Chapter 2
Analyzing and Recording Transactions
QUESTIONS
1. a. Common asset accounts: cash, accounts receivable, notes receivable, prepaid
expenses (rent, insurance, etc.), office supplies, store supplies, equipment,
building, and land.
2. A note payable is formal promise, usually denoted by signing a promissory note to
pay a future amount. A note payable can be short-term or long-term, depending on
3. There are several steps in processing transactions: (1) Identify and analyze the
transaction or event, including the source document(s), (2) apply double-entry
4. A general journal can be used to record any business transaction or event.
7. Expense accounts have debit balances because they are decreases to equity (and
equity has a credit balance).
8. The recordkeeper prepares a trial balance to summarize the contents of the ledger
9. The error should be corrected with a separate (subsequent) correcting entry. The
entry’s explanation should describe why the correction is necessary.
10. The four financial statements are: income statement, balance sheet, statement of
owner’s equity, and statement of cash flows.
11. The balance sheet provides information that helps users understand a company’s
12. The income statement lists the types and amounts of revenues and expenses, and
13. An income statement user must know what time period is covered to judge whether
the company’s performance is satisfactory. For example, a statement user would
14. (a) Assets are probable future economic benefits obtained or controlled by a specific
entity as a result of past transactions or events. (b) Liabilities are probable future
15. The balance sheet is sometimes referred to as the statement of financial position.
16. Debit balance accounts on the Polaris balance sheet include: Cash and cash
equivalents; Trade receivables, net; Inventories, net; Prepaid expenses and other;
Income taxes receivable; Deferred tax assets; Land, buildings and improvements;
17. The asset account with receivable in its account title is: Accounts receivable, less
18. KTM’s revenue account is titled “Net sales.”
QUICK STUDIES
Quick Study 2-1 (10 minutes)
The likely source documents include:
a. Sales ticket
Quick Study 2-2 (5 minutes)
a. B Balance sheet
b. E Statement of owner’s equity
Quick Study 2-3 (10 minutes)
a.
Debit
d.
Debit
g.
Credit
b.
Debit
e.
Debit
h.
Debit
c.
Credit
f.
Debit
i.
Credit
Quick Study 2-4 (10 minutes)
a.
Debit
e.
Debit
i.
Credit
b.
Debit
f.
Credit
j.
Debit
c.
Credit
g.
Credit
k.
Debit
d.
Credit
h.
Debit
l.
Credit
Quick Study 2-5 (10 minutes)
a.
Debit
e.
Debit
i.
Credit
b.
Credit
f.
Credit
j.
Debit
c.
Debit
g.
Credit
d.
Credit
h.
Credit
Quick Study 2-6 (15 minutes)
May 15 Cash ……………………………………………………………….. 70,000
Equipment ……………………………………………………… 30,000
D. Tyler, Capital ……………………………………….. 100,000
Owner invests cash and equipment.
30 Cash ……………………………………………………………….. 1,000
Unearned Landscaping Services Revenue .. 1,000
Received cash in advance for landscaping services.
Quick Study 2-7 (10 minutes)
Quick Study 2-8 (10 minutes)
a.
I
e.
B
i.
E
b.
B
f.
B
j.
B
c.
B
g.
B
k.
I
d.
I
h.
I
l.
I
Quick Study 2-9 (10 minutes)
a. Accounting under IFRS follows the same debit and credit system as
under US GAAP.
b. The same four basic financial statements are prepared under IFRS and
c. Accounting reports under both IFRS and US GAAP are likely different
depending on the extent of accounting controls and enforcement. For
EXERCISES
Exercise 2-1 (10 minutes)
1 a. Analyze each transaction from source documents.
Exercise 2-2 (10 minutes)
a.
d.
5
b.
e.
2
c.
Exercise 2-3 (5 minutes)
a.
b.
1
Exercise 2-4 (15 minutes)
Type of
Normal
Increase
Account
Account
Balance
(Dr. or Cr.)
a.
Cash ……………………………………..
asset
debit
debit
b.
