Financial Accounting Transactions

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Chapter 2 Financial Statements

and

Accounting Transactions

QUESTIONS EXERCISES Exercise 2-1 (10 minutes) a) $80,000 – $65,000 = $15,000 net income b) $92,000 – $149,000 = $57,000 net loss c) $10,000 + 0 – 0 + x = $86,000 x = $86,000 – $10,000 x = $76,000 net income d) $25,000 + $40,000 – 0 + x = $52,000 x = 52,000 – 25,000 – 40,000 x = –$13,000 or a $13,000 Net loss Exercise 2-2 (15 minutes) (a) (b) (c) (d) (e) Answers _{$ (24,750}_{) $36,000 $12,000 $21,500 $92,000} Proofs:

Owner’s equity, January 1 ... $ 0 $ 0 $ 0 $ 0 $92,000

Owner’s investments

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year ...

Owner’s withdrawals

during the year ... (24,750 ) (27,000 ) (15,000 ) (15,750 ) (63,000 )

Owner’s equity, December

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Exercise 2-3 (15 minutes)

THE DOBBS GROUP Income Statement

For Month Ended November 30, 2011 Revenues:

Consulting fees earned ... $18,000 Operating expenses:

Salaries expense ... $6,000 Rent expense ... 2,550 Telephone expense ... 1,680 Utilities expenses ... 660

Total operating expenses ... 10,890

Net income ... $ 7,110 Exercise 2-4 (15 minutes)

THE DOBBS GROUP Statement of Owner’s Equity For Month Ended November 30, 2011

Jean Dobbs, capital, November 1 ... $ 0 Add: Investments by owner ... 84,000

Net income ... 7,110 91,110 Total ... $91,110 Less: Withdrawals by owner ... 3,360

Jean Dobbs, capital, November 30 ... $87,750

Analysis component:

The owner, Jean Dobbs, invested $84,000 of assets during the month, which caused equity to increase. Also, net income earned during the month was $7,110 also causing equity to increase during November. The total increases in equity during the month were a total of $91,110 ($84,000 + $7,110).

NOTE: Students might point out that equity decreased by a total of $3,360 in withdrawals which in combination with the total increase of $91,110 caused a net increase in equity of $87,750.

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THE DOBBS GROUP Balance Sheet November 30, 2011

Assets Liabilities

Cash ... $12,000 Accounts payable ... $ 7,500 Accounts receivable ... 17,000

Office supplies ... 2,250 Owner’s Equity

Automobiles ... 36,000 Jean Dobbs, capital ... 87,750 Office equipment ... 28,000 Total liabilities and

Total assets ... $95,250 owner’s equity... $95,250

$87,750 (or 92.13% calculated as $87,750/$95,250 × 100) of the total $95,250 assets are owned by Jean Dobbs, the owner of The Dobbs Group.

EXCEL LEARNING SERVICES Income Statement

For Month Ended July 31, 2011 Revenues:

Tutoring fees earned ... $4,200 Textbook rental revenue ... 300 Total revenues ... $ 4,500 Operating expenses:

Office rent expense ... $2,500 Tutors wages expense ... 1,540 Utilities expense ... 580

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EXCEL LEARNING SERVICES Statement of Owner’s Equity For Month Ended July 31, 2011

George Pelzer, capital, July 1 ... $ 7,400 Add: Investments by owner ... 1,200 Total ... $ 8,600 Less: Withdrawals by owner ... $ 1,000

Net loss ... 120 1,120 George Pelzer, capital, July 31 ... $ 7,480

Withdrawals of $1,000 by the owner, George Pelzer, caused equity to decrease during July, 2011. Also, the net loss of $120 caused equity to decrease in July. The total decrease in equity during the month of July was $1,120 (calculated as $1,000 + $120).

NOTE: Students might point out that equity increased by $1,200 of owner investments which, in combination with the total decrease of $1,120, caused a net increase in equity of $80.

EXCEL LEARNING SERVICES Balance Sheet

July 31, 2011

Cash ... $ 1,600 Accounts payable ... $ 1,400 Accounts receivable ... 2,680

Supplies ... 600 Owner’s Equity

Furniture ... 1,800 George Pelzer, capital ... 7,480 Computer equipment ... 2,200 Total liabilities and

Total assets ... $8,880 owner’s equity ... $8,880

$1,400 or 15.77% (calculated as $1,400/$8,880 × 100) of the total $8,880 assets held by Excel Learning Services are financed by debt.

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Exercise 2-9 (10 minutes)

Description

B 1. Requires every business to be accounted for separately from its owner or owners.

