3-1
CHAPTER 3
The Accounting Information System
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
1.
Transaction identification.
1, 2, 3, 5,
6, 7, 8
1, 2, 3, 4, 17
1
6.
Closing.
12
13, 14, 16
1, 4, 9,
10, 12
7.
Inventory and cost
of goods sold.
9
14, 15
8.
Comprehensive
accounting cycle.
1, 2, 6, 12
Cash vs. Accrual Basis.
15, 16, 17
18, 19
Reversing entries.
Worksheet.
21, 22, 23
Nominal accounts.
4, 7
Trial balance.
6, 10
2, 3, 4
1, 2, 7, 8
8, 9, 10
9, 10, 20
5, 6, 7, 8,
9, 10, 12
5.
Financial statements.
11, 12, 15,
22, 23
1, 2, 4, 6
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ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
1. Understand basic accounting terminology.
2. Explain double-entry rules.
10, 12
6. Prepare financial statements from the adjusted
trail balance.
11, 12, 15
1, 2, 4, 6,
7, 8, 9,
10, 12
7. Prepare closing entries.
11
13, 14, 16
1, 4, 9,
10, 12
12
18, 19
21, 22, 23
3. Identify steps in accounting cycle.
4. Record transactions in journals, post to ledger
5, 6, 7
1, 2, 3,
4, 17
1, 4, 9, 10
5. Explain the reasons for preparing adjusting
entries.
3, 4, 5, 6, 7,
5, 6, 7, 8,
9, 10, 20
2, 3, 4, 5,
6, 7, 8, 9,
3-3
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.
Simple
10–15
E3-5
Adjusting entries.
Moderate
10–15
*E3-18
Cash to accrual basis.
Moderate
15–20
*E3-19
Cash to accrual basis.
Moderate
10–15
*E3-20
Adjusting and reversing entries.
Complex
20–25
*E3-21
Worksheet.
Simple
10–15
*E3-22
Worksheet and balance sheet presentation.
Moderate
20–25
*E3-23
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
P3-7
Adjusting entries and financial statements.
Moderate
25–35
P3-8
Adjusting entries and financial statements.
Moderate
25–35
Adjusting and closing.
Moderate
30–40
Adjusting and closing.
Moderate
30–35
*P3-11
Cash and accrual basis.
Moderate
35–40
*P3-12
Worksheet, balance sheet, adjusting and closing entries.
Complex
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
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.
ANSWERS TO QUESTIONS
1. Examples are:
2. Transactions (a), (b), (d) are considered business transactions and are recorded in the accounting
records because a change in assets, liabilities, or owners’/stockholders’ equity has been effected
3. Transaction (a): Accounts Receivable (debit), Service Revenue (credit).
4. Revenue and expense accounts are referred to as temporary or nominal accounts because each
5. Andrea is not correct. The double-entry system means that for every debit amount there must be a
credit amount and vice-versa. At least two accounts are affected. It does not mean that each trans-
action must be recorded twice.
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:
7. (a) Real account; balance sheet.
(b) Real account; balance sheet.
(c) Inventory is generally considered a real account appearing on the balance sheet. It has the
elements of a nominal account when the periodic inventory system is used. It may appear on the
8. At December 31, the three days’ wages due to the employees represent a current liability. The
related expense must be recorded in this period to properly reflect the expense incurred.
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
3-5
Questions Chapter 3 (Continued)
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
expenses in measuring income and (2) to achieve an accurate presentation of assets, liabilities
and stockholders’ equity.
12. Closing entries are prepared to transfer the balances of nominal accounts to capital (retained
13. Cost – Salvage Value = Depreciable Cost: $4,000 – $0 = $4,000. Depreciable Cost ÷ Useful Life =
14.
December 31
Interest Receivable ……………………………………………………………………………………
10,000
Interest Revenue ……………………………………………………………………………………
10,000
(To record accrued interest revenue on loan)
Accrued expenses result from the same causes as accrued revenues. In fact, an accrued expense
on the books of one company is an accrued revenue to another company.
