Brief
Exercises
B. Ex. 3.1
B. Ex. 3.2
B. Ex. 3.3
B. Ex. 3.4 Analysis
B. Ex. 3.5
B. Ex. 3.6
B. Ex. 3.7
B. Ex. 3.8
B. Ex. 3.9
B. Ex. 3.10
Exercises
3.1
3.2
3.3
3.4
3.5
3.6 Analysis
3.7
3.8 Revenue, expenses, and dividends Analysis
3.9 Financial statement effects Analysis
3.10 Preparing a trial balance Analysis
3.11 Preparing a trial balance Analysis
3.12
3.13
3.14 Analysis
3.15
CHAPTER 3
THE ACCOUNTING CYCLE:
CAPTURING ECONOMIC EVENTS
Communication, analysis
3-1–3-3, 3-7, 3-10
Real World: Home Depot, Inc.
Using an annual report
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Objectives
Learning
Accounting terminology
The matching principle
Journal and ledger relationships
3-6, 3-7
3-6, 3-7
Analysis
The accounting cycle
Skills
Debit and credit rules
Analysis
Analysis
Analysis, judgment
Analysis, judgment
Recording transactions
Topic
3-1, 3-2, 3-5, 3-9,
3-10
3-3–3-5
Analysis
Analysis
Analysis
3-3, 3-6
3-6, 3-7
3-6, 3-7
Analysis
3-2–3-6
3-2–3-6
Analysis
3-3, 3-5, 3-8, 3-9
3-3, 3-5, 3-8, 3-9
Accounting equation relationships
Analysis, communication
Analysis
3-3, 3-6, 3-8
3-3, 3-6, 3-8
Preparing a trial balance
Analyzing transactions
Analyzing transactions
Real World: Apple Computer Net
income and owners’ equity
3-3, 3-5, 3-8, 3-9
3-3, 3-6, 3-7
3-7, 3-8
3-3, 3-8
Analysis
Recording transactions
Realization and matching principles
Topic
Expense recognition
3-9
3-2–3-5
Revenue realization
Accounting equation relationships
3-6, 3-8
3-4, 3-6–3-8
Learning
Objectives
Preparing a trial balance
Analysis
3-1–3-10
Skills
Analysis
3-6, 3-7
Communication, analysis
Changes in retained earnings
Matching principle
Revenue realization
Analysis
3-6, 3-7
Problems
Sets A, B
3.1 A,B
3.2 A,B Recording journal entries and
3.3 A,B
3.4 A,B
3.5 A,B
3.6 A,B Short comprehensive problem
3.7 A,B Short comprehensive problem
3.8 A,B
3.1 Revenue recognition 3-7, 3-10
3.2 Income measurement 3-6, 3-7, 3-10
3.3 3-6, 3-7, 3- 10
3.4 3-6
Learning
3-3–3-8
3-3–3-8
3-3–3-5
Objectives
Analysis, communication
Topic
Skills
3-7–3-9
Analysis, communication
3-1–3-10
3-1–3-10
Analysis, judgment,
communication
The accounting cycle
The accounting cycle
Analysis, communication
Communication, judgment
Communication, judgment,
analysis
Recording journal entries and
identifying their effects on the
accounting equation
identifying their effects on the
accounting equation
Recording journal entries and
identifying their effects on the
accounting equation
Communication,
technology, judgment,
3-3–3-9
Real World: PC Connection –
Revenue from various sources
(Internet)
3-3, 3-8
Analyzing the effects of errors
Analysis, judgment,
communication
Critical Thinking Cases
Whistle-Blowing
(Ethics, fraud & corporate governance)
Analysis, communication
Analysis
Analysis, communication,
judgment
Communication, judgment,
analysis
Problems (Sets A and B)
30 Medium
30 Medium
35 Medium
60 Strong
50 Strong
50 Strong
50 Strong
Home Team Corporation/Blind River, Inc.
3.6 A,B
Donegan’s Lawn Care Service/Clown Around, Inc.
Requires students to journalize and post transactions, prepare a
trial balance, and understand various relationships among financial
statement elements.
Requires students to analyze the effects of errors on financial
statement elements.
Requires students to journalize and post transactions, prepare a
trial balance, and understand various relationships among financial
statement elements.
3.7 A,B
Sanlucas, Inc./Ahuna, Inc.
3.8 A,B
50 Strong
3.4 A,B
3.1 A,B
A company engages in numerous transactions during its first
month of operations. Students are required to journalize each
transaction and analyze the effect of each transaction on the
accounting equation.
Heartland Construction/North Enterprises
3.2 A,B
Weida Surveying, Inc./Dana, Inc.
Aerial Views/Tone Deliveries, Inc.
Calls for a detailed analysis of numerous transactions,
journalizing, and the application of the realization and matching
principles.
3.5 A,B
Dr. Schekter, DVM/Dr. Cravati, DMD
Requires students to journalize and post transactions, prepare a
trial balance, and understand the relationships between the income
statement and balance sheet.
Environmental Services, Inc./Lyons, Inc.
3.3 A,B
Requires students to journalize transactions and to understand the
relationship between the income statement and the balance sheet.