D 2. Requires financial statement information to be supported by evidence other than someone’s opinion or imagination.

A 3. Requires financial statement information to be based on costs incurred in transactions.

E 4. Requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold.

C 5. Requires revenue to be recorded only when the earnings process is complete.

a. Assets – Liabilities = Owner’s Equity

Beginning of the year ... $ 150,000 – $60,000 = $90,000 End of the year ... $240,000 – $92,000 = 148,000 Net increase in owner’s equity ... $58,000 Net income ... $58,000

(Because there were no additional investments or withdrawals, the net income for the year equals the net increase in owner’s equity.)

b. Net increase in owner’s equity ... $58,000 Add: Withdrawals (12 months @ $3,500) ... 42,000 Net income ... $100,000

An alternative calculation:

$90,000 + x - $42,000 = $148,000; x = $100,000

c. Net increase in owner’s equity ... $58,000 Less: Additional investment ... 65,000 Net loss ... $ 7,000

$90,000 + $65,000 + x = $148,000; x = ($7,000) where the negative represents a loss.

d. Net increase in owner’s equity ... $58,000 Add: Withdrawals (12 months @ $3,500) ... 42,000 Gross increase in owner’s equity ... $100,000 Less: Additional investment ... 50,000 Net income ... $50,000

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$90,000 + $50,000 - $42,000 + x = $148,000; x = $50,000

Exercise 2-11 (10 minutes) a.

If assets decreased by $5,000 during August, then $20,000 + $5,000 = $25,000 Assets at August 1, 2011.

Therefore, Owner’s Equity at August 1, 2011 = $25,000 - $1,000 = $24,000

b.

If liabilities increased by $3,000 during August, then $1,000 + $3,000 = $4,000 Liabilities at August 31, 2011.

Assets Liabilities + Owner’s Equity

Cash + Receivable + Accounts Supplies = Office Accounts Payable + Noel Bridges, Capital

a) + $2,500 + $2,500

Totals 2,500 2,500

b) + $200 + $200

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Totals 3,100 200 200 3,100 e) – 1,500 – 1,500 Totals 1,600 200 200 1,600 f) + $1,250 + 1,250 Totals $1,600 $1,250 $200 $200 $2,850 $3,050 = $3,050

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Assets Liabilities + Owner’s Equity Cash + Receivable + Accounts Supplies + Parts Equipment = Accounts Payable + Janine Commry, Capital

a) + $7,000 + $ 7,000 b) - 2,500 - 2,500 Totals $4,500 $ 4,500 c) + $1,200 + $1,200 Totals $4,500 $1,200 $1,200 $ 4,500 d) + $3,400 + $ 3,400 Totals $4,500 $3,400 $1,200 $1,200 $7,900 e) – $ 950 + $950 Totals $3,550 $3,400 $1,200 $950 $1,200 $7,900 f)* Totals $3,550 $3,400 $1,200 $950 $1,200 $ 7,900 g) – $1,200 – $1,200 Totals $2,350 $3,400 $1,200 $950 $ 0 $7,900 h) + $1,400 + $ 1,400 Totals $3,750 $3,400 $1,200 $950 $ 0 $9,300 i) – $2,700 – $ 2,700 Totals $1,050 $3,400 $1,200 $950 $ 0 $6,600 $6,600 = $6,600

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d. Completed work for a client on credit; $1,000. e. Purchased office supplies on credit; $400. f. Paid $250 to a creditor.

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a) The business purchased land paying $3,000.

b) $400 of office supplies were purchased on credit (or on account). c) Paid $700 for the purchase of office supplies

d) $1,050 of revenue on account (or on credit) was earned. e) Collected $1,000 cash for revenue performed.

f) Paid $400 to a creditor.

g) Collected $1,050 from a credit customer. h) The owner invested $5,000 of land. Exercise 2-16 (30 minutes)

+ Accounts + Equip- = Accounts + Ellen Manson, Explanation

Cash Receivable ment Payable Capital of Change

a. $25,000 $5,000 $30,000 Investment b. – 1,300 –$1,300 Rent Expense $23,700 $5,000 $28,700 c. +6,000 +6,000 $23,700 $11,000 $6,000 $28,700 d. + 500 + 500 Revenue $24,200 $11,000 $6,000 $29,200 e. +$1,000 + 1,000 Revenue $24,200 $1,000 $11,000 $6,000 $30,200 f. – 4,000 + 4,000 $20,200 $1,000 $15,000 $6,000 $30,200

