Chapter 2
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Analyzing
and Recording Transactions
QUESTIONS
1. a. Common
asset accounts: cash, accounts receivable, notes receivable, prepaid expenses
(rent, insurance, etc.), office supplies, store supplies, equipment, building,
and land.
b. Common
liability accounts: accounts payable, notes payable, and unearned revenue,
wages payable, and taxes payable.
c. Common equity accounts: common stock and retained
earnings and dividends.
2. A note payable is formal promise, usually
denoted by signing a promissory note to pay a future amount. A note payable can
be short-term or long-term, depending on when it is due, and usually carries an
interest charge based on amount and time. An account payable also references an
amount owed to an entity. An account payable can be oral or implied, and often
arises from the purchase of inventory, supplies, or services. An account payable is usually short-term and
not charged interest.
3. There are several steps in processing
transactions: (1) Identify and analyze the transaction or event, including the
source document(s), (2) apply double-entry accounting, (3) record the
transaction or event in a journal, and (4) post the journal entry to the
ledger. These steps would be followed by
preparation of a trial balance and then with the reporting of financial
statements.
4. A general journal can be used to record any
business transaction or event.
5. Debited accounts are commonly recorded
first. The credited accounts are commonly indented.
6. Expense accounts have debit balances
because they are decreases to equity (and equity has a credit balance).
7. A transaction is first recorded in a
journal to create a complete record of the transaction in one place. (The journal is often referred to as the book
of original entry.) This process reduces
the likelihood of errors in ledger accounts.
8. The recordkeeper prepares a trial balance
to summarize the contents of the ledger and to verify the equality of total
debits and total credits. The trial
balance also serves as a helpful internal document for preparing financial
statements and other reports.
9. The
error should be corrected with a separate (subsequent) correcting entry. The
entry’s explanation should describe why the correction is necessary.
10. The four financial statements are: income
statement, balance sheet, statement of retained earnings, and statement of cash
flows.
11. The income statement lists the types and
amounts of revenues and expenses, and reports whether the business earned a net
income (also called profit or earnings) or a net loss.
12. An income statement user must know what time
period is covered to judge whether the company’s performance is
satisfactory. For example, a statement
user would not be able to assess whether the amounts of revenue and net income
are satisfactory without knowing whether they were earned over a week, a month,
a quarter, or a year.
13. The balance sheet provides information that
helps users understand a company’s financial position at a point in time. Accordingly, it is often called the statement
of financial position. The balance sheet
lists the types and dollar amounts of assets, liabilities, and equity of the
business.
14. (a) Assets are probable future economic
benefits obtained or controlled by a specific entity as a result of past
transactions or events. (b) Liabilities are probable future sacrifices of
economic benefits arising from present obligations of a particular entity to
transfer assets or provide services to other entities in the future as a result
of past transactions or events. (c)
Equity is the residual interest in the assets of an entity that remains after
deducting its liabilities. (d) Net
assets refer to equity.
15. The balance sheet is sometimes referred to as
the statement of financial position.
16. Debit balance accounts on the Research In
Motion balance sheet include: Cash and cash equivalents; Short-term
investments; Accounts receivable; Other receivables; Inventories; Other current
assets; Deferred income tax asset; Long-term investments; Property, plant and
equipment; Intangible assets; Goodwil; Treasury stock
Credit balance accounts on the Research In
Motion balance sheet include: Accounts payable; Accrued liabilities; Income
taxes payable; Deferred revenue; Deferred income tax liability; Common stock;
Additional paid-in capital; Retained earnings; Accumulated other comprehensive income.
17. The asset account with receivable in its account title is: Accounts receivable. The liability with payable in its account title is: Accounts payable.
18. Palm’s revenue account is titled “Revenues.”
19. Nokia calls the asset referring to its
merchandise available for sale: “Inventories.”
