CHAPTER 3
The Accounting Information System
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
1.
Transaction
identification.
1, 2, 3, 5
1, 3, 4, 17
1
2.
Nominal accounts.
4, 7
3.
Trial balance.
6, 10
2, 3, 4
1, 2, 7
4.
Adjusting entries.
8, 11, 13, 14
5, 6, 7, 8,
9, 10, 20
1, 2, 3, 4, 5, 6,
7, 8, 9, 11
5.
Financial statements.
11, 12, 15,
22, 23
1, 2, 4, 6, 7, 11
6.
Closing.
13, 14, 16
1, 4, 8, 9, 11
7.
Inventory and cost
of goods sold.
9
12, 14, 15
8.
Comprehensive
accounting cycle.
1, 2, 6, 11
*9.
Cash vs. accrual basis.
15, 16, 17
18, 19
*10.
Reversing entries.
*11.
Worksheet.
21, 22, 23
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
1. Describe the basic accounting
information system.
1, 2, 3,
4, 5, 7
2. Record and summarize basic
transactions.
3, 6
1, 2, 3, 4,
5, 6, 7
1, 2, 3,
4, 9, 17
1, 4
8, 11,
13, 14
3, 4, 5, 6,
7, 8, 9, 10
5, 6, 7, 8,
9, 10, 20
1, 2, 3, 4, 5,
6, 7, 8, 9,
5. Prepare financial statements for a
merchandising company.
9
13, 15
4
*6. Differentiate the cash basis of
accounting from the accrual basis of
accounting.
15, 16,
17
12
18, 19
10
reversed.
18
13
21, 22, 23
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E3.1
Transaction analysis–service company.
Simple
15–20
E3.2
Corrected trial balance.
Simple
10–15
E3.3
Corrected trial balance.
Simple
15–20
E3.4
Corrected trial balance.
10–15
E3.5
Adjusting entries.
Moderate
10–15
E3.6
Adjusting entries.
Moderate
15–20
E3.7
Analyze adjusted data.
Complex
15–20
E3.8
Adjusting entries.
Moderate
10–15
E3.9
Adjusting entries.
Moderate
15–20
E3.10
Adjusting entries.
Complex
25–30
E3.11
Prepare financial statements.
Moderate
20–25
E3.12
Prepare financial statements.
Moderate
20–25
E3.13
Closing entries.
Simple
10–15
E3.14
Closing entries.
Moderate
10–15
E3.15
Missing amounts.
Simple
10–15
E3.16
Closing entries for a corporation.
Moderate
10–15
Transactions of a corporation, including investment
and dividend.
Cash to accrual basis.
Moderate
15–20
Cash to accrual basis.
Moderate
10–15
Worksheet.
Simple
10–15
Worksheet and statement of financial position
presentation.
Partial worksheet preparation.
Moderate
10–15
P3.1
Transactions, financial statements–service company.
Moderate
25–35
P3.2
Adjusting entries and financial statements.
Moderate
35–40
P3.3
Adjusting entries.
Moderate
25–30
P3.4
Financial statements, adjusting and closing entries.
Moderate
40–50
P3.5
Adjusting entries.
Moderate
15–20
P3.6
Adjusting entries and financial statements.
Moderate
25–35
P3.7
Adjusting entries and financial statements.
Moderate
25–35
Adjusting and closing.
Moderate
30–40
Adjusting and closing.
Moderate
30–35
Cash and accrual basis.
Moderate
35–40
Worksheet, statement of financial position, adjusting and
closing entries.
ANSWERS TO QUESTIONS
1. Examples are:
(a) Payment of an accounts payable.
2. Transactions (a), (b), (d) are considered business transactions and are recorded in the accounting
records because a change in assets, liabilities, or equity has been effected as a result of a transfer
3. Transaction (a): Accounts Receivable (debit), Service Revenue (credit).
Transaction (b): Cash (debit), Accounts Receivable (credit).
4. Revenue and expense accounts are referred to as temporary or nominal accounts because each
period they are closed out to Income Summary in the closing process. Their balances are reduced
5. Andrea is not correct. The double-entry system means that for every debit amount there must be a
6. Although it is not absolutely necessary that a trial balance be taken periodically, it is customary
and desirable. The trial balance accomplishes two principal purposes:
(1) It tests the accuracy of the entries in that it proves that debits and credits of an equal amount
LO: 2, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
7. (a) Real account; statement of financial position.
(b) Real account; statement of financial position.
(c) Inventory is generally considered a real account appearing on the statement of financial position. It
Questions Chapter 3 (Continued)
8. At December 31, the three days’ salaries and wages due to the employees represent a current
9. (a) In a service company, revenues are service revenues and expenses are operating expenses.