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$19,250 $750 $15,000 $6,000 $29,000 i. –6,000 – 6,000 $13,250 $750 $15,000 $ 0 $29,000 j. – 250 – 250 Withdrawal $13,000 $750 $15,000 $ 0 $28,750 $28,750 = $28,750

Revenue – Expenses = Net loss

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Possible examples include:

a. The business purchases office supplies (or some other asset) for cash. b. The owner withdraws cash (or some other asset) from the business; also,

the business incurs an expense paid with cash. c. The business incurs an expense on credit.

d. The business purchases equipment (or some other asset) on credit.

e. The owner invests cash (or some other asset); or, the business earns a revenue and accepts cash or an account receivable.

f. The business pays an account payable (or some other liability) with cash. Exercise 2-18 (20 minutes)

Assets Liabilitie

s + Owner’s Equity

Cash + Accounts

Receivable + Supplies + Equipment = Accounts Payable + Annie Deweerd, Capital Explanation a) + $2,500 +$2,500 Owner Investment b) + $4,000 +$4,000 Revenue Totals $4,000 $ 0 $ 0 $2,500 $ 0 $6,500 c) + $150 + $150 Totals $4,000 $ 0 $150 $2,500 $150 $6,500 d) – $ 450 – $ 450 Sal. Expense Totals $3,550 $ 0 $150 $2,500 $150 $6,050 e)* Totals $3,550 $ 0 $150 $2,500 $150 $6,050

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Totals $2,150 $2,000 $150 $2,500 $150 $6,650

$6,800 = $6,800

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Annie Deweerd – Freelance Writing Income Statement

For Month Ended March 31, 2011 Revenues:

Freelance writing revenue $6,000

Operating expenses:

Salaries expense $ 450

Rent expense 1,400

Total operating expenses 1,850

Net income $4,15

0

Annie Deweerd – Freelance Writing Statement of Owner’s Equity For Month Ended March 31, 2011

Annie Deweerd, capital, March 1 $ 0

Add: Investment by owner _$2,500

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Annie Deweerd – Freelance Writing Balance Sheet March 31, 2011 Assets Liabilities Cash $2,15 0 Accounts payable $ 150 Accounts receivable 2,000 Supplies 150 Equipment 2,500 Owner’s Equity

Annie Deweerd, capital 6,650

Total assets $6,80

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a. Supplies of $150 were financed by accounts payable, a liability. b. Equipment of $2,500 was financed by owner investment, an

equity transaction.

c. Cash of $2,150 and Accounts receivable of $2,000 were financed by net income of $4,150. Net income includes the equity

transactions of revenues and expenses (revenues of $6,000 less expenses of $1,850).

Assets Liabilitie

Cash + Accounts

Receivable + Supplies + Equipment = Accounts Payable + Pete Jong, Capital Explanation

a) + $500 +$15,000 +$15,500 Owner Investment b) +$400 +$400 Totals $500 $ 0 $400 $15,000 $400 $15,500 c) +$600 +$600 Totals $500 $ 0 $1,000 $15,000 $1,000 $15,500 d)* Totals $500 $ 0 $1,000 $15,000 $1,000 $15,500 e) +$550 +$550 Revenue Totals $500 $550 $1,000 $15,000 $1,000 $16,050 f) +$600 +$600 Revenue Totals $500 $1,150 $1,000 $15,000 $1,000 $16,650

(19)

Totals $50 $1,150 $1,000 $15,000 $800 $16,400

$17,200 = $17,200

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Pete’s Yard Care Income Statement

Yard care revenue $1,150

Advertising expense 250

Net income $ 900

Pete’s Yard Care

Statement of Owner’s Equity For Month Ended March 31, 2011

Pete Jong, capital, March 1 $ 0

Net income 900 16,400

Pete Jong, capital, March 31 $16,40

0 Pete’s Yard Care

Balance Sheet March 31, 2011

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Supplies 1,000

Equipment 15,000

Owner’s Equity

Pete Jong, capital 16,400

Total assets $17,200

Total liabilities and

owner’s equity $17,20

0

The $900 of net income does not represent cash because all of the revenues ($550 + $600 = $1,150) were on account. The $250 of

advertising expense was paid in cash. The net income or net loss on an income statement represents accrual net income (loss) as opposed to a

cash basis net income (loss). Recall that accrual basis net income

represents revenues and expenses that occurred regardless of when cash is actually received/paid.

