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,
2. A note payable is formal promise, usually denoted by signing a promissory note to
3. There are several steps in processing transactions: (1) Identify and analyze the
4. A general journal can be used to record any business transaction or event.
6. A transaction is first recorded in a journal to create a complete record of the
7. Expense accounts have debit balances because they are decreases to equity (and
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
10. The four financial statements are: income statement, balance sheet, statement of
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
14. (a) Assets are probable future economic benefits obtained or controlled by a specific
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;
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:
Quick Study 2-2 (5 minutes)
a. B Balance sheet
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
Debit
Financial & Managerial Accounting, 5th Edition
60
Quick Study 2-5 (10 minutes)
Quick Study 2-6 (15 minutes)
May 15 Cash ……………………………………………………………….. 70,000
Equipment ……………………………………………………… 30,000
Common Stock………………………………………… 100,000
Owner invests cash and equipment for stock.
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
Financial & Managerial Accounting, 5th Edition
62
EXERCISES
Exercise 2-1 (10 minutes)
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.
Dividends ………………………………
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.
Common Stock………………………
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
Financial & Managerial Accounting, 5th Edition
64
Exercise 2-6 (15 minutes)
Of the items listed, the following effects should be included:
Explanation: This transaction created $62,000 in revenue, which is the
value of the service provided. Payment is received in the form of a $10,000
Exercise 2-7 (25 minutes)
Aug. 1 Cash …………………………..……………………………. 6,500
Photography Equipment …………………………... 33,500
Common Stock …………………………………… 40,000
Owner investment in business for stock.
2 Prepaid Insurance …………………………………….. 2,100
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
Common Stock
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
Common stock …………………………..
$40,000
Photography fees earned ………….…
3,331
Utilities expense……………………….…
675
______
Totals …………………………………………
$43,331
$43,331
Financial & Managerial Accounting, 5th Edition
66
Exercise 2-9 (30 minutes)
a. Cash ………………………………………………………………… 100,750
Common Stock ………………………………………….. 100,750
Owner invested in the business for stock.
b. Office Supplies …………………………………………………. 1,250
f. Accounts Receivable ………………………………………… 2,700
Fees Earned ………………………………………………. 2,700
Billed customer for services provided.
g. Rent Expense …………………………………………………… 1,225
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
Common Stock
(a)
100,750
Balance
100,750
Accounts Receivable
Dividends
(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
Common stock ……………………….
100,750
Dividends ……………………………….………………..
10,000
Fees earned …………………………...
18,200
Rent expense …………………………..
1,225
________
Totals …………………………..………….
$118,950
$118,950
Financial & Managerial Accounting, 5th Edition
68
Exercise 2-11 (20 minutes)
Transactions that created revenues:
b. Accounts Receivable …………………………..………. 2,300
Services Revenue ………………………………….. 2,300
Provided services on credit.
c. Cash …………………………………………………………… 875
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
Exercise 2-12 (20 minutes)
Transactions that created expenses:
b. Salaries Expense ………………………………….. 1,233
Transactions a, c, and e are not expenses for the following reasons:
a. This transaction decreased assets in settlement of a previously
Exercise 2-13 (15 minutes)
HELP TODAY
Income Statement
For Month Ended August 31
Revenues
Consulting fees earned ……………………. $ 27,000
Financial & Managerial Accounting, 5th Edition
70
Exercise 2-14 (15 minutes)
HELP TODAY
Statement of Retained Earnings
For Month Ended August 31
Retained earnings, July 31 …………………… $ 0
Exercise 2-15 (15 minutes)
HELP TODAY
Balance Sheet
August 31
Assets Liabilities
Cash …………………………. $ 25,360 Accounts payable ……………. $ 10,500
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 dividends …………………………………………..
(0)
Change in equity …………………………………………
$29,000
Net Income = $29,000
Since there were no additional investments or dividends, the net
income for the year equals the net increase in equity.
b. Net income ………………………………………………….
$ ?
Plus owner investments ………………………………
0
Less dividends ($1,250/mo. x 12 mo.) …………..
(15,000)
Change in equity …………………………………………
$29,000
Net Income = $44,000
The dividends were added back because they reduced equity
without reducing net income.
c. Net income ………………………………………………….
$ ?
Plus owner investment ………………………………..
55,000
Less dividends ……………………………………………
(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 dividends ($1,250/mo. X 12 mo.) …………..
(15,000)
Change in equity …………………………………………
$29,000
Net Income = $9,000
The dividends were added back because they reduced equity
without reducing net income and the investments were deducted
because they increased equity without creating net income.