Question 2–1
External events involve an exchange transaction between the company and a
Question 2–2
According to the accounting equation, there is equality between the total
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,
Question 2–5
Assets are increased by debits and decreased by credits. Liabilities and equity
accounts are increased by credits and decreased by debits.
Chapter 2 Review of the Accounting Process
QUESTIONS FOR REVIEW OF KEY TOPICS
2–2 Intermediate Accounting, 8/e
Answers to Questions (continued)
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
Transaction 1 records the purchase of $20,000 of inventory on account.
Question 2–11
An unadjusted trial balance is a list of the general ledger accounts and their
Answers to Questions (continued)
Question 2–12
Adjusting entries record the effect on financial position of internal events, those
Question 2–13
Closing entries transfer the balances in the temporary owners’ equity accounts to
Question 2–14
Prepaid expenses represent assets recorded when a cash disbursement creates
Question 2–15
The adjusting entry required when deferred revenues are earned is a debit to the
Question 2–16
Accrued liabilities are recorded when an expense has been incurred that will not
Answers to Questions (continued)
Question 2–17
Income statement—The purpose of the income statement is to summarize the
profit-generating activities of the company during a particular period of time. It is a
change statement that is reporting the changes in owners’ equity that occurred during
Question 2–18
A worksheet provides a means of organizing the accounting information needed
Question 2–19
Reversing entries are recorded at the beginning of a reporting period. They
Answers to Questions (concluded)
Question 2–20
The purpose of special journals is to record, in chronological order, the dual
effect of repetitive types of transactions, such as cash receipts, cash disbursements,
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
2–6 Intermediate Accounting, 8/e
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
2. Salaries expense ………………………………………………. 40,000
BRIEF EXERCISES
Brief Exercise 2–3
BALANCE SHEET ACCOUNTS
Cash Accounts receivable
___________________________ ___________________________
6/1 Bal. 65,000 6/1 Bal. 43,000
4. 180,000 40,000 2. 3. 200,000 180,000 4.
INCOME STATEMENT ACCOUNTS
Sales revenue Cost of goods sold
___________________________ ___________________________
0 6/1 Bal. 6/1 Bal. 0
200,000 3. 3. 120,000
Brief Exercise 2–4
1. Prepaid insurance …………………………..………………… 12,000
Brief Exercise 2–5
1. Insurance expense ($12,000 x 3/12) ……………………….. 3,000
Brief Exercise 2–6
Brief Exercise 2–7
1. Service revenue ………………………………………………. 4,000
Deferred service revenue ………………………………. 4,000
Brief Exercise 2–8
Assets would be higher by $1,000, the amount of prepaid advertising that
expired during the month. Liabilities would be lower by $21,600 ($4,000 + 16,000 +
Brief Exercise 2–9
1. Interest receivable ……………………………………………. 2,250
Interest revenue ($50,000 x 6% x 9/12) ……………….. 2,250
2–10 Intermediate Accounting, 8/e
Brief Exercise 2–10
BOWLER CORPORATION
Income Statement
For the Year Ended December 31, 2016
Sales revenue ………………………………………..
$325,000
Cost of goods sold …………………………………
168,000
Gross profit …………………………………………..
Operating expenses:
107,000
Net income …………………………………………..
$ 50,000
Brief Exercise 2–11
BOWLER CORPORATION
Balance Sheet
At December 31, 2016
Assets
Current assets:
Cash …………………………………………………..
$ 5,000
Accounts receivable …………………………….
Inventory ……………………………………………
Property and equipment:
Equipment ………………………………………….
Less: Accumulated depreciation ……………
$91,000
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable ………………………………..
$ 20,000
Salaries payable …………………………………..
12,000
Common stock ……………………………………
Retained earnings ………………………………..
