Chapter 02 – Investing and Financing Decisions and the Accounting System
2-21
HANDOUT 2 – 1 SOLUTION, continued
(d) Purchase $300 worth of supplies on credit. “On credit” (or “on account”) means that you receive the
supplies now, and pay for them later.
1.
Decide if a transaction took place.
Yes – received supplies and obligated to pay for them.
2.
Identify the accounts affected.
Supplies and Accounts Payable
3.
Classify each account affected.
Supplies is an Asset (A) and Accounts Payable is a
Liability (L)
4.
Identify direction and amount.
Supplies (A) + $300 and Accounts Payable (L) + $300.
5.
Ensure the accounting equation is in
balance.
Yes – see below.
(e) Sign contract for first website design for $10,000.
1.
Decide if a transaction took place.
No – no exchange took place.
2.
Identify the accounts affected.
3.
Classify each account affected.
4.
Identify direction and amount.
5.
Ensure the accounting equation is in
balance.
Chart
Assets
=
Liabilities
+
Ref.
Cash
+
Supplies
+
Equipment
=
Accounts
Payable
+
Notes
Payable
+
(a)
+10,000
=
(b)
+15,000
=
+15,000
(c)
–20,000
+20,000
=
(d)
+300
=
+300
Total
5,000
300
20,000
300
15,000
$25,300
$15,300
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-22
HANDOUT 2 – 2
ANALYZING TRANSACTIONS
Analyze each of the following transactions of World Wide Webster by performing each of the following.
Then, use the chart on the following page to keep track of the amount in each account:
(f) Company pays off $300 Accounts Payable.
1.
Decide if a transaction took place.
2.
Identify the accounts affected.
3.
Classify each account affected.
4.
Identify direction and amount.
5.
Ensure the accounting equation is in balance.
(g) Company pays for and receives $600 worth of supplies.
1.
Decide if a transaction took place.
2.
Identify the accounts affected.
3.
Classify each account affected.
4.
Identify direction and amount.
5.
Ensure the accounting equation is in balance.
(h) Company acquires and receives $1,000 worth of equipment.
1.
Decide if a transaction took place.
2.
Identify the accounts affected.
3.
Classify each account affected.
4.
Identify direction and amount.
5.
Ensure the accounting equation is in balance.
(i) Order a $900 lawn mower, to be delivered next month.
1.
Decide if a transaction took place.
2.
Identify the accounts affected.
3.
Classify each account affected.
4.
Identify direction and amount.
5.
Ensure the accounting equation is in balance.
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-23
HANDOUT 2 – 2, continued
Chart
Assets
=
Liabilities
+
Stockholders’
Equity
Ref.
Cash
+
Supplies
+
Equipment
=
Accounts
Payable
+
Notes
Payable
+
Common Stock
(a)
+10,000
=
+10,000
(b)
+15,000
=
+15,000
(c)
–20,000
+20,000
=
(d)
+300
=
+300
(f)
(g)
(h)
(i)
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-24
HANDOUT 2 – 2 SOLUTION
ANALYZING TRANSACTIONS
Analyze each of the following transactions of World Wide Webster by performing each of the following.
Then, use the chart on the following page to keep track of the amount in each account:
(f) Company pays off $300 Accounts Payable.
1.
Decide if a transaction took place.
Yes – paid cash to reduce accounts payable.
2.
Identify the accounts affected.
Cash and Accounts Payable
3.
Classify each account affected.
Cash is an Asset (A) and Accounts Payable is a Liability
(L)
4.
Identify direction and amount.
Cash (A) – $300 = Liabilities (L) – $300
5.
Ensure the accounting equation is
in balance.
Yes – see below.
(g) Company pays for and receives $600 worth of supplies.
1.
Decide if a transaction took place.
Yes – paid cash to purchase supplies.
2.
Identify the accounts affected.
Cash and Supplies
3.
Classify each account affected.
Cash is an Asset (A) and Supplies is an Asset
4.
Identify direction and amount.
Cash (A) – $600 and Supplies (A) + $600.
5.
Ensure the accounting equation is
in balance.
Yes – see below.
(h) Company acquires and receives $1,000 worth of equipment.
1.
Decide if a transaction took place.