*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 it is earned and expenses are recognized when incurred, without regard to the
*16. Wages paid during the year will include the payment of any wages attributable to the prior year but
unpaid at the end of the prior year. This amount is an expense of the prior year and not of the
*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
Questions Chapter 3 (Continued)
*18. Reversing entries are made at the beginning of the period to reverse accruals and some deferrals.
*19. Disagree. A worksheet is not a permanent accounting record and its use is not required in the ac–
3-7
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-1
May
1
Cash ……………………………………………………….
4,000
Common Stock ……………………………………………………….
4,000
BRIEF EXERCISE 3-2
Aug.
2
Cash ……………………………………………………….
12,000
Equipment ……………………………………………………….
2,500
Owner’s Capital ……………………………………………………….
14,500
7
Accounts Payable……………………………………………………….
Cash ……………………………………………………….
1,300
Accounts Receivable ……………………………………………………….
Service Revenue ……………………………………………………….
1,970
Rent Expense ……………………………………………………….
Cash ……………………………………………………….
Supplies Expense ……………………………………………………….
3
Equipment ……………………………………………………….
1,100
Accounts Payable …………………………..
1,100
Cash ……………………………………………………….
Accounts Receivable ……………………………………………………….
Service Revenue ……………………………………………………….
BRIEF EXERCISE 3-3
July
1
Prepaid Insurance ……………………………………………………….
15,000
Cash……………………………………………………….
15,000
Dec.
Insurance Expense …………………………..…………………………..
Prepaid Insurance
($15,000 X 1/2 X 1/3) …………………………..
BRIEF EXERCISE 3-4
July
1
Cash ……………………………………………………….
15,000
Unearned Service Revenue …………………………..
15,000
Dec.
Unearned Service Revenue …………………………..
Service Revenue
($15,000 X 1/2 X 1/3) …………………………..
2,500
BRIEF EXERCISE 3-5
Feb.
1
Prepaid Insurance ……………………………………………………….
720,000
Cash……………………………………………………….
720,000
June
Insurance Expense …………………………..…………………………..
150,000
Prepaid Insurance
($720,000 X 5/24) …………………………..
BRIEF EXERCISE 3-6
Nov.
1
Cash ……………………………………………………….
2,400
Unearned Rent Revenue …………………………..
2,400
Dec.
Unearned Rent Revenue …………………………..
1,600
Rent Revenue
($2,400 X 2/3) ……………………………………………………….
3-9
BRIEF EXERCISE 3-7
Dec.
31
Salaries and Wages Expense…………………………..
4,800
Salaries and Wages Payable
($8,000 X 3/5) ……………………………………………………….
4,800
BRIEF EXERCISE 3-8
Dec.
31
Interest Receivable ……………………………………………………….
300
Interest Revenue ……………………………………………………….
300
Feb.
Cash ……………………………………………………….
Notes Receivable ……………………………………………………….
Interest Receivable …………………………..
300
Interest Revenue ……………………………………………………….
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
Jan.
Salaries and Wages Payable …………………………..
Salaries and Wages Expense…………………………..
Cash ……………………………………………………….
BRIEF EXERCISE 3-10
Depreciation Expense ……………………………………………………….
2,000
Accumulated Depreciation—Equipment …………………………..
2,000
Equipment ………………………………………………………………………………
$30,000
2,000
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
Administrative Expenses …………………………………………………..
189,000
Income Tax Expense ……………………………………………………….
35,100
Income Summary ……………………………………………………….
42,100
Retained Earnings ……………………………………………………….
42,100
Retained Earnings …………………………..…………………………..
Dividends ……………………………………………………….
18,900
*BRIEF EXERCISE 3-12
(a)
Cash receipts ……………………………………………………….
$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
3-11
*BRIEF EXERCISE 3-13
(a)
Salaries and Wages Payable …………………………..
4,200
Salaries and Wages Expense …………………………..
