUPPLIES
OFFICE FURNITURE
5/15
700
|
5/25
700
|
See the journal entries and T accounts for B. Sebastian & Company.
Required: If you assume that all journal entries have been posted correctly, use the above information to answer these
questions:
(1) Identify the transactions that the bookkeeper recorded incorrectly in the general journal.
(2) Prepare the journal entry that the bookkeeper should have made for each transaction that you have identified as being
made incorrectly.
(3) For each journal entry recorded incorrectly, indicate the impact of the error on the accounting equation. For your
answer, indicate whether each element of the accounting equation, Assets, Liabilities, and Stockholders’ Equity, has been
“Understated” or “Overstated” or there has been “No Effect.”
Chapter 3: Processing Accounting Information
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
ANSWER:
(1) The October 11, 15, and 25 entries were recorded incorrectly.
(2) The correct journal entries are:
October 11
Cash
500
Accounts Receivable
500
October 15
Office Furniture
700
Accounts Payable
700
October 25
Accounts Payable
700
Cash
700
(3) The incorrect journal entry on October 11 overstates stockholders’ equity and overstates
assets. Liabilities are not affected. Service Revenue was recorded a second time, rather than
reducing the asset Accounts Receivable.
The incorrect entry on October 15 has no effect on any of the elements of the accounting
equation. The wrong asset account was debited—Office Supplies instead of Office Furniture.
The incorrect entry on October 25 overstates assets and overstates liabilities. Stockholders’
equity is not affected. An asset, Office Furniture, was recorded a second time, rather than
reducing the liability, Accounts Payable.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.03-05 – LO: 03-05
FACC.PONO.13.03-06 – LO: 03-06
KEYWORDS:
Bloom’s: Analyzing
Terry Company
Transactions
October 1
Terry purchased computer equipment for $8,400, paying $1,000 now, and
issuing a promissory note for the balance; the note is due in monthly
installments of $500 plus interest at 10% on the unpaid balance.
8
Terry records service revenue earned: $3,200 from cash customers; $12,000
for customers billed for completed services.
22
Common stock is issued for land with a fair value of $35,000.
31
An invoice for $1,200 is received from the company’s advertising agency for
ads which were run on radio and TV during October; the invoice is due in 30
days.
+$15,200
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.03-03 – LO: 03-03
KEYWORDS:
Bloom’s: Analyzing
213. Refer to the transactions for Terry Company.
Use the transactions incurred by the Terry Corporation to set up T accounts and post each transaction to the T accounts.
ANSWER:
COMPUTER EQUIPMENT
CASH
5/1
8,400
|
5/8
3,200
|
5/1
1,000
|
|
NOTES PAYABLE
ACCOUNTS RECEIVABLE
|
5/1
7,400
5/8
12,000
|
|
|
SERVICE REVENUE
LAND
|
5/8
15,200
5/22
35,000
|
|
|
COMMON STOCK
ADVERTISING EXPENSE
|
5/22
35,000
5/31
1,200
|
|
|
ACCOUNTS PAYABLE
|
5/31
1,200
|
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
214. Refer to the Terry Company transactions.
Required: Indicate the economic effects of each transaction above on the accounting equation. Use the following format
for your answers. Show the dollar amounts in the appropriate columns and use a “+” (plus) sign to indicate an increase and
a “-” (minus) sign to indicate a decrease.
Transaction
Date
Assets
Liabilities
Stockholders’
Equity
ANSWER:
amounts transferred from the general journal entries. The difference between the debit
the sums of the debit and credit balances are not equal, procedures for locating the
Moderate
FACC.PONO.13.03-04 – LO: 03-04
215. Several terms which represent components of a bookkeeping system are listed below. For each term, write a brief
explanation of how that component is used in a bookkeeping system. Space is provided for your answer immediately
below each term.
A)
Accounts
B)
Chart of Accounts
C)
Double-entry system with debits and credits
D)
General Journal
E)
General Ledger
F)
Trial Balance
ANSWER:
Brief explanations of components of a bookkeeping system.
A)
Accounts—An account is a record used to accumulate monetary amounts for each
element reported in an entity’s financial statements. A separate record is prepared for
each asset, liability, stockholders’ equity, revenue, and expense element.