Yes – paid cash to purchase equipment
2.
Identify the accounts affected.
Cash and Equipment
3.
Classify each account affected.
Cash is an Asset (A) and Equipment is an Asset (A)
4.
Identify direction and amount.
Cash (A) – $1,000 and Equipment (A) + $1,000
5.
Ensure the accounting equation is
in balance.
Yes – see below.
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-25
HANDOUT 2 – 2 SOLUTION, continued
(i) Order a $900 computer, to be delivered next month.
1.
Decide if a transaction took place.
No exchange took place.
2.
Identify the accounts affected.
3.
Classify each account affected.
4.
Identify direction and amount.
5.
Ensure the accounting equation is
in balance.
Chart
Assets
=
Liabilities
+
Stockholders’
Equity
Ref.
Cash
+
Supplies
+
Equipment
=
Accounts
Payable
+
Notes
Payable
+
Common Stock
(a)
+10,000
=
+10,000
(b)
+15,000
=
+15,000
(c)
–20,000
+20,000
=
(d)
+300
=
+300
(f)
–300
–300
(g)
–600
+600
(h)
–1,000
+1,000
(i)
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-26
HANDOUT 2 – 3
THE DEBIT/CREDIT FRAMEWORK
Analyze each of the following transactions of World Wide Webster and prepare the journal entry required
to record the related transaction.
(a) Stockholder invests $10,000 into the business in exchange for 10,000 shares of $1 par value common
stock.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
(b) Borrow $15,000 signing a note payable to the bank that is due in three months.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
(c) Acquire a $15,000 truck and $5,000 worth of equipment.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-27
HANDOUT 2 – 3, continued
(d) Purchase $300 worth of supplies on credit.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
(e) Sign contract for first website design for $10,000.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-28
HANDOUT 2 – 3 SOLUTION
THE DEBIT/CREDIT FRAMEWORK
Analyze each of the following transactions of World Wide Webster and prepare the journal entry required
to record the related transaction.
(a) Stockholder invests $10,000 into the business in exchange for 10,000 shares of $1 par value common
stock.
Debit and credit the accounts affected
(a)
Cash (+A)
10,000
Common Stock (+SE)
10,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
+10,000
Common
Stock
+10,000
(b) Borrow $15,000 signing a note payable to the bank that is due in three months.
Debit and credit the accounts affected
(b)
Cash (+A)
15,000
Note Payable (+L)
15,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
+15,000
Note
Payable
+15,000
(c) Acquire a $15,000 truck and $5,000 worth of equipment.
Debit and credit the accounts affected
(c)
Equipment (+A)
20,000
Cash (–A)
20,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
Equipment
–20,000
+20,000
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-29
HANDOUT 2 – 3 SOLUTION, continued
(d) Purchase $300 worth of supplies on credit.
Debit and credit the accounts affected
(d)
Supplies (+A)
300
Accounts Payable (+A)
300
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Supplies
+300
Accounts
Payable
+300
(e) Sign contract for first website design for $10,000.
No entry – this is not a transaction
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-30
HANDOUT 2 – 4
THE DEBIT/CREDIT FRAMEWORK
Analyze each of the following transactions of World Wide Webster and prepare the journal entry required
to record the related transaction.
(f) Company pays off $300 Accounts Payable.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
(g) Company pays for and receives $600 worth of supplies.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
(h) Company acquires and receives $1,000 worth of equipment.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-31
HANDOUT 2 – 4, continued
(i) Order a $900 computer, to be delivered in 90 days.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-32
HANDOUT 2 – 4 SOLUTION
THE DEBIT/CREDIT FRAMEWORK
Analyze each of the following transactions of World Wide Webster and prepare the journal entry required
to record the related transaction.
(f) Company pays off $300 Accounts Payable.
Debit and credit the accounts affected
(f)
Accounts Payable (–L)
300
Cash (–A)
300
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
–300
Acct. Pay.
–300
(g) Company pays for and receives $600 worth of supplies.
Debit and credit the accounts affected
(g)
Supplies (+A)
600
Cash (–A)
600
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Supplies
+600
Cash
–600
(h) Company acquires and receives $1,000 worth of equipment.