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Assets Liabilitie

Cash + Accounts

Receivable + Supplies + Equipment = Accounts Payable + Otto Ingles, Capital Explanation

Bal. $4,000 $1,200 $900 $7,500 $4,000 $9,600 a) +$1,000 -$1,000 Totals $5,000 $200 $900 $7,500 $4,000 $9,600 b) -$2,000 -$2,000 Totals $3,000 $200 $900 $7,500 $2,000 $9,600 c) +$700 +$700 Revenue Totals $3,700 $200 $900 $7,500 $2,000 $10,300 d) -$500 -$500 Wage Exp. Totals $3,200 $200 $900 $7,500 $2,000 $9,800 e) -$1,200 -$1,200 Rent Exp. Totals $2,000 $200 $900 $7,500 $2,000 $8,600 f) -$600 -$600 Utilities Exp. Totals $1,400 $200 $900 $7,500 $2,000 $8,000 g) +$400 +$400 Revenue Totals $1,400 $600 $900 $7,500 $2,000 $8,400 h)* Totals $1,400 $600 $900 $7,500 $2,000 $8,400

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Otto’s Wrecking Service Income Statement

For Month Ended July 31, 2011 Revenues: Wrecking revenue $1,100 Operating expenses: Rent expense $ 1,200 Wages expense 500 Utilities expense 600

Net loss $1,20

0 Otto’s Wrecking Service

Statement of Owner’s Equity For Month Ended July 31, 2011

Otto Ingles, capital, July 1 $ 9,600

Less: Net loss _1,200

Balance Sheet July 31, 2011

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Cash $1,400 Accounts payable $ 2,000

Accounts receivable 600

Supplies 900

Equipment 7,500

Otto Ingles, capital 8,400

0

Analysis component:

$8,400 or 80.77% (calculated as $8,400/$10,400 × 100) of the assets are financed by Otto Ingles, the owner. $2,000 or 19.23% (calculated as $2,000/$10,400 × 100) of the assets are financed by debt.

Chapter 2 Financial Statements

and

Accounting Transactions

QUESTIONS EXERCISES Exercise 2-1 (10 minutes) e) $80,000 – $65,000 = $15,000 net income

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x = $76,000 net income h) $25,000 + $40,000 – 0 + x = $52,000 x = 52,000 – 25,000 – 40,000 x = –$13,000 or a $13,000 Net loss Exercise 2-2 (15 minutes) (a) (b) (c) (d) (e) Answers _{$ (24,750}_{) $36,000 $12,000 $21,500 $92,000} Proofs:

during the year ... 60,000 36,000 31,500 37,000 150,000

Net income (loss) for the

year ... 15,750 40,500 (4,500 ) 21,500 (8,000 )

during the year ... (24,750 ) (27,000 ) (15,000 ) (15,750 ) (63,000 )

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NOTE: Students might point out that equity decreased by a total of $3,360 in withdrawals which in combination with the total increase of $91,110 caused a

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July 31, 2011

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Description

$90,000 + x - $42,000 = $148,000; x = $100,000

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$90,000 + $50,000 - $42,000 + x = $148,000; x = $50,000

b.

a) + $2,500 + $2,500 Totals 2,500 2,500 b) + $200 + $200 Totals 2,500 200 200 2,500 c) + 600 + 600 Totals 3,100 200 200 3,100 d)*

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e) – 1,500 – 1,500

Totals 1,600 200 200 1,600

f) + $1,250 + 1,250

Totals $1,600 $1,250 $200 $200 $2,850

$3,050 = $3,050

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Cash + Receivable + Accounts Supplies + Parts Equipment = Accounts Payable + Janine Commry, Capital

*Note: For (f), since no exchange has occurred, no entry is required. Exercise 2-14: (15 minutes)

b. Office Supplies were purchased paying cash of $500. c. Office Furniture was purchased paying cash of $8,000.

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f. Paid $250 to a creditor.

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i) The business purchased land paying $3,000.

j) $400 of office supplies were purchased on credit (or on account). k) Paid $700 for the purchase of office supplies

l) $1,050 of revenue on account (or on credit) was earned. m) Collected $1,000 cash for revenue performed.

n) Paid $400 to a creditor.

o) Collected $1,050 from a credit customer. p) The owner invested $5,000 of land. Exercise 2-16 (30 minutes)

a. $25,000 $5,000 $30,000 Investment b. – 1,300 –$1,300 Rent Expense $23,700 $5,000 $28,700 c. +6,000 +6,000 $23,700 $11,000 $6,000 $28,700 d. + 500 + 500 Revenue $24,200 $11,000 $6,000 $29,200 e. +$1,000 + 1,000 Revenue $24,200 $1,000 $11,000 $6,000 $30,200 f. – 4,000 + 4,000 $20,200 $1,000 $15,000 $6,000 $30,200 g. – 1,200 – 1,200 Wages Expense $19,000 $1,000 $15,000 $6,000 $29,000 h. + 250 – 250