Requires students to journalize and post transactions, prepare a
trial balance, and understand the relationships between the income
statement and balance sheet.
Critical Thinking Cases
Revenue Recognition 15 Medium
Measuring Income
Whistle-Blowing 5 Easy
Ethics, Fraud & Corporate Governance
PC Connection 10 Easy
Revenue from Various Sources
Internet
3.1
3.2
Requires students to draw conclusions concerning the point at which various
companies should recognize revenue.
Students are to determine whether a company’s methods of measuring income
are fair and reasonable. Also requires students to distinguish between net
income and cash flow.
30 Strong
Using 10-K reports, students are asked to identify revenue from various
sources.
3.3
Students are asked to consider the legal and ethical implications of engaging
in fraudulent reporting activities.
3.4
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
3. Asset accounts:
4.
5.
No, the term debit means an entry on the left-hand side of an account; the term credit simply
a. Increases are recorded by debits
Although it has no obligation to issue financial statements to creditors or investors, Baker
Construction still should maintain an accounting system. For a start, the company probably has
numerous reporting obligations other than financial statements. These include income tax
Assets are located on the left side of the balance sheet equation; an increase in an asset account is
6.
7.
8.
9.
Operating profitably causes an increase in owners’ equity. Usually, this increase in equity is
The term expenses means the cost of the goods and services used up or consumed in the process
of obtaining revenue. Expenses cause a decrease in owners’ equity. To determine the net income
Revenue represents the price of goods sold and of services rendered to customers during the
for another asset (cash) and does not constitute revenue.
No, net income does not represent an amount of cash. The entire amount of cash owned by a
10.
11.
13.
14.
15.
Revenue is considered realized at the time that services are rendered to customers or goods sold
Some of the more analytical functions performed by accountants include determining the
A dividend is a distribution of assets (usually cash) by a corporation to its stockholders.
Dividends reduce both assets and owners’ equity (specifically, the Retained Earnings account).
The matching principle indicates that expenses should be recognized in the period (or periods)
The trial balance provides proof that the ledger is in balance. A trial balance does not, however,
12.
B. Ex. 3.1 a.
b.
1360,000
360,000
B. Ex. 3.2 Oct.
Capital Stock ……………………………………
Issued capital stock at $72 per share.
Cash ……………………………………………………
SOLUTIONS TO BRIEF EXERCISES
6. Prepare financial statements.
8. Prepare an after-closing trial balance.
3. Prepare a trial balance.
7. Journalize and post closing entries.
4. Make end-of-period adjustments.
5. Prepare an adjusted trial balance.
1. Journalize transactions.
4. Help make business decisions.
3. Maintain a documentary record of business activities.
2. Establish accountability for assets and transactions.
1. Evaluate the efficiency of operations.
4300,000
120,000
180,000
600,000
Paid cash dividend.
Collected amount owed from Health One Insurance.
Accounts Payable ……………………………………….
Cash …………………………………………………
Purchased surgical supplies on account.
Dividends ……………………………………………
Cash …………………………………..
Surgical Supplies …………………………………….
Accounts Receivable …………………..
Accounts Payable ……………………..
Paid account payable to Zeller Laboratories.
Notes Payable ………………………….
Cash ……………………………………
Diagnostic Equipment ……………………………………….
B. Ex. 3.3 a. Jan. 18 400,000
400,000
B. Ex. 3.4 Owners’
Expenses Liabilities Equity
Cash ……………………………………………………
Capital Stock ……………………………………
Issued capital stock for $400,000.
Assets
Revenue
100,000
Paid for radio ad to be aired on January 24.
Advertising Expense ……………………………………….
Cash …………………………………..
Cash ……………………………………………………
Notes Payable ……………………………………
Service Revenue….. …………………..
Cash…………….. …………………………………….
Provided services to clients.
Service Revenue ……………………..
Accounts Receivable …………………………………..
Cash…….. ……………………………………………
Provided services to clients on account.
Accounts Receivable …………………………………………………
B. Ex. 3.5
B. Ex. 3.6 a.
b.
Thus, Breeze Camp Ground will recognize advertising expense in the months that
B. Ex. 3.7 a.
b.
d.
This fee was earned in May and represents revenue of that month, despite the fact
that collection will not be made until June.
The collection of an account receivable does not increase owners’ equity and does
not represent revenue.
Revenue is recognized when it is earned. Thus, KPRM Radio will recognize revenue
from Breeze Camp Ground in the months that the ads are aired (at $500 per ad):
Expenses are matched to the periods in which they contribute to generating revenue.
An investment by stockholders does not constitute revenue. Although this
investment causes an increase in owners’ equity, this increase was not earned. It did
Beginning Retained Earnings (1/1) ………
108,000$
378,000$
288,000
B. Ex. 3.8 a.
b.
c.
B. Ex. 3.9
B. Ex. 3.10
Gasoline purchased is an expense because it is ordinarily used up in the current
Payment to an employee for services rendered in March is a March expense. Such a
The purchase of a copying machine does not represent an expense. The asset Cash is
exchanged for the asset Office Equipment, without any change in owners’ equity.
Revenue is recognized when it is earned, not necessarily when cash is received.