Quick
Studies
Quick Study 2-1 (5
minutes)
a. B Balance sheet
b. B Balance sheet
c. I Income statement
d. B Balance sheet
e. B Balance sheet
f. I Income statement
g. B Balance sheet
h. E Statement of retained earnings
i. B Balance sheet
Quick
Study 2-2 (10 minutes)
The
likely source documents include:
a. Bank
statement
b. Sales
ticket
e. Telephone
bill
f. Invoice
from supplier
Quick
Study 2-3 (10 minutes)
|
a.
|
Debit
|
e.
|
Credit
|
i.
|
Credit
|
|
b.
|
Debit
|
f.
|
Debit
|
j.
|
Credit
|
|
c.
|
Credit
|
g.
|
Credit
|
|
|
|
d.
|
Debit
|
h.
|
Credit
|
|
|
Quick Study 2-4 (10
minutes)
|
a.
|
Debit
|
d.
|
Debit
|
g.
|
Debit
|
|
b.
|
Debit
|
e.
|
Debit
|
h.
|
Credit
|
|
c.
|
Credit
|
f.
|
Debit
|
i.
|
Credit
|
Quick Study 2-5 (10
minutes)
|
a.
|
Credit
|
e.
|
Credit
|
i.
|
Debit
|
|
b.
|
Debit
|
f.
|
Debit
|
j.
|
Credit
|
|
c.
|
Debit
|
g.
|
Credit
|
k.
|
Debit
|
|
d.
|
Credit
|
h.
|
Credit
|
l.
|
Debit
|
Quick Study 2-6 (15
minutes)
Jan. 15 Cash....................................................................... 75,000
Equipment ............................................................. 30,000
Common Stock............................................... 105,000
Owner invests cash and equipment in exchange
for stock.
21 Office
Supplies....................................................... 650
Accounts Payable........................................... 650
Purchased office supplies on credit.
25 Cash....................................................................... 8,700
Remodeling Services
Revenue....................... 8,700
Received cash for remodeling services.
30 Cash....................................................................... 4,000
Unearned Remodeling
Services Revenue....... 4,000
Received cash in advance for remodeling
services.
Quick Study 2-7 (10
minutes)
The correct answer is f.
Explanation: If a $2,250 debit to
Utilities Expense is incorrectly posted as a credit, the effect is to
understate the Utilities Expense debit balance by $4,500. This causes the Debit column total on the
trial balance to be $4,500 less than the Credit column total.
Quick
Study 2-8 (10 minutes)
|
a.
|
B
|
e.
|
I
|
i.
|
B
|
|
b.
|
I
|
f.
|
I
|
j.
|
I
|
|
c.
|
E
|
g.
|
I
|
k.
|
B
|
|
d.
|
B
|
h.
|
B
|
l.
|
B
|
Quick
Study 2-9 (10 minutes)
a. Accounting under IFRS follows the same debit
and credit system as under US GAAP.
b. The same four basic financial statements are
prepared under IFRS and US GAAP: income statement, balance sheet, statement of
changes in equity, and statement of cash flows. Although some variations from
these titles exist within both systems, the four basic statements are present.
c. Accounting reports under both IFRS and US GAAP
are likely different depending on the extent of accounting controls and
enforcement. For example, the absence of controls and enforcement increase the
possibility of fraudulent transactions and misleading financial statements.
Without controls and enforcement, all accounting systems run the risk of abuse
and manipulation.
Exercises
Exercise 2-1 (10 minutes)
2 a. Record relevant transactions in a journal.
4 b. Prepare
and analyze the trial balance.
1 c. Analyze each transaction from source
documents.
3 d. Post
journal information to ledger accounts.
Exercise
2-2 (10 minutes)
|
a.
|
5
|
d.
|
2
|
|
b.
|
4
|
e.
|
1
|
|
c.
|
3
|
|
|
Exercise
2-3 (5 minutes)
|
a.
|
1
|
b.
|
2
|
Exercise
2-4 (15 minutes)
|
|
|
Type of
|
Normal
|
Increase
|
|
|
Account
|
Account
|
Balance
|
(Dr. or Cr.)
|
|
a.
|
Fees Earned...............................
|
revenue
|
credit
|
credit
|
|
b.
|
Equipment.................................
|
asset
|
debit
|
debit
|
|
c.
|
Notes Payable............................
|
liability
|
credit
|
credit
|
|
d.
|
Common Stock..........................
|
equity
|
credit
|
credit
|
|
e.
|
Cash...........................................
|
asset
|
debit
|
debit
|
|
f.
|
Legal Expense............................
|
expense
|
debit
|
debit
|
|
g.
|
Prepaid Insurance......................
|
asset
|
debit
|
debit
|
|
h.
|
Land........................................... ...................................................
|
asset
|
debit
|
debit
|
|
i.
|
Accounts
Receivable.................
|
asset
|
debit
|
debit
|
|
j.
|
Dividends...................................
|
equity
|
debit
|
debit
|
|
k.
|
License Fee
Revenue.................
|
revenue
|
credit
|
credit
|
|
l.
|
Unearned Revenue.....................
|
liability
|
credit
|
credit
|
Exercise 2-5 (15
minutes)
Of the items listed, the following effects
should be included:
a. $34,500 increase in a liability account.
b. $7,500 increase in the Cash account.
e. $48,000 increase in a revenue account.
