CHAPTER 2 The Recording Process ASSIGNMENT CLASSIFICATION TABLE Study Objectives
Questions
Brief Exercises
A Problems
B Problems
1, 3, 10
1A, 2A, 3A, 5A
1B, 2B, 3B, 5B
Exercises
1.
Explain what an account is and how it helps in the recording process.
1
2.
Define debits and credits and explain how they are used to record business transactions.
2, 3, 4, 5, 6, 7, 8, 9, 14
1, 2, 5
3.
Identify the basic steps in the recording process.
10, 19
4
4.
Explain what a journal is and how it helps in the recording process.
11, 12, 13, 14, 16
3, 6
2, 4, 6, 7, 8
1A, 2A, 3A, 5A
1B, 2B, 3B, 5B
5.
Explain what a ledger is and how it helps in the recording process.
17
6.
Explain what posting is and how it helps in the recording process.
15, 17
7, 8
5, 8
2A, 3A, 5A
2B, 3B, 5B
7.
Prepare a trial balance and explain its purposes.
18, 20
9, 10
5, 6, 7, 9, 10
2A, 3A, 4A, 5A
2B, 3B, 4B, 5B
2-1
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Journalize a series of transactions.
Simple
20−30
2A
Journalize transactions, post, and prepare a trial balance.
Simple
30−40
3A
Journalize transactions, post, and prepare a trial balance and financial statements.
Moderate
40−50
4A
Prepare a correct trial balance.
Moderate
30−40
5A
Journalize transactions, post, and prepare a trial balance.
Moderate
40−50
1B
Journalize a series of transactions.
Simple
20−30
2B
Journalize transactions, post, and prepare a trial balance.
Simple
30−40
3B
Journalize and post transactions, prepare a trial balance, and determine the elements of financial statements.
Moderate
40−50
4B
Prepare a correct trial balance.
Moderate
30−40
5B
Journalize transactions, post, and prepare a trial balance.
Moderate
40−50
2-2
2-3
Define debits and credits and explain how they are used to record business transactions.
Identify the basic steps in the recording process.
Explain what a journal is and how it helps in the recording process.
Explain what a ledger is and how it helps in the recording process.
Explain what posting is and how it helps in the recording process.
Prepare a trial balance and explain its purposes.
2.
3.
4.
5.
6.
7.
Broadening Your Perspective
Explain what an account is and how it helps in the recording process.
1.
Study Objective
Q2-11 Q2-13 Q2-14
Q2-12
BE2-9 E2-5 E2-6 E2-7
Q2-18
P2-1B P2-2B P2-3B P2-5B
E2-10 P2-2B Q2-20 P2-2A P2-3B BE2-10 P2-3A P2-5B E2-9 P2-4A P2-5A
P2-2A P2-3B P2-3A P2-5B P2-5A P2-2B
E2-7 E2-8 P2-1A P2-2A P2-3A P2-5A
Analysis
P2-4B
Synthesis
Evaluation
Financial Reporting Group Decision Case Comparative Analysis Communication Ethics Case Research Case Group Decision Interpreting Exploring the Web Financial Case Cookie Chronicle Statements Global Focus
BE2-7 BE2-8 E2-5 E2-8
Q2-16 BE2-3 BE2-6 E2-2 E2-4 E2-6
Q2-9 E2-10 P2-3A P2-2B Q2-14 P2-1A P2-5A P2-3B BE2-1 P2-2A P2-1B P2-5B BE2-2 BE2-5 E2-1 E2-3
Application
Q2-15 Q2-17
Q2-17
Q2-19 BE2-4
Q2-2 Q2-3 Q2-4 Q2-5 Q2-6 Q2-7 Q2-8
Comprehension
Q2-10
Q2-1
Knowledge
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
BLOOM'S TAXONOMY TABLE
ANSWERS TO QUESTIONS 1.
A T account has the following parts: (a) the title, (b) the left or debit side, and (c) the right or credit side. Because the alignment of these parts of an account resembles the letter T, it is referred to as a T account.
2.
Disagree. The terms debit and credit mean left and right respectively.
3.
Britney is incorrect. The double-entry system merely records the dual effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect.
4.
Julia is incorrect. A debit balance only means that debit amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable nor unfavorable.
5.
(a) Asset accounts are increased by debits and decreased by credits. (b) Liability accounts are decreased by debits and increased by credits. (c) Revenues, common stock, and retained earnings are increased by credits and decreased by debits. Expenses and dividends are increased by debits and decreased by credits.
6.
(a) Accounts Receivable—debit balance. (b) Cash—debit balance. (c) Dividends—debit balance. (d) Accounts Payable—credit balance. (e) Service Revenue—credit balance. (f) Salaries Expense—debit balance. (g) Common Stock—credit balance.
7.
(a) (b) (c) (d) (e)
8.
(a) Debit Supplies and credit Accounts Payable. (b) Debit Cash and credit Notes Payable. (c) Debit Salaries Expense and credit Cash.
9.
(1) (2) (3) (4) (5) (6)
Cash—both debit and credit entries. Accounts Receivable—both debit and credit entries. Dividends—debit entries only. Accounts Payable—both debit and credit entries. Salaries Expense—debit entries only. Service Revenue—credit entries only.
The (1) (2) (3)
basic steps in the recording process are: Analyze each transaction for its effect on the accounts. Enter the transaction information in a journal (book of original entry). Transfer the journal information to the appropriate accounts in the ledger (book of accounts).
10.
Accounts Receivable—asset—debit balance. Accounts Payable—liability—credit balance Equipment—asset—debit balance. Dividends—stockholders’ equity—debit balance. Supplies—asset—debit balance.
2-4
Questions Chapter 2 (Continued) 11.
The (1) (2) (3)
12.
(a) The debit should be written first. (b) The credit should be indented.
13.
When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. An example of a compound entry is the purchase of equipment, part of which is paid for with cash and the remainder is on account.
14.
(a) (b)
15.
The advantage of the last step in the posting process is to indicate that the item has been posted.
16.
(a) Cash ............................................................................................ Common Stock .................................................................... (Invested cash in the business in exchange for stock) (b)
(c)
(d)
17.
advantages of using the journal in the recording process are: It discloses in one place the complete effects of a transaction. It provides a chronological record of all transactions. It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.
No, debits and credits should not be recorded directly in the ledger. The advantages of using the journal are: 1. It discloses in one place the complete effects of a transaction. 2. It provides a chronological record of all transactions. 3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.
12,000 12,000
Prepaid Insurance ........................................................................ Cash.................................................................................... (Paid one-year insurance policy)
720
Supplies ....................................................................................... Accounts Payable ................................................................ (Purchased supplies on account)
900
Cash ............................................................................................ Service Revenue ................................................................. (Received cash for services rendered)
3,000
720
900
3,000
(a) The entire group of accounts maintained by a company, including all the asset, liability, and stockholders’ equity accounts, is referred to collectively as the ledger. (b) The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and identify their location in the ledger. The numbering system used to identify the accounts usually starts with the balance sheet accounts and follows with the income statement accounts.