Expenses are recognized when they are incurred, not necessarily when cash is paid.
d.
The dividend does not constitute an expense. Unlike payments for advertising, rent,
Ex. 3.1 a.
Ex. 3.2 a.
Gasoline (15,000 miles at 30 mpg. = $3.20/gal.) ………………………………….
Registration and license ………………………………………………………….
Depreciation …………………………………………………………………………
Repairs and maintenance ……………………………………………………………
Annual total……………………………………………………………………..
1,000$
b.
Insurance ………………………………………………………………………..
Costs of owning and operating an automobile (estimates will vary; the following list is
only an example):
SOLUTIONS TO EXERCISES
Accounting period
Although you spent no money during this trip, you incurred significant costs. For
Realization principle
Matching principle
Net income
None (This statement describes the accounting convention of conservatism.)
Ex. 3.3 Nov. 1 144,000
144,000
Notes payable ………………………………………………….
Accounts payable ………………………………………………
Capital stock ……………………………………………………
Building ………………………………………………………..
Office equipment ……………………………………………….
Vehicles ………………………………………………………..
87,600$
84,000
Land ……………………………………………………………
Cash …………………………………………………………..
Ex. 3.4
AVENSON INSURANCE COMPANY
Trial Balance
November 30, Current Year
Capital Stock ………………………………………
Cash ……………………………………………………………
114,000
Notes Payable …………………………………
Office Equipment …………………………………………………..
Cash …………………………………………
Vehicles ………………………………………………………..
Accounts Payable ………………………………
Accounts Payable ……………………………………………..
Office Equipment ……………………………..
Notes Payable ………………………………………………..
Cash …………………………………………
Notes Payable …………………………………
Land ………………………………………………………………….
Building ……………………………………………………….
Cash ……………………………………………..
c. billion
Less: Beginning retained earnings ….…..
Increase in retained earnings …..………..
Plus: Dividends …………………………..…
Net income ……………………………….
Ex. 3.6
Revenue –Expenses = Assets –Liabilities =
INE I I NE I
NE I D NE I D
3.
2.
5.
6.
4.
Ex. 3.7
a.
Revenue –Expenses = Assets –Liabilities =
NE I D NE I D
INE I I NE I
NE I D D NE D
8.
5.
7.
3.
6.
b. 1.
Paid an outstanding account payable.
Earned revenue to be collected at a later date.
Declared and paid a cash dividend.
Purchased office supplies on account.
Incurred and paid repairs expense.
Collected cash from a customer for revenue earned previously on account.
Owners’
Equity
Balance Sheet
Balance Sheet
1.
Income Statement
Net
Income
Owners’
Equity
Ending retained earnings ……………………
63.4$
2.
Trans-
action
Trans-
action
Incurred wages expense to be paid at a later date.
1.
Net
Income
Income Statement
Ex. 3.5 a.
Liabilities at the beginning of the year: $90.1 billion – $33.4 billion = $56.7 billion
Owners’ equity at the end of the year: $92.0 billion – $61.5 billion = $30.5 billion
Ex. 3.8 a. Apr. 5 Accounts Receivable …………………………… 13,200
Drafting Fees Earned ……………………
13,200
b.
June 10: Payment of an account payable.
June 25: Payment of a dividend payable.
May 17: Declaration of a cash dividend.
The following transactions will not cause a change in net income.
13,200
Paid amount owed to Bob Needham, CPA.
Paid cash dividend declared May 17.
Declared cash dividend; payment due June 25.
Ex. 3.9 Transaction Net Income Assets Liabilities Equity
a. NE INE I
Ex. 3.10 a. May 3 Cash……………………………………………. 950,000
Capital Stock…………………………….
950,000
20 120,000
Client Revenue………………………..
120,000
Salary Expense…………………………………
Paid salary expense incurred in May.
Declared dividend to be distributed in June.
Utilities Expense………………………………
Paid May utilities.
Accounts Receivable…………………………
Billed clients for services on account.
Issued capital stock for $950,000.
4
5
15
Paid May office rent expense.
Purchased office supplies.
Purchased office equipment on account. Amount
b.
Cash
May 3 950,000 May 4 1,800 May 20 120,000 May 30 90,000
May 30 90,000 May 5 600
Accounts Payable Dividends Payable
May 15 12,400 May 26 8,000
May 31 bal. 12,400 May 31 bal. 8,000
May 3 950,000 May 20 120,000
Accounts Receivable
May 18 15,000
May 29 500
May 31 bal. 990,100 May 31 bal. 30,000
May 5 600 May 15 12,400
May 31 bal. 600 May 31 bal. 12,400
May 18 45,000 May 18 30,000
May 31 bal. 45,000 May 31 bal. 30,000
c.
Janet Enterprises Incorporated
Trial Balance
May 31, Current Year
Debit Credit
Cash……………………………………. 990,100$
Accounts receivable………………………
30,000
Office rent expense………………………
Ex. 3.11 a. Sep. 2 Cash……………………………………………. 1,170,000
Capital Stock…………………………….
1,170,000
Issued capital stock for $1,170,000.
Recorded and paid salary expense.