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i. –6,000 – 6,000 $13,250 $750 $15,000 $ 0 $29,000 j. – 250 – 250 Withdrawal $13,000 $750 $15,000 $ 0 $28,750 $28,750 = $28,750

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Exercise 2-17 (15 minutes) (Answers may vary.) Possible examples include:

Assets Liabilitie

Cash + Accounts

Receivable + Supplies + Equipment = Accounts Payable + Annie Deweerd, Capital Explanation a) + $2,500 +$2,500 Owner Investment b) + $4,000 +$4,000 Revenue Totals $4,000 $ 0 $ 0 $2,500 $ 0 $6,500 c) + $150 + $150 Totals $4,000 $ 0 $150 $2,500 $150 $6,500 d) – $ 450 – $ 450 Sal. Expense Totals $3,550 $ 0 $150 $2,500 $150 $6,050 e)* Totals $3,550 $ 0 $150 $2,500 $150 $6,050 f) – $ 1,400 – $ 1,400 Rent Expense Totals $2,150 $ 0 $150 $2,500 $150 $4,650 g) + $2,000 +$2,000 Revenue

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$6,800 = $6,800 *Note: For (e), since no exchange has occurred, no entry is required.

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Rent expense 1,400

Net income $4,15

0

Net income 4,15

0 6,650

Annie Deweerd, capital, March 31 $6,65

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Total assets $6,80

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Exercise 2-19 (concluded)

d. Supplies of $150 were financed by accounts payable, a liability. e. Equipment of $2,500 was financed by owner investment, an

equity transaction.

f. Cash of $2,150 and Accounts receivable of $2,000 were financed by net income of $4,150. Net income includes the equity

Assets Liabilitie

Cash + Accounts

a) + $500 +$15,000 +$15,500 Owner Investment b) +$400 +$400 Totals $500 $ 0 $400 $15,000 $400 $15,500 c) +$600 +$600 Totals $500 $ 0 $1,000 $15,000 $1,000 $15,500 d)* Totals $500 $ 0 $1,000 $15,000 $1,000 $15,500 e) +$550 +$550 Revenue Totals $500 $550 $1,000 $15,000 $1,000 $16,050 f) +$600 +$600 Revenue Totals $500 $1,150 $1,000 $15,000 $1,000 $16,650 g) -$200 -$200 Totals $300 $1,150 $1,000 $15,000 $800 $16,650 h) -$250 -$250 Adv. Expense

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$17,200 = $17,200 *Note: For (d), since no exchange has occurred, no entry is required.

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Net income $ 900

Pete’s Yard Care

Assets Liabilities

Cash $ 50 Accounts payable $ 800

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Equipment 15,000

0

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Assets Liabilitie

Cash + Accounts

Bal. $4,000 $1,200 $900 $7,500 $4,000 $9,600 a) +$1,000 -$1,000 Totals $5,000 $200 $900 $7,500 $4,000 $9,600 b) -$2,000 -$2,000 Totals $3,000 $200 $900 $7,500 $2,000 $9,600 c) +$700 +$700 Revenue Totals $3,700 $200 $900 $7,500 $2,000 $10,300 d) -$500 -$500 Wage Exp. Totals $3,200 $200 $900 $7,500 $2,000 $9,800 e) -$1,200 -$1,200 Rent Exp. Totals $2,000 $200 $900 $7,500 $2,000 $8,600 f) -$600 -$600 Utilities Exp. Totals $1,400 $200 $900 $7,500 $2,000 $8,000 g) +$400 +$400 Revenue Totals $1,400 $600 $900 $7,500 $2,000 $8,400 h)* Totals $1,400 $600 $900 $7,500 $2,000 $8,400 $10,400 = $10,400

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Net loss $1,20

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Assets Liabilities

Supplies 900

Equipment 7,500

0

Chapter 2 Financial Statements

and

Accounting Transactions

QUESTIONS EXERCISES Exercise 2-1 (10 minutes) i) $80,000 – $65,000 = $15,000 net income j) $92,000 – $149,000 = $57,000 net loss k) $10,000 + 0 – 0 + x = $86,000 x = $86,000 – $10,000

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l) $25,000 + $40,000 – 0 + x = $52,000 x = 52,000 – 25,000 – 40,000 x = –$13,000 or a $13,000 Net loss Exercise 2-2 (15 minutes) (a) (b) (c) (d) (e) Answers _{$ (24,750}_{) $36,000 $12,000 $21,500 $92,000} Proofs:

during the year ... 60,000 36,000 31,500 37,000 150,000

Net income (loss) for the

year ... 15,750 40,500 (4,500 ) 21,500 (8,000 )

during the year ... (24,750 ) (27,000 ) (15,000 ) (15,750 ) (63,000 )

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NOTE: Students might point out that equity decreased by a total of $3,360 in withdrawals which in combination with the total increase of $91,110 caused a net increase in equity of $87,750.