2-5
Questions Chapter 2 (Continued) 18.
A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove that the debits equal the credits after posting. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements.
19.
Joe (b) (c) (a) (e) (d)
20.
(a) The trial balance would balance. (b) The trial balance would not balance.
is not correct. The proper sequence is as follows: Business transaction occurs. Information is entered in the journal. Debits and credits are posted to the ledger. Trial balance is prepared. Financial statements are prepared.
2-6
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2-1
1. 2. 3. 4. 5. 6.
Accounts Payable Advertising Expense Service Revenue Accounts Receivable Common Stock Dividends
(a) Debit Effect Decrease Increase Decrease Increase Decrease Increase
(b) Credit Effect Increase Decrease Increase Decrease Increase Decrease
(c) Normal Balance Credit Debit Credit Debit Credit Debit
BRIEF EXERCISE 2-2
June 1 2 3 12
Account Debited Cash Equipment Rent Expense Accounts Receivable
Account Credited Common Stock Accounts Payable Cash Service Revenue
BRIEF EXERCISE 2-3 June 1
2
3
12
Cash ....................................................................... Common Stock ..............................................
4,000
Equipment.............................................................. Accounts Payable .........................................
900
Rent Expense ........................................................ Cash................................................................
800
Accounts Receivable............................................ Service Revenue............................................
300
2-7
4,000
900
800
300
BRIEF EXERCISE 2-4 The basic steps in the recording process are: 1.
Analyze each transaction. In this step, business documents are examined to determine the effects of the transaction on the accounts.
2.
Enter each transaction in a journal. This step is called journalizing and it results in making a chronological record of the transactions.
3.
Transfer journal information to ledger accounts. This step is called posting. Posting makes it possible to accumulate the effects of journalized transactions on individual accounts.
BRIEF EXERCISE 2-5 (a) Effect on Accounting Equation
(b)
Aug. 1
The asset Cash is increased; the stockholders’ equity account Common Stock is increased.
Debits increase assets: debit Cash $5,000. Credits increase stockholders’ equity: credit Common Stock $5,000.
4
The asset Prepaid Insurance is increased; the asset Cash is decreased.
Debits increase assets: debit Prepaid Insurance $1,800. Credits decrease assets: credit Cash $1,800.
16
The asset Cash is increased; the revenue Service Revenue is increased.
Debits increase assets: debit Cash $800. Credits increase revenues: credit Service Revenue $800.
27
The expense Salaries Expense is increased; the asset Cash is decreased.
Debits increase expenses: debit Salaries Expense $1,000. Credits decrease assets: credit Cash $1,000.
2-8
Debit-Credit Analysis
BRIEF EXERCISE 2-6 Aug. 1
4
16
27
Cash ........................................................................ Common Stock...............................................
5,000
Prepaid Insurance.................................................. Cash ................................................................
1,800
Cash ........................................................................ Service Revenue ............................................
800
Salaries Expense ................................................... Cash ................................................................
1,000
5,000
1,800
800
1,000
BRIEF EXERCISE 2-7 Cash 5/12 2,400 5/15 3,000 Ending bal. 5,400
5/5
Service Revenue 5/5 6,000 5/15 3,000 Ending bal. 9,000
Accounts Receivable 6,000 5/12 2,400
Ending bal. 3,600
BRIEF EXERCISE 2-8 Cash Date May 12 15
Explanation
Ref. J1 J1
2-9
Debit 2,400 3,000
Credit
Balance 2,400 5,400
BRIEF EXERCISE 2-8 (Continued) Accounts Receivable Date Explanation May 5 12 Service Revenue Date Explanation May 5 15
Ref. J1 J1
Ref. J1 J1
Debit 6,000
Debit
Credit 2,400
Balance 6,000 3,600
Credit 6,000 3,000
Balance 6,000 9,000
BRIEF EXERCISE 2-9 P. J. FARVE COMPANY Trial Balance June 30, 2006 Cash .............................................................................. Accounts Receivable .................................................. Equipment .................................................................... Accounts Payable........................................................ Common Stock ............................................................ Dividends...................................................................... Service Revenue.......................................................... Salaries Expense ......................................................... Rent Expense ...............................................................
2-10
Debit $ 6,800 3,000 17,000
Credit
$ 9,000 20,000 1,200 6,000 6,000 1,000 $35,000
.
$35,000
BRIEF EXERCISE 2-10 CHENG CORPORATION Trial Balance December 31, 2006 Cash .............................................................................. Prepaid Insurance........................................................ Accounts Payable........................................................ Unearned Revenue ...................................................... Common Stock ............................................................ Dividends...................................................................... Service Revenue .......................................................... Salaries Expense ......................................................... Rent Expense ...............................................................
2-11
Debit $16,800 3,500
Credit
$ 3,000 4,200 13,000 4,500 25,600 18,600 2,400 $45,800
.
$45,800
Asset
Liability
Stockholders’ Equity
20
23
28
9
Stockholders’ Equity
Asset
3
16
Asset
Jan. 2
Asset
Asset
Date
11
(a) Basic Type
2-12
Dividends
Accounts Payable
Cash
Advertising Expense
Accounts Receivable
Supplies
Equipment
Cash
(b) Specific Account
(c)
Increase
Decrease
Increase
Increase
Increase
Increase
Increase
Increase
Effect
Account Debited
Debit
Credit
Debit
Debit
Debit
Debit
Debit
Debit
(d) Normal Balance
Asset
Asset
Asset
Asset
Stockholders’ Equity
Liability
Asset
Stockholders’ Equity
(a) Basic Type
Cash
Cash
Accounts Receivable
Cash
Service Revenue
Accounts Payable
Cash
Common Stock
(b) Specific Account
Decrease
Decrease
Decrease
Decrease
Increase
Increase
Decrease
Increase
Effect
(c)
Account Credited
Debit
Debit
Debit
Debit
Credit
Credit
Debit
Credit
(d) Normal Balance
SOLUTIONS TO EXERCISES
EXERCISE 2-1
EXERCISE 2-2 General Journal Date
Account Titles and Explanation
Jan. 2
Cash Common Stock
3
9
11
16
20
23
28
Ref.
Debit
J1 Credit
15,000 15,000
Equipment Cash
4,000 4,000
Supplies Accounts Payable
500 500
Accounts Receivable Service Revenue
1,800
Advertising Expense Cash
200
Cash Accounts Receivable
700
Accounts Payable Cash
300
1,800
200
700
300
Dividends Cash
1,000 1,000
EXERCISE 2-3 Oct. 1
Debits increase assets: debit Cash $20,000. Credits increase Stockholders’ equity: credit Common Stock $20,000.