B)
Chart of Accounts—A chart of accounts is a list of all accounts (financial statement
elements) used by a company, including numbers assigned to the accounts by the entity
to facilitate bookkeeping activities. The chart of accounts is used to locate accounts in a
general ledger.
C)
Double-entry system with debits and credits—In the double-entry system of
bookkeeping, equal debut and credit amounts are recorded for the effects of each
transaction on an entity’s accounts. Increases and decreases are recorded as debits (left-
side entries) or credits (right-side entries) in the accounts. To maintain the equality of
the accounting equation, assets = liabilities + stockholders’ equity, the rules of debit
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
216. Would errors made by a bookkeeper in recording journal entries and in posting journal entries to the general ledger
be discovered by preparing a trial balance? Explain why or why not for both the journal entry errors and the posting
errors.
ANSWER:
If equal dollar amounts were recorded in each journal entry, a trial balance would not help
discover the errors. The errors made in posting the journal entries would be discovered by
preparing a trial balance, if credit amounts were posted as debits. If this occurred, the sum of
the debit balances would exceed the sum of the credit balances.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.03-07 – LO: 03-07
KEYWORDS:
Bloom’s: Analyzing
Buildings
Equipment
85,000
Accounts Payable
Income Taxes Payable
Notes Payable
Capital Stock
Retained Earnings
Commissions Revenue
Interest Revenue
Commissions Expense
2,600
Heat, Light, and Water Expense
1,400
Income Tax Expense
1,700
Office Salaries Expense
6,000
Dividends
2,000
Moderate
Bloom’s: Analyzing
217. The following list of accounts was taken from the general ledger of Bassett Corporation on December 31, 2016. The
bookkeeper thought it would be helpful if the accounts were arranged in alphabetical order. Each account contains the
balance that is normal for that type of account; for example, Cash normally has a debit balance. Prepare a trial balance as
of this date with the accounts arranged in the following order: (1) assets, (2) liabilities, (3) stockholders’ equity, (4)
revenues, (5) expenses, and (6) dividends.
Accounts Payable
$ 8,650
Accounts Receivable
5,325
Automobiles
9,200
Buildings
150,000
Capital Stock
100,000
Cash
11,500
Commissions Expense
2,600
Commissions Revenue
12,750
Dividends
2,000
Equipment
85,000
Heat, Light, and Water Expense
1,400
Income Tax Expense
1,700
Income Taxes Payable
2,500
Interest Revenue
1,300
Land
50,000
Notes Payable
90,000
Office Salaries Expense
6,000
Office Supplies
500
Retained Earnings
110,025
ANSWER:
BASSETT CORPORATION
TRIAL BALANCE
DECEMBER 31, 2016
Dr.
Cr.
Cash
$ 11,500
Accounts Receivable
5,325
Office Supplies
500
Land
50,000
Automobiles
9,200
Chapter 3: Processing Accounting Information
Essay
218. From an accounting perspective, explain how an external event differs from an internal event and give an example of
each.
ANSWER:
Both external and internal events affect an entity. An external event involves interaction with
someone outside of the entity. An internal event takes place entirely within the entity, with no
interaction with anyone outside of the company. Examples given by students will vary but
could include something like the purchase of land as an external event and the transfer of raw
materials into production as an internal event.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.03-01 – LO: 03-01
KEYWORDS:
Bloom’s: Applying
219. From an accounting perspective, what are source documents? Give examples of at least three source documents.
ANSWER:
Source documents are the basis for recording transactions. They provide the evidence, or
documentation, needed to recognize an event for accounting purposes. Student examples may
vary but can include purchase invoices, time cards, and cash register tapes.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.03-02 – LO: 03-02
KEYWORDS:
Bloom’s: Applying
220. Provide at least three source documents and the related event for which each would provide the evidence to record.
ANSWER:
Student answers may vary but could include:
Purchase invoice: acquisition of goods or services from a supplier
Sales invoice: sale of goods or services to a customer
Cash register tape: cash sale of goods or services to a customer
Time cards: payment of periodic payroll
Promissory note: borrowing money in return for promise to repay in future with interest
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.03-02 – LO: 03-02
KEYWORDS:
Bloom’s: Applying
221. Briefly explain what accountants mean when they refer to the double-entry system of
accounting.
