CP3-1 Recording Nonquantitative Journal Entries
The following list includes a series of accounts for B-ball Corporation, which has been operating for three years. These accounts are listed alphabetically and numbered for identifi cation. Following the accounts is a series of transactions. For each transaction, indicate the account(s) that should be deb- ited and credited by entering the appropriate account number(s) to the right of each transaction. If no journal entry is needed, write none after the transaction. The fi rst transaction is used as an example.
TIP: In transaction ( h ), remember what the expense recognition principle says.
TIP: Think of transaction ( j ) as two transactions: (1) incur expenses and liability and (2) pay part of the liability.
Account No. Account Title Account No. Account Title
1 Accounts Payable 8 Note Payable
2 Accounts Receivable 9 Prepaid Insurance
3 Cash 10 Rent Expense
4 Contributed Capital 11 Service Revenue
5 Equipment 12 Supplies Expense
6 Income Tax Expense 13 Supplies
7 Income Tax Payable
Transactions Debit Credit
a. Example: Purchased equipment for use in the business; paid
one-third cash and signed a note payable for the balance.
b. Issued stock to new investors.
c. Collected cash for services performed this period.
d. Paid cash for rent this period.
e. Performed services this period on credit.
f. Collected cash on accounts receivable for services performed
last period.
g. Paid cash on accounts payable for expenses incurred last period. h. Purchased supplies to be used later; paid cash.
i. Used some of the supplies for operations.
j. Paid three-fourths of the income tax expense for the year;
the balance will be paid next year.
k. On the last day of the current period, paid cash for an
insurance policy covering the next two years.
5 3, 8
CP3-2 Recording Journal Entries
Ryan Olson organized a new company, MeToo, Inc. The company provides networking manage- ment services on social network sites. You have been hired to record the following transactions.
a. May 1: Issued 1,000 shares of stock to investors for $30 per share.
b. May 15: Borrowed $50,000 from the bank to provide additional funding to begin operations; the note is due in two years.
c. May 31: Paid $2,400 for a one-year fire insurance policy with coverage starting June 1. TIP: For convenience, simply record the full amount of the payment as an asset (Prepaid
Insurance). At the end of June, this account will be adjusted to its proper balance. We will study this adjustment process in Chapter 4, so just leave it as Prepaid Insurance for now.
d. June 3: Purchased furniture for the store for $15,000 on account. The amount is due within 30 days.
e. June 5: Placed advertisements in local college newspapers for a total of $250 cash.
f. June 9: Sold services for $400 cash.
g. June 14: Made full payment for the furniture purchased on account on June 3.
Required:
For each of the transactions, prepare journal entries. Be sure to categorize each account as an asset (A), liability (L), stockholders’ equity (SE), revenue (R), or expense (E).
CP3-3 Analyzing the Effects of Transactions Using T-Accounts, Preparing an Unadjusted Trial Balance, and Determining Net Income
Barbara Jones opened Barb’s Book Business on February 1, 2013. You have been hired to maintain the company’s fi nancial records. The following transactions occurred in February 2013, the fi rst month of operations.
a. Received shareholders’ cash contributions totaling $16,000 to form the corporation; issued
stock.
b. Paid $2,400 cash for three months’ rent for office space.
TIP: For convenience, simply record the full amount of the payment as an asset (Prepaid Rent). At the end of the month, this account will be adjusted to its proper balance. We will study this adjustment process in Chapter 4, so just leave it as Prepaid Rent for now.
c. Purchased supplies for $300 cash.
d. Signed a promissory note, payable in two years; deposited $10,000 in the company’s bank account.
e. Used the money from ( d ) to purchase equipment for $7,500 and other noncurrent assets for $2,500. f. Placed an advertisement in the local paper for $425 cash.
g. Made sales totaling $1,800; $1,525 was in cash and the rest on accounts receivable.
h. Incurred and paid employee wages of $420.
i. Collected accounts receivable of $50 from customers.
j. Repaired one of the computers for $120 cash.
TIP: Most repairs involve costs that do not provide additional future economic benefits.
Required:
1. Set up appropriate T-accounts for Cash, Accounts Receivable, Supplies, Prepaid Rent,
Equipment, Other Noncurrent Assets, Notes Payable, Contributed Capital, Service Reve- nue, Advertising Expense, Wages Expense, and Repair Expense. All accounts begin with zero balances because this is the first month of operations.
TIP: When preparing the T-accounts, you might find it useful to group them by type: assets, liabilities, stockholders’ equity, revenues, and expenses.
2. Record in the T-accounts the effects of each transaction for Barb’s Book Business in February,
referencing each transaction in the accounts with the transaction letter. Show the unad- justed ending balances in the T-accounts.
3. Prepare an unadjusted trial balance at the end of February.
4. Refer to the revenues and expenses shown on the unadjusted trial balance. Based on this
information, calculate preliminary net income and write a short memo to Barbara offering your opinion on the results of operations during the first month of business.
LO 3–2, 3–3
CP3-4 Analyzing, Journalizing, and Interpreting Business Activities
Lakewood Tennis Club (LTC) operates an indoor tennis facility. The company charges a $150 annual membership fee plus a member rental rate of $20 per court per hour. LTC’s fi scal year end is August 31. LTC’s revenue recognition policy is described in its fi nancial statement notes as follows:
Revenue Recognition —LTC earns revenue from two sources. Annual membership fees are earned by providing twelve months of services to members, so they are reported as membership revenue as they are earned over that 12-month period. Court rental fees are earned by renting courts each day, so they are reported as service revenue as courts are used by members.
On August 31, 10 new members joined and paid the annual membership fee in cash. The member- ships do not begin until September 1. For the week ended September 11, LTC provided 190 court- hours of rental services for members, and collected its fees in cash. On September 13, LTC purchased and received tennis balls and other supplies. The regular retail price was $220, but LTC negotiated a lower amount ($200) that is to be paid in October. On September 15, LTC paid $1,500 to employ- ees for the hours they worked from September 1–15. For the two weeks ended September 25, LTC provided 360 court-hours for members, and collected its fees in cash. On September 26, LTC’s courts were used for a member’s birthday party. LTC expects the member to pay the special event booking fee of $210 on Saturday, October 2. On September 27, LTC wrote a $300 check to an advertising company to prepare advertising fl yers that will be inserted in local newspapers on Octo- ber 1. On September 29, LTC received $210 on account for the member’s birthday party that was held on September 26. On September 30, LTC submitted its electricity and natural gas meter read- ings online. According to the suppliers’ Web sites, the total charges for the month will be $300. This amount will be paid on October 17 through a preauthorized online payment.
Required:
1. Indicate the accounting equation effects of the August and September events, using a table
similar to the one shown for Demonstration Case B on page 114. Reference each transaction by date.
2. Prepare journal entries to record the August and September events described above. Refer-
ence each transaction by date.
3. Using your answer to requirement 1 or 2, calculate LTC’s preliminary net income for
September. Is LTC profitable, based on its preliminary net income?
4. Identify at least two adjustments that LTC will be required to make before it can prepare a
final income statement for September.
TIP: Scan the accounts used to answer requirements 1 and 2, looking for amounts that are no longer accurate at September 30.