2
No transaction.
3
Debits increase assets: debit Office Furniture $1,900. Credits increase liabilities: credit Accounts Payable $1,900.
2-13
EXERCISE 2-3 (Continued) Oct. 6
Debits increase assets: debit Accounts Receivable $3,200. Credits increase revenues: credit Service Revenue $3,200.
27
Debits decrease liabilities: debit Accounts Payable $700. Credits decrease assets: credit Cash $700.
30
Debits increase expenses: debit Salaries Expense $2,000. Credits decrease assets: credit Cash $2,000.
EXERCISE 2-4 General Journal Date Oct. 1
Account Titles and Explanation Cash Common Stock
Ref.
Debit 20,000
20,000
2
No entry—not a transaction.
3
Office Furniture Accounts Payable
1,900
Accounts Receivable Service Revenue
3,200
6
27
30
Credit
1,900
3,200
Accounts Payable Cash
700 700
Salaries Expense Cash
2,000 2,000
2-14
EXERCISE 2-5 (a)
Aug. 1 10 31 Bal.
Cash 3,000 Aug. 12 2,400 900 5,300
Accounts Receivable Aug. 25 1,600 Aug. 31 Bal. 700
1,000
900
Office Equipment Aug. 12 5,000
(b)
Notes Payable Aug. 12
4,000
Common Stock Aug. 1
3,000
Service Revenue Aug. 10 25 Bal.
2,400 1,600 4,000
ROBERTA MENDEZ, INVESTMENT BROKER Trial Balance August 31, 2006 Cash .......................................................................... Accounts Receivable............................................... Office Equipment ..................................................... Notes Payable .......................................................... Common Stock......................................................... Service Revenue ......................................................
Debit $ 5,300 700 5,000
_______
$11,000
2-15
Credit
$ 4,000 3,000 4,000 $11,000
EXERCISE 2-6 (a)
General Journal
Date Apr. 1
12
15
25
29
30
Account Titles and Explanation Cash Common Stock (Investment of cash in exchange for stock)
Ref.
Debits 10,000
10,000
Cash Service Revenue (Received cash for services provided)
900
Salaries Expense Cash (Paid salaries to date)
600
Accounts Payable Cash (Paid creditors on account) Cash Accounts Receivable (Received cash in payment of account) Cash Unearned Revenue (Received cash for future services)
2-16
Credit
900
600
1,500 1,500
400 400
1,000 1,000
EXERCISE 2-6 (Continued) (b)
PADRE LANDSCAPING COMPANY Trial Balance April 30, 2006 Debit Cash ...................................................................... $10,200 Accounts Receivable........................................... 2,800 Supplies ................................................................ 1,800 Accounts Payable ................................................ Unearned Revenue .............................................. Common Stock..................................................... Service Revenue .................................................. Salaries Expense.................................................. 600 $15,400
Credit
$
300 1,000 10,000 4,100 _______ $15,400
EXERCISE 2-7 (a) Oct. 1
10
10
20
20
Cash ................................................................. Common Stock........................................ (Investment of cash in business in exchange for stock)
5,000
Cash ................................................................. Service Revenue ..................................... (Received cash for services provided)
650
Cash ................................................................. Notes Payable.......................................... (Obtained loan from bank)
3,000
Cash ................................................................. Accounts Receivable.............................. (Received cash in payment of account)
500
Accounts Receivable...................................... Service Revenue ..................................... (Billed clients for services provided)
940
2-17
5,000
650
3,000
500
940
EXERCISE 2-7 (Continued) (b)
MAXIM CO. Trial Balance October 31, 2006 Cash ...................................................................... Accounts Receivable........................................... Supplies ................................................................ Furniture ............................................................... Notes Payable ...................................................... Accounts Payable................................................ Common Stock .................................................... Dividends.............................................................. Service Revenue .................................................. Store Wages Expense ......................................... Rent Expense .......................................................
Debit $ 8,200 1,240 400 2,000
Credit
$ 3,000 500 7,000 300 2,390 500 250 $12,890
_______
$12,890
EXERCISE 2-8 (a)
General Journal
Date Sept. 1
5
25
30
Account Titles and Explanation Cash Common Stock
Ref. 101 311
Debit 10,000
Equipment Cash Accounts Payable
157 101 201
12,000
Accounts Payable Cash
201 101
3,000
Dividends Cash
332 101
500
2-18
J1 Credit 10,000
6,000 6,000
3,000
500
EXERCISE 2-8 (Continued) (b) Cash Date Sept. 1 5 25 30
Explanation
Equipment Date Explanation Sept. 5
Accounts Payable Date Explanation Sept. 5 25
Common Stock Date Explanation Sept. 1
Dividends Date Explanation Sept. 30
Ref. J1 J1 J1 J1
Ref. J1
Ref. J1 J1
Ref. J1
Ref. J1
2-19
Debit 10,000
Credit 6,000 3,000 500
Debit 12,000
Debit
Credit
No. 157 Balance 12,000
Credit 6,000
No. 201 Balance 6,000 3,000
3,000
Debit
Debit 500
No. 101 Balance 10,000 4,000 1,000 500
Credit 10,000
Credit
No. 311 Balance 10,000
No. 332 Balance 500
EXERCISE 2-9
Error 1. 2. 3. 4. 5. 6.
(a) In Balance No Yes Yes No Yes No
(b) Difference $400 — — 300 — 36
(c) Larger Column Debit — — Credit — Credit
EXERCISE 2-10 SPEEDY DELIVERY SERVICE Trial Balance July 31, 2006 Debit Cash ($90,907 – Debit total without Cash $69,340)..................................................................... Accounts Receivable .................................................. Prepaid Insurance ....................................................... Delivery Equipment ..................................................... Notes Payable .............................................................. Accounts Payable........................................................ Salaries Payable .......................................................... Common Stock ............................................................ Retained Earnings ....................................................... Dividends...................................................................... Service Revenue.......................................................... Salaries Expense ......................................................... Gas and Oil Expense................................................... Repair Expense............................................................ Insurance Expense......................................................
2-20
Credit
$21,567 10,642 1,968 49,360 $26,450 8,396 815 40,000 4,636 700 10,610 4,428 758 961 523 $90,907
.
$90,907
SOLUTIONS TO PROBLEMS PROBLEM 2-1A
Date Mar. 1
3
5
6
10
18
Account Titles and Explanation Cash Common Stock (Investment of cash in business in exchange for stock) Land Buildings Equipment Cash (Purchased Lee’s Golf Land)
Ref.
Debit 60,000
60,000
23,000 9,000 6,000 38,000
Advertising Expense Cash (Paid for advertising)
1,600
Prepaid Insurance Cash (Paid for one-year insurance policy)
1,480
Equipment Accounts Payable (Purchased equipment on account)
2,600
Cash
1,600
1,480
2,600
800 Golf Revenue (Received cash for services provided)
19
J1 Credit
800
Cash Unearned Revenue (Received cash for coupon books sold)
2-21
1,500 1,500
PROBLEM 2-1A (Continued) Date Mar. 25
30
30
31
Account Titles and Explanation Dividends Cash (Payment of cash dividend) Salaries Expense Cash (Paid salaries)
Ref.