Explanation: This transaction created a $48,000 revenue,
which equals the value of the service provided. Payment is received in the form
of a $7,500 increase in cash, a $75,000 increase in the computer equipment, and
a $34,500 increase in the company’s liabilities. The net value received by the company is
$48,000.
Exercise
2-6 (15 minutes)
|
1.
|
Beginning cash
balance (debit)...............................................
|
$ ?
|
|
|
Cash received in
October (debits)...........................................
|
97,500
|
|
|
Cash disbursed in
October (credits).......................................
|
(101,250)
|
|
|
Ending cash
balance (debit).....................................................
|
$
16,800
|
|
|
|
|
|
|
Beginning cash
balance (debit)...............................................
|
$ 20,550
|
|
|
|
|
|
2.
|
Beginning
accounts receivable (debit)..................................
|
$
97,500
|
|
|
Sales on account
in October (debits).....................................
|
?
|
|
|
Collections on
account in October (credits).........................
|
(88,950)
|
|
|
Ending accounts
receivable (debit)........................................
|
$100,500
|
|
|
|
|
|
|
Sales on account
in October (debits).....................................
|
$ 91,950
|
|
|
|
|
|
3.
|
Beginning
accounts payable (credit)......................................
|
$147,000
|
|
|
Purchases on
account in October (credits)..........................
|
270,000
|
|
|
Payments on
accounts in October (debits)...........................
|
( ?)
|
|
|
Ending accounts
payable (credit)............................................
|
$136,500
|
|
|
|
|
|
|
Payments on
accounts in October (debits)...........................
|
$280,500
|
Exercise 2-7 (25
minutes)
Aug. 1 Cash................................................................ 7,500
Photography Equipment.................................. 32,500
Common Stock.......................................... 40,000
Owner investment in
business in exchange for stock.
2 Prepaid Insurance........................................... 3,000
Cash.......................................................... 3,000
Acquired 2 years of insurance coverage.
5 Office
Supplies................................................ 1,400
Cash.......................................................... 1,400
Purchased office supplies.
20 Cash................................................................ 2,650
Photography Fees Earned......................... 2,650
Collected photography fees.
31 Utilities Expense............................................. 875
Cash.......................................................... 875
Paid for August utilities.
Exercise
2-8 (30 minutes)
|
Cash
|
|
Photography Equipment
|
|||||||
|
Aug. 1
|
7,500
|
|
Aug. 2
|
3,000
|
|
Aug. 1
|
32,500
|
|
|
|
20
|
2,650
|
|
5
|
1,400
|
|
|
|
|
|
|
|
|
|
31
|
875
|
|
Common Stock
|
|||
|
Balance
|
4,875
|
|
|
|
|
|
|
Aug. 1
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Supplies
|
|
Photography Fees Earned
|
|||||||
|
Aug. 5
|
1,400
|
|
|
|
|
|
|
Aug. 20
|
2,650
|
|
|
|
|
|
|
|||||
|
Prepaid Insurance
|
|
Utilities Expense
|
|||||||
|
Aug. 2
|
3,000
|
|
|
|
|
Aug. 31
|
875
|
|
|
|
POSE FOR PICS
|
||||
|
Trial Balance
|
||||
|
August 31
|
||||
|
|
Debit
|
|
Credit
|
|
|
Cash.................................................
|
$
4,875
|
|
|
|
|
Office supplies...............................
|
1,400
|
|
|
|
|
Prepaid insurance.........................
|
3,000
|
|
|
|
|
Photography equipment.............
|
32,500
|
|
|
|
|
Common stock.............................. ...........................................................
|
|
|
$40,000
|
|
|
Photography fees earned...........
|
|
|
2,650
|
|
|
Utilities expense............................
|
875
|
|
______
|
|
|
Totals...............................................
