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Chapter 2
Accounting for Business 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
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.
5. Debited accounts are commonly recorded first. The credited accounts are commonly
indented.
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
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
retained earnings, 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 Apple balance sheet include: Cash and cash
equivalents; Short-term marketable securities; Accounts receivable; Inventories;
Deferred tax assets; Vendor non-trade receivables; Other current assets; Long-term
17. The asset accounts with receivable in its account title are: Accounts receivable, net
18. Samsung’s balance sheet lists the following current liabilities: Trade and other
payables; Short-term borrowings; Advances received; Withholdings; Accrued
QUICK STUDIES
Quick Study 2-1 (10 minutes)
The likely source documents include:
Quick Study 2-2 (5 minutes)
a. A Asset
b. A Asset
Quick Study 2-3 (5 minutes)
a. E Expense 655
b. R Revenue 406
Quick Study 2-4 (10 minutes)
a.
Credit
d.
Debit
g.
Credit
b.
Debit
e.
Debit
h.
Debit
c.
Debit
f.
Debit
i.
Credit
Quick Study 2-5 (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 2-6 (15 minutes)
a.
1) Analyze:
Assets
=
Liabilities
+
Equity
Cash Equipment
Common Stock
7,000 + 3,000
=
0
+
10,000
2) Record:
Date
Account Titles and Explanation
PR
Debit
Credit
May 15
Cash
101
7,000
Equipment
167
3,000
Common Stock
307
10,000
Owner invests cash & equipment for stock.
3) Post
Cash 101
7,000
Common Stock 307
10,000
Equipment 167
3,000
Quick Study 2-6 (Continued)
b.
1) Analyze:
Assets
=
Liabilities
+
Equity
Office Supplies
Accounts Payable
500
=
500
+
0
2) Record:
Date
Account Titles and Explanation
PR
Debit
Credit
May 21
Office Supplies
124
500
Accounts Payable
201
500
Purchased office supplies on credit.
3) Post
Office Supplies 124
500
c.
1) Analyze:
Assets
=
Liabilities
+
Equity
Cash
Landscaping Revenue
4,000
=
0
+
4,000
2) Record:
Date
Account Titles and Explanation
PR
Debit
Credit
May 25
Cash
101
4,000
Landscaping Revenue
403
4,000
Received cash for landscaping services.
3) Post
Cash 101
4,000
Accounts Payable 201
500
Landscaping Revenue 403
4,000
Quick Study 2-6 (Continued)
d.
1) Analyze:
Assets
=
Liabilities
+
Equity
Cash
Unearned Landscaping
Revenue
1,000
=
1,000
+
0
2) Record:
Date
Account Titles and Explanation
PR
Debit
Credit
May 30
Cash
101
1,000
Unearned Landscaping Revenue
236
1,000
Received cash in advance for landscaping
services.
3) Post
Cash 101
1,000
Quick Study 2-7 (10 minutes)
a.
Debit
e.
Debit
i.
Credit
b.
Credit
f.
Credit
j.
Debit
c.
Credit
g.
Credit
d.
Debit
h.
Credit
Quick Study 2-8 (10 minutes)
Unearned Landscaping Revenue 236
1,000
©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 2
65
Quick Study 2-9 (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 2-10 (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
EXERCISES
Exercise 2-1 (10 minutes)
4 a. Prepare and analyze the trial balance.
Exercise 2-2 (10 minutes)
a.
5 “Three”
d.
1 “Asset”
b.
2 “Equity”
e.
3 “Account”
c.
4 “Liability”
Exercise 2-3 (5 minutes)
a.
1 “Chart”
b.
2 “General Ledger”
Exercise 2-4 (15 minutes)
Type of
Normal
Increase
Account
Account
Balance
(Dr. or Cr.)
a.
Land ............................................
asset
debit
debit
b.
Cash ............................................
asset
debit
debit
c.
Legal Expense ............................
expense
debit
debit
d.
Prepaid Insurance ......................
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)
Of the items listed, the following effects should be included:
a. $28,000 increase in a liability account.
Exercise 2-6 (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 2-7 (25 minutes)
Aug. 1 Cash .................................................................. 6,500
Photography Equipment ................................. 33,500
Common Stock .......................................... 40,000
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
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
Cash .................................................................... 1,250
Purchased supplies with cash.
c. Office Equipment ...................................................... 10,050
Accounts Payable ............................................. 10,050
Purchased office equipment on credit.
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, 2015
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
©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial Accounting Fundamentals, 5th Edition
72
Exercise 2-11 (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
Exercise 2-12 (20 minutes)
Transactions that created revenues:
b. Accounts Receivable .......................................... 2,300
Services Revenue ......................................... 2,300
Provided services on credit.
Exercise 2-13 (25 minutes)
a. Belle created a new business and invested $6,000 cash, $7,600 of
equipment, and $12,000 in automobiles in exchange for stock.