In a merchandising company, revenues are sales revenues and expenses consist of cost of
10. (a) No change.
(b) Before closing, balances exist in these accounts; after closing, no balances exist.
11. Adjusting entries are prepared prior to the preparation of financial statements in order to bring the
accounts up to date and are necessary (1) to achieve a proper recognition of revenues and
12. Closing entries are prepared to transfer the balances of nominal accounts to capital (retained
earnings) after the adjusting entries have been recorded and the financial statements prepared.
13. Cost – Residual Value = Depreciable Cost: €4,000 – $0 = €4,000. Depreciable Cost ÷ Useful Life =
Depreciation Expense for One Year €4,000 ÷ 5 years = €800 per year. The asset was used for
14.
December 31
Interest Receivable ……………………………………………………………………………………
10,000
Interest Revenue ……………………………………………………………………………………
(To record accrued interest revenue on loan)
Questions Chapter 3 (Continued)
*15. Under the cash basis of accounting, revenue is recorded only when cash is received and
expenses are recorded only when paid. Under the accrual basis of accounting, revenue is
recognized when a performance obligation is satisfied and expenses are recognized when
*16. Salaries and wages paid during the year will include the payment of any salaries and wages
attributable to the prior year but unpaid at the end of the prior year. This amount is an expense of
*17. Although similar to the strict cash basis, the modified cash basis of accounting requires that
expenditures for capital items be charged against income over all the periods to be benefited. This
*18. Reversing entries are made at the beginning of the period to reverse accruals and some deferrals.
Reversing entries are not required. They are made to simplify the recording of certain transactions
*19. Disagree. A worksheet is not a permanent accounting record and its use is not required in the ac–
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3.1
May
1
Cash ……………………………………………………………………………………
4,000
Share Capital-Ordinary …………………………..
4,000
3
Equipment ……………………………………………………….
1,100
Accounts Payable ……………………………………………………….
1,100
Rent Expense ……………………………………………………….
Cash ……………………………………………………….
Accounts Receivable ……………………………………………………….
Service Revenue ……………………………………………………….
BRIEF EXERCISE 3.2
Aug.
2
Cash ……………………………………………………………………………………
12,000
Equipment ……………………………………………………….
2,500
Agazzi, Capital ……………………………………………………….
14,500
7
Supplies ……………………………………………………….
Accounts Payable ……………………………………………………….
Cash ……………………………………………………………………………………
Accounts Receivable ……………………………………………………….
Service Revenue ……………………………………………………….
1,970
BRIEF EXERCISE 3.2 (Continued)
15
Rent Expense ……………………………………………………….
600
Cash ……………………………………………………….
19
Supplies Expense ……………………………………………………….
230
Supplies (€500 – €270) …………………………..
BRIEF EXERCISE 3.3
July
1
Prepaid Insurance ……………………………………………………….
15,000
Cash ……………………………………………………….
15,000
Dec.
31
Insurance Expense ……………………………………………………….
Prepaid Insurance
(€15,000 X 1/2 X 1/3) …………………………..
BRIEF EXERCISE 3.4
July
1
Cash ……………………………………………………………………………………
15,000
Unearned Insurance Revenue …………………………..
15,000
Insurance Revenue
(€15,000 X 1/2 X 1/3) …………………………..
BRIEF EXERCISE 3.5
Feb.
1
Prepaid Insurance ……………………………………………………….
72,000
Cash ……………………………………………………….
72,000
June
30
Insurance Expense ……………………………………………………….
15,000
Prepaid Insurance
(£72,000 X 5/24) ……………………………………………………….
15,000
BRIEF EXERCISE 3.6
Nov.
1
Cash ……………………………………………………………………………………
2,400
Unearned Rent Revenue …………………………..
2,400
Dec.
31
Unearned Rent Revenue ……………………………………………………….
1,600
Rent Revenue
(€2,400 X 2/3) ……………………………………………………….
1,600
BRIEF EXERCISE 3.7
Dec.
31
Salaries and Wages Expense …………………………..
4,800
Salaries and Wages Payable
(€8,000 X 3/5) ……………………………………………………….
4,800
Jan.
2
Salaries and Wages Payable …………………………..
4,800
Salaries and Wages Expense* …………………………..
3,200
Cash ……………………………………………………….
8,000
BRIEF EXERCISE 3.8
Dec.
31
Interest Receivable ……………………………………………………….
300
Interest Revenue ……………………………………………………….
300
Feb.
Cash ……………………………………………………………………………………
Notes Receivable ……………………………………………………….
Interest Receivable ……………………………………………………….