Legal Expense ……………………….
expense
debit
debit
c.
Prepaid Insurance ………………….
asset
debit
debit
d.
Land ……………………………………..
asset
debit
debit
e.
Accounts Receivable ……………..
asset
debit
debit
f.
Owner Withdrawals………………..
equity
debit
debit
g.
License Fee Revenue …………….
revenue
credit
credit
h.
Unearned Revenue ………………..
liability
credit
credit
i.
Fees Earned …………………………..
revenue
credit
credit
j.
Equipment …………………………….
asset
debit
debit
k.
Notes Payable ……………………….
liability
credit
credit
l.
Owner Capital ………………………..
equity
credit
credit
Exercise 2-5 (15 minutes)
a.
Beginning accounts payable (credit) ………………………………………
$152,000
Purchases on account in October (credits) …………………….…….
281,000
Payments on accounts in October (debits) ……………………..……
( ?)
Ending accounts payable (credit) …………………………………..………
$132,500
Payments on accounts in October (debits) ……………………..……
$300,500
b.
Beginning accounts receivable (debit) ……………………………………
$102,500
Sales on account in October (debits) ……………………………..………
?
Collections on account in October (credits) …………………………..
(102,890)
Ending accounts receivable (debit) ………………………………..………
$ 89,000
Sales on account in October (debits) ……………………………..………
$ 89,390
c.
Beginning cash balance (debit) ………………………………………………
$ ?
Cash received in October (debits) ………………………………….………
102,500
Cash disbursed in October (credits) ……………………………….………
(103,150)
Ending cash balance (debit) …………………………………………..………
$ 18,600
Beginning cash balance (debit) ………………………………………………
$ 19,250
Exercise 2-6 (15 minutes)
Of the items listed, the following effects should be included:
a. $28,000 increase in a liability account.
increase in cash, an $80,000 increase in computer equipment, and a
$28,000 increase in its liabilities. The net value received by the company is
$62,000.
Exercise 2-7 (25 minutes)
Aug. 1 Cash …………………………..……………………………. 6,500
Photography Equipment …………………………... 33,500
M. Harris, Capital ………………………………… 40,000
Owner investment in business.
31 Utilities Expense ………………………………………. 675
Cash …………………………………………………… 675
Paid for August utilities.
Exercise 2-8 (30 minutes)
Cash
Photography Equipment
Aug. 1
6,500
Aug. 2
2,100
Aug. 1
33,500
20
3,331
5
880
31
675
M. Harris, Capital
Balance
6,176
Aug. 1
40,000
Office Supplies
Photography Fees Earned
Aug. 5
880
Aug. 20
3,331
Prepaid Insurance
Utilities Expense
Aug. 2
2,100
Aug. 31
675
POSE-FOR-PICS
Trial Balance
August 31
Debit
Credit
Cash ………………………………………..…
$ 6,176
Office supplies …………………………..
880
Prepaid insurance …………………….…
2,100
Photography equipment …………..…
33,500
M. Harris, Capital…………………………
$40,000
Photography fees earned ………….…
3,331
Utilities expense……………………….…
675
______
Totals …………………………………………
$43,331
$43,331
Exercise 2-9 (30 minutes)
a. Cash ………………………………………………………………… 100,750
K. Spade, Capital …………………………..…………… 100,750
Owner invested in the business.
f. Accounts Receivable ………………………………………… 2,700
Fees Earned …………………………..………………….. 2,700
Billed customer for services provided.
g. Rent Expense …………………………………………………… 1,225
Cash ………………………………………………………….. 1,225
Paid for this period’s rental charge.