Debit 1,000
Credit 1,000
600 600
Accounts Payable Cash (Paid creditor on account) Cash
2,600 2,600
500 Golf Revenue (Received cash for services provided)
2-22
500
PROBLEM 2-2A
(a) Date Apr. 1
Account Titles and Explanation Cash Common Stock (Investment of cash in business in exchange for stock)
Ref. 101 311
Debit 25,000
25,000
1
No entry—not a transaction.
2
Rent Expense Cash (Paid monthly office rent)
729 101
800
Supplies Accounts Payable (Purchased supplies on account from Halo Company)
126 201
1,500
Accounts Receivable Service Revenue (Billed clients for services provided)
112 400
900
Cash
101 205
500
101 400
1,500
726 101
1,500
3
10
11
Unearned Revenue (Received cash for future service) 20
Cash Service Revenue (Received cash for services provided)
30
Salaries Expense Cash (Paid monthly salary)
2-23
J1 Credit
800
1,500
900
500
1,500
1,500
PROBLEM 2-2A (Continued) Date Apr. 30
Account Titles and Explanation Accounts Payable Cash (Paid Halo Company on account)
Ref. 201 101
Debit 600
Credit 600
(b) Cash Date
Explanation
Apr. 1 2 11 20 30 30 Accounts Receivable Date Explanation Apr. 10 Supplies Date Apr. 3
Explanation
Accounts Payable Date Explanation Apr. 3 30 Unearned Revenue Date Explanation Apr. 11
Ref.
Debit
J1 J1 J1 J1 J1 J1
25,000
Ref. J1
Ref. J1
Ref. J1 J1
Ref. J1
2-24
Credit 800
500 1,500 1,500 600
Debit 900
Debit 1,500
Debit
25,000 24,200 24,700 26,200 24,700 24,100
Credit
No. 112 Balance 900
Credit
No. 126 Balance 1,500
Credit 1,500
No. 201 Balance 1,500 900
600
Debit
No. 101 Balance
Credit 500
No. 205 Balance 500
PROBLEM 2-2A (Continued) Common Stock Date Explanation Apr. 1
Service Revenue Date Explanation Apr. 10 20
Salaries Expense Date Explanation Apr. 30
Rent Expense Date Explanation Apr. 2
(c)
Ref. J1
Ref. J1 J1
Ref. J1
Ref. J1
Debit
Debit
Debit 1,500
Debit 800
Credit 25,000
No. 311 Balance 25,000
Credit 900 1,500
No. 400 Balance 900 2,400
Credit
No. 726 Balance 1,500
Credit
No. 729 Balance 800
JUDI DENCH, INC. Trial Balance April 30, 2006 Cash ...................................................................... Accounts Receivable........................................... Supplies ................................................................ Accounts Payable ................................................ Unearned Revenue .............................................. Common Stock..................................................... Service Revenue .................................................. Salaries Expense ................................................. Rent Expense .......................................................
2-25
Debit $24,100 900 1,500
Credit
$
1,500 800 $28,800
900 500 25,000 2,400
_______
$28,800
PROBLEM 2-3A (a) Trans. 1.
Account Titles and Explanation Cash Common Stock
Debit 120,000
120,000
2.
No entry—not a transaction.
3.
Prepaid Rent Rent Expense Cash
33,000 3,000
Furniture & Equipment Cash Accounts Payable
70,000
4.
5.
6.
7.
8.
9.
10.
36,000
20,000 50,000
Prepaid Insurance Insurance Expense Cash
2,750 250
Office Supplies Cash
1,000
Office Supplies Accounts Payable
3,000
3,000
1,000
3,000
Cash Accounts Receivable Brokerage Revenue
10,000 20,000 30,000
Accounts Payable Cash
800 800
Cash
5,000 Accounts Receivable
11.
Credit
Utility Expense Accounts Payable
5,000 400 400
2-26
PROBLEM 2-3A (Continued) Trans. 12.
Account Titles and Explanation Salaries Expense Cash
Debit 4,000
Credit 4,000
(b) (1)
(8) (10)
(8)
(6) (7)
(5)
(3)
Cash 120,000 (3) (4) (5) (6) 10,000 (9) 5,000 (12) 70,200
(4) 36,000 20,000 3,000 1,000 800 (9) 4,000
Accounts Receivable 20,000 (10) 5,000 15,000
Furniture & Equipment 70,000 70,000
Accounts Payable (4) 50,000 (7) 3,000 800 (11) 400 52,600
Common Stock (1) 120,000 120,000
Brokerage Revenue (8) 30,000 30,000
Office Supplies 1,000 3,000 4,000
Prepaid Insurance 2,750 2,750
Prepaid Rent 33,000 33,000
2-27
(12)
Salaries Expense 4,000 4,000
(3)
Rent Expense 3,000 3,000
PROBLEM 2-3A (Continued)
(11)
(c)
Utility Expense 400 400
(5)
Insurance Expense 250 250
CHAMBERS BROKERAGE SERVICES INC. Trial Balance May 31, 2006 Cash .................................................................. Accounts Receivable....................................... Office Supplies................................................. Prepaid Insurance............................................ Prepaid Rent..................................................... Furniture & Equipment.................................... Accounts Payable............................................ Common Stock ................................................ Brokerage Revenue ......................................... Salaries Expense ............................................. Rent Expense ................................................... Utility Expense ................................................. Insurance Expense ..........................................
2-28
Debit $ 70,200 15,000 4,000 2,750 33,000 70,000
Credit
$ 52,600 120,000 30,000 4,000 3,000 400 250 $202,600
________
$202,600
PROBLEM 2-3A (Continued) (d)
CHAMBERS BROKERAGE SERVICES INC. Income Statement For the Month Ended May 31, 2006 Revenues Brokerage Revenue ........................................ Expenses Salaries expense ............................................. Rent expense ................................................... Utility expense................................................. Insurance expense.......................................... Total expenses ........................................ Net income...............................................................
$30,000 $4,000 3,000 400 250 7,650 $22,350
CHAMBERS BROKERAGE SERVICES INC. Statement of Retained Earnings For the Month Ended May 31, 2006 Retained earnings, May 1, 2006.............................................. Add: Net income .................................................................... Retained earnings, May 31, 2006............................................
2-29
$
0 22,350 $ 22,350
PROBLEM 2-3A (Continued) CHAMBERS BROKERAGE SERVICES INC. Balance Sheet May 31, 2006 Assets Cash .......................................................................................... Accounts receivable................................................................ Office supplies ......................................................................... Prepaid insurance.................................................................... Prepaid rent .............................................................................. Furniture & equipment ............................................................ Total assets ......................................................................