$91,000
2–12 Intermediate Accounting, 8/e
Brief Exercise 2–12
Sales revenue …………………………………………………………. 850,000
Income summary ………………………………………………… 850,000
Income summary …………………………..……………………….. 815,000
Cost of goods sold ………………………………………………. 580,000
Brief Exercise 2–13
Revenues
$428,000*
Expenses:
Salaries
(240,000)
Utilities
Advertising
Net Income
$143,000
*$420,000 cash received plus $8,000 increase ($60,000 – 52,000) in amount due
from customers:
** $35,000 cash paid less $2,000 decrease in amount owed to utility company:
Exercise 2–1
Assets = Liabilities + Paid-in Capital + Retained Earnings
1. + 300,000 (cash) + 300,000 (common stock)
2. – 10,000 (cash)
+ 40,000 (equipment) + 30,000 (note payable)
EXERCISES
2–14 Intermediate Accounting, 8/e
Exercise 2–2
1. Cash ……………………………………………………………….. 300,000
Common stock …………………………………………….. 300,000
2. Equipment ………………………………………………………. 40,000
5. Rent expense …………………………………………………… 5,000
Cash ……………………………………………………………. 5,000
6. Prepaid insurance …………………………..………………… 6,000
Cash ……………………………………………………………. 6,000
Exercise 2–3 BALANCE SHEET ACCOUNTS
Cash Accounts receivable
___________________________ ___________________________
3/1 Bal. 0 3/1 Bal. 0
1. 300,000 10,000 2. 4. 120,000 55,000 8.
Inventory Prepaid insurance
___________________________ ___________________________
3/1 Bal. 0 3/1 Bal. 0
Equipment Accumulated depreciation
___________________________ ___________________________
3/1 Bal. 0 0 3/1 Bal.
Accounts payable Note payable
___________________________ ___________________________
0 3/1 Bal. 0 3/1 Bal.
Common stock
___________________________
2–16 Intermediate Accounting, 8/e
Exercise 2–3 (concluded)
INCOME STATEMENT ACCOUNTS
Sales revenue Cost of goods sold
___________________________ ___________________________
0 3/1 Bal. 3/1 Bal. 0
Rent expense Depreciation expense
___________________________ ___________________________
3/1 Bal. 0 3/1 Bal. 0
Account Title
Debits
Credits
Cash
264,000
Accounts receivable
65,000
Inventory
20,000
Prepaid insurance
6,000
Equipment
40,000
Accumulated depreciation
Accounts payable
Note payable
Common stock
Sales revenue
Cost of goods sold
Rent expense
Depreciation expense
Exercise 2–4
1. Cash ……………………………………………………………. 500,000
Common stock …………………………………………… 500,000
2. Furniture and fixtures ……………………………………. 100,000
Cash………………………………………………………….. 40,000
Note payable …………………………………………….. 60,000
5. Rent expense ………………………………………………… 6,000
Cash………………………………………………………….. 6,000
6. Prepaid insurance …………………………………………. 3,000
Cash………………………………………………………….. 3,000
7. Accounts payable …………………………………………. 120,000
Cash………………………………………………………….. 120,000
Exercise 2–5
List A List B
k 1. Source documents a. Record of the dual effect of a transaction in
debit/credit form.
f 5. Unadjusted trial balance e. Determine the dual effect on the accounting
equation.
b 6. Adjusting entries f. List of accounts and their balances before
recording adjusting entries.
h 7. Adjusted trial balance g. List of accounts and their balances after
recording closing entries.
Exercise 2–6
Increase (I) or
Decrease (D) Account
1. I Inventory
2. I Depreciation expense
7. D Salaries and wages payable
8. I Cost of goods sold
9. I Utility expense
10. I Equipment
Exercise 2–7
Account(s) Account(s)
Debited Credited
Example: Purchased inventory for cash 3 5
1. Paid a cash dividend. 10 5
2. Paid rent for the next three months. 8 5
3. Sold goods to customers on account. 4,16 9,3
Exercise 2–8
1. Prepaid insurance ($12,000 x 30/36) ………………………… 10,000
Insurance expense ………………………………………….. 10,000
2. Depreciation expense …………………………………………. 15,000