4,200
(b)
Salaries and Wages Expense …………………………..
Cash ……………………………………………………….
7,000
(c)
Salaries and Wages Payable …………………………..
Salaries and Wages Expense …………………………..
SOLUTIONS TO EXERCISES
EXERCISE 3-1 (15–20 minutes)
Apr.
2
Cash ……………………………………………………….
30,000
Equipment ……………………………………………………….
14,000
Owner’s 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
30
Supplies Expense ……………………………………………………….
Supplies ……………………………………………………….
30
Equipment ……………………………………………………….
5,100
Owner’s Capital ……………………………………………………….
5,100
3-13
EXERCISE 3-2 (10–15 minutes)
GERONIMO COMPANY
Trial Balance
April 30, 2012
Debit
Credit
Cash ………………………………………………………………
$ 2,100
Accounts Receivable ………………………………………
2,750
Prepaid Insurance ($700 + $1,000) ……………………
1,700
Equipment ………………………………………………………
8,000
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)
190
Bal.
7,044
(1)
270
Bal.
5,240
(1)
270
Bal.
Retained Earnings
Bal.
2,967
Bal.
2,000
Property Tax Payable ………………………………………
3,200
Service Revenue ……………………………………………..
4,200
Advertising Expense ($1,100 + $300) ………………..
1,400
Property Tax Expense ($800 + $1,000) ………………
3-14
EXERCISE 3-3 (Continued)
Equipment
Service Revenue
Bal.
6,100
Bal.
5,200
(2)
1,900
(3)
2,025
(5)
80
SCARLATTI CORPORATION
Trial Balance (Corrected)
April 30, 2012
Cash ……………………………………………………….………
Accounts Receivable …………………………..…………..
Supplies ……………………………………………………….
Equipment ……………………………………………………….
Accounts Payable…………………………………………….
Common Stock ………………………………………………..
Retained Earnings …………………………..……………….
Service Revenue ………………………………………………
4,320
(2)
1,900
EXERCISE 3-4 (10–15 minutes)
OAKLEY CO.
Trial Balance
June 30, 2012
Debit
Credit
Cash ($2,870 + $360 – $65 – $65) …………………………………….
$ 3,100
Accounts Receivable ($3,231 – $360) …………………………..
2,871
Supplies ($800 – $500) ……………………………………………………
300
Accounts Payable ($2,666 – $206 – $260) …………………………
Unearned Service Revenue ($1,200 – $225) ……………………..
975
575
3,000
Salaries and Wages Expense ($3,400 + $670 – $575) ………..
3,495
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) …………………………..
2,100
Rent Revenue ……………………………………………………….
3.
Interest Expense……………………………………………………….
500
Interest Payable ……………………………………………………….
500
4.
Supplies Expense ……………………………………………………….
Supplies ($2,800 – $650) ……………………………………………………
5.
Insurance Expense ($300 X 3) ………………………………………………….
Prepaid Insurance ……………………………………………………….
900
EXERCISE 3-6 (15–20 minutes)
1.
Accounts Receivable ……………………………………………………….
750
Service Revenue ……………………………………………………….
750
2.
Utilities Expenses ……………………………………………………….
Accounts Payable ……………………………………………………….
520
3.
Depreciation Expense ……………………………………………………….
Accumulated Depreciation—Equipment …………………………..
400
Interest Expense ……………………………………………………….
Interest Payable ……………………………………………………….
500
4.
Insurance Expense ($15,000 X 1/12) …………………………..
1,250
Prepaid Insurance …………………………..…………………………..
1,250
5.
Supplies Expense ($1,600 – $400) …………………………..
1,200
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 …………………………………
Amount used (6 X $400) …………………………………
Present balance …………………………………………….
The entry in January to record salary expense was
Salaries and Wages Expense …………………………..
Salaries and Wages Payable …………………………..
900
3-17
EXERCISE 3-7 (Continued)
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
EXERCISE 3-8 (10–15 minutes)
(a)
Salaries and Wages Expense …………………………………………………..