$ 70,200 15,000 4,000 2,750 33,000 70,000 $194,950
Liabilities and Stockholders’ Equity Liabilities Accounts payable ............................................................ Stockholders’ equity Common stock ..................................................$120,000 Retained earnings............................................. 22,350 Total stockholders’ equity........................ Total liabilities and stockholders’ equity......................................................
2-30
$ 52,600
$142,350 $194,950
PROBLEM 2-4A
RON SALEM CO. Trial Balance June 30, 2006 Cash ($3,840 + $180).................................................... Accounts Receivable ($3,231 – $180) ........................ Supplies ($800 – $340) ................................................ Equipment ($3,000 + $340).......................................... Accounts Payable ($2,666 – $309 – $390) ................. Unearned Revenue ...................................................... Common Stock ............................................................ Dividends ($800 + $500) .............................................. Service Revenue ($2,380 + $801) ............................... Salaries Expense ($3,400 + $367 – $500) .................. Office Expense .............................................................
2-31
Debit $ 4,020 3,051 460 3,340
Credit
$ 1,967 2,200 9,000 1,300 3,181 3,267 910 $16,348
_______
$16,348
PROBLEM 2-5A (a) & (c) Cash Date Mar. 1 2 9 10 12 20 20 31 31 31
Explanation Balance
Accounts Receivable Date Explanation Mar. 31
Land Date Mar. 1
Explanation Balance
Buildings Date Explanation Mar. 1 Balance
Equipment Date Explanation Mar. 1 Balance
Ref. J1 J1 J1 J1 J1 J1 J1 J1 J1
Ref. J1
Ref.
Ref.
Ref. 2-32
400 12,000
No. 101 Balance 16,000 13,000 19,500 10,500 9,700 16,900 13,900 9,100 9,500 21,500
Debit 400
Credit
No. 112 Balance 400
Credit
No. 140 Balance 42,000
Credit
No. 145 Balance 18,000
Credit
No. 157 Balance 16,000
Debit
Credit 3,000
6,500 9,000 800 7,200 3,000 4,800
Debit
Debit
Debit
PROBLEM 2-5A (Continued) Accounts Payable Date Explanation Mar. 1 Balance 2 10
Common Stock Date Explanation Mar. 1 Balance
Admission Revenue Date Explanation Mar. 9 20 31
Concession Revenue Date Explanation Mar. 31
Advertising Expense Date Explanation Mar. 12
Film Rental Expense Date Explanation Mar. 2 20
Ref. J1 J1
Ref.
Ref. J1 J1 J1
Ref. J1
Ref. J1
Ref. J1 J1
2-33
Debit
Credit 6,000
9,000
Debit
Debit
Debit
Debit 800
Debit 9,000 3,000
Credit
No. 201 Balance 12,000 18,000 9,000
No. 311 Balance 80,000
Credit 6,500 7,200 12,000
No. 405 Balance 6,500 13,700 25,700
Credit 800
No. 406 Balance 800
Credit
No. 610 Balance 800
Credit
No. 632 Balance 9,000 12,000
PROBLEM 2-5A (Continued) Salaries Expense Date Explanation Mar. 31
Ref. J1
Debit 4,800
Credit
No. 726 Balance 4,800
(b) Date Mar. 2
Account Titles and Explanation Film Rental Expense Accounts Payable Cash (Rented films for cash and on account)
3
No entry—not a transaction.
9
Cash Admission Revenue (Received cash for services provided)
10
Accounts Payable ($6,000 + $3,000) Cash (Paid creditors on account)
Ref. 632 201 101
Debit 9,000
101 405
6,500
201 101
9,000
6,000 3,000
6,500
9,000
11
No entry.
12
Advertising Expense Cash (Paid advertising expense)
610 101
800
Cash
101 405
7,200
632 101
3,000
20
Admission Revenue (Received cash for services provided) 20
Film Rental Expense Cash (Paid film rental)
2-34
J1 Credit
800
7,200
3,000
PROBLEM 2-5A (Continued) Date Account Titles and Explanation Mar. 31 Salaries Expense Cash (Paid salaries expense)
Ref. 726 101
Debit 4,800
31 Cash Accounts Receivable Concession Revenue (10% X $8,000) (Received cash and balance on account for concession revenue)
101 112 406
400 400
31 Cash
101 405
12,000
Admission Revenue (Received cash for services provided)
(d)
Credit 4,800
800
12,000
RUSSO THEATER Trial Balance March 31, 2006 Cash .................................................................... Accounts Receivable ........................................ Land .................................................................... Buildings ............................................................ Equipment .......................................................... Accounts Payable.............................................. Common Stock .................................................. Admission Revenue .......................................... Concession Revenue ........................................ Advertising Expense ......................................... Film Rental Expense ......................................... Salaries Expense ..............................................
2-35
Debit $ 21,500 400 42,000 18,000 16,000
Credit
$
800 12,000 4,800 $115,500
9,000 80,000 25,700 800
________
$115,500
PROBLEM 2-1B
Date Apr. 1
4
Account Titles and Explanation Cash Common Stock (Stockholders’ investment of cash in business in exchange for stock) Land
Ref.
Debit 50,000
50,000
30,000 Cash (Purchased land for cash)
8
11
1,800
Salaries Expense Cash (Paid salaries)
1,500
No entry.
13
Prepaid Insurance Cash (Paid for one-year insurance policy)
20
30,000
Advertising Expense Accounts Payable (Incurred advertising expense on account)
12
17
J1 Credit
1,800
1,500
1,500 1,500
Dividends Cash (Payment of cash dividends) Cash
600 600
5,700 Admission Revenue (Received cash for services provided)
2-36
5,700
PROBLEM 2-1B (Continued) Date Apr. 25
30
Account Titles and Explanation Cash Unearned Admission Revenue (Received cash for future services) Cash
Ref.
Debit 2,500
2,500
8,900 Admission Revenue (Received cash for services provided)
30
Credit
Accounts Payable Cash (Paid creditor on account)
2-37
8,900
900 900
PROBLEM 2-2B
(a) Date May 1
Account Titles and Explanation Cash Common Stock (Investment of cash in business in exchange for stock)
Ref. 101 311
Debit 20,000
20,000
2
No entry—not a transaction.