Exercise 2-9 (concluded)
Cash
Accounts Payable
(a)
100,750
(b)
1,250
(e)
10,050
(c)
10,050
(d)
15,500
(e)
10,050
Balance
0
(h)
1,125
(g)
1,225
(i)
10,000
Balance
94,850
K. Spade, Capital
(a)
100,750
Balance
100,750
Accounts Receivable
K. Spade, Withdrawals
(f)
2,700
(h)
1,125
(i)
10,000
Balance
1,575
Balance
10,000
Office Supplies
Fees Earned
(b)
1,250
(d)
15,500
Balance
1,250
(f)
2,700
Balance
18,200
Office Equipment
Rent Expense
(c)
10,050
(g)
1,225
Balance
10,050
Balance
1,225
Exercise 2-10 (15 minutes)
SPADE COMPANY
Trial Balance
May 31, 2013
Debit
Credit
Cash ………………………………………
$ 94,850
Accounts receivable ……………….
1,575
Office supplies………………………..
1,250
Office equipment …………………….
10,050
Accounts payable ……………………
$ 0
K. Spade, Capital …………………….
100,750
K. Spade, Withdrawals …………….…………….
10,000
Fees earned …………………………...
18,200
Rent expense …………………………..
1,225
_______
Totals …………………………..………….
$118,950
$118,950
Exercise 2-11 (20 minutes)
Transactions that created revenues:
b. Accounts Receivable …………………………..………. 2,300
Services Revenue ………………………………….. 2,300
Provided services on credit.
Transactions that did not create revenues along with the reasons are:
a. This transaction brought in cash, but this is an owner investment.
d. This transaction brought in cash, but it created a liability because the
services have not yet been provided to the client.
Exercise 2-12 (20 minutes)
Transactions that created expenses:
b. Salaries Expense ………………………………….. 1,233
Cash ………………………………………………. 1,233
Paid salary of receptionist.
Transactions a, c, and e are not expenses for the following reasons:
a. This transaction decreased assets in settlement of a previously
existing liability, and equity did not change. Cash payment does not
mean the same as using up of assets (expense is recorded when the
supplies are used).
Exercise 2-13 (15 minutes)
HELP TODAY
Income Statement
For Month Ended August 31
Revenues
Consulting fees earned ……………………. $ 27,000
Expenses
Rent expense …………………………..……… $ 9,550
Exercise 2-14 (15 minutes)
HELP TODAY
Statement of Owner’s Equity
For Month Ended August 31
C. Camry, Capital, July 31 ……………………. $ 2,000
Add: Investment by owner …………………. 100,000
Exercise 2-15 (15 minutes)
HELP TODAY
Balance Sheet
August 31
Assets Liabilities
Cash …………………………. $ 25,360 Accounts payable ……………. $ 10,500
Accounts receivable …. 22,360
* Amount from Exercise 2-14.
Exercise 2-16 (20 minutes)
Calculation of change in equity for part a through part d
Assets
–
Liabilities
=
Equity
Beginning of the year ……….
$ 60,000
–
$20,000
=
$40,000
End of the year ………………...
105,000
–
36,000
=
69,000
Net increase in equity ……….
$29,000
a. Net income ………………………………………………….
$ ?
Plus owner investments ………………………………
0
Less owner withdrawals ……………………………..
(0)
Change in equity …………………………………………
$29,000
Net Income = $29,000
Since there were no additional investments or withdrawals, the net
income for the year equals the net increase in owner’s equity.
b. Net income ………………………………………………….
$ ?
Plus owner investments ………………………………
0
Less owner withdrawals ($1,250/mo. x 12 mo.)
(15,000)
Change in equity …………………………………………
$29,000
Net Income = $44,000
The withdrawals were added back because they reduced equity
without reducing net income.
c. Net income ………………………………………………….
$ ?
Plus owner investment ………………………………..
55,000
Less withdrawals by owner ………………………….
(0)
Change in equity …………………………………………
$29,000
Net Loss = $26,000
The investment was deducted because it increased equity without
creating net income.
d. Net income ………………………………………………….
$ ?
Plus owner investment ………………………………..
35,000
Less owner withdrawals ($1,250/mo. X 12 mo.)
(15,000)
Change in equity …………………………………………
$29,000
Net Income = $9,000
The withdrawals were added back because they reduced equity
without reducing net income and the investments were deducted
because they increased equity without creating net income.