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3-13
Demonstration Problem 3-2 Solution
Date
Account Titles
Debit
Credit
Event No.
1
Cash
5,000
Common Stock
5,000
Event No.
2
Cash
4,000
Notes Payable
4,000
Event No.
3
Supplies
500
Accounts Payable
500
Event No.
4
Accounts Receivable
8,000
Service Revenue
8,000
Event No.
5
Salaries Expense
3,900
Cash
3,900
Event No.
6
Prepaid Rent
2,400
Cash
2,400
Event No.
7
Office Furniture
3,500
Accounts Payable
3,500
Event No.
8
Cash
1,800
Unearned Revenue
1,800
Event No.
9
Cash
3,000
Accounts Receivable
3,000
Event No.
10
Utilities Expense
1,200
Cash
1,200
Event No.
11
Dividends
1,000
Cash
1,000
Event No.
12
Certificate of Deposit
2,000
Cash
2,000
Event No.
13
Notes Payable
1,600
Cash
1,600
Event No.
14
Land
2,700
Cash
2,700
Event No.
15
Interest Expense
400
Interest Payable
400
Event No.
16
Unearned Revenue
1,800
Service Revenue
1,800
Event No.
17
Supplies Expense
400
Supplies
400
Event No.
18
Salaries Expense
2,300
Salaries Payable
2,300
Event No.
19
Interest Receivable
150
Interest Revenue
150
3-14
Demonstration Problem 3-1 Workpaper, part a.
T-Account Entries
Panel 1 Recording Scheme Provided for Convenience
ASSETS
LIABILITIES
EQUITY
Debit
Credit
Debit
Credit
Debit
Credit
+
–
–
+
–
+
Panel 2 Ledger T-Accounts
Cash
Unearned Revenue
Common Stock
Prepaid Rent
Dividends
Braxton Personnel Advisory Services Company
Unadjusted Trial Balance
December 31, 2015
Account Title
Debit
Credit
Cash
Prepaid rent
Unearned revenue
Common stock
Retained earnings
Services revenue
Rent expense
Dividends
Totals
7,400
7,400
3-15
Demonstration Problem 3-1 Workpaper, part b.
T-Account Adjusting Entries
Panel 1 Recording Scheme Provided for Convenience
ASSETS
LIABILITIES
EQUITY
Debit
Credit
Debit
Credit
Debit
Credit
+
–
–
+
–
+
Panel 2 Ledger T-Accounts
Cash
Unearned Revenue
Common Stock
(1) 5,000
1,800 (2)
2,400 (3)
5,000 (1)
(3) 2,400
200 (4)
Bal. 5,400
Prepaid Rent
Services Revenue
(2) 1,800
Rent Expense
Dividends
(4) 200
Braxton Personnel Advisory Services Company
Adjusted Trial Balance
December 31, 2015
Account Title
Debit
Credit
Cash
Prepaid rent
Unearned revenue
Common stock
Retained earnings
Services revenue
Rent expense
Dividends
Totals
7,400
7,400
3-16
Demonstration Problem 3-1 Workpaper, part c. Financial Statements
Braxton Personnel Advisory Services Company
Financial Statements
Income Statement
For the Year Ended December 31,
2015
Services revenue
$
Rent expense
Net income
$ 350
Statement of Retained Earnings
Beginning retained earnings
$ 0
Plus: Net income
Less: Dividends
Ending retained earnings
$ 150
Balance Sheet as of December 31, 2015
Assets
Cash
$
Prepaid rent
Total assets
$ 5,550
Liabilities
Unearned revenue
$
Stockholders’ equity
Common stock
5,000
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
Statement of Cash Flows
Net cash flow from operating activities
$
Net cash flow from investing activities
Net cash flow from financing activities
Net change in cash
Beginning cash balance
Ending cash balance
$ 5,400
3-17
Demonstration Problem 3-1 Workpaper, part d. T-Acct. Closing Entries
Panel 1 Recording Scheme Provided for Convenience
ASSETS
LIABILITIES
EQUITY
Debit
Credit
Debit
Credit
Debit
Credit
+
−
−
+
−
+
Panel 2 Ledger T-Accounts
Cash
Unearned Revenue
Common Stock
(1) 5,000
1,800 (2)
(adj2) 2,000
2,400 (3)
5,000 (1)
(3) 2,400
200 (4)
400 Bal.
5,000 Bal.
Bal. 5,400
Prepaid Rent
Retained Earnings
(2) 1,800
1,650 (adj1)
Bal. 150
Services Revenue
2,000 (adj2)
Rent Expense
(adj1) 1,650
Dividends
(4) 200
Braxton Personnel Advisory Services Company
Post-closing Trial Balance
December 31, 2015
Account Title
Debit
Credit
Cash
Prepaid rent
Unearned revenue
Common stock
Retained earnings
Services revenue
Rent expense
Dividends
Totals
5,550
5,550
3-18
Demonstration Problem 3-2 Workpaper
Date
Account Titles
Debit
Credit
Event No.
1
Cash
5,000
Common Stock
5,000
Event No.
2
Event No.
3
Event No.
4
Event No.
5
Event No.
6
Event No.
7
Event No.
8
Event No.
9
Event No.
10
Event No.
11
Event No.
12
Event No.
13
Event No.
14
Event No.
15
Event No.
16
Event No.
17
Event No.
18
Event No.
19
3-19
Quiz Questions for Chapter 3
1. The following general journal entry was recorded in the books of Miles Company:
Accounts Payable
700
Cash
700
Based on this entry,
a. net income was unaffected.
b. assets increased.
c. equity decreased.
d. liabilities increased.
2. Company A collected $9,000 cash that was due on an account receivable. Company A’s account-
ant recorded the entry as a debit to cash and a credit to service revenue. As a result of this error
a. the totals of the trial balance will not be equal.
b. retained earnings will be overstated.
c. dividends will be understated.
d. the amount of cash will be overstated.
3. The following adjusted trial balance was drawn from the records of the Dakota Company.
Account Title Dr Cr
Cash 500
Equipment 2,000
Common Stock 1700
Retained Earnings 500
Service Revenue 900
Operating Expenses 600
-------- --------
Totals 3,100 3,100
Based on the information in the trial balance, the amount of retained earnings reported on the year-
end balance sheet would be
a. $500.
b. $600.
c. $1,400.
d. $800.
4. Which of the following statements is true?
a. Expense accounts normally have debit balances immediately before the closing entries are recorded.
b. A debit entry in an asset account will decrease the account.
c. Adjusting entries are recorded at the beginning of an accounting cycle.
d. Equal totals in a trial balance proves that no errors have been made in the recording process.
5. Recording revenue earned on account is what kind of transaction?
a. Claims exchange.
b. Asset use.
c. Asset source.
d. Asset exchange.
3-20
6. The entry to record accrued interest on a note payable involves a
a. credit to interest expense and a debit to cash.
b. debit to interest expense and a credit to interest payable.
c. credit to interest expense and a debit to interest payable.
d. credit to interest receivable and a debit to interest expense.
7. Select the true statement.
a. A debit to a liability account will increase the balance of the account.
b. A credit to a revenue account will decrease the balance of the account.
c. A debit to an asset account will increase the balance of the account.
d. A credit to the retained earnings account will decrease the balance of the account.
8. X Company mistakenly recorded the purchase of supplies on account by debiting supplies and
crediting cash. As a result of this error
a. assets are understated.
b. liabilities are overstated.
c. expenses are understated.
d. both a and b.
9. The following account balances were drawn from the adjusted trial balance of Newton, Inc.
Service revenue
$ 700
Operating expenses
400
Accounts payable
600
Unearned revenue
100
Dividends
200
Retained earnings
1,200
After the closing entries have been recorded and posted, the balance in the retained earnings ac-
count would be
a. $1,200.
b. $1,600.
c. $1,400.
d. None of the above.
10. Smith Company issued a $10,000 face value note to the National Bank on October 1, 2015. The
note had a 12 percent annual interest rate and a one-year term. Which of the following general
journal entries would be necessary to record accrued interest on December 31, 2015?
a. Interest Expense $900
Interest Payable $900
b. Interest Expense $300
Interest Payable $300
c. Interest Payable $900
Interest Expense $900
d. Interest Payable $300
Interest Expense $300
3-21
11. LMN experienced an accounting event that affected its financial statements as follows
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
+
NA
+
+
NA
+
+ OA
The general journal entry to record the event must have included
a. A debit to an asset account and a credit to unearned revenue.
b. A credit to an asset account and a debit to a revenue account.
c. A debit to cash and a credit to revenue.
d. A debit to cash and a credit to accounts receivable.
12. ABC Company experienced an accounting event that is recorded in the following T-accounts:
Cash
Unearned Revenue
5,000
5,000
Which of the following reflects how this event affects the company’s financial statements?
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
a.
+
+
NA
NA
+
–
+ FA
b.
+
+
NA
NA
NA
NA
+ OA
c.
+
NA
+
+
NA
+
+ OA
d.
+
+
NA
NA
NA
NA
+ FA
3-22
Quiz Answers
Question
Answer
1
A
2
B
3
D
4
A
5
C
6
B
7
C
8
A
9
D
10
B
11
C
12
B
3-23
Summary Outline of a Lesson Plan for Chapter 3
I. Introduce debit and credit rules with T-accounts. Use the equity account as
the reference point for expense and dividend accounts and use assets in general as
the reference point for contra accounts.
II. Use Demonstration Problem 3-1 to illustrate the rules of debits and credits
and to introduce trial balances. Work the problem in steps, allowing students to
work various stages before giving them the answers.
III. Use Demonstration Problem 3-2 as a drill for recording transactions in gen-
eral journal form. Use the first few transactions to demonstrate recording pro-
cedures, then have students record the remaining transactions for reinforcement.
IV. Provide an overview of the accounting cycle using a single transaction. Use
an unearned revenue transaction as the starting point. Record the journal entry,
prepare an unadjusted trial balance, record the adjusting entry, prepare an adjusted
trial balance, prepare financial statements, record the closing entry, and prepare a
post-closing trial balance.
V. Use the horizontal financial statements model to demonstrate the effects of
business events on financial statements as you deem appropriate.
VI. Enrichment. Use ATC Case 4-7 in the textbook as an enrichment exercise.