3
Supplies Accounts Payable (Purchased supplies on account)
126 201
1,500
Rent Expense Cash (Paid office rent)
729 101
900
Accounts Receivable Service Revenue (Billed client for services provided)
112 400
2,100
Cash
101 205
3,500
101 400
1,200
726 101
1,000
7
11
12
Unearned Revenue (Received cash for future services) 17
Cash Service Revenue (Received cash for services provided)
31
Salaries Expense Cash (Paid salaries) 2-38
J1 Credit
1,500
900
2,100
3,500
1,200
1,000
PROBLEM 2-2B (Continued) Date May 31
Account Titles and Explanation Accounts Payable ($1,500 X 40%) Cash (Paid creditor on account)
Ref. 201 101
Debit 600
Credit 600
(b) Cash Date May 1 7 12 17 31 31
Explanation
Accounts Receivable Date Explanation May 11
Supplies Date Explanation May 3
Accounts Payable Date Explanation May 3 31
Unearned Revenue Date Explanation May 12
Ref. J1 J1 J1 J1 J1 J1
Ref. J1
Ref. J1
Ref. J1 J1
Ref. J1
2-39
Debit 20,000
Credit 900
3,500 1,200 1,000 600
Debit 2,100
Debit 1,500
Debit
Credit
No. 112 Balance 2,100
Credit
No. 126 Balance 1,500
Credit 1,500
600
Debit
No. 101 Balance 20,000 19,100 22,600 23,800 22,800 22,200
No. 201 Balance 900
Credit 3,500
No. 205 Balance 3,500
PROBLEM 2-2B (Continued) Common Stock Date Explanation May 1
Service Revenue Date Explanation May 11 17
Salaries Expense Date Explanation May 31
Rent Expense Date Explanation May 7
(c)
Ref. J1
Ref. J1 J1
Ref. J1
Ref. J1
Debit
Debit
Debit 1,000
Debit 900
Credit 20,000
No. 311 Balance 20,000
Credit 2,100 1,200
No. 400 Balance 2,100 3,300
Credit
No. 726 Balance 1,000
Credit
No. 729 Balance 900
SHIN CORP. Trial Balance May 31, 2006 Cash ...................................................................... Accounts Receivable........................................... Supplies ................................................................ Accounts Payable................................................ Unearned Revenue .............................................. Common Stock .................................................... Service Revenue .................................................. Salaries Expense ................................................. Rent Expense .......................................................
2-40
Debit $22,200 2,100 1,500
Credit
$
1,000 900 $27,700
900 3,500 20,000 3,300 .
$27,700
PROBLEM 2-3B (a)
As indicated in item (9), $4,000 was paid for four months in advance on December 1. One month has passed, so 1/4 X $4,000 = $1,000 of rent has expired and become an expense. Three months are still to come, so 3/4 X $4,000 = $3,000 remains in the prepaid rent account as an asset.
(b) & (d) Balance
(4) (7)
Balance
Cash 8,000 (1) (3) 13,000 (5) 5,000 (8) (10) 3,000
1,000 2,000
(5)
Accounts Payable Balance (2) 15,000 Balance
19,000 4,000
15,000 3,000 2,000
Common Stock Balance
30,000
Retained Earnings Balance
11,000
Accounts Receivable Balance 15,000 (4) 13,000 (7) 9,000 Balance 11,000
(10)
Parts Inventory 13,000 4,000 (6) 13,000
(1)
Advertising Expense 1,000
(3)
Miscellaneous Expense 2,000
(6)
Repair Parts Expense 4,000
(9)
Rent Expense 1,000
(8)
Wages Expense 3,000
Balance (2) Balance Balance Balance
Prepaid Rent 3,000 (9) 2,000
8,000
Dividends 2,000 Repair Services Revenue (7) 14,000
4,000
1,000
Shop Equipment Balance 21,000
2-41
PROBLEM 2-3B (Continued) (c) Trans. 1.
2.
3.
4.
Account Titles and Explanation Advertising Expense Cash
Debit 1,000
Parts Inventory Accounts Payable
4,000
Miscellaneous Expense Cash
2,000
1,000
4,000
2,000
Cash
13,000 Accounts Receivable
5.
6.
7.
8.
9.
10.
Credit
Accounts Payable Cash
13,000 15,000 15,000
Repair Parts Expense Parts Inventory
4,000
Cash Accounts Receivable Repair Services Revenue
5,000 9,000
Wages Expense Cash
3,000
Rent Expense Prepaid Rent
1,000
Dividends Cash
2,000
4,000
14,000
3,000
1,000
2,000
2-42
PROBLEM 2-3B (Continued) (e)
BYTE REPAIR SERVICE, INC. Trial Balance January 31, 2006 Cash ...................................................................... Accounts Receivable........................................... Parts Inventory..................................................... Prepaid Rent ......................................................... Shop Equipment .................................................. Accounts Payable ................................................ Common Stock..................................................... Retained Earnings ............................................... Dividends .............................................................. Repair Services Revenue .................................... Advertising Expense ........................................... Miscellaneous Expense....................................... Repair Parts Expense .......................................... Rent Expense ....................................................... Wages Expense....................................................
(f)
Cash ................................................... Accounts Receivable........................ Parts Inventory.................................. Prepaid Rent ...................................... Shop Equipment ............................... Total Assets...................................
(g) Repair Services Revenue ................. Advertising Expense ........................ Miscellaneous Expense.................... Repair Parts Expense ....................... Rent Expense .................................... Wages Expense................................. Net Income.....................................
2-43
$ 3,000 11,000 13,000 2,000 21,000 $50,000
$14,000 (1,000) (2,000) (4,000) (1,000) (3,000) $ 3,000
Debit $ 3,000 11,000 13,000 2,000 21,000
Credit
$ 8,000 30,000 11,000 2,000 14,000 1,000 2,000 4,000 1,000 3,000 $63,000
.
$63,000
PROBLEM 2-4B
GARLAND COMPANY Trial Balance May 31, 2006 Cash ($3,850 + $520 – $405) ......................................... Accounts Receivable ($2,570 – $420).......................... Prepaid Insurance ($700 + $100).................................. Supplies ($0 + $520) ...................................................... Equipment ($12,000 – $520).......................................... Accounts Payable ($4,500 – $100 + $520 – $420)....... Property Taxes Payable ................................................ Common Stock ($11,700 + $1,000)............................... Dividends ($0 + $1,000) ................................................. Service Revenue............................................................ Salaries Expense ($4,200 + $200) ................................ Advertising Expense ($1,100 + $405) .......................... Property Tax Expense ($800 + $100) ...........................
2-44
Debit $ 3,965 2,150 800 520 11,480
Credit
$ 4,500 560 12,700 1,000 8,960 4,400 1,505 900 $26,720
$26,720
PROBLEM 2-5B
(a) & (c) Cash Date Apr. 1 2 9 10 12 25 29 30 30
Explanation Balance
Accounts Receivable Date Explanation Apr. 30
Prepaid Rentals Date Explanation Apr. 30
Land Date Apr. 1
Explanation Balance
Buildings Date Explanation Apr. 1 Balance
Ref. J1 J1 J1 J1 J1 J1 J1 J1
Ref. J1
Ref. J1
Ref.
Ref.