Debit and credit the accounts affected
(h)
Equipment (+A)
1,000
Cash (–A)
1,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Equipment
+1,000
Cash
–1,000
(i) Order a $900 computer, to be delivered in 90 days.
No entry – this is not a transaction.
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-33
HANDOUT 2 – 5
POSTING TO T-ACCOUNTS
Post the transactions from handouts 2-3 and 2-4 and determine the ending balances of each of the
following T-accounts.
Assets
Liabilities
Stockholders’ Equity
+ Cash –
– Accounts Payable +
– Common Stock +
+ Supplies –
– Notes Payable +
– Retained Earnings +
+ Equipment –
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-34
HANDOUT 2 – 5 SOLUTION
POSTING TO T-ACCOUNTS
Post the transactions from handouts 2-3 and 2-4 and determine the ending balances of each of the
following T-accounts.
Assets
Liabilities
Stockholders’ Equity
+ Cash –
BegBal
0
(a)
10,000
(b)
15,000
20,000
(c)
300
(f)
600
(g)
1,000
(h)
EndBal
3,100
– Accounts Payable +
0
BegBal
(f)
300
300
(d)
0
EndBal
– Common Stock +
0
BegBal
10,000
(a)
10,000
EndBal
+ Supplies –
BegBal
0
(d)
300
(g)
600
EndBal
900
– Notes Payable +
0
BegBal
15,000
(b)
15,000
EndBal
– Retained Earnings +
0
BegBal
0
EndBal
+ Equipment –
BegBal
0
(c)
20,000
(h)
1,000
EndBal
21,000
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-35
HANDOUT 2 – 6
PREPARING A TRIAL BALANCE
Use the ending balances from the T-accounts on Handout 2-5 to prepare a trial balance for World Wide
Webster as of December 31, 2014.
World Wide Webster
Trial Balance
At December 31, 2010
Debit
Credit
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-36
HANDOUT 2 – 6
PREPARING A TRIAL BALANCE
Use the ending balances from the T-accounts on Handout 2-5 to prepare a trial balance for World Wide
Webster as of December 31, 2014.
World Wide Webster
Trial Balance
At December 31, 2014
Debit
Credit
Cash
$ 3,100
Supplies
900
Equipment
21,000
Notes Payable
$15,000
Common Stock
10,000
Totals
$25,000
$25,000
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-37
HANDOUT 2 – 7 SOLUTION
PREPARING A BALANCE SHEET
Use the balances from the trial balance on Handout 2-6 to prepare a classified balance sheet for World
Wide Webster as of December 31, 2014.
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-38
HANDOUT 2 – 7 SOLUTION
PREPARING A BALANCE SHEET
Use the balances from the trial balance on Handout 2-6 to prepare a classified balance sheet for World
Wide Webster as of December 31, 2014.
World Wide Webster
Balance Sheet
At December 31, 2014
Assets
Current Assets:
Cash
$ 3,100
Supplies
900
Total Current Assets
4,000
Equipment
21,000
Total Assets
$25,000
Liabilities
Current Liabilities:
Notes Payable
$15,000
Total Current Liabilities
15,000
Stockholders’ Equity
Common Stock
10,000
Retained Earnings
0
Total Stockholders’ Equity
10,000
Total Liabilities and Stockholders’ Equity
$25,000
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-39
HANDOUT 2 – 8
CURRENT RATIO
Refer to the classified balance sheet from Handout 2-7 and calculate the current ratio of World Wide
Webster as of December 31, 2014. Then, interpret the current ratio.
Calculation:
Interpretation:
Chapter 02 – Investing and Financing Decisions and the Accounting System
2-40
HANDOUT 2 – 8 SOLUTION
CURRENT RATIO
Refer to the classified balance sheet from Handout 2-7 and calculate the current ratio of World Wide
Webster as of December 31, 2014. Then, interpret the current ratio.
Calculation:
Current Ratio = Current Assets ÷ Current Liabilities
Current ratio = $4,000 ÷ $15,000 = 0.27
Interpretation:
A current ratio of 0.27 indicates that the company has $0.27 of current assets for $1.00 of current
liabilities as of December 31, 2014. It does not appear that the company’s current assets are sufficient
to pay its current liabilities.