2,900
Salaries and Wages Payable ……………………………………………..
2,900
(b)
Utilities Expenses ……………………………………………………….
Accounts Payable ……………………………………………………….
(c)
Interest Expense ($60,000 X 8% X 1/12) …………………………..
Interest Payable ……………………………………………………….
(d)
Utilities Expenses ……………………………………………………….
Accounts Payable ……………………………………………………….
Ending balance of salaries and wages payable
Plus: Reduction of salaries and wages payable
(d)
Service revenue …………………………………………………………
Cash received …………………………..………………………………..
Ending unearned service revenue January 31, 2012 ……..
Plus: Unearned service revenue reduced …………………….
EXERCISE 3-9 (15–20 minutes)
(a)
10/15
Salaries and Wages Expense …………………………..
800
Cash ……………………………………………………….
800
(To record payment of October 15
payroll)
10/17
Accounts Receivable ……………………………………………………….
Service Revenue …………………………..…………………………..
10/20
Cash ……………………………………………………….…………………………..
Unearned Service Revenue …………………………..
650
(To record receipt of cash for
(b)
10/31
Supplies Expense ……………………………………………………….
470
Supplies ……………………………………………………….
470
(To record the use of supplies during
October)
10/31
Accounts Receivable ……………………………………………………….
Service Revenue …………………………..…………………………..
10/31
Salaries and Wages Expense …………………………..
600
Salaries and Wages Payable …………………………..
600
(To record liability for accrued payroll)
10/31
Unearned Service Revenue …………………………..
400
Service Revenue …………………………..…………………………..
400
3-19
EXERCISE 3-10 (25–30 minutes)
(a)
1.
Aug. 31
Insurance Expense ($4,500 X 3/12) …………………………..
1,125
Prepaid Insurance …………………………..
1,125
3.
Aug. 31
Depreciation Expense …………………………..…………………………..
1,080
Accumulated Depreciation—
Buildings ……………………………………………………….
1,080
($120,000 – $12,000 = $108,000;
$108,000 X 4% = $4,320 per year;
$4,320 X 3/12 = $1,080)
Aug. 31
Depreciation Expense …………………………..…………………………..
Accumulated Depreciation—
4.
Aug. 31
Unearned Rent Revenue …………………………..
3,800
Rent Revenue ……………………………………………………….
3,800
5.
Aug. 31
Salaries and Wages Expense …………………………..
Salaries and Wages Payable …………………………..
6.
Aug. 31
Accounts Receivable ……………………………………………………….
Rent Revenue ……………………………………………………….
7.
Aug. 31
Interest Expense ……………………………………………………….
1,000
Interest Payable
[($50,000 X 8%) X 3/12] …………………………..
1,000
2.
Aug. 31
1,950
Supplies ……………………………………………………….
1,950
EXERCISE 3-10 (Continued)
(b) UHURA RESORT
Adjusted Trial Balance
August 31, 2012
Debit
Credit
Cash ………………………………………………………….
$ 19,600
Accounts Receivable ………………………………….
800
Supplies ($2,600 – $1,950) …………………………..
650
Land ………………………………………………………….
Buildings …………………………………………………..
Accumulated Depreciation—Buildings ………..
Equipment …………………………………………………
360
Accounts Payable ………………………………………
4,500
Unearned Rent Revenue ($4,600 – $3,800)……
800
Salaries and Wages Payable ……………………….
375
Interest Payable …………………………………………
1,000
Mortgage Payable ………………………………………
50,000
Common Stock ………………………………………….
100,000
Dividends ………………………………………………….
Rent Revenue ($86,200 + $3,800 + $800) ………
90,800
Utilities Expenses ………………………………………
Maintenance and Repairs Expenses ……………
Insurance Expense …………………………………….
Supplies Expense ………………………………………
Depreciation Expense …………………………..……
Depreciation Expense …………………………..……
360
Interest Expense ………………………………………..