2-45
Debit
Credit 800
1,800 3,000 300 5,200 1,600 85 900
Debit 85
Debit 900
Debit
Debit
No. 101 Balance 6,000 5,200 7,000 4,000 3,700 8,900 7,300 7,385 6,485
Credit
No. 112 Balance 85
Credit
No. 136 Balance 900
Credit
No. 140 Balance 10,000
Credit
No. 145 Balance 8,000
PROBLEM 2-5B (Continued) Equipment Date Explanation Apr. 1 Balance
Accounts Payable Date Explanation Apr. 1 Balance 10 20
Mortgage Payable Date Explanation Apr. 1 Balance 10
Common Stock Date Explanation Apr. 1 Balance
Admission Revenue Date Explanation Apr. 9 25
Concession Revenue Date Explanation Apr. 30
Ref.
Ref. J1 J1
Ref. J1
Ref.
Ref. J1 J1
Ref. J1
2-46
Debit
Debit
Credit
Credit
1,000 1,000
Debit
Debit
Debit
No. 201 Balance 2,000 1,000 2,000
Credit
No. 275 Balance 8,000 6,000
Credit
No. 311 Balance 20,000
2,000
Debit
No. 157 Balance 6,000
Credit 1,800 5,200
No. 405 Balance 1,800 7,000
Credit 170
No. 406 Balance 170
PROBLEM 2-5B (Continued) Advertising Expense Date Explanation Apr. 12 Film Rental Expense Date Explanation Apr. 2 20 Salaries Expense Date Explanation Apr. 29
Ref. J1
Ref. J1 J1
Ref. J1
Debit 300
Debit 800 1,000
Debit 1,600
Credit
No. 610 Balance 300
Credit
No. 632 Balance 800 1,800
Credit
No. 726 Balance 1,600
(b) Date Apr. 2
Account Titles and Explanation Film Rental Expense Cash (Paid film rental)
3
No entry—not a transaction.
9
Cash Admission Revenue (Received cash for services provided)
10
Mortgage Payable Accounts Payable Cash (Made payments on mortgage and accounts payable)
2-47
Ref. 632 101
Debit 800
101 405
1,800
275 201 101
2,000 1,000
J1 Credit 800
1,800
3,000
PROBLEM 2-5B (Continued) Date Apr. 11 12
20
25
Account Titles and Explanation No entry—not a transaction.
Ref.
Debit
Advertising Expense Cash (Paid advertising expenses)
610 101
300
Film Rental Expense Accounts Payable (Rented film on account)
632 201
1,000
Cash
101 405
5,200
Salaries Expense Cash (Paid salaries expense)
726 101
1,600
Cash Accounts Receivable Concession Revenue (17% X $1,000) (Received cash and balance on account for concession revenue)
101 112 406
85 85
Prepaid Rentals Cash (Paid cash for future film rentals)
136 101
900
Admission Revenue (Received cash for services provided) 29
30
30
2-48
Credit
300
1,000
5,200
1,600
170
900
PROBLEM 2-5B (Continued) (d)
LAKE THEATER Trial Balance April 30, 2006 Cash ...................................................................... Accounts Receivable........................................... Prepaid Rentals.................................................... Land....................................................................... Buildings............................................................... Equipment............................................................. Accounts Payable ................................................ Mortgage Payable ................................................ Common Stock..................................................... Admission Revenue............................................. Concession Revenue........................................... Advertising Expense ........................................... Film Rental Expense............................................ Salaries Expense .................................................
2-49
Debit $ 6,485 85 900 10,000 8,000 6,000
Credit
$ 2,000 6,000 20,000 7,000 170 300 1,800 1,600 $35,170
$35,170
BYP 2-1
FINANCIAL REPORTING PROBLEM
(a) Account Accounts Payable Accounts Receivable Property, Plant, and Equipment Income Taxes Payable Interest Expense Inventory
(1) Increase Side Right Left Left
(1) Decrease Side Left Right Right
(2) Normal Balance Credit Debit Debit
Right Left Left
Left Right Right
Credit Debit Debit
(b) (1) Cash is increased. (2) Cash is decreased. (3) Cash is decreased or Accounts Payable is increased. (c) (1) Cash is decreased. (2) Cash is decreased or Notes or Mortgage Payable is increased.
2-50
BYP 2-2
(a) 1. 2. 3. 4.
COMPARATIVE ANALYSIS PROBLEM
PepsiCo Inventory: Property, Plant, and Equipment: Accounts Payable: Interest Expense:
debit debit
1. 2.
credit debit
3. 4.
Coca-Cola Accounts Receivable: Cash and Cash Equivalents: Cost of Goods Sold: Sales (Revenue):
debit debit debit credit
(b) The following other accounts are ordinarily involved: (1) Increase in Accounts Receivable: Service Revenue or Sales is increased (credited). (2) Decrease in Wages Payable: Cash is decreased (credited). (3) Increase in Property, Plant, and Equipment: Notes Payable is increased (credited) or Cash is decreased (credited). (4) Increase in Interest Expense: Cash is decreased (credited).
2-51
BYP 2-3
RESEARCH CASE
The students’ answers will depend on the company and article selected.
2-52
BYP 2-4
INTERPRETING FINANCIAL STATEMENTS
(a) & (b) Account Cash and Cash Equivalents Inventories Notes Payable Selling, Gen. & Adm. Exp. Sales Revenue Dividends Common Stock Income Tax Expense
(a) Increase Side Left/Debit Left/Debit Right/Credit Left/Debit Right/Credit Left/Debit Right/Credit Left/Debit
(a) Decrease Side Right/Credit Right/Credit Left/Debit Right/Credit Left/Debit Right/Credit Left/Debit Right/Credit
(b) Normal Balance Debit Debit Credit Debit Credit Debit Credit Debit
(c)
Balance sheet accounts: Cash and Cash Equivalents Inventories Notes Payable Common Stock
(d)
Income statement accounts: Selling, General, and Administrative Expenses Sales Revenue Income Tax Expense
(e)
Dividends appear on the Retained Earnings Statement.
2-53
BYP 2-5
A GLOBAL FOCUS
(a) One advantage of reporting using U.S. GAAP is that the U.S. financial markets are the largest in the world, and by reporting under U.S. GAAP a company is making it easier for these investors to evaluate the company. Also, U.S. GAAP is widely respected as being a well designed approach to financial reporting. A disadvantage of using U.S. GAAP if you are not a U.S. company is that converting will be costly. It will normally require that the company keep records using the standards of its home country, as well as U.S. GAAP. (b) While there are many similarities between U.S. and Canadian standards, some differences do exist. Sometimes these differences can result in materially different results. Often it is not possible for analysts to make adjustments to convert from one reporting model to another because financial reports don’t typically provide enough detail to make such a conversion. Therefore, making comparisons of companies that use different reporting models can be time consuming, costly, and risky. (c) Even if companies report using the same GAAP, in this case Canadian, it is still possible that they will apply the rules differently. The application of GAAP in any country requires considerable judgment. One company might apply the rules in a way that tends to result in higher net income, while the other company might apply the rules in a way that results in lower net income. Thus, even if both companies use Canadian GAAP, significant problems can still arise when comparing the results of the two companies. (d) Despite the issues raised in part (c), the reality is that it is much easier to compare the results of companies that use GAAP of the same country; e.g., if both use U.S. standards or both use Canadian standards. For example, under U.S. GAAP companies can choose different ways to account for inventory, but U.S. GAAP also requires disclosures that make comparison of companies that choose different methods easier.