300
Interest Revenue (€12,000 X 10% X 1/12) …………………………..
100
BRIEF EXERCISE 3.9
Aug.
31
Interest Expense …………………………..…………………………..
300
Interest Payable ……………………………………………………….
300
31
Accounts Receivable …………………………..…………………………..
Service Revenue ……………………………………………………….
31
Salaries and Wages Expense …………………………..
700
Salaries and Wages Payable …………………………..
700
31
Bad Debt Expense ……………………………………………………….
900
Allowance for Doubtful Accounts …………………………..
900
BRIEF EXERCISE 3.10
Depreciation Expense ……………………………………………………….
2,000
Accumulated Depreciation—Equipment …………………………..
2,000
Equipment ……………………………………………………….……………………..
Less: Accumulated Depreciation—Equipment …………………………
BRIEF EXERCISE 3.11
Sales Revenue ……………………………………………………….
808,900
Interest Revenue …………………………..…………………………..
13,500
Income Summary ……………………………………………………….
822,400
Income Summary ……………………………………………………….
780,300
Cost of Goods Sold……………………………………………………….
556,200
Operating Expenses ……………………………………………………….
189,000
Income Tax Expense ……………………………………………………….
Income Summary ……………………………………………………….
42,100
Retained Earnings ……………………………………………………….
Retained Earnings ……………………………………………………….
18,900
Dividends ……………………………………………………….
*BRIEF EXERCISE 3.12
(a)
Cash receipts from customers …………………………..
$142,000
+ Increase in accounts receivable
(€18,600 – €13,000) ……………………………………………………….
5,600
Service revenue …………………………..…………………………..
$147,600
(b)
Payments for operating expenses …………………………..
$ 97,000
(€23,200 – €17,500) ……………………………………………………….
Operating expenses ……………………………………………………….
$ 91,300
*BRIEF EXERCISE 3.13
(a)
Salaries and Wages Payable …………………………………………………….
4,200
Salaries and Wages Expense …………………………..
4,200
(b)
Salaries and Wages Expense …………………………..
7,000
Cash ……………………………………………………….
7,000
(c)
Salaries and Wages Payable …………………………………………………….
4,200
Salaries and Wages Expense (7,000 – 4,200) …………………………..
2,800
Cash ……………………………………………………….
7,000
SOLUTIONS TO EXERCISES
EXERCISE 3.1 (15–20 minutes)
Apr.
2
Cash ……………………………………………………………………………………
30,000
Equipment ……………………………………………………….
14,000
Kai Edo, Capital ……………………………………………………….
44,000
2
3
Supplies ……………………………………………………….
Accounts Payable ……………………………………………………….
7
Rent Expense ……………………………………………………….
Cash ……………………………………………………….
11
Accounts Receivable ……………………………………………………….
1,100
Service Revenue ……………………………………………………….
1,100
12
Cash ……………………………………………………………………………………
3,200
Unearned Service Revenue …………………………..
3,200
17
Cash ……………………………………………………………………………………
2,300
Service Revenue ……………………………………………………….
2,300
21
Insurance Expense……………………………………………………….
Cash ……………………………………………………….
30
Salaries and Wages Expense …………………………..
1,160
Cash ……………………………………………………….
1,160
EXERCISE 3.1 (Continued)
30
Supplies Expense ……………………………………………………….
120
Supplies ……………………………………………………….
120
30
Equipment ……………………………………………………….
Kai Edo, Capital ……………………………………………………….
EXERCISE 3.2 (10–15 minutes)
GERONIMO AG
Trial Balance
April 30, 2019
Debit
Credit
Cash ………………………………………………………………
€ 2,100
Accounts Receivable ………………………………………
2,750
Prepaid Insurance (€700 + €1,000) ……………………
1,700
Equipment ………………………………………………………
8,000
Accounts Payable (€4,500 – €1,000) ………………….
Property Tax Payable ………………………………………
Geronimo, Capital (€11,200 + €3,200) ………………..
Geronimo, Drawing …………………………………………
3,200
Service Revenue ……………………………………………..
Salaries and Wages Expense …………………………..
4,200
Advertising Expense (€1,100 + €300) ………………..
1,400
Property Tax Expense (€800 + €1,000) ………………
EXERCISE 3.3 (15–20 minutes)
The ledger accounts are reproduced below, and corrections are shown in
the accounts.
Cash
Accounts Payable
Bal.
5,912
(4)
Bal.
7,044
(1)
Accounts Receivable
Bal.
5,240
(1)
Bal.
8,000
Bal.
4,970
Supplies
Retained Earnings
Bal.
2,967
Bal.
2,000
Bal.
6,100
Bal.