|
$42,650
|
|
$42,650
|
|
Exercise
2-9 (30 minutes)
a. Cash......................................................................... 12,750
Common Stock................................................. 12,750
Owner invested in the business in
exchange for stock.
b. Office Supplies........................................................ 375
Cash................................................................. 375
Purchased supplies with cash.
c. Office Equipment..................................................... 7,050
Accounts Payable............................................. 7,050
Purchased office equipment on credit.
d. Cash......................................................................... 1,500
Fees Earned...................................................... 1,500
Received cash from customer for services.
e. Accounts Payable.................................................... 7,050
Cash................................................................. 7,050
Made payment toward account payable.
f. Accounts Receivable............................................... 2,700
Fees Earned...................................................... 2,700
Billed customer for services provided.
g. Rent Expense........................................................... 525
Cash................................................................. 525
Paid for this period’s rental charge.
h. Cash......................................................................... 1,125
Accounts Receivable........................................ 1,125
Received cash toward an account receivable.
i. Dividends................................................................. 1,000
Cash................................................................. 1,000
Pays cash dividends.
Exercise
2-9 (concluded)
|
Cash
|
|
Accounts Payable
|
||||||||||||
|
(a)
|
12,750
|
|
(b)
|
375
|
|
(e)
|
7,050
|
(c)
|
7,050
|
|||||
|
(d)
|
1,500
|
|
(e)
|
7,050
|
|
|
|
Balance
|
0
|
|||||
|
(h)
|
1,125
|
|
(g)
|
525
|
|
|
|
|
|
|||||
|
|
|
|
(i)
|
1,000
|
|
|
|
|
|
|||||
|
Balance
|
6,425
|
|
|
|
|
Common Stock
|
||||||||
|
|
|
|
|
|
|
|
|
(a)
|
12,750
|
|||||
|
|
|
|
|
|
|
|
|
Balance
|
12,750
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Accounts
Receivable
|
|
Dividends
|
||||||||||||
|
(f)
|
2,700
|
|
(h)
|
1,125
|
|
(i)
|
1,000
|
|
|
|||||
|
Balance
|
1,575
|
|
|
|
|
Balance
|
1,000
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Office Supplies
|
|
Fees Earned
|
||||||||||||
|
(b)
|
375
|
|
|
|
|
|
|
(d)
|
1,500
|
|||||
|
Balance
|
375
|
|
|
|
|
|
|
(f)
|
2,700
|
|||||
|
|
|
|
|
|
|
|
|
Balance
|
4,200
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Office Equipment
|
|
Rent Expense
|
||||||||||||
|
(c)
|
7,050
|
|
|
|
|
(g)
|
525
|
|
|
|||||
|
Balance
|
7,050
|
|
|
|
|
Balance
|
525
|
|
|
|||||
Exercise 2-10 (15 minutes)
|
DEXTER COMPANY
|
||
|
Trial Balance
|
||
|
May 31, 2011
|
||
|
|
Debit
|
Credit
|
|
Cash..................................................
|
$
6,425
|
|
|
Accounts receivable......................
|
1,575
|
|
|
Office supplies................................
|
375
|
|
|
Office equipment............................
|
7,050
|
|
|
Accounts payable..........................
|
$
0
|
|
|
Common stock...............................
|
12,750
|
|
|
Dividends............................................
|
1,000
|
|
|
Fees earned.....................................
|
4,200
|
|
|
Rent expense...................................
|
525
|
_______
|
|
Totals..................................................
|
$16,950
|
$16,950
|
Exercise
2-11 (20 minutes)
Transactions
that created revenues:
b. Accounts Receivable.................................. 1,350
Services Revenue................................. 1,350
Provided services on credit.
c. Cash........................................................... 1,575
Services Revenue................................. 1,575
Provided services for cash.
[Note: Revenues are inflows of assets (or
decreases in liabilities) received in exchange for goods or services provided
to customers.]
Transactions
that did not create revenues along with the reasons are:
a. This transaction brought in cash, but this
is an owner investment.
d. This transaction brought in cash, but it
created a liability because the services have not yet been provided to the
client.
e. This transaction changed the form of the
asset from accounts receivable to cash.
Total assets were not increased (revenue was recognized when the
receivable was originally recorded).
f. This transaction brought in cash and
increased assets, but it also increased a liability by the same amount (no
goods or services were provided to generate revenue).
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