2-54
BYP 2-6
EXPLORING THE WEB
The answer is dependent upon the company selected by the student.
2-55
BYP 2-7
GROUP DECISION CASE
(a) May 1 5 7 14 15 20
Correct. Cash .......................................................................... Lesson Revenue...........................................
250
Cash .......................................................................... Unearned Boarding Revenue...................
500
Office Equipment .................................................. Cash .................................................................
800
Dividends................................................................. Cash .................................................................
400
Cash .......................................................................... Riding Revenue ............................................
184
30
Correct.
31
Hay and Feed Supplies ....................................... Accounts Payable........................................
250 500 800 400 184
1,500 1,500
(b) The errors in the entries of May 14 and 20 would prevent the trial balance from balancing. (c) Net income as reported ................................................. Add: 5/15, Salaries expense (Dividends paid stockholders)................................................... 5/31, Hay and feed expense (still on hand) ..................................................................
$4,500 $ 400 1,500
Less: 5/7, Boarding revenue unearned ................... Correct net income ......................................................... (d) Cash as reported ............................................................. Add: 5/20, Transposition error.................................. 5/31, Purchase on account .............................. Correct cash balance
1,900 6,400 500 $5,900 $12,475
$ 36 1,500
1,536 $14,011
2-56
BYP 2-8
COMMUNICATION ACTIVITY
Date:
May 25, 2005
To:
Accounting Instructor
From:
Student
In the first transaction, bills totaling $5,000 were sent to customers for services rendered. Therefore, the asset Accounts Receivable is increased $5,000 and the revenue Service Revenue is increased $5,000. Debits increase assets and credits increase revenues, so the journal entry is: Accounts Receivable ........................................................................ Service Revenue........................................................................ (Bill customers for services provided)
5,000 5,000
The $5,000 amount is then posted to the debit side of the general ledger account Accounts Receivable and to the credit side of the general ledger account Service Revenue. In the second transaction, $2,000 was paid in salaries to employees. Therefore, the expense Salaries Expense is increased $2,000 and the asset Cash is decreased $2,000. Debits increase expenses and credits decrease assets, so the journal entry is: Salaries Expense................................................................................ Cash............................................................................................... (Salaries paid)
2,000 2,000
The $2,000 amount is then posted to the debit side of the general ledger account Salaries Expense and to the credit side of the general ledger account Cash.
2-57
BYP 2-9
ETHICS CASE
(a) The stakeholders in this situation are:
Sara Rankin, assistant chief accountant. Users of the company’s financial statements. The Hokey Company.
(b) By adding $1,000 to the Equipment account, that account total is intentionally misstated. By not locating the error causing the imbalance, some other account may also be misstated by $1,000. If the amount of $1,000 is determined to be immaterial, and the intent is not to commit fraud (cover up an embezzlement or other misappropriation of assets), Sara’s action might not be considered unethical in the preparation of interim financial statements. However, if Sara is violating a company accounting policy by her action, then she is acting unethically. (c) Sara’s alternatives are: 1. Miss the deadline but find the error causing the imbalance. 2. Tell her supervisor of the imbalance and suffer the consequences. 3. Do as she did and locate the error later, making the adjustment in the next quarter.
2-58
BYP 2-10
CONTINUING COOKIE CHRONICLE
(a) Date Nov. 8
9 11
13
14
16
General Journal Account Titles and Explanation Cash Common Stock
Debit 500
500
No entry required since this is not a monetary transaction. Advertising Supplies Cash
95 95
Baking Supplies Cash
125
Baking Equipment Common Stock
300
125
300
Cash
2,000 2,000
Notes Payable 17
Credit
Baking Equipment Cash
900 900
20
No entry—no transaction has occurred.
25
Cash
25 Unearned Revenue
25
2-59
CONTINUING COOKIE CHRONICLE (Continued) (a) (Continued)
Date Nov. 29
30
30
General Journal Account Titles and Explanation Cash Teaching Revenue
Debit 100
J1 Credit 100
Website Accounts Payable
600 600
Prepaid Insurance Cash
1,200 1,200
(b)
Date Nov. 8 11 13 16 17 25 29 30
Cash Explanation
Ref. J1 J1 J1 J1 J1 J1 J1 J1
2-60
Debit 500
Credit 95 125
2,000 900 25 100 1,200
Balance 500 405 280 2,280 1,380 1,405 1,505 305
CONTINUING COOKIE CHRONICLE (Continued) (b) (Continued)
Date Nov. 11
Date Nov. 13
Date Nov. 30
Date Nov. 14 17
Date Nov. 30
Advertising Supplies Explanation
Baking Supplies Explanation
Prepaid Insurance Explanation
Baking Equipment Explanation
Website Explanation:
Ref. J1
Debit 95
Credit
Balance 95
Ref. J1
Debit 125
Credit
Balance 125
Ref. J1
Debit 1,200
Credit
Balance 1,200
Ref. J1 J1
Debit 300 900
Credit
Balance 300 1,200
Ref. J1
Debit 600
Credit
Balance 600
2-61
CONTINUING COOKIE CHRONICLE (Continued) (b) (Continued)
Date Nov. 30
Date Nov. 25
Date Nov. 16
Date Nov. 8 14
Date Nov. 29
Accounts Payable Explanation
Unearned Revenue Explanation
Notes Payable Explanation
Common Stock Explanation
Teaching Revenue Explanation
Ref. J1
Debit
Credit 600
Balance 600
Ref. J1
Debit
Credit 25
Balance 25
Ref. J1
Debit
Credit 2,000
Balance 2,000
Ref. J1 J1
Debit
Credit 500 300
Balance 500 800
Ref. J1
Debit
Credit 100
Balance 100
2-62
CONTINUING COOKIE CHRONICLE (Continued) (c) Cookie Creations Trial Balance November 30, 2005 Account Cash.......................................................................................... Advertising Supplies........................................................... Baking Supplies.................................................................... Prepaid Insurance................................................................ Baking Equipment ............................................................... Website.................................................................................... Accounts Payable ................................................................ Unearned Revenue .............................................................. Note Payable.......................................................................... Common Stock ..................................................................... Teaching Revenue ...............................................................
Debit $ 305 95 125 1,200 1,200 600
$
$ 3,525
2-63
Credit
600 25 2,000 800 100 $ 3,525