(2)
1,900
(3)
2,025
Bal.
8,000
(5)
Bal.
4,320
(2)
1,900
Bal.
2,420
(1) 1,850 – 1,580
EXERCISE 3.3 (Continued)
SCARLATTI CORPORATION
Trial Balance (Corrected)
April 30, 2019
Debit
Credit
Cash ……………………………………………………………….
$ 5,992
Accounts Receivable ……………………………………….
4,970
Supplies ……………………………………………………….
2,967
Equipment ……………………………………………………….
8,000
Accounts Payable…………………………………………….
$ 7,044
Share Capital—Ordinary …………………………………..
Retained Earnings ……………………………………………
Service Revenue ………………………………………………
Office Expense ………………………………………………..
2,420
EXERCISE 3.4 (15–20 minutes)
OAKLEY NV
Trial Balance
June 30, 2019
Debit
Credit
Cash (€2,870 + €360 – €65 – €65) (1) & (4) ………………………….
€ 3,100
Accounts Receivable (€3,231 – €360) …………………………..
2,871
Supplies (€800 – €500) (2) ………………………………………………..
300
Equipment (€3,800 + €500) ……………………………………………..
4,300
Accounts Payable (€2,666 – €206 – €260) (7) …………………….
Unearned Service Revenue (€1,200 – €225) (5) ………………….
Share Capital—Ordinary …………………………………………………
Dividends ………………………………………………………………………
575
Retained Earnings ……………………………………………………….
Service Revenue (€2,380 + €801 + €225) (3) & (5) ………………..
Salaries and Wages Expense (€3,400 + €670 – €575) (5) …….
3,495
Office Expense ………………………………………………………………
EXERCISE 3.5 (10–15 minutes)
1.
Depreciation Expense (€250 X 3) …………………………..
750
Accumulated Depreciation—Equipment …………………………..
750
2.
Unearned Rent Revenue (€6,300 X 1/3) …………………………..
Rent Revenue …………………………..…………………………..
3.
Interest Expense ……………………………………………………….
500
Interest Payable ……………………………………………………….
500
EXERCISE 3.5 (Continued)
4.
Supplies Expense …………………………..…………………………..
2,150
Supplies (€2,800 – €650) ……………………………………………………
2,150
5.
Insurance Expense (€300 X 3) ………………………………………………….
Prepaid Insurance ……………………………………………………….
900
EXERCISE 3.6 (10–15 minutes)
1.
Accounts Receivable ……………………………………………………….
750
Service Revenue ……………………………………………………….
750
2.
Utilities Expense ……………………………………………………….
520
Accounts Payable ……………………………………………………….
520
3.
Depreciation Expense ……………………………………………………….
400
Accumulated Depreciation—Equipment …………………………..
400
Interest Expense ……………………………………………………….
500
Interest Payable ……………………………………………………….
500
4.
Insurance Expense ($15,000 X 1/12) …………………………..
Prepaid Insurance ……………………………………………………….
1,250
5.
Supplies Expense ($1,600 – $400) …………………………..
Supplies ……………………………………………………….
1,200
EXERCISE 3.7 (15–20 minutes)
(a)
Ending balance of supplies …………………………...
£ 900
Add: Adjusting entry …………………………………….
950
Deduct: Purchases …………………………..…………..
850
Beginning balance of supplies ……………………….
£1,000
(b)
Total prepaid insurance (£400 X 12) ……………….
Amount used (6 X £400)…………………………………
2,400
(c)
The entry in January to record salaries paid was
Salaries and Wages Expense …………………………..
Salaries and Wages Payable …………………………..
Cash ……………………………………………………….
The “T” account for salaries and Wages payable is
Salaries and Wages Payable
Paid
900
Beg. Bal.
?
January
End Bal.
800
The beginning balance is therefore
and Wages Payable …………………………………………….
Plus: Reduction of Salaries
and Wages Payable ……………………………………………..
and Wages Payable ……………………………………………..
Ending balance of Salaries
EXERCISE 3.7 (Continued)
(d)
Service revenue …………………………..………..
£2,000
Cash received ……………………………………….
Ending Unearned revenue January 31, 2019 …………….
Plus: Unearned service revenue reduced ………………..
EXERCISE 3.8 (10–15 minutes)
(1)
Salaries and Wages Expense …………………………………………………..
2,900
Salaries and Wages Payable ……………………………………………..
2,900
Accounts Payable ……………………………………………………….
(3)
Interest Expense ($60,000 X 8% X 1/12) …………………………..
Interest Payable ……………………………………………………….
(4)
Telephone and Internet Expense ………………………………………………
Accounts Payable ……………………………………………………….