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July 31, 2011

Total assets ... $8,880 owner’s equity ... $8,880

$1,400 or 15.77% (calculated as $1,400/$8,880 × 100) of the total $8,880 assets held by Excel Learning Services are financed by debt.

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Description

$90,000 + x - $42,000 = $148,000; x = $100,000

d. Net increase in owner’s equity ... $58,000 Add: Withdrawals (12 months @ $3,500) ... 42,000 Gross increase in owner’s equity ... $100,000 Less: Additional investment ... 50,000 Net income ... $50,000

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$90,000 + $50,000 - $42,000 + x = $148,000; x = $50,000

b.

a) + $2,500 + $2,500

Totals 2,500 2,500

b) + $200 + $200

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Totals 3,100 200 200 3,100 e) – 1,500 – 1,500 Totals 1,600 200 200 1,600 f) + $1,250 + 1,250 Totals $1,600 $1,250 $200 $200 $2,850 $3,050 = $3,050

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Assets Liabilities + Owner’s Equity Cash + Receivable + Accounts Supplies + Parts Equipment = Accounts Payable + Janine Commry, Capital

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d. Completed work for a client on credit; $1,000. e. Purchased office supplies on credit; $400. f. Paid $250 to a creditor.

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q) The business purchased land paying $3,000.

r) $400 of office supplies were purchased on credit (or on account). s) Paid $700 for the purchase of office supplies

t) $1,050 of revenue on account (or on credit) was earned. u) Collected $1,000 cash for revenue performed.

v) Paid $400 to a creditor.

w) Collected $1,050 from a credit customer. x) The owner invested $5,000 of land. Exercise 2-16 (30 minutes)

a. $25,000 $5,000 $30,000 Investment b. – 1,300 –$1,300 Rent Expense $23,700 $5,000 $28,700 c. +6,000 +6,000 $23,700 $11,000 $6,000 $28,700 d. + 500 + 500 Revenue $24,200 $11,000 $6,000 $29,200 e. +$1,000 + 1,000 Revenue $24,200 $1,000 $11,000 $6,000 $30,200 f. – 4,000 + 4,000 $20,200 $1,000 $15,000 $6,000 $30,200

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$19,250 $750 $15,000 $6,000 $29,000 i. –6,000 – 6,000 $13,250 $750 $15,000 $ 0 $29,000 j. – 250 – 250 Withdrawal $13,000 $750 $15,000 $ 0 $28,750 $28,750 = $28,750

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Possible examples include:

Assets Liabilitie

Cash + Accounts

Receivable + Supplies + Equipment = Accounts Payable + Annie Deweerd, Capital Explanation a) + $2,500 +$2,500 Owner Investment b) + $4,000 +$4,000 Revenue Totals $4,000 $ 0 $ 0 $2,500 $ 0 $6,500 c) + $150 + $150 Totals $4,000 $ 0 $150 $2,500 $150 $6,500 d) – $ 450 – $ 450 Sal. Expense Totals $3,550 $ 0 $150 $2,500 $150 $6,050 e)* Totals $3,550 $ 0 $150 $2,500 $150 $6,050

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Totals $2,150 $2,000 $150 $2,500 $150 $6,650

$6,800 = $6,800

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Rent expense 1,400

Net income $4,15

0

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Total assets $6,80

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g. Supplies of $150 were financed by accounts payable, a liability. h. Equipment of $2,500 was financed by owner investment, an

equity transaction.

i. Cash of $2,150 and Accounts receivable of $2,000 were financed by net income of $4,150. Net income includes the equity

Assets Liabilitie

Cash + Accounts

a) + $500 +$15,000 +$15,500 Owner Investment b) +$400 +$400 Totals $500 $ 0 $400 $15,000 $400 $15,500 c) +$600 +$600 Totals $500 $ 0 $1,000 $15,000 $1,000 $15,500 d)* Totals $500 $ 0 $1,000 $15,000 $1,000 $15,500 e) +$550 +$550 Revenue Totals $500 $550 $1,000 $15,000 $1,000 $16,050 f) +$600 +$600 Revenue Totals $500 $1,150 $1,000 $15,000 $1,000 $16,650

(65)

Totals $50 $1,150 $1,000 $15,000 $800 $16,400

$17,200 = $17,200

(66)

Net income $ 900

Pete’s Yard Care

(67)

Supplies 1,000

Equipment 15,000

0

(68)

Assets Liabilitie

Cash + Accounts

Bal. $4,000 $1,200 $900 $7,500 $4,000 $9,600 a) +$1,000 -$1,000 Totals $5,000 $200 $900 $7,500 $4,000 $9,600 b) -$2,000 -$2,000 Totals $3,000 $200 $900 $7,500 $2,000 $9,600 c) +$700 +$700 Revenue Totals $3,700 $200 $900 $7,500 $2,000 $10,300 d) -$500 -$500 Wage Exp. Totals $3,200 $200 $900 $7,500 $2,000 $9,800 e) -$1,200 -$1,200 Rent Exp. Totals $2,000 $200 $900 $7,500 $2,000 $8,600 f) -$600 -$600 Utilities Exp. Totals $1,400 $200 $900 $7,500 $2,000 $8,000 g) +$400 +$400 Revenue Totals $1,400 $600 $900 $7,500 $2,000 $8,400 h)* Totals $1,400 $600 $900 $7,500 $2,000 $8,400

(69)

Net loss $1,20

Balance Sheet July 31, 2011

(70)

Supplies 900

Equipment 7,500

0

Chapter 3 Analyzing and Recording

Transactions EXERCISES

Cash Accounts Payable

(a) 25,500 750 (b) (e) _14,100 _{14,100 (c)}

(d) 3,000 14,100 (e) 0 Balance

(h) 2,250 1,050 (g)

(71)

(f) 5,400 2,250 (h) Ella Tims, Withdrawals Balance 3,150 (i) 2,000 Balance 2,000 Office Supplies (b) 750 Fees Earned Balance 750 3,000 (d) 5,400 (f)

Office Equipment _{8,400 Balance}

(c) 14,100

Balance 14,100 Rent Expense

(g) 1,050

Balance 1,050

(72)

Feb. 2 2,800 60 23 _{800 Bal.}

20 2,400 1,000 25

800 26

Bal. 40 Neil Simon, Withdrawals

Jan. 31 -0-

Accounts Receivable _{Feb. 25} _1,000

Jan. 31 1,200 2,400 Feb. 20 Bal. 1,000

Feb. 12 15,000 18 1,900 Service Revenue Bal. 15,700 2,600 Jan. 31 2,800 Feb. 2 Prepaid Insurance _15,000 ₁₂ Jan. 31 -0- 1,900 18 Feb. 14 4,000 22,300 Bal. Bal. 4,000 Wages Expense

Computer Equipment _{Jan. 31} _1,080

Jan. 31 480 Feb. 26 800

Feb. 10 7,600 Bal. 1,880

Bal. 8,080

(73)

Notes Payable

-0- Jan. 31 7,600 Feb. 10 7,600 Bal.

Revenue recognition requires that when a transaction has occurred, it must be recorded whether cash has been received or not. A transaction has occurred when there has been an economic exchange — when something has been given up or received. On February 12, services were performed and, although cash will not be received until a future date, a revenue must be recorded because an economic exchange has occurred.

(74)

Cash Nels Sigurdsen, Withdrawals

Mar. 31 1,800 400 Apr. 10 Mar. 31 500

Apr. 2 780 300 15 Apr. 29 1,000

19 2,000 1,000 29 Bal. 1,500

Bal. 2,880

Repair Revenue

Accounts Receivable 14,000 Mar. 31

Mar. 31 4,800 2,000 Apr. 19 780 Apr. 2

Apr. 18 1,200 1,200 18

Bal. 4,000 15,980 Bal.

Repair Supplies Rent Expense

Mar. 31 1,400 Mar. 31 950 Apr. 9 890 Apr. 25 250 Bal. 2,290 Bal. 1,200 Equipment Mar. 31 7,400 Apr. 15 300 Bal. 7,700

(75)

1,240 Bal.

Nels Sigurdsen, Capital

2,350 Mar. 31

2,350 Bal.

(76)

2.

GENERAL JOURNAL Page 1

Date Account Titles and Explanations PR Debit Credit

2011

July 1 Cash ... 101 5,000

Sue Ware, Capital ... 301 5,000

To record investment by owner.