ANSWER:
The term “double-entry system of accounting” means that every transaction is entered in at
least two accounts on opposite sides of T accounts. In this system, every transaction is
recorded in such a way that the equality of debits and credits is maintained, and in the process
the accounting equation is kept in balance.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.03-03 – LO: 03-03
KEYWORDS:
Bloom’s: Applying
222. There are three elements to the accounting equation: assets, liabilities, and stockholders’ equity. Below are five
possible types of transactions. For each of these five types, write descriptions of a example that would illustrate this type
of transaction.
Type
Example of transaction
Assets =
Liabilities +
Stockholders’ Equity
1.
Increase
Increase
—
2.
Increase
—
Increase
3.
Decrease
Decrease
—
4.
Decrease
—
Decrease
5.
Decrease
Increase
—
—
ANSWER:
Student answers may vary but could include something like the following:
Type
Example of Transaction
1.a.
Purchase supplies on credit.
b.
Purchase land in exchange for promissory note.
2.a.
Issue stock in exchange for cash.
b.
Provide service in exchange for cash.
3.a.
Repay bank loan with cash.
b.
Pay supplier amount owed on open account.
4.a.
Pay dividend to stockholders.
b.
Pay wages to employees.
5.a.
Collect amount owed from customer on open account.
b.
Purchase equipment with cash.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.03-03 – LO: 03-03
KEYWORDS:
Bloom’s: Applying
223. Explain what the chart of accounts is and how its numbering system works.
ANSWER:
Companies need a way to organize the large number of accounts they use to record
transactions. A chart of accounts is a numerical list of all of the accounts an entity uses. The
numbering system is a convenient way to identify accounts. For example, all asset accounts
might be numbered from 100 to 199; liability accounts, from 200 to 299; equity accounts,
from 300 to 399; revenues, from 400 to 499; and expenses, from 500 to 599.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.03-04 – LO: 03-04
KEYWORDS:
Bloom’s: Applying
224. You have just taken a job as the accountant for a stucco repair firm whose accounting year ends on December 31. As
part of the management team, you receive a year-end bonus directly related to the firm’s earnings for the year. One of
your duties is to review the journal entries recorded by the bookkeepers. A new bookkeeper prepared the following
journal entry:
Dec. 12
Cash
20,000
Service Revenue
20,000
To record deposit from client.
You notice that the explanation for the journal entry refers to the amount as a deposit, and the bookkeeper explains to you
that the firm plans to provide the services to the client in March of the following year.
Required:
1. Did the bookkeeper prepare the correct journal entry to account for the client’s deposit? Explain your answer.
2. What is your responsibility in this situation as the new accountant for the firm? Explain your answer.
ANSWER:
1. No, the bookkeeper did not prepare the correct journal entry to account for the client’s
deposit. Because the amount received from the client is a deposit for work to be done next
year, it represents a liability at the end of the year rather than revenue. The bookkeeper
should have credited the Unearned Revenue account.
2. As the accountant for the firm, you are responsible for the accuracy and fairness of the
financial statements. You have a moral and ethical responsibility to correct the books, even
this will reduce the income for the company and your bonus for the year. Your professional
responsibility is to the users of the financial statements and that supersedes any concerns over
your personal financial situation.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.03-05 – LO: 03-05
FACC.PONO.13.03-06 – LO: 03-06
KEYWORDS:
Bloom’s: Applying
225. How frequently should entries be posted from the journal to the ledger? How have computers improved the posting
process?
ANSWER:
There is no standard rule about the frequency of posting entries from the journal to the
ledger. The size of the company and the extent to which the accounting system is
computerized will affect how often entries are posted. Computerized systems have improved
this process because it is now possible for entries to be posted instantaneously to the ledger at
the time they are recorded in the journal.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.03-06 – LO: 03-06
KEYWORDS:
Bloom’s: Applying
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
226. Explain the purpose of a trial balance and the limitation of the trial balance.
ANSWER:
A trial balance proves the equality of debits and credits. It does not prove that the correct
accounts were debited and credited or that the correct amounts were necessarily recorded. It
simply ensures that the balance of all of the debits in the ledger accounts is equal to the
balance of all of the credits at any point in time.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.03-07 – LO: 03-07
KEYWORDS:
Bloom’s: Applying