978-1259722660 Chapter 2 Solution Manual Part 1

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Question 2–1

External events involve an exchange transaction between the company and a

separate economic entity. For every external transaction, the company is receiving

Question 2–2

According to the accounting equation, there is equality between the total

economic resources of an entity, its assets, and the claims to those resources,

Question 2–3

The purpose of a journal is to capture, in chronological order, the dual effect of a

Question 2–4

Permanent accounts represent the financial position of a company—assets,

liabilities and owners’ equity—at a particular point in time. Temporary accounts

Solutions Manual, Vol.1, Chapter 2 2–1

McGraw-Hill Education.

Chapter 2 Review of the Accounting Process

QUESTIONS FOR REVIEW OF KEY TOPICS

Answers to Questions (continued)

Question 2–5

Question 2–6

Revenues and gains are increased by credits and decreased by debits. Expenses

Question 2–7

The first step in the accounting processing cycle is to identify external

Question 2–8

Transaction analysis is the process of reviewing the source documents to

Question 2–9

Question 2–10

In Transaction 1 we record the purchase of $20,000 of inventory on account. In

Question 2–11

An unadjusted trial balance is a list of the general ledger accounts and their

Solutions Manual, Vol.1, Chapter 2 2–2

McGraw-Hill Education.

Answers to Questions (continued)

Question 2–12

We use adjusting entries to record the effect on financial position of internal

events, those that do not involve an exchange transaction with another entity. We

record them at the end of any period when financial statements are prepared to

Question 2–13

Closing entries transfer the balances in the temporary owners’ equity accounts

(revenues, expenses, gains, losses, dividends) to a permanent owners’ equity account,

Question 2–14

Prepaid expenses represent assets recorded when a cash disbursement creates

Question 2–15

Question 2–16

Accrued liabilities are recorded when an expense has been incurred that will not

Solutions Manual, Vol.1, Chapter 2 2–3

McGraw-Hill Education.

Answers to Questions (continued)

Question 2–17

Income statement—The purpose of the income statement is to summarize the

profit-generating activities of a company during a particular period of time. It is a

Statement of comprehensive income—The statement of comprehensive income

extends the income statement to report changes in shareholders’ equity during the

Balance sheet—The purpose of the balance sheet is to present the financial

Statement of cash flows—The purpose of the statement of cash flows is to

Statement of shareholders’ equity—The purpose of the statement of shareholders’

equity is to disclose the sources of the changes in the various shareholders’ equity

Question 2–18

A worksheet provides a way to organize the accounting information needed to

Solutions Manual, Vol.1, Chapter 2 2–4

McGraw-Hill Education.

Answers to Questions (concluded)

Question 2–19

Reversing entries are recorded at the beginning of a reporting period. They

reverse the effects of some of the adjusting entries recorded at the end of the previous

Question 2–20

The purpose of special journals is to record, in chronological order, the dual

Special journals simplify the recording process in the following ways: (1)

journalizing the effects of a particular transaction is made more efficient through the

Question 2–21

The general ledger is a collection of control accounts representing assets,

liabilities, permanent and temporary shareholders’ equity accounts. The subsidiary

ledger contains a group of subsidiary accounts associated with a particular general

Solutions Manual, Vol.1, Chapter 2 2–5

McGraw-Hill Education.

Brief Exercise

2–1

Assets = Liabilities + Paid-in Capital + Retained Earnings

1. + 165,000

(inventory) + 165,000 (accounts payable)

2. – 40,000

(cash) – 40,000(expense)

Brief Exercise 2–2

1. Inventory………………………………………………………… 165,000

Accounts payable…………………………………………. 165,000

Solutions Manual, Vol.1, Chapter 2 2–6

McGraw-Hill Education.

BRIEF EXERCISES

Solutions Manual, Vol.1, Chapter 2 2–7

McGraw-Hill Education.

Brief Exercise 2–3

BALANCE SHEET ACCOUNTS

Cash Accounts receivable

_____________________________ _____________________________

6/1 Bal. 65,000

6/1 Bal.

6/30 Bal.

Inventory Accounts payable

_____________________________ _____________________________

6/1 Bal. 0 6/1 Bal. 22,000

1. 165,000

120,000

INCOME STATEMENT ACCOUNTS

Sales revenue Cost of goods sold

_____________________________ _____________________________

Solutions Manual, Vol.1, Chapter 2 2–8

McGraw-Hill Education.

Salaries expense

_____________________________

6/1 Bal. 0

Brief Exercise 2–4

1. Prepaid insurance…………………………………………….. 12,000

Cash …………………………………………………………… 12,000

Brief Exercise 2–5

1. Insurance expense ($12,000 x 3/12)……………………….. 3,000

Prepaid insurance ………………………………………… 3,000

Solutions Manual, Vol.1, Chapter 2 2–9

McGraw-Hill Education.

Brief Exercise 2–6

Net income would be higher by $14,700 ($3,000 – 300 + 12,000).

Solutions Manual, Vol.1, Chapter 2 2–10

McGraw-Hill Education.

Brief Exercise 2–7

1. Service revenue ………………………………………………. 4,000

Deferred service revenue ………………………………. 4,000

2. Advertising expense ($2,000 x 1/2)……………………….. 1,000

Brief Exercise 2–8

Assets would be higher by $1,000, the amount of prepaid advertising that

Brief Exercise 2–9

1. Interest receivable …………………………………………… 2,250

Interest revenue ($50,000 x 6% x 9/12)……………….. 2,250

Solutions Manual, Vol.1, Chapter 2 2–11

McGraw-Hill Education.

Brief Exercise 2–10

BOWLER CORPORATION

Income Statement

For the Year Ended December 31, 2018

Sales revenue ……………………………………….. $325,000

Cost of goods sold ………………………………… 168,000

Brief Exercise 2–11

BOWLER CORPORATION

Balance Sheet

At December 31, 2018

Assets

Current assets:

Cash ………………………………………………….. $ 5,000

Accounts receivable ……………………………. 10,000

Inventory …………………………………………… 16,000

Solutions Manual, Vol.1, Chapter 2 2–12

McGraw-Hill Education.

Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable ……………………………….. $ 20,000

Solutions Manual, Vol.1, Chapter 2 2–13

McGraw-Hill Education.