10 Equipment ... 150 2,500

Accounts Payable ... 201 2,500

Purchased equipment on credit.

12 Cash ... 101 10,000

Revenue ... 401 10,000

Performed services for cash.

14 Expenses ... 501 3,500 Cash ... 101 3,500 Paid expenses. 15 Accounts Receivable ... 106 1,500 Revenue ... 401 1,500

Completed services on account.

31 Sue Ware, Withdrawals ... 302 250

Cash ... 101 250

(77)

Exercise 3-4 (continued)

*Note: The student could use T-accounts or balance column format accounts as their general ledger. Both are shown in this solution.

1 and 3. Cash 101 July 1 5,000 3,500 July 14 12 10,000 250 31 Balance 11,250 Accts. Receivable 106 July 15 1,500 Equipment 150 July 10 2,500 Accounts Payable 201 2,500 July 10 Sue Ware, Capital 301 5,000 July 1 Sue Ware, Withdrawals 302 July 31 250

(78)

10,000 July 12 1,500 15 11,500 Balance Expenses 501 July 14 3,500

(79)

Exercise 3-4 (continued) 1 and 3.

Cash Account No. 101

Date Explanation PR Debit Credit Balance

2011 July 1 G1 5,000 5,000 12 G1 10,000 15,000 14 G1 3,500 11,500 31 G1 250 11,250

Accounts Receivable Account No. 106

2011

July 15

G1 1,500 1,500

Equipment Account No. 150

2011

July 10 G1 2,500 2,500

Accounts Payable Account No. 201

2011

July 10 G1 2,500 2,500

Sue Ware, Capital Account No. 301

(80)

July 1 G1 5,000 5,000

Sue Ware, Withdrawals Account No. 302

2011

July 31 G1 250 250

Revenue Account No. 401

2011

July 12 G1 10,000 10,000

15 G1 1,500 11,500

Expenses Account No. 501

2011 July 14 G1 3,500 3,500 Exercise 3-4 (continued) 4. DelaWare Trial Balance July 31, 2011 Acct.

(81)

401 Revenue ... 11,500 501 Expenses ... 3,5 00 Totals ... $19,000 $19,000 5. DelaWare Income Statement

For Month Ended July 31, 2011

Revenue ... $11,500 Expenses... 3,500 Net income ... $8,000

DelaWare

Statement of Owner’s Equity For Month Ended July 31, 2011

Sue Ware, capital, July 1 ... $ 0 Add: Investments by owner ... $5,000

Net income... 8,000 13,000 Total ... 13,000

Less: Withdrawals by owner ... 250

(82)

5. (concluded)

DelaWare Balance Sheet

July 31, 2011

Assets Liabilities

Cash ... $11,250 Accounts payable ... $ 2,500 Accounts receivable ... 1,500

Equipment ... 2,500 Owner’s Equity

Sue Ware, capital ... 12,750 Total liabilities and

Total assets ... $15,250 owner’s equity ... $15,250

Accounts receivable result from credit sales to customers (debit accounts receivable and credit a revenue). Sales, or revenue, is part of equity. As revenues on account are recorded, assets on the one side of the accounting equation increase and equity on the opposite side of the accounting equation also increases. Therefore, accounts receivable are financed by, or created by, an equity transaction.

Note: Students could choose any account number within the specified range.

Account

Number Account Name

110 Cash

(83)

310 Wes Bosse, Capital

320 Wes Bosse, Withdrawals

410 Consulting Revenues

510 Salaries Expense

520 Rent Expense

(84)

Cash 110 Accounts Receivable 115 Office Equipment 160 Accounts Payable 210

Bal 11,500 2,000 Feb 5 Bal 6,000 Bal 12,500 Feb 5 2,000 3,000 Bal

Feb 1 8,500 500 17 1,000 Bal

10 2,500 10,000 28

Bal 10,000

Unearned Revenue 215 Wes Bosse, Capital 310 Wes Bosse, Withdrawals 320 Consulting Revenues 410

500 Bal 9,500 Bal Bal 2,000 37,500 Bal

2,500 Feb 10 Feb 17 500 8,500 Feb 1

3,000 Bal Bal 2,500 46,000 Bal

Salaries Expense 510 Rent Expense 520 Utilities Expense 530

Bal 10,000 Bal 7,500 Bal 1,000

Feb 28 10,000 Bal 20,000 5 by M cGraw -H ill R ye rso n L im ited. A ll rig hts res erv ed . al fo